Demand will continue
Metin Esendal, analyst, Renaissance Capital
Subdued political noise, the introduction of a Credit Guarantee Fund (CGF), widespread state support programmes, normalised security conditions and a pick-up in tourism activity have improved both business and consumer sentiment substantially compared to the beginning of the year. These are reflected in higher loan growth and stronger asset quality for banks, and better-than-expected sales volumes for consumer companies. The companies confirmed our view that the end of the State of Emergency would be a strong positive boost to business sentiment and a strong catalyst for further outperformance of Turkish assets. Regarding consumer demand, given that some demand was pulled forward in first half of this year owing to periodic state support and expected price increases after rapid currency movement in 4Q16 and 1Q17, the companies expect demand for some consumer products to slow down towards 4Q17. In general, however, they are not concerned about demand conditions in 2018 as they expect the supportive government stance to prevail heading into elections in 2019. The CGF is quite advantageous for banks’ capital as 90% of loans’ risk weighting is 0% and the state covers non-performing loan risk unless it tops 7%. According to Bloomberg consensus, Turkish banks’ net income is to increase by 17% year-on-year in 2017; however, following our meeting with banks, we believe that net income growth might be around 25% year-on-year this year, corresponding to a 1617% return on equity.