Bad Loans Soar at Turkish Banks

Bad loans in Turkey soared 3.6% m/m in January caused concerns rising around the asset quality in the financial sector. Even worse, annual change was 32.6% which was the highest figure recorded in six years. That being said, total NPLs in Turkish banking universe rose to TRY 49.2 billion which accounted for 3.18% of total loan portfolio of the sector with an increase of 9 basis points from December 2015. This was also the highest NPL ratio ever recorded since April 2011.

Turkey - NonPerforming Loans Change

Traditionally, a major asset quality deterioration is very rare event with mortgages and auto loans, but we have seen worse effects in other consumer loans, more specifically in credit cards. Consumer NPLs posted 36.4% y/y growth in January was a sign of the jobless rate remaining high leading a surge in insolvencies.
Credit cards are not the only source for pain ahead for Turkish financial institutions. Corporates struggling to pay their debts are also another hassle for Turkish lenders. Bad corporate loans rose by 32.1% y/y reaching TRY 28.2 billion.

Turkey - NonPerforming Loans Change - Consumer and Corporate

The following is the sectoral data for bad loans in Turkey. It is important to note that some key sectors have contributed to the increase in bad loans. Mining and energy sectors unfortunately posted higher than 50% growth in troubled loans. Considering mining industry mostly operating as a supply side to energy production, thing might have gone terrible bad for the industry (see our post concerning energy loans here). The debt performance of wholesale and retail trade seemed very disturbing either. Also, TSC (transportation, storage and communication) surprised to the downside. Going forward, bad loans in tourism should be expected to soar give the dramatic decrease in the number of tourists vising Turkey.

Turkey - Sectoral Breakdown of Bad LoansTurkey - Bad Loans in Manufacturing

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.