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3Q13 summary duration gap weighing on margins, weak asset quality and more AfS losses. In this report, we take a sneak-peek at preliminary 3Q13 trends among the Turkish banks in our coverage universe. We believe 3Q13 will offer no surprises for the banking sector. We expect the duration gap to lead to up to a 200-bpt contraction in lira loan-deposit spreads. Asset quality looks worse to us than in 2Q13 (see Figures 1-4), and we also note the NPL provisioning ratio is 1-2 ppts higher QoQ. Last but not least, we think climbing rates will continue to limit book value growth through lower QoQ available for sale (AfS) reserves, although not as much as in 2Q13.
Signs of recovery in loan pricing...New product spreads have climbed to late-May levels, giving us hope that there is more to come (Figure 10). That said, time will show if this leads to better bottom-line profitability, as higher rates could be a knee-jerk reaction to the still-high cost-of-risk (CoR) burden in the sector, as well as the regulator's new proposals for credit cards. Although we think rising spreads (particularly in commercial loans) are good news, they are not yet sufficient for us to change our estimates, which already assume some recovery.
...overshadowed by still-poor asset quality. NPL growth in the sector is higher than in 2Q13 and NPL provisioning coverage has also gone up. This will lead to a higher QoQ CoR burden for banks. Depending on the economic outlook, we believe the pace of NPL inflows could increase in 2014, given lira weakness, which will make life more difficult for corporates.
AfS portfolio losses will continue to limit book value growth. The two-year local currency rate is up by 66 bpts since the end of 2Q12, which means banks will continue to book losses on their AfS portfolios. Nevertheless, we think losses should be much more contained vs 2Q13, when aggregated losses for the six large banks were TRY5.7bn.
Volume trends are stronger than we had expected. 22% YtD loan growth beats our expectations, and is supported by 15% YoY deposit growth (Figure 5), which is at levels above low-growth years such as 2012. Higher real rates on deposits are positive news for savings growth in Turkey.
We maintain our cautious stance. Our 2013E EPS forecasts for the banks under our coverage are, on average, 12% below Bloomberg consensus (furthermore, we even see downside risk, due to NIM and CoR in 2H13E), and our 2014 EPS forecasts are 16% below consensus. We forecast no earnings growth for the sector in 2013 and 2014 (we see a flat or slightly lower bottom line for our coverage in both years). We think the current P/B multiples of Turkish banks, on a par with the emerging market (EM) banks universe, and P/E multiples, at a premium to EM banks (on our numbers), suggest that the sector is at best fairly valued.
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