Despite the ongoing still-decent GDP growth, the economic outlook of Turkey is not in brilliant shape. Following a robust start to 2015 for the economy, the current focus of consumers in view of economics developments in predominantly on general domestic conditions and clearly there are negative signs in these areas.
The mood of consumers in Turkey is more pessimistic according to the data released by Turkish central bank in September’s Survey of Consumer Confidence. The overall indicator providing the numerical information about the consumers’ expectations was down by 3.9 points to 58.5 which was the lowest figure recorded since January 2009. Moreover, Turkey posted a reading below 60 only three times in the past (between November 2008 and January 2009), in other words consumer confidence is not that far from hitting its all-time low.
The economic expectations index also hit an all-time low in September at 72.0. The index averagely fell by 8% in the past two months.
Given the higher political risks ahead of the elections, further potential lira weakness, and the restart of violence in the southeastern part of the country, one would not expect the mood of consumer to be boosted after all.
We find something very interesting in the chart above as it provides information about the relationship between propensity to save and Turkey benchmark bond (2-year) yield. Apparently, the index had worked out greatly as a pre-indicator for rates in the debt market until early this years, however the two series clearly have moved different way since then. Ultimately, average Turkish citizen is likely to face important challenges in a struggling economy before they return to non-crisis consumption patterns.
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.
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.
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.
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.
Examining the determinants of the banks profitability is very important in any economy as these foundations perform key financial functions. In Turkey it is even more important considering the fact that the stock market is heavily dominated by the banks. See here, here and here for more about the bank-intensive style of Turkish financial markets.
Lately we noted that on historical basis profitability indicator ratios of Turkish banks have been dramatically declining despite the relatively high valuations. We observed those bank stocks losing momentum and the benchmark equity index evaporation right after, a harbinger for what might happen remainder of the year.
At this stage we find it important to find out what the industry-specific and macroeconomic determinants of Turkish banks’ profitability are because of its strong impact on the characteristics of stock market. To be more accurate I narrow the scope of this research and used the data of the commercial banks only -which is compiled by Turkish Banking Watchdog (BRSA)-.
Below is a list of possible determinants of Turkish commercial banks’ profitability.
- Total Assets (log)
- Capital Adequacy Standard Ratio
- Loans to Assets
- Non-performing Loans Ratio
- Liquid asset to assets
- Deposit to Assets
- Loan to Deposit
- Net Interest Margin
- Non-interest Income
- Annual Real GDP Growth
- Annual Inflation
- Real Interest Rates
After collecting the data over the time period between 2003 and 2014 I calculate the correlation between the variables listed above which is as follows:
As a profitability measure again we use the return on equity (RoE) ratio. Following that, this next table demonstrates the relationship between the profitability of Turkish commercial banks and the given independent variables through a regression analysis.
The results suggest that the relationship between the banks’ profitability and the selected macroeconomic variables is significantly weak. On the other hand we find out that the banks can improve their profitability through increasing their capital adequacy and decreasing their loan/asset or loans/deposit ratio. Our main deduction from the latter finding is that to improve their profitability the commercial banks in the country need pay more attention to being well-capitalized and having a more liquid financial position with lower loan/deposit ratio.
For the issue of declining capital adequacy ratios in Turkish banks read this.
and this is for the increasing risks around loan/deposit spreads.
Considering the above-mentioned developments it would not be surprising to see banks posting lower income figures in the upcoming quarters.