TSKB_Company_Report_July 2012

Company Report Banking Sector

19 July 2012

Sustainable Banking…

Derya Guzel Research Analyst [email protected]

Advantageous funding ability...Low cost & long term funding enables the bank to execute long term lending, and hence less volatile loan yields should result in resilient NIM, in our view. It is no coincidence that medium and long term loans account for 88.7% of TSKB’s total lending book, but rather, part of a sustainable strategy. TSKB matches funding with lending, and thus has no currency and maturity mismatch on its loan book. We expect TSKB to be one of the players within the Turkish banking universe to maintain its NIM above 4%, at least over the next two years, and it should even subsequently be able to extend margins. We forecast 4.2% NIM in 2012 and estimate a sustainable NIM level of 4% thereafter. Thanks to its long-standing relationships with multilateral agencies backed by Turkish Treasury Guarantee, TSKB has had the ability to borrow funds even during crises. In 2009 it was able to borrow USD 1,039mn from multilateral agencies in total. The only risk in our view is the need to find the right loan segments and project finance deals to channel funds. Superior asset quality... With a 0.40% NPL ratio TSKB has the lowest NPL’s within the sector, vs. the sector’s 2.7% NPL ratio (based on weekly BRSA data as of 22nd June’12). TSKB’s superior asset quality is mainly due to: 1) An extensive knowledge of the loan segments the bank operates 2) Its involvement throughout the project financing life cycle, and its provision of advice to borrowers, hence any risk of asset quality problems being discovered at an earlier stage, 3) And finally a lack of exposure to retail lending (i.e credit cards or mortgages). Successful track record in delivering highest ROE... TSKB has been one of the highest ROE earners of the banking sector. Between 2005 and 2011 it managed to deliver average ROE of 19.3% to its investors. And we estimate it ending 2012 above 20% ROE followed by 19.2% and 19% in 2013F and 2014F, respectively. Valuation, recommendatation and risks... We rate TSKB “Outperform” with a 12M target price of TRY2.42. The stock trades on PBR of 1.29x and PER of 6.8x on our 2012 estimate. Slower than expected GDP growth is a downside risk to our loan growth, earnings and NPL estimates, whereas moving into the infrastructure segment is an upside risk to our loan growth estimate as there are several still incomplete infrastructure privatisation deals in the PA’s pipeline.

TSKB- Türkiye Sinai Kalkınma Bankası

Şeker Securities Research

OUTPERFORM TP: TRY2.42

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18/07/2011 18/01/2012 18/07/2012

Xbank relative Share Price (TRY)

Performance TRY USDClose 1.82 1.01High, 52w 1.91 1.07Low, 52w 1.21 0.67Ticker# of Shares, mn 1,100.0Return 1 M YOY YTDTRY Return (%): 6.4 4.5 41.6US$ Return (%): 6.7 -4.8 50.0ISE-100 Relative (%): -0.7 3.8 16.3Avg. Daily Vol. (TRY Mn): 3.68Avg. Daily Vol. (US$ Mn): 2.06

TSKB.TI /TSKB.IS

Quick Facts 2011A 2012E 2013ENet Income (TRYm) 255 299 327 % Change, YoY 17.0% 9.4%NPL (%) 0.40 0.45 0.60NIM (%) 4.2 4.0 4.1

Multiples 2011A 2012E 2013EP/E (x) 7.9 6.8 6.2P/BV (x) 1.48 1.29 1.10

ValuationCurrent Price, TRY 1.82Target Price, TRY 2.42Upside Potential 33%Rating OPTarget Mcap, TRYbn 2,662

19 July 2012

Banking Sector | TSKB P a g e | 1

Investment Case

Low cost & long term funding allows the bank to lend at long term, and hence less volatile loan yields should result in resilient NIM, while having no retail lending exposure provides further margin immunity in our view. It is no coincidence that medium and long term loans account for 88.7% of TSKB’s total lending book, but rather part of a sustainable banking strategy. TSKB matches funding through lending, and hence has no currency and maturity mismatch on its loan book. We expect TSKB to be one of the players within the Turkish banking universe to maintain its NIM level above 4%, at least over the next two years, and even to be able to subsequently extend margins.

TSKB has one the highest ROE ratios among our banks coverage after Halkbank. Between the years of 2005-2011 it managed to delivery its investors an average ROE of 19.3%. We estimate TSKB ending 2012 above 20% ROE followed by 19.2% and 19.0% in 2013F and 2014F, respectively. We expect our 20% ROE estimate in 2012F to be driven by 1) 16% loan growth in local currency terms, 2) estimated 4.2% NIM for 2012 and 4.0% sustainable NIM level thereafter, 3) 14% net interest income growth, 4) 0.45% NPL ratio, 5) 10% fee growth and 6) opex growth of around 9%.

Robust asset quality: the best within the sector....

With a 0.40% NPL ratio TSKB has the lowest NPL’s within the Banking sector in Turkey, vs. the sector’s 2.7% (based on weekly BRSA data as of 22nd June’12). TSKB’s high NPL ratio from 2001 until 2004 was due to a legacy NPL portfolio acquired via Isbank group companies. However, as of 2004 TSKB’s NPL ratio evolution has fallen short of the banking sector. TSKB’s NPL ratio from 2008 to Mar’12 averaged at 0.53%, one of the lowest in the sector.

TSKB has superior asset quality mainly due to: 1) Its extensive knowledge of the segments it operates in, 2) its involvement throughout the project financing life cycle and offering advice to borrowers, hence earlier capture of any asset quality risks, 3) And finally a lack of exposure to retail lending (credit cards or mortgages).

Figure 1: TSKB quarterly NPL ratio (%) evolution vs. sector

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2.0

4.0

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8.0

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Sector TSKB

TSKB has the lowest NPL ratio in the sector (TSKB 0.4% vs. 2.7% sector)

Source: BRSA

19 July 2012


A better than sector NPL ratio may raise questions over its sustainability. However, we believe that as the bank is not active in the retail segment the risk of sharp NPL ratio deterioration is minimal. We expect TSKB to end the year with a 0.45% NPL ratio, vs. our 3.2% expectation for the Turkish Banking sector. The downside risk to our NPL ratio is that since TSKB’s ticket size in lending is quite large when compared to the sector (especially in project finance), the addition of just one corporate file to NPL would increase the NPL ratio sharply.

The Bank has a 100% provisioning policy for all non-performing loans regardless of collateral attached to the loan. TSKB has had no NPL write-off or sale policy for the past twenty years, and our impression from meetings with the bank is that it has no plans to change its policy going forward.

Lending portfolio: long term & FX loans concentrated Its aim, as a Turkish industrial Development Bank, is to assist enterprises in all sectors, but with special emphasis on the industrial sector. Given this special focus the bank is able to obtain long term & low cost funds from financial institutions. The joint aim of these multilateral agencies is to offer financial aid to emerging market economies, including Turkey. In that sense, TSKB is effectively an intermediary between Turkish companies and multilaterals, hence funds borrowed by it from these agencies receive a Turkish Treasury guaranty.

35% of TSKB’s total loan book as of March-2012 consists of loans provided to the energy generation sector. In line with its overall mission of becoming the leading financer of the renewable energy sector, the bank as of 2009 included energy efficiency project financing in its portfolio. Indeed, as of end-Dec-11 it had financed a total of 93 renewable energy projects. However, at our meetings with TSKB management they have emphasized that going forward the focus would be on infrastructure projects as the segment attracts more investors and offers long-term business prospects. Please remember that based on the data published by the Central Bank of the Republic of Turkey (CBT), Turkey’s privatisation efforts have generated USD 44bn over the past eight years, and that there are numerous areas i.e. Infrastructure and energy generation which remain partially executed.

Figure 2: Sectoral distribution of TSKB’s loan book

35%

13%

10%

9%

7%

7%

6%

6%

5%

4%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Energy production

Finance

Other

Logistics

Non‐residential Real Estate

Metal and machinery

Electricity/Gas distribution

Chemistry and Plastics

Construction

Tourism

Source: Company data

APEX lending: TSKB is acting as an intermediary between Turkish companies and multilateral agencies

19 July 2012


TSKB also has a unique way of lending to SMEs, namely APEX lending, whereby the Bank operates as an agent between banks and multilateral agencies, whereby it carries no NPL risk. And considering that the SME segment is one of the highest NPL generators within the lending book in times of economic downturn, no direct exposure to SMEs (in TSKBs case via Apex lending) provides an extra support to the NPL ratio. Currently, 11% of TSKB’s total loan book comprises APEX loans, down from 18% in 2010. This year the bank obtained a USD300mn loan via the European Development Bank for use in APEX lending, and we expect TSKB to use at least USD200mn of it this year. Hence, we anticipate a slight increase in Apex lending over the coming quarters.

In 2009 with the issuance of a Turkish Lira corporate bond the bank was able to lend in local currency. Yet as there is currently no demand for Turkish Lira loans, TSKB is inactive in such lending. However, we believe that with the rates on a gradual decline there might be a business opportunity for TSKB to engage in long term local currency borrowing and lending.

As of March’12 98% of TSKB’s loan book is foreign currency dominated, hence the bank doesn’t carry any currency mismatch, unlike others. When considering the FX lending portfolio in detail we see that 44% of total lending is in EUR and 54% in USD, and that the lending portfolio has an average maturity of 5 years.

It is no coincidence that medium and long term loans account for 88.7% of TSKB’s total lending book, but rather a part of its sustainable banking strategy. As of Dec-11, 11.3% of the bank’s loan portfolio comprised loans of less than one year (down from 14.9% a year earlier), 41.9% of loans are up to 5 years and 38.1% were longer than 5 years, with 8.7% having maturities of over 10 years. The share of loans of over 10 year maturity within the total loan book has been rising steadily over the years (to 8.7% in 2011 from 4.7% in 2009).

Figure 3: Loan book maturity as of Mar’12 Figure 4: Funding maturity as of Mar’12

46.8% of loan book consists of loans up to longer than 5 years

46.8% of loan book consists of loans of longer than 5 year maturity

Further increase in Apex lending over coming quarters

TSKB may become more active in local currency lending going forward with favorable rates

Demand0%

Upto 1m5%

1‐3m4% 3‐12m

6%

1‐5yrs35%

5yrs +50%

Source: Company data, Seker estimates

Demand0%

Upto 1m2%

1‐3m4%

3‐12m16%

1‐5yrs57%

5yrs +21%


98% of TSKB’s LT loan portfolio is FX dominated

19 July 2012


Funding Structure: “Long Term & Low Cost Funding”

Of total funds borrowed, 93% are long term funds. As of 1Q’12 TSKB has USD3,525mn of long term and USD282mn of short term funds available for utilization. Since 2009, total funding agreements TSKB has signed amount to USD1,895mn. Short terms funds are made up of syndication loan agreements and money market instruments.

Due to its investment and development bank status, TSKB by law is not permitted to collect deposits, but rather, is able to obtain long term & low cost funds from multilateral financial institutions such as World Bank (IBRD), European Investment Bank (EIB), Council of Europe Development Bank (CEB), Kreditanstalt für Wiederaufbau (KfW), Agence Francaise de Developpement (AFD), International Finance Corporation (IFC) and European Bank for Reconstruction and Development (EBRD). The joint aim of these multilateral agencies is to offer financial aid to emerging market economies, including Turkey. In that sense TSKB acts as an intermediary between Turkish companies and the above-mentioned agencies, which means that 100% of long term funds obtained via multilateral agencies are Treasury guaranteed.

Thanks to its long standing relations with multilateral agencies and Turkish Treasury Guarantee, TSKB has enjoyed the ability to borrow funds even in times of crisis. In 2009 the bank was able to borrow USD1,039mn in total from multilateral agencies. The sole risk in our view involves finding the right loan segments and project finance deals to channel funds. As of March-2012 repo funding comprises 12% of TSKB’s liabilities, with 65% made up of long term funds, 15% equity and the remaining 8% other liabilities.

Figure 5: Multilateral funding agreements signed by year (USDm)

279

549

1,039

121

660

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200

400

600

800

1,000

1,200

2007 2008 2009 2010 2011

Since 2009 total funding agreements signed by TSKB amount to USD1,895mn.

Thanks to its long standing relations, TSKB has had the ability to borrow funds even during crises.


19 July 2012


Since TSKB borrows long term in FX, (the average maturity of its long term funding base is 12 years) and it lends long in FX (medium and long term loans account for 88.7% of TSKB’s total lending book), hence TSKB doesn’t carry maturity or currency mismatch between its funds and loan book.

Figure 6: Duration of TSKB’s funding base Figure 7: Outstanding funding base (USDm)

Figure 8: TR Banks balance sheet maturity mismatch as at Mar-12

Akbank Garanti Halk Isbank Vakif YKB TSKB Akbank Garanti Halk Isbank Vakif YKB TSKB

AssetsDemand 15.1 7.5 2.1 17.6 11.6 8.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Upto 1m 17.4 22.5 8.2 23.6 6.1 16.5 0.3 0.1 0.1 0.0 0.1 0.0 0.1 0.0

1-3m 10.0 8.0 7.3 9.2 3.4 7.4 0.3 0.1 0.1 0.2 0.1 0.1 0.1 0.1

3-12m 18.6 13.2 23.3 25.3 14.2 18.1 1.5 1.0 0.7 1.8 1.2 1.1 1.3 1.2

1-5yrs 54.0 65.3 40.7 55.4 41.5 26.2 5.3 14.1 15.8 15.5 12.3 15.8 8.9 20.1

5yrs + 20.3 28.0 9.5 21.3 15.2 24.3 1.8 7.1 9.0 4.8 6.3 7.7 11.0 9.2

Not specified 2.1 4.2 3.4 10.2 2.8 5.1 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total 137.7 148.6 94.5 162.6 94.6 106.0 9.5 22.4 25.7 22.4 19.9 24.7 21.4 30.5

LiabilitiesDemand 9.7 16.4 16.1 17.2 8.9 12.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Upto 1m 64.3 71.7 43.6 78.1 47.0 44.1 1.4 0.2 0.2 0.2 0.2 0.2 0.2 0.1

1-3m 19.7 14.4 11.4 25.1 16.7 15.7 0.3 0.3 0.2 0.2 0.3 0.4 0.3 0.1

3-12m 14.5 10.9 9.3 12.9 6.9 9.2 0.4 0.8 0.6 0.7 0.6 0.5 0.6 0.3

1-5yrs 8.8 9.5 2.3 4.4 1.8 9.0 2.4 2.3 2.3 0.9 1.0 0.7 3.1 9.0

5yrs + 2.5 4.4 1.8 1.1 1.7 2.6 3.4 0.9 1.4 0.9 0.3 0.8 1.2 17.1

Not specified 18.2 21.3 9.9 23.7 11.7 13.3 1.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total 137.7 148.6 94.5 162.6 94.6 106.0 9.5 4.5 4.7 3.0 2.5 2.7 5.4 26.5

18.0 21.0 19.4 17.4 22.0 16.0 4.1

TLbn Months

Maturity GAP

Long term funding , 93%

Short term funding, 7%

2,036

2,513

2,848 3,016

3,351 3,525

640 413

94 258 296 282

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3,000

3,500

4,000

2007 2008 2009 2010 2011 1Q 2012

Long term funds Short term funds

Source: Company data Source: Company data

19 July 2012


Fee & Commission generation: we see limited growth potential... The share of TSKB’s fee & commission business within total banking revenues, at 2% is rather small when compared to Tier 1 banks. TSKB’s main source of fee income stems from non-cash lending activities, which account for around 69% of fee & commission income.

Other contributors to fee & commission income are brokerage (19%), fund management (4%), and the corporate finance business (8%). Due to the regulatory cap on fund management fees, its share within total fee & commission income declined to 4% in 1Q12 from 15% in 2010. Corporate finance related fees are also subject to volatility depending on market conditions and GDP growth. Mainly stemming from IPO and fixed income related deals, TSKB’s corporate finance related fees fell to 8% in 1Q12 from 36% in 2010. Recall that in 2010 TSKB was involved in a number of high profile IPOs, including Emlak REIT, the largest IPO of 2010, and the fifth largest in the ISE’s history.

As mentioned above, driven by corporate finance activities in 2010, TSKB managed to grow its fee income base by 93.9%, although slower GDP growth decreases fee income. We foresee TSKB growing its fee & commission income by 10.6% in 2012 driven mainly by non-cash loans.

We foresee limited growth in TSKB’s fee & commission income over the coming few years. We forecast fee income stabilizing at around 3% of total banking revenues from 2013F onwards, and the non-cash loan segment remaining the largest contributor to fee income. The upside risk to our fee income estimate would be TSKB involvement in another major IPO, or else further infrastructure segment privatisation activities in the coming years.

Figure 9: Fee & commission income growth estimates

Fee & commission income currently accounts for 2% of total banking revenues.

We estimate fee income stabilizing at around 3% of total banking revenues from 2013F onwards

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19 July 2012


OPEX: Low cost to income due to lack of branch network

For the past three years, TSKB’s opex growth has averaged at 8%, and in 2011 the bank managed meagre growth of 4% in this item. We estimate around 9% higher costs for the bank in 2012F, and 13% in 2013F, mainly driven by HR costs. Staff-related cost make up 62% of TSKB’s total operating expenditure as of March 2012.

Due to its corporate and development bank status TSKB doesn’t collect deposits, or operate in the retail segment. Hence it has just 3 branches and a headquarters based in Istanbul, and as of 1Q12 employs 347 personnel. Duly, TSKB’s cost to income ratio of around 18% is well below the average of 50% for deposit banks.

Foreign ownership of free float

While during the crisis TSKB experienced some decline in its foreign ownership in free float as of 2010, we now observe a steady rise in foreign interest in the stock. As of June 2012, foreign ownership stands at 52.2%, vs. 51.8% in the same period a year ago.

Figure 10: TKSB Expense ratios forecasts 2012-2014F

Figure 11: TSKB’s foreign ownership of free float 2005- March 2012 (%)

Expense ratios (%) 2010 2011 2012F 2013F 2014F

Cost/income 20.4 17.9 18.8 17.9 18.9

Cost/NII plus fees 20.1 17.3 18.4 17.7 18.8

Fees coverage of Opex 21.6 15.2 19.7 20.4 20.0

Cost/Total assets 0.9 0.7 0.8 0.7 0.7

Source: Company data and Seker estimates

Source: ISE and Company data

52.70%49.40%

41.80% 41.50%37.80%

53.40%50.10%

52.20%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

As of Jun’12 the foreign ownership of TSKB’s free float stands at 52.2%, vs. 51.8% in the same period a year ago

HR cost makes up 62% of Opex in March 2012

TSKB’s has a cost income ratio of around 18%, vs. 50% in deposit banks

19 July 2012


Summary of 1Q’12 results

During 1Q12, TSKB announced net income of TRY 81mn, up +12% QoQ and +22% YoY, thus beating the consensus estimate by 7%, driven by better than expected net interest income (6% QoQ). Loan growth in EUR/USD basket terms came in at 4.5% QoQ. The bank managed to sustain its superior asset quality with no NPL inflows during 1Q12, and its low NPL ratio of 0.4%, precluded the need to set aside specific provisions.

Unlike the sector trend , TSKB managed to contain cost growth. Opex on a YoY basis declined by 5% driven by non-HR cost. Accordingly, its cost to income ratio improved to 14.5% from 18.0% a year ago.

CAR ratio improved by 30bps from a quarter ago to 19.4%, while ROE on a 12M rolling basis came in at 19.9%, vs. 19.4% in Dec-11 and 18.8% in Mar-11.

Figure 12: 1Q’12 results summary

TSKB Bank-only results summaryIncome Statement (TRYm) 1Q11 4Q11 1Q12 QoQ (%) YoY (%)Gross interest income 124 137 143 4.6 15.5

Interest expense -36 -38 -39 2.1 9.3

Net interest income 88 99 104 6 18

Net fees 3 1 3 89.8 -26.1

Net trading and currency gains 1 -1 3 N/M 165.9

Revenues 93 99 110 10.2 18.1

Cost -17 -20 -16 -21.6 -4.9

Operating income 76 79 94 18.4 23.2

Other income 13 13 9 -29.9 -29.1

Provisions -7 -1 -4 N/M -52.6

Pre tax income 82 91 100 9.3 21.7

Taxes -15 -19 -18 -2.1 20.3

Net income 67 72 81 12.3 22.0

Balance Sheet (TRYm) Mar-11 Dec-11 Mar-12 QoQ (%) YoY (%)Cash and liquid assets 112 121 175 44.7 56.3

AFS securities 2,130 2,321 2,601 12.1 22.1

HTM securities 308 127 0 N/M N/M

Customer loans 5,110 6,367 6,318 -0.8 23.6

Non performing loans 24 26 26 -0.6 7.9

Total assets 8,329 9,456 9,500 0.5 14.1

Borrow ed funds 5,267 6,779 6,605 -2.6 25.4

Shareholders' funds 1,279 1,366 1,436 5.2 12.3

Selected ratios (%) Mar-11 Dec-11 Mar-12 QoQ (%) YoY (%)NIM 4.0 4.1 4.2 1.0 3.3

ROA 2.9 2.9 2.9 2.4 -0.1

ROE 18.5 19.4 19.9 2.7 7.8

LDR 97.0 93.9 95.7 1.9 -1.4

Leverage (x) 6.5 6.9 6.6 -4.5 1.6

Cost income 18.0 17.9 14.5 -19.0 -19.5

Fee coverage of cost 20.9 15.2 16.2 6.6 -22.3

Tier-1 CAR 18.1 17.0 17.1 1.0 -5.5

Total CAR 21.0 19.1 19.4 1.9 -7.5

NPL 0.5 0.4 0.4 0.1 -12.7

Cost of risk 0.6 0.1 0.2 N/M -63.0


19 July 2012


Valuation and Estimates

We use the residual earnings (RE) methodology to value TSKB and other banks within our coverage when setting target prices. RE methodology can be viewed as a dividend discount model. Residual earnings are the return on common equity, expressed as a TL return, rather than a ratio. For each earnings period we restate residual earnings as Residual Earnings = (Return on Equity – Cost of Equity)*BV per share.

We rate the stock “Outperform” with a 12M target price of TRY2.42. There are several reasons behind our recommendation (in order or importance):

1. We like TSKBs superior asset quality compared to sector,

2. Turkish Treasury guarantee ensures the bank has no funding constraints in tighter liquidity periods, and the ability to borrow long term and low cost, hence higher spreads,

3. We believe that the shift away from energy sector lending to infrastructure is an upside risk to our loan growth estimate, as there are several incomplete infrastructure privatisation deals in the pipeline,

4. TSKB has been one of the highest ROE earners of the banking sector. Between 2005 and 2011 TSKB managed to deliver its investors an average ROE of 19.3%. We estimate the bank delivering average 19.5% ROE in our forecast period of 2012-2014F.

Figure 13: Target Price Model

Figure 14: TSKB bank only forecasts and ratios


Year to Dec 2007 2008 2009 2010 2011 2012F 2013F 2014FLoans (TLm) 2,554 3,668 3,820 4,773 6,367 7,395 8,726 10,297

Revenue (TLm) 146 220 264 307 363 417 455 527

NII (TLm) 137 244 255 298 364 415 445 516

Net income (TLm) 147 119 175 212 255 299 327 378

BVPS (TL) 0.67 0.68 0.95 1.15 1.24 1.43 1.67 1.94

EPS (TL) 0.13 0.11 0.16 0.19 0.23 0.27 0.30 0.34

PER (x) 13.7 17.0 11.6 9.6 7.9 6.8 6.2 5.4Yield (%) 0.00 0.00 1.48 1.56 1.88 2.27 2.66 2.90PBR (x) 2.74 2.70 1.94 1.60 1.48 1.29 1.10 0.95ROE (%) 22.2 16.0 18.7 18.0 19.4 20.3 19.2 19.0

TSKB Target Price assumption- Residual Earnings Estimate

2008 2009 2010 2011 2012F 2013F 2014F

EPS 0.11 0.16 0.19 0.23 0.27 0.30 0.34

DPS 0.04 0.02 0.03 0.04 0.05 0.05 0.06

BVPS 0.68 0.95 1.15 1.24 1.43 1.67 1.94

ROE 0.16 0.19 0.18 0.19 0.20 0.19 0.19

Cost of Equity 0.13 0.13 0.13 0.13 0.13 0.13 0.13

Growth in RE 0.47 0.21 0.21 0.17 0.09 0.09

13.3 % on RE 0.02 0.04 0.04 0.07 0.09 0.08 0.10

Present Value of RE 0.02 0.04 0.04 0.07 0.09 0.08 0.10

Total PV of RE 0.48

Continuing value (CV) 1.08

Present Value of CV 0.51

Target Price (TRY) 2.42

19 July 2012


TSKB Investor Multiples in Context

Figure 15: PBR (x) 2012F and 2013F

Figure 16: PER (x) 2012F and 2013F



1.65

1.47

1.361.29 1.27

1.151.07

0.90

1.371.28

1.20

1.10 1.11

1.00 0.97

0.82

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Halkbank Garanti Akbank TSKB Industry Yapi Kredi Isbank Vakifbank

2012F 2013F

10.1

9.08.6

8.37.9 7.7 7.6

6.8

8.5

7.7 7.57.1

6.5 6.7 6.76.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Akbank Garanti Isbank Industry Vakifbank Yapi Kredi Halkbank TSKB

2012F 2013F

19 July 2012


Company Profile

A bank on a “mission”

TSKB is Turkey’s only listed corporate and development bank, as well as its first private investment and development institution. The bank was established in 1950 with World Bank assistance (its first CEO was also a World Bank veteran) along with the collaboration of the Turkish Government, Central Bank of Turkey (CBT) and leading domestic commercial banks.

The aim of the bank as a Turkish industrial development entity is to assist enterprises across all sectors with special attention to industry. The bank also facilitates domestic and international investment in local companies. As well as providing financial support to companies, TSKB offers consultation, technical support and sector expertise.

TSKB is the 16th largest bank by asset size as of Mar’12. The banks’ headquarters is located in Istanbul and it has only three other branches, in Ankara, Izmir, and Bahrain (which is in the process of closing down). As of the end of 1Q12 TSKB employs 347 personnel. The bank does not collect deposits, but funds itself via long-term borrowings from multinational corporations.

Isbank Group companies own 50% of TSKB, while 8% is owned by Vakifbank and the remaining 42% is traded on the ISE. Isbank has 8 members on TSKB’s board, while Vakifbank is represented with one board member.

Figure 17: Ownership structure

Isbank50%Free Float

42%

Vakifbank8%

Detailed ownership %

Isbank 40.52%

Camis Yatırım Holding 5.80%

Milli Reasurans 1.90%

Anadolu Hayat Emeklil ik 0.89%

Anadolu Sigorta 0.89%

Isbank Group 50.00%

Vakifbank 8.38%

Istanbul Ticaret Odas ı 0.52%

Istanbul Ticaret Borsas ı 0.21%

Istanbul Sanayii Odas ı 0.12%

Other 2.89%

Free Float 37.88%

TOTAL 100.00%

Source: Company data

19 July 2012


Figure 18: TSKB- FINANCIALS SUMMARY


TRYm 2007 2008 2009 2010 2011 2012F 2013F 2014F

Net Interest Income (NII) 137 244 255 298 364 415 445 516

Fees and comm 5 4 7 14 10 11 12 15

Trading income 23 (21) 3 (1) (29) (5) 2 -

Foreign exchange gains (19) (7) (1) (2) 18 (4) (4) (4)

Bank revenues 146 220 264 307 363 417 455 527

Staff cost (26) (31) (33) (36) (33) (36) (40) (45)

Other cost (17) (21) (21) (25) (31) (31) (35) (39)

Total OPEX (43) (52) (54) (61) (64) (67) (76) (84)

Operating Income 103 168 210 246 300 350 380 443

Associates 20 24 19 23 26 27 28 30

Other income 62 10 25 26 28 34 36 42

Income before provision 185 202 255 294 353 411 444 515

Provisions for loan losses (1) (12) (1) (9) (1) (10) (31) (42)

Other provisions (14) (42) (42) (16) (33) (24) (7) (9)

Depreciation and amortisation (2) (1) (1) (1) (1) (4) (4) (4)

Pre Tax Income 169 147 211 268 318 373 402 459

Taxes (23) (29) (36) (57) (62) (75) (77) (83)

Net income 146 118 175 212 255 299 326 376

Balancesheet Summary

Cash and alike 3 10 3 64 121 133 146 161

Due from banks 28 147 155 162 60 66 72 79

Trading securities 82 27 43 67 104 115 126 139

Fixed income securities 1,668 1,755 2,428 2,441 2,447 2,407 2,366 2,325

Loans 2,554 3,668 3,820 4,773 6,367 7,395 8,726 10,297

Total IEA 4,336 5,608 6,448 7,508 9,099 10,116 11,438 13,002

Fixed assets 17 26 22 16 9 10 10 11

Assets total 4,883 6,209 6,905 7,912 9,456 10,444 11,734 13,264

Interbank funds 834 806 1,285 1,186 948 1,047 1,176 1,329

Funds borrowed 3,115 4,436 4,328 4,998 6,779 8,000 7,488 6,964

Int bearing liabilities 3,949 5,242 5,613 6,184 7,727 9,046 8,664 8,293

Shareholders Equity 738 750 1,041 1,264 1,366 1,575 1,836 2,138

Per share data and valuation

BVPS (TL) 0.67 0.68 0.95 1.15 1.24 1.43 1.67 1.94

EPS (TL) 0.13 0.11 0.16 0.19 0.23 0.27 0.30 0.34

PER 13.7x 17.0x 11.6x 9.6x 7.9x 6.8x 6.2x 5.4x

PBR 2.74x 2.70x 1.94x 1.60x 1.48x 1.29x 1.10x 0.95x

Dividend Yield (%) 0.00 0.00 1.48 1.56 1.88 2.27 2.66 2.90

19 July 2012


Figure 19: TSKB- RATIO ANALYSIS


2007 2008 2009 2010 2011 2012F 2013F 2014F

Balance sheet ratios (%)

Loans/Total assets 52.3 59.1 55.3 60.3 67.3 70.8 74.4 77.6

Consumer loans/Total assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Home loans/Total assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Securities/Total assets 34.2 28.3 35.2 30.9 25.9 23.0 20.2 17.5

Shareholders' funds/Total assets 15.1 12.1 15.1 16.0 14.4 15.1 15.6 16.1

Shareholders' funds/RWA 25.6 18.0 23.3 21.8 17.4 16.4 17.1 17.6

Asset quality (%)

NPL 0.75 0.90 0.56 0.53 0.40 0.45 0.60 0.60

Total cost of risk 0.60 1.72 1.14 0.57 0.61 0.50 0.50 0.57

Expense ratios (%)

CIR 29.5 23.6 20.4 20.0 17.5 16.1 16.6 16.0

Fees coverage of cost 11.1 7.4 12.9 22.0 15.5 16.3 16.1 17.8

Cost/Total assets -0.9 -0.9 0.8 0.8 0.7 0.6 0.6 0.6

Spreads and margins (%)

Loan spread 7.0 5.7 6.0 4.7 5.1 5.4 5.5 5.8

Bond spread 13.8 14.7 11.8 9.3 8.6 8.8 8.7 8.7

Average spread 9.7 8.6 8.3 6.2 6.1 6.2 6.2 6.3

NIM 3.1 4.4 3.8 4.1 4.1 4.2 4.0 4.1

Net fees/Total assets 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.1

ROE 22.2 16.0 18.7 18.0 19.4 20.3 19.2 19.0

ROA 3.3 2.1 2.6 2.9 2.9 3.0 2.7 2.8

Growth measures (%)

Loans 16.6 43.6 4.1 25.0 33.4 16.2 18.0 18.0

Assets 20.2 27.1 11.2 14.6 19.5 10.4 12.4 13.0

Net interest income -3.1 77.8 4.8 16.6 22.4 13.9 7.2 16.1

Fees and comm -36.1 -19.9 81.5 93.9 -26.8 10.6 11.4 23.0

Cost -0.1 0.2 0.1 0.1 0.0 0.1 0.1 0.1

Net income 38.6 -19.3 47.0 21.0 20.7 17.0 9.4 15.7

Capital (TRYm)

RWA 2,887 4,161 5,800 5,800 7,860 9,584 10,769 12,172

Capital 797 879 1,318 1,318 1,499 1,804 2,149 2,558

CAR (%) 27.6 21.1 22.7 22.7 19.1 18.8 20.0 21.0

Tier-1 Capital 701 828 1,137 1,137 1,333 1,536 1,757 2,007

Tier-1 (%) 24.3 19.9 19.6 19.6 17.0 16.0 16.3 16.5

19 July 2012


Ş E K E R S E C U R I T I E S R E S E A R C H

Şeker Yatırım Menkul Değerler A.Ş. TEL: +90 (212) 334 33 33 İnönü Cad. Tumşah Han No: 36 Fax: +90 (212) 334 33 34 Beyoğlu – İSTANBUL E-mail: [email protected] TURKEY Web: http://www.sekeryatirim.com/english/index.aspx

For additional information, please contact:

Research Kadir Tezeller Head of Research +90 (212) 334 33 33 [email protected] Derya Guzel Banking +90 (212) 334 33 33 x228 [email protected] Burak Demirbilek Utilities, Aviation, Iron-Steel, Beverage +90 (212) 334 33 33 x128 [email protected] Selahattin Aydin Cement & Technical Analyst +90 (212) 334 33 33 x251 [email protected] Ezgi Gulbas Autos, Oil & Gas, Retail +90 (212) 334 33 33 x201 [email protected] Volkan Dukkancik Telecoms, REITs, White Goods, Glass +90 (212) 334 33 33 x257 [email protected] Okan Uzun Banking, Insurance, Conglomerates +90 (212) 334 33 33 x245 [email protected] Engin Degirmenci Database Associate +90 (212) 334 33 33 x334 [email protected] Economy & Politics Ibrahim Aksoy Economist +90 (212) 334 91 04 [email protected] Institutional Sales Batuhan Alpman Head +90 (212) 334 91 01 [email protected] Volkan Muhurcuoglu Sales +90 (212) 334 91 02 [email protected] Selin Gursel Trader +90 (212) 334 91 03 [email protected] Murat Senalp Sales Representative +90 (212) 334 91 05 [email protected]

DISCLAIMER

I, DERYA GUZEL, hereby certify that the views expressed in this research accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

This report has been prepared by Şeker Yatırım Menkul Değerler A.Ş. (Şeker Securities, Inc.). The information and opinions contained herein have been obtained from and are based upon public sources that Şeker Securities considers to be reliable. No representation or warranty, express or implied, is made that such information is accurate or complete and should not be relied upon, as such. All estimates and opinions included in this report constitute our judgments as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors as they believe necessary. Şeker Securities may, from time to time, have a long or short position in the securities mentioned in this report and may solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriter or lender) for any company referred to in this report and may, to the extent permitted by law, have acted upon or used the information contained herein, or the research or analysis upon which it is based, before its publication. This report is for the use of intended recipients and may not be reproduced in whole or in part or delivered or transmitted to any other person without the prior written consent of Şeker Securities. By accepting this document you agree to be bound by the foregoing limitations.

Copyright © 2012 Şeker Securities, Inc.

TSKB_Company_Report_July 2012

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