Tough times never last, but tough banks do: We are assigning Hold recommendations to the Halkbank (HALKBK) 2020 and 2021 senior US$-denominated bonds. We think the two 2021 bonds offer slightly better value. Although Halkbank’s profitability remains somewhat weak relative to most peers, the issuer did make notable progress in the second quarter – core margins improved and costs fell qoq.
We acknowledge that the HALKBK bonds are quoted well over 30ppts higher than in August 2018, and no longer offer double-digit yields. However, these securities are still among the highest-yielding senior bank bonds in Turkey.
There are still concerns about the bank’s relationship with the US authorities, even after the release of Halkbank’s former deputy general manager. As noted in previous reports, this is the key risk to any constructive view on the bank’s bonds. In the Q2 19 report, management again noted that there are ‘no enforcement or other actions’ against the bank. Halkbank received a EUR900mn boost to AT1 capital in Q2. We consider this, and other support from the state to be positive, and believe the probability of Halkbank receiving additional support, if needed, remains high.