Turkish Banks - 1Q14 Earnings Preview

Earnings season is expected to kick off on April 28 with Halkbank results followed by Garanti Bank on April 29 and then Yapi Kredi Bank on April 30. 1Q14 earnings performance of Turkish banks is again expected to be not much effective on the market mood, in our view. However closely monitored loans, loan composition and the duration mismatch will be our main focus areas.

Weak economic growth and high interest rates will mostly formulate the basics of banks’ 1Q results. The key themes of 1Q14 are slow loan growth, weak fee growth due to slow loan growth and high base of last year, relatively stronger than initially expected NIM, controlled growth in operating expenses and trading losses mainly due to rising swap costs parallel to widening on balance short FX positions. Moreover, the annual growth in operating expenses might exceed inflation in 1Q14 due to some minor one-off expenses and rise in some FX denominated expenses due to TL depreciation.

We estimate aggregate reported earnings to contract by 26.6% YoY, while remaining flattish over the previous quarter. After having adjusted for one-off items and the dividend income, banks’ pre-tax earnings will decline by 32.6% YoY and 6.1% QoQ, according to our estimates. We forecast only 8bps QoQ NIM contraction in 1Q14, while state banks will likely see more severe NIM contraction compared to private peers. We do not foresee any meaningful rise in specific cost-of-risk ratio, which is estimated to attain 100bps levels in 1Q14, staying flat on QoQ basis. Due to lack of lending expansion and the TL’s value bouncing back towards the end of quarter compared to mid quarter due to CBT’s front-loaded tightening at the end of January, the CARs are likely to remain flat, in our opinion. Only, Bank Asya may have a sizeable expansion in CAR due to the drop in risk weighted assets, which funded the sizeable QoQ contraction in the bank’s deposits.

Among the banks that we cover, TSKB is expected to be the only bank enjoying earnings growth both on annual and quarterly basis. Among large cap banks, Isbank is expected to have the least annual pre-tax earnings contraction with 23.0% YoY followed by Garanti Bank and Halkbank. When compared to the previous quarter Garanti Bank is expected to have the strongest pre-tax earnings growth rate with 15.9% QoQ followed by Halkbank with 2.2% QoQ. Akbank is expected to have one of the steepest annual earnings contraction in our coverage mainly due to the lack of trading income 1Q14.

Rather than 1Q14 results, we would prefer focusing on banks’ earnings performances in the upcoming quarters. We believe two main items may bring upward revisions to banks’ earnings. The first item is the sustainability of stronger asset quality in accordance with the better than initially expected growth in economic activity, yielding healthy cash flows for corporates. The second item is the possible support from regulatory bodies, especially from the BRSA, in the form of a limited cut in general provisioning requirements. Furthermore, CBT might step in with a decrease in RRRs and/or paying some paying interest to banks for their RRRs. Though not our base scenario, any policy rate cut by the CBT, which may arise from strengthening portfolio inflows and/or declining inflationary pressure might provide additional boost to earnings.  Last but not least, another issue that might support earnings performance is security portfolio trading income thanks to the pull back in benchmark bond rates recently compared to 1Q14 average.