Central Bank Moves And Selective Lending Will Strengthen Liquidity

Key Takeaways

• Tight monetary policy and selective lending strategies are expected to boost net interest margins and support revenue growth.
  
• Robust deposit performance and strong fee generation enhance liquidity and revenue diversification, stabilizing the bank's earnings.
  
• Aggressive rate hikes and potential asset quality deterioration threaten net interest margins, revenue growth, and overall earnings due to increased funding costs and provisioning needs.

Catalysts

Provides commercial banking and financial products and services in Turkey and internationally.

• The bank expects improvement in headline inflation trajectory due to a tight monetary policy and slowdown in economic activity, which could lead to better managed interest rate cycles, enhancing net interest margins.
  
• There is a potential for the Central Bank to restart the rate cut cycle after July, which could positively impact the cost of funding and improve net interest income.
  
• The strategy of selective and lucrative lending, particularly in Turkish lira and foreign currency loans, supports attractive loan yields above sector averages, potentially boosting future revenue growth.
  
• Optimization of funding costs via robust demand deposit performance and agile time deposit pricing, coupled with a high level of Turkish lira liquidity coverage ratio, supports a strong liquidity position, which can stabilize earnings.
  
• Strong fee generation is expected to continue through increased customer penetration and diversification in products, which could enhance revenue streams and improve net margins.

Yapi ve Kredi Bankasi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Yapi ve Kredi Bankasi's revenue will grow by 56.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.1% today to 21.1% in 3 years time.
• Analysts expect earnings to reach TRY 100.3 billion (and earnings per share of TRY 12.02) by about May 2028, up from TRY 30.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as TRY78.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.2x on those 2028 earnings, up from 6.4x today. This future PE is greater than the current PE for the TR Banks industry at 5.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 29.78%, as per the Simply Wall St company report.

Yapi ve Kredi Bankasi Future Earnings Per Share Growth

Risks

• The Central Bank's recent aggressive rate hikes and high overnight funding rate of 49% could increase funding costs for Yapi Kredi, potentially squeezing net interest margins and affecting interest income.
  
• Continued volatility in inflation and currency exchange rates, coupled with potential hikes in energy prices and agricultural production disruptions, pose risks to the bank’s revenue growth and cost management.
  
• The rise in non-performing loan (NPL) inflows, particularly from unsecured consumer loans, indicates potential deterioration in asset quality, which might necessitate increased provisioning and impact net margins.
  
• Potential dollarization trends, with increased demand for foreign currency deposits, could pressure the bank’s Turkish lira liquidity and affect overall revenue, given interest rate discrepancies.
  
• Prolonged high rates, if they extend beyond expected timelines, threaten retail and corporate asset quality, which could result in higher provisions and a decline in earnings.

Valuation

• The analysts have a consensus price target of TRY38.989 for Yapi ve Kredi Bankasi 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 TRY49.47, and the most bearish reporting a price target of just TRY26.4.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be TRY475.8 billion, earnings will come to TRY100.3 billion, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 29.8%.
  
• Given the current share price of TRY22.76, the analyst price target of TRY38.99 is 41.6% 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.