2009: The Year of Modesty
We are maintaining our Neutral view on Turkish banks, as they are now going through the
second phase of the financial crisis, where the performance of the real sector will play a
more determining factor. We believe that Turkish banks emerged successfully in terms of
capitalization from the first phase of the crisis and they will get through the second phase
too, thanks to their relative resilience in terms of financial strength, although they won’t go
unscathed – we forecast 10% contraction in earnings for Turkish banks in 2009. While
relative valuations in the Turkish banking sector do not promise any miracle returns - thus
justifying our Neutral view - their better asset quality and less dependence on external
borrowing compared to the banking sectors of regional peers give some grounds for a
certain amount of optimism.
􀂄 We do not believe a solid recovery is imminent… 2009 will be characterized by three “lows”
- (i) Low growth, (ii) Low inflation and (iii) Low interest rates, all referring to a severe slowdown in
demand. Therefore, although we assume margins will remain flat, top-line growth will be rather
lacking in 2009. As such, declining volumes will result in a mere 8% YoY growth in loans, according
to our forecasts, both curtailing interest income and fee generation. Although operational expenses
will edge down, loan-loss provisioning will take a toll on banks’ earnings at the bottom-line. Our
forecast of a 10% YoY contraction in earnings for 2009 yields a 2009F 6.1x P/E and a 0.8x P/BV for
the banks in our coverage universe. These levels are not stunningly attractive when compared to
banking sectors in the region. Based on these multiples and given the sluggish economic
environment, we do not believe a solid recovery is imminent.
􀂄 Second phase: real sector performance to play determining role… The tide in NPL ratios
has only barely started to turn upwards, with average NPL ratios only inching up by a mere 50bps in
4Q08 to 3.5% by the end of the year. However, we expect cash flow problems to trigger a rise in
this ratio to 6.0% by the end of 2009, which is expected to precipitate a 70% jump in banks’ loanloss-
provisioning expenses. However, the restructuring measures may limit the expansion in NPLs,
thus reducing provisioning rates and leading to higher-than-expected bottom-line and equity.
􀂄 Margins to hold their own… While the two arguments of (i) a declining cost of Lira funding
and (ii) almost unchanged cost of external borrowing will help banks improve their NIM levels in
2009, declining yields on the security portfolio are likely to offset this positive impact, with the share
of the security portfolio in total assets set to edge up slightly in 2009.
􀂄 Lower fee income to be accompanied by lower operational expenses… In line with
slumping business volumes, fee generation is expected to demonstrate a slower 10% YoY growth;
however, operational expenses are expected to remain under strict control, only inching up by 4%
YoY.
􀂄 Rating changes to our coverage… The single rating change in our coverage is on Akbank:
we are upgrading our rating for the stock to Neutral from Underperform.
􀂄 Isbank remains our top-pick with its rock solid financial structure blended with aboveaverage
profitability in our coverage universe… We also find Vakifbank extraordinarily cheap
blended with its strong financial structure and moderate earnings performance. We have a Neutral
rating for Halkbank, as the low interest rate environment will chip away at its margins. We like
Garanti Bank thanks to its improved risk/return profile, backed by lowered FX exposure and a more
balanced loan breakdown.

Table of Contents Page #
Executive Summary 3
Valuation Summary 4
Investment Thesis 11
Macro Forecasts 15
Growth Analysis 17
Box 1. What happened in 4Q08? 32
Box 2. Ownership Structure of Turkish Banks 33
A Top-Down Approach to the NPL Problem 34
Contraction in Earnings 44
Turkish Banking Sector Regional Comparison 50
Akbank 55
Garanti Bank 58
Halkbank 61
Isbank 64
Vakifbank 67
Yapi Kredi Bank 70
Sekerbank 73
TEB 76
TSKB 79
Albaraka Turk 82
Bank Asya 85

Executive Summary
We are maintaining our Neutral view on Turkish banks, as they are now going through the
second phase of the financial crisis, where the performance of the real sector will play a more
determining factor. We believe that Turkish banks emerged successfully in terms of capitalization
from the first phase of the crisis. Turkish banks will get through the second phase too, thanks to
their relative resilience in terms of financial strength, although they won’t go unscathed – we
forecast a 10% contraction in earnings for Turkish banks in 2009. While relative valuations in the
Turkish banking sector do not promise any miracle returns - thus justifying our Neutral view -
their better asset quality and less dependence on external borrowing compared to the banking
sectors of regional peers give some grounds for a certain amount of optimism.
􀂄 Loan-loss-provisioning expenses to hit earnings… 2009 will be characterized by three
“lows” - (i) Low growth, (ii) Low inflation and (iii) Low interest rates, all referring to a severe
slowdown in demand. Therefore, although we assume margins will remain flat, top-line growth
will be rather lacking in 2009. As such, declining volumes will result in a mere 8% YoY growth in
loans, according to our forecasts, both curtailing interest income and fee generation. Although
operational expenses will edge down, loan-loss provisioning will take a toll on banks’ earnings at
the bottom-line. Our forecast of a 10% YoY contraction in earnings for 2009 yields a 2009F 6.1x
P/E and a 0.8x P/BV for the banks in our coverage universe. These levels are not stunningly
attractive when compared to banking sectors in the region. Based on these multiples and given
the sluggish economic environment, we do not believe a solid recovery is imminent.
􀂄 Second phase: real sector performance to play determining role… The tide in NPL
ratios has only barely started to turn upwards, with average NPL ratios only inching up by a mere
50bps in 4Q08 to 3.5% by the end of the year. However, we expect cash flow problems to trigger
a rise in this ratio to 6.0% by the end of 2009, which is expected to precipitate a 70% jump in
banks’ loan-loss-provisioning expenses. However, the restructuring measures may limit the
expansion in NPLs, thus reducing provisioning rates and leading to higher-than-expected bottomline
and equity.
􀂄 Margins to hold their own… While the two arguments of (i) a declining cost of Lira funding
and (ii) almost unchanged cost of external borrowing will help banks improve their NIM levels in
2009, declining yields on the security portfolio are likely to offset this positive impact, with the
share of the security portfolio in total assets set to edge up slightly in 2009. Therefore, we expect
2009 margins to be little changed from 2008. Additionally, our expectation for the Central Bank to
cut key borrowing rate by 1pp to 12.00% during the rest of 2009 signals further ease in the cost
of Lira deposits.
􀂄 Lower fee income to be accompanied by lower operational expenses… In line with
slumping business volumes, fee generation is expected to demonstrate a slower 10% YoY
growth; however, operational expenses are expected to remain under strict control, only inching
up by 4% YoY and offsetting the negative impact of lower fee generation. The delays to branch
openings, pay cuts and even lay-offs are all expected to limit the OPEX growth.
􀂄 Rating changes to our coverage… The single rating change in our coverage is on Akbank:
we are upgrading our rating for the stock to Neutral from Underperform. Under these economic
circumstances, we are still betting on banks with (i) Solid financial strength, (ii) the ability to lower
OPEX, and (iii) the potential to derive fee generation, which are all met by Akbank. In our view,
its financial resilience, in terms of capitalization, prevents the downside risk and windfall mark-tomarket
gains on the security portfolio further enhance the capitalization of the bank. Competence
of the bank to apply a firm hand over its operational expenses promises to be one of the main
positives of Akbank.
􀂄 Isbank remains our top-pick with its rock solid financial structure blended with aboveaverage
profitability in our coverage universe… We also find Vakifbank extraordinarily cheap
despite its strong financial structure and moderate earnings performance. We have a Neutral
rating for Halkbank, as the low interest rate environment will chip away at its margins. We like
Garanti Bank thanks to its improved risk/return profile, backed by lowered FX exposure and a
more balanced loan breakdown. Its attractive valuation compared to domestic peers is expected
to result in an outperformance over the banking index, yet its upside potential is lower than our
market, hence we reiterate our Neutral rating for the stock. We reiterate our Underperform rating
for Yapi Kredi Bank, as the bank’s valuation still remains unattractive compared to Tier-I average.

Valuation Summary
We have valued banks on the P/BV – RoE paradigm, which in our view captures the risk return
trade-off offered by banks quickly and competently. Many bank multiples already largely reflect
the downturn in the economic activity, in our view. Overall, multiples are commonly just a tick
above the historical lows in the period following the 2001 crisis.
The Tier-I and Tier-II banks are currently trading at 2009F P/E multiples of 6.2x and 4.8x
respectively – well below the average of 8.2x across both groups over the last six years. It seems
the risk of an asset quality shift is mostly priced in and a further de-rating requires systemic
concerns over credit quality.