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.

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