Turkey Wake up call: Macro, Political and Equity News, 27th May

BIST added 0.37% on Friday in the last trading day before the 4-day Eid holiday and carried its weekly gains to 3.26%. After a negative start, BIST100 index managed to claw back to positive territory by noontime and mostly managed to stay there for the rest of the day. Banks were again a drag on the broader market with the 0.21% drop in their sector index as AKBNK stayed afloat while GARAN and VAKBN underperformed. BIMAS, CCOLA, AEFES, TUPRS, TAVHL, DOAS, AKGRT, TATGD, and HEKTS led the gainers among non-financials while EREGL, AYGAZ, GUBRF, IPEKE, MAVI, KORDS, and TTRAK topped the decliners. Coming to this morning, our local macro agenda is muted but the BIST is off to a gap higher start to play catch up with the decent gains in global markets during our holiday. Lira is also stronger with the USDTRY pair at 6.7642 vs 6.8148 at latest BIST close. U.S. futures are up 0.6% in early trades on top of the 1.9-2.7% gains from the time we left last Friday while Asian markets present a rather mixed picture in today's action given resurfacing tension between the U.S. and China.

Macro and Political News:
(+) Real sector confidence index in May... According to the data released by the Central Bank of Turkey, the real sector confidence index improved to 76.9 in May, from 66.8 in April.

(=) Sectoral Confidence Indices in May... TURKSTAT released the sectoral confidence indices for May. Accordinlgy, seasonally adjusted confidence index increased by 10.8% in services, 5.0% in retail trade and 31.1% in construction sectors in May compared to the previous month. Seasonally adjusted confidence index which was 46.1 for services in April increased by 10.8% in May to 51.1. In services sector compared to the previous month, demand-turnover expectation over next three months sub-index increased by 82.9% to 77.2. Demand-turnover over past three months sub-index decreased by 19.2% to 39.0 and business situation over past three months sub-index decreased by 22.5% to 37.1. Seasonally adjusted retail trade confidence index increased by 5.0% in May to 79.0. In retail trade sector compared to the previous month, current volume of stock sub-index increased by 1.6% to 120.4. Business activity-sales expectation over next three months sub-index increased by 48.8% to 75.1 and business activity-sales over past three months sub-index decreased by 26.7% to 41.6. Seasonally adjusted construction confidence index which was 44.7 in previous month increased by 31.1% in May to 58.5. In construction sector compared to the previous month, total employment expectation over next three months sub-index increased by 39.9% to 77.1. Current overall order books sub-index became 40.0 by increasing 16.9%.

(=) Tax hike in exchange transactions and bonds... According to the Official Gazette, the tax from exchange transactions has been hiked to 1% from 0.2% while the tax in bonds has been hiked to 15% from 10%.

(=/+) Income and corporate tax cut… The Treasury and Finance Ministry announced that income and corporate tax will be reduced by 5% for commercial and agricultural income tax payers as well as corporate tax payers (excluding finance and banking sector, insurance and reassurance companies and pension companies and pension funds). The reduced tax amount will not be above TL1mn.

Sector and Company News:

(=) According to the Fitch announcement made on last Friday, the credit rating agency affirmed the Long Term Foreign Currency Issuer Default Rating (LTFC IDR) of TSKB as “B+” however downgraded the outlook of the bank from “Stable” to “Negative” due to the insufficient FC reserves of the country.

(=) THYAO’s chairman Ilker Ayci has been interviewed in Airporthaber.com website, stating that THYAO will not lay off any personnel in 2020 and 2021. He also underlined that the recovery will not be rapid and it will take time to reach the pax and revenue level of what THYAO generated in 2019.

(=/+) CUR of Manufacturing Industry in May... According to the CBT, the CUR of manufacturing industry improved to 62.6% in May from 61.6% in April.

(-) Non-residents’ net flow of securities… According to the CBRT data released on Thursday, during the week of 08-15 May, non-residents executed net outflow of USD405.0mn from equities and USD390.0mn from GDDOs. As of last week, non-residents’ y-t-d net total flow of securities has been USD-3.58bn from equities and USD-6.67bn from GDDOs.

(-) According to the latest CBRT data released on Thursday, the Central Bank’s gross international reserves declined by 1.63% WoW from USD85.99bn to USD84.59bn. The decline in gross reserves has been 3.95% by monthly comparison. Net international reserves declined by 53 bps from USD26.02bn to USD25.8bn WoW.

As of May 15, the CBRT gross international reserves declined by 19.87% and the net reserves declined by 36.85% y-t-d.

(=) According to the BRSA weekly banking data released on last Friday, total loans declined by 41 bps WoW with the effect of declined commercial loans which was 59 bps WoW. However, instalment commercial loans and corporate credit card segment increased by 1.21% WoW while FX indexed loans continued its declining trend by 1.89% WoW.

NPL ratio of the sector remained the same at 4.81% level, which means a short stop its declining trend since the beginning of the year. From this week on, its direction will be crucial for the outlook of banking sector in the upcoming quarters.

Total deposits decreased nearly at the same rate with total loans, by 44 bps WoW mainly driven by the decline in real persons’ and commercial institutions’ deposits by 72 and 78 bps respectively. As for FX deposits of the residents; while real persons increased their FX deposits by USD702.0mn, the corporates increased their FX deposits by USD748.0mn WoW. As year-to-date figures considered, real persons declined their FX deposits by 2.36% and USD2.86bn, the corporates increased their FX deposits significantly by 5.75% and USD4.21bn.

(=/-) KCHOL posted TL3.47bn net income in 1Q20 including one-offs from the change in YKBNK’s consolidation method (from equity pickup to full consolidation) shareholding structure and compensation received from UniCredit. After excluding the one-offs, KCHOL’s net income is TL90.0mn, decreased 88% YoY and 92% QoQ. This net income level is 60% below the consensus estimates of TL222.0mn and 64% below the Global estimate of TL250.0mn. The reason behind this deviation is the significant loss derived from the energy segment, mainly from TUPRS.

KCHOL had TL927.0mn net loss from energy segment which corresponds to 22% of its total NAV mainly driven from TUPRS’ inventory losses, low jet fuel demand due to the aviation industy’s flight suspensions and low capacity utilization rates which sourced all from the Covid-19 pandemic.

On the automative segment, KCHOL received TL501.0mn net income, up by 61% YoY sourced from the strong demand in domestic market and solid export contracts. The further expansion in the bottom line prevented by the declined demand in export markets because of the Covid-19 pandemic.

Consumer durables segment contributed the KCHOL’s bottom line by TL112.0mn, up by 11% YoY, contributed by domestic revenue growth and stable raw material prices. In especially the last month of first quarter, the decline in global demand limited the export capacity of ARCLK, the main export player of the conglomerate in durables segment.

Finance segment has been one of the most successful arm of the company. YKBNK contributed TL549.0mn consolidated net income, up by 20% YoY. YKBNK performed well in Q1 with solid OPEX management, well managed interest margins and solid liquidty structure. The further increase in banking revenue was offset by prudent provisioning for probable uncertainties in the near future due to the pandemic conditions.

The TL2.99bn of one-time revenue came from the share purchase transaction of YKBNK by KCHOL from the accounting - calculation method. Previously, KCHOL accounted YKBNK and the Koc Financial Services (KFS) on “profit/loss from associates under equity method” however, after having overall 49.97% share of the bank, KCHOL turned to full consolidation method and recorded this revenue as “income from investment activities”. Additionally, KCHOL received TL400.0mn termination fee from UniCredit. After adjustments and eliminations, KCHOL posted TL3.38bn of one-off net income in total.

On the other hand, KCHOL increased its stand-alone net cash position by 3% from USD433.0mn to USD445.0mn QoQ. While its consolidated Net Debt/EBITDA increased from 1.5X to 2.1X QoQ, yet it is still at sustainable level.