Key Takeaways
We expect a rate-cutting cycle to start with 250bp in January. Keeping this pace through June still yields a more hawkish path in 1H25 than market expectations.
The margin inflection story for Turkish banks is intact but has been pushed further out, so we await a more attractive entry point.
In FX, the CBT’s continued focus on bringing down inflation is supportive of TRY.
We still think the currency is more attractive than local bonds, given that we expect a slower CBT cutting pace in 1H25.
The fiscal consolidation efforts into 2025 are credit positive, but we stay neutral for now on rich valuations.
Economics | Waiting for some relief in inflation
While the September inflation print highlighted risks to the pace of disinflation in the near term, conversations on our trip focused on the appropriate timing and size of rate cuts amid the ongoing slowdown in economic activity. We have long been forecasting rate cuts to start in 1Q25, following resolution of uncertainty around wage and price hikes in January.
With the announcement of September inflation, consensus on the ground has come closer to our forecast. Barring any upside shock to publicly set wages and prices, we expect easing steps to start with a 250bp rate cut in January. We see consecutive 250bp cuts, bringing the policy rate to 42.5% by March and 35% by June 2025, after which we expect the easing cycle to continue with smaller steps to normalise ex post real rates at around a 3% average in 4Q25.
Risks to our rates call in 2025 are skewed to the upside given the stickiness in inflation and the resilience of domestic demand as well as geopolitical tensions.
Turkish banks | Margin inflection story intact but pushed further out
Our economist maintains her forecast for the first rate cut being in 1Q25, as inflation has remained sticky. The CBT’s focus on bringing inflation down means tighter macroprudential measures were introduced in 3Q, such as higher reserve requirements for the Turkish banks, which weigh on the margin outlook.
With funding costs high until rate cuts come through, and loan growth caps limiting repricing, the margin inflection is pushed out further – as indicated by 3Q sector trends, with NII down QoQ for private banks as per BRSA data, versus management guidance of an improvement with 1H24 results.
This drives a lower exit rate for margins on our forecasts for 2024, setting the stage for a lower starting point for 2025 margin inflection. Asset quality deterioration is trending as expected by banks, which also expect a year-on-year pick-up in provisions in 2025. With that, we reduce our FY25-26 net income estimates by 19% on average, placing us 13% below consensus.
Stock recommendations
We move to Equal-weight on Akbank, leaving us with no Overweights in Turkey as we await a more attractive entry point into the 2025 earnings inflection story.
Macro strategy | We still prefer FX over bonds:
The CBT’s continued focus on bringing inflation down is supportive of TRY, in our view. We see a risk that TRY will come in stronger versus our end-2024 forecast of 36, and see USD/TRY at 45 by end-2025, well within the forwards. The real exchange rate valuation is not stretched, in our view, with the economy better balanced externally. We continue to believe that the currency is more attractive than the bonds, given our forecast for a slower CBT rate-cutting path in 1H25. We think that this relative preference should also apply in the event of a smaller fiscal consolidation than projected next year. We discuss the significant increase in reported foreign investor holdings of government bonds.
Sovereign credit strategy | Neutral for now
The fiscal consolidation efforts into 2025 are credit positive, in our view. We see this as being supportive of our view that a second BB rating in November is likely, yet bonds are already pricing this in.
With gross issuance now in line with our 2024 estimate, we think that more supply is unlikely, but the possibility of an additional primary deal is there on account of the recent buyback. We stay neutral for now on rich valuations.
Excerpt from research report titled Turkey Trip Notes: Navigating the Trade-offs