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Banking 11 Jul 2017

Why Turkish Banks Are Booming

Unlike other sectors in Turkey, banks are standing out because of the excellent progress of their financial indicators in the first part of 2017. One of the reasons is the measures taken by the Turkish Government to stimulate growth. However, there are also other reasons that are making Turkish banks the ones preferred by many investors. Garanti, owned 49.85% by BBVA, has particularly shined bright.

The Turkish banking sector is the second largest in emerging Europe, behind Russia. It is an underpenetrated market with strong growth potential. It is highly liquid, well capitalized, underleveraged, and stands out in its asset quality.

  1.    Good macro perspectives and credit-boosting measures.

As of December 2016, the Turkish economy held the seventeenth position in the world. Its average GDP growth over the last ten years has been around 5%. Even though a slight deceleration was observed in 2016, the government stimulus measures focused on livening up the economy are having a positive impact. In fact, BBVA Research has revised upwards its growth forecast for 2017 (from 3.0% to 5.0%). For its part, the Central Bank of Republic of Turkey (CBRT) has been tightening the monetary policy since the end of last year to contain the inflationary pressures. Since 2011, it has applied several monetary policy tools focused on reinforcing financial stability. Regarding public debt, very low levels are maintained (28% of the GDP in 2016 vs. Maastricht criteria of 60%), especially compared to the levels of other European countries.

2.   Great growth potential of the financial sector.

The Turkish financial sector is comprised of 50 banks, is the second largest within emerging Europe behind Russia by its asset size ($791 billion as of March 2017). The banking sector offers significant long-term growth potential backed by attractive demographics & underpenetrated market (56% of the 80 million people residing in Turkey are under 35 years old and total loans only represented 62% of the GDP as of 1Q17 while the Eurozone reached 101%). In addition, Turkish Government took measures to stimulate growth via lending,  more specifically by expanding the size and the scope of the Credit Guarantee Fund (CGF). The intention of the CGF is to boost the economic growth and support high potential companies that cannot access funding due to collateralization constraints. Thanks to this mechanism, in the first quarter of 2017, private Turkish banks’ loan growth increased significantly, neither entailing an extra capital cost nor a greater risk as they are backed by the Turkish Treasury.

3.    Very liquid sector.

A significant percentage of financing in the Turkish Banking Sector  comes from deposits (56% of the total assets in March 2017). In addition, Turkish banks have comfortable access to the international funding sources and are capable of rolling-over their liabilities without any problem. Turkish banks are operating with comfortable liquidity levels. In fact, the liquidity ratios are well above the levels required by the regulator. As of March 2017, the Total Liquidity Coverage Ratio of the four main private Turkish banks was at 110% when the minimum required ratio for 2017 was 80%.

4.    Balance Sheet – Solid Fundamentals.

The Turkish financial sector has high capital levels and is underleveraged. As of March 2017, Capital Adequacy Ratio of the system stands at 16.1% and is of high quality (85% of the total capital qualifies as Tier 1). Leverage as of year-end 2016 is 7.8x vs. 11.8x in Euro Zone. Turkish Banks stand out for their effectiveness in risk management, which combines very advanced systems with prudent policies. The high quality of assets of the entire sector is notable (the NPL ratio as of March 2017 was 3.2% with a total cash coverage of 126% as of December 2016).

5.    Income statement: highly profitable and efficient.

Turkish banks maintained their high profitability. The average return on equity of the Turkish banking system reached 17.7% in March 2017, while the return on average assets was 1.94%. In addition, the sector efficiency (42.8% average in March) is maintained at very competitive levels compared to financial systems of more developed economies like the Euro zone.

Garanti: the best performer in the sector

Garanti Bank, the Turkish bank of which BBVA is the largest shareholder (with a 49.85% participation), shines brighter than the rest within the thriving financial system of this country. It is the second largest bank in Turkey by asset size (90.4 billion dollars at March 2017 on a consolidated basis). It is the #1 bank among private Turkish banks in total consumer loans, mortgages, car loans and also holds leading positions in the credit card industry.

Technological leadership is one of Garanti’s competitive advantages. With its dynamic and customer-centric business model and in-house developed superior technology integrated to its innovative products and services, Garanti continues to differentiate itself and facilitate the lives of its over 14 million customers. It is a pioneer bank in digitalization. As of May 2017, Garanti manages Turkey’s largest digital customer base of over 5 million active customers, and more than 4 million active mobile customers. The share of digital sales in total sales is on an increasing trend and reached 30% in the first quarter of 2017. Garanti has been celebrating 20 years at the forefront of the digital banking industry thanks to its innovative products & services and state of the art technology.

Regarding the fundamentals, the strength of Garanti’s balance sheet stands out. It is very liquid (the consolidated LCR ratio, in March 2017 reached 119%), well-capitalized (the total capital ratio in local terms in March 2017 is 15.9%, above the average of the comparable elements in the sector) and has sound asset quality.

Garanti is the best private bank in the Turkish market in terms of profitability (the ROAE in local terms in March was 19.0%, while the ROAA in local terms was 2.3%), credit quality (the local NPL ratio in local terms in March 2017 was 2.7%, one-tenth below the ratio in December and clearly below the sector average) and the efficiency levels compare positively with the sector average (at March 2017, the ratio in local terms was 43.2%).

The entity has broadly shown its capacity to generate sustainable results over time. A large part of the merit is thanks to a management team capable of quickly and flexibly adapting to market dynamics that allows them to be very proactive in, for example, price management policies. In fact, in the first quarter of 2017, Garanti presented results above analysts’ consensus, and increased its consolidated net profit by 45% YoY to 1,537 million Turkish Liras (equivalent of 396mn Euros). The performance of the Bank was marked by its core banking performance, namely successfully managed net interest margin, strong sustainable income generation, strict control over expenses and better-than-expected asset quality outlook.

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