* Well-deserved re-rating
confirmed but limited potential for further share price rises makes range-bound
trading likely
* We look for the sector to post earnings growth of 7% in 2013 with a 13bp NIM contraction and flattish CoR
* Halkbank is our key OW idea, also a GEMs Super 15 constituent; we downgrade Isbank to Neutral (from OW)
Re-rating confirmed, but further potential for share price rises limited: Turkish banking sector stocks confirmed their new fair value range (average 2013e P/BV of 1.30-1.55x) after posting a strong rally followed by a brief correction over the past 12 months. Unless strong fundamental catalysts emerge, we see the current valuation levels as the new normal for the Turkish banks - so range-bound trading is highly likely in the mid-term. Trading at an average 2013e PE of 10x and PBV of 1.35x, with an ROAE of 14.4%, we believe the sector's current valuations are fair (compared with international peers). We increased our target prices for Turkish banks by an average of 9% owing to strong mark-to-market gains on their book values and average CoE of 12.5% (down from 13.2%). Our bottom-up potential return is 16% on average (13% excluding Halkbank).
* We look for the sector to post earnings growth of 7% in 2013 with a 13bp NIM contraction and flattish CoR
* Halkbank is our key OW idea, also a GEMs Super 15 constituent; we downgrade Isbank to Neutral (from OW)
Re-rating confirmed, but further potential for share price rises limited: Turkish banking sector stocks confirmed their new fair value range (average 2013e P/BV of 1.30-1.55x) after posting a strong rally followed by a brief correction over the past 12 months. Unless strong fundamental catalysts emerge, we see the current valuation levels as the new normal for the Turkish banks - so range-bound trading is highly likely in the mid-term. Trading at an average 2013e PE of 10x and PBV of 1.35x, with an ROAE of 14.4%, we believe the sector's current valuations are fair (compared with international peers). We increased our target prices for Turkish banks by an average of 9% owing to strong mark-to-market gains on their book values and average CoE of 12.5% (down from 13.2%). Our bottom-up potential return is 16% on average (13% excluding Halkbank).
We expect 7% earnings growth for Turkish banks in 2013: We lowered our 2013 earnings forecasts by 2%. We now look for a 13bp contraction in NIM y-o-y and a flat real CoR of c80bp on average; which leads to 7% earnings growth y-o-y. Our 2013e net income versus consensus is higher for Is (3%), in line for Vakif, but lower for Yapi (-7%), Garanti (-5%), Halk (-2%) and Akbank (-1%).
Complex monetary policy: We believe potential tightening measures via required reserve ratio (RRR) hikes will not be as effective as in 2010-11 due to the reserve option mechanism (ROM) and lower interest rates. To cut 2013 loan growth to 15%, according to our economists the central bank (CB) should raise RRR more sharply and/or cut the reserve option on TRY RRR. We believe loan growth of 15-20% won't be far outside the CB's comfort zone and do not expect it to make any aggressive moves, although BRSA may step in if needed, as it did in 2011.
Halkbank is our key OW idea; we downgrade Isbank to Neutral (from OW), maintain our Overweight on Akbank, and Neutral on Garanti, Vakif and Yapi.
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