德银-新兴市场-金融业-宏观风险远大于固体信贷指标-20171027-Deutsche_Bank-Garanti_Bank：Macro_risks_overweighing_solid_credit_metrics_10页_541kb

Garanti Bank 3Q17 Summary

Core Content

Garanti Bank reported its 3Q17 BRSA results, which were in line with expectations but showed positive surprises in capitalization and net interest margin (NIM). The bank's performance was compared to Akbank, another leading private bank in Turkey. Despite strong credit metrics, macroeconomic risks such as the weakening Turkish Lira (TRY) and higher U.S. Treasury (UST) yields are expected to negatively impact bond valuations.

Main Points

• Positive Performance:

  • Garanti's capitalization reached its highest level since FY10, with a Capital Adequacy Ratio (CAR) of 17.1%, up 210 bps YoY and 70 bps QoQ.
  • Net Interest Income (NII) grew by 24.1% YoY and 4.4% QoQ, leading to a 13.3% YoY increase in Pre-provision Income (PPI).
  • Net loans grew by 18.3% YoY and 1% QoQ, driven by TRY lending which grew 2% QoQ, compensating for a 3% QoQ contraction in FX lending.

• Macro Risks:

  • TRY weakened by 10% against USD since mid-September, potentially affecting credit metrics and bond valuations.
  • Higher UST yields pose a downside risk for EM credits in general.
  • The bank's bonds have fallen by 3-4 cash points, making valuations attractive, but further weakness cannot be ruled out.

• Bond Recommendations:

  • The bank lowered its Buy recommendation on GARAN 4.75% '19s, 6.25% '21s, and 6.125% '27c22 to Hold.
  • Maintained Hold on GARAN 5.25% '22s and initiated Hold on GARAN 5.875% '23s.
  • 3-5 year notes are considered most valuable on risk-reward terms, with mid yields of 4-5%.

• Earnings and Liquidity:

  • Earnings growth was strong in TRY terms, with a 18.6% YoY increase in Net Income.
  • Liquidity remained stable, with a Gross Loans to Customer Deposits ratio of 115.3%, slightly down from previous quarters.
  • Liquid assets accounted for 22.3% of total assets, up 43.1% QoQ.

• Conference Call Highlights:

  • Management expects slower loan growth in 2H17 due to a slowdown in CGF lending and FX loan demand.
  • Targeted for mid-teens lending growth in 2018.
  • A potential 2-3% negative impact on net earnings from higher corporate tax rates in 2018.
  • No concrete developments on OTAS exposure, but management is hopeful for resolution in 4Q17.
  • Management guided for a dividend payout of at least 25%, with potential upside.

Key Information

• Capitalization: CAR improved to 17.1%, with core capital (T1) at 15%, well above regulatory requirements.
• Loan Portfolio: Problem loans decreased to 2.8% of gross loans, with a stable NPL ratio.
• Earnings: Strong NII and PPI growth in TRY terms, but earnings in USD terms were negatively impacted by TRY depreciation.
• Liquidity: The bank maintains a healthy liquidity position with liquid assets at 22.3% of total assets.
• Recommendations: The bank's bond recommendations have been adjusted to Hold due to macroeconomic concerns, despite strong credit fundamentals.

Risk and Upside Factors

• Upside Risks:

  • TRY stabilization against USD.
  • Improvement in domestic economic activity.
  • Continued strengthening of credit metrics and NIM.
  • Potential rating upgrade.

• Downside Risks:

  • Continued TRY weakness.
  • Slowdown in economic activity and credit growth.
  • Rating downgrade.

Financial Summary

Income Statement (TRYm)

Balance Sheet (TRYm)

Profitability Analysis

Loan Portfolio Quality

Conclusion

Garanti Bank's 3Q17 results reflect strong credit metrics and capitalization, but macroeconomic risks such as TRY depreciation and UST yields are overshadowing these positives. The bank's bond valuations are considered attractive, but the analyst suggests waiting for stabilization in the TRY and more clarity on Fed policy before taking a bullish stance. The bank's financials and ratios show a healthy position, with a strong CAR and stable NPL levels. However, the outlook is cautious due to potential macroeconomic headwinds.