Turkish Financials: Latest Results & Outlook

Turkish banks have outperformed its EM peers on a ytd basis (see the chart below), as MSCI EM Financials index took a huge hit in the first two weeks of this year arising out of a massive sell-out in Chinese markets. Excluding that timeframe, the performances of two indexes has almost been in line to date. Going forward, EM equities are expected to pull out a vapid performance owing to a Federal Reserve not appearing to be relenting on rate hikes anymore. This will most certainly limit the gains in Turkish stocks.

Turkish Banking Stocks v MSCI EM Financials

Time and time again, we reported declining profitability, low growth expectations and asset quality deterioration are key risks that lied ahead that are to weigh on stock market performance. By this means we maintained cautious stance against Turkish banking stocks while we thought Akbank (BIST: AKBNK) could deliver strong returns due its strong capital position, better asset quality, comfortable funding and liquidity profile and improved operational efficiencies. Additionally, we underlined that TSKB (BIST: TSKB) would be a defensive play in case of an emerging market sentiment reversal due to its strong FX net asset position.

Q1 results, in our view, were satisfying with in broad strokes despite the fact Isbank (BIST: ISCTR) missed widely the consensus in earnings. Our high conviction call Akbank reported a quarterly net income above the consensus (TRY1.07 billion versus TRY 965 million, ROAE: 14.9%) which was driven by the continuation of strong operational efficiency, better than expected credit metrics and solid recovery performance. Surprisingly, the growth in loan was below the sector average, however, we are of the opinion that its strong funding capacity and deposit base will support lending activities in the quarters to come. Akbank’s loan-to-deposits ratio stood a 101% which was the lowest figure recorded among Tier 1 banks. Following the Q1 results, we maintain our bullish views for the bank and reiterate our “Buy” rating. The bank has outperformed BIST Bank Index (BIST: XBANK) and BIST 100 Index (BIST: XU100) by 9.3% and 5.7%, respectively since our publication.

Garanti (BIST: GARAN) also beat the estimates but the positive deviation came from “other” income (subsidiaries, provision reversal). The bank also received a NIM contraction that is likely to be a signal of new cycle which will eventually curb the bank’s future earnings as it has been struggling to grow its deposit base to finance growth. Also, the asset quality metrics draw picture full of uncertainties along with criticized assets rising. Above all, Garanti is not the back that returns value to shareholder as its ROE is on a declining. We do not see the current trends are favorable for Garanti.

Halkbank (BIST: HALKB) beat the estimates at the bottom line thanks to some help from non-operational lines. Halk has a strong deposit base as its clients are generally consistent savers such as retired people. Its loans-to-deposit has been lower when compared to other Tier 1 Turkish banks, but in this quarter we saw lending outpacing deposits as the bank has been aggressive on commercial segment. Credit metrics were not favorable, particularly on the commercial lending side. Halkbank has seemed to lose its historical premium ROE, as growth has come at the expense of profitability. What is more, newsflow about its state ownership profile may lead a cost of equity remaining elevated.

Isbank was the only bank that reported a lower than expected net income in Q1 2016 as ROAE was at 11.8%. Despite a loan book decreasing by 1%, the management reiterated its growth rate target of 10% for the full year. The effective tax rate of 12% in the quarter helped the bank fill the gap between consensus and the actual results to some extent. Fundamentals spiral downwards in Isbank in our view.

Vakifbank (BIST: VAKBN) posted a solid set of results that exceed our expectations and the analyst estimates. Volume growth was bright with deposits growing remarkable while funding costs were only 21 basis points higher. This seemed to be supporting the core spread. We very well might see an acceleration in NIM going forward, however are not still convinced that the bank deserves to enjoy a premium valuation as profitability metrics are not up to the mark.

Yapi Kredi (BIST: YKBNK) reported a net income of TRY704 million which was well above the estimates. Key points from the Q1 results were fast lending growth, an expansion of 10 basis points in swap-adjusted NIM, best-in-class efficiency, and strengthening capital position. Yapi Kredi was the fastest lender among the private banks in the quarter. On a negative note, deposit costs saw a pick-up as expected, as the bank still sought for lending growth despite its relative weak funding capacity. Newsflow regarding Unicredit planning to sell its stake in the bank, however, would be able to limit the gains in the stock. Thus, we do not recommend to build positions in Yapi Kredi at this stage.

Eventually, we do not draw positive reviews about Turkish financials with the exclusion of Akbank. We see more attractive opportunities in emerging and frontier Asia, specifically we expect Indian (private) and Pakistani banks to emerge as outperformers in the EM financial sphere.

For further information, you may contact the author via the section below or directly subscribe for new articles by using the form. The author has no position in the stocks mentioned in this article, and finally, do not forget to read our disclaimer.

Are Turkish Banks Undervalued?

Turkish banks had outperformed European peers over the course of last year. However, rising risks around Turkish central bank’s independency depressed the asset prices in the country as well as the share prices. Therefore, the gap between Turkish banks and their European peers began to close starting late January. Since then, we have seen Turkish banking index performing in line with MSCI European Financial Index.

Turkish Banking Index vs MSCI European Financials Index

To be more specific, following is an analysis of most traded Turkish banks stocks and their CEEMEA peers. Simply, Eastern European and Middle Eastern stocks seem to be the most overvalued ones while Nigerians remain exceptionally cheap. This should be mostly due to country-specific risks. In broad strokes Turkish banks along with their Russian peers are traded at reasonable multiples. At this stage my recommendation to investors looking into CEEMEA financials would be forming a list of stock picks supported by a strong investment theme and key fundamental data.

CEEMEA Banks Multiples

Below is a list of top-traded Turkish banks with fundamental indicators.

Turkish Banks Key Fundamentals

ROE generation has appeared to be the key theme in Turkish banking sector. Halkbank which delivered the strongest profitability metric has been the best performer in year-to-date terms. Isbank, Yapi Kredi, and Vakifbank are traded at a discount to their book values. Growing fee income in the industry has built a supportive case for Garanti and Akbank due to their exposure consumer banking and credit cards.

The consensus has a neutral view on Turkish banks in general, and more specifically on the stocks excluding Akbank and Halkbank. However, there are key risks to be watched including the economic growth on a slowing path and higher unemployment leading higher credit card fails.

A Historical Analysis of Turkish Bank Stocks

As I noted earlier, Turkish stock market is mostly driven by a bunch of large-cap bank stocks with high levels of trading activity. Under these circumstances, developments in the industry becomes crucially important for any investor holding Turkish assets. Hereby, my aim is to mention some important points by using some valuation metrics in historical perspective. In this analysis I have a narrow scope consisting of six top trading bank stocks which in fact is big enough to cover and to fully understand the undergoing stock market trends. These stocks include Akbank, Halkbank, Garanti, Is Bankasi, Yapi Kredi and Vakifbank.

The chart below shows how has the market cap weighted price to book value of under-researched companies evolved for the last five years. Turkish bank stocks seem to be cheap at first glance on historical basis. For the last five years they have averagely traded at one and a half times their book value. However, September 2010 was a significant turnaround in the valuation of banks where an average a P/BV over 2.3 was observed. Therefore, I minimized the period that the chart covers to three years to able to obtain more meaningful results. Once more, the recent valuations are slightly below the historical average.

Turkish Bank Equities Historical Valuations - 5 Years

Turkish Bank Equities Historical Valuations - 3 Years

The premium valuations certainly require high profits, there is no doubt about that. At this stage it would be helpful to check the reported financials to see if the valuations prove to be right. Return on equity which is a central measure of performance in the banking industry is what I intend to focus here. That said, it is the most widely used metric to predict the future P/BV.

Turkish Banks Equities Return on Equity Figures

As of the end of 2014, market cap weighted RoE in selected bank stocks seems to hit the dip in under-researched period. This presents some important findings. First, below average valuation on historical basis is simply fair as the profitability of industry has taken a huge hit starting mid-2014. Second, aside from being fair, the valuation may even be optimistic as they are still near their historical average. This may also be due to Turkey’s macroeconomic fundamentals perceived as less risky by investors, like lower blended risk-free rate for the local currency, or lower market risk premium.

The second finding I mentioned above take us to paint a picture of future for Turkish bank stocks. Frankly speaking the level of profitability across the industry does not help us paint a rosy one for upcoming months. What is worse, United States Federal Reserve’s policy tightening will absolutely hurt the capital inflows to emerging markets and result in gloomier macroeconomic outlook for them. This eventually will cause a substantial increase in perceived risk. Will Turkey’s banks reporting lower revenues and income still be able to attract investors’ attention in this case? That’s a vital question.