Garanti Bank:BBVA's stake increase is Credit supportive;u/g '19s and '21s to Buy
BBVA increases stake in Garanti by 9.95% to 49.85%BBVA (Baa1/BBB+/A-) yesterday entered into an agreement with Dogus Group(Ba1/BB-/NR) to acquire an additional 9.95% stake in Garanti Bank for a totalconsideration of TL3.3bn (~USD916mn). Following the acquisition, BBVA’sstake in Garanti Bank will increase to 49.85%, Dogus’ stake will decline to0.05% and the remaining 50.1% will be free float. The transaction is expectedto be completed in 1H17 following further approvals from regulators, etc.
Stake increase represents BBVA’s commitment to TurkeyBBVA has taken the opportunity to increase its stake in Garanti Bank despitenear-term domestic uncertainties; we believe this represents its 1) commitmentto long-term growth in Turkey and 2) confidence in Garanti Bank’s overallfranchise. The reduction of the stake held by domestic group Dogus, thoughnot exactly welcome, can likely be explained by the group’s liquidity needsfollowing its expansion in the leisure and entertainment sectors.
Credit supportive for Garanti BankWe believe that the increased presence of a higher-rated controllingshareholder would be credit positive for Garanti Bank, allowing greatercollaboration with BBVA to further enhance the former's franchise in Turkey. Itshould also boost Garanti’s access to additional and cheaper funding sources.
This should provide Garanti an edge over its domestic peers, given the recentconcerns of increasing funding costs for Turkish lenders in the wake of recentrating downgrades. Recall that Garanti Bank retained its IG rating by Fitch(thanks to its support rating buffer) while ratings of other domestically ownedTurkish lenders were recently downgraded to sub-IG on the reduced likelihoodof sovereign support.
Upgrade GARAN 4.75% ‘19s and 6.25% 21s to BuyWe believe that the above credit-supportive developments, together withfavourable external and internal factors – a stabilizing UST and recent TRYappreciation vs. USD (+8% since late Jan-17) – have the potential to act aspositive catalysts for Garanti Bank’s bonds. We also take comfort fromGaranti’s strong FY16 earnings, which demonstrated healthy credit metrics(adequate capitalization (14.7% CAR), lower-than-sector NPLs (3%) and strongearnings generation (NII up 20% YoY). GARAN 4.75% ‘19s($101.5/4.14%/243bps) look attractive for 2.5 year duration risk and offer pickup of 3.5 cash points and 30bps in yield terms over FINBN ‘19s($105/3.84%/222bps). GARAN 6.25% ‘21s ($104.25/5.1%/314bps) also lookcheap relative to AKBNK 4% ‘20s, offering 80bps yield pickup for one yearlonger duration. Therefore, we upgrade our recommendation on GARAN ‘19sand ‘21s to Buy from Hold while maintaining our Hold recommendation onGARAN 5.25% ‘22s (5.35%/325bps).