The Turkish Bank Shares With 32% Potential And Few Takers

  • Halkbank’s potential upside is almost double its nearest rival
  • Bank is second-worst performer among Turkish peers this year

It has the biggest potential for gains among peers across Turkey and Eastern Europe, but many investors still won’t touch it.

Istanbul-based state-run Halkbank has room to rally 32 percent, according to the average 12-month target price of 31 analyst estimates compiled by Bloomberg. While that’s almost double its nearest rival, investors could be concerned the lender may be implicated in a scandal. U.S. prosecutors allege Turkish-Iranian gold trader Reza Zarrab bribed the bank’s former head Suleyman Aslan to allow transactions through Halkbank that violated sanctions on Iran.

Aslan, who has not been charged, was replaced in February 2014 and removed from the board of directors the following April. He couldn’t be reached for comment on Wednesday. Halkbank, which hasn’t been accused of any wrongdoing, has denied any connection with the investigation and has repeatedly said its business is in-line with national and international regulations. The lender’s director of investor relations declined to comment when contacted by Bloomberg News on Tuesday.

“This stock looks completely different when you look at it from both sides -- on the one hand the valuation is very attractive, on the other there is great uncertainty about the future,” said Burak Cetinceker, a money manager at Istanbul-based Strateji Portfoy whose equity fund returned about 8.2 percent this year through Wednesday, compared with 8.7 percent for the Borsa Istanbul 100 Index. “Once investors are discouraged, it’s not easy to win them back, especially when the reason is still on the table.”  

In an indictment in May, U.S. prosecutors accused Zarrab of paying at least $1.4 million to former Halkbank Chief Executive Officer Aslan. Prosecutors say the bank was used to process the trader’s illicit transactions, which helped the Iranian government launder hundreds of millions of dollars. Zarrab has denied any wrongdoing in Turkey.

Turkiye Halk Bankasi AS, as the lender is officially known, is navigating a challenging year for Turkey’s $720 billion economy. Growth will probably slow in the second and third quarters this year, according to data compiled by Bloomberg. The bank’s loans to small- and medium-sized companies account for 40 percent of the total, compared with an average of 25 percent for its peers, raising its credit risk, according to Bloomberg Intelligence analyst Tomasz Noetzel.

‘Ridiculously Cheap’

The lender posted a 37 percent increase in profit last quarter to 885.6 million liras ($303 million), helping drive the shares up 12 percent this month to 8.81 liras at close on Thursday in Istanbul. They’re still down 15 percent this year, the most among Turkish banks after Sekerbank TAS.

The average target price over the next 12 months is 11.61 liras. The potential upside is the most among peers in Turkey and those with a market capitalization above $1 billion across Eastern Europe, according to data compiled by Bloomberg.

“Keep in mind that investors look at everything, including reputational risk,” said Anastasia Levashova, who helps manage $300 million at Blackfriars Asset Management Ltd. in London and has an overweight position on the stock. While she thinks the lender is “ridiculously cheap,” the Zarrab case creates “unpredictability and an extra risk element” that some analysts struggle to quantify, she said.

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