Erste Group Research Flash note | Banking | Turkey 03 February 2012

Garanti Bank – Buy
Target Price: TRY 8.60 / Close as of 02/02/2012 TRY 6.70

Analyst: Sevda Sarp,

Vibrant margin improvement
Bottom line strengthened. In its 4Q11 financials, Garanti Bank reported a net profit of TRY 791mn net earnings, thus in line with our TRY 760mn forecast and TRY 782mn consensus estimates. The 4Q11 bottom line marks a 64% q/q jump; and implies 18% quarterly RoE. The 4Q11 net income carried the YE bottom line to TRY 3,071mn, which is 2% lower than 2010. The bank closed 2011 with 18% trailing RoE, which is expected to be the second highest figure in the market. The results indicate sound performance, especially on the margin side and easing LDR. Accordingly, we maintain our “Buy” call for the bank. Strongest quarterly NII in 2011. After a 4% q/q contraction in 3Q11, Garanti’s NII jumped by 49% q/q; mainly driven by improvement in CPI linker yields, from 9.6% to 30% in the quarter, which resulted in a 133bps positive NIM impact. This, coupled with improving loan deposit spreads (with 46bps upward repricing in loan rates), enabled Garanti’s NIM to expand by 140bps to 4.4% in 4Q11. When adjusted for the volatility of CPI linkers, the margin remains flattish q/q. Seasonal factors in fees and OPEX. Commission based income dropped by 7% q/q materializing at TRY 480mn – the lowest quarterly figure of 2011, mainly due to seasonality factors and the timing of account maintaining fees. Total fees cover 63% of operating expenses, still high among its peers, despite the q/q drop in fees. Meantime, there is a 35% q/q jump in OPEX, which is related to seasonality factors. Limited, but selective growth in lending. In the quarter, there is 3% q/q growth in total lending, which carried annual growth to 30%. Quarterly growth was mainly driven by auto and GPLs, which showed 7% and 4% respective growth rates. Repo funding diluted. The bank’s deposit base expanded by 5% q/q; which eased the loans to deposit ratio to 99% from 101% a quarter earlier. It should be highlighted that the bank reduced its exposure to repo transaction in 4Q11 as a result of the cost increase, repo transactions dived by 30% q/q where its share in total funding slipped to 7.5% from 10% in 3Q11; this supported the bank’s NIM in the quarter. NPL inflows resulted in a higher cost of risk. Garanti booked TRY 35mn net NPL additions in 4Q11 where there is a TRY 100mn inflow related to a few commercial companies. However, collections remained strong in the quarter, with a 28% rate. The bank closed 2011 on a 1.8% NPL ratio, which remained flattish q/q, but improved from 2.9% in 2010. However, due to NPL inflows, the bank’s provisioning expenses jumped by 39% q/q; and led the cost of risk to increase to 93bps from 86bps in 3Q11. When we adjust the TRY 91mn provisioning expense recorded as a result of the commercial files, CoR remains flattish.

Erste Group Research – Flash note
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Erste Group Research Flash note | Banking | Turkey 03 February 2012

BRSA Bank-Only Financials
Incom e Statem ent TRYmn I. Net Interest Incom e II. Net Fee Income III. Provisions IV. OPEX V. Net Operating Incom e (I+II-III-IV) VI. Net Trading Gain/Loss VII. Other Income VIII. Dividend Income IX. Pre-Tax Income X. Net Profit Balance Sheet TRYmn Loans Security Portfolio Assets Deposits Equity 4Q10 1,280 530 116 929 766 15 111 0 892 698 3Q11 1,044 517 161 761 639 -67 59 1 632 482 4Q11 1,556 480 224 1,027 786 74 148 0 1,008 791 q/q 49% -7% 39% 35% 23% n.a. 153% -71% 59% 63.9% y/y 22% -9% 93% 11% 3% 375% 33% 418% 13% 13% 2010 4,755 1,816 584 3,041 2,945 364 638 5 3,952 3,145 2011 4,689 2,008 822 3,206 2,668 332 903 6 3,908 3,071 y/y -1% 11% 41% 5% -9% -9% 41% 5% -1% -2%

Dec 10 Sep 11 Dec 11 64,827 81,133 83,813 39,210 37,872 35,243 123,963 148,644 146,642 72,658 80,469 84,543 16,475 17,247 17,577

q/q 3.3% -6.9% -1.3% 5.1% 1.9%

y/y 29.3% -10.1% 18.3% 16.4% 6.7%

Key Financial Ratios Spread NIM NPL Ratio NPL Provisioning Ratio Cost-of-Risk Ratio RoE Loans-to-Deposits Loans-to-Deposits (Lira Side) Source: Company Data, Erste Group Research

Quarterly Trend 4Q10 3Q11 4Q11 3.1% 1.7% 3.0% 4.5% 3.0% 4.4% 2.9% 1.8% 1.8% 81.9% 82.0% 81.7% 0.3% 0.3% 0.7% 17.4% 11.3% 18.1% 89.2% 100.8% 99.1% 79.8% 177.0% 113.3%

12-Month Trend 2010 9M11 2011 3.0% 2.2% 2.2% 4.4% 3.5% 3.6% 2.9% 1.8% 1.8% 81.9% 82.0% 81.7% 0.7% 0.3% 0.4% 21.0% 18.1% 18.2% 89.2% 100.8% 99.1% 79.8% 177.0% 113.3%

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