Aggressive expansionary policies have necessitated a change in the by smx43008

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									                                                                                                                                                                                                                       Turkish Equities, Banks




TEB                                                                                                                                                                                                                                                                                                                            BUY

TEBNK.IS                                                                                                                                                                              Price: TRY13.40 / USD8.95

Aggressive expansionary policies have necessitated a                                                   Potential Upside
change in the “dividend policy”                                                                        Target Market Cap:                                                                                                                                                                                  US$ 1,100 mn
     Decision by the board implies a shift from the former policy of                                   Current Market Cap:                                                                                                                                                                                            US$ 685 mn
distributing solely cash dividends                                                                     Target Upside                                                                                                                                                                                                                                                  61%
    TEB has opened 31 new branches that are mainly SME/retail
oriented, managing to expand the balance sheet by 32% so far in 2006.                                  Price Data
    …yet the bank still produces an ROE as high as 26%, which would                                    Mcap Range since IPO                                                                                                                                                             $486 - $1,319 mn
be maintained above 20% in the foreseeable future.                                                     Relative Performance
                                                                                                                                                                                                          1mnth:                                                                                                                                              -1.5%
TEB announced on Friday that it will pay up to 40% of the net distributable
                                                                                                                                                                                                          3mnth:                                                                                                                                                      3.9%
profit to its shareholders as cash dividend or bonus share in relation with its
Articles of Association. The bank declared that the distributable amount will                                                                                                                     12mnth:                                                                                                                                                -15.8%
be dependent on relevant market conditions, sustenance of a comfortable
level of capital adequacy ratio and growth plans of the Bank. Important thing                          Trading Data
to be highlighted is that the decision by the Board implies a shift from the
                                                                                                       Avg. Daily Volume                                                                                                                                                                                                   US$ 1.9 mn
former policy of distributing cash dividend, due to the expansionary policies
                                                                                                       Weight in ISE100                                                                                                                                                                                                                                   1.08%
pursued over the last few years.
                                                                                                       Beta (daily, 5 years)                                                                                                                                                                                                                                          0.62
It should be recalled that as early as September 2003, TEB management                                  Foreign Ownership
declared that it would distribute “at least 30% of its distributable profit as cash
                                                                                                                                                                                                          Current                                                          51.24% of free float
dividend every year” as long as the market conditions allow and a suitable
capital adequacy ratio is sustained. Recent decision may therefore frustrated                                                                                                    1mnth ago                                                                                 51.60% of free float
investors that are sensitive to the dividend payout. From another perspective,                                                                                                   3mnth ago                                                                                 50.46% of free float
however, change in the dividend policy should improve the sentiment for
those that are playing for the growth story of TEB with its partner BNPP. From                         Shareholder Structure
a valuation perspective, TEB shares are trading at 2007 PER (adj.) of 5.78x and
                                                                                                       TEB Financial Services                                                                                                                                                                                                                        84.25%
PBV (adj.) of 1.30x, against the sector average of 13.73x and 2.23x,
                                                                                                       Other                                                                                                                                                                                                                                              0.58%
respectively. We maintain our BUY rating on TEB.
                                                                                                       Free Float                                                                                                                                                                                                                                    15.17%
    The restored macroeconomic stability in Turkish economy and the inclusion of
BNPP into picture (BNPP’s retail arm has acquired 50% stake in TEB Financial
                                                                                                                                                                                                     Share Perform ance
Services - parent company, owning 84.25% of TEB Bank - in February 2005,                               1,400                                                                                                                                                                                                                                                           120


giving BNPP a 42.1% stake in TEB Bank) has put TEB into the transformation                             1,200                                                                                                                                                                                                                                                           110


                                                                                                                                                                                                                                                                                                                                                                             R tive to IS 100
                                                                                                S n)




stage. BNPP sees Turkish market among the countries in the Middle                                                                                                                                                                                                                                                                                                                        E
                                                                                         M ap (U $m




                                                                                                       1,000                                                                                                                                                                                                                                                           100

East/Maghrep region that has strong growth potential supported by low but                               800                                                                                                                                                                                                                                                            90
                                                                                          c




                                                                                                                                                                                                                                                                                                                                                                              ela




growing banking penetration. In parallel to the BNPP’s strategy, TEB is now
                                                                                                        600                                                                                                                                                                                                                                                            80
investing in its branch network, expanding its asset size, securing a growth
                                                                                                        400                                                                                                                                                                                                                                                            70
platform through new product offerings and increasing revenues through cross
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selling, in contrast to its former banking perception of staying at the defensive edge
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of the business.                                                                                                                                      Re lative to ISE-100                                                                                                         TEBNK M cap




 Key Financials (TRY 000) – Bank-only                     2004             2005                          2006e                                                                                                                 2007e                                                                                                                     2008e
Net Income, bank-only                                   33,800            78,717                       148,460                                                                                                     196,507                                                                                                                  224,153
Net Interest Margin (adjusted)                           6.3%              4.7%                          2.1%                                                                                                        3.6%                                                                                                                     3.4%
Cost to Income                                          63.3%             58.5%                         45.0%                                                                                                       49.1%                                                                                                                    47.5%
Stated ROE                                               9.4%             18.2%                         27.4%                                                                                                       27.5%                                                                                                                    24.3%
EPS                                                       0.44              1.03                          1.94                                                                                                        2.57                                                                                                                     2.93
DPS                                                        0.11             0.31                               0.00                                                                                                                      0.00                                                                                                                         0.00
PE (x) – Unadjusted                                      30.33             13.02                               6.90                                                                                                                      5.22                                                                                                                         4.57
PBV (x) - Unadjusted                                       2.60             2.19                               1.66                                                                                                                      1.26                                                                                                                         0.99
Source: Company Data, FinansInvest estimates




 Kazim Andac                                                                                                                                                                                                                                                           October 02, 2006
 +90 212 336 72 77
 kazim.andac@finansinvest.com
                                                                                                               Turkish Equities, Banks



    Starting from 2006, TEB is implementing aggressive strategies in SME/retail banking, through new product offerings. We
perceive 2006-07 period as the phase of transformation for TEB, which aims at accelerating growth, controlling risks and
increasing revenues. Branch openings would continue to be a feature of TEB’s expansion, although it is speculated that the bank
may be one of the candidates for the state-owned Halkbank bid. It should be noted that the bank activated further 31 branches in
2006 until the end of September, focused mainly on retail and SMEs, and aims to extend the branch network to above 150 by the
end of 2006.

    So far in 2006, TEB had impressive deposit growth, thanks to the ongoing branch openings that have injected fresh deposits
into the bank. It should be noted that TEB’s overall deposit base have expanded 46% since the beginning of the year (highest
among the banks in our coverage universe), pushing the balance sheet growth up to as high as 32% within the same time frame.
On the other hand, bulk of the funding provided mainly via deposits has been placed to lending, more specifically to retail and
foreign trade loans. Accordingly, loan book of the bank increased by a significant 33% so far in 2006.

    TEB still has excess liquidity and a relatively large level of free capital to finance the aggressive growth in its loan book without
competing aggressively to collect lira deposits at least in the first couple of years, and can therefore keep its deposit costs
relatively low. On the other hand, a policy shift towards higher yielding assets should help TEB smooth out the contraction in its
margins in a declining inflation environment. As of equal importance, stronger presence of SME/retail lending should give a boost
to fee income going forward. Operating expenses will be another key component of the profitability for TEB, as branch openings
will be the feature of the bank’s expansion strategy. We foresee hefty investments mainly in 2006-08 period, which will ease
towards 2009. It is also expected that problem loans would rise gradually, due to aggressive lending polices. Overall, we expect
the bank to post a ROE of 27% in 2006 and 27.5% in 2007, against 18% in 2005. The ROE is then estimated to stabilise around
20% going forward.




 Kazim Andac                                                                                                           October 02, 2006
 +90 212 336 72 77
 kazim.andac@finansinvest.com
                                                                                                               Turkish Equities, Banks




Summary Financials
Balance Sheet and Income Statement – Bank-only BRSA Financials

Assets - (TRY 000)                                    2002        2003        2004        2005       2006e          2007e        2008e
Liquid assets                                      1,162,690   1,186,472   1,121,409     812,536     746,783        702,049      384,550
Marketable securities                                 81,356     113,259     407,562   1,136,662   1,248,402      1,400,574    1,573,300
Loans (net)                                          801,872   1,167,830   1,584,721   2,938,644   4,937,866      6,221,711    8,088,224
Non-performing loans                                  20,212      24,415      20,881      33,679      54,317         74,661     105,147
Specific provisions (-)                               15,250      15,944      11,244      16,849      35,306        52,262        73,603
Reserve deposits                                     131,905     147,928     190,170     211,383     286,742        339,748      404,656
Investments, subs. and associates                    106,815     131,234     146,474     139,230     151,204        153,043      156,214
Property and equipments                               37,234      36,351      40,312      54,015      62,032         74,203       89,265
Other assets                                          51,310      65,905      74,948     129,396     321,018        383,998      461,948
Total assets                                       2,373,182   2,848,979   3,565,596   5,421,866   7,754,047     9,275,325    11,158,158


Liabilities and Shrs. Equity - (TRY 000)               2002        2003        2004       2005       2006e          2007e        2008e
Deposits                                           1,691,487   1,977,521   2,259,870   3,242,197   5,213,498      6,291,622    7,635,026
Customer deposits                                  1,631,543   1,854,102   2,164,372   3,140,794   5,062,970      6,118,023    7,420,015
Bank deposits                                         59,944     123,419      95,498     101,403     150,527        173,599      215,010
Interbank money market                                22,800      15,422     158,532     754,462     460,222        483,233      531,556
Funds borrowed                                       263,037     363,149     576,708     652,851     894,406      1,073,287    1,287,944
Provisions                                            27,154      39,407      31,510      63,767      79,709         99,636      124,545
Other liabilities                                    112,919     126,993     144,779     239,778     489,593        515,160      543,051
Shareholders equity                                  255,785     326,487     394,197     468,811     616,620        812,387    1,036,036
Total liabilities and Shrs. Equity                 2,373,182   2,848,979   3,565,596   5,421,866   7,754,047     9,275,325    11,158,158

Income Statement - (TRY 000)                          2002        2003        2004        2005       2006e          2007e        2008e
Interest Income                                      325,800     324,726     408,202     473,969     644,392        779,911      881,465
Interest on loans                                   159,792     178,437     239,829     302,741     441,085        585,878       708,342
Interest received from marketable sec. portfolio      58,010      24,142      81,409    102,341     143,104        145,694       133,824
Other interest income                               107,998     122,147       86,964      68,887      60,204        48,339        39,298
Interest Expense                                     170,909     188,148     227,191     254,621     406,014        489,037      551,788
Interest on deposits                                110,886     139,086     188,348     164,864     293,772        377,510       430,086
Interest on funds borrowed                            29,894      20,147      22,150      39,232      58,796        73,788        86,185
Other interest expense                                30,129      28,915      16,693      50,525      53,446        37,738        35,518
Net interest income                                  154,891     136,578     181,011     219,348     238,379        290,874      329,676
Net fee and commission income                         16,625      18,521      29,931      40,567      75,049         90,059      112,573
Profit on trading account securities (net)            18,775      41,373      21,086      61,545      98,472         78,778       74,839
FX gains/(loss)                                        1,129      11,207      10,814     -15,625    -100,119         11,635       11,539
Other operating income                                11,964      16,855      16,986      16,866     120,381         20,361       23,077
Total operating profit                               203,384     224,534     259,828     322,701     432,162        491,707      551,705
Provision for loan losses and other                   15,773       6,498      24,624      17,629      25,486         29,458       34,487
Other operating expenses                             113,230     124,570     157,669     197,772     239,764       235,839       256,633
Net operating profit                                  74,381      93,466      77,535     107,300     166,912        226,410      260,584
Income from associates and subsidiaries                6,864      12,433       7,266       7,942      18,664         19,224       19,608
Gains/(loss) on net monetary position                -41,158     -25,451     -31,123           0           0             0             0
Profit before taxes                                   40,087      80,448      53,678     115,242     185,576        245,633      280,192
Provision for taxes on income                        -21,573      29,546      20,002      36,525      37,115         49,127       56,038
Net operating profit after tax                        18,514      50,902      33,676      78,717     148,460        196,507      224,153
Extraordinary income                                       0           0         124           0           0             0             0
Net Profit                                            18,514      50,902      33,800      78,717     148,460        196,507      224,153


Source: Company data, FinansInvest estimates




  Kazim Andac                                                                                                        October 02, 2006
  +90 212 336 72 77
  kazim.andac@finansinvest.com
                                                                                            Turkish Equities, Banks



Summary Financials
Ratios and Analysis

Balance sheet analysis                         2002     2003     2004     2005     2006e        2007e      2008e
Asset Structure
Liquid assets/Total assets                     49.0%    41.6%    31.5%    15.0%     9.6%          7.6%       3.4%
Gross loans/Total assets                       34.4%    41.6%    44.8%    54.5%    64.1%         67.6%      73.1%
Marketable securites/Total assets               3.4%     4.0%    11.4%    21.0%    16.1%         15.1%      14.1%
Particip.& tangible assets/Total assets         6.1%     5.9%     5.2%     3.6%     2.8%          2.5%       2.2%
Earning assets/Total assets                    91.8%    91.8%    92.7%    94.0%    93.1%         93.4%      93.7%
Earning assets/Int. bearing liabilities (x)      1.09     1.10     1.10     1.08     1.06          1.07       1.08
Asset quality
NPL rate                                        2.5%     2.1%     1.3%     1.1%     1.1%          1.2%       1.3%
Net past due loans/Equity                       1.9%     2.6%     2.4%     3.6%     3.1%          2.8%       3.0%
Funding and Capital Ratios
Deposits/Gross loans (x)                         2.07     1.67     1.42     1.10     1.05         1.00       0.94
Deposits/Total assets                          71.3%    69.4%    63.4%    59.8%    67.2%         67.8%      68.4%
Loans from Banks/Total assets                  11.1%    12.7%    16.2%    12.0%    11.5%         11.6%      11.5%
Cash equity/Total assets                        3.7%     4.3%     5.0%     4.1%     4.7%          5.8%       6.5%
Equity/Assets                                  10.8%    11.5%    11.1%     8.6%     8.0%          8.8%       9.3%


Income Statement Analysis                      2002     2003     2004     2005     2006e        2007e      2008e
Net Interest Income
NIM                                             8.5%     5.7%     6.1%     5.2%     3.9%          3.7%       3.4%
Adjusted NIM                                    4.6%     4.3%     6.3%     4.7%     2.1%          3.6%       3.4%
Net interest income/Total assets                7.8%     5.2%     5.6%     4.9%     3.6%          3.4%       3.2%
Net interest income/Cash equity (x)              1.98     1.29     1.21     1.10     0.82          0.65       0.52
Spreads Analysis
Total balance sheet spread                      4.2%     2.1%     3.0%     3.1%     1.7%          1.5%       1.4%
Loan/deposit spread                             8.5%     4.7%     2.9%     2.3%     2.2%          2.0%       1.9%
Securities/deposit spread                      59.9%    10.7%     7.7%     1.0%     3.0%          2.5%       1.0%
Interest yield                                 17.9%    13.5%    13.8%    11.3%    10.5%         9.8%       9.2%
Interest cost                                  13.7%    11.4%    10.8%    8.2%      8.7%         8.3%       7.8%
Fee income
Fee income/Total income                         8.2%     8.7%    12.0%    12.0%    14.1%         18.8%      20.8%
Fee income/Net interest income                 10.7%    13.6%    16.5%    18.5%    31.5%         31.0%      34.1%
Fee income coverage ratio                      14.7%    14.9%    19.0%    20.5%    31.3%         38.2%      43.9%
Fee income/Total assets                         0.8%     0.7%     0.9%     0.9%     1.1%          1.1%       1.1%
Banking income
Trading income/Banking income                  15.6%    25.6%     8.9%    20.6%    32.8%         17.2%      14.6%
Banking income/Total income (x)                  0.59     0.76     0.96     0.88     0.56         0.95       0.95
Banking income/Total assets                     6.0%     6.2%     7.4%     6.6%     4.6%          5.4%       5.0%
Cost efficiency
Cost/Income ratio                              50.6%    52.7%    57.9%    54.5%    41.2%         44.1%      42.2%
Cost/income incl. depreciation                 56.0%    58.4%    63.3%    58.5%    45.0%         49.1%      47.5%
Staff expenses/Total income                    21.9%    26.8%    31.1%    29.9%    22.1%         27.5%      26.1%
Cost/Net interest income                       73.1%    91.2%    87.1%    90.2%    100.6%        81.1%      77.8%
Cost/Total assets                               5.7%     4.8%     4.9%     4.4%     3.6%          2.8%       2.5%
Profitability
ROAE                                            8.5%    17.5%     9.4%    18.2%    27.4%         27.5%      24.3%
ROAA                                            0.9%     1.9%     1.1%     1.8%     2.3%          2.3%       2.2%


Source: Company data, FinansInvest estimates




 Kazim Andac                                                                                      October 02, 2006
 +90 212 336 72 77
 kazim.andac@finansinvest.com
                                                                                                                        Turkish Equities, Banks




All information enclosed in this document has been obtained from sources believed to be reliable. While FINANSINVEST has spent reasonable
care in verifying the accuracy and completeness of the information presented herein, it cannot be held responsible for any errors, omissions or for
consequences arising from the use of such information. This document is published for purposes of providing information to investors who are
expected to make their own investment decisions without undue reliance on this report. Therefore, no article or statement can be construed as an
investment advice or a solicitation to buy or sell the securities mentioned herein. The affiliates, officers, partners and employees, including
persons involved in the preparation or issuance of this material, may have a direct or indirect position in any security mentioned in this report.




 Kazim Andac                                                                                                                   October 02, 2006
 +90 212 336 72 77
 kazim.andac@finansinvest.com
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