Turkey’s Garanti bank opts to not distribute dividend from its TRY6.64bn profit

Turkey’s Garanti bank opts to not distribute dividend from its TRY6.64bn profit
By Akin Nazli in Belgrade March 5, 2019

Turkish private lender Garanti Bankasi said on March 4 in a bourse filing that it has decided to not distribute dividends from its 2018 net profit of TRY6.64bn ($1.23bn) after taking stock of its growth target, long-term strategy and domestic and international economic developments.

This year will thus be the first year without dividends from Garanti Bankasi since 2008, according to its website.

Many Borsa Istanbul-listed companies, including Akbank and QNB Finansbank, are taking the ‘no dividend’ option this year. They are instead aiming to strengthen their capital structures in advance of the worst of what is expected to be a tough year.

However, the case of private lender Isbank is the first in which the banking industry regulator BDDK has directly intervened as regards a financially healthy lender’s dividend distribution decision. On February 28, Isbank said in a bourse filing that the BDDK had not approved its application to distribute dividends from its 2018 profit.

Last month, Garanti Bankasi, received regulatory approval from the Capital Markets Board (SPK) to issue up to $6bn worth of eurobonds abroad.

Fitch Ratings downgraded Garanti Bankasi to BB-/Negative in October after Moody’s Rating Services downgraded the lender’s FX deposit ceiling to B2/Negative in Septemberaccording to the lender’s website. In August 2018, Standard & Poor’s downgraded the lender to B+/Stable.

Garanti Bankasi will redeem €500mn worth of eurobonds in July and another $750mn worth of eurobonds in October, according to its 2019 operating plan guidance.

In December, Turkiye Kalkinma Bankasi (Turkish Development Bank, or TKB) completed the issuance of TRY3.15bn (€521mn) worth of asset-backed paper based on mortgage-backed securities to be issued by Ziraat Bankasi, Halkbank and Vakifbank and Garanti Bankasi. Garanti put forward its TRY8.7bn mortgage loans pool as collateral against its issuance of TRY150mn.

BBVA sets aside more financial firepower
Spain’s Banco Bilbao Vizcaya Argentaria (BBVA) controls a 49.85% stake in Garanti Bankasi, according to public disclosure platform (KAP)In October, BBVA said it would need to set aside more financial firepower as a result of the worsening economic situation in its fourth-largest market, Turkey.

Norway’s Government Pension Fund Global had a 1.28% stake in Garanti Bankasi as of end-2018, Norges Bank said on February 27. The fund’s investment in Garanti was its largest equity investment in Turkey.

Garanti Bankasi has a free float ratio of 50.07%, according to its website.

It also has the largest weighting, of 8.95%, in the iShares MSCI Turkey ETF.

Garanti Bankasi is active in Romania with subsidiary Garanti Bank Romania. In January, the IFC, a member of the World Bank Group, said on January 29 that it was lending €55mn to Garanti Bank Romania. Adding this financing line, since 2012 the IFC has granted a total of €157mn to Garanti Bank Romania. Also in January, the European Investment Bank (EIB) said on January 9 it was lending €22.3mn to Garanti Bank Romania.

On January 31, Garanti Bankasi said in a bourse filing that its unconsolidated net income declined by 37% y/y to TRY1.06bn in Q4.

“This is respectively 6.6% below our TRY1,136mn call and in line with the TRY1,058mn RT consensus estimate,” Sevgi Onur of Seker Invest said in a research note.

NPL portfolio goes for TRY17.5mn
In Q4, Garanti sold a TRY337mn non-performing loans (NPL) portfolio for TRY17.5mn.

Garanti’s net profit rose by a limited 5% y/y to TRY6.64bn in 2018. CPI inflation stood at 20.3% in Turkey as of end-2018.

Garanti Bankasi was Turkey’s third largest bank with TRY411bn in assets as of end-September, according to the latest data from Turkish banking association TBB.

In January, Garanti said in its 2019 guidance that 2019 would be a challenging year but that it expected economic activity to pick up in 2020. The bank predicted that the Turkish economy—widely expected to slip into recession early in 2019—would grow by 1% this year, slowing from an expected 3% expansion in 2018. The bank expected to see a 5% increase in Turkish lira loans and a 10% decline in foreign currency credits. It expected an NPL ratio that remained below 7% while net fees and commission revenues would be in the low teens. The bank predicted its NIM (net interest margin) would remain flat this year.

“In 2019, consumer loans will also put some pressure on asset quality due to the anticipated rise in unemployment that will be driven by the cooling economy. However, household indebtedness in Turkey is quite low; actually, it is much lower than that in Eurozone and in developing countries,” Garanti CEO Ali Fuat Erbil said in the lender’s 2018 annual report.

Annual share price loss of 16%
Garanti Bankasi shares were up 1.77% d/d to TRY9.19 as of 13:00 local time on March 5 while the benchmark BIST-100 was up 0.51% to 104,721. The annual loss on Garanti Bankasi shares stood at 16% versus the 15% y/y gain on the BIST-100.

Garanti was the third largest Borsa Istanbul listed company with a market cap of TRY38bn.

Garanti Bankasi shares were trading in the 7.50s on January 3 and tested the 9.30s as of January 17 while the BIST-100 was moving around the 87,000s on January 3 before reaching the 104,000s on January 29.

The country’s largest mobile operator Turkcell, refiner Tupras and private lender Garanti Bankasi have led the Borsa Istanbul gains since the beginning of January, Bloomberg reported on January 23.

Seker Invest’s target price for Garanti Bankasi shares stood at TRY9.67, according to the Istanbul-based brokerage house’s recommendation list published on March 5.

As of January 28, 14 equity analysts were advising Buy, 11 were recommending Hold and two were placing Sell on Garanti Bankasi, according to the lender’s websiteAs of December, 21 analysts were on Buy, five were on Hold and two were on Sell.

“Time to take a breather”
In a research note entitled “Turkish Banks – Time to take a breather” published on February 19, Akin Tuzun of VTB Capital said that the Russian investment bank had revised its view on the Turkish banking sector to Neutral from Strong Buy.

VTB’s 12-month target price for Garanti Bankasi stood at TRY9.20 while it cut its 2019 net income forecast for the lender to TRY5.45bn. VTB forecasts growth of 8% y/y in Garanti’s lira loans in 2019 and a 5% y/y contraction in the lender’s FX loans.

VTB said: “Following the restructuring of the bank sector after the 2001 crisis, the sector became a favourite of investors and remains strong to this day. Turkish banks rallied 78% in dollar terms from their lows in August, and outperformed global EM and EMEA financials by 70% and 68%, respectively.

“In 2018, the banking index (XBANK) fell 31% in local currency. Only Garanti and Akbank outperformed the banking index as they are widely seen as more defensive and better capitalised. Vakifbank and Yapi Kredi were the worst performers. In 2019 YTD, Isbank, Yapi Kredi and Vakifbank started to perform reversing some of their underperformance in 2018.”

After the rally seen in the last five months, VTB cut Akbank, Garanti Bankasi, Halkbank and Isbank to Hold from Buy but kept Vakifbank and Yapi Kredi Bank at Buy. The investment bank expects high volatility in 2019.

More upbeat than the street
In terms of upsides and ratings, VTB Capital is more upbeat than the street on Vakifbank and Yapi Kredi and less positive on Akbank and Garanti, saying: “The foreign investors have been selling Turkish banks since April last year and the sell-off intensified during 3Q18 in tandem with the currency crisis in August. 4Q18 was mixed with foreign investors first coming back and then selling off again in December.

“However in January 2019 there was a sharp come-back and the average foreign ownership of Turkish banks almost increased to the levels of precurrency crisis. In the longer-term context, the average foreign ownership currently at 66% has upside room to the peaks of 70 % levels, but still well above the average of the past 5-6 years. So, there is room for further positioning of foreign investors but this is limited.”

VTB added: “In terms of the individual banks, the most sold-off banks were Vakifbank and Yapi Kredi, but in January, they also showed a sharp pick-up. Garanti and Akbank were holding up much better, expectedly given their high quality perception among foreign investors.”

Garanti Bankasi carries some exposure to Turkish government mega infrastructure projects as well as the slowdown in the Turkish real sector. 

Agreement obliges creditors to restructure
In September 2018, a Financial Restructuring Framework Agreement was approved by the banking watchdog BDDK. The Framework Agreement was signed by 28 banks as of December. According to the agreement, if creditors covering two-thirds of a syndicated loan agree to sign a contract with the debtor within the scope of the Framework Agreement, then all of the creditors are obliged to restructure the entire loan if need be.

Last month, Ebru Dildar Edin, executive vice president for corporate and investment banking at Garanti Bankasi told state-run news agency Anadolu that banks in Turkey planned to restructure between $7bn and $8bn of credit extended to local energy companies to enable the borrowers to repay their debts by 2020-2021 and pave the way for their participation in further energy investments.

Investments in the power generation sector amounted to $85bn and companies took out $60bn in loans from banks to finance those projects, according to Edin.

“A total amount of $13bn, including the debts of electricity distribution companies, is required to be restructured. Banks restructured $4bn in 2017 and 2018," she said.

In January 2019, Bloomberg reported that Anadolu Birlik was in talks with lenders to restructure part of its $2bn debt pile. Konya Seker, an Anadolu Birlik unit, and its partner Siyahkalem Muhendislik borrowed $786mn in a 12-year project finance loan in 2013 for the Kangal coal-fired plant it bought for $985mn, according to data compiled by Bloomberg. The lenders in the deal were TC Ziraat Bankasi, Turkiye Garanti Bankasi, Turkiye Is Bankasi, Turkiye Halk Bankasi, Turkiye Vakiflar Bankasi and Yapi Kredi Bankasi.

Mega airport, Turk Telekom financing
In 2018, Garanti Bankasi made available €80mn for financing the additional investment expenditures of Istanbul New Airport, according to the lender’s annual report.

In July 2018, a 55% stake in Turk Telekom was taken over by a special purpose vehicle, Levent Yapilandirma Yonetimi (LYY), controlled by Akbank, Garanti Bank and Isbank. Turk Telekom’s former shareholder, Otas, borrowed $4.75bn in 2013 to refinance its acquisition of 55% in Turk Telekom. Akbank has $1.7bn worth of exposure to Otas’ loan while Garanti Bankasi contributed with $1bn and Is Bankasi with $500mn.

In March 2018, Turkey’s 1915 Canakkale Bridge and Highway project secured €2.3bn of financing. According to reports in local media, a total of €1.6bn, representing 70% of the financing, was provided by foreign banks while the remaining €683mn, or 30%, was provided by foreign branches of Turkish banks, including Akbank, QNB Finansbank, Garanti Bank (€125mn), Is Bank, Vakiflar, Yapi Kredi and Kuveyt Turk.

In March 2015, partners of Bilkent integrated health facilities (Ankara city hospital), to be built under a PPP scheme, secured a project financing loan worth €1.2bn. Some €890mn of the loan was provided by Garanti, Yapi Kredi, Denizbank, QNB Finansbank, Isbank, Siemens Financial Services and Unicredit Bank Austria.

Also in 2015the IGA Havalimani Isletmesi consortium building Istanbul New Airport—a mega airport officials want to see eventually become the world’s busiest airport—took out an initial 16-year loan of €4.5bn from TC Ziraat Bankasi, Turkiye Halk Bankasi, Denizbank, Turkiye Garanti Bankasi, Turkiye Vakiflar Bankasi and QNB Finansbank, according to Bloomberg loan data. Ziraat, Turkey’s biggest bank by assets, was the largest lender with $1.5bn, while fellow state-run lenders Halkbank and Vakifbank each lent $966mn.

In February 2018, Yildiz Holding requested the largest loan ever from Turkish banks—some $6bn-$7bn—referring to the challenges if faced with its existing financing structure. The 10 banks that Yildiz addressed were Yapi & Kredi Bankasi, Akbank, TC Ziraat Bankasi, Turkiye Halk Bankasi, Turkiye Garanti Bankasi, Turkiye Is Bankasi, Turkiye Vakiflar Bankasi, HSBC Bank, Denizbank and QNB Finansbank.