Global ordeal tests Turk banks

Turkish banks are starting to look overvalued despite their resilience to the ravages of the global economic crisis compared with their international peers.

The sector rose 24 percent in the last month as investors sought profits from firms such as Garanti Bankası, which posted a 6.1 percent rise in net profit in the fourth-quarter, despite an economic contraction of 6.2 percent.

Yet profits are set to be squeezed this year as banks are forced to cut customer lending rates in line with a sharp reduction in their borrowing costs, leaving scope for investor disappointment. First-quarter earnings are due from May.

"Turkish banks have gone up very quickly in a very short amount of time and I would not be surprised to see a correction in the near term. The price movement we have seen recently is unsustainable," said Eli Koen, Fortis Investments fund manager.

Turkish banking stocks have risen 24 percent since March 9, outperforming the benchmark IMKB-100 index of the Istanbul Stock Exchange, of which they form the major component, which gained 20 percent. Banks are up 7 percent since the start of the year.

The DJ Stoxx European bank index is up 4 percent this year after hitting a 16-year low in early March.

Search for sustainability
"Gains are mainly based on the view that first-quarter earnings for Turkish banks are going to be very good, and I share that view, but I don't think that performance will be sustainable for the rest of the year," said Koen.

Banks have benefited from falling borrowing costs while keeping lending rates to customers high. For years Turkey had some of the world's highest interest rates as it sought to combat rampant inflation. But the Central Bank has cut rates by 625 basis points since November, bringing them to an historic low of 10.50 percent. The Bank was expected to cut the rate further yesterday evening, from the previous level of 10.5 percent. This has helped the banking sector post a 38 percent increase in total net profit in the first two months of 2009 to 3.2 billion Turkish Liras ($1.99 billion) - relief for investors after total profits fell 11 percent to 13.3 billion liras in 2008.

"The interest rates paid out on deposits mirror the interest-rate cuts made by the Central Bank, but the rates assigned to loans haven't been revised downward," said Mete Yüksel, head of research at EFG Istanbul Securities.Analysts believe profit gains have been largely priced in and predict stocks will fall as banks bring down lending rates in the hunt for new business amid the recession and as non-performing loans rise.

Fall in net profits
Overall net profits for the sector are seen falling 8 percent to 20 percent this year, according to analysts' forecasts.

The Turkish economy will contract this year for the first time in seven years. The government expects gross domestic product, or GDP, to slump 3.6 percent, while the Central Bank says rate cuts of the same size are not expected.

Growth in deposits is seen outpacing loans in 2009, rising 10 percent, while loanbooks are expected to grow 6 percent, according to Seda Şahin, an analyst at İş Investment in Istanbul. Non-performing loans could rise to 7 percent of lending in 2009 from a level of 4 percent in the last quarter of 2008.

"Once optimism about the first-quarter is priced in, and we are coming to the end of that process, we will look beyond ... and it is not going to be an optimistic picture," said Koen. However, he added that beyond the large-caps banks, good value could still be found among medium and small-sized banks.State-owned Halkbank, with a free float of 25 percent, is favored by several analysts, and was added this month to Deutsche Bank's Turkish top picks list for April.

Deutsche Bank noted that with a large amount of its funding derived from Turkish Lira deposits it would profit in particular from lower interest rates. Halkbank trades at 4.8 times projected 2009 earnings, below an average price/earnings ratio for Turkish banks of 5.6, and below that of biggest lender Akbank at 8.8 - the most expensive. European banks trade at an average P/E ratio of 9.8, but Turkish stocks have long come with a risk premium attached due to the volatility of the currency and the political climate.

In the long term, Turkish banks remain a much-favored investment - they have some of the strongest capitalization levels and loans-to-deposit ratios in the world and strict regulation has spared them exposure to risky assets.

Five major Turkish banks post net profit rise in 2008
Akbank: Turkey's largest bank by market value, Akbank posted 2008 net profit of 1.704 billion Turkish Liras ($1.07 billion), down 14 percent from 2007. Akbank trades at 8.8 times projected 2009 earnings, making it the most expensive of Turkish banks.

Garanti: Turkey's second-largest private bank by market value posted a net profit of 1.75 billion liras in 2008, down 24 percent. The lender trades at 6.9 times projected 2009 earnings.

Halkbank: State-run Halkbank posted net profit of 1.018 billion liras in 2008, down 10 percent. It is the cheapest of the six major Turkish banks, trading at 4.8 times projected earnings. Halkbank listed 25 percent of its capital in 2007 in Turkey's largest-ever IPO.

İşbank: Turkey's biggest listed lender by assets, posted net profits of 1.5 billion liras in 2008, an 11 percent decline. The stock trades at 7 times projected 2009 earnings.

Vakıfbank: State-controlled VakıfBank is Turkey's sixth-largest bank by market value and one of the cheapest - trading at 5.8 times projected earnings. In 2008 VakifBank posted a 27 percent decline in net profit to 753.2 million liras.

Yapı Kredi: Turkey's fourth-largest lender by market value had full-year net profits of 1.04 billion liras in 2008, up 47 percent. The bank trades at 6.7 times 2009 projected earnings.