Strong fundamentals, decent valuations – Buy: We are assigning Buy recommendations to Akbank’s senior and subordinated US$-denominated bonds. These securities are significantly tighter than when we first wrote about Turkish lenders. However, the senior bonds are still more than 200bp off the historic tights and Akbank’s two subordinated securities are 650-700bp off the tights (based on indicative mid z-spreads). Akbank’s fundamentals remain best-in-class. Capitalisation and liquidity are particular strengths. Akbank disclosed excess Tier 1 capital of over TRY14bn at end June and has enough liquidity to repay maturing obligations over the next three years (at least). The issuer beat consensus expectations – yet again – in Q2, and comments from management suggest that FY 2019 performance may be better than expected on margins and asset quality.
There are still some risks: Significant escalation in tensions between the US and Turkey remains a risk. The US administration has not imposed sanctions on Turkey following partial delivery of military equipment from Russia, but there are concerns this may still happen. Significant TRY weakness and asset quality deterioration are also risks. However, we believe Akbank is one of the best-placed Turkish lenders to weather such potential challenges.
Another solid quarterly result: Bank-only net income exceeded the Bloomberg consensus forecast. Akbank reported consolidated net income of TRY1.26bn, down both qoq and yoy, but still a solid result. The annualised ROE was 10.4% on our calculations. Core revenue generation improved. However, a wider trading loss led to a decline in total operating revenues. Costs declined qoq but provisions rose, contributing to the slightly weaker bottom line. Given significant challenges faced by Turkish banks, we think performance in Q2 19 was decent overall. Regarding the recent rate cut, Akbank expects this to have a positive impact on deposit costs but notes that its pays less than some competitors on deposits.