MSCI Turkey has gained 17% since its low in mid-August and recorded a quarter-to-date gain of 4% despite all the negative news flow and volatility in Turkish markets. BIST-100 gained another 1.2% led by banks, closing at the level of 100,299 with a trading volume 22% higher than the last 5 days’ average. Banking index gained 3.7% and industrials index gained 0.2%. Interest rate on 2-year benchmark bond rate increased to 25.94% (up 24bps) while 10-year bond rate inched up to 18.02% (up 23bps). USD/TRY reversed its appreciation on Friday, closing the week at 6.05.
The rally is difficult to sustain, because it lacks two primary drivers. First, there is no concrete sign of an improvement in relations with US and Germany. Secondly and more importantly, the most reliable leading indicator of economic growth, loans continued to shrink in real and currency adjusted terms at the end of September. Here is the analysis by Yatirim Finansman Research:
Currency adjusted loan growth drops to 9% y/y
According to BRSA weekly bulletin for the week of September 21, total loans increased by 0.6% w/w. Currency adjusted total loan growth came down to 9.1% y/y from 9.6% (10.5% in end August). TL loans decreased by 0.6% and FC (USD) loans increased by 0.2% vs. a week ago. TL commercial loan growth (13 week annualized) shows a 6.3% contraction (4.2% contraction a week ago). The growth trend (13w-annualized) in consumer cash loans decelerated to 2.9% from 9.9% a week ago. Quarter-to-date TL loan contraction by 1.3% (vs. 3.6% growth in 2Q18).
We expect the flat loan growth trend to prevail until macro dynamics stabilize considerably, paving the way for more affordable rates while easing concerns around rising credit risk costs.
Currency adjusted deposit growth falls to 3.6% y/y
Total deposits increased by 0.8% w/w. TL deposits decreased by 0.7 % and FC (USD) deposits increased by 0.5% w/w. TL deposit growth reached 3.8% in 3Q18 (vs. 2Q18: 2.6%). Currency adjusted total deposit growth level stands at 3.6% y/y vs. 5.0% in end August. Total loan-to-deposit and TL loan-to-deposit ratios stand at 116% and 141%, respectively.
NPL ratio reaches 3% while coverage ratio falls to 70%
Sector’s NPL ratio realized at 2.99% (vs. 2.95% previous week) while NPL provisioning ratio stands at 69.7% (vs. 70.6% a week ago). As expected NPL deterioration in the second half of the year due to the macro downturn continues. Note the loan loss provisions may increase at a faster pace than NPL ratio increase, given the denominator impact of FX appreciation on total loans on a nominal basis (27% y-t-d).
USD2.2bn weekly drop in CBRT gross reserves
The CBRT’s gross F/X reserves fell to USD69.8bn from USD, while gold reserves fell to USD17.9bn from USD18.4bn. Total reserves (gold + FX) decreased by USD2.2bn w/w to USD87.6bn from USD89.7bn. Continuation of decline in ROM utilization which began in the week ending with August 13th was the main culprit here.
However, we might have come to the end of the bleeding due to ROM by this week. Since mid-June, gross gold reserves dropped by USD6.7bn, while decrease in gross FX reserves realized at USD14.2bn. Total gross reserves was therefore down USD21.5bn in the last 3 months (20% decline –at a half-life rate of 29 weeks). Net reserves went down to USD28.2bn from 29.6bn a week ago, while FX-only portion was down to USD18.3bn from USD20.0bn. Net FX reserves stand at a low level considering cUSD10.0bn annual government debt repayments.