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…
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.
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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