VAKIFBANK Company Update - STRONG BUY re-iterated

VAKIFBANK <VAKBN TI> Company Update

STRONG BUY re-iterated

Punished on groundless concerns

 

Vakifbank shares have underperformed the ISE-100 by 5% in the last one month, as the Directorate of Foundation’s share transfer news to the Treasury increased the SPO expectations for the bank. In addition, Vakifbank management suspended the sub-loan process to take the Treasury’s opinion which also increased the expectation that Treasury will support the bank’s capital through a rights issue. The groundless SPO and rights issue concerns took its toll on the bank’s share price performance, which we believe is unjustified.

 

With the Directorate of Foundation’s share transfer to the Treasury, Vakifbank’s shareholder structure and its ”state-bank “ status will become clear. We believe that all of the state banks will be privatized in the end and the share transfer in Vakifbank is also done with this purpose. The possible alternatives for the privatization of Vakifbank can be an SPO or a block sale. We believe that an SPO is not likely for Vakifbank in the near term, as the bank is currently trading below its book value as a result of its low RoAE and the government should not be willing to privatize the bank below its book value. We also believe that the government should not care to lose a controlling stake in Vakifbank as long as they own the majority stakes in Ziraat Bank and Halkbank. In that sense, a block sale of a majority stake in Vakifbank to a strategic shareholder with a control premium is more likely for Vakifbank’s privatization,which will also require a tender call supporting the share price performance further.

Turkish Stock Preferences - Alpha Themes: Closing our Garanti vs. Vakifbank call

Closing our Garanti vs. Vakifbank call on strong alpha generation

In an Alpha Themes report on 26 June, we introduced Garanti to our Most Preferred list against its peer Vakifbank. We argued that the valuation level of the latter reflected the near-term positive catalysts following the strong rebound in the shares, while further underperformance of the former would be unwarranted given the fundamental outlook and relative easing of its partnership woes. Since late June Garanti has outperformed Vakifbank by 14%, attributable to a) concerns over a secondary offering (SPO) of Vakifbank shares, along with less appealing valuations, b) the postponement of the subordinated debt issuance (Vakifbank), c) the recent outcome of the Spanish bank stress tests, which showed no deficit for Garanti’s parent BBVA, and d) strong management guidance on Garanti’s 2013 earnings prospects.

Vakifbank: a change in ownership structure is unlikely to trigger an SPO in the near term; Tier-II capital seems inevitable to sustain the existing revenue-centered performance

We remove Vakifbank from our Least Preferred list, as we think further underperformance of the bank versus Garanti is unlikely: i) the decision of the state Treasury to acquire 58% of Vakifbank from General Directorate of Foundations is unlikely to trigger an SPO in the near term; ii) the issuance of subordinated debt is inevitable in 2013 (given that CAR stands at 13% vs. the threshold of 12%) if it is to sustain existing organic growth policies, which entails an upside risk to our earnings forecasts; iii) although well-collateralized, Garanti continues to see new commercial NPLs, which is a challenge to our year-end estimates; and iv) Vakifbank has recently underperformed relative to Garanti in the underlying time frame, as indicated above.

Maintaining other relative calls in financials and industrials space

We maintain our Akbank vs. Sabanci Holding call in the financial universe space, and Turkish Airlines vs. TAV Airports and Turkcell vs. Turk Telekom calls in the consumer and services universe.

*This report recommends one or more “pair trades” involving the simultaneous purchase of one or more securities and sale of one or more other securities. As the name implies, this is a trade idea (not fundamental research) that is only recommended to be executed in its entirety. As such, the buy and sell components of the trade might not align with the analyst’s current fundamental research rating on the stocks involved on a standalone basis.

 

Deutsche Bank