GARANTI BANK - Set for sharp recovery in 4Q12: BUY

Upward revisions in profit estimates and target price
We increase our net profit forecast for 2012 by 10%, driven by the larger-than-expected trading gains in 3Q12 and the increased October CPI forecast which are partly offset by higher provisions. We also fine-tune our 2013 net profit forecast up 2% while increasing our DDM-based target price by 13% to TRY9.86/share from TRY8.72/share previously.

3Q results beat estimates on higher-than-expected trading income
Garanti Bank reported TRY733m net profit in 3Q12, 22% above our TRY600m estimate and 12% higher than CNBC-e consensus. Stronger than expected trading gains resulted in the beat, while slightly lower-than-estimated NIM and higher-than-forecast provisions provided negative surprises. Other P&L items were broadly in-line with our estimates.

Garanti Bank Report 01/08/2012

Asset quality surprised on the downside… 

·         Garanti Bank recorded TL718mn earnings in its 2Q12 bank-only financials, down by 17% QoQ and 24% YoY; and marking a quarterly RoAE of 15.3%. The results came slightly below both the consensus estimate of TL748mn and our estimate of TL751mn on higher than expected specific provisions for NPLs due to some worsening in asset quality.

·         The highlights of the quarter can be summarized as: i) selective lending continued in 2Q12 with increasing market share in consumer loans and decreasing market share in FX loans ii) market share gains in deposits, driven mainly by TL retail deposits as average TL time deposit cost of Garanti Bank was well above the sector at 10.3% in 2Q12. iii) NIM increased by 12bps QoQ as the positive impact of a 40bps QoQ improvement in loan-deposit spreads is reduced by the quarterly decline in TL FRN and CPI linker yields. iv) fee income contracted by 6% QoQ bringing the YoY fee contraction to 3% in 1H12, owing to the