Turkey Wake up call: Macro, Political and Equity News, 11th May

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 dropped 0.56% on Friday in its 6th consecutive day of losses and it was down 3.23% for the whole week. After a higher open and testing the 99.5k levels in early trades on Friday, benchmark BIST100 spent good part of the day in slight positive territory. But a wave of selling after 4PM pushed the index to negative territory from where it could not rebound. Banking index lost 0.79% despite the strength in two state lenders that were buoyed by rumors and reports of an imminent capital injection by the government. TCELL, PETKM, MGROS, BIMAS, KCHOL, and ALKIM were among the rare gainers in the BIST100 space while KRDMD, Koza Group names, TTKOM, CCOLA, FROTO, ARCLK, SOKM, KORDS, VESTL, and MPARK stood out among the decliners. Today, our local macro agenda involves the unemployment statistics for February'20 to be released at 10AM local time. Headline unemployment had inched up 0.1pp from a month ago to 13.8% in January while remaining nicely below the 14.7% level for same month of 2019. Meanwhile, seasonally-adjusted employment had retreated 0.4% on a sequential basis to a 14-month low of 12.6%. Separately, Treasury will issue 7-year FRNs and reissue 1-year fixed-coupon bonds today in its double domestic borrowing auctions. Will hold two more auctions tomorrow ahead of its hefty TL10.65bn redemption this week. BIST is off to an uptick start given the positive mood abroad and continued rebound in lira (USDTRY at 7.0815 vs 7.1187 at Friday' closing bell). U.S. futures are up 0.2% on top of the c.0.6% overnight gains from when we left ans Asian indices are mostly trading in the green.
Macro and Political News:
(=) The Cabinet will discuss four-day curfew in this weekend... According to the Milliyet, the Cabinet will convene today and the four-day curfew will be discussed starting from May 16th and ending at May 19th (Commemoration of Ataturk Youth and Sports Day).

(=) Foreign Ministry published a press release for Libya... Turkish Foreign Ministry published a press release Regarding Haftar’s Attacks Against the City Centre of Tripoli, saying that “The illegitimate militia forces led by warlord Haftar in Libya have recently increased their indiscriminate attacks against civilians and civilian infrastructure, particularly in Tripoli. Just on 9 May 2020, the elements affiliated with Haftar launched more than 100 missiles along with heavy artillery fire on civilian neighborhoods in the city centre of Tripoli. These attacks targeting diplomatic missions including our Embassy in Tripoli, Mitiga International Airport, civilian aircrafts prepared for departure and other civilian infrastructure, which resulted in civilian casualties and injuries, constitute war crimes. In this context, we reemphasize that we will consider Haftar’s elements as legitimate targets in case they target our diplomatic missions and interests in Libya. It is unacceptable for the United Nations to still remain inactive in the face of this atrocity. The international community bears a collective responsibility to stop putschist Haftar, who massacres his own people irrespective of child, woman or the elderly in this holy month of Ramadan and pandemic period. It should not be forgotten that those countries providing military, financial and political support to Haftar share responsibility for the atrocity suffered by the Libyan people, and the chaos and instability the country is drifted into.
Turkey will continue to support the legitimate government and institutions of Libya for the protection of the friendly and brotherly Libyan people.

(=/+) ISG Airport targets to open on May 28th... Istanbul Sabiha Gokcen CEO Ersel Goral said that the airport is ready to resume operations and the flights are planned to kick off on May 28th with domestic flights


Sector and Company News:

(=) PETKM rescheduled its 1Q20 earnings day. Accordingly the company will release 1Q20 Financial Results on May 15 before market (previously May 11) and conference-call will be held on 15 May 2020 at 4:00pm (Istanbul time.

TL mn 1Q20-cons. 1Q20-home est. 1Q19 4Q19
Revenues 2,812 3,085 2,832 2,795
EBITDA 217 213 288 312
Net Income -7 -40 154 104

EBITDA Margin 8% 7% 10% 11%
Net Margin 0% -1% 5% 4%



(+) VAKBN posted TRY1.716bn net income in 1Q20, 7% above the consensus estimate vs. 13% above the Global estimate. This amount indicates 34% increase in net income QoQ and 164% YoY. The main reason behind the deviation is the substantial amount of NPL collection that the bank managed to execute in 1Q20. VAKBN collected TRY1.78bn of NPL back to its revenues which contributed the bottom line significantly. The other driver of the strong result is lower interest expenses, down by 13% QoQ and by 27% YoY. The further expansion in net income was offset by the increased coverage of NPL provisions from 90% to 93% which led an increase in “provisions for expected credit losses” segment by 28% QoQ and 24% YoY to TRY3.09bn. Additionally, TRY933.0mn increase in “other operating expenses” segment which comes from TRY888mn of NPL write-off operation, indicates 91% QoQ and 128% YoY advance also adversely affected the bottom line expansion.

VAKBN executed a 14% loan growth, slightly higher than the sector average which led 7 bps increase QoQ swap adjusted NIM in Q1 in addition to declined swap costs. The raise in swap adjusted NIM has been 186 bps YoY.

As for liquidity, the bank posted 116% of LDR, which is located between the ratios of 1Q19 124% and 4Q19 109%. However, the bank improved its FC liquidity coverage ratio (LCR) in Q1 to 469% from 413% in 4Q19. A slight decline has been evident in total LCR by 21 ppt from 134% in 4Q19 to 113% in 1Q20.

In terms of asset quality, NPL ratio improved by 60 bps QoQ from 5.90% in 4Q19 to 5.30% in 1Q20, both from significant loan expansion and a TRY888mn of NPL write off. On the other hand, while increased coverage for expected credit losses led the gross cost of risk 90 bps to 4.21%, the NPL collections executed in Q1 resulted in 219 bps of net cost of risk, 45 bps down QoQ.

Regarding the capital adequacy, the bank posted 14.73% of CAR which is slightly lower than the sector average of 18%. However, this level is still higher than the international and domestic minimum requirements. The bank managed highly substantial international funding in 2020, USD750.0mn of Eurobond transaction with 5 years of maturity in January, USD325.0mn of loan from ICBC Turkey 3 year terms with 130% rollover ratio in April and USD950.0mn of syndicated loans from 33 international banks from 16 different countries with 90% rollover ratio.

TRYmn 1Q20 Actual Consensus Estimate Global Estimate Dev. from consensus Dev. From Global Estimate 1Q19 YoY 4Q19 QoQ
Net Income 1,716 1,607 1,513 6.78% 13.42% 651 163.51% 1,280 34.03%
NIM (swap-adjusted) 4.48% 4.71% -0.23% 4.41% 0.07%
Loan Growth 14.00% 11.14% 2.86% 6.16% 7.84%
Securities Growth 21.60% 11.90% 9.70% 14.00% 7.60%
Deposit Growth 6.90% 10.40% -3.50% 9.52% -2.62%
LDR 116% 124.30% -8.30% 109% 6.80%
ROE 20.60% 9.10% 11.50% 16.10% 4.50%
ROA 1.55% 0.80% 0.75% 1.30% 0.25%
C/I 26.10% 32.1% -6.00% 30.20% -4.10%
NPL Ratio 5.30% 4.60% 0.70% 5.90% -0.60%
CoR 2.19% 2.67% -0.48% 2.60% -0.41%
Tier 1 Ratio 12.69% 13.87% -1.18% 13.59% -0.90%
CAR 14.73% 15.25% -0.52% 16.61% -1.88%
Net Interest Income 4,908 2,345 109.30% 4,598 6.74%
Fee Growth -2.49% 32.65% -35.14% -4.50% 2.01%
Fee Income 1,021 979 4.32% 1,047 -2.49%



(-) ISCTR posted TRY1.46bn net income for 1Q20, 20% below the consensus estimates vs. 29% below Global estimates. This amount indicates 37% of significant contraction in net income QoQ but flat YoY. The main reasons behind the large deviation are the high OPEX figure; while we expect TRY2.8bn in Q1, the bank posted TRY3.11bn and additional TRY400.0mn other allowance expense. Secondly, we expected TRY2.20bn of provision expenses for expected credit losses which came TRY2.48bn.

The swap adjusted NIM remained flattish, up by only 3 bps to 4.89% QoQ while expansion YoY terms is evident up by 163 bps. On the liquidity front, total LDR increased by 4 ppt QoQ from 93% to 97% consistent with the fact that loan growth exceeded the deposit growth in Q1.

As for asset quality, NPL ratio contracted by 50 bps QoQ to 6% While it was 6.50% in 4Q19. The bank executed TRY804.0mn other operating income which majority consists of NPL collections which helped the NPL ratio narrow down as well as the loan growth. Increased coverage for NPLs caused an elevation in net CoR by 32 bps QoQ from 217 bps in 4Q19 to 249 bps in 1Q20.

In terms of solvency metrics, ISCTR posted 18.41% of CAR up by 54 bps QoQ and significantly increased by 228 bps YoY from 16.13% in 1Q19, higher than both international and domestic regulatory minimum requirements.

Overall, by this result, ISCTR generated 9.90% ROE in Q1, slightly below the average of the banks that released their earnings so far.

TRYmn 1Q20 Actual Consensus Est. Global Est. Dev. from Consensus Est. Dev. From Global Est. 1Q19 YoY 4Q19 QoQ
Net Income 1,456 1,812 2,050 -19.65% -28.98% 1,458 -0.14% 2,309 -36.94%
NIM (Swap-adjusted) 4.89% 3.26% 1.63% 4.86% 0.03%
Loan Growth 10.20% -2.50% 12.70% 9.10% 1.10%
Securities Growth 4.10% 5.60% -1.50% 6.50% -2.40%
Deposit Growth 4.10% -9.70% 13.80% 12.10% -8.00%
LDR 97% 101.00% -4.20% 93% 3.80%
ROE 9.90% 11.60% -1.70% 10.10% -0.20%
ROA 1.19% 1.38% -0.19% 1.40% -0.21%
C/I 38.70% 40.5% -1.80% 38.80% -0.10%
NPL Ratio 6.00% 5.10% 0.90% 6.50% -0.50%
CoR 2.49% 1.71% 0.78% 2.17% 0.32%
Tier 1 Ratio 14.37% 13.39% 0.98% 14.97% -0.60%
CAR 18.41% 16.13% 2.28% 17.87% 0.54%
Net Interest Income 5,756 4,294 34.05% 5,689 1.18%
Fee Income 1,446 1,246 16.05% 1,574 -8.13%
Fee Growth 16.10% -3.80% 19.90% 12.60% 3.50%