Best value in AKBNK 2028s: We upgrade our recommendation on the Akbank (AKBNK) 6.797% 2028 subordinated bond to Buy from Hold. We reiterate our Hold recommendations on Akbank’s other bonds. The spread difference between the AKBNK 2028 bond and the AKBNK 7.2% 2027 security is now almost 70bps. This looks excessive, given that both bonds are Tier 2s, and the difference between the first call dates is just over a year. Since mid-January, the AKBNK 2027 and 2028 bonds have both widened relative to the AKBNK 5% 2022 senior bond. We note that Akbank reported excess Tier 1 capital of over TRY20bn at the end of last year, and internal capital generation remains strong. These factors are especially positive for Akbank’s subordinated securities.
Good FY performance: Net income of cTRY5.4bn was 6% lower than in 2018, similar to the yoy decline at Garanti BBVA. We still think Akbank’s results were solid overall. Strong revenue growth was offset by higher personnel and regulatory costs and a rise in depreciation charges, leading to the decline in the bottom line. Akbank’s capital ratios improved yoy, reflecting good internal capital generation as well as the rights issue completed in early 2019. The NPL ratio continued to rise in Q4 19, but management expects this metric to fall to less than 6% this year. Management also sees 40-50bps upside to previous FY 20 NIM guidance of 4% as the CBRT reduced rates earlier than Akbank anticipated. The issuer also disclosed that its legacy exposure to OTAS (held via LYY, a special purpose entity) could take 1.5% off this year’s return on equity. However, Akbank noted that the difference between the book value and market value of the exposure has declined, and still expects to generate a mid-teens ROE for FY 20.
Solid core revenue growth: Operating revenue of TRY21.6bn was 10% higher than in 2018, driven by core revenue growth. Net interest income was 9% higher than in the previous year, as deposit costs fell significantly in H2 19. Management disclosed that marginal deposit costs declined to 9.5% in January from c22% in the middle of last year. Further, growth in LC-denominated business banking loans and general purpose consumer loans was particularly strong in 2019. These factors helped offset the reduced contribution from CPI linkers. Akbank noted that the composition of the securities book has changed – fixed rate securities now accounting for 45% of the LC-denominated securities book, up from 27% at end-18. Net fee and commission income growth was also strong, reflecting strong performance across many business lines. Management still expects more muted (single-digit) growth this year, as regulatory changes will impact payment system fees.
Cost/income ratio is still below 40%: As mentioned earlier, costs increased significantly yoy. Personnel costs were 22% higher than in 2018, and other operating expenses rose 17%, reflecting a rise in SDIF premiums and depreciation charges on data centre investments. Further, ‘other’ provisions (which we include in costs) increased to TRY1.1bn from TRY103mn. Despite this, the cost/income ratio remained relatively low, at just under 37%. We note that this ratio was highest in Q1 19, and improved in each subsequent quarter of last year.
NPL ratio expected to fall: The consolidated NPL ratio was 6.4% at the end of last year, up from 5.9% at end-September 2019, reflecting the classification of a large real estate loan. Akbank has guided for a non-performing loans ratio of under 6% this year. Management stated that write-offs and NPL sales will take 1ppt off the NPL ratio. Further, management believes the cost of credit peaked in Q4 19 (at 281bps, up from 225bps in Q3), and there should be improvements this year. The ratio of Stage 2 plus Stage 3 loans is also expected to fall.
LCRs remain very high: The foreign currency and overall liquidity coverage ratios were 198% and 204%, respectively. Both ratios are still much higher than required, albeit lower than disclosed in the 2018 annual report. FY deposit growth outpaced loan growth (which was driven by TRY lending), and the loans/deposit ratio improved to 93% at end-19 from just over 100% at end-18.
Capital ratios continue to rise: The Tier 1 and total capital ratios were 16.9% and 19.7% respectively, up both yoy and qoq. Based on these figures, the issuer had over TRY20bn in excess Tier 1 capital at the end of last year. The equity/assets ratio was 14%, up from 12.3% at the end of the previous year. Capitalisation clearly remains a strength at Akbank.