Turkish financial markets in 2015
ISY’s financial results are dependent on activity levels and the direction of the Turkish financial markets.
Exhibit 7: Istanbul Stock Exchange
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Turkish equity markets started 2015 in optimistic mood as falling oil prices were expected to lower inflation, which would allow interest rates to fall and boost economic activity, so the Borsa Istanbul rose to over 91,000 by the end of January, 45% higher than the year before. However, since that date, negative global and local economic and political developments including negative sentiment towards emerging markets, have resulted in a decline in the index. There was a rebound in the index after September, which has continued after the decisive outcome of the general election. However, sentiment remains fragile.
Exhibit 8: Turkish lira vs US$ and two-year Turkish government bonds yields
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Turkish bond yields have risen for most of 2015 and the Turkish lira has depreciated against the US$ over concerns about Turkey’s economy and geopolitical and local political uncertainties. However, even before the outcome of the Turkish elections was announced in November, there was a recovery the lira and a fall in Turkish bond yields, as investors increased their risk appetite for Turkish assets.
Q315 results for ISY were a continuation of the performance achieved earlier in the year, with the investment bank performing relatively well in its core activities, but a number of one-off negatives, especially in the subsidiaries, resulting in group net profit falling by 30% y-o-y, as shown in Exhibit 9 below.
Exhibit 9: Is Investment group net profits by entity
TRYm |
9M14 |
9M15 |
Change (%) |
IS Investment |
36.6 |
41.0 |
12 |
Foreign-based subsidiaries |
(0.3) |
(4.1) |
|
IS Investment Trust (28.9%) |
4.7 |
0.2 |
(96) |
IS Private Equity (29.1%) |
0.4 |
(3.5) |
|
IS Asset Management (70.0%) |
5.0 |
6.9 |
38 |
Efes NPL Asset Management (74%) |
6.5 |
5.7 |
(12) |
Elimination adjustments* |
(13.4) |
(18.7) |
40 |
Profit attributable to shareholders |
39.5 |
27.5 |
(30) |
Source: ISY. Note:*Dividend and revenue eliminations
Is Investment (parent) posted a 12% y-o-y increase in attributable profits in the nine months to 30 September 2015, as shown in Exhibit 11.
Interest and derivative income fell 26% in the nine months to 30 September 2015 compared with the previous year, as in 2015 the cost of funding its commercial paper programme has now been included in this line; it was previously netted off finance income. This is a more appropriate treatment as the borrowed funds are used in the arbitrage business.
Prop book trading consists of trading in equities, debt instruments, mutual funds and warrants. In aggregate there was a 16% increase y-o-y, with equity warrant trading doing particularly well. In aggregate, brokerage revenues rose 25% y-o-y, primarily because of 28% growth in derivative brokerage and a 36% rise in FX brokerage, as ISY’s investors traded actively in the volatile market conditions. Equity brokerage revenues rose around 9%. ISY has lost some market share in trading equities, derivative and FX as the company has been reluctant to chase market share with discounted prices like some of its rivals.
Exhibit 10: ISY market share and ranking: 9M14 and 9M15
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Market share 9M14 |
Position 9M14 |
Market share 9M15 |
Position 9M15 |
Equity trading |
7.6% |
1 |
7.1% |
1 |
Derivatives trading |
10.9% |
1 |
8.8% |
2 |
FX brokerage |
11.0% |
1 |
5.6% |
7 |
Exhibit 11: Is Investment (parent)
|
9M14 |
9M15 |
% change |
Interest and derivative income |
51.6 |
38.1 |
-26% |
Prop book trading |
20.8 |
24.1 |
16% |
Brokerage |
59.0 |
73.8 |
25% |
Corporate finance |
8.8 |
13.1 |
49% |
Asset management |
5.3 |
6.8 |
28% |
Other commissions |
0.7 |
0.6 |
-15% |
Total revenue |
146.2 |
156.5 |
7% |
Operating expenses |
-112.2 |
-124.5 |
11% |
Other income/(expenses) |
1.4 |
0.3 |
|
Operating profit |
35.4 |
32.2 |
-9% |
Finance income (net) |
9.0 |
16.3 |
82% |
Pre-tax profit |
44.4 |
48.6 |
9% |
Taxation |
-7.8 |
-7.6 |
-3% |
Profit after tax |
36.6 |
41.0 |
12% |
Cost/income ratio |
77% |
80% |
|
Tax rate |
18% |
16% |
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ISY’s corporate finance team was active in the first nine months of 2015, with revenue rising 49%
y-o-y. It closed five M&A transactions in the period despite the adverse market headwinds. Asset management revenues increased as a result of the higher AuMs being managed.
Operating expenses at Is Investment (parent) increased by 11% y-o-y in 9M15, more than inflation of around 8%. ISY normally keeps a close control over operating expenses, but in this instance the depreciation of the Turkish lira meant it was unable to do so in 2015.
The rise in net finance income in 9M15 occurred as the cost of funding its commercial paper activities was reclassified to the interest and derivative income line in the profit and loss account.
The foreign-based subsidiaries incurred a loss of TRY4.1m in 9M15, considerably higher than in the comparable period of the previous year. Usually the foreign subsidiaries more or less break even in aggregate, but ISY is in the process of closing its Dubai subsidiary and its London operation, Maxis Investments, has suffered from GBP costs and revenues linked to the depreciating Turkish lira.
The lower profit contribution from Is Investment Trust was due to unrealised losses in its bond portfolio following the rise in Turkish lira interest rates during the year. Is Private Equity losses were the result of operating losses at its investee companies, which were adversely affected by political headwinds in Turkey. It should be remembered that ISY fully consolidates the results of Is Private Equity in its accounts, even though IS Private Equity values its holdings at fair value in its accounts.
The rise in profit contribution of 38% from Is Asset Management was due to the rise in its AuMs as a result of the strength of the Turkish equity compared to 2014. Efes NPL Asset Management profits fell 12% y-o-y in 9M15, which should be considered a good performance given the rise in bond markets during the year and the uncertain economic and political situation.
Forecasts: Downward revision for 2015 and 2016
We have revised down our 2015 and 2016 attributable profit expectations, the former by 29% and the latter by 19% to reflect a cautious economic and financial outlook.
Exhibit 12: Edison ISY forecast revisions
|
Revenue (TRYm) |
Attributable profit (TRYm) |
EPS (Kr) |
DPS (Kr) |
|
Old |
New |
% chg |
Old |
New |
% chg |
Old* |
New |
% chg |
Old* |
New |
% chg |
12/15e |
411.8 |
349.8 |
-15% |
63.2 |
45.0 |
-29% |
17.8 |
12.7 |
-29% |
13.2 |
13.2 |
N/A |
12/16e |
450.0 |
374.0 |
-17% |
77.6 |
62.8 |
-19% |
21.9 |
17.7 |
-19% |
13.2 |
13.2 |
N/A |
Source: Edison Investment Research
We have left our DPS forecasts for 2015 and 2016 unchanged. ISY increased its DPS by over 90% in 2014 as it believes that shareholders are more likely to be rewarded by dividend income than by capital gains from a rising ISY share price. ISY has a comparatively strong balance sheet with tangible equity equal to 15% of total assets, which compares with 9% at Goldman Sachs, so the company could pay out more than its earnings on a temporary basis. We estimate that if ISY maintains its dividend in 2015 at Kr 13.2, the dividend will be slightly uncovered by attributable profits in 2015, but we anticipate that it will be covered again in 2016. The dividend payment is a board matter, which will be decided in spring 2016 when the economic and political outlook may be clearer. Our dividend forecasts remain tentative.
Exhibit 13: Financial summary
TRY'm |
2012 |
2013 |
2014 |
2015e |
2016e |
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
Revenue |
311.9 |
344.7 |
400.3 |
349.8 |
374.0 |
Operating expenses |
(193.5) |
(247.2) |
(266.5) |
(295.9) |
(310.0) |
Gross Profit |
118.4 |
97.5 |
133.8 |
53.9 |
64.0 |
Other operating Income |
10.1 |
5.7 |
|
|
|
Other operating Expenses |
(4.8) |
(10.0) |
(2.1) |
(21.3) |
(21.0) |
Operating profit |
123.7 |
93.2 |
131.7 |
32.6 |
43.0 |
Other income |
5.4 |
4.3 |
(31.2) |
(1.4) |
0.0 |
Net financials |
20.5 |
39.7 |
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|
Exceptionals |
4.2 |
0.0 |
0.0 |
0.0 |
0.0 |
Profit Before Tax (norm) |
149.6 |
137.2 |
100.5 |
31.2 |
43.0 |
Profit Before Tax (FRS) |
153.8 |
137.2 |
100.5 |
31.2 |
43.0 |
Tax |
(16.5) |
(11.8) |
(7.9) |
(7.8) |
(5.2) |
Profit After Tax (norm) |
133.2 |
125.3 |
92.6 |
23.4 |
37.8 |
Profit After Tax (FRS) |
137.4 |
125.3 |
92.6 |
23.4 |
37.8 |
Minority interest |
68.6 |
54.5 |
29.7 |
(-21.6) |
(-25.0) |
Net income (norm) |
64.5 |
70.8 |
62.9 |
45.0 |
62.8 |
Net income (FRS) |
68.7 |
70.8 |
62.9 |
45.0 |
62.8 |
Average Number of Shares Outstanding (m) |
355 |
355 |
355 |
355 |
355 |
EPS - normalised fully diluted (kr) |
18.2 |
19.9 |
17.7 |
12.7 |
17.7 |
EPS - IFRS (kr) |
19.4 |
19.9 |
17.7 |
12.7 |
17.7 |
Dividend per share (Kr) |
5.9 |
6.9 |
13.2 |
13.2 |
13.2 |
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BALANCE SHEET |
|
|
|
|
|
Fixed Assets |
148.8 |
150.7 |
168.8 |
181.6 |
185.0 |
Intangible Assets |
72.4 |
66.2 |
61.2 |
62.5 |
63.0 |
Tangible Assets |
53.1 |
29.2 |
35.0 |
33.0 |
33.0 |
Investments |
23.3 |
25.9 |
72.6 |
86.1 |
89.0 |
Current Assets |
4,017.7 |
4,784.6 |
5,186.3 |
5,500.0 |
5,500.0 |
Investments |
658.6 |
588.2 |
709.0 |
535.0 |
600.0 |
Trade receivables |
1,004.4 |
1,296.0 |
1,380.0 |
1,625.0 |
1,630.0 |
Cash and equivalents |
2,218.5 |
2,665.6 |
2,906.0 |
3,030.0 |
3,035.0 |
Other |
136.2 |
234.8 |
191.3 |
310.0 |
235.0 |
Total Assets |
4,166.5 |
4,935.3 |
5,355.1 |
5,681.6 |
5,685.0 |
|
|
|
|
|
|
Current Liabilities |
(3,240.5) |
(3,907.8) |
(4,294.9) |
(4,593.4) |
(4,678.5) |
Short term borrowings |
(2,319.6) |
(2,753.8) |
(3,140.1) |
(3,128.0) |
(3,503.5) |
Trade payables |
(829.3) |
(979.4) |
(981.2) |
(1,282.0) |
(1,000.0) |
Other |
(91.6) |
(174.6) |
(173.6) |
(183.4) |
(175.0) |
Long Term Liabilities |
(72.2) |
(110.1) |
(102.2) |
(177.5) |
(105.0) |
Long term borrowings |
(58.3) |
(95.0) |
(90.1) |
(151.8) |
(97.0) |
Other long term liabilities |
(13.9) |
(15.1) |
(12.1) |
(25.7) |
(8.0) |
Total Liabilities |
(3,312.7) |
(4,017.9) |
(4,397.1) |
(4,770.9) |
(4,783.5) |
|
|
|
|
|
|
Equity attributable to ordinary shareholders |
460.0 |
518.5 |
557.4 |
555.4 |
571.2 |
Minority interest |
393.8 |
398.9 |
400.6 |
355.3 |
330.3 |
Total shareholders' equity |
853.8 |
917.4 |
958.0 |
910.7 |
901.5 |
Number of shares at year end (m) |
355 |
355 |
355 |
355 |
355 |
NAV per share |
1.30 |
1.46 |
1.57 |
1.56 |
1.61 |
ROE |
14.0% |
14.5% |
11.7% |
8.1% |
11.2% |
ROA |
1.5% |
1.6% |
1.2% |
0.8% |
1.1% |
Cost/income ratio |
62.0% |
71.7% |
66.6% |
84.6% |
82.9% |
Source: ISY, Edison Investment Research
Contact details |
Revenue by geography |
Is Kuleleri, Kule-2 Kat 12 34330 4. Levent, Istanbul, Turkey +90 212 350 2000 www.isinvestment.com |
N/A |
Contact details |
Is Kuleleri, Kule-2 Kat 12 34330 4. Levent, Istanbul, Turkey +90 212 350 2000 www.isinvestment.com |
Revenue by geography |
N/A |
Management team |
|
Chairman: İlhami Koç |
CEO: Ali Erdal Aral |
Having previously served as the general manager of ISY, Mr Koç was appointed as the chairman of ISY in February 2013. In 1997, he moved from Isbank to Is Investment, where he has been a manager in the Asset Management, Corporate Finance, Research and International Capital Markets, and Private Equity divisions. In 2002, he became the general manager of Is Investment. |
In February 2013, Mr Aral was appointed as the general manager of ISY. Since starting his career at Isbank in 1989, he has served in various units and branches before being appointed head of treasury in 2002. He was later promoted to corporate branch manager of Isbank–Kozyatağı corporate branch in 2008 and deputy chief executive at Isbank in 2011. |
Management team |
Chairman: İlhami Koç |
Having previously served as the general manager of ISY, Mr Koç was appointed as the chairman of ISY in February 2013. In 1997, he moved from Isbank to Is Investment, where he has been a manager in the Asset Management, Corporate Finance, Research and International Capital Markets, and Private Equity divisions. In 2002, he became the general manager of Is Investment. |
CEO: Ali Erdal Aral |
In February 2013, Mr Aral was appointed as the general manager of ISY. Since starting his career at Isbank in 1989, he has served in various units and branches before being appointed head of treasury in 2002. He was later promoted to corporate branch manager of Isbank–Kozyatağı corporate branch in 2008 and deputy chief executive at Isbank in 2011. |
Principal shareholders |
(%) |
Is Bank and IS Bank Group Companies |
71.0 |
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Companies named in this report |
Is Bank, Is Investment; Is Private Equity; Is Investment Trust; Is Asset Management, Goldman Sachs |
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