Another solid quarter: We reiterate our Hold recommendations on the Garanti BBVA senior and subordinated bonds. Consolidated net income of TRY1.3bn was down qoq, reflecting higher provisions. However, the bank-only net result exceeded Bloomberg consensus expectations. In addition, capital ratios improved and so did liquidity metrics. Overall, we think performance at Garanti BBVA was solid, and expect this bank’s fundamentals to continue to compare well with most peers.
Solid core revenue generation: Operating revenue of TRY7.3bn was 4% higher than in the previous quarter, driven by solid net interest income and net fee and commission income. Net interest income improved qoq, reflecting a significant decline in interest expenses. This helped offset the lower contribution from CPI linkers. Net fee and commission income of cTRY1.7bn was 25% higher than a year ago, and up 13% on an already-strong Q2 19 result. In the full year, Garanti BBVA expects to beat its fee income growth target of ‘low teens’, but sees growth moderating in 2020 (to a ‘one-digit number’) due to a cap on merchant fees.
Cost/income ratio remains below 40%: Operating expenses exceeded TRY2.6bn, 8% higher than a year ago, as both personnel and other administrative costs rose. We note that costs fell qoq, and the Q3 19 cost/income ratio of 36% (on our calculations) still compares well to many peers.
As at Akbank, NPLs increased: The non-performing loans ratio rose to 6.5% from 5.6% at the end of June, and 4.2% a year ago. We note that Akbank also reported a higher NPL ratio, and these changes come after the banking regulator asked lenders to classify over US$8bn in exposures. There was a significant increase in NPL inflows at Garanti in Q3, as some (mostly corporate and commercial) files were moved from Stage 2 to Stage 3. This, and a 2% decline in gross loans, led to the deterioration in the NPL ratio. The lender booked provisions of cTRY3bn in Q3 19, close to 40% higher than in Q2 19, but down 7% versus Q3 18.
FC liquidity exceeds external debt: Garanti BBVA’s loans/deposit ratio improved to 101% from 102% in June and 104% a year ago, as declines in net loans more than offset lower deposit volumes. We note that the fall in loan balances was driven by foreign currency lending – in TRY, net loans increased qoq. This was also the case with deposits – LC-denominated deposits rose 3% qoq while FC-denominated accounts fell 3% in the same period. Garanti’s overall and foreign currency liquidity coverage ratios were 233% and 290%, respectively. Both ratios were higher than disclosed in the FY 18 report. The bank further disclosed that its foreign currency liquidity buffer (US$10.6bn) now exceeds the total amount of external debt outstanding (US$9.8bn). Liquidity clearly remains a strength at this lender.
Capital ratios improved qoq: The Tier 1 and total capital ratios improved to 15.7% and 18.1%, respectively. The qoq improvement was driven by reduced foreign currency lending and by changes in asset allocation which led to lower risk-weighted assets. The equity/assets ratio was 12.6%, 60bps higher than at end-June. Management noted that based on minimum capital requirements, there is now TRY18bn of excess capital at group-level and TRY22bn of excess capital at the bank.