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