Fixed Income Analysis /

Halkbank: Q1 results highlights – Some improvements

  • Consolidated net income improved yoy and qoq; bank-only net income came in below the Bloomberg consensus forecast

  • Revenue generation was strong and the yoy rise in operating expenses was modest

  • HALKBK now has just two USD eurobonds outstanding; foreign currency liquidity is not currently a concern

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
26 May 2020
Published byTellimer Research

Some improvements: Halkbank (HALKBK) reported results for Q1 20 on 14 May. The issuer also hosted a conference call. We reiterate our Hold recommendations on Halkbank’s senior bonds. Bank-only net income of TRY825mn for Q1 came in below the Bloomberg consensus forecast of TRY850mn. However, the bottom line improved yoy and qoq. Consolidated net income of more than TRY1.1bn for Q1 20 compares to net income of just TRY173mn a year ago. The Q1 2020 ROE was 13.8% (Q1 2019: 2.3%). Net interest income was particularly strong, and this more than offset a significant rise in provisions. Capital ratios declined, but Turkey’s authorities have since boosted core capital at the bank by TRY7bn. As a result, the Turkish Treasury now owns c75% of Halkbank. As at other major Turkish lenders, near-term foreign currency liquidity is not currently a concern – foreign currency liquid assets far exceed maturing liabilities even after Halkbank repaid a US$750mn eurobond in February.

Net interest income was >2x the Q1 19 level: Operating revenue of TRY5.7bn was 85% higher than a year ago, as net interest income more than doubled – to TRY5.6bn from less than TRY2bn. This was partly driven by a decline in funding costs – Halkbank disclosed that the cost of LC deposits fell to 9% from 16.3% a year earlier and the bank expects a further 100bps improvement in these deposit costs in Q2 20. In addition, the yield on securities improved qoq, and the securities book grew to TRY93.5bn from TRY86.6bn at end-19, helping boost net interest income. Net fee and commission income of TRY707mn was 20% higher than in Q1 19, but down 4% qoq due to changes in regulations. FX-related losses led to a TRY1.2bn trading loss, which compares to a TRY407mn loss in the prior year. This was not enough to offset very strong net interest income, so revenues still increased yoy. While swap usage has increased since the end of Q1, management does not expect full-year swap costs to exceed TRY2bn this year, down from TRY3.8bn in 2019.

Significant improvement in efficiency ratio: Operating expense of TRY2.1bn was just 8% higher than in the previous year as personnel costs increased (due to pay rises) while other operating expenses fell yoy. The cost/income ratio improved to 36.7% from 63% in Q1 19.

NPL ratio was under 5%: Halkbank reported TRY17.4bn in total non-performing loans, 4% higher than at end-19. Changes in regulations likely contributed to this modest qoq rise. Unlike Vakifbank, Halkbank did not report significant write-offs in Q1. The NPL ratio improved to 4.7% from 5.1% reflecting the impact of strong loan growth. Positively, the coverage ratio was almost 9ppts higher than at end-19, at 80.8%. Halkbank booked TRY2.4bn in provisions in the quarter, up from TRY1.1bn a year ago as there was a marked rise in provisions against Stage 2 loans. Provisions against Stage 3 exposures also increased. These additional provisions are somewhat forward looking, as Halkbank expects asset quality deterioration in H2 20. Despite this, Halkbank still expects the gross cost of risk to be 70-80bps better than in 2019. Management noted that payment deferrals have been granted on TRY22bn in loans. This equates to c6% of the loan book. 

FC-denominated wholesale funding now accounts for just 5.4% of total liabilities: Cash and equivalents of TRY27.9bn declined from TRY39.6bn at end-19 and accounted for less than 6% of total assets. This may partly reflect the repayment of a US$750mn eurobond in February. Halkbank also disclosed foreign currency liquid assets of more than US$5.9bn, including US$2.4bn in swaps. These figures compare to US$965mn in wholesale liabilities coming due in the next 12 months. The overall LCR was 121% and the FC LCR was 196%. The FC LCR declined from 395% at end-19, which probably isn’t surprising following a eurobond repayment. Management noted that FC-denominated wholesale funding now accounts for just 5.4% of total liabilities. HALKBK now has just two USD-denominated Eurobonds outstanding totalling US$1bn. The bonds mature in February and July 2021. LC-denominated loan growth (driven by business and SME loans) was particularly strong, and the LC LDR rose to 141% from 136% at end-19. We note this ratio was lower than a year ago, however. Interestingly, the share of public sector deposits increased to 9% from 6% during the quarter and Halkbank notes that recent LC deposit growth has been strong overall as the introduction of the asset ratio has led to reduced competition from privately-owned banks (Vakifbank also highlighted this). The FC LDR improved by c1.4ppts to 64.7% as FC-denominated loans fell 6% qoq while FC-denominated deposits were down 3% in the quarter (both qoq changes are in USD terms). 

Welcome boost to core capital: Halkbank’s equity/asset ratio was 6.6%, down from 6.9% at end-19. The CET1, Tier 1 and total capital ratios fell to 8.9% (end-19: 9.3%), 10.6% (end-19: 11.1%) and 13.3% (end-19: 13.7%), respectively. As is well known, the Turkey Wealth Fund has boosted core capital at Halkbank with a TRY7bn injection. Management expects core capital to exceed 10% and total capital to exceed 15%, with the capital injection expected to add 175-185bps to these ratios. Management also disclosed that at end-Q1, regulatory forbearance added 33bps to the core capital ratio and 50bps to the total capital ratio.