Equity report by HSBC Global Research
Outlook summary
- Last six months’ strong performance brought 2024e PB to 80x which looks fair in the context of EEMEA banks
◆ Temporary earnings weakness in Q4/Q1 driven by a spike in deposit rates may drag shares, making them seem attractive
◆ We increase our earnings estimates on stronger fees; raise TP to TRY27.50 (from TRY22.00), but downgrade to Hold
We see a balanced risk/reward at 0.80x 24e PB
We remain sanguine on the earnings outlook of YKB, forecasting a 2023-25 CAGR of 42%. However, the shares appreciated 65% in nominal terms and outperformed BIST100 by 53% since July 2023 and the 2024e PB has reached 0.80x which seems a balanced risk/reward.
We raise our 2024e/2025e earnings 16%/12% on higher fee income assumptions, and raise our TP by 25% to TRY27.50 from TRY22.00, but downgrade to Hold from Buy.
Our TP implies 1.0x PB; we think it is too soon for YKB to trade above its book until inflation enters a decreasing trend thereby unlocks lower COE and revenue tailwinds
Until then, weak 4Q23 and 1Q24 results owing to rising deposit costs in the system could pose short-term overhangs, which could make the shares look more attractive.
Recent spike in deposit costs delays NIM recovery to 2Q24
Turkish Airlines: Outlook improves, yet valuations are stretched
We still see substantial NIM expansion in Turkish banks in the next two years and that forms the basis of our bullish earnings forecasts. Having said that, escalated deposit competition in Nov 2023 and Dec 2023 in a bid to run down currency-protected deposits pushed costs above 50% versus our expectation of 45%. Although we observe some de-escalation, the last two months’ pricing will still take a toll on Q4 and Q1 margins.
Furthermore, tailwinds from CPI linker repricing will be absent in coming quarters. Lastly, we expect trading income to moderate amid low FX volatility and decreasing buy/sell activity of clients.
2024 looks like a transition year. Earnings may spike in 2025
We expect YKB’s core revenues (NII + fees) to grow 65% in FY24. However, normalising trading income, provisions and carry-over growth in opex from last year limits our earnings growth to 16%. Come 2025, we foresee easing funding costs boosting NII while headwinds from the trading line, provisions and opex ease. We therefore project earnings to grow 75%, which could bring ROE above COE.
However, we caveat that this scenario presumes an improving inflation trajectory for which there is not enough evidence yet.
Downgrade to Hold from Buy with TP of TRY27.50 (from TRY22.00)
YKB’s comps don’t look as attractive after the recent rally. Its 2024e 0.80x PB is broadly in line with that of EU banks, although the latter offer faster book value growth in hard currency terms, higher dividends and buybacks. Moreover, YKB’s PB valuation is above Greek banks except Eurobank, and at par with that of OTP.
Lastly, YKB’s 2024e PB comes at a slight premium to EM banks in USD terms.
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