TURKISH BANKS - BRSA DRAFT CHANGES

The BRSA has recently introduced some draft amendments on Capital Adequacy Ratio, Provisioning Policy and Credit Card regulations aimed at: 1) healthier loan growth by favouring real sector loans over retail loans and 2) better asset quality by raising the minimum payment on credit card balances. This draft law will remain under public discussion until 26 August, so there may be some amendments in the final version.

According to this draft regulation, the BRSA plans to: 1) increase risk weight on credit card loans by 25-50ppt depending on number of instalments, 2) extend the definition of consumer loans by including credit card loans and overdraft loans in this category, 3) hike the provisioning ratio for overdraft loans and credit card loans by 300bp to 4.0% for loans under Group-I and by 600bp to 8.0% for loans under Group-II, 4) reduce the general provisioning ratio for SME loans by 50bp to 0.5% and remove the general provisioning on export loans, which is 1.0% for now, 5) raise the minimum monthly payments on credit card balances and 6) bring a TRY1,000 cap on credit card limits for credit card holders who earn less than TRY1,000 and whose earnings cannot be determined.

The reduction of the general provisioning ratio on SME loans and export loans could be positive for Turkish banks. However, increasing the provisioning ratio for overdraft loans and credit card loans is likely to have a negative impact on financials as it is planned to be applied on outstanding balances. The BRSA, to smooth the negative impact, noted that banks have to build up at least 25% of the necessary provisioning need by the end of FY13, at least 50% by the end of FY14 and 100% by the end of FY15. Therefore, we are likely to see the major negative impact in FY14 and FY15, as the general provisioning ratio reduction in SME and export loans should be supportive for FY13.

Our analysis shows that the banks that we cover might need TRY1.0b additional provisioning (4.8% of annualized pre-tax income and 0.9% of equity) and the impact on CAR could be 22bp on the downside according to the draft regulation. Among large cap banks Yapi Kredi Bank could be impacted most negatively (-2.2% of equity, -9.7% of annualized pre-tax income and 37bp drop in CAR), while Halkbank could be affected even positively (+0.7% of equity, +2.7% of annualized pre-tax income and just 6bp drop in CAR) as the former has higher exposure to credit card loans, at 16.9% while the latter has higher exposure to SME lending, at37.0%. Yapi Kredi Bank is followed by Garanti Bank (1.5% of equity) and Akbank (1.4% of equity) as these banks have sizeable credit card portfolios. Isbank is likely to be impacted less negatively compared to most peers due to its balanced loan composition and the negative impact on Vakifbank might be broadly tolerable in our opinion. Small cap banks are not expected to be affected negatively as consumer loans constitute less than 25% of total loans in these banks. Net net; we reiterate our BUY call on Halkbank and recommend investors to pair it with Yapi Kredi Bank.

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