1

DenizBank Economic Update

December 2017

Economy

Financial Markets

Banking Sector

Economic Research and Strategy

Saruhan Özel, Ph.D.

Ezgi Gülbaş

Deniz Bayram

2

Economy (I)

DenizBank Economic Update

December 2017

Gro

wth

In

fla

tio

n

Growth accelerated further in 3Q17 with the support of strong base effect..

● In 3Q17, GDP expanded YoY by 11.1%, above market consensus of 8.5%. Strong GDP growth was driv-en by favorable base effects and the ongoing impacts of the stimulus measures. On the other hand, sea-sonally and calendar adjusted QoQ growth rate moderated to 1.2% from 2.2% in 2Q17.

● Private consumption and investments were the main drivers of the growth as both increased at double digits. Private consumption and investments’ contribution to headline growth was 7.0 percentage points (pp) and 3.6pp, respectively. Government consumption contributed 0.3pp to the headline growth. The contribu-tion from net exports was also limited 0.3 pp as solid growth in exports (YoY by 17.2%) was partially offset by the expansion in imports (YoY by 14.5%).

● October industrial production (YoY by 8.9%) and other preliminary indicators (PMI, capacity utilization) show that economic activity is still strong in 4Q17. Nevertheless, the surge in imports signals that the con-tribution of net exports may turn to negative. Also as fiscal incentives (i.e. tax cuts) expired and credit stimu-lus reached its limits, growth could moderate in 4Q17 but we expect 2017 overall growth rate to be strong at c.6.5%.

Currency depreciation and base effect continues to push inflation higher...

● In November, CPI increased MoM by 1.5%, above the market expectations of 1.1%. Higher-than-expected CPI was mainly driven by sharp increases in food and transportation prices. Food prices in-creased MoM by 2.1% contributing 0.46 pp to the monthly CPI. Transportation prices increased by 2.0% due to higher global energy prices and weaker TL.

● Annual inflation jumped to 13% from 11.9% a month ago, its highest level since 2003. The deterioration in the inflation outlook is not only due to food and energy prices, as core inflation (CPI excluding food, energy, non-alcoholic and alcoholic beverages, tobacco, gold) remains elevated at 12.1%. Annual producers’ price inflation is also high at 17.3%.

● Inflation will start a downward trend as the favorable base effect kicks in from December. However, given the depreciation in currency and deterioration in the core inflation and producer prices, we expect the down-ward movement to be limited and transient. Our 2017 year-end inflation forecasts stands at 11.4%. We ex-pect annual inflation to remain at double digits most of the year in 2018 and to be 9.5% at the year-end.

1Q14 4Q14 3Q15 2Q16 1Q17

Quarter (vs. the same quarter of previous year)

Annualized

GDP Growth

-25%

-15%

-5%

5%

15%

25%

35%

Investment and Private Consumption Growth (Annual)

Investment Growth

Private Consumption Growth

12.98%

12.08%

2%

4%

6%

8%

10%

12%

14%

Headline CPI

Core CPI (C)

Headline and Core Inflation 1.49%

0.46%

0.00%

0.28%0.33%

0.19%0.01% 0.04%

0.20%

-0.5%

0.0%

0.5%

1.0%

1.5%

CPI Food&Bev.

Alc bev&Tobacco

Cloth Trans HousingRecrea&Culture

Cafe&Hotels

Other

Nov-14 Nov-15 Nov-16 Nov-17

Contribution to Monthly CPI

3

Economy (II)

DenizBank Economic Update

December 2017 M

on

eta

ry

Po

lic

y

Ex

tern

al S

ec

tor

Central Bank of Turkey increased the average funding rate by 50 bps and stressed commitment to a tight monetary policy stance until inflation outlook improves significantly...

● Central Bank (CB) increased its late liquidity window (LLW) rate by 50 bps to 12.75% in December meet-ing, below the market expectations of 100 bps shaped upon the depreciation in TL and elevated inflation print in November. CB kept the policy (8%), O/N lending (9.25%) and O/N borrowing (7.25%) rates un-changed. Following the meeting, CB continued to provide all funding through LLW rate and the average funding rate increased to 12.75%.

● Decision statement was mostly unchanged, except for the part remarking recent developments in cost factors as one of the reasons behind rising inflationary risks. CB continued to emphasize that tight monetary policy stance will be maintained until inflation outlook improves significantly.

● According to CB’s December survey, year-end, 12m and 24m ahead inflation expectations are 11.7%, 9.3% and 8.5% respectively. Given the depreciation in TL and the anticipation that the downward trend in inflation due to base effect will be transient, we expect CBT to hold on a tight monetary policy in early 2018.

Current account deficit continues to widen with the upsurge in imports...

● In October, current account deficit (CAD) came at 3.8bn, in line with the expectations. 12 month cumula-tive CAD widened to $41.9 bn (4.9% of GDP) from $39.7 bn (4.7% of GDP) one month ago. Portfolio in-flows reached $21 bn annually and were the main source of financing the deficit in 2017.

● In October, annualized current account balance excluding energy and gold, which has improved signifi-cantly in the first 8 months of the year, gave a deficit of $2.4 bn. Energy and gold imports continued to build an upward pressure on CAD. Annualized energy deficit widened to $30.6 bn from $29.7 bn while annual-ized net gold imports reached $9bn. On the other hand, tourism revenues were up by 30% and 12 month cumulative tourism revenues increased to $17.5 bn, partly compensating the increase in trade deficit.

● In November, annual trade deficit continued to widen, indicating CA deficit will continue to increase. Giv-en the upward trend in imports supported by economic activity and higher energy prices, we expect CAD to GDP ratio to increase further by the end 2017 but stay at manageable levels, namely c.5.3%.

-32 -38 -40

-12

-45

-75

-49-65

-44-32 -33 -42

-5.8%-5.6%-5.2%

-1.9%

-5.9%

-9.0%

-5.6%-6.8%

-4.7%-3.7%-3.8%

-4.9%

-15%

-13%

-11%

-9%

-7%

-5%

-3%

-1%

1%

-110

-90

-70

-50

-30

-10

Current Account Balance (Bn $)

CA Bal. Current Account Deficit (% of GDP)

-41.9

-2.4

-30.6

-80

-60

-40

-20

0

20

2009 2010 2011 2012 2013 2014 2015 2016 2017

Current Account Balance

Energy Balance

Current Account Balance (exc. energy and gold)

Current Account Balance (Bn $ , 12M Trailing)(Bn $)

-200

-150

-100

-50

0

50

100

150

200 Bond yield spreads (bps)

Spread between 2 and 5 year bond yieldsSpread between 2 and 10 year bond yields

6

8

10

12

14

Jan-15 Jan-16 Jan-17

CBRT Weekly Repo Rate

CBRT Average Funding Rate

O/N Lending Rate

O/N Borrowing Rate

Late Liquidity Window Lending Rate

Benchmark Bond Yield

Policy Rates (%)

4

Financial Markets

DenizBank Economic Update

December 2017

De

bt

Ma

rke

t

As the end of December, Turkey’s 2-year benchmark bond yield is at 13.4%. Turkey’s CDS is down MoM by 18% to 165.

Cu

rre

nc

y M

ark

et

Sto

ck

Ma

rke

t

In December, TL and other EM currencies appreciated against USD.

In December, EM stock markets continued to increase. MSCI Turkey Index was up MoM by 9% after a decline in November.

Data retrieved from Bloomberg as of 15:00 (GMT + 3), 29.12.2017

6

8

10

12

14

Jan-15 Jan-16 Jan-17

CBRT Weekly Repo Rate

CBRT Average Funding Rate

O/N Lending Rate

O/N Borrowing Rate

Late Liquidity Window Lending Rate

Benchmark Bond Yield

Policy Rates (%)

-18.0%

-8.2%

0.6%

-5.1%

-20% -15% -10% -5% 0% 5%

Turkey

Poland

Russia

Brazil

CDS162

128

47

165

EM CDS Spreads Monthly Change (%, 5 Year)

95105115125135145155165175185195205215225235

Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17Jul-17

TL EM Average

Ap

pre

cia

te

EM Currencies (against $, Jan- 13=100)

De

pre

cia

te

10.3%

4.5%

1.4%

1.8%

-6.0%

0.9%

1.8%

0.8%

-2.1%

-7% -5% -3% -1% 1% 3% 5% 7% 9% 11%

ZAR

TRY

RUB

PLN

MXN

KRW

HUF

CZK

BRL

Hundreds

Monthly Change Against $ (Positive Values= appreciating against $)

4.4%

3.6%

0.8%

10.8%

0% 2% 4% 6% 8% 10%

EM Banks

US Banks

EU Banks

TR Banks

Monthly Performance of Banking Shares (%)

60

80

100

120

140

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Stock Market Performance (Jan-13=100)

MSCI Turkey Index

MSCI EM Index

5

Banking Sector (I)

DenizBank Economic Update

Ca

pit

al

Turkish banking sector CAR was at 16.4% in November.

Fu

nd

ing

Deposits were up YoY by 19% to TL 1.72 trillion as of Dec 15th. Share of deposits in funding was 55%.

Le

nd

ing

Annualized loan growth was at 13.5% as of Dec 15th.

December 2017

167 170 165152

161147 144 143

136144

50

100

150

200 Liquidity Coverage Ratio

Regulatory Minimum75

8877

10291

10090 85 90

20.6%19.0%

16.6%17.9%

15.3%16.3%

15.6%15.6%16.4%

14.0%13.3%13.2%13.6%

0%

5%

10%

15%

20%

25%

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 2015 2016 Nov-17

Owners' Equity CAR Core Capital RatioCapital and CAR ($ bn, %)

1724

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

1700

1800

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Total Deposits (TL bn)

13.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Loan Growth Rate(13W MA, Annualized, Net of Currency)

Macro Prudential Tightening

35% 32% 28% 26% 32% 29% 23% 20% 17% 15% 14% 13% 12%

38% 44% 49% 50% 47% 52% 56% 58% 60% 62% 63% 64% 64%

26% 24% 23% 23% 21% 19% 21% 22% 23% 23% 23% 24% 24%

2005200620072008 2009 2010 2011 20122013201420152016 Oct-17

Other Loans Gov. Bonds

Breakdown of Total Assets

6

Banking Sector (II)

DenizBank Economic Update

Lo

an

to

De

po

sit

Ra

tio

s

By the end of November, loan to deposit ratio (LDR) was at 121% while TL LDR was at 144%.

Lo

an

Qu

ali

ty

Headline NPL ratio for the sector remained stable at 2.9%.

P &

L

In November, banking sector’s annual profit increased YoY by 26% to TL 47 bn and ROE went up to 14.8%.

December 2017

2.9%2.8%

6.8%

4.7%

1.8%

0%

2%

4%

6%

8%

10%

12%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Headline Consumer LoansCredit Cards SMECorporate-Commercial

20

40

60

80

100

120

Protested Bills and Unpaid Cheques(# Thousands)

Protested Bills (3 Months m.a)

Unpaid Cheques (3 months m.a)

14.9 13.420.2 22.1 19.8

23.5

24.7

24.6 26.1

37.5

46.6

31%

-10%

50%

10%

-10%

19%

5%

0% 6%

44%

26%

0

10

20

30

40

50

-20%

0%

20%

40%

60%12 Months Cumulative Profit

TL bn Annual Change (%)

23.721.918.918.0

20.619.016.617.9

15.316.315.615.616.4

11.9

19.9

22.0

16.5

20.5

18.0

14.2 14.413.1

11.4 10.5

13.314.8

0

5

10

15

20

25

0

5

10

15

20

25 CAR (%) ROE

33% 43

% 51% 62

% 71%

79%

80%

76%

84% 97

%

102%

108%

115%

118%

118%

121%

0%

20%

40%

60%

80%

100%

120%Loan to Deposit Ratio (%)

33% 46

% 60% 71

% 87%

93%

90%

84%

87% 10

5%

112% 12

4%

131%

141%

134% 14

6%

0%

20%

40%

60%

80%

100%

120%

140%

160% TL Loan to Deposit Ratio (%)