Fixed Income Analysis /
Turkey

Garanti BBVA: Q1 results highlights

  • Revenue generation was exceptionally strong but elevated provisions led to a bottom-line miss vs. Bloomberg consensus

  • LCRs remained high. Capital ratios were also high (even before regulatory forbearance)

  • Management believes the bank is well positioned and the balance sheet can weather even the most severe risk scenarios

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

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Tellimer Research
22 May 2020
Published byTellimer Research

Never mind the tech mishap: The Turkish banks’ Q1 results season continued on April 29 with solid results from Garanti BBVA (GARAN). A mishap at an "outsourced online operator" meant the Q&A session during the conference call was short, but we’ve chosen not to read too much into that. The lender gave quite a detailed presentation before the Q&A. We note that BBVA, the bank’s largest shareholder, reported its biggest-ever quarterly loss. This may well lead to even more questions about the probability of support from this owner but, as has been the case for some time, Garanti’s fundamentals show such support is unlikely to be required.

A miss, but still a solid result: Bank-only net income for the period was TRY1.6bn, a miss versus the Bloomberg consensus forecast of TRY1.86bn but still a solid result, given that GARAN generated an annualised ROE of over 12% and the net result was better than in Q4 19. Pre-provision performance was impressive. However, provisions increased partly because the lender booked TRY650mn in additional provisions on Turk Telekom – TRY550mn due to currency weakness and TRY100mn to cover the interest charged on the exposure.

Stellar revenue generation: Operating revenue of almost TRY11bn was exceptionally strong – this was over 30% higher than in both Q1 and Q4 19. Net interest income of TRY5.9bn improved, as the decline in funding costs more than offset lower interest income. Changes in regulation notwithstanding, fee income still rose 10% qoq and almost 20% yoy. Added to this, GARAN booked trading gains of TRY818mn, reversing the loss booked in Q1 last year. The lender also booked other revenues of TRY2.5bn, which includes almost TRY2bn in provision reversals. 

Cost/income ratio improved: There was a modest yoy rise in personnel expenses, but other operating costs rose to TRY1.9bn from TRY1.4bn. Garanti also disclosed "other provisions" (which we include in costs) of TRY739mn, up from TRY245mn in the previous year. Although total operating expenses rose qoq, strong revenue generation meant that the cost/income ratio improved to 34% from 42%, on our calculations.

Significant rise in ECLs: Garanti set aside more than TRY5bn in expected credit losses, up from TRY3.4bn a year earlier. This reflects a number of factors including the Turk Telekom exposure, changes in macro assumptions and a rise in business-as-usual provisions. Management sees expected credit losses remaining elevated. The NPL ratio actually improved in the quarter, to 6.2% from 6.6%, and the bank booked net collections of more than TRY500mn. Garanti now has TRY2.5bn in free provisions set aside and does not intend to release this in the near term. We think this is further proof the bank’s prudent stance.

Liquidity coverage ratios remain high: The overall and FC liquidity coverage ratios were 222% (end-19: 207%) and 364% (end-19: also 207%), respectively. Management disclosed a FC liquidity buffer of US$10.2bn, far in excess of ST external debt of US$2.6bn. As at Akbank, liquidity is clearly a strength here too. The recently announced Eurobond buyback supports this view. The LDR, which was 101%, was up qoq but was better than at end-March 2019, as deposits rose 13% yoy. The LC LDR was 147% and the FC LDR was just over 67%.

Capital ratios still high excluding regulatory forbearance: Garanti reported Tier 1 and total capital ratios of 14.8% and 17.5%, respectively, including regulatory forbearance measures. Excluding these measures, the Tier 1 ratio was 14% and the total capital ratio was 16.6%. Management noted that these ratios remain much higher than required – the issuer has TRY17bn in excess capital.

Asset quality deterioration is "inevitable": The bank provided some very helpful slides and comments on growth and other assumptions for the rest of the year. Q2 is expected to be especially challenging – Turkey’s economy could shrink 9% according to this issuer, 4x worse than the 2018 adjustment. However, a V-shaped recovery is forecast, mainly due to monetary, banking and fiscal measures introduced, and the bank expects 0% FY 20 GDP growth. The previous forecast was 4% FY growth. Garanti expects margins to contract reflecting the lagged effect of lower loan yields (due to rate cuts) and sees "clear downside" to the previous guidance of high single-digit fee income growth. Management sees asset quality deterioration as "inevitable" in a number of sectors – GARAN previously guided for an NPL ratio of 6.5% and net cost of risk of 200bps. There is also downside risk to previous FY 20 guidance of an ROE in the high teens. Management believes the bank is well positioned and the balance sheet can weather even the most severe risk scenarios.