Turkey Wake up call: Macro and Political News, 17th February

This analysis by GLOBAL Securities is presented to you by Raiffeisen Centrobank AG. Raiffeisen Centrobank AG acts solely as a distributor of this analysis and has not introduced any material changes to the content of this analysis or any recommendation included herein.

Wake – up call

BIST slipped 0.32% on Friday and ended the week with a cumulative decline of 0.71%. After a positive start on Friday morning, BIST100 climbed to 121.5k level which proved to be a tough nut to crack and profit taking in the afternoon erased earlier gains and a bit more. Banks again underperformed with the 0.75% retreat in their sector index amid pressure on GARAN and ISCTR while the two state lenders as well as YKBNK managed to close higher. Aviation stocks, TUPRS, VESTL, ARCLK, and TCELL were among the laggards of non-financials while ASELS, PETKM, KCHOL, GUBRF, AKSA, and SISE topped the gainers. Today, our local macro agenda highlight will be the January'20 central government budget numbers due at 11AM local time. We foresee a flattish open for the BIST amid mixed signals from international markets and a stable lira just below the 6.05 mark vs dollar. U.S. futures are up 0.25% in early trades while Asian markets are cruising in different directions, mostly on country-specific developments.
Macro and Political News:
(+) Erdogan and Trump discussed Idlib, Libya and bilateral trade over the phone… President Erdogan and his U.S. counterpart Donald Trump discussed regional developments and negotiations to increase the bilateral trade volume in a phone call Saturday. The Turkish Presidency said the two leaders discussed recent developments in Syria, stressing that the Bashar Assad regime’s attacks on the northwestern province of Idlib are unacceptable. The Presidency said in a statement that Erdogan and Trump also discussed ways to end the crisis in Idlib without further delay. The presidents also agreed to restart negotiations to boost the bilateral trade volume to USD100bn per year.
(=) Erdogan: Turkey won’t be silent as Syrian regime surrounds its posts… President Erdogan said Turkey cannot remain silent while the Syrian regime forces surround Turkish observation points in northwestern Idlib. Speaking to reporters on his return flight from an official visit to Pakistan, President Erdogan said recent clashes in Idlib have inflicted heavy losses on regime forces, causing concern for both the Assad regime and Moscow. The Turkish president stated that Ankara’s main concern is that the regime's offensive in Idlib is pushing nearly 1 million people toward the Turkish border. Erdogan said that Turkey already host 3.5-4 million Syrian refugees and does not have the capacity to accept another million, adding that Ankara has requested financial help from Germany and other European states to build these shelters.
Speaking about recent developments in Libya, Erdogan said Turkey is determined to continue providing support in line with training and security deals signed with the internationally recognized government led by Prime Minister Fayez al-Sarraj. He underscored that senior Russian officials are currently managing the war in Libya with Gen. Khalifa Haftar and using additional soldiers brought from Sudan and Chad. Erdogan also criticized France, Egypt and the United Arab Emirates for providing financial support and weapons to Haftar’s forces.
The president also commented on the controversial “Deal of the Century”, unveiled by U.S. President Donald Trump in January and said the plan threatens regional peace and tranquillity. President Erdogan stressed that Turkey will never allow “legitimization of invasion, annexation and destruction”.
(+) Turkish FM: Syria disagreements won’t affect Turkey-Russia ties and S-400 deal… Foreign Minister Mevlut Cavusoglu said that differences over Syria should not affect Ankara's relations with Moscow or disrupt its contract for the purchase of Russian S-400 missile systems. Cavusoglu said after meeting his Russian counterpart Sergei Lavrov that Turkey and Russia must not allow the problems in Syria to undermine co-operation and relations. Also, Turkish foreign minister said he has reiterated the necessity of permanent cease-fire in Idlib, northwestern, Syria during his meeting with his Russian counterpart in Munich, adding that a permanent cease-fire should be established, he added.
(+) Turkish and Russian diplomats hold positive talks in Munich… Turkish and Russian delegations are set to meet in Moscow on February 17 amid escalated tension in the Syrian province of Idlib where the Turkish and Syrian military forces pit against each other with concerns of fresh armed conflicts between the two. The Moscow meeting was announced after Turkish and Russian foreign ministers, Mevlut Cavusoglu and Sergei Lavrov held a face-to-face meeting in Munich on Feb 15 to discuss the recent standoff and ways to de-escalate in Idlib.
Cavusoglu said on Twitter that he had a positive meeting with Foreign Minister Sergey Lavrov of Russian Federation, adding that delegations will continue meeting in Moscow on Monday. Lavrov, for his part, said Turkey and Russia have “very good relations” but that does not mean they have to agree on everything, highlighting that full agreement on all issues cannot be possible between any two countries. Recalling the need to dissociate moderate opposition groups from terrorists, the Russian minister said that the task is difficult but contacts between Russia and Turkey at the expert level - between diplomats, military, security services - are aiming to find ways to implement the agreements on Idlib. The next round of talks will take place this week.
(+) Turkish delegation to visit Russia for Idlib talks… A Turkish delegation will visit Russia on Feb. 17 to discuss the situation in Idlib in Northwestern Syria. Foreign Minister Mevlut Cavusoglu said that President Erdogan has already expressed Turkey’s determination. The minister’s remarks came while talking to reporters after a meeting with his German counterpart Heiko Maas on the sidelines of the Munich Security Conference. He asserted that the Syrian regime recently intensified its aggression because it believed in a military solution to the conflict rather than a political one.
(+) Turkish residential property sales surge in January… Residential property sales in Turkey surged 55.8% year-on-year in January. A total of 113,615 houses changed hands last month, up from 72,937 the previous year, according to the TurkStat. Housing sales to foreign buyers also rose significantly during the same period, up 23.3% to 3,907 units. Istanbul enjoyed the lion's share of sales to foreign buyers, with 48% (or 1,875 units). The Mediterranean holiday resort city of Antalya followed with 762 properties, while the capital Ankara came third with 235. January data showed that Iraqi citizens made up the largest group of foreign sales according to nationality, as they bought 739 houses in Turkey. They were followed by Iranians with 678 house sales, Russians with 254, Afghans with 204, and Yemenis with 142.
(=) Current account saw USD2.8bn gap in December… Turkey’s current account balance posted a deficit of USD2.8bn in December 2019. Official data showed that the figure widened USD1.7bn from the same month of previous year. The 12-month rolling surplus totalled USD1.67bn. Bloomberg survey projected the current account balance to post a USD3bn deficit in the month. The figure was driven by USD2.1bn rise in goods deficit recording net outflow of USD3.4bn, adding that primary income gap also rose USD93mn to USD1.1bn. Current account surplus excluding gold and energy totalled USD1.5bn, indicating a fall of USD1,4mn compared to December 2018. Travel items, which constitute a major part of the services account, recorded a net inflow of USD1.1bn in December 2019, increasing USD214mn compared to the same month of previous year. Turkey’s treasury and finance minister said 12-month rolling surplus of USD1.67bn reflects the success of stabilization process in 2019.

Sector and Company News:

(=) ENKAI bought 1.2mn lots of its own shares with TRY6.70-6.75 price range per share.

(=/-) According to Automotive Manufacturers’ Association data, total motor vehicle production remained flat YoY at 110k units in Jan20. While commercial vehicle production down by 11% YoY to 34k units, passenger car production was strong with a 6% YoY growth to 75k units. In Jan20, total automotive exports shrank by 4% YoY to 90k units. While commercial vehicle exports were down by 15% YoY to 30k units, passenger car exports grew by 3% YoY to 60k units. Meanwhile tractor production grew by 137% YoY to 2,515 units thanks to the recovery in domestic market. In this period, tractor exports increased by 32% YoY to 1,468units. FROTO’s (-) and TOASO’s (-) exports declined by 12% and 7% YoY, respecitvely. Honda and Toyota increased their export shipments by 36% and 25% YoY, respectively. Recall that TTRAK (+) increased its export shipments by 26% YoY to 1,348 units in Jan20.

(=/+) PGSUS posted 2.57mn passenger traffic for January 2020, up by 9.4% YoY. During this period, domestic passengers increased by 2.9% YoY, while international pax were up by 18.8% YoY, continuing its upward trend. Load factor, on the other hand, was up by 430 bps, reaching 89.8%, with 90 bps and 860 bps YoY respective increase in domestic and international load factor.

(=) President Erdogan spoke about the transfer of 28% of Republican People’s Party (CHP) shares in Is Bankasi (ISCTR) to the treasury at last weekend. He said that a team of attorneys have been instructed to accelerate the process

(=/+) VAKBN posted TRY1.28bn net income (154% QoQ vs. 22.63% YoY) for 4Q19 25% above the consensus estimate vs. 22% from Global estimate. The reason for the deviation from our estimate has been the bank’s better than expected NIM performance in Q4. While the interest income remained flattish for both quarterly and yearly terms, the main drivers of the solid performance in the bottom line are i) significant improvement in interest expenses (-19% QoQ and -22% YoY) due to the declining interest rate environment ii) a substantial decline in trading losses segment, which was down by 36% QoQ . The solid performance in NIM (4.41% swap-adjusted) was slightly offset by the high provisions for expected credit losses that increased by 24% QoQ and 150% YoY from TRY960mn in 4Q18 to TRY2405mn in 4Q19. While net fees and commissions income remained flattish quarterly, the yearly upward movement by around 42% has been remarkable.
The liquidity structure of the bank also improved in the last quarter. The LDR ratio declined from 123% in 4Q18 and 113% in 3Q19 to 109% in 4Q19 together with the composition of smaller loan growth than deposit growth in the same last quarter which was 6.16% and 9.52% respectively.
In terms of asset quality, VAKBN closed the year with a 5.90% NPL ratio which has been slightly lower than the sector averages that hover around 6-6.50%. However it is noteworthy to remind that the bank's CoR figure increased 56 bps QoQ and 169 bps YoY.
As for solvency, the bank managed to keep its strong buffers with 16.6% CAR and 13.59% CET-1 ratio, both are way above international standards.
A solid performance in opex growth has been evident in both quarterly and yearly terms, up by 6.6% QoQ vs. down by -7.81% YoY which indicates with its lower than sector average C/I ratio of 30%.
All told, the bank managed to keep its profitability, take the advantage of rate cuts in the 4Q19 and succeed to keep its asset quality deterioration below the sector averages.

TRYmn 4Q19 Actual Consensus Estimate Global Estimate Dev. from consensus Dev. From Global Estimate 4Q18 YoY 3Q19 QoQ
Net Income 1,280 1,025 1,053 24.91% 21.59% 1,044 22.63% 503 154.53%
NIM (swap-adjusted) 4.41% 3.65% 0.76% 4.08% 0.33%
Loan Growth 6.16% -5.60% 11.76% 4.00% 2.16%
Securities Growth 14.00% 4.60% 9.40% 0.03% 13.97%
Deposit Growth 9.52% -6.02% 15.54% 7.20% 2.32%
LDR 109% 123.50% -14.30% 113% -3.80%
ROE 16.10% 16.10% 0.00% 6.90% 9.20%
ROA 1.30% 1.20% 0.10% 0.60% 0.70%
C/I 30.20% 34.5% -4.30% 38.60% -8.40%
NPL Ratio 5.90% 4.65% 1.25% 5.23% 0.67%
CoR 2.60% 1.69% 0.91% 2.04% 0.56%
Tier 1 Ratio 13.59% 13.75% -0.16% 13.80% -0.21%
CAR 16.61% 16.99% -0.38% 17.00% -0.39%
Net Interest Income 4,598 2,591 77.46% 3,302 39.25%
Fee Growth -4.50% 17.50% -22.00% 28.00% -32.50%
Fee Income 1,047 738 41.92% 1,097 -4.52%

(=) HALKB posted TRY797mn net income in 4Q19, (up by 158% QoQ vs. 152% YoY) in line with the consensus estimate and 14.6% above our estimate. The reason behind the deviation was mainly due to lower than expected interest expense. While the interest income declined slightly by -9% both YoY and QoQ, the sharper decrease in interest expenses (-22% QoQ vs. -23% YoY) helped HALKB to improve its bottom line. On the other hand, quarterly 32% of lower trading losses also contributed to net income. The provisions for expected credit losses, (up by 95% QoQ vs. 16.4% YoY) were the key factor against further expansion at bottom line. The opex growth was slightly higher both quarterly and yearly terms, by 8% and 14% respectively. However the bank's C/I ratio is 50%, which is way more than the sector average despite 550 bps improvements QoQ.
In terms of asset quality, HALKB posted 5.1% of NPL ratio however, it should be noted that the NPL coverage ratio of the bank is 55.8% and it is lower than the sector average.
In 4Q19, HALKB improved its liquidity structure by lowering its LDR 102% from 105.6% in 3Q19 but still slightly lower than 4Q18 levels which was 100.7%.
As for capital buffers and solvency, both CAR and Tier-1 ratios (14.3% and 11.7% respectively) are above the international standards however below the sector averages.
All told, HALKB kept its profitability as the primary purpose for the last quarter of the year and we believe the bank will further improve its key metrics and financials in 2020 when the economic recovery is widely expected.

TRYmn 4Q19 Actual Consensus Estimate Dev. from consensus Global Estimate Dev. From Global Estimate 4Q18 YoY 3Q19 QoQ
Net Income 797 775 2.84% 695 14.68% 317 151.78% 308 158.77%
NIM (Non-adjusted) 2.40% -2.40% 3.00% -3.00%
Loan Growth -4.80% 4.80% 5.50% -5.50%
Securities Growth 3.26% -3.26% -2.80% 2.80%
Deposit Growth 4.08% -4.08% 7.70% -7.70%
LDR 100.70% -100.70% 105.60% -105.60%
ROE 9.30% -9.30% 4.20% -4.20%
ROA 0.70% -0.70% 0.30% -0.30%
C/I 50.5% -50.50% 55.70% -55.70%
NPL Ratio 3.20% -3.20% 4.60% -4.60%
CoR 1.15% -1.15% 1.00% -1.00%
Tier 1 Ratio 10.70% -10.70% 11.40% -11.40%
CAR 13.80% -13.80% 14.20% -14.20%
Net Interest Income 1,953 -100.00% 2819.00 -100.00%
Fee Income 563 -100.00% 713 -100.00%
Fee Growth 17.60% -17.60% -0.97% 0.97%