AL BARAKA TURK - 4Q12 Earnings review: BUY

Higher provisioning expenses due to a single large commercial file
Al Baraka posted TRY42.7m bank-only net profit in 4Q12 (-32% q-q, -15% y-y), bringing FY12 net profit to TRY192m marking 20% y-y growth and resulting in a 17.3% ROE. The bank’s top-line performance (NII + NFI) is in line with our estimate. What pulled down the reported bottom-line is high provisioning expenses due to a large commercial file.

Lower liquid assets/total assets to help defend NIM in FY13
TRY deposit growth rate was huge at 10% q-q in 4Q12, as participation banks’ deposit returns remained above conventional banks, which resulted in a liquidity ratio rise. Therefore, we expect NIM to be more resilient in FY13 as its liquidity ratio normalizes. Also, the bottoming out interest rate environment will be supportive for NIM, especially in 2H13.

BUY reiterated with slight upward revision in TP to TRY2.50
We transfer coverage and maintain our BUY rating with TRY2.50 TP (up from TRY2.43). The key downside risks to our GGM & EERM-based target price are: 1) worse than expected NPL’s, 2) higher than projected growth in opex, 3) higher than anticipated growth in non-cash loans compelling the CAR and, 4) excess liquidity which may pressurize the NIM.

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AL BARAKA TURK - Strong profitability continues: BUY

Profit estimates and target price revised up
We increase our net profit forecast for 2012 by 7% and 2013 by 12%, driven mainly by higher net interest income and lower provision estimates. We also raise our DDM-based target price by 17% to TRY1.82/share from TRY1.56/share, on higher medium-term profitability assumptions.

3Q12 net profit beats estimates on stronger than forecast NII
Al Baraka reported TRY63m net profit in 3Q12, 27% above our TRY50m estimate and 28% higher than CNBC-e consensus, for a 22% ROE. Stronger than expected NII on proceeds from JV projects caused the beat while lower than forecast provisions were partly offset by lower other operating income. Other P&L items were in-line with our estimates.

Reiterate BUY on attractive valuation with healthy upside to TP
The bank is trading at the lowest P/E multiples among our Turkish banks coverage which we think is undeserved. Key downside risk to our call is a substantial contraction in economic activity with increasing unemployment, and particularly problems in the construction sector which would hit the bank harder than peers.

Risks are to the upside on our 17% ROE estimate for FY13
Growth was in line with our expectations as loans and deposits grew 3% and 5%, respectively q-q. Meanwhile, adjusted NIM came in 50bp higher than our expectation at 5.2%, with the deviation primarily stemming from higher-than-expected proceeds from JV projects. We think these could represent continued upside to our net profit estimates for the next couple of years. Slight pick-up in NPL inflows caused a 9bp rise in the NPL ratio to 2.2% where the asset quality deterioration remained below sector averages. Still, due to lower collections net CoR increased to 35bp, just above our 27bp forecast. CAR improved to 12.5% after Basel-II where sukuk investments in 4Q12 could further alleviate the pressure.