TURKISH BANKS - MONTHLY BRSA FIGURES

The banking sector’s net profit dropped 2% m-m in August, led primarily by foreign and state deposit banks (SB), while private local deposit banks (PLB) achieved a 27% m-m rise helped by a normalised effective tax rate (from 28% in July) and lower other and general provisions. On y-y bases, bottom-lines surged on wider spreads and the low CPI base of last year. The average net income of July and August was 3% lower than the 2Q12 monthly average for the sector while being 1% and 4% lower for SB and PLB, respectively.

The positive trends are: 1) 24bp m-m total loan-deposit (L-D) spread expansion where a similar rise in September would bring the q-q L-D spread widening to c.20bp in 3Q12; 2) only 8bp m-m NIM contraction, despite large pressure from CPI-linked bonds, on the back of lower funding costs; 3) more limited but further MTM gains, bringing total QTD increase in the sector’s equity to 4%; and 4) some decline in the pace of opex growth. The negative developments are: 1) specific CoR adjusted for the drop in NPL coverage remains high at 113bp, indicating to a 30bp q-q increase for 3Q12; 2) collections continue to get weaker as other non-interest income is on track to be 35% lower q-q in 3Q12; and 3) loan demand is weak and geared towards unsecured segments such as credit-cards and general purpose cash.

We see the overall trends in the sector, where PLB are faring better than SB in 3Q12, to be in line with expectations. However, margins could still prove to be more resilient than analysts estimate, as we expect strong contribution from CPI-linked bonds in 4Q12, coupled with further back-loaded spread expansion by some banks, to create potential earnings surprises for FY12.

* Spread expansion limits NIM pressure – The downward repricing in TRY loans continued at 13bp m-m in August, which was down only 1bp for PLB and 21bp for SB. Meanwhile, TRY deposit costs dropped 38bp m-m with PLB performing better here as well, achieving a 49bp m-m drop vs a 23bp drop for SB. As a result, TRY L-D spread expanded 48bp m-m for PLB and only 2bp for SB. On the FX side, L-D spreads expanded 40bp m-m for both PLB and SB mainly on upward loan repricing. We estimate that with another 25bp m-m expansion in total L-D spreads, PLB and SB will achieve around 25bp and 15bp q-q L-D spread expansion in 3Q12. The rise in spreads, coupled with lower repo costs, mostly helped offset the impact of CPI-linked bonds on margins, as the security impairment adjusted NIM of the sector contracted only 8bp m-m. NIM for PLB remained flat, while expanding 30bp when adjusted for FX and trading gains, which were higher on realisation of some MTM gains and lower swap costs. Further declines in repo and swap funding costs, a pick-up in CPI base, and additional trading gains should continue to support NIMs in September and 4Q12.

* Asset quality pressures rising – With continued drops in NPL coverage, we analyse the evolution of CoR adjusting for those. Accordingly, the specific CoR of the sector remained high at 113bp, where the July and August average of 117bp was 30bp higher than the 88bp average in 2Q12. Similar to spreads and margins, SB underperformed PLB, turning in 139bp specific CoR vs PLB’s 96bp. Meanwhile, collections under other operating income are also getting weaker. We estimate net CoR of PLB to have reached 76bp in August, vs 65bp in July and 35bp in 2Q12, and of SB to have reached 104bp, vs 82bp in July and 33bp in 2Q12.

* Fee growth steady; some decline in opex growth – Fee growth for PLB was 7% y-y in August, similar to y-y growth in 1H12. SB’s growth slowed to 4% y-y from 12% in July, but was still better than the 1% y-y rate in 1H12. Opex growth as of July and August slowed by about 3ppt y-y for both PLB and SB to 10% and 8%, respectively, vs respective 1H12 y-y growth rates of 13% and 11%.