April 07, 2017 - 6:18pm EST by
2017 2018
Price: 10.50 EPS 0 0
Shares Out. (in M): 1,250 P/E 0 0
Market Cap (in $M): 3,500 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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Halkbank (HALKB.Turkey) is one of the Big Seven banks of Turkey, which collectively dominate the banking market in the country.  Halkbank provides an array of financial services to the SME sector and to consumers with the emphasis on traditional banking.


In a nutshell, Halkbank is a conservative well-capitalized bank with an attractive deposit-gathering franchise available at a very significant discount to both global and Turkish peers.


Halkbank was founded in 1938 to serve the needs of tradesmen and artisans, and over the ensuing years has grown to become the dominant banking institution in the SME space.


Today Halkbank is one of the banks comprising the Big Seven of Turkey, which are a group of the country’s largest and most prominent financial institutions controlling approximately 75% of deposits in Turkey.  The Big Seven are a tightly-regulated oligopoly, in which a balance of competitive power is maintained, such that all members of the group enjoy solid competitive positions and boast robust operating metrics.


While the differences between the competitive standings within the Big Seven are marginal, Halkbank is one of the leaders of the pack by a small margin due to its #1 position in the SME space.  As a result, Halkbank enjoys a stable low-cost deposit base that serves as the bedrock of the bank’s competitive advantage.


Importantly, Halkbank complements its low-cost funding advantage with conservative underwriting practices in order to generate low-risk growth.


Halkbank’s loan portfolio is split between business and consumer lending on a roughly 80/20 basis, reflecting the bank’s historical SME focus.


Over a half of Halkbank’s business loans represent SME lending in which the bank has decades of expertise.  Over 1/3 of SME loans are guaranteed by the state pursuant to an exclusive agreement between the government and Halkbank.  This serves to contribute to a lower-risk lending profile. 


Over a half of Halkbank’s consumer loans outside of mortgages are structured on a “payroll deduction” basis or are made to retirees.  Since retirees generally enjoy stable income guaranteed by the state and the payments are deducted directly from the borrowers’ paychecks, Halkbank faces substantially reduced collection risk with respect to the above loans.


As a result of combining its low-cost deposit advantage with prudent underwriting practices, Halkbank produces above-average profitability performance in a low-risk manner.  The table below provides additional detail with respect to Halkbank’s KPIs vs. Turkey’s Big Seven banks, Tier 2 banks, and Tier 3 banks:









10-YR AVG Cost of Risk






Big Seven (ex Halk)





Tier 2




over 2.0%

Tier 3






Halkbank’s robust performance is likely to continue going forward, as the bank should maintain its solid competitive position within the Big Seven.  Indeed, examining the history of banking franchises around the world reveals enduring competitive longevity within tightly-regulated banking oligopolies.


Halkbank’s strong financial condition further underpins the positive expectations about the bank’s future performance.  Halkbank maintains a prudent loan-to-deposit ratio of approximately 100%, indicating a high degree of stability of the bank’s funding structure.  In addition, Halkbank is well capitalized as evidenced by its capital adequacy ratio of 14%, which is significantly higher than the global regulatory minimum requirement of 10.5%.


Over time Halkbank experienced substantial growth in the underlying business value, as the bank benefitted from increasing penetration of banking services across the Turkish market.  For example, over the past 10 years Halkbank’s book value, which can be used as a conservative proxy for business value, has expanded at a 10% annual clip (in USD).  Importantly, the growth has been low-risk in nature as evidenced by the bank’s below-average long-term historical loan loss development, prudent funding profile, and conservative capital adequacy ratio.


It is likely that growth in Halkbank’s underlying business value will remain solid in the future.  While the rate might be somewhat slower, given that Halkbank’s end market is more saturated today than 10 years ago, the bank still has a long growth runway ahead of it.


First, as Turkey’s banking services penetration is about 1/2 of the developed markets’ penetration, the Turkish banking services market will likely expand over time at an above-average pace.


Second, Halkbank is likely to increase its share of the Turkish banking services market over time with the introduction of new products and services.  To that end the bank is actively developing additional income streams, such as payment processing, insurance, treasury management services, and credit cards.  These complementary income streams are growing at a 15% annual rate and over time should meaningfully contribute to the growth of Halkbank’s business value.


Halkbank’s management team earns an “A” both with respect to operator skills and capital allocation skills.


With respect to operator skills, Halkbank’s management team has a long-term track record of growing book value at high rates in a low-risk manner.  For example, the management team has expanded the bank’s book value (in USD) nearly three-fold in the past 10 years while maintaining the loan loss ratio 40% below industry averages, preserving the capital ratio that is 1.5X greater than the global regulatory minimum, and keeping the low-to-deposit ratio under 100%.


In addition, Halkbank’s management team has done a good job in augmenting the bank’s growth rate by developing complimentary fee streams over the past several years.  Currently Halkbank’s fee streams from the complimentary banking services grow at rate that is double the industry averages.


On the capital allocation front, Halkbank’s management team has demonstrated its commitment to sticking with the core traditional banking business.  The team at Halkbank re-invested the bulk of earnings back into the business at attractive rates of return, while remitting the excess funds to the shareholders through dividends. 


Halkbank is subject to a couple of potential risks, which are worth discussing:


Political Risk.


The Turkish government is the controlling shareholder of Halkbank.  Therefore, there is a risk that government will force the bank to finance uneconomic public projects to the detriment of the non-government minority shareholders.


However, the risk of large-scale government meddling is fairly low.


First, the government is well aware of the fact that its hold on power is dependent on having a sound financial system.  Hence, it is unlikely that the government will push a major systemically-important institution, such as Halkbank, to engage in large-scale uneconomic activities.


Second, the government plans to eventually privatize Halkbank.  Getting top dollar in such a transaction would necessarily require having a clean operating history, further reducing incentives for the government to steer Halkbank towards large-scale uneconomic activities. 


Indeed, examining Halkbank’s loan book reveals minimal exposure to public sector lending, which constitutes just 3% of the total exposure.


There is also a risk that Halkbank may get investigated by the DOJ over Iran-related transactions.  If this were to happen and if Halkbank were to be found complicit the bank may be subject to potentially significant monetary fines.

By way of background, a Halkbank executive was recently arrested in JFK over the allegations of helping Iran entities contravene the US sanctions regime.  While DOJ specifically avoided naming Halkbank in the complaint and focused exclusively on the individual, there is always a risk that the bank will be implicated at some point in the future.  Examining recent historical precedents involving German and French banks, which were subject to investigations over sanctions violations, suggests a potential book value hit of less than 2% to 3%.  


On the plus side, despite being generally viewed as a “negative,” government ownership of Halkbank serves to reduce certain risks.  In an emerging market setting a stand-off over political affiliations between private control interests and governments may frequently lead to value destruction for minority shareholders (Yukos in Russia and Asya Bank in Turkey are a few cases which come to mind).  The fact that the Turkish state has control ownership of Halkbank eliminates the risk of such a stand-off and the resultant value destruction.


In addition, examining management’s track record over the past decade reveals that Halkbank was historically managed for the benefit of the shareholders.  The bank has significantly grown the underlying business value in a low-risk manner, delivered operational improvements across the organization, and shared the fruits of success with the shareholders via dividends.


Currency Risk.


A U.S. Dollar-based investor should also be concerned with potential currency risk.  While Turkish Lira depreciation against the U.S. Dollar may have a short-term impact, over the long-term the impact is immaterial.  Since the Turkish economy is highly dollarized, any local currency depreciation is eventually reflected in higher inflation, thereby lifting banking assets to the pre-depreciation dollar equivalent (while also widening net interest margins).  Hence, Halkbank’s dollar-based investors face minimal negative impact over the long-term from any Turkish currency depreciation.


The solid banking franchise that Halkbank is can be purchased at a very significant discount to its underlying business value.


Halkbank is currently selling for just 55% of its book value, which represents a significant discount to the bank’s historical valuation of 1.4X BV to 1.8X BV.  Halkbank’s current valuation also represents a significant discount to its Turkish peers, which are currently trading at approximately 1.1X BV.  Recent buyouts in the Turkish banking space took place at a sizeable premium to book value even for second-rate banking institutions.


In addition, Halkbank is selling for approximately 4X NFY EPS and has a 3% NFY Dividend Yield.  Notably, both metrics reflect the recessionary environment currently present in the bank’s core markets.


Adjusting Halkbank’s earnings to reflect a more normalized economic environment would indicate an even more attractive valuation of approximately 3X earnings and a 4% Dividend Yield.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- Sheer cheapness of the stock that trades at a significant discount to its intrinsic value

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