Fixed Income Analysis /

Halkbank: FY 19 review – Performance to be proud of

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    17 February 2020
    Published byTellimer Research

    Recommendations unchanged: We are keeping our Hold recommendations on the Halkbank (HALKBK) eurobonds. The two 2021 securities are now less than 70bps off historic tights, but these bonds are still quoted wider than all other Turkish bank senior bonds with similar maturities. Concerning the US indictment, a federal appeals court granted a temporary stay in proceedings at the end of January. However, risks related to this case remain and according to the bank, no provision has been made for the US case. Our base case remains that US litigation will not obstruct or delay payments on HALKBK eurobonds. 

    Double-digit annualised ROE in Q4 19: Consolidated net income was down yoy at just under TRY2.3bn. However, bank-only FY 19 net income of TRY1.72bn exceeded the Bloomberg consensus forecast of TRY1.58bn. Performance was especially strong in the final quarter of the year – on our calculations, Q4 consolidated net income exceeded TRY1bn, and generated an annualised ROE of almost 14%, partly helped by securities disposals. This was a marked improvement on the single-digit annualised ROEs reported in the preceding three quarters. 

    Core revenue growth was strong: Operating revenue was just 2% higher than in 2018, as strong core revenue generation was partly offset by higher swap costs. Net interest income exceeded TRY11.6bn and was up 30% on the previous year as interest income from loans rose and deposit costs fell to 6.7% in Q4 19 from 11.6% in Q4 18. Further, income from securities also rose. Although there was a significant drop in CPI (and in income from CPI linkers) Halkbank added to its securities portfolio during the year – the total securities portfolio increased to TRY103bn at end-19 from TRY75bn at end-18 (bank-only figures). Net fee and commission income was up more than 40% on the previous year, with payment systems and non-cash loans being the most significant contributors to fees. We expect some moderation in fee income growth this year, due to changes in regulations. Halkbank expects its use of swaps to decline this year and believes this should be positive for operating revenue. 

    Cost/income ratio is back under 50%: Operating expense of TRY6.7bn was 16% lower than in the previous year, as a rise in personnel costs was offset by lower administrative expenses (including depreciation charges and lease costs) and a decline in other provisions (which we include in costs). Halkbank’s cost/income ratio was just under 49%, down from 59% in the previous year. The bank expects its efficiency ratio to continue to improve this year. 

    Asset quality metrics were weaker than at end-18: There was a significant rise in provisions/allowances for expected credit losses in 2019 – to TRY4.7bn from TRY2.6bn in the previous year. Further, the bank’s non-performing loans ratio was 5.1%, up from 4.6% at end-Q3 19 and 3.4% at end-18. Unlike some other Turkish banks, there were no write-offs and no NPL sales at Halkbank in 2019. Halkbank expects its NPL ratio to rise further this year, but sees this ratio remaining below the banking system average.

    Another bond has been redeemed: Halkbank’s overall loans/deposit ratio was 104%, down from almost 108% at the end of September 2019, as deposits rose 5% in the final quarter of the year. Management noted that local currency deposit growth was especially strong, and some clients switched from foreign to local currency deposits. As a result, the LC LDR improved to 136% at end-19 from 152% at the end of Q3, while the FC LDR rose c2.4ppts qoq to 66%. Halkbank’s overall and foreign currency liquidity coverage ratios were 122% and 395%, respectively. Both ratios were higher than reported in 2018 (overall LCR: 117%, FC LCR: 145%). The bank redeemed a US$750mn bond earlier this month, and now has just US$1bn in senior eurobonds outstanding (two bonds, both of which mature in 2021). As we have stated before, we expect Halkbank to continue to redeem its eurobonds as these securities fall due. 

    Modest improvement in capital ratios: The Tier 1 and total capital ratios were 11.1% and 13.7%, respectively. Both ratios were higher than at end-18, as the negative impact of a weaker TRY and higher credit and market risk-weighted assets was offset by good internal capital generation and a boost to AT1 capital of almost TRY6bn in April 2019. The equity/assets ratio was 6.9%, which was lower than at end-18 but up qoq. The bank expects strong revenue generation to lead to improved capital ratios this year. 

    Strong H1 20 expected: Halkbank expects local currency loan growth of 23-25% and sees the proportion of foreign currency loans in total loans continuing to decline (% FC loans fell to 29% in 2019 from 34% in 2018). The lender expects blended loan growth of 12-13% this year. After the bank-only net interest margin widened by 1ppt in Q4 19 (to 4.0%), Halkbank expects further improvement this year. Most of this improvement is expected in the first half, but the bank still sees a FY 20 NIM c70-80bps better than in 2019. Swap volumes are seen falling significantly, leading to a reduction in the difference between swap-adjusted and unadjusted margins. The bank expects fees and costs to grow in line with CPI. Halkbank also expects a 50bps rise in the non-performing loans ratio, but sees its cost of risk falling by 20-25bps this year.