BNP says invest in Turkish banks, cautiously optimistic on economy

France's BNP Paribas recommended investing in Turkish banks, citing their underperformance and a relatively benign economic environment.

The Paris-based bank said it remained “cautiously optimistic” on Turkey going into 2018, with its moderating economic growth, “relatively contained” inflation and loan growth of some 11 percent, on a foreign exchange-adjusted basis.

“Our favorite sectors for the year are banking, insurance, steel and aviation while REITs (real estate investment trusts) and cement are likely to be laggards,” Mete Yüksel, head of research and assistant general manager at BNP’s securities unit in Istanbul, said in an e-mailed report on Wednesday. “We prefer the banking sector, which may sound contradictory given the prevailing rate trajectory, but we are not spooked by higher interest rates as they hamper spread evolution for a mere two consecutive quarters followed by visible recovery from 3Q.”

Yüksel pointed to the fact that banks have underperformed the main BIST-100 share index by 10 percent in 2017 and industrials by 15 percent, despite aggregate earnings growth of 28 percent.

“Banks are trading at an unjustifiable 40 percent discount to emerging market peers, that is unseen historically,” he said. “The credit guarantee fund scheme that supported bank earnings in 2017 on volume growth and asset quality is set to continue, reloading 90 billion liras in collections and 50 billion liras in contributions from unused allowances.”

The government supported the economy with some 250 billion liras ($66 billion) in credit guarantees during 2017 and has said that an additional 50 billion liras in new money is also available this year, as well as cash from rollovers of existing debt.