Turkey's banking sector is moving into a lower-growth era. Although Turkish banks' funding has not taken centre stage until very recently, lower savings/deposit growth and the Central Bank of Turkey's (CBT) soft loan-growth targets are changing the environment for banks. The sector is now much more directly involved in financial stability management, and may be heading into a lower-growth environment, in our view.

Deposit growth has settled on a lower path since 2H11, and real rates are not helping. Although banks have enjoyed the rally in rates on the margin front, lower real rates will make a recovery in domestic savings less likely. Deposit growth, adjusted for swings in hard currency and local-currency (LC) bond issues, implies 12% YoY growth in 2012 - below the loan growth we would expect banks to aim for in a business-as-usual year. Although public savings and CBT facilities may help to some extent, a 100% LC loan/deposit ratio makes the situation challenging.

The CBT's soft loan growth targets also cap the growth funded by wholesale funds. Citing the strong relationship between loan growth and the current account, the CBT has set out an annual loan-growth target since 2011; and in its recent presentations, the central bank suggests a limited loan-growth picture, in the 10-15%, range for 2013-2032. There is no active supervision on banks to hit such targets, but the CBT's calculations clearly confirm its view of an extended low-growth environment.

Our deep-dive analysis in this report covers the deposits market, margin and RoE calculations, and gold deposits. Lower real rates on deposits have not translated into a shift from deposits to other savings instruments, but rather a decline in domestic savings. We make a detailed analysis of the deposit market in this report. In addition, we do the maths on margins, RoA and RoE, and discuss what can be done to support RoE.

We expect the low-growth theme to affect the RoE outlook, and would stick to banks with adequate leverage and franchises. We think the effects of a lower-growth environment going forward are widely underestimated. Assuming above a 20% dividend distribution ratio is not possible in the near term, it is clear to us that RoEs are likely to deteriorate. In this environment, we prefer banks that are already leveraged, comfortably funded and have access to a franchise that can distribute higher-spread products. Based on this outlook, we reiterate Halkbank as our top pick in the sector. We think Akbank and Garanti Bank will be the most growth-oriented banks in the sector and will utilise their strength on the capital front.

Source: bne