This is an excerpt from HSBC Research Note! PA Turkey does not do equity research, or endorse the views expressed herein.
Key Points
- Disinflation path next year looks mostly priced in following a profound rally year-to-date; we remain selective
◆ Garanti stands out as an exception, where Q1 margins suggest much stronger earnings than the market expects, and a low PE
◆ We revise earnings and TPs: upgrade Garanti to Buy; downgrade Akbank to Hold; we see value in Garanti over YKB (retain Hold) Divergent revenue dynamics suggest relative value: Garanti’s 1Q24 results showed that lower exposure to swaps and CPI linkers works better in a high real rate environment.
We expect its earnings to grow by 24% in 2024. YKB, on the other hand, saw heavy margin contraction from its high wholesale funding exposure and a normalising CoR vs a low base; we expect its 2024 earnings to fall by 27%. That puts Garanti’s ROE 13pp/8pp above YKB for 2024/2025e, which isn’t captured in valuations – YKB trades at a c15% premium on 1-year forward P/B basis. A potential sale of YKB could be a catalyst, but the price range quoted in the media looks high in the context of EEMEA banks.
Still expect solid 2025 earnings, but...
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The Central Bank of the Republic of Türkiye’s (CBRT) last hike pushed the NIM recovery out by a quarter, in our view; we cut our 2024e earnings by 6% on average. Yet, the narrative for next year still holds. We see ample room for a reduction in funding costs as HSBC forecasts inflation to fall towards 30% by YE25. Given the banks’ rate-sensitive liabilities, we see NII growth of 285% in 2025 on average. That puts them in a unique spot since NII has already peaked elsewhere in EEMEA. We forecast Turkish bank earnings to grow 120% in 2025e vs almost no growth for the other EEMEA banks we cover.
…they seem mostly priced in
Turkish banks’ share prices have risen 75% YTD as investors have bought the macro normalisation story ahead. Yet, Garanti’s resilient margins don’t seem priced in: our 2024/25e earnings are 21%/65% above consensus; and 2025e PE at below 3x looks attractive vs EEMEA banks (Polish banks 5.5x, Greek banks 7.5x, OTP 5.5x). We upgrade the stock to Buy. Elsewhere, valuations look fair.
[embed]https://www.paturkey.com/news/citi-research-on-turkish-bank-shares-neutral/2024/[/embed]
We downgrade Akbank to Hold after its c15% outperformance of local peers in three months. Its 2025e 1.3x P/B is in line with Polish banks, but its cumulative capital return for next three years is subpar. We retain our Hold rating for Isbank on depressed short-term margin dynamics and a relatively lower capital position. We retain our Hold on YKB on its lacklustre near-term margins and stretched valuation vs domestic peers. We discuss its potential sale to FAB and compare reported valuation ranges with our coverage inside.
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