The market’s muted reaction to the banks’ strong Q1 profits implies a re-rating requires
earnings to recover from recurring sources instead of trading gains and provision
reversals. Yet, the near-term prospects have worsened as recent lira weakness has
delayed the turning point for inflation and funding costs.
Hence, we move the inflection point for NIM to Q4 and cut FY21e core pre-provision income (PPI) by 2%, although we raise headline earnings by 23% on non-core income. The banks offer deep value medium term, we think, but they lack catalysts to draw back investors until Q4.
Despite near-term challenges, we remain convinced that banks’ core PPI could rise by
c60% next year as inflation falls and gives way to a full NIM recovery. We fine-tune our
FY22e earnings and see all four banks trading below 3x PE. True, COE is high with bond
rates at c18%. Yet, banks’ earnings yields (inverted PE) far exceed this hurdle. Risk premia looks fully priced in, but FY22e earnings are not.
Is the re-rating contingent on an improvement in inflation and funding costs?
This is the third time we have had to delay NIM recovery forecasts this year. The first
two reflected rising rates, while the most recent is because rates are not falling. Our
analysis implies our FY22 NIM forecasts would be met even if rates remain at the
current elevated levels throughout next year as assets should continue to reprice
upwards, while liabilities have already done so.
Hence, our ROE-driven re-rating thesis should hold. In a high, sustained rate environment, the re-rating of banks looks a matter of time; for this patience, our new TPs imply upsides of 47-81%. Upgrade YKB to Buy (Hold); all four private banks now rated Buy
On 2022e 2.2x PE, 0.35x PB for 16% ROE, the banks look attractive. We raise FY21/22/23e earnings by 23%/6%/4% and TPs by 7% on average. Garanti (Buy) is our preferred stock for its superior returns and proxy status. Upgrade YKB to Buy as MSCI exclusion headwinds are removed. Retain Buy ratings on Akbank and Isbank.
Source: HSBC Global Research