Short-term recovery from recent lows likely
Garanti share price is down 30% since our downgrade in mid-January vs. the 7% fall in BIST-100 during the same period. While the macro uncertainties that keep Turkey’s CDS, interest rate and REER at stressed levels remain, we think that GARAN is oversold at 2021E P/BV of 0.43x and P/E of 3.2x. Short-term catalysts behind our upgrade are i) CBRT decision to keep policy rate unchanged until inflation heads down, ii) recent local selling into USD strength and iii) positive FX flow momentum on external payment vs. tourism revenues trajectory (Page 2); which all should support TL.
Strong 1Q results with quarterly ROE of 16.7%
The Bank has announced 1Q solo net income as TL2.5bn (+128% q/q, +55% y/y) last week, implying 16.7% (4Q: 7.3%) quarterly ROE. NII declined only 4% q/q to TL6.3bn (+12% y/y) on well managed funding costs and asset growth performance, corresponding to 110bps quarterly decline in swap adjusted NIM to 4% from 5.1% on higher swap costs of TL2.3bn (4Q: TL1.6bn) and lower CPI-linker income of TL993mn (4Q: TL1.5bn). Trading gain of TL70mn supported quarterly net income thanks to Eurobond sale and revenues from hedge positions. Positive highlight of the quarter was higher other income of TL2.9b on provision reversals and strong collections. On the asset quality side, despite of the increase in nominal NPL portfolio due to the currency devaluation, NPL ratio came down to 4.5% in 1Q from 4.6% in 4Q on strong collection performance and denominator effect. Provisioning costs increased by 108% q/q to TL5.9bn (+5% y/y, YFe: TL3.5bn) with a quarterly total net CoR of 278bps (4Q: 291bps), including free provision of TL150mn set aside in 1Q (total free provision buffer: TL4.8bn). Fee income was up by 11% y/y whereas OPEX was up by 13% y/y.
Raising 2021 net income estimate to 10% above consensus
We expect Garanti to maintain its leading position in ROE progression this year with upside risks to earnings in case of a benign macro scenario that meets the second half expectations of lower inflation, leading to lower funding costs and improved spreads. Given the Bank’s proven track record in managing short-term macro volatility as underpinned by 1Q results, the decisive factor for full year earnings would be asset quality trends. Strong GDP growth and BRSA’s reported plans to extend temporary NPL classification rule of 180 days until year-end lower the short-term uncertainty on this front. We maintain that Garanti’s strong coverage buildup 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 at TL9.7bn level (previously TL9.1bn), 10% over current Bloomberg consensus (details on Page 3-4).
Target Price revised from TL12.40 to TL11.00
Our valuation is based on 16.0% sustainable ROE (unchanged), 14.0% risk free rate (+200bps) and a 5% equity risk premium (unchanged), resulting in 2021 Target P/BV of 0.61x (previously 0.74x). 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.
Source: Y.F Securities Research