GARAN: 2Q Preview & Target Price Revision – Mind the ROE Progress

Earnings recovery and attractive valuation support share performance

Garanti share price is up 15% since our upgrade in early May vs. the 4% fall in BIST-100 during the same period. In line with our views outlined in the upgrade note, macro uncertainties that keep Turkey’s CDS (389bps vs. 400bps), interest rate and REER at stressed levels remain; while potential short-term catalysts that could have propped up TL (postponed easing, FX flow momentum, local selling into USD strength) have failed to leave an impact. What has driven the recovery in the share price performance has been the earnings recovery and the Bank’s attractive 2021E 0.49x P/BV and 3.4x P/E.

Expect strong 2Q results with 17% quarterly ROE  

We estimate TL2.8bn 2Q solo net income (+9% q/q, +77% y/y), corresponding to 16.9% quarterly ROE (1Q: 16.1%). We expect NII to increase by 11% q/q to TL7.0bn (+30% y/y), despite slight decline in TL spreads on elevated funding costs; supported by higher CPI linker income contribution of TL1.4bn vs. TL1bn in 1Q (with yield assumption raised from 13% to 16%). We estimate swap costs to remain elevated at TL2.5bn (1Q: TL2.3bn) and trading line to come in negative TL1.1bn this quarter (in absence of bond sale profits and lower revenues from hedge positions) vs. +TL70m in 1Q. We understand the NPL inflows has remained negative in 2Q amid strong GDP growth. Parallel to our long held view regarding what sets Garanti apart, the Bank’s conservative provisioning policies and strong buffers would pave the way for lower provision costs (TL3.3bn vs. TL5.9bn in 1Q) and a higher ROE for the quarter, despite the said headwinds. We expect fee income to be up by 55% y/y (TL2bn) whereas OPEX remain in check at 18% y/y (TL2.7bn).

2021 net income estimate 13% above consensus

We expect Garanti to maintain its leading position in ROE progression this year on relative strength in TL spreads, high fee income growth and lower cost of risk, despite higher inflation, funding costs and pressure on NIM. Given the Bank’s proven track record in managing short-term macro volatility as underpinned by 1Q results, we reiterate that the decisive factor for full year earnings would be asset quality trends. Strong GDP growth and BRSA’s decision to extend temporary NPL classification rule of 180 days until end September lower the short-term risks on this front. We underline once again that Garanti’s strong coverage build-up since 2018 and its ample free reserve buffers (TL4.8bn) add an extra safety margin against earnings volatility versus peers. Another point of strength is the strong capital position (17.4% CAR, 14.7% Tier-I, TL18bn excess capital, as of 1Q21), which gives the Bank ammunition for growth, as well as higher flexibility in tapping the increasingly competitive TL deposit market. With this background, we raise our 2021E net income to TL10.5bn (previously TL9.7bn), 13% over Bloomberg consensus.

Target Price raised from TL11.00 to TL11.80

Our valuation is based on 17.0% sustainable ROE (previously 16.0%), 16.0% risk free rate (unchanged) and a 5% equity risk premium (unchanged), resulting in 2021 Target P/BV of 0.68x (previously 0.61x). We underline upside risk to our Target Price in case of sharper than expected decline in inflation and long-term interest rates leading to lower COE and higher Target P/BV. Conversely, further weakness in TL, higher inflation and elevated funding costs are the key downside risks.



Source: Y.F Securities Research