JP Morgan equity research team put Akbank, Garanti, Isbank, and Yapi Kredi on Negative Catalyst Watch on account of shaprly rising costs and high valuations vs EM peers. The reprot was also published in the Turkish press, and seems to have taken the sails out of a mronnig rally. The main stock index, BİST-100 is still up by 0.5% vs 1.32% at the opening hours.
This is summary of JP Morgan report:
Core trends to worsen in the near term, placing on Negative Catalyst Watch into 4Q23 results
We are excited about the macroeconomic normalization in Türkiye and the resulting positive long-term outlook for the banking sector. We forecast ~30% ROTEs for Turkish private banks in 2024, with the expectation that this level will remain sustainable through 2026E, even as inflation subsides. Assuming a simultaneous easing in COE (JPMe 35%), this creates an appealing long-term re-rating opportunity from the current 0.9x 2024E P/TBV.
Yet we see core operating trends worsening in 4Q23E-1Q24E as the cost of macro readjustment flows through bank balance sheets and P&Ls, driven particularly by higher-than-expected margin pressures and rising risk provisions, which we think will weigh on sentiment in the short term.
Considering the strong share price performance ytd with XBANK up 12% vs CEEMEA Financials flat, we approach 4Q23 earnings (starting on 29 Jan) cautiously and place Akbank, Garanti, Isbank, and Yapi Kredi on Negative Catalyst Watch.
Core operating trends to worsen in the near term
Sector data shows core margins failed to post a recovery in 4Q23, driven by intense TL deposit repricing and slower back book loan pass-through. Coupled with lower CPI linker income and a sharp rise in swap costs, we see banks’ NII declining 29% on average QoQ (-43% YoY), with NIMs compressing 2%-pts. Margin pressures are here to stay for at least 1-2 additional quarters while back book asset repricing continues, and we see additional risk from FX KKM conversion efforts, where the heavy lifting still lies ahead.
Cost of risk is another focus area as banks are signalling a visible rise in 4Q23 in a first sign of normalization, reflecting the higher interest rate environment as well as large ticket idiosyncratic NPL inflows, with JPMe average CoR up 1.2%-pts QoQ to 1.6%.
Reducing FY23E-25E earnings ahead of 4Q results
We reduce FY23E EPS by 6% reflecting increased margin pressures, higher swap costs, and higher cost of risk, which are partly offset by a strong fee performance as well as lower-than-usual tax expenses in the quarter. We also cut FY24E-25E earnings by 10%/2% largely on mark-to-market changes reflecting our conversations with the companies as well as latest industry data points.
Re-rating above book is a long-term trade with bumps on the road
Turkish private banks have performed well since the macro readjustment has begun and now trade at 0.9x 2024E P/TBV. The sector is up 12% ytd vs CEEMEA Financials broadly flat. At 30% average ROTEs and 35% COE we find current valuations fair, but there is a good case for a continued gradual re-rating assuming COE compresses over time in line with inflation.
Whereas foreign interest in the sector has increased visibly, we feel new investors are not in a rush to play the COE theme and await signs of sustainable improvements in core earnings, while domestic retail participation shows signs of retreating likely as a result of the macro readjustment and high deposit rates.
As such, and taking into account the strong share price performance ytd as well as our expectation for worsening core trends, we approach 4Q23 earnings cautiously and place Akbank, Garanti, Isbank, and Yapi Kredi on Negative Catalyst Watch.
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