1
DenizBank Economic Update
October 2017
Economy
Financial Markets
Banking Sector
Economic Research and Strategy
Saruhan Özel, Ph.D.
Ezgi Gülbaş
Orhan Kaya
Deniz Bayram
2
Economy (I)
DenizBank Economic Update
October 2017
Gro
wth
In
fla
tio
n
Economic activity accelerates in the third quarter of the year…
Seasonally and calendar adjusted industrial production (IP) index contracted MoM by 0.1% in August. The unadjusted index rose 3.8% annually. Annualized IP growth reached 3.3%.
Early indicators signal economic activity stayed on a high note throughout the third quarter and perfor-mance remains to be positive in the last quarter of the year as well. PMI has stayed above 50 for 7 consec-utive months. Capacity utilization, first indicator of the fourth quarter from real sector, has gone up to 79.4%. This is the highest level of the data since August 2008.
Third quarter GDP growth rate, which will be announced on Dec 11th, will likely be this year’s peak. With
incentives coming to an end, GDP growth rate may start to ease from Q4 onward. Overall, we expect GDP growth to be 5.0% in 2017.
Base effect and currency depreciation pushes inflation higher...
● CPI in September increased MoM by 0.65%, in line with the market expectation of 0.63%. Decline in food prices continue. Monthly food inflation was –0.23%.
● Annual inflation jumped to 11.2% from 10.7% a month ago. Annual food inflation went up to 12.5% from 12% a month ago, due to low base effect. Core CPI (CPI excluding food, energy, non-alcoholic and alcohol-ic beverages, tobacco, gold) increased sharply to 11% from 10.2%. Producers’ price index increased YoY by 16.3%.
● The base effect continues to work unfavorably in inflation dynamics. In October and November, inflation is expected to remain in high levels. In December, the impact of base effect will reverse and bring annual rate down, starting a downward trend into 2018. However, the latest depreciation in currency starting mid—September, will likely diminish the impact and duration of this downward trend.
3.8%3.3%
-30%
-20%
-10%
0%
10%
20%
30%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Industrial Production Growth (Non - Seasonally Adjusted)
Annualized (12 month ma)YoY change
11.20%
10.98%
2%
4%
6%
8%
10%
12%
14%
Headline CPI
Core CPI (C)
Headline and Core Inflation
0.65%
-0.05%
0.00%0.06%
0.26%
0.11%0.01%
0.08%0.18%
-0.5%
0.5%
CPI Food&Bev.
Alc bev&Tobacco
Cloth Trans HousingRecreation&Culture
Cafe&Hotels
Other
Jun-17 Jul-17 Aug-17 Sep-17
Contribution to Monthly CPI
3
Economy (II)
DenizBank Economic Update
October 2017 M
on
eta
ry
Po
lic
y
Ex
tern
al S
ec
tor
Central Bank of Turkey is committed to tight monetary stance until inflation improves significantly...
● In its October meeting, Central Bank of Turkey (CBT) kept weekly repo, O/N lending and borrowing rates and late liquidity funding lending rate unchanged at 8.0%, 9.25%, 7.25% and 12.25% respectively. Mone-tary Policy Committee will convene next on December 14th.
● The decision statement was pretty much unchanged, except for the part where CBT underlines its contin-ued commitment to tight monetary stance.
● The spike in August inflation was higher than expected. In September, core inflation jumped sharply. Cur-rency has depreciated 6% against USD in October, possibly deteriorating pricing behaviour further. The de-velopments in inflation front in the last two months indicate that the expected downward trend of inflation start-ing from December may be weaker and slower than anticipated. This would require CBT to hold on to tight monetary policy, i.e. keeping average weighted funding high c. 12%.
Energy and gold deficit grow wider, but current account deficit is stable thanks to tourism reve-nues.
● Current account deficit (CAD) in August came slightly below expectations (Bloomberg: $1.4 bn) at $1.2 bn. 12 month cumulative CAD decreased slightly to $37.0 bn from $37.1 bn in July (Aug 2016: $30.3 bn).
● Portfolio inflows peaked in the first eight months of the year, reaching $20bn and continued to be the main source of financing the deficit. Annualized tourism revenues increased to $15.9 bn from $ 15.2 bn a month ago.
● Annualized core deficit narrowed down to $0.4 bn in August from $1.9 bn from a month ago. Annualized gold deficit increased to $7.9 bn from $7.3 bn a month ago. Annualized energy deficit increased to $28.8 bn from $28.0 bn a month ago.
● Annual trade deficit in September has widened, indicating that CAD may widen as well. However, CAD to GDP ratio in the remainder of the year is expected to stay at manageable levels, namely below 5%.
-32 -38 -40
-12
-45
-75
-49-65
-44-32 -33 -37
-5.8%-5.6%-5.2%
-1.9%
-5.9%
-9.0%
-5.6%-6.8%
-4.7%-3.7%-3.8%-4.4%
-15%
-13%
-11%
-9%
-7%
-5%
-3%
-1%
1%
-110
-90
-70
-50
-30
-10
Current Account Balance (Bn $)
CA Bal. Current Account Deficit (% of GDP)
-37.0
-0.4
-28.8
-80
-60
-40
-20
0
20
2009 2010 2011 2012 2013 2014 2015 2016 2017
Current Account Balance
Energy Balance
Current Account Balance (exc. energy and gold)
(Bn $)
6
8
10
12
14
Jan-15 Jan-16 Jan-17
CBRT Weekly Repo Rate
CBRT Average Funding Rate
O/N Lending Rate
O/N Borrowing Rate
Late Liquidity Window Lending Rate
Benchmark Bond Yield
Policy Rates (%)
-150
-100
-50
0
50
100
150
200 Bond yield spreads (bps)
Spread between 2 and 5 year bond yields
Spread between 2 and 10 year bond yields
4
Financial Markets
DenizBank Economic Update
October 2017
De
bt
Ma
rke
t
2-year benchmark bond yield is at 12.80%.
Cu
rre
nc
y M
ark
et
Sto
ck
Ma
rke
t
EM currencies continued to depreciate against USD.
Stock market indices performed well in October.
Data retrieved from Bloomberg as of 17:00 (GMT + 3), 31.10.2017
6
8
10
12
14
Jan-15 Jan-16 Jan-17
CBRT Weekly Repo Rate
CBRT Average Funding Rate
O/N Lending Rate
O/N Borrowing Rate
Late Liquidity Window Lending Rate
Benchmark Bond Yield
Policy Rates (%)
-1.0%
-9.6%
-10.0%
-12.5%
-15% -10% -5% 0%
Turkey
Poland
Russia
Brazil
CDS185
128
48
185
EM CDS Spreads Monthly Change (%, 5 Year)
95105115125135145155165175185195205215225
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
TL EM Average
Ap
pre
cia
te
EM Currencies (against $, Jan- 13=100)
De
pre
cia
te
-3.8%
-5.9%
-0.8%
0.9%
-4.8%
2.4%
-0.6%
0.1%
-3.5%
-7.0% -5.0% -3.0% -1.0% 1.0% 3.0%
ZAR
TRY
RUB
PLN
MXN
KRW
HUF
CZK
BRL
Hundreds
Monthly Change Against $ (Positive Values= appreciating against $)
1.3%
3.8%
-1.4%
2.2%
-2% 0% 2% 4%
EM Banks
US Banks
EU Banks
TR Banks
Monthly Performance of Banking Shares (%)
5
Banking Sector (I)
DenizBank Economic Update
Ca
pit
al
CAR increased to 17.2% in Sep 2017.
Fu
nd
ing
Share of deposits in funding was at 57% as of Sep 2017.
Le
nd
ing
Annualized loan growth is at 13.4% as of Oct 20th.
October 2017
167 170 165152
161147 144 143
136142
50
100
150
200 Liquidity Requirement Ratio
Regulatory Minimum75
8877
10291
10090 85
97
5668
59
7970 75
65 6170
20.6%19.0%
16.6%17.9%
15.3%16.3%
15.6%15.6%17.2%
0%
5%
10%
15%
20%
25%
0
20
40
60
80
100
120
2009 2010 2011 2012 2013 2014 2015 2016 Sep-17
Owners' Equity Free Capital CAR
Capital, Free Capital and CAR ($ bn, %)
69% 67% 65% 62% 61% 60% 59% 58% 57%
10% 12% 14% 14% 17% 18% 18% 19% 19%
13% 13% 12% 13% 11% 12% 11% 11% 11%
7% 7% 9% 10% 11% 11% 11% 12% 13%
2009 2010 2011 2004 2013 2014 2015 2016 Sep. 17
Other Capital Wholesale Deposit1673.5
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
1700
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Total Deposits (TL bn)
13.4%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Loan Growth Rate(13W MA, Annualized, Net of Currency)
Macro Prudential Tightening
35% 32% 28% 26% 32% 29% 23% 20% 17% 15% 14% 13% 12%
38% 44% 49% 50% 47% 52% 56% 58% 60% 62% 63% 64% 65%
26% 24% 23% 23% 21% 19% 21% 22% 23% 23% 23% 24% 22%
200520062007200820092010201120122013201420152016 Sep-17
Other Loans Gov. Bonds
Breakdown of Total Assets
6
Banking Sector (II)
DenizBank Economic Update
Lo
an
to
De
po
sit
Ra
tio
s
Loan to deposit ratio is 120% in September.
Lo
an
Qu
ali
ty
Headline NPL ratio for the sector is at 3.0% as of Sep 2017.
P &
L
In Sep 2017, banking sector’s annual profit increased YoY by 27% while ROE is 14.4%.
October 2017
3.0%
2.8%
6.9%
4.4%
1.9%
0%
2%
4%
6%
8%
10%
12%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Headline Consumer LoansCredit Cards SMECorporate-Commercial
20
40
60
80
100
120
2010 2011 2012 2013 2014 2015 2016 2017
Protested Bills and Unpaid Cheques(# Thousands)
Protested Bills (3 Months m.a)
Unpaid Cheques (3 months m.a)
14.9 13.420.2 22.1 19.8
23.5
24.7
24.6 26.1
37.5
45.8
31%
-10%
50%
10%
-10%
19%
5%
0% 6%
44%
27%
0
5
10
15
20
25
30
35
40
45
50
-20%
0%
20%
40%
60% 12 Months Cumulative Profit
TL bn Annual Change (%)
18.918.020.619.0
16.617.915.316.315.615.617.2
22.0
16.5
20.5
18.0
14.2 14.413.1
11.410.5
13.314.4
0
5
10
15
20
25
0
5
10
15
20
25 CAR (%) ROE
33
% 43
% 51
% 62
% 71
%
79
%
80
%
76
%
84
% 97
%
10
2%
10
8%
11
5%
11
8%
11
8%
12
0%
0%
20%
40%
60%
80%
100%
120%
200220032004200520062007200820092010201120122013201420152016 Sep
17
Loan to Deposit Ratio (%)
33% 46
% 60% 71
% 87%
93%
90%
84%
87% 10
5%
112% 12
4%
131%
141%
134% 14
7%
0%
20%
40%
60%
80%
100%
120%
140%
160%
200220032004200520062007200820092010201120122013201420152016 Sep
17
TL Loan to Deposit Ratio (%)