All else aside, there is a bullish case for investing in Turkish banks

Published December 2nd, 2014 - 04:55 GMT
Turkey is a major beneficiary of the collapse in Brent crude since the cost of imported energy narrows the current account deficit
Turkey is a major beneficiary of the collapse in Brent crude since the cost of imported energy narrows the current account deficit

The Turkish banking sector is inexpensive at just above one times price/book value due to the macro risks and consumer credit losses that have seen bank RoEs fall to 13-15 per cent. 

Turkey is a major beneficiary of the collapse in Brent crude since the cost of imported energy narrows the current account deficit, lowers the nine per cent inflation rate and sets the stage for a monetary ease by the central bank in Ankara. There is at least another 100 basis points easing potential in a policy rate that is now 8.25 per cent. The AKP faces an election year in 2015 and President Erdogan will exert pressure on the central bank to ease monetary policy and stimulate bank credit growth. This will put the Turkish lira under pressure as the Yellen Fed hardens short term US dollar rates. However, the macro milieu can stimulate a major rally in Turkish banks that constitute almost 50 per cent of the Istanbul stock index. There is serious money to be made in bank shares on the Bosphorus.

The Turkish banking sector is inexpensive at just above one times price/book value due to the macro risks and consumer credit losses that have seen bank RoEs fall to 13-15 per cent. Moreover, inflation in Turkey is still far too high above nine per cent, not exactly a bullish augury for Turkish bank long-term capital growth and profitability. The ghosts of the Gazi Park protests, tensions with the military high command, violence in Syria and the post Kobank Kurdish riots in Southeast Anatolia have once again raised political risk in Turkish assets.

However, Brent prices could now fall to their lowest levels since 2010, a windfall for the Turkish current account deficit, CPI and consumer spending that will culminate in monetary easing by next April. If Brent falls to $50, as it well might by late spring, Turkish CPI could fall at least 200 basis points. This will be a compelling argument for Basci Pasha to cut interest rates on the eve of the June election. In fact, I anticipate a succession of base rate cuts. This will be pure ballast for Turkish bank funding costs, earnings and net interest rate margins. The Sabanci’s White Bank will rock!

Turkey’s Achilles heel is, of course, the highest current account deficit in the emerging markets, 8.5 per cent in mid-2013, with dependence on offshore hot money capital flows to finance it at a time of slowing exports. However, the collapse in Brent has seen the current account deficit now fall to five to six per cent of GDP. If crude oil stays “lower for longer”, as I expect, lower Turkish inflation and narrower current account deficits in the future will be priced into the slope of the lira yield curve. This, in essence, raises the promise of a valuation rerating in Turkey.

I have been disturbed by the news about mass murders of students by drug cartels. This is a serious threat to the reform momentum enacted by PRI President Enrique Pena Nieto and even the long-term political stability of Mexico. The evil of the narco-trafficante cartels must be exterminated for both humanitarian and economic reasons, period. Frankly, I think the Mexican Borsa is overvalued as I see far better values in Asia and Africa. Moreover, despite the accelerating US economy, earnings growth was a mediocre three per cent this year. Mexico has been a major oil producer ever since the oil strikes in the Gulf of Compeche in the 1970s and GDP growth suffers from the fall in West Texas/Brent crude. For now, Brazil (despite the 7-1 loss to the Germans, Dilma’s re-election, Petrobras woes) could be a better bet given its depressed valuations.

Russia is the most inexpensive emerging market in the world, thanks to the Kremlin’s Ukraine/Crimea gamble, capital flight, collapse of the rouble, sanctions and high-capital control risks. However, when money markets price in Armageddon, I get very interested. Sberbank is Russia’s oldest, biggest retail bank, with more than one-third loans and deposits across Mother Rus that was founded in the reign of Tsar Alexander II while President Lincoln lived in the White House in 1861. Right, 1861. Sberbank survived Lenin, Stalin, Beria, Kruschev, Brezhnev, Yeltsin, Putin and German Gref. Sberbank, the de facto bank for 140 million Russians in nine time zones, is now valued at a miniscule $17 billion. Lord Rothschild’s “blood on the street” value argument holds true for Borodino and Sberbank.

Researched and compiled by Matein khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: matein@emirates.net.ae


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