TURKISH BANKS - MONTHLY BRSA FIGURES

The banking sector’s net profit grew 15% y-y in July, primarily led by foreign deposit banks while state banks matched the sector average. Private local deposit banks, however, achieved a 3% y-y rise, which is an improvement over the 2% YTD contraction. Participation banks’ earnings grew 25% y-y, indicating a slowdown from the 32% YTD growth pace. On a m-m comparison adjusted for dividend income, state banks’ bottom lines more than doubled due to the low base created by hefty free provisions set aside in June. Even adjusted for those, state banks still achieved a mid-single-digit m-m increase in earnings. Private local deposit banks, however, saw their profits come off by 20% in dividend-adjusted terms, due to margin pressure from CPI-linked bonds and lack of FX and trading gains, despite higher loan-deposit spreads. For the remainder of 3Q12, CPI-linked bonds will continue to put pressure on NIMs but we expect the level of relief from decreasing funding costs to gain pace as deposits will reprice downwards from the elevated end-2Q12 levels. Asset quality, where we are observing a steady inflow of NPLs, will be key for banks.

§ Improvement in spreads to gain pace – TRY loan yields came down 3bp and 5bp m-m in July for private banks and state banks, respectively, while TRY deposit costs decreased 10bp and 12bp. As a result, for both private and state banks, TRY loan-deposit spreads expanded 7bp each. As of July, TRY
L-D spread is 22bp lower than the 2Q12 average for private, and 4bp higher for state banks. Upward repricing of TRY loans seems to have come to an end but we also do not expect to see a major decline as of 3Q12. Meanwhile, the drop in TRY deposit costs should gain pace in future months as the marginal cost of TRY time deposits came down by a full 200bp between end-June and end-August. On the FX side, spreads continue to expand (+18bp for private; +10bp for state banks) mainly on the back of easing deposit costs. As of July, FX L-D spread is just above the 2Q12 average across the sector

§ NIM contraction due to CPI-linked bond portfolios – NIM adjusted for FX and trading income and security impairments decreased 53bp m-m in July for private banks on the back of sharply lower CPI-linked bond returns and lack of FX and trading gains. For state banks, NIM contraction was lower at 31bp m-m on higher FX and trading income. The yield of CPI-linked bonds will make a dip in August and NIMs in 3Q12 are set to take an average 35bp q-q hit on these alone. However, we expect falling funding costs to increasingly offset those losses in coming months. Higher trading gains could also be on the cards if banks choose to realise some of the MTM gains on both their Eurobond and TRY government bond portfolios.

§ Reported cost of risk suppressed by lower specific coverage – The specific CoR of the sector halved
m-m to 61bp in July. However, we note that specific NPL coverage came down significantly for private banks in particular at 3.4ppt m-m. Had coverage ratio stayed flat, the CoR for private banks would have reached 124bp vs. 112bp in June and 84bp in 2Q12. However, we also note an unusually large “other provision” line, which we suspect may partly include some provisions for NPL purposes. Asset quality, where we are observing a steady inflow of NPLs (gross NPLs: +6.9% QTD vs. loans: +1.1% as of 4 September) on a daily basis, will be key in our view for bank profitability. Continuously decreasing capacity utilisation readings indicate increasing risks on the asset quality front but an expected rise in the availability of credit could alleviate some of the pressures going into 2013.

§ State banks did better on fee and opex fronts – Fee growth was 9% y-y for private banks in July, similar to the 2Q12 y-y growth but an improvement over June’s 4% level. State banks had a more marked improvement, as their fees grew 12% y-y compared to 7% in 2Q12 and 3% in June. Operating expenses growth remained relatively high for private banks at 14% y-y, in between the respective figures for 2Q12 and June of 13% and 16%. State banks did better on this front as well, reducing their y-y cost growth pace to 8% from 11% and 12% in 2Q12 and June, respectively.