Turkey Wake up call: Macro and Political News, 5th February

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Wake – up call

BIST jumped 2.43% yesterday as foreign investors returned to the scene as strong buyers in a bunch of blue-chip names. After a positive start, BIST100 index spent the morning part of the day in a very tight range around 120.5k levels. Market started to gain traction after 12:30PM with waves of buying, especially after 3PM. Banking index was up 3.58% as heavyweights GARAN and AKBNK caught strong bids, joining the rally in HALKB. PGSUS, THYAO, SAHOL, ASELS, PETKM, TAVHL, and EREGL topped the list of non-bank gainers while Sisecam subsidiaries, MPARK, and KOZAL were among the handful of decliners for the today. Coming to this morning, our local macro agenda is muted and we foresee a slight positive start for the BIST given prevailing rebound in global peers while some slide in lira (USDTRY now at 5.9857 vs 5.9697 at yesterday’s closing bell) may create some headwinds. U.S. futures are down 0.2% in early trades while Asian markets are mostly trading in the green.
Macro and Political News:
(=) Erdogan and Putin talk over phone after Idlib attack… President Erdogan held a phone call with his Russian counterpart Putin on Tuesday. In the phone call, President Erdogan reportedly told his Russian counterpart Vladimir Putin that the Syrian regime’s attack against the Turkish military was a blow to joint efforts to bring peace to Syria. Erdogan also underlined that Turkey would continue to use its legitimate right of self-defense in the harshest way in the case of similar attacks from the forces loyal to Bashar Assad. The Kremlin said the two presidents had agreed to take immediate measures to improve the coordination of their countries’ actions in Syria. The Kremlin added that Putin and Erdogan highlighted the need to follow Russian-Turkish agreements on Syria’s Idlib province that envisaged increasing cooperation to neutralize extremists.
(-) Turkey urges Russia to step up efforts to prevent violations by Assad regime… Foreign Minister Mevlut Cavusoglu said Russia needs to undertake responsibility to prevent attacks by the Assad regime and Turkey will not tolerate such aggression. FM Cavusoglu said stated that they strive to end these conflicts in Syria with Russia while adding that it is not possible for Turkey to tolerate attacks targeting Turkey. Hence, he stressed that Turkey has have given the necessary response in Idlib and will continue to do so. The foreign minister noted that he told his Russian counterpart Sergei Lavrov that Russia needs to prevent the regime as it shored up flagrant attacks targeting the Turkish military in northwestern Idlib province. He continued by highlighting that the Astana and Sochi agreements have been seriously damaged as a result of recent attacks. The Foreign Minister also dismissed Russia’s claims that they cannot fully control the regime, saying that the statement does not reflect the truth.
(-) Turkey hit back at 54 regime targets after Syrian shells kill Turkish troops… Turkey said on Feb. 3 that its military hit 54 of Syrian regime’s targets and neutralized 76 soldiers of the regime forces after eight Turkish military personnel were killed by shelling in Idlib in northwest Syria. Turkish and Syrian troops have traded fire in northwest Syria since early this week. In fact, February 3’s tit-for-tat shelling between Turkish and Russian-backed Syrian forces was the deadliest since Turkey deployed troops to Syria in 2016, ratcheting up tensions between the conflict’s two main foreign protagonists.
Defense Minister Akar underlined that Moscow was informed beforehand about the Turkish units’ deployment. He added that some Turkish troop deployments were planned and implemented to provide necessary support in the field. The deployments were coordinated with Russia, which was given the necessary information in terms of both location and time, he said. Despite all the communication and information given out, Turkish troops were still fired on, the defense chief said.
(-) Turkish army and Syrian regime forces are about to confront… The distance between regime forces and Turkish Armed Forces (TSK) has been reduced to just 800 meters. In response to regime attacks, the Turkish military targeted regime forces throughout the day on Monday. TSK also established temporary military bases and observation points in four different locations in Saraqib, which is the crossing point across the M4 and M5 highways. TSK continues deploying additional military forces to the region. Most recently, a military convoy of 10 vehicles crossed the border and reached northwestern Syria. While the regime forces were surrounding Saraqib and getting closer to Idlib city, TSK increased its security on the M4 and M5 highways. Turkish artillery has been attacking regime targets, and Turkish tanks have been patrolling the area to prevent any possible threat. With the aim of providing security to Turkish soldiers and observation points, TSK is retaliating against any harassment or threat targeting observation points. Turkish soldiers are also actively supported by the Syrian National Army.
(+) Pompeo backs Turkey on troops’ deaths by Syria regime… U.S. Secretary of State on Tuesday offered condolences for Turkish troops martyred by Syrian regime shelling in Idlib and reiterated Washington’s support amid clashes with regime forces. Mike Pompeo called the attack on Turkish observation posts by forces loyal to Bashar al-Assad regime a grave escalation. Pompeo said in a statement that the U.S. stands by its NATO ally Turkey in the aftermath of the attack and fully support Turkey’s justified self-defense actions in response. The top U.S. diplomat reiterated that Washington condemned assaults on Idlib residents by Assad and its allies. Pompeo stressed that brutal actions by the Assad regime, Russia, the Iranian regime, and Hizballah are directly preventing the establishment of a ceasefire in northern Syria. Also, he called for an end to the attacks, access for humanitarian aid and peace in line with UNSCR 2254 - a 2015 UN Security Council resolution that called for a cease-fire in Syria and a political settlement of the conflict. Pomepo concluded that the United States will do all in its powers 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 that incorporates Idlib.
(=) Erdogan discusses latest developments with Merkel… President Erdogan discussed the latest developments in Libya and Syria in a phone call with German Chancellor Angela Merkel, presidential sources said Tuesday. The German chancellor was in Turkey in January to discuss the migration crisis. The Turkish president has been telling the international community that renewed attacks in Syria’s northwestern Idlib province could prompt a new migrant wave toward Turkey. He’s warned that Turkey, which already hosts about 3.7 million Syrian refugees, would not be able to handle a new wave of migrants if attempts by the Syrian regime and Russia to retake opposition-held Idlib sent more people fleeing. Like other European countries, Germany does not want to experience a similar crisis like the one that happened in 2015, when Berlin had to open its doors to over a million Syrian refugees.
(=) Turkey to hold tender for Grand Istanbul Tunnel in 2020… Turkey is planning a tender this year for a third underwater tunnel beneath Istanbul’s Bosporus Strait, this one combining both road and railway passages. Cahit Turhan,, transportation and infrastructure minister, said the Grand Istanbul Tunnel contract will have the build-operate-transfer (BOT) model. The three-level mega-project will integrate with the Yenikapi-Sefakoy subway line. After completion, the tunnel is set to be used by some 6.5 million people annually to travel between the Asian and European sides of Istanbul. The 6.5-kilometer tunnel, which will include a rail system and highways together under the Bosporus, aims to reduce traffic in the metropolis and save time. The healthy operation of trade and transportation is indispensable for Turkey’s development, Turhan underlined. The new tunnel is set to join the Eurasia Tunnel, a 5.4 km highway-only passage which opened in 2016, and the Marmaray, a 13.5-km commuter rail and train passage which opened in 2013, both beneath the Bosporus.
(=) Turkey sold TRY4.7bn bonds in two auctions... In the first auction, Turkey sold TRY2.49bn (USD416mn) of bonds due Apr 14, 2021. Investors offered to buy 2.19X the amount of securities sold. The zero coupon bonds were sold at a price of 89,080, have a yield of 10.18% and will settle on Feb 5. The sale is a reopening of previously issued securities with TRY7.43bn outstanding. Currently the securities are being quoted at a price to yield of 10.35%. In the second auction, Turkish Treasury sold TRY2.22bn 14-month zero coupon bills at 10.18% compound rate, with a bid/cover rate of 2.45x. Coupled with the Monday’s TRY4.6bn auction, Turkish Treasury raised TRY9.3bn through domestic debt market.
(=/+) Turkey non-financial firms net FX shortfall USD175.9bn as of Nov 19… Turkish non-financial companies’ total FX shortfall fell to USD175.9bn in November from USD177.5b as of October. Companies’ short-term net FX surplus USD9.55bn, down from USD10.7bn as of October.

Sector and Company News:

(+) PGSUS - Transportation and Infrastructure Minister Cahit Turhan said that new frequency allocations at Sabiha Gokcen have been suspended until new runway becomes operational at the end of 2020. Recall that Turkish Civil Aviation Authority decided to decline applications for new flight rights from Istanbul Sabiha Gökçen Airport due to capacity constraints stemming from the ongoing maintenance works and heavy air traffic at the beginning of this year. After the restriction decision, Pegasus announced that it doesn’t foresee any revision on their strong 2020 guidance announced on 13 January 2020. The company was expecting its capacity to increase by 12-14%, EBITDA margin estimated to be at 32-32.5% while net income expectation stands at EUR210-250mn in 2020.
The capacity restriction at the company’s main hub and concerns regarding the coronavirus caused selling pressure on the stock recently. However, we believe that the stock should perform better in the near term with falling oil prices, no exposure to Chinese market and the 36% 12 month forward EV/EBITDA discount compared to the global airline index, strong operations and growth prospects.

(=) YKBNK 4Q19 Results: Yapi Kredi Bank posted TRY263mn net income (-73% QoQ and -75.6% YoY) in its Q4 bank-only financials. The results came 109% above the consensus estimate of TRY126mn and 29% above our estimate. In Q4, YKBNK’s bottom line contracted mainly by i) provision expenses for expected credit losses, TRY3.16bn in 4Q19 up by 73.4% QoQ in addition to total TRY5.6bn in 9M19, ii) operating expenses which increased by 36.3% QoQ and 20.6% YoY. Decline in interest expenses (-20.3% QoQ and -34.1% YoY) and 90% QoQ higher other income segment which sourced by NPL reversals supported the bottom-line. YKBNK posted 4% NIM in 4Q19 (up by 64 bps) mainly due to the declining interest expenses despite the CPI linker income contribution narrowed by the easing CPI inflation rate. The decline in deposit cost contributed NIM by 136 bps. As for solvency, solo CAR and Cet-1 ratios reported 16.7% and 13.7% respectively. CAR remained flattish with the previous quarter while improved YoY by 190 bps. Cet-1 ratio slightly improved by 10 bps while significantly improved YoY terms by 230 bps. On the other hand, the bank managed to improve its LDR figure in 4Q19 to 97% from 101% in 3Q19 indicating a positive outlook for liquidity as well as remaining in line with its 2019 guidance. Asset quality front has been the most deteriorated part in bank’s financials. NPL ratio has been 7.6% up by 70 bps QoQ and 110 bps YoY, deviated 60 bps from its 2019 guidance in addition to having 312 bps of CoR also missed its guidance of remaining below 300 bps. Overall, other than asset quality measures, YKBNK performed well and remained in line with its 2019 guidance in all segments in its financials. Lowering LDR figure, paying attention to improvement in CAR and showing confidence in putting provisions for bad loans, the bank demonstrated its willingness to open up a path to perform well in the upcoming financial periods.
TRYmn 4Q19 Actual Consensus Dev. from consensus 4Q18 YoY 3Q19 QoQ
Net Income 263 126 108.73% 1,081 -75.67% 976 -73.05%
NIM (swap-adjusted) 4.00% 4.57% -0.57% 3.36% 0.64%
Loan Growth 3.23% -10.68% 13.91% -4.00% 7.23%
Securities Growth -9.93% -29.00% 19.07% 0.00% -9.93%
Deposit Growth 5.61% -4.00% 9.61% -2.00% 7.61%
LDR 97% 104.00% -7.00% 101% -4.00%
ROE 9.80% 14.20% -4.40% 10.10% -0.30%
ROA 1.00% 1.34% -0.34% 2.46% -1.46%
C/I 37.50% 34.2% 3.30% 36.50% 1.00%
NPL Ratio 7.60% 6.10% 1.10% 6.90% 0.30%
CoR 4.46% 4.48% -0.02% 2.78% 1.68%
Tier 1 Ratio 13.70% 11.40% 2.30% 13.60% 0.10%
CAR 16.70% 14.80% 1.90% 16.70% 0.00%
Net Interest Income 3,723 3,923 -5.10% 3,827 -2.72%
Fee Growth -2.70% 8.39% -11.09% 7.00% -9.70%
Fee Income 1,512 1,059 42.78% 1,347 12.25%

(=) YKBNK announced its guidance for 2020 on Tuesday. According to the guidance, the banks targets its NIM above 3.7% and keep its NPL ratio below 7%. On the other hand, YKBNK aims to keep its liquidity safe zone with its LDR to remain below 105%.


YKBNK 2020 Guidance Outlook
TL Loan Growth High-teens
LDR =16%
ROE Mid- low teens
NIM (swap adj.) >=3.7%
Net Fees & Commissions Growth High-single digits
Costs Mid-teens
NPL ~7%
Net Total CoR ~225 bps


(=) TOASO posted TL450mn net income, up by 38% YoY, above the consensus of TRY401mn. Revenues increased by 14% YoY to TL5,468mn in line with the consensus. We see slight an improvement in EBITDA, up by 4% YoY to TRY665mn, below consensus of TL729mn. Profitability derived by take-or-pay contracts was not estimated accuratetely, in our opinion. TOASO’s PC+LCV retail sales were up by 62% YoY to 34,596 units, but exports were down by 14% YoY to 44k units in 4Q19, despite the low base in the same quarter of previous year. Hence total volume stood at 77k up by 8% YoY. Following the results, TOASO announced its 2020E guidance. The management expect domestic market to stands at 560k - 600k units (15-25% YoY increase), and its own domestic volume guidance at 78k - 84k units (2019: 79k units). Tofas also has a 170k-190k units of export shipments’ target. Recall that export volume was 194k units in 2019. Capex guidance is around EUR250mn. We deem its 4Q19 results as neutral. However, management export guidance still indicates a cautious view on FCA’s market share in European market. On the B/S side, we deem the YoY improvement in net debt to EBITDA level as positive before the new Doblo and Egea investments.


TRYmn 4Q19 Consensus Global Securities Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 5.468 5.589 5.546 -2% 4.779 14% 4.159 31%
EBITDA 665 729 748 -9% 641 4% 570 17%
margin 12,2% 13,0% 13,5% -0,9 pps 13,4% -1,3 pps 13,7% -1,5 pps
Net profit 450 401 449 12% 327 38% 298 51%
margin 8,2% 7,2% 8,1% 1,1 pps 6,8% 1,4 pps 7,2% 1,1 pps
Net Debt/EBITDA (x) 0,45 1,36 -91 bps 0,96 -51 bps
ROE (%) 34,2% 35,9% -2 pps 34,0% 0 pps
Net debt 1.125 3.451 -67% 2.361 -52%
Working capital 992 120 727% 37 2590%
Δ in WC 955 -101 -1048% -967 -199%
CapEx 304 205 48% 149 104%
FCF to firm 1.317 384 243% -516 -355%
Shareholders' Equity 4.329 3.707 17% 3.988 9%


(+) According to Automotive Distributors’ Association (ODD) data, auto market grew by 90% YoY to 27,273 units in Jan20. (Jan19: 14,373) The growth in passenger cars were 101% YoY, and LCV sales increased by 55% YoY. (+) TOASO maintained its strong performance with outstanding 48% YoY growth in PC sales and 97% increase in its LCV volumes. (=/-) FROTO’s results were below the market, with 21% and 32% YoY growth in PC and LCV volumes, respectively; (+) DOAS, on the other hand, showed a solid performance in PC segment, grew by 149% YoY in PC and 37% YoY growth in its LCV volumes.

Recall that a total of 479K vehicles sold in 2019, carrying 12M19 contraction to 23% YoY, with 20% and 32% respective contraction in PC and LCV. In 2019 year-end, due to consumer orientation towards lower-priced models in recent months, (+) TOASO showed a solid 34% YoY growth in PC sales so much above the market, but we saw a 33% decline in its LCV volumes which was parallel to market (-) FROTO’s PC retail sales declined by 34% and LCV sales deteriorated by 25% YoY growth, which was 28% YoY decline in total, below the market; (-) DOAS, on the other hand, showed a weak performance, falling by 26% YoY and 43% YoY in PC and LCV, below the market.

There were a positive signals in the domestic automotive market starting from Jun19. Finally, Sep19 results give us a significant recovery signal which was followed by Oct19 results. Public banks’ loan agreement with brands that manufacture passenger and/or commercial vehicles in Turkey continued the recovery with support of low interest rate environment. In addition, the stabilization in EUR/TRY rate (recent months) also supported importers’ retail sales. Therefore, we reached a 479k units of light vehicle market in 2019 which is much better than the expectations in the beginning of the year.

In 2020, market players’ expectations sitting in a wide range between 10%-30%. Recall that, the companies’ were stock-out in the last couple of months of 2019. Thus, we may see to continue significant growth in the first and second quarter of 2020, due to the low-base of 1Q19 and 2Q19.