Fixed Income Analysis /

Alternatifbank: FY 19 review – Strong pre-provision performance

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    5 February 2020
    Published byTellimer Research

    A typical Q4 result: We reiterate our Hold recommendation on the Alternatifbank (ALNTF) 8.75% 2026 subordinated bond, which is callable next year. Once again, the final quarter of the year appears to have been a ‘clean-up’ period for Alternatifbank. Provisions in Q4 19 equalled pre-provision profit. A small tax credit meant that the lender reported a TRY3mn net profit for the final quarter. This compares to TRY1mn and TRY2mn in Q4 17 and Q4 18 respectively. FY 2019 net income of TRY178mn was 13% lower than in the previous year, as provisions almost doubled yoy, to TRY330mn. Positively, capital ratios improved after an equity injection from the parent bank, and liquidity coverage ratios were higher than Alternatifbank reported in 2018. We believe the probability of support from Commercial Bank remains high. This should continue to support valuations.

    Higher core revenues, trading gains: FY 2019 operating revenue was up 22% yoy at TRY993mn, driven by strong core revenues and higher trading gains (primarily FX-related). Net interest income was 15% higher at TRY666mn, boosted by income from money market placements, while net fee and commission income rose to TRY101mn from TRY57mn. 

    Cost/income ratio was under 50%: Operating expenses totalled TRY444mn, up a modest 8% versus the prior year. Other allowances (which we include in costs) fell by a third, while personnel expenses rose 8% yoy. However, non-personnel costs were 20% higher than in 2018, partly reflecting higher depreciation charges. Solid revenue growth meant that the cost/income ratio improved to 45% last year from c50% in 2018.

    Significant write-offs in Q4: Alternatifbank reported a 25% yoy rise in non-performing loans. This meant that the NPL ratio rose to 5.6% from 4.7% at the end of the previous year. The bank wrote off TRY622mn in loans in Q4. This led to a significant decline in reserves, and a drop in the coverage ratio. We think this should be seen in the context of regulatory changes in the final part of 2019, and recent disclosures from Akbank and Garanti. We expect this coverage ratio to improve this year.

    LCRs higher than in 2018: The LDR improved to 111% from almost 120% at the end of the prior year, as deposit growth outpaced the 9% rise in net loans. In the final quarter of the year, local currency deposit growth was especially strong, at 14%. This meant that the LC LDR improved to 119% at YE 2019, from 137% at end Sept 2019. Cash and equivalents totalled TRY5.7bn, up from TRY3.6bn at YE 2018, and accounting for 19% of total assets. The overall and foreign currency liquidity coverage ratios were c170% and c244% respectively. Both ratios were higher than reported in 2018. A US$250mn eurobond was repaid in 2019 and Alternatifbank now only has the US$300mn subordinated bond outstanding, which is callable in April 2021. 

    Capital ratios improved yoy: A capital injection from Commercial Bank Qatar meant that the Tier 1 ratio improved to 9.5% from 8.3% at the end of the previous year. The total capital ratio was 1ppt higher, at 17.3%. We note that this lender’s core capital ratios remain lower than at many larger peers. However, additional capital injections from the parent bank, which are planned, should help narrow this difference over time.