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.

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.

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