AKBNK – Turkish Market News

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.

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.

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Turkish Banks: 4Q 2015 Earnings Preview

Turkish banks are up 3.5% on average year-to-date with tailwinds from a better outlook for 2016 and easing regulation standards. However, since last year, Turkish banks have performed remarkable worse in a MENA context. The “exciting” period regarding the political risks and the continuation of downward trend in profitability were the key reason for the exceptionally weak performance.

This year has signs of relief for the industry with strong projected EPS growth figure after a tough year. Even if the most banks guided prudently on volume growth and asset quality for 2016, the bottom line are likely to improve with the help of higher fee income and lower operational expenses. That said, Akbank (BIST:AKBNK) remained as the most optimistic lender with aggressive growth expectations for the upcoming period. Easing regulations will somehow help all the banks to growth their businesses and to record lower provision expenses despite some NPL additions in the horizon. Having said that, accelerating earnings growth is enough to make a permanent optimist, as expected ROEs would still be held back this year.

I continue to prefer Akbank (BIST:AKBNK) and TSKB (BIST:TSKB). I believe Akbank is set for profitable growth in 2016 and should perform relatively better than its peers. TSKB is still a defensive pick against foreign exchange volatility and its top line will be supported by stronger CPI-linker revenues this year.

Do Turkish Banks Add Economic Value?

Time and time again I have been directing sharp criticism for the relatively poor financial performance, and more importantly, for the industry’s lack of focus on low profitability. In September, return on equity, or ROE, for the whole industry, came down to a level that made it even lower yielding than the riskless Treasury bonds (September RoAA was at 10.41% versus average 10Y bond yield at 10.44%). The situation is even more severe once the other elements of costs of equity such as equity risk premium are considered. These all reveals an important finding: Turkish banks are deeply struggling to add economic value.

The chart above shows the return on equity for the industry and the cost of equity. Return on equity is derived from 12-month trailing net income and 12-month average total shareholder’s equity. On the other part, the cost of equity, the threshold for generating positive economic value, is derived from average Turkey 10Y government bond yield, an estimated equity risk premium of 6%, and beta of 1.0x. Importantly, the chart reveals why we have seen lots of discount to book value valuation in the equity market and M&A deals.

However, it is also worth to point that October data may be signaling a turning point for banks as RoE and CoE both showed signs of convergence. RoE was up by 4 basis points to 10.45% m/m as well as 10Y bond yield significantly decreased 46 basis points to 9.98%. The industry posted 5.6% and 15.5% growth in earnings and total equity, respectively.

The important part of earnings growth came from the net interest income that were up by 18.5% y/y to 62.8 million liras. The growth is fees was relatively slower with 12.2% increase while expenses grew by 19.2%. On a negative note provisions extended significantly in October.

With banks’ 3Q financial statements and first month of 4Q stats at the table, Akbank (BIST:AKBNK) seems to be a good candidate to be an outperformer in my view, as the bank is poised for fast loan growth due to its strong liquidity and core liabilities.