Turkish Banks 2H19: More in Store
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Turkish banks (XBANK) trade at a 48% discount to MSCI EM banks on 12M forward P/E of 4.07x and a 51% discount on 12M forward P/BV of 0.49x going into publication. Also, our coverage banks are trading at 3.67x 2019E P/E and 0.45x 2019E P/BV compared to MSCI EM peers’ average of 7.8x and 0.99x, respectively.
We expect a brighter outlook for NIM evolution and some normalisation in CoR in H2 which should altogether result in improvement in operating profits starting from late 3Q19 onwards.
Turkish banks (XBANK) have been notoriously underperformer in MSCI EM in terms of 12M forward-looking P/BV of 0.49x going into publication. Even after recovering from this year’s 25% stock collapse in March, banks are still trading below the 5yr average of 0.75x price-to-book. This is almost 56% below 2009 levels, during which banks traded at 19% ROE expectations, with the economy shrinking almost 5%.
Now, consensus expects ROE in the range of 8-15% for Turkish banks over the next two years, with GDP growth to accelerate to 2.5% in 2020 vs. our 1.2% contraction estimate for this year. Yet, weak activity and elevated bad loans act as main headwinds to banks; needless to say, geopolitical risks drive country risk premium and weigh on Turkish banks’ creditworthiness as they are highly vulnerable to a sudden shift in investor sentiment given the cost of their foreign-currency funding.
Asset quality remains as the major uncertainty in Turkish banking sector albeit with some potential easing in the second half this year owing to the rate cutting cycle and anticipated base effect driven improvement in growth:inflation trade-off.
Despite adverse conditions in H1, Turkish banks’ balance sheets have remained resilient as they adopted prudent and controlled approach towards balancing risk/return strategies.
This has allowed banks to effectively combat the aforementioned headwinds, with ROAE of around 11.3%, NPL ratio of 4.4%, CAR of 17.7%, and gross coverage ratio of 106.6% in 2Q19, which have altogether made Turkish lenders well placed to cope with turbulent days with confidence. While CPI linker bond portfolio hit margins in 1H19 in YoY terms (despite some recovery in Q2 in QoQ terms from the Q1’s depressed levels), NI generation mostly benefited from well managed cost of funding, ongoing fee growth and strictly controlled OPEX.
Hence, lacklustre NII performance (due to CPI linker losses and hefty swap expenses) and increased provision burden have been efficiently balanced with operating performance in H1.
Given the anticipated turnaround in activity and favourable base-effects in CPI, we expect a brighter outlook for NIM and some normalisation in CoR in H2 which should result in an improvement in profits starting from late 3Q19 onwards. While swap costs seem to ease in accordance with improving TRY financing conditions as a result of the CBRT’s rate cuts, COE should also improve on the backdrop of lower rates and slower inflation. Nevertheless, any improvement in COE should remain rather limited as the recent rating downgrades could hit risk premium.
While below trend growth seems to remain main hurdle for cost-of-risk charges and weigh on NI performance, we expect banks will set aside less provision next year than they do currently. Despite rating agencies’ cautious view, we expect sizable reversals in Stage 1 and Stage 2 provisions during mid-2020 conditional on macro backdrop and loan restructurings, which if true could boost operating income.
We continue to favour GARAN as top pick banking stock in our forecast horizon.
We now add YKBNK to our top pick portfolio. While a directional bull positioning in Turkish banking stocks is not a close call given the weak asset quality, we also suggest investors to maintain their bull positions in AKBNK and ISCTR, and add new exposures in these stocks in tranquil times.
Company report excerpt by Global Securities
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