Turkish Banks: Still cheap but less cheerful

Going through an easing cycle but concerns on inflation still lingering

Following the CBRT’s 100 bps rate cut in September 2021, discussions evolved around whether an easing cycle without the support of improving inflation expectations is sustainable. We paint a rather constructive scenario whereby further rate cuts would be matched by lower inflation numbers. Though, different from previous easing cycles, room for rate-cuts would be limited as we forecast 2022-end policy rate to be 350bps lower than the current level. Even this lower cost of funding would be higher than the cost of credit in the height of 2020 credit boom. This reflects itself in rather muted earnings growth for banks for 2022E.

2021 EPS estimates raised thanks to much better cost of risk Already evidenced by 1H results and 3Q earnings expectations, TR private banks are expected to post impressive earnings growth (or 50% for our coverage) thanks to better volumes and lower cost of risk offset by tepid improvement in core spreads in 2021E. In this note, we raise our 2021 EPS estimates by 20% for five banks under coverage. For 2022, our estimates are conservative on cost of risk side albeit we believe loan volumes will continue to grow across the board. Hence, while we expect more modest earnings growth of 21% y-y for 2022, we anticipate pre-provision earnings to grow 32% y-y.

TR banks cheapest across EM. GARAN remains our top pick; ISCTR can be a come-back kid Due to high nominal cost of equity and volatile Turkish Lira, the TR banks continue to trade at a hefty discount (80%) to EM peers on 2022E P/E basis. We believe a meaningful re-rating will depend on anchored inflation expectations and lower risk premia. We embrace a Neutral stance in terms of the weight of banking sector in portfolios. GARAN remains our preferred pick with new a TP of TRY12.41. ISCTR’s banking earnings are likely to grow more notably in 2022. Given its depressed valuation, ISCTR can be the stock for bargain hunters. We continue to rate AKBNK and YKBNK as BUYs while VAKBN is kept at HOLD.



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