Garanti Bank shares are widely covered by research analysts of leading domestic and international investment banks and brokerage houses. As of March 2019, 19 analysts had “BUY”, 8 analysts had “HOLD” and 2 analysts has “SELL” recommendation on Garanti stock.
We believe Garanti’s proactive funding management practices and potential to extract efficiency gains from its strong digital banking platform may create upside challenges to our earnings forecasts and valuation.
Garanti management acknowledges it will be a difficult year, but the bank is well prepared to weather the challenges, assuming the macro environment develops in line with expectations..
The bank’s strong capital and profitability are likely to provide flexibility while its peers try to economize on capital.
We appreciate Garanti’s low balance sheet leverage and strong capital position, its higher than peer margin, and its solid track record of managing credit risk. We expect the bank to weather the current period of volatility better than many of its peers.
MORGAN STANLEY :
We think Garanti is one of the bestpositioned banks for a strong RoE rebound.
1 Includes funds borrowed, sub-debt & securities issued.
REBALANCING IN THE ECONOMY CRYSTALLIZED IN 4Q18. Turkish Economy contracted by 3.0% in annual terms in 4Q18. The economy technically entered into a recession as the quarterly contraction in seasonally and calendar adjusted terms became deeper with -2.4% after the decline of 1.6% in 3Q18. The shrinkage in domestic demand reached the highest level since 2009 global financial crisis, while the contribution of net exports remained the main buffer with its peak in the series going back to 1998. All in all, the economy grew by 2.6% in 2018, down from 7.4% in 2017.
SOME STABILIZATION IN IP REALIZED IN 1Q19. Industrial Production (IP) contracted by 5.1% yoy in calendar adjusted terms in February. Seasonal and calendar adjusted IP rose by 1.3% mom for the second month in a row, signaling a recovery of 0.7% in the first 2 months of the year compared to the last quarter of 2018. Both the slow-down in the contraction of IP trend and other preliminary indicators such as our Big Data Retail Sales Indicator, confidence indices, real imports and credit growth all show the recession would be short-lived. Our monthly GDP indicator also confirms this trend and nowcasts a contraction of 1.2% yoy in March (with 47% info), with some bottoming-out signals in economic activity. Though, the implications of the recent increased volatility in the financial markets and the likely extension of the tight monetary policy for a longer period of time could reduce the magnitude of the expected recovery in the coming quarters. Risks are now weighing on the downside for our 1% GDP growth estimate for 2019.
CURRENT ACCOUNT DEFICIT (CAD) MAINTAINED THE CORRECTION IN 1Q19. Current account deficit materialized as 27.2bn USD (3.5% of GDP) in 2018. In the first two months of 1Q19, current account deficit was 1.3bn USD. Hence, 12 month cumulative sum of current account deficit retreated further to 17bn USD (2.3% of GDP) in February 2019, the lowest level in the last 9 years on the back of the contraction in domestic demand and still promising exports growth. Additionally, core current account balance (excluding energy and gold) gave a surplus of 27.9bn USD (3.7% of GDP), the highest level seen in the historical data. On the financing side, despite the improvement in portfolio inflows due to the easing in external financial conditions, main items in yearly terms remained to be net error and omissions and CBRT reserves. We expect the 12-month deficit to close the year at near 1.5% of GDP.
BUDGET DEFICIT EXPANDED IN 1Q19.Budget revenues increased by 30%, supported mostly by the non-tax revenues which grew by 196% (tax revenues rose by 6%), while budget expenditures increased by 35% due to high current transfers, personnel expenses and investment expenditures in 1Q19. Thus, 12 month budget deficit reached 88.4bn TL (2.3% of GDP) meanwhile primary deficit was 3.3bn TL (0.1% of GDP). Looking ahead, the extension of tax incentives and expected poor performance of tax revenues on the poor economic activity could weigh on the budget performance. On the other hand, the extension of zoning reform till July 2019 and the likely introduction of extended paid military service together with the measures taken by government to save could provide some buffer against further deterioration. All in all, we expect budget deficit about 2.5% of GDP by end 2019, higher than New Economic Program (NEP) forecast of 1.8%.
INFLATION SLOWED-DOWN IN 1Q19. Annual consumer inflation was 19.7% in March 2019, down from 20.3% in December 2018. Also, annual core inflation retreated to 17.5% from 19.5% on diminishing exchange rate pass through on lower demand. Looking ahead, still alive cost push factors, lack of improvement in core inflation trend (still hovers near 14%) and recent volatility in exchange rate pose some upside risks on inflation while likely lower than expected demand on the back of tighter both internal and external financial conditions and extended tax incentives could provide some buffers. We expect that the consumer inflation could end the year at around 15.5%.
CENTRAL BANK (CBRT) REMAINS PRUDENT.The CBRT maintains its tight stance by keeping its policy rate (24%) unchanged on the back of likely upside risks on inflation, still alive cost push factors, lack of improvement in core inflation trend and recent volatility in exchange rate. We expect the CBRT continue with the tight stance for a longer period of time due to the recent upside risks on inflation as it could postpone the easing cycle to 4Q19 when the recovery in inflation will be more obvious.
TURKISH FINANCIAL ASSETS UNDERPERFORMED IN 1Q19.Turkish financial assets showed some stabilization on the back of the right steps in both monetary and fiscal policies and relatively calmer global market conditions in the last quarter of 2018. However, due to some uncertainties on the back of local and global factors, the assets underperformed in 1Q19 compared to 4Q18. After appreciating near 20% in 4Q18, TL depreciated by 4.3% against the currency basket in 1Q19. 10-year TL benchmark bond yield which was at 16.4% at the end of 4Q18 increased to 17.9% by end March.
1Q19 MARKET RECAP
In the first quarter of the year, equity markets rebounded from a weak end to 2018 posting their best quarterly returns since 2009 amid improved relations between U.S. and China and dovish policy actions from major central banks.
US equities rallied mainly on the back of FED’s dovish policy and guidance, constructive negotiations between the US and China and relatively stronger fourth-quarter earnings and as well as corporate buybacks. U.S. companies purchased significant amount of their shares representing largest source of demand for US stocks during the quarter. The FED lowered its US growth and inflation projections and stated that it would adjust its planned interest rate hikes to support deteriorating economic momentum. As the quarter ended, market expects no rate hikes this year and only one in 2020. On the other hand, U.S. economic data released during the quarter was mixed. While non-farm payroll declined sharply on February, unemployment rate remained low at 3.8% and wage growth was significant with 3.4% YoY increase.
On Europe front, Eurozone economy growth was almost flat in the last quarter of 2018 as Germany recorded no growth and Italy slipped into recession. Accordingly, European
Central Bank (ECB) followed the same path as FED, stepped away from tighter monetary policy and stated that rates would remain at current level until the end of the year. ECB revised its forecast downwards from 1.7% to 1.1% and introduced stimulus measures to revive the economy amid political turmoil and ongoing trade tensions. Banks drew support in funding to increase lending, yet low interest rates continued to pressure their net earnings. However, PMI remaining below 50 in February, indicates contraction.
FED’s hold decision on rate hikes and ECB turning less hawkish increased investor appetite for riskier assets. Accordingly, emerging market equities posted strong returns in 1Q led by China. US’s decision on suspending tariff hikes and continued government support to domestic economy also supported the sentiment in China. Especially China A shares were exceptionally strong, as MSCI announced that their weight will be quadrupled, which will eventually drive additional inflows. Elsewhere, Russia and Columbia benefited from rise in oil prices resulting from OPEC’s output cuts and lifted US sanctions on Russian companies.
On domestic front, Turkish stocks were down by nearly 3% in the quarter despite the rally in January mainly due to sharp sell-off in March when lira depreciated dramatically against US dollar. Turkey’s 2018 GDP growth came in lower than expected at 2.6% vs. 7.4% in 2017. In fact, Turkish economy entered a recession for the first time in a decade as the shrinkage continued in two consecutive quarters. None the less, Central Bank maintained its tight monetary policy stance and left one-week repo rate unchanged at 24.0%. On politics front, local elections were the main item on the quarterly agenda, resulted in the ruling party losing key cities’ municipalities to opposition party.
Turkish Banks continued to successfully rollover their syndications in 1Q19. Total foreign funding equivalent to USD 5.9 billion was secured in the quarter.
Akbank announced that the procedures regarding the use of pre-emptive rights to purchase new shares with regard to the total capital increase of TL 3 billion were completed as of the 17th of January.
CBRT ACTIONS DURING THE QUARTER
REGULATORY DEVELOPMENTS DURING THE QUARTER
NPL SALES DURING THE QUARTER
AWARDS & RECOGNITIONS
Garanti Bank Investor Relations has been honoured with the “LARGEST GEOGRAPHICAL COVERAGE” award at the TUYID Investor Relations Summit.
Garanti, once again, has been the only company to be listed in the “Bloomberg Gender Equality Index” from Turkey thanks to its successful practices on gender equality, particularly in human resources as well as all its value chain including contributions to its customers and society.
Received a bronze medal for “BEST SALES SOLUTIONS” with our Digital Auto Loan at the 2019 Stevie Awards.
Garanti Bank Private Banking has been selected as “THE BEST PRIVATE BANKING IN TURKEY” by Euromoney Private Banking and Wealth Management Surveys.
Named as the “BEST TRADE FINANCE BANK IN TURKEY” by Global Finance magazine for the 9th year in a row.
Received the “OPERATIONAL EXCELLENCE” award from JP Morgan for achieving high quality straight through processing (STP) volumes for USD payments
Our “Motorcycle Loan” won the “BEST NEW PRODUCT / SERVICE” award at the internationally prestigious Best Business Awards.
GARANTI AND THE COMMUNITY
Garanti has published its SECOND INTEGRATED REPORT, which makes a holistic assessment of the financial and non-financial performance of the bank, as well as conveying its forward looking strategy.
The content of the Report is identified in line with the material issues, which are determined as an intersection of issues raised by our stakeholders and topics that are significant to Garanti. The connection between the material issues, business strategy and performance in 2018 is clearly established, as suggested in the Integrated Reporting framework published by the International Integrated Reporting Council (‘IIRC’).
GARANTI JAZZ GREEN SPRING PROGRAM is running at full steam. Once again, concerts across Istanbul, including Nardis Jazz Club, Salon İKSV and Babylon stages, will unite music fans and jazz gems.
Garanti, the supporter of Turkish basketball, renewed sponsorship contract with the TURKISH BASKETBALL FEDERATION and will continue to support Turkish basketball for another three years as the Main Sponsor of National Teams.
DID YOU KNOW?
GARANTI IR APP has been redesigned with investors’ feedbacks. This responsive and user friendly app provides instant mobile access to important financial and business information on Garanti. The app is available on Apple Store and Google Play Store.
In addition to Garanti Mobile and Garanti Internet, our customers are now able to complete loan applications from Garanti Call Center.
Launched A NEW VIDEO CALL FEATURE for remote General Purpose Loan applications in order to further decrease branch dependency
First bank in Turkey to make “SWIFT TRACKING REPORT” FEATURE available via our online banking. We now allow our users to track the entire process, from order placement through to transaction completion. Transaction details - such as the status of the currency transfer, the intermediary bank, time elapsed, and can all be easily viewed from now on.
Within the digitalization journey of COMPLAINT MANAGEMENT, our customer experience team launched a new option for customers to submit their complaints by leaving a Voicemail to the Call Center.
The “DIGITAL AUTO LOAN” which provides a smart tool for the calculation of different payment plans has been launched. Whether you are a Garanti customer or not, anyone can make an auto loan application easily and get the pre-evaluations result immediately via garanti.com.tr without the necessity of contacting a branch or call center.
GARANTI ASSET MANAGEMENT increased its volume in pension funds to TL 16,6 billion with a market share of 17.2% and its volume of mutual funds is TL 4,8 billion with a market share of 7.5% as of 31.03.2019.
Garanti Bank shares are widely covered by research analysts of leading domestic and international investment banks and brokerage houses. As of December 2018, 21 analysts had “BUY”, 5 analysts had “HOLD” and 2 analysts has “SELL” recommendation on Garanti stock.
We see Garanti as the industry benchmark on revenue and cost efficiency and, along with its high free funds base, it commands one of the highest ROAs in the system.
BBVA, as a core shareholder with a ~50% stake, offers stability for Garanti’s longterm goal to maintain one of the leading positions in the Turkish banking sector.
Garanti’s stronger balance sheet should enable it to absorb rising NPLs with less pressure on ROE than peers.
Garanti remains the benchmark bank in Turkey, and we expect it to manage the downturn effectively and without external assistance. Strong capital and prudent provisioning should set Garanti in good stead to grow EPS once a recovery takes hold.
Garanti’s solid operating profitability creates ample room to absorb unexpected provision charges.
Garanti remains our only Buy-rated bank owing to its leading positions in capital, coverage and profitability.
1 Includes Leasing and Factoring receivables2 Includes funds borrowed, sub-debt & securities issued
REBALANCING IN THE ECONOMY CRYSTALLIZED IN 3Q18. Turkish Economy grew by 1.6% in annual terms in 3Q18. Seasonally and calendar adjusted quarterly growth rate turned to be negative with -1.1%, which signals that the adjustment in the economy becomes faster. Domestic demand gives the lowest contribution to growth since 2009 with only 0.4pp contribution to growth and if stocks are also included, its contribution becomes sizably negative with 5.2pp. Private consumption grew only 1.1% in annual terms; while investment expenditures contracted by 3.8%, mainly on machinery and equipment. All in all, the adjustment in domestic demand was compensated by a sharp reversal of external demand (6.7 pp contribution), due to sizable contraction in imports and relatively stronger performance of exports.
ADJUSTMENT IN ECONOMIC ACTIVITY GAINS MOMENTUM IN 4Q18. Industrial production (IP) contracted by 6.1% during October-November period after its 1.6% growth in 3Q18. The continuation of the sharp worsening especially in the intermediate goods seems to weigh on production in the coming months. Besides, the worsening performance of the exporting sectors could be a risk factor, given the continuation of the sizable fall in intermediate goods imports. On the other hand, the recent supportive policies and some stabilization in loans contraction could provide some buffer against further deterioration. Our monthly GDP indicator nowcasts a contraction of 1.3% yoy growth in December (with 47% info) which is still consistent with our 3% 2018 GDP growth estimate but with some downside risks. We maintain our 2019 GDP growth forecast at 1%.
CURRENT ACCOUNT DEFICIT (CAD) CONTINUED TO SHRINK IN 4Q18. Current account balance (CAB) gave its fourth consecutive month’s surplus in November, bringing the 12-month deficit to 33.9 bn USD (4.3% of GDP) down from 45.9bn USD (5.5% of GDP) in 3Q18. The cool-down in the economy, still supportive tourism revenues and recent ease in oil prices are the main reasons on the continuation of the shrinkage in the deficit. On the financing side, the main items in yearly terms were CBRT reserves and net error and omissions, while there was an outflow in portfolio flows and net other investment. We expect the 12-month deficit to close the year at near 28.3bn USD (3.6% of GDP) and continue to decline further to USD 16.4bn (2.2% of GDP) by end 2019.
BUDGET FIGURES CLOSED 2018 IN LINE WITH THE GOVERNMENT’S TARGETS. Budget expenditures remained strong mainly due to high personnel expenditures and goods and service purchases, while revenues continued to be supportive on one-off revenues such as zoning reform, tax amnesty and paid military service in 4Q18. Hence, Central Government budget gave a deficit of TL 72.6bn (1.9% of GDP) by end 2018, while primary balance gave a surplus of TL 1.3bn (0% of GDP). Looking ahead, the extension of tax incentives, expected poor performance of tax revenues on the cool-down in the economy and initially unbudgeted compensation for the employees could weigh on the budget performance. On the other hand, the extension of zoning reform till July 2019 and higher than expected profit transfer from the Central Bank (CBRT) could provide some buffer against further deterioration. All in all, we expect budget deficit at 2.2% of GDP by end 2019, slightly higher than New Economic Program (NEP) forecast of 1.8%.
TURKEY’S EXTERNAL DEBT STOCK TO GDP INCREASED IN 3Q18. Turkey’s external debt stock to GDP ratio increased to 53.8% in 3Q18 compared to 51.9% of 2Q18 and 53.4% of 4Q17 due to the higher decline in nominal GDP despite the deleveraging in both short and long term debt. Also, EU-defined public debt to GDP ratio rose to 32.6% in 3Q18, up from 29.2% of 2Q18 and 28.3% of the end of 2017.
INFLATION SLOWED-DOWN FASTER THAN EXPECTED IN 4Q18. Annual consumer inflation closed the year at 20.3%, down from 24.5% in September 2018. Also, annual core inflation retreated to 19.5% from 24.05% on the back of cyclical factors such as currency appreciation, maintenance of tax reductions and price discount campaigns, and weak demand. Looking ahead, higherthan-expected minimum wage hike could bring an additional 1pp upward risk on our baseline scenario, though the price reductions in utility prices could eliminate that impact. We estimate that the headline inflation could stay above 20% in the first half of the year, before decelerating much faster afterwards on base effects and lagged effects of the poor demand. We maintain our year-end inflation estimate at 16% for 2019.
CENTRAL BANK (CBRT) MAINTAINS ITS TIGHT STANCE. The CBRT maintains its strong stance by keeping its policy rate (24%) unchanged as the inflation outlook is still not promising. High volatility in the markets, uncertainties over the pricing behavior and cost push factors, likely upside risks on food inflation and tobacco prices will probably keep inflation increasing in 1Q (but to a lower extent, by around 1-2pp). We think that the CBRT should wait for June when the negative output gap and diminishing exchange rate pass-thru might result in a deeper decline in the headline inflation, to start a gradual easing cycle as inflation expectations are still above the CBRT’s interim targets.
TURKISH FINANCIAL ASSETS STABILIZED IN 4Q18. Followed by the extreme volatility on both local and external factors mainly till September, Turkish financial assets started to show some stabilization on the back of the right steps in both monetary and fiscal policies and relatively calmer global market conditions. After depreciating near 32% in 3Q18, TL appreciated 13% against the currency basket in 4Q18. 10year TL benchmark bond yield which was at 17.9% at the end of 3Q18 decreased to 16.4% by end December.
4Q18 MARKET RECAP
In the fourth quarter of the year, concerns over global trade and slowdown in economic growth weighed heavily on the markets. Global equities suffered steep declines, posting their worst quarterly returns since 2008.
US equities recorded their largest quarterly loss since 2011 due to fears over economic momentum and slower earnings growth. Stock prices fell as 10 year benchmark rate reached to 3.25%, its highest level since 2011. Plunging oil prices caused the energy sector to be the worst performer. As expected, the Fed raised interest rates by 25 bps to the highest level in decade. On the other hand, economic data released during the quarter indicated a robust growth and unemployment continued to decrease ending the quarter at 48 years low of 3.7%.
European stocks tumble amid global selling and political uncertainty. Slower Chinese growth and Brexit continue to weigh on European markets. Budget negotiations between Italy and EU and protests in France further deteriorated the sentiment. December economic data showed slowdown in business activity at the weakest level in four years. As expected, ECB left the policy rates unchanged and reduced its 2019 growth forecast.
It was a poor quarter for equities and Emerging Markets were no exception. Persisted U.S. – China dispute , rising interest rates and global growth concerns drove investors to safe havens. Although Emerging Market index lost value, it has outperformed the MSCI World. Asia was the worst-performing region mainly due to the fact that global economic slowdown expectation formed potential negative implications for the export-dependent economies.
On domestic front, Turkey declined amid 15year high inflation of 25.24% in October and slowdown in manufacturing. On currency side, Turkish Lira gained ground against U.S. dollar by 13% in the quarter on the back of improved relations in the U.S. While industrial production and unemployment continue to deteriorate, consolidated budget remains under control in line with the government’s target of 1.9%. Although, the economic data released implies lower than expected growth in the quarter, Central Bank maintained its tight monetary policy stance and left one-week repo rate unchanged at 24.0%.
Turkish Banks continued to successfully rollover their syndications in 4Q18. Total foreign funding equivalent to US$ 5.1 billion was secured in the quarter.
Akbank announced a rights issue to raise TL3bn on December 5th, 2018. The Bank shared its plans to increase its paid-in capital from TRY4bn to TRY5.2bn where new shares was sold for TRY2.5/share bringing the total capital injection to TRY3bn. The Bank’s parent, Sabanci Holding (40.8% stake), fully subscribed and guaranteed to buy unused rights.
RATING ACTIONS DURING THE QUARTER
On October 1st, following the sovereign rating downgrade in September 2018, Fitch has downgraded 20 Turkish Banks and their subsidiaries’ long-term FC credit ratings and viability ratings. Outlook maintained at Negative.
SALES DURING THE QUARTER
192,500,000,000 Class A shares in Türk Telekom owned by Ojer Telekomünikasyon A.Ş. (OTAŞ), representing 55% of Türk Telekom’s issued share capital, which were pledged as security for the existing loan facilities of OTAŞ, have been officially taken over by an SPV (special purpose vehicle) owned by the senior secured creditors to OTAŞ.
Named as “TURKEY’S BEST DIGITAL BANK” by World Finance Magazine.
Received “OPERATIONAL EXCELLENCE AWARD” from Wells Fargo for achieving high quality straight through processing (STP) volumes for USD payments.
Garanti Asset Management awarded as the “BEST INVESTMENT BANK OF TURKEY” by International Finance.
Our mobile wallet BonusFlaş selected as the “BEST WALLET” IN TURKEY IN “CUSTOMER FOCUS” category on PSM Awards.
BonusFlaş, was named the MARKET LEADER with its highest NPS score for two consecutive years.
Garanti Mobile selected as “TURKEY’S BEST MOBILE APPLICATION” by World Finance Magazine.
Garanti Mobile received “SILVER PRICE” in Turkey and the “GOLD PRICE” in the EMEA region (Europe, the Middle East and Africa) in the mobile application category at Smarties Awards.
Garanti was granted awards at Davey Awards in three important categories. “GOLD PRIZE” for Garanti Mobile assistant “Ugi” in messaging and bots category for digital advertisement and marketing. “SILVER PRIZE” for garanti.com. tr in websites category. “SILVER PRIZE” with Garanti Mobile in mobile properties and user experience category.
Received 1 SPECIAL PRIZE, 1 GRAND PRIZE, 1 CRYSTAL, 1 SILVER AND 1 BRONZE APPLE, a total of 5 awards this year at the 30th annual “Kristal Elma (Crystal Apple) Awards”, one of the most pstigious competitions in the world of advertising.
Organized “TURKEY’S WOMAN ENTREpNEUR COMPETITION” for the 12th time, jointly with the Ekonomist magazine, and with the support of the Women Entrepneurs Association of Turkey (KAGIDER), to encourage woman entrepneurs and tell their stories to everyone in Turkey.
Hosted “BBVA MOMENTUM” program for the second time in Turkey to support social entrepneurs. In this year, the program is supporting 10 social entrepneurs help grow their social businesses in areas such as; finance, communications, technology and decision making.
Secured funding with maturities of (i) 367 days, (ii) 2 years and 1 day and iii) 7 years. The total amount of funding that has been obtained from international markets in 4Q18 totaled US$1.3 billion.JCR upgraded Garanti’s corporate governance rating score to 9.60 from 9.51.Increase in the score was due to improvements in the Public Disclosure and Transparency Stakeholders and Board of Directors.Enriched the point of sale product range and launched ONE STOP SHOP INSURANCE AND LOANS for motorcycles. Integrated to the Interbank Gold Transfer System, which is operated by Takasbank, enabling gold transfer among clients electronically via Banks’ accounts. Garanti Mobile users can now access relevant content through the GARANTI STORIES section on the application’s landing screen. Garanti Stories offers digital product and service promotions, campaigns, tutoring and information specific to customers’ needs, with content that helps users in their everyday lives.Further improved & facelifted foreign currency buy/sell section on Garanti Mobile. New features added to the overall experience include; 29 New Currency Pairs, 25 seconds Currency rate Freeze option, Date & FX Rate Alarms.MODULAR STRUCTURE HEALTH INSURANCE service added to Garanti Mobile which allows customers to add or remove any coverages or services.Garanti Supplier Financing System re-designed in line with needs and demands of corporate customers. With the added functions, it is aimed to contact more customers and provide solutions to enable them to use their working capital even more effectively.Launched its’ first airline agnostic traveling credit card, SHOP&FLY.Launched DRAGON BONUS BUSINESS CREDIT CARD in cooperation with UnionPay, one of the largest bankcard networks of the world. The card aims to facilitate businessman doing business in China and enable them to use credit cards for all kinds of their expenditures in the country.
The number of active digital banking customers reached 7.3 million. Additionally, active mobile banking customers reached 6.5 million.Despite the recession in the automotive sector, increased market share among the banks & financed 14,000 vehicle purchases.
GARANTI ASSET MANAGEMENT
increased its volume in pension funds to TL 13.5 billion with a market share of 14.5% and its volume of mutual funds is TL 4 billion with a market share of 8.8%.
Garanti Bank shares are widely covered by research analysts of leading domestic and international investment banks and brokerage houses. As of June 2018, 20 analysts had “BUY”, 5 analysts had “HOLD” and 2 analysts has “SELL” recommendation on Garanti stock.
A stock-selective approach is essential and Garanti is one of our top preferences. The bank offers one of the highest sustainable ROE generation potentials among peers, despite operating with low leverage. The bank’s strong capital
Balanced and strong liquidity metrics.
High-quality asset among Turkish banks. It is widely considered to be one of the best-managed banks in Turkey.
Garanti is seen as well positioned vs. its peers as its success in digital channels and its relatively large branch network and headcount to leave ample room for operating leverage.
When the going gets tough, Garanti does just fine.A very good bank in a very tough market. Garanti remains the benchmark bank in Turkey, and we expect it to manage the downturn effectively and without external assistance.
Garanti has one of the highest share of CPI linkers in IEAs in our coverage, providing a hedge if CPI exceeds expectations..
Highest capital ratios among the Turkish banks. Valuation is also not demanding. Fee performance is outstanding for a bank that is known to be expensive.
1 Includes Leasing and Factoring receivables 2 Includes funds borrowed, sub-debt & securities issued
GROWTH PERFORMANCE IN 2Q18 SIGNALED THE ADJUSTMENT IS UNDERWAY. Turkish economy grew by 5.2% (YoY) in 2Q18, down from 7.4% (YoY) in 1Q18. The slow-down in the economy hints the expected rebalancing with a much lower domestic demand contribution supported by a positive contribution from net exports. Private consumption grew by 6.3% yoy in 2Q, led by services and durable goods consumption. Investment expenditures also decelerated by growing 3.9% yoy in 2Q on top of a broad-based worsening in subcomponents. On the other hand, Government consumption accelerated by growing 7.2% yoy in 2Q. In sum, domestic demand gave 4.2pp contribution to growth, including the negative contribution of stocks by 1.7pp; while external demand contribution turned into positive with 1pp after near 3.5pp negative contribution in the previous two quarters. On the supply side, services sector still remained robust with 4.3% growth, while the deceleration in industry and construction was noteworthy with 4.3% and 0.8% growth rates, respectively (down from 8.1% and 6.6%). Agricultural sector, on the other hand, contracted by 1.5%, a negative signal for 3Q when its share is the highest seasonally.
3Q ACTIVITY DATA SHOWS THE ADJUSTMENT IS GETTING FASTER.Industrial Production (IP) grew by 1.7% yoy in calendar adjusted terms in August. Accordingly, in July-August period annual IP growth decelerated to 3.7% from 5.2% yoy in 2Q18. The slowdown was broad-based, but getting clearer in intermediate and durable consumer goods production. As financial conditions became tighter more obviously starting from April; the lagged effects will certainly weigh more from onwards. The decline in manufacturing PMI to 42 (the lowest level since 2009), worsening in capacity utilization and electricity production, the sizable deceleration in credit growth and ongoing strong fall in intermediate goods imports all signal a much more rapid slow-down. Thus, the cool-down in economic activity will become much clearer in the second half of this year as statistical base effects and tightening financial conditions will affect domestic demand negatively. We expect GDP growth to come down to 3.0% in 2018, with downside risks accumulating for 2019.
CURRENT ACCOUNT DEFICIT (CAD) STARTED TO SHRINK IN 3Q. CAD is down to USD51.1bn (6.2% of GDP) in annual terms in August from 57.5bn in 2Q18 (6.5% of GDP) after the first surplus in August since 2015 and the largest monthly current account surplus on record. Also, core CAD, excluding net energy and gold imports, decreased to 0.2bn USD in the same period from 5.8bn USD, which implies a cool-down in economic activity through domestic demand. The main financing items in the July-August period were net error and omissions and CBRT reserves while there was an outflow in portfolio, deposits and credits. Specific to August, the CBRT decision to lower required reserve ratios and change the coefficients of ROM to provide FX liquidity for banks led its reserves to decline fast. Expected slow-down in the economy, continued normalization in gold imports and recovery in tourism revenues could help CAD decrease at the end of year to near USD 40bn levels (5% of GDP). The adjustment would be much more obvious next year and could bring the deficit down to USD 20bn (3% of GDP) by end 2019.
NEW ECONOMIC PLAN(NEP) SUGGEST AN AGGRESSIVE FISCAL CONSOLIDATION PLAN IN THE SHORT TERM. Budget expenditures remained strong mainly due to high personal expenditures and goods and service purchases, while revenues continued to be supportive on one-off revenues such as zoning reform, tax amnesty and paid military service. As of September year-to-date revenues increased by 20% in annual terms and expenditures expanded by 24%. Hence, 12-month cumulative budget deficit reached TL 72.5bn and budget deficit to GDP ratio stood at 2.0% in 3Q18. Primary balance of -0.1% GDP remained at the same level with 2Q18. We expect budget deficit to deteriorate further and close the year at slightly above 2% of GDP. Turkey’s New Economic Program (NEP) suggests an aggressive fiscal consolidation plan in the short term. The Government relies more intensively on the expenditure side (1.3% of GDP savings) while envisages extra revenues equivalent to 0.4% of GDP in 2019. Though, as we assume lower growth rates in the medium term, we think that a higher deficit path compared to the Government estimates is more likely.
TURKEY’S GROSS EXTERNAL DEBT STOCK DECREASED IN 2Q.Turkey’s external debt stock to GDP ratio decreased to 51.8% in 2Q18 compared to 52.9% of 1Q18 and 53.4% of 4Q17 thanks to the decline mostly in the long term debt (10bn USD decline in total). On the other hand, EU-defined public debt to GDP ratio rose to 29.2% in 2Q18, up from 28.4% of 1Q18 and 28.3% of the end of 2017.
CLIMBING COST-PUSH FACTORS AND ONGOING PASS-THRU LED INFLATION TO HIT WORRYING LEVELS IN 3Q. Annual inflation climbed to 24.5% in September (the highest figure since June 2003), up from 15.4% in June on top of rapid exchange rate pass-thru after sharp currency depreciation, climbing cost-push factors and high food inflation despite favorable seasonality. Also, core inflation accelerated to 24.05% from 14.6% in June with broad-based worsening. Domestic producer prices (PPI) also surprised on the upside by hitting 46.2% in annual terms in the same period, which will keep cost push factors well alive over consumer prices in the short term. Risks are now clearly on the upside for inflation in the short term, given the lagged effects of exchange rate pass-thru, latest utility price hikes and climbing cost pressures. However, after the upside surprise on inflation data in September, Treasury and Finance Ministry announced a new set of measures to fight inflation. Depending on the success of the program, there could be downside risk on our year-end forecast. Assuming no additional negative currency shock, we estimate the yearend inflation to be near 24% in 2018.CENTRAL BANK (CBRT) KEPT ITS STANCE TIGHTER AGAINST WORSENED INFLATION OUTLOOK IN 3Q.The Central Bank (CBRT) surprised on the upside and hiked its policy interest rate (one-week repo) by 625bps to 24.0% in September meeting. The decisions from the CBRT do not only contribute to fight against inflation and inflation expectations but also supports financial stability by decreasing the pressures over the currency. Thus, the CBRT reinforced its stance on inflation worries in the short term and took a solid step to restore credibility against rapidly worsening inflation expectations. Though, given the upside surprise on inflation data in September, the potentially high deviation in future inflation expectations might need to be tackled by even tighter monetary policy.
TURKISH FINANCIAL ASSETS STARTED TO STABILIZE IN SEPTEMBER. After the high volatility on the back of rising concerns over deepening macro imbalances, elevated uncertainty on corporate defaults, escalation in geopolitical risks and the overall worsening in global financial markets in the eve of tightening financial conditions and uncertainties from trade protectionism, Turkish financial assets started to stabilize on the back of the right steps in both monetary and fiscal policies. After depreciating 44% till the end of August compared to the end of 2Q, TL appreciated close to 9% against currency basket in September. 10-year benchmark bond yield which was at 19.25% at the end of 2Q18 climbed up to 21.8% by end August, but then eased to 17.9% by end September.
2Q18 MARKET RECAP
In the third quarter of the year, global equities rose for the second straight quarter on the back of robust U.S. economic data. However, the two risks (trade-wars and Italy’s macro-political uncertainty) remain and the currency turmoil in emerging markets bear close watching
US equities significantly outperformed other developed markets. Economic growth and earnings continued to remain robust overshadowing concerns around US-China trade war. The S&P recorded approximately 7% gain during the quarter and ranked by far the best performing index of the developed markets. Unemployment continued to decrease ending the quarter at a historically low 3.9%. Considering supporting U.S. economic data, the Fed raised its outlook for the U.S. economy and revised the fed funds rate upward by another 0.25%. Another rate increase is signaled for the December FOMC meeting.
Eurozone equity gains were modest. European equities ended the quarter in a positive territory, supported by resilient macroeconomic data. Banks were generally weaker amid concerns over exposure to emerging markets as well as worries over the Italian budget. Italy’s higher than expected budget proposal of 2.4% weighed on European equities.
Emerging markets equities closed flat in the third quarter due to risk-off investor sentiment. Continued U.S. dollar strength and the U.S.- China trade dispute coupled with fears of contagion stemming from weaker EM countries, namely Turkey and Argentina. EM currency turmoil which began in Turkey and Argentina led to a general financial market stress across a wider range of countries. On the other hand, Russia outperformed amid rising oil prices and increasing earnings expectations. Oil price continued to rise approaching a four-year high. Turkey was again the weakest-performing equity market in the region amid a sharp selloff in the lira
On domestic front, Turkish Lira plunged further as geopolitical tensions with the US worsen ongoing concerns over the wide current account deficit, high inflation and central bank independence. Currency depreciated against USD by 31% QoQ on top of 21% in the first half.
September inflation print came in substantially higher than expectations bringing YoY inflation to 24.5%. Despite the concerns, Central Bank hiked the one-week repo rate by 625bp to 24.0% significantly above consensus expectations. The Ministry of Economy introduced the New Economic Program (NEP) to rebalance the Turkish economy during 2019-2021 through fiscal discipline and transformation in manufacturing and exports with a value-added perspective.
Turkish Banks continued to successfully rolled-over their syndications in 3Q18, US$ 1.7 billion equivalent* amount was secured as syndicated loans in the quarter. Syndication rollovers of Eximbank, Isbank and TEB were also successfully completed in October.
Vakıf, Halk and Eximbank announced their TL sub-debt issuances in September:
Isbank and Halkbank decided to initiate a share buyback program for their maximum 130 million and 70 million shares, respectively. Accordingly, as of quarter-end, Isbank has bought back 79.6 million shares.
CBRT ACTIONS DURING THE QUARTER
NPL SALES DURING THE QUARTER
* Public Disclosure Platform. Calculation based on publicly-traded banks.
Awarded as “THE BEST RETAIL BANK OF TURKEY” by World Finance Magazine.
Received “THE BEST RETAIL BANK OF EUROPE” award from European CEO Magazine for its customer experience, digital transformation in its branches, innovative projects and solutions such as instant shopping credit for e-trade sector.
Recognized among “MOST HONORED” institutions as the only bank from Turkey in Institutional Investor Magazine’s survey of 2018 Emerging EMEA Executive Team Leaders. Among financials, our CEO ranked second in the category of “BEST CEO” as the only CEO from Turkey in the top 3 & Head of Investor Relations, ranked first as “BEST IR PROFESSIONAL” in the region.
Honored as “BEST BANK FOR SUSTAINABLE FINANCE IN CEE” in Euromoney Excellence Awards.
Received “OPERATIONAL EXCELLENCE” award from KBC Belgium for achieving high quality straight through processing (STP) volumes for Euro payments.
Commercial Cards VCF4 project awarded as “THE MOST INNOVATIVE VISA COMMERCIAL CARD PRODUCT” in Vizyonist 18 event that is organized by Visa. VCF4 system enables firms’ accounting teams to monitor workers’ spending via Visa corporate cards in detail.
Cash Management Sales & Marketing Team received “BRONZE STEVIE” in 2018 Global Best Customer Service Category.
Cash Management and Transaction Banking’s Business Development team recognized as “BUSINESS DEVELOPMENT DEPARTMENT/ TEAM OF THE YEAR” by Best in Biz Awards.
Garanti Asset Management was named as “BEST INVESTMENT MANAGEMENT COMPANY” of Turkey by World Finance.
Garanti received awards in 5 different categories of the Global Finance Awards: THE BEST DIGITAL BANK IN TURKEY, THE BEST WEBSITE, THE BEST INTEGRATED PERSONAL BANK WEBSITE, THE BEST MOBILE BANKING, THE BEST SOCIAL MEDIA MARKETING AND SERVICE.
Garanti Mobile Banking App has been awarded with a “GOLD STEVIE” in the category of Best Banking Application in the Financial Services & Banking.
Garanti Bonus platform became “LOVEMARK” for 9th time in Turkey’s Most-Loved Brands (Lovemarks) Survey by Mediacat and Ipsos. Furthermore, Bonus was selected as “THE COOLEST BRAND OF THE YEAR” in credit card category in the COOL Brand Survey by Marketing Türkiye and Roamler Türkiye.
Contributed to “Sustainable Development Goals (SDG) Bonds and Corporate Finance - Road Map to Mainstream Investments Report” prepared by UN Global Compact Action Platform on Financial Innovation for the SDGs
Digital Approval on corporate tablet is introduced to support the paperless workplace initiative. Accordingly, our customers can digitally approve their GPL & Overdraft Contracts, Savings Account Openings, Bundled Products Contracts for Retail and SME customers, Investment Trading Contracts, Pension Contracts and Insurance Policies.
Garanti Women’s Turkish Wheelchair Basketball Championship was organized with Garanti Bank’s sponsorship.
The concert program of the fall season within the scope of Garanti Jazz Green was announced.
Became the only company from Turkey qualified to be included in the DOW JONES SUSTAINABILITY EMERGING MARKETS INDEX for four consecutive years.
Launched SMS Custom Tax Payment Service, which offers a faster and user friendly tax payment experience.
Executed TURKEY’S FIRST GREEN CORPORATE LOAN AGREEMENT for meeting the operational capital needs of the borrower. Companies using the Green Loan are expected to improve or at least retain their initial sustainability performance during the loan life.
Became “THE GREEN FACILITY AGENT” of Turkey’s first Green Project Finance Loan. Green facility agent tracks sustainability performance of company throughout the loan term.
Introduced “REMOTE SALES” facility in branches. Sales personnel are now able to start secured/verified phone calls with their customers leading to a truly lean product/ service offering processes completed with digital signature in channels.
Further improved DIGITAL CHANNELS with the releases of;
Redesigned Mobile and Online services for SME CUSTOMERS;
The number of active digital banking customers reached 7 million. Additionally, active mobile banking customers are over 6 million.
Launched its first Foreign Currency priced & traded mutual funds for investors who want to invest their savings in foreign currency assets. The portfolios can consist of Eurobonds, Gold & Term Deposit and Foreign Traded Funds investment products.
MILES&SMILES CREDIT CARD
Agreement between Garanti Bank and Turkish Airlines has been extended until 2023.
Garanti’s duration mismatches between assets and liabilities are lower than the Tier 1 bank’s average, and it has a well-balanced currency structure in the balance sheet. Equally importantly, its loan composition in terms of segments is well-diversified, which will likely limit NPL inflows in the coming years.
Garanti’s strong franchise is well positioned with resilient core revenue growth and better cost efficiency
Prolonged CPI linker contribution, sector leading core spread and NIM position enable quality progression in terms of banking revenues.
Well positioned to weather sector-wide problems owing to its sector-leading capital ratios, a sector-leading pre-provision profit margin and its proven track record of risk management.
We continue to see Garanti as the right way to have exposure to Turkey given its proven ability to protect its bottom line through these periods of instability.
Superior interest rate repricing profiles that should support NIM expansion in a rising rate environment, solid NPL coverage buffers that should mitigate the impact of asset quality weakness and IFRS 9 transition, and highest core capital levels among peers.
We believe that increase in stage 2 loans is mainly related to the Bank’s prudent approach and, hence, should be viewed positively by investors.
Garanti offers one of the highest sustainable ROE generation potential among peers, on our estimates, despite operating with low leverage.
ROBUST GROWTH PERFORMANCE CONTINUED IN 1Q18. GDP grew by 7.4% (YoY) in 1Q18 mainly supported by the boost in private consumption and the recovery in investment. Private consumption grew by 11.0% yoy in 1Q, up from 6.6% in 4Q17 and 6.1% in overall 2017, supported by all subcomponents except for durable goods. Investment expenditures also picked-up by 9.7% yoy growth in 1Q, up from 6.0% in 4Q17 and 7.3% in 2017, on the top of acceleration in construction and ongoing moderate rise in machinery investment. On the other hand, government consumption receded to 3.4% growth in 1Q, down from 5.0% 2017. Thus, domestic demand gave 10.9pp contribution to growth with contribution of stocks by 1pp, while external demand continued to drag down growth by 3.6pp with almost no contribution from exports. On sectorial side, main subsectors kept the high momentum with a positive differentiation from construction whose growth rate rose to 6.9% from 5.8% in 4Q17.
2Q ACTIVITY DATA SIGNALS A CLEAR MODERATION.The Industrial Production (IP) grew by 6.4% yoy in calendar adjusted terms in May but the highest monthly deterioration of 1.6% since September 2016 signals the increasing likelihood of a more rapid adjustment than expected. The monthly deterioration in IP was broad-based as capital goods production took the lead (0.7 negative contribution to overall decline) and followed by nondurable consumer goods (-0.5 pp cont.) and intermediate goods production (-0.3 pp cont.),respectively. Accordingly, annual IP growth in the first two months of the 2Q18 decelerated to 6.1% compared to 10% yoy in 1Q18. Hence, May data is still mirroring a positive outlook for growth but signaling a loss in pace. In the sectorial details, both domestic demand and export oriented sectors registered a slowdown but the higher adjustment in exporting ones implies a gloomy outlook for exporters. Also, as financial conditions had become tighter more obviously starting from April; the lagged effects will certainly weigh more from onwards. Thus, the cool-down in the economic activity to become much clearer in the second half of this year as statistical base effects and tightening financial conditions will affect domestic demand negatively. We expect GDP growth to come down to 3.8% in 2018, with downside risks accumulating for 2019..
DETERIORATION IN CURRENT ACCOUNT DEFICIT (CAD) CONTINUED IN 2Q. Current account deficit (CAD) recorded USD57.6bn in annual terms in May (6.6% of GDP, up from 6.3% of GDP in 1Q18), the highest figure since March 2014. However, core CAD (exc. gold and net energy) has started to decelerate which implies a cool-down in economic activity through domestic demand. Though, increasing oil prices will continue to weigh on the energy bill, thus eliminate the positive impact from lower import demand this year. On the financing side, slightly higher than half of the deficit being financed by short term flows raise concerns over the quality of finance. Expected slow-down in the economy, normalization in gold imports and ongoing recovery in tourism revenues will help CAD to decrease at the end of year to USD 54bn levels (c.6.6% of GDP).
BUDGET FIGURES DETERIORATED FURTHER IN 2Q. In the second quarter of 2018, expenditures remained strong, while revenues continued to be supportive. The revenues increased by 18.2% yoy to TL353.6bn while the expenditures expanded by 23.2% yoy to TL399.7bn in June. Hence, the 12m sum budget deficit reached TL 68.2bn and budget deficit to GDP ratio rose to 2.0% in 2Q18 (up from 1.6% in 1Q), while primary surplus of -0.1% GDP decreased significantly due to high retirement bonus payment in June (down from 0.2% in 1Q18)). We expect budget deficit to deteriorate further especially in the third quarter of this year before closing the year at around 1.9% of GDP.
TURKEY’S GROSS EXTERNAL DEBT STOCK DECREASED IN 1Q. Turkey’s external debt stock to GDP ratio decreased to 52.9% in 1Q18 compared to 53.4% of 4Q17 and up from 47.3% by end 2016 mostly due to better growth performance in the first quarter of 2018 although there was a pick-up in both short and long term external debt. On the other hand, EU-defined general government debt stock to GDP ratio slightly rose to 28.4% in 1Q18, up from 28.3% of 4Q17 and the end of 2016.
HISTORICAL HIGH FOOD INFLATION AND ONGOING PASS-THRU LED INFLATION TO HIT THE HIGHEST LEVEL IN 2Q. Annual consumer inflation hit 15.4% yoy in June, the highest level since December 2003, up from 10.2% in March due to the broad-based acceleration in core prices and exceptional food inflation as a result of bad weather conditions. Also, the acceleration in exchange rate passthru led core inflation to jump up to 14.6% yoy in June from 11.4% in March. Annual domestic producer price inflation skyrocketed to a new peak of 24% in June from 14.3% in March, keeping the cost push factors on the upside. Looking ahead, depending on the level of correction in food inflation and the likely removal of the adjustment in fuel prices, the peak in the headline could still be in July. Assuming no additional negative currency shock, we estimate the year-end inflation to be around 14.0% in 2018.
CENTRAL BANK (CBRT) KEPT ITS STANCE TIGHT AGAINST WORSENED INFLATION EXPECTATIONS IN 2Q. The Central Bank of Turkey (CBRT) increased its funding rate by 500 bps to 17.75%, simplified its policy framework and provided some supporting liquidity measures since its March meeting. Thus, the CBRT reinforces its stance on inflation worries in the short term and takes a solid step to restore credibility against rapidly worsening inflation expectations. Given the surprising June inflation data, the likely high deviation in future inflation expectations has to be tackled by tighter monetary policy. Thus, the Central Bank needs to be more effective to anchor inflation expectations by promising a higher real interest rate in an extended period of time.
TURKISH FINANCIAL ASSETS PERFORMED WORSE IN 2Q. TL depreciated due to increasing volatility in global financial markets on the back of continued monetary policy normalization and escalated concern on trade wars, geopolitical risk s, higher than expected inflation realizations, deterioration in CAD and doubts on CBRT’s independence in 2Q. Thus, TL depreciated by 12% to 4.94 against US dollarEuro currency basket by the end of 2Q from 4.41 by the end of 1Q. 2-year benchmark bond yield which was at 14.07% at the end of 1Q18 climbed up to 19.15% in 2Q18.
In the second quarter of the year, global volatility remained, as growing fears of “trade war” between U.S. and overseas countries weighed on the markets. However, resilient economic data and strong earnings momentum outweighed the concerns. Hence, global equities rebounded from first quarter’s 1.7% decline.
U.S. equities appreciated by 3.4% QoQ on the back of robust corporate earnings and U.S. economic conditions. The unemployment rate reached 48-year low of 3.8% at the end of May. Accordingly, the US Federal Reserve raised its key lending rate by another 25bps-the second time in 2018. FOMC lifted the target range for the federal funds rate to between 1.75% and 2.0% and increased its forecasts of growth and inflation. The anticipation is two further rate hikes in the second half.
On Europe front, rising trade concerns between U.S. on steel & aluminum and imported vehicles affected the sentiment in the region. Political tension in Italy due to Eurosceptic views of the government created further volatility. Despite trade anxiety and political instability, Eurozone equities posted positive returns in the second quarter. The economic data indicates a steady growth in Europe, yet at a slower pace compared to last year. Highlighting the economic outlook risks, ECB announced their expectation to end the economic easing program by the end of this year and signaled for gradual policy normalization.
Emerging market equities recorded their first quarterly decline since 2016. Robust US dollar coupled with rising US Treasury yields, weighed negatively on the sentiment in EMs. Argentina by far registered largest losses. The Central Bank of Argentina increased the interest rates to 40% to stabilize the currency. On the other hand, EMEA was the best performing region in EM. Notably, Russia was the best performer on the back of rising oil prices closing the quarter on the positive territory. Whereas, Turkey was the weakest-performing equity market in the region.
Tur key, for the s e cond cons e cutive quarter, negatively decoupled from EMs by underperforming MSCI EM by 21%. Macroeconomic vulnerabilities, deepening political turmoil and investors questioning Central Banks’ independency led to further deterioration in economic indicators of the country. Currency depreciated against USD by 16% QoQ on top of 4% in the first quarter. The Benchmark interest rate increased sharply by 5pp to 19.25%. June inflation print came in substantially higher than expectations bringing YoY inflation to 15.4%. On the other hand, Turkey’s GDP growth continued to be strong with 7.4% YoY growth in 1Q18, which was the 2nd highest among G20 countries.
Turkish Banks raised a total amount of US$ 7.3 billion* equivalent international funding in 2Q18. US$ 6.3 billion equivalent amount was secured as syndicated loans, US$ 0.5 billion equivalent amount from securitizations, US$ 85 million from covered bond issuance, US$ 0.2 billion equivalent amount from multilateral development banks and US$ 0.2 billion equivalent issuances** under Global Medium Term Notes (GMTN) Programs.
YKB announced its capital strengthening plan and increased its issued share capital by TL 4,100,000,000 to TL 8,447,051,284. Shareholders were able to participate in the capital increase in the proportion of their participation held in the Bank. CMB’s approval and the necessary procedures have been completed on 29 June 2018.
* Public Disclosure Platform. Calculation based on publicly-traded banks ** Bloomberg
Garanti RANKED 3RD in “Best in Region: Central & Eastern Europe” category by IR Magazine after MOL Group and Sberbank. Garanti was also short-listed for “Best use of multimedia for IR” among 6 finalists including banks such as Banco Santander, Royal Bank of Scotland etc. This year, Banco Santander was awarded as the winner. It was the 3rd consecutive year that Garanti was nominated in this category.
Named “BEST PROJECT FINANCE HOUSE IN CEE” for the third consecutive year and the “BEST STRUCTURED FINANCE HOUSE IN CEE” at the EMEA Finance Awards 2017.
EMEA Finance, one of the leading finance publications covering EMEA region, awarded Garanti for 5 project financings in 9 different categories with a total project amount of US$ 5 billion.
Garanti Asset Management was named as “BEST ASSET MANAGEMENT COMPANY” of Turkey by International Finance Magazine. Awarded with “BEST IN CLASS” on UX category and the “SECOND PRIZE” in General Mobile Banking Application category with Garanti Mobile in Europe in 2018 Mobile Functionality Evaluation by Forrester.
Entitled to receive the “HONOR” AWARD with Garanti Mobile in the Mobile Sites & Apps: Financial Services / Banking category at the Webby Awards.
Awarded in 2018 A.L.F.A. Awards with the EXCELLENCE in its customer experience management. Also Garanti’s Credit Card platform Bonus was recognized as “PERFECT CUSTOMER EXPERIENCE BRAND” in credit card category. A.L.F.A. Awards honors the brands that create a difference in their sector with the experience they deliver.
Rewarded as “TURKEY’S BEST CASH MANAGEMENT PROVIDER”, for the 3th consecutive year by the world’s leading finance magazine Global Finance.
Garanti Securities was recognized as “THE MOST LIKED BROKERAGE HOUSE OF 2017” among Turkey’s Most Liked Companies.
During the Communicator Awards, Garanti Mobile have received EXCELLENCE PRIZE in User Experience & General Finance categories while receiving SUPERIORITY PRIZE in User Interface, Visual design–Functionality & Visual design- Esthetic. Also, Garanti.com.tr received SUPERIORITY PRIZE in User Experience, User Interface, General Finance, Site Structure Menu and Sample Applications categories.
Launched its Sustainability Website: www.surdurulebilirlik.garanti.com.tr/en
Became the chair of the Environment and Climate Change Working Group established under Turkish Industr y and Business Association (TÜSİAD).
Became a member of the Carbon Pricing Leadership Coalition (CPLC) Global Steering Committee.
Became the finance partner of the ‘Expansion of Cleaner Production in the Textile Sector Project’, launched by WWF-Turkey and the South Aegean Development. The project aims to avoid pollution that has already reached critical levels in the Great Menderes, Basin. Main stakeholders of the project are textile manufacturers, global textile brands and financial institutions. Within the scope of the project, clean production trainings, technical and financial support will be given to raise awareness for water and energy efficiency projects.
Presented its carbon pricing practices through a webinar organized by Yale University, World Economic Forum and CPLC
Istanbul Jazz Festival, organized by Istanbul Culture and Art Foundation (IKSV) under the sponsorship of Garanti Bank.
Signed a syndicated loan agreement comprising of three separate tranches of US$ 457million and € 670.5 million with 367-DAYS MATURITY, and US$ 145 million with 2 years and 1 day. The loan has been executed with commitments received from 38 banks from 17 countries.
Issued the first GENDER BOND in Turkey with IFC (International Finance Corporation) to be used in the financing of women entrepreneurs. Gender Bond has a value of US$ 75 million and a maturity of 6 years and it is the first social bond issued by a private bank in emerging markets.
Became the first bank from Turkey to go live in SWIFT GPI SERVICE which offers a faster, traceable and transparent payment experience. To enhance customer experience among SME customers, new initiatives are introduced:
The number of active digital banking customers reached 6.6 million. Additionally, active mobile banking customers reached 5.8 million.
Total AUM reached TL 18.9 billion and increased its volume in pension funds to TL 12.5 billion with a market share of 14.8% and its volume of mutual funds is TL 5.8 billion with a market share of 11.0%.
Completed the Sok Marketler initial public offering as the sole domestic bookrunner, which is the largest initial public offering in Turkey since 2010 with US$ 539 million issue size. Additionally, as a global coordinator, completed the Aselsan secondary public offering with US$ 651 million offer size, which is the largest public equity offering realized in Turkey since 2013.
We see Garanti as the industry benchmark on revenue and cost efficiency and, along with its high free funds base, it commands one of the highest ROAs in the system. We also appreciate Garanti's low balance sheet leverage and strong capital position, its higher than peer margin, and its solid track record of managing credit risk.
The bank’s strong capital and high profitability are likely to provide flexibility in the long-run while its peers try to economize on capital.
The bank delivered the best opex performance among peers in FY17.
Garanti is perfectly positioned to respond to any revival in consumer demand backed by very low leveraged balance sheet, comparative cheaper funding access and strong fee generation capacity.
Our latest visit to Turkey confirms our thesis: Garanti is the best managed bank.
Solid ROE momentum.
Digital migration and transition to its new branch model should increase sales capacity, reduce costs and foster fee performance in the medium term.
We expect Garanti to deliver the best NIM performance similar to past couple of years thanks to its strong demand deposit base.
1 Includes Leasing and Factoring receivables 2 Includes funds borrowed, sub-debt & securities issued * Sector figures are based on BRSA weekly data for commercial banks only. Garanti figures are per bank-only financials for fair comparison
Robust growth performance continued in 2018 with some moderation. According to the most recent figures from the Turkish Statistical Institute, year-on year economic growth was 7.3% in the fourth quarter of 2017. The growth was supported by the still high domestic demand contribution while net export dragged down the growth. Private consumption was leading domestic demand while investment continued to be also supported by machinery and equipment. The economic activity is expected to remain strong on high inertia in the first half of 2018. We expect growth to remain close to 6% in 1Q18. Current high momentum, still solid exports, expected recovery in tourism revenues and continuing policy impulses may remain supportive on activity, while more rapidly than expected tightening financial conditions could drag down growth with a stimulating impact coming from negative base effects in the second half of the year. We maintain our growth forecast at 4.5% this year, though with uncertainties which could weigh on the downside.
1Q activity data signals a slight moderation.Industrial production (IP) grew by 9.9% yoy (cal. adj.) in February, keeping the high momentum as the overall increase almost stayed the same at 10.9% yoy in the first two months of the year (vs. 10.7% in 4Q). In seasonal and calendar adjusted terms, monthly decline continued in February but to a marginal extent compared to January, signaling only a limited cool-down in economic activity. In the details, ongoing higher contributions from intermediate and capital goods on production demonstrates further support towards a balanced growth in medium to long term as current productive capacity could be boosted more after recent investment incentives. All in all, recent slow-down in manufacturing PMI in April (still above 50, signaling expansion), deceleration in electricity production, moderation in economic sentiment and normalization in credit growth are the signals that the economic activity is losing pace; while still robust global growth could remain supportive, though with uncertainties on recent protectionism measures and geopolitical risks.
Deterioration in current account deficit (CAD) continued in 1Q. Current account deficit (CAD) expanded to USD11.2bn in the first two months of 2018 from USD5.2bn in same period of last year. Growing energy bill, still high net gold imports and solid domestic demand continued to weigh on the deterioration in CAD. Hence,12-month cumulative deficit posted USD53.3bn (6.1% of GDP, up from 5.5% of GDP in 2017) in February, the highest figure since April 2014. Slightly higher than half of CAD was financed by portfolio inflows while FDIs remained weak in the first two months of 2018. Concerns on CAD accelerated further after Moody’s downgrade due to doubts on external debt sustainability. Considering the economic activity in the first half of the year will stay robust, CAD will deteriorate towards 6.5-7% of GDP till September. Base effects, expected normalization in gold imports and ongoing recovery in tourism revenues will help CAD to decrease at the end of year at USD 56bn levels (c.6.4% of GDP).
Budget figures continued to deteriorate in 1Q. In the first quarter of 2018, the increase in spending suppressed the increase in revenues. The revenues increased by 15.7% yoy to TL167bn while the expenditures expanded by 17.7% to TL188bn. Tax revenues maintained its positive performance on top of high inflation, robust activity and higher than expected tax amnesty revenues. Though, still high expenditures and lower privatization revenues than the last year resulted in TL20.4bn deficit in the first quarter of this year, compared to TL14.9bn deficit in the same period in 2017. Thus, budget deficit to GDP ratio slightly worsened to 1.6% (up from 1.5% in 2017), while primary surplus of 0.3% in 2017 slightly declined to 0.2% of GDP in the first quarter. We expect the budget deficit to deteriorate further especially in the second half of this year on top of expected slow-down in economic activity and close the year at 2.2% of GDP.
Turkey’s gross external debt stock continued to grow in 4Q. Turkey’s external debt stock to GDP ratio increased to 53.3% in 4Q17 compared to 52.6% of 3Q17 and up from 47.3% by end 2016 mostly due to the pick-up in the long term external debt of the private sector. On the other hand, EU-defined general government debt stock to GDP ratio slightly rose to 28.3% in 4Q17, up from 28.2% of 3Q17; though it remained the same as the end of 2016.
High food inflation and ongoing pass-thru absorbed favorable base effects in 1Q.Annual consumer inflation still remained at two-digits in March, retreated to 10.2% from 11.9% in December thanks to favorable base effects. Core inflation declined to 11.4% in March from 12.3% at the end of 2017 thanks to easing cumulative impact of exchange rate pass-through, yet the recovery is still limited on recent depreciation pressures year-to-date. Domestic producer prices, whose annual inflation realized as 14.3% in March will keep upward pressures on consumer prices. Looking ahead, as favorable base effects fade away as of April and currently overshooting currency results in additional pressures on core prices, risks remain tilted to the upside on inflation in addition to still positive output gap and high inertia (backward and forward looking).
Central Bank (CBRT) stays on hold and keeps the tone tight in 1Q.The Bank maintained its policy tone but this time also stressed the inertia in inflation outlook and the high levels of core inflation in the March meeting. Given the high levels of inflation and inflation expectations, pricing behavior carries the risk of further inertia, which requires the CBRT to keep its tight policy stance. Thus, we expect monetary policy to remain tight and hold its funding rate at 12.75% throughout the year unless the negative differentiation on Turkish financial assets persists.
Turkish financial assets performed worse in 1Q.TL depreciated due to increasing volatility in global financial markets, geopolitical risks, higher than expected inflation realizations and deterioration in CAD in 1Q. Thus, TL depreciated by 7% to 4.47 against US dollar-Euro currency basket by the end of 1Q from 4.15 by end 2017. 2-year benchmark bond yield which was at 13.4% at the end of 4Q17 climbed up to 14.07% in 1Q18.
1Q18 MARKET RECAP
Global equities declined in the first quarter of the year. Worries about the path of interest rate rises and global trade concerns weighted in negatively on the sentiment. Boosted by tax reforms, US equities were strong at first, however, they lost on a QoQ basis, due to inflation concerns and the impact of US-China trade sanctions. Asian and Eurozone equities followed suit. Sterling’s strength weighted in negatively on UK equities. US Federal Reserve increased federal funds rate by 25 bps to 1.50%-1.75%, while keeping its three rate hikes in 2018 projection.
On the commodities front, industrial metals weakened amid rising global trade tensions and concerns that further escalation could impact demand. Brent crude rallied 5.1% QoQ, supported by the rising confidence in OPEC maintaining its production cuts through the full year 2018.
Emerging market equities outperformed developed markets. Brazil gained the most, as former president Luiz Inácio Lula da Silva is now expected to be prohibited from participating in October’s presidential elections. Russian equities were strong again as the central bank cut interest rates and the country’s debt was upgraded to investment grade by rating agency S&P.
Turkey negatively decoupled from its EM peers, with 6.2% drop in MSCI Turkey QoQ. Persistent currency weakness, rating downgrades and cross border military operations in Northern Syria negatively affected the sentiment. TRY depreciated by 4.2% QoQ against USD, and was the third worst performing EM currency. The Benchmark interest rate increased by 63bps to 14.03% within the same period. Turkey’s GDP grew by 7.3% in 4Q17 YoY, above consensus of 6.7%. The main contribution came from the government spending and exports; thanks to the recovery in European economies. Moody’s downgraded Turkey’s ratings to Ba2 from Ba1. XBANK in Dollar terms lost 5.6% during the period. Looking ahead, political agenda can direct performance in the developed markets as it continues to be crowded. Emerging markets are expected to receive more inflows despite rate rises.
Turkish Banks raised a total amount of US$ 5.5 billion* equivalent international funding in 1Q18. US$ 1.2 billion equivalent amount was secured as syndicated loans, US$ 1.1 billion equivalent amount from securitizations, US$ 555 million from covered bond issuance, US$ 1.8 billion from Eurobond issuances and US$ 224 million equivalent issuances** under Global Medium Term Notes (GMTN) Programs.
CBRT actions during the quarter
Rating actions during the quarter
Regulatory developments during the quarter
NPL sales during the quarter:
* Public Disclosure Platform. Calculation based on publicly-traded banks. ** Bloomberg
Garanti, once again, became the only company from Turkey to be listed in the Bloomberg Gender Equality Index.
Awarded the Best Trade Finance Bank in Turkey for the eighth consecutive year and Best Investment Bank in Turkey for second consecutive year by Global Finance, one of the world’s leading business magazines.
Awarded in two categories at the Stevie International Business Awards; Transportation Cards Top-up developed on GarantiOne, Garanti Mobile, and Garanti Internet won the Gold Stevie in the “Business Development in Financial Services” category, and Free Speech won the Bronze Stevie in the ”Customer Services Innovation in Financial Services” category.
Won Bronze Certificate with Garanti Mobile in the “Digital Special - Mobile Application” category at Social Media Awards - Turkey Jury Awards.
Received Honour’s with Garanti Mobile in the “Mobile Sites & Apps: Financial Services / Banking” category at the Webby Awards.
Garanti Factoring has been ranked 1st in 2F Export Factoring by FCI (Factors Chain International) with its transaction volume of 1.3 billion Euros in 2017.
Garantibank International NV (GBI) COO Marco Witteveen has been awarded with the annual The Innovation Manager Award (TIM) for most innovative IT-leader in the Netherlands.
Became a member of the UNEP FI Banking Principles Core Group to develop the principles that will define and affirm the banking industry’s role and responsibilities shaping and financing a sustainable future, in alignment with internationally agreed targets detailed in the Paris Agreement and the Sustainable Development Goals (SDGs).
Participated in the working group discussions for the 11th National Development Plan. Launched its Mentoring Program developed for Women Managers.
DID YOU KNOW
Secured financing from international capital markets in the amount of USD 125 million with 1 year maturity under GMTN Programme.
Participated in the financing of Canakkale Bridge & Motorway Project, world’s longest suspension bridge, as the Facility Agent with EUR 125 million cash loan.
Participated in Koc Group’s Menzelet & Kilavuzlu Hydro Power Plant privatization financing as the Facility Agent with TL 265 million non-cash loan and TL 190 million cash loan.
Renewed its Certificate of Complaints Management System - ISO 10002 accredited by British Standards Institution (BSI). In 2006, Garanti became the first Turkish bank to hold this certificate.
Aimed at increasing customer loyalty and improving customer experience in digital channels, Garanti launched Smart E-Time Deposit Offers, that provide advantageous interest rates to customers on their renewal date.
Further improved Digital Channels with the releases of;
Garanti extended a free set of transactions for visually impaired customers using other banks’ cards on Garanti ATMs; enabling cash deposit, credit card debt payment, checking of card’s limit and total debt.
Continued to improve BonusFlas to improve customer experience, launched:
Improved POS Processes by revising POS application & installment follow up processes and simplifying processes for operational efficiency; which improved customer experience through faster processing & better information services.
Garanti Leasing renewed and diversified its packages for strategically focused machine related investments, for improved advantages to customers and increased business volume.
GARANTI ASSET MANAGEMENT total AUM reached TL 19.5 billion and increased its volume in pension funds to TL 12.2 billion with a market share of 15.1% and its volume of mutual funds is TL 6.5 billion with a market share of 11.8%.
With an actual free float ratio of ~50%, Garanti shares constituted 12% of all foreign transactions in BIST and 34% of all listed banks in 2017.
The number of active digital banking customers reached 6 million. Additionally, active mobile banking customers reached 5.1 million.
Garanti Asset Management total AUM reached TL 18.3 billion and increased its volume in pension funds to TL 11.9 billion with a market share of 15.3% and its volume of mutual funds is TL 5.7 billion with a market share of 11.3%.
Garanti Factoring asset size reached TL 3,5 billion with an increase of 19% compared to 2016.
Successfully refinanced its USD 1.30 billion equivalent 367-day Dual Currency Syndicated Loan Facility with a 100% rollover ratio. The new facility is comprised of USD 405 million and EUR 648.5 million 367-day tranches along with a USD 180 million two-year one day tranche. The loan which will be used for trade finance and general corporate purposes has been executed with commitments received from 38 banks from 18 countries. This has been the first 2-year syndicated loan that Garanti has raised since 2006.
Secured financing from an International Financial Institution in the amount of EUR 200 million equivalent Turkish Lira, with 6 years maturity under Covered Bond Programme. The proceeds of the loan will be used for SME financing.
Secured two loans from international credit markets equivalent to USD 250 million and USD 145 million with a 3 years maturity and 2 years maturity, respectively. Proceeds will be used for general corporate purposes.
Secured financing from two different counterparties in the total amount of USD 535,714,286 with a maturity of 5 years through its Diversified Payment Rights securitization program.
Became the first bank using BPO (Bank Payment Obligation) within BBVA Group; doing so Garanti diversified its customer portfolio and carried out new BPO transactions.
Continued to improve BonusFlas for increased efficiency and better customer experience, launched:
Launched a Human Resources Virtual Assistant named Sorbi that was developed using artificial intelligence, to help employees get to standardized and instant responses for their HR & training related queries.
Launched Early Warning System for customers that have commercial products. With this development, both Garanti and its customers are warned about customers’ financial situation and activities that will cause problem in the near future. The system leads Loan Assessment Departments to take the right actions at the right time; and will positively affect the collection performance and help keep NPL ratio low.
Developed Garanti Empathy Assistant within its efforts to strengthen its leadership as the most recommended Bank in Turkey*. Empathy Assistant has a unique design with its smart flows which automatically diagnose the root cause of the complaint and provide the list of actions necessary to solve it. The Assistant also supports branch employees in solving the most frequent customer complaints with its user friendly infographics showing a road map for the relevant solutions. This new smart platform for complaint resolution has been rolled-out in June 2017 and reached 80% utilization rate as of 2018 year end.
* Net Promoter Score researches conducted by an independent research agency Ipsos, main customers of each bank surveyed. According to the research, Net Promoter Score of Garanti Bank was the highest among its peer group in Turkey. Peer group consists of Garanti, İş, Ak, YKB, Finans and Deniz. 2016 NPS research had been conducted between October 10, 2016 - January 17, 2017. Main bank customers, who have communicated with the banks over the last 3 months, surveyed by quota sampling and conducted face to face in the representative cities of Turkey.
Garanti Mortgage launched Garanti Evimmatik application which provides users with very crucial calculation tools linked to Mortgages.
Named as the Bank of the Year in Turkey by The Banker, the finance and economics journal of the Financial Times group. The assesment, based on the objective views of expert bankers and analysts, weighs fiscal performance, risk management, use of new technologies and strategies that differentiate the Bank from its competitors.
Became the only financial institution worldwide to be included in the 2017 CDP Water A List and received CDP Global 2017 Water Leadership Award. Also, retained its score at the climate change program and entered the A- list and sustained its position among CDP Turkey Leaders.
Received Operational Excellence Awards from Citibank, KBC Belgium, Wells Fargo and Standard Chartered for achieving high quality straight through processing (STP) volumes for US$ and Euro payments.
Granted First Place in the category of “Best Performance Improvement” in 2017 Turkey Call Center Awards, the only call center organization in Turkey, for the third time.
Selected Turkey's Best Digital Bank and Turkey's Best Mobile Application with Garanti Mobile, by World Finance magazine.
Won Gold and Public Favorite awards in the “Banking & Finance - Mobile Application” category of the 15th Altın Örümcek (Golden Spider) Web Awards.
Chosen as the Lovemark in the “Mobile Banking” category at the Lovemark Survey conducted for the 10th time this year with the collaboration of MediaCat and Ipsos to determine the brands loved by the Turkish consumers.
Named second best in Europe, right after BBVA, in 2017 Online Banking Functionality Benchmark report by Forrester Research, one of the most influential research and advisory firms in the world.
Entered the list of 100 Best Annual Reports of 2017, in addition to receiving Gold at Mercomm's Annual Report Competition, with 2016 Annual Report “Sharing Moments”.
Won Crystal Apple Award in the “Communication Design” category with 2016 Sustainability Report. Also, was awarded in the “Reporting” category at the Sustainable Business Awards.
Garanti Mortgage won three prizes at the 15th Altın Örümcek (Golden Spider) Web Awards; in the categories of “Banking & Finance” it was granted Public Favorite and Gold Awards and it was granted Silver in the “Institutional Web Site” category.
Garanti Securities was recognized for the “Best Research – Daily Bulletin” and “Best Research – Macroeconomy & Strategy” at the TÜYİD (Turkish Investor Relations Society) Investor Relations Summit.
Garanti Securities has been chosen as the “The Most Liked Brokerage House of 2017” among “Turkey’s Most Liked Companies” by Capital Magazine.
Organized Turkey’s Woman Entrepreneur Competition for the 11th time, jointly with the Ekonomist magazine, and with the support of the Women Entrepreneurs Association of Turkey (KAGIDER), to encourage woman entrepreneurs and tell their stories to everyone in Turkey.
Hosted Woman Entrepreneurs Executive School offering free training sessions in Şanlıurfa and Marmaris, the school was launched in 2012 to enhance the know-how and vision of women entrepreneurs.
Organized Remarkable Women Trainings for its middle and senior women managers in collaboration with McKinsey & Company.
Garanti offers one of the highest sustainable ROE generation potentials among peers, on our estimates, despite operating with low leverage.
Garanti has one of the highest CET1s and has among the most room for cost improvements, despite significant progress last year already.
The scale that the bank has achieved in retail banking has been improving the earning diversity and resilience.
In our view, further rerating is possible on the back of i) positive NIM dynamics going into 4Q17E, ii) increased digitalization leading to solid core revenue momentum, iii) improving operational efficiency, and iv) a healthy capital position enabling higher dividend payouts.
Garanti has one of the highest sustainable ROE among large cap banks thanks to its robust ROA.
Delivering the highest ROE in the system in 2017E. Garanti could easily increase its leverage by 2x and boost its ROE to beyond 20% to deserve much higher target P/Bs.
Among commercial banks, Garanti is the only bank we expect to keep their NIMs resilient and deliver positive core earnings growth.
Garanti is one of the banks that is able to strike a balance between NIM and volume growth.
The Bank managed asset quality developments well through its free provision buffer and proactive communication with investors.
Synchronous economic growth across the globe continued with supportive fiscal prospects and easy financial conditions. In the last quarter of the year, MSCI World rose 5% capping off a solid yearly growth with 20% YoY. Global equities ended 2017 on a high note. Upwards earnings revisions in 2017 was a contrast to the flattish or modest downward revisions seen in the last five years.
Economic fundamentals have improved broadly across Europe and other parts of the developed world. As it did throughout most of 2017, Euro continued to strengthen against the Dollar during the quarter. This was attributed to the ECB policy and better-than-expected European growth. Profit-taking and a strong euro were factors in MSCI EM index receding 0.5% in 4Q. Political events in Spain and Germany also weighed-in on the markets. In the US, S&P 500 rose 6.6% in the last quarter. Robust corporate earnings from the consumer discretionary sector, technology sector and financials also helped overall sentiment. Equity markets were buoyed by the US Tax law, which reduced the highest corporate tax rate from 35% to 20%. Generally positive macroeconomic data also supported the markets, such as the better-than-expected third-quarter annualized GDP growth of 3.0% in the US. Another important indicator is the all-time low volatility in developed equity markets. Daily S&P 500 Index volatility hovered near its first historic lows for most of 2017, which reflected the strong macro backdrop. As expected, FED lifted interest rates by 25bps in December, and raised its growth forecasts for 2018 to 2.5% from 2.1%.
On the commodities front, Brent crude rallied another 18% on top of its 20% QoQ increase in the previous quarter. On top of increasing global demand; an agreement among OPEC, and a number of non-member countries such as Russia, to extend production cuts to the end of 2018 helped oil prices. As Chinese demand remained firm industrial metals rose.
In 4Q EMs experienced strong foreign funds inflow from the equity and the bond markets in the amounts of US$ 18.8 billion and US$ 11.3 billion, respectively, according to IIF data. As a result, MSCI EM rose 7%, and recorded a 34% YoY growth. Political developments supported gains in EMs. In South Africa, Ramaphosa was elected leader of the African National Congress, which increased the prospect for a return to more orthodox policy after elections in 2019. Greek equities rallied as the country reached agreement with international creditors over reforms, paving the way for the dispersal of further bailout funds. India outperformed as the government announced plans for a major recapitalization for state-controlled banks. In contrast, Mexico posted a negative return, attributable to peso weakness, amid concerns on NAFTA modernization negotiations.
In 4Q17, MSCI Turkey rose 4% and underperformed MSCI EM by 3%. Nevertheless, on a yearly basis MSCI Turkey performed in line with MSCI EM. According to the monthly BIST foreign transactions data, Turkish equites attracted US$1.8bn of foreign investments in 2017. In December Turkey attracted US$180mn worth of foreign investments, despite outflows worth US$192mn in the prior two months. Global risk appetite, combined with domestic inflation outlook and local politics resulted in strong lira depreciation in the second half of November, the exchange rate rose to an all-time high at 3.96 TRYUSD. Lira depreciated by 9.8% QoQ against Dollar, however, yearly depreciation was limited to 7.5%. The Benchmark interest rate touched 14.34% in the second half of November, highest level since March 2009, and ended the quarter at 13.40% registering 151bps increase QoQ.
Looking ahead, markets expect the positive momentum to continue. Growth should endure as more developed and emerging market countries participate. Yet, the pace of the recovery most likely peaked in 2017. Equities made considerable gains in 2017 and reached their full valuations. Earnings growth will be the primary driver going forward. Central banks entered an era of policy transition, with rate and balance sheet normalizations, however they will remain accommodative.
Robust growth performance in 2017. Turkish economy grew by 11.1% YoY in the third quarter of 2017, which supported by the Government’s counter-cyclical measures (particularly the Credit Guarantee Fund) and favorable base year impact and working day adjustments. Consumption and residential investment remained strong but this time there was also a recovery in machinery investment. Exports on goods and services had its fastest pace in 5 years although robust growth in imports hindered its support. Thus, Turkish economy grew by 7.4% in the first 3 quarters of the year and we expect the whole year growth rate to be close 7% in 2017. We envisage a normalization towards 4.5% in 2018.
4Q activity data signals a slight moderation. After growing 10% in 3Q, yearly IP growth rate in October-November period moderated to 7.2%. Despite the moderation, still higher contributions from intermediate and capital goods production remain supportive for favorable growth outlook for further production.Considering the sectors in detail, higher moderation seems to stem from domestic demand oriented sectors instead of exporting ones, implying positive implications from the recovering global demand, particularly Europe. The strongest manufacturing PMI in December since August and still strong electricity production in December continue to be supporting factors. Our monthly GDP indicator nowcasts a growth rate of around 6% in the last quarter of 2017.
Deterioration in current account deficit (CAD) continued in 4Q. Current account balance (CAB) posted a 12-month cumultive deficit of USD43.8bn (5.1% of GDP) in November, the highest figure in the 3 years (up from 3.8% of GDP in 2016). Also, core CAB (CAB exc. Energy and Gold) gave a deficit of USD1.1bn. Considering the intense economic activity, we think that deterioration in CAD will continue in December closing the year at USD 47bn levels (c.5.5% of GDP).
Budget figures surprised in 4Q. Budget revenues increased by 13.7% (down from 22% of 3Q), while expenditures slightly scaled up to 16.1% (up from 15% of 3Q) in 4Q, compared to the same period of last year. After the intensified countercyclical measures in the first half of the year, the Government seems to scale up its expenditures as of September together with a relatively worse picture on revenues side. However, the Government closed the year TL15bn less than its 2017’s MTP projection (TL62bn deficit) in 2017 and we expect budget deficit to GDP ratio to increase to 2.2% at the end of 2018 from 1.5% in 2017 and primary balance to fall down to -0.2% of GDP from 0.3% of 2017 year-end.
Turkey’s gross external debt stock continued to be high in 3Q. Turkey’s external debt stock to GDP ratio stayed the same in 3Q compared to 51.9% of 2Q and up from 47% of 4Q16 mostly due to the increase in the long term external debt of the private sector. On the other hand, EU-defined general government debt stock to GDP ratio slightly fell to 28.2% in 3Q, down from 28.7 of 2Q.
Core prices kept upward movement though non-core prices start recovering in 4Q. After realizing the highest level (13%) in 2003 series as of November, annual consumer inflation fell to 11.9% in December. Base impact on food inflation and exclusion of the tax hike on tobacco in this period helped annual headline inflation fall by near 1pp at the end of 2017, while the pick-up in core inflation limited the expected decline in the headline. Core inflation kept its upward trend by reaching 12.3% from 12.1% in annual terms. Solid domestic demand and exchange rate pass-thru (especially on the items sensitive to euro) continued to be the key factors behind. Lagged effects of lira depreciation and cost-push factors remained to be the impulsive force as domestic producer prices annual inflation continued to be high at 15.5%. All in all, we expect headline inflation to fall below %10 in the first quarter through favorable base effects and stay close to these levels until 4Q before falling to around 9% at the end of the year.
Central Bank (CBRT) remained tight in 4Q.The CBRT keeps its hawkish tones since it finds sizably worsening in inflation expectations and excess demand. Bearing in mind deteriorating inflation outlook, and the ongoing high momentum of the economic activity, The Bank reinforced the tight sentiment in the last meeting in January 2018. Thus, we expect monetary policy will likely remain tight at least throughout 2018.
Turkish financial assets performed worse in 4Q. Due to the appreciation of both Euro and Dollar, TL depreciated to 4.14 against US dollar-Euro currency basket by the end of December from 3.88 by end 3Q. Thus, the average annual depreciation against currency basket in 4Q realized at 14.6%. Benchmark bond yield which was at 12.1% at the end of 2Q climbed up to 12.98% in 4Q.
Turkish Banks raised a total amount of US$ 8.2 billion* equivalent international funding in 4Q17. US$ 3.5 billion equivalent amount was secured as syndicated loans, US$ 2.0 billion equivalent amount from securitizations, US$ 1.2 billion from covered bond issuance, US$ 682 million equivalent amount from multilateral development banks, US$ 500 million from Eurobond issuances and US$ 377 million equivalent issuances** under Global Medium Term Notes (GMTN) Programs.
* Public Disclosure Platform. Calculation based on publicly-traded banks** Bloomberg
Source: BRSA weekly sector data, commercial banks only*Including consumer and commercial installment loans**Including other and overdraft loans
Note:Not available due to methodology change in issuing and acquiring volume calculation as of September Interbank Card Center
* Includes shared and virtual POS **Number of customer in 2017 was restated due to the exclusion of customers with inadequate documentation. *** Active customers only -- min. 1 login or call per quarter
Source: Interbank Card Center, Turkish Statistical Institute, Banking Regulation and Supervision Agency Note: Official population is based on 2016 announced figure of 79.8 million. Plastic cards defined as the sum of plastic credit cards and debit cards
REIDIN Turkey Composite Residential Property Price Index: The index reflects an increase 0.80% m-o-m and 12.01% y-o-y in residential sales prices in December’17. Index series are calculated monthly for sales and rent covering 68 cities, taking January 2012 as the base period.
REIDIN.com-GYODER New Home Price Index: The index shows an increase of 0.39% m-o-m and 4,02% y-o-y in December’17. Taking January 2010 as the base period, REIDIN.com-GYODER New Home Price Index is calculated on 70 housing projects and with a monthly average number of 22.500 properties presented by 27 developers.
Note: Currency conversion is based on US$/TL CBRT ask rate, data as of September 30, 2017, foreign ownership ratio includes Depository Receipts
Figures are based on BRSA consolidated financials as of September 30, 2017 Note: Exchange rate used for currency conversion is based on Garanti Bank's September 30, 2017 dated financials.
The number of active digital banking customers has increased by 22% compared to 3Q16 and reached 5.6 million. Additionally, active mobile banking customers reached 4.7 million with 42% increase compared to 2016.
As of 3Q17, over 440k unique customers logged in to Garanti Mobile Banking using Eye Scanning technology. Total number of logins using Eye Scanning method is more than 8,5 million since initial launch. (Feb-17)
MIA has responded to more than 10 million intents from >1.3 million distinct customers so far.
Garanti Asset Management increased its volume in pension funds to TL 11.2 billion with a market share of 15.4% and its volume of mutual funds is TL 5.0 billion with a market share of 10.6% as of 30.09.2017.
Garanti Pension is the market leader in number of participants. As of 29 September, Garanti Pension is ahead of its closest competitor by 68 thousand participants.
Secured financing in the amount of EUR 75 million equivalent Turkish Lira, with 5 years maturity from European Bank for Reconstruction and Development (EBRD) under Covered Bond Programme. The proceedings of the loan will be on-lent to green mortgages. In an effort to align with the Equator Principles, signed the Declaration on Sustainable Finance, along with six other banks in Turkey that have also signed UN Global Compact. The declaration prepared under the leadership of the Global Compact Turkey aims to amend the credit processes with the evaluation of the environmental and social risks and integrating these assessments to relevant policies.
Career Management System has been renewed in line with the changing dynamics of the bank and the feedback received from employees. The new career system enables employees to take charge of their careers and development areas; and allows career movements to be managed in a more open and transparent manner.
Launched Digital Application Approval on corporate tablets, where customers can digitally approve their GPL & Overdraft Disbursement Agreements; easing approval processes, and saving time and paper.
Became the first and only bank in Turkey to offer transportation card top-up via digital channels by Kentkart integration in Çanakkale. New cities will be added to new versions.
Enabled donations to over 85 institutions; and launched Title Deed & Configuration Tax Payments in Garanti Mobile Banking app.
In addition to Turkish Lira deposit and withdrawal via Garanti Mobile Banking QR code, foreign currency money withdrawal and deposit functions have been launched.
Continued to improve Garanti Online Banking for increased operational efficiency and better customer experience, launched:
In order to enhance accessibility of visually impaired customers in ATMs, credit card debt payments can now be made through the visually impaired menu.
Developed Voice Biometrics authentication on Alo Garanti call center. Customers can now verify their identity in 3 seconds while they are naturally speaking with the agents.
Renewed Call Center building within the Sivas Cumhuriyet University campus, which has been serving since 2008, allowing the bank to work with young and dynamic employees. Today, 600 employees with an average age of 25 are responding to 70% of all Alo Garanti call center calls from this location.
Listed in Dow Jones Sustainability Index for the third consecutive year, where sustainability performance of companies are evaluated at world-wide scale.
Remained a component of FTSE4GOOD Emerging Index.
Won a Gold Stevie in the “Best New Product or Service of the Year - Financial Services” category with MIA (Mobile Assistant), and the Bronze Stevie in the “Financial Services - Banking App” category with Garanti Mobile App at the 2017 Stevie International Business Awards. Additionally, Garanti was honored with a Bronze Stevie in the “Company of the Year - Banking” category.
2016 Annual Report “Sharing Moments” was honored with Gold at Mercomm's Annual Report Competition (ARC). In addition, won a Silver Stevie in the “Best Annual Report - Print” category at the 2017 Stevie International Business Awards.
The Teachers Academy Foundation (ÖRAV) established by Garanti was accredited by United Nations Economic and Social Council and honored with the “Special Consultative Status”. Moreover, ÖRAV was recognized as the Civil Society Organization of Year at the Success Awards in Education competition, organized for the 4th time by Artı Eğitim magazine.
Garanti Factoring 2016 Annual Report was honored with Silver at Mercomm's Annual Report Competition (ARC).
Garanti Factoring’s Corporate Governance Compliance Rating Grade has improved to 93.20 from 92.60. Accordingly, the company could stay in BIST Corporate Governance Index.
Garanti Pension won a Silver Stevie in the “Achievement in Workforce Development and Training” category, with its digital learning platform “Go-On” at the Stevie Awards for Great Employers 2017. Additionally, Garanti Pension won the Bronze Brandon Hall Award in the “Learning & Development category” category with “Go-On”, at the Brandon Hall Excellence Awards.
Garanti Pension’s "Back to School", corporate social responsibility project aiming to redirect working children back to school completely, has been honored with a Silver Stevie in the "Corporate Social Responsibility Program of the Year - in Europe" category at the 2017 Stevie International Business Awards. Also, "Back to School" won the Silver Award in the “Most Socially Responsible Company of the Year” category at the Best in Biz Awards 2017 International Awards. Garanti Pension won the Company With the Highest Corporate Governance Rating award in the “Non-Public Companies” Category at the TKYD Corporate Governance Awards, with its rating of 9.45 out of 10.
Launched BBVA Momentum program in Turkey to support social entrepreneurs. In its first year, the program is supporting six social entrepreneurs help grow their social businesses in areas such as; finance, communications, technology and decision making. Next year the program aims to be open to all social entrepreneurs.
Hosted 3rd Sustainability and Risk Management Workshop, where corporate customers from energy and infrastructure industries are informed on cutting edge sustainable business topics such as TCFD (Task Force on Climate-related Financial Disclosures) recommendations, carbon pricing and disruptive technologies.
Broadcasted a video on gender equality where Executive Vice Presidents Ebru Dildar Edin and Cemal Onaran informed Garanti employees about the bank’s projects on the matter.
As of 3Q17, Math & Science Learning with Fun project which is conducted by Garanti and the Educational Volunteers of Turkey (TEGV), has reached out to 86,135 children through 2836 volunteers.
Garanti has a best-in-class ROA and that its ROE has been held back by the fact that it uses lower leverage than its peers.
Garanti dividends are likely to be one of the key drivers of a valuation re-rating in our view.
Garanti’s competitive strength as compared to its domestic peers include strong profitability (one of the highest RoTNAV), highest NIM, solid capital position, focus on technology and scale, as compared to most domestic players, branch network and market shares in core business segments.
We believe Garanti has done well in maintaining its margin and has room to optimise costs.
Garanti’s strong free funding capability and opportunistic swap funding utilization give the Bank a competitive advantage.
Backed by positive earnings releases, global equities posted strong quarterly gains in the third quarter of 2017. MSCI World rose 4% and MSCI EM rose 7%. Economic growth across the globe stayed in the positive territory.
In the U.S., generally positive macroeconomic data (i.e. 3.1% Annualized GDP growth in 2Q); strong earnings and further weakness in the dollar supported equities reach record high levels during the quarter. Rising tensions with North Korea and Trump administration’s policy failures did not affect the investor sentiment. The Federal Reserve left its policy rate unchanged. Nevertheless, FED officials set a hawkish tone regarding the need for additional hikes over the near-term. Despite persistently weak inflation, the FOMC statement confirmed that measures to reduce its balance sheet would begin in October. EU equities also posted modest gains during 3Q17. In September, ECB President confirmed that the central bank is discussing measures to end its QE. The prospect of tighter monetary policy kept Euro strong throughout the quarter. The weak German election results slightly weakened the currency. In the UK, BoE signaled it would normalize rates relatively soon, Sterling appreciated against a weak dollar. Consequently, FTSE performed poorly compared to its global counterparts. In Japan, economic data continued to improve. After staying flat for the first two months of the quarter, Japanese equities rose firmly in September. Political events made headlines in Japan, with PM Abe calling a snap general election to be held in late October.
On the commodities front, after two consecutive quarters of declines, Brent crude rallied 20% QoQ. Rising global demand, faster-than-expected fall in US crude inventories, and production cut extension expectations reversed the move in oil prices. Moreover, industrial metals posted sizable gains as economic momentum in China remained firm.
Emerging markets outperformed in the third quarter. Brazil stood out from the rest, thanks to some progress on reforms and diminished prospects of the leftist Workers Party returning in the 2018 presidential elections. Also the central bank was able to ease policy rate as inflation continued to decrease. Russia equities rallied in 3Q as oil prices picked up and low inflation cleared the way for further interest rate cuts. Elsewhere, Chinese GDP expanded 6.9% YoY in the second quarter and the upbeat sentiment on the economy resulted in Chinese stocks recording gains. Stronger Yuan also eased concerns over capital outflows.
In 3Q, Turkey underperformed its EM counterparts by 6%. MSCI Turkey devalued by 10% in September and Turkish financial assets were flat QoQ. In September, FED announcement regarding plans to reduce its balance sheet were interpreted as tighter global liquidity conditions. Due to its high current account deficit, Turkey decoupled from its EM counterparts in 3Q. According to monthly BIST foreign transactions data, Turkish equities could attract foreign investors in the first two months of the quarter with a total US$ 486 million, yet, Turkey experienced a US$ 321 million outflow in September. During the quarter, Banking Index devalued 5% in USD terms, due to negative news flow and some profit taking. Geopolitical risks such as the independence referendum in Northern Iraq and military involvement in the region persevered. Consumer confidence index fell by 3.41% MoM to 68.7 in September, to pre-referendum levels. Turkey GDP grew by 5.1% in YoY in the first half. As expected CBRT left its interest rate policy unchanged throughout the quarter.
Looking ahead, global GDP growth and inflation readings will be closely monitored both for EMs and DMs alike. Political concerns revolving around Trump presidency remain, especially as the US tax reform continues to evolve. Moreover, both FED and ECB signaled for tighter monetary policy for the first time since the financial crisis.
Robust economic performance in 1H17. After registering 5% YoY growth rate in 1Q17, GDP grew by 5.1% in 2Q17. Investment and private consumption were the main contributors whilst government spending contribution was negative for the first time in 9 quarters. Government stimulus seems to leverage growth via both private consumption with more confident households and as desired by encouraging investments through funding channels. As previous indicators had signaled and base impact assisted, we expect a sizably higher growth rate for 3Q, which will bring our whole year growth estimation to 6% despite bearing in mind some moderation in 4Q.
3Q activity data posts strong outlook. Industrial production (IP) growth climbed up to 9.8% YoY in July-August period, a sharp acceleration from 2Q’s 4.6%. Electricity production in 3Q posted its strongest growth rate in the last 28 quarters, while manufacturing PMI posted above-50 level in September for the 7th time. Strong exports performance (near 16% growth in 3Q), robust production and retail sales data had our monthly GDP indicator to nowcast 8.2% (26% of info) growth for 3Q.
Current account deficit (CAD) deteriorated on non-core items. 12-month cumulative deficit realized at USD 37.0 bn in August, up from USD 34.4bn (4.1% of GDP) in June. Improvement in tourism revenues with increasing number of tourists helped core CAD improve, resulting in a surplus in core current account balance (excluding net gold and energy trade) in August the first time since June 2015. We expect CAD to GDP ratio to deteriorate to 4.5% in 2017 on top of strong domestic demand but to be contained by the moderate recovery in tourism sector and increasing EU demand.
Budget figures improved in 3Q. Budget revenues increased by 22% (up from 8% of 2Q), while expenditures slightly scaled back to 15% (down from 16% of 2Q) in 3Q, compared to the same period of last year. After the intensified countercyclical measures in the first half of the year, the Government seems to somewhat scale back its expenditures in 3Q together with a relatively better picture on revenues side thanks to the recent high economic momentum. However, bearing in mind the last quarters’ worsening, we expect budget deficit to GDP ratio to increase to 2.0% at the end of 2017 from 1.7% of 3Q and primary balance to fall down to -0.1% of GDP from 0.2% of 3Q.
Turkey’s gross external debt stock continued to climb in 2Q. Turkey’s external debt stock to GDP ratio rose to 51.8% in 2Q, up from 48.6% of 1Q and 46.9% of 4Q17 mostly due to the increase in the long term external debt of the private sector. On the other hand, EU-defined general government debt stock to GDP ratio slightly fell to 28.5% in 2Q, down from 28.7 of 1Q.
Inflation maintained a deteriorated path in 3Q. Annual CPI inflation climbed up to 11.2% in end 3Q, from 10.9% by end 2Q. The main reason behind the worsening was core inflation, which rose to 11.0% from 9.2% in the same period. This year’s methodological change assigning fixed weights and second round price effects on cost push factors created a sharper pressure on core prices together with the recent appreciation of Euro and spillovers from narrowing output gap. We expect the headline to converge to 10% at the end of 2017 with favorable base effects.
Central Bank (CBRT) remained tight in 3Q. The CBRT keeps its hawkish tone as it also finds the high levels of both the headline and core inflation alarming over pricing behavior. Bearing in mind the high inertia in inflation and the ongoing high momentum of the economic activity, we expect the Bank to rely on late liquidity window (LLW) in the short term and not to find any room for monetary easing until the end of 1Q18.
Turkish financial assets performed worse in 3Q. Due to especially the appreciation of Euro, TL depreciated to 3.88 against US dollar-Euro currency basket by the end of September from 3.77 by end 2Q. Thus, the average annual depreciation against currency basket in 3Q realized at 22%. Benchmark bond yield which was at 11.1% at the end of 3Q climbed up to 12.1% in 3Q.
Turkish Banks raised a total amount of US$ 6.4 billion* equivalent international funding in 3Q17. US$ 4.7 billion equivalent amount was secured as syndicated loans, US$ 271 million from covered bond issuance, US$ 300 million in sub-debt, US$ 1.0 billion from Eurobond issuances and US$ 102 million equivalent issuances** under Global Medium Term Notes (GMTN) Programs.
* Public Disclosure Platform. Calculation based on publicly-traded banks.** Bloomberg
Source: BRSA weekly sector data, commercial banks only *Including consumer and commercial installment loans **Including other and overdraft loans
*Including consumer credit cards and other
* Includes shared and virtual POS **Decrease in number of active customers is due to exclusion of customers with inadequate documentation. *** Active customers only -- min. 1 login or call per quarter
Source: Interbank Card Center, Turkish Statistical Institute, Banking Regulation and Supervision Agency Note: Official population is based on 2016 announced figure of 79.8 million. Plastic cards defined as the sum of plastic credit cards and debit cards
REIDIN Turkey Composite Residential Property Price Index: The index reflects an increase 0.79% m-o-m and 11.55% y-o-y in residential sales prices in September’17. Index series are calculated monthly for sales and rent covering 68 cities, taking January 2012 as the base period.
REIDIN.com-GYODER New Home Price Index: The index shows an increase of 0.34% m-o-m and 4,30% y-o-y in September’17. Taking January 2010 as the base period, REIDIN.com-GYODER New Home Price Index is calculated on 70 housing projects and with a monthly average number of 22.500 properties presented by 27 developers.
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