Garanti Bank: Banking

The Company

Garanti Bank operates in every segment of the banking sector, including corporate, commercial, small and medium-sized entity (SME), retail, and private and investment banking. The company provides a wide range of financial services to its more than 11m customers through an extensive distribution network of 933 domestic branches. Garanti Bank is jointly controlled by Doğuş Holding and Banco Bilbao Vizcaya Argentaria (BBVA), under the principle of equal partnership, and 50.8% of Garanti Bank shares are on free float.

Garanti Bank boasts one of the highest return on average assets (RoAA) levels in the industry, as the bank benefits from its fee generation capability, superior credit risk assessment approach and high net interest margin (NIM). In addition, Garanti is one of the best-positioned banks to sustain its high RoAA level over the long term due to its strong presence in the credit card market, which will help the bank to increase its cross-sell ratios, especially in consumer loans. Moreover, the bank’s expenses per branch, excluding human resources, implies room for efficiency improvements in the coming years.

As of 2012, Garanti Bank’s capital adequacy ratio (CAR) and Tier I ratio stood at 18.2% and 16.5%, respectively, levels that were significantly above the company’s peer group average. Garanti Bank’s strong CAR will enable the management to sustain its 20% dividend payout ratio (the maximum allowed by Turkey’s Banking Regulation and Supervision Agency) and provide room for above-sector loan growth for the bank in the long term. We also expect Garanti Bank to more than regain its 2012 loan market share losses in 2013 as a result of its strong capitalisation.

Development Strategy

The rising share of international borrowing in Turkish banks’ assets will serve to increase the share of FX liabilities within banks’ liability base and it is highly probable that the fresh source of funding from Eurobonds and sub-debt issues will be channelled into Turkish lira (TL) lending, specifically in the SME and consumer loan segments. This will eventually lead to a dollarisation of liabilities and a de-dollarisation of assets in the banking sector going forward. With its relatively low TL loans/assets ratio, Garanti Bank will emerge as the main beneficiary of this trend, which would lead to a more resilient NIM performance in the long term.

Garanti Bank’s average TL deposit cost materialised well above the sector average in 2012, and we expect the year-on-year fall in the bank’s deposit costs to be steeper than the sector average in 2013.

Apart from that, the bank’s average TL loan yield stood at 12% in 2012, and given that the average marginal consumer loan rates hover at around 11.5%, the downward re-pricing in Garanti Bank’s loan yields should remain below the sector average in 2013. In line with the management’s operating budget guidance, our loan-deposit spread improvement projection for Garanti Bank in 2013 totally eliminates the negative impact of the upcoming redemptions in the bank’s CPI linker stock (37% of the bank’s CPI linker stock, which have 12% real rate redeems in August 2013) and results in a somewhat flat NIM projection for Garanti Bank in 2013.

We believe that Garanti Bank will stand out with its resilient NIM performance in 2013 at a time when the overall sector NIM is contracting. We also expect Garanti Bank’s fees to grow by 15% in 2013, as the bank’s conservative fee accounting methodology in 2012 provides a favourable base.

At an operating budget presentation, the CEO of Garanti Bank also stated that the company may carry out an adjustment in their conservative fee accounting methodology in 2013, raising the potential for positive surprises in the bank’s fee income growth. Following a relatively weak earnings performance in 2012, we believe that Garanti Bank is the best-positioned bank to positively surprise the market in 2013 with its earnings performance. We project 21% earnings growth for the bank in 2013.