turkish banking sector_april2012

Industry Analysis Banking Industry

April 30, 2012

New era in Turkish Banking: normalised “CAR and ROE”... Even though the current environment is increasing the risk of reinvestment in Turkish Banks we believe that the negatives are mostly priced in by a broad sway of market participants. The main risks for Turkish Banks in 2012 are 1) Weaker than anticipated GDP growth, 2) Higher than expected inflation, and hence further tightening of CBT policy, 3) Deterioration in asset quality and 4) Implication of Basel II, hence a decline in the sector’s capital adequacy. We see selected value in banks that have: 1) High CAR ratio, 2) High ROE, 3) Earn wider spread between loans and deposits, 4) Diversified funding base, and hence less constraint on funding cost. Margins to pick up slightly, although nothing spectacular expected...Banks are more upbeat on margin improvement, vs. a year ago and we expect modest recovery in sector margins (an average 20-30bps), which is in line with the guidance we get from the banks under our coverage. The positive effect of loan re-pricing done (on average 350-700bps) during 2H of 2011 will kick in. We factor in slower re-pricing on the lending book and a flattish deposit rate for rest of 2012. Muted Fee & Commission income growth...The banks enjoyed splendid fee income growth in 2011 mainly stemming from: 1) High volume growth, 2) Introduction of new fees by banks and increased fees on services 3) Cross-selling. However, in 2012 regulatory wise there will be two factors in the sector affecting fee and commission income negatively: 1) Decreased fees from mutual funds and 2) A decline in fees on cash loans due to the change in accounting (now on an accrual basis), both of which became effective as of 2012. Stake sale news to keep the sector buoyant...The Turkish Banking sector is undergoing a major stake sale activity boom, and there are several banks in the system waiting for suitable buyers since their foreign partners have decided to exit due to credit problems at home. We think that the sale of any of the banks would invigorate the sector, and hence draw further investment and possible consolidation in the long term. While this may create short term volatility, overall, sector consolidation will be positive for the long term. CAR to decline and ROE’s to normalise...With the implementation of Basel II as of July 2012 we expect the banking sector Capital Adequacy Ratio to decline by between 100-150bp from 16.5% in Dec-11, and Akbank and Garanti to stand out with their CAR ratios. We believe that going forward the sector ROE level will normalise between 15-16% and that banks that earn higher ROE’s compared to the sector will distinguish themselves from the rest.

Derya Guzel +90 (212) 334 33 33 x228

[email protected]

Turkish Banks

Seker Securities Research

Market Perform

EPS 2011A 2012F 2013FAkbank 0.60 0.66 0.78 Garanti 0.73 0.78 0.91 Halkbank 1.64 1.84 2.09 Isbank 0.59 0.55 0.63 Vakifbank 0.49 0.46 0.56 Yapi Kredi 0.43 0.46 0.53

2012E PBR (x) PER (x) ROE (%)Akbank 1.38 10.25 14.2 Garanti 1.40 8.61 17.3 Halkbank 1.48 6.83 23.9 Isbank 0.94 7.58 13.0 Vakifbank 0.81 7.14 11.8 Yapi Kredi 1.11 7.47 15.9

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TURKISHBANKING INDEX

MSCIEMERGINGMARKET BANKING INDEX

RUSSIAN BANKING INDEX

POLISHBANKINGINDEX

April 30, 2012

Banking Industry | Turkish Banking Sector P a g e | 1

Executive Summary

Improvement in margins will make up for the slowdown in credit growth

We expect the sector’s margins to recover in 2012 by an average 20-30bps, which is in line with guidance we get from the banks under our coverage. This year the banks will reap the fruits of loan book re-pricing (on an average 350-650bps) during 2011 (especially in 2Q11 and 4Q11). We factor in slower re-pricing on the lending book and a flattish deposit rate for the rest of 2012. Upside risk to our expectation here would be the CBT’s reduction in RRR, which would help the bank’s funding cost, and hence further improvement in NIM. On the other hand the CBT’s volatile funding policy is a downside risk to our assumptions where it will create deposit competition between banks, and hence a pickup in deposit interest rates, which would in turn reduce spreads.

As widely expected loan growth will lose steam from the heights of 2011. The consensus now expects 15% loan growth for the sector, vs. 20-30% in 3Q11 for 2012. The CBT last week reduced their loan growth rate to 14% from 15% previously. We are more bullish compared to the consensus and foresee 17% loan growth for the sector (driven by SMEs and consumer segment), vs. the banks management expectation which ranges between 15-20%. Asset growth should moderate this year and be driven by loan growth. LAR (loans to assets) in the system increased to 56.0%, vs. 52.2% in 2010 whereas the share of securities declined 501bps to 23.5% as banks sold some part of their sovereign bond portfolios to fund the lending. On the securities side the banks increased their exposure to CPI linked bonds and moved from fixed rate to FRN notes.

Manageable deterioration in asset quality and rise in COR to continue

Slower inflow of bad loans and higher collections exceeding new NPL generation allowed the sector to reduce the NPL ratio to 2.7%, vs. 3.7% in 2010. However since 4Q of 2011 the trend has been in reversal and NPLs are now in an increasing trend. While we don’t view this as a threat, we believe it is something to keep an eye on, and expect NPL to have peaked by end-2013. With growth falling behind last year’s boom and a possible pick up in the unemployment rate we expect further deterioration in asset quality, and CoR to rise by at least 50bps on average. Even though some banks will be able to sell and restructure bad loans (mainly private ones) we anticipate the banking sector’s NPL ratio rising to 3.2% by year-end from 2.8% currently (based on weekly data published as of 30 March 2012).

We believe that re-priced loan yields will support NIM in the coming quarters as loan growth picks up.

We expect 17% loan growth, vs. 15% consensus expectation

Risk of NPL ratio picking up and slow down in collections

April 30, 2012


Slower F&CI generation

For the last two years the banks introduced new fees for the services they have not been charging previously (i.e. money transfer, money exchange over the counter, credit card payment from branches and internet banking text message service), and hence the sector’s net fee and commission income increased drastically. The sector increased its FCI by 19% in 2011. However, it might be a different story for 2012 as regulation-wise there will be two factors affecting fee and commission income growth negatively, both of which became effective in the sector as of 2012. 1) Decreased fees from mutual funds, 2) A decline too in fees on cash loans due to change in accounting (now on accrual basis).

New era in Turkish Banking: normalised “CAR and ROE”

With the implementation of Basel II as of July 2012 we expect the banking sector Capital Adequacy Ratio to decline by between 100-150bp from 16.5% in Dec-11. The banks that have more SME and retail exposure should feel the Basel II affect to a lesser extent than the rest as the risk weighting of the segment was reduced to 75% from 100% previously.

Banking sector profitability was under pressure last year with sector earning an average ROE of 15.48%, vs. 20.12% a year earlier (and 23% in 2009). Our coverage universe ROE averaged at 18.2% in 2011, with Halkbank 25.1%, Garanti 23.4% the top two ROEs. We believe that operating in a low rate environment; the sector’s sustainable ROE level will be at around 15-16% going forward. Those banks that earn higher ROE’s compared to the sector would distinguish themselves from the rest.

BBG Sekerconsensus estimate Seker vs BBG Seker Seker vs

Banks net income net income consensus TP TP consensus BBG consensus rating Seker rating2012E TRYm 2012E TRYm TRY TRY

Akbank 2,595 2,639 1.7% 6.63 6.5 -2.0% 1 BUY, 14 HOLD, 16 SELL UnderperformGaranti 3,099 3,260 5.2% 7.62 7.59 -0.4% 19 BUY, 14 HOLD, 2 SELL OutperformHalkbank 2,168 2,298 6.0% 14.6 14.7 0.7% 28 BUY, 18 HOLD, 7 SELL OutperformIsbank 2,506 2,459 -1.9% 4.65 4.22 -9.2% 13 BUY, 12 HOLD, 7 SELL Market PerformVakifbank 1,238 1,142 -7.8% 3.48 3.55 2.0% 8 BUY, 18 HOLD, 7 SELL Market PerformYapi Kredi 1,958 1,989 1.6% 3.77 3.97 5.3% 14 BUY, 15 HOLD, 5 SELL Outperform

We expect 100-150bp decrease in sector CAR due to Basel II implementation

Sector ROE to normalise going forward

April 30, 2012


Figure 1 : Turkish Banking index performance vs. MSCI EMEA Banks (rebased to 100)

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TURKISHBANKING INDEX

MSCIEMERGINGMARKET BANKING INDEX

RUSSIAN BANKING INDEX

POLISHBANKINGINDEX

TR Banks 2012F PBR 1.09x vs. EMEA Peers 1.55x TR Banks 2012F PER 7.6x vs. EMEA Peers 9.6x

April 30, 2012


Macro Assumptions

Monetary Policy to maintain flexibility on inflation concerns

In 2011, the Turkish economy displayed a very strong growth performance of 8.5%, following 9.2% upwardly revised growth in 2010. Our economist’s view on the sustainability of elevated GDP levels is that it is questionable this year. In fact, QoQ contraction in economic activity in the first quarter is a high probability, given the weakness of indicators such as credits, industrial production, capacity utilization and PMI. The slowdown in consumer credits was even more pronounced than we had been anticipating in our economist’s annual economic view.

After reaching 11.93% on January 6th, cost of funding from the CBRT declined significantly, even outpacing our economist’s pessimistic projection thanks to the effect of short term inflows on the lira. Following the initial phase of additional tightening, the CBRT admitted that reaching its inflation target would be difficult and gave mid-2013 as the time to reach the 5% medium-term inflation target, as reaching the target by year-end would require excess tightening, which could cause undesired fluctuations in economic activity. While the central bank eased funding costs from 12% early this year to around 7.5%, it narrowed the interest rate corridor by cutting its upper limit (O/N lending rate) by 100 bps to 11.50% (from 12.00% to 11.00% for primary dealers) in February, “also considering the recent expansionary monetary policy decisions throughout the globe.” (Figure 2) Appreciation of the lira against the basket by 8.2% between end-2011 and February 20th certainly played a role in decreasing the upper boundary of the corridor.

Figure 2: Interest rate (simple, %)

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14.0O/N repo in ISEO/N Borrowing O/N Lending to PDsOne-week repo rate

April 30, 2012


Our preliminary forecasts for Q1 point to some 0.5% contraction in economic activity over Q4 last year. The CBRT hinted that economic activity may have remained flat or contracted in Q1 over Q4. While bad weather conditions played a role in the weak economic activity, we believe that the weakness came mainly on the back of slow loan growth, and is likely to continue in the second quarter. The loan rates will likely remain high in Q2 compared to the average of the past year as the CBRT used a second round of additional tightening in late March and is using a third one in April against lira weakness. CBRT officials reportedly stated their expectation that additional tightening would not push loan rates upwards, and we broadly concur with this expectation as banks are now sure that additional tightening would be temporary after the two experiences.

However, the cost of CBRT funding is likely to stay above 7.5% (the level prior to the second additional tightening) and will prevent a material decline in loan rates and a strong acceleration in credit growth, in our view. Therefore, in contrast to the CBRT and the general market consensus, we expect flat economic activity, or a slight contraction also in the second quarter before the economy recovers in the second half, despite positive signals from real sector confidence. Credits will revive in Q2 and beyond, and yet the revival would not be strong enough to warrant the government’s 4% growth projection, a figure now shared by a significant number of market players. Although future expectations have been improving, credit growth, which is projected as 14% at year-end (down from 15% previously) by the CBRT in the second inflation report of the year, will likely take its toll on economic activity, in our opinion.

The cost of CBRT funding is likely to stay above 7.5%

Loan rates will likely remain high in 2Q12

April 30, 2012


Figure 3: Macro framework

Seker Sec.

2008 2009 2010 2011 2012f

Growth (GDP; %) 0.7 -4.8 9.2 8.5 1.6GDP (TRY bn.) 951 953 1099 1295 1446GDP ($; bn.) 730 614 731 772 803GDP per capita ($) 10,271 8,528 10,020 10,444 10,729

CPI Inflation (%)Avg. 10.4 6.3 8.6 6.5 9.9EoP 10.1 6.5 6.4 10.4 7.3

Central Government Budget Balance (TRY bn) 1/ -17.4 -52.8 -39.6 -17.4 -29.5as % of GDP -1.8 -5.5 -3.6 -1.3 -2.0

o/w: Primary Balance (as % of GDP) 3.5 0.0 0.8 1.9 1.4

Central Government Debt (as % of GDP) 40.0 46.3 43.1 40.0 37.4Domestic 28.9 34.6 32.1 28.5 ...External 11.1 11.7 11.0 11.6 ...

Public Debt (as % of GDP) 42.9 48.9 45.2 42.2 39.5

Current Account Balance ($ bn) -42.0 -13.4 -46.6 -77.2 -70.0as % of GDP -5.7 -2.2 -6.4 -10.0 -8.7

Trade Balance (TURKSTAT definition; $ bn) -69.9 -38.8 -71.7 -105.9 -99.1Oil price (Brent; $) 98.4 61.5 79.5 111.2 120.0

Exchange Rate (TL/$)Avg. 1.302 1.550 1.502 1.677 1.800EoP (December) 1.540 1.503 1.518 1.866 1.787 % 31.1 -2.4 1.0 22.9 -4.2

Real Effective Exchange Rate (2003=100)EoP 115 117 126 109 120 % (up means appreciation) -12.7 1.6 7.6 -12.9 9.9

Interest Rate on Benchmark Bond (comp.; %)EoP (December) 17.9 9.2 7.4 10.4 8.7

Real Interest Rate (compounded eop; %) 2/ 7.1 2.5 1.0 0.0 1.2Central Bank Policy Rate (EoP; simple; %) 3/ 15.00 6.50 6.50 5.75 5.75

Source: CBRT, MoF, Treasury, TURKSTAT, Turkey Data Monitor, Seker Securities. f= forecast.

2/ Ex-post annual: (1+nominal interest)/(1+eop inflation).3/ One week repo rate for 2010-2012. O/N borrowing rate for the previous years.

1/ MoF definitions.

April 30, 2012


Sector Outlook

LOAN GROWTH

Slow start to the year, although volumes to pick up in 2H’12

Latest weekly data (as of 6th April, 2012) published by the Turkish banking regaulator (BRSA) shows that there is a visible slowdown in loan growth in 1Q12. YTD the loan growth came in at 2.3% (24.3% YoY). We factor in 17% loan growth for the sector in 2012 and 20% in 2013.

This year we expect most of the growth to realize in 2H of the year as opposed to last year’s trend (last year’s loan growth was frontloaded) and for growth to be driven by smaller corporate loans (Macro and micro SMEs) and higher yielding consumer loans (such as GPL, mortgage loans and credit cards as banks will try to improve NIM). When looking into the details of the latest loan data we see that so far lending growth is driven by corporate and commercial loans, which outpaced that of consumer loans, 3.4% YtD, vs. 2.0% respectively.

Figure 4: Sector loan growth (%) vs. GDP growth (%)

Source: Loan growth 2003-2011 BRSA data, 2012F and 2013F Seker Securities estimates. GDP growth 2003-2011 TurkStat, 2012F and 2013F Bloomberg consensus data.

As seen in the 30th March 2012 BRSA weekly data, loans on a 13W annualised basis grew by 10.5%, vs. 6.3% a week earlier. The sharp increase was due to quarter-end window dressing efforts as the banks tried to reach their quarterly targets before books closed.

Loan growth to gain pace during in 2H Loan growth to gain pace during 2H

We expect 17% loan growth in 2012, vs. the consensus GDP growth estimate of 2.6%.

April 30, 2012


Figure 5 : 13W Annualised loan growth (%)

Source: BRSA We foresee that last year’s loan growth laggards, such as Halkbank and Vakifbank, should be on the catch up move and grow their lending book by more than the sector this year. We forecast 18.9% loan growth for Halkbank and 118.7% for Vakifbank in 2012.

Source: Company data, Seker Securities estimates

Evolution in loan yield so far...

Starting from the second half of last year we saw banks re-pricing their loan books agressively, ranging from 350-700bps depending on loan segments. However, higher yielding loan classes i.e GPLs (General Purpose Loans) experience the highest re-pricing. Garanti was the first bank among its peers to initiate the replacing of lower yielding loans with higher yielding products, which was later followed by rest of the sector.

However, since the start of the year we have witnessed some downward pricing in loan yields, especially from mid-cap banks.

Figure 6 : Coverage loan growth (%)

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Aggressive re-pricing of loans in 2011 (2Q and 4Q) will result in stable NIM in 2012

13W annualized loan growth in 1Q12 came in at 10.5%.

2010 2011A 2012E2012 Company

guidanceAkbank 33.2 32.9 17.1 18.0Garanti 30.4 29.3 17.4 14.0Halkbank 36.5 26.9 18.9 16-20Isbank 32.9 42.6 17.0 15-17Vakifbank 29.8 27.7 18.7 15.0Yapi Kredi 39.0 28.8 17.9 17-19Coverage average 33.6 31.4 17.8 16.5Sector 33.9 32.5 17.0

April 30, 2012


Source: Central Bank of Turkey

When analysing on a bank by bank basis, state banks were the front runners earning the highest blended yields on their loan book. As of Dec-11 Halkbank earned 9.97% and Vakifbank 9.31% on their lending book on a blended basis, vs. the sector average of 9.28%. Following this state bank, Yapi Kredi earned an 8.93% loan yield mainly driven by the credit card segment. We foresee Halkbank (mainly driven by SME segment) and Yapi Kredi (driven by credit cards) earning the greatest loan yield when compared to peers in 2012.

Source: Company data, Seker Securities estimates, BRSA

As observed from the latest loan rate increases, the Turkish consumer is not sensitive to loan rate increases of up to 100bp. And segment-wise commercial loans are more sensitive to a rate increase followed by GPL and mortgage loans. According to weekly data published by the Central Bank of Turkey the average yield on loans declined by 116bp (average of GPL, auto, mortgage and commercial loans) from their highs in Jan 2012. Auto loans, on a 2.5pp decline, saw the biggest downward re-pricing followed by mortgages and GPLs. However, when looking at the 6th of April data we observe that there is a slight retreat and the average loan yield picked by 20bps compared to March end data.

Figure 7: Change in loan yields (%)

Figure 8: Blended loan yields (%) as of Dec-11

GPL Auto Mortgage CommercialJune 2011 13.93% 11.51% 11.07% 10.62%

December 2011 19.78% 11.85% 14.35% 14.89%Change Jun-Dec 2011 (pp) 5.85 0.34 3.29 4.26

January 2012 19.84% 15.27% 14.58% 14.05%March 2012 18.73% 12.75% 13.21% 14.38%

6th April 2012 18.90% 13.21% 13.17% 14.73%Change Jan-Mar 2012 (pp) -1.12 -2.51 -1.37 0.34

9.979.31 9.28 8.93 8.80 8.50

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State banks earned the highest yield on their loan book in 2012

April 30, 2012


Figure 9: Loan yield evaluation-


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April 30, 2012


FUNDING MARKET

Change in Funding Mix

Although Turkish Banks start using the alternative funding sources (TL bonds, Eurobonds, syndication loans, repo financing) we believe deposit collection will remain as a key funding source for Turkish Banks in the medium term. As of Dec-11 deposits make up 57% of total assets in the system, vs. 61% in 2010. We forecast CAGR of 14.5% deposit growth for the sector 2012-2014. And when considered as a saving instrument there are limited alternatives to deposits in Turkey (currently only government bonds) and there is a limited crossover between deposit and bond holding customers. Hence, we deeply believe that deposit collection is there to remain as an important funding source for banks over the coming years.

With the CBT beginning to apply a higher RRR for shorter maturities in 2011 there was a visible change in the maturity of deposits kept with the bank. As readers may remember, last year the CBRT increased reserve requirement rates in deposits of up to 1-month maturity and deposits of up to 3-month maturity by 1,000bp and 700bp, respectively. Deposits maturing within 1 month in 2010 made up 26% of the total as opposed to 15% in 2011, while on the other hand the percentage of deposits maturing within 3-6 months rose to 8% from 4% a year ago.

Even though there has yet to be a solid development over withholding tax on deposit interest in Turkey, we may soon see the application of a gradual tax system depending on deposit maturity. Currently, there is a flat 15% withholding tax applied to all maturities. With new inducement, it is expected that the tax rate on longer term deposits will be lowered and possibly reduced to zero for deposits of longer than three-year maturities. This in our view would promote saving, and hence decrease the LDR ratio going forward.

Source: BRSA

Figure 10 : Deposits maturities in the system

Demand Deposits up to 1 month 1-3

months3-6

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months1 year and

longer2005 20% 23% 39% 10% 3% 4%2006 18% 28% 43% 6% 2% 3%2007 16% 29% 45% 5% 2% 3%2008 14% 31% 46% 3% 3% 3%2009 16% 28% 49% 3% 2% 3%2010 16% 26% 50% 4% 2% 3%2011 17% 15% 53% 8% 2% 5%

Change 2005-2011 (pp) -3% -9% 14% -3% -1% 1%

Deposits to remain an important funding source

Longer term deposits are increasing

Regulatory changes on the way to increase deposit maturity in the system

April 30, 2012


COVERAGE BANKS FUNDING MIX AS OF FY2011

AKBANK GARANTI

HALKBANK ISBANK

VAKIFBANK YAPI KREDI

LC deposits46.3%

FX deposits35.2%

LC borrowings

0.9%

FX borrowings

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TRY94.3bn

LC deposits44.7%

FX deposits34.4%

LC borrowings

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TRY106.9bn

LC deposits60.5%FX deposits

30.1%

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TRY73.1bnTRY73.1bn

LC deposits54.0%

FX deposits34.0%

LC borrowings

0.9%

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TRY111.7bn

LC deposits60.8%FX deposits

24.9%

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2.7%

FX borrowings11.6%

TRY71.1bn

LC deposits44.5%

FX deposits36.1%

LC borrowings

1.9%

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TRY78.8bn

April 30, 2012


Funding Cost, should we be worried?

On the deposit cost side, according to data published by the Central Bank of Turkey, the weighted average cost of deposits in the system on shorter maturity deposits (maturing in 1 month) has been declining somewhat. Yet we observe an increasing trend in 6M deposits, which saw a 117bp increase between December 2011 and February 2012. Although not seen in the March-end data, we may state that the latest data could be indicative of a slight decline in NIM in 2Q12 as deposit cost is rising and loan yields remain stable.


Although there is an upside risk for deposit cost to increase further due to funding concerns in the sector (low visibility on funding costs due to the CBT’s volatile funding policy) we don’t expect the deposits to cost ratio to fall further, but rather to stabilise at these levels going forward.


Figure 11 : Bp change in sector deposit yield Dec’11 vs. Feb’12

Figure 12 : Banking sector MA deposit yield curve (%)

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1M deposit cost declined by 76bp, whereas 6M deposit cost rose by 117bp

We don’t expect a decline in deposit cost going forward

While loan yields have been decreasing since the start of the year deposit cost has been on the rise

April 30, 2012


Blended cost of deposits in the system stood at 5.61% as at Dec-11, and had increased by 50bp from September’11 driven by aggressive deposit competition drummed up by small and midsized banks. Garanti at 5% paid the lowest cost for deposits on a blended basis, thanks to its highest share in demand deposits and sensible pricing.

The share of demand deposits in the sector stood at 17.4% of the total as of Dec-11, vs. 15.9% in 2010. This is an area where we expect banks to see stiff competition due to the low maintenance cost of demand deposits (which will then reduce overall cost of deposits). Garanti did well last year and increased its demand deposit base via its cash management, cheque processing, merchant deposits, acquisition of old POS networks and wide variety of bill payments.

Figure 13: Blended cost of deposits (%) as at Dec-11

Figure 14: Demand deposit as % of total (inc. bank deposits) in 2012

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Akbank Vakifbank Yapi Kredi Sector Halkbank Isbank Garanti

April 30, 2012


The banking sector blended loan yield stood at 9.28% as at Dec-11, vs. blended deposit cost of 5.61%. The blended spread for 4Q11 is calculated at 3.67% down from 4.61% from a year ago. Within our banks coverage Halkbank (476bp) and Vakifbank (392) earn the best spread followed by Garanti (370bp), Yapi Kredi (370bp), and Isbank (360bp). Akbank on 240bp earned the lowest spread. By our assumptions, state banks lead the way earning the highest spread due to lower than sector deposit cost thanks to their competitive advantage when it comes to pay-roll accounts.

Source: BRSA The table below displays the in-branch deposit rates offered by Turkish Banks (taken from websites as at 15 April, 2012). As we can see, mid-sized banks are more aggressive when it comes to deposit collection and offer higher rates compared to large cap peers as big banks are more rational and profitability focused as they can tap other funding sources. When applied for online, some banks are now offering around a 10-12% interest rate for deposits, which is up by around 200bp on a year ago.

Figure 15: Banking sector blended loan-deposit spread (%)

Figure 16: Yearly deposit interest rate offered by Turkish Banks (%)

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Halkbank earns the widest loan-deposit spread on a blended basis

Sector’s blended loan yield stood at 9.28%, vs. blended cost of deposit at 5.61% as at Dec-11

Small and midsized banks are more aggressive in deposit pricing than their large cap peers

1 month 3 months 6 months 12 months 18 months 24 months 36 months

Akbank 6.0% 6.3% 6.5% 7.0% 7.0% 7.0% 7.0%Anadolubank 5.9% 6.9% 7.9% 7.9% 7.3% 7.3% 7.3%Citibank 7.0% 7.0% 7.0% 9.0% 9.0% 9.0% 9.0%Denizbank 7.0% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2%Eurobank Tekfen 7.0% 8.0% 8.5% 9.0% 9.0% 9.0% 9.0%Fibabanka 6.8% 8.5% 8.8% 9.3% 9.3% 9.3% 9.3%Finansbank 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8%Garanti 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5%Halkbank 5.8% 6.0% 6.0% 6.3% 6.5% 6.5% 6.5%HSBC 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 7.0%ING Bank 6.0% 6.8% 7.0% 7.0% 7.0% 7.0% 7.0%T-Bank 6.0% 8.0% 7.0% 7.0% 7.0% 7.0% 7.0%Isbank 6.0% 6.3% 6.8% 7.3% 7.3% 7.3% 7.3%TEB 6.5% 6.8% 6.8% 7.1% 7.1% 7.1% 7.1%Tekstilbank 8.5% 8.5% 8.7% 8.5% 8.5% 8.5% 8.5%Turkishbank 7.0% 7.0% 7.0% 8.0% 8.0% 8.0% 8.0%Vakıfbank 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%Yapı Kredi 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%Ziraat 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

April 30, 2012


Total syndication loans in the sector currently stand at TL16bn as of Feb-12. The rollover of syndication loans in the sector reached approx. 120% in 2011, although as widely expected, the rollover ratio could decline slightly, and also there may be some deterioration in syndication loan cost, although we don’t expect this to reach above 40-50bp. This was seen in Akbank and Vakifbank, which recently obtained a syndication loan at a cost of Libor/Euribor+145bp up from Libor/Euribor+110bp a year ago.

Source: Company announcements

Figure 17: Turkish Banks syndication maturity in 2012

Sector’s syndication loans currently stand at around USD15.2bn and 2.2% of total assets.

March16%

April12%

May19%August

12%

September25%

October4%

November11%

December1%

April 30, 2012


ASSET QUALITY

NPL trend in 2011 and thus far in 1Q12

Sector NPL decreased by 100bp as at Dec-11, and came in at 2.7%, vs. 3.7% in 2010. On a YoY basis Isbank (149bp), Vakifbank (118bp) and Garanti (111bp) improved their NPL ratios above the sector, while Halkbank’s (93bp) NPL improvement was in line with the sector, and Akbank (60bp) and Yapi Kredi (44bp) stayed below it.

Source: Company data, BRSA Among our banks coverage Halkbank, Yapi Kredi and Vakifbank reported above sector NPL ratios, mainly due to their exposure to high NPL ratio generating sectors (mainly SME and credit cards), on the other hand, Akbank, Garanti and Isbank stood out for their below sector NPL. Please bear in mind that state banks have a policy of no write-offs or sell-offs, and hence a higher NPL ratio compared to the sector. Yapi Kredi on the other hand sold TL290m worth of its NPL book for TL64m in Nov-11.

Figure 18: Change in NPL ratio between Dec-10 and Dec-11 (pp)

Figure 19: Turkish Banks NPL ratios as at Dec-11 vs. sector (%)

0.4

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Weekly data signals some pick up in NPL in the sector

Vakifbank, Yapi Kredi and Halkbank’s NPL stayed above the sector in 2011

Isbank reduced its NPL ratio the most in 2011 thanks to above sector volume growth

State banks have no NPL sale or write off policy, and hence larger NPL stock

April 30, 2012


We follow NPL trends via weekly data published by BRSA (published with a two week lag). According to the 30th March 2012 data, the NPL ratio gained 10bp to now stand at 2.8%, vs. 2.7% in 4Q11. Looking into the details of the NPL figures we observe that this is mainly coming from the consumer segment (GPLs and credit cards). Total consumer loan NPL added 8.5% YTD and has risen 3.6% YoY.

..... Will it be year of “NPL trouble”?

Although we don’t actually believe it will turn out be a year of “NPL trouble” for the sector, we are much of the view that NPLs will be on the rise for the rest of the year, and will start peaking towards 2H of 2013.

The banks have been enjoying collections for the past couple of years. We expect these collections to continue albeit at a slower pace when compared to 2011. Halkbank and Vakifbank have a large NPL stock compared to the sector (mainly legacy NPL carried over from the 2001 crisis), and hence a higher rate of collections when compared with their peers. We forecast the sector’s NPL reaching 3.2% by end of this year and peaking in 2013 to 4% in line with the rise in unemployment (as it is a main indicator of the NPL ratio) and slower GDP growth.

Unemployment, according to the Bloomberg consensus, is expected to increase to 10.7% in 2012 and to 10.5% in 2013 from 9.5% currently. Consensus figures are close to those published in the Government’s Medium Term Plan (10.4% and 10.2%, respectively).

Source: Actual NPL data is from the BRSA and estimates are those of Seker Securities. Actual unemployment figures are from TurkStat and estimated figures for 2012-2013 are from Bloomberg consensus data, and for 2014E from the Government’s Medium Term Plan.

Figure 20: NPL ratio vs. Unemployment (%)

We forecast the NPL ratio reaching 3.2% in 2012, vs. unemployment at 10.7%.

NPL ratio to peak in 2013

Weekly data signals some pick up in NPLs in the sector. NPL ratio stands at 2.8% in 1Q12, vs. 2.7 in 4Q12.

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April 30, 2012


FEE and COMMISSION INCOME (FCI)

The banks enjoyed splendid fee income growth in 2011 mainly stemming from:

1) High volume growth, 2) Introduction of new fees by banks that have not been charging for services previously and increased fees for services in place. 3) Cross-selling.

On the other hand, those segments to have driven growth were mainly: credit cards, bancassurance, trade finance activities and money transfers.

In 2011 Halkbank’s fee growth (38.5% YoY) outpaced that of the sector and peers as the bank started charging fees for services it hadn’t done so for before, introducing higher fees to catch up with the rest of the sector. However, we believe that this year due to the base effect and regulatory changes we mention below, fee growth at Halkbank and also that of the sector should be slower. And even though Halkbank management guides for flat fee income growth for 2012 we believe the bank should be able to deliver 7% growth in fees driven by non-cash loans and addition of new fees as the bank announced its intention to charge fees for its internet banking service going forward.

Source: Company data, BRSA

Although a large part of the population wouldn’t share our view, we maintain that Turkish Banks charge relatively low fees when compared to their European peers (for example when considering money transfer fees). We believe the Turkish Banks still have room to increase their fee income as they can exploit other areas they have not been charging fees for i.e. internet banking.

Figure 21: Fee income growth as of Dec-2011 (%)

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Halkbank Vakifbank Akbank Isbank Yapi Kredi Garanti

April 30, 2012


Regulation-wise there will be two factors affecting fee and commission income growth negatively, both of which became effective as of 2012 in the sector.

1) Decreased fees from mutual funds,

2) Also the decline in fees on cash loans due to the change in accounting methodology (now on an accrual basis).


Figure 22: Seker 2012 Fee growth estimate vs. management guidance

Two main regulatory changes to affect fee growth in 2012

2011A 2012E2012

Management guidance

Akbank 20.6 11.0 10.0Garanti 10.6 12.1 Double digitsHalkbank 38.5 7.2 FlatIsbank 15.5 7.3 10.0Vakifbank 26.2 3.5 FlatYapi Kredi 14.4 7.6 StableCoverage average 21.0 8.1

April 30, 2012


OPEX

In light of the recent global credit crisis, the banking sector has paid more attention to cost, and hence opened fewer branches and decreased the amount of personnel hired over the past couple of years. During 2011 the sector added 368 branches (vs. 436 in 2010) taking total branch number to 9,833. On the recruitment side the sector hired 1,380 new personnel (vs. 4,011 in 2010) whereby total headcount reached 181,418 people.

State banks (Halkbank, Vakifbank and Ziraat Bank) opened almost half of the branches in the sector (having added 165 branches in 2011). As per management guidance we receive from the banks, state banks are expected to be more aggressive with their hiring plans in 2012 compared to their private sector peers, and hence we forecast higher cost growth for that group; Halkbank 16% and Vakifbank 17%, respectively.

Source: Turkish Bankers Association

Source: Management guidance

Figure 23: Banking sector recruitment and branch opening trends: net additions YoY

Figure 24: Coverage banks branch opening and recruitment trends

3,111

5,095

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targetAkbank 9 14 500 70Garanti 98 55 <400 31Halkbank 193 62 1,000 60Isbank 943 59 Limited 40-45Vakifbank 1,145 44 1,000 70Yapi Kredi 448 39 1% increase 50-60Sector 2,914 368

State banks top the sector for branch openings and hiring targets in 2012

April 30, 2012


Opex on average among our banks coverage grew by around 9% in 2011 with the exception of Halkbank and Vakifbank, which grew their cost by 15.5% and 14.9%, respectively. We expect a similar trend to continue, and for state banks to see cost rise above that of the sector in 2012. Even though we expect banks to continue opening branches and adding to headcount, we expect these activities to be modest with the exception of Halkbank and Vaikfbank where the management is guiding to open 60-70 branches and hire around 1,000 personnel in 2012.

With inflationary pressure on the rise we believe it will be challenging for banks to contain opex growth during 2012. The BRSA weekly data for 30th March 2012 confirms our view that personnel expenses grew in line with CPI, although other opex rose by +20% YoY. The sector’s YTD opex expansion is 14%.

Source: Company data, Seker Securities estimates To be able to evaluate the banks in terms of their cost efficiency we created the efficiency matrix below. In terms of their expense ratios we can divide our coverage banks into two groups. Yapi Kredi, Akbank and Garanti distinguish themselves as the most efficient banks when compared in terms of fee coverage ratio.

• First group comprises Akbank, Garanti and Yapi Kredi.

• Second group comprises Halkbank, Vakifbank and Isbank.


Figure 25: 2012E Opex growth estimate vs. management guidance

Figure 26: Turkish Banks efficiency matrix as at Dec-11

Expense ratios % Akbank Garanti Halkbank Isbank Vakifbank Yapi KrediCost to Income 44.6 45.6 39.1 55.3 55.6 55.1Cost tp NII+Fees 43.7 47.9 41.1 58.1 56.2 52.4Fees coverage of cost 64.8 62.6 42.2 41.0 28.8 67.9Cost to Total assets 1.9 2.3 2.0 2.3 2.3 2.8

We expect Halkbank and Vakifbank to grow cost above the sector in 2012

Sector opex has grown 14% YTD driven by non-HR cost

Yapi Kredi, Akbank and Garanti are the most efficient banks when considering their fee coverage cost ratio

2010 2011 2012E2012

Management guidance

Akbank 10.7 0.7 9.6 CPIGaranti 18.3 5.4 8.9 CPI+2-3%Halkbank 25.3 15.4 15.9 12-15%Isbank 18.9 8.7 10.3 CPI+Vakifbank 10.2 14.9 17.3 15.0%Yapi Kredi 7.6 8.1 8.4 CPICoverage average 15.2 8.9 11.8

April 30, 2012


IMPLEMENTATION of BASEL II and AFTER EFFECTS

The Turkish banking sector has learnt important lessons from the crisis of 2001 since when regulations have been both stricter and proactive. In 2011 banking industry CAR declined 2.5 points, vs. 2010. However, in the last quarter of 2011 the downward trend in CAR halted due to slowdown in loan growth which began in 2H 2012.

Source: BRSA Basel II will be in operation as of July 2012, and with its implementation we expect the banking sector Capital Adequacy Ratio to decline by between 100-150bp from 16.5% in Dec-11. The banks that have more SME and mortgage exposure should feel the Basel II effect to a lesser extent than the rest, as the risk weighting of these segments was reduced. (SME’s were reduced to 75% from 100% and mortgages were reduced to 35% from 50% previously).

The banks under our coverage are guiding on an average 100bp-120bp decline to their CAR ratio under Basel II.

When we adjust their CAR under Basel II we have 2 groups of banks:

• First group will feature Akbank and Garanti, where their robust capital structure will not be affected under Basel II as much as the peer group. (We forecast around 16% CAR for 2012). Strong capital will contribute to solid expansion capability.

• Second Group will feature Halkbank, Vakifbank, Yapi Kredi and Isbank with capital ratios ranging from 13.7% to 12.0%. Vakifbank appears worse off among the group with its 12.0% reading when adjusted for Basel II. Vakifbank management has discussed the possibility of a non-core asset sale to beef up their CAR ratio during the 4Q11 conference call. The bank mentioned that assets worth TL350m book value, such as insurance subsidiary Gunes Sigorta, could be up for sale.

Figure 27: Banking sector CAR (%)

We expect 100-150bp decrease in sector’s CAR due to Basel II implementation

16.76%

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April 30, 2012


Yapi Kredi management during their year-end conference call also shared possible scenarios under which to strengthen their capital ratios under Basel II. 1) Obtaining sub-ordinate loans (the bank taken on USD585m subordinated loan from parent UniCredit), 2) Optimisation of RWA (work in progress), 3) Asset sale (regular rumours in local daily press regarding the sale of Yapi Kredi Sigorta sale) 4) Rights issue (seems likely to be a last option).

Although we see a very low possibility, there is a likelihood of the BRSA reducing the minimum CAR requirement for the sector from 12% to the official 8% level (perhaps only for a limited spell until banks adjust to Basel II). Under current practice the banks, in order to sustain branches, require 12% CAR, vs. the official CAR limit of 8%.


Figure 28: Coverage CAR ratios following Basel II

May BRSA reduce min CAR ratio?

2010 2011 2012E Basel II affect

Akbank 20.6 17.0 16.5 -0.49Garanti 19.6 16.9 16.4 -0.48Halkbank 15.9 14.3 13.7 -0.62Isbank 17.5 14.1 13.1 -0.96Vakifbank 14.4 13.4 12.0 -1.36Yapi Kredi 16.1 14.7 13.3 -1.38Sector 19.0 16.6 15.1 -1.50

April 30, 2012


Sector themes 2011 vs. 2012E

What happened in 2011

Net Income: Bottom-line declined by 10% YoY. Cost of Equity: Lira depreciating and worries over higher inflation pushed yields above 11% levels. Loan growth: 32.5% growth in total loans even though the CBRT and BRSA had closely monitored banking sector credit expansion. Loans to assets and securities to assets: Share of securities fell, whereas size of loan book within total assets increased. OPEX: Banks did well on the opex front with many growing cost by less than CPI. Size of staff recruitment and branches opened was limited compared to 2010. CAR: In preparation for Basel II implementation the sector sustained its well capitalized stance. Sector CAR stood at 16.5% as of Dec-11. ROE: Banking sector closed the year on 15.4% ROE, vs. 20.1% in 2010. NIM: Even though starting with the banks’ guided bearish view on NIM sector’s margin trend wasn’t as bad as feared, year-end average NIM was around 4%. Asset quality and CoR: With a growing economy it was a year of collections. NPLs started to show signs of worsening in the last quarters of the year, and the sector’s 2011 NPL stood at 2.7%.

What we expect from 2012

We expect 3.5% net income growth. We expect benchmark bond yields to stay at around 8.5-9.5% levels during 2012. Market expects 15% loan growth for the sector this year and leading banks are guiding 15-20%, our expectation is for 17% loan growth. We anticipate similar trends in balance sheet mix to continue this year too, and securities to be replaced by higher yielding loans. Banks will continue utilizing resources carefully this year too. Lower staff hiring and limited branch expansion. However, this year we expect cost growth to realise above CPI. With implementation of Basel II in July 2012, sector CAR is expected to decrease by between 100-150bp. We expect sector ROE to stay between 15-16% this year. All depends on cost of funding; nevertheless our expectation is for limited margin expansion this year. We expect the banking sector to improve NIM by 20-30bps. We expect slower growth to lead some deterioration in asset quality and slowdown in collection ability. We estimate NPL ratio rising to 3.2% for the sector and increased CoR.

April 30, 2012


Turkish Banks SWOT Analysis

Strengths • Turkish banks are relatively protected against

international shocks due to focus on the domestic market.

• Turkish banks are heavily regulated since financial crisis of 2000-2001.

• Turkish banks are well capitalized compared to their EMEA and EU peers.

Weaknesses

• Low Savings/GDP rate. • Relatively high LDR. • Volatility and low visibility in funding cost. • High CAD.

Opportunities

• An under-banked population. • Possible M&A activities and consolidation in

2012. • Turkish Banks expanding in and around CEE.

Threats

• Economic slowdown. • Increase in funding costs, especially on repo

funding side. • Increased bad loans. • Low saving rate.

April 30, 2012


Turkish Banks in EMEA context

Although Turkish Banks have relatively outperformed their EMEA peers since the beginning of the year based on the Bloomberg consensus, they currently trade at a deep discount on 2012 and 2013 estimates (On PBR 42% and 44%, respectively and PER 26% and 33%). The tables below display our comparison of Turkish Banks, vs. EMEA peers.

Source: Bloomberg

Source: Bloomberg

Figure 29: Turkish Banks vs. EMEA peers Net Income and Dividend Yield consensus (USDm)

Figure 30: Turkish Banks vs. EMEA peers PER and PBR consensus

2010 Y 2011 Y 2012 Y 2013 Y 2014 Y 2010 Y 2011 Y 2012 Y 2013 Y 2014 YAKBANK T.A.S. 3.30 2.22 2.57 3.30 2.68 1,865 1,451 1,448 1,656 1,884

TURKIYE GARANTI BANKASI 2.23 2.07 2.09 2.54 2.73 2,057 1,716 1,732 1,955 2,253 TURKIYE VAKIFLAR BANKASI T-D 2.44 0.80 0.74 1.02 1.48 694 707 689 777 861

TURKIYE HALK BANKASI 3.06 2.64 2.64 3.12 3.09 1,265 1,143 1,208 1,311 1,438 ASYA KATILIM BANKASI AS 2.00 0.30 0.00 0.00 - 164 126 134 159 201

YAPI VE KREDI BANKASI 0.54 0.00 0.00 0.54 0.32 1,359 1,101 1,090 1,278 1,514 TURKIYE SINAI KALKINMA BANK 2.74 2.50 3.31 4.03 2.66 133 138 151 166 186

TURKIYE IS BANKASI-C 4.03 2.79 2.75 3.32 4.03 1,829 1,338 1,395 1,571 1,781 TURKISH BANKS' AVERAGE 2.54 1.66 1.76 2.23 2.43 1,171 965 981 1,109 1,265

BANCO DO BRASIL S.A. 6.92 7.58 6.73 7.21 7.75 5,889 6,532 6,271 6,961 8,049 BANCO BRADESCO SA-PREF 3.37 3.49 3.63 4.09 4.84 5,753 6,532 6,479 7,354 8,301 ITAU UNIBANCO HOLDING SA 3.35 3.03 3.77 4.38 5.13 7,692 8,444 8,684 9,923 11,550

BANCO SANTANDER (BRASIL) SA - - - - - - - 2,775 - -KOMERCNI BANKA AS 6.39 6.14 7.20 7.78 8.00 717 568 688 740 804 PKO BANK POLSKI SA 4.18 4.58 4.68 5.32 6.49 1,157 1,237 1,229 1,349 1,506

BANK ZACHODNI WBK SA 2.17 3.78 4.01 5.29 6.11 319 372 408 470 503 BANK PEKAO SA 5.26 4.47 5.71 6.57 7.59 898 913 936 1,014 1,136

SBERBANK - - - - - 5,622 10,987 10,849 12,162 13,500 BANK MOSKVY OJSC 0.24 - - - - 424 - - - -

VTB BANK OJSC 0.00 0.00 0.00 0.00 0.00 1,752 3,346 3,261 4,398 5,408 PEERS' AVERAGE 3.54 4.13 4.47 5.08 5.74 3,022 4,326 4,158 4,930 5,640

DIV YLD NET INCOME

2010 Y 2011 Y 2012 Y 2013 Y 2014 Y 2010 Y 2011 Y 2012 Y 2013 Y 2014 YAKBANK T.A.S. 7.88 10.07 10.21 8.95 8.31 1.37 1.41 1.33 1.20 1.10

TURKIYE GARANTI BANKASI 7.70 9.19 9.05 8.08 7.14 1.57 1.56 1.41 1.26 1.10TURKIYE VAKIFLAR BANKASI T-D 6.40 6.13 6.42 5.64 5.28 0.84 0.81 0.76 0.66 0.62

TURKIYE HALK BANKASI 6.91 7.52 7.16 6.55 5.96 1.88 1.74 1.49 1.27 1.13ASYA KATILIM BANKASI AS 5.43 7.09 6.58 5.62 7.14 0.74 0.75 0.66 0.60 0.59

YAPI VE KREDI BANKASI 5.85 7.32 7.35 6.28 5.44 1.25 1.17 1.04 0.89 0.79TURKIYE SINAI KALKINMA BANK 7.29 7.08 6.78 5.79 5.66 1.28 1.24 1.13 1.00 0.94

TURKIYE IS BANKASI-C 5.48 7.52 7.40 6.56 5.83 0.98 0.99 0.91 0.81 0.75TURKISH BANKS' AVERAGE 6.62 7.74 7.62 6.68 6.34 1.24 1.21 1.09 0.96 0.88

BANCO DO BRASIL S.A. 6.18 5.54 5.82 5.19 4.49 1.26 1.09 1.06 0.93 0.81BANCO BRADESCO SA-PREF 10.42 9.61 9.57 8.43 7.41 2.10 1.91 1.77 1.56 1.37ITAU UNIBANCO HOLDING SA 9.84 9.22 8.76 7.63 6.62 2.17 1.90 1.76 1.54 1.32

BANCO SANTANDER (BRASIL) SA - - - - - - - - - -KOMERCNI BANKA AS 9.37 11.60 9.75 9.11 8.46 1.60 1.63 1.50 1.42 1.32PKO BANK POLSKI SA 11.01 9.98 10.02 9.16 8.12 1.65 1.65 1.57 1.43 1.31

BANK ZACHODNI WBK SA 16.48 14.14 13.22 11.57 11.12 2.32 2.45 2.05 1.90 1.66BANK PEKAO SA 12.74 12.46 12.27 11.35 10.24 1.65 1.70 1.63 1.57 1.61

SBERBANK - - - - - - - - - -BANK MOSKVY OJSC 13.79 9.23 7.34 - - 1.51 - - - -

VTB BANK OJSC - - - - - 1.08 1.08 1.08 0.72 0.72PEERS' AVERAGE 11.23 10.22 9.59 8.92 8.06 1.70 1.68 1.55 1.38 1.27

DISCOUNT/PREMIUM -70% -32% -26% -33% -27% -38% -39% -42% -44% -44%

P/E P/BV

April 30, 2012


Source: Bloomberg

Figure 30: Turkish Banks vs. EMEA peers ROE and ROA consensus

2010 Y 2011 Y 2012 Y 2013 Y 2014 Y 2010 Y 2011 Y 2012 Y 2013 Y 2014 YAKBANK T.A.S. 2.79 2.11 1.83 1.82 1.60 19.11 14.52 13.45 13.88 14.21

TURKIYE GARANTI BANKASI 2.93 2.17 1.91 1.94 1.80 22.32 17.73 16.75 16.64 16.51TURKIYE VAKIFLAR BANKASI T-D 1.58 1.50 1.26 1.27 1.10 14.29 13.63 12.20 12.55 12.47

TURKIYE HALK BANKASI 3.06 2.42 2.10 2.05 1.97 30.26 25.31 21.81 20.82 19.33ASYA KATILIM BANKASI AS 2.08 1.50 1.40 1.44 - 14.67 10.85 10.50 11.70 11.33

YAPI VE KREDI BANKASI 3.06 2.02 1.69 1.71 1.70 23.68 17.65 15.06 15.62 15.29TURKIYE SINAI KALKINMA BANK 3.04 2.86 2.83 2.74 - 19.03 18.27 17.94 18.04 17.34

TURKIYE IS BANKASI-C 2.40 1.65 1.44 1.44 1.30 20.96 13.00 12.84 13.23 13.69TURKISH BANKS' AVERAGE 2.62 2.03 1.81 1.80 1.58 20.54 16.37 15.07 15.31 15.02

BANCO DO BRASIL S.A. 1.34 1.28 1.17 1.14 1.16 22.81 20.61 19.59 19.71 19.64BANCO BRADESCO SA-PREF 1.72 1.59 1.51 1.49 1.53 21.35 21.59 20.37 20.06 20.05ITAU UNIBANCO HOLDING SA 1.92 1.73 1.81 1.81 1.84 23.25 22.20 21.64 21.64 21.74

BANCO SANTANDER (BRASIL) SA - - - - - - - 12.50 - -KOMERCNI BANKA AS 1.90 1.40 1.71 1.80 1.90 18.14 15.09 16.02 16.30 16.62PKO BANK POLSKI SA 1.92 2.12 1.99 2.05 2.03 15.13 17.20 16.31 16.30 16.43

BANK ZACHODNI WBK SA 1.73 - 2.00 2.30 2.40 14.74 17.88 16.97 18.26 18.10BANK PEKAO SA 1.95 2.07 1.94 2.05 2.10 13.37 13.94 13.39 13.98 14.61

SBERBANK 2.00 3.38 2.88 2.63 2.67 17.61 27.39 22.22 20.27 19.71BANK MOSKVY OJSC 1.35 - - - - 12.27 15.50 16.50 - -

VTB BANK OJSC - 1.85 1.68 1.80 1.93 10.17 15.57 15.10 15.62 16.27PEERS' AVERAGE 1.76 1.93 1.85 1.90 1.95 16.88 18.70 17.33 18.02 18.13

ROEROA

April 30, 2012


Valuation and Recommendation

Ticker AKBNK GARAN HALKB ISCTR VAKBN YKBNK XBANK

Current share price 6.70 6.64 12.40 4.08 3.19 3.37 115,64712M Target price 6.50 7.59 14.70 4.22 3.55 3.97 129,346

Upside (%) -3.0 14.3 18.5 3.5 11.3 17.9 11.8YTD share performance % (TL) 12.97 12.54 25.25 26.74 30.20 25.28 17.11

YTD share performance % (USD) 21.69 21.23 34.92 36.53 40.26 34.95 26.15Rating Underperform Outperform Outperform Market Perform Market Perform Outperform Market Perform

Key Data (TLm)Market cap 27,040 28,056 15,688 18,630 8,150 14,867 114,238

Market cap US$m 15,371 15,949 8,918 10,591 4,633 8,451 64,941Assets 133,552 146,642 91,124 161,669 89,184 108,103 739,730Loans 70,306 83,813 56,216 91,621 57,309 67,780 433,413

Deposits 76,814 84,543 66,247 98,313 60,939 63,517 450,374EPS (TL)

2008 0.43 0.42 0.81 0.34 0.30 0.24 0.382009 0.68 0.71 1.30 0.53 0.50 0.31 0.612010 0.71 0.75 1.61 0.66 0.46 0.47 0.712011 0.60 0.73 1.64 0.59 0.49 0.43 0.69

2012F 0.66 0.78 1.84 0.55 0.46 0.46 0.732013F 0.78 0.91 2.09 0.63 0.56 0.53 0.84

BVPS (TL)2008 2.80 2.25 3.43 2.10 2.27 1.58 2.202009 3.55 3.17 4.61 3.00 2.95 1.90 2.932010 4.39 3.92 5.96 3.78 3.42 2.37 3.632011 4.39 4.18 6.91 3.98 3.72 2.69 3.94

2012F 4.92 4.77 8.47 4.39 4.04 3.08 4.522013F 5.54 5.45 10.25 4.86 4.43 3.53 5.18

PER (x)2008 15.7 15.9 15.2 12.2 10.6 14.1 9.912009 9.8 9.4 9.5 7.7 6.4 10.8 6.412010 9.4 8.9 7.7 6.2 6.9 7.1 5.482011 11.2 9.1 7.6 6.9 6.5 7.9 5.63

2012F 10.2 8.6 6.7 7.5 7.0 7.4 5.372013F 8.5 7.3 5.9 6.5 5.7 6.4 4.60

PBR (x)2008 2.39 2.95 3.61 1.94 1.41 2.14 2.412009 1.89 2.09 2.69 1.36 1.08 1.77 1.812010 1.53 1.69 2.08 1.08 0.93 1.42 1.452011 1.53 1.59 1.79 1.02 0.86 1.25 1.34

2012F 1.36 1.39 1.46 0.93 0.79 1.09 1.172013F 1.21 1.22 1.21 0.84 0.72 0.96 1.03

Key ratios (Dec 2011) %LDR 91.53 100.95 84.86 93.19 94.04 106.71 95.03NPL 1.76 1.80 2.88 2.12 3.63 2.98 2.22

Loans as % assets 52.64 57.15 61.69 56.67 64.26 62.70 60.35CAR 16.98 16.89 14.30 14.07 13.38 14.69 15.63ROA 1.91 2.19 2.37 1.76 1.44 1.84 2.05

NIM (%)2008 4.53 4.06 4.47 4.07 4.17 4.23 4.282009 5.08 5.23 5.50 4.62 5.26 5.42 5.002010 4.10 5.11 4.81 3.74 3.81 4.29 4.282011 3.24 4.68 4.22 3.11 3.58 3.43 3.78

2012F 3.56 4.36 4.53 3.31 3.78 3.56 3.872013F 3.53 5.36 4.47 3.47 3.97 3.77 4.08

ROE (%)2008 15.8 21.1 24.0 15.9 14.0 17.6 17.82009 21.3 25.2 31.5 20.2 18.6 17.2 21.82010 17.9 23.5 30.5 19.5 14.4 21.4 20.72011 13.9 23.4 25.1 15.0 13.5 16.5 18.1

2012F 14.2 21.9 23.9 13.0 11.8 15.9 17.22013F 15.0 22.9 22.3 13.6 13.2 15.9 17.5

April 30, 2012


Share Price Performances

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April 30, 2012


Turkish Banks PER and PBR comparison

2012F PBR (x)

2012F PER (x)

1.481.41 1.38

1.181.11

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April 30, 2012


COMPANY PAGES

April 30, 2012


“Still a bet on CPI” Akbank is poised to stand out with its high CAR ratio and low LDR compared to the sector in 2012. Although we consider it positive for Akbank in the long term, Citi’s stake sale news will weigh on stock performance in the short term. We rate the stock a Underperform with a 12M target price of TL6.50. It is trading at a premium to its peers, despite its below average ROE. On our assumptions, the shares are trading at 1.4x 2012F P/BV and 10.2x 2012F P/E. Pickup in inflation and 2011’s loan re-pricing and growth in higher yielding segments should support NIM in 2012...Annual CPI inflation remained elevated (10.43%) in March, which indicates that annual inflation may be at double-digit levels beyond May until the last quarter according to our projections before declining to 7.3% by year-end, mainly owing to base effects, well above the CBT’s year-end target of 5%. This should, in our view, spell positive news for Akbank as CPI linked bonds make up 35% of the bank’s security portfolio (vs. 30% a year ago and management guidance of an increase to 40% in 2012). With a new CEO on board, Akbank management is more upbeat over growing in high yielding segments such as SMEs, and over increased retail segment market share going forward. Management bullish on fee income growth...Despite regulatory changes set to negatively affect the sector’s fee income generation, Akbank management is bullish when it comes to fee generation and guides on 10% YoY growth supported by the bank’s credit card franchise, vs. our forecast of 12% growth. Akbank saw a 110bp market share gain in credit card issuance volume in 2011 and generated the highest fee via its banking payment systems. The decrease in the max rate that banks can charge on cards, and further regulations pose downside risk to our estimate here. Highest securities to asset ratio (32% as of Dec-11) will allow Akbank to fund its loan growth...as was the case in 2011, we expect Akbank to fund lending growth via redemptions in 2012. As a result, the share of securities within total assets fell to 32% in Dec-11, vs. 43% in the same quarter a year ago. We forecast flat deposit growth for Akbank and further reduction in the share of deposits within overall funding. In line with management guidance, we estimate Akbank growing its loan book slightly above the sector this year driven (19% Akbank, vs. 17% sector) mainly supported by growth in SME and consumer segments. Risks...Faster than expected NPL deterioration (-), higher than expected deposit cost (-) and lower than expected volume growth (-) pose downside risk to our valuation. Although we deem Akbank defensive, Sabanci Family members’ share sale, coupled with Citi’s 10% disposal sale should create share overhang risk on the stock.

STOCK DATAReuters AKBNK.IS

Bloomberg AKBNK TIAvg. Daily Volume (1Y) (mn) 66.9

Free Float (%) 29%

Target Mcap (TRY mn) 26,000

Current Mcap (TRY mn) 26,240

Current Mcap (USD mn) 14,672

Float Mcap (TRY mn) 7,513

Exchange Rate 1.77

Current Price 6.76

12M Target Price 6.50

No. of Shares in Issue 'mn 4,000

52-Week Range 5.52 - 7.98

Weight in ISE-100 8%

Beta (2 year, weekly return) 1.15

SHAREHOLDER STRUCTURE %Sabanci Holding 44%

Citibank O.I.C. 20%

Sabanci Family 7%

Akbank – AKBNK

Underperform T-Price: TRY 6.50

T-Mcap: TRY 26,000mn

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XBANK AKBNK

SNAPSHOTS 2010A 2011A 2012ENet Earnings 2,857 2,395 2,639Total Assets 113,183 133,552 147,357ROE 12M rolling basis % 17.9 13.9 14.2ROA % 2.7 1.9 1.9NPL % 3.2 1.8 2.1P/BV 1.5x 1.5x 1.4xP/E 9.5x 11.3x 10.2xEPS 12-m 0.71 0.60 0.66

April 30, 2012


AKBANK-FINANCIALS SUMMARY

2007 2008 2009 2010 2011 2012F 2013F 2014FNet Interest Income (NII) 3,242 3,488 4,593 4,277 3,993 5,006 5,514 5,706 Fees and comm 946 1,092 1,280 1,309 1,579 1,753 1,952 2,280 Trading income (18) (120) 326 471 72 (32) (45) 428 Foreign exchange gains 167 165 (171) (438) (191) (140) (156) (175) Bank revenues 4,337 4,624 6,028 5,619 5,452 6,587 7,264 8,238 Staff cost (616) (834) (818) (878) (960) (1,053) (1,183) (1,314) Other cost (1,080) (1,354) (1,263) (1,436) (1,364) (1,482) (1,666) (1,851) Total OPEX (1,696) (2,187) (2,081) (2,313) (2,325) (2,535) (2,849) (3,165) Operating Income 2,641 2,437 3,948 3,306 3,128 4,052 4,416 5,073 Associates 32 30 43 27 50 53 56 58 Other income 507 741 525 864 581 281 578 701 Income before provision 3,181 3,208 4,516 4,196 3,759 4,386 5,049 5,833 Provisions for loan losses (625) (999) (994) (348) (302) (763) (844) (1,004) Other provisions (94) (150) (123) (171) (346) (191) (184) (219) Depreciation and amortisation (104) (109) (103) (104) (110) (133) (150) (167) Pre Tax Income 2,358 1,951 3,296 3,574 3,001 3,298 3,872 4,444 Taxes (467) (355) (570) (718) (607) (660) (736) (800) Net income 1,891 1,595 2,726 2,857 2,395 2,639 3,136 3,643

Balancesheet SummaryCash and alike 2,762 7,684 4,740 6,096 13,876 15,264 16,790 18,470 Due from banks 1,333 4,104 2,960 1,784 2,819 3,101 3,411 3,752 Trading securities 4,843 220 314 1,032 960 1,056 1,162 1,278 Fixed income securities 20,231 26,846 45,009 48,848 42,695 44,489 46,491 48,583 Loans 37,016 44,374 39,718 52,896 70,306 82,318 97,958 116,570 Total IEA 66,186 83,228 92,741 110,655 130,657 146,227 165,812 188,652 Fixed assets 699 800 792 888 786 841 900 963 Assets total 68,205 85,655 95,309 113,183 133,552 147,357 164,999 185,703 Deposits 41,044 52,182 55,851 67,167 76,814 87,568 98,076 114,749 Interbank funds 4,415 8,105 13,431 11,211 12,785 14,106 15,795 17,777 Funds borrowed 8,855 11,299 8,152 10,375 16,770 17,004 17,539 18,240 Int bearing liabilities 54,313 71,586 77,435 88,753 106,369 118,678 131,411 150,767 Other liabilities 3,291 2,861 3,684 6,865 9,628 9,013 11,413 9,845 Shareholders Equity 10,601 11,208 14,191 17,565 17,554 19,665 22,175 25,091 Per share data and valuation metricsBVPS (TL) 2.65 2.80 3.55 4.39 4.39 4.92 5.54 6.27EPS (TL) 0.50 0.43 0.68 0.71 0.60 0.66 0.78 0.91PER 13.6x 15.9x 9.9x 9.5x 11.3x 10.2x 8.6x 7.4xPBR 2.6x 2.4x 1.9x 1.5x 1.5x 1.38x 1.2x 1.1xYield (%) 0.39 0.60 1.29 1.43 1.20 1.32 1.57 1.82

Established in 1948, Akbank is the fourth largest Turkish bank by asset size. The bank also has overseas operations via its subsidiaries in the Netherlands (Akbank NV), Germany (Akbank AG) and Dubai (Akbank Dubai Ltd), along with a branch in Malta. Headquartered in Istanbul, as of March 2012 the bank had 936 branches and 15,476 employees. Sabanci Holding has a 40.8% stake in Akbank, while Citigroup has a 20.0% stake. Recently Citigroup annouced their intention to reduce their stake by 10%.

April 30, 2012


AKBANK RATIO ANALYSIS

2007 2008 2009 2010 2011 2012F 2013F 2014F

Balance sheet ratios (%)Loans/Total assets 54.3 51.8 41.7 46.7 52.6 55.9 59.4 62.8Consumer loans/Total assets 18.5 16.8 15.7 17.4 18.8 21.2 23.5 25.9Home loans/Total assets 5.6 5.4 4.6 5.3 5.5 6.0 6.4 6.9Securities/Total assets 29.7 31.3 47.2 43.2 32.0 30.2 28.2 26.2Loans/Deposits 90.2 85.0 71.1 78.8 91.5 94.0 99.9 101.6Shareholders' funds/Total assets 15.5 13.1 14.9 15.5 13.1 13.3 13.4 13.5Shareholders' funds/RWA 18.9 17.8 22.3 21.2 16.2 15.5 15.1 14.7Asset quality (%)NPL 2.65 2.50 4.30 3.23 1.76 2.10 2.10 2.30Total cost of risk 2.15 2.75 2.57 1.08 1.03 1.25 1.20 1.20Expense ratios (%)CIR 39.1 47.3 34.5 41.2 42.6 38.5 39.2 38.4Fees coverage of cost 55.8 49.9 61.5 56.6 67.9 69.1 68.5 72.0Cost/Total assets -2.6 -2.7 2.2 2.0 1.7 1.7 1.7 1.7Spreads and margins Loan spread 5.4 3.8 5.2 3.0 2.2 2.4 2.2 2.2Bond spread 5.3 4.8 4.8 4.0 4.2 4.0 4.0 3.1Average spread 5.4 4.2 5.0 3.5 3.0 3.0 2.8 2.5NIM % 5.0 4.3 5.2 4.0 3.2 3.6 3.5 3.3Net fees/Total assets % 1.5 1.4 1.4 1.2 1.3 1.2 1.3 1.3ROE % 20.3 15.8 21.3 17.9 13.9 14.2 15.0 15.4ROA % 3.1 2.1 3.1 2.7 1.9 1.9 2.1 2.2Growth measures (%)Loans 30.6 19.9 -10.5 33.2 32.9 17.1 19.0 19.0Deposits 20.0 27.1 7.0 20.3 14.4 14.0 12.0 17.0Assets 19.1 25.6 11.3 18.8 18.0 10.3 12.0 12.5Net interest income 27.6 7.6 31.7 -6.9 -6.6 25.4 10.1 3.5Fees and comm 17.3 15.4 17.2 2.3 20.6 11.0 11.4 16.8Cost 7.5 28.9 -0.1 10.7 0.7 9.6 12.4 11.1Net income 24.6 -14.5 59.9 4.8 -16.2 10.2 18.9 16.2Capital (TRYm)RWA 56,160 62,927 63,634 83,035 108,079 127,072 146,850 170,804Capital 10,618 11,452 14,315 17,115 18,350 20,952 24,093 27,810CAR (%) 18.9 18.2 22.5 20.6 17.0 16.5 16.4 16.3Tier-1 Capital 10,254 11,128 13,581 15,952 17,791 19,683 21,897 24,430Tier-1 (%) 18.3 17.7 21.3 19.2 16.5 15.5 14.9 14.3

April 30, 2012


“Guaranteed” choice for profitability & stability As a “price setter” of the Turkish Banking sector and the most efficient player amongst its peers, we believe the bank will be able to deliver an average 18% ROE 2012-2014F. The stock remains our top pick with a 12M TP TRY7.59 offering 14% upside from current levels. By our assumptions, the shares are trading at 1.40x 2012F P/BV and 8.6x 2012F P/E. The sources of risks include: further increase in NPLs (-), higher than expected provisioning (-), higher than expected fee growth (+). March quarter recap: Income Statement highlights… Garanti published its 1Q12 last week. Accordingly, March quarterly net income came in at TRY861.7m, up 9% QoQ and c.1% YoY. The bottom line exceeds both our and the consensus estimate (Seker 1Q12 TRY830m and consensus TRY827m). The QoQ increase in net income was driven by a 20% rise in trading & currency gains that Garanti booked during the March quarter (1Q12 trading gains TRY89m, vs. TRY74m in 4Q11) and lower provisioning. Fees were also strong, as net fee and commission income climbed 6% QoQ, but was down c.4% YoY due to the change in accounting and cap on mutual fund fees. Opex increased 17% YoY, although management maintains their CPI+2-3% cost growth guidance for the full year. Balance sheet highlights… On the lending side Garanti’s loan growth lagged the sector this quarter when looked at on an FX unadjusted basis. The loan book declined by 1%, vs. the sector’s 2.3% growth (YoY loan growth came in at 18%). Deceleration in lending book growth was driven by corporate loans, which shed 2% QoQ. Consumer loans, on the other hand, grew 2% thanks to 4% growth in GPL loans and 2% growth in mortgages. On an FX adjusted basis TL loans grew by 2.1% and FX loans grew by 2%. Despite some pick up in the blended cost of deposits, the bank managed to keep the loan–deposit spread stable during the March quarter. On the funding side deposits on a QoQ basis declined 2%, vs. the sector’s 0.5% increase in 1Q as Garanti relinquished costly big ticket corporate deposit holders to keep the cost of deposits in check. The share of loans within total assets decreased to 56%, vs. 57% in FY2011, whereas that of securities rose to 25% from a quarter ago. Asset quality trends… Despite a slight deterioration in asset quality, all seems to be in place for now. The NPL ratio stood at 1.88% in 1Q12, vs. 1.80 in 4Q11, due to slower collections and new NPL inflow. Note that during their conference call management emphasized possible asset quality problems in the SME segment going forward. CAR and ROE…Visible RWA optimization from Garanti and CAR ratio seems stable, at 16.92%, vs. 16.89% in 4Q11. ROE on a 12M rolling basis came in at 17.5%, vs. 18.5% in 1Q11.

Garanti Bank - GARAN

Outperform Target Price: TRY 7.59

Target Mcap: TRY 31,878mn

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XBANK GARAN


STOCK DATAReuters GARAN.IS

Bloomberg GARAN TIAvg. Daily Volume (1Y) (mn) 413.6

Free Float (%) 29%





Exchange Rate 1.77

Current Price 6.74



52-Week Range 5.54 - 8.18



SHAREHOLDER STRUCTURE %Dogus Group 24%

BBVA 25%

Other 22%

April 30, 2012


GARANTI BANK- FINANCIALS SUMMARY

2007 2008 2009 2010 2011 2012F 2013F 2014FNet Interest Income (NII) 2,804 3,178 5,080 4,755 4,689 5,428 6,363 6,749 Fees and comm 1,198 1,441 1,643 1,816 2,008 2,250 2,259 2,640 Trading income (71) 529 502 240 (21) 264 521 587 Foreign exchange gains (65) (278) 379 124 353 466 521 587 Bank revenues 3,866 4,870 7,603 6,934 7,029 8,408 9,665 10,562 Staff cost (700) (963) (994) (1,161) (1,248) (1,359) (1,556) (1,751) Other cost (1,124) (1,412) (1,409) (1,721) (1,797) (1,958) (2,241) (2,522) Total OPEX (1,823) (2,375) (2,403) (2,882) (3,045) (3,317) (3,797) (4,272) Operating Income 2,042 2,496 5,200 4,052 3,984 5,091 5,867 6,290 Associates 49 102 79 5 6 6 6 6 Other income 1,018 298 279 638 903 155 174 978 Income before provision 3,110 2,896 5,558 4,695 4,892 5,252 6,047 7,274 Provisions for loan losses (191) (419) (1,212) (387) (309) (752) (920) (1,086) Other provisions (147) (148) (400) (198) (514) (251) (201) (237) Depreciation and amortisation (146) (168) (167) (159) (161) (175) (200) (225) Pre Tax Income 2,626 2,162 3,779 3,952 3,908 4,075 4,726 5,726 Taxes (457) (412) (816) (807) (838) (815) (898) (1,031) Net income 2,170 1,750 2,962 3,145 3,071 3,260 3,828 4,695

Balancesheet SummaryCash and alike 7,228 5,572 7,866 7,510 8,261 9,087 9,996 10,996 Due from banks 3,133 4,801 8,334 8,321 14,344 15,778 17,356 19,092 Trading securities 146 666 915 980 1,657 1,823 2,005 2,205 Fixed income securities 17,046 24,963 35,441 38,230 33,586 36,105 38,452 40,951 Loans 37,218 49,907 49,733 64,827 83,813 98,418 116,133 137,037 Total IEA 64,771 85,910 102,289 119,869 141,661 161,211 183,942 210,281 Fixed assets 940 1,085 1,143 1,201 56 59 64 68 Other assets 1,021 707 288- 954 3,393 3,452 2,384- 5,516- Assets total 67,578 88,941 105,381 123,963 146,642 163,766 183,828 207,231 Deposits 39,098 52,715 62,808 72,658 84,543 96,379 110,836 127,461 Interbank funds 8,177 10,703 10,535 11,254 10,955 12,234 13,733 15,481 Funds borrowed 8,559 10,843 13,007 16,633 20,524 22,920 24,228 25,813 Int bearing liabilities 55,834 74,262 86,350 100,546 116,021 131,533 148,797 168,755 Other liabilities 4,862 5,210 5,715 6,943 13,044 12,211 12,138 12,060 Shareholders Equity 6,883 9,469 13,316 16,475 17,577 20,022 22,894 26,417

Per share data and valuationBVPS (TL) 1.64 2.25 3.17 3.92 4.18 4.77 5.45 6.29EPS (TL) 0.55 0.42 0.71 0.75 0.73 0.78 0.91 1.12PER 12.2x 16.2x 9.6x 9.0x 9.2x 8.7x 7.4x 6.0xPBR 4.1x 3.0x 2.1x 1.7x 1.6x 1.4x 1.2x 1.1xYield (%) 0.37 0.78 1.23 1.41 1.50 1.46 1.55 1.83

Turkey’s third largest bank with assets of TL149bn (as of March 2012). Garanti Bank operates via 820 branches and has a headcount of 17,000. The Bank’s head office is located in Istanbul. Doğuş Holding has a 24.2% stake in Garanti, while BBVA has a 25.0% stake.

April 30, 2012


GARANTI BANK- RATIO ANALYSIS

2007 2008 2009 2010 2011 2012F 2013F 2014F

Balance sheet ratios (%)Loans/Total assets 55.1 56.1 47.2 52.3 57.2 60.1 63.2 66.1Consumer loans/Total assets 20.1 18.4 16.0 17.3 18.9 21.0 23.2 25.6Home loans/Total assets 5.4 4.8 4.9 5.9 5.9 6.4 6.8 7.3Securities/Total assets 25.2 28.1 33.6 30.8 22.9 22.0 20.9 19.8Loans/Deposits 95.2 94.7 82.7 91.9 100.9 102.1 104.8 107.5Shareholders' funds/Total assets 10.2 10.6 12.6 13.3 12.0 12.2 12.5 12.7Shareholders' funds/RWA 14.6 15.2 20.6 19.2 15.3 14.4 14.2 14.1Asset quality (%)NPL 2.22 2.42 4.30 2.90 1.80 1.85 1.90 1.75Total cost of risk 1.02 1.27 3.13 0.98 1.08 1.10 1.10 1.10Expense ratios (%)CIR 47.2 48.8 31.6 41.6 43.3 39.5 39.3 40.4Fees coverage of cost 65.7 60.7 68.3 63.0 65.9 67.8 59.5 61.8Cost/Total assets -3.1 -3.2 2.3 2.3 2.1 2.0 2.1 2.1Spreads and margins Loan spread 3.8 3.2 5.4 3.8 3.5 3.8 4.0 3.8Bond spread 5.6 5.6 6.4 5.4 5.4 5.8 4.6 4.4Average spread 4.4 4.0 5.8 4.4 4.0 4.3 4.1 3.9NIM % 4.7 4.0 5.2 4.2 3.3 3.5 3.7 3.5Net fees/Total assets % 2.0 1.8 1.7 1.6 1.4 1.5 1.3 1.4ROE % 36.3 21.1 25.2 20.5 18.1 17.3 17.8 19.1ROA % 3.9 2.2 3.0 2.8 2.2 2.3 2.3 2.5Growth measures (%)Loans 36.1 34.1 -0.4 30.4 29.3 17.4 18.0 18.0Deposits 29.7 34.8 19.1 15.7 16.4 14.0 15.0 15.0Assets 34.4 31.6 18.5 17.6 18.3 11.7 12.3 12.7Net interest income 47.4 13.3 59.9 -6.4 -1.4 15.8 17.2 6.1Fees and comm 18.1 20.3 14.0 10.5 10.6 12.1 0.4 16.8Cost 24.5 39.4 1.1 18.3 5.4 8.9 14.5 12.5Net income 117.7 -24.4 69.2 6.2 -2.4 6.2 17.5 22.7Capital (TRYm)RWA 47,027 62,265 64,501 85,810 115,170 138,704 160,794 187,406Capital 7,231 10,048 13,673 16,839 19,454 22,828 26,901 32,027CAR (%) 15.4 16.1 21.2 19.6 16.9 16.5 16.7 17.1Tier-1 Capital 6,235 8,394 11,396 14,203 16,843 19,034 21,581 24,665Tier-1 (%) 13.3 13.5 17.7 16.6 14.6 13.7 13.4 13.2

April 30, 2012


“Delivering the highest ROE repeatedly” We like Halkbank’s solid management and ability to generate the highest ROE in the Turkish Banking universe. Higher retail focus should enable the bank to improve NIM above the sector this year, along with the advantages afforded by being the leading SME bank in Turkey. The sources of upside risk include the continuation of NPL recoveries and non-core asset sale. On the other hand, higher than expected NPL generation and lower than expected volume growth presents downside risk to our valuation. We rate the stock “Outperform”, with a new target price of TR14.70. Based on our assumptions, it is trading at 1.5x 2012F P/BV and 6.8x 2012F P/E. Halkbank to own credit card brand...Retail loans were the main driver of loan growth during 2011. Being an SME bank, and now with additional focus on high margin retail lending (especially GPL, mortgages and credit cards) we expect Halkbank to improve NIM above the sector in 2012. Although it would initially come at a cost, Halkbank’s plan to create its own credit card would increase volumes and support revenue line in the long term. Other income to get a boost from non-core asset sale and continuation of bad loan collections...Halkbank’s REIC subsidiary is expected to be listed in 2H of 2012, and the asset transfer between REIC and bank, in our view, should support the other income line. The bank is also getting ready to enter the factoring sector. Now with a wider subsidiary network, we expect Halkbank to increase dividend income in the medium term. Asset quality doesn’t look as bad as it is, and without legacy NPLs (which make up 31% of total NPL book) Halkbank’s NPL ratio, at 2.0%, is below sector levels. With a relatively larger gross NPL book we expect collections to continue unlike the reverse trend in the sector. This should, in our view, create upside risk to our net income estimate for the bank in 2012. Low total fees in banking revues indicate growth potential... Halkbank increased its fees by 39% last year in an attempt to catch up with peers on fees charged for services rendered. However, fees make up 17% of total revenues as of Dec-11, vs. the 23% average of large cap peers, indicating room for expansion. Despite management guidance for flat growth, we believe that the introduction of additional fees (such as internet banking) should help fee growth this year. And while gaining presence in the credit card segment marks a longer term positive, it should also support fees and commissions going forward. Risk... NPL recoveries (+), non-core asset sale (+), and higher than expected NPL generation (-).

Halkbank - HALKB

Outperform T-Price: TRY 14.70



STOCK DATAReuters HALKB.IS

Bloomberg HALKB TIAvg. Daily Volume (1Y) (mn) 80.1

Free Float (%) 100%





Exchange Rate 1.77

Current Price 12.55



52-Week Range 9.26 -13.40



SHAREHOLDER STRUCTURE %Privatization Adminstration 75%

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XBANK HALKB

April 30, 2012


HALKBANK- FINANCIALS SUMMARY

2007 2008 2009 2010 2011 2012F 2013F 2014FNet Interest Income (NII) 1,752 2,126 3,109 3,191 3,473 4,417 4,988 6,172 Fees and comm 296 370 461 526 728 780 893 1,026 Trading income (258) 357 92 188 51 39 45 51 Foreign exchange gains 216 (551) (76) (73) 156 (98) (112) (128) Bank revenues 2,007 2,303 3,585 3,832 4,409 5,139 5,814 7,121 Staff cost (449) (507) (595) (670) (732) (848) (1,065) (1,224) Other cost (399) (495) (542) (825) (993) (1,051) (1,321) (1,517) Total OPEX (848) (1,002) (1,137) (1,495) (1,725) (1,899) (2,386) (2,741) Operating Income 1,159 1,301 2,448 2,336 2,684 3,239 3,428 4,380 Associates 19 39 11 56 49 51 54 56 Other income 452 363 261 575 594 482 670 769 Income before provision 1,629 1,703 2,720 2,968 3,327 3,772 4,152 5,206 Provisions for loan losses (131) (243) (434) (316) (211) (360) (363) (451) Other provisions (92) (193) (212) (142) (479) (440) (444) (551) Depreciation and amortisation (49) (43) (57) (67) (78) (100) (126) (144) Pre Tax Income 1,358 1,223 2,017 2,443 2,559 2,872 3,220 4,059 Taxes (276) (248) (386) (499) (592) (574) (612) (731) Net income 1,083 975 1,631 1,944 1,967 2,298 2,608 3,328

Balancesheet SummaryCash and alike 3,521 3,009 3,416 4,770 7,272 8,000 8,800 9,680 Due from banks 1,162 2,119 1,136 989 1,475 1,623 1,785 1,963 Trading securities 480 115 56 89 128 141 155 171 Fixed income securities 15,464 18,219 21,317 20,117 23,218 25,424 27,839 30,484 Loans 18,121 25,836 32,458 44,296 56,216 66,824 79,788 94,948 Total IEA 38,748 49,298 58,383 70,262 88,310 102,011 118,367 137,245 Fixed assets 642 892 1,139 945 1,011 1,016 1,021 1,026 Assets total 40,234 51,096 60,650 72,942 91,124 103,937 119,317 137,121 Deposits 30,841 40,271 43,950 54,782 66,247 75,522 86,095 99,009 Interbank funds 1,703 2,390 5,762 3,155 4,905 4,929 4,954 4,978 Funds borrowed 937 1,522 2,032 3,824 6,291 7,176 6,738 6,243 Int bearing liabilities 33,481 44,183 51,743 61,761 77,443 87,626 97,786 110,230 Other liabilities 2,371 2,624 3,148 3,736 5,041 5,718 8,721 11,252 Shareholders Equity 4,383 4,289 5,760 7,445 8,640 10,593 12,810 15,639


Halkbank is the sixth largest bank in terms of asset size, with TL91bn as of FY2011. It operates via 784 branches and employs 13,500 people. The Turkish Privatization Administration agency owns 75% of the bank, with a possibility of an SPO or block sale in the medium term.The Bank’s head office is located in Istanbul.

April 30, 2012


HALKBANK RATIO ANALYSIS

2007 2008 2009 2010 2011 2012F 2013F 2014F

Balance sheet ratios (%)Loans/Total assets 45.0 50.6 53.5 60.7 61.7 64.3 66.9 69.2Consumer loans/Total assets 10.2 10.7 12.0 15.5 16.3 17.6 18.9 20.3Home loans/Total assets 4.2 3.8 4.4 5.5 5.9 6.2 6.5 6.8Securities/Total assets 38.4 35.7 35.1 27.6 25.5 24.5 23.3 22.2Loans/Deposits 58.8 64.2 73.9 80.9 84.9 88.5 92.7 95.9Shareholders' funds/Total assets 10.9 8.4 9.5 10.2 9.5 10.2 10.7 11.4Shareholders' funds/RWA 20.5 14.4 16.2 16.0 13.2 12.5 11.8 11.2Asset quality (%)NPL 5.39 4.62 4.89 3.82 2.88 3.20 2.70 2.70Total cost of risk 1.40 1.89 2.11 1.14 1.33 1.30 1.10 1.15Expense ratios (%)CIR 42.2 43.5 31.7 39.0 39.1 37.0 41.0 38.5Fees coverage of cost 34.9 36.9 40.5 35.2 42.2 41.1 37.4 37.4Cost/Total assets -2.2 -2.1 1.9 2.0 1.9 1.8 2.0 2.0Spreads and margins (%)Loan spread 4.6 4.6 6.5 5.3 4.8 4.8 4.5 5.0Bond spread 4.1 4.3 4.3 4.2 4.0 4.0 4.0 4.0Average spread 4.4 4.5 5.6 5.0 4.5 4.5 4.4 4.8NIM 4.6 4.5 5.5 4.8 4.0 4.5 4.5 4.8Net fees/Total assets 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8ROE 28.7 24.0 31.5 30.5 25.1 23.9 22.3 23.4ROA 3.0 2.2 2.9 2.9 2.4 2.8 2.7 3.0Growth measures (%)Loans 55.6 42.6 25.6 36.5 26.9 18.9 19.4 19.0Deposits 13.4 30.6 9.1 24.6 20.9 14.0 14.0 15.0Assets 16.9 27.0 18.7 20.3 24.9 14.1 14.8 14.9Net interest income 28.0 21.3 46.2 2.6 8.8 27.2 12.9 23.7Fees and comm 27.9 25.0 24.4 14.2 38.5 7.2 14.5 14.9Cost 17.2 18.2 19.1 25.3 15.4 15.9 25.6 14.9Net income 31.0 -10.0 60.2 23.3 1.7 12.4 13.5 27.6Capital (TRYm)RWA 21,360 29,844 35,600 46,436 65,408 84,723 108,542 139,316Capital 4,279 4,324 5,706 7,400 9,353 11,587 14,170 17,486CAR (%) 20.0 14.5 16.0 15.9 14.3 13.7 13.1 12.6Tier-1 Capital 4,042 4,107 5,390 6,956 8,961 10,567 12,333 14,497Tier-1 (%) 18.9 13.8 15.1 15.0 13.7 12.5 11.4 10.4

April 30, 2012


“More restructuring efforts are awaited” We would like to see further developments on the restructuring efforts begun in 2010, especially on insurance and glass subsidiaries before adopting a more positive view of the stock. Sources of risk include the continuation of NPL recoveries (+) non-core asset sale (+)further restructuring (+), and higher than expected NPL (-) and increased cost of deposits (-). We expect Isbank to post the highest opex among the private banking peers driven by personnel cost. We rate the stock “Marketperform”, with a new target price of TRY4.22. On our assumptions, the stock is trading at 0.9x 2012F P/BV and 7.6x 2012F P/E. Asset restructuring efforts and possible asset sale & IPO... Before we adopt a positive view on the stock we would like to see visible developments in restructuring efforts such as an IPO to list Milli Re on the ISE, and a reduction in its stake in the glass business. We believe such efforts would brighten the view on Isbank, as many investors would like to see the bank doing core business, rather than its holding structure. Deceleration in pace of collections, hence reduced other income line in 2012...90% of Isbank’s other income has comprised NPL collections for the past two years, this year we expect slower collections, and hence decreased other income. On the other hand, slower volume growth, vs. a year ago would result in NPL ratio deterioration and higher provisioning, which will result in lower income, vs. a year ago. Isbank looks worse off when compared on expense ratios...When compared to its large cap private peers, Isbank appears worse off with is 55% CIR, vs. 45% at Akbank and Garanti. And we don’t expect 2012 to be any different due to inflationary pressure. We forecast Isbank growing opex by 15% in 2012, vs. CPI+2/3ppt at private bank peers driven by staff cost. When compared on fee coverage cost, Isbank also lags the peer group with its 41% fee/cost, vs. an average 65% at Akbank, Garanti and Yapi Kredi, and with lower fees this year we forecast a 36% fee/cost ratio for Isbank, vs. 60% at private peers. Basel II adoption to reduce CAR ratio...Based on our calculations, Isbank will end up with a CAR ratio of 12.9% in 2012, vs. 14.1% a year ago, thus one of the lowest among large cap private peers (Akbank and Garanti 16%, and Yapi Kredi 13% when adjusted for Basel II). The market has started to price in the rights issue for the bank, although we consider the asset sale option more likely at this point, as the market would prefer to see further restructuring efforts from the bank.

Isbank - ISCTR

Market Perform T-Price: TRY 4.22

T-Mcap: TRY 18.990mn

STOCK DATAReuters ISCTR.IS

Bloomberg ISCTR TIAvg. Daily Volume (1Y) (mn) 192.2

Free Float (%) 31%





Exchange Rate 1.77

Current Price 4.14



52-Week Range 3.12 - 5.33



SHAREHOLDER STRUCTURE %Isbank Pension Fund 40%

Ataturk's Shares 28%

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April 30, 2012


ISBANK- FINANCIALS SUMMARY

2007 2008 2009 2010 2011 2012F 2013F 2014FNet Interest Income (NII) 2,960 3,618 4,867 4,582 4,562 5,637 6,576 7,068 Fees and comm 1,075 1,204 1,253 1,236 1,429 1,533 1,688 1,994 Trading income 546 (462) 765 443 448 28 (45) (47) Foreign exchange gains (119) 935 (356) (309) (142) (170) (172) (177) Bank revenues 4,461 5,295 6,528 5,953 6,296 7,027 8,047 8,837 Staff cost (1,085) (1,252) (1,405) (1,625) (1,819) (2,007) (2,280) (2,577) Other cost (1,069) (1,568) (1,150) (1,432) (1,496) (1,642) (1,865) (2,108) Total OPEX (2,154) (2,820) (2,555) (3,058) (3,315) (3,649) (4,144) (4,686) Operating Income 2,307 2,476 3,974 2,895 2,981 3,378 3,902 4,152 Associates 503 285 325 369 556 583 613 643 Other income 911 652 1,073 1,569 1,311 920 948 1,072 Income before provision 3,721 3,412 5,372 4,834 4,848 4,881 5,463 5,867 Provisions for loan losses (582) (1,504) (1,471) (770) (597) (760) (789) (751) Other provisions (1,036) (110) (815) (366) (786) (855) (964) (918) Depreciation and amortisation (114) (134) (140) (145) (166) (192) (218) (247) Pre Tax Income 1,989 1,664 2,946 3,553 3,298 3,074 3,492 3,951 Taxes (401) (289) (573) (571) (631) (615) (664) (712) Net income 1,588 1,375 2,372 2,982 2,667 2,459 2,829 3,239

Balancesheet SummaryCash and alike 7,091 11,837 8,760 8,523 13,780 15,158 16,674 18,341 Due from banks 6,954 6,788 8,433 3,185 2,254 2,480 2,728 3,001 Trading securities 992 452 499 733 1,576 1,734 1,907 2,098 Fixed income securities 23,730 24,712 38,910 44,964 42,119 43,803 45,993 48,753 Loans 33,980 47,610 48,335 64,232 91,621 107,196 126,491 151,790 Total IEA 72,747 91,399 104,936 121,637 151,350 170,371 193,793 223,982 Fixed assets 1,922 1,878 1,862 1,832 1,860 1,990 2,129 2,278 Assets total 80,181 97,552 113,223 131,796 161,669 178,929 200,414 228,472 Deposits 48,533 63,539 72,177 88,260 98,313 113,060 131,150 153,445 Interbank funds 5,803 7,007 10,984 10,159 19,461 20,539 23,005 26,226 Funds borrowed 9,963 11,033 9,744 8,042 11,148 10,838 10,640 10,629 Int bearing liabilities 64,299 81,579 92,905 106,461 128,922 144,437 164,795 190,300 Other liabilities 5,278 6,524 6,825 8,321 14,825 14,726 13,732 13,853 Shareholders Equity 10,604 9,449 13,494 17,014 17,921 19,766 21,888 24,319


With assets of over TL160bn as of FY2011, Isbank is Turkey’s largest private bank. The bank also has the largest branch network with 1,120 branches and 12% market share in branch nerwork. Isbank has around 25,000 staff, as of March 2012. The shareholding structure of the bank is: Isbank Pension fund 40.5%, CHP 28.1%, and 31.5% free float.

April 30, 2012


ISBANK- RATIO ANALYSIS

2007 2008 2009 2010 2011 2012F 2013F 2014F

Balance sheet ratios (%)Loans/Total assets 42.4 48.8 42.7 48.7 56.7 59.9 63.1 66.4Consumer loans/Total assets 14.7 15.0 13.3 14.9 15.7 17.7 19.6 21.4Home loans/Total assets 4.4 3.5 3.6 4.6 4.8 5.2 5.5 5.8Securities/Total assets 29.6 25.3 34.4 34.1 26.1 24.5 22.9 21.3Loans/Deposits 70.0 74.9 67.0 72.8 93.2 94.8 96.4 98.9Shareholders' funds/Total assets 13.2 9.7 11.9 12.9 11.1 11.0 10.9 10.6Shareholders' funds/RWA 20.1 13.5 17.7 17.6 13.5 12.3 11.8 11.1Asset quality (%)NPL 4.21 4.41 5.42 3.61 2.12 2.30 2.40 2.30Total cost of risk 4.87 3.79 4.53 1.93 1.73 1.70 1.50 1.20Expense ratios (%)CIR 48.3 53.2 39.1 51.4 52.7 51.9 51.5 53.0Fees coverage of cost 49.9 42.7 49.0 40.4 43.1 42.0 40.7 42.6Cost/Total assets -2.8 -3.1 2.3 2.3 2.1 2.0 2.1 2.1Spreads and margins (%)Loan spread 6.58 5.77 7.78 5.10 3.49 3.50 3.50 3.20Bond spread 2.94 3.16 2.50 3.10 3.66 3.50 3.50 3.30Average spread 5.08 4.88 5.43 4.27 3.54 3.50 3.50 3.22NIM 3.8 4.0 4.6 3.7 3.0 3.3 3.5 3.3Net fees/Total assets 1.4 1.3 1.2 1.0 0.9 0.9 0.9 0.9ROE 16.5 15.9 20.2 19.5 15.0 13.0 13.6 14.0ROA 2.2 1.7 2.2 2.4 1.8 1.7 1.7 1.6Growth measures (%)Loans 14.0 40.1 1.5 32.9 42.6 17.0 18.0 20.0Deposits 4.6 30.9 13.6 22.3 11.4 15.0 16.0 17.0Assets 6.6 21.7 16.1 16.4 22.7 10.7 12.0 14.0Net interest income 17.4 22.2 34.5 -5.9 -0.4 23.6 16.7 7.5Fees and comm 2.9 12.1 4.0 -1.3 15.5 7.3 10.1 18.1Cost 15.9 30.9 -4.4 18.9 8.7 10.3 13.6 13.1Net income 53.4 -11.3 57.2 25.7 -10.6 -7.8 15.1 14.6Capital (TRYm)RWA 52,762 70,046 76,266 96,857 132,476 160,763 185,859 219,685Capital 10,834 10,638 13,963 16,996 18,643 21,076 23,940 27,298CAR (%) 20.5 15.2 18.3 17.5 14.1 13.1 12.9 12.4Tier-1 Capital 9,944 10,795 12,862 15,152 16,720 18,356 20,227 22,355Tier-1 (%) 18.8 15.4 16.9 15.6 12.6 11.4 10.9 10.2

April 30, 2012


“Lacking a near term catalyst” The stock is the cheapest in our coverage universe although the lowest ROE ratio amongst the peer group justifies this, in our view. Our 2012F ROE estimate stands at 12% with a forecast period (2012-2014F) average ROE of 13%. Although the stock has enjoyed a good run since the start of the year to catch up with the sector, we argue that Vakifbank lacks a near term positive catalyst that could drive the share price further through the remainder of the year. We have a “Marketperform” rating for the stock and 12M target price of TRY3.55. Based on our assumptions, the shares are trading at 0.8x 2012F P/BV and 7.1x 2012F P/E. Collections should outperform the sector... As opposed to the general sector trend this year, while it will see a more leisurely pace (20-30% lower compared to a year ago), we believe that Vakifbank should be able to continue collections due to its legacy NPL portfolio and relatively large gross NPL book. Vakifbank’s structurally higher NPL ratio when compared with the sector stems from no write-off or sale policy with bad loans, and we don’t foresee this changing in the near term. We estimate the NPL ratio reaching 4.0%, driven by a lack of collections, lower volume growth and higher NPL inflow. Branch network additions and further hiring to increase opex above the sector average in 2012. Vakifbank grew its opex well above that of its peers last year due to its head office relocation from Ankara to Istanbul (15% YoY). We estimate that with the branch expansion and hiring plan in place for this year personnel cost and branch related expenses should rise over the coming quarters, spelling higher expense ratios in 2012. Based on our valuations opex growth at Vakifbank should outpace that of its peers in 2012 (17% in Vakifbank, vs. 12% peer average, on our 2012E assumptions), marking one of the worst expense ratios among our banking coverage. Basel II adoption to reduce CAR ratio to lowest among our coverage...Based on our calculations Vakifbank will end up with a CAR ratio of 12% in 2012, vs. 14% a year ago, thus one of the lowest amongst large cap private peers when adjusted for Basel II. And although we believe that this will not create any danger for the bank in terms of branch openings, we expect Vakifbank to tackle the issue via a non-core asset sale (TRY350mn BV worth assets expected to be on sale as per management guidance), the possible sale of insurance arm (Gunes Sigorta) and a potential sub-loan. Risk... The continuation of NPL recoveries (+) and non-core asset sale (+), higher than expected NPL inflow (-) and lower than expected volume growth (-), increased cost of deposits (-).

Vakifbank - VAKBN

Market Perform T-Price: TRY 3.55

T-Mcap: TRY 8,875mn

STOCK DATAReuters VAKBN.IS

Bloomberg VAKBN TIAvg. Daily Volume (1Y) (mn) 77.2

Free Float (%) 25%





Exchange Rate 1.77

Current Price 3.26



52-Week Range 2.24 - 4.08



SHAREHOLDER STRUCTURE %State Foundations & Funds 75%

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XBANK VAKBN


April 30, 2012


VAKIFBANK- FINANCIALS SUMMARY

2007 2008 2009 2010 2011 2012F 2013F 2014FNet Interest Income (NII) 1,676 1,975 3,077 2,730 2,894 3,591 4,256 4,867 Fees and comm 360 466 466 443 559 579 665 778 Trading income 48 51 117 295 61 (152) (102) 107 Foreign exchange gains 146 38 61 21 (22) 47 49 52 Bank revenues 2,230 2,531 3,721 3,490 3,492 4,066 4,869 5,804 Staff cost (457) (557) (620) (683) (834) (979) (1,106) (1,264) Other cost (537) (762) (810) (914) (1,007) (1,186) (1,339) (1,531) Total OPEX (995) (1,319) (1,429) (1,598) (1,841) (2,164) (2,445) (2,796) Operating Income 1,235 1,211 2,291 1,892 1,651 1,902 2,424 3,009 Associates 35 25 24 35 45 47 49 52 Other income 357 313 311 601 885 777 643 730 Income before provision 1,627 1,550 2,627 2,528 2,581 2,726 3,117 3,790 Provisions for loan losses (221) (389) (746) (664) (411) (846) (1,041) (1,367) Other provisions (148) (235) (235) (309) (495) (338) (227) (298) Depreciation and amortisation (74) (90) (103) (92) (100) (114) (129) (147) Pre Tax Income 1,185 835 1,542 1,463 1,575 1,428 1,720 1,978 Taxes (227) (172) (291) (306) (348) (286) (327) (356) Net income 957 663 1,251 1,157 1,227 1,142 1,393 1,622

Balancesheet SummaryCash and alike 3,206 5,306 6,450 6,748 7,327 8,060 8,866 9,753 Due from banks 2,746 2,557 2,739 1,272 2,130 2,343 2,577 2,834 Trading securities 350 47 39 24 174 192 211 232 Fixed income securities 10,637 11,453 18,464 18,072 19,111 19,875 20,769 21,912 Loans 23,470 30,502 34,573 44,861 57,309 68,026 80,271 94,719 Total IEA 40,408 49,866 62,265 70,977 86,051 98,495 112,694 129,450 Fixed assets 906 985 1,083 1,114 1,094 1,170 1,252 1,340 Assets total 42,408 52,193 64,798 73,962 89,184 100,666 113,805 129,396 Deposits 28,863 37,120 44,652 47,701 60,939 69,471 79,891 91,875 Interbank funds 2,076 1,687 6,143 8,128 5,940 6,704 7,579 8,618 Funds borrowed 4,693 5,770 4,366 6,327 8,237 9,298 9,011 8,746 Int bearing liabilities 35,631 44,578 55,161 62,157 75,116 85,473 96,482 109,239 Other liabilities 1,551 1,945 2,255 3,246 4,770 5,095 6,249 7,947 Shareholders Equity 5,226 5,671 7,381 8,559 9,298 10,098 11,074 12,211


Vakifbank was established in 1954 and as of FY2011 with an asset size reaching around TL90bn it is Turkey’s seventh largest. The bank is 25.2% owned by Vakifbank Pension Fund and 59% by The General Directorate of Foundations (GDF). It has 690 branches, a headcount of 12,200 (as of March 2012) and total customers of 12m.

April 30, 2012


VAKIFBANK- RATIO ANALYSIS

2007 2008 2009 2010 2011 2012F 2013F 2014F

Balance sheet ratios (%)Loans/Total assets 55.3 58.4 53.4 61.6 64.3 67.6 70.5 73.2Consumer loans/Total assets 15.4 16.5 15.7 21.4 23.7 25.8 28.2 30.5Home loans/Total assets 5.7 5.9 6.1 8.8 9.9 10.5 11.1 11.8Securities/Total assets 25.1 21.9 28.5 22.6 21.4 19.7 18.2 16.9Loans/Deposits 81.3 82.2 77.4 96.5 94.0 97.9 100.5 103.1Shareholders' funds/Total assets 12.3 10.9 11.4 11.5 10.4 10.0 9.7 9.4Shareholders' funds/RWA 16.7 15.0 16.6 14.7 12.9 11.3 10.6 9.9Asset quality (%)NPL 4.64 4.56 5.78 4.81 3.63 4.00 4.50 4.50Total cost of risk 1.69 2.21 2.86 2.32 1.70 1.80 1.80 2.00Expense ratios (%)CIR 44.6 52.1 38.4 45.8 52.7 53.2 50.2 48.2Fees coverage of cost 36.2 35.3 32.6 27.7 30.4 26.8 27.2 27.8Cost/Total assets -2.5 -2.7 2.2 2.2 2.1 2.1 2.1 2.2Spreads and margins (%)Loan spread 3.88 3.93 6.80 4.74 3.92 3.80 3.80 3.80Bond spread 2.38 3.82 4.18 2.64 2.84 3.40 3.90 3.40Average spread 3.41 3.90 5.89 4.14 3.65 3.71 3.82 3.72NIM 4.2 4.0 5.1 3.8 3.4 3.8 4.0 4.0Net fees/Total assets 0.9 0.9 0.8 0.6 0.7 0.6 0.6 0.6ROE 21.2 14.0 18.6 14.4 13.5 11.8 13.2 13.9ROA 2.6 1.5 2.1 1.6 1.4 1.2 1.3 1.3Growth measures (%)Loans 30.1 30.0 13.3 29.8 27.7 18.7 18.0 18.0Deposits 16.2 28.6 20.3 6.8 27.8 14.0 15.0 15.0Assets 14.5 23.1 24.1 14.1 20.6 12.9 13.1 13.7Net interest income 5.7 17.8 55.8 -11.3 6.0 24.1 18.5 14.4Fees and comm 25.0 29.3 -0.1 -4.8 26.2 3.5 14.8 17.1Cost 6.3 32.6 16.2 10.2 14.9 17.3 13.0 14.3Net income 33.9 -26.9 66.1 -7.5 6.0 -6.9 22.0 16.5Capital (TRYm)RWA 31,268 37,682 44,352 56,186 71,862 89,439 104,615 123,246Capital 4,800 5,390 6,838 8,065 9,616 10,749 12,164 13,861CAR (%) 15.4 14.3 15.4 14.4 13.4 12.0 11.6 11.2Tier-1 Capital 4,473 5,053 6,230 7,287 8,797 9,574 10,520 11,621Tier-1 (%) 14.3 13.4 14.0 13.0 12.2 10.7 10.1 9.4

April 30, 2012


“Risks priced in, but could surprise on the upside” We like Yapi’s pure retail banking structure and believe that investors are aware of the risks, which are mostly priced in by now. The bank is proactively tackling issues related to liquidity and adjusting its CAR to Basel II. The sources of risk include the sale of non-core assets (positive), deposit re-pricing (negative), and increased regulation of the credit card industry (negative). We reiterate our Outperform rating with a new target price of TRY 3.97. Based on our assumptions, the shares are trading at 1.11x 2012F P/BV and 7.5x 2012F P/E. Selective deposit collection and optimization in deposit cost with one-on-one pricing incentive...The project that Yapi has been working on for 18 months is now live, and the bank currently offers custom made rates for its deposit holders depending on their user profiles (offering higher rates for more loyal customers and vice versa). We believe that in the medium term this new program will enable the bank to maintain more stable deposit cost and preserve LDR at steady levels. What’s more, releasing higher cost big ticket corporate deposit clients and replacing than them with smaller retail deposit holders should affect NIM positively. We expect Yapi to carry on collecting deposits in excess of the sector in 2012 as it did last year, in addition to other expanding funding sources. Non-core asset sale upside risk to our estimates...Although denied by the management on several occasions, there is a possibility of divesting the insurance subsidiary. Should the bank sell its 74% stake in Yapi Kredi Sigorta in 2012, this would predictably add an estimated c.10% to its earnings, by our assumptions. We also expect the bank to sell a portion of its NPL book as is done almost every year; this would be a welcome development for the NPL ratio too, in terms of upside risk to our bottom line expectation in 2012. Fee income generation and credit card regulation... The Central Bank of Turkey increased the monthly interest rate that the banks are allowed to charge on credit cards in January of this year to 2.34% from 2.12% in Mar-11, in line with the rise in loan rates. We believe that there is a possibility of the CBT raising credit card interest rates further should the rise in loan rates continue, which would be positive for Yapi Kredi’s fee income. It also appears that (as per official government announcements) the regulation regarding a single credit card limit for each card holder would not be applied in 2012. Risks... The sources of risk include the sale of non-core assets, i.e. Yapi Kredi Sigorta (positive), further NPL sales (positive), deposit re-pricing (negative), and increased regulation of the credit card industry (negative).

Yapi Kredi - YKBNK

Outperform T-Price: TRY 3.97


STOCK DATAReuters YKBNK.IS

Bloomberg YKBNK TIAvg. Daily Volume (1Y) (mn) 79.2

Free Float (%) 18%





Exchange Rate 1.77

Current Price 3.42



52-Week Range 2.55-4.88



SHAREHOLDER STRUCTURE %Koc Financial Services 82%

80

90

100

110

120

130

140

150

2‐Jan‐12

9‐Jan‐12

16‐Jan

‐12

23‐Jan

‐12

30‐Jan

‐12

6‐Feb‐12

13‐Feb

‐12

20‐Feb

‐12

27‐Feb

‐12

5‐Mar‐12

12‐M

ar‐12

19‐M

ar‐12

26‐M

ar‐12

2‐Apr‐12

9‐Apr‐12

16‐Apr‐12

23‐Apr‐12

XBANK YKBNK


April 30, 2012


YAPI KREDI- FINANCIALS SUMMARY

2007 2008 2009 2010 2011 2012F 2013F 2014FNet Interest Income (NII) 2,123 2,415 3,478 3,200 3,310 4,119 4,979 5,610 Fees and comm 974 1,263 1,436 1,596 1,827 1,966 2,112 2,477 Trading income (201) 304 437 464- (469) 116 (109) (248) Foreign exchange gains 274 (309) (97) 397 215 (173) (132) (155) Bank revenues 3,170 3,673 5,255 4,729 4,882 6,027 6,850 7,684 Staff cost (788) (874) (883) (990) (1,138) (1,234) (1,341) (1,572) Other cost (1,944) (1,485) (1,293) (1,362) (1,406) (1,536) (1,669) (1,958) Total OPEX (2,732) (2,359) (2,176) (2,352) (2,544) (2,770) (3,010) (3,529) Operating Income 437 1,314 3,079 2,377 2,338 3,257 3,840 4,154 Associates 39 206 143 155 128 135 141 148 Other income 803 367 195 1,207 811 496 396 774 Income before provision 1,279 1,887 3,417 3,739 3,277 3,888 4,378 5,077 Provisions for loan losses (238) (379) (1,267) (969) (456) (879) (975) (1,235) Other provisions (188) (174) (298) (114) (321) (377) (418) (269) Depreciation and amortisation (123) (118) (138) (136) (146) (146) (158) (186) Pre Tax Income 730 1,217 1,714 2,520 2,355 2,487 2,826 3,387 Taxes (144) (292) (359) (459) (498) (497) (537) (610) Net income 586 925 1,355 2,060 1,857 1,989 2,289 2,777

Balancesheet SummaryCash and alike 3,689 4,559 5,505 6,853 11,873 13,060 14,366 15,803 Due from banks 731 2,164 1,650 1,065 1,814 1,995 2,195 2,414 Trading securities 229 667 834 882 448 492 542 596 Fixed income securities 12,323 12,516 13,279 17,464 19,594 22,533 25,913 31,095 Loans 28,509 38,673 37,858 52,615 67,780 79,879 94,257 116,878 Total IEA 45,480 58,580 59,126 78,879 101,508 117,959 137,272 166,786 Fixed assets 1,068 1,143 1,086 1,105 1,009 1,080 1,156 1,237 Assets total 50,353 63,723 64,560 84,776 108,103 123,141 140,899 168,703 Deposits 32,167 41,705 40,833 52,725 63,517 73,045 85,463 102,555 Interbank funds 1,777 387 926 2,960 5,918 6,741 7,713 9,235 Funds borrowed 4,236 6,164 5,309 8,373 13,723 15,632 16,386 18,119 Int bearing liabilities 38,180 48,256 47,068 64,057 83,158 95,417 109,561 129,909 Other liabilities 7,270 8,614 9,225 10,401 13,245 14,332 16,000 21,094 Shareholders Equity 4,904 6,853 8,267 10,318 11,700 13,391 15,338 17,699


Founded in 1944, Yapi Kredi is Turkey’s fourth largest bank by asset size, at over TL100bn as of FY2011. As of 1Q12 the bank had 908 branches and 15,000 employees. Yapi Kredi was the first bank to issue credit cards in Turkey and remains the leading bank in the Turkish credit card business, with a market share of 18.3%. Yapi Kredi Bank is owned by Koc Financial Services (KFS) as a JV between UniCredit and Koc Group. KFS holds an 81.8% stake in Yapi Kredi. The bank has 10.3% market share in loans and 9.2% in deposits as of FY 2011.

April 30, 2012


YAPI KREDI- RATIO ANALYSIS

2007 2008 2009 2010 2011 2012F 2013F 2014F

Balance sheet ratios (%)Loans/Total assets 56.6 60.7 58.6 62.1 62.7 64.9 66.9 69.3Consumer loans/Total assets 20.9 21.2 22.0 21.1 21.4 23.4 25.5 26.6Home loans/Total assets 4.1 4.5 5.5 5.9 5.9 6.3 6.6 6.6Securities/Total assets 24.5 19.6 20.6 20.6 18.1 18.3 18.4 18.4Loans/Deposits 88.6 92.7 92.7 99.8 106.7 109.4 110.3 114.0Shareholders' funds/Total assets 9.7 10.8 12.8 12.2 10.8 10.9 10.9 10.5Shareholders' funds/RWA 11.5 13.0 15.2 14.1 12.0 10.8 10.4 9.5Asset quality (%)NPL 5.75 4.24 6.38 3.42 2.98 3.30 3.10 3.00Total cost of risk 1.56 1.56 3.87 2.28 1.25 1.70 1.60 1.50Expense ratios (%)CIR 86.2 64.2 41.4 49.7 52.1 46.0 43.9 45.9Fees coverage of cost 35.6 53.5 66.0 67.9 71.8 71.0 70.2 70.2Cost/Total assets -5.7 -4.0 3.4 2.8 2.4 2.2 2.1 2.1Spreads and margins (%)Loan spread 7.46 7.32 6.73 4.97 3.72 3.70 3.73 2.86Bond spread 3.61 4.70 3.41 2.94 3.87 2.90 2.80 2.60Average spread 6.30 6.68 5.87 4.46 3.76 3.52 3.53 2.81NIM 4.3 4.1 5.4 4.3 3.3 3.6 3.8 3.6Net fees/Total assets 2.0 2.1 2.2 2.1 1.8 1.7 1.6 1.6ROE 17.2 17.6 17.2 21.4 16.5 15.9 15.9 16.8ROA 2.3 1.8 2.1 2.7 1.8 2.1 2.1 1.9Growth measures (%)Loans 26.7 35.7 -2.1 39.0 28.8 17.9 18.0 24.0Deposits 3.3 29.7 -2.1 29.1 20.5 15.0 17.0 20.0Assets 3.0 26.6 1.3 31.3 27.5 13.9 14.4 19.7Net interest income 20.7 13.8 44.0 -8.0 3.5 24.4 20.9 12.7Fees and comm 14.3 29.7 13.8 11.1 14.4 7.6 7.5 17.3Cost 36.7 -13.7 -1.9 7.6 8.1 8.4 8.7 17.3Net income 38.4 47.0 29.9 52.1 -9.8 7.1 15.1 21.3Capital (TRYm)RWA 42,661 53,988 54,533 73,259 97,275 124,337 147,647 185,524Capital 5,832 8,500 9,697 11,821 14,294 16,561 19,201 22,431CAR (%) 13.7 15.7 17.8 16.1 14.7 13.3 13.0 12.1Tier-1 Capital 3,371 6,879 6,879 6,879 6,879 7,697 8,617 9,705Tier-1 (%) 7.9 13.0 12.6 9.4 7.1 6.2 5.8 5.2

April 30, 2012


Ş E K E R S E C U R I T I E S R E S E A R C H Şeker Yatırım Menkul Değerler A.Ş. TEL: +90 (212) 334 33 33 İnönü Cad. Tumşah Han No: 36 Fax: +90 (212) 334 33 34 Beyoğlu – İSTANBUL E-mail: [email protected] TURKEY Web: http://www.sekeryatirim.com/english/index.aspx

For additional information, please contact:

Research Kadir Tezeller Head of Research +90 (212) 334 33 33 [email protected] Derya Guzel Banking +90 (212) 334 33 33 x228 [email protected] Burak Demirbilek Utilities, Aviation, Iron-Steel, Beverage +90 (212) 334 33 33 x128 [email protected] Selahattin Aydin Cement & Technical Analyst +90 (212) 334 33 33 x251 [email protected] Ezgi Gulbas Autos, Oil & Gas, Retail +90 (212) 334 33 33 x201 [email protected] Volkan Dukkancik Telecoms, REITs, White Goods, Glass +90 (212) 334 33 33 x257 [email protected] Okan Uzun Banking, Insurance, Conglomerates +90 (212) 334 33 33 x245 [email protected] Engin Degirmenci Database Associate +90 (212) 334 33 33 x334 [email protected] Economy & Politics Ibrahim Aksoy Economist +90 (212) 334 91 04 [email protected] Institutional Sales Batuhan Alpman Head +90 (212) 334 91 01 [email protected] Atakan Andic Sales Trader +90 (212) 334 91 02 [email protected] Selin Gursel Trader +90 (212) 334 91 03 [email protected] Hulya Oztan Kuru Sales Representative +90 (212) 334 33 33 x361 [email protected] Murat Senalp Sales Representative +90 (212) 334 91 05 [email protected]

DISCLAIMER

I, Derya GUZEL, hereby certify that the views expressed in this research accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

This report has been prepared by Şeker Yatırım Menkul Değerler A.Ş. (Şeker Securities, Inc.). The information and opinions contained herein have been obtained from and are based upon public sources that Şeker Securities considers to be reliable. No representation or warranty, express or implied, is made that such information is accurate or complete and should not be relied upon, as such. All estimates and opinions included in this report constitute our judgments as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors as they believe necessary. Şeker Securities may, from time to time, have a long or short position in the securities mentioned in this report and may solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriter or lender) for any company referred to in this report and may, to the extent permitted by law, have acted upon or used the information contained herein, or the research or analysis upon which it is based, before its publication. This report is for the use of intended recipients and may not be reproduced in whole or in part or delivered or transmitted to any other person without the prior written consent of Şeker Securities. By accepting this document you agree to be bound by the foregoing limitations.

Copyright © 2012 Şeker Securities, Inc.

turkish banking sector_april2012

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