NEW TURKISH BANKS REPORT OUT !! ISCTR now an "ACCUMULATE" .. HALKB & TSKB "BUY" recoms kept INTACT

ü  FUNDING COSTS WILL BE THE OVERRIDING THEME .. With the aim of maintaining both financial and price stability the Turkish Central Bank (CBT) is continuing to utilizing unconventional policy tools, which has been putting banks under pressure on the cost side. Meanwhile, the landscape of the Turkish banking sector has changed once again amid high inflation, mixed monetary policy and slower economic growth.

ü  GROWTH ASSUMPTIONS REVISED UPWARD.. The Central Bank’s monetary policy amidst surrounding uncertainty over global financial developments will be the main driver of Turkey’s macroeconomic performance throughout the year. We expect developments over sovereign debt concerns in peripheral Europe to prevent the CBT from pursuing a dovish stance up until the final quarter of the year. We now expect GDP to post 3.5% growth in 2012.

ü  EARNINGS GROWTH FOR THE TURKISH BANKS FORECASTED AS 5% for 2012 .. Our revised 2012 forecasts for the sector are: 16-17% loan growth, 14% deposit growth, margins expanding by 20bps to 3.9%, 35bps deterioration in the cost of risk, 8-9% growth in OPEX, and fees remaining flattish as a result of accrual based accounting, and 8% growth in total fees as a result of regulatory change. All in all, we believe that banks will be able to sustain their profitability in 2012, and register 5% growth in the bottom line over 2011, which should correspond to 15-16% RoE.

ü  14% UPSIDE POTENTIAL FOR THE BANKS .. Turkish banks’ valuations have diverged significantly since the beginning of 2012. After a 31% drop in 2011 Turkish banks are up by 12% in TRY terms since the beginning of the year. Consequently, the banking index (XBANK) has closed the valuation gap between the peer group in past months and is now trading at a par relative to its counterparts in terms of P/BV (1.2x) but with a relatively higher RoE of 15-16%.

ü  WHAT WE LIKE & WHY? .. Halkbank & TSKB remain a BUY, and we upgrade Isbank to ACCUMULATE. Considering the potential pressure on the NIM and earnings, we prefer banks that are more exposed to the retail and SME segments, that have a higher return on local currency lending and lower earnings vulnerability, and that have a more resilient margin outlook with better NPLprospects and better cost management. In this light, we view Garanti and Halkbank as better positioned relative to their peers. With this report, we upgrade our recommendation for Isbank to Accumulate from Hold, after revising our estimates upwards on the back of upbeat 2012 management guidance, which yields a better earnings outlook.