WOOD Flash – Garanti: 1Q18 wrap up – ticks all the boxes, but overshadowed by increase in stage 2 loans

Yesterday (26 April), Garanti reported TRY 1,996m in net income for 1Q18, 21% above the TRY 1,656m consensus. The deviation vs. the consensus stemmed mainly from a combination of better-than-expected core revenues (NII and fees), as well as trading income and opex. We note that the pattern in trading income could change as the bank has started to book foreign currency loans’ NPLs in the same currency, which it hedges with a trading position. The only issue we see in Garanti’s 1Q18 financials is that the bank opted to classify 17% of its loans as stage 2 in IFRS 9 accounting. Although IFRS 9 and BRSA standards are not comparable in this sense, this is a major jump vs. the “group 2 loans as a % of working loans” figure of 8%.
We like the results a lot in all of the core lines, apart from asset quality. We believe that the market might react to the increase in stage 2 loans, which seems to be model driven. There is a good reason to take a deep dive on this, but our opinion is that it is unlikely that Garanti and Akbank’s working loan quality will differ this much within a quarter. Our initial view is that we should try to see past this and also focus on how the other core lines performed in the quarter. We rate the bank a BUY, with a price target (PT) of TRY 12.3/share.