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.
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.
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).