Garanti Bank announced its 4Q12 bottom-line as TRY757mn, which was 6% below our TRY806mn estimate. Although pre-provision income was 5% higher than our estimate, higher than expected provision charges led to the deviation in our estimate. In Garanti's 4Q12 results, we observed strong core banking activities, however, higher provision charges, mainly driven by the non-recurring item, blurred the bottom-line. As the results were in line with our expectations at the pre-provision level, we maintain our estimates and our HOLD rating with a target price of TRY9.61, which offers 9% upside potential. Based on yesterday's closing prices, Garanti Bank trades at 10.3x of its 2013E earnings and 1.55x of its 2013E book value. 
Our key takeaways from the results are as follows: 
Lending: Garanti Bank posted 3% q/q loan growth, which was in line with our expectations. TRY loan growth (+3% q/q) was mainly driven by retail loans and to a lesser degree by credit card loans. The bank intentionally reduced its exposure by 40bp to the low- margin commercial lending segment, which formed 38% of the loans in 4Q412. Meanwhile, FX loan growth stood at 3% q/q in USD terms, where the bank lost a ca.20bp market share. 
Funding: In 4Q12, Garanti Bank registered a 6% q/q decline in its TRY deposit base as the bank did not get involved in price-based competition in the TRY deposit market and also utilized a higher share of money market funding in its TRY funding base as a substitute for TRY deposits that have gone away. On the FX deposits front, the bank posted 3% q/q growth in its FX deposits. All in all, Garanti Bank achieved a 90bp q/q decline in its funding costs. 
Margins: Thanks to the higher interest income earned from the CPI-linkers (4Q12: TRY1,082mn vs. TRY573mn in 3Q12) and lower funding costs, the quarterly NIM rose by 231bp q/q to 5.8% in 4Q, which led the NIM to improve to 4.5% in 2012 from 4.0% a year ago. In core banking activities, the loan-to-deposit spread improved by ca.85bp q/q thanks to the slightly lower TRY loan yields, -50bp q/q, and sharp decline in TRY deposit costs, -150bp q/q in blended terms. 
Provisions: Provision charges at TRY457mn were higher than our TRY297mn estimate, up 39% q/q. In 4Q412, Garanti Bank registered an NPL inflow of TRY141mn from two loans that belong to transportation and consumer sector clients and booked a provision of TRY113mn after taxes. Separately, Garanti Bank recorded TRY60mn in provisions for loans that originated before 2006 and also allocated TRY80mn in provisions for the recent legislative change related to checks that belong to clients who have defaulted on their borrowings. Recall that Garanti Bank set aside TRY82mn in free provisions in 3Q12 against possible losses associated with lending activities and reversed it in the quarter. When we examine the details, the gross cost of risk in 4Q12 stood at 190bp vs. 111bp in 3Q12. Accordingly, the cumulative gross cost of risk stood at 121bp in 2012 vs. 93bp in 2011 and if we were to adjust for the one-off items and regulatory changes, the restated gross cost of risk will decline to 88bp in 2012. The NPL ratio rose by 30bp q/q to 2.3% at the end of 2012. 
Non-recurring items: Trading gains were in line with our expectations (ESI: TRY10mn), posting a major slump q/q at TRY7mn in 4Q12 vs. TRY452mn in 3Q12. In detail, the sharp decline in trading gains was attributable to the declining capital markets gains. NPL write-backs declined to TRY25mn in 4Q12 from TRY52mn in 3Q12, which was the lowest level in 2012. Nevertheless, management expects NPL write-backs to increase in 2013. 
Capital strength: The quarterly ROE was down by 44bp q/q to 14.6%, while the core banking ROE stood at 16.6% in 4Q12. In 2012, Garanti Bank reported its ROE as 15.9%, which was at 18.2% a year ago. On the other hand, the total capital adequacy and Tier 1 ratios stood at 18.2% and 16.4%, respectively. 
Source: bne