OREANDA-NEWS. August 2, 2011. Renaissance Capital, the leading emerging markets investment bank, continues to extend its Turkish research footprint, initiates coverage of eight major Turkish banks.

The Turkish banking sector is unique in having posted 20% annual growth in 2005-2010 despite the world going through one of history’s most severe financial crises and considering the limitations of the macro environment in which Turkish banks operate, Renaissance Capital’s report says.

In terms of their depth of management, balance sheet flexibility and crisis experience, Turkish banks can only be matched by their counterparts in Brazil – and Renaissance Capital believes they should definitely be given credit for this. However, no matter how well they execute, Turkish banks can never escape the fact that they operate in a volatile macro environment that leads to sharp slowdowns, every now and then.

Renaissance Capital forecasts 6% GDP growth in Turkey in 2011 slowing down to 4% in 2012 which is good for Turkish banks’ margins but asset quality and cost of risk will emerge as issues in 2H11/2012E. Fundamentally, currency weakness is a direct threat to the Turkish banking sector in the absence of short FX positions. Still, analysts would recommend any currency/share price weakness as an opportunity to buy selected Turkish banks.

Renaissance Capital prefers banks that are more focused on lending, have lower costs and generate higher RoEs. The top pick is Yapi Kredi (YKB); besides analysts think that Halkbank deserves a re-rating. Both banks have been assigned BUY recommendation.

For the banks covered in its report, Renaissance Capital forecasts 2011-2013 operating profit growth of 15% (stable net interest margins) but slower earning per share (EPS) growth of 7% per annum (assuming significantly higher normalised cost of risk). This implies RoE of 14% during 2012-2013E for all the eight banks, and RoE of 16-20% for those banks which analysts prefer.

Valuations are no longer demanding at 1.6x P/BV and 8.7x 2012E P/E for Turkish banks, vs 1.8x and 9.3x, respectively, for the GEM banks universe. However, without improved earnings momentum, near-term outperformance will be difficult, Renaissance Capital says.

Maturity mismatch remains a key structural weakness. In the near future this will impact earnings as rates go up; in the long term, it overstates Turkish banks’ margins, justifying a valuation discount.

Renaissance Capital initiates Isbank with a SELL rating. Isbank is a conglomerate and, hence, deserves a discount to its sum-of-the-parts valuation. Analysts believe its earnings quality remains poor, with large non-cash income from associates boosting profit. Besides, EPS should be adjusted for employee dividends.

Renaissance Capital initiates on Garanti Bank, Akbank, Vakifbank, Bank Asya and Albaraka with HOLD ratings. Analysts believe that Garanti remains best in class but there is a limited upside potential for its stock, while Akbank is fully valued. Vakif deserves a discount due to its weaker deposit franchise and lower RoE. Analysts remain cautious about Bank Asya and Albaraka even at their current depressed valuations.