Tag: Fee Income

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%.

Valuation

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.

What Fee Restriction Would Mean for the Stocks

Huseyin Aydin, head of the Turkish Banks’ Association, said that he expects the regulator to publish new rules that limit fees and commission charged by the banks (read the Bloomberg story here). This has been longstanding topic in the industry and eventually it will be likely made come true by the regulator.

This will also have an impact on industry, especially on banks capitalized by non-state investors. Additionally, we will probably see a switch by many analysts into state-run lenders. The chart below shows shares of fees and commissions in total income in both state-run and private sector banks.

Turkish Banks - Fee and Commission Income

According to analysts, as much as 20 per cent of bank’s fee generation may be at stake for a typical retail bank. This would lead an decrease of 3% in profits reported the by the banks. Not surprisingly this will be followed by lowered target prices and banks stock sell-off. Additionally earnings have already plummeted by 9% at the first half of the year on yearly basis.

It is speculated that government aims to become more dominant in the industry with implying new blocks to the foreign entrants. The new rule will also help the state-run lenders relatively perform better compared to others. This is providing important insight on shape of things in Turkish banking universe to come.