Borsa Istanbul 3Q Earnings Review:  The summer of discontent

One of Turkey’s leading investment banks, Yatirim Finans (Invest) became the first institution to disclose the 3Q earnings review by its research department. The post-normalization recovery seems to have boosted banks’ bottom lines YoY, as QoQ they, too suffered a slow down. Non-financials  are forecast to release very poor financial results, but the devil is in the details.


Estimating 30% lower net income y/y in 3Q20



3Q20 earnings season is to kick off next week with EREGL, TAVHL and ARCLK results (deadline for non-consolidated financials is October 30th and November 9th for consolidated financials). We estimate the corporates under our coverage to post 30% y/y decline in net earnings, reflecting negative impact of the pandemic on economic activity, higher financial expenses and FX losses.

We expect Banks’ earnings to increase by 36% versus last year’s low base, while non-financials’ net earnings are expected to decline by 51% y/y. Our bottom-up coverage based 12M target for BIST-100 is 1,400 and we maintain that lower volatility in macro dynamics and lower risk premium for TL assets in general would likely remain key drivers for short-term valuations -given the background of weak earnings.


Banks: another quarter of low profitability

We expect just 13% average drop q/q in net income, with ROE’s ranging between 3-15%. Three key pressure on earnings are i) lower TL core spreads due to funding costs, ii) FX losses, iii) lower fee income due to regulation impact, and iv) elevated cost of risk. With continued pressure on NIM and fees in 2H20, the key driver of profitability during the remainder of the year would be the trend in asset quality; but given the regulation changes that prolongs NPL recognition and the current growth environment, we reiterate that we expect low visibility on this front until 2021.

Economy management’s renewed focus on ‘normalisation’ is a positive development. Although weaker TL and/or higher interest rates do not bode well for short-term earnings, they may facilitate the re-balancing targeted for sustainable growth and continue lower Turkey’s risk premium. This raises the long-term appeal of sector’s valuation multiples that trend near historical lows.

Our current Top Pick in the sector is GARAN due to its strong capital position, provision buffers and earnings momentum. We expect the Bank to post stronger 3Q results (15.0% quarterly ROE before free provisions) versus peers, along with YKBNK (14.5% quarterly ROE).


Non-financials: – 8% y/y EBITDA, while NI is down 51%

We estimate aggregate results of the non-financials under our coverage to be negatively affected by sectors such as aviation and refining, which took the severest hit from Covid-19 pandemic. While aggregate operating earnings is seen 8% lower y/y, we note that, excluding aviation and refining, aggregate EBITDA of non-financials is expected to increase by 24% y/y. Similarly, aggregate net earnings is expected to decline 51%, but excluding aviation and refining, net earnings of non-financials is still seen 5% higher y/y, despite FX losses stemming from TL depreciation.

Among the companies under our coverage; we expect 3Q results to be strong in ARCLK, FROTO, DOAS, CCOLA, TTRAK, AKCNS, BIMAS, SOKM, TCELL and OZKGY. We expect TUPRS, PGSUS, THYAO, KORDS to report relatively weak set of results.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.