Turkish Stocks: Banks v Industrials

One of the key market themes that marked this year has been the bank stocks trading with low multiples and the advancement in the industrials. Time and time again we uttered that the golden age of Turkish banking is over (see here and here) which was finally embraced by a top banker in Turkey. Given the banks capturing a dominant share of the Turkish stock market the BIST 100 index has expectedly performed poorly.


We also have seen the ratio of the Turkish banking index (BIST:XBANK) to industrials index (BIST:XUSIN) falling below 2 this year which may have seemed like an anomaly from a historical perspective. A part of analysts attributed this to the start of a bear market while the other part mentioned a changing overall market trend. Despite the fact that I have been long-term bear and clearly recommended investors to avoid from risky Turkish assets (and EM in general), I also believe the upheaval in Turkish market has begun forcing investor to be extremely selective to be able to make a winning pick.

Turkish Stocks Volume - Banks v Industrials

Turkish Stocks Valuations - Banks v Industrials

Interestingly, according to volume data the dominance of the banks are likely to continue. This may require the fund managers moving to a set of unconventional investment strategies such as smart-beta from typical index investing as hoping and holding bank stocks leave investors face a potential long-term bear market.

State-Owned Banks under Pressure

Considering the fact that poor performance from main bank stocks is more able to drag the whole market down in Turkey than anywhere else, I have been trying to provide comprehensive information about the key themes in the industry in order to measure the changing dynamics. From this point I find analyzing of state-owned banks’ recent performance extremely necessary as it is already seen as the biggest threat to Turkish markets.

Halkbank and Vakifbank are the state-owned banks whose shares also traded in Borsa Istanbul with free-float rates of 49% and 25%, respectively. Their poor performance compared to the peers on a year-to-date basis had been already eye-catching, but, it has been even clearer following the general elections which ended up with no single party majority. As being run by the state share prices of both banks were amenable to the outcome of the elections.

Turkish Banks Stocks Performance 2014 - 2015

Above is the visualized form of year-over-year stock performances of Tier-1 banks in Turkey where two state-owned banks’ are shown in different shades of red. Vakifbank and Halkbank along with Yapi Kredi seem to be underperformers and all three have provided a negative return to investor through this period. Reviewing the stock performance with the fundamental data is here to be a key to fully discover the pricing dynamics and what actually lies behind.

Turkish Banks Key Fundamental Data

According to 1Q15 results Halkbank posted a ROE figure of 15.7% that made it one of the most profitable banks in CEEMEA region, however, this could not have prevented the stock from trading below its book value. On the other hand Vakifbank with a ROE of 13.6% is traded a significant discount of 26% to its book value. In light of this information two stocks are not fairly valued, offer a huge potential upside, and each indeed would be a great buying opportunity for investors who are eager to take hard to predict political risks.

In a previous note about Halkbank, I mentioned that the stock should not have been the conviction call among Tier-1 Turkish banks, and it was not likely benefit from the current trends in the industry. The current valuation is definitely beyond the framework I had proposed. As a matter of fact it is safe to say that political worries could be overblown.

On the other hand, there is evidence that shows Halkbank has always been valued with a company specific risk premium. The following charts show that the bank is traded with modest multipliers when compared to Tier-1 banks. Moreover, now Halk is not exceptionally far from historical averages in valuation terms.

Turkish Banks - Historical Price to Book Value

Halkbank - Historical Price to Book Value

Turkish Banks - Historical Price to EarningsHalkbank - Historical Price to Earnings

With so many upside and downside catalysts it is tough to allocate funds perfectly in emerging markets as the transformation in global monetary policy is likely to a game changer. Most particularly in Turkey it is crucially important to walk on eggs where the stock market is set to navigate in choppy waters. Within this context I believe the short term potential and longer term risks in Turkey’s state-owned banks stocks should be realized.

Turkish Banks: Expectations, Valuations & Risks


Over the past two months we have seen earnings upgrades coming to an end in most emerging market as well as in Turkey. Specifically, for Turkish banks, consensus lowered next year’s earnings estimate by a considerable 0.7%, bringing the cumulative cut to 1.5% since mid-August. Still, analysts averagely estimate an earnings per share growth of 20% in 2015 following a 9% contracting this year. On the other hand projections at year beginnings proved to be optimistic in six of last seven years as we have seen those projections being downgraded afterwards.

Meanwhile, year to date return of Turkish banks stocks is 23.5% which higher than the return of the benchmark index XU100.

Turkish Stocks Returns


Out of Turkey six large banks listed on the stock exchange, Garanti is the one enjoying premium valuations with P/E of 13.6 and with trading 1.5 times its book value. Akbank seems to have the second highest multiples. Yapi Kredi‘s lower P/E is due to selling its insurance subsidy to Allianz on a $1 billion deal. Compared to their peers, Isbank, Halkbank and Vakifbank are notably undervalued. Additionally, the six banks mentioned here account for 25% of market cap of the all companies listed on Borsa Istanbul.

Turkish Banks - Valuations


Apart from the key risks including declining GDP growth projections, vulnerability of Turkish lira, and geopolitical risks, there may be some other industry-specific headwinds to face. First, the loan to deposit ratio in Turkish banks have stayed above normal since 2012 which is now 115% leaving the companies with in sufficient liquidity to cover any unexpected fund requirements. Second, Tier1 common capital ratios (Capital Adequacy Standard Ratios) which measures the financial strength of banks by comparing the banks’ core equity capital to their risk weighted assets, have appeared to be weakening since the late-2008 global financial crisis (the following link goes to the article where we mentioned the importance of the sound fundamentals of its financial system for Turkey).

 Turkish Banks LD Spread

Turkish Banks - Capital Ratios