Turkish Banks Credit Review 130830

7/29/2019 Turkish Banks Credit Review 130830

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Turkey

Fixed Income

30 August 2013 Focus

Prices cited in the body of this report are as of 28.08.13 (except where indicated otherwise).

Please refer to the Disclosures section of this report for other important disclosures, including the analyst certification. Additional disclosures regarding the subject company(ies)discussed in this report can be found athttp://research.vtbcapital.com/ServicePages/Disclosures.aspx.

Cre

dit

Turkish Banks Credit Review

Risk and resilience

We review the performance of the major Turkish banks in the context ofbroader EM credit weakness, driven by a reversal in capital inflows anddeteriorated external financing conditions.

We aim to re-assess the banking sector's resilience to increased liquidityand market risk pressures in view of the significant foreign borrowingsand exposures to local currency government debt.

Based on our peer group analysis, we identify potential credit drivers forTurkish banks as a sector and for particular names, including Akbank,

Garanti, Isbank, Halkbank, YapiKredi, Vakifbank and Finansbank.

Although Turkish bank bonds have underperformed as a sector (withoutextraordinary imbalances or anomalies in individual credit spreads), wecurrently see no fundamental catalysts for a positive re-pricing.

In the longer-term, we cannot rule out negative rating actions (such asputting banks on review for downgrade) driven by a sustained pressureon capital adequacy ratios or changes in the sovereign rating outlook.However, downgrades to sub-investment grade are unlikely, given thebanks generally high loss absorption capacity.

Mikhail Nikitin // +7 495 660 4271 // [email protected]
http://research.vtbcapital.com/ServicePages/Disclosures.aspxhttp://research.vtbcapital.com/ServicePages/Disclosures.aspxhttp://research.vtbcapital.com/ServicePages/Disclosures.aspxhttp://research.vtbcapital.com/ServicePages/Disclosures.aspx


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Turkey Turkish banks credit review

Fixed Income

30 August 2013 2

Table of contents

Execu tive Summary ...................................................................................................................... 3Market context ......................................................................................................................... 4Balance sheet exposures ......................................................................................................... 5Asset quality ............................................................................................................................. 6Liquidity .................................................................................................................................... 7Interest margins ....................................................................................................................... 8Capital adequacy / Regulatory environment ............................................................................ 9Peer comparison (1/3)............................................................................................................ 10Spread performance .............................................................................................................. 13Relative value ........................................................................................................................ 14Akbank (Baa2/--/BBB) ............................................................................................................ 15Garanti Bank (Baa2/BB+/BBB) .............................................................................................. 18Isbank (Baa2/BB+/BBB) ......................................................................................................... 21Halkbank (Baa2/--/BBB-)........................................................................................................ 24Yapi Kredi Bank (Baa2/BB+/BBB).......................................................................................... 27Vakifbank (Baa2/BB+/BBB-) .................................................................................................. 30Finansbank (Ba2/--/BBB-) ...................................................................................................... 33

Disc losures ................................................................................................................................. 36


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Fixed Income

30 August 2013 3

Executive Summary

Turkish banks credit: risk and resilience

The gradual deterioration in liquidity ratios has followed rapid lendingexpansion and acceleration of capital inflows on the back of improvement in

Turkish risk perception. In our view, Turkish banks current financingstructure implies a moderate refinancing risk, given that the sector morethan doubled foreign borrowings since 2009.

Dependence on external funding is not critical as it has been balanced by

expanding deposits. At the same time, increased reliance on short-termwholesale funding makes the banks balance sheets structurally sensitive tore-pricing/rollover risk.

We estimate the share of foreign bank funding in the banks total liabilitiesas an early indicator of potential risk.

Furthermore, we estimate the impact of mark-to-market revaluations of thebanks bond portfolios. Turkish banks government bond holdings supportliquidity in a volatile interest rate environment, although increased use ofrepo financing implies a higher level of asset encumbrance. This mightexacerbate pressure on the banks CARs through capital charges on'restricted' available-for-sale portfolios, in our view.

We calculate conservative NPL and coverage ratios (including the loansclassified as close-monitoring into the risk group II under BRSA reporting

standards) as the key asset quality metrics. Although we note Turkishbanks' resilient capital buffers and strong asset quality, we see no catalystsfor a positive re-pricing in the short-term. If anything, negative factors aremore readily available in the current market environment, and we believethat rating agencies might react to any signs of a deterioration.


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Fixed Income

30 August 2013 4

Market context We focus on recent developments in Turkish banks

credit profiles in the context of downward pressure

on Turkish assets due to a reversal of capital

inflows and heightened political uncertainty. Since May 2013, the Turkish lira has lost 10% of its

value against the USD/EUR basket. Government

bond yields have surged, triggering the widening of

credit spreads, particularly in local currency paper.

The banking sector is exposed to moderate rollover

risk as its short-term borrowings have more than

doubled since 2009. The growth in foreign debt has

been counterbalanced by the expanding depositbase and the enhanced policy funding options.

The Central Bank of Turkey (CBRT) has adopted arefinancing mechanism through a combination of

short-term repos and lending windows. By varyingthe volumes of liquidity provided to the market and

absorbed by the CBRT, interest rates are being

maintained within the policy rates corridor.

Given the pressure on EM currencies and debt, we

believe the CBRT might be forced to bring interest

rates back to the upper bound of the corridor to

defend the lira. Further interest rate direction is

uncertain, as the CBRT might opt for another round

of controlled volatility, with potentially negative

consequences for the corporate sector and,

indirectly, banks.

In an unlikely scenario in which Turkish banks

cannot roll over their external debt, the CBRT might

step in by injecting liquidity to banks from its FXreserves. However, banks would be forced to sell

domestic assets in this case, implying furtherpressure on the lira and lira-denominated bonds.

Figure 1: Key policy rates Figure 2: Exchange rate (TRY vs USD/EUR basket)

Source: Bloomberg, VTB Capital Research Source: Bloomberg, VTB Capital Research

Figure 3: TRY benchmark bond yields, % Figure 4: USD benchmark bond spreads, bp


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

O/N market rate CBRT policy rate

CBRT O/N borrowing rate CBRT O/N lending rate

CBRT average funding rate

1.85

1.9

1.95

2

2.05

2.1

2.15

2.2

2.252.3

2.35

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

F eb-13 Mar-13 Apr-13 May-13 J un-13 J ul-13

2Y 5Y 10Y

0

50

100

150

200

250

300

350


TURKEY23 TURKEY30


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Fixed Income

30 August 2013 5

Balance sheet exposures Turkish banks balance sheet structure has evolved

from a fully deposit-funded model (LTD below 1x) to

a more aggressive, but overall well-balanced,

model, supported by a gradual diversification offunding sources.

Rapid lending growth resulted in a decreased share

of liquid assets as banks started to reduce their

holdings of fixed income securities, especially after

Basel II capital regulations were introduced in 2012.Still, sovereign bonds the banks key repo-eligible

collateral with a high utilisation ratio areincreasingly important for the sectors liquidity given

that the share of repo is some 8% of total funding.

Turkish banks generally do not take significant

unhedged FX exposure. They might be exposed,

however, to elevated market risk as a result of the

volatility in the bond markets. This is largely a riskfor the banks capital positions through revaluation

of their available-for-sale portfolios: elsewhere in

this report we estimate the effect of MtM losses on

the individual banks capital in 1H13.

On the funding side, we highlight the role of

interbank loans and deposits, including syndicated

loans and trade finance. Turkish banks

dependence on foreign bank loans is not critical:

their share has not exceeded 15% of total liabilities.

However, this funding source is generally short term(one-year facility is an industry standard in the

syndicated loan market), implying a rollover risk at

least for some banks. Borrowings on the Eurobondmarket helped to strengthen the maturity profile of

Turkish banks, but these became material only

recently, after the sovereign rating upgrades.

Figure 5: Loan-to-deposits ratio Figure 6: Simplified asset structu re

Source: BRSA, VTB Capital Research Source: BRSA, VTB Capital Research

Figure 7: Simplified non-debt fundi ng structur e Figure 8: Repo financing


0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2008 2009 2010 2011 2012 J ul-13

Total loans Total deposits Loan-to-deposit ratio (RHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 J ul-13

Cash and CBRT Due from banks Securities Loans

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 J ul-13

Repo financing Foreign banks

Retail deposits Corporate deposits

Domestic banks

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2008 2009 2010 2011 2012 J ul-13

Restricted securities* / Total securities

Repo financing / Total non-debt funding


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Fixed Income

30 August 2013 6

Asset quality The sectors key strength is its strong asset quality,

supported by the exceptionally robust performance

of the Turkish economy over the past few years.

Whether the non-performing loans have alreadybottomed out as the economy is past the bullish

phase of the economic cycle is less certain now. But

the current indicators such as the share of NPLs

below 3% of total loans or coverage ratio above

75% on a specific provisioning basis positively

characterise the credit standing of the Turkish

banking sector as a whole.

Single-industry and single-borrower risk

concentrations are relatively low (compared with

peer EM banks). The sectors key exposures are in

manufacturing, trade and services, with the

increased share of retail lending and SMEs. Based

on the available data, we have not identified any

excessive related-party concentrations at major

banks, even though some of them are controlled by

family-owned multi-industry holdings.

In retail lending, consumer loans, credit cards and

other unsecured personal finance products have

been the key growth driver. NPLs have dropped to

the historical lows on the back of accelerated

growth, although the increased cost of risk and

restructured loans in the segment might indicate a

potential trend reversal. On a positive note, banks

have almost ceased origination of FX-denominated

consumer loans, while effective interest rates onother high-risk products are subject to explicit

regulatory caps since 2006. We also note increased

credit bureau coverage from 43% of adult

population in 2009 to 63% in 2012, following the

development of the centralised Credit Bureau of

Turkey (KKB) based on the membership by all

major banks.

Figure 9: NPLs and coverage ratio, % Figure 10: Industry concentration s


Figure 11: Retail lending, TRY bn Figure 12: NPLs in retail lending


70.0

72.0

74.0

76.0

78.0

80.0

82.0

84.0

86.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Total NPLs / Total loans, %

Specific provisions / Total NPLs, % (RHS)

Agriculture andforestry

4%

Manufacturing19%

Electric, gasand waterresources

4%

Construction6%

Wholesale andretail trade

12%Hotels andrestaurants(tourism)

2%

Transportationand

communication4%

Financialintermediation

4%

Real estatebrokerage, rentand advisory

3%

Individuals33%

Other9%

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Housing Vehicle Personal finance

Other consumer Credit cards

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Housing NPLs / Housing loans

Vehicle NPLs / Vehicle loans

Personal finance NPLs / Personal finance loans

Credit card NPLs / Credit cards


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Fixed Income

30 August 2013 7

Liquidity The gradual reduction in balance sheet liquidity

(adjusted liquid assets as a share of total assets)

has followed the banks more aggressive lending

expansion, particularly in consumer and SMElending, and acceleration of capital inflows on the

back of improvement in Turkish risk perception.

Free liquid assets decreased largely due to the

encumbrance of the banks bond portfolio in regard

to repo facilities. In April 2013, the CBRT estimated

the share of collateral-free government securities,

which could be used by banks in the case of a

liquidity shortfall at 16%, and we believe that the

ratio has not increased since then.

The other important liquidity factor is the CBRTs

reserve requirement policy, allowing banks to hold

required Turkish lira reserves in gold and foreigncurrencies. The total liquidity requirement ratio

(used as a regulatory limit in accordance with the

regulation on banks liquidity adequacy) has been

declining, but remains above the minimum 100%.

Debt issuance by Turkish banks also grew

significantly in 2012, following the sovereign rating

upgrades, albeit from a low base. Total foreign

liabilities, including syndicated loans, are

increasingly important as a funding source. The

banks average external debt rollover ratio has been

hovering around 1x given the significant amount of

short-term borrowings. Still, deposits remain the core funding source for

Turkish banks. In 2012, deposit withdrawals without

incurring a loss of interest were conditionally

allowed by the regulator, aiming to increase the

average maturity generally short-term even if

viewed as largely sticky or core by the hosting

banks.

Figure 13: Liqui d assets (% Total assets) Figure 14: Liqui dity requirement ratio, %


Figure 15: Debt securities issued abroad, USDbn Figure 16: Total foreign liabiliti es ex-repo, USDbn

Source: CBRT, VTB Capital Research Source: CBRT, VTB Capital Research

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Unencumbered securities Cash and cash equivalents

Liquid assets

50

70

90

110

130

150

170

190

210

230

250

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Up to 7 days Up to 1 month

Up to 3 months Up to 12 months

Total liquidity requirement ratio Regulatory limit

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

0.0

10.0

20.030.0

40.0

50.0

60.0

70.0

80.0

90.0

2008 2009 2010 2011 2012 1Q13 2Q13

Long-term Short-term


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Fixed Income

30 August 2013 8

Interest margins Margin contraction has been the markets main

concern given the tightened liquidity conditions and

a rise in the cost of funding. However, the sectors

interest margins proved resilient. In fact, due to the

short average duration of both loans and deposits,

any sharp change in funding rates has been offsetby a respective move in lending rates, and vice

versa. In 2012, the sectors average net interestmargin stood at 4.1%.

The CBRT has been determining the maximum

contractual interest rates on credit cards on aquarterly basis since 2006, and on overdraft

accounts since 2013. In fact, these two products are

most profitable for Turkish banks, with

extraordinarily high effective rates of around 60%,

compared to 8.5-10% for housing and auto loans or

12.5-13% for personal installment loans (beforeextra fees and commissions). Fees and

commissions might also be subject to regulatory

intervention, including explicit caps on credit card

fees.

Apart from direct pricing regulation for selected loan

products, there have been cases of a legal

involvement in interest rates policies: in 2012,Turkeys Competition Board launched an

investigation of the 12 major banks related toalleged collusion in determining interest rates on

retail loan products. The competition watchdog

imposed fines up to 1.5% of total revenues (the

largest fine was TRY 213mn, imposed on Garanti);however, these actions have not had any significant

impact on the banks profitability.

Figure 17: W/A interest rates on TRY loans, % Figure 18: W/A interest rates on TRY deposits, %

Source: CBRT, VTB Capital Research Source: CBRT, VTB Capital Research

Figure 19: W/A interest rates on FX deposits, % Figure 20: Average NIM / blended fundin g rate, %

Source: CBRT, VTB Capital Research Source: BRSA, VTB Capital Research

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Jan-0

9

Apr-09

Jul-09

Oct-09

Jan-1

0

Apr-10

Jul-10

Oct-10

Jan-1

1

Apr-11

Jul-11

Oct-11

Jan-1

2

Apr-12

Jul-12

Oct-12

Jan-1

3

Apr-13

Jul-13

Personal Vehicle Housing Commercial

0.0

4.0

8.0

12.0

16.0

20.0

Jan-0

9

Apr-09

Jul-09

Oct-09

Jan-1

0

Apr-10

Jul-10

Oct-10

Jan-1

1

Apr-11

Jul-11

Oct-11

Jan-1

2

Apr-12

Jul-12

Oct-12

Jan-1

3

Apr-13

Jul-13

Up to 6 months Up to 1 year More than 1 year Total

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Jan-0

9

Apr-09

Jul-09

Oct-09

Jan-1

0

Apr-10

Jul-10

Oct-10

Jan-1

1

Apr-11

Jul-11

Oct-11

Jan-1

2

Apr-12

Jul-12

Oct-12

Jan-1

3

Apr-13

Jul-13

USD 3-month USD 6-month

EUR 3-month EUR 6-month

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Average NIM. %

Average cost of interest-bearing liabilities, %


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Fixed Income

30 August 2013 9

Capital adequacy / Regulatory environment Turkish banking law gives significant regulatory

powers to the BRSA, a supervisory agency

reporting directly to the prime minister. BRSAs legal

mandate stipulates for aligning the Turkishregulatory framework with that of the EU. Banks

must maintain minimum capital adequacy ratios of

8%, or 12% recommended for banks applying for

the right to issue TRY-denominated bonds and bills.

Basel II regulation was implemented in Turkey in

J uly 2012, after a one-year parallel run for the

simultaneous implementation of Basel I and Basel

II. The rollout of Basel had a limited impact on

capital adequacy (only 20bp decrease in the

systems TCAR immediately following the new

regulation), mostly due to the banks high

profitability and increased subordinated debt

issuance.

The banking sectors TCAR was 16.3% in J une.

The banks capital positions are likely to be affected

by higher impairment charges and significant mark-

to-market adjustments on available-for-sale

securities, but are likely to be supported by

sustainable revenues and strong operational

efficiency.

The share of Tier I equity in total capital exceeds

80%, indicating a limited reliance on subordinated

debt, as well as significant potential for increased

issuance of hybrid debt once Turkish bank

regulations are aligned with Basel III. The existing

LT2 bonds do not have loss absorption features: a

typical structure only includes subordination event

language, i.e. contractual subordination in

bankruptcy, receivership or reorganisation. We

expect these bonds to be grandfathered under new

regulations, with an adequate phase-out period.

In February 2013, BRSA initiated further steps

toward transition to Basel III. The BRSA has

published draft regulations on capital adequacy

introducing the concept of core Tier I and additionalTier I capital as well as Basel-compliant

requirements for subordinated debt. There is no

precise timeline for the rollout of Basel III, but we

understand that the implementation is planned to

start in J anuary 2014.

According to the draft, the minimum Core Tier I ratio

is set at 4.5%, and the Total Tier I ratio at 6%, while

TCAR is supposed to remain unchanged. The

BRSA also prepared draft regulations on capital

protection and counter-cyclical buffer requirements,

as well as liquidity coverage ratios. This part of the

Basel III package is expected to become effective

from 2015.

As an additional tool, the regulator intends to

introduce higher central bank reserve requirements

for banks that fail to meet leverage ratios. Effective

from 4Q13, banks with leverage ratios below 3.5%

are to be required to hold additional reserves,

ranging from one to two percentage points. The

threshold would step up to 4% in 4Q14 and then to

5% in 4Q15. The leverage ratios of most Turkish

banks (reported starting in 2013 for monitoring

purposes only) are significantly above the new

requirement, so any immediate impact for the banks

would be limited.

The Turkish national version of Basel II also

includes a complex interest rate and exchange rate

shock testing, aimed at ensuring that banks hold

sufficient capital to absorb losses from severe rate

movements. The stressed interest rate shift

reporting is incorporated into banks quarterly BRSA

financials.

Figure 21: Turkish banks capital adequacy

Source: BRSA, VTB Capital Research

Figure 22: Simple leverage and sub debt , %

Source: BRSA, VTB Capital Research

10.0

12.0

14.0

16.0

18.0

20.0

22.0

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Total regulatory capital, TRYbn

RWA, TRYbn

Capital adequacy ratio, % (RHS)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Equity / Total assets. %

Subordinated debt / Total equity. %


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Fixed Income

30 August 2013 10

Peer comparison (1/3)

Figure 23: Capital adequacy/leverage Figure 24: Balance sheet liquid ity Figure 25: Fixed income portfo lio

Source: company financials, VTB Capital Research Source: company financials, VTB Capital Research Source: company financials, VTB Capital Research

We use 1H13 BRSA consolidated financials, with

two exceptions, VAKBN and FINBN, for which 1H13

consolidated reports were not available on this

reports publication date. 1Q13 numbers were used

for these two banks. We believe this does not affect

materially the quality of the peer comparison.

We conservatively adjust loan-to-deposit ratios for

bank deposits reported as part of total deposits

under BRSA disclosure standards.

In terms of LTD ratios, all banks in our peer grouphave a conservative level of dependence on non-

deposit funding sources.

Capital adequacy calculated in line with Basel II

requirements is relatively high for all the banks

under review, indicating their sufficient loss

absorption capacity.

We calculate liquid assets as the sum of cash and

cash equivalents, money market placements and

government bonds, adjusted for the accounts

pledged, used as collateral under repo transactions

or otherwise restricted.

The ratio of liquid assets to total assets has been

falling for major Turkish banks over the past few

years, mostly due to the increased use of bond

portfolios as collateral under repo funding. The

overall asset encumbrance is not critical and implies

increased levels of interest rate exposure ratherthan liquidity shortfall.

HALKBK has the highest balance sheet liquidity in

the peer group (and the lowest level of repofinancing). AKBNKs funding policy is currently more

aggressive, given the share of repo financing near18% of the banks total liabilities.

AKBNK also has the largest exposure to

government bonds (25% of total assets), while the

other banks have lightened up on their portfolios. It

is important to note, however, that Turkish banks

bond portfolios usually comprise a significant share

of CPI linkers and floating rate bonds, partially

mitigating market risk exposure. AKBNK is no

exception: on a non-consolidated basis, the share of

CP I linkers was 35% of AKBNKs total securities at

end-1H13.

Government bonds are typically reported as part ofavailable-for-sale securities, implying that the bulk of

MtM revaluation gains and losses are chargeddirectly on capital. In 2Q13 this caused a

deterioration in the banks capital positions, yet

without a dramatic effect on capital adequacy ratios.

AKBNKGARAN

ISCTRYKBNKHALKBK

VAKBN

FINBN

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

1.00 1.05 1.10 1.15 1.20 1.25

TCAR

Adj . LTD ratio

AKBNK

GARAN

ISCTR

YKBNK

HALKBK

VAKBN

FINBN

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

10.0% 15.0% 20.0% 25.0% 30.0%

Repofinancing/Totalliabilities

Adj .l iqu id ass ets / Total ass ets

AKBNK

GARAN

ISCTR

YKBNK

HALKBK

VAKBN

FINBN

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

10.0% 15.0% 20.0% 25.0% 30.0%

Pledged/Adj.totalsecurities

Government bonds / Total assets


11/39


Fixed Income

30 August 2013 11


Figure 26: Foreign bank deposits / Total liabilit ies Figure 27: Debt securities issued / Total liabilit ies Figure 28: FX-denominated loans/deposits


We estimate the share of foreign bank funding in

the banks total liabilities as an early indicator of

potential rollover risk.

Foreign bank funding formally does not contribute to

extension of the average duration of the banks

liabilities: average maturity of bank loans (except

securitization credits and loans from IFIs) is just

about 1 year. However, Turkish banks generally do

have a track record of successful refinancing of

bilateral and syndicated bank debt, even in an

environment of closed international debt markets.

AKBNK, GARAN and HALKBK are almost equally

equally exposed to refinancing risk, given the ratioof foreign bank loans to total liabilities in the 16-18%

range. VAKBN and FINBN are less dependent on

foreign bank loans. The Turkish banks average

external debt rollover ratio is about 100%.

Bond issuance accelerated in 2012 on the back of

increased risk appetite in global debt markets and

following the Turkish sovereign rating upgrades.

The total amount of FX-denominated bank debt

increased from USD 4.3bn at YE11 to USD 13.5bn

at YE12. The share of debt borrowings

(predominantly local currency bonds) in the banks

total funding is still relatively low.

Eurobonds represent an important source of long-

term funding (the average maturity of foreign bonds

issued by Turkish banks now exceeds five years).Given the sharp widening in credit spreads in J une-

August 2013, we believe that it would be a

challenge for Turkish banks to print new dollar-

denominated debt in 2H13 at acceptable price

levels. Combined with CBRT tightening, this might

re-prioritise deposit funding as a key source,

implying short-term pressure on the bank liquidity

and interest margins.

A relatively high level of balance sheet dollarisation

is typical for Turkish banks. At the same time, banks

do not take unhedged currency risk exposures

beyond the regulatory limits. In fact, banks FX-

denominated loans are symmetrically funded by FX

deposits.

GARAN has the highest (but overall balanced)

current shares of both FX loans and FX deposits.

FINBN runs a significant currency risk mismatch as

its almost entirely TRY-denominated loan book is to

a significant extent funded via swapping FX fundinginto TRY.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

AKBNK GARAN

ISCTR

YKBNK

HALKBK

VAKBN

FINBN

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

FX-den.deposits/Totaldeposit

s

FX-den. loans / Total loans


12/39


Fixed Income

30 August 2013 12


Figure 29: Trading gains / Revaluation losses Figure 30: NIM vs Cost of risk Figure 31: Non-performing loans


We estimate the impact of mark-to-market

revaluations of the bond portfolios (classified into

the AFS category) on the banks equity in 1H13.

VAKBN and FINBN are excluded as their

consolidated 1H13 results were not available.

AKBNK reported the biggest change in a MtM

revaluation reserve: a TRY 2.6bn MtM valuation

difference or about 10% of regulatory capital. The

banks TCAR lost 160bp in 2Q13, largely due to the

revaluation effect. AKBNK also reported the largest

share of net trading gains in operating profit,reflecting its above-peer market risk exposure.

For other banks, the impact of the revaluationreserve on regulatory capital was in the 4-6% range

(100-180bp in terms of TCAR). On a non-

consolidated basis, this applies also to VAKBN

(MtM revaluation at 5.6% of the banks total equity).

Turkish banks profitability metrics have remained

solid. Operating performance might come under

pressure toward the end of the year, but it continues

to be supported by strong efficiency and

manageable risk charges.

Unsurprisingly, banks with a higher cost of risk

(FINBN, VAKBN) tend to report higher interest

margins, reflecting their focus on higher-risk/higher-

margin lending products. We note above-peer

margin/risk efficiency of HALKBK, driven by its

largely TRY-denominated, SME-focused loan book.

FINBNs policy not to sell impaired loans partly

explains its higher cost of risk and NPL ratios. At thesame time, loan impairments and respective risk

charges might increase further in 2013 following the

banks retail expansion and a natural seasoning of

the portfolio.

We calculate the sum of general and specific

provisions vs. total impaired loans (including the

loans classified as close-monitoring under BRSA

reporting standards).

On this basis, FINBN shows the highest level of

problem loans, while its coverage ratio is in line with

peers.

ISCTR has reported the strongest asset quality

metrics: its NP L ratio was 1.9% and its close-

monitoring loans was 3.7% of total loans. ISCTR

has an above-peer total coverage ratio but arelatively low specific coverage as it had to create

higher general provisions against its consumerloans from 3Q11, although NPLs and recoveries did

not change materially.

On a specific-only basis, all banks under reviewreported coverage ratios above 75%.

AKBNK

GARAN

ISCTR

YKBNK

HALKBK

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

0.0% 3.0% 6.0% 9.0% 12.0% 15.0%ChangeinAFSM-t-Mreserves/Equity

Net trading gains / Total operating income

AKBNKGARAN

ISCTR YKBNK

HALKBK

VAKBN

FINBN

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0% 5.0% 6.0% 7.0% 8.0%

Costofrisk(annualised)

Net interest margin

AKBNK

GARAN

ISCTR

YKBNK

HALKBK

VAKBNFINBN

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

2.5% 5.0% 7.5% 10.0% 12.5%

Totalprovisions/TotalNPLsand

watchlistloans

Total NPLs and w atchlist loans / Total loans


13/39


Fixed Income

30 August 2013 13

Spread performance Turkish bank credit in the Eurobond market has

been repriced wider in the context of a broader

pressure on Turkish and EM assets, but apart

from technicals without a coherent logic driving

the relative movement of individual bond prices.

Bond spreads have widened at least by 100bp over

the past three months. ISCTR18 and VAKBN18

both issued in April 2013, i.e. into an aggressive

demand and immediately before the market startedto soften sold off most heavily, losing more than

10pp in price and adding 215bp and 170bp inspreads, respectively.

Subordinated LT2 issues such as VAKBN22 and

ISCTR22 have outperformed, but largely due to

their relatively low liquidity. As a result, sub-senior

ratios dropped to 1.1x for most issuers. This is not

entirely groundless, given the structuralcharacteristics of the Turkish LT2 debt, but leaves

no room for any upside vs. senior paper.

Bank spreads to Turkish sovereign paper also

widened from a very tight 60-80bp in February to

150-170bp in August. Although it is difficult to

identify fundamental drivers behind the spread

dynamics of individual names, we note the relative

weakness of YKBNK across the curve and the

resilience of FINBN, the highest-yielding name in

the sector.

We note especially sharp and non-discriminatory

spread widening in liquid long-duration, paperincluding GARAN22 and AKBNK22 all trading

wider than 450bp over mid-swaps now. Yields in the

segment are 200-250bp higher than at initial

offerings in 2012 and 1Q13.

Figure 32: Worst performers (Z-spread basis) Figure 33: Top performers (Z-spread basis)


Figure 34: Bank spreads vs TURKEY17, bp Figure 35: Selected bonds Z-spreads, bp


0

50

100

150

200

250

3-month spread change, bp 6-month spread change, bp

0

20

40

60

80

100

120

140160

180

3-month spread change, bp 6-month spread change, bp

0.0

50.0

100.0

150.0

200.0

250.0

300.0

Feb-13 Mar-13 Apr-13 May-13 J un-13 J ul-13

AKBNK17-TURKEY17 GARAN17-TURKEY17

HALKBK17-TURKEY17 ISCTR17-TURKEY17

YKBNK17-TURKEY17

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

550.0


GARAN 22 AKBNK 22 HALKBK 20 YKBNK 20


14/39


Fixed Income

30 August 2013 14

Relative value Turkish bank bonds have strongly underperformed

as a sector without many imbalances or

anomalies in relative spreads. The only exception

has been the relatively resilient subordinated debt.

We believe that the mid-duration segment (senior

2017s) has the strongest price recovery potential

within a broader market recovery. The best way to

express a constructive view on the sector would be

through YKBNK 15s or 17s, in our view.

At the same time, we see no positive triggers for

such a repricing in the short-term. If anything,

negative factors are easier to identify in the currentenvironment, and we believe that rating agencies

might react to any signs of further deterioration.

In our view, downgrades back to sub-investment

grade are unlikely, but in the medium term wecannot rule out negative actions (such as putting

banks on negative credit watch), driven by the

continued pressure on the banks capital adequacy

ratios, the potentially negative impact of FX volatility

on the corporate sector and/or a generally weaker

economic environment.

Whether the increased downgrade risk is already

priced is uncertain, given that credit spreads have

followed sovereign curve dynamics.

Figure 36: Selected Turkish bank b ond yields

Source: Bloomberg, VTB Capital Research

Turkey

Akbnk15

Akbnk17

Akbnk18

Akbnk22

Garan17

Garan21

Garan22

Isctr16

Isctr17

Isctr18

Isctr22 T2

Halkbk17

Halkbk20

Finbn16

Finbn17

Excrtu16

Excrtu19

Ykbnk15

Ykbnk17

Ykbnk20

Ykbnk22 T2

Vakbn17

Vakbn18

Vakbn22 T2

SBERRURUSSIA

ALFARU

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

0 1 2 3 4 5 6 7 8 9 10

Yield,%

Duration, years


15/39


Fixed Income

30 August 2013 15

Akbank (Baa2/--/BBB)Shareholding str ucture:Sabanci Holding, affiliated

institutions and individuals (48.8%), Citigroup (9.9%),

free float (41.3%). Sabanci Holding is one of the largest

family-owned multi-business groups in Turkey, with totalconsolidated turnover of USD15bn. Akbank is the

groups largest entity.

Key balance sheet exposures:

Largely deposit-funded, but increasingly reliant on

the repo market due to the significant investment in

Turkish government bonds (25% of total assets).

About 80% of total securities were blocked as

collateral or restricted under repo agreements at the

end of 1H12, implying a limited liquidity buffer

(money market borrowings are already close to 20%

of the banks funding base; the share of liquid

assets adjusted for the pledged securities is lessthan 15% of total assets).

A significant share of foreign bank loans, potentially

exacerbating risk mismatches, but hedged through

derivatives (within the regulatory limit), without any

significant gaps or refinancing pressures.

Capital adequacy:

Strong Basel II TCAR of 15.7% and Tier I ratio of

15.3% indicate high quality core capital (no hybrid

instruments).

Significant pressure on capital adequacy comes

from an available-for-sale securities revaluationcharge in 2Q13 (TCAR 160bp lower; negative

change in market value reserve exceeded 10% of

regulatory capital at end-1H13).

Figure 37: Leverage and capital adequacy Figure 38: Funding structur e

Source: Akbanks BRSA consolidated financials, VTB Capital Research Source: Akbanks BRSA consolidated financials, VTB Capital Research

Figure 39: Key financials & ratios

2009 2010 2011 2012 1Q13

BALANCE SHEET, TRY bn

Adj. total assets 101.0 118.8 138.7 162.5 163.1

Total loans 46.4 59.0 75.5 93.4 97.6

Adj. total deposits 56.9 64.0 70.5 79.9 79.8

Adj. retail deposits 35.9 38.6 43.2 47.2 48.7

Total wholesale funding 27.5 33.5 45.9 53.1 54.9

Total capital 14.4 17.9 18.1 22.5 22.3

KEY RATIOS

Adj. LTD, times 0.82x 0.92x 1.07x 1.17x 1.22x

Government bonds / Total assets 44.7% 41.3% 30.2% 26.9% 23.3%

Adj liquid assets / Total assets 34.2% 32.9% 26.7% 19.1% 18.2%Total wholesale funding / Total liabilities 31.1% 32.8% 37.7% 37.6% 38.7%

NPLs / Total loans 3.8% 2.2% 1.7% 1.2% 1.3%

Close-monitoring loans / Total loans 5.8% 2.2% 1.7% 3.2% 2.2%

Adj. NIM 5.3% 4.3% 3.6% 4.1% 4.6%

Cost of risk (annualised) 2.3% 1.0% 1.0% 1.3% 1.9%

ROAE 21.1% 18.6% 14.1% 14.8% 15.6%

Total CAR 21.0% 19.9% 18.6% 17.9% 17.3%

Source: Akbanks BRSA consolidated financials, VTB Capital Research

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2009 2010 2011 2012 1Q13 1H13

Total CAR, %

Core capital / Adj RWA, %

Adjusted loan-to-deposit ratio, times [RHS]

Money market

repo payables18%

Foreign bankfunding16%

Debt securitiesissued

5%Savingsdeposits

33%

Corporatedeposits

23%

Other

5%


16/39


Fixed Income

30 August 2013 16

(contd) Akbank: credit summaryProfitability:

Consistently sound NIM supported by double-digit

effective interest rates on TRY-denominated loans

(11.1% in 1H13) and an average cost of fundinggradually declining over the past three years.

Strong fee and commission-based income

contributing up to 25% of the banks total operating

profit, backed by credit card fees and insurance

cross-sell.

Above-peer (but potentially volatile) contribution of

trading gains, given the market risk exposures and

revaluation reserve on investment securities

(charged directly against capital).

Credit risk:

Strong asset quality: NPLs below the market

average (1.2% vs. 2.7%); annualised cost of risk

below 2% (about 70bp on a quarterly basis).

Coverage ratio above 2x (including general

provisions), with sufficient 50% coverage of total

NPLs and watchlist loans.

No significant reported single-name/single-industry

concentrations in lending (including to the banks

related risk group).

Rapid loan growth largely driven by unsecured

consumer loans and mortgages (21% and 25%

YTD, respectively) as well as SMEs, implying a

decrease in FX-denominated loans (from 44% in

2009 to 32% in 1H13) and reversal in the banks

balance sheet currency position.

Market risk :

Significant unhedged exposure to the domestic

sovereign bond market (25% of total assets),

implying some correlation between the bankscapital position and sovereign debt performance.

About half of the banks portfolio consists of FRNs

and CPI linkers, partially offsetting the interest rate

risk.

Above-peer revaluation reserve charge on capital in

2Q13 due to the unrealised losses on fixed income

instruments (about 11% of regulatory capital at the

end of 1H13).

Moderate exposure to FX risk due to the structurally

short balance sheet position in foreign currencies

prompted by the securities portfolio and regulatory

limits on FX retail loans.Liquidity risk:

Balanced funding profile with lending growth largely

financed by the banks broad deposit base; but

lower flexibility in managing short-term liquidity as a

result of the moderation in loan-to-deposit ratio and

increased use of repo financing.

Gradual decrease in the share of unencumbered

liquid assets (about 80% of liquid fixed income

securities restricted or blocked as collateral under

repo transactions).

The share of repo-based funding in the banks total

liabilities reached its historical high of 17% at the

end of 1H13. Increased dependence on repo andforeign bank funding is partially offset by the low use

of debt financing (debt securities were only 5% oftotal liabilities at the end of 1H13).

Figure 40: Asset quality metrics


Figure 41: Foreign currenc y loans and deposits


0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%80.0%

90.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2009 2010 2011 2012 1Q13 1H13

NPLs / Total loans, %

NPLs and watchlist loans / Total loans, %

Total provisions / Total NPLs and watchlist loans, % [RHS]

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2009 2010 2011 2012 1Q13 1H13

FCY-den loans / Total loans, %

FCY-den deposits / Total deposits, %


17/39


Fixed Income

30 August 2013 17

(contd) Akbank: financials & ratios

Figure 42: Profit and loss accoun ts, TRY bn

YE09 YE10 YE11 YE12 1Q13 2Q13 1H13

Interest income 9.5 9.0 9.5 11.6 2.9 2.8 5.7

Interest expense -4.8 -4.6 -5.3 -6.3 -1.3 -1.2 -2.5NET INTEREST INCOME 4.7 4.4 4.2 5.4 1.6 1.6 3.2

Fees and Commissions Received 1.5 1.6 1.9 2.1 0.6 0.7 1.3

Fees and Commissions Paid -0.2 -0.2 -0.3 -0.3 -0.1 -0.1 -0.1

Net trading gains/losses 0.1 0.1 -0.1 0.4 0.3 0.4 0.7

Other operating income 0.5 0.9 0.7 0.4 0.1 0.1 0.2

TOTAL OPERATING INCOME 6.7 6.8 6.4 8.0 2.6 2.7 5.2

Provision for loan losses and other receivables -1.1 -0.5 -0.7 -1.1 -0.4 -0.6 -1.0

Operating expenses -2.3 -2.5 -2.5 -3.0 -1.0 -0.8 -1.8

PROFIT/LOSS BEFORE TAX 3.3 3.8 3.2 3.9 1.2 1.3 2.4

Tax provision -0.6 -0.8 -0.7 -0.9 -0.3 -0.3 -0.6

CURRENT YEAR PROFIT/LOSS 2.7 3.0 2.5 3.0 0.9 1.0 1.8

Source: Akbanks consolidated BRSA financials, VTB Capital Research

Figure 43: Profitability ratios

2009 2010 2011 2012 1Q13 1H13

Adjusted NIM 5.3% 4.3% 3.6% 4.1% 4.6% 4.4%

Effective interest on TRY loans 14.6% 11.9% 13.0% 12.8% 12.0% 11.1%

Effective interest on USD loans 3.9% 3.8% 4.7% 4.9% 4.9% 4.8%

Weighted-average interest rate on loans 9.9% 8.4% 9.5% 10.0% 9.5% 9.1%

Effective interest on non-adj. TRY deposits 8.2% 7.1% 8.8% 6.5% 5.6% 5.2%

Effective interest on non-adj. USD deposits 1.9% 2.6% 3.8% 2.4% 2.0% 2.2%

Weighted-average interest rate on non-adj. deposits 5.5% 5.5% 6.5% 4.7% 4.0% 3.8%

TL interest spread 6.4% 4.7% 4.2% 6.2% 6.4% 5.9%

USD interest spread 2.0% 1.2% 0.9% 2.5% 3.0% 2.7%

Weighted-average effective interest spread 4.4% 2.8% 2.9% 5.2% 5.5% 5.3%

CIR 33.9% 36.7% 39.4% 37.3% 37.9% 34.4%

Fees and commissions received / Total operating income 22.9% 23.2% 29.9% 26.4% 24.2% 24.6%Net trading gains / Total operating income 1.7% 1.2% -1.8% 5.1% 12.0% 13.1%

Net trading gains / Capital 0.8% 0.4% -0.6% 1.8% 1.4% 3.2%

ROAE 21.1% 18.6% 14.1% 14.8% 15.6% 16.6%

Source: Akbanks consolidated BRSA financials, VTB Capital Research


18/39


Fixed Income

30 August 2013 18

Garanti Bank (Baa2/BB+/BBB)Shareholding str ucture:Dogus Group, consolidated

(24.2%), Banco Bilbao Vizcaya Argentaria (25.0%),

others (50.8%). The bank is jointly controlled by Dogus

Group and BBVA (from 2011), which are equallyrepresented on the banks board. Dogus Group is a

Turkish conglomerate with total assets of USD 30bn,

and its stake in Garanti is one of its core holdings.


Contracting but still high exposure to sovereign debt

securities (17% of total assets), implying some

capital volatility as a result of respective mark-to-market valuation adjustments in 2Q13.

Moderate lending growth focused on mortgages(+15% in 1H13) and general purpose loans (+14%)

but relatively low cost of risk. Garanti is Turkeyslargest mortgage lender with a market share of

14%.

Funded largely by deposits, with limited reliance on

repo financing and borrowings, as indicated by a

loan-to-deposit ratio of 1.1x. More than 20% of total

customer deposits are demand deposits; longer-

term liquidity gaps covered by opportunistic debt

issuance.

Capital adequacy:

Solid Basel II TCAR of 15.2% and Tier I ratio of

14.3% (the end of 1H13), based on sufficient

internal capital generation no significantsubordinated debt.

Limited impact of mark-to-market losses on capital

in 1H13 (MtM revaluation reserve less than 6% of

regulatory capital and the resulting impact on capital

adequacy


Source: Garantis BRSA consolidated financials, VTB Capital Research Source: Garantis BRSA consolidated financials, VTB Capital Research


2009 2010 2011 2012 1Q13 1H13


Adj. total assets 114.5 135.0 161.9 177.7 183.5 195.2

Total loans 55.3 72.0 92.3 102.2 107.1 117.7

Adj. total deposits 66.0 76.3 90.1 92.2 99.2 105.5

Adj. retail deposits 38.4 49.7 50.7 57.5 59.4 61.4

Total wholesale funding 29.0 34.4 42.8 51.5 50.2 54.8

Total capital 13.7 16.7 17.9 21.7 22.6 21.9

KEY RATIOS

Adj. LTD, times 0.84x 0.94x 1.02x 1.11x 1.08x 1.12x

Government bonds / Total assets 29.5% 26.6% 19.8% 19.7% 19.7% 17.3%Adj liquid assets / Total assets 28.0% 21.5% 16.0% 15.9% 18.1% 16.0%

Total wholesale funding / Total liabilities 28.2% 28.6% 29.4% 32.6% 30.7% 31.3%

NPLs / Total loans 4.1% 3.1% 2.1% 2.6% 2.7% 2.3%

Close monitoring loans / Total loans 1.1% 1.7% 1.0% 2.5% 2.5% 2.5%

Adj. NIM 5.7% 4.6% 4.0% 4.4% 5.2% 5.0%

Cost of risk (annualised) 3.2% -1.1% 1.1% 1.4% 2.2% 1.9%

ROAE 26.5% 22.3% 19.4% 17.0% 21.4% 19.8%

Total CAR 19.2% 18.1% 15.8% 16.9% 16.8% 15.2%

Sources: Garantis BRSA consolidated financials, VTB Capital Research

0.00

0.20

0.40

0.60

0.80

1.00

1.20

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2009 2010 2011 2012 1Q13 1H13

Total CAR, %



Money market

repo payables7%



5%

Savingsdeposits

36%

Corporatedeposits

26%

Other9%


19/39


Fixed Income

30 August 2013 19

(contd) Garanti Bank: credit summaryProfitability:

Above-peer NIM hovering around 5%, supported by

high effective yields on TRY-denominated loans

(above 13%, according to the banks managementdata) and a relatively low blended cost of funding.

Sustainably high contribution of fees and

commissions over 25% of the banks total

operating profit mainly due to payment system

handling fees and commitment fees on credit lines.

Limited impact from the change in market value

reserve on AFS securities (5.6% of regulatory

capital at the end of 1H12).

Credit risk:

Lending growth accelerated in 2Q13, driven by retail

products and project finance loans in energy andutilities. Loan portfolio well-diversified by industry

and single-name exposures.

Strong asset quality, as indicated by the banks low

NPLs (2.3% of total loans at the end of 1H13 or

2.8% after adjustment for NPL sales and write-offs),

with only slightly higher levels in credit cards (3.7%).

Specific reserve coverage ratio close to an

adequate 80% (about 50% for the total amount of

NPLs and unimpaired watch loans). General

provisions increased in 2Q13 due to increased loan

origination and FX rebalancing.

Market risk :

Floater-heavy securities portfolio 65% of total,

further split between CPI linkers and FRNs.

The market value revaluation reserve was a

significant 5.6% of capital at the end of 1H13 (but

lower than that of AKBNK, reflecting the gradual

decrease in GARANs government bond holdings).

About 40% of both loans and deposits denominated

in foreign currencies, implying potentially high FX

rates sensitivity in periods of market volatility.

Balance-sheet FX position has been managed fully

in line with the regulatory limits.

Liquidity risk:

Strong, well-diversified deposit base as the banks

key funding source. Opportunistic marketborrowings help to increase the average duration of

funding.

Wholesale funding was about 30% of total liabilities

at the end of 1H13. Market funding is dominated by

syndicated and bilateral bank loans, as a cheaper

funding option, usually implying a high rollover rate.

Moderate use of repo financing (7% of total liabilities

at end-1H13), mostly through the short-term CBRT

facility, but without excessive reliance on the

instrument (collateral utilisation rate of about 60% at

the end of 1H13).


Source: Garantis BRSA consolidated financials, VTB Capital Research



0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%4.0%

4.5%

2009 2010 2011 2012 1Q13 1H13


Close monitoring loans / Total loans, %


37.0%

38.0%

39.0%

40.0%

41.0%

42.0%

43.0%

44.0%

45.0%

46.0%

47.0%

2009 2010 2011 2012 1Q13 1H13




20/39


Fixed Income

30 August 2013 20

(contd) Garanti Bank: financials & ratios

Figure 49: Profit and loss accoun ts, TRY bn

2009 2010 2011 2012 1Q13 2Q13 1H13

Interest income 11.1 10.2 11.4 13.8 3.5 3.4 6.9

Interest expense -5.7 5.0 -6.1 -7.4 -1.5 -1.5 -3.0NET INTEREST INCOME 5.4 5.2 5.3 6.4 2.0 1.9 3.9

Fees and commissions received 2.2 2.2 2.5 2.6 0.8 0.8 1.5

Fees and commissions paid -0.3 -0.3 -0.4 -0.5 -0.7 0.5 -0.2

Net trading gains/losses 0.9 0.4 0.4 0.6 0.2 0.2 0.4



Provision for loan losses and other receivables -1.7 0.7 -0.9 -1.4 -0.6 -0.5 -1.0

Other operating expenses -3.0 -3.4 -3.7 -4.1 -1.0 -1.2 -2.2


Tax provision -0.8 -0.9 -0.9 -0.9 -0.4 -0.3 -0.7




2009 2010 2011 2012 1Q13 1H13

Adjusted NIM 5.7% 4.6% 4.0% 4.4% 5.2% 5.0%

Effective interest on TL loans - - - - - -

Effective interest on USD loans - - - - - -

Weighted-average interest rate on loans - - - - - -

Effective interest on non-adj. TL deposits - - - - - -

Effective interest on non-adj. USD deposits - - - - - -

Weighted-average interest rate on non-adj. deposits - - - - - -

TL interest spread - - - - - -

USD interest spread - - - - - -

Weighted-average effective interest spread - - - - - -

CIR 34.3% 40.7% 41.7% 41.6% 32.5% 36.0%

Fees and commissions received / Total operating income 25.2% 26.6% 28.5% 26.4% 24.6% 25.5%Net trading gains / Total operating income 10.4% 4.8% 4.0% 6.2% 7.5% 6.4%

Net trading gains / Capital 6.6% 2.4% 2.0% 2.8% 1.0% 1.8%

ROAE 26.5% 22.3% 19.4% 17.0% 21.4% 19.8%



21/39


Fixed Income

30 August 2013 21

Isbank (Baa2/BB+/BBB)Shareholding str ucture:Isbank Pension Fund (39.7%),

Ataturk shares through the Republican Peoples Party or

CHP (28.1%), free float (32.2%). CHP holds voting rights

but dividends on its stake are paid to other non-profitentities, the Turkish Language Institute and Turkish

Historical Society.


Solid TRY funding base historically underpinned by

the banks broad network (second-largest in Turkey

and No.1 among privately-owned banks). The

companys share of borrowings has increased,

however, reflecting the ongoing change in the

banks funding priorities.

The banks sovereign bond portfolio shrank in the

past three years from 30% to 18% of total assets,

following the increase in lending and loan-to-depositratio increased from 0.8x to 1.2x.

Historically high (and numerous) equity

participations negatively affect the banks capital

position: about 20 participations left, with the largest

remaining holdings in financials and services, as

well as manufacturing (Sisecam) and telecoms(Avea).

Capital adequacy:

Below-peer but still adequate capitalisation: TCAR

at 14.8% (-140bp in 1H13, consumed largely by the

market revaluation reserve against AFS securities)

and 12.1% Tier I ratio at end-2Q13.

15% share of supplementary capital due to

subordinated debt, including USD 1bn 10-year LT2

Eurobond issued in 2012.


Source: Isbanks BRSA consolidated financials, VTB Capital Research Source: Isbanks BRSA consolidated financials, VTB Capital Research


2009 2010 2011 2012 1Q13 1H13


Adj. total assets 126.1 148.3 182.6 199.4 205.2 219.4

Total loans 55.6 71.5 101.1 116.9 121.5 136.6




Total capital 15.3 19.0 20.3 24.9 25.2 24.5

KEY RATIOS




NPLs / Total loans 5.1% 3.4% 2.1% 1.8% 1.9% 1.8%


Adj. NIM 5.8% 4.6% 3.9% 4.3% 4.8% 4.6%

Cost of risk (annualised) 4.3% 1.9% 1.7% 1.2% 1.8% 1.8%

ROAE 20.2% 18.8% 12.2% 16.4% 17.7% 15.3%

Total CAR 18.1% 17.6% 14.1% 16.3% 16.1% 14.7%

Sources: Isbanks consolidated BRSA financials, VTB Capital Research

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2009 2010 2011 2012 1Q13 1H13

Total CAR, %



Money marketrepo payables

12%



4%

Savingsdeposits

37%

Corporatedeposits

23%

Subordinateddebt1%

Other

11%


22/39


Fixed Income

30 August 2013 22

(contd) Isbank: credit summaryProfitability:

Sound profitability metrics, with sustainable NIM at

about 4.5% and ROE above 15%. The share of

trading gains is less than 5% of total operatingprofit.

Fees and commissions contribute more than 15% o

total operating income (albeit significantly lower

than those of AKBNK or GARAN), especially from

credit card and other loan-related fees.

Cost-efficiency lags that of the banks peers due to

significant administrative costs related to its branch

network.

Credit risk:

Low NPLs at 1.8% of total loans, with a specific

coverage ratio of about 75%. Higher NPLs (3.9% atend-1H13) were reported in credit card lending, but

without any significant impact on the banks cost of

risk.

Loans classified into close monitoring categories

increased slightly in 1H13, but still far from the peak

levels of 2008-2009.

Relatively low risk concentrations by sectors and

borrowers, with the loan book split almost equally

between commercial and retail/SME lending.

Market risk :

Conservative portfolio structure and below-peer

exposure to fixed income markets: the share of

government bonds decreased from 31% to 18% oftotal assets.

FRNs (mostly TRY-denominated) comprised 58% of

total portfolio at end-1H13, followed by CPI linkers

(33%).

Lending-related interest rate risk is manageable, as

loans are usually re-priced within a three-month

period and the gaps covered via derivative

instruments.

Liquidity risk:

Liquidity is supported by the core deposit base; any

significant maturity mismatches are covered byshort-term repo as well as opportunistic borrowings

on the debt market.

The share of repo and wholesale funding in the

banks total liabilities has not changed materially

since 2009: total borrowings (including repo) stood

at 29%, while foreign bank loans funded only 11.5%

of total liabilities at the end of 1H13.

Debt securities issued increased from nearly zero in

2010 to 4% of total liabilities.


Source: Isbanks consolidated BRSA financials, VTB Capital Research



0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2009 2010 2011 2012 1Q13 1H13




0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2009 2010 2011 2012 1Q13 1H13




23/39


Fixed Income

30 August 2013 23

(contd) Isbank: financials & ratios

Figure 56: Profit and loss accou nts, TRY bn

2009 2010 2011 2012 1Q13 2Q13 1H13

Interest income 11.4 10.9 12.1 14.7 3.6 3.6 7.2



Fees and commissions paid -0.5 -1.4 0.7 0.8 -0.2 -0.2 -0.4

Dividend income 0.2 0.0 0.2 0.2 0.1 0.1 0.2





Other operating expenses -5.2 -5.7 -6.6 -7.8 -2.0 -2.1 -4.1


Tax provision -0.6 -0.7 -0.7 -1.0 -0.2 -0.2 -0.5




2009 2010 2011 2012 1Q13 1H13

Adjusted NIM 5.8% 4.6% 3.9% 4.3% 4.8% 4.6%

Effective interest on TL loans 16.4% 12.9% 14.0% 12.5% 12.2% 11.0%



Effective interest on non-adj. TL deposits 7.7% 7.1% 8.5% 6.4% 5.5% 5.1%






CIR 47.7% 52.6% 59.1% 56.7% 51.2% 54.0%

Fees and commissions received / Total operating income 13.4% 14.0% 16.0% 15.2% 15.0% 16.0%

Net trading gains / Total operating income 5.1% 2.7% 4.0% 6.3% 5.5% 4.8%


ROAE 20.2% 18.8% 12.2% 16.4% 17.7% 15.3%



24/39


Fixed Income

30 August 2013 24

Halkbank (Baa2/--/BBB-)Shareholding str ucture: the state through the

Privatisation Administration (51.1%), free float (48.9%).

A 25% stake was privatised in 2007 and further 23.9%

floated through an SPO in November 2012. Fullprivatisation is unlikely in the medium term.


Conservative funding structure, with a loan-to-

deposit ratio just above 1x and retail deposits

forming more than one-half of total deposits.

Loan book dominated by short-term, TRY-

denominated loans; core franchise in retail and

SMEs (supported by interest rate subsidies). Asset

quality has been improving supported by loan

growth.

Decreased share of securities portfolio (about 18%

of total assets at end-1H13), dominated by floating-

rate notes (61%) and CPI linkers (31%). More thanone-half of total securities (mostly CPI-linked)

booked as HTM.

Borrowings largely consisted of bank deposits andrepo with the CBRT, but overall, the bank has a

lower dependence on wholesale funding than most

of its peers.

Capital adequacy:

Adequately capitalized, with a TCAR of 14.7% and

a Tier I ratio at 13.3% (end-1H13), supported by the

banks high retained profits.

No subordinated debt issued so far.


Source: Halkbanks consolidated BRSA financials, VTB Capital Research Source: Halkbanks consolidated BRSA financials, VTB Capital Research


2009 2010 2011 2012 1Q13 1H13


Adj. total assets 59.4 71.6 90.7 107.4 110.8 116.3

Total loans 33.8 45.8 57.7 67.5 70.8 75.6




Total capital 5.8 7.4 8.6 11.5 12.4 12.1

KEY RATIOS


Government bonds / Total assets 35.3% 27.8% 25.5% 21.4% 20.8% 18.1%

Adj liquid assets / Total assets 28.9% 28.2% 26.5% 32.4% 30.5% 28.7%Total wholesale funding / Total liabilities 17.7% 15.7% 23.2% 18.7% 22.1% 24.8%

NPLs / Total loans 4.9% 3.8% 2.9% 2.9% 2.9% 2.8%


Adj. NIM 6.2% 5.3% 4.8% 5.3% 5.5% 5.4%


ROAE 33.4% 28.0% 25.4% 26.3% 24.8% 23.8%

Total CAR 15.8% 15.5% 13.9% 15.3% 15.3% 14.1%

Source: Halkbanks consolidated BRSA financials, VTB Capital Research

0.00

0.20

0.40

0.60

0.80

1.00

1.20

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

2009 2010 2011 2012 1Q13 1H13

Total CAR, %




2% Foreign bankfunding17%


3%

Savingsdeposits

37%

Corporatedeposits

34%

Other

7%


25/39


Fixed Income

30 August 2013 25

(contd) Halkbank: credit summaryProfitability:

Relatively strong core profitability due to a solid NIM

(above 5%) and ROE approaching 25%, while the

cost of risk has remained below 1.5%.

Blended cost of TRY deposits decreased

significantly in the past three years, supporting

margins.

Below-peer contribution of fees and commissions,

which is partially explained by the banks relatively

weak positions in credit card lending.

Credit risk:

NPLs at a low 2.7%, with coverage close to 100%,

including discretionary provisions; higher level ofNPLs (about 4.5%) in credit cards did not affect

asset quality metrics. Focus on presumably high-risk/high-margin SME

business actually implies low single-name

concentrations, as well as implicitly strong asset

quality due to the use of collective collateral

schemes and interest rate subsidies.

As a state-controlled bank, Halkbank holds the

exclusive right to issue subsidised loans to SMEs

and directed fund loans (the state budget covers

around 50% of the interest payments, but the bank

bears the credit risk).

Performing loans classified as watchlisted and

subject to close monitoring stood at 2.7% at the endof 1H13 in line with the banks peers.

Market risk :

The banks securities portfolio is dominated by CPI

linkers (primarily booked as HTM) and floating-rate

bonds.

The combined share of government bonds

decreased to 17% of total assets at the end of 1H13

(from almost 30% in 2009); repo-backed financing is

far from critical levels about 7% of total liabilities.

Minimal structural FX position, as the banks core

SME business is largely TRY-based.

Liquidity risk:

Strong, diversified deposit base fully covering the

banks current funding needs.

Additional support through Turkish regulations

requiring certain types of state-owned companies tokeep deposits with state-owned banks.

Strengthening access to capital markets, mostly viarolling syndicated loans and long-term loans from

international financial institutions, as well asspecialised funding provided by the state for the

purposes of back-to-back lending.





0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2009 2010 2011 2012 1Q13 1H13




0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2009 2010 2011 2012 1Q13 1H13




26/39


Fixed Income

30 August 2013 26

(contd) Halkbank: financials & ratios

Figure 63: Profit and loss accounts

2009 2010 2011 2012 1Q13 2Q13 1H13

Interest income 6.8 6.4 7.3 9.1 2.3 2.2 4.5



Fees and commissions paid -0.1 -0.1 -0.1 -0.2 -0.1 -0.4 -0.5

Dividend income 0.0 0.0 0.0 0.0 0.0 0.0 0.0





Other operating income -1.3 -1.7 -1.9 -2.4 -0.8 -0.8 -1.6


Tax provision -0.4 -0.5 -0.6 -0.8 -0.2 -0.1 -0.4


Source: Halkbanks consolidated BRSA financials, VTB Capital ResearchFigure 64: Profitability ratios

2009 2010 2011 2012 1Q13 1H13

Adjusted NIM 6.2% 5.3% 4.8% 5.3% 5.5% 5.4%

Effective interest on TL loans 11.7% 11.7% 12.5% 12.5% 11.9% 11.0%



Effective interest on non-adj. TL deposits 8.3% 8.3% 9.4% 7.7% 6.9% 6.4%






CIR 32.5% 37.1% 36.9% 35.8% 39.9% 41.3%

Fees and commissions received / Total operating income 13.4% 13.8% 15.7% 15.1% 13.7% 14.3%Net trading gains / Total operating income 0.5% 3.0% 4.0% 8.3% 9.6% 8.4%


ROAE 33.4% 28.0% 25.4% 26.3% 24.8% 23.8%



27/39


Fixed Income

30 August 2013 27

Yapi Kredi Bank (Baa2/BB+/BBB)Shareholding str ucture:Koc Financial Services

(81.8%), free float (18.2%). Koc Financial Services is a

50/50 joint venture between Koc Holding, one of the

largest multi-industry conglomerates in Turkey, and

Unicredit Group.


Slightly above-peer loan-to-deposit ratio of 1.2x;

relatively high concentration in deposits (in the

Turkish context) but overall well-diversified funding

with an additional line of potential support from

Unicredit Group.

Strong market position in retail banking (especially

credit cards) underpinning the net interest margin,

but also implying above-peer NPL ratios; retail

expansion in Azerbaijan.

Exposure to sovereign bonds decreased

significantly in the past three years (13% of totalassets at the end of 1H13); moderately negative

impact on the banks capital position through a

direct equity charge in 2Q13.

Capital adequacy:

Capital adequacy slightly below peer average

(TCAR at 14.8% and Tier I ratio at 10.5%) but

sufficient given the banks current risk profile.

Positive effect on capital position from an agreed

sale of YK Sigorta insurance business to Allianz: a

capital gain of about TRY 1.2bn is to be booked in3Q13, with a positive CAR impact of some 90bp ona consolidated basis.

The USD 1bn LT2 subordinated Eurobond issued in2012 is an alternative re-capitalisation source.


Source: YKBs consolidated BRSA financials, VTB Capital Research Source: YKBs consolidated BRSA financials, VTB Capital Research


2009 2010 2011 2012 1Q13 1H13


Adj. total assets 69.5 91.3 116.1 129.9 133.5 141.2

Total loans 41.5 56.2 71.5 80.4 83.4 90.1




Total capital 8.6 10.7 12.6 16.0 16.1 16.3

KEY RATIOS




NPLs / Total loans 6.3% 3.4% 3.0% 3.2% 3.4% 3.5%


Adj. NIM 6.7% 5.3% 4.3% 4.8% 4.9% 4.8%


ROAE 20.1% 23.3% 19.6% 14.6% 13.5% 15.4%

Total CAR 16.5% 15.4% 14.9% 15.2% 14.7% 14.8%

Source: YKBs consolidated BRSA financials, VTB Capital Research

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2009 2010 2011 2012 1Q13 1H13

Total CAR, %




6%Foreign bank

funding12%


4%

Savingsdeposits

27%

Corporatedeposits

33%

Subordinateddebt5%

Other13%


28/39


Fixed Income

30 August 2013 28

(contd) Yapi Kredi: credit summaryProfitability:

Strong core revenues in retail banking driven by the

banks leading market share in credit cards and

increased presence in the SME segment.

Significant contribution of fees and commission

income related to the banks retail lending business.

A limited impact of trading gains on the bottom-line

due to the low share of securities in total assets.

Healthy ROE driven by effective cost control.

Credit risk:

Loan growth has been primarily driven by

commercial installment loans and retail (mortgage

and general purpose loans) in 1H13.

The banks loan book is well-diversified, without any

material sector concentrations; related party

(intragroup) lending at about 6.6% of total capital

(vs. 20% regulatory limit).

FX loans stood at 32% of total loans, almost entirely

driven by commercial and corporate lending.

The banks asset quality metrics in line with sectoraverages. Cost of risk is normalising down from

2011, given the seasoning of the loan portfolio afterthe period of accelerated growth (+25% in 2011).

Market risk :

Below-peer exposure to local government bond

market; securities portfolio dominated by CPI

linkers.

40% share of FX deposits implying a structural short

position, but within the regulatory limits.

Interest risk largely driven by re-pricing mismatches

between loans and deposits, overall in line with

peers.

Liquidity risk:

Robust deposit base supporting asset expansion in

previous years and sufficient to maintain an

adequate short-term liquidity.

No significant dependence on repo and other

money market borrowings (the share of repo in totalliabilities below 6%, below-peer encumbrance of thebond portfolio).

Adequate wholesale funding structure, with 12%

share of foreign bank loans in total liabilities anddebt borrowings below 5%.

A track record of support provided by Unicredit

Group (in the form of guaranteed debt).





0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2009 2010 2011 2012 1Q13 1H13




0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2009 2010 2011 2012 1Q13 1H13




29/39


Fixed Income

30 August 2013 29

(contd) Yapi Kredi: financials & ratios

Figure 70: Profit and loss accou nts, TRY bn

2009 2010 2011 2012 1Q13 2Q13 1H13

Interest income 7.4 6.4 7.8 10.1 2.5 2.4 4.9



Fees and commissions paid -0.3 -0.3 -0.4 -0.5 -0.1 -0.1 -0.2

Net trading gains/losses 0.4 0.0 -0.1 0.0 -0.1 0.2 0.1


TOTAL OPERATING

Documents

Turkish Banks Credit Review 130830