Turkish Banks: What to Expect After 2Q Earnings

Turkish banks enjoyed the seconds earnings season of this year, as their profitability metrics hit two-year highs on the back of strong operational performance. The downward trend for Turkish banking sector that had started in mid-2013 ended in August 2015, when the systemwide ROAE hit 10.3%. Banks have experienced a pick-up in returns on their equities ever since. ROAE at the sector-level was 11.9% at the end of 1H16.

Turkish Banks - ROE v COE

On the other hand, the banks are now struggling to keep pace with volume growth as evidenced by y/y changes in loans and deposits which have been constantly declining since mid-2015.

Turkish Banks - Loan and Deposit Growth

Meanwhile NPL generation have been faster than loan growth, leading us maintain a fairly cautious stance for the outlook of credit metrics in Turkish banking space.

Turkish Banks - NPL Evolution

Also note that capital levels have improved.

Turkish Banks - Capital Adequacy

Below is summarized financial highlights of Tier-1 banks that are listed in the stock market from the earnings season.

Turkish Banks - 2Q Earnings and Valuations

Isbank (BIST:ISCTR) and Garanti (BIST:GARAN) beat the consensus estimate by a wide margin, primarily due to non-operational income on the back of proceeds from the Visa merger. That said, Halkbank (BIST:HALKB) also enjoyed some provision reversals that contributed to the bottom line in 2Q 2016.

Despite the improving profitability and intact asset quality, we still remain neutral on banks with the exception of Akbank (BIST:AKBNK) and TSKB (BIST:TSKB) due to some reasons we explained in previous articles (Do Turkish Banks Add Economic Value?, Banks to Face Risks from FX Liabilities). With that being said, we continue to prefer Turkey’s industrials over banks (Turkish Industrials: Buying Opportunities).