OYAK-TURKEY: Turkish Banking Sector Update and 4Q19 Earnings Preview
We forecasted an aggregated 61% earnings growth in 2020 for banks in our coverage with aggregated ROE normalizing towards 14% (10% in 2019E), which implies a 0.6x P/BV multiple versus current multiple of 0.7x.
Sector Update and 4Q19 Earnings Preview
BIST banking index gained 29% in nominal terms in the last 3 months and outperformed the BIST-100 index by 3% amid improved earnings outlook, while declining COE has also been the major driver. Following the banks recovered from their lows reflecting some portion of the optimistic expectations we expect the upwards momentum in BIST Banking index to slow down. We forecasted an aggregated 61% earnings growth in 2020 for banks in our coverage with aggregated ROE normalizing towards 14% (10% in 2019E), which implies a 0.6x P/BV multiple versus current multiple of 0.7x.
Akbank and Vakifbank are our top picks
We prefer Akbank and Vakifbank from the banking universe as we see further room for re-rating, while the banks are also offering resilient asset quality, strong solvency and relatively strong margin recovery. We have also Outperform rating for Garanti, however the bank is not among our top picks currently, as its 1yr forward P/BV premium over BIST banking index has widened recently. We rate Isbank, Yapikredi and Halkbank at Market Perform.
Accelerated loan growth, margin recovery and declining COR to drive 61% earnings growth in 2020
We anticipate a brighter NIM outlook in 2020 on continued downwards trend in TL deposit rates and positive duration gap of Turkish banks between assets and liabilities that appears to be supportive for TL loan-deposit spread evolution. NIM expansion is likely to take place mostly in 1H20 following strong core spread recovery in the late 2019, while downward repricing in the loan book should yield a gradual decline in margins by year-end with a cumulative c.160bps fall in TRY loan-deposit spread. Concerns over the asset quality and capital ratios of the banks are largely left behind and COR should start decelerating in 2H20 driven by slowdown in NPL formation on our 4% GDP growth assumption. However, more than expected transfer from restructured loans to NPLs remains as a downside risk, considering sizeable increases in stage 2 loans in 2019. Earnings recovery is expected to be driven by i) 12% blended loan growth for 6 banks in our coverage with some normalization in state banks’ loan growth momentum while private banks to continue grab market share, ii) 110 bps y/y improvement in TRY loan-deposit spread following NIM depressed by rising rates in 2019 and iii) 40bps decline in net COR amid a moderate recovery in NPL formation rates.
We project 17% q/q earnings growth in 4Q19
Aggregated swap adjusted NII is expected to increase by 32% q/q, while swap adjusted NIM is expected to improve by 85bps q/q for the 6 banks in our coverage. Despite the visible improvement in TRY loan-deposit spreads, downward pricing in CPI linker portfolios and higher COR are expected shave some part of the positive contribution on NI. Momentum in fee income generation and lower trading losses are also expected to be supportive for the bottom-line performances. Vakifbank stands out positively with highest quarterly NI and NII improvement, while massive increase in provisions expenses is expected to drag down quarterly ROE of Yapikredi to low single digit.