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Turkish delight

Turkey is set for bumper growth, with a new Banking Act in place and other legislation in the pipeline

A growing consumer appetite for credit in general and mortgages in particular means that the outlook for Eastern European financial services stocks is good, with the greatest potential in Russia and Turkey.

Although volatility looks inevitable, from a long-term perspective, the markets for financial services in these two countries, plus Poland, Hungary and the Czech Republic, are still relatively young and set for growth.

In economic terms, moves towards the neighbouring EU have already brought down interest rates and inflation in a number of these Eastern European countries, where living standards and consumption have started to rise to EU levels. Credit demand in these countries is picking up, with the main driver being housing loans, which in all five countries still represent only a fraction of the levels in the 15 “old” EU members.

The convergence process is most advanced in Poland, Hungary and the Czech Republic, also known as the CE3. Turkey and Russia have started covering the lags, which means they stand out in terms of investment opportunities in a region that as a whole was neglected in the rush to emerging markets over the past year.

With Eastern European economies growing at 4-7 per cent a year, consumption is on the rise and financial services companies should benefit.

We believe that, over time, stocks in Turkish financials in particular have further to go after a good run. With a new Banking Act in place and other legislation in the pipeline covering areas such as credit cards, leasing and private pensions, the market is set for bumper growth. Consumer loans, mortgages and housing-related insurance are in pole position.

Statistics show that Turkey lags the EU in terms of bank lending. Equally, income per head has a good deal of ground to make up. Further falls in inflation and interest rates and rising house prices should also whet consumer appetite for financial services.

A surge in mortgage lending is expected to fuel sales of products such as fire insurance. This should add to the appeal of the insurance sector, which can also look ahead to legislation allowing individual pension plans on top of state schemes.

Merger & acquisition activity makes Turkey and Russia stand out in Eastern Europe. Companies such as GE, Axa, HSBC and Fortis already have footholds in Turkey and the M&A moves of recent months point to an unabated appetite. Planned IPOs such as the Ziraat Bankasi and Halkbank offerings are further investment opportunities.

Risks for investors include margin pressure from the growing competition. In the Czech Republic, interest rates are low and face further pressure, which is weighing on margins. Investors in Hungarian financials should be aware of the country’s macroeconomic problems, inflationary pressure and the forint’s depreciation. Competition is an issue in Poland, where western banks have been building market share for quite a while. In Russia, oil-related wealth is feeding through into incomes and consumption but investment opportunities in the banking sector are still limited.

In Turkey, banking sector stocks have suffered in line with the wider market from volatility as carry trade conditions change and from tensions with the IMF or EU and political uncertainty. In the longer term, the fundamentals in Turkey are very favourable and despite a recent correction, the investment case is still strong.

Relative to financials in emerging markets generally, valuations in Eastern Europe are comparable but the growth potential is considerable, making setbacks a buying opportunity. Within the region, Russia and Turkey are the favourites.

The ABN Amro Asset Management Eastern Europe equity fund has a 10 per cent allocation in Turkey, with Russia capped at 25 per cent and the rest shared by the three other countries. Its biggest holding in the financials sector are in Polish bank BPK and Hungarian bank OTP.

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