■ Sector view unchanged; we upgrade Halkbank to Outperform and downgrade Yapi Kredi to Neutral. Turkish banks' performance relative to EEMEA peers has been volatile this year and stands at 12% underperformance ytd, post 28% outperformance in 2012. We think the sector is fairly valued at a 14% P/E discount on 2014E and 4% P/BV premium on 2013E vs EEMEA peers. We review our TPs and estimates, upgrade Halkbank to Outperform and downgrade Yapi Kredi to Neutral.
■ In-depth look into growth and margin dynamics. In this report, we show that Turkish banks' balance sheet growth is capped by funding constraints and note that the very low interest rate environment was not as positive as consensus anticipated. Turkish banks' sustainable NIM will be supported by higher rates and, in the absence of regulatory measures hurting profitability and assuming rates stabilise at reasonable levels, the sustainable RoE–CoE differential could even expand, in our view.
■ Regulatory pressures continue to hurt profitability. We carry out sensitivity analyses for the recent regulatory measures such as BRSA's draft amendment, the interest rate cap for overdraft loans and cuts for the interest rate cap on credit card and overdraft loans. These suggest a 7.4% average hit to 2014E pre-tax earnings for the banks in our coverage.
■ We upgrade Halkbank to Outperform from Neutral. Halkbank has the highest sustainable RoE generation potential among large-cap Turkish banks and is favourably positioned against increasing interest rates and regulatory pressures. The recent underperformance of the stock creates an opportunity to add exposure, in our view.
■ We downgrade Yapi Kredi to Neutral from Outperform. Yapi Kredi has outperformed the ISE Banks index by 10% since June and is now fairly valued at 1.1x 2013E P/BV and 7.6x 2014E P/E, on our estimates. We continue to view Yapi Kredi as a good long-term investment but we would wait for more attractive relative valuations to add further exposure