Garanti Bank (BUY, TRY 7.69)

Garanti Bank (BUY, TRY 7.69)

Garanti announced TRY 791mn net profit in its 4Q11 financials, up 64% qoq and 16% yoy but broadly in line with our estimate (UniCredit: TRY 777mn; consensus: TRY 786mn). 4Q11 results are boosted by tail winds from CPI linkers and a reversal of last quarter’s trading losses. Margins are in-line with our estimates, while higher than expected operating expenses and provisions are compensated with strong write-backs and trading income. Garanti’s FY11 ROE is at 17.8%, down 3.3pp yoy. 

■  Tail winds boost bottom-line – Thanks to the ca. TRY 445mn increase in CPI linker revenues, we see a 136bp expansion in NIM qoq and 49% qoq increase in NII. CPI linker revenues will still be satisfactory in 1Q12, yet down by ca. TRY 220mn, in our view. Net trading income improved from a TRY 67mn loss in 3Q11 to TRY 74mn gain in 4Q11, as the mark-to-market losses on swaps gets reversed.  

■  Core revenues are solid – Adjusting for CPI linkers, we still see a satisfactory 10% qoq NII expansion. The TRY loan-deposit spread widened ca. 25bp qoq. Yet, this improvement may lag some peers in 4Q11. While the TRY loan book’s yield repriced by a lucrative 57bp qoq, TRY time deposit costs increased by 40bp qoq as the bank tapped the TRY deposit market aggressively.

■  Strong deposit growth – While its repo book decreased 27% qoq, Garanti’s high LDR urged it to tap the deposit market. TRY deposits increased 6.3% qoq in 4Q11 (sector: +0.7% qoq). Loan growth of 3.3% qoq was parallel to the sector. LDR decreased ca. 2pp qoq to 99%.

■  High opex comes as a surprise – Opex increased by 35% qoq surpassing our 21% call significantly. While opex is seasonally high in last quarters, such an increase is quite dramatic. We see personnel expenses rising 48% qoq and 23% yoy, which can be partly explained by bonus payments. That said, Garanti’s FY11 cost growth is 5%, which is still a good result in a year with double digit inflation.   

■  Strong collections keep net CoR flat – Garanti’s NPL inflows increased ca. 80% qoq in 4Q11 to TRY 201mn. While specific provisions seem to have more than doubled qoq, strong collections and lower general provision expenses seem to have compensated for this. Net cost of risk is unchanged qoq at 60bp in 4Q11.

■  Capitalization is a competitive advantage – Garanti’s CAR stands at 16.9% as of 4Q11, which is quite comfortable to nourish future growth. Its strong capitalization enables Garanti to budget strong growth figures for high yield, unsecured consumer loans. Peers with low CAR are likely to shy away from the market to economize on capital. Solid capitalization, an opportunistic strategy and a good execution track record may provide better growth, NII and margin prospects to Garanti, in our view. We maintain our positive view on the stock, which trades at 2012E 9.2x P/E and 1.4x P/B. Our recommendation is to pair with less capitalized and lower ROE peers such as Vakifbank.