Corporate Lending Expansion And Fee Income Surge Set To Turbocharge Net Interest Margins

Key Takeaways

• VakifBank’s loan strategy favors Turkish lira yield improvement, potentially boosting net interest margins in future periods.
  
• Increased fee income and efficient funding strategies indicate potential for strong revenue growth and enhanced profit margins.
  
• Rising non-performing loans and dependence on wholesale market borrowings could impact margins and profitability, with competition limiting revenue growth potential.

Catalysts

Provides corporate, commercial, small business, retail, and investment banking services in Turkey and internationally.

• VakifBank's strategy to grow its loan portfolio more in corporate and commercial lending than retail, combined with a shift from floating to fixed rates, is expected to enhance their Turkish lira loan yields, which could improve the bank's net interest margin in future quarters.
  
• The potential for stronger fourth-quarter core spreads due to additional income from CPI-linked securities presents a catalyst for improved net interest margins and higher net income.
  
• VakifBank's active engagement in international funding, including Eurobond and Tier 2 capital issuances, suggests a strengthened capital position which could support future growth and stability, positively impacting their earnings.
  
• The shift towards more granular and sticky deposit portfolios with higher shares of demand and retail deposits might enhance net interest margin by reducing funding costs.
  
• VakifBank's increased fee income and an improved fee to OpEx ratio indicate strong fee-based revenue growth opportunities, potentially bolstering overall revenue and profit margins.

Türkiye Vakiflar Bankasi Türk Anonim Ortakligi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Türkiye Vakiflar Bankasi Türk Anonim Ortakligi's revenue will grow by 23.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 36.8% today to 38.3% in 3 years time.
• Analysts expect earnings to reach TRY 94.7 billion (and earnings per share of TRY 5.76) by about December 2027, up from TRY 48.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2027 earnings, up from 4.6x today. This future PE is lower than the current PE for the TR Banks industry at 12.4x.
• Analysts expect the number of shares outstanding to grow by 18.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 40.76%, as per the Simply Wall St company report.

Türkiye Vakiflar Bankasi Türk Anonim Ortakligi Future Earnings Per Share Growth

Risks

• Despite the bank's expansion, there is a rising non-performing loan (NPL) ratio, particularly from retail and credit card inflows, which could lead to increased credit losses and impact net margins.
  
• Guided reductions in return on average equity (ROAE) suggest limited recovery in net interest margins, posing a risk to long-term profitability and earnings growth.
  
• Projected CPI changes may initially improve net interest margin due to adjustments in interest income from CPI linkers, but a significant future reduction in assumed CPI could lead to lower interest income, negatively affecting future earnings.
  
• Heavy reliance on wholesale market borrowings, including Eurobond issuances, may increase exposure to market fluctuations and affect net interest margins due to changing funding costs.
  
• Increased competition and varying growth strategies relative to peers, such as a lack of appetite for certain retail lending sectors like residential mortgages, may limit the bank's ability to maximize revenue growth.

Valuation

• The analysts have a consensus price target of TRY 25.2 for Türkiye Vakiflar Bankasi Türk Anonim Ortakligi based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of TRY 33.0, and the most bearish reporting a price target of just TRY 16.82.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be TRY 247.0 billion, earnings will come to TRY 94.7 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 40.8%.
  
• Given the current share price of TRY 22.54, the analyst's price target of TRY 25.2 is 10.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.