1

DenizBank Economic Update

September 2019

Economy

Financial Markets

Banking Sector

DenizBank Economic Research and Strategy

2

Economy (I)

DenizBank Economic Update

September 2019 G

row

th

Turkey has recovered from last year’s recession, but economy remains stagnant

● In 2Q19 Turkish economy contracted by 1.5% compared to a year ago, less severely than 1Q19 (-2.4%) and outperforming market expectations. On calendar and seasonally adjusted basis, economy grew by 1.2% compared to the previous quarter, avoiding the risks of falling into a second recession.

● While private consumption improves gradually, exports continued to be the main driver of growth. On the other hand, investment spending weakened further in 2Q19, dropping sharply by 23% YoY, which may be the main drag on growth in next quarters. Sectoral breakdown suggest that industrial production continued to decline at a slower pace and services sector contributed positively to annual growth in 2Q19.

● Preliminary data such as PMI (13-months high in August), capacity utilization rate and imports point to further recovery in economic activity in 3Q19. However, weak credit growth and worsening global outlook suggests that the rebound will be slow. Overall, we expect annual growth to turn positive in 2H19 on the back of low base effect and full-year growth rate to be 1%, significantly below its potential. As economy re-mains stagnant, weak labor market conditions prevail.

Inflation retreats to 15-months low supporting Central Bank’s pending rate cuts

● Monthly inflation (0.86%) was lower than expectations for the fifth consecutive month in August, bringing annual inflation down to 15% from 16.6% a month ago, lowest in 15-months. While administrative and tax-related price hikes in gas and tobacco were the main drivers of inflation, decline in core inflation (13.6%), was more significant, as core goods inflation was subdued by weak domestic demand.

●Price pressures have weakened significantly in the last few months due to muted domestic demand, nor-malization in food prices, subdued volatility in TL and decline in commodity prices, while administrative price hikes (termination of tax cuts in durable goods, rise in gas, electricity, and tobacco prices) were the main contributor to inflation in last two months. More importantly, cost-push pressures weakened significantly, as evident in the PPI inflation (13.5%) which fell below headline figure for the first time since 2016.

● As favorable base effect becomes more pronounced, we expect inflation to fall to single digits (9-10%) in September and November, before finishing the year at 12.5%. Improved price dynamics, subsiding inflation expectations and the support from global low interest rate environment provide room for Central Bank (CBRT) to continue its large rate cuts, as long as political risks are avoided and global conditions continue to be supportive. Following the initial 425 bps cut in July, we expect CBRT to deliver further cuts around 400 bps till the end of the year, bringing policy rate below 16%.

In

fla

tio

n

13.4%15.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

PPI CPI

CPI and PPI Inflation

13.6%

17.3%

0%

5%

10%

15%

20%

25%

30%

35%

Core CPI (YoY change)

Food prices (YoY change)

Core and Food Price Inflation

42

44

46

48

50

52

54

56

74%

75%

76%

77%

78%

79%

80%

2016 2017 2018 2019

Manufacturing Industry Leading Indicators (Seasonally Adjusted)

Capacity Utilization Rate PMI

8.7%

2.9%

3.7% 5.

9%

3.6%

7.2%

5.8% 7.

5%

4.8%

4.9%

-0.8

%

4.2% 5.3%

5.3%

11.6

%

7.3%

7.4%

5.6%

2.3%

-2.8

%

-2.4

%

-1.5

%

8.5

%

6.8

%

5.4

%

5.2

%4

.1% 5.1

%

5.7

%

6.1

%

6.3

%

5.8

%

4.0

%

3.2

%

3.3

%

3.4

%

6.7

%

7.5

%

7.9

%

8.0

%

5.6

%

2.8

%

0.6

%

-1.1

%

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

2Q

19

Quarter (vs. the same quarter of previous year)

Annualized

GDP Growth

3

Economy (II)

DenizBank Economic Update

September 2019

Current account balance posts annual surplus for the first time since 2002

● Turkey’s external balance has improved dramatically in first half of 2019 with significant drop in imports due to weakening domestic demand, stable increase in exports and strong tourism inflows. In line with re-balancing in the economy, imports were down by 20% to $197 bn annually in June 2019 from $247 bn a year ago while exports are up by 5% to $171 bn from $163 bn. Rising tourism revenues ($31 bn annually) as number of tourists reach all time high, together with transportation income balance out remaining exter-nal trade deficit. As a result, annual current account balance (CAD), which gave $57 bn (6.5% of GDP) defi-cit a year ago, turned to surplus ($0.5 bn, 0.1% of GDP) for the first time since 2002. Excluding energy and gold, current account surplus yielded a record-high surplus of $43 bn (5.9% of GDP).

● On the financial account side, banks’ debt repayments ($20 bn annually, 12-month cumulative debt rollo-ver: 65%) and deposit outflows were compensated by FDI inflows ($9 bn), reserve drawdowns ($4 bn) and net errors/omissions ($9 bn). Portfolio investments continued to decline (-$1.4 bn annually).

●In July and August, annual trade deficit decreased further by $3bn, suggesting current account surplus may have expanded above 2002 levels combined with surging tourism revenues. As economic activity picks up gradually in rest of the year, we expect current account turn back to deficit yet remain low around 1-1.5% of the GDP in 2019.

Pu

bli

c S

ec

tor

Budget deficit is rising with very limited pressure on public debt and market liquidity

● As authorities eased the fiscal policy to support economic growth, Turkey’s budget deficit increased by 53% in the first seven months of the year, bringing 12 months trailing figure to TL96 bn (2.4% of GDP), above the 2019 target of 1.8% (2018: 2.0%). The exemplary primary balance, also turned to a small deficit of TL 6 bn (0.1% of GDP)

● Besides countercyclical spending and higher interest expenses, significant slowdown in tax revenues in the stagnant economy (indirect tax revenues were down 10% YoY) deteriorated the budget balance. How-ever, weakening tax income was partly compensated by non-tax income which has doubled throughout last year, keeping the budget deficit below international criteria of 3%.

● Going forward, we expect annual budget deficit to remain below 3% with restrained spending and pend-ing revenue support from CBRT, as pledged by Ministry of Treasury and Finance. Moreover, gross govern-ment debt, with moderate increase, remains low at c.34%, keeping the sovereign risk low.

Ex

tern

al S

ec

tor

-12

-45

-75-49

-65

-44-32 -33

-47

-27

0.5

-1.9%

-5.9%

-9.0%

-5.6%

-6.8%

-4.7%-3.7%-3.8%

-5.6%

-3.5%

0.1%

-10%

-8%

-6%

-4%

-2%

0%

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10Current Account Balance (Bn $)

CA Balance ($ bn)CA Balance (% of GDP)

0.5

42.6

-37.4

-4.7

-80-70-60-50-40-30-20-10

01020304050

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Current Account Balance

Energy Balance

Current Account Balance (ex. energy and gold)

Current Account Balance (Bn $ , 12M Trailing)

Gold Balance

0 8

2419

3127

30

21

9 1

-6

0.0%

0.7%

1.8%

1.2%

1.7%

1.3%1.3%

0.8%

0.3%0.0%

-0.1%

-1%

1%

2%

-10

0

10

20

30

40

Primary Budget BalancePrimary Budget Balance (TL Bn) % of GDP

*12 months cumulative, % of July 19 GDP forecast

-53-40

-18-29

-19 -23 -24-30

-47

-73

-96

-5.3%

-3.5%

-1.3%-1.9%

-1.0%-1.1%-1.0%-1.1%-1.5%

-2.0%-2.4%

-6%

-5%

-4%

-3%

-2%

-1%

0%

-110-100

-90-80-70-60-50-40-30-20-10

0

Budget Balance

Budget Balance (TL Bn)

% of GDP

*12 months cumulative, % of July 19 GDP forecast

4

Financial Markets

DenizBank Economic Update

September 2019

De

bt

Ma

rke

t

Turkish Lira depreciated by 1.5% since the beginning of August, bringing year-to-date losses to 7%.

Cu

rre

nc

y M

ark

et

Sto

ck

Ma

rke

t

Turkey’s CDS rose to 440 bps in August, before recovering below 390 bps in early September. 2-year TL benchmark bond yield decreased by almost 1000 bps since May down to 15.2%, lowest in 15 months.

MSCI Turkey index was up 7% since the beginning of the year, overperforming EM peers (MSCI EM index was up 1%)

Data retrieved from Bloomberg as of 13:00 (GMT + 3), 04.09.2019

90110130150170190210230250270290310330

2014 2015 2016 2017 2018 2019

TL EM Average

Ap

pre

cia

te

EM Currencies (against $, Jan-14=100)

De

pre

cia

te0.4%

-1.7%

-1.3%

-2.1%

-1.1%

-2.3%

-4.1%

-17.9%

-20% -18% -16% -14% -12% -10% -8% -6% -4% -2% 0%

ZAR

TRY

RUB

PLN

MXN

HUF

BRL

ARS

Monthly Change Against $ (Positive Values= appreciating against $)

0

100

200

300

400

500

600

700

2014 2015 2016 2017 2018 2019

TR, BB S. Africa, BB+ Rus, BBB- Bra, BB-

EM CDS and Ratings (5-year; Fitch, LT FX)

5

6

7

8

9

10

12

17

22

27

32

Interest Rates (%)Turkey 2Y Benchmark Bond Yield (%)Turkey 10Y Eurobond Yield (%)

60

80

100

120

140

160

180

2014 2015 2016 2017 2018 2019

Stock Market Performance (Jan-14=100)

MSCI Turkey Index

MSCI EM Index

-4.1%

-2.2%

-3.2%

-1.7%

-7% -5% -3% -1%

EM Banks

US Banks

EU Banks

TR Banks

Monthly Performance of Banking Shares (%)

5

Banking Sector (I)

DenizBank Economic Update

Ca

pit

al

Turkish banking sector has a strong capital base. Capital adequacy ratio rose to 18.2% in July 2019.

Fu

nd

ing

FX deposits went up by 13.5% since the beginning of 2019 while TL deposits increased only by 6.3%.

Le

nd

ing

Year-to-date loan growth has been weak at 5% (1.6% net-of-currency effect).

September 2019

88 77102 91 100 90 85 95

80 82

19.0%

16.6%17.9%

15.3%16.3% 15.6% 15.6%

16.9% 17.3% 18.2%

14.0% 13.3% 13.2% 14.1%

13.8% 14.0%

0%2%4%6%8%10%12%14%16%18%20%

0

20

40

60

80

100

120

Owners' Equity ($ bn) CAR Core Capital RatioCapital and CAR ($ bn, %)

165

152 16

1

147

144

143

136 14

4

144

144

5060708090

100110120130140150160170180

Liquidity Coverage Ratio

Regulatory Minimum

67% 65% 62% 61% 60% 59% 58% 56% 55% 57%

12% 14% 14% 17% 18% 19% 20% 19% 20% 18%

13% 12% 13% 11% 12% 11% 11% 11% 11% 11%

7% 9% 10% 10% 11% 11% 11% 14% 14% 14%

Other Capital Wholesale DepositBreakdown of Total Liabilities

130

140

150

160

170

180

190

200

600

800

1000

1200

1400

1600

2014 2015 2016 2017 2018 2019

Loans

TL Loans (TL billion)

FX Loans (USD billion)

29% 23% 20% 17% 15% 14% 13% 12% 12% 14%

52% 56% 58% 60% 62% 63% 64% 64% 62% 60%

19% 21% 22% 23% 23% 23% 24% 23% 26% 26%

Other Loans Gov. Bonds

Breakdown of Total Assets

140

160

180

200

220

240

500

600

700

800

900

1000

1100

1200

2014 2015 2016 2017 2018 2019

Deposits

TL deposits (TL billion)

FX deposits (USD billion)

6

Banking Sector (II)

DenizBank Economic Update

Lo

an

to

De

po

sit

Ra

tio

s

Total loan to deposit ratio (LDR) decreased to 108% while TL LDR remains high.

Lo

an

Qu

ali

ty

Headline NPL ratio for the banking sector rose rose to 4.6% by August 2019.

P &

L

Banking sector’s annual net profit decreased by 8% YoY to TL 49 bn in July 2019. RoE of the sector decreased to 11.4%.

August 2019

76% 84

% 97%

102%

108% 11

7%

119%

119%

122%

117%

108%

50%

60%

70%

80%

90%

100%

110%

120%

130%Loan to Deposit Ratio(%)

84%

87% 10

5%

112% 12

4%

132% 14

2%

134% 14

8%

137%

136%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

TL Loan to Deposit Ratio(%)

4.6%

3.4%

3.2%

5.8%

8.1%

1%

3%

5%

7%

9%

2014 2015 2016 2017 2018 2019

Headline Corporate-CommercialConsumer Loans Credit CardsSME

NPL Ratios

20

30

40

50

60

70

80

90

100

110Protested Bills and Unpaid Cheques(# Thousands)

Protested Bills (3 Months m.a)

Unpaid Cheques (3 Months m.a)

19.0

16.6

17.9

15.316.3 15.6 15.6

16.9 17.318.2

18.0

14.2 14.413.1

11.410.5

13.314.8

13.7 11.4

5

10

15

20

10

12

14

16

18

20Capital Adequacy and Profitability

CAR (%) ROE (%)

20

.2

22

.1

19

.8

23

.5

24

.7

24

.6

26

.1 37

.5 48

.6

53

.5

48

.7

50%

10%

-10%19%

5%

0%6%

44%

30%

10%

-8%0

10

20

30

40

50

60

-20%

0%

20%

40%

60%Annual Net Profit

Net Profit (Bn TL)

Annual Change (%)