BANKING OUTLOOK 2008 REINITIATION OF COVERAGE
Year of funding
Turkish banking sector experienced a robust period… Banks funded growth through security liquidation
since 2002. The portion of the securities in the banking assets declined substantially over the years from
40% in 2002 to 28% as of 2007. The growth in loan portfolio contributed to fee income and higher yield
retail loans replaced maturing securities. The industry experienced substantial annual loan growth of 46% on
the average on the back of the base effect since 2002. Banking returns were hefty due to the declining rate
environment, strong demand generated through strength of currency and expansion in profitable retail lending.
Assuming a similar growth trend was presumptuous… On the back of weak funding base, it was
apparent that the system could not justify similar growth experienced between 2002 and 2007. The positive
effect of decreasing interest rates and liquidity already freed from redeeming securities will have a reduced
amount of contribution to growth and profitability in 2008. As savings rate is substantially low in Turkey, the
major bottleneck seems to be YTL funding which will be the determinant factor in growth. The problem with
YTL funding is clearer with YTL loan/deposit ratio, which reached 94% as of YE2007 for the sector. From
this level on, it is evident that the banks will compete for scarce YTL sources. This factor, in the end, will
lead to decline in spreads on YTL assets and liabilities and depress overall margins.
Spillover effects of international funding environment will be limited to costs… Structural funding
problems on YTL are apparent. With no rate cut expected for 2008 we project YTL deposits cost to
increase gradually. Also, international funding problems increased swap costs that major Turkish banks are
heavily dependent. 5Y CDS spreads doubled to 300 bps levels in the past 6 months. Assuming that
funding environment should clear out late 2008, the negative effect of financial crisis is expected to be
limited to costs. Similarly, we do not expect substantial problems on syndication rollovers apart from
increase in costs.
There is still substantial potential in the banking system. The level of fee income and low penetration in
retail loans suggest substantial value to be extracted. However, we believe the process will be gradual and
the expansion plans to achieve this value will generate more cost than benefits initially. In terms of overall
banking sector, we expect 28-30% annual loan growth on the average in the next 5 years.
Risks – Overall slowdown of economy and increasing FX rates might take its toll on NPLs. Consumer
protection draft law, as is, which will depress fee and interest income, is another major risk especially for
YKB, Garanti, Akbank and Isbank. In terms of legal issues, off-shore transaction tax under investigation
and pension fund transfers to social security system, are our major concerns.
We rate Turkish banking sector as MARKETWEIGHT with a negative bias… When we look at
international comparison, Turkish banks do not have substantial upsides trading at 8.0x 200(E P/E and
1.6x 2008E P/BV. The market has attached similar risks to Hungary, South Africa and Turkey due to similar
economic imbalances. Most importantly, we cannot quantify the political risk regarding AKP closure case.
Although we rate them as Marketperform, we like Garanti and YKB among the big banks.
We upgrade TEB as Outperform due to depressed market cap and long term prospects. Trading at
7.8x 2008E P/E and 1.0 2008E P/BV, the stock is a definite bargain. TEB is over punished by the rights
offering announcement of YTL145mn. We believe the story is intact in terms of growth.
We believe worst is over for YKB as the retail market share is due for substantial improvement in 2008.
Although expansion costs might continue to weigh in, we see long term prospects in consumer lending.
The proceeds from the sale of YKSGR will also be a catalyst for growth.
Garanti is definitely the premium bank for investors betting on long terms prospect of Turkish Banking.
With limited negative surprises, strong loan growth expectation and an upside potential of 19% to our
valuation target of USD12.8bn, Garanti is a definite pick for a market reversal.
We advise investors to avoid Halkbank as the possibility of a block sale is unlikely in 2008 and news of
an SPO is back on the street. We also have fundamental concerns regarding asset quality of the bank.
Table of Contents
A Snapshot of Turkish Banks 3
ternational Comparison 4
sumptions 5
cro and Sector Developments 6
gal and Legislation Issues 14
ks in Perspective 15
ks’ Section 22
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