One
last push before the start of normalization
We see limited room for multiple
expansion, given our expectation of steady declines in ROE on the assumption of
no interruption to the almost 0% real interest rate environment. In this report, we
present our 2013-2015 estimates for the Tier-I Turkish banks and our 2013
trading strategy. Accordingly, we expect the combination of an average real
interest rate of just above 0% throughout our estimation period and policy
actions towards limiting a rise in leverage to eat away from margins. This
should allow for Tier-I banks’ EPS to grow at a limited 8% CAGR from 2012 to
2015, below the 13% CAGR we expect for the nominal GDP over the same time
period. Combining this with the limited potential for a further decline in bond
yields, we see limited room for multiple expansion. Hence we see a limited 10%
average upside for the Tier-I Turkish banks which currently trade at 2013E P/E
of 10.0x and P/B of 1.39x
However, until the announcement of
1Q13 results, which we expect to be very strong, there may be a final rally
which we would recommend utilizing to trim overweight positions. We expect 2013 to be the
best of the next 3-year period from a y/y perspective with a 10% EPS growth
(including the Competition Authority fines) thanks to several favorable base
effects. We also estimate 1Q to be the best quarter of 2013 (before sequential
core NIM contraction in each of the following three quarters), mainly on the
back of 1) a final leg of marginal deposit rate cuts allowing for further
loan-deposit spread expansion and 2) strong fee income growth boosted by both
the base effect and the refinancing activity in the market.
We would watch the level of
competition and potential monetary/macroprudential measures to decide on later
positioning. If sustained, we view the current environment, with relatively limited
loan demand that does not trigger harsh policy actions and allow for
maintaining healthy marginal spreads, as a sweet spot for banks. However, it is
quite likely to see competition intensifying, deposit costs rising (given the
stretched LDRs), and CBT and/or BRSA stepping in as loan demand picks up into
the spring months. We think Ziraat Bank’s behavior will be key here as the bank
is definitely back in the market following a deleveraging during the past
one-and-a-half years.
We expect convergence in bank
multiples in line with ROEs and do not believe that paying too much premium to
free equity in the current environment is justified. We note a mean
reversion in bank ROEs as banks find it difficult to differentiate themselves
in this competitive sector where successful strategies are immediately
mimicked. So, we look for convergence in multiples. We believe Vakifbank
and Isbank are beneficiaries of this trend as both banks are improving
efficiency towards sector standards. Partly a victim to the mean reversion
story, we think Halkbank can hold on to some of its competitive
advantages and find its valuation is attractive, given that we expect the bank
to continue to grow its equity faster than peers. We find YKB to be the
main beneficiary of the mean reversion trend and expect the bank to deliver the
largest CAGR in EPS in the medium-term. However, we find this to be mostly
priced in and would wait for a better entry point. We do not favor Akbank
and Garanti Bank, as we believe that the market attaches too large of a
premium to their free equity, which we find to actually hurt profitability in
the current environment of abundant capital and liquidity.
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