IS Yatirim Menkul Degerler

IS Yatirim’s (ISY) investment banking division reported a 33% fall in operating profits during H113 as narrower spreads on interest rates reduced profits earned from interest and trading. Including the volatile profits from subsidiaries, consolidated profits were 52% lower. Substantial gains have already been generated since mid-year, which should see a recovery in subsidiary profits in H2. We have kept our long-term growth assumptions unchanged but reduced our FY14e fair value estimate by 20% to TRY1.9, reflecting the recent macroeconomic trends in Turkey.

H1 profits down but expected to recover in H2
Lower interest and trading income contributed to the 9% drop in revenues. Profits fell more (33%) because costs increased 5% as ISY continues to invest in the business to grow market share. Lower contributions from subsidiaries led to a 52% decline in consolidated profits. Although consolidated H1 revenues of TRY138.9m were 11% below our estimates, we have kept our forecasts unchanged as H2 profits will benefit from the sale of Aras Kargo by IS Private Equity. This sale was completed in July and will add TRY24m to ISY’s net profits after minorities.

Economic and political risks remain high
Turkey has been bearing the brunt of the selloff in emerging markets over the past three months (-25% vs MSCI EM Index: -10%) as concerns have been raised over the possible reduction in quantitative easing measures in the US, slowing economic growth in Turkey and a resurgence in domestic and regional political risks.

New regulation driving consolidation
Turkey’s investment banking sector is undergoing a similar level of consolidation to that previously seen in Europe. There are currently around 100 brokers operating in Turkey, but CMB expects this to fall to c 35 leading up to the introduction of new regulatory capital requirements in July 2014. With its robust capital position (FY12 equity: TRY465m), ISY is in a very strong position to capitalise on this sector consolidation and to increase market share even further.

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