1 Ağustos 2012 Çarşamba

Garanti Bank Report 01/08/2012

Asset quality surprised on the downside… 

·         Garanti Bank recorded TL718mn earnings in its 2Q12 bank-only financials, down by 17% QoQ and 24% YoY; and marking a quarterly RoAE of 15.3%. The results came slightly below both the consensus estimate of TL748mn and our estimate of TL751mn on higher than expected specific provisions for NPLs due to some worsening in asset quality.

·         The highlights of the quarter can be summarized as: i) selective lending continued in 2Q12 with increasing market share in consumer loans and decreasing market share in FX loans ii) market share gains in deposits, driven mainly by TL retail deposits as average TL time deposit cost of Garanti Bank was well above the sector at 10.3% in 2Q12. iii) NIM increased by 12bps QoQ as the positive impact of a 40bps QoQ improvement in loan-deposit spreads is reduced by the quarterly decline in TL FRN and CPI linker yields. iv) fee income contracted by 6% QoQ bringing the YoY fee contraction to 3% in 1H12, owing to the
negative impact of accrual methodology and lack of account maintenance fees in the quarter. v) other income increased by 27% QoQ in 2Q12 thanks to the TL32.6mn gains on the TL201mn NPL portfolio sale. vi) provision expenses doubled QoQ due to a significant rise in special provisions for NPLs. vii) thanks to the NPL sale, NPL ratio eased slightly to 1.8% in 2Q12, yet would have been up by 15bps QoQ if there weren’t any NPL sale. viii) specific cost of risk doubled QoQ to 100bps in 2Q12 as NPL additions increased by 31% QoQ, while collections managed to cover only 19% of the NPL additions in the quarter. iv) loans under close follow up also increased by 6% QoQ, which is also not promising for 3Q12.

·         1H12 loan growth stands at 4%. Garanti Bank maintained its selective lending strategy in 2Q12, gaining market share in the relatively more lucrative consumer lending, while refraining from growing in FX loans. The management maintained its 18% loan growth guidance for 2012, which implies 13% loan growth for the remainder of the year. Management’s loan growth guidance is too bullish, in our view. We believe that 14% loan growth is more reasonable for Garanti Bank in 2012 assuming a stable currency for the rest of the year, which implies 9% loan growth for 2H12.

·         A potential upward adjustment on fee revenues might be on the agenda. At the conference call, management mentioned that banks are not fully complying with the BRSA’s recent amendment on the accrual methodology of documentation fees. Management believes that some banks are collecting documentation fees in other names such as intelligence fees on which accrual accounting is not applied, making the YoY fee growth comparison among banks to be misleading. Garanti Bank management stated that they will ask the BRSA to bring a standard to this issue. Recall that in its 2Q12 financials, Halkbank made an upward adjustment in its fee revenues as they received a clarification from the BRSA on this issue. Should BRSA bring a standard for all banks, those banks that have booked their fee revenues more conservatively up to now, such as Vakifbank, Yapi Kredi Bank and Garanti Bank will be the main beneficiaries. Garanti Bank management also stated that they expect this issue to be resolved within 3-6 months.

·         20bps YoY NIM improvement guidance maintained. At the conference call, Garanti Bank management maintained its 20bps YoY improvement guidance for 2012. Considering that inflation switched to a declining trend in May, our 8.5% YoY inflation projection for October-end implies 28% contraction in CPI linker yields in 2H12 compared to its 1H12 level. Management sounded very upbeat regarding the loan-deposit spread evolution for 3Q12 as TL time deposit costs are currently 100bps lower than its 2Q12-end level along with QoQ stabilizing loan yields. In order to reach the 20bps YoY NIM improvement, we calculate that Garanti Bank should attain 4.1% NIM in 2H12, which implies a 20bps decline compared to its 1H12 level. Considering the decline in CPI linker yields in 2H12, the management’s full-year NIM guidance implies that the bank should improve its loan-deposit spreads by another 20bps in 2H12 compared to its 1H12 level. We believe that the recent decline in deposit costs is more related to a slowdown in loan growth pace in 3Q12 rather than the recent decline in average CBT funding cost. In fact, the CBT reduced the amount of total CBT funding to TL17bn levels from the TL30bn in 2Q12, while decreasing the average CBT funding cost to 7.5% levels from previously 9%. Considering the decline in liquidity level, the easing in average CBT funding cost should not have a major impact on funding costs as the funding structure of the sector is quite tight with a 103% loans / deposits ratio. Thus, we believe that any potential improvement in loan-deposit spreads (on the back of declining deposit costs) can only be achieved with sluggish loan growth. In that sense, lower deposit costs may result in a QoQ widening in loan-deposit spreads in 3Q12 in line with Garanti Bank management guidance, yet spreads should definitely contract QoQ in 4Q12 on higher deposit costs and lower loan yields. Thus, we also attach lower probability to a 20bps improvement in Garanti Bank’s loan deposit spreads in 2H12 over its 1H12 level, which makes the 20bps YoY NIM improvement guidance hard to achieve as well.

·         All in all, Garanti Bank’s 2Q12 results surprised us on the downside in terms of asset quality performance. The quarterly NPL generation of TL225mn came well above our expectations although the management named TL67mn of these NPLs as one-off, which might not be the case. The above sector deposit costs of Garanti Bank especially on the TL front in 1H12 also raises questions on the necessity of the subdebt repayment in 1Q12. We also find the management’s 2012 loan growth and NIM guidance optimistic. It is also worth to add that we expect Garanti Bank’s CPI linker yields to fall from 19.7% in 2Q12 to 3.4% level in 3Q12, leading to a post-tax TL300mn negative impact in 3Q12 financials. We will be revising our recommendation and valuation for the bank

BGC Partners

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