1

DenizBank Economic Update

January 2018

Economy

Financial Markets

Banking Sector

Economic Research and Strategy

Saruhan Özel, Ph.D.

Ezgi Gülbaş

Deniz Bayram

2

Economy (I)

DenizBank Economic Update

January 2018

Gro

wth

In

fla

tio

n

Growth remained strong in the fourth quarter of 2017...

● Following a 11.1% surge in GDP in 3Q17, leading indicators suggest that growth performance remained strong in 4Q17. In the first two months of 4Q17, the unadjusted IP index was up 8%, lower than 3Q17 (13.7%), but still well above 1H17 (1.9%). Moreover, manufacturing PMI rose to 54.9 in December, close to its highest levels since 2011, and well above the long term average of 50.8.

● Early indicators signal that economic activity remains positive at the beginning of 2018, as well. Capacity utilization in January was at 78.7%, close to 2017 average of 78.5%. Real sector confidence index was strong at 110.9, with increased investment spending and export order expectations.

● Industrial production and other preliminary indicators show that economic activity remained strong in 4Q17. Nevertheless, the surge in imports signals that the contribution of net exports may turn to negative. Also as fiscal incentives expired and credit stimulus reached its 2017 limits by 4Q17, we expect growth to somewhat moderate in 4Q17, but 2017 overall growth rate to be strong at 6.5%. In 2018, with credit gua-rantee facility loans declining significantly compared to 2017, we expect growth to lose some momentum. Risks to government’s 5% growth target are tilted to the downside.

Inflation started a downward trend thanks to favorable base effect...

● In December, CPI increased MoM by 0.69%, in line with the market expectations. December CPI was mainly driven by sharp increases in food and transportation prices. Food prices increased MoM by 1.52% contributing 0.33 pp to the monthly CPI. Transportation prices increased by 1.69% contributing 0.28 pp to the CPI as motor vehicle prices rose due to weaker TL.

● As favorable base effect kicked in, annual inflation decreased to 11.9% in December from the 13% peak in November. Core inflation (CPI excluding food, energy, non-alcoholic and alcoholic beverages, tobacco, gold) on the other hand continued its upward trend, rising to 12.3%, its highest level since 2004. Annual producers’ price inflation remains elevated at 15.5%.

● Thanks to the favorable base effect and waning impact of exchange rate depreciation, we expect inflation to be on a downward trend in the first four months of 2018. However, given the continued cost pressures and the elevated levels of core inflation and producer prices, we expect a limited and transient downward movement. We expect annual inflation to remain at double digits most of the year in 2018 and to be 9.5% at the year-end.

78.7%

60%

65%

70%

75%

80%

85%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Capacity Utilization Rate(Seasonally Adjusted)

6.9%

5.7%

-30%

-20%

-10%

0%

10%

20%

30%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Industrial Production Growth (Non - Seasonally Adjusted)

Annualized (12 month ma)YoY change

0.69%

0.33%

0.00%-0.18%

0.28%0.11%

0.00% 0.04% 0.10%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

CPI Food&Bev.

Alc bev&Tobacco

Cloth Trans HousingRecrea&Culture

Cafe&Hotels

Other

Dec-14 Dec-15 Dec-16 Dec-17

Contribution to Monthly CPI

11.92%

12.3%

2%

4%

6%

8%

10%

12%

14%

Headline CPI

Core CPI (C)

Headline and Core Inflation

3

Economy (II)

DenizBank Economic Update

January 2018 M

on

eta

ry

Po

lic

y

Ex

tern

al S

ec

tor

Central Bank of Turkey stresses commitment to a tight monetary policy stance until inflation out-look improves significantly...

● In January meeting, as expected, Central Bank (CB) kept policy (8%), O/N lending (9.25%) and O/N bor-rowing (7.25%) and most importantly late liquidity window (12.75%) rates unchanged. CB continued to pro-vide all funding through late liquidity window and the average funding rate remained at 12.75%.

● Decision statement was marginally more hawkish with the emphasis on high inflation expectations and persistently tight policy stance. CB reiterated that monetary policy will be maintained tight decisively until the inflation outlook displays a significant improvement independent of base effects and temporary factors, and becomes consistent with the targets. CB stands ready for further tightening if needed.

●In the first quarterly inflation report of 2018, CB revised its 2018 year and inflation expectation from 7% to 7.9%. On the other hand, according to CB’s survey, markets’ year-end inflation expectations stands much higher at 9.6%. As the cost side factors continue to push inflation up, we see upward risks to CB ’s inflation

Current account deficit continued to widen with the upsurge in imports...

● In November, current account deficit (CAD) came at $4.2 bn, slightly above the expectations. 12 month cumulative CAD widened to $43.8 bn (5.1% of GDP) from $41.8 bn (4.9% of GDP) one month ago. Portfo-lio inflows reached $22 bn annually and became the main source of CAD financing in 2017.

● In November, annualized current account balance excluding energy and gold, which had improved signif-icantly in the first 8 months of the year, gave a deficit of $2.7 bn. Energy and gold imports continued to put an upward pressure on CAD. The annualized energy deficit went up YoY by 31% to $31.6 bn while annual-ized net gold imports reached $9.5bn. On the other hand, annualized tourism revenues were up YoY by 36% reaching $17.8 bn, partly compensating the increase in trade deficit.

● In December, annual trade balance gave the largest deficit of last 4 years, indicating CAD continued to widen. In 2018, with an improvement in gold balance and higher exports, we expect CAD to increase mod-erately while CAD to GDP ratio remains at manageable levels around 5.5%.

-43.8

-2.7

-31.6

-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)

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

-32 -38 -40

-12

-45

-75

-49-65

-44-32 -33

-44

-5.8%-5.6%-5.2%

-1.9%

-5.9%

-9.0%

-5.6%-6.8%

-4.7%-3.7%-3.8%

-5.1%

-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)

-200

-150

-100

-50

0

50

100

150

200 Bond yield spreads (bps)

Spread between 2 and 5 year bond yieldsSpread between 2 and 10 year bond yields

6

8

10

12

14

Jan-15 Jan-16 Jan-17 Jan-18

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 (%)

4

Financial Markets

DenizBank Economic Update

January 2018

De

bt

Ma

rke

t

As the end of January, Turkey’s 2-year benchmark bond yield is at 13.1%.

Cu

rre

nc

y M

ark

et

Sto

ck

Ma

rke

t

In January, TL and other EM currencies appreciated against USD.

In January, EM stock market indices continued to increase. MSCI Turkey Index was up MoM by 3.1% while MSCI EM Index was up by 9.1%.

Data retrieved from Bloomberg as of 14:00 (GMT + 3), 31.01.2018

6

8

10

12

14

Jan-15 Jan-16 Jan-17 Jan-18

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 (%)

1.2%

4.6%

-15.6%

-10.0%

-20% -15% -10% -5% 0% 5%

Turkey

Poland

Russia

Brazil

CDS

146

108

45

167

EM CDS Spreads Monthly Change (%, 5 Year)

95

105

115

125

135

145

155

165

175

185

195

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-14=100)

De

pre

cia

te

4.5%

1.1%

2.5%

4.5%

5.4%

-0.1%

3.7%

4.7%

4.1%

-1% 1% 3% 5%

ZAR

TRY

RUB

PLN

MXN

KRW

HUF

CZK

BRL

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

60

80

100

120

140

160

Jan-14 Jan-15 Jan-16 Jan-17

Stock Market Performance (Jan-14=100)

MSCI Turkey Index

MSCI EM Index 4.9%

2.7%

0.6%

11.6%

0% 2% 4% 6% 8% 10% 12%

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 CAR rose to 16.9% in 2017.

Fu

nd

ing

Deposits were up YoY by 15% to TL 1.73 trillion as of Jan19th. Share of deposits in funding was 56%.

Le

nd

ing

Annualized loan growth was stable at 13.1% as of Jan 19th.

January 2018

1729

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

1700

1800

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Total Deposits (TL bn)

13.1%

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

Jan

-18

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% 64%

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

2005 20062007200820092010 2011 2012 2013 201420152016 Dec-17

Other Loans Gov. Bonds

Breakdown of Total Assets

167 170 165152

161147 144 143

136144

50

100

150

200 Liquidity Coverage Ratio

Regulatory Minimum75

8877

10291

10090 85

95

20.6%19.0%

16.6%17.9%

15.3%16.3%

15.6%15.6%16.9%

14.0%13.3%13.2%14.1%

0%

5%

10%

15%

20%

25%

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 2015 2016 Dec-17

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

69% 67% 65% 62% 61% 60% 59% 58% 56%

10% 12% 14%14% 17% 18% 19% 20%

19%

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

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

2009 2010 2011 2004 2013 2014 2015 2016 Dec-17

Other Capital Wholesale Deposit

6

Banking Sector (II)

DenizBank Economic Update

Lo

an

to

De

po

sit

Ra

tio

s

By the end of 2017, loan to deposit ratio (LDR) rose to 123% while TL LDR rose to 148%.

Lo

an

Qu

ali

ty

Headline NPL ratio for the sector remained stable at 3.0%.

P &

L

In December 17, banking sector’s annual profit increased YoY by 31% to TL 49 bn and ROE went up to 14.9%.

January 2018

20

40

60

80

100

120

Protested Bills and Unpaid Cheques(# Thousands)

Protested Bills (3 Months m.a)

Unpaid Cheques (3 months m.a)

33% 43

% 51% 62

% 71%

79%

80%

76%

84% 97

%

102%

108%

115%

118%

118%

123%

0%

20%

40%

60%

80%

100%

120%Loan to Deposit Ratio (%)

33% 46

% 60% 71

% 87%

93%

90%

84%

87%

105%

112% 12

4%

131%

141%

134% 14

8%

0%

20%

40%

60%

80%

100%

120%

140%

160% TL Loan to Deposit Ratio (%)

23.721.918.918.0

20.619.016.617.9

15.316.315.615.616.9

11.9

19.9

22.0

16.5

20.5

18.0

14.2 14.413.1

11.4 10.5

13.314.9

0

5

10

15

20

25

0

5

10

15

20

25 CAR (%) ROE

14.9 13.420.2 22.1 19.8 23.5

24.7

24.6 26.137.5

49.1

31%

-10%

50%

10%

-10%

19%

5%

0% 6%

44%31%

0

10

20

30

40

50

60

-20%

0%

20%

40%

60%12 Months Cumulative Profit

TL bn Annual Change (%)

3.0%2.7%

6.5%

4.7%

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