Fixed Income Analysis /

Akbank: Q1 20 review – Solid performance overall

  • Performance in the first quarter was solid overall, though the annualised ROE was lower than in the previous quarter

  • Regulatory and other changes mean asset quality deterioration may not materialise until Q3; Akbank is prepared for this

  • Capital and liquidity metrics remain strong, which is credit-positive

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
22 May 2020
Published byTellimer Research

Solid performance overall: As is now customary, Akbank (AKBNK) released results for the first quarter in late April, marking the start of the reporting season for major Turkish banks. Q1 bank-only net income of TRY1.31bn compared to the Bloomberg consensus forecast of TRY1.35bn. The bank added more provisions than a year ago, though this charge was lower than in the fourth quarter. The annualised ROE was just under 10%, which was down yoy and qoq. We still have a Buy on the subordinated bond and Hold on the senior bonds. 

Ready for the challenges that lie ahead: As would be expected from the battle-ready lender this is, Akbank emphasised the strengths which put the bank in the 'best position' to navigate current challenges, including robust capital, solid liquidity and low leverage. The issuer reported significant excess capital, the FC and LC LDRs improved and the qoq change in leverage was modest. Akbank made a MtM adjustment of TRY871mn on its Turk Telekom exposure and set aside TRY250mn in 'free provisions', but still recorded a solid result overall. Management acknowledged that the outlook is challenging. For the full year, Akbank sees downside risk to previous loan growth, fee growth and ROE targets. The lender also expects its NPL ratio and cost of risk to be higher than guided at the start of the year. However, the net interest margin may be better than expected and Akbank has maintained previous guidance on cost growth, efficiency and leverage.

Good core revenues in the first quarter: Q1 20 consolidated operating revenue of TRY6.4bn was up both yoy and qoq, driven by solid net interest income. Management noted that funding costs decreased (due to rate cuts) and income from CPI linkers was higher than in Q4 19. More stringent regulation meant that fee income decline qoq, but these revenues still rose yoy, reflecting solid performance in wealth management, business loans and bancassurance. Other operating income (which usually includes provision reversals) also increased, contributing to higher operating revenues.

Efficiency remains a strength: Personnel costs and other administrative expenses increased yoy, as did other allowances to TRY1.1bn from TRY495mn, which we include in costs. In all, operating expenses of TRY3.2bn were over 40% higher than in Q1 19. The cost/income ratio was just under 50% based on these calculations. 

Net new NPLs declined: Provisions increased to almost TRY1.5bn, 15% higher than a year ago, but lower than in the previous quarter. The 6.6% consolidated NPL ratio was about 20bps higher than at end-19. Positively, net new NPLs fell qoq and yoy. Management noted that payment holidays mean that the impact of the Covid-19 pandemic on asset quality will not be seen until Q3. 

Near-term liquidity is not a concern:  The overall and FC LCRs were 201% and 273%, respectively (end-19: 198% and 204%). Liquidity is clearly a strength. Akbank last issued a USD-denominated eurobond in April 2018 – the AKBNK 2028s. In some instances, the bank has decided to only partly roll over syndicated loans – importantly this market remains open to Akbank . Wholesale funding now totals less than US$7bn, accounting for less than 13% of total liabilities, down from 17% in 2018. The LDR improved to 86% from 93% at end-19, reflecting very strong deposit growth, in both LC and FC, which is a positive. 

Capital in excess of requirements: Akbank estimates that it has over TRY18bn in excess Tier 1 capital and almost TRY21bn in excess total capital. Including forbearance measures, the Tier 1 and total capital ratios were 17.4% and 20.4%, respectively (22% CAR including forbearance measures introduced since end March). Excluding these measures, the Tier 1 ratio was 16% and the total capital ratios was 18.8%. The equity/assets ratio was 12.8% (end-19: 14%).