Margins narrowing; volumes short of compensating; earnings quality
dubious… So, what do we have other than high capitalisations?
Beware of the final quarter -- Despite the expected qoq margin erosion and flat volumes, the banks
are likely to post satisfactory numbers for 3Q09. However, as lending competition gains momentum with
rates coming down; deposit costs remain sticky amid limited lending growth; and mark-to-market gains
tail off with the easing cycle drawing to a close, 4Q09 looms to be the worst quarter of the year for the
banking sector. On top of these operating negatives, banks are also likely to be inclined to saddle their
remarkable 2009 P/Ls with extra provisions, in a bid to somewhat normalise their bottom lines and set
the stage for higher net profits yoy in 2010.
Will lower rates trigger loan growth? -- Banks have slashed their annual mortgage rates by 400bp
over the past three months. Declines in yields driven by competition have been more moderate in other
loan segments. Bluechip companies are able to obtain short term financing at a mere 9%, even below
the marginal cost of deposit, while credible SMEs can borrow at 13%, 300bp below the level of only a
quarter ago. Deposit costs, on the other hand, are relatively stickier with rates touching 10% for larger
amounts. The banks are able to expand their profits only via volume growth, which is not quite in sight
yet -- other than some activity in mortgages and foreign currency loans.
Isolating the effects of the easing cycle -- The bulk of the profits generated in 2009 stemmed from
aggressive rate cuts. Adjusting the P/L for trading gains and extraordinary margins, the net profit of the
sector comes down by 30%. There is also a questionable contribution from the restructuring of loans.
Some banks consider loan restructuring as a regular business practice and oppose the treatment of lower
provision expenses as one-off. If we assume that the banks have restructured closely monitored loans
corresponding to c.2% of total lending, there should be another 20% one-off, which implies that up to
half of the ‘09 net profits could be questionable. Halkbank and Garanti remain as the most profitable
banks, even after the adjustments, while the steepest deterioration is seen in the case of Vakifbank.
The true level of the NPLs -- Banks managed to mask a sizable percentage of their NPLs through
restructurings. If we were to adjust the sector’s 1H09 NPL ratio (4.7%) for less-than-90-days overdue
loans (5.2%) and the restructured part of those closely monitored ones (c.2%), the figure would increase
to 12%. We expect official NPLs to peak in the final quarter of the year at 5.5-6%.
Very well capitalised -- Fuelled by the Central Bank’s implicit capital support via aggressive rate cuts,
the capital adequacy ratio (CAR) of the sector climbed to 19.8%, 300bp above the crisis-hit CAR level
back in October 2008. Note that even if the TRL depreciated by 25%; the sector’s NPL ratio doubled; and
bond yields rose by 500bp, the CAR would still remain above the legal limit.
BUY Halkbank, Garanti and Isbank – We continue to keep Halkbank, Garanti and Isbank as our large
cap picks versus YKB, Vakif and Akbank as the least favourites. TSKB, which is set to benefit the most
from the recently implemented investment incentive scheme, is our top idea in the midcap universe.