Turkey Wake up call: Macro and Political News, 4th February

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Wake – up call

BIST inched up 0.09% yesterday after a day of ups and downs within a 1,000-point range for the benchmark index. Banks gained 0.22% on average with ISCTR and AKBNK catching some bids while YKBNK and GARAN faced some selling pressure. AEFES, TTKOM, ENJSA, MPARK, TRKCM, PETKM, THYAO, and PGSUS stood out as outperformers of non-financials while EREGL, KOZAL, SODA, ANACM, ENKAI, and SOKM topped the decliners. Today, our local macro highlight will be the Central Bank’s January'20 real effective FX rate due at 2:30PM local time. The CPI-based index is expected to recover a bit from its 5-month low of 76.17 for the previous month given ~0.3% appreciation of lira vs the currency basket along with the 1.35% headline CPI print for January. Separately, Treasury will re-issue 14-month discount bonds in its single domestic borrowing auction for today. Domestic redemption is T12.02bn for the week while Treasury has raised TL4.61bn in its auction held yesterday. BIST seems off to a slight positive start given the bounce-back in Asian markets and positive news-flow related to the HALKB case in the U.S. Lira is flattish, trading around the 5.9850 mark vs the greenback. U.S. futures are up some 0.65% in early trades, more than reversing the 0.4-0.5% overnight losses from the hour we left. Asian markets are all trading in the green as investors become more optimistic about efforts to contain the coronavirus outbreak.
Macro and Political News:
(-) Deadly clashes between Syria and Turkey highlight tensions in Syria… Turkey carried out rare and deadly strikes on Syrian military positions Monday, after accusing the Al-Assad forces of killing eight Turkish military personnel in a northern Syrian province of Idlib. The escalation of violence in Idlib province between Turkey and Syria was indeed the culmination of tensions over the region that had been building for years. Syrian President Bashar al-Assad has tried repeatedly to recapture Idlib, the last rebel-held territory in Syria, using tactics, like bombing hospitals and other civilian sites. Turkey has tried to stave off an all-out Syrian offensive, to protect its allies in Idlib and to prevent a surge of refugees toward the Turkish border. Russia has tried to stake out a position between the two rivals: by backing Assad on the battlefield, while participating in negotiations with Turkey aimed at de-escalating the violence.
(-) Turkey continues operations in Syria… President Erdogan said Monday that Turkey is determined to continue its military operations in Syria in order to ensure the safety of its own borders and the Syrian people. Erdogan told journalists in Istanbul before his official visit to Ukraine that the government are determined to continue our operations to ensure the safety of Turkey. Soon after Erdogan’s statements, Turkey would continue its operations to eliminate threats near its borders, it was reported that Turkish-backed Syrian National Army (SNA) artillery targeted the positions of YPG/PKK terrorists in the village of Khalidiya and in the vicinity of Ain Issa area north of Raqqa. Earlier in the day, eight Turkish soldiers were killed and nine others were injured after shelling by Assad regime forces in northern Syria.
There are 12 Turkish observation posts that were established as part of a deal signed between Turkey and Russia to prevent Assad regime attacks in Idlib. Although Turkey and Russia have agreed to stop acts of aggression and turn Idlib into a de-escalation zone, the Syrian regime has consistently violated the cease-fire, launching frequent attacks inside the designated zone. Following eight months of relative calm provided by the Sochi deal, the Bashar Assad regime intensified its attacks starting April 26, under the pretext of fighting Hayat Tahrir al-Sham (HTS) militants holed up in Idlib. Moscow is responsible for preventing attacks by the Assad regime and Iran-backed militia groups.
(-) Joint Turkish-Russian patrol in northern Syria cancelled… Joint Turkish-Russian patrol scheduled for Monday in northern Syria’s Ayn al-Arab was cancelled after regime attacks targeted Turkish soldiers in Idlib. The ruling Justice and Development (AK) Party Spokesperson Omer Celik rejected the Russian Foreign Ministry statement claiming that Turkey did not inform Russian authorities regarding the attack on the Assad regime in Syria’s Idlib. Celik said Turkey informs Russia on a regular basis, adding that Turkey also informed Russia on the latest attack on regime forces. He stressed that the mechanisms in place have been utilized like always. Earlier on Monday, the Russian Foreign Ministry claimed the Turkish military came under fire from Assad regime troops as they were allegedly targeting opposition forces in an area west of Saraqib. The ministry said in a statement that Turkish troops were changing locations at night in the Idlib de-escalation zone without informing the Russian side. The Russian ministry also noted that Turkish fighter jets did not violate Syria’s border and no attacks on regime troops were recorded. Turkey retaliated against the Assad regime attack.
(-) Erdogan warned Russia not to stand in way in Syria’s Idlib… Turkey has warned Russian authorities to avoid confrontation with the Turkish military in Syria’s northwestern Idlib province, as the country retaliates the Bashar Assad regime’s recent attack that killed eight Turkish soldiers. President Erdogan noted that Turkish officials have spoken with Russian authorities regarding the situation in Idlib and have told them to avoid confronting Turkish forces in the area during an operation to prevent incessant attacks by the Assad regime. The president said, if they do not see the desired results then he will speak with his counterpart Putin. He continued by adding that the ongoing Turkish operation is being carried out based on frequent correspondence between Turkish and Russian generals on the ground.
President Erdogan said that those who are testing Turkey’s determination with this kind of treacherous attack will realize they’ve committed a big mistake, underscoring that Turkey can’t remain silent as Turkish soldiers are martyred. He stressed that Turkey will continue to make them pay. Meanwhile Defense Minister Hulusi Akar said that Turkish warplanes and artillery units killed more than 75 Syrian soldiers and allied government forces. At the same time, though, Erdogan urged Russia to stay out of the fray, and not try to “halt” the Turkish operation, saying its target was the Syrian regime. Herein, Kremlin spokesman Dmitry Peskov told reporters on a conference call that Russian and Turkish militaries are in constant contact, adding that Russia remains concerned about the continued activity of terrorist groups in this Syrian region.
The Kremlin on Friday expressed concern about “terrorists” in Idlib attacking the Syrian army and the Russian base, while avoiding any direct criticism of Turkey. The Russian Foreign Ministry also limited itself to saying Russia is fulfilling its obligations, even when Erdogan directly criticized Moscow of failing to uphold promises to maintain the cease-fire in Idlib. To remind, Turkey sent reinforcements to Idlib as the advance of Syrian troops threatened to cut off some Turkish military outposts stationed on the perimeters of Idlib under a cease-fire monitoring mission negotiated with Russia and Iran.
(+) US stands by Turkey after Syria regime’s deadly attacks… The U.S. on Monday voiced solidarity with Turkey after Syrian regime strikes martyred over a half-dozen Turkish troops and injured several more. A State Department spokeswoman told Anadolu Agency on condition of anonymity. She said the U.S. stands by its NATO ally Turkey against these actions, send condolences to the Turkish government on the deaths of their people and fully support Turkey’s justified self-defense actions in response. She added that the U.S. is consulting with the Turkish government on this matter. Also, the spokeswoman state that the United States will do all in its power to block any reintegration of the Assad regime into the international community until it complies with all provisions of UNSCR 2254, including a nationwide ceasefire which incorporates Idlib.
(+) Finance minister: Turkey makes strong start into 2020 with production-based growth… Treasury and Finance Minister Berat Albayrak said Monday that Turkey has made a strong start to 2020 within the scope of its production-based growth target. Albayrak’s remarks came after Turkey's manufacturing activity hit its 22-month high in January, with new orders returning to growth and the rate of output expansion quickening. The Purchasing Managers' Index (PMI) for manufacturers rose to 51.3 in January, exceeding the 50-point line that separates expansion from contraction for the first time since March 2018, according to a report Sunday prepared by Istanbul Chamber of Industry. It was up from 49.5 in December.
New orders returned to growth with improving customer demand and new export orders also increased, ending a five-month moderation, the panel said. Manufacturers expanded production for the third consecutive month, as a result of the rise in new orders, it said, adding that some firms using inventories to meet new business led to the sharpest decrease in stocks since July. Employment rose for the first time in three months, which the panel linked to the need for additional resources. Input prices rose at the fastest pace in six months, which panellists said was due to ongoing currency weakness, while output prices rose at a moderate pace. Turkey closed 2019 with improvements in all indicators beyond expectations, Albayrak said in a post on his Twitter account. The relationship between the PMI data and official figures suggests that industrial production growth is running at above 5% year-on-year at the start of the year.
(=/-) Jan-20 CPI above the consensus estimate… CPI rose by 1.35% MoM in January, coming above the consensus estimate of 1.10%. PPI for Jan20 was also higher than the consensus which came in 1.84% vs. the consensus of 1.1%. Thus, YoY CPI and PPI was 12.15% and 8.84%, respectively. While the core CPI was almost flattish with only 0.1% MoM increase, the highest monthly increase was 4.88% in miscellaneous items, and 4.65% in food and beverages and 3.96% in health, among the 12 sub-items. On the other hand, clothing and shoes inflation declined sharply with 6.65% MoM retreat. Although CPI and PPI had a strong kick off to the 2020 year, we expect 2020E CPI to be at 10.5% (year-end target). This will result in further policy rate cuts for the rest of 2020. Recall, the CBRT last week reaffirmed its view that inflation will converge gradually this year as it made no changes in its midpoint inflation forecast for the end of this year and next. Policymakers at the bank projected inflation at 8.2% in 2020.
(+) Turkish exports enjoy their best January ever with 13% increase… Turkish exports witnessed their highest-ever January volume, according to data revealed Monday. Exports were up 6.1% on an annual basis last month to USD14.8bn, according to Turkish Exporters Assembly data print, the highest January export figure in the history. Trade Minister Ruhsar Pekcan said on her Twitter account that the figure hinted at economic recovery despite the weak trend in the global economy. Exports surged to USD180.46bn last year, up 2.04% year-on-year, according to TIM data. Imports dropped by 8.99%, reaching USD210.4bn, while the foreign trade deficit decreased by 44.9% year-on-year from USD54.3bn to USD29.9bn. Foreign trade made a record contribution of 4.7 points to the country’s growth, the largest contribution in the last 18 years in Turkey. The export/import coverage ratio was 85.8% in 2019, up from 76.5% in 2018. The minister said the figures also support the positive developments in the country’s macro indicators.
Germany (USD1.5bn), Italy (USD889mn) and the U.K. (USD870mn) were the main recipients of Turkish exports in the month. The country’s exports to the EU hit USD7.4bn in January, bringing the bloc’s share in Turkey’s total exports to 50%, thanks to the recovery in the EU. In the same period, Turkey imported the most from Russia (USD2.1bn), China (USD1.9bn), Germany (USD1.35bn) and the U.S. (USD1.27bn).
In terms of sectors, the automotive industry maintained its leadership and went on to export USD2.4bn worth of goods last month, followed by chemicals with USD1.7bn and ready-made garments with USD1.5bn. Nine industries managed to achieve an over 10% increase in their exports.
(=) Turkish Treasury borrows TR4.6bn through auction… The Turkish Treasury borrowed TRY4.61bn Turkish liras from domestic markets on Monday, according to an official statement. The Treasury and Finance Ministry announced that five-year CPI-indexed government bonds (new issue, semiannually) were sold in an auction. The government bonds will be settled on Wednesday and mature on Jan. 29, 2025. The total tender amounted to TRY8.36bn with a 55.2% accepted/tendered rate. The Treasury said the term rate of 1,820-day government bonds was accepted at 1.16%,while the annual simple and compound interest rates were 2.31% and 2.32%, respectively.

Sector and Company News:
(=) Turkish Airlines declaredthat it has suspended its flights to Beijing, Shanghai, Xian and Guangzhou until the end of February. Recall that earlier the company announced to stop flights to those four destinations until 9 February. As these four destinations have relatively small share in the company’s overall operations, we expect the news to have a limited impact on share price. We will be closely monitoring the developments on this side as further spreading of the virus globally would possess further downside risk for the stock.

(+) US court grants Halkbank reprieve in Iran sanctions case… A U.S. appeals court in Manhattan granted Turkish state lender Halkbank a temporary pause in its Iran sanctions evasion case. The temporary halt in the case was granted Friday to allow for the bank’s requests to be heard by a three-judge panel. The court said it would take up Halkbank’s requests on an expedited basis. Recall, Halkbank was charged in October with attempts to evade U.S. sanctions on Iran. A court denied in early December Halkbank’s request to make a “special and limited appearance” in order to have the case dropped without having to formally participate in proceedings. District Court Judge Richard Berman said Halkbank and its counsel failed to appear at an Oct. 22 hearing and that in so doing, it “wilfully and knowingly disobeyed the Court's order”. A second hearing held on Nov. 5 saw Halkbank’s counsel, listed as King & Spalding, appear but with the sole intent of seeking permission for the “special and limited appearance”. The three-judge appeals panel will now weigh in on the matter.

(=) YKBNK is to release its 4Q19 earnings today at 6:30 PM local time. The consensus estimate is TRY126mn net income and in house estimate is TRY203mn.

(=) TSKB 4Q19 results: TSKB posted TRY171mn net income (14% QoQ and 0.65% YoY) in its Q4 bank-only financials. The results came sharply in line with the consensus estimates of TRY171mn but slightly lower than our estimate of TL181mn by -5.5% due to the higher amount of interest expenses announced. The most significant contribution to bank’s bottom line came from the improvement in the trading loss segment which decreased to TRY-41mn in 4Q19 from TRY-175mn in 3Q19. Sharp increase in provisions for expected credit losses expense (81.3% QoQ and 46% YoY) and 23% YoY opex growth were the main culprits against further expansion of its bottom-line.

TSKB= E2��s NIM figure deteriorated slightly 10 bps QoQ and 70 bps YoY to 4.2%. The bank managed to take advantage of having a relatively compact business operations in terms of having way lower cost-to-income ratio which is 13.40% in 4Q19, 30 bps slight increase QoQ, still almost one-third of the banking sector.

On the solvency front, CAR remained flattish compared to last quarter and Cet-1 ratio improved both QoQ and YoY which are 10 bps and 130 bps respectively.

As for the asset quality, the bank indicated a slight increase in NPL ratio QoQ terms which is 30 bps and relatively higher compared to 4Q18, 140 bps. This led net cost of risk figure to increase 25 bps quarterly but still in line with the bank’s guidance for 2019.

All told, TSKB failed to meet its guidance only on ROE terms by 100 bps. Other than that, it managed to remain in line or exceed its guidance in all terms of income generation, capital, solvency and asset quality indicators.


TRYmn 4Q19 Actual Consensus Dev. from consensus 4Q18 YoY 3Q19 QoQ
Net Income 171 171 0.00% 170 0.65% 150 14.00%
NIM (Non-adjusted) 4.20% 4.90% -0.70% 4.30% -0.10%
Loan Growth 6.54% -16.03% 22.57% -3.03% 9.57%
Securities Growth 6.32% n.a n.a 3.85% 2.47%
Deposit Growth n.a n.a n.a n.a n.a
LDR n.a n.a n.a n.a n.a
ROE 13.50% 16.00% -2.50% 14.70% -1.20%
ROA 1.70% 2.00% -0.30% 1.80% -0.10%
C/I 13.40% 10.8% 2.60% 13.10% 0.30%
NPL Ratio 3.50% 2.10% 1.40% 3.20% 0.30%
CoR 1.26% 1.53% -0.27% 1.01% 0.25%
Tier 1 Ratio 12.40% 11.10% 1.30% 12.30% 0.10%
CAR 17.80% 16.20% 1.60% 17.80% 0.00%
Net Interest Income 420 592 -28.98% 488.00 -13.88%
Fee Income 10 6 72.49% 7 42.43%
Fee Growth 46.00% 23.12% 22.88% 34.62% 11.38%

(=/+) TOASO is to release its 4Q19 earnings today. The consensus EBITDA and net profit estimates are TL729mn and TL401, respectively. Our estimates are TL748mn and TL449mn, respectively.