Turkish Banks Credit Review 130830
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Transcript of Turkish Banks Credit Review 130830
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7/29/2019 Turkish Banks Credit Review 130830
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Turkey
Fixed Income
30 August 2013 Focus
Prices cited in the body of this report are as of 28.08.13 (except where indicated otherwise).
Please refer to the Disclosures section of this report for other important disclosures, including the analyst certification. Additional disclosures regarding the subject company(ies)discussed in this report can be found athttp://research.vtbcapital.com/ServicePages/Disclosures.aspx.
Cre
dit
Turkish Banks Credit Review
Risk and resilience
We review the performance of the major Turkish banks in the context ofbroader EM credit weakness, driven by a reversal in capital inflows anddeteriorated external financing conditions.
We aim to re-assess the banking sector's resilience to increased liquidityand market risk pressures in view of the significant foreign borrowingsand exposures to local currency government debt.
Based on our peer group analysis, we identify potential credit drivers forTurkish banks as a sector and for particular names, including Akbank,
Garanti, Isbank, Halkbank, YapiKredi, Vakifbank and Finansbank.
Although Turkish bank bonds have underperformed as a sector (withoutextraordinary imbalances or anomalies in individual credit spreads), wecurrently see no fundamental catalysts for a positive re-pricing.
In the longer-term, we cannot rule out negative rating actions (such asputting banks on review for downgrade) driven by a sustained pressureon capital adequacy ratios or changes in the sovereign rating outlook.However, downgrades to sub-investment grade are unlikely, given thebanks generally high loss absorption capacity.
Mikhail Nikitin // +7 495 660 4271 // [email protected]
http://research.vtbcapital.com/ServicePages/Disclosures.aspxhttp://research.vtbcapital.com/ServicePages/Disclosures.aspxhttp://research.vtbcapital.com/ServicePages/Disclosures.aspxhttp://research.vtbcapital.com/ServicePages/Disclosures.aspx -
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Table of contents
Execu tive Summary ...................................................................................................................... 3Market context ......................................................................................................................... 4Balance sheet exposures ......................................................................................................... 5Asset quality ............................................................................................................................. 6Liquidity .................................................................................................................................... 7Interest margins ....................................................................................................................... 8Capital adequacy / Regulatory environment ............................................................................ 9Peer comparison (1/3)............................................................................................................ 10Spread performance .............................................................................................................. 13Relative value ........................................................................................................................ 14Akbank (Baa2/--/BBB) ............................................................................................................ 15Garanti Bank (Baa2/BB+/BBB) .............................................................................................. 18Isbank (Baa2/BB+/BBB) ......................................................................................................... 21Halkbank (Baa2/--/BBB-)........................................................................................................ 24Yapi Kredi Bank (Baa2/BB+/BBB).......................................................................................... 27Vakifbank (Baa2/BB+/BBB-) .................................................................................................. 30Finansbank (Ba2/--/BBB-) ...................................................................................................... 33
Disc losures ................................................................................................................................. 36
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Executive Summary
Turkish banks credit: risk and resilience
The gradual deterioration in liquidity ratios has followed rapid lendingexpansion and acceleration of capital inflows on the back of improvement in
Turkish risk perception. In our view, Turkish banks current financingstructure implies a moderate refinancing risk, given that the sector morethan doubled foreign borrowings since 2009.
Dependence on external funding is not critical as it has been balanced by
expanding deposits. At the same time, increased reliance on short-termwholesale funding makes the banks balance sheets structurally sensitive tore-pricing/rollover risk.
We estimate the share of foreign bank funding in the banks total liabilitiesas an early indicator of potential risk.
Furthermore, we estimate the impact of mark-to-market revaluations of thebanks bond portfolios. Turkish banks government bond holdings supportliquidity in a volatile interest rate environment, although increased use ofrepo financing implies a higher level of asset encumbrance. This mightexacerbate pressure on the banks CARs through capital charges on'restricted' available-for-sale portfolios, in our view.
We calculate conservative NPL and coverage ratios (including the loansclassified as close-monitoring into the risk group II under BRSA reporting
standards) as the key asset quality metrics. Although we note Turkishbanks' resilient capital buffers and strong asset quality, we see no catalystsfor a positive re-pricing in the short-term. If anything, negative factors aremore readily available in the current market environment, and we believethat rating agencies might react to any signs of a deterioration.
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Market context We focus on recent developments in Turkish banks
credit profiles in the context of downward pressure
on Turkish assets due to a reversal of capital
inflows and heightened political uncertainty. Since May 2013, the Turkish lira has lost 10% of its
value against the USD/EUR basket. Government
bond yields have surged, triggering the widening of
credit spreads, particularly in local currency paper.
The banking sector is exposed to moderate rollover
risk as its short-term borrowings have more than
doubled since 2009. The growth in foreign debt has
been counterbalanced by the expanding depositbase and the enhanced policy funding options.
The Central Bank of Turkey (CBRT) has adopted arefinancing mechanism through a combination of
short-term repos and lending windows. By varyingthe volumes of liquidity provided to the market and
absorbed by the CBRT, interest rates are being
maintained within the policy rates corridor.
Given the pressure on EM currencies and debt, we
believe the CBRT might be forced to bring interest
rates back to the upper bound of the corridor to
defend the lira. Further interest rate direction is
uncertain, as the CBRT might opt for another round
of controlled volatility, with potentially negative
consequences for the corporate sector and,
indirectly, banks.
In an unlikely scenario in which Turkish banks
cannot roll over their external debt, the CBRT might
step in by injecting liquidity to banks from its FXreserves. However, banks would be forced to sell
domestic assets in this case, implying furtherpressure on the lira and lira-denominated bonds.
Figure 1: Key policy rates Figure 2: Exchange rate (TRY vs USD/EUR basket)
Source: Bloomberg, VTB Capital Research Source: Bloomberg, VTB Capital Research
Figure 3: TRY benchmark bond yields, % Figure 4: USD benchmark bond spreads, bp
Source: Bloomberg, VTB Capital Research Source: Bloomberg, VTB Capital Research
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
O/N market rate CBRT policy rate
CBRT O/N borrowing rate CBRT O/N lending rate
CBRT average funding rate
1.85
1.9
1.95
2
2.05
2.1
2.15
2.2
2.252.3
2.35
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
F eb-13 Mar-13 Apr-13 May-13 J un-13 J ul-13
2Y 5Y 10Y
0
50
100
150
200
250
300
350
F eb-13 Mar-13 Apr-13 May-13 J un-13 J ul-13
TURKEY23 TURKEY30
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Balance sheet exposures Turkish banks balance sheet structure has evolved
from a fully deposit-funded model (LTD below 1x) to
a more aggressive, but overall well-balanced,
model, supported by a gradual diversification offunding sources.
Rapid lending growth resulted in a decreased share
of liquid assets as banks started to reduce their
holdings of fixed income securities, especially after
Basel II capital regulations were introduced in 2012.Still, sovereign bonds the banks key repo-eligible
collateral with a high utilisation ratio areincreasingly important for the sectors liquidity given
that the share of repo is some 8% of total funding.
Turkish banks generally do not take significant
unhedged FX exposure. They might be exposed,
however, to elevated market risk as a result of the
volatility in the bond markets. This is largely a riskfor the banks capital positions through revaluation
of their available-for-sale portfolios: elsewhere in
this report we estimate the effect of MtM losses on
the individual banks capital in 1H13.
On the funding side, we highlight the role of
interbank loans and deposits, including syndicated
loans and trade finance. Turkish banks
dependence on foreign bank loans is not critical:
their share has not exceeded 15% of total liabilities.
However, this funding source is generally short term(one-year facility is an industry standard in the
syndicated loan market), implying a rollover risk at
least for some banks. Borrowings on the Eurobondmarket helped to strengthen the maturity profile of
Turkish banks, but these became material only
recently, after the sovereign rating upgrades.
Figure 5: Loan-to-deposits ratio Figure 6: Simplified asset structu re
Source: BRSA, VTB Capital Research Source: BRSA, VTB Capital Research
Figure 7: Simplified non-debt fundi ng structur e Figure 8: Repo financing
Source: BRSA, VTB Capital Research Source: BRSA, VTB Capital Research
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
2008 2009 2010 2011 2012 J ul-13
Total loans Total deposits Loan-to-deposit ratio (RHS)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2008 2009 2010 2011 2012 J ul-13
Cash and CBRT Due from banks Securities Loans
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2008 2009 2010 2011 2012 J ul-13
Repo financing Foreign banks
Retail deposits Corporate deposits
Domestic banks
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
2008 2009 2010 2011 2012 J ul-13
Restricted securities* / Total securities
Repo financing / Total non-debt funding
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Asset quality The sectors key strength is its strong asset quality,
supported by the exceptionally robust performance
of the Turkish economy over the past few years.
Whether the non-performing loans have alreadybottomed out as the economy is past the bullish
phase of the economic cycle is less certain now. But
the current indicators such as the share of NPLs
below 3% of total loans or coverage ratio above
75% on a specific provisioning basis positively
characterise the credit standing of the Turkish
banking sector as a whole.
Single-industry and single-borrower risk
concentrations are relatively low (compared with
peer EM banks). The sectors key exposures are in
manufacturing, trade and services, with the
increased share of retail lending and SMEs. Based
on the available data, we have not identified any
excessive related-party concentrations at major
banks, even though some of them are controlled by
family-owned multi-industry holdings.
In retail lending, consumer loans, credit cards and
other unsecured personal finance products have
been the key growth driver. NPLs have dropped to
the historical lows on the back of accelerated
growth, although the increased cost of risk and
restructured loans in the segment might indicate a
potential trend reversal. On a positive note, banks
have almost ceased origination of FX-denominated
consumer loans, while effective interest rates onother high-risk products are subject to explicit
regulatory caps since 2006. We also note increased
credit bureau coverage from 43% of adult
population in 2009 to 63% in 2012, following the
development of the centralised Credit Bureau of
Turkey (KKB) based on the membership by all
major banks.
Figure 9: NPLs and coverage ratio, % Figure 10: Industry concentration s
Source: BRSA, VTB Capital Research Source: BRSA, VTB Capital Research
Figure 11: Retail lending, TRY bn Figure 12: NPLs in retail lending
Source: BRSA, VTB Capital Research Source: BRSA, VTB Capital Research
70.0
72.0
74.0
76.0
78.0
80.0
82.0
84.0
86.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Total NPLs / Total loans, %
Specific provisions / Total NPLs, % (RHS)
Agriculture andforestry
4%
Manufacturing19%
Electric, gasand waterresources
4%
Construction6%
Wholesale andretail trade
12%Hotels andrestaurants(tourism)
2%
Transportationand
communication4%
Financialintermediation
4%
Real estatebrokerage, rentand advisory
3%
Individuals33%
Other9%
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Housing Vehicle Personal finance
Other consumer Credit cards
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Housing NPLs / Housing loans
Vehicle NPLs / Vehicle loans
Personal finance NPLs / Personal finance loans
Credit card NPLs / Credit cards
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Liquidity The gradual reduction in balance sheet liquidity
(adjusted liquid assets as a share of total assets)
has followed the banks more aggressive lending
expansion, particularly in consumer and SMElending, and acceleration of capital inflows on the
back of improvement in Turkish risk perception.
Free liquid assets decreased largely due to the
encumbrance of the banks bond portfolio in regard
to repo facilities. In April 2013, the CBRT estimated
the share of collateral-free government securities,
which could be used by banks in the case of a
liquidity shortfall at 16%, and we believe that the
ratio has not increased since then.
The other important liquidity factor is the CBRTs
reserve requirement policy, allowing banks to hold
required Turkish lira reserves in gold and foreigncurrencies. The total liquidity requirement ratio
(used as a regulatory limit in accordance with the
regulation on banks liquidity adequacy) has been
declining, but remains above the minimum 100%.
Debt issuance by Turkish banks also grew
significantly in 2012, following the sovereign rating
upgrades, albeit from a low base. Total foreign
liabilities, including syndicated loans, are
increasingly important as a funding source. The
banks average external debt rollover ratio has been
hovering around 1x given the significant amount of
short-term borrowings. Still, deposits remain the core funding source for
Turkish banks. In 2012, deposit withdrawals without
incurring a loss of interest were conditionally
allowed by the regulator, aiming to increase the
average maturity generally short-term even if
viewed as largely sticky or core by the hosting
banks.
Figure 13: Liqui d assets (% Total assets) Figure 14: Liqui dity requirement ratio, %
Source: BRSA, VTB Capital Research Source: BRSA, VTB Capital Research
Figure 15: Debt securities issued abroad, USDbn Figure 16: Total foreign liabiliti es ex-repo, USDbn
Source: CBRT, VTB Capital Research Source: CBRT, VTB Capital Research
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Unencumbered securities Cash and cash equivalents
Liquid assets
50
70
90
110
130
150
170
190
210
230
250
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Up to 7 days Up to 1 month
Up to 3 months Up to 12 months
Total liquidity requirement ratio Regulatory limit
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
0.0
10.0
20.030.0
40.0
50.0
60.0
70.0
80.0
90.0
2008 2009 2010 2011 2012 1Q13 2Q13
Long-term Short-term
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Interest margins Margin contraction has been the markets main
concern given the tightened liquidity conditions and
a rise in the cost of funding. However, the sectors
interest margins proved resilient. In fact, due to the
short average duration of both loans and deposits,
any sharp change in funding rates has been offsetby a respective move in lending rates, and vice
versa. In 2012, the sectors average net interestmargin stood at 4.1%.
The CBRT has been determining the maximum
contractual interest rates on credit cards on aquarterly basis since 2006, and on overdraft
accounts since 2013. In fact, these two products are
most profitable for Turkish banks, with
extraordinarily high effective rates of around 60%,
compared to 8.5-10% for housing and auto loans or
12.5-13% for personal installment loans (beforeextra fees and commissions). Fees and
commissions might also be subject to regulatory
intervention, including explicit caps on credit card
fees.
Apart from direct pricing regulation for selected loan
products, there have been cases of a legal
involvement in interest rates policies: in 2012,Turkeys Competition Board launched an
investigation of the 12 major banks related toalleged collusion in determining interest rates on
retail loan products. The competition watchdog
imposed fines up to 1.5% of total revenues (the
largest fine was TRY 213mn, imposed on Garanti);however, these actions have not had any significant
impact on the banks profitability.
Figure 17: W/A interest rates on TRY loans, % Figure 18: W/A interest rates on TRY deposits, %
Source: CBRT, VTB Capital Research Source: CBRT, VTB Capital Research
Figure 19: W/A interest rates on FX deposits, % Figure 20: Average NIM / blended fundin g rate, %
Source: CBRT, VTB Capital Research Source: BRSA, VTB Capital Research
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Jan-0
9
Apr-09
Jul-09
Oct-09
Jan-1
0
Apr-10
Jul-10
Oct-10
Jan-1
1
Apr-11
Jul-11
Oct-11
Jan-1
2
Apr-12
Jul-12
Oct-12
Jan-1
3
Apr-13
Jul-13
Personal Vehicle Housing Commercial
0.0
4.0
8.0
12.0
16.0
20.0
Jan-0
9
Apr-09
Jul-09
Oct-09
Jan-1
0
Apr-10
Jul-10
Oct-10
Jan-1
1
Apr-11
Jul-11
Oct-11
Jan-1
2
Apr-12
Jul-12
Oct-12
Jan-1
3
Apr-13
Jul-13
Up to 6 months Up to 1 year More than 1 year Total
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Jan-0
9
Apr-09
Jul-09
Oct-09
Jan-1
0
Apr-10
Jul-10
Oct-10
Jan-1
1
Apr-11
Jul-11
Oct-11
Jan-1
2
Apr-12
Jul-12
Oct-12
Jan-1
3
Apr-13
Jul-13
USD 3-month USD 6-month
EUR 3-month EUR 6-month
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Average NIM. %
Average cost of interest-bearing liabilities, %
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Capital adequacy / Regulatory environment Turkish banking law gives significant regulatory
powers to the BRSA, a supervisory agency
reporting directly to the prime minister. BRSAs legal
mandate stipulates for aligning the Turkishregulatory framework with that of the EU. Banks
must maintain minimum capital adequacy ratios of
8%, or 12% recommended for banks applying for
the right to issue TRY-denominated bonds and bills.
Basel II regulation was implemented in Turkey in
J uly 2012, after a one-year parallel run for the
simultaneous implementation of Basel I and Basel
II. The rollout of Basel had a limited impact on
capital adequacy (only 20bp decrease in the
systems TCAR immediately following the new
regulation), mostly due to the banks high
profitability and increased subordinated debt
issuance.
The banking sectors TCAR was 16.3% in J une.
The banks capital positions are likely to be affected
by higher impairment charges and significant mark-
to-market adjustments on available-for-sale
securities, but are likely to be supported by
sustainable revenues and strong operational
efficiency.
The share of Tier I equity in total capital exceeds
80%, indicating a limited reliance on subordinated
debt, as well as significant potential for increased
issuance of hybrid debt once Turkish bank
regulations are aligned with Basel III. The existing
LT2 bonds do not have loss absorption features: a
typical structure only includes subordination event
language, i.e. contractual subordination in
bankruptcy, receivership or reorganisation. We
expect these bonds to be grandfathered under new
regulations, with an adequate phase-out period.
In February 2013, BRSA initiated further steps
toward transition to Basel III. The BRSA has
published draft regulations on capital adequacy
introducing the concept of core Tier I and additionalTier I capital as well as Basel-compliant
requirements for subordinated debt. There is no
precise timeline for the rollout of Basel III, but we
understand that the implementation is planned to
start in J anuary 2014.
According to the draft, the minimum Core Tier I ratio
is set at 4.5%, and the Total Tier I ratio at 6%, while
TCAR is supposed to remain unchanged. The
BRSA also prepared draft regulations on capital
protection and counter-cyclical buffer requirements,
as well as liquidity coverage ratios. This part of the
Basel III package is expected to become effective
from 2015.
As an additional tool, the regulator intends to
introduce higher central bank reserve requirements
for banks that fail to meet leverage ratios. Effective
from 4Q13, banks with leverage ratios below 3.5%
are to be required to hold additional reserves,
ranging from one to two percentage points. The
threshold would step up to 4% in 4Q14 and then to
5% in 4Q15. The leverage ratios of most Turkish
banks (reported starting in 2013 for monitoring
purposes only) are significantly above the new
requirement, so any immediate impact for the banks
would be limited.
The Turkish national version of Basel II also
includes a complex interest rate and exchange rate
shock testing, aimed at ensuring that banks hold
sufficient capital to absorb losses from severe rate
movements. The stressed interest rate shift
reporting is incorporated into banks quarterly BRSA
financials.
Figure 21: Turkish banks capital adequacy
Source: BRSA, VTB Capital Research
Figure 22: Simple leverage and sub debt , %
Source: BRSA, VTB Capital Research
10.0
12.0
14.0
16.0
18.0
20.0
22.0
0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Total regulatory capital, TRYbn
RWA, TRYbn
Capital adequacy ratio, % (RHS)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Equity / Total assets. %
Subordinated debt / Total equity. %
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Peer comparison (1/3)
Figure 23: Capital adequacy/leverage Figure 24: Balance sheet liquid ity Figure 25: Fixed income portfo lio
Source: company financials, VTB Capital Research Source: company financials, VTB Capital Research Source: company financials, VTB Capital Research
We use 1H13 BRSA consolidated financials, with
two exceptions, VAKBN and FINBN, for which 1H13
consolidated reports were not available on this
reports publication date. 1Q13 numbers were used
for these two banks. We believe this does not affect
materially the quality of the peer comparison.
We conservatively adjust loan-to-deposit ratios for
bank deposits reported as part of total deposits
under BRSA disclosure standards.
In terms of LTD ratios, all banks in our peer grouphave a conservative level of dependence on non-
deposit funding sources.
Capital adequacy calculated in line with Basel II
requirements is relatively high for all the banks
under review, indicating their sufficient loss
absorption capacity.
We calculate liquid assets as the sum of cash and
cash equivalents, money market placements and
government bonds, adjusted for the accounts
pledged, used as collateral under repo transactions
or otherwise restricted.
The ratio of liquid assets to total assets has been
falling for major Turkish banks over the past few
years, mostly due to the increased use of bond
portfolios as collateral under repo funding. The
overall asset encumbrance is not critical and implies
increased levels of interest rate exposure ratherthan liquidity shortfall.
HALKBK has the highest balance sheet liquidity in
the peer group (and the lowest level of repofinancing). AKBNKs funding policy is currently more
aggressive, given the share of repo financing near18% of the banks total liabilities.
AKBNK also has the largest exposure to
government bonds (25% of total assets), while the
other banks have lightened up on their portfolios. It
is important to note, however, that Turkish banks
bond portfolios usually comprise a significant share
of CPI linkers and floating rate bonds, partially
mitigating market risk exposure. AKBNK is no
exception: on a non-consolidated basis, the share of
CP I linkers was 35% of AKBNKs total securities at
end-1H13.
Government bonds are typically reported as part ofavailable-for-sale securities, implying that the bulk of
MtM revaluation gains and losses are chargeddirectly on capital. In 2Q13 this caused a
deterioration in the banks capital positions, yet
without a dramatic effect on capital adequacy ratios.
AKBNKGARAN
ISCTRYKBNKHALKBK
VAKBN
FINBN
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
1.00 1.05 1.10 1.15 1.20 1.25
TCAR
Adj . LTD ratio
AKBNK
GARAN
ISCTR
YKBNK
HALKBK
VAKBN
FINBN
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
10.0% 15.0% 20.0% 25.0% 30.0%
Repofinancing/Totalliabilities
Adj .l iqu id ass ets / Total ass ets
AKBNK
GARAN
ISCTR
YKBNK
HALKBK
VAKBN
FINBN
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
10.0% 15.0% 20.0% 25.0% 30.0%
Pledged/Adj.totalsecurities
Government bonds / Total assets
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Peer comparison (2/3)
Figure 26: Foreign bank deposits / Total liabilit ies Figure 27: Debt securities issued / Total liabilit ies Figure 28: FX-denominated loans/deposits
Source: company financials, VTB Capital Research Source: company financials, VTB Capital Research Source: company financials, VTB Capital Research
We estimate the share of foreign bank funding in
the banks total liabilities as an early indicator of
potential rollover risk.
Foreign bank funding formally does not contribute to
extension of the average duration of the banks
liabilities: average maturity of bank loans (except
securitization credits and loans from IFIs) is just
about 1 year. However, Turkish banks generally do
have a track record of successful refinancing of
bilateral and syndicated bank debt, even in an
environment of closed international debt markets.
AKBNK, GARAN and HALKBK are almost equally
equally exposed to refinancing risk, given the ratioof foreign bank loans to total liabilities in the 16-18%
range. VAKBN and FINBN are less dependent on
foreign bank loans. The Turkish banks average
external debt rollover ratio is about 100%.
Bond issuance accelerated in 2012 on the back of
increased risk appetite in global debt markets and
following the Turkish sovereign rating upgrades.
The total amount of FX-denominated bank debt
increased from USD 4.3bn at YE11 to USD 13.5bn
at YE12. The share of debt borrowings
(predominantly local currency bonds) in the banks
total funding is still relatively low.
Eurobonds represent an important source of long-
term funding (the average maturity of foreign bonds
issued by Turkish banks now exceeds five years).Given the sharp widening in credit spreads in J une-
August 2013, we believe that it would be a
challenge for Turkish banks to print new dollar-
denominated debt in 2H13 at acceptable price
levels. Combined with CBRT tightening, this might
re-prioritise deposit funding as a key source,
implying short-term pressure on the bank liquidity
and interest margins.
A relatively high level of balance sheet dollarisation
is typical for Turkish banks. At the same time, banks
do not take unhedged currency risk exposures
beyond the regulatory limits. In fact, banks FX-
denominated loans are symmetrically funded by FX
deposits.
GARAN has the highest (but overall balanced)
current shares of both FX loans and FX deposits.
FINBN runs a significant currency risk mismatch as
its almost entirely TRY-denominated loan book is to
a significant extent funded via swapping FX fundinginto TRY.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
AKBNK GARAN
ISCTR
YKBNK
HALKBK
VAKBN
FINBN
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
FX-den.deposits/Totaldeposit
s
FX-den. loans / Total loans
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Peer comparison (3/3)
Figure 29: Trading gains / Revaluation losses Figure 30: NIM vs Cost of risk Figure 31: Non-performing loans
Source: company financials, VTB Capital Research Source: company financials, VTB Capital Research Source: company financials, VTB Capital Research
We estimate the impact of mark-to-market
revaluations of the bond portfolios (classified into
the AFS category) on the banks equity in 1H13.
VAKBN and FINBN are excluded as their
consolidated 1H13 results were not available.
AKBNK reported the biggest change in a MtM
revaluation reserve: a TRY 2.6bn MtM valuation
difference or about 10% of regulatory capital. The
banks TCAR lost 160bp in 2Q13, largely due to the
revaluation effect. AKBNK also reported the largest
share of net trading gains in operating profit,reflecting its above-peer market risk exposure.
For other banks, the impact of the revaluationreserve on regulatory capital was in the 4-6% range
(100-180bp in terms of TCAR). On a non-
consolidated basis, this applies also to VAKBN
(MtM revaluation at 5.6% of the banks total equity).
Turkish banks profitability metrics have remained
solid. Operating performance might come under
pressure toward the end of the year, but it continues
to be supported by strong efficiency and
manageable risk charges.
Unsurprisingly, banks with a higher cost of risk
(FINBN, VAKBN) tend to report higher interest
margins, reflecting their focus on higher-risk/higher-
margin lending products. We note above-peer
margin/risk efficiency of HALKBK, driven by its
largely TRY-denominated, SME-focused loan book.
FINBNs policy not to sell impaired loans partly
explains its higher cost of risk and NPL ratios. At thesame time, loan impairments and respective risk
charges might increase further in 2013 following the
banks retail expansion and a natural seasoning of
the portfolio.
We calculate the sum of general and specific
provisions vs. total impaired loans (including the
loans classified as close-monitoring under BRSA
reporting standards).
On this basis, FINBN shows the highest level of
problem loans, while its coverage ratio is in line with
peers.
ISCTR has reported the strongest asset quality
metrics: its NP L ratio was 1.9% and its close-
monitoring loans was 3.7% of total loans. ISCTR
has an above-peer total coverage ratio but arelatively low specific coverage as it had to create
higher general provisions against its consumerloans from 3Q11, although NPLs and recoveries did
not change materially.
On a specific-only basis, all banks under reviewreported coverage ratios above 75%.
AKBNK
GARAN
ISCTR
YKBNK
HALKBK
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
0.0% 3.0% 6.0% 9.0% 12.0% 15.0%ChangeinAFSM-t-Mreserves/Equity
Net trading gains / Total operating income
AKBNKGARAN
ISCTR YKBNK
HALKBK
VAKBN
FINBN
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0% 5.0% 6.0% 7.0% 8.0%
Costofrisk(annualised)
Net interest margin
AKBNK
GARAN
ISCTR
YKBNK
HALKBK
VAKBNFINBN
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
2.5% 5.0% 7.5% 10.0% 12.5%
Totalprovisions/TotalNPLsand
watchlistloans
Total NPLs and w atchlist loans / Total loans
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Spread performance Turkish bank credit in the Eurobond market has
been repriced wider in the context of a broader
pressure on Turkish and EM assets, but apart
from technicals without a coherent logic driving
the relative movement of individual bond prices.
Bond spreads have widened at least by 100bp over
the past three months. ISCTR18 and VAKBN18
both issued in April 2013, i.e. into an aggressive
demand and immediately before the market startedto soften sold off most heavily, losing more than
10pp in price and adding 215bp and 170bp inspreads, respectively.
Subordinated LT2 issues such as VAKBN22 and
ISCTR22 have outperformed, but largely due to
their relatively low liquidity. As a result, sub-senior
ratios dropped to 1.1x for most issuers. This is not
entirely groundless, given the structuralcharacteristics of the Turkish LT2 debt, but leaves
no room for any upside vs. senior paper.
Bank spreads to Turkish sovereign paper also
widened from a very tight 60-80bp in February to
150-170bp in August. Although it is difficult to
identify fundamental drivers behind the spread
dynamics of individual names, we note the relative
weakness of YKBNK across the curve and the
resilience of FINBN, the highest-yielding name in
the sector.
We note especially sharp and non-discriminatory
spread widening in liquid long-duration, paperincluding GARAN22 and AKBNK22 all trading
wider than 450bp over mid-swaps now. Yields in the
segment are 200-250bp higher than at initial
offerings in 2012 and 1Q13.
Figure 32: Worst performers (Z-spread basis) Figure 33: Top performers (Z-spread basis)
Source: Bloomberg, VTB Capital Research Source: Bloomberg, VTB Capital Research
Figure 34: Bank spreads vs TURKEY17, bp Figure 35: Selected bonds Z-spreads, bp
Source: Bloomberg, VTB Capital Research Source: Bloomberg, VTB Capital Research
0
50
100
150
200
250
3-month spread change, bp 6-month spread change, bp
0
20
40
60
80
100
120
140160
180
3-month spread change, bp 6-month spread change, bp
0.0
50.0
100.0
150.0
200.0
250.0
300.0
Feb-13 Mar-13 Apr-13 May-13 J un-13 J ul-13
AKBNK17-TURKEY17 GARAN17-TURKEY17
HALKBK17-TURKEY17 ISCTR17-TURKEY17
YKBNK17-TURKEY17
150.0
200.0
250.0
300.0
350.0
400.0
450.0
500.0
550.0
F eb-13 Mar-13 Apr-13 May-13 J un-13 J ul-13
GARAN 22 AKBNK 22 HALKBK 20 YKBNK 20
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Relative value Turkish bank bonds have strongly underperformed
as a sector without many imbalances or
anomalies in relative spreads. The only exception
has been the relatively resilient subordinated debt.
We believe that the mid-duration segment (senior
2017s) has the strongest price recovery potential
within a broader market recovery. The best way to
express a constructive view on the sector would be
through YKBNK 15s or 17s, in our view.
At the same time, we see no positive triggers for
such a repricing in the short-term. If anything,
negative factors are easier to identify in the currentenvironment, and we believe that rating agencies
might react to any signs of further deterioration.
In our view, downgrades back to sub-investment
grade are unlikely, but in the medium term wecannot rule out negative actions (such as putting
banks on negative credit watch), driven by the
continued pressure on the banks capital adequacy
ratios, the potentially negative impact of FX volatility
on the corporate sector and/or a generally weaker
economic environment.
Whether the increased downgrade risk is already
priced is uncertain, given that credit spreads have
followed sovereign curve dynamics.
Figure 36: Selected Turkish bank b ond yields
Source: Bloomberg, VTB Capital Research
Turkey
Akbnk15
Akbnk17
Akbnk18
Akbnk22
Garan17
Garan21
Garan22
Isctr16
Isctr17
Isctr18
Isctr22 T2
Halkbk17
Halkbk20
Finbn16
Finbn17
Excrtu16
Excrtu19
Ykbnk15
Ykbnk17
Ykbnk20
Ykbnk22 T2
Vakbn17
Vakbn18
Vakbn22 T2
SBERRURUSSIA
ALFARU
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.50
8.00
0 1 2 3 4 5 6 7 8 9 10
Yield,%
Duration, years
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Akbank (Baa2/--/BBB)Shareholding str ucture:Sabanci Holding, affiliated
institutions and individuals (48.8%), Citigroup (9.9%),
free float (41.3%). Sabanci Holding is one of the largest
family-owned multi-business groups in Turkey, with totalconsolidated turnover of USD15bn. Akbank is the
groups largest entity.
Key balance sheet exposures:
Largely deposit-funded, but increasingly reliant on
the repo market due to the significant investment in
Turkish government bonds (25% of total assets).
About 80% of total securities were blocked as
collateral or restricted under repo agreements at the
end of 1H12, implying a limited liquidity buffer
(money market borrowings are already close to 20%
of the banks funding base; the share of liquid
assets adjusted for the pledged securities is lessthan 15% of total assets).
A significant share of foreign bank loans, potentially
exacerbating risk mismatches, but hedged through
derivatives (within the regulatory limit), without any
significant gaps or refinancing pressures.
Capital adequacy:
Strong Basel II TCAR of 15.7% and Tier I ratio of
15.3% indicate high quality core capital (no hybrid
instruments).
Significant pressure on capital adequacy comes
from an available-for-sale securities revaluationcharge in 2Q13 (TCAR 160bp lower; negative
change in market value reserve exceeded 10% of
regulatory capital at end-1H13).
Figure 37: Leverage and capital adequacy Figure 38: Funding structur e
Source: Akbanks BRSA consolidated financials, VTB Capital Research Source: Akbanks BRSA consolidated financials, VTB Capital Research
Figure 39: Key financials & ratios
2009 2010 2011 2012 1Q13
BALANCE SHEET, TRY bn
Adj. total assets 101.0 118.8 138.7 162.5 163.1
Total loans 46.4 59.0 75.5 93.4 97.6
Adj. total deposits 56.9 64.0 70.5 79.9 79.8
Adj. retail deposits 35.9 38.6 43.2 47.2 48.7
Total wholesale funding 27.5 33.5 45.9 53.1 54.9
Total capital 14.4 17.9 18.1 22.5 22.3
KEY RATIOS
Adj. LTD, times 0.82x 0.92x 1.07x 1.17x 1.22x
Government bonds / Total assets 44.7% 41.3% 30.2% 26.9% 23.3%
Adj liquid assets / Total assets 34.2% 32.9% 26.7% 19.1% 18.2%Total wholesale funding / Total liabilities 31.1% 32.8% 37.7% 37.6% 38.7%
NPLs / Total loans 3.8% 2.2% 1.7% 1.2% 1.3%
Close-monitoring loans / Total loans 5.8% 2.2% 1.7% 3.2% 2.2%
Adj. NIM 5.3% 4.3% 3.6% 4.1% 4.6%
Cost of risk (annualised) 2.3% 1.0% 1.0% 1.3% 1.9%
ROAE 21.1% 18.6% 14.1% 14.8% 15.6%
Total CAR 21.0% 19.9% 18.6% 17.9% 17.3%
Source: Akbanks BRSA consolidated financials, VTB Capital Research
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2009 2010 2011 2012 1Q13 1H13
Total CAR, %
Core capital / Adj RWA, %
Adjusted loan-to-deposit ratio, times [RHS]
Money market
repo payables18%
Foreign bankfunding16%
Debt securitiesissued
5%Savingsdeposits
33%
Corporatedeposits
23%
Other
5%
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(contd) Akbank: credit summaryProfitability:
Consistently sound NIM supported by double-digit
effective interest rates on TRY-denominated loans
(11.1% in 1H13) and an average cost of fundinggradually declining over the past three years.
Strong fee and commission-based income
contributing up to 25% of the banks total operating
profit, backed by credit card fees and insurance
cross-sell.
Above-peer (but potentially volatile) contribution of
trading gains, given the market risk exposures and
revaluation reserve on investment securities
(charged directly against capital).
Credit risk:
Strong asset quality: NPLs below the market
average (1.2% vs. 2.7%); annualised cost of risk
below 2% (about 70bp on a quarterly basis).
Coverage ratio above 2x (including general
provisions), with sufficient 50% coverage of total
NPLs and watchlist loans.
No significant reported single-name/single-industry
concentrations in lending (including to the banks
related risk group).
Rapid loan growth largely driven by unsecured
consumer loans and mortgages (21% and 25%
YTD, respectively) as well as SMEs, implying a
decrease in FX-denominated loans (from 44% in
2009 to 32% in 1H13) and reversal in the banks
balance sheet currency position.
Market risk :
Significant unhedged exposure to the domestic
sovereign bond market (25% of total assets),
implying some correlation between the bankscapital position and sovereign debt performance.
About half of the banks portfolio consists of FRNs
and CPI linkers, partially offsetting the interest rate
risk.
Above-peer revaluation reserve charge on capital in
2Q13 due to the unrealised losses on fixed income
instruments (about 11% of regulatory capital at the
end of 1H13).
Moderate exposure to FX risk due to the structurally
short balance sheet position in foreign currencies
prompted by the securities portfolio and regulatory
limits on FX retail loans.Liquidity risk:
Balanced funding profile with lending growth largely
financed by the banks broad deposit base; but
lower flexibility in managing short-term liquidity as a
result of the moderation in loan-to-deposit ratio and
increased use of repo financing.
Gradual decrease in the share of unencumbered
liquid assets (about 80% of liquid fixed income
securities restricted or blocked as collateral under
repo transactions).
The share of repo-based funding in the banks total
liabilities reached its historical high of 17% at the
end of 1H13. Increased dependence on repo andforeign bank funding is partially offset by the low use
of debt financing (debt securities were only 5% oftotal liabilities at the end of 1H13).
Figure 40: Asset quality metrics
Source: Akbanks BRSA consolidated financials, VTB Capital Research
Figure 41: Foreign currenc y loans and deposits
Source: Akbanks BRSA consolidated financials, VTB Capital Research
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%80.0%
90.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
2009 2010 2011 2012 1Q13 1H13
NPLs / Total loans, %
NPLs and watchlist loans / Total loans, %
Total provisions / Total NPLs and watchlist loans, % [RHS]
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2009 2010 2011 2012 1Q13 1H13
FCY-den loans / Total loans, %
FCY-den deposits / Total deposits, %
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(contd) Akbank: financials & ratios
Figure 42: Profit and loss accoun ts, TRY bn
YE09 YE10 YE11 YE12 1Q13 2Q13 1H13
Interest income 9.5 9.0 9.5 11.6 2.9 2.8 5.7
Interest expense -4.8 -4.6 -5.3 -6.3 -1.3 -1.2 -2.5NET INTEREST INCOME 4.7 4.4 4.2 5.4 1.6 1.6 3.2
Fees and Commissions Received 1.5 1.6 1.9 2.1 0.6 0.7 1.3
Fees and Commissions Paid -0.2 -0.2 -0.3 -0.3 -0.1 -0.1 -0.1
Net trading gains/losses 0.1 0.1 -0.1 0.4 0.3 0.4 0.7
Other operating income 0.5 0.9 0.7 0.4 0.1 0.1 0.2
TOTAL OPERATING INCOME 6.7 6.8 6.4 8.0 2.6 2.7 5.2
Provision for loan losses and other receivables -1.1 -0.5 -0.7 -1.1 -0.4 -0.6 -1.0
Operating expenses -2.3 -2.5 -2.5 -3.0 -1.0 -0.8 -1.8
PROFIT/LOSS BEFORE TAX 3.3 3.8 3.2 3.9 1.2 1.3 2.4
Tax provision -0.6 -0.8 -0.7 -0.9 -0.3 -0.3 -0.6
CURRENT YEAR PROFIT/LOSS 2.7 3.0 2.5 3.0 0.9 1.0 1.8
Source: Akbanks consolidated BRSA financials, VTB Capital Research
Figure 43: Profitability ratios
2009 2010 2011 2012 1Q13 1H13
Adjusted NIM 5.3% 4.3% 3.6% 4.1% 4.6% 4.4%
Effective interest on TRY loans 14.6% 11.9% 13.0% 12.8% 12.0% 11.1%
Effective interest on USD loans 3.9% 3.8% 4.7% 4.9% 4.9% 4.8%
Weighted-average interest rate on loans 9.9% 8.4% 9.5% 10.0% 9.5% 9.1%
Effective interest on non-adj. TRY deposits 8.2% 7.1% 8.8% 6.5% 5.6% 5.2%
Effective interest on non-adj. USD deposits 1.9% 2.6% 3.8% 2.4% 2.0% 2.2%
Weighted-average interest rate on non-adj. deposits 5.5% 5.5% 6.5% 4.7% 4.0% 3.8%
TL interest spread 6.4% 4.7% 4.2% 6.2% 6.4% 5.9%
USD interest spread 2.0% 1.2% 0.9% 2.5% 3.0% 2.7%
Weighted-average effective interest spread 4.4% 2.8% 2.9% 5.2% 5.5% 5.3%
CIR 33.9% 36.7% 39.4% 37.3% 37.9% 34.4%
Fees and commissions received / Total operating income 22.9% 23.2% 29.9% 26.4% 24.2% 24.6%Net trading gains / Total operating income 1.7% 1.2% -1.8% 5.1% 12.0% 13.1%
Net trading gains / Capital 0.8% 0.4% -0.6% 1.8% 1.4% 3.2%
ROAE 21.1% 18.6% 14.1% 14.8% 15.6% 16.6%
Source: Akbanks consolidated BRSA financials, VTB Capital Research
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Garanti Bank (Baa2/BB+/BBB)Shareholding str ucture:Dogus Group, consolidated
(24.2%), Banco Bilbao Vizcaya Argentaria (25.0%),
others (50.8%). The bank is jointly controlled by Dogus
Group and BBVA (from 2011), which are equallyrepresented on the banks board. Dogus Group is a
Turkish conglomerate with total assets of USD 30bn,
and its stake in Garanti is one of its core holdings.
Key balance sheet exposures:
Contracting but still high exposure to sovereign debt
securities (17% of total assets), implying some
capital volatility as a result of respective mark-to-market valuation adjustments in 2Q13.
Moderate lending growth focused on mortgages(+15% in 1H13) and general purpose loans (+14%)
but relatively low cost of risk. Garanti is Turkeyslargest mortgage lender with a market share of
14%.
Funded largely by deposits, with limited reliance on
repo financing and borrowings, as indicated by a
loan-to-deposit ratio of 1.1x. More than 20% of total
customer deposits are demand deposits; longer-
term liquidity gaps covered by opportunistic debt
issuance.
Capital adequacy:
Solid Basel II TCAR of 15.2% and Tier I ratio of
14.3% (the end of 1H13), based on sufficient
internal capital generation no significantsubordinated debt.
Limited impact of mark-to-market losses on capital
in 1H13 (MtM revaluation reserve less than 6% of
regulatory capital and the resulting impact on capital
adequacy
Figure 44: Leverage and capital adequacy Figure 45: Funding structur e
Source: Garantis BRSA consolidated financials, VTB Capital Research Source: Garantis BRSA consolidated financials, VTB Capital Research
Figure 46: Key financials & ratios
2009 2010 2011 2012 1Q13 1H13
BALANCE SHEET, TRY bn
Adj. total assets 114.5 135.0 161.9 177.7 183.5 195.2
Total loans 55.3 72.0 92.3 102.2 107.1 117.7
Adj. total deposits 66.0 76.3 90.1 92.2 99.2 105.5
Adj. retail deposits 38.4 49.7 50.7 57.5 59.4 61.4
Total wholesale funding 29.0 34.4 42.8 51.5 50.2 54.8
Total capital 13.7 16.7 17.9 21.7 22.6 21.9
KEY RATIOS
Adj. LTD, times 0.84x 0.94x 1.02x 1.11x 1.08x 1.12x
Government bonds / Total assets 29.5% 26.6% 19.8% 19.7% 19.7% 17.3%Adj liquid assets / Total assets 28.0% 21.5% 16.0% 15.9% 18.1% 16.0%
Total wholesale funding / Total liabilities 28.2% 28.6% 29.4% 32.6% 30.7% 31.3%
NPLs / Total loans 4.1% 3.1% 2.1% 2.6% 2.7% 2.3%
Close monitoring loans / Total loans 1.1% 1.7% 1.0% 2.5% 2.5% 2.5%
Adj. NIM 5.7% 4.6% 4.0% 4.4% 5.2% 5.0%
Cost of risk (annualised) 3.2% -1.1% 1.1% 1.4% 2.2% 1.9%
ROAE 26.5% 22.3% 19.4% 17.0% 21.4% 19.8%
Total CAR 19.2% 18.1% 15.8% 16.9% 16.8% 15.2%
Sources: Garantis BRSA consolidated financials, VTB Capital Research
0.00
0.20
0.40
0.60
0.80
1.00
1.20
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2009 2010 2011 2012 1Q13 1H13
Total CAR, %
Core capital / Adj RWA, %
Adjusted loan-to-deposit ratio, times [RHS]
Money market
repo payables7%
Foreign bankfunding17%
Debt securitiesissued
5%
Savingsdeposits
36%
Corporatedeposits
26%
Other9%
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(contd) Garanti Bank: credit summaryProfitability:
Above-peer NIM hovering around 5%, supported by
high effective yields on TRY-denominated loans
(above 13%, according to the banks managementdata) and a relatively low blended cost of funding.
Sustainably high contribution of fees and
commissions over 25% of the banks total
operating profit mainly due to payment system
handling fees and commitment fees on credit lines.
Limited impact from the change in market value
reserve on AFS securities (5.6% of regulatory
capital at the end of 1H12).
Credit risk:
Lending growth accelerated in 2Q13, driven by retail
products and project finance loans in energy andutilities. Loan portfolio well-diversified by industry
and single-name exposures.
Strong asset quality, as indicated by the banks low
NPLs (2.3% of total loans at the end of 1H13 or
2.8% after adjustment for NPL sales and write-offs),
with only slightly higher levels in credit cards (3.7%).
Specific reserve coverage ratio close to an
adequate 80% (about 50% for the total amount of
NPLs and unimpaired watch loans). General
provisions increased in 2Q13 due to increased loan
origination and FX rebalancing.
Market risk :
Floater-heavy securities portfolio 65% of total,
further split between CPI linkers and FRNs.
The market value revaluation reserve was a
significant 5.6% of capital at the end of 1H13 (but
lower than that of AKBNK, reflecting the gradual
decrease in GARANs government bond holdings).
About 40% of both loans and deposits denominated
in foreign currencies, implying potentially high FX
rates sensitivity in periods of market volatility.
Balance-sheet FX position has been managed fully
in line with the regulatory limits.
Liquidity risk:
Strong, well-diversified deposit base as the banks
key funding source. Opportunistic marketborrowings help to increase the average duration of
funding.
Wholesale funding was about 30% of total liabilities
at the end of 1H13. Market funding is dominated by
syndicated and bilateral bank loans, as a cheaper
funding option, usually implying a high rollover rate.
Moderate use of repo financing (7% of total liabilities
at end-1H13), mostly through the short-term CBRT
facility, but without excessive reliance on the
instrument (collateral utilisation rate of about 60% at
the end of 1H13).
Figure 47: Asset quality metrics
Source: Garantis BRSA consolidated financials, VTB Capital Research
Figure 48: Foreign currenc y loans and deposits
Source: Garantis BRSA consolidated financials, VTB Capital Research
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%4.0%
4.5%
2009 2010 2011 2012 1Q13 1H13
NPLs / Total loans, %
Close monitoring loans / Total loans, %
Total provisions / Total NPLs and watchlist loans, % [RHS]
37.0%
38.0%
39.0%
40.0%
41.0%
42.0%
43.0%
44.0%
45.0%
46.0%
47.0%
2009 2010 2011 2012 1Q13 1H13
FCY-den loans / Total loans, %
FCY-den deposits / Total deposits, %
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(contd) Garanti Bank: financials & ratios
Figure 49: Profit and loss accoun ts, TRY bn
2009 2010 2011 2012 1Q13 2Q13 1H13
Interest income 11.1 10.2 11.4 13.8 3.5 3.4 6.9
Interest expense -5.7 5.0 -6.1 -7.4 -1.5 -1.5 -3.0NET INTEREST INCOME 5.4 5.2 5.3 6.4 2.0 1.9 3.9
Fees and commissions received 2.2 2.2 2.5 2.6 0.8 0.8 1.5
Fees and commissions paid -0.3 -0.3 -0.4 -0.5 -0.7 0.5 -0.2
Net trading gains/losses 0.9 0.4 0.4 0.6 0.2 0.2 0.4
Other operating income 0.4 0.9 1.2 0.7 0.3 0.2 0.5
TOTAL OPERATING INCOME 8.6 8.4 8.9 9.8 3.1 2.9 6.1
Provision for loan losses and other receivables -1.7 0.7 -0.9 -1.4 -0.6 -0.5 -1.0
Other operating expenses -3.0 -3.4 -3.7 -4.1 -1.0 -1.2 -2.2
PROFIT/LOSS BEFORE TAX 3.9 4.3 4.3 4.3 1.5 1.3 2.9
Tax provision -0.8 -0.9 -0.9 -0.9 -0.4 -0.3 -0.7
CURRENT YEAR PROFIT/LOSS 3.1 3.4 3.3 3.4 1.2 1.0 2.2
Source: Garantis BRSA consolidated financials, VTB Capital Research
Figure 50: Profitability ratios
2009 2010 2011 2012 1Q13 1H13
Adjusted NIM 5.7% 4.6% 4.0% 4.4% 5.2% 5.0%
Effective interest on TL loans - - - - - -
Effective interest on USD loans - - - - - -
Weighted-average interest rate on loans - - - - - -
Effective interest on non-adj. TL deposits - - - - - -
Effective interest on non-adj. USD deposits - - - - - -
Weighted-average interest rate on non-adj. deposits - - - - - -
TL interest spread - - - - - -
USD interest spread - - - - - -
Weighted-average effective interest spread - - - - - -
CIR 34.3% 40.7% 41.7% 41.6% 32.5% 36.0%
Fees and commissions received / Total operating income 25.2% 26.6% 28.5% 26.4% 24.6% 25.5%Net trading gains / Total operating income 10.4% 4.8% 4.0% 6.2% 7.5% 6.4%
Net trading gains / Capital 6.6% 2.4% 2.0% 2.8% 1.0% 1.8%
ROAE 26.5% 22.3% 19.4% 17.0% 21.4% 19.8%
Source: Garantis BRSA consolidated financials, VTB Capital Research
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Isbank (Baa2/BB+/BBB)Shareholding str ucture:Isbank Pension Fund (39.7%),
Ataturk shares through the Republican Peoples Party or
CHP (28.1%), free float (32.2%). CHP holds voting rights
but dividends on its stake are paid to other non-profitentities, the Turkish Language Institute and Turkish
Historical Society.
Key balance sheet exposures:
Solid TRY funding base historically underpinned by
the banks broad network (second-largest in Turkey
and No.1 among privately-owned banks). The
companys share of borrowings has increased,
however, reflecting the ongoing change in the
banks funding priorities.
The banks sovereign bond portfolio shrank in the
past three years from 30% to 18% of total assets,
following the increase in lending and loan-to-depositratio increased from 0.8x to 1.2x.
Historically high (and numerous) equity
participations negatively affect the banks capital
position: about 20 participations left, with the largest
remaining holdings in financials and services, as
well as manufacturing (Sisecam) and telecoms(Avea).
Capital adequacy:
Below-peer but still adequate capitalisation: TCAR
at 14.8% (-140bp in 1H13, consumed largely by the
market revaluation reserve against AFS securities)
and 12.1% Tier I ratio at end-2Q13.
15% share of supplementary capital due to
subordinated debt, including USD 1bn 10-year LT2
Eurobond issued in 2012.
Figure 51: Leverage and capital adequacy Figure 52: Funding structur e
Source: Isbanks BRSA consolidated financials, VTB Capital Research Source: Isbanks BRSA consolidated financials, VTB Capital Research
Figure 53: Key financials & ratios
2009 2010 2011 2012 1Q13 1H13
BALANCE SHEET, TRY bn
Adj. total assets 126.1 148.3 182.6 199.4 205.2 219.4
Total loans 55.6 71.5 101.1 116.9 121.5 136.6
Adj. total deposits 70.1 85.7 96.5 102.8 101.9 110.5
Adj. retail deposits 52.4 55.5 60.8 63.7 64.0 67.7
Total wholesale funding 30.2 30.2 47.4 45.8 52.1 57.7
Total capital 15.3 19.0 20.3 24.9 25.2 24.5
KEY RATIOS
Adj. LTD, times 0.79x 0.83x 1.05x 1.14x 1.19x 1.24x
Government bonds / Total assets 31.8% 31.4% 24.5% 21.0% 19.7% 18.1%Adj liquid assets / Total assets 32.4% 30.4% 20.1% 20.8% 19.1% 15.5%
Total wholesale funding / Total liabilities 26.6% 22.9% 29.0% 26.0% 28.6% 29.3%
NPLs / Total loans 5.1% 3.4% 2.1% 1.8% 1.9% 1.8%
Close monitoring loans / Total loans 2.3% 1.2% 1.0% 1.7% 1.9% 1.9%
Adj. NIM 5.8% 4.6% 3.9% 4.3% 4.8% 4.6%
Cost of risk (annualised) 4.3% 1.9% 1.7% 1.2% 1.8% 1.8%
ROAE 20.2% 18.8% 12.2% 16.4% 17.7% 15.3%
Total CAR 18.1% 17.6% 14.1% 16.3% 16.1% 14.7%
Sources: Isbanks consolidated BRSA financials, VTB Capital Research
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2009 2010 2011 2012 1Q13 1H13
Total CAR, %
Core capital / Adj RWA, %
Adjusted loan-to-deposit ratio, times [RHS]
Money marketrepo payables
12%
Foreign bankfunding12%
Debt securitiesissued
4%
Savingsdeposits
37%
Corporatedeposits
23%
Subordinateddebt1%
Other
11%
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(contd) Isbank: credit summaryProfitability:
Sound profitability metrics, with sustainable NIM at
about 4.5% and ROE above 15%. The share of
trading gains is less than 5% of total operatingprofit.
Fees and commissions contribute more than 15% o
total operating income (albeit significantly lower
than those of AKBNK or GARAN), especially from
credit card and other loan-related fees.
Cost-efficiency lags that of the banks peers due to
significant administrative costs related to its branch
network.
Credit risk:
Low NPLs at 1.8% of total loans, with a specific
coverage ratio of about 75%. Higher NPLs (3.9% atend-1H13) were reported in credit card lending, but
without any significant impact on the banks cost of
risk.
Loans classified into close monitoring categories
increased slightly in 1H13, but still far from the peak
levels of 2008-2009.
Relatively low risk concentrations by sectors and
borrowers, with the loan book split almost equally
between commercial and retail/SME lending.
Market risk :
Conservative portfolio structure and below-peer
exposure to fixed income markets: the share of
government bonds decreased from 31% to 18% oftotal assets.
FRNs (mostly TRY-denominated) comprised 58% of
total portfolio at end-1H13, followed by CPI linkers
(33%).
Lending-related interest rate risk is manageable, as
loans are usually re-priced within a three-month
period and the gaps covered via derivative
instruments.
Liquidity risk:
Liquidity is supported by the core deposit base; any
significant maturity mismatches are covered byshort-term repo as well as opportunistic borrowings
on the debt market.
The share of repo and wholesale funding in the
banks total liabilities has not changed materially
since 2009: total borrowings (including repo) stood
at 29%, while foreign bank loans funded only 11.5%
of total liabilities at the end of 1H13.
Debt securities issued increased from nearly zero in
2010 to 4% of total liabilities.
Figure 54: Asset quality metrics
Source: Isbanks consolidated BRSA financials, VTB Capital Research
Figure 55: Foreign currenc y loans and deposits
Source: Isbanks consolidated BRSA financials, VTB Capital Research
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2009 2010 2011 2012 1Q13 1H13
NPLs / Total loans, %
Close monitoring loans / Total loans, %
Total provisions / Total NPLs and watchlist loans, % [RHS]
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
2009 2010 2011 2012 1Q13 1H13
FCY-den loans / Total loans, %
FCY-den deposits / Total deposits, %
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(contd) Isbank: financials & ratios
Figure 56: Profit and loss accou nts, TRY bn
2009 2010 2011 2012 1Q13 2Q13 1H13
Interest income 11.4 10.9 12.1 14.7 3.6 3.6 7.2
Interest expense -5.6 -5.4 -6.7 -7.8 -1.6 -1.6 -3.2NET INTEREST INCOME 5.7 5.4 5.4 6.8 2.0 2.0 3.9
Fees and commissions received 1.5 1.5 1.8 2.1 0.6 0.6 1.2
Fees and commissions paid -0.5 -1.4 0.7 0.8 -0.2 -0.2 -0.4
Dividend income 0.2 0.0 0.2 0.2 0.1 0.1 0.2
Net trading gains/losses 0.6 0.3 0.4 0.9 0.2 0.2 0.4
Other operating income 3.5 4.0 4.1 4.6 1.2 1.1 2.3
TOTAL OPERATING INCOME 10.9 10.8 11.2 13.7 3.8 3.8 7.6
Provision for loan losses and other receivables -2.4 -1.2 -1.5 -1.3 -0.5 -0.6 -1.1
Other operating expenses -5.2 -5.7 -6.6 -7.8 -2.0 -2.1 -4.1
PROFIT/LOSS BEFORE TAX 3.4 3.9 3.1 4.7 1.3 1.0 2.4
Tax provision -0.6 -0.7 -0.7 -1.0 -0.2 -0.2 -0.5
CURRENT YEAR PROFIT/LOSS 2.8 3.2 2.4 3.7 1.1 0.8 1.9
Source: Isbanks consolidated BRSA financials, VTB Capital Research
Figure 57: Profitability ratios
2009 2010 2011 2012 1Q13 1H13
Adjusted NIM 5.8% 4.6% 3.9% 4.3% 4.8% 4.6%
Effective interest on TL loans 16.4% 12.9% 14.0% 12.5% 12.2% 11.0%
Effective interest on USD loans 3.4% 3.7% 4.5% 4.6% 4.7% 4.6%
Weighted-average interest rate on loans 11.4% 9.2% 9.8% 9.9% 9.4% 8.8%
Effective interest on non-adj. TL deposits 7.7% 7.1% 8.5% 6.4% 5.5% 5.1%
Effective interest on non-adj. USD deposits 2.2% 2.3% 3.4% 2.3% 1.9% 1.8%
Weighted-average interest rate on non-adj. deposits 5.7% 5.6% 6.8% 4.9% 4.1% 4.0%
TL interest spread 8.8% 5.8% 5.5% 6.1% 6.8% 5.9%
USD interest spread 1.2% 1.4% 1.1% 2.3% 2.8% 2.7%
Weighted-average effective interest spread 5.7% 3.6% 3.0% 5.0% 5.4% 4.8%
CIR 47.7% 52.6% 59.1% 56.7% 51.2% 54.0%
Fees and commissions received / Total operating income 13.4% 14.0% 16.0% 15.2% 15.0% 16.0%
Net trading gains / Total operating income 5.1% 2.7% 4.0% 6.3% 5.5% 4.8%
Net trading gains / Capital 3.6% 1.5% 2.2% 3.5% 0.8% 1.5%
ROAE 20.2% 18.8% 12.2% 16.4% 17.7% 15.3%
Source: Isbanks consolidated BRSA financials, VTB Capital Research
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Halkbank (Baa2/--/BBB-)Shareholding str ucture: the state through the
Privatisation Administration (51.1%), free float (48.9%).
A 25% stake was privatised in 2007 and further 23.9%
floated through an SPO in November 2012. Fullprivatisation is unlikely in the medium term.
Key balance sheet exposures:
Conservative funding structure, with a loan-to-
deposit ratio just above 1x and retail deposits
forming more than one-half of total deposits.
Loan book dominated by short-term, TRY-
denominated loans; core franchise in retail and
SMEs (supported by interest rate subsidies). Asset
quality has been improving supported by loan
growth.
Decreased share of securities portfolio (about 18%
of total assets at end-1H13), dominated by floating-
rate notes (61%) and CPI linkers (31%). More thanone-half of total securities (mostly CPI-linked)
booked as HTM.
Borrowings largely consisted of bank deposits andrepo with the CBRT, but overall, the bank has a
lower dependence on wholesale funding than most
of its peers.
Capital adequacy:
Adequately capitalized, with a TCAR of 14.7% and
a Tier I ratio at 13.3% (end-1H13), supported by the
banks high retained profits.
No subordinated debt issued so far.
Figure 58: Leverage and capital adequacy Figure 59: Funding structur e
Source: Halkbanks consolidated BRSA financials, VTB Capital Research Source: Halkbanks consolidated BRSA financials, VTB Capital Research
Figure 60: Key financials & ratios
2009 2010 2011 2012 1Q13 1H13
BALANCE SHEET, TRY bn
Adj. total assets 59.4 71.6 90.7 107.4 110.8 116.3
Total loans 33.8 45.8 57.7 67.5 70.8 75.6
Adj. total deposits 42.0 51.3 59.2 72.4 71.7 73.1
Adj. retail deposits 24.5 28.6 34.5 38.3 37.2 37.9
Total wholesale funding 9.7 10.3 19.4 18.3 22.1 26.3
Total capital 5.8 7.4 8.6 11.5 12.4 12.1
KEY RATIOS
Adj. LTD, times 0.81x 0.89x 0.97x 0.93x 0.99x 1.03x
Government bonds / Total assets 35.3% 27.8% 25.5% 21.4% 20.8% 18.1%
Adj liquid assets / Total assets 28.9% 28.2% 26.5% 32.4% 30.5% 28.7%Total wholesale funding / Total liabilities 17.7% 15.7% 23.2% 18.7% 22.1% 24.8%
NPLs / Total loans 4.9% 3.8% 2.9% 2.9% 2.9% 2.8%
Close monitoring loans / Total loans 4.5% 1.9% 1.1% 2.9% 2.8% 2.7%
Adj. NIM 6.2% 5.3% 4.8% 5.3% 5.5% 5.4%
Cost of risk (annualised) 2.1% 1.2% 1.3% 1.4% 1.1% 1.2%
ROAE 33.4% 28.0% 25.4% 26.3% 24.8% 23.8%
Total CAR 15.8% 15.5% 13.9% 15.3% 15.3% 14.1%
Source: Halkbanks consolidated BRSA financials, VTB Capital Research
0.00
0.20
0.40
0.60
0.80
1.00
1.20
11.5%
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
16.0%
16.5%
2009 2010 2011 2012 1Q13 1H13
Total CAR, %
Core capital / Adj RWA, %
Adjusted loan-to-deposit ratio, times [RHS]
Money marketrepo payables
2% Foreign bankfunding17%
Debt securitiesissued
3%
Savingsdeposits
37%
Corporatedeposits
34%
Other
7%
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(contd) Halkbank: credit summaryProfitability:
Relatively strong core profitability due to a solid NIM
(above 5%) and ROE approaching 25%, while the
cost of risk has remained below 1.5%.
Blended cost of TRY deposits decreased
significantly in the past three years, supporting
margins.
Below-peer contribution of fees and commissions,
which is partially explained by the banks relatively
weak positions in credit card lending.
Credit risk:
NPLs at a low 2.7%, with coverage close to 100%,
including discretionary provisions; higher level ofNPLs (about 4.5%) in credit cards did not affect
asset quality metrics. Focus on presumably high-risk/high-margin SME
business actually implies low single-name
concentrations, as well as implicitly strong asset
quality due to the use of collective collateral
schemes and interest rate subsidies.
As a state-controlled bank, Halkbank holds the
exclusive right to issue subsidised loans to SMEs
and directed fund loans (the state budget covers
around 50% of the interest payments, but the bank
bears the credit risk).
Performing loans classified as watchlisted and
subject to close monitoring stood at 2.7% at the endof 1H13 in line with the banks peers.
Market risk :
The banks securities portfolio is dominated by CPI
linkers (primarily booked as HTM) and floating-rate
bonds.
The combined share of government bonds
decreased to 17% of total assets at the end of 1H13
(from almost 30% in 2009); repo-backed financing is
far from critical levels about 7% of total liabilities.
Minimal structural FX position, as the banks core
SME business is largely TRY-based.
Liquidity risk:
Strong, diversified deposit base fully covering the
banks current funding needs.
Additional support through Turkish regulations
requiring certain types of state-owned companies tokeep deposits with state-owned banks.
Strengthening access to capital markets, mostly viarolling syndicated loans and long-term loans from
international financial institutions, as well asspecialised funding provided by the state for the
purposes of back-to-back lending.
Figure 61: Asset quality metrics
Source: Halkbanks consolidated BRSA financials, VTB Capital Research
Figure 62: Foreign currenc y loans and deposits
Source: Halkbanks consolidated BRSA financials, VTB Capital Research
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2009 2010 2011 2012 1Q13 1H13
NPLs / Total loans, %
Close monitoring loans / Total loans, %
Total provisions / Total NPLs and watchlist loans, % [RHS]
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2009 2010 2011 2012 1Q13 1H13
FCY-den loans / Total loans, %
FCY-den deposits / Total deposits, %
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(contd) Halkbank: financials & ratios
Figure 63: Profit and loss accounts
2009 2010 2011 2012 1Q13 2Q13 1H13
Interest income 6.8 6.4 7.3 9.1 2.3 2.2 4.5
Interest expense -3.7 -3.2 -3.8 -4.5 -1.0 -0.9 -2.0NET INTEREST INCOME 3.1 3.2 3.5 4.6 1.3 1.2 2.5
Fees and commissions received 0.5 0.6 0.8 1.0 0.3 0.3 0.5
Fees and commissions paid -0.1 -0.1 -0.1 -0.2 -0.1 -0.4 -0.5
Dividend income 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net trading gains/losses 0.0 0.1 0.2 0.6 0.2 0.1 0.3
Other operating income 0.4 0.6 0.8 0.7 0.2 0.3 0.5
TOTAL OPERATING INCOME 4.0 4.5 5.3 6.7 1.9 1.9 3.8
Provision for loan losses and other receivables -0.6 -0.5 -0.7 -0.9 -0.2 -0.2 -0.4
Other operating income -1.3 -1.7 -1.9 -2.4 -0.8 -0.8 -1.6
PROFIT/LOSS BEFORE TAX 2.1 2.4 2.6 3.4 1.0 0.8 1.8
Tax provision -0.4 -0.5 -0.6 -0.8 -0.2 -0.1 -0.4
CURRENT YEAR PROFIT/LOSS 1.7 1.8 2.0 2.6 0.7 0.7 1.4
Source: Halkbanks consolidated BRSA financials, VTB Capital ResearchFigure 64: Profitability ratios
2009 2010 2011 2012 1Q13 1H13
Adjusted NIM 6.2% 5.3% 4.8% 5.3% 5.5% 5.4%
Effective interest on TL loans 11.7% 11.7% 12.5% 12.5% 11.9% 11.0%
Effective interest on USD loans 3.0% 3.0% 3.8% 4.1% 4.2% 5.1%
Weighted-average interest rate on loans 11.8% 9.7% 10.5% 10.7% 10.2% 9.4%
Effective interest on non-adj. TL deposits 8.3% 8.3% 9.4% 7.7% 6.9% 6.4%
Effective interest on non-adj. USD deposits 2.5% 2.5% 3.8% 2.9% 2.4% 2.3%
Weighted-average interest rate on non-adj. deposits 6.1% 5.9% 7.1% 5.2% 4.5% 4.2%
TL interest spread 3.4% 3.4% 3.0% 4.8% 5.0% 4.6%
USD interest spread 0.5% 0.5% 0.1% 1.2% 1.7% 2.8%
Weighted-average effective interest spread 5.7% 3.9% 3.3% 5.5% 5.7% 5.2%
CIR 32.5% 37.1% 36.9% 35.8% 39.9% 41.3%
Fees and commissions received / Total operating income 13.4% 13.8% 15.7% 15.1% 13.7% 14.3%Net trading gains / Total operating income 0.5% 3.0% 4.0% 8.3% 9.6% 8.4%
Net trading gains / Capital 0.3% 1.8% 2.5% 4.8% 1.5% 2.6%
ROAE 33.4% 28.0% 25.4% 26.3% 24.8% 23.8%
Source: Halkbanks consolidated BRSA financials, VTB Capital Research
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Yapi Kredi Bank (Baa2/BB+/BBB)Shareholding str ucture:Koc Financial Services
(81.8%), free float (18.2%). Koc Financial Services is a
50/50 joint venture between Koc Holding, one of the
largest multi-industry conglomerates in Turkey, and
Unicredit Group.
Key balance sheet exposures:
Slightly above-peer loan-to-deposit ratio of 1.2x;
relatively high concentration in deposits (in the
Turkish context) but overall well-diversified funding
with an additional line of potential support from
Unicredit Group.
Strong market position in retail banking (especially
credit cards) underpinning the net interest margin,
but also implying above-peer NPL ratios; retail
expansion in Azerbaijan.
Exposure to sovereign bonds decreased
significantly in the past three years (13% of totalassets at the end of 1H13); moderately negative
impact on the banks capital position through a
direct equity charge in 2Q13.
Capital adequacy:
Capital adequacy slightly below peer average
(TCAR at 14.8% and Tier I ratio at 10.5%) but
sufficient given the banks current risk profile.
Positive effect on capital position from an agreed
sale of YK Sigorta insurance business to Allianz: a
capital gain of about TRY 1.2bn is to be booked in3Q13, with a positive CAR impact of some 90bp ona consolidated basis.
The USD 1bn LT2 subordinated Eurobond issued in2012 is an alternative re-capitalisation source.
Figure 65: Leverage and capital adequacy Figure 66: Funding structur e
Source: YKBs consolidated BRSA financials, VTB Capital Research Source: YKBs consolidated BRSA financials, VTB Capital Research
Figure 67: Key financials & ratios
2009 2010 2011 2012 1Q13 1H13
BALANCE SHEET, TRY bn
Adj. total assets 69.5 91.3 116.1 129.9 133.5 141.2
Total loans 41.5 56.2 71.5 80.4 83.4 90.1
Adj. total deposits 42.1 53.4 64.6 69.7 71.7 76.4
Adj. retail deposits 24.0 25.7 31.7 35.5 35.3 34.6
Total wholesale funding 10.7 16.9 26.4 26.2 28.9 30.9
Total capital 8.6 10.7 12.6 16.0 16.1 16.3
KEY RATIOS
Adj. LTD, times 0.99x 1.05x 1.11x 1.15x 1.16x 1.18x
Government bonds / Total assets 21.6% 19.1% 16.3% 15.2% 13.6% 12.8%Adj liquid assets / Total assets 29.8% 24.0% 21.0% 24.0% 24.8% 21.2%
Total wholesale funding / Total liabilities 17.0% 20.6% 25.2% 22.7% 24.3% 24.4%
NPLs / Total loans 6.3% 3.4% 3.0% 3.2% 3.4% 3.5%
Close monitoring loans / Total loans 3.0% 2.8% 2.0% 3.2% 2.9% 2.9%
Adj. NIM 6.7% 5.3% 4.3% 4.8% 4.9% 4.8%
Cost of risk (annualised) 4.0% 2.4% 1.3% 1.8% 1.8% 1.7%
ROAE 20.1% 23.3% 19.6% 14.6% 13.5% 15.4%
Total CAR 16.5% 15.4% 14.9% 15.2% 14.7% 14.8%
Source: YKBs consolidated BRSA financials, VTB Capital Research
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
2009 2010 2011 2012 1Q13 1H13
Total CAR, %
Core capital / Adj RWA, %
Adjusted loan-to-deposit ratio, times [RHS]
Money marketrepo payables
6%Foreign bank
funding12%
Debt securitiesissued
4%
Savingsdeposits
27%
Corporatedeposits
33%
Subordinateddebt5%
Other13%
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(contd) Yapi Kredi: credit summaryProfitability:
Strong core revenues in retail banking driven by the
banks leading market share in credit cards and
increased presence in the SME segment.
Significant contribution of fees and commission
income related to the banks retail lending business.
A limited impact of trading gains on the bottom-line
due to the low share of securities in total assets.
Healthy ROE driven by effective cost control.
Credit risk:
Loan growth has been primarily driven by
commercial installment loans and retail (mortgage
and general purpose loans) in 1H13.
The banks loan book is well-diversified, without any
material sector concentrations; related party
(intragroup) lending at about 6.6% of total capital
(vs. 20% regulatory limit).
FX loans stood at 32% of total loans, almost entirely
driven by commercial and corporate lending.
The banks asset quality metrics in line with sectoraverages. Cost of risk is normalising down from
2011, given the seasoning of the loan portfolio afterthe period of accelerated growth (+25% in 2011).
Market risk :
Below-peer exposure to local government bond
market; securities portfolio dominated by CPI
linkers.
40% share of FX deposits implying a structural short
position, but within the regulatory limits.
Interest risk largely driven by re-pricing mismatches
between loans and deposits, overall in line with
peers.
Liquidity risk:
Robust deposit base supporting asset expansion in
previous years and sufficient to maintain an
adequate short-term liquidity.
No significant dependence on repo and other
money market borrowings (the share of repo in totalliabilities below 6%, below-peer encumbrance of thebond portfolio).
Adequate wholesale funding structure, with 12%
share of foreign bank loans in total liabilities anddebt borrowings below 5%.
A track record of support provided by Unicredit
Group (in the form of guaranteed debt).
Figure 68: Asset quality metrics
Source: YKBs consolidated BRSA financials, VTB Capital Research
Figure 69: Foreign currenc y loans and deposits
Source: YKBs consolidated BRSA financials, VTB Capital Research
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2009 2010 2011 2012 1Q13 1H13
NPLs / Total loans, %
Close monitoring loans / Total loans, %
Total provisions / Total NPLs and watchlist loans, % [RHS]
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2009 2010 2011 2012 1Q13 1H13
FCY-den loans / Total loans, %
FCY-den deposits / Total deposits, %
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(contd) Yapi Kredi: financials & ratios
Figure 70: Profit and loss accou nts, TRY bn
2009 2010 2011 2012 1Q13 2Q13 1H13
Interest income 7.4 6.4 7.8 10.1 2.5 2.4 4.9
Interest expense -3.5 -2.8 -4.1 -5.2 -1.2 -1.1 -2.2NET INTEREST INCOME 3.9 3.6 3.7 4.9 1.3 1.4 2.7
Fees and commissions received 1.9 2.1 2.4 2.3 0.6 0.6 1.2
Fees and commissions paid -0.3 -0.3 -0.4 -0.5 -0.1 -0.1 -0.2
Net trading gains/losses 0.4 0.0 -0.1 0.0 -0.1 0.2 0.1
Other operating income 0.2 1.4 1.1 0.6 0.1 0.1 0.2
TOTAL OPERATING