DenizBank Economic Update March, 2011
Economy
Financial Markets
Banking Sector
Focus
CBRT’s 390 bps RRR hike was a front-loaded measure...
Economic Research, Strategy and Project Management Saruhan Özel, Ph.D. Ercan Ergüzel Berke Gümüş
1
March, 2011
DenizBank Economic Update Economy (I) (Seasonally Adjusted)
18.9%
Month on Month
15%
Growth
Industrial Production Index
Industrial Production Growth
25%
5.7%
130
13.6%
120
5% 110
-5%
100
-15%
Annualized
-25%
2007
2008
2009
2010
90 Jan-08
2011
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
* Industrial production in Turkey (IP) was up by 18.9% in January 2011, compared to the same month a year ago. The rise corresponds to 13.6% expansion in 12 month trailing IP. * The seasonally adjusted (SA) figures also went up by 0.5% compared to December 2010. It appears a slight change but was still important considering that it was on top of the strong growth in December. * Given that the Central Bank of Turkey (CBRT) is trying to cool down the economy through several measures, mainly curbing bank loans through RRR hikes, we have not yet made a revision in our 5% GDP growth estimate for 2011, which was much slower than that of last year. The risk in our forecast is on the upside. * The GDP figures regarding the last quarter of 2010 are released today. The economic growth has accelerated to 9.2% in Q4 from 5.2% in Q3. Thus, yearly growth has topped a whopping 8.9% in 2010... Q4 growth of 9.2% is ranking third among emerging economies. We will deep dive in growth outturn details in our next report.
The Current Account Balance
70
External Sector
(Bn $)
20
60
10 0
-30
FDI
40
-17
20
Non-Energy CA Balance
-50
Energy Balance
61
30
CA Balance
-40
-60 1997
Total Cap. Inflows
50
-10 -20
Foreign Capital Inflows Into Turkey* ($ bn)
-34
40
38
10 0
-51
46
9
19
41
20
16
14
7
7
0
-10 1999
2001
2003
2005
2007
2009
2005
2011
7
2006
2007
2008
2009
2010
Jan 2011*
* Current account (CA) has recorded $5.9 bn deficit in January, carrying 12M trailing deficit to $51 bn, which is record high. It corresponds to around 6.8% of estimated 2010 GDP. * The CBRT’s efforts against the surging CAD started mainly in November 2010, but we have not yet witnessed a change in its upward trend so far. Looking forward, the CBRT is expecting to see some correction in CAD starting from the second quarter of this year. It should also be noted, however, part of the CAD rise in the first quarter stemmed from the jump in oil prices well above the CBRT’s estimates for the year, boosting the import bill in energy (the Brent oil rose above $100 in January and then stabilized around $115 thus far vs. the official estimate of $95 on average for 2011). * On the financing side, the main channels of inflows were portfolio investment and corporate and bank borrowing rather than FDI. The error term, which gives inexplicable inflows was also very high in January was in . * We expect the CAD to reach as high as 8% of GDP during the year receding afterwards gradually to around 7% at the end of 2011.
2
March, 2011
DenizBank Economic Update Economy (II) Annual Inflation
20%
CPI and CPI Expectation (12M Fw) 12%
Inflation
PPI
CB Survey Expectations
10.9%
12%
8%
CPI
6.59%
4%
4%
4.16%
4.16%
0%
-4% 2008
2009
2010
2007
2011
2008
2009
2010
2011
* Annual CPI inflation has plunged to 4.2% in Jan-2011 from 9.2% five months ago. We expect it to gradually rise from this record low figure by March due to: 1) about 10% fall in TL (vs. the basket of 50% $ and 50% €) since the beginning of November 2010; 2) the global rise in energy and food prices, 3- strong domestic growth, 4) pass -through from the rise in PPI and 5) the waning high base effect. * Similarly, the CBRT has raised its year end inflation expectation from 5.4% to 5.9% in its recent inflation report. As per the CBRT survey, the year-end inflation is expected at 6.85%, approximately 100 bps higher than the CBRT’s forecast. * In the March Monetary Policy Meeting Communiqué, the CBRT stressed that service inflation was tame while goods inflation was rising due to global commodity and energy prices. The 390 bps hike in the RRR (see Focus Section for details) may provide the monetary tightening required for containing the potential second round effects of the recent increases in oil and other commodity prices.
Budget Balance
Public Sector
0
-3
-5
-0,6% -10
-27
-21
-11
-13
-1,1% -1,6%
-1,8% -34
-20 -5,2%
-26
-21
-40
-5,5%
% GDP
-2%
180 160
-4%
140
-6%
120
-8%
100
Income Tax VAT Spec. Cons. Tax VATon Imports
80
-8,8% 2003
200
-3,6%
-30
$ bn
Tax Revenues (6M Trailing)
0%
-10% 2004
2005
2006
2007
2008
2009
60 Jun-08
2010 Feb-11
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
* The central government budget posted TL1 bn surplus in February as it was the case in January, this is the first time that both January and February budget outturns are posting a surplus. * On the revenue side, tax revenues, mainly the indirect taxes, were robust, barring the income tax. Additionally, the jump in the VAT levied on imports in February (by about 49% compared to Feb-2010) might signal that imports remain strong and there is still time to see some correction in the CAD deficit increase. As for expenditures, main contribution is coming from decelerating interest expenses. But the savings form lower interest expense go to current spending such as transfers to social security system and municipalities and agricultural subsidies rather than pulling budget deficit down further. * There is a difference of around TL8 bn between the Ministry’s budget figures and the net cash flows of the Treasury. As is known, the main difference is that the budget figures are based on accrual accounting. Therefore in the following months we might see a slight deterioration in today’s stellar performance of first two months. * Yet, as per the Medium Term Programme, the 2011 budget deficit to GDP target is 2.8%, which is likely to be overdelivered, in our view.
3
March, 2011
DenizBank Economic Update Financial Markets EM CDS Spreads and Ratings (5 Year; Fitch, LT FX)
Benchmark Bond Yield (%)
25
Debt Market
900
TR, BB+
Hun, BBB-
Rus, BBB
Bra, BBB-
20
600
15
Benchmark Bond Yield (Compounded)
300
10
8.99%
Policy Rate (Compounded) 0 31.12.2008
31.12.2009
5 Jan-00
31.12.2010
O/N Equivalent: 6.25%
Jun-09
Mar-10
Dec-10
The 2-year benchmark bond yield jumped around 9% following the CBRT’s reserve requirement hike (RRR) of 390 bps (weighted by different deposit duration). Since Turkey’s CDS spreads are moving in parallel to her emerging peers this was clearly a matter of policy tightening rather than an increase in risk premium.
Apr-10
% Change Against $
Dec-10
(Positive Values= appreciating against $) Appreciate
Aug-09
80 90
1,1 0,8 1,3 0,7 1,3
BRL MXN
Monthly Change Weekly Change
CZK PLN
-0,6
1,2 1,1
HUF
100 110 120
TRY BRL
130
HUF KRW
CZK ZAR
3,5
0,8 1,9 1,5 2,2 1,8
ZAR KRW
Depreciate
Currency Market
EM Currencies (Dec 2008=100) Dec-08 70
TRY
2,7
0,1
JPY
-2,6
-1,6 -1,2 -1,0
GBP EURO
0,1
-4
-2
2,1
0
2
4
The TL is outperforming its emerging peers in the last couple weeks mainly due to the CBRT’s tightening stance and the correction of previous underperformance.
Bank's Equity Prices (Jan 2008 = 100)
Stock Market Performance (Sep 2008=100)
Stock Market
200
200
MSCI Turkey Index
160
150
EM Banks
US Banks
EU Banks
TR Banks
120 80
100
MSCI EM Index 40 US Stress Test
50 Sep-08
Apr-09
Nov-09
May-10
0 Jan-08
Dec-10
Oct-08
Jun-09
Feb-10
Oct-10
The latest reserve requirement rate hike will wipe off up to 10% of banks year-end profitability in 2011 – with the assumption that the banks do not pass the related costs to their customers. That is the reason the banking sector stocks are underperforming their counterparts in developed and emerging countries.
4
March, 2011
DenizBank Economic Update Banking Sector (I) Owners' Equity
29%
Capital
Free Capital
35%
24%
22%
19%
18%
88
40
75
65 47
42
40
34
24
29
2005
2006
17
57
68
56
40%
15%
30%
41
2008
2009
Foreign Banks' CAR
23% 19% 17%
20%
5% 0%
2007
State Banks' CAR
20%
10%
0 2004
Private Banks' CAR
50%
25%
21%
19%
60
60%
CAR
30%
80
20
Capital Adequacy Ratio by Bank Groups
Sector's Capital Strength ($ bn)
100
10%
2010
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
The sector’s capital adequacy ratio is more than triple the Basel requirement. Also, the gap between the banking groups has diminished, as the state banks engage in more lending decelerating their capital adequacy (CAR) to the sector average.
Wholesale Funding
Total Deposits (TL bn)
670
90
Funding
624
590
Wholesale Funding ($)
Wholesale Funding / Total Deposits
79
25%
70 515
510
50
20%
452
430
350 Dec-07
30
10
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Dec-02
15% Dec-04
Dec-06
Dec-08
Dec-10
Both wholesale and deposit funding are growing robustly. Since the rise in the reserve requirements is much higher for short term deposits, we might see stronger growth in longer term deposits and wholesale funding in the remainder of 2011.
Total Loans (TL bn)
560
549
Lending
520
570
Bonds and Loans (TL bn) 300
Bonds
530
480
280
490
260
440 400
361
220 410
360
Jul-08
Dec-08 May-09
Oct-09
Mar-10
Aug-10
330 Oct-08
Jan-11
200
Loans
370
320 280 Feb-08
240
450
390
180 160 Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Given stable funding, loan books continue to grow steadily with some switch from T-bond positions. But the recent increases in reserve requirements may take its toll on loan demand if the rise in funding costs are reflected to the clients on the lending side.
5
March, 2011
DenizBank Economic Update Banking Sector (II) Loan Breakdown (2007=100)
Loan Breakdown
200
SME
Corporate
Retail
C. Card
Retail Loans (Dec 2007=100)
260
220
Mortgage
Auto
General Purpose
C. Card
180 150
140
100 100 Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
60 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
Dec-10
Following the RRR hikes, there is no change at all in the robust upward trend of mortgage and general purpose loans. Additionally, loans to the small and medium size companies (SMEs) have picked up strongly in the second half of 2010.
NPL Ratio
Loan Quality
6%
NPL Provisions (Monthly)
(TL Mn. )
1.300
5,8%
2010 Average: TL451 mn 2009 Average: TL824 mn 2007-2008 Avr: TL350 mn
1.100 5%
900 700
500
4%
356
300 3,5%
3,2%
3%
100
Jun-07
Dec-07 May-08 Oct-08 Mar-09 Aug-09 Dec-09 May-10 Oct-10 Mar-11
Jun-08
Jun-09
Jun-10
The NPL ratio fell significantly and the provision expenses decelerated to pre-crisis levels. Accordingly, NPL provisions are falling, which is supporting the profitability in 2011.
(TL Mn. )
3.000
2.600
P&L
2.200
(TL Mn. )
Net Income (Monthly)
4.000
2010 Average: TL1.8 bn 2009 Average: TL1.7 bn 2007-2008 Avr: TL1.2 bn
3.200
1.800
Net Interest Income (Monthly) 2010 Average: TL3.2 bn 2009 Average: TL3.5 bn 2007-2008 Avr: TL2.5 bn
3.2
1.6
1.400
2.400
1.000
600 200
Jun-07
1.600
Jun-08
Jun-09
Jun-10
Haziran 07
Haziran 08
Haziran 09
Haziran 10
Monthly net interest in the first month of 2011 income is still hovering around record high average of year 2010. As a result, the system remains profitable despite an enviable balance sheet growth.
6
March, 2011
DenizBank Economic Update
Focus CBRT’s 390 bps RRR hike was a front-loaded measure... The Central Bank of Turkey (CBRT) surprisingly increased the reserve requirement rate (RRR) by a whopping 390 bps on average weighted by duration, while keeping the policy interest rate (weekly repo rate) constant at 6.25%. The general expectation was no move, compared to our call of 200 bps hike. The RRR increases on front-end of the deposit curve were higher, similar to the previous RRR hikes as seen below. The CBRT has stressed in the communiqué that although the measures taken since November 2010 are expected to have an impact on credit growth starting with the second quarter (that was the reason why no RRR hike was expected by the market this month), additional increases in RRR was deemed necessary. As per the Committee, the RRR hike this time will not only help to curb loan growth but also to ease inflationary pressures emanating from global commodity and energy prices increases (that was the reason why we expected a RRR hike).
CBRT Reserve Requirement Rates Decision Dates Pre-Crisis 05.12.2008 16.10.2009 26.04.2010 29.07.2010 23.09.2010 12.11.2010 17.12.2011 24.01.2011 23.03.2011
TL Deposit Maturities (Months) FC Liquidity Withdrawn Demand 0-1 M. 1-3 M. 3-6 M. 6-12 M. > 1Year Repo Weigh. Avr. Dep. TL FC ($) 6,0 6,0 6,0 6,0 6,0 6,0 6,0 11 6,0 6,0 6,0 6,0 6,0 6,0 6,0 9 5,0 5,0 5,0 5,0 5,0 5,0 5,0 9 5,0 5,0 5,0 5,0 5,0 5,0 5,0 9,5 0,7 5,0 5,0 5,0 5,0 5,0 5,0 5,0 10 5,5 5,5 5,5 5,5 5,5 5,5 5,5 11 2,1 1,5 6,0 6,0 6,0 6,0 6,0 6,0 6,0 11 2,1 8,0 8,0 7,0 7,0 6,0 5,0 8,0 7,4 11 7,6 0,2 12,0 10,0 9,0 7,0 6,0 5,0 9,0 9,4 11 9,8 15,0 15,0 13,0 9,0 6,0 5,0 13,0 13,3 11 19,1
Initial market response to the hike were as follows: 1- The 2-year benchmark government bond yield went up by 35 bps to 8.94%. For two reasons in our view. First, the Minutes’ rhetoric was more hawkish compared to the previous ones. Indeed, following the CBRT’s decision, some analysts brought forward their rate hike projections before the general elections dated in June 2011. Second, some of the banks liquidated their bond portfolios to fund their loan growth, as it was the case in the previous RRR hikes. 2– Prices of bank stocks went down by a strong 3.5% (compared to flat non-banking sector stocks). As would be recalled from our previous reports, we calculated the cost of previous sum of RRR hikes of 340 bps to the banking sector as 10% of projected 2011 profitability; in the case the banks try to digest the whole increase in deposit cost. But the banks are likely to reflect part of the costs to their clients on both sides, and that’s in fact what the CBRT is expecting from RRR hikes. After the recent increase in RRR, banks would have to give up to 20% of their 2010 profits. 3- Conversely, the TL appreciated vs. the basket by 1.7%, mainly due to the CBRT’s tightening stance. As a result the currency market happened to have responded the most to the hikes when compared to the bond and stock markets. Part of that response of the TL may be attributed to a correction sşnce the TL had long underperformed its emerging peers. 4- The TL yield curve has shifted upwards in the lower maturities, while being flat in longer maturities. Looking forward, the YoY loan growth rate will likely to decelerate in between 20-25%, which is the level the CBRT believes as reasonable for a more sustainable current account dynamics. In fact, we were witnessing some slight deceleration in loan growth in the last couple of weeks. But apparently the CBRT wanted to stay ahead of the curve by taking additional precautionary measures also against possibly rising inflation in the coming months while the current account deficit was still on the rise.
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