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 (%)

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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

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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 (%)