1

DenizBank Economic Update

June 2019

Economy

Financial Markets

Banking Sector

DenizBank Economic Research and Strategy

2

Economy (I)

DenizBank Economic Update

June 2019 In

fla

tio

n

Gro

wth

Economic activity has recovered moderately in the first half of 2019

● Turkey’s GDP contracted 2.6% YoY in 1Q19, denoting a slight improvement on the 3% YoY contraction in the last quarter of 2018. 1.3% growth compared to 4Q18 on seasonally adjusted basis, following three con-secutive quarters of QoQ contraction, meant Turkey is out of recession, according to its technical definition. ● Preliminary data suggest annual contraction in the economy continued in 2Q19, albeit at a slower pace. As volatility in financial markets increased in late March and pick-up credit growth in the first quarter stopped, contraction in industrial production accelerated (-4%) in April. Leading indicators point to sluggish economic activity in May, as well. However, as economic sentiment improved once again in June, PMI man-ufacturing increased to 47.9 (11-month high) and capacity utilization rate rose 76.6% (10-month high), sig-naling an increase in industrial production for the first time since August 2018.

● Overall, June imprints suggest bottoming up in the economy continues despite a temporary setback in the beginning of second quarter. Yet, recovery should be gradual, as loan growth is still in the negative territory and further fiscal support is unlikely with the deterioration in budget deficit. We expect annual growth to turn to positive in 2H19 with the help of low base effect, and 2019 full-year growth rate to be 1%, significantly below its potential.

Inflationary pressures are subdued by weak domestic demand

● Monthly inflation surprised to downside for the second consecutive month in May, bringing annual inflation down to 18.7%, thanks to both significant retreat in core inflation and normalization in food prices. Core inf-lation moderated further to 15.9% (from a peak of 24.3% in Oct’18), as supply-side price pressures are par-tially subdued by weak domestic demand. Meanwhile, despite monthly deflation in May, food inflation rema-ins stubbornly high at 29.5%, well above Central Bank’s 2019 forecast of 16%. Moreover, cost-push pressu-res are still strong, with producers’ price inflation high at 28.7% and 7% depreciation in TL in the first half of 2019.

● In the light of April and May inflation imprints, we revise our 2019 inflation expectation downwards, mainly because FX pass-through to inflation has been milder than we previously anticipated, reflecting the weak domestic demand. On the back of strong base effect starting in June, we expect inflation to decrease rapid-ly to 9% in September-October, before finishing the year at 13%.

-4.0%

-2.7%

-10%-8%-6%-4%-2%0%2%4%6%8%

10%12%14%16%

2016 2017 2018 2019

Industrial Production Growth (YoY change, Calendar Adjusted)

Annualized(12 month MA)

18.7%

29.5%

0%

5%

10%

15%

20%

25%

30%

35%

CPI (YoY change)

Food prices (YoY change)

Core and Food Price Inflation

28.7%

18.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

PPI CPI

CPI and PPI 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

3

Economy (II)

DenizBank Economic Update

June 2019

Central Bank may start its easing cycle as soon as this month

● Central Bank (CBRT) kept the policy (one-week repo) rate unchanged at 24% for the ninth month in June meeting as widely expected. Yet, CBRT’s statement on monetary policy was less hawkish, with the removal of emphasis on the risks to price stability and commitment to maintaining tight policy, raising the expecta-tions of a rate cut in July. Moreover, perceived as a beginning to the easing cycle, Central Bank opened a new liquidity facility for the primary dealer (PD) banks, providing certain amount of funding to PDs at inter-est rate already 100 bps below the policy rate, bringing average funding rate to 23.8%.

●Given the faster-than-anticipated disinflation process, recent appreciation in TL (7% since the end of May), easing signals from core central banks and extended weakness in domestic demand, it is likely that the CBRT will start rate cuts earlier than previously forecasted. Based on our revised inflation trajectory, we expect CB to start its easing cycle in July with an initial cut of 100 bps, and deliver a cumulative 400 bps cut till the end of 2019.

Ex

tern

al S

ec

tor

Current account balance will record annual surplus for the first time since 2002

● Contraction in economic activity and imports, combined with steady increase in goods exports and ser-vices revenues led to a rapid improvement in Turkey’s external balances starting in 2H18. While imports decreased by 20% in the last 12 months following the sharp depreciation of TL, exports increased by 5%. Meanwhile, rising net tourism and transportation income balanced out most of the remaining external trade deficit. As a result, annual current account deficit (CAD) decreased to $9 bn (1.2% of GDP) in April from $57 bn (6.5% of GDP) a year ago, its lowest level since 2004. Current account surplus excluding energy and gold reached record high level of $36 bn (%5 of GDP).

● On the financing side; reserve drawdowns ($15 bn), net errors and omissions ($12 bn) and FDI inflows ($10 bn) compensated for banks’ debt repayments ($19 bn) and deposit outflows ($23 bn), and financed the shrunken current account deficit. Financial account recorded $0.5 bn portfolio outflows annually, compared to $ 19 bn inflow same period the previous year.

● In May-June period, annual trade deficit decreased further by $8.3 bn, suggesting current account bal-ance have turned to a surplus for the first time since 2002. As economic activity picks up gradually in 2H19, we expect CAD/GDP to finish the year at 1%.

Mo

ne

tary

Po

lic

y

-12

-45

-75-49

-65

-44-32 -33

-47

-27-9

-1.9%

-5.9%

-9.0%

-5.6%

-6.8%

-4.7%-3.7%-3.8%

-5.6%

-3.5%

-1.2%

-11%

-9%

-7%

-5%

-3%

-1%

1%

-90

-80

-70

-60

-50

-40

-30

-20

-10

0Current Account Balance (Bn $)

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

-9

36

30

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

010203040

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Current Account Balance

Current Account Balance (ex. gold)

Current Account Balance (ex. energy and gold)

Current Account Balance (Bn $ , 12M Trailing)(Bn $)

0

2

4

6

8

10

12

14

16

18

2015 2016 2017 2018 2019

2 Year 1 Year

Turkish Bonds' Real Interest Rate (%)

23.824.0

19.2

6

8

10

12

14

16

18

20

22

24

26

28

30

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

Weekly Repo Rate

Average Funding Rate

O/N Lending and Borrowing Rates

LLW Lending Rate

BenchmarkBond Yield

Policy Rates (%)

4

Financial Markets

DenizBank Economic Update

June 2019

De

bt

Ma

rke

t

Supported by accommodative stance of core central banks and decreased political risks, Turkish Lira appreciated by 7% since the end of May. Despite recent appreciation, TL remains as the weakest performing EM currency on year-to-date basis (-7%) after Argentine Peso.

Cu

rre

nc

y M

ark

et

Sto

ck

Ma

rke

t

Thanks to the positive sentiment in June, Turkey’s risk premium and funding cost decreased sig-nificantly compared to the recent peak in May. Turkey’s CDS spread fell to 370 bps and 2-year TL benchmark bond yield decreased 570 bps down to 19.2%, lowest since March 2019.

MSCI Turkey index was also up 11% (in TL terms) in June led by banking shares, overperforming EM peers (MSCI EM index was up 7%) and bringing year-to-year gains up to 9.1%.

Data retrieved from Bloomberg as of 13:00 (GMT + 3), 02.07.2019

90110130150170190210230250270290310330

2014 2015 2016 2017 2018 2019

TL EM Average

Ap

pre

ciat

e

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

De

pre

ciat

e2.4%

3.5%

3.2%

1.3%

3.6%

0.5%

0.7%

5.3%

-7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6%

ZAR

TRY

RUB

PLN

MXN

HUF

BRL

ARS

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

-23.8%

-19.2%

-15.6%

-18.4%

-30% -25% -20% -15% -10% -5% 0%

Turkey

S.Africa

Russia

Brazil

CDS

147

110

163

371

EM CDS Spreads Monthly Change (%, 5 Year)

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

3.8%

7.4%

1.1%

14.4%

-1% 1% 3% 5% 7% 9% 11% 13% 15%

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 is at 16.9% as of Apr’19.

Fu

nd

ing

FX deposits went up by 15% since the beginning of 2019 while TL deposits decreased by 1%.

Le

nd

ing

Year-to-date loan growth has been weak at 7.9% (1.8% net-of-currency) since the beginning of the year.

June 2019

88 77102

91 100 90 85 9580 74

19.0%

16.6%17.9%

15.3%16.3% 15.6% 15.6%

16.9% 17.3% 16.9%

14.0% 13.3% 13.2% 14.1%

13.8% 12.7%

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, %)

16

5

15

2 16

1

147

14

4

143

13

6 14

4

14

4

14

2

5060708090

100110120130140150160170180

Liquidity Coverage Ratio

Regulatory Minimum

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

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

19% 21% 22% 23% 23% 23% 24% 23% 26% 27%

Other Loans Gov. Bonds

Breakdown of Total Assets

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

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

13% 12% 13% 11% 12% 11% 11% 11% 11% 10%

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)

140

160

180

200

220

240

500

600

700

800

900

1000

1100

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 111% while TL LDR increased to 144%.

Lo

an

Qu

ali

ty

Headline NPL ratio for the banking sector rose moderately to 4.3% by the end of 1H19.

P &

L

Banking sector’s annual net profit increased marginally by 2% YoY to TL 51 bn in Apr’19. RoE of the sector decreased to 12.4%.

June 2019

19.0

16.6

17.9

15.316.3 15.6 15.6

16.9 17.3 16.9

18.0

14.2 14.413.1

11.410.5

13.314.8

13.712.4

5

7

9

11

13

15

17

19

10

12

14

16

18

20Capital Adequacy and Profitability

CAR (%) ROE (%)

22.1 19.8 23.5 24.7 24.6 26.1

37.5 48.653.5 50.9

10%

-10%

19%

5% 0%

6%

44%

30%

10%2%

0

10

20

30

40

50

60

-20%

0%

20%

40%

60%Annual Net Profit

Net Profit (Bn TL)

Annual Change (%)

76

% 84

% 97

%

10

2%

10

8%

11

7%

119%

11

9%

12

2%

11

7%

11

1%

50%

60%

70%

80%

90%

100%

110%

120%

130%Loan to Deposit Ratio(%)

84

%

87

% 10

5%

112% 12

4%

132% 14

2%

13

4%

14

8%

13

7%

14

4%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

TL Loan to Deposit Ratio(%)

4.3%

3.0%3.2%

6.0%

7.7%

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)