Halkbank: Not A Good Play for the Current Trends

Halkbank has performed poorly since last November and now the stock trades slightly below its book value and is one of the worst performing stocks among Turkish blue-chip stocks.

Halkbank - Stock Price

The bank closed 2011 with 14.4% return on equity and an aggregate net income of 2,206 million liras, which was 22% lower compared to the posted number a year earlier. Net interest margin stood at 4.2% at yearend thanks to solid fourth quarter margin of 4.5%. The bank saw its loan portfolio growing 19.9% on yearly basis. Loans to deposits ratio rose to a record level of 98.1% as deposits grew moderately by 2.9% year-over-year. Not surprisingly, the reported capital adequacy decreased to 13.6% thanks to the rise in risk-weighted assets arising out of the wildly growing loan portfolio.

Halkbank - Valuations

The worrisome point is that the return on equity figures have been on steady decline in Turkish banks, but more remarkably in Halkbank. For the last four quarters the bank has been posting a figure below 20%. Following that the stock has been interestingly most volatile one among large-cap Turkish banks stocks that deteriorates the outlook of the stock through its impact on beta which is a component of the cost of equity.

Turkish banks reported the highest 12-month trailing net income ever in February with remarkably rising fee income. Given its lower exposure to credit cards compared to those of its peers, Halkbank operates with lower fee income generation. Thus, I believe Halkbank is not fully benefiting from the improving sector outlook.

Halkbank - Price Target

My price target for the stock is 14 TRY implying a not convincing upside potential of 9%. I arrived at this price target based on 1.1x price to book multiple, 9% assumed growth rate, and 15% cost of equity which is derived from a beta of 1.4x, an equity risk premium of 6%, and a risk-free rate of 7.5%.


Of the 36 analysts covering the bank, 23 have a buy ratings, while 11 recommend to hold and 2 think the stock should be sold, according to the company’s Investor Relations website.

Finally, do not forget to read our disclaimer.

Draft Revealed For Regulation on Consumer Loans

The burning question has been how the Banking Supervisory would regulate the consumer loans with some tightening tools. Yesterday, the draft for new regulations were revealed on consumer loans and credit cards with the intention of slowing general purpose lending.

Some expected restrictions are listed below:

  • No layaway while purchasing food and gas,
  • Length of layaway plans limited to 6 months while purchasing electronics, jewellery,
  • Length of layaway plans limited to 12 months while purchasing white goods, furnitures,
  • New restrictions for consumer loans used in purpose of purchasing cars, the plans could be 48 month-length at most,
  • All consumer loan plans excluding mortgages will mature in 36 months at most.

Now let us just get focused how these will shape the macro view.

As mentioned many times before, Turkey Current Account Deficit is serious threat for the economy mainly caused by the saving gap. For three years, Turkish policymakers have organized efforts for applying pressure on consumer loans to reduce consumption as CAD had widened. For a reliable macro outlook, this initiative was needed but firstly we need to observe the market reaction.

Turkey - Consumer Loans and Cuurent Account Balance

Taking a deeper look, policymakers are happy with a moderate pace growth, even ahead of elections from four months now. Actually, this unusual approach is reducing the political risk.

Of course, some industries will be hurt that are most depending on consumer loans because of the restrictions on consumer spending to stay in effect as mentioned above. The first industry spring to mind is banking of course. These regulations will in some way hurt the consumer loans but the banks will reduce the risk of maturity mismatching, have asset quality to be improved, and the liquidity. In the eyes of market, these all are already priced in and measures have been better than feared so far.

In my opinion, car sales will be seen falling due to shortened layaway plans because it may force consumers to delay purchases. Notwithstanding, in the short-run car sales may be boosted until the new regulations come into force.

This was a good sign prompting if policymakers intend to cool down the economy. More macro-based measures to be taken should be expected soon.

A More Supervised Credit Era Begins in Turkey

Too much public spending, excessive reliance on domestic demand and loose monetary policy. These are the points that IMF implied about Turkish economy within its global economic outlook report published recently. In addition, for the past few years, the country’s technocrats have forewarned of rates of loan growth running at an alarming average of about 30% a year. As might be expected, loan growth is the main underlying cause of macroeconomic imbalances that form non-ignorable downside risks.

Here are some quotes from the IMF:

In 2012, Turkey achieved a welcome reduction of imbalances while maintaining positive growth. In 2013, growth is accelerating and rotating back to domestic demand. With imbalances still high and the global financial environment less forgiving, reducing these vulnerabilities should be the overarching focus of short- and medium-term policies.

As the meteoric loan growth in Turkey comes under fire, we saw some harsh but constructive self-criticism made by the government. And, finally, banking watchdog, Banking Regulation and Supervising Agency, took a enervating step for personal loan growth, to take the it under control by limiting credit card borrowing limits.

Here is the new system had a coverage in Turkish media:

Credit limits for new cardholders will be capped at twice their monthly income for the first year, subsequently increasing to a maximum of four times income. Existing credit limits won’t be affected – until cardholders ask for increases. If people fail to make their minimum payments three times in a row, they will be cut off from new lending until they pay their debt in full.

Personal Loan Growth in Turkey

The chart above shows the comparison of personal loans and GDP growth rates in Turkey, starting from end of 2006, assuming both rates equal to 100 at that time. Clearly, we see personal loans grew 17 times more that GDP did during the time.

Wondering what’s gonna happen next.