Turkish Banks - Türk Ekonomi Bankası 12 Credit Suisse.pdfSECTOR REVIEW Taking a breather in 2011...

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08 December 2010 EEMEA/Turkey

Equity Research Banks (Emerging EMEA)

Turkish Banks SECTOR REVIEW

Taking a breather in 2011 and 2012 ■ Wait for a better entry point: We believe the longer-term investment

outlook of the sector remains attractive and that Turkish banks will continue to be re-rated amid the new low CoE environment. However, we expect a 10% contraction in earnings (2010-2012E), putting them at 11.1x 2012E P/E versus the EMEA average of 8.8x. We have almost no upside on average for Turkish banks versus 25% in SA, 18% in MENA and 10% in CEE. In this report, we review our ratings, TPs and estimates, and initiate coverage on TSKB (OP), Bank Asya (UP) and TEB (N).

■ Earnings contract 2011E/12E: We cut our 2011/12 earnings estimates by 15% and 20%, respectively, putting us at the bottom end of consensus on 2012E EPS (27% below the mean) and target prices (10% below). We expect a 12% drop in earnings on average in 2011 (consensus mean is +4%).

■ Why we are bearish for the near-term earnings: We expect: (1) a sharper drop in NIM, to 3.6% by 2012E from 4.6% as of 9M10; (2) fee income to come under pressure due to regulatory pressure and lower credit card merchant fees; (3) trading gains and other income lines to normalise (i.e., fall) sharply; (4) loan loss provisions to start growing quickly again with 28% 2011E–12E CAGR in loans; and (5) cost growth to outpace weak banking income.

■ Winners: We favour banks with: (i) low P/BV and ROE currently; (ii) limited exposure to securities; (iii) low dependence on trading and other income gains in the 09/10 period; and (iv) not too much dependence on fee income. Our score card analysis shows TSKB as the best-positioned bank.

■ Initiate coverage of TSKB, Bank Asya and TEB: In this report we initiate coverage of TSKB—Outperform, TL3.60 TP (potential upside of 42%); Bank Asya—Underperform, TL2.80 TP (potential downside of 13%); and TEB—Neutral, TL2.33 TP (potential downside of 1%).

■ Our preferred stocks are TSKB, Vakifbank and Isbank: TSKB is our top pick, offering strong upside potential with a relatively better positioned and defensive balance sheet. Vakifbank and Isbank also look relatively well positioned, with 21% and 18% potential upsides to our target prices. We upgrade both stocks to Outperform from Neutral. Our Neutral-rated stocks are Yapi Kredi (we upgrade from Underperform), Garanti and TEB, and our Underperform-rated stocks are Akbank, Halkbank and Bank Asya.

Figure 1: Credit Suisse Turkish Banks Coverage Universe TSKB VAKBN ISCTR TEBNK YKBNK GARAN AKBNK HALKB ASYAB

2011E P/BV 1.11 1.05 1.33 1.26 1.80 1.91 1.84 1.93 1.34

2012E P/E 6.5 8.6 10.6 10.1 10.2 12.6 12.2 10.2 11.0

Upside to TP 41.8% 21.3% 18.2% -1.4% -1.9% -2.0% -8.4% -8.8% -13.2%

CS Rating Outp Outp Outp Neutral Neutral Neutral Underp Underp Underp

CS Scorecard 36.0 32.5 35.5 31.5 29.0 28.0 27.5 25.5 24.5

Potential upsides based on prices as of 2 December 2010; Source: Credit Suisse estimates

Research Analysts

Akin Tuzun 90 212 349 0458

[email protected]

Ates Buldur 90 212 349 0459

[email protected]

08 December 2010

Turkish Banks 2

Table of contents Investment summary 3 Long-term earnings outlook 24 ROA analysis / scenarios 37 Turkiye Is Bankasi (ISCTR.IS) 42 Akbank (AKBNK.IS) 46 Yapi Kredi Bank (YKBNK.IS) 50 Garanti Bank (GARAN.IS) 54 Vakifbank (VAKBN.IS) 58 Halkbank (HALKB.IS) 62 Bank Asya (ASYAB.IS) 66 Bank Asya – Overview 70 TEB (TEBNK.IS) 79 TEB – Overview 83 TSKB (TSKB.IS) 89 TSKB – Overview 93

08 December 2010

Turkish Banks 3

Investment summary The Turkish banking sector has been among the best performers in the global equity markets since the beginning of 2009, showing resilience to the global financial crisis and delivering strong earnings growth in a challenging environment (the sector delivered 56% yoy earnings growth in 2009 and we expect 14% growth in 2010E), while factoring in a much lower cost of equity outlook. However we expect earnings to stall in the next two years, a period we define as the transition to a low inflation and interest rate paradigm—for reasons we will explain in detail in this report—and drop by 10% between 2010E and 2012E, while the other EMEA banking regions should deliver 33% earnings growth over the period. Based on these numbers, Turkish banks are trading at 11.1x 2012E earnings versus the EMEA average of 8.8x. Although we have also factored into our valuations a much lower COE (implied average 11.8%, down from our previous estimate of 14.7%), in our view this still does not fully justify the current valuation premium of Turkish banks on 2011 and 2012.

From 2012 though, with stabilised margins and continued asset growth, we expect Turkish banks to start outperforming peers in terms of earnings growth potential—we continue to like the fundamentals of the sector in the longer term but we would prefer better relative entry points in order to invest into the longer-term fundamentals of the sector—we see relatively better value in regions such as South Africa, where the top pick of Credit Suisse Standard Securities is Standard Bank (OP, TP R140), MENA (top pick Saudi British Bank, OP, TP SRI 52) and CE3 (top pick PKO BP, OP, PLN 50.6). That said, however, we do see good value offerings among the Turkish banks and despite our cautious stance we highlight three names that we like: TSKB, Isbank and Vakifbank. TSKB, on which we initiate in this report with an Outperform rating and TL3.60 target price, is our top pick with potential upside of 42%, the highest in the overall EMEA space.

The summary investment points in this report are:

1. Earnings to fall by 10% in the next two years on our estimates: This is our key call and differs significantly from consensus, putting us 17% below the consensus mean for total 2011E earnings and 27% below for 2012E.

2. Better earnings growth in other markets: Turkish banks delivered 34% CAGR in earnings between 2008 and 2010 outperforming their EMEA peers significantly. Turkey was clearly much more resilient to the global financial crisis, but now the recovery theme looks stronger for other markets. We expect a drop of 5% in the CAGR of Turkish banks’ earnings versus 33% positive growth for EMEA (ex-Turkey) in the next two years (2010E–12E)

Figure 2: 2010E-2012E Regional banks CAGR in earnings Figure 3: Regional EM banks – 2012E P/Es

60.5%

54.8%

32.8%

24.3% 24.0% 23.7% 22.4% 21.5% 21.4%

16.6% 15.8% 15.8%12.6% 11.7%

7.5%

-4.8%-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Kazak

hstan

Russia

EMEA ex-Turk

eyChin

aInd

ia

EMEA ex-Turk

ey & Rus

sia CEE

EMEA COVERAGE

South

Africa

EM BANKSASIA

Mexico

LATAM

Brazil

Austra

lia

Turkey

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Mexico India ASIA Turkey LATAM EM BANKS Australia CEE China Brazil EMEACOVERAGE

EMEA ex-Turkey &Russia

EMEA ex-Turkey

Russia South AfricaKazakhstan

Source: Credit Suisse estimates; Priced as of 2 December Source: Company data, Credit Suisse estimates; Priced as of 2

December

08 December 2010

Turkish Banks 4

3. South Africa, MENA and Poland seem to offer better value: The longer-term outlook remains attractive for Turkish banks in our view, but trading at 11.1x 2012E earnings versus the 8.8x EMEA average, we would wait for better entry points for Turkish banks. We have 18% average potential upside to our target prices in South Africa, MENA and CEE versus almost none on average for the Turkish banks (Figure 4).

4. Be stock selective in Turkey: In the new banking environment of low inflation and low interest rates, we prefer banks with: (i) low current P/BV and ROE as those with higher ROEs tend to have more downside in the structural margin and ROE compression; (ii) low securities exposure; (iii) less dependence on credit card and other fees, which are likely to come under pressure; (iv) higher FX mix in the balance sheet as TL spreads converge toward FX spreads; and (v) lower loans per branch, i.e. more room to grow without cost pressures. Our score-card analysis based on these points supports our valuation model and indicates TSKB, Isbank and Vakifbank as being better positioned than their peers.

Figure 4: Potential average upsides to target prices in

regional banks

Figure 5: Individual potential upsides to target prices

25%

18%

10%8%

4%

1%

0%

5%

10%

15%

20%

25%

30%

South Africa MENA CEE Kazakhstan Russia Turkey

42%

37%

31%

25% 25% 24% 23% 21%18% 18% 16% 14% 14% 13% 12%

7% 7%3% 2%

-1% -2% -2% -4%-8% -9%

-13%-14%

-21%

-28%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

TSKB

Stan

dard

Ban

k

The

Saud

i Brit

ish

Bank

Kazk

omm

erts

Arab

Nat

iona

l Ban

k

ABSA

Sam

ba F

inan

cial

Gro

up

Vaki

fban

k

Isba

nk

PKO

BP

Al R

ajhi

Ban

k

Riy

ad B

ank

OTP

Sber

bank

Saud

i Hol

land

i Ban

k

Banq

ue S

audi

Fra

nsi

Firs

tRan

d

Kom

ercn

i

Peka

o

TEB

Yapi

Kre

di

Gar

anti

Hal

yk

Akba

nk

Hal

kban

k

Bank

Asy

a

VTB

Vozr

oz

St.P

eter

sbur

g

Source: Credit Suisse estimates Source: Credit Suisse estimates, Credit Suisse Standard Securities

for Standard Bank, ABSA and First Rand

5. We initiate on three mid-caps: In this report we initiate coverage on TSKB, rated Outperform with a TL3.60 target price, Bank Asya, rated Underperform with a TL2.80 target price, and TEB, rated Neutral with a TL2.33 target price.

6. TSKB becomes our top pick: Despite our cautious stance on the sector overall, TSKB offers the highest potential upside among the EMEA coverage universe, at 42%. Although it has been among the best performers in the market in 2010, we think TKSB still offers decent value for an attractive but defensive business model. The stock trades at 1.1x 2011E P/BV and 6.5x 2012E P/E—a 26% P/E discount to the EMEA average.

08 December 2010

Turkish Banks 5

The new paradigm – Lower COE... and Lower ROE We take a detailed look at the medium to longer term earnings dynamics of the sector in this report and we see a new banking environment where inflation and interest rates stay low, loans grow fast, margins first shrink and then stabilise and the focus is on ‘economies of scale’ rather than ‘real interest rates’. Interest rates have been low in Turkey for some time now and the low COE environment is generally accepted by the market and reflected into the valuation models. What we think is yet to be factored in is the ROE adjustment of the coming years, which will be a disappointment in our view.

Earnings momentum turned negative in Q3 as we expected, but this has not stopped the relative outperformance of Turkish banks as at the same time the new lower cost of equity (COE) environment was helping the re-rating of multiples. We expect the low inflation interest rate environment for Turkey to be sustainable and we incorporate much lower COE in our models (implied average 11.8%, down from our previous estimate of 14.7%). This clearly gives a boost to target prices; however, at the same time we lower our earnings forecasts to incorporate the earnings challenges that we highlight in more detail later in this report. We lower our earnings forecasts by an average of 15% for 2011E, 20% for 2012E and at slightly higher rates for the following years. These two factors (lower COE and lower ROE) roughly offset each other, resulting in limited to no upside on average for the banks. We believe the key investment theme for Turkish banks in the coming years will be how investors perceive both lower COE and ROE for the sector. We think that market sentiment is currently skewed towards the positive argument (i.e. lower COE) and is not focusing on the new low ROE environment, which leaves room for disappointment in 2011 and 2012, in our view. Based on our assessment of the earnings outlook for the next two years, it appears that more correction in Turkish bank prices would be necessary before becoming more positive on the sector. Until then, we remain cautious in general and suggest a cautious approach to stock selection.

2011/12E transition to sustained low interest rate environment—a flat period in top- and bottom-line growth—growing again from 2013E

We expect Turkish banks to continue to be resilient to any further potential turmoil in global markets; however, we expect 2011E/12E to be a period of transition where earnings contract/normalise to start growing again from 2013E. In this report, we analyse the longer-term earnings growth dynamics in the sector in a new environment of sustained low interest rates and spreads. Figure 6 and Figure 7 summarise our long-term forecasts for the sector. We expect a depressed top line growth environment in the next two years (Figure 6) to pass directly to the bottom line, contracting earnings by 10% from 2010 to 2012, on our estimates.

Figure 6: Turkish banks – revenue breakdown, 07-15E TL in millions

Figure 7: Turkish banks – revenue to net income, 07-15E TL in millions

0

10,000

20,000

30,000

40,000

50,000

60,000

2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Net interest income Fee income Trading gains Other bank income

Flat revenue phase

Revenue growthphase

0

10,000

20,000

30,000

40,000

50,000

60,000

2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Net income Tax Opex Provisions

Earnings under pressure

Breakdown oftotal revenuesto net income

Earnings growthphase again

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Interest rates have been low in Turkey for quite some time now and the low COE environment is generally accepted and reflected into valuation models. What we think is yet to be factored in is the ROE adjustment of the coming years which will be a negative disappointment in our view.

Currently we have only 1% upside on average for the sector and would wait for further correction as market slowly adjust to the lower ROE reality, before considering an investment in the more attractive long-term investment case.

2011/12 a transition period to sustained low interest rate environment

08 December 2010

Turkish Banks 6

We differ significantly from consensus in terms of earnings expectations, with our 2011 net income estimate for the sector 17% below the consensus mean and 27% below for 2012, putting us at the bottom end of the consensus. This makes us think that the market is not ready for the sector earnings and ROE normalisation that we view as the outlook for the sector going forward. We believe that the strong sector earnings performance of the past 1.5 years has made the market too optimistic, leaving room for disappointment.

Turkish banks currently trade at 11.3x on 2011E P/E on our numbers and 1.9x 2010E P/B with an expected 2011E–12E ROE of c15%. When we compare this with regional peers, Turkish banks do not look that attractive (an average 8% premium to EMEA average). Therefore, we would wait for more relative correction and better entry points to invest for the longer-term prospects of the sector, which we still believe are better than for most other markets given the strong demographics and positive macroeconomic backdrop. The macro assumptions we use in our model are no worse than those envisaged by the market—in fact, we may be factoring in a more bullish macro picture in the medium to longer term. However, we believe the market is misjudging the revenue and cost dynamics for the sector and is too optimistic regarding the next two years’ earnings.

A quick valuation snapshot

Figure 8: EM Regions, 2010E P/BV vs 2011E–12E ROE Figure 9: EM Regions, 2011E and 2012E P/E

MENA

Brazil

CEE

LatAM

S. AfricaTurkeyASIA

India

Russia

EMEA

EM ex Asia

Mexico

EM

Australia

China

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

12.0% 14.0% 16.0% 18.0% 20.0% 22.0%

2011E-12E ROE

2010

E P/

BV

Weak Strong

Undervalued

Overvalued

8.89.8 9.8 10.3 10.5 10.8 10.8 11.2 11.3 11.6 11.8 12.0

12.9

16.6

18.1

7.28.4 8.1

9.1 9.5 9.610.2 9.9

11.110.4 10.4 10.1

11.3

13.4

15.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

South

Africa

Saudi

Banks

Russia

EMEA ex-R

ussia

Brazil

China

Austra

lia

EM ex Asia

Turkey

LATAM

EM BANKSCEE

ASIAInd

ia

Mexico

11E P/E 12E P/E

Source: Credit Suisse estimates Source: Credit Suisse estimates

A quick snapshot of our macro assumptions

Figure 10: Macro and Banking Sector Forecasts 2009 2010E 2011E 2012E 2013E 2014E 2015E

KEY MACRO FORECASTS

GDP growth -5.4% 7.2% 4.0% 5.0% 4.0% 4.0% 4.0%

Year-end Interest Rates (TL) 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3%

Year-end Interest Rates (FX) 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1%

Year-end TRY/USD rate 1.50 1.52 1.58 1.60 1.69 1.78 1.87

Inflation (CPI) 6.5% 7.4% 6.3% 5.5% 5.3% 5.2% 5.0%

BANKING SECTOR FORECASTS

Loan growth 6.4% 28.1% 27.7% 25.5% 20.3% 14.8% 14.6%

Deposit growth 12.2% 17.3% 18.1% 23.5% 17.7% 14.3% 14.2%

Securities growth 35.4% 4.8% 4.1% 3.5% 2.6% 4.4% 3.7%

Borrowed funds growth -7.2% 31.3% 41.4% 4.4% 7.4% 2.7% 1.4%

As % of GDP

Loans 40.2% 45.0% 51.7% 58.3% 64.0% 67.1% 70.3%

Deposits 51.2% 52.3% 55.6% 61.8% 66.3% 69.2% 72.3%

Securities 26.7% 24.4% 22.8% 21.3% 19.9% 19.0% 18.0%

Borrowed funds 8.7% 10.0% 12.7% 12.0% 11.7% 11.0% 10.2%

Source: CBT, BRSA, Credit Suisse estimates

The earnings performance of Turkish banks in 2008/10 period was exceptional and was boosted by some one-offs. In 2010/12, we expect the market to see consolidation of earnings at around these levels, growing again from 2012E

08 December 2010

Turkish Banks 7

Sharp P/E re-rating with the reversal of earnings Figure 11: Quarterly net income of our coverage universe of TR banks vs ISE Banks

index

0

1,000

2,000

3,000

4,000

5,000

6,000

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Qua

rter-o

nly

earn

ings

(TLm

)

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

ISE

Bank

ing

inde

x

Quarterly earnings (TLm) ISE Banking Index

Source: Company data, Thomson Reuters

Figure 12 shows the re-rating of Turkish banks in the last two quarters despite the falling earnings trend (as shown above). During 2009 and early 2010, Turkish banks re-rated slightly (on earnings) alongside an improvement in TL bond yields (albeit not much). As the low interest rate environment stabilised, it appears that the market started to believe in the low CoE and this is reflected in the share prices.

Figure 12: Q-only annualised P/E vs TL bond yields

4

6

8

10

12

14

16

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Q-o

nly

P/E

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

TL b

ond

yiel

ds

Q-only annualized P/E TL bond yields

P/E re-ratingmostly in Q3

P/E was re-rated a bit in 2009 but then stalled

Source: Company data, Thomson Reuters

Until 1Q10, the share price performance of Turkish banks followed the earnings momentum primarily, but diverged sharply from 2Q10.

This can be explained by the lower cost of equity argument, leading a P/E re-rating of the Turkish banks

However, we think the lower COE argument is fully factored in already and a sharp reversal of earnings has moved Turkish banks to a premium to regional peers.

With the recent pull back in the market (off c7%-10% off peaks), valuations have become a bit more reasonable but we still believe the risk-reward profile is not attractive enough for us to be comfortable with a more positive near-term view of Turkish banks…

…we would wait for a further correction in share prices.

08 December 2010

Turkish Banks 8

COE and ROE sensitivity A simple analysis of COE and ROE sensitivity based on the Gordon’s growth methodology indicates to us that on current valuations, one needs to be optimistic in terms of RoE to justify a reasonable potential upside from current levels. Figure 13 looks at the implied target P/BV multiples (on 2010E book) at different COE assumptions for three different ROE levels. The real growth is a constant at 4% on top of inflation, which is linked to COE. Therefore, the nominal growth (“g”) in the equation goes up when we use a higher Rf and COE in the formula. Turkish banks currently trade at an average 1.9x 2010E P/B, and the consensus ROEs hover around 14–18%. As Figure 14 shows, COE must be below 13% with ROEs of over 16% in order to justify upside. This implies a sustainable long-term bond yield below 7–7.5% for Turkey, which may be a bit optimistic under the current global environment, in our view.

Figure 13: COE sensitivity of target P/B valuations

0.0

0.5

1.0

1.5

2.0

2.5

3.0

10% 11% 12% 13% 14% 15% 16% 17% 18%

COE

Targ

et P

/BV

ROE=18%

ROE=16%

ROE=14%

In order to justify higher target P/B multiples, CoE must be lower than 13%...

This implies a sustainable long-term bond yield below 7%-7.5%.

We believe 20% ROE is not realistic if we are

using lower CoE assumptions now

Source: Credit Suisse estimates

Figure 14: ROE sensitivity of target P/B valuations

0.00

0.50

1.00

1.50

2.00

2.50

3.00

12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0%

ROE

Targ

et P

/BV

COE=16%

current level of P/BV

For reasonable upside, ROE must be above 16% and CoE must be around

14% or lower.

COE=14%

COE=12%


COE and ROE in the longer term should be correlated with each other.

If one assumes a low Rf environment going forward (i.e. low COE), Turkish banks’ NIMs will be lower, the environment will be more competitive and 20%+ ROEs of the past cannot be repeated.

Our ROE for 2012E is 15%, while the market is more optimistic and assumes around 17-18%.

Even at 18% ROE, the COE should be as low as 11–12% to justify a good upside potential in Turkish banks and this requires an long-term Rf of 6–6.5% (versus 8–8.5% now).

08 December 2010

Turkish Banks 9

Our relative stock recommendations While we are generally cautious and would prefer to see further pull back in share prices before investing in Turkish banks generally, there are some stocks that look better positioned to /offer good value, making it worth building positions now.

We have three Outperform ratings, TSKB—our top pick with the highest upside potential to our target price (42%), and on which we initiate in this report—Isbank and Vakifbank.

Figure 15: Potential upsides to target prices Figure 16: 9M10A Annualised BRSA Consolidated P/E

41.8%

21.3%18.2%

1.2%

-1.4% -1.9% -2.0%

-8.4% -8.8%

-13.2%

-25.0%

-15.0%

-5.0%

5.0%

15.0%

25.0%

35.0%

45.0%

TSKB VAKBN ISCTR Average TEBNK YKBNK GARAN AKBNK HALKB ASYAB

Outperforms

Neutrals

Underperforms

7.3

8.8 9.09.4

9.910.4

10.811.2 11.5

13.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

TSKB ISCTR HALKB YKBNK AVERAGE GARAN VAKBN AKBNK ASYAB TEBNK

Source: Company data, Credit Suisse estimates; Priced as of 2

December

Source: Company data

Figure 17: Credit Suisse Turkish Banks – Outperforms and Underperforms Outperforms Underperforms

Arguments TSKB ISCTR VAKBN ASYAB AKBNK HALKB

Argument 1 Lowest P/E multiple (9M10) 27% discount to

the sector

Second lowest P/E multiple (9M10) 11% discount to

the sector

The only large cap likely to be able to

grow earnings in 10-12E period

Trading at 15% premium to

average on 9M10 P/E

Trading at 15% premium to

average on 9M10 P/E

Trading at 30% premium on

reported P/BV amid 33% ROE…

Argument 2 Has one of the best NIM

resilience… NIM compression is

60bps vs 200bps (2009A-2012E)

Already has the lowest NIM and

looks better positioned for a

low inflation environment

Lowest 2010E P/BV and ROE but

ROE is likely to converge towards

sector in the coming years

Low interest rates not the best

environment for participation banks

Excessive dependence on

government securities and

challenges to grab back loan market

share

The highest ROE (9M10) in the sector (33%)

makes Halk the most vulnerable

for ROE normalisation

Argument 3 No dependence on high trading and

other bank income gains

Lowest fee to assets among

private banks. Will have less pressure

on earnings

Excess provisioning in

2010 creates a low base for earnings

growth

Non-interest income

dependence too high - the highest

in the coverage universe

Credit card and fee income

dependence high

High TL mix

Argument 4 Cost and provisioning

pressure should be less in the coming years

Risks on higher cost of risk,

deposit outflow in low interest rate

environment

Not much room to improve costs

(already has the lowest cost-to-

assets)

Source: Company data, Credit Suisse estimates

We rate TSKB, Isbank and Vakifbank Outperform

08 December 2010

Turkish Banks 10

Score Card – Which banks are best/worst positioned We have built a simple score card ranking banks in terms of what we believe are the key themes of the next two years, including:

i) Net interest margins shrinking from 4.6% levels (9M10) to 4.1% as of 2011E and 3.6% as at the end of 2012E. We think the market and banks also expect margins to fall, but more slowly. We are much more bearish than the market in terms of margins.

ii) The end of high real interest rates in Turkish bonds. Real interest rates in Turkey have fallen to almost zero from as high as over 10% in 2008. Banks that benefited more from this, both in terms of trading gains and interest on securities, are likely to feel more downward earnings pressure.

iii) Credit cards no longer a highly lucrative business: Due to lower interest rates, regulatory pressures, lower merchant fees and intense competition, we expect the credit card business to become less attractive in the next couple of years and banks to invest less in this area. Those that were highly dependent on revenues in this segment are likely to be affected more negatively.

iv) TL spreads converging towards FX spreads: With the risk premium of Turkish lira assets having decreased sharply, the gap between TL and FX spreads should also narrow. By 2012E, we expect TL L-D spreads to fall to 4.4% from 8.0% as at the end of 2009 (a drop of 360 bps), while we estimate a drop in FX spreads of only 100bps (from 3.1% to 2.1%) over the same period.

v) Growth should be the key: Asset growth is key to compensate for the pressures on margins, lower non-interest income and higher costs. Over the coming years, loan growth differences among the banks will be an important share price driver, in our view. Those banks with lower capacity utilisation currently (for instance, lower loans/branch) have theoretically more comfortable and less costly growth potential in the near-term.

Another key theme will the expected increase in the funding terms (duration) as Turkish banks now have a more favourable environment for issuing TL corporate bonds. Eventually the deposit terms are also likely to increase. While this clearly helps the duration mismatch risk, it may initially increase the cost of funding and put further pressure on margins in the near term. We have not included this item in our score card analysis.

Along the lines mentioned above, we compare the individual banks to identify those that are potentially better positioned in the new environment. We briefly analyse all of these points and score the banks accordingly, which supports our relative preferences for the stocks based on the set target prices.

Figure 18: Score card based on key long-term themes of the sector in the context of valuations Current

valuations 1. NIM score

2. Securities score

3. Credit card score

4. TL-FX spread score

5. Capacity to grow score

Total points

TSKB 7.0 3.0 3.0 9.0 9.0 5.0 36.0

ISCTR 5.0 9.0 5.0 6.0 2.5 8.0 35.5

VAKBN 9.0 8.0 2.0 7.0 4.5 2.0 32.5

TEBNK 8.0 4.0 6.0 2.0 2.5 9.0 31.5

YKBNK 2.0 5.0 8.0 1.0 6.0 7.0 29.0

GARAN 3.0 7.0 4.0 5.0 8.0 1.0 28.0

AKBNK 4.0 6.0 1.0 3.5 7.0 6.0 27.5

HALKB 1.0 1.0 7.0 8.0 4.5 4.0 25.5

ASYAB 6.0 2.0 9.0 3.5 1.0 3.0 24.5

* We score the banks assigning points from 1 to 9. In the cases of close performance, we attach the average point (i.e. instead of assigning 3

and 4, we gave 3.5 points to both banks). Source: Credit Suisse estimates

08 December 2010

Turkish Banks 11

1. Net interest margins shrinking

Turkish banks’ margins expand while interest rates fall due to: (1) longer duration of assets versus liabilities; and (2) sizeable securities exposures. However, in a sustained low inflation/low interest rate environment, their margins tend to shrink and stay low. Those with lower net interest margins currently (see Figure 19) will normally have relatively less room to fall while those with higher margins are likely to be affected more. However, there are exceptions to this trend due to different business models and balance sheet structures and occasional factors that affected the 9M10 net interest margins. In Figure 20, we show our estimates for the decline in net interest margins for sector until 2015E.

Figure 19: Net interest margins, 2010E Figure 20: Expected NIM drop 9M10–2012E

5.3%5.1% 5.1%

4.9%4.8%

4.6% 4.6%4.3% 4.3% 4.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

TEBNK YKBNK HALKB ASYAB TSKB GARAN Average AKBNK ISCTR VAKBN

2.9%

6.8%

3.8%

6.6%

5.7%

4.8% 5.0%4.7%

5.6% 5.4%

5.0%4.6% 4.5%

4.1%

3.6% 3.5% 3.5% 3.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2001

2002

2003

2004

2005

2006

2007

2008

2009

1Q10

1H10

9M10

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

Source: Company data and Credit Suisse estimates. Source: Company data, Credit Suisse estimates

2. Low real interest rates and much lower spreads in government securities

Turkish banks have generated high profits both through rich spreads and trading gains on government securities. We believe this trend is now over. Securities mix will fall gradually and spreads of 3–4% will fall to 1-1.5%, on our estimates as the Treasury is not in urgent need of the domestic banks’ funding any more given lower domestic debt-to-GDP ratios and foreign investor appetite on TL bonds. Figure 21 ranks the banks in terms of the net securities interest income as a percentage of pre-tax income while Figure 22 adds the trading gains. Bank Asya and Yapi Kredi are the best positioned banks on this metric, while Vakifbank and Akbank top the list in terms of being over-exposed to securities gains.

Figure 21: Net securities interest inc. % of pre-tax, 9M10 Figure 22: Net sec. int inc + trading gains - % of pre-tax

4.1%

22.3%

40.5%43.7% 43.7%

45.2%

52.5%

56.9% 57.6% 57.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

ASYAB YKBNK HALKB Average GARAN ISCTR TEBNK AKBNK VAKBN TSKB

19.5%21.9%

49.3%51.3%

54.5% 54.9% 55.1%57.1%

60.9%

74.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

ASYAB YKBNK HALKB Average TEBNK ISCTR GARAN TSKB AKBNK VAKBN

Source: Company data Source: Company data

In this section, we briefly assess the key themes in the sector but will analyse these in detail under the ‘Long-term earnings outlook’ section starting from page 26.

08 December 2010

Turkish Banks 12

3. Credit cards no longer a highly lucrative segment

The credit card business has been one of the most profitable areas, particularly for those with economies of scale in this business. We believe credit cards are unlikely to continue to be as lucrative a segment for the Turkish banking sector in the coming years for the following reasons:

i) Credit card interest rates will likely continue to fall fast due to low interest rates and a regulatory cap imposed after potential political pressure, that will have a negative impact on the banks’ revenues.

ii) Merchant fee is a direct function of the interest rate environment. As a result of lower interest rates, these fees have come down and will likely continue to fall, affecting fee income growth negatively.

iii) Due to its attraction over the past several years, this business has become highly competitive, with significant promotions and benefits to card holders. This has meant an increase in operating costs of the credit card business in the past few years that are unlikely to come down anytime soon. Credit cards are becoming must- have products for Turkish banks as a cross-sell rather than a very profitable product.

iv) The government has said several times in the past that the annual credit card fees should be abolished. Leading up to the elections, there may be a risk that banks will no longer be able to charge annual fees.

Figure 23 shows the credit card loan books as a percentage of the total loan book and Figure 24 shows the credit card-related fee income as a percentage of pre-tax net income (as of 9M10). The charts show Yapi Kredi as the most dependent bank to fee income followed by TEB and Bank Asya while TSKB, Halkbank and Vakifbank appear to depend on it much less.

Figure 23: Credit card mix in total loans, 9M10 Figure 24: Credit card related fee as % of 9M10 pre-tax

income

17.8%

13.3%12.6%

8.8%

7.3%

4.5%

3.2%

1.6%

0.0%0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

YKBNK AKBNK GARAN ISCTR ASYAB TEBNK VAKBN HALKB TSKB

22.6%

20.6%

17.6%17.0%

13.9%13.2%

10.3%

8.4%

2.9%

0.0%0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

YKBNK TEBNK ASYAB AKBNK GARAN Average ISCTR VAKBN HALKB TSKB


08 December 2010

Turkish Banks 13

4. TL spreads converging towards FX spreads

We expect rapid growth in TL loans in the coming years but the TL loan-deposit spreads should shrink fast in the next two years. Therefore, those banks that are highly dependent on TL loans are likely to be affected more than those that are relatively more exposed to FX loan-deposit spreads. Figure 25 shows the TL mix in total loans as of 9M10 and Figure 26 shows the loan interest income breakdown between FX and TL. TSKB looks to be the best positioned bank by far, as almost the entire loan book is FX (either FX or FX-indexed TL loans). Garanti, Akbank and Yapi Kredi also look relatively better positioned versus other banks.

Figure 25: TL loan mix, 9M10 Figure 26: FX-TL loan interest income breakdown, 9M10-

70.9% 70.2% 68.9%67.2% 66.5%

61.9%60.0%

54.2%

0.0%0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

HALKB TEBNK ASYAB VAKBN ISCTR YKBNK AKBNK GARAN TSKB

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

TSKB GARAN AKBNK YKBNK Average HALKB VAKBN ISCTR TEBNK ASYAB

FX interest income TL interest income


5. Capacity to grow loan book

In an environment of margin compression, asset growth (loans in particular) will be key. Only time will show which will be able to grow successfully, but from a simple perspective, we look at the ‘capacity’ to grow the loan book in the context of current loans per branch ratio. We simply assume those with lower utilisation (i.e. lower loans per branch) may have more room to grow loans. Figure 28 also shows the retail loans (ex SME) per employee, which is another way of looking at the overall capacity to grow the retail loan book. In terms of capacity, TEB has room to grow its loan book, particularly after the Fortisbank merger. Bank Asya has room in retail lending growth and Isbank has relatively more room among large cap private banks. Garanti has the most efficient structure currently; however, this also means that theoretically it has less room to improve efficiency.

Figure 27: Loans per branch, 9M10 Figure 28: Retail loans (ex SME) per employee, 9M10

31.2

50.9 52.5 53.756.9 56.9 58.0

67.770.9

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

TEBNK ISCTR YKBNK AKBNK Average HALKB ASYAB VAKBN GARAN

0.34

0.49

0.74 0.75

0.95

1.17 1.18 1.181.21

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

ASYAB TEBNK HALKB ISCTR Average YKBNK VAKBN GARAN AKBNK

Source: Company data, TBB Source: Company data, TBB

08 December 2010

Turkish Banks 14

Earnings / Target price revisions Figure 29: Old and new forecasts for BRSA unconsolidated net income (TL in millions)* 2010E 2011E 2012E

Old New Old New Old New

ISCTR 2,467 3,006 2,606 2,578 2,811 2,576 AKBNK 3,001 2,807 3,507 2,483 3,472 2,451 YKBNK 1,617 2,243 1,912 1,922 2,198 2,051 GARAN 3,217 3,013 3,734 2,637 4,179 2,792 VAKBN 1,123 1,069 1,127 1,121 1,291 1,142 HALKB 1,725 2,014 1,767 1,660 1,920 1,603 ASYAB NA 267 NA 275 NA 301 TEBNK NA 232 NA 233 NA 266 TSKB NA 222 NA 246 NA 257 ALL 14,826 13,154 13,438

* Not adjusted.


Figure 30: Old and new forecasts for BRSA consolidated net income (TL in millions)* 2010E 2011E 2012E



* Adjusted for one-off gains/losses


Figure 31: Old and new forecasts for IFRS consolidated net income (TL in millions) 2010E 2011E 2012E




08 December 2010

Turkish Banks 15

Figure 32: Old and new EPS forecasts BRSA solo 2010E 2011E 2012E


ISCTR 0.53 0.60 0.56 0.51 0.60 0.51 AKBNK 0.78 0.78 0.91 0.70 0.90 0.70 YKBNK 0.45 0.58 0.52 0.50 0.59 0.53 GARAN 0.80 0.75 0.92 0.66 1.03 0.70 VAKBN 0.45 0.46 0.46 0.48 0.52 0.49 HALKB 1.39 1.72 1.42 1.44 1.54 1.40 ASYAB NA 0.26 NA 0.27 NA 0.29 TEBNK NA 0.14 NA 0.20 NA 0.23 TSKB NA 0.34 NA 0.37 NA 0.39


Figure 33: Target price revisions Current Old New Upside to

price target target new target

ISCTR 5.92 5.55 7.00 18.2% AKBNK 8.52 7.40 7.80 -8.4% YKBNK 5.46 3.86 5.36 -1.9% GARAN 8.78 7.65 8.60 -2.0% VAKBN 4.24 3.90 5.14 21.3% HALKB 14.25 10.60 13.00 -8.8% ASYAB 3.22 NA 2.80 -13.2% TEBNK 2.36 NA 2.33 -1.4% TSKB 2.54 NA 3.60 41.8% ALL 1.2%

Source: Thomson Reuters, Credit Suisse estimates

Rating changes

Figure 34: Rating changes Old rating New rating

ISCTR Neutral Outperform AKBNK Underperform Underperform YKBNK Underperform Neutral GARAN Neutral Neutral VAKBN Neutral Outperform HALKB Underperform Underperform ASYAB Not rated Underperform TEBNK Not rated Neutral TSKB Not rated Outperform


08 December 2010

Turkish Banks 16

Figure 35: Macro and Banking Sector Forecasts 2009 2010E 2011E 2012E 2013E 2014E 2015E

KEY MACRO FORECASTS

GDP growth -5.4% 7.2% 4.0% 5.0% 4.0% 4.0% 4.0%

Year-end Interest Rates (TL) 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3%

Year-end Interest Rates (FX) 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1%

Year-end TRY/USD rate 1.50 1.52 1.58 1.65 1.73 1.80 1.88

Inflation (CPI) 6.5% 7.4% 6.3% 5.5% 5.3% 5.2% 5.0%

BANKING SECTOR FORECASTS

Loan growth 6.4% 28.1% 27.7% 24.1% 20.2% 15.3% 15.2%

TL Loan growth 9.5% 32.6% 27.7% 23.9% 20.3% 15.8% 15.6%

FX Loan growth -1.3% 16.1% 27.7% 24.8% 19.9% 13.9% 13.8%

Deposit growth 12.2% 17.3% 18.1% 24.0% 17.0% 14.3% 14.2%

TL Deposit growth 14.7% 21.5% 21.9% 28.9% 19.2% 15.4% 15.3%

FX Deposit growth 7.5% 9.2% 9.9% 12.7% 11.3% 10.9% 10.7%

Securities growth 35.4% 4.8% 4.1% 3.5% 2.6% 4.4% 3.7%

Borrowed funds growth -7.2% 31.3% 41.4% 3.3% 9.9% 5.6% 4.8%

As % of GDP

Loans 40.2% 45.0% 51.7% 57.7% 63.2% 66.6% 70.2%

(i) Home loans 4.5% 5.6% 7.0% 8.2% 9.5% 10.5% 11.6%

(ii) Auto loans 0.4% 0.5% 0.6% 0.7% 0.7% 0.8% 0.9%

(iii) GP loans 4.4% 5.3% 6.4% 7.3% 8.2% 8.8% 9.5%

(iv) CC loans 3.7% 4.0% 4.6% 5.0% 5.4% 5.5% 5.7%

(v) SME & commercial 14.9% 16.6% 20.1% 22.8% 25.5% 27.4% 29.5%

(vi) Corporate loans 12.3% 12.9% 13.0% 13.6% 13.9% 13.5% 13.0%

Deposits 51.2% 52.3% 55.6% 62.0% 66.2% 69.1% 72.2%

Securities 26.7% 24.4% 22.8% 21.3% 19.9% 19.0% 18.0%

Borrowed funds 8.7% 10.0% 12.7% 11.8% 11.8% 11.4% 11.0%

Source: CBT, BRSA, Thomson Reuters, Credit Suisse estimates

Credit Suisse vs Consensus Figure 36: Credit Suisse versus consensus BRSA net income forecasts 2010E 2011E 2012E

Credit Suisse

Cons diff% Credit Suisse

Cons diff% Credit Suisse

Cons diff%

ISCTR 3,028 2,895 4.6% 2,597 2,900 -10.5% 2,596 3,396 -23.6%

AKBNK 2,895 3,019 -4.1% 2,574 3,108 -17.2% 2,547 3,541 -28.1%

YKBNK 2,570 2,133 20.5% 2,232 2,225 0.3% 2,377 2,647 -10.2%

GARAN 3,256 3,364 -3.2% 2,815 3,454 -18.5% 2,981 3,963 -24.8%

VAKBN 1,120 1,126 -0.5% 1,175 1,237 -5.1% 1,197 1,464 -18.2%

HALKB 1,997 1,941 2.9% 1,642 2,006 -18.1% 1,584 2,234 -29.1%

ASYAB 263 283 -7.1% 270 358 -24.4% 297 428 -30.7%

TEBNK 189 239 -20.9% 265 259 2.1% 299 329 -9.1%

TSKB 247 210 18.0% 272 224 21.6% 284 255 11.5%

ALL 14,866 15,208 -2.2% 13,034 15,770 -17.3% 13,282 18,257 -26.4%


08 December 2010

Turkish Banks 17

Figure 37: Credit Suisse earnings growth forecasts vs consensus 2011E Earnings growth 2012E Earnings growth

Credit Suisse Cons Credit Suisse Cons

ISCTR -14.2% 0.2% 0.0% 17.1% AKBNK -11.1% 2.9% -1.0% 13.9% YKBNK -13.1% 4.3% 6.5% 19.0% GARAN -13.6% 2.7% 5.9% 14.7% VAKBN 4.8% 9.9% 1.9% 18.3% HALKB -17.8% 3.3% -3.5% 11.4% ASYAB 2.9% 26.6% 9.7% 19.5% TEBNK 39.8% 8.3% 13.1% 27.0% TSKB 10.0% 6.7% 4.5% 14.1% ALL -12.3% 3.7% 1.9% 15.8%


Share price performance and foreign ownership Figure 38: Share price performance – 1 month Figure 39: Share price performance – 6 months

-13%

-10%

-9% -8%

-6%-5%

-5% -4% -4% -4%-3%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

ASYA

B

ISC

TR

VAKB

N

AKBN

K

ISE-

Bank

s

TEB

HAL

KB

YKBN

K

ISE-

100

GAR

AN

TSKB

-7%

8% 9%

20% 21% 21%25%

27%31%

36%37%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

ASYA

B

TEB

AKBN

K

ISC

TR

ISE-

Bank

s

ISE-

100

VAKB

N

GAR

AN

YKBN

K

TSKB

HAL

KB

Source: Thomson Reuters Source: Thomson Reuters

Figure 40: Share price performance – Ytd Figure 41: Share price performance – 4 years

-27%

-16%

-2%

18% 19%25% 27%

35% 35%

61% 64%

-40%

-20%

0%

20%

40%

60%

80%

ASYA

B

TEB

VAKB

N

AKBN

K

HAL

KB

ISE-

100

ISE-

Bank

s

GAR

AN

ISC

TR

TSKB

YKBN

K

26% 32%

55% 63% 71% 73%89%

111%

148%

202%

0%

50%

100%

150%

200%

250%

VAKB

N

TEB

ISC

TR

ASYA

B

AKBN

K

ISE-

100

ISE-

Bank

s

TSKB

YKBN

K

GAR

AN


08 December 2010

Turkish Banks 18

Figure 42: Foreign ownership of free float

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10

TSKB

TEBNK

AKBNK

ASYAB

ISCTRAVERAGE

GARAN

VAKBN

HALKB

YKBNK

Source: Thomson Reuters

08 December 2010

Turkish Banks 19

Turkish Banks Valuation P/E

Figure 43: YTD annualised P/E, 9M10A Figure 44: Credit Suisse Coverage universe, 2010E & 11E

P/Es (BRSA consolidated)

7.3

8.8 9.09.4

9.910.4

10.811.2 11.5

13.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

TSKB ISCTR YKBNK HALKB AVERAGE GARAN AKBNK VAKBN ASYAB TEBNK

7.2

9.5

13.7

8.89.2

11.0

8.9

10.1

11.311.8

6.5

9.09.8

10.310.6 10.7 10.8

11.5

13.1 13.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

TSKB VAKBN TEBNK ISCTR YKBNK ASYAB HALKB Average GARAN AKBNK

2010E 2011E

Consolidated 2010 & 2011E P/E multiples

Source: Company data Source: Credit Suisse estimates

P/BV vs ROE

Figure 45: 9M10A (latest) P/BV vs 9M10A Annualised ROE Figure 46: 2010E P/BV vs 2011–12E ROE

VAKBN

ALNTF

ALBRK

AVERAGEAKBNK

TEBNK

ISCTR

ASYAB

FORTS

TSKB

YKBNKGARAN

SKBNK

HALKB

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

9M10A Consolidated ROE

9M10

A P

/BV

Weak Strong

Undervalued

Overvalued

VAKBN

TEBNK

Average

AKBNK

GARANYKBNK

HALKB

TSKB

ASYAB

ISCTR

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

12.0% 14.0% 16.0% 18.0% 20.0%

2011E-12E ROE

2010

E P

/BV

Weak Strong

Undervalued

Overvalued

Source: Company data Source: Credit Suisse estimates

Core Bank P/E and ROE

Figure 47: Core Bank 2010E P/BV vs 2011-12E ROE Figure 48: Core Bank 2011E and 2012E P/Es

VAKBN

TEBNK

AverageAKBNK

GARAN

YKBNKHALKB

TSKBASYABISCTR

0.00

0.50

1.00

1.50

2.00

2.50

3.00

12.0% 14.0% 16.0% 18.0% 20.0%

Core Bank 2011E-12E ROE

Cor

e B

ank

2010

E P

/BV

Weak Strong

Undervalued

Overvalued

7.67.1

9.410.0

8.99.4

17.2

10.0

11.9 11.9

6.8

8.6 9.09.7

10.9 11.3 11.4 11.6

13.5 14.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

TSKB ISCTR VAKBN ASYAB HALKB YKBNK TEBNK Average AKBNK GARAN

2010E 2011E

Core Bank 2010 & 2011E P/E multiples


08 D

ecemb

er 2010

Tu

rkish B

anks

20

Figure 49: Credit Suisse Turkish Banks Coverage – Valuation Comp

CREDIT SUISSE Turkish Banks Valuation Comp SheetISCTR AKBNK YKBNK GARAN VAKBN HALKB TIER1 AVG ASYAB TEBNK TSKB TOTAL

A. MARKET DATA Share Price (TL) 5.92 8.52 5.46 8.78 4.24 14.25 NA 3.22 2.36 2.54 NA Number of shares (m) 4,500 4,000 4,347 4,200 2,500 1,250 NA 900 1,100 700 NAMarket Cap (TLm) 26,639 34,080 23,735 36,876 10,600 17,813 149,743 2,898 2,596 1,778 157,015Market Cap (US$m) 17,916 22,920 15,963 24,801 7,129 11,980 100,708 1,949 1,746 1,196 105,599B. CREDIT SUISSE RECOMMENDATION Rating OutperformUnderperform Neutral Neutral OutperformUnderperform Underperform Neutral Outperform Target Price (TL) 7.00 7.80 5.36 8.60 5.14 13.00 NA 2.80 2.33 3.60 NA Dividend yield 2.8% 1.6% 0.0% 0.0% 1.1% 0.0% 0.9% 1.0% 8.0% 1.7% 1.1% Upside (%) [cum-div] 18% -8% -2% -2% 21% -9% 1.0% -13% -1% 42% 1.2%C. BRSA Parent-only P/E 2009A 10.3 12.4 17.1 11.7 8.5 10.9 11.7 9.6 12.4 10.2 11.7 9M10A 8.4 11.8 9.9 11.3 10.4 8.8 10.1 11.5 18.7 7.9 10.2 2010E 8.9 12.1 10.5 12.2 9.9 8.8 10.6 10.9 16.4 8.0 10.6 Consensus 2010E 9.2 11.3 11.1 11.0 9.4 9.2 10.3 10.3 10.8 8.5 10.3 2011E 10.3 13.7 12.4 14.0 9.5 10.7 12.1 10.6 11.1 7.2 11.9 Consensus 2011E 9.2 11.0 10.7 10.7 8.6 8.9 10.0 8.1 10.0 7.9 10.0 2012E 10.3 13.9 11.6 13.2 9.3 11.1 11.9 9.6 9.8 6.9 11.7 Consensus 2012E 7.8 9.6 9.0 9.3 7.2 8.0 8.7 6.8 7.9 7.0 8.6D. BRSA Consolidated P/E 2009A 9.9 12.4 15.1 11.2 8.2 10.7 11.3 9.4 9.7 6.8 11.1 9M10A 8.8 11.2 9.4 10.4 10.8 9.0 9.9 11.5 13.7 7.3 9.9 2010E 8.8 11.8 9.3 11.3 9.5 8.9 10.1 11.0 9.9 7.2 10.1 2011E 10.3 13.2 10.6 13.1 9.0 10.8 11.5 10.7 9.8 6.5 11.3 2012E 10.3 13.4 10.0 12.4 8.9 11.2 11.3 9.8 8.7 6.3 11.1E. BRSA Consolidated P/BV 2009A 2.0 2.4 2.8 2.7 1.4 3.1 2.4 1.7 1.4 1.6 2.3 9M10A 1.7 2.0 2.3 2.3 1.3 2.6 2.0 1.6 1.3 1.4 2.0 2010E 1.6 2.1 2.2 2.2 1.2 2.4 2.0 1.5 1.4 1.4 1.9 2011E 1.4 1.9 1.9 1.9 1.1 2.1 1.7 1.3 1.3 1.2 1.7 2012E 1.2 1.7 1.6 1.8 1.0 1.9 1.5 1.1 1.1 1.0 1.5F. BRSA Consolidated ROE 2009A 22.7% 21.3% 20.7% 28.2% 19.9% 33.6% 23.9% 19.9% 15.8% 27.5% 23.9% 9M10A 21.9% 20.2% 28.1% 24.6% 12.9% 32.3% 25.7% 15.8% 10.8% 24.3% 25.0% 2010E 20.3% 18.7% 27.1% 21.3% 14.0% 30.3% 21.3% 14.4% 10.4% 20.7% 21.3% 2011E 14.7% 14.7% 19.2% 15.7% 12.8% 20.5% 15.9% 12.9% 13.8% 19.5% 15.9% 2012E 12.9% 13.3% 17.3% 15.0% 11.6% 17.5% 14.4% 12.4% 13.7% 17.4% 14.4%G. Consensus P/BV 2010E 1.65 2.01 2.30 2.33 1.27 2.44 2.00 1.49 1.36 1.48 1.97 2011E 1.49 1.83 1.93 2.00 1.15 2.08 1.76 1.27 1.22 1.34 1.73 2012E 1.30 1.63 1.61 1.72 1.01 1.76 1.52 1.09 1.10 1.15 1.50

Source: Company data, Credit Suisse estimates, Thomson Reuters

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Figure 50: Credit Suisse Turkish Banks Coverage – Financials Comp

CREDIT SUISSE Turkish Banks Financials Comparison ISCTR AKBNK YKBNK GARAN VAKBN HALKB PEER AVG ASYAB TEBNK TSKB ALL

A. MARKET DATA Share Price (TL) 5.92 8.52 5.46 8.78 4.24 14.25 NA 3.22 2.36 2.54 NA Number of shares (m) 4,500 4,000 4,347 4,200 2,500 1,250 NA 900 1,100 700 NAMarket Cap (TLm) 26,639 34,080 23,735 36,876 10,600 17,813 149,743 2,898 2,596 1,778 157,015Market Cap (US$m) 17,916 22,920 15,963 24,801 7,129 11,980 100,708 1,949 1,746 1,196 105,599B. CREDIT SUISSE RECOMMENDATION Rating Outperform nderperform Neutral Neutral Outperform nderperform Underperform Neutral Outperform Target Price (TL) 7.00 7.80 5.36 8.60 5.14 13.00 NA 2.80 2.33 3.60 NA Dividend yield 2.8% 1.6% 0.0% 0.0% 1.1% 0.0% 0.9% 1.0% 8.0% 1.7% 1.1% Upside (%) [cum-div] 18% -8% -2% -2% 21% -9% 1.0% -13% -1% 42% 1.2%C. BRSA Parent-only net income (adj) (TLm) 2009A 2,574 2,747 1,388 3,155 1,251 1,638 12,754 301 210 175 13,440 9M10A 2,379 2,166 1,806 2,447 765 1,511 11,074 189 104 169 11,536 2010E 3,006 2,807 2,270 3,013 1,069 2,014 14,179 267 159 222 14,826 Consensus 2010E 2,895 3,019 2,133 3,364 1,126 1,941 14,477 283 239 210 15,208 2011E 2,578 2,483 1,922 2,637 1,121 1,660 12,401 275 233 246 13,154 Consensus 2011E 2,900 3,108 2,225 3,454 1,237 2,006 14,930 358 259 224 15,770 2012E 2,576 2,451 2,051 2,792 1,142 1,603 12,614 301 266 257 13,438 Consensus 2012E 3,396 3,541 2,647 3,963 1,464 2,234 17,245 428 329 255 18,257D. BRSA Consolidated net income (adj) (TLm) 2009A 2,700 2,744 1,576 3,293 1,295 1,672 13,278 308 268 261 14,115 9M10A 2,259 2,288 1,893 2,665 738 1,485 11,327 189 142 183 11,842 2010E 3,028 2,895 2,543 3,256 1,120 1,997 14,839 263 263 247 15,612 2011E 2,597 2,574 2,232 2,815 1,175 1,642 13,034 270 265 272 13,842 2012E 2,596 2,547 2,377 2,981 1,197 1,584 13,282 297 299 284 14,162E. BRSA Consolidated book value (TLm) 2009A 13,343 14,447 8,429 13,637 7,338 5,770 62,963 1,694 1,833 1,114 67,604 9M10A 15,384 16,632 10,178 15,805 8,230 6,953 73,183 1,853 1,971 1,251 78,258 2010E 16,461 16,522 10,567 16,928 8,663 7,413 76,554 1,957 1,793 1,281 81,585 2011E 18,868 18,414 12,713 18,999 9,739 8,624 87,357 2,233 2,046 1,512 93,148 2012E 21,433 19,993 14,720 20,678 10,837 9,454 97,117 2,538 2,336 1,751 103,742F. BRSA Consolidated ROE 2009A 22.7% 21.3% 20.7% 28.2% 19.9% 33.6% 23.9% 19.9% 15.8% 27.5% 23.9% 9M10A 21.9% 20.2% 28.1% 24.6% 12.9% 32.3% 25.7% 15.8% 10.8% 24.3% 25.0% 2010E 20.3% 18.7% 27.1% 21.3% 14.0% 30.3% 21.3% 14.4% 10.4% 20.7% 21.3% 2011E 14.7% 14.7% 19.2% 15.7% 12.8% 20.5% 15.9% 12.9% 13.8% 19.5% 15.9% 2012E 12.9% 13.3% 17.3% 15.0% 11.6% 17.5% 14.4% 12.4% 13.7% 17.4% 14.4%G. Consensus book value 2010E 16,155 16,920 10,303 15,834 8,325 7,300 74,836 1,944 1,903 1,204 79,887 2011E 17,820 18,600 12,302 18,396 9,250 8,550 84,918 2,277 2,123 1,323 90,641 2012E 20,565 20,960 14,736 21,378 10,475 10,100 98,214 2,664 2,354 1,547 104,779

Source: Company data, Credit Suisse estimates, Thomson Reuters

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Turkish Banks 22

EMEA Peer Group Valuations P/E

Figure 51: EM Regions , 2011E & 2012E P/E Figure 52: EM Banks 2011E & 2012E P/E

8.89.8 9.8 10.3 10.5 10.8 10.8 11.2 11.3 11.6 11.8 12.0

12.9

16.6

18.1

7.28.4 8.1

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ussia

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EM BANKSCEE

ASIAInd

ia

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11E P/E 12E P/E

6.8 7.0

7.6

8.2 8.28.5

8.8 9.09.4

9.9 9.9 10.110.6 10.6

10.911.3

11.611.8

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12.913.3

14.9

6.5

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6.87.2 7.0

8.6

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kHaly

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aVT

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P

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o

11E P/E 12E P/E


P/BV vs ROE

Figure 53: EM Regions, 2010E P/BV vs 2011-12E ROE Figure 54: EM Banks, 2010E P/BV vs 2011-12E ROE

MENA

Brazil

CEE

LatAM

S. AfricaTurkeyASIA

India

Russia

EMEA

EM ex Asia

Mexico

EM

Australia

China

1.60

1.80

2.00

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E P/

BV

Weak Strong

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First RandGaranti

HalkbankYapi Kredi

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Vozroz

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Riyad Bank

St.Petersburg

Komercni

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Halyk

OTP

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TSKB

1.0

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10% 12% 14% 16% 18% 20% 22% 24% 26%

2011E-2012E Average ROE

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E P/

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Weak Strong

Undervalued

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Figure 55: EMEA Banks Valuations Reuters Market Currency Rating Cur. Price Tar. Price Upside

Region/Bank Code Cap ($m) (Local) (Local) to target 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012ECEE 10% 15.1 12.0 10.1 2.2 2.0 1.8 16.4% 18.1% 19.1%Komercni BKOMsp.PR 8,846 Kc UNDERPERFORM 4388 4200 3% 11.9 11.3 10.6 2.1 2.0 1.9 19.6% 18.3% 18.4%OTP OTPB.BU 6,975 HUF NEUTRAL 5220 5600 14% 10.9 7.6 5.2 1.3 1.1 1.0 16.7% 17.8% 20.4%PKO BP PKOB.WA 18,433 PLN OUTPERFORM 44.46 50.6 18% 16.9 12.9 11.4 2.7 2.4 2.1 16.5% 19.8% 19.6%Pekao BAPE.WA 15,679 PLN OUTPERFORM 180.2 185.8 2% 18.6 14.9 13.3 2.5 2.4 2.3 13.9% 16.2% 17.4%Russia 4% 19.5 9.8 8.1 2.2 1.8 1.5 12.1% 20.4% 20.6%St.Petersburg STBK.RTS 1,376 US$ OUTPERFORM 4.88 3.5 -28% 21.6 9.9 7.6 1.6 1.4 1.2 9.5% 18.6% 23.5%Sberbank SBER.RTS 71,453 US$ OUTPERFORM 3.31 3.6 13% 19.6 9.0 7.4 2.4 1.9 1.5 13.2% 23.6% 23.0%Vozrozhdenie VZRZ.RTS 974 US$ NEUTRAL 41 32 -21% 38.4 11.8 7.4 1.8 1.6 1.3 4.8% 14.1% 35.1%VTB VTBRq.L 34,363 US$ UNDERPERFORM 6.57 5.5 -14% 18.9 12.2 10.3 1.9 1.7 1.5 10.7% 14.7% 15.3%Kazakhstan 8% 16.8 8.7 6.5 1.2 1.1 1.0 7.8% 13.4% 15.8%Halyk HSBKq.L 3,253 US$ NEUTRAL 10 9.3 -4% 18.2 10.6 8.2 2.0 1.7 1.5 11.6% 17.2% 19.1%Kazkommerts KKGByq.L 2,201 US$ OUTPERFORM 5.66 7.4 25% 15.2 7.0 5.1 0.8 0.7 0.7 5.6% 11.1% 13.7%Turkey 1% 10.0 11.3 11.1 1.9 1.7 1.5 20.7% 15.7% 14.2%Akbank AKBNK.IS 22,962 TRY UNDERPERFORM 8.52 7.80 -8% 10.9 12.1 12.2 2.1 1.8 1.7 20.1% 16.0% 14.5%Garanti GARAN.IS 24,846 TRY NEUTRAL 8.78 8.60 -2% 11.7 13.3 12.6 2.1 1.9 1.8 20.3% 15.2% 14.6%Halkbank HALKB.IS 12,001 TRY UNDERPERFORM 14.25 13.00 -9% 8.3 9.9 10.2 2.2 1.9 1.8 30.2% 20.8% 18.1%Isbank ISCTR.IS 17,949 TRY OUTPERFORM 5.92 7.00 18% 9.0 10.6 10.6 1.5 1.3 1.2 18.5% 13.4% 11.8%Vakifbank VAKBN.IS 7,142 TRY OUTPERFORM 4.24 5.14 21% 9.2 8.8 8.6 1.2 1.1 0.9 13.8% 12.7% 11.6%Yapi Kredi YKBNK.IS 15,992 TRY NEUTRAL 5.46 5.36 -2% 9.4 10.9 10.2 2.2 1.8 1.6 25.5% 18.0% 16.3%Bank Asya ASYAB.IS 1,949 TRY UNDERPERFORM 3.22 2.80 -13% 12.5 12.1 11.0 1.5 1.3 1.2 13.1% 11.8% 11.4%TEB TEBNK.IS 1,746 TRY NEUTRAL 2.36 2.33 -1% 17.3 11.6 10.1 1.4 1.3 1.1 8.4% 11.6% 11.6%TSKB TSKB.IS 1,196 TRY OUTPERFORM 2.54 3.60 42% 7.5 6.8 6.5 1.3 1.1 1.0 18.8% 17.6% 15.9%South Africa 25% 10.7 8.8 7.2 1.9 1.7 1.5 18.2% 19.8% 21.5%ABSA ASAJ.J 13,797 R NEUTRAL 132.5 160 24% 10.2 8.2 6.8 1.7 1.5 1.3 17.5% 19.4% 20.7%FirstRand FSRJ.J 16,707 R UNDERPERFORM 20.44 21.5 7% 11.3 10.1 8.1 2.3 1.9 1.7 18.6% 18.6% 20.6%Standard Bank SBKJ.J 23,402 R OUTPERFORM 101.88 140 37% 10.6 8.5 7.0 1.9 1.7 1.5 18.4% 20.8% 22.4%MENA 18% 12.9 9.8 8.4 2.2 1.9 1.7 17.7% 20.8% 21.2%Al Rajhi Bank 1120.SE 31,096 SRIs OUTPERFORM 77.75 90 16% 15.7 12.2 10.3 3.7 3.2 2.7 25.0% 28.0% 28.0%Riyad Bank 1010.SE 10,559 SRIs NEUTRAL 26.4 30 14% 13.3 9.4 7.9 1.3 1.2 1.1 10.3% 13.6% 15.1%Samba Financial Group 1090.SE 13,558 SRIs OUTPERFORM 56.5 71 23% 11.1 8.2 7.2 2.0 1.7 1.5 19.5% 22.4% 21.9%Banque Saudi Fransi 1050.SE 8,543 SRIs NEUTRAL 44.3 47 7% 10.8 9.0 8.0 1.9 1.7 1.5 18.2% 20.0% 19.7%The Saudi British Bank 1060.SE 7,879 SRIs OUTPERFORM 39.4 52 31% 12.1 8.9 7.9 2.2 1.9 1.7 18.3% 22.9% 23.1%Arab National Bank 1080.SE 6,378 SRIs NEUTRAL 36.8 46 25% 10.1 8.0 6.9 1.5 1.3 1.1 15.5% 17.2% 17.4%Saudi Hollandi Bank 1040.SE 2,681 SRIs NEUTRAL 30.4 34 12% 14.2 9.4 7.1 1.6 1.4 1.2 11.8% 15.9% 18.3%EMEA COVERAGE 403,934 7% 13.0 10.2 8.8 2.0 1.8 1.5 15.8% 17.3% 17.4% EMEA ex-Turkey 9% 14.5 9.9 8.2 2.1 1.8 1.6 15.3% 19.8% 20.6% EMEA ex-Russia 10% 11.6 10.3 9.1 2.0 1.7 1.6 18.3% 18.0% 18.1% EMEA ex-Turkey & Russia 13% 12.7 9.9 8.3 2.1 1.8 1.6 17.0% 19.5% 20.5%Turkey discount to EMEA-ex Turkey & Russia -21.2% 10.6% 25.6% -7.5% -6.2% -3.3%Other EM RegionsLATAM 153,112 13.2 11.6 10.4 2.3 2.1 1.8 18.3% 18.2% 18.3%Brazil 129,999 11.8 10.5 9.5 2.3 2.0 1.7 19.4% 19.1% 19.1%Mexico 23,112 21.1 18.1 15.7 2.6 2.3 2.1 12.2% 12.7% 13.3%ASIA 698,114 15.2 12.9 11.3 1.9 1.7 1.6 12.5% 13.6% 14.0%Australia 168,148 11.7 10.8 10.2 1.8 1.7 1.6 15.2% 15.6% 15.6%China 114,607 14.9 10.8 9.6 2.6 2.1 1.8 17.3% 19.9% 19.2%India 132,448 20.5 16.6 13.4 2.8 2.5 2.1 13.7% 15.2% 15.7%EM BANKS 1,823,474 14.1 11.8 10.4 2.1 1.9 1.6 15.8% 16.6% 16.8% EM ex Asia 1,125,360 13.5 11.2 9.9 2.2 1.9 1.7 17.6% 18.3% 18.2%Turkey discount to EM Banks Coverage (ex Asia) -26.0% 0.7% 12.0% -13.7% -14.1% -11.3%Turkey discount to Brazilian banks -15.2% 7.5% 16.8% -17.7% -17.4% -11.6%

Price-to-earnings ($) Price-to-book ($) ROTE ($)

Source: Company data, Thomson Reuters, Credit Suisse estimates, CSSS for ABSA, First Rand and Standard Bank, Isbank estimates are IFRS net income before special dividends

08 December 2010

Turkish Banks 24

Long-term earnings outlook As stated before, we are more bearish than consensus in terms of future earnings growth. In this section we elaborate on the reasons for our stance.

Reasons for our bearish stance on earnings

1. We believe that net interest margin compression will be faster and more extensive than consensus is assuming. We expect average NIM to drop by around 50bps for both 2011E and 2012E and stabilise at around 3.4% levels from 2013E.

2. Consensus envisages strong loan growth and in fact our long growth assumptions are above the mean (28% average in the next two years). However we believe other IEA growth (securities and liquid asset growth) will be flattish and overall IEA growth will be around 20%, still strong but not enough to generate a strong net interest income growth in the next two years.

3. We expect 12% CAGR in fee income in the next two years despite strong loan growth expectations. This is due to expected regulatory challenges (capping credit card and transaction fees) and a low interest rate environment lowering the merchant fees on credit cards (which makes around 35% of total fee income)

4. We expect trading gains to contract by 29% in 2011E, which would explain a major part of the top line earnings pressure. We believe the risks may even be more on the downside unless interest rates fall sharply, which we do not anticipate.

5. Other banking income (NPL reversals) will continue to be a key determinant of earnings next year. After excessive provisioning in 2009, the NPL reversal momentum in 2010 has been strong but we expect this to drop sharply in 2011E, by 31%. This is another area where our model differs from consensus, in our view.

6. We expect operating costs to grow above inflation in the coming years, giving an average compounded growth of 11% (2010E–12E). We believe that after the cost control measures in 2009 and to some extent 2010, there is limited room for cost efficiency and we expect opex growth over the period to be at least 3–4% above inflation.

7. While there is pressure on top line revenue growth, the provisioning charges should grow more in line with the loan book growth. Although we expect cost of risk to drop further and stay low (at around 1%), due to 28% CAGR in loans in the next two years, we expect loan losses to grow by 18%, putting further pressure on the bottom line.

In the coming sections, we will analyse the earnings growth dynamics in detail but prior to this, we briefly summarise in Figure 58 the combined income statement of the nine banks we cover between 2009 and 2015E. We have looked at the growth rates line by line for two different periods—2010E-12E and 2012E-15E. We define the 2010E-12E period as the ‘transition period’ for the sector after a solid asset and earnings expansion since 2007 and in this transition period, we expect revenues to stay flat (see Figure 56 on the left) and net income to decline by 5% on average, (but mostly front loaded in 2011E - Figure 57 on the right). After 2013E though, with top line growth kicking in as margins stabilise, volume growth continues and with the normalisation of one-off gains of 2009-2010 period, we expect healthy net income growth.

08 December 2010

Turkish Banks 25

Figure 56: Turkish banks – revenue breakdown, 07-15E TL in millions

Figure 57: Turkish banks – revenue to net income, 07-15E TL in millions

0

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20,000

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2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

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Earnings under pressure

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Earnings growthphase again


Figure 58: Credit Suisse Turkish Banks Coverage P&L (2009-2015E) TL in millions P&L table 2009 2010E 2011E 2012E 10-12E

CAGR 2013E 2014E 2015E 12-15E

CAGR Net interest income 25,861 24,080 25,503 27,321 7% 30,881 35,589 40,069 14%

Fee & commission income, net 7,042 7,067 7,633 8,791 12% 9,845 10,714 11,598 10%

Trading income, net 2,124 1,368 975 1,113 -10% 1,132 1,135 1,190 2%

Other banking income, net 2,578 5,037 3,490 3,663 -15% 3,817 4,258 4,830 10%

Total bank income 37,605 37,553 37,601 40,887 4% 45,675 51,697 57,687 12%

Operating costs (13,704) (15,232) (16,974) (18,795) 11% (20,730) (22,850) (25,138) 10%

Pre-provision profits 23,901 22,321 20,627 22,092 -1% 24,946 28,847 32,549 14%

Loan loss provisions (6,492) (3,152) (3,866) (4,821) 24% (6,008) (7,157) (8,361) 20%

Other provisions (1,381) (1,326) (1,261) (1,380) 2% (1,631) (1,868) (2,122) 15%

Post provisions income 16,028 17,844 15,500 15,891 -6% 17,307 19,822 22,066 12%

Income from associates 656 686 795 833 10% 872 913 956 5%

Monetary gains/losses 0 0 0 0 n.m. 0 0 0 n.m.

Extraordinary items (456) 46 0 0 -100% 0 0 0 n.m.

Pre-tax income 16,228 18,576 16,295 16,723 -5% 18,179 20,734 23,022 11%

Tax (3,244) (3,704) (3,163) (3,335) -5% (3,632) (4,147) (4,604) 11%

Net income 12,984 14,872 13,132 13,388 -5% 14,547 16,588 18,418 11%

Adjusted net income 13,440 14,826 13,132 13,388 -5% 14,547 16,588 18,418 11%


08 December 2010

Turkish Banks 26

1. Net interest income outlook Net interest income accounts for around 60–65% of Turkish banks’ total revenues and is around 1.3-1.4x pre-tax net income, and therefore is the key component for the earnings growth. The sector went through a considerable growth phase in the NII line since 2004, growing at a CAGR of 26% over the 2004-09 period and by 42% alone in 2009. The NII growth in 2009 was exceptional due to the temporary margin expansion in a falling interest rate environment. This started to normalise in 2010 and in the first nine months of the year, NII fell by 6% year on year. We expect 2010 to finish on a drop of 7%.

We are in line with the market in expecting reasonably strong loan growth in the coming years (we expect around 28% CAGR in the next two years slightly above consensus expectations). We believe this creates a common perception (albeit wrongly, in our view) that NII growth could be strong too. We believe not. We think the next two years will be challenging for the top line net interest income growth for the sector due to (1) sharp margin contraction and (2) despite the strong loan growth, the total interest earning asset (IEA) growth will not be that much as loans currently represent c58% of total IEA and other IEA growth will be weak. (we expect a CAGR of c20% in total IEA vs 28% in loans).

As Figure 59 shows, we are expecting NIM to fall to 4.5% by the end of this year (from 4.6% in 9M10 and 5.6% at the end of 2009) and to 3.6% in 2012 and to 3.4% in 2013 (we will later explain in detail the drivers behind this margin contraction). During the same period we expect a rather solid asset growth (average IEA CAGR of 21% in 2011-12). We expect 28% CAGR in loans in the next two years. This leads to a flattish net interest income line until 2012E after which growth picks up as margins stabilise (see Figure 60 and Figure 61).

Figure 59: Net interest margin, IEA growth and net interest income growth, 2005-2015E

5.7%

4.8% 5.0%4.7%

5.6%

4.5%

4.1%

3.6%3.4% 3.4% 3.4%

0.0%

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2.0%

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2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Net i

nter

est m

argi

n

-10%

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10%

20%

30%

40%

50%

60%

Annu

al g

row

th ra

tes

Net interest margin IEA growth Net interest income growth

We expect net interest income line growth to recover gradually after its normalization in 2010, depressed by

continuation margin contraction. As margins start to stabilize from 2012 onwards, we expect NII growth to pick up

supported by continued albeit slower asset growth


We expect net interest income growth to remain weak until 2012E despite our bullish loan growth assumptions, because

(1) margins are likely to contract much more sharply;

(2) loans represent only 58% of total IEA, and IEA growth will likely be pulled down by flat securities books

We expect the net interest income line to go through a transition period between 2009-12E, and then to continue growing at a healthy rate from 2012E.

09-12E NII CAGR: 1.8% 12-15E NII CAGR: 13.6%

Loan growth should be strong in the next few years but flat other IEA (securities and money market) growth should lower overall IEA growth to 20% levels.

08 December 2010

Turkish Banks 27

Figure 60: Net interest income and NIM, 2005A-2015E Figure 61: IEA growth

10.512.4

15.7

18.2

25.924.1

25.527.3

30.9

35.6

40.1

0.0

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2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Net

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n)

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Net i

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n (%

)

Net interest income (TLbn) Net interest margin

Flat growth

339

431496

567

688

836

968

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1248

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)

Total IEA (TLbn) Loan growth IEA growth


Recent trends

Figure 62 shows the recent trends (quarter only annualised) in main TL and FX spreads. We expect the TL L-D spread compression to continue but at a gradually slowing pace in 2011E, stabilising around 4% levels. The securities spreads however are likely to drop more significantly in our view. The securities yields should jump back in Q4 due to the CPI linker effect; however in the medium term, in line with the low real interest rate environment, we would expect the TL S-D spread to stabilise around 1.0–1.5%.

Figure 62: Quarter-only annualized TL and FX L-D and S-D spreads

0.0%

1.0%

2.0%

3.0%

4.0%

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6.0%

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1Q08

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4Q08

1Q09

2Q09

3Q09

4Q09

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2Q10

3Q10

TL S-D spread TL L-D spread FX S-D spread FX L -D spread

TL loan-depositspread to go backto 4.5% by 2010-endand 4% by 2011.

FX spreads are more

stableTL Security spread fell to zero but due toCPI linker effect. Should bounce in Q4…Still tough we expect S-D spread to stabilize around 1%-1.5%


08 December 2010

Turkish Banks 28

IEA and margin breakdown

In order to assess the long-term net interest income growth dynamics, we look at the structural drivers of NIM for the sector and recent trends. We first divide the 12m rolling IEA (interest earnings assets) into three:

1. Loans funded by total funding base (IBL) = (Loans x IBL/IEA) as % of IEA

2. Securities and other assets funded by total funding base = (Securities and other IEA x IBL/IEA) as % of IEA

3. Net interest earning assets funded by equity = (IEA-IBL as % of IEA)

In Figure 63 below, we show the breakdown of IEA in columns. As of 3Q10, loans represent 47% of total IEA, while net IEA is 12% and securities (and liquid assets) is 41%.

We also plotted on the same chart the adjusted spreads on loans, securities and net IEA. The net IEA spread is simply the gross yield on IEA as it does not bear a funding cost. Net IEA spread is 8.9% as of 3Q10 (12m rolling), loan spread is 5.0% and securities spread is 3.4%.

As seen in Figure 63, the net IEA spread has been falling sharply as in the low real interest rate environment, return on free equity is falling directly. The loan and security spreads were rising in 2009 due to maturity mismatch benefit, but now they are normalising. So margins will be negatively affected by two factors: (1) the maturity mismatch effect disappearing and lowering security and loan spreads and (2) the net IEA spread falling due to lower interest rates.

Figure 63: IEA and spread breakdown, 1Q05-3Q10 (12m rolling)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10

IEA

mix

0%

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Spre

ad

Loans Securities & others Free funding (net IEA)Loan spread Securities & others spread Net IEA spread

Net IEA mix

Securities& others

mix

Loans mix

Loan spread

Sec & othersspread

Net IEAspread

Source: Company data, Credit Suisse research

The structure shown above gives the output as shown in Figure 64. As of 3Q10, the 12m rolling NIM is 4.8%, and of this, half (2.4%) is contributed by loans, 1.4% by securities and 1.0% by equity funded excess IEA.

08 December 2010

Turkish Banks 29

Figure 64: NIM breakdown and contributors

3.5% 3.4% 3.2%2.8% 2.5% 2.3% 2.1% 2.1% 2.1% 2.1% 2.1% 2.2% 2.3% 2.4% 2.4% 2.2% 2.3% 2.5% 2.7% 2.9% 2.8% 2.6% 2.4%

3.1% 2.9%2.6%

2.6%

2.3%2.1%

2.0% 1.7% 1.7% 1.6% 1.6% 1.5% 1.4% 1.4% 1.3%1.2% 1.2%

1.3%1.5%

1.6% 1.7%1.6%

1.4%

0.7%0.7%

0.8%1.0%

1.1%

1.1%1.1%

1.1% 1.2% 1.2% 1.3% 1.3% 1.4% 1.4% 1.4%1.3% 1.3%

1.3%1.2%

1.1% 1.1%1.1%

1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Loans Securities & others Free funding (net IEA)


Figure 65: Turkish Banks – Breakdown of net interest margin, IEA mix and Yield mix by asset groups, 1Q07-3Q10A 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

NIM breakdown

Loans 2.1% 2.1% 2.1% 2.2% 2.3% 2.4% 2.4% 2.2% 2.3% 2.5% 2.7% 2.9% 2.8% 2.6% 2.4%

Securities & others 1.7% 1.6% 1.6% 1.5% 1.4% 1.4% 1.3% 1.2% 1.2% 1.3% 1.5% 1.6% 1.7% 1.6% 1.4%

Free funding (net IEA) 1.2% 1.2% 1.3% 1.3% 1.4% 1.4% 1.4% 1.3% 1.3% 1.3% 1.2% 1.1% 1.1% 1.1% 1.0%

IEA mix

Loans 44% 45% 46% 46% 48% 49% 51% 51% 51% 51% 50% 48% 47% 47% 47%

Securities & others 47% 46% 45% 44% 42% 40% 39% 38% 39% 39% 40% 41% 42% 42% 41%

Free funding (net IEA) 8% 9% 9% 10% 10% 10% 11% 10% 10% 10% 10% 10% 11% 11% 12%

Yield mix

Loans 4.8% 4.6% 4.7% 4.7% 4.8% 4.8% 4.7% 4.3% 4.5% 4.9% 5.4% 6.0% 6.0% 5.6% 5.0%

Securities & others 3.5% 3.5% 3.4% 3.4% 3.4% 3.4% 3.4% 3.1% 3.2% 3.4% 3.6% 3.9% 4.1% 3.9% 3.4%

Free funding (net IEA) 13.7% 13.8% 14.0% 13.4% 13.3% 13.1% 13.0% 13.0% 12.8% 12.5% 12.0% 10.9% 10.2% 9.6% 8.9%


What do the analyses above tell us?

■ The current net interest margin performance of the sector is still highly reliant on non-loan interest income. Of the 4.8% NIM as of 3Q10, half is generated by either the securities spreads and/or net interest earning assets and both will be under pressure.

■ The 12m rolling net securities spread was 3.4%, having peaked at 4.1% in 1Q10. Given that the real interest rates are almost at zero currently, and expecting a low real interest rate environment in the near future, there is much more downside here. We expect securities spreads to drop to 1.5% levels in the coming years.

■ In a falling interest rate environment, as Figure 65 shows, the IEA yields are falling sharply, which means less contribution from net IEA. Net IEA currently contributes 100bps to the net margin (around 20% of the total NIM) but this is likely to drop in 2011E and 2012E.

08 December 2010

Turkish Banks 30

What does a negative real interest rate environment mean for the banks?

The real interest rate (based on the difference between benchmark t-bill yield and past 12m inflation) in Turkey has moved to negative territory since the first quarter of 2010 and ex-ante real interest rates (based on 12m forward looking inflation expectations) is around 1% levels (Figure 66). This is a unique period for a country which was used to double digit real interest rates until only two years ago.

What does this mean for the banks? In our view it is clearly negative because:

1. The high spreads they generated from TL securities cannot be repeated

2. The same environment will shrink the loan-deposit spreads

But what has changed and is a negative real interest rate environment sustainable? As long as the monetary easing policy of the US Fed continues through QE programmes, the low or negative real interest rate environment in Turkey should be supported for a while. This is simply because international capital should be satisfied with lower nominal returns on TL bonds given their close-to-zero cost of capital, while in the past several years, TL bonds have been more dependent on the domestic capital mainly through Turkish banks. As a result, in our view Turkish banks will either have to take currency risk onboard again or will have to accept lower spreads in government securities. Given that the regulator is very strict in FX risk, we think it will probably have to be the latter for the banks.

Figure 66: Real interest rate in Turkey Figure 67: Benchmark TL bond yield vs. 12m inflation

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

Forward looking real interest rate Backward looking real interest rate

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

int rates 12m inf

Source: CBT, Thomson Reuters Source: CBT, Thomson Reuters

Loan spreads

Above we concluded that the securities spreads and returns on free equity are likely to drop under a low absolute and real interest rate environment. Turkish banks benefited from a high interest rate environment significantly in the past and therefore historically they could subsidise aggressive competition ( ie lower interest rates given the bad debt and duration mismatch risks) in lending from time to time. In other words, the market is probably too competitive in lending currently and will need to adjust to the new environment. The current consumer loan rates offered by the banks and some TL loan rates banks charge for working capital loans to large corporates generate very low margins. During the adjustment phase of the sector in the next few years, in the absence of high yields in securities, we think banks will thus realise that their loan spreads are probably too low given the risks.

We have constructed Figure 68 using the average official rates of home loan interest rates for a 60-month period. We have also included the upfront fee charges where applicable. In certain cases, there are various fee charges depending on the mortgage product. For those, we have taken the average. We do not show the individual banks’ names—we aim rather to simply get a snapshot on the current monthly home loan interest rate in the market.

08 December 2010

Turkish Banks 31

The average home loan interest rate (for 5 year mortgages) is 0.90% per month (excluding fees) which annualises to 11.3%. Banks currently offer 8–9% to 1-month TL deposit holders. This implies a gross spread of 2.3–3.3% versus TL deposits, The other funding source which is commonly used for home loans has been TL/USD currency swaps. The 5 year swap rate is currently at 7.75%, and together with the FX funding cost the total 5 year funding rate for Turkish banks is getting near to 10%, which leaves little spread for home loans if fully hedged. Banks recently started to fund home loan growth more by deposits and looking to fund more through TL corporate bonds, which they will start to issue more in the coming years. Regardless of the funding mechanism, mortgage loan yields and spreads look too low at this stage and as we expect home loans to be the fastest growing area for Turkish banks in the coming years, we would expect further pressure on margins. Given the attractive growth prospects in home loans, banks seem willing to create a strong brand awareness and early market shares at the expense of margins in early years.

Figure 68: Average home loan interest rates (monthly) for the banks we cover Fee Monthly Combined

Bank1 1.0% 0.91% 0.93%

Bank2 0.0% 0.90% 0.90%

Bank3 1.0% 0.88% 0.90%

Bank4 3.0% 0.92% 0.97%

Bank5 4.0% 0.81% 0.88%

Bank6 1.0% 0.95% 0.97%

Bank7 1.0% 0.87% 0.89%

Bank8 2.0% 0.95% 0.98%

AVERAGE 1.6% 0.90% 0.93%


In general, the lowest returns are in home loans, followed by auto loans and general purpose loans. Average SME yield is also slightly higher than the GP loan yields. We have done a similar analysis for the other TL loan segments and our long-term analysis reveal the following forecasts which feed into our long-term forecasts for the banks.

Figure 69: Estimated average annualized yields on different loan segments, 2010E-15E 2010E 2011E 2012E 2013E 2014E 2015E

Home loans 12.4% 10.6% 9.4% 9.0% 8.7% 8.4%

Other consumer loans 13.4% 11.7% 10.5% 10.1% 9.8% 9.5%

Credit card loans* 37.7% 29.8% 26.8% 25.6% 24.8% 24.0%

SME loans 15.7% 13.9% 12.7% 12.9% 12.7% 12.4%

Average TL interest rate 8.4% 7.8% 7.3% 6.9% 6.6% 6.4%

* This is the yield on rolling portion of the CC loan portfolio. Source: Company data, Credit Suisse estimates

Figure 70: TL Loan yields and TL deposit costs, 07-15E Figure 71: FX Loan yields and FX deposit costs, 07-15E

0.0%

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6.0%

8.0%

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12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

2007 2008 2009A 2010E 2011E 2012E 2013E 2014E 2015E

TL Loan yield TL deposits cost

We expect TL loan yields to move closer to 10% levels and stabilize there from 2012 onwards. . . .

. . . and TL L-D spreads to shrink in 2010-12period and then stabilize at around 4.5%-5.0%. .

0.0%

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2007 2008 2009A 2010E 2011E 2012E 2013E 2014E 2015E

FX Loan yield TL deposits cost

The drop in FX L-D spreads will be much more containedin our view with both FX loan yields and FX deposit costsfalling at similar paces.


08 December 2010

Turkish Banks 32

2. Fee income outlook Above, we have argued that the net interest income growth will likely coming under pressure in the coming years. This makes fee income an even more important earnings driver for the Turkish banks. However, there are several challenges in this line as well, driven by regulatory pressures and lower merchant fees in low interest rate environment.

1. Potential cap on banking transaction fees by the regulator (5.2% of total fees and 2.0% of pre-tax earnings)

2. Potential abolition of annual credit card management fees by the regulator (5.6% of total fees and 2.1% of pre-tax earnings)

3. Declining merchant fees correlating with the short-term interest rate environment (total credit card fees are 29.3% of total fees and 11.1% of pre-tax)

4. Competitive environment: Fees on cash loans is usually the first item to be waived by customer representatives in order to attract customers in particular mortgage, auto and GP loan applications. (17.5% of total fees and 6.6% of pre-tax earnings)

5. Asset management fees likely to decline: Although we believe the domestic asset management industry growth will be strong, we think it very unlikely that we will see the 4-5% annual asset management fees (12% of total fees and 4.6% of pre-tax earnings).

Figure 72 shows the major banks’ fee income breakdown (information gathered from bank presentations but with certain assumptions and consolidation of items) as of 9M10. In the last column, we also put a rough estimate of medium/long term growth outlook for each line. We believe cash and non-cash loan growth is likely to be the strongest driven by loan growth prospect. Assets under management should also grow strongly but fees should clearly fall and as a result we would not expect growth that is as strong as for loan fees. We also believe that credit card fees will be the most under pressure, being capped by regulatory caps and low interest rates. We have also assumed a negative growth in transaction fees to reflect potential caps on banking transaction fees by the regulator.

Figure 72: Breakdown of fee income, 9M10 and theoretical fee income growth potential based on current mix ISCTR AKBNK YKBNK GARAN VAKBN HALKB ASYAB TEBNK Group

average Estimated LT Growth

Non-cash loans 8% 4% 12% 10% 11% 13% 61% 14% 11% 20%

Cash loans 12% 9% 25% 19% 24% 31% 0% 15% 18% 25%

Asset management 22% 14% 8% 10% 11% 8% 0% 10% 12% 10%

Credit card fees 32% 47% 42% 33% 26% 14% 23% 23% 35% -10%

Transaction fees 5% 4% 3% 8% 7% 10% 0% 2% 5% -5%

Account management 7% 5% 2% 5% 2% 0% 0% 0% 4% 15%

Other 14% 17% 9% 16% 19% 24% 16% 36% 16% 5%

Implied growth rate 5.1% 1.2% 5.7% 5.5% 7.4% 10.5% 10.7% 7.0% 5.4%


08 December 2010

Turkish Banks 33

Figure 73: Fee income as % of revenues, loans and IEA Figure 74: Selected countries - Fees as % of total IEA

21.4%

15.6% 15.5%

19.0%19.7%

22.8%21.4%

22.6%

18.7% 18.8%

20.3%21.5% 21.6%

20.7%20.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Fee

as %

of r

even

ues

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

As %

of I

EA a

nd lo

ans

Fee income as % of bank revenues Fees as % of IEA (Interest earning assets) Fee income as % of average loans

5.8%

5.3%

2.7% 2.6%2.3% 2.3% 2.2% 2.1%

1.8% 1.7% 1.6%1.2% 1.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Brazil

LATAM

Poland

Turkey

EEMEA

South

Africa

Russia

Czech

Repub

lic

Hunga

ry

Europe

India

MENA

Kazak

hstan

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates

Figure 73 shows our estimates for fee income as a percentage of revenues and as of interest earning assets. We forecast a gradually declining ratio, following the pattern since 2002. By 2012E, we expect fee income as a percentage of average loans to drop to 1.8%. Figure 74 shows the 2010E fee income as a percentage of loans for various regions/countries. Excluding Brazil (structural reasons for high fee income as a percentage of loans), Turkey and Poland top the list of fee income generation currently, but we expect Turkey to converge towards others in that area.

Figure 75shows a rough assessment of the sensitivity of earnings to the potential fee items that may come under pressure, as explained above. These five items in total represent 26% of the pre-tax income. Based on our estimates, the total impact, ceteris paribus, could be around 5% of the net income.

Figure 75: Potential fee areas under threat As % of

fees (9M10) As % of pre-tax income (9M10)

Potential hit to the fee item

Potential hit to net income

Transaction fees 5.2% 2.0% -10% -0.2%

Annual CC fees 5.6% 2.1% -80% -1.7%

Credit card merchant fees 29.3% 11.1% -20% -2.2%

Cash loans 17.5% 6.6% -5% -0.3%

Asset management fees 12.0% 4.6% -10% -0.5%

Total impact 26.4% -4.9%


08 December 2010

Turkish Banks 34

3. Other non-interest income This is mainly composed of trading and FX gains and provision reversals. In 2009 and 2010 to date, the other non-interest income line of Turkish banks was strong because of trading and FX gains in 2009 and provision reversals in 2010. From 2011E, this line is likely to drop materially to put further pressure on top line growth.

Figure 76 shows the total other non-interest income by years and as a percentage of pre-tax income. We expect a sharp drop in other income, in particular in 2011E, due to normalisation of the NPL reversal process. In 2010 to date, Turkish banks reversed the provisions they wrote in 2009. We do not expect this to be repeated in 2011 or the following years at the same magnitude. We also expect a slight normalisation of the trading gains performance. This suggests a rather flattish performance in 2011E and 2012E, picking up after 2013E driven by other income growth on the back of the natural reversal of provisioning.

Figure 78 and Figure 79 show other banking income and trading and FX gains on an annual basis separately. The strong performance of Turkish banks in 2009 and 2010 to date was clearly supported by the exceptional one-off gains in trading (in 2009) and other banking income (in 2010 to date). Where trading gains normalised in 2010, it was other banking income which jumped and compensated for that, but from 2011E both lines should normalise.

Figure 76: Other non-interest income and as % of pre-tax Figure 77: Quarterly evolution of trading & FX gains

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Net

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(TLb

n)

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

34.0%

36.0%

Trading & FX gains Other income Total as % of pre-tax income

Normalization in 2011 and 2012

0

100

200

300

400

500

600

700

800

900

1Q05

2Q05

3Q05

4Q05

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2Q06

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2Q08

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2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

TL in

mill

ions

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Perc

enta

ge

Trading & FX gains 12m rolling trading & FX gains as % of investment securities

Source: Company data, Credit Suisse estimates Source: Company data

Figure 78: Other banking income and as % of previous

year provisioning stock, 2002-2012E (TLm)

Figure 79: Trading & FX gains versus interest rates

0

1,000

2,000

3,000

4,000

5,000

6,000

2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Other bank income Other banking income as % of previous year provisioning stock

one-off

0

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

TL in

mill

ions

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%B

ench

mar

k in

tere

st ra

tes

Trading and FX gains Year-end interest rates

Trading and FX gains of 2009 were one-offdue to sharp decline ininterest rates


08 December 2010

Turkish Banks 35

4. Operating costs We expect a total banking income CAGR of 4% in 2011E–12E. This level of growth will clearly stay below the cost growth in our view due to inflation and branch and headcount expansion in a highly competitive market where banks will likely be chasing asset growth. As a result we expect the cost-income ratio to go up. Figure 80 shows the total operating costs of our coverage universe and costs-to-IEA for 2005-2015E.

We expect the Turkish banking sector to run assets at lower costs gradually in the coming years with the costs-to-interest assets ratio falling towards 2.5% levels by 2012E and 2.1% by 2015E. Figure 82 shows the costs-to-IEA ratio for selected regions and countries. Although we expect costs-to-assets ratio to drop for Turkey, this chart suggests that there may be a negative surprise risk as the current EM average is 3.6% and Latam is 4.6%.

The falling cost-to-asset ratio does not mean that costs will be growing less than revenues though. Figure 81 shows our expected annual cost growth and inflation. We expect costs to rise 4-5% higher than inflation on average in the next three years due to competition, and branch and employee growth. Figure 83 plots the annual revenue and cost growth for the sector together. After a considerable revenue outperformance versus costs, we see 2010E-12E as a period of normalisation, with costs outpacing the revenue growth and lowering the operating profitability before provisioning. From 2012E, with revenue growth recovering, we expect positive operating income growth to return.

Figure 80: Operating costs and Costs-to-IEA, 2005-15E Figure 81: Annual opex growth vs. inflation

0

5,000

10,000

15,000

20,000

25,000

30,000

2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

TL in

mill

ions

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Cos

t-to-

asse

ts

Total operating costs (TLm) Cost-to-IEA

21.3%

26.9%

17.6%

21.9%

4.9%

11.1% 11.4%10.7% 10.3% 10.2% 10.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Opex growth Inflation

Opex growth will not be as high as 2005-2008 period but still will beat revenue growth in 2010-2012 period


Figure 82: Costs to IEA Selected countries/regions, 2010E Figure 83: Turkish banks –Revenues and cost growth

4.8%4.6%

4.3% 4.3%4.0%

3.6%

3.0% 2.9%

2.2%2.1% 2.0%

1.8%1.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Brazil

LATAM

South

Africa

Russia

Hunga

ry

EEMEAPola

nd

Turkey

India

Czech

Repub

lic

Kazak

hstan

Europe

MENA

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Revenue growth Opex growth

After a massive revenue outperformance of costs in 2009, we expect 2010-12 period to be normalization of revenues and costs outpacing the revenue growth hence lowering operating profitability.

We expect from 2012 onwards, operating income to start growing again

Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates

08 December 2010

Turkish Banks 36

5. Provisioning Lower provisioning was the key earnings driver for the sector in 2010. In the first nine months of the year, total provisioning of our coverage universe fell by 41% year on year and we expect it to fall by 43% for the full year. This is equivalent to 1.5% cost of risk for 2010E (including other general and free provisions. Specific loan loss provisions as a percentage of average loans is 1.1%). Assuming a benign macro environment (i.e. stable and strong growth and no economic turmoil scenarios), we expect cost of risk to stabilise at around 1.0% levels for specific loan loss provisions and 1.2% for total provisions.

Although we expect a positive asset quality environment, we identify two key arguments that are negative for the Turkish banks’ medium term earnings outlook.

1. Same cost of risk in lower spread/margin environment

In a normalising margin environment (i.e. interest margin on loans moving from 6-7% levels to 4-5% levels), the same cost of risk becomes a bigger hit to overall earnings. In other words, assuming 100bps cost of risk (i.e. assuming 1% of the loan book becoming bad loans and written off eventually), and assuming loan spread falling from 6% to 4%, the fall in loan spread (pre-provisions) is 33%. An average loan growth of 33% could normally compensate for that. But looking at this as net loan interest income bad loans, the net loan margin drops from 5% to 3%, a drop of 40% which requires a 40% average loan growth for break-even.

2. Higher loan mix in total IEA

Turkish banks will be moving from 50-50 loans-securities mix to 70-30 mix in the coming years, putting pressure on ROAs as a larger portion of the assets (or interest earnings assets) will be subject to asset quality risk. Even though the cost of risk stays (loan losses as a percentage of loans) flat, the provision charges as a percentage of total interest earning assets will likely go up.

Figure 84: Specific loan provisions and cost of risk Figure 85: 12m rolling total provisioning and as % of IEA

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

TL in

mill

ions

0.0%

0.5%

1.0%

1.5%

2.0%

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3.0%

Cos

t-to-

asse

ts

Loan provisions Cost of risk

A CAGR of 21.5%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

Tota

l pro

visi

ons

(TLm

)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

As %

of a

vera

ge IE

A

Total provisions As % of average IEA

Source: Company data, Credit Suisse estimates Source: Company data

As Figure 84 briefly shows, we expect a CAGR of 21.5% in provisioning charges between 2010E and 2015E, where loans grow at a CAGR of 22%. In the same period, total operating income (pre provisioning) will see a CAGR of 18.5% on our estimates. We assume cost of risk to stay flattish at around 1% levels, which is lower than the historical trends, but this can be justified given the lower interest rate and stronger macro economic environment.

08 December 2010

Turkish Banks 37

ROA analysis / scenarios As well as the detailed analysis we have provided in this report, we also take a simple look at the earnings potential of Turkish banks from a top-down ROA/ROE perspective. The line-by-line ROA analysis sometimes means it is useful to take a broader look at the regional banking industries.

As of 9M10, our Turkish banking coverage’s annualised ROA is 2.93% (assets regarded as interest earning assets only). ROA is driven by six factors primarily:

1. Net interest margin: Currently 4.6% (9M10) but as stated before, this is not sustainable in our view. We used different inputs from 3% to 4% in the scenarios below. Our official forecasts stabilise at around 3.5% levels.

2. Net loan loss as a percentage of IEA: This is cost of risk (loan losses as a percentage of loans) multiplied by average loans to IEA ratio. The higher the loan mix, the higher the cost as a percentage of IEA. In our scenarios, we generally assume 100bps cost of risk.

3. Cost to assets (IEA): Currently Turkish banks run with c3% cost to asset ratio. In other words, the annual operating cost of running the interest earnings assets of the sector is around 3%. Excluding LatAM and Brazil, this is in line with the EM average but we expect a drop in costs to assets as Turkish banks have some room to grow assets, given the low loan penetration rates, without incurring much costs. The capacity utilisation is not full yet.

4. Fee income to IEA: We expect fee to IEA to stabilise around 1.0–1.2% from 1.4% currently. This is equivalent to 50% fee income coverage of operating costs.

5. Trading gains as a percentage of IEA: Historically trading gains were 0.5% of the average interest earnings assets but this was in a securities-heavy balance sheet structure and in a generally falling interest rate environment. Therefore we think it would be too optimistic to assume that the sector would continue to generate 50bps return on interest earnings assets (especially given that the investment securities mix is set to fall). We have used a range of 10-30bps returns in our scenarios.

6. Other income as a percentage of IEA: Other income line mainly consists of NPL reversals; however for the purpose of this analysis we have extracted the NPL reversals from this line and netted it off with the provisioning line. The adjusted other income line is mainly composed of dividend and associate income and reversal of free and general provisions. In our scenarios we have used a range of 0.2–0.5%

08 December 2010

Turkish Banks 38

Figure 86: 2009, 9M10A actual ROA breakdown and various scenarios 2009A 9M10A SC1 SC2 SC3 SC4 SC5 SC6

1. NIM 5.6% 4.6% 4.0% 4.0% 3.5% 3.5% 3.0% 3.0%

Loans-to-IEA 54.5% 54.8% 60.0% 75.0% 60.0% 75.0% 70.0% 75.0%

Cost of risk, net -2.5% -1.1% -1.2% -1.0% -1.0% -1.0% -1.0% -1.0%

2. Net loan loss as % of IEA -1.4% -0.6% -0.7% -0.8% -0.6% -0.8% -0.7% -0.8%

3. Cost to IEA -3.0% -2.9% -2.2% -2.5% -2.2% -2.5% -2.2% -2.5%

Fee coverage of opex 51.4% 47.8% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%

4. Fee income to IEA 1.54% 1.37% 1.10% 1.25% 1.10% 1.25% 1.10% 1.25%

5. Trading gains % of IEA 0.46% 0.28% 0.30% 0.10% 0.30% 0.10% 0.30% 0.10%

6. Other income % of IEA 0.34% 0.85% 0.50% 0.20% 0.50% 0.20% 0.50% 0.20%

Pre-tax ROA 3.64% 3.61% 2.98% 2.30% 2.60% 1.80% 2.00% 1.30%

Tax ratio -19.4% -18.9% -20.00% -20.00% -20.00% -20.00% -20.00% -20.00%

ROA 2.94% 2.93% 2.38% 1.84% 2.08% 1.44% 1.60% 1.04%

Leverage (IEA-to-equity) 7.9x 7.3x 8.0x 8.0x 9.0x 9.0x 10.0x 10.0x

ROE 23.1% 21.4% 19.1% 14.7% 18.7% 13.0% 16.0% 10.4%


2010E Country ROA Comparisons

In Figure 87, we provide a comparison of various countries and regions from an ROA/ROE breakdown perspective. The table is useful to assess the current differences in NIM structures, cost of risk, fee income capacity etc. When compared with the average of other regions, Turkish banks seem to be generating slightly higher ROE (2010E) but much better ROA (due to lower leverage). The average 2010E ROA of Turkish banks is 2.76%, almost 90bps higher than the regional peer average. This is mainly driven by a much lower net cost of risk (50bps versus 140bps regional average). Operating costs are also lower—by c30bps—but fee generation is also 30bps lower, which offsets the lower operating costs. NIM is 20bps lower for Turkey in 2010E versus the average of other regions but again, this is offset by 20bps higher non-interest income.

The ROA differential in favour of Turkey cannot be reflected in the ROE line due to lower leverage. Turkish banks generate on average 2.76% 2010E ROA, with much higher capital allocation (7.2x leverage versus 9.7x average). The ROE differential is only 150bps.

Figure 87: EMEA and selected EM Banking regions – ROA breakdown, 2010E Czech

Rep Hung

ary Kazakh

stan Poland Russia South

Africa MENA LATAM EEMEA Brazil India AVG Turkey

1. NIM 3.4% 7.0% 6.0% 3.9% 7.5% 3.7% 3.3% 6.3% 4.6% 6.5% 3.0% 4.7% 4.5%

Loans-to-IEA 60.2% 82.7% 101.5% 77.6% 88.2% 88.8% 79.2% 48.0% 77.5% 45.5% 66.2% 68.5% 55.4%

Cost of risk, net -0.8% -3.7% -3.7% -1.1% -4.0% -1.4% -1.1% -3.5% -1.9% -3.8% -1.3% -2.1% -0.9%

2. Net loan loss % of IEA -0.5% -3.1% -3.7% -0.8% -3.5% -1.2% -0.9% -1.7% -1.5% -1.7% -0.9% -1.4% -0.5%

3. Costs to IEA -2.1% -4.0% -2.0% -3.0% -4.3% -4.3% -1.5% -4.6% -3.0% -4.8% -2.2% -3.2% -2.9%

Fee coverage of opex 60.9% 37.2% 55.5% 69.7% 45.7% 46.2% 63.1% 54.9% 50.7% 54.9% 46.3% 51.4% 46.4%

4. Fee income to IEA 1.28% 1.50% 1.13% 2.07% 1.97% 2.01% 0.92% 2.53% 1.53% 2.63% 1.04% 1.66% 1.33%

5. Other non-int as % IEA 0.52% 0.32% 0.37% 0.51% 0.54% 2.25% 0.57% 0.00% 1.00% -0.17% 0.86% 0.74% 1.01%

Pre-tax ROA 2.61% 1.65% 1.76% 2.67% 2.16% 2.40% 2.44% 2.51% 2.59% 2.44% 1.81% 2.41% 3.49%

Tax ratio -20.0% 2.5% -31.3% -19.5% -20.6% -29.4% -0.5% -32.6% -15.7% -27.6% -32.1% -22.2% -19.9%

ROA 2.09% 1.69% 1.21% 2.15% 1.72% 1.69% 2.43% 1.69% 2.19% 1.77% 1.23% 1.87% 2.79%

Leverage (IEA-to-equity) 9.7x 8.9x 6.5x 7.3x 7.6x 11.1x 7.0x 11.6x 7.9x 12.8x 17.2x 9.7x 7.2x

ROE 20.2% 15.0% 7.9% 15.6% 13.0% 18.8% 17.0% 19.7% 17.4% 22.6% 21.2% 18.3% 20.0%


08 December 2010

Turkish Banks 39

Turkey’s average 2010E NIM seems to be in line with the EEMEA and EM averages but we expect normalisation towards the right hand side of the chart (i.e. Poland, South Africa and Czech Republic). On cost of risk, Turkey and Czech Republic look to be the best regions, and while Russia, Brazil and Hungary top the list, this is also due to accounting structures. (Note that these three countries also have the highest NIMs so both lines are a bit inflated.)

Figure 88: Net interest margin, 2010E Figure 89: CoR and net loan loss of IEA, 2010E

7.5%

7.0%6.5%

6.3%6.0%

4.7% 4.6% 4.5%

3.9%3.7%

3.4% 3.3%3.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Russia

Hunga

ryBraz

il

LATAM

Kazak

hstan

EM Averag

e

EEMEATurk

ey

Poland

South

Africa

Czech

Repub

licMENA

India

-0.8%-0.9%

-1.1% -1.1%-1.3% -1.4%

-1.9%-2.1%

-3.5%-3.7% -3.7% -3.8%

-4.0%

-0.5% -0.5%

-0.8% -0.9% -0.9%

-1.2%

-1.5% -1.4%

-1.7%

-3.7%

-3.1%

-1.7%

-3.5%

-4.5%

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

Czech

Repub

lic

Turkey

Poland

MENAInd

ia

South

Africa

EEMEA

EM Averag

e

LATAM

Kazak

hstan

Hunga

ryBraz

il

Russia

Cost of risk Net loan loss as % of IEA

Source: Credit Suisse estimates, Credit Suisse Standard Securities

for South Africa


for South Africa

Figure 90: NIM post net loan loss, 2010E

4.8%4.6%

4.0% 4.0% 3.9%

3.2% 3.1% 3.1%2.9%

2.5% 2.4% 2.3% 2.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Brazil

LATAM

Turkey

Russia

Hunga

ry

EM Averag

e

EEMEAPola

nd

Czech

Repub

lic

South

Africa

MENA

Kazak

hstan Ind

ia

Source: Credit Suisse estimates, Credit Suisse Standard Securities for South Africa

Net interest margin post the net bad debt charge is a good indicator of core banking profitability. Turkey, after Brazil, provides the best net NIM as of 2010E of our sample but we expect normalisation towards EM and EMEA averages while staying above those averages in the longer term, on our estimates.

08 December 2010

Turkish Banks 40

Turkish banks are below their regional peers’ average in terms of fee generation capacity but we do not expect an immediate improvement in this line. Given the pressures going forward, we would expect this ratio to remain below average. It is also normal to expect a lower fee to IEA as Turkish banks have much higher securities portion in overall IEA. On the costs side, Turkish banks are slightly below the average cost-to-asset ratio for other regions. We would normally expect lower costs to assets for Turkish banks going forward, but given that they already have a lower ratio than their peers, this may be a bit optimistic.

Figure 91: Fee income to IEA, 2010E Figure 92: Costs-to-assets (IEA), 2010E

2.6%2.5%

2.1% 2.0% 2.0%

1.7%1.5% 1.5%

1.3% 1.3%1.1%

1.0%0.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Brazil

LATAM

Poland

South

Africa

Russia

EM Averag

e

EEMEA

Hunga

ry

Turke

y

Czech

Rep

ublic

Kazak

hstan Ind

iaMENA

-1.5%

-2.0% -2.1% -2.2%

-2.9% -3.0% -3.0%-3.2%

-4.0%-4.3% -4.3%

-4.6%-4.8%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

MENA

Kazak

hstan

Czech

Rep

ublic

India

Turkey

Poland

EEMEA

EM Averag

e

Hunga

ry

Russia

South

Africa

LATA

MBraz

il


for South Africa


for South Africa

ROA and leverage

As of 2010, Turkey ranks top in terms of ROA and we already looked into the reasons of this briefly (mainly coming from lower net cost of risk), but the balance sheets in the sector are less leveraged and therefore the ROE differential is not as high as in ROAs.

Figure 93: ROA (on IEA), 2010E Figure 94: Leverage (Average IEA to average equity)

2.8%

2.4%

2.2% 2.1% 2.1%

1.9%1.8% 1.7% 1.7% 1.7% 1.7%

1.2% 1.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Turkey

MENA

EEMEAPola

nd

Czech

Repub

lic

EM Averag

eBraz

il

Russia

South

Africa

Hunga

ry

LATAM

India

Kazak

hstan

6.5 7.0 7.2 7.3 7.6 7.98.9

9.7 9.7

11.111.6

12.8

17.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Kazak

hstan

MENATurk

ey

Poland

Russia

EEMEA

Hunga

ry

Czech

Repub

lic

EM Averag

e

South

Africa

LATAM

Brazil

India


for South Africa


for South Africa

08 December 2010

Turkish Banks 41

Figure 95: 2010E ROE

22.6%21.2%

20.2% 20.0% 19.7%18.8% 18.3%

17.4% 17.0%15.6%

15.0%

13.0%

7.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Brazil

India

Czech

Rep

ublic

Turkey

LATAM

South

Africa

EM Averag

e

EEMEAMENA

Poland

Hunga

ry

Russia

Kazak

hstan

Source: Credit Suisse estimates, Credit Suisse Standard Securities for South Africa

Individual banks ROA analysis Figure 96: Turkish Banks – ROA breakdown (on Interest Earning Assets), 9M10A 9M10A ISCTR AKBNK YKBNK GARAN VAKBN HALKB ASYAB TEBNK TSKB SECTOR

1. NIM 4.3% 4.3% 5.1% 4.6% 4.1% 5.1% 4.9% 5.3% 4.8% 4.6%

Loans-to-IEA 48.6% 46.4% 66.5% 53.7% 57.4% 58.3% 77.8% 66.3% 59.7% 54.8%

Cost of risk, net -0.9% -0.1% -0.7% -1.2% -2.6% -1.2% -0.4% -1.3% -0.5% -1.1%

2. Net loan loss as % of IEA -0.4% -0.1% -0.5% -0.6% -1.5% -0.7% -0.3% -0.8% -0.3% -0.6%

3. Cost to IEA -2.9% -2.5% -3.9% -2.8% -2.5% -2.3% -4.5% -5.2% -0.9% -2.9%

Fee coverage of opex 38.7% 55.3% 64.4% 60.9% 25.3% 36.8% 47.6% 32.5% 17.7% 47.8%

4. Fee income to IEA 1.1% 1.4% 2.5% 1.7% 0.6% 0.9% 2.1% 1.7% 0.2% 1.4%

5. Trading gains % of IEA 0.3% 0.1% 0.0% 0.5% 0.3% 0.4% 0.4% 0.0% 0.0% 0.3%

6. Other income % of IEA 1.2% 0.5% 1.3% 0.7% 0.9% 0.8% 0.1% 0.2% 0.8% 0.8%

Pre-tax ROA 3.5% 3.8% 4.6% 4.1% 2.0% 4.1% 2.8% 1.2% 4.5% 3.6%

Tax ratio -17.1% -19.7% -17.0% -20.0% -20.6% -19.6% -21.1% -20.5% -21.0% -18.9%

ROA 2.9% 3.0% 3.8% 3.3% 1.6% 3.3% 2.2% 1.0% 3.5% 2.9%

Leverage (IEA-to-equity) 7.5x 6.3x 6.9x 6.9x 8.4x 9.7x 6.4x 8.4x 5.7x 7.3x

ROE 22.0% 19.1% 26.4% 22.4% 13.1% 31.6% 14.2% 8.0% 20.1% 21.4%


08 December 2010

Turkish Banks 42

Europe / Turkey Regional Banks

Turkiye Is Bankasi (ISCTR.IS) UPGRADE RATING

Outperformance to continue ■ We upgrade Isbank to Outperform (from Neutral) and increase our

target price to TL7.00 from TL5.55. Isbank remains in our preferred Turkish banks list, with 18% potential upside to our target price. The stock has outperformed the market by 33% in 2010 YTD and we believe its relative defensiveness and attractive valuations should continue to deliver outperformance. We increase our target price to TL7.00 from TL5.55, mainly driven by lower CoE.

■ We believe Isbank is relatively better positioned given our expectations for the sector’s longer-term outlook. It has the lowest NIM in our coverage universe and leaves limited room for further margin compression. Earnings may be under pressure in 2011 in line with the sector trends we anticipate; however, Isbank is trading at a 17% discount to its private bank peers on 9M10A annualised P/E. Overall, we see Isbank as a defensive investment with good upside potential, which warrants an Outperform rating.

■ Isbank is trading at 1.6x 2010E P/TBV and 11.6x 2011E P/E. Our standard valuation methodology for Turkish banks is a combination of: (i) discounted EVA® model; (ii) Gordon’s growth; and (iii) EMEA peer group multiple-based valuation. Our target price of TL7.0 suggests potential upside of 18% versus 1% average for the sector.

Share price performance

1

3

5

7

Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10

Price Price relative

The price relative chart measures performance against the Turkey ISE 100 index which closed at 66860.19 on 03/12/10 On 03/12/10 the spot exchange rate was TRY1.98/Eu 1. - Eu .75/US$1

Performance Over 1M 3M 12M Absolute (%) -11.1 5.7 46.5 Relative (%) -7.1 -4.6 8.4

Financial and valuation metrics

Year 12/09A 12/10E 12/11E 12/12E Net Income Reported (TRY m) 2,372 3,006 2,578 2,576 Adjusted Net Income (TRY m) 2,136 2,688 2,300 2,295 EPS stated (TRY) 0.53 0.67 0.57 0.57 CS adj. EPS (TRY) 0.47 0.60 0.51 0.51 Prev. EPS (TRY) — 0.53 0.56 0.60 Tangible Book Value (TRY m) 13,494 16,623 19,036 21,610 CS adj. ROTE 22.4 20.0 14.5 12.7 P/E (adj., x) 12.47 9.91 11.58 11.61 Price/T. book per share (x) 2.0 1.6 1.4 1.2

Dividend (2010E) 0.17 Tier 1 ratio (12/10E, %) 18.9 Dividend yield (%) 2.8 Eqt Tier 1 Ratio (12/10E, %) 18.9 Free float (%) 33.0 Number of shares (m) 4,499.88

Source: Company data, Thomson Reuters, Credit Suisse estimates.

*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts

Akin Tuzun 90 212 349 0458

[email protected]

Ates Buldur 90 212 349 0459

[email protected]

Rating (from Neutral) OUTPERFORM* Price (02 Dec 10, TRY) 5.92 Target Price (TRY) (from 5.55) 7.00¹ Market cap. (TRY m) 26,639

08 December 2010

Turkish Banks 43

Figure 97: Isbank: Target valuation TRY in millions, unless otherwise stated ISCTR - TARGET VALUATION

Model Target Price Calculation TL Fixed Prices and RatingsValuation Methods MV Price Weight Target Price (Cum-div) 7.00 Target 7.00I. EVA Model 32,458 7.21 50% (-) DPS (0.17) Dividend 0.17II. Gordon's Growth Model 28,610 6.36 25% Target Price (Ex-div) 6.83 Target mcap 31,500III. Peer Group Valuation 32,474 7.22 25% Current Share Price 5.92 ETR 18.2%Weighted Average Target 31,500 7.00 Share Price Return (SPR) 15.4% Current Valuation 26,639 5.92 Dividend Yield 2.8%Upside 18.2% 18.2% Estimated Total Return (ETR) 18.2%

consensus 6.65 12.3%I. EVA MODELTL in millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Turkish Lira Risk Free Rate 21.2% 16.6% 16.4% 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3% 7.3% Eurobond Risk Free Rate 7.5% 6.8% 8.7% 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1% 4.1% Implied TL mix 80.4% 82.1% 81.7% 80.9% 82.8% 84.0% 85.5% 86.3% 87.2% 88.0% 88.9%1.Blended Risk free rate 18.5% 14.9% 15.0% 8.4% 7.6% 7.9% 7.5% 7.3% 7.1% 6.9% 6.9%2. Equity/Tier 1 Capital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%3. Required Tier 1 Ratio 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%4. Forecast RWA (TL) 35,971 42,627 57,132 61,589 67,660 84,634 104,969 124,688 144,215 165,505 173,7805. Required Equity (2x3x4) 2,878 3,410 4,571 4,927 5,413 6,771 8,398 9,975 11,537 13,240 13,9026. Total Equity 9,410 10,604 9,449 13,494 16,623 19,036 21,610 24,428 27,653 31,416 32,986 (-) Participations (4,695) (4,817) (3,096) (5,031) (5,486) (6,034) (6,638) (7,301) (8,031) (8,835) (9,011)7. Core Equity 4,715 5,787 6,354 8,462 11,137 13,002 14,972 17,127 19,622 22,581 23,9758. Excess Equity (7-5) 1,837 2,377 1,783 3,535 5,724 6,231 6,575 7,152 8,084 9,341 10,0739. Earnings on Excess Equity (1x Avg(8)) 242 313 312 224 350 475 480 499 538 599 67010. Effective Tax Rate -32.0% -19.1% -16.1% -19.5% -20.0% -19.0% -20.0% -20.0% -20.0% -20.0% -20.0%11. Tax Adj. Earnings on Excess Equity 165 254 262 180 280 384 384 400 431 479 53612. Reported Parent-only net income 1,109 1,702 1,509 2,372 3,006 2,578 2,576 2,759 3,144 3,704 3,948 (-/+) One-off items 0 (23) 198 202 0 0 0 0 0 0 0 (-) Income from subsidiaries (117) (169) (285) (325) (369) (388) (407) (427) (449) (471) (490) (-/+) Excess provision normalization 58 87 158 221 106 129 156 193 230 268 287 (-) Founder / preferred shares adjustment (78) (140) (115) (200) (263) (221) (220) (239) (277) (332) (355)13. Normalized Core Banking Net Profit 972 1,457 1,466 2,270 2,480 2,099 2,105 2,287 2,649 3,170 3,38914. Core ROE 27.8% 24.1% 30.6% 25.3% 17.4% 15.1% 14.2% 14.4% 15.0% 14.6%15. Adjusted Earnings (13-11) 807 1,204 1,204 2,089 2,200 1,715 1,721 1,887 2,218 2,691 2,854

EVA Model (TLm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016I. Required Equity (=5) 2,878 3,410 4,571 4,927 5,413 6,771 8,398 9,975 11,537 13,240 13,902II. Adjusted Earnings (=15) 807 1,204 1,204 2,089 2,200 1,715 1,721 1,887 2,218 2,691 2,854III. Discount Rate 24.3% 20.7% 20.8% 13.3% 12.0% 12.6% 11.9% 11.5% 11.2% 10.9% 10.9%IV. Capital Charge ( III x Avg(I) ) (651) (831) (633) (620) (767) (900) (1,060) (1,204) (1,350) (1,484)V. EVA Flow (II + IV) 552 373 1,456 1,579 948 821 827 1,014 1,341 1,369VI. Discount Factor 0.00 1.00 0.89 0.79 0.71 0.64 0.58 0.52VII. NPV of EVA (VxVI) 0 0 0 1,579 842 652 589 649 774 712

EVA Calculation TLm Valuation Box Stock Info2010E Core Book Value 11,137 Fair Value (TLm) 32,458 Equity Stock Beta 1.17+EVA Flows 4,218 Current value (TLm) 26,639 Stock specific risk pr. 0.0%+Terminal EVA Value 9,244 Number of Shares 4,499,893 Long Term Growth 3.0%TOTAL Core Value (TLm) 24,600 Target Price (TL) 7.2 2015 Core ROE 14.6% (+) Value of Participations 7,858 Current Price (TL) 5.92Total Fair Value (TLm) 32,458 Upside 21.8%

II. Gordon's Growth ModelPrice-to-book calculation TLm Valuation BoxSustainable Core ROE (Avg 10-16) 16.6% Fair Value (TLm) 28,610Cost of Equity (Avg 09-16) 11.6% Current value (TLm) 26,639Adjusted LT Growth Rate 5.8% Number of Shares 4,499,893Implied Target P/BV (2010) 1.9 Target Price (TL) 6.42010E Core Equity (TLm) 11,137 Current Price (TL) 5.92Total Core Value (TLm) 20,752 Upside 7.4% (+) Value of Participations 7,858Total Fair Value (TLm) 28,610

III. Peer Group ValuationPeer group multiple valuation TLm Valuation Box2010E Adj Net Income x target EMEA (ex RU) 34,186 Fair Value (TLm) 32,474 EMEA Ex Russia2011E Adj Net Income x target EMEA (ex RU) 23,012 Current value (TLm) 26,639 10E PE 15.94 12.722010E Book Value x target EMEA (ex RU) 36,245 Number of Shares 4,499,893 11E PE 10.97 10.012009E Book Value x target EMEA (ex RU) 36,451 Target Price (TL) 7.2 10E PBV 2.11 2.06 Taking average of above = Current Price (TL) 5.92 11E PBV 1.82 1.82Total Fair Value (TLm) 32,474 Upside 21.9% Adjustment factor FALSE

Upside in EMEA ex Turkey 0%Implied Target Valuation Multiples

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Price-to-book (IFRS Cons) 3.3 2.9 2.6 2.2 1.8 1.6 1.4 1.2 1.1 1.0Price-to-book (Core) 6.7 5.4 5.0 3.7 2.8 2.4 2.1 1.8 1.6 1.4Price-to-book (BRSA) 3.3 3.0 3.3 2.3 1.9 1.7 1.5 1.3 1.1 1.0Price-to-earnings (IFRS Cons) 21.8 15.5 20.4 14.8 10.7 12.5 12.5 11.7 10.2 8.7Price-to-earnings (Core) 31.8 20.9 22.1 14.0 11.9 14.4 14.5 13.5 11.7 9.7Price-to-earnings (BRSA) 28.4 18.8 18.4 12.2 10.5 12.2 12.2 11.4 10.0 8.5ROE (IFRS Cons) 15.5% 19.6% 15.1% 17.7% 18.5% 13.4% 11.8% 11.2% 11.3% 11.9%ROE (Core) 20.4% 29.1% 23.4% 30.4% 26.9% 18.1% 15.5% 14.5% 14.7% 15.3%ROE (BRSA) 11.7% 16.8% 15.1% 20.7% 20.0% 14.5% 12.7% 12.0% 12.1% 12.5%

Target (TL)

Source: Company data, Credit Suisse estimates for 2010 and afterwards

08 December 2010

Turkish Banks 44

Figure 98: Isbank: Income statement TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

I. Interest Income 10,596 10,200 9,843 10,813 12,285 13,837 15,569 17,361

on TRY Loans 6,040 6,087 5,499 6,502 7,884 9,466 11,093 12,744

on FX Loans 745 678 602 728 812 902 992 1,096

on Securities 3,175 3,017 3,517 3,390 3,362 3,223 3,240 3,283

on Liquid Assets & Others 635 418 226 192 228 246 244 238

II. Interest Expense (6,978) (5,333) (5,241) (5,962) (7,287) (8,283) (9,189) (10,071)

on TRY Deposits (4,984) (3,973) (3,727) (4,443) (5,679) (6,655) (7,503) (8,319)

on FX Deposits (518) (594) (563) (534) (539) (559) (594) (643)

on Borrowed Funds (769) (586) (519) (588) (633) (625) (642) (660)

on Others (708) (179) (431) (397) (436) (443) (449) (449)

III. Net Interest Income 3,618 4,867 4,603 4,851 4,999 5,555 6,380 7,290

Net FX gains/losses 935 (356) 259 134 217 253 273 293

IV. FX adj. Net Interest Income 4,553 4,511 4,862 4,985 5,216 5,808 6,654 7,583

Fee & commission income, net 1,204 1,253 1,163 1,288 1,551 1,807 2,022 2,329

Trading income, net (462) 765 100 152 206 191 176 186

Other banking income, net 782 983 1,452 1,061 1,076 1,126 1,219 1,345

V. Total Banking Income 6,077 7,512 7,578 7,485 8,049 8,932 10,070 11,443

Personnel expenses (1,252) (1,405) (1,617) (1,813) (1,979) (2,147) (2,326) (2,515)

Other operating costs (1,500) (1,290) (1,485) (1,635) (1,801) (1,990) (2,176) (2,353)

VI. Total Operating Costs (2,752) (2,695) (3,102) (3,448) (3,781) (4,138) (4,501) (4,868)

VII. Operating Income 3,325 4,817 4,475 4,037 4,268 4,795 5,569 6,575

Loan loss provisions (1,054) (1,471) (704) (861) (1,041) (1,287) (1,532) (1,788)

Other provisions (560) (523) (382) (382) (413) (486) (555) (627)

VII. Op. Inc. After Provisions 1,711 2,823 3,389 2,795 2,813 3,022 3,481 4,159

Income from associates 285 325 369 388 407 427 449 471

Monetary gains/losses 0 0 0 0 0 0 0 0

Extraordinary items (198) (202) 0 0 0 0 0 0

VIII. Pre-tax income 1,798 2,946 3,758 3,183 3,220 3,449 3,930 4,631

Tax (289) (573) (752) (605) (644) (690) (786) (926) IX. Net Income (Reported BRSA), not consolidated 1,509 2,372 3,006 2,578 2,576 2,759 3,144 3,704

Adjusted Net Income (BRSA) 1,708 2,574 3,006 2,578 2,576 2,759 3,144 3,704

(+/-) IFRS Consolidation Difference 32 (238) (56) (58) (61) (63) (66) (68)

X. IFRS Adj. Net Income pre special div. 1,739 2,336 2,951 2,520 2,516 2,696 3,078 3,636

(-) Founder & Employee Dividends (115) (200) (263) (221) (220) (239) (277) (332)

X. IFRS Adj. Net Income 1,624 2,136 2,688 2,300 2,295 2,458 2,802 3,304


08 December 2010

Turkish Banks 45

Figure 99: Isbank: Balance sheet TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Cash and Banks 7,381 9,317 7,918 9,527 14,615 14,382 16,637 15,748

Money Market 0 0 0 0 0 0 0 0

Securities Portfolio 23,946 38,009 42,067 44,521 46,827 48,787 51,713 54,467

Trading Securities 452 499 841 890 937 976 1,034 1,089

Available for Sale 20,032 24,581 29,447 32,055 33,715 35,127 37,234 39,216

Held Until Maturity 3,462 12,929 11,779 11,576 12,175 12,685 13,445 14,161

Loans, net 46,194 47,535 60,765 78,603 98,887 120,473 140,726 164,107

TRY Loans 31,535 33,718 43,524 56,558 71,338 87,384 102,995 121,096

FX Loans 14,659 13,818 17,241 22,045 27,549 33,090 37,731 43,012

NPLS, net 0 0 0 0 0 0 0 0

Gross NPLs 2,195 2,768 2,503 2,738 3,095 3,608 4,238 4,967

Provisions for NPLs (2,195) (2,768) (2,503) (2,738) (3,095) (3,608) (4,238) (4,967)

Reserve deposits 11,106 7,829 5,028 5,931 7,376 8,668 9,951 11,416

Accrued Interest 2,772 2,246 2,894 3,465 4,193 4,808 5,476 6,143

Financial subsidiaries 1,150 2,432 2,627 2,890 3,179 3,496 3,846 4,231

Non-financial subsidiaries 1,945 2,599 2,859 3,145 3,459 3,805 4,185 4,604

Fixed assets 1,878 1,862 1,899 1,937 1,976 2,015 2,056 2,097

Other assets 1,178 1,394 2,091 2,133 2,175 2,219 2,263 2,308

Total Assets 97,552 113,223 128,149 152,151 182,686 208,653 236,855 265,122

Total Deposits 63,016 71,858 83,807 98,848 122,930 144,465 165,858 190,274

TRY Deposits 39,917 44,394 55,001 67,143 87,162 104,616 121,593 141,227

FX Deposits 23,099 27,464 28,806 31,706 35,769 39,849 44,266 49,047

Money Market (Mainly repo) 7,007 10,984 10,057 11,862 14,752 14,446 16,586 15,222

Funds borrowed 11,033 9,744 11,034 15,607 16,116 17,705 18,691 19,594

Other funds 0 0 0 0 0 0 0 0

Payables 3,169 3,030 2,758 3,087 3,653 4,002 4,407 4,840

Accrued Interest Payables 523 320 262 264 281 277 274 271

Provisions 3,355 3,795 3,608 3,448 3,345 3,329 3,385 3,505

Subordinated Loans 0 0 0 0 0 0 0 0

Total Liabilities 88,103 99,730 111,526 133,116 161,077 184,225 209,202 233,706

Book Value 9,449 13,494 16,623 19,036 21,610 24,428 27,653 31,416

Total Liabilities and Equity 97,552 113,223 128,149 152,151 182,686 208,653 236,855 265,122


08 December 2010

Turkish Banks 46


Akbank (AKBNK.IS) COMPANY UPDATE

Earnings need to adjust to low real interest rates ■ We revise down our 2011E and 2012E forecasts by 29%, but we also

lower our cost of equity assumptions to factor in a lower interest rate environment. We have slightly increased our target price to TL7.80 from TL7.40, implying 8% potential downside to the current price, which warrants an Underperform rating.

■ Akbank has underperformed its peers by 6% YTD in 2010, but its earnings have also underperformed and it still trades at 20% premium on 9M10 annualised P/E. The bank has invested heavily in government securities and now has the highest securities-to-asset ratio in the sector (40% versus the 30% sector average). The banking environment in the coming few years should favour banks with higher loans-to-assets ratios due to a sharper decline in securities spreads. Akbank will need to increase its loans-to-assets ratios (the lowest in the sector) quickly, which we believe may prove to be difficult and will come at a high cost (operating costs or loan loss charges). Nevertheless, the high CPI exposure may be a strong cushion for the bank in 2011. If inflation picks up more than expected, this may favour Akbank, with the largest CPI linker portfolio in the sector. Akbank has also become reliant on credit cards and fee income, which may also be under pressure. For these reasons, the longer-term earnings outlook is theoretically under more pressure relative to average sector trends and we believe valuations need to be more attractive to have a favourable risk-reward outlook for the bank.

■ Akbank is trading at 2.1x 2010E P/TBV and 12.1x 2011E P/E. Our standard valuation methodology for Turkish banks is a combination of: (i) discounted EVA® model; (ii) Gordon’s growth; and (iii) EMEA peer group multiple-based valuation. Our target price of TL7.80 suggests potential downside of 8% versus average 1% potential upside for the sector.


2468

10




Performance Over 1M 3M 12M Absolute (%) -6.8 3.9 23.5 Relative (%) -4.4 -5.2 -8.3


Year 12/09A 12/10E 12/11E 12/12E Net Income Reported (TRY m) 2,726 2,807 2,483 2,451 Adjusted Net Income (TRY m) 2,855 3,123 2,811 2,796 EPS stated (TRY) 0.68 0.70 0.62 0.61 CS adj. EPS (TRY) 0.71 0.78 0.70 0.70 Prev. EPS (TRY) — — 0.91 0.90 Tangible Book Value (TRY m) 14,191 16,399 18,285 19,858 CS adj. ROTE 21.6 18.3 14.3 12.9 P/E (adj., x) 11.94 10.91 12.12 12.19 Price/T. book per share (x) 2.4 2.1 1.9 1.7




Research Analysts

Akin Tuzun 90 212 349 0458

[email protected]

Ates Buldur 90 212 349 0459

[email protected]

Rating UNDERPERFORM* Price (02 Dec 10, TRY) 8.52 Target Price (TRY) (from 7.40) 7.80¹ Market cap. (TRY m) 34,080

08 December 2010

Turkish Banks 47

Figure 100: Akbank: Target valuation TRY in millions, unless otherwise stated AKBNK - TARGET VALUATION

Model Target Price Calculation TL Fixed Prices and RatingsValuation Methods MV Price Weight Target Price (Cum-div) 7.80 Target 7.80I. EVA Model 31,700 7.9 50% (-) DPS (0.14) Dividend 0.14II. Gordon's Growth Model 27,463 6.9 25% Target Price (Ex-div) 7.67 Target mcap 31,209III. Peer Group Valuation 33,972 8.5 25% Current Share Price 8.52 ETR -8.4%Weighted Average Target 31,209 7.8 Share Price Return (SPR) -10.0% Current Valuation 34,080 8.5 Dividend Yield 1.6%Upside -8.4% -8.4% Estimated Total Return (ETR) -8.4%

consensus 8.57 0.6%I. EVA MODELTL in millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Turkish Lira Risk Free Rate 21.2% 16.6% 16.4% 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3% 7.3% Eurobond Risk Free Rate 7.5% 6.8% 8.7% 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1% 4.1% Implied TL mix 77.9% 80.8% 77.6% 80.9% 82.0% 83.2% 84.7% 85.6% 86.4% 87.3% 88.2%1.Blended Risk free rate 18.1% 14.7% 14.7% 8.4% 7.6% 7.9% 7.5% 7.3% 7.0% 6.9% 6.9%2. Equity/Tier 1 Capital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%3. Required Tier 1 Ratio 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%4. Forecast RWA (TL) 33,891 47,014 54,171 52,063 64,477 82,088 102,850 124,369 144,872 168,557 176,9855. Required Equity (2x3x4) 2,711 3,761 4,334 4,165 5,158 6,567 8,228 9,950 11,590 13,485 14,1596. Total Equity 7,065 10,601 11,208 14,191 16,399 18,285 19,858 21,616 23,546 25,608 26,889 (-) Participations (926) (769) (924) (922) (894) (984) (1,082) (1,191) (1,310) (1,441) (1,469)7. Core Equity 6,139 9,832 10,285 13,269 15,504 17,301 18,776 20,425 22,237 24,168 25,4198. Excess Equity (7-5) 3,428 6,071 5,951 9,104 10,346 10,734 10,548 10,476 10,647 10,683 11,2619. Earnings on Excess Equity (1x Avg(8)) 395 700 882 633 734 834 794 762 743 731 75510. Effective Tax Rate -17.4% -19.0% -17.3% -19.5% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0%11. Tax Adj. Earnings on Excess Equity 327 567 730 510 587 667 636 610 595 584 60412. Reported Parent-only net income 1,600 1,994 1,705 2,726 2,807 2,483 2,451 2,613 2,840 3,049 3,272 (-/+) One-off items 0 (270) (225) 21 0 0 0 0 0 0 0 (-) Income from subsidiaries (76) (32) (30) (43) (27) (29) (30) (31) (33) (35) (36) (-/+) Excess provision normalization 56 94 150 149 61 78 95 113 136 160 172 (-) Founder / preferred shares adjustment 0 0 0 0 0 0 0 0 0 0 013. Normalized Core Banking Net Profit 1,580 1,786 1,599 2,853 2,840 2,532 2,517 2,695 2,943 3,175 3,40714. Core ROE 22.4% 15.9% 24.2% 19.7% 15.4% 14.0% 13.8% 13.8% 13.7% 13.7%15. Adjusted Earnings (13-11) 1,253 1,218 870 2,343 2,253 1,865 1,881 2,085 2,348 2,590 2,803

EVA Model (TLm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016I. Required Equity (=5) 2,711 3,761 4,334 4,165 5,158 6,567 8,228 9,950 11,590 13,485 14,159II. Adjusted Earnings (=15) 1,253 1,218 870 2,343 2,253 1,865 1,881 2,085 2,348 2,590 2,803III. Discount Rate 23.2% 19.8% 19.7% 12.7% 11.4% 11.9% 11.2% 10.9% 10.6% 10.3% 10.4%IV. Capital Charge ( III x Avg(I) ) (641) (798) (538) (530) (698) (831) (992) (1,141) (1,293) (1,431)V. EVA Flow (II + IV) 578 72 1,805 1,723 1,167 1,050 1,093 1,207 1,297 1,373VI. Discount Factor 0.00 1.00 0.89 0.80 0.72 0.65 0.59 0.54VII. NPV of EVA (VxVI) 0 0 0 1,723 1,043 843 792 790 770 739

EVA Calculation TLm Valuation Box Stock Info2010E Core Book Value 15,504 Fair Value (TLm) 31,700 Equity Stock Beta 1.01+EVA Flows 4,977 Current value (TLm) 34,080 Stock specific risk pr. 0.0%+Terminal EVA Value 10,348 Number of Shares 4,000,000 Long Term Growth 3.0%TOTAL Core Value (TLm) 30,829 Target Price (TL) 7.9 2015 Core ROE 13.7% (+) Value of Participations 871 Current Price (TL) 8.52Total Fair Value (TLm) 31,700 Upside -7.0%

II. Gordon's Growth ModelPrice-to-book calculation TLm Valuation BoxSustainable Core ROE (Avg 10-16) 14.9% Fair Value (TLm) 27,463Cost of Equity (Avg 09-16) 11.0% Current value (TLm) 34,080Adjusted LT Growth Rate 5.5% Number of Shares 4,000,000Implied Target P/BV (2010) 1.7 Target Price (TL) 6.92010E Core Equity (TLm) 15,504 Current Price (TL) 8.52Total Core Value (TLm) 26,592 Upside -19.4% (+) Value of Participations 871Total Fair Value (TLm) 27,463

III. Peer Group ValuationPeer group multiple valuation TLm Valuation Box2010E Adj Net Income x target EMEA (ex RU) 39,717 Fair Value (TLm) 33,972 EMEA Ex Russia2011E Adj Net Income x target EMEA (ex RU) 28,133 Current value (TLm) 34,080 08E PE 15.94 12.722010E Book Value x target EMEA (ex RU) 34,309 Number of Shares 4,000,000 09E PE 10.97 10.012009E Book Value x target EMEA (ex RU) 33,731 Target Price (TL) 8.5 08 PBV 2.11 2.06 Taking average of above = Current Price (TL) 8.52 09 PBV 1.82 1.82Total Fair Value (TLm) 33,972 Upside -0.3% Adjustment factor FALSE


2006 2007 2008 2009 2010 2011Price-to-book (IFRS Cons) 4.4 2.9 2.7 2.2 1.9 1.7Price-to-book (Core) 5.1 3.2 3.0 2.4 2.0 1.8Price-to-book (BRSA) 4.4 2.9 2.8 2.2 1.9 1.7Price-to-earnings (IFRS Cons) 19.8 15.5 17.2 11.0 10.0 11.1Price-to-earnings (Core) 20.5 18.4 21.5 11.5 11.2 12.7Price-to-earnings (BRSA) 19.5 18.1 21.1 11.4 11.1 12.6ROE (IFRS Cons) 23.3% 19.6% 14.4% 22.1% 20.1% 16.0%ROE (Core) 26.0% 20.2% 14.4% 23.0% 19.3% 15.0%ROE (BRSA) 24.5% 21.6% 15.6% 21.5% 18.4% 14.3%

Target (TL)


08 December 2010

Turkish Banks 48

Figure 101: Akbank: Income statement TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E


on TRY Loans 5,196 4,056 3,495 4,424 5,611 6,941 8,258 9,623

on FX Loans 837 803 696 803 897 997 1,098 1,215

on Securities 3,351 4,153 4,136 3,721 3,548 3,394 3,347 3,321



on TRY Deposits (4,158) (2,983) (3,066) (3,628) (4,557) (5,343) (6,040) (6,714)

on FX Deposits (672) (556) (495) (483) (488) (506) (538) (583)


on Others (878) (754) (572) (465) (489) (491) (489) (549)


Net FX gains/losses 165 75 33 19 30 35 38 41




Other banking income, net 516 525 899 669 685 721 771 840


Personnel expenses (834) (818) (888) (986) (1,076) (1,168) (1,265) (1,368)




Loan loss provisions (999) (994) (403) (522) (637) (755) (906) (1,066)


VIII. Op. Inc. After Provisions 1,805 3,363 3,481 3,075 3,034 3,235 3,517 3,777



Extraordinary items 225 (21) 0 0 0 0 0 0

IX. Pre-tax income 2,060 3,385 3,509 3,103 3,064 3,267 3,550 3,812

Tax (355) (659) (702) (621) (613) (653) (710) (762)

X. Net Income (Reported BRSA) 1,705 2,726 2,807 2,483 2,451 2,613 2,840 3,049


(+/-) IFRS Consolidation Difference 114 108 316 329 345 359 373 388

XI. IFRS Adj. Net Income pre special div. 1,594 2,855 3,123 2,811 2,796 2,972 3,213 3,437

(-) Founder & Employee Dividends 0 0 0 0 0 0 0 0

XII. IFRS Adj. Net Income 1,594 2,855 3,123 2,811 2,796 2,972 3,213 3,437


08 December 2010

Turkish Banks 49

Figure 102: Akbank: Balance sheet TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Cash and Banks 4,714 3,556 5,213 7,206 10,182 11,512 12,459 13,348

Money Market 0 0 0 0 0 0 0 0


Trading Securities 220 314 854 890 921 944 986 1,022



Loans, net 43,537 39,297 50,344 65,574 83,337 102,463 120,668 141,852

TRY Loans 25,402 23,678 32,811 43,124 55,243 68,673 82,085 97,809

FX Loans 18,135 15,619 17,533 22,450 28,094 33,790 38,583 44,043

NPLS, net 0 0 0 0 0 0 0 0

Gross NPLs 1,139 1,785 1,296 1,429 1,637 1,900 2,236 2,632




Financial subsidiaries 920 919 891 980 1,078 1,186 1,305 1,435

Non-financial subsidiaries 3 3 3 4 4 5 5 6

Fixed assets 800 792 808 824 840 857 874 892

Other assets 704 855 1,026 1,047 1,068 1,089 1,111 1,133

Total Assets 85,655 95,309 107,000 127,221 151,242 174,495 197,328 223,072

Total Deposits 51,743 55,648 65,969 77,864 96,481 113,448 130,380 149,724

TRY Deposits 28,576 34,383 42,275 51,777 67,043 80,643 93,928 109,323

FX Deposits 23,167 21,265 23,694 26,087 29,439 32,806 36,452 40,401


Funds borrowed 11,299 8,152 10,903 15,421 15,924 17,495 18,469 19,361

Other funds 0 0 1,517 0 0 0 0 0

Payables 1,937 2,632 2,403 2,694 3,169 3,502 3,856 4,274


Provisions 924 1,052 1,067 1,108 1,159 1,239 1,343 1,470



Book Value 11,208 14,191 16,399 18,285 19,858 21,616 23,546 25,608



08 December 2010

Turkish Banks 50


Yapi Kredi Bank (YKBNK.IS) UPGRADE RATING

Favourable balance sheet mix, but earnings to contract due to high base in 2010E ■ We upgrade our rating to Neutral (from Underperform) and increase our

target price to TL5.36 (from TL3.86) despite lowering our 2012E earnings forecast by 7%. The incorporation of a lower CoE was the main reason for our TP increase. However, we think that this is already more than accounted for in the price and our new target price offers 2% potential downside. We upgrade our rating to Neutral (from Underperform).

■ Yapi Kredi’s investment case is a mixed bag, with both major positives and negatives. Yapi Kredi has the largest fee income and credit card exposure and both interest and fee yields in this segment are likely to be under pressure in the coming years. On the other hand, Yapi Kredi has the lowest securities exposure and did not have major windfall gains in 2010. What is more key to our investment thesis is the earnings outlook in 2011/12, for which we are considerably below consensus.

■ Yapi Kredi is trading at 2.5x 2010E P/TBV and 10.9x 2011E P/E. Our standard valuation methodology for Turkish banks is a combination of: (i) discounted EVA® model; (ii) Gordon’s growth; and (iii) EMEA peer group multiple-based valuation. Our target price of TL5.36 suggests potential downside of 2% versus 1% potential upside average for the sector.


1

3

5




Performance Over 1M 3M 12M Absolute (%) -3.5 19.2 70.6 Relative (%) 0.8 7.6 26.2



Dividend (2010E) — Tier 1 ratio (12/10E, %) 14.3 Dividend yield (%) — Eqt Tier 1 Ratio (12/10E, %) 14.3 Free float (%) 24.0 Number of shares (m) 4,347.05



Research Analysts

Akin Tuzun 90 212 349 0458

[email protected]

Ates Buldur 90 212 349 0459

[email protected]

Rating (from Underperform) NEUTRAL* Price (02 Dec 10, TRY) 5.46 Target Price (TRY) (from 3.86) 5.36¹ Market cap. (TRY m) 23,735

08 December 2010

Turkish Banks 51

Figure 103: Yapi Kredi: Target valuation TRY in millions, unless otherwise stated YKBNK - TARGET VALUATION

Model Target Price Calculation TL Fixed Prices and RatingsValuation Methods MV Price Weight Target Price (Cum-div) 5.36 Target 5.36I. EVA Model 23,372 5.4 50% (-) DPS 0.00 Dividend 0.00II. Gordon's Growth Model 21,309 4.9 25% Target Price (Ex-div) 5.36 Target mcap 23,294III. Peer Group Valuation 25,121 5.8 25% Current Share Price 5.46 ETR -1.9%Weighted Average Target 23,294 5.4 Share Price Return (SPR) -1.9% Current Valuation 23,735 5.5 Dividend Yield 0.0%Upside -1.9% -1.9% Estimated Total Return (ETR) -1.9%

consensus 5.74 5.1%I. EVA MODELTL in millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Turkish Lira Risk Free Rate 21.2% 16.6% 16.4% 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3% 7.3% Eurobond Risk Free Rate 7.5% 6.8% 8.7% 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1% 4.1% Implied TL mix 75.9% 79.2% 79.5% 78.1% 78.9% 80.7% 82.3% 83.1% 83.9% 84.8% 85.6%1.Blended Risk free rate 17.9% 14.6% 14.8% 8.3% 7.5% 7.8% 7.4% 7.2% 7.0% 6.8% 6.8%2. Equity/Tier 1 Capital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%3. Required Tier 1 Ratio 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%4. Forecast RWA (TL) 32,475 38,688 42,156 44,637 55,045 81,642 102,805 122,908 142,925 165,554 173,8325. Required Equity (2x3x4) 2,598 3,095 3,372 3,571 4,404 6,531 8,224 9,833 11,434 13,244 13,9076. Total Equity 3,344 4,904 6,853 8,267 10,605 12,752 14,762 16,878 19,139 21,680 22,764 (-) Participations (1,736) (2,447) (2,838) (2,833) (3,019) (3,223) (3,447) (3,694) (3,965) (4,264) (4,434)7. Core Equity 1,607 2,456 4,015 5,434 7,586 9,530 11,315 13,184 15,173 17,417 18,3308. Excess Equity (7-5) (990) (639) 642 1,863 3,182 2,998 3,090 3,351 3,739 4,172 4,4249. Earnings on Excess Equity (1x Avg(8)) (184) (119) 0 105 188 242 225 231 247 268 29210. Effective Tax Rate -27.8% -16.8% -18.9% -21.0% -20.0% -18.0% -20.0% -20.0% -20.0% -20.0% -20.0%11. Tax Adj. Earnings on Excess Equity (133) (99) 0 83 151 198 180 185 197 214 23412. Reported Parent-only net income 512 709 1,043 1,355 2,243 1,922 2,051 2,256 2,530 2,852 3,172 (-/+) One-off items 0 (35) 5 33 27 0 0 0 0 0 0 (-) Income from subsidiaries (42) (39) (206) (143) (155) (163) (171) (180) (189) (198) (206) (-/+) Excess provision normalization (88) (73) (132) (5) (118) (70) (58) (37) (44) (51) (58) (-) Founder / preferred shares adjustment 0 0 0 0 0 0 0 0 0 0 013. Normalized Core Banking Net Profit 382 562 710 1,240 1,996 1,689 1,821 2,040 2,298 2,602 2,90914. Core ROE 27.7% 21.9% 26.2% 30.7% 19.7% 17.5% 16.7% 16.2% 16.0% 16.3%15. Adjusted Earnings (13-11) 515 661 710 1,157 1,845 1,491 1,641 1,855 2,100 2,388 2,675

EVA Model (TLm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016I. Required Equity (=5) 2,598 3,095 3,372 3,571 4,404 6,531 8,224 9,833 11,434 13,244 13,907II. Adjusted Earnings (=15) 515 661 710 1,157 1,845 1,491 1,641 1,855 2,100 2,388 2,675III. Discount Rate 23.9% 20.6% 20.8% 13.4% 12.0% 12.5% 11.8% 11.5% 11.1% 10.8% 10.9%IV. Capital Charge ( III x Avg(I) ) (586) (673) (464) (477) (685) (871) (1,035) (1,183) (1,337) (1,476)V. EVA Flow (II + IV) 75 36 694 1,369 806 770 820 917 1,052 1,199VI. Discount Factor 1.00 0.89 0.79 0.71 0.64 0.58 0.52VII. NPV of EVA (VxVI) 0 0 0 1,369 716 612 585 589 609 626

EVA Calculation TLm Valuation Box Stock Info2010E Core Book Value 7,586 Fair Value (TLm) 23,372 Equity Stock Beta 1.20+EVA Flows 3,737 Current value (TLm) 23,735 Stock specific risk pr. 0.0%+Terminal EVA Value 8,191 Number of Shares 4,347,051 Long Term Growth 3.0%TOTAL Core Value (TLm) 19,514 Target Price (TL) 5.4 2015 Core ROE 16.3% (+) Value of Participations 3,858 Current Price (TL) 5.46Total Fair Value (TLm) 23,372 Upside -1.5%

II. Gordon's Growth ModelPrice-to-book calculation TLm Valuation BoxSustainable Core ROE (Avg 10-16) 19.0% Fair Value (TLm) 21,309Cost of Equity (Avg 09-16) 11.5% Current value (TLm) 23,735Adjusted LT Growth Rate 5.8% Number of Shares 4,347,051Implied Target P/BV (2010) 2.3 Target Price (TL) 4.92010E Core Equity (TLm) 7,586 Current Price (TL) 5.46Total Core Value (TLm) 17,451 Upside -10.2% (+) Value of Participations 3,858Total Fair Value (TLm) 21,309

III. Peer Group ValuationPeer group multiple valuation TLm Valuation Box2010E Adj Net Income x target EMEA (ex RU) 31,959 Fair Value (TLm) 25,121 EMEA Ex Russia2011E Adj Net Income x target EMEA (ex RU) 21,765 Current value (TLm) 23,735 08E PE 15.94 12.722010E Book Value x target EMEA (ex RU) 22,745 Number of Shares 4,347,051 09E PE 10.97 10.012009E Book Value x target EMEA (ex RU) 24,017 Target Price (TL) 5.8 08 PBV 2.11 2.06 Taking average of above = Current Price (TL) 5.46 09 PBV 1.82 1.82Total Fair Value (TLm) 25,121 Upside 5.8% Adjustment factor FALSE



Target (TL)


08 December 2010

Turkish Banks 52

Figure 104: Yapi Kredi: Income statement TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E


on TRY Loans 4,511 4,382 3,809 4,549 5,664 6,886 8,123 9,393

on FX Loans 695 796 675 749 836 928 1,021 1,128

on Securities 1,475 1,309 1,138 1,131 1,127 1,098 1,092 1,098



on TRY Deposits (3,498) (2,316) (1,916) (2,389) (3,134) (3,702) (4,286) (4,870)

on FX Deposits (542) (480) (384) (383) (388) (403) (428) (463)


on Others (97) (58) (48) (93) (189) (293) (362) (452)


Net FX gains/losses (309) (97) 486 (27) (45) (53) (59) (64)



Trading income, net 304 437 (498) 68 48 50 53 56



Personnel expenses (874) (883) (956) (1,062) (1,160) (1,258) (1,362) (1,473)




Loan loss provisions (379) (1,267) (526) (622) (777) (983) (1,173) (1,372)





Extraordinary items (5) (33) (27) 0 0 0 0 0


Tax (243) (359) (561) (422) (513) (564) (633) (713)

IX. Net Income (Reported BRSA) 1,043 1,355 2,243 1,922 2,051 2,256 2,530 2,852







08 December 2010

Turkish Banks 53

Figure 105: Yapi Kredi: Balance sheet TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Cash and Banks 2,762 2,287 1,501 1,923 3,869 2,397 2,807 2,427

Money Market 40 1,530 0 0 0 0 0 0


Trading Securities 667 834 588 623 657 686 729 769

Available for Sale 987 1,264 2,938 3,428 3,778 3,945 4,191 4,423


Loans, net 37,181 36,725 47,403 62,032 78,880 96,338 112,768 131,779

TRY Loans 23,934 23,712 32,348 42,779 54,815 67,427 79,795 94,184

FX Loans 13,248 13,013 15,054 19,253 24,065 28,911 32,973 37,595

NPLS, net 644 403 557 664 793 941 1,145 1,372

Gross NPLs 1,713 2,581 1,826 2,327 2,855 3,566 4,382 5,291




Financial subsidiaries 1,857 1,852 2,037 2,240 2,464 2,711 2,982 3,280


Fixed assets 1,143 1,086 1,108 1,130 1,153 1,176 1,199 1,223

Other assets 2,142 2,494 3,243 3,308 3,374 3,441 3,510 3,580

Total Assets 63,723 64,560 76,471 94,141 115,917 134,721 154,938 177,106

Total Deposits 41,399 40,702 48,812 59,123 72,545 85,972 100,596 116,592

TRY Deposits 24,431 22,890 28,197 36,317 46,803 57,279 68,706 81,240

FX Deposits 16,968 17,812 20,615 22,806 25,742 28,693 31,889 35,352

Money Market (Mainly repo) 387 926 2,929 4,730 10,882 12,896 15,089 17,489

Funds borrowed 6,164 5,309 5,292 8,286 7,730 8,493 8,965 9,398

Other funds 0 0 0 0 0 0 0 0

Payables 4,274 4,499 4,310 5,013 6,020 6,714 7,535 8,443


Provisions 2,120 2,502 2,221 2,003 1,831 1,711 1,635 1,597

Subordinated Loans 2,221 2,224 2,188 2,115 2,018 1,929 1,849 1,775


Book Value 6,853 8,267 10,605 12,752 14,762 16,878 19,139 21,680



08 December 2010

Turkish Banks 54


Garanti Bank (GARAN.IS) INCREASE TARGET PRICE

Market performer ■ In line with our bearish stance on the 2011–12E earnings environment,

we lower our forecasts for Garanti by 29% and 33%, respectively. However, incorporating a much lower CoE compensates for the changed forecasts and we increase our target price to TL8.60 from TL7.65, suggesting 2% potential downside to the current price and warranting a Neutral rating.

■ In line with the sector trends, we expect a challenging earnings environment for Garanti in the coming years. Garanti’s high real interest rate CPI linker portfolio should provide a strong cushion in 2011, but normalised cost of risk, trading gains and fee income slowdown may create earnings disappointments for the market. We believe Garanti continues to be an attractive Turkish asset owing to its strong franchise and management, but lower valuations may be required for a more comfortable positive investment case—therefore we maintain our Neutral rating on the shares.

■ Garanti is trading at 2.2x 2010E P/TBV and 13.3x 2011E P/E. Our standard valuation methodology for Turkish banks is a combination of: (i) discounted EVA® model; (ii) Gordon’s growth; and (iii) EMEA peer group multiple-based valuation. Our target price of TL8.60 suggests potential downside of 2% versus average 1% potential upside for the sector.


1

6




Performance Over 1M 3M 12M Absolute (%) -3.3 13.3 45.1 Relative (%) 1.1 2.2 7.4





*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Akin Tuzun 90 212 349 0458

[email protected]

Ates Buldur 90 212 349 0459

[email protected]

Rating NEUTRAL* [V] Price (02 Dec 10, TRY) 8.78 Target Price (TRY) (from 7.65) 8.60¹ Market cap. (TRY m) 36,876

08 December 2010

Turkish Banks 55

Figure 106: Garanti: Target valuation TRY in millions, unless otherwise stated GARAN - TARGET VALUATION

Model Target Price Calculation TL Fixed Prices and RatingsValuation Methods MV Price Weight Target Price (Cum-div) 8.60 Target 8.60I. EVA Model 39,038 9.29 50% (-) DPS 0.00 Dividend 0.00II. Gordon's Growth Model 31,865 7.59 25% Target Price (Ex-div) 8.60 Target mcap 36,126III. Peer Group Valuation 34,561 8.23 25% Current Share Price 8.78 ETR -2.0%Weighted Average Target 36,126 8.60 Share Price Return (SPR) -2.0% Current Valuation 36,876 8.8 Dividend Yield 0.0% 2.48Upside -2.0% -2.0% Estimated Total Return (ETR) -2.0%

consensus 9.14 4.1%I. EVA MODELTL in millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Turkish Lira Risk Free Rate 21.2% 16.6% 16.4% 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3% 7.3% Eurobond Risk Free Rate 7.5% 6.8% 8.7% 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1% 4.1% Implied TL mix 73.5% 75.5% 77.4% 78.6% 80.4% 81.6% 83.1% 83.9% 84.3% 84.8% 84.8%1.Blended Risk free rate 17.5% 14.2% 14.7% 8.4% 7.5% 7.9% 7.4% 7.2% 7.0% 6.8% 6.8%2. Equity/Tier 1 Capital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%3. Required Tier 1 Ratio 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%4. Forecast RWA (TL) 31,466 41,927 53,974 54,770 66,268 83,828 104,549 124,595 143,327 165,435 173,7075. Required Equity (2x3x4) 2,517 3,354 4,318 4,382 5,301 6,706 8,364 9,968 11,466 13,235 13,8976. Total Equity 4,670 6,883 9,469 13,316 16,686 18,747 20,414 22,500 24,794 27,675 29,058 (-) Participations (605) (589) (840) (1,033) (1,543) (1,697) (1,867) (2,054) (2,259) (2,485) (2,584)7. Core Equity 4,065 6,294 8,629 12,283 15,143 17,050 18,547 20,446 22,535 25,189 26,4748. Excess Equity (7-5) 1,548 2,940 4,311 7,901 9,841 10,344 10,183 10,479 11,069 11,955 12,5779. Earnings on Excess Equity (1x Avg(8)) 168 319 531 510 666 793 760 743 751 779 83010. Effective Tax Rate -20.0% -16.5% -19.0% -21.6% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0%11. Tax Adj. Earnings on Excess Equity 134 267 430 400 533 634 608 595 600 624 66412. Reported Parent-only net income 1,064 2,316 1,750 2,962 3,013 2,637 2,792 3,271 3,700 4,479 4,530 (-/+) One-off items 0 (900) 27 193 0 0 0 0 0 0 0 (-) Income from subsidiaries (47) (49) (102) (79) (5) (80) (82) (83) (85) (87) (90) (-/+) Excess provision normalization (27) (33) (69) (16) 16 (33) (42) (51) (61) (71) (72) (-) Founder / preferred shares adjustment (91) (209) 0 0 0 0 0 0 0 0 013. Normalized Core Banking Net Profit 900 1,123 1,606 3,060 3,024 2,523 2,669 3,136 3,554 4,321 4,36814. Core ROE 21.7% 21.5% 29.3% 22.1% 15.7% 15.0% 16.1% 16.5% 18.1% 16.9%15. Adjusted Earnings (13-11) 765 857 1,176 2,660 2,491 1,889 2,060 2,542 2,953 3,697 3,704

EVA Model (TLm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016I. Required Equity (=5) 2,517 3,354 4,318 4,382 5,301 6,706 8,364 9,968 11,466 13,235 13,897II. Adjusted Earnings (=15) 765 857 1,176 2,660 2,491 1,889 2,060 2,542 2,953 3,697 3,704III. Discount Rate 23.3% 20.0% 20.4% 13.2% 11.8% 12.4% 11.7% 11.3% 11.0% 10.7% 10.7%IV. Capital Charge ( III x Avg(I) ) (586) (783) (573) (573) (743) (879) (1,039) (1,176) (1,317) (1,447)V. EVA Flow (II + IV) 270 393 2,087 1,918 1,146 1,181 1,503 1,777 2,380 2,257VI. Discount Factor 1.00 0.89 0.80 0.72 0.65 0.58 0.53VII. NPV of EVA (VxVI) 0 0 0 1,918 1,020 941 1,076 1,146 1,387 1,189

EVA Calculation TLm Valuation Box Stock Info2010E Core Book Value 15,143 Fair Value (TLm) 39,038 Equity Stock Beta 1.15+EVA Flows 6,760 Current value (TLm) 36,876 Stock specific risk pr. 0.0%+Terminal EVA Value 15,979 Number of Shares 4,200,000 Long Term Growth 3.0%TOTAL Core Value (TLm) 37,881 Target Price (TL) 9.3 2015 Core ROE 16.9% (+) Value of Participations 1,157 Current Price (TL) 8.78Total Fair Value (TLm) 39,038 Upside 5.9%

II. Gordon's Growth ModelPrice-to-book calculation TLm Valuation BoxSustainable Core ROE (Avg 10-16) 17.2% Fair Value (TLm) 31,865Cost of Equity (Avg 09-16) 11.4% Current value (TLm) 36,876Adjusted LT Growth Rate 5.7% Number of Shares 4,200,000Implied Target P/BV (2010) 2.0 Target Price (TL) 7.62010E Core Equity (TLm) 15,143 Current Price (TL) 8.78Total Core Value (TLm) 30,708 Upside -13.6% (+) Value of Participations 1,157Total Fair Value (TLm) 31,865

III. Peer Group ValuationPeer group multiple valuation TLm Valuation Box2010E Adj Net Income x target EMEA (ex RU) 39,933 Fair Value (TLm) 34,561 EMEA Ex Russia2011E Adj Net Income x target EMEA (ex RU) 27,708 Current value (TLm) 36,876 08E PE 15.94 12.722010E Book Value x target EMEA (ex RU) 35,490 Number of Shares 4,200,000 09E PE 10.97 10.012009E Book Value x target EMEA (ex RU) 35,112 Target Price (TL) 8.2 08 PBV 2.11 2.06 Taking average of above = Current Price (TL) 8.78 09 PBV 1.82 1.82Total Fair Value (TLm) 34,561 Upside -6.3% Adjustment factor FALSE


2006 2007 2008 2009 2010 2011 2012Price-to-book (IFRS Cons) 7.3 5.0 3.6 2.6 2.1 1.9 1.7Price-to-book (Core) 8.9 5.7 4.2 2.9 2.4 2.1 1.9Price-to-book (BRSA) 7.7 5.2 3.8 2.7 2.2 1.9 1.8Price-to-earnings (IFRS Cons) 31.5 14.9 18.9 11.7 11.5 13.0 12.3Price-to-earnings (Core) 35.5 26.4 21.6 11.7 12.0 14.1 13.3Price-to-earnings (BRSA) 34.0 25.5 20.3 11.4 12.0 13.7 12.9ROE (IFRS Cons) 25.6% 25.1% 22.7% 27.6% 20.3% 15.2% 14.6%ROE (Core) 28.7% 26.2% 22.5% 29.4% 21.9% 15.9% 15.2%ROE (BRSA) 25.3% 39.9% 21.4% 26.0% 20.1% 14.9% 14.3%

Target (TL)


08 December 2010

Turkish Banks 56

Figure 107: Garanti: Income statement TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E


on TRY Loans 4,464 4,601 4,211 5,130 6,332 7,769 9,120 10,549

on FX Loans 1,293 1,403 1,095 1,201 1,339 1,486 1,634 1,805

on Securities 2,956 3,918 3,539 3,218 3,160 2,952 2,896 2,889



on TRY Deposits (3,611) (3,319) (3,122) (3,699) (4,468) (5,047) (5,591) (6,162)

on FX Deposits (707) (617) (526) (506) (510) (529) (562) (609)


on Others (1,168) (757) (391) (264) (351) (411) (408) (409)


Net FX gains/losses (278) 141 141 (21) (34) (39) (43) (45)



Trading income, net 529 740 271 176 183 188 195 203



Personnel expenses (930) (994) (1,166) (1,306) (1,419) (1,540) (1,668) (1,803)




Loan loss provisions (419) (1,212) (421) (445) (555) (685) (815) (952)







Tax (412) (816) (753) (659) (698) (818) (925) (1,120) IX. Net Income (Reported BRSA) (not consolidated) 1,750 2,962 3,013 2,637 2,792 3,271 3,700 4,479







08 December 2010

Turkish Banks 57

Figure 108: Garanti: Balance sheet TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Cash and Banks 5,484 9,228 9,036 11,235 15,955 15,694 15,503 14,336

Money Market 41 1,000 0 0 0 0 0 0


Trading Securities 666 915 2,071 2,157 2,232 2,289 2,390 2,479



Loans, net 48,358 48,564 61,552 79,608 100,145 121,874 142,022 166,242

TRY Loans 26,729 27,589 37,884 49,357 62,357 76,503 90,308 107,313

FX Loans 21,629 20,975 23,668 30,251 37,789 45,371 51,714 58,929

NPLS, net 450 425 353 451 501 573 661 777

Gross NPLs 1,240 2,237 2,061 2,078 2,248 2,485 2,779 3,166

Provisions for NPLs (790) (1,812) (1,709) (1,628) (1,746) (1,912) (2,118) (2,389)



Financial subsidiaries 828 1,017 1,525 1,678 1,846 2,030 2,233 2,457


Fixed assets 1,085 1,143 1,165 1,189 1,213 1,237 1,262 1,287

Other assets 1,107 997 1,496 1,526 1,556 1,588 1,619 1,652

Total Assets 88,941 105,462 118,088 141,640 170,660 195,336 219,217 246,316

Total Deposits 52,384 62,281 73,103 85,812 105,643 123,272 140,713 160,481

TRY Deposits 28,730 35,649 44,400 54,220 70,001 83,565 96,605 111,608

FX Deposits 23,654 26,631 28,703 31,593 35,642 39,707 44,109 48,873


Funds borrowed 10,843 13,007 15,612 22,083 22,803 25,052 26,447 27,725

Other funds 0 0 0 0 0 0 0 0

Payables 3,246 3,528 4,731 5,332 6,317 6,922 7,562 8,314


Provisions 1,183 1,394 1,342 1,323 1,324 1,359 1,420 1,505



Book Value 9,469 13,316 16,686 18,747 20,414 22,500 24,794 27,675



08 December 2010

Turkish Banks 58


Vakifbank (VAKBN.IS) UPGRADE RATING

Upgraded to Outperform ■ We upgrade Vakifbank to Outperform from Neutral, increasing our TP to

TL5.14 from TL3.90, which now offers 21% potential upside. We expect a relatively better earnings outlook for Vakifbank in 2011 and this to help the shares to catch up with its peers following significant underperformance in 2010.

■ Vakifbank has delivered the lowest return in the sector in 2010 YTD, underperforming its peers by 23%, mainly driven by sluggish earnings growth. Vakifbank’s ROE has remained depressed in 2010 and this has been reflected in its P/B multiple. As at the end of 9M10, Vakifbank trades at the lowest end on P/BV (1.3x), at a 37% discount to the group average. In an environment of further NIM compression, Vakifbank is slightly better positioned due to its already shrunk NIM in 2010 (the second-lowest NIM as of 9M10). Its relatively high securities income and trading gain exposure in 2010 could be cause for concern, but its high provisioning base in 2010 and low fee income dependence seem to outweigh this risk. Overall, there is clearly room for more positive surprises at Vakifbank and we expect the stock to catch up after being a major laggard in 2010.

■ Valuation: Vakifbank is trading at 1.2x 2010E P/TBV and 8.8x 2011E P/E. Our standard valuation methodology for Turkish banks is a combination of: (i) discounted EVA® model; (ii) Gordon’s growth; and (iii) EMEA peer group multiple-based valuation. Our target price of TL5.14 suggests potential upside of 21% versus 1% average for the sector.


1

3

5




Performance Over 1M 3M 12M Absolute (%) -6.4 -0.9 11.0 Relative (%) -4.0 -9.6 -17.5






Research Analysts

Akin Tuzun 90 212 349 0458

[email protected]

Ates Buldur 90 212 349 0459

[email protected]

Rating (from Neutral) OUTPERFORM* Price (02 Dec 10, TRY) 4.24 Target Price (TRY) (from 3.90) 5.14¹ Market cap. (TRY m) 10,600

08 December 2010

Turkish Banks 59

Figure 109: Vakifbank: Target valuation TRY in millions, unless otherwise stated VAKBN - TARGET VALUATION


consensus 4.82 13.7%I. EVA MODELTL in millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Turkish Lira Risk Free Rate 21.2% 16.6% 16.4% 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3% 7.3% Eurobond Risk Free Rate 7.5% 6.8% 8.7% 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1% 4.1% Implied TL mix 85.3% 88.7% 84.2% 85.5% 86.4% 87.4% 88.6% 89.5% 90.4% 91.3% 92.2%1.Blended Risk free rate 19.1% 15.5% 15.2% 8.5% 7.7% 8.1% 7.6% 7.4% 7.2% 7.0% 7.0%2. Equity/Tier 1 Capital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%3. Required Tier 1 Ratio 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%4. Forecast RWA (TL) 20,623 26,976 32,796 37,707 45,352 52,126 62,472 74,645 86,928 101,128 106,1845. Required Equity (2x3x4) 1,650 2,158 2,624 3,017 3,628 4,170 4,998 5,972 6,954 8,090 8,4956. Total Equity 4,487 5,226 5,671 7,381 8,636 9,711 10,808 11,972 13,482 15,239 16,001 (-) Participations (409) (521) (539) (688) (918) (1,010) (1,111) (1,222) (1,344) (1,478) (1,537)7. Core Equity 4,079 4,705 5,132 6,693 7,719 8,702 9,698 10,750 12,138 13,760 14,4638. Excess Equity (7-5) 2,429 2,547 2,508 3,676 4,090 4,532 4,700 4,779 5,184 5,670 5,9699. Earnings on Excess Equity (1x Avg(8)) 368 386 384 264 297 347 351 350 357 379 40810. Effective Tax Rate -24.7% -18.1% -18.6% -18.9% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0%11. Tax Adj. Earnings on Excess Equity 277 316 312 214 238 278 281 280 286 303 32612. Reported Parent-only net income 770 1,031 753 1,251 1,069 1,121 1,142 1,201 1,545 1,830 1,850 (-/+) One-off items 0 (125) (5) 0 0 0 0 0 0 0 0 (-) Income from subsidiaries (17) (35) (25) (24) (36) (38) (40) (42) (44) (46) (48) (-/+) Excess provision normalization 24 33 6 (1) 21 54 67 82 98 115 116 (-) Founder / preferred shares adjustment 0 0 0 0 0 0 0 0 0 0 013. Normalized Core Banking Net Profit 777 904 728 1,226 1,053 1,137 1,169 1,241 1,599 1,898 1,91714. Core ROE 20.6% 14.8% 20.7% 14.6% 13.8% 12.7% 12.1% 14.0% 14.7% 13.6%15. Adjusted Earnings (13-11) 500 588 416 1,012 815 859 888 961 1,313 1,595 1,591

EVA Model (TLm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016I. Required Equity (=5) 1,650 2,158 2,624 3,017 3,628 4,170 4,998 5,972 6,954 8,090 8,495II. Adjusted Earnings (=15) 500 588 416 1,012 815 859 888 961 1,313 1,595 1,591III. Discount Rate 26.4% 22.8% 22.5% 14.9% 13.5% 14.1% 13.4% 13.0% 12.7% 12.4% 12.4%IV. Capital Charge ( III x Avg(I) ) (435) (537) (420) (448) (551) (614) (715) (820) (931) (1,030)V. EVA Flow (II + IV) 153 (121) 591 367 308 274 245 492 665 562VI. Discount Factor 1.00 0.88 0.77 0.68 0.61 0.54 0.48VII. NPV of EVA (VxVI) 0 0 0 367 270 212 168 299 359 270

EVA Calculation TLm Valuation Box Stock Info2010E Core Book Value 7,719 Fair Value (TLm) 13,116 Equity Stock Beta 1.26+EVA Flows 1,576 Current value (TLm) 10,600 Stock specific risk pr. 1.0%+Terminal EVA Value 2,949 Number of Shares 2,500,000 Long Term Growth 3.0%TOTAL Core Value (TLm) 12,243 Target Price (TL) 5.2 2015 Core ROE 13.6% (+) Value of Participations 873 Current Price (TL) 4.24Total Fair Value (TLm) 13,116 Upside 23.7%





Target (TL)


08 December 2010

Turkish Banks 60

Figure 110: Vakifbank: Income statement TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E


on TRY Loans 3,757 3,872 3,693 4,507 5,578 6,589 7,842 9,031

on FX Loans 589 607 491 537 605 677 751 837

on Securities 1,696 1,691 1,570 1,508 1,519 1,476 1,464 1,462



on TRY Deposits (3,544) (2,538) (2,366) (2,821) (3,597) (4,193) (4,703) (5,187)

on FX Deposits (363) (353) (343) (324) (328) (341) (362) (393)


on Others (300) (288) (433) (393) (519) (614) (646) (687)




Fee & commission income, net 466 466 403 444 522 602 670 733

Trading income, net 51 117 179 185 193 198 205 214



Personnel expenses (557) (620) (667) (741) (813) (891) (974) (1,064)

Other operating costs (762) (913) (1,001) (1,132) (1,265) (1,411) (1,557) (1,716)



Loan loss provisions (389) (746) (557) (714) (893) (1,096) (1,304) (1,532)


VII. Op. Inc. After Provisions 894 1,518 1,300 1,364 1,387 1,459 1,887 2,241



Extraordinary items 5 0 0 0 0 0 0 0

VIII. Pre-tax income 925 1,542 1,336 1,402 1,427 1,501 1,931 2,287

Tax (172) (291) (267) (280) (285) (300) (386) (457)

IX. Net Income (Reported BRSA) 753 1,251 1,069 1,121 1,142 1,201 1,545 1,830

Adjusted Net Income (BRSA) 748 1,251 1,069 1,121 1,142 1,201 1,545 1,830


X. IFRS Adj. Net Income pre special div. 879 1,330 1,153 1,209 1,234 1,297 1,645 1,934


X. IFRS Adj. Net Income 879 1,330 1,153 1,209 1,234 1,297 1,645 1,934


08 December 2010

Turkish Banks 61

Figure 111: Vakifbank: Balance sheet TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Cash and Banks 2,997 3,330 3,174 3,600 7,906 8,851 8,699 8,372

Money Market 3,201 3,401 0 0 0 0 0 0


Trading Securities 47 39 182 946 979 1,005 1,048 1,088



Loans, net 29,883 34,041 43,051 56,111 70,454 84,944 99,891 117,245

TRY Loans 18,966 23,285 31,088 40,678 50,998 61,372 72,781 86,077

FX Loans 10,916 10,756 11,963 15,432 19,456 23,572 27,110 31,168

NPLS, net 85 134 155 198 268 354 454 569

Gross NPLs 1,456 2,119 2,393 2,947 3,644 4,498 5,498 6,650




Financial subsidiaries 384 536 750 825 908 999 1,099 1,208


Fixed assets 985 1,083 1,105 1,127 1,149 1,172 1,196 1,220

Other assets 804 762 876 893 911 929 948 967

Total Assets 52,193 64,798 71,769 87,038 107,853 125,141 142,171 161,516

Total Deposits 36,875 44,475 49,489 58,855 73,621 86,607 99,340 113,857

TRY Deposits 25,198 31,565 36,045 44,035 56,876 67,925 78,556 90,794

FX Deposits 11,677 12,909 13,445 14,820 16,745 18,682 20,784 23,063


Funds borrowed 5,770 4,366 6,155 8,705 8,989 9,876 10,426 10,929

Other funds 99 83 198 235 294 346 397 455

Payables 991 1,200 1,054 1,199 1,450 1,605 1,766 1,957


Provisions 855 972 1,148 1,125 1,123 1,155 1,207 1,277



Book Value 5,671 7,381 8,636 9,711 10,808 11,972 13,482 15,239



08 December 2010

Turkish Banks 62


Halkbank (HALKB.IS) INCREASE TARGET PRICE

Expecting ROE to normalise sharply ■ We increase our target price for Halkbank to TL13.0 from TL10.6

incorporating a lower CoE and our new forecasts, but due to its relative strength in the past months, there is 9% potential downside and we maintain our Underperform rating on the shares. We think we have seen the best in earnings for Halkbank and believe the market is attaching a P/B multiple to the bank that is a bit high, at 2.4x 2010E P/B. We take profits to wait for better entry points.

■ Investment case: As of 9M10, Halkbank has the highest NIM of the nine banks we cover and the lowest CoR (except TSKB). Given its higher-than-average loan growth and loan mix in the past five years, we do not see this as sustainable. The bank has a high TL mix in its balance sheet and will be negatively affected by shrinking TL spreads and have little room for improvement in costs-to-assets and cost of risk ratios, in our view. Therefore, we think its ROE (32% in 9M10 annualised versus 21% of the sector) has more downside risk. The bank has low fee income dependence, which is positive given the pressures on fee income going forward, but the anticipated slowdown in net income may outweigh this. Given our cautious stance on the sector, we would also avoid high P/BV multiples—thus we rate Halkbank Underperform.

■ Valuation: Halkbank is trading at 2.4x 2010E P/TBV and 9.9x 2011E P/E. Our standard valuation methodology for Turkish banks is a combination of: (i) discounted EVA® model; (ii) Gordon’s growth; and (iii) EMEA peer group multiple-based valuation. Our target price of TL13.0 suggests potential downside of 9% versus 1% average potential upside for the sector.


3

8

13




Performance Over 1M 3M 12M Absolute (%) -5.6 13.1 44.7 Relative (%) -3.2 3.2 7.5






Research Analysts

Akin Tuzun 90 212 349 0458

[email protected]

Ates Buldur 90 212 349 0459

[email protected]

Rating UNDERPERFORM* [V] Price (02 Dec 10, TRY) 14.25 Target Price (TRY) (from 10.60) 13.00¹ Market cap. (TRY m) 17,813

08 December 2010

Turkish Banks 63

Figure 112: Halkbank: Target valuation TRY in millions, unless otherwise stated HALKB - TARGET VALUATION

Model Target Price Calculation TL Fixed Prices and RatingsValuation Methods MV Price Weight Target Price (Cum-div) 13.00 Target 13.00I. EVA Model 15,116 12.1 50% (-) DPS 0.00 Dividend 0.00II. Gordon's Growth Model 15,110 12.1 25% Target Price (Ex-div) 13.00 Target mcap 16,246III. Peer Group Valuation 19,642 15.7 25% Current Share Price 14.25 ETR -8.8%Weighted Average Target 16,246 13.0 Share Price Return (SPR) -8.8% Current Valuation 17,813 14.3 Dividend Yield 0.0%Upside -8.8% -8.8% Estimated Total Return (ETR) -8.8%

consensus 16.19 13.6%I. EVA MODELTL in millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Turkish Lira Risk Free Rate 21.2% 16.6% 16.4% 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3% 7.3% Eurobond Risk Free Rate 7.5% 6.8% 8.7% 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1% 4.1% Implied TL mix 86.5% 86.0% 83.5% 83.4% 85.2% 86.4% 87.7% 90.3% 93.1% 95.8% 98.7%1.Blended Risk free rate 19.3% 15.3% 15.1% 8.5% 7.6% 8.0% 7.6% 7.4% 7.3% 7.1% 7.2%2. Equity/Tier 1 Capital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%3. Required Tier 1 Ratio 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%4. Forecast RWA (TL) 11,597 17,661 25,693 30,393 39,723 55,766 69,750 83,808 96,620 111,208 116,7685. Required Equity (2x3x4) 928 1,413 2,055 2,431 3,178 4,461 5,580 6,705 7,730 8,897 9,3416. Total Equity 3,780 4,383 4,289 5,760 7,513 8,728 9,563 10,517 11,758 12,941 13,588 (-) Participations (135) (347) (325) (321) (353) (388) (427) (470) (517) (569) (591)7. Core Equity 3,645 4,036 3,964 5,439 7,160 8,339 9,136 10,048 11,241 12,372 12,9968. Excess Equity (7-5) 2,717 2,623 1,909 3,007 3,982 3,878 3,556 3,343 3,511 3,475 3,6559. Earnings on Excess Equity (1x Avg(8)) 422 407 343 208 267 315 281 256 249 249 25710. Effective Tax Rate -22.7% -19.6% -19.6% -19.1% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0%11. Tax Adj. Earnings on Excess Equity 326 328 276 168 213 252 225 205 199 199 20612. Reported Parent-only net income 863 1,131 1,018 1,631 2,014 1,660 1,603 1,689 2,013 2,113 2,294 (-/+) One-off items 0 0 16 7 0 0 0 0 0 0 0 (-) Income from subsidiaries (14) (19) (39) (11) (56) (59) (62) (65) (68) (71) (74) (-/+) Excess provision normalization 18 18 (47) (52) (35) (31) (22) 0 0 0 0 (-) Founder / preferred shares adjustment 0 0 0 0 0 0 0 0 0 0 013. Normalized Core Banking Net Profit 868 1,130 949 1,576 1,923 1,570 1,519 1,624 1,945 2,041 2,21914. Core ROE 29.4% 23.7% 33.5% 30.5% 20.3% 17.4% 16.9% 18.3% 17.3% 17.5%15. Adjusted Earnings (13-11) 542 803 673 1,407 1,709 1,317 1,294 1,420 1,746 1,842 2,014

EVA Model (TLm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016I. Required Equity (=5) 928 1,413 2,055 2,431 3,178 4,461 5,580 6,705 7,730 8,897 9,341II. Adjusted Earnings (=15) 542 803 673 1,407 1,709 1,317 1,294 1,420 1,746 1,842 2,014III. Discount Rate 26.3% 22.2% 22.1% 14.5% 13.2% 13.8% 13.1% 12.8% 12.6% 12.4% 12.5%IV. Capital Charge ( III x Avg(I) ) (260) (383) (326) (369) (527) (656) (788) (908) (1,027) (1,140)V. EVA Flow (II + IV) 543 291 1,081 1,340 790 637 631 837 815 874VI. Discount Factor 1.00 0.88 0.78 0.69 0.61 0.54 0.48VII. NPV of EVA (VxVI) 0 0 0 1,340 694 495 435 512 444 423

EVA Calculation TLm Valuation Box Stock Info2010E Core Book Value 7,160 Fair Value (TLm) 15,116 Equity Stock Beta 1.19+EVA Flows 3,004 Current value (TLm) 17,813 Stock specific risk pr. 1.0%+Terminal EVA Value 4,587 Number of Shares 1,250,000 Long Term Growth 3.0%TOTAL Core Value (TLm) 14,750 Target Price (TL) 12.1 2015 Core ROE 17.5% (+) Value of Participations 366 Current Price (TL) 14.25Total Fair Value (TLm) 15,116 Upside -15.1%





Target (TL)


08 December 2010

Turkish Banks 64

Figure 113: Halkbank: Income statement TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E


on TRY Loans 3,458 3,756 3,846 4,748 5,817 7,014 8,319 9,367

on FX Loans 316 470 489 541 610 685 761 850

on Securities 2,776 2,442 2,002 1,714 1,739 1,716 1,733 1,760



on TRY Deposits (3,925) (2,859) (2,521) (3,134) (4,026) (4,696) (5,269) (5,814)

on FX Deposits (409) (353) (274) (266) (269) (279) (297) (322)


on Others (260) (421) (334) (316) (406) (454) (503) (562)


Net FX gains/losses (551) (43) 240 25 43 50 56 60


Fee & commission income, net 370 461 514 579 696 820 926 1,018




Personnel expenses (507) (595) (674) (821) (941) (1,072) (1,220) (1,385)

Other operating costs (495) (599) (770) (884) (1,032) (1,196) (1,385) (1,601)



Loan loss provisions (243) (434) (312) (419) (591) (817) (1,005) (1,208)







Tax (248) (386) (503) (415) (401) (422) (503) (528)

IX. Net Income (Reported BRSA – parent only) 1,018 1,631 2,014 1,660 1,603 1,689 2,013 2,113







08 December 2010

Turkish Banks 65

Figure 114: Halkbank: Balance sheet TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Cash and Banks 2,331 1,393 3,126 5,222 8,085 8,586 10,185 11,961

Money Market 0 0 0 0 0 0 0 0


Trading Securities 115 56 201 1,061 1,113 1,157 1,223 1,285



Loans, net 25,121 31,666 42,118 54,921 68,957 83,886 97,046 112,072

TRY Loans 18,624 22,839 32,123 42,000 52,636 64,073 74,216 85,777

FX Loans 6,496 8,826 9,995 12,921 16,321 19,813 22,830 26,295

NPLS, net 214 309 328 386 464 573 728 909

Gross NPLs 1,251 1,668 1,731 1,984 2,375 3,016 3,790 4,694




Financial subsidiaries 324 320 352 387 426 468 515 567


Fixed assets 892 1,139 1,162 1,185 1,209 1,233 1,258 1,283

Other assets 581 808 1,050 1,071 1,092 1,114 1,137 1,159

Total Assets 51,096 60,650 72,843 89,979 109,420 127,111 144,616 164,266

Total Deposits 39,922 43,791 53,858 64,666 80,667 94,760 108,596 124,354

TRY Deposits 26,718 29,288 37,929 47,114 60,844 72,654 84,013 97,087

FX Deposits 13,204 14,503 15,930 17,552 19,822 22,106 24,583 27,266


Funds borrowed 1,522 2,032 3,851 5,448 5,625 6,180 6,524 6,839

Other funds 1,216 1,316 1,346 1,940 2,420 2,843 3,258 3,731

Payables 664 884 1,354 1,559 1,860 2,059 2,268 2,514


Provisions 744 948 931 946 975 1,033 1,113 1,213



Book Value 4,289 5,760 7,513 8,728 9,563 10,517 11,758 12,941



08 December 2010

Turkish Banks 66


Bank Asya (ASYAB.IS) INITIATION

Not the right environment ■ Initiating with Underperform: We are initiating coverage on Bank Asya

with an Underperform rating and TL2.80 target price, implying 13% potential downside. We believe that the delayed interest rate hike expectations make Bank Asya’s business model less attractive and the historically high growth figures are difficult to achieve.

■ Investment Case: Participation banking model benefits from higher interest rates and the Central Bank of Turkey’s recent actions as a part of its exit strategy suggest an extended period of low interest rates which is negative for the bank. Bank Asya recorded outstanding deposit growth rates historically owing to its business model which enabled the bank to pay higher interest rates than commercial banks to depositors in a falling interest rate environment. This fuelled Bank Asya’s significant asset CAGR of 41% in 2006-2009 but such funding availability is no longer present and the bank may even see deposit outflows if interest rates rise sharply, in our view. The high amount of restructured loans (7% of loans), high exposure to SMEs (34% of loans) and relatively low capital adequacy ratio (13.8%) are other factors supporting our cautious view on the bank. Lack of securities exposure is a positive for the bank in the current banking environment, and this is likely to provide a better-than-average NIM performance albeit nowhere near the high margins enjoyed in the past.

■ Catalysts: A further drop in participation ratio, an increase in fee income and a potential stake acquisition by a foreign bank are potential positive catalysts. Risks include an extended period of low interest rates, sharp interest rate increases causing deposit outflow and stiffer competition.

■ Valuation: Bank Asya is trading at 1.5x 2010E P/TBV and 12.1x 2011E P/E at a 19% discount and 8% premium to our Turkish Banks coverage average. Our standard valuation methodology for Turkish banks is a combination of: (i) discounted EVA®; (ii) Gordon growth model; and (iii) EMEA peer group multiple-based valuation.


0.97

2.97

4.97




Performance Over 1M 3M 12M Absolute (%) -11.8 -6.9 -7.5 Relative (%) -7.8 -16.0 -31.5


Year 12/09A 12/10E 12/11E 12/12E Net Income Reported (TRY m) 301 267 275 301 Adjusted Net Income (TRY m) 269 232 239 263 EPS stated (TRY) 0.33 0.30 0.31 0.33 CS adj. EPS (TRY) 0.30 0.26 0.27 0.29 Prev. EPS (TRY) — — — — Tangible Book Value (TRY m) 1,708 1,963 2,240 2,545 CS adj. ROTE 19.4 14.5 13.1 12.6 P/E (adj., x) 10.77 12.48 12.14 11.00 Price/T. book per share (x) 1.7 1.5 1.3 1.1

Dividend (2010E) 0.03 Tier 1 ratio (12/10E, %) 13.1 Dividend yield (%) 0.92 Eqt Tier 1 Ratio (12/10E, %) 13.1 Free float (%) 52.0 Number of shares (m) 900.00



Research Analysts

Ates Buldur 90 212 349 0459

[email protected]

Akin Tuzun 90 212 349 0458

[email protected]

Rating UNDERPERFORM* Price (02 Dec 10, TRY) 3.22 Target Price (TRY) 2.80¹ Market cap. (TRY m) 2,898

08 December 2010

Turkish Banks 67

Figure 115: Bank Asya: Target valuation TRY in millions, unless otherwise stated ASYAB - TARGET VALUATION


consensus 4.16 29.2%I. EVA MODELTL in millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Turkish Lira Risk Free Rate 21.2% 16.6% 16.4% 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3% 7.3% Eurobond Risk Free Rate 7.5% 6.8% 8.7% 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1% 4.1% Implied TL mix 75.7% 77.3% 80.8% 82.7% 82.5% 83.8% 85.3% 87.8% 90.5% 93.2% 96.0%1.Blended Risk free rate 17.8% 14.4% 14.9% 8.5% 7.6% 7.9% 7.5% 7.3% 7.2% 7.0% 7.1%2. Equity/Tier 1 Capital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%3. Required Tier 1 Ratio 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%4. Forecast RWA (TL) 3,477 4,958 9,778 10,415 12,886 15,799 19,263 22,919 26,479 30,605 32,1355. Required Equity (2x3x4) 278 397 782 833 1,031 1,264 1,541 1,834 2,118 2,448 2,5716. Total Equity 633 854 1,404 1,708 1,963 2,240 2,545 2,869 3,258 3,650 3,833 (-) Participations (79) (131) (162) (185) (228) (251) (276) (304) (334) (368) (382)7. Core Equity 553 723 1,242 1,523 1,734 1,989 2,269 2,565 2,923 3,283 3,4518. Excess Equity (7-5) 275 326 459 690 703 725 728 732 805 834 8809. Earnings on Excess Equity (1x Avg(8)) 36 43 59 49 53 57 54 53 55 58 6110. Effective Tax Rate -25.4% -18.9% -21.0% -20.4% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0%11. Tax Adj. Earnings on Excess Equity 27 35 46 39 42 45 43 43 44 46 4912. Reported Parent-only net income 146 221 247 301 267 275 301 320 384 391 448 (-/+) One-off items 0 0 0 0 0 0 0 0 0 0 0 (-) Income from subsidiaries 0 0 (4) 0 0 0 0 0 0 0 0 (-/+) Excess provision normalization (14) (25) (33) (47) (29) (32) (38) (44) (48) (52) (60) (-) Founder / preferred shares adjustment (12) (20) 0 0 0 0 0 0 0 0 013. Normalized Core Banking Net Profit 120 177 210 254 238 242 263 277 335 338 38814. Core ROE 27.7% 21.4% 18.4% 14.6% 13.0% 12.3% 11.4% 12.2% 10.9% 11.5%15. Adjusted Earnings (13-11) 93 142 163 215 196 197 219 234 291 292 339

EVA Model (TLm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016I. Required Equity (=5) 278 397 782 833 1,031 1,264 1,541 1,834 2,118 2,448 2,571II. Adjusted Earnings (=15) 93 142 163 215 196 197 219 234 291 292 339III. Discount Rate 24.0% 20.5% 21.1% 13.8% 12.5% 13.0% 12.3% 12.1% 11.9% 11.7% 11.8%IV. Capital Charge ( III x Avg(I) ) (69) (124) (112) (116) (149) (173) (204) (235) (266) (296)V. EVA Flow (II + IV) 72 39 104 80 48 46 29 57 26 43VI. Discount Factor 1.00 0.88 0.79 0.70 0.63 0.56 0.50VII. NPV of EVA (VxVI) 0 0 0 80 42 36 21 36 15 22

EVA Calculation TLm Valuation Box Stock Info2010E Core Book Value 1,734 Fair Value (TLm) 2,386 Equity Stock Beta 1.03+EVA Flows 171 Current value (TLm) 2,898 Stock specific risk pr. 1.0%+Terminal EVA Value 254 Number of Shares 900,000 Long Term Growth 3.0%TOTAL Core Value (TLm) 2,159 Target Price (TL) 2.7 2015 Core ROE 11.5% (+) Value of Participations 226 Current Price (TL) 3.22Total Fair Value (TLm) 2,386 Upside -17.7%

II. Gordon's Growth ModelPrice-to-book calculation TLm Valuation BoxSustainable Core ROE (Avg 10-16) 12.3% Fair Value (TLm) 1,994Cost of Equity (Avg 09-16) 12.2% Current value (TLm) 2,898Adjusted LT Growth Rate 6.1% Number of Shares 900,000Implied Target P/BV (2010) 1.0 Target Price (TL) 2.22010E Core Equity (TLm) 1,734 Current Price (TL) 3.22Total Core Value (TLm) 1,768 Upside -31.2% (+) Value of Participations 226Total Fair Value (TLm) 1,994

III. Peer Group ValuationPeer group multiple valuation TLm Valuation Box2010E Adj Net Income x target EMEA (ex RU) 2,953 Fair Value (TLm) 3,299 EMEA Ex Russia2011E Adj Net Income x target EMEA (ex RU) 2,389 Current value (TLm) 2,898 08E PE 15.94 12.722010E Book Value x target EMEA (ex RU) 3,906 Number of Shares 900,000 09E PE 10.97 10.012009E Book Value x target EMEA (ex RU) 3,947 Target Price (TL) 3.7 08 PBV 2.11 2.06 Taking average of above = Current Price (TL) 3.22 09 PBV 1.82 1.82Total Fair Value (TLm) 3,299 Upside 13.8% Adjustment factor FALSE



Target (TL)


08 December 2010

Turkish Banks 68

Figure 116: Bank Asya: Income statement TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E


on TRY Loans 941 1,145 1,063 1,254 1,487 1,719 2,018 2,242

on FX Loans 23 59 56 62 74 85 98 106

on Securities 0 14 28 41 43 42 42 43


II. Interest Expense (567) (706) (630) (726) (892) (1,052) (1,223) (1,404)

on TRY Deposits (419) (562) (485) (572) (734) (887) (1,048) (1,215)

on FX Deposits (125) (124) (130) (130) (132) (138) (148) (162)


on Others (1) (1) 0 0 0 0 0 0

III. Net Interest Income 501 600 575 677 759 851 1,005 1,072


IV. FX adj. Net Interest Income 545 803 577 682 767 860 1,015 1,083


Trading income, net 15 (109) 47 52 49 45 42 38


V. Total Banking Income 855 1,055 988 1,094 1,219 1,340 1,515 1,623

Personnel expenses (174) (213) (247) (280) (307) (336) (368) (401)

Other operating costs (216) (246) (268) (298) (333) (371) (410) (452)

VI. Total Operating Costs (390) (459) (516) (578) (640) (707) (777) (853)

VII. Operating Income 465 596 472 516 579 633 737 770

Loan loss provisions (129) (195) (109) (144) (170) (194) (215) (233)


VII. Op. Inc. After Provisions 308 378 333 343 376 400 479 489




VIII. Pre-tax income 312 378 333 343 376 400 479 489

Tax (65) (77) (67) (69) (75) (80) (96) (98)

IX. Net Income (Reported BRSA – parent only) 247 301 267 275 301 320 384 391

Adjusted Net Income (BRSA) 247 301 267 275 301 320 384 391

(+/-) IFRS Consolidation Difference (23) (32) (35) (36) (38) (39) (41) (42)

X. IFRS Adj. Net Income pre special div. 224 269 232 239 263 281 343 348


X. IFRS Adj. Net Income 224 269 232 239 263 281 343 348


08 December 2010

Turkish Banks 69

Figure 117: Bank Asya: Balance sheet TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Cash and Banks 185 279 543 163 325 688 1,539 2,552

Money Market 0 0 0 0 0 0 0 0

Securities Portfolio 30 161 462 481 498 511 533 553


Available for Sale 0 80 388 289 299 306 320 332

Held Until Maturity 0 76 74 168 174 179 187 194

Loans, net 6,019 8,063 10,205 12,867 15,745 18,697 21,339 24,395

TRY Loans 5,749 7,430 9,378 11,779 14,348 16,974 19,322 22,038

FX Loans 271 632 828 1,088 1,398 1,724 2,017 2,357

NPLS, net 128 134 155 206 285 384 503 616

Gross NPLs 325 456 484 603 762 960 1,197 1,423

Provisions for NPLs (197) (322) (329) (397) (476) (575) (694) (807)


Accrued Interest 0 0 0 0 0 0 0 0



Fixed assets 227 310 316 322 329 335 342 349

Other assets 295 265 270 276 281 287 293 298

Total Assets 8,109 11,609 13,747 16,446 20,100 24,084 28,308 33,200

Total Deposits 5,843 9,137 10,448 12,535 15,731 19,185 22,835 27,129

TRY Deposits 3,603 5,980 6,783 8,465 11,098 13,979 17,000 20,608

FX Deposits 2,239 3,157 3,665 4,070 4,633 5,207 5,834 6,520

Money Market (Mainly repo) 0 0 0 0 0 0 0 0

Funds borrowed 458 191 643 910 940 1,032 1,090 1,142

Other funds 0 0 0 0 0 0 0 0

Payables 261 396 513 580 696 800 914 1,051


Provisions 144 177 181 182 188 198 211 228



Book Value 1,404 1,708 1,963 2,240 2,545 2,869 3,258 3,650



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Turkish Banks 70

Bank Asya – Overview Bank Asya is the leading participation bank in Turkey with TL13.2bn assets, TL9.7bn loans and TL10bn funds. Founded in 1996 as the sixth private finance house in Turkey, Bank Asya uses interest-free banking practices. As of September 2010, it operates 164 branches and employs 4,225 personnel.

Participation banking model – brief description The key difference of participation banks and conventional commercial banks is the interest-free banking practice. In principle, no interest is paid or received by the bank. They collect deposits in the form of either “profit/loss sharing account” (similar to time deposits but offering a profit/loss share instead of a predetermined guaranteed return) or “current account” (similar to demand deposits, with principal guarantee and without profit/loss sharing). In current accounts, the related loan yield is taken wholly by the bank, similar to loans funded by equity.

In profit/loss sharing accounts even the principal is not guaranteed. The depositors’ return is the predetermined portion (80–85% in most cases) of the loan yield minus provisions for the loan pool. The previous period’s loan yields are distributed to the depositors, resulting in a delay in reflecting the changes in loan yields to the deposit returns. Participation banks provide loans for the purpose of purchasing specific goods, land or services and the bank is involved in the process, ensuring the use of the goods, land or services for the intended purpose. NPL recognition and NPL coverage affect the cost of deposits as depositors share the cost of risk with the bank. Banks may change their coverage ratios to affect cost of deposits. The maturity and size of deposits are important factors to determine participation ratio (higher participation ratios for longer-term and larger-size deposits).

Participation banks are subject to the same regulations as commercial banks. The major difference is the capital adequacy ratio (CAR) weighting of loans funded with participation accounts which has a 70% weighting as loan losses are shared with depositors. BRSA is the regulating authority and deposit guarantee is supplied by SDIF with the same terms applied to commercial banks.

Figure 118: Comparison of participation banks as of 3Q10 TL in millions, unless otherwise stated

0

2000

4000

6000

8000

10000

12000

14000

Assets Loans Funds Equity

Bank Asya Turkiye Finans Kuveyt Turk Albaraka Turk


08 December 2010

Turkish Banks 71

Minimal securities exposure, a lack of trading gains (and related volatility) and staying away from irrational competition for deposits (owing to the business model) are among the major positives for participation banks. To minimize risks relating to maturity and currency, participation banks match deposits and loans and, if there is outstanding FX risk, it is hedged off-balance sheet. Minimal securities exposure prevents the book value fluctuations known as unrealized gains/losses. In the higher interest rate environment of the previous decade, participation banks developed a very strong lending culture as they could not benefit from securities, the favourite asset class of commercial banks during that time.

Figure 119: ASYAB: Asset structure - Sep-10 Figure 120: ASYAB: Liability structure - Sep-10

Other6%

Cash Loans75%

Cash and Banks19%

Current Accounts

14%Profit / Loss Share Accounts

65%

Other2%

Shareholders' Equity15%

Wholesale Funding

4%


Deposits are the main non-equity funding source for participation banks, bringing the need for a strong branch network. This is why the branch network of participation banks quadrupled after the 2002 crisis. The increase is even higher (6x) for Bank Asya (Figure 121).

Figure 121: Participation banks – Branch network Figure 122: Participation banks - Number of employees

28 43 62 72 92118

149 158 164148188

256290

355

422

530558

595

0

100

200

300

400

500

600

700

2002 2003 2004 2005 2006 2007 2008 2009 3Q10

ASYAB Sector

4,225

25303504

47915749

7114

9215

1103211802

12404

649 993 1,344 1,797 2,3653,300

3,806 4,074

0

2000

4000

6000

8000

10000

12000

14000

2002 2003 2004 2005 2006 2007 2008 2009 3Q10

ASYAB Sector

Source: Association of Participation Banks Source: Association of Participation Banks

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Turkish Banks 72

Figure 123: Breakdown of total 595

participation bank branches as of 3Q10

Figure 124: Breakdown of total 12,404

participation bank personnel as of 3Q10

Turkiye Finans31%

Bank Asya28%

Kuveyt Turk23%

Albaraka Turk18%

Turkiye Finans27%

Bank Asya34%

Kuveyt Turk22%

Albaraka Turk17%

Source: Association of Participation Banks Source: Association of Participation Banks

Figure 125: Participation banks: Employee per branch

15

17

19

21

23

25

27

29

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 9M10

Participation Banks Average ASYAB

Source: Association of Participation Banks, Credit Suisse estimates

Impact of delayed rate hikes, premium during increasing rates Participation banks benefit from increasing rates because of their business model while commercial banks’ margins are negatively affected due to the re-pricing mismatch. In Q1 2010, Bank Asya shares’ outperformed the ISE Banks index by 22%, reflecting market expectations of an increase in interest rates. This was followed by a sharp relative underperformance of 34% since March which reflected market expectations of an easing in inflation and a delay in interest rate hikes, coupled with disappointing earnings figures in Q2 and Q3 (see Figure 126). Bank Asya’s outperformance of the ISE Banks index since its IPO in Q2 2006 is still strong at 42%.

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Turkish Banks 73

Figure 126: Relative performance of ASYAB and ISE Banks index – Ytd

80

90

100

110

120

130

140

150

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10

ASYAB 100 ISE Banks 100


Historical data suggest there is a delayed correlation between benchmark bond yields and participation banks’ relative performance. After the shift in expectations towards a delayed policy rate hike (instead of rate hikes starting in 2010), Bank Asya underperformed the ISE Banks index as can be seen from Figure 127. We think that this relationship is tied to interest rate hike expectations rather than level of rates owing to the business model. The Central Bank’s recent move to increase reserve requirements instead of policy rates suggests no rate hikes are imminent: the Central Bank increased the reserve requirements ratio for TL deposits by 100bps to 6% in two 50bps hikes (in September and November) and, more importantly, stopped paying interest on reserve requirements. This move suggests that the Central Bank may increase the reserve requirement ratio further rather than implement a strategy of increasing interest rates.

Figure 127: ASYAB relative to ISE banks vs Benchmark bond yield

0.5

0.7

0.9

1.1

1.3

1.5

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

0%

5%

10%

15%

20%

25%

30%

ASYAB relative to ISE Banks Benchmark Bond Yield

Source: Thomson Reuters, CBT

08 December 2010

Turkish Banks 74

However, no further decreases in interest rates and a stable loan rate outlook mean better y-o-y profitability for participation banks. 2010 loan yields were not sufficient to create the margins to meet the high deposit costs driven by high loan yields of the previous period. Assuming stable rates in 2010-2011, Bank Asya and other participation banks will likely record earnings growth in 2011, in our view.

NIM premium disappears in low interest rate environment

As Figure 128 shows, Bank Asya’s 12-month rolling net interest margin converged towards the industry average in 2010 from a substantial premium in the previous years. This is due mainly to the participation banking business model benefiting from high interest rates more than the traditional banking business model.

Figure 128: Bank Asya’s net interest margin vs sector average in the context of bond

yields, 4Q06-3Q10

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Bond

yie

lds

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Net i

nter

est m

argi

ns

Bond yields [left] Bank Asya NIM [right] Sector NIM [right]

In low interest rate environment, Bank Asya's margins converge with the

sector's average margin...


Risk of deposit outflow In 2009, Bank Asya recorded 56% deposit growth, significantly above the commercial banks’ sector growth of 12%. As participation banks distribute the previous period’s loan yields to their depositors, re-pricing of deposits is delayed and, in a falling interest rate environment, attracts higher yield-seeking depositors. Since 2002, participation banks have steadily outperformed commercial banks in terms of growth partially due to this phenomenon but growth in 2009 was specifically driven by higher yield-seeking depositors who would switch back to commercial banks when higher rates at the participation banks came to an end. This occurred in 2010 as TL deposit market share of Bank Asya fell to 1.68% (by 12bps vs 56bps increase in 2009, Figure 129). The average maturity of deposits also fell significantly in 2010 (Figure 130 and Figure 131), supporting our analysis. There is more deposit market share loss risk, in our view, as the bulk of the growth in the recent years was driven by higher returns at participation banks. It will be more difficult for participation banks to attract TL funding in the form of deposits in the long run, in our view.

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Turkish Banks 75

Figure 129: ASYAB – TL deposit market share vs nominal interest rate

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

0%

5%

10%

15%

20%

25%

ASYAB - TL deposit market share (left axis) Nominal interest rate (right axis)

Source: Company data, BRSA, CBT

Figure 130: Deposits’ maturity as of Dec-

09

Figure 131: Deposits’ maturity as of Sep-

10

1 month19%

3 months 33%

6 months10%

1+ year38%

1 month29%

3 months 31%

6 months6%

1+ year34%


Bank Asya and other participation banks have guided for stricter deposit cost control which will cause an outflow in higher return seeking deposits. A decrease in profit sharing rates suggests NIM improvement at the expense of funding availability.

New asset classes The Turkish Treasury issued a new bond class (revenue indexed bonds) in 2009 to help the banks place their excess funding. Revenues from state-owned enterprises are the major drivers of the bond value and provide a low risk interest-free asset type for participation banks. The potential issuance of similar interest-free assets (rent certificates, real-estate bonds, among others) and the creation of liquid markets for these assets would be an important positive catalyst for participation banks.

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Turkish Banks 76

NPL risk - Restructured loans Participation banks are more exposed to potential NPL issues owing to their higher exposure to SME loans. As of September 2010, 34% of Bank Asya’s loans were SME loans. With the help of strong loan growth, the NPL ratio of Bank Asya has been contained in recent quarters (4.9% vs 4.2% for the sector for Q3 2010). It is important to highlight the high level of Category 2 and restructured loans which may create significant NPL problems in the next few quarters. 7% of Bank Asya’s loan book is in the restructured category which is high compared with other banks under our coverage. Participation banks’ managements argue that an important portion of the restructurings are undertaken to consolidate a customer’s loans thus providing payment simplicity. The BRSA’s deadline for restructuring is March 2011 so the health of these loans will be understood better by then.

We also note that, in participation banking, customers usually pay a portion of the principal and interest/profit shares in monthly instalments, creating a more frequent monitoring opportunity, and therefore an earlier recognition of NPLs (this is not a major problem for participation banks as they share the burden with depositors).

Probability of a foreign partner, fragmented ownership structure Bank Asya has a fragmented shareholder structure with no shareholder holding more than a 5% stake and 254 shareholders owning the non-floating shares. This is a negative, in our view, as we favour the model in Garanti and YKB cases where a foreign partner with equal control provides its expertise to the local partner who knows the country well. Bank Asya is the only bank with such a fragmented shareholder structure and no controlling shareholder. One may argue that this creates a positive catalyst as there is the potential for a foreign institution to acquire a stake, provide its expertise and to some extent end this fragmented structure. However, ordinary shareholders may not be able to fully benefit from any change of control owing to the presence of privileged shares. Since its IPO, Bank Asya’s free float has increased to 52% from 23% owing to the selling pressure from previously unlisted B-type shares (shares without a privilege). Close to 90% of B-type shares are in the free float now, thus limiting the selling pressure.

Figure 132: Ownership structure (after

IPO)

Figure 133: Ownership structure (Sept-10)

Not listed77%

Free f loat23%

Free Float52%

Other48%


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Turkish Banks 77

Figure 134: ASYAB: Foreign ownership of free float

40%

50%

60%

70%

80%

90%

100%

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Source: ISE, CRA

Previous statements from the bank suggest a strategic partnership through a rights issue and selling a 10%-20% stake without giving control. These would also help ease the problems regarding the capital adequacy ratio of the bank which stood at 13.8% as of September 2010 (down from 14.5% at year-end 2009). BRSA requires 12% CAR to open branches. Subordinated loans may be another solution to potential CAR problems. Bank Asya had expressed its interest in a subordinated loan in 2007 but there hasn’t been any development since then. Securities exposure will be important for CAR calculations as, with the full adoption of Basel requirements in Turkey, commercial banks will see the greatest hit from the FX securities which will have a higher risk-weighting. Bank Asya is better positioned due to its interest-free model.

Measures to increase fee income Bank Asya recorded lower-than-expected earnings in 9M10, owing mainly to low fee income (down 6% yoy) resulting from the competitive pressure on its non-cash lending business and its deliberate efforts to release capital to grow cash lending. Non-cash loans’ risk weighting in capital adequacy calculations is higher, making these loans less attractive. Also, non-cash loan NPLs imply cash outflows and are not shared with depositors. Another reason for the disappointing earnings performance was the inability of the bank to take down the participation ratio as much as the market expected despite its guidance after 1H10 results. Bank Asya management had also guided for a recovery in fees & commissions income in 2H10 and 2011 by introducing new fees such as account management, money transfers and credit card fees and the management maintained its guidance following Q3 results.

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Turkish Banks 78

Figure 135: ASYAB: Fees & Commissions income breakdown

10% 10% 13% 18% 17% 16%

21% 22% 20%19% 22% 23%

69% 68% 67% 63% 61% 61%

0%

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30%

40%

50%

60%

70%

80%

90%

100%

Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010

Other Credit card Non-cash loan related


Figure 136: ASYAB: Revenues’ breakdown Figure 137: ASYAB: Expenses’ breakdown

20% 15% 14% 20% 17% 15%

27%24% 26%

26%24% 25%

53%61% 60% 54% 59% 60%

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Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010

Other Fees and commissions Net profit share

26% 26% 30% 29% 28% 30%

6% 5%7% 6% 7% 7%6% 6%6%

3% 5% 6%

30% 32% 22% 26% 24% 17%

32% 31% 35% 36% 36% 40%

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Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010

Other Rent Advertisement Provisions HR


Potential increase in competition With its outstanding growth in the past eight years, participation banking in Turkey is attracting the attention of international interest-free banking players. According to the Turkish daily, Vatan, Qatar Fist Investment bank is in talks to acquire Ihlas Finans, a bankrupt Turkish participation bank. The key issue is the banking license of Ihlas Finans which was revoked by BRSA and although it is not clear whether BRSA will renew the licence, such news shows that there is a risk of increasing competition.

Tamweel Holding Bank Asya acquired a 40% stake in Tamweel Africa Holding, owner of banks in West Africa, in 1Q10. The initial equity investment of Bank Asya was TL22m, followed by a rights issue with Bank Asya’s TL9m contribution. The remaining 60% stake is owned by ICD (the Islamic Corporation for the Development of the Private Sector, a corporation of the Islamic Development Bank). Frontier markets are becoming increasingly popular in the investment community and increasing trade relations with the region should benefit Bank Asya in the medium to long term.

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Turkish Banks 79


TEB (TEBNK.IS) INITIATION

Merger drives the stock ■ Initiating with Neutral: We are initiating coverage on TEB with a Neutral

rating and TP of TL2.33 per share (1% potential downside). TEB shares have underperformed the ISE Banks index by 33% ytd, mainly on the back of concerns about the TEB – Fortis Turkey (owned by BNP Paribas) merger process. We think that this underperformance should come to an end but we do not see any reason to be bullish on the stock as success of bank mergers is hard to predict.

■ Investment Case: We believe that the merger will continue to overshadow the operational dynamics of the bank although the swap ratio of 1.0518 TEB shares for each Fortis Turkey share has recently been announced. 1+1 does not necessarily equal to 2 in bank mergers, and costs savings can be underestimated and revenue enhancements overestimated. The overlapping branch networks, customers’ diversification needs and banks’ credit limits for a single customer are among the key concerns. Trading at 1.6x 2010E tangible book value, there is room for value accretion relative to the sector trading at 1.9x; however, this is balanced by the uncertainties ahead. If TEB + Fortis can reach the necessary economies of scale (which means preserving the combined market share and growing further), the ROEs which are currently depressed for both banks may improve and could lead to the re-rating of the shares. Nevertheless, we initiated coverage with a Neutral rating.

■ Catalysts: Further clarification about the merger (including approvals from regulatory institutions), release of the financials of the merged entity, and measures taken to lower costs are the major catalysts, in our opinion.

■ Valuation: TEB is trading at 1.6x 2010E P/TBV and 11.6x 2011E P/E at a 24% discount and 3% premium to our Turkish Banks coverage average. We value TEB’s existing operations and will continuously update our estimates during the merger process. The release of the merged banks’ financials will be a key step. Our standard valuation methodology for Turkish banks is a combination of: (i) discounted EVA®; (ii) Gordon growth model; and (iii) EMEA peer group multiple-based valuation.


0.54

1.54

2.54




Performance Over 1M 3M 12M Absolute (%) -5.6 3.5 — Relative (%) -1.3 -6.6 -26.0



Dividend (2010E) — Tier 1 ratio (12/10E, %) 11.9 Dividend yield (%) — Eqt Tier 1 Ratio (12/10E, %) 11.9 Free float (%) 16.0 Number of shares (m) 1,100.00



Research Analysts

Ates Buldur 90 212 349 0459

[email protected]

Akin Tuzun 90 212 349 0458

[email protected]

Rating NEUTRAL* [V] Price (02 Dec 10, TRY) 2.36 Target Price (TRY) 2.33¹ Market cap. (TRY m) 2,596

08 December 2010

Turkish Banks 80

Figure 138: TEB: Target valuation TRY in millions, unless otherwise stated TEBNK - TARGET VALUATION


consensus 2.44 3.4%I. EVA MODELTL in millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Turkish Lira Risk Free Rate 21.2% 16.6% 16.4% 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3% 7.3% Eurobond Risk Free Rate 7.5% 6.8% 8.7% 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1% 4.1% Implied TL mix 71.8% 75.5% 80.0% 81.1% 80.3% 81.5% 83.1% 84.0% 84.6% 85.2% 85.2%1.Blended Risk free rate 17.3% 14.2% 14.9% 8.4% 7.5% 7.9% 7.4% 7.2% 7.0% 6.8% 6.8%2. Equity/Tier 1 Capital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%3. Required Tier 1 Ratio 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%4. Forecast RWA (TL) 5,561 7,508 9,710 10,110 12,349 15,253 18,473 21,862 25,049 28,677 30,1115. Required Equity (2x3x4) 445 601 777 809 988 1,220 1,478 1,749 2,004 2,294 2,4096. Total Equity 552 910 1,424 1,649 1,666 1,915 2,198 2,505 2,875 3,294 3,459 (-) Participations (146) (152) (154) (156) (125) (137) (151) (166) (183) (201) (209)7. Core Equity 405 758 1,270 1,494 1,542 1,778 2,047 2,339 2,692 3,093 3,2508. Excess Equity (7-5) (39) 157 493 685 554 557 569 590 689 799 8419. Earnings on Excess Equity (1x Avg(8)) (2) 8 48 50 46 44 42 42 45 50 5610. Effective Tax Rate -21.5% -21.5% -16.8% -18.2% -16.0% -16.0% -17.0% -19.0% -20.0% -20.0% -20.0%11. Tax Adj. Earnings on Excess Equity (2) 7 40 41 39 37 35 34 36 40 4512. Reported Parent-only net income 106 130 164 210 232 233 266 289 350 398 429 (-/+) One-off items 0 0 0 0 (73) 0 0 0 0 0 0 (-) Income from subsidiaries (19) (15) (19) (12) (14) (15) (16) (17) (18) (18) (19) (-/+) Excess provision normalization 1 (11) (17) (34) (8) (10) (11) (7) (9) (10) (11) (-) Founder / preferred shares adjustment (10) (9) 0 0 0 0 0 0 0 0 013. Normalized Core Banking Net Profit 78 96 128 165 136 208 239 265 324 369 39914. Core ROE 16.5% 12.6% 11.9% 9.0% 12.5% 12.5% 12.1% 12.9% 12.8% 12.6%15. Adjusted Earnings (13-11) 80 89 88 124 97 171 204 231 288 329 354

EVA Model (TLm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016I. Required Equity (=5) 445 601 777 809 988 1,220 1,478 1,749 2,004 2,294 2,409II. Adjusted Earnings (=15) 80 89 88 124 97 171 204 231 288 329 354III. Discount Rate 22.8% 19.7% 20.4% 13.0% 11.6% 12.2% 11.5% 11.2% 10.8% 10.5% 10.5%IV. Capital Charge ( III x Avg(I) ) (103) (140) (103) (105) (134) (155) (180) (203) (226) (247)V. EVA Flow (II + IV) (14) (52) 21 (8) 37 49 51 85 103 107VI. Discount Factor 1.00 0.89 0.80 0.72 0.65 0.59 0.53VII. NPV of EVA (VxVI) 0 0 0 (8) 33 39 36 55 60 57

EVA Calculation TLm Valuation Box Stock Info2010E Core Book Value 1,542 Fair Value (TLm) 2,720 Equity Stock Beta 1.10+EVA Flows 281 Current value (TLm) 2,596 Stock specific risk pr. 0.0%+Terminal EVA Value 778 Number of Shares 1,100,000 Long Term Growth 3.0%TOTAL Core Value (TLm) 2,600 Target Price (TL) 2.5 2015 Core ROE 12.6% (+) Value of Participations 120 Current Price (TL) 2.36Total Fair Value (TLm) 2,720 Upside 4.8%




2007 2008 2009 2010 2011 2012Price-to-book (IFRS Cons) #DIV/0! 2.6 1.6 1.4 1.4 1.2 1.1Price-to-book (Core) 6.3 3.4 2.0 1.7 1.7 1.4 1.3Price-to-book (BRSA) 4.6 2.8 1.8 1.6 1.5 1.3 1.2Price-to-earnings (IFRS Cons) #DIV/0! 18.2 13.5 12.7 11.5 11.4 10.0Price-to-earnings (Core) 29.4 22.2 17.7 12.9 17.8 11.8 10.2Price-to-earnings (BRSA) 24.2 19.7 15.6 12.2 16.1 11.0 9.6ROE (IFRS Cons) #DIV/0! 14.2% 14.9% 12.1% 8.4% 11.6% 11.6%ROE (Core) 24.1% 22.1% 14.3% 14.3% 9.5% 13.1% 13.1%ROE (BRSA) 20.9% 19.4% 14.1% 13.7% 14.0% 13.0% 12.9%

Target (TL)


08 December 2010

Turkish Banks 81

Figure 139: TEB: Income statement TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E


on TRY Loans 1,323 1,133 1,113 1,333 1,611 1,847 2,122 2,391

on FX Loans 154 135 111 122 135 149 161 176

on Securities 301 290 274 260 244 238 237 238


II. Interest Expense (1,262) (834) (732) (832) (987) (1,116) (1,252) (1,394)

on TRY Deposits (738) (513) (432) (495) (638) (767) (891) (1,018)

on FX Deposits (143) (81) (68) (67) (68) (72) (77) (84)


on Others (136) (65) (76) (44) (37) (38) (38) (39)

III. Net Interest Income 704 801 796 910 1,031 1,143 1,294 1,437

Net FX gains/losses 5 (184) 236 (6) (10) (11) (13) (13)

IV. FX adj. Net Interest Income 709 617 1,031 904 1,021 1,132 1,282 1,424







VI. Total Operating Costs (701) (701) (770) (789) (874) (971) (1,077) (1,199)




VIII. Op. Inc. After Provisions 178 245 188 262 304 340 420 479




IX. Pre-tax income 197 257 276 277 320 356 438 497

Tax (33) (47) (44) (44) (54) (68) (88) (99)

X. Net Income (Reported BRSA) 164 210 232 233 266 289 350 398


(+/-) IFRS Consolidation Difference 26 (8) (9) (9) (9) (10) (10) (10)

XI. IFRS Adj. Net Income pre special div. 190 202 150 224 257 279 340 387


XII. IFRS Adj. Net Income 190 202 150 224 257 279 340 387


08 December 2010

Turkish Banks 82

Figure 140: TEB: Balance sheet TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Cash and Banks 781 732 572 1,845 1,715 1,702 1,890 2,131

Money Market 757 695 0 0 0 0 0 0





Loans, net 8,112 8,606 11,088 14,239 17,625 21,148 24,359 28,011

TRY Loans 5,965 6,640 8,879 11,387 14,106 16,975 19,662 22,725

FX Loans 2,147 1,966 2,208 2,852 3,519 4,173 4,697 5,285

NPLS, net 95 188 144 172 209 239 279 323

Gross NPLs 202 428 386 482 604 748 910 1,086


Reserve deposits 1,812 1,173 1,498 723 899 1,068 1,242 1,442




Fixed assets 167 155 158 161 164 168 171 175

Other assets 458 423 550 561 572 583 595 607

Total Assets 14,736 15,064 17,531 21,101 24,769 28,660 32,512 36,885

0 0 0 0 0 0 0 0

Total Deposits 9,207 9,395 10,161 12,045 14,976 17,799 20,692 24,031

TRY Deposits 5,518 5,844 6,151 7,596 9,916 12,117 14,330 16,927

FX Deposits 3,689 3,551 4,010 4,449 5,060 5,682 6,361 7,103

Money Market (Mainly repo) 202 1,072 711 602 749 890 1,035 1,202

Funds borrowed 2,445 1,650 3,471 4,909 5,069 5,569 5,880 6,164

Other funds 0 0 0 0 0 0 0 0

Payables 716 621 841 953 1,109 1,232 1,363 1,517


Provisions 183 167 172 182 194 210 231 256



Book Value 1,424 1,649 1,666 1,915 2,198 2,505 2,875 3,294



08 December 2010

Turkish Banks 83

TEB – Overview Turk Ekonomi Bankasi (TEB) was founded in 1927 as KHB and its name was changed to TEB in 1982 after being acquired by Colakoglu Group. In 2000, 20% of shares were released through an IPO which has fallen to 15.6% in the last 10 years. In 2005, BNP Paribas acquired 50% shares of TEB Mali Yatirimlar AS, the major shareholder of the group with a 84.25% share. As a consequence of the bail out of Fortis Bank NV/SA by the Belgium government and its later sale of 75% Fortis Bank NV/SA stake to BNP Paribas, BNP Paribas became the shareholder of two banks in Turkey and the TEB - Fortis Turkey merger is underway.

Figure 141: TEB Mali Yatirimlari:

Ownership structure as of Sep-10

Figure 142: TEBNK: Ownership structure

BNP Paribas

50%

Colakoglu50%

Free float

16%

TEB Mali Yatirimlar

84%


TEB is the 11th largest bank in Turkey in terms of assets and 10th largest in terms of deposits. The bank has 334 branches mostly concentrated in cities. Despite being a dedicated funder for the corporate and commercial segment, TEB has changed its focus to the SMEs and retail segment since 2008.

Merger The key topic for investors has been the TEB-Fortis Turkey merger in 2010. TEB has underperformed the ISE Banks index by 33% ytd, mainly on the back of concerns over the merger. On 25 November, TEB announced that the merger had reached its final stage. Accordingly, Fortis shareholders will receive 1.0518 TEB shares for each Fortis share and the merger will be completed through a capital increase of TL1,104m. The swap ratio was more favourable for Fortis Turkey shareholders compared with earlier market expectations. Approvals from the Turkish Capital Markets Board, the Turkish banking regulator and General Assemblies of both banks are needed to proceed with the merger.

08 December 2010

Turkish Banks 84

Figure 143: TEB, Fortis Turkey and ISE Banks index relative performance

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Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10

TEB Fortis Turkey ISE Banks


We prefer to value only TEB’s existing operations at this stage as 1+1 is not necessarily equal to 2, in bank mergers. Successful integration of the two banks plays a critical role in the process as costs savings can be underestimated and revenue enhancements overestimated. If the merger takes place in a sector with consolidation expectations, the market rewards the merged entity and the market capitalization of the merged entity increases beyond the sum of the market capitalizations of two entities. But, again, the key is the successful integration of the entities and there is no guarantee on the outcome of bank mergers. We will refine our valuations continuously as the merger proceeds. There are clear scale advantages but issues about scope may sweep the bulk of the expected value added from the transaction. The main concerns are the overlapping branch networks, customers’ diversification need and banks’ credit limits for a single customer. These suggest that a portion of the balance sheet and income is at risk but it is difficult to determine the amount at risk at this stage.

We provide Turkish Banking Association data (Figure 144 and Figure 145) to give an idea of the current standings of both banks but it is important to highlight once more that 1+1 is not necessarily equal to 2 in bank mergers.

08 December 2010

Turkish Banks 85

Figure 144: Comparison of asset, loan and deposit sizes of selected Turkish banks TL in millions, unless otherwise stated

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Figure 145: Comparison of branch network and employee numbers of selected Turkish banks

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08 December 2010

Turkish Banks 86

Valuation supports Neutral rating Despite the strong 33% ytd underperformance, our TEB-only model implies 1% downside potential, leading to our Neutral rating.

Figure 146: Sell-side analysts’ current ratings Figure 147: Sell-side analysts’ historical rating co-efficient

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Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

TEBNK Turkish Banks' Average


TEB is trading at 1.6x 2010E P/TBV and 11.6x 2011E P/E at a 24% discount and 3% premium to our Turkish Banks coverage average, respectively.

Figure 148: 12m forward PE comparison

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TEBNK Turkish banks' average


08 December 2010

Turkish Banks 87

Business review TEB has changed its preference towards TL and retail business in the recent years (Figure 149). Despite being accepted as a key player in the commercial & corporate segment, TEB has focused more on a profitable retail business with a strong marketing effort. These moves raise concerns about asset quality as the bank’s coverage ratio is very low at 55%. Securities exposure of TEB is lower than peers at 15% of total assets.

Figure 149: Loan breakdown by line of business Figure 150: TL loan mix in total loans

27.4% 25.3% 21.7%

41.7% 40.0%40.2%

12.8% 13.7% 15.3%

18.1% 21.0% 22.8%

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2008 2009 9M10

Corporate Commercial SME Retail

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2006 2007 2008 2009 9M10

TL loan mix


Figure 151: Loan breakdown by industry Figure 152: Breakdown of retail loans

Misc. Services5%

Other32%

Textile8%

Metal7%

Consumer19%

Construction9%

Food, Beverage & Tobacco

9%

Tourism6%

Chemicals5%

33% 33%43% 42% 41% 39%

16%10%

7% 6% 7% 7%

26%28%

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24% 29%20% 18% 17% 17%

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2007 2008 2009 1Q10 1H10 9M10

Housing Auto Consumer Credit Card


TEB has a high cost/income ratio of 75%, one of the highest in its peer group. We have seen no improvement in the cost/income ratio recently but scale disadvantages may disappear and the cost/income ratio may improve after the completion of Fortis Turkey merger. For NPLs, TEB sold NPLs in Q1 2010 (TL40m) and Q2 2010 (TL75m) to take the NPL ratio down as the ageing of loans appears to be a concern for the bank.

08 December 2010

Turkish Banks 88

.

Figure 153: TEBNK - Evolution of cost ratios Figure 154: NPL ratio evolution - TEBNK vs Tier-1 Banks

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4Q05 4Q06 4Q07 4Q08 4Q09

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4Q05 4Q06 4Q07 4Q08 4Q09

TEBNK Tier-1 Banks Average


08 December 2010

Turkish Banks 89


TSKB (TSKB.IS) INITIATION

Our top pick ■ Initiating with Outperform: We initiate coverage on TSKB with an

Outperform rating and TL3.60 per share TP (42% potential upside). TSKB’s business model is exceptional in the Turkish banking sector with low risk, sustainable margins and higher efficiency, in our view. These qualities come with attractive 31% and 39% discounts on PBV and PE basis, on our estimates.

■ Investment Case: As an investment and development bank, TSKB channels low-cost, long-term foreign currency funds from multi-national institutions to Turkish corporates. This enables the bank to record stable margins while the short-term local currency funding structure at commercial banks creates margin fluctuations. We expect c50bps NIM contraction for TSKB between 2009 and 2012 (vs c200bps for the sector). TSKB does not have retail clients or credit card exposure. Its loan exposure is mainly to the commercial and corporate segment. This creates an asset quality advantage over its peers with a significantly lower NPL ratio (0.7% as of Sept-2010 vs 4.2% of the sector). The shrinking margins in securities will hit TSKB too as 27% of its assets are invested in TL government papers but the positive earnings drivers and stable margin in the core business makes TSKB much better positioned versus other banks. We have the highest upside potential in our coverage universe in TSKB and the stock is our top pick.

■ Catalysts: Turkish Capital Market Board’s IPO efforts, increasing corporate finance activities with mandates of state-owned companies (potential to boost fee income) and financing relating to the electricity & gas distribution tenders are the major catalysts. Sharp interest rate hikes may hurt the margins owing to the decreasing but still present dependence on overnight TL borrowing.

■ Valuation: TSKB is trading at 1.4x 2010E P/TBV and 6.8x 2011E P/E. Our standard valuation methodology for Turkish banks is a combination of: (i) discounted EVA®; (ii) Gordon growth model; and (iii) EMEA peer group multiple-based valuation.


0.46

1.46

2.46




Performance Over 1M 3M 12M Absolute (%) -6.6 13.4 85.4 Relative (%) -2.4 2.3 37.2



Dividend (2010E) 0.06 Tier 1 ratio (12/10E, %) 24.4 Dividend yield (%) 2.5 Eqt Tier 1 Ratio (12/10E, %) 24.4 Free float (%) 54.0 Number of shares (m) 700.00



Research Analysts

Ates Buldur 90 212 349 0459

[email protected]

Akin Tuzun 90 212 349 0458

[email protected]

Rating OUTPERFORM* [V] Price (02 Dec 10, TRY) 2.54 Target Price (TRY) 3.60¹ Market cap. (TRY m) 1,778

08 December 2010

Turkish Banks 90

Figure 155: TSKB: Target valuation TRY in millions, unless otherwise stated TSKB - TARGET VALUATION


consensus 2.87 13.0%I. EVA MODELTL in millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Turkish Lira Risk Free Rate 21.2% 16.6% 16.4% 8.9% 8.0% 8.5% 8.0% 7.8% 7.5% 7.3% 7.3% Eurobond Risk Free Rate 7.5% 6.8% 8.7% 6.4% 5.5% 5.0% 4.5% 4.3% 4.1% 4.1% 4.1% Implied TL mix 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0%1.Blended Risk free rate 18.4% 14.7% 14.9% 8.4% 7.5% 7.8% 7.3% 7.1% 6.8% 6.6% 6.6%2. Equity/Tier 1 Capital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%3. Required Tier 1 Ratio 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%4. Forecast RWA (TL) 1,851 2,475 3,505 3,617 3,921 4,919 6,018 7,326 8,522 9,839 10,3315. Required Equity (2x3x4) 148 198 280 289 314 393 481 586 682 787 8266. Total Equity 589 738 750 1,041 1,247 1,476 1,714 1,958 2,225 2,506 2,631 (-) Participations (149) (210) (189) (244) (269) (296) (325) (358) (393) (433) (450)7. Core Equity 439 528 562 797 978 1,181 1,389 1,600 1,831 2,073 2,1818. Excess Equity (7-5) 291 330 281 507 665 787 907 1,014 1,150 1,286 1,3559. Earnings on Excess Equity (1x Avg(8)) 40 46 45 33 44 57 62 68 74 81 8710. Effective Tax Rate -18.1% -13.6% -19.6% -16.9% -20.0% -18.0% -20.0% -20.0% -20.0% -20.0% -20.0%11. Tax Adj. Earnings on Excess Equity 33 39 36 27 35 46 49 54 59 64 7012. Reported Parent-only net income 106 147 119 175 222 246 257 262 283 298 314 (-/+) One-off items 0 0 0 0 0 0 0 0 0 0 0 (-) Income from subsidiaries (13) (20) (24) (19) (23) (24) (25) (26) (28) (29) (30) (-/+) Excess provision normalization 1 0 2 0 1 1 1 1 1 1 1 (-) Founder / preferred shares adjustment (9) (12) 0 0 0 0 0 0 0 0 013. Normalized Core Banking Net Profit 86 116 97 156 201 223 233 237 257 270 28514. Core ROE 23.9% 17.8% 23.0% 22.6% 20.6% 18.1% 15.9% 15.0% 13.8% 13.4%15. Adjusted Earnings (13-11) 53 76 60 129 165 176 183 183 198 206 215

EVA Model (TLm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016I. Required Equity (=5) 148 198 280 289 314 393 481 586 682 787 826II. Adjusted Earnings (=15) 53 76 60 129 165 176 183 183 198 206 215III. Discount Rate 24.7% 21.0% 21.2% 13.8% 12.5% 12.9% 12.2% 11.8% 11.4% 11.1% 11.1%IV. Capital Charge ( III x Avg(I) ) (36) (51) (39) (38) (46) (53) (63) (72) (82) (90)V. EVA Flow (II + IV) 40 10 89 128 131 130 120 125 124 125VI. Discount Factor 1.00 0.89 0.79 0.71 0.63 0.57 0.51VII. NPV of EVA (VxVI) 0 0 0 128 116 103 84 79 71 64

EVA Calculation TLm Valuation Box Stock Info2010E Core Book Value 978 Fair Value (TLm) 2,571 Equity Stock Beta 1.06+EVA Flows 517 Current value (TLm) 1,778 Stock specific risk pr. 1.0%+Terminal EVA Value 814 Number of Shares 700,000 Long Term Growth 3.0%TOTAL Core Value (TLm) 2,310 Target Price (TL) 3.7 2015 Core ROE 13.4% (+) Value of Participations 261 Current Price (TL) 2.54Total Fair Value (TLm) 2,571 Upside 44.6%

II. Gordon's Growth ModelPrice-to-book calculation TLm Valuation BoxSustainable Core ROE (Avg 10-16) 17.1% Fair Value (TLm) 2,096Cost of Equity (Avg 09-16) 11.9% Current value (TLm) 1,778Adjusted LT Growth Rate 5.9% Number of Shares 700,000Implied Target P/BV (2010) 1.9 Target Price (TL) 3.02010E Core Equity (TLm) 978 Current Price (TL) 2.54Total Core Value (TLm) 1,835 Upside 17.9% (+) Value of Participations 261Total Fair Value (TLm) 2,096

III. Peer Group ValuationPeer group multiple valuation TLm Valuation Box2010E Adj Net Income x target EMEA (ex RU) 3,014 Fair Value (TLm) 2,844 EMEA Ex Russia2011E Adj Net Income x target EMEA (ex RU) 2,618 Current value (TLm) 1,778 08E PE 15.94 12.722010E Book Value x target EMEA (ex RU) 2,824 Number of Shares 700,000 09E PE 10.97 10.012009E Book Value x target EMEA (ex RU) 2,918 Target Price (TL) 4.1 08 PBV 2.11 2.06 Taking average of above = Current Price (TL) 2.54 09 PBV 1.82 1.82Total Fair Value (TLm) 2,844 Upside 59.9% Adjustment factor FALSE



Target (TL)


08 December 2010

Turkish Banks 91

Figure 156: TSKB: Income statement TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

I. Interest Income 442 499 439 456 477 492 545 595

on TRY Loans 79 104 86 96 109 124 140 158

on FX Loans 98 122 99 114 129 146 163 183

on Securities 241 259 234 219 212 190 195 196


II. Interest Expense (198) (244) (135) (131) (123) (126) (146) (168)

on TRY Deposits 0 0 0 0 0 0 0 0

on FX Deposits 0 0 0 0 0 0 0 0


on Others (104) (96) (88) (82) (71) (68) (82) (96)

III. Net Interest Income 244 255 304 325 354 366 399 427

Net FX gains/losses (7) 1 (1) (3) (4) (5) (5) (6)

IV. FX adj. Net Interest Income 237 257 303 323 349 361 394 422




V. Total Banking Income 230 290 339 362 391 406 442 473



VI. Total Operating Costs (52) (55) (62) (70) (76) (83) (89) (97)




VIII. Op. Inc. After Provisions 124 192 255 276 296 301 326 343




IX. Pre-tax income 148 211 278 300 321 328 354 372

Tax (29) (36) (56) (54) (64) (66) (71) (74)

X. Net Income (Reported BRSA) 119 175 222 246 257 262 283 298



XI. IFRS Adj. Net Income pre special div. 130 257 237 262 273 279 301 316


XII. IFRS Adj. Net Income 130 257 237 262 273 279 301 316


08 December 2010

Turkish Banks 92

Figure 157: TSKB: Balance sheet TRY in millions, unless otherwise stated 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Cash and Banks 129 144 303 430 374 706 1,100 1,391

Money Market 8 0 0 0 0 0 0 0





Loans, net 3,434 3,623 3,908 5,005 6,352 7,700 8,908 10,294

TRY Loans 1,527 1,560 1,585 2,023 2,532 3,047 3,529 4,078

FX Loans 1,908 2,062 2,323 2,982 3,820 4,653 5,379 6,216

NPLS, net 0 0 0 0 0 0 0 0

Gross NPLs 25 22 27 26 26 28 30 34


Reserve deposits 0 3 35 0 0 0 0 0




Fixed assets 26 22 23 23 24 24 25 25

Other assets 386 190 152 155 158 161 164 168

Total Assets 6,209 6,905 7,368 9,194 10,064 12,087 13,929 15,838

Total Deposits 0 0 0 0 0 0 0 0

TRY Deposits 0 0 0 0 0 0 0 0

FX Deposits 0 0 0 0 0 0 0 0

Money Market (Mainly repo) 806 1,285 1,057 1,435 1,188 1,554 1,892 2,243

Funds borrowed 4,436 4,328 4,636 5,758 6,689 8,075 9,291 10,543

Other funds 0 0 193 287 238 259 270 280

Payables 57 64 53 64 66 76 85 94


Provisions 89 112 107 103 100 100 103 112



Book Value 750 1,041 1,247 1,476 1,714 1,958 2,225 2,506



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Turkish Banks 93

TSKB – Overview Founded in 1950, TSKB is the leading Turkish investment and development bank. It is the 16th largest bank in Turkey in terms of assets with TL7bn asset size. Loans are predominantly to the Energy and Finance sectors. TSKB carries out Apex Banking practices with international banking institutions such as IBRD, EIB and KFW, placed through 22 intermediary financials institutions. It reaches long-term funding through multinationals within the scope of country assistance programmes. 92% of TSKB's long-term funds are guaranteed by the Turkish Treasury.

Figure 158: TSKB: Ownership as of Sep-10 Figure 159: TSKB: Change in foreign

ownership of free float

Isbank Group50%

Vakifbank8%

Other42%

20%

30%

40%

50%

60%

Jan-0

8

May-08

Sep-08

Jan-0

9

May-09

Sep-09

Jan-1

0

May-10

Sep-10

Source: Company data Source: ISE, CRA

TSKB’s foreign ownership of free float level is low at 53.1% vs average 73.5% average for the other banks in our coverage. The level of foreign ownership may increase as the bank increases its international presence with investors, in our view.

Business model TSKB’s business model is exceptional in the Turkish banking sector with low risk, relatively low but sustainable margins and high efficiency. Being the leading development and investment bank in Turkey, TSKB channels funds from supranational/international institutions to Turkish companies. Minimal interest rate mismatch, full currency match and higher quality borrower profile positions TSKB as a relatively low risk opportunity in the Turkish banking universe, in our view.

As an investment bank, TSKB cannot fund its assets with deposits and utilizes dedicated supranational/international sources. 92% of these funds are guaranteed by Turkish Treasury and this creates a cost of funding advantage over other banks.

Funds are utilized through corporate loans, project finance facilities in co-operation with other banks (mainly in the energy sector where Credit Suisse expects c.US$20bn new investments in the next three years in Turkey), on and off balance sheet trade finance, apex banking (directing wholesale funds to other financial institutions to be placed to SMEs) and leasing activities (investment & development banks and participation banks can undertake leasing activities without establishing leasing subsidiaries).

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Figure 160: Loans by type as of Sep-10 Figure 161: Loans by sector as of Sep-10

Apex18%

Project Finance41%

Corporate Loans41%

Finance24%

Other35%

Energy34%

Transportation & Communication

7%


As TSKB matches its funding and loans in terms of currency, it does not utilize FX funds for TL securities exposure. TL securities are financed with equity or repo funding, creating another dimension of the currency match and providing relatively higher NIM expansion.

Valuation and rating We are 8% and 10% above consensus for TSKB in 2011E bank revenues and net income, respectively. Currently TSKB is trading at 6.8x 2011E P/E, at a 39% discount to the sector. We expect c50bps NIM contraction for TSKB between 2009 and 2012 (vs c200bps for the sector).

TSKB’s core operations are in foreign currency, theoretically justifying a lower discount rate compared with peers. We use a blended risk free rate in our Turkish banks’ models but do not fully reflect this in our TSKB valuation, to be conservative.

Figure 162: 12-month forward P/E comparison

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10

TSKB Turkish banks' average


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Figure 163: Sell-side analysts’ current ratings Figure 164: Sell-side analysts’ historical rating co-efficient

0

1

2

3

4

Sell Underperform Hold Outperform Buy

2

2.2

2.4

2.6

2.8

3

3.2

3.4

3.6

3.8

4

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

TSKB Turkish Banks' Average


Efficient player of the sector TSKB is the most efficient bank in the Turkish banking sector as its cost-income ratio is at the low-end of the sector and one may expect a further decrease in this ratio owing to operational leverage. As an investment and development bank with no retail exposure, TSKB has only 4 branches and 352 personnel as of September 2010.

Figure 165: Cost-income ratio comparison Figure 166: Cost-average assets comparison

10%

15%

20%

25%

30%

35%

40%

45%

50%

4Q05 4Q06 4Q07 4Q08 4Q09

TSKB Tier-1 Average

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4Q05 4Q06 4Q07 4Q08 4Q09

TSKB Tier-1 Average


Low risk We believe TSKB is arguably the lowest risk bank in the Turkish banking system against potential shocks. Matching the currency of loans with the currency of related funds, longer term funding and lending with relatively low maturity mismatch and no exposure to retail loans (NPL ratio at 0.7% vs 4.2% of the sector) position TSKB as the lowest risk bank in our Turkish banks coverage universe. It is important to highlight that the magnitude of NPL problems may be high if there are any major shocks given that it is dependent on a small number of clients but this does not change the attractiveness in a relative context, in our view.

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Turkish Banks 96

Figure 167: NPL ratio comparison Figure 168: Capital adequacy ratio comparison

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

4Q05 4Q06 4Q07 4Q08 4Q09

TSKB Tier-1 Average

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

4Q05 4Q06 4Q07 4Q08 4Q09

TSKB Tier-1 Average


Capital Adequacy Ratio of TSKB is at the high end of the sector (25.6%) which, at first sight, seems to be a waste of resources. In fact, this is a cautious but necessary approach as the bank’s equity is TL denominated while RWAs are FX denominated which means a sharp FX appreciation against TL can take the CAR down substantially.

Opportunities The bank has the opportunity to boost its fee income with upcoming IPOs and privatizations while electricity tenders will likely boost corporate loan book. Fee income constituted only 4% of TSKB’s pre-tax income in 9M 2010. This is a low figure for an investment bank but the lack of retail business and credit cards is an important reason for its relative weakness in this area.

Figure 169: Historical breakdown of fees and commissions income

40%47% 41%

34%

16% 6% 16% 24%

14%13%

15%22%

30% 34% 27%20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 3Q 09 2009 3Q10

Non-cash Loans Corporate Finance Fund Management Brokerage


Compared with the beginning of 2010, expectations for interest rate hikes have now been delayed. We now expect 100bps rate hike by the Turkish Central Bank in the second half of 2011. As the TL securities book is more than 50% funded with equity (remaining portion funded with overnight borrowing and TL corporate bonds), the impact of interest rate increases on NIM will be most positively seen at TSKB. The weight of overnight borrowing

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has been decreasing in recent quarters but sharp increases in interest rates still constitute the major drawback to this argument. The issuance of local currency denominated bonds is another opportunity to diversify the funding base and obtain TL funding to be channelled to TL loans or securities. TSKB raised TL200m in 2010 through bond issues and these funds may be used to buy corporate debt which have up to 200-250bps higher spreads compared with government bonds.

Figure 170: Securities portfolio – Dec-09 Figure 171: Securities portfolio – Sep-10

TRY Fixed43%

FX Fixed 16%

CPI Linked5%

TRY Floating31%

FX Floating5%

TRY Fixed33%

FX Fixed 17%CPI Linked

6%

TRY Floating42%

FX Floating2%


Risks The typical concern for an investment bank is the sustainability of growth as these banks cannot grow with deposits. To our knowledge and company guidance, TSKB’s funding sources are committed and there is not a limitation to block the growth of the bank.

Although the bank will be a beneficiary of a gradual increase in interest rates as it funds its securities mainly with its equity, sharp increases in interest rates will mean margin erosion owing to the decreasing but still present dependence on local currency overnight borrowing.

Competitive forces are also a risk, although not specific to TSKB. As deal volumes rise, spreads fall and one irrational move from a bank is enough to take the margins of the whole sector down.

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Companies Mentioned (Price as of 02 Dec 10) *ABSA Group Limited (ASAJ.J, R132.50, NEUTRAL, TP R160.00) Akbank (AKBNK.IS, TRY8.52, UNDERPERFORM, TP TRY7.80) Al Rajhi Bank (1120.SE, SRls77.75, OUTPERFORM, TP SRls90.00) Arab National Bank (1080.SE, SRls36.80, NEUTRAL, TP SRls46.00) Bank Asya (ASYAB.IS, TRY3.22, UNDERPERFORM, TP TRY2.80) Bank St Petersburg (STBK.RTS, $4.88, OUTPERFORM [V], TP $3.50) Banque Saudi Fransi (1050.SE, SRls44.30, NEUTRAL, TP SRls47.00) BBVA (BBVA.MC, Eu7.91) *FirstRand Limited (FSRJ.J, R20.44, UNDERPERFORM, TP R21.50) Garanti Bank (GARAN.IS, TRY8.78, NEUTRAL [V], TP TRY8.60) Halkbank (HALKB.IS, TRY14.25, UNDERPERFORM [V], TP TRY13.00) Halyk Bank (HSBKq.L, $10.00, NEUTRAL [V], TP $9.30) Investec PLC (JSE) (INPJ.J, R54.68) Kazkommertsbank (KKGByq.L, $5.66, OUTPERFORM [V], TP $7.40) Komercni Banka (BKOMsp.PR, Kc4388.00, UNDERPERFORM, TP Kc4200.00) *Nedbank Group Limited (NEDJ.J, R126.89, OUTPERFORM, TP R160.00) OTP (OTPB.BU, HUF5220.00, NEUTRAL [V], TP HUF5600.00) Pekao (BAPE.WA, PLN180.20, OUTPERFORM, TP PLN185.80) PKO BP (PKOB.WA, PLN44.46, OUTPERFORM, TP PLN50.60) Riyad Bank (1010.SE, SRls26.40, NEUTRAL, TP SRls30.00) Samba Financial Group (1090.SE, SRls56.50, OUTPERFORM, TP SRls71.00) Saudi Hollandi Bank (1040.SE, SRls30.40, NEUTRAL, TP SRls34.00) Sberbank (SBER.RTS, $3.31, OUTPERFORM [V], TP $3.60) *Standard Bank Group Limited (SBKJ.J, R101.88, OUTPERFORM, TP R140.00) TEB (TEBNK.IS, TRY2.36, NEUTRAL, TP TRY2.33) The Saudi British Bank (1060.SE, SRls39.40, OUTPERFORM, TP SRls52.00) TSKB (TSKB.IS, TRY2.54, OUTPERFORM, TP TRY3.60) Turkiye Is Bankasi (ISCTR.IS, TRY5.92, OUTPERFORM, TP TRY7.00) Unicredit (CRDI.MI, Eu1.65) Vakifbank (VAKBN.IS, TRY4.24, OUTPERFORM, TP TRY5.14) Vozrozhdenie (VZRZ.RTS, $41.00, NEUTRAL [V], TP $32.00) VTB (VTBRq.L, $6.57, UNDERPERFORM [V], TP $5.50) Yapi Kredi Bank (YKBNK.IS, TRY5.46, NEUTRAL, TP TRY5.36) *Denotes a Credit Suisse Standard Securities covered company, a joint venture involving Credit Suisse. For information regarding companies covered by CSSS, full research reports, definitions of analysts’ stock ratings, and disclosure information, please refer to: www.researchandanalytics.com.

Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock

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Turkish Banks 99

rating definitions, respectively, subject to analysts’ perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts’ perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 45% (61% banking clients) Neutral/Hold* 41% (60% banking clients) Underperform/Sell* 12% (53% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Credit Suisse Standard Securities (Proprietary) Limited (“CSSS”) is the name provided to the Joint Venture created by Credit Suisse and The Standard Bank of South Africa Limited. This report includes references to CSSS research recommendations. For published CSSS research reports in their entirety and corresponding disclosures, please visit the website at: http://www.credit-suisse.com/researchandanalytics. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: AKBNK.IS, BBVA.MC, GARAN.IS, HSBKq.L, KKGByq.L, BKOMsp.PR, OTPB.BU, BAPE.WA, PKOB.WA, SBER.RTS, ISCTR.IS, CRDI.MI.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Akin Tuzun, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. • Ates Buldur, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

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Equity Research

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