GARAN 1Q23 Review (Oyak Yatırım)

Top-line contracts; fees strong
Garanti posted 1Q23 net income of TL15,735mn (-21% q/q, +92% y/y), above market consensus (TL13,142mn) and our estimate (TL12,876mn). Core revenues (NII + fees) declined %35 q/q on contracted core spread (2.8ppt q/q, Akbank: -3.1ppt, OYAKe: -2.7ppt) due to high deposit costs and lower yield from CPI-linkers post 4Q’s high base, despite strong fees. Fees surged 106% y/y thanks to growing loans and payment system contribution, while opex expanded by 140%, driven by high inflation and earthquake-related expenses. Net total CoR dropped to 140bp this quarter from 280bp in 4Q22 on intact asset quality. ROE went down to 39% in 1Q23 from 56% in 4Q22 and 37% a year ago.
Garanti guides for in-line with CPI TL loan growth, 1.85ppt drop in NIM (excluding CPI-linkers), >CPI fee growth and 100bps net CoR coupled with >28% RoE for 2023. This guidance is in line with our 23E RoE expectation of 31.5% for Garanti, which indicates 23% drop in net earnings.
We expect earnings to be weaken in 1H on the back of retreating TL spreads as loan yields are under regulatory pressure and potential ebb in inflation reflecting negatively on securities yields. We expect fee growth to be strong on new customer acquisition and loan growth. Asset quality, on the other hand, should remain intact backed by high provisioning.
Spread contraction takes its toll from NIM
TL spread contracted 3ppt q/q (Akbank: -3.9ppt, OYAKe: -3.3ppt) on lower loan yields versus high deposit costs, while FX spread inched up 57bp q/q. Reflecting this and y/y lower CPI assumption (45% for Oct23; Oct22: 85.5%), NIM went south by 5.7ppt q/q (Akbank: -6.8ppt, OYAKe: -6ppt). Garanti gained market share in TL deposits and FX loans in 1Q23. TL loans grew 10.3% q/q vs +12.1% for private banks (PBs), while TL deposits expanded 32.3% q/q vs +21.2% for PBs. On FX (USD) side, loans went up 7.6% q/q vs -0.7% for PBs, deposits contracted 7.6% vs -3.7% for PBs.
Asset quality appears good; free provisioning remains strong
NPL ratio slid to 2.4% in 1Q23 from 2.6% in 4Q on limited fresh NPL inflows and strong loan growth. The Stage-2 to total loans ratio increased to 15.5% in 1Q from 15.1% last quarter, while Stage-2 coverage slid to 18.8% (-1.2ppt q/q). Garanti’s free provision buffer remained strong at TL8bn as of 1Q.
FY23E earnings and OP rating maintained
We foresee Garanti’s 2023E earnings to decline 23% y/y to TL45bn, assuming that inflation retreats and linker yields drop in 2023. Garanti trades attractively at 23E P/BV of 0.8x and 2.5x P/E, while 23E ROE stands at 31.5%. We maintain our Outperform rating for the stock with a TP of TL43.47 per share.


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