The consensus earnings are understated by at least 10% on 2017, and more on 2018. Looking at the turnaround in economic activity and seeing strong earnings momentum not yet fully recognized by the market, we reckon share price gains will continue in 2H17. The earnings momentum alone warrants 25% upside.

The capacity expansion and upgrade at Lokman's Etlik Hospital, the most profitable location across Lokman group hospitals, should be earnings and value enhancing to shareholders.

Turkish banks' earnings growth has declined steadily since 2005. From as high as 40-50% pa between 2003-05, the EPS growth first fell towards mid-teens by 2010, then slowed to low single digits from 2010 and finally turned negative in 2014/2015. We identify three reasons for the deceleration in pace of earnings growth. The no.1 reason is the decline in the level of inflation hurting core business margins. The second reason is the lower annual volatility in CPI itself, which has had an adverse impact on trading incomes. The third reason is tighter regulation over credit.

Lokman Hekim reported one of its strongest quarters since Van hospitals were acquired. December quarter sales grew 24.0% on the year, driven by growth in inpatient admissions at Van hospitals and improvement in patient traffic at Sincan, Lokman's flagship. The company also reported solid margin gains with EBITDA margin widening by 394bp on the year.

Finansbank is changing hands again - and it's yet another bad deal for the National Bank of Greece. Having bought Finansbank for ~4x book in 2006, they are now selling to QNB for below 1x. What's more, Finansbank is NBG's most profitable business, the absence of which would reduce the group ROE, quite possibly significantly.

Kudos to QNB for acquiring one of the best retail and SME banks in Turkey for a bargain.

Combined revenues in Van now make up 40% of Lokman's sales, up from 35% same period last year - that's the key take-away from September financials. Pace of growth at both Van and Van Hayat continues to outstrip the rest of the group.

The market valuation of Turkish banks is currently implying a cost of equity of 12% on average, which we find too low. Turkish risks – inflation, regulatory and political –, as well as global outlook warrant more conservative risk assumptions and hence require higher rate of return. Inflation itself should increase towards 9% mark in 1Q16 to factor in further weakness in currency. Our models factor in an average 14% COE, some 200bp above that implied by the market.