Fixed Income Analysis /

Halkbank: Q3 review – Thriving, against the odds

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    15 November 2019
    Published byTellimer Research

    Still a Hold: We reiterate our Hold recommendations on the Halkbank (HALKBK) USD-denominated bonds. The recent indictment by the US Department of Justice may have meant that Halkbank’s Q3 results received little attention. However, we do think it is a small positive that the issuer’s bottom line is improving – consolidated net income of TRY587mn was 40% higher than in the previous quarter, and Halkbank’s annualised ROE rose to 7.7% from 5.6% in Q2 19. Added to this, liquidity metrics remain strong – foreign currency assets far exceed near-term maturities. Even after this week’s meeting between the presidents of the US and Turkey, it is not clear how the Halkbank case will be resolved. Despite this, as we have stated before, we believe the probability of state support for Halkbank remains high. We also believe the bank remains committed to repaying its bonds on schedule. This is what drives our Hold recommendations on the HALKBK 2020 and 2021 bonds.

    Solid core revenue generation: Operating revenue of almost TRY3.8bn was flat qoq, but up yoy, with the yoy rise driven by solid core revenues. This helped offset a trading loss, which was wider than in Q3 18. Net interest income exceeded TRY3bn, driven by a decline in local currency deposit costs that led to improved core spreads. Net fee and commission income was 2% lower than the very strong Q2 19 result, but over 40% higher than a year ago, with payment systems and non-cash loans businesses contributing most to this revenue line.

    Rise in costs meant efficiency ratio was worse than in Q2: Operating expense of just under TRY2.2bn was up both yoy and qoq. We note that while the number of branches increased yoy, headcount actually fell. However, both personnel and other administrative costs increased yoy. As a result, the cost/income ratio for Q3 19 was 57%, up from 49% in Q2 19, but flat yoy as both revenues and costs were up 14% versus Q3 18.

    NPLs up, coverage ratio down: Halkbank’s NPL ratio deteriorated to 4.6% from 4.1% in the third quarter, as total non-performing loans rose by almost 20%, to TRY14.8bn. The trend is similar to what other Turkish lenders have reported. Despite this, Halkbank booked provisions of just TRY708mn in Q3. This was down 22% yoy and was more than 50% lower than in Q2 19. As at a number of other banks, NPL coverage declined – on our calculations, this ratio was down almost 10ppts in the quarter.

    Liquidity metrics look strong: Halkbank addressed foreign currency liquidity in the very first slide of the latest results presentation, perhaps an attempt to address what must be one of the most frequently-asked questions posed to the bank. At bank-level, there is US$1.9bn in foreign currency-denominated wholesale funding coming due over the next 12 months. This compares to almost US$6bn in foreign currency liquid assets (figure excludes US$4.2bn in swaps). The overall and foreign currency liquidity coverage ratios averaged 117.4% and 368.3%, respectively in Q3. These ratios were 116.9% and 144.6% in the Q4 18 report. Very strong local currency deposit growth meant that Halkbank’s LC loans/deposit ratio improved to 152% from 156% at the end of the previous quarter. The FC LDR was 64%, down from 68% at end-June, as net foreign currency loans declined in Q3, while FC deposits rose 2%.

    Capital ratios fell qoq: The consolidated Tier 1 and total capital ratios were 11% and 13.7%, respectively. Both ratios declined in Q3, reflecting a 4% rise in risk-weighted assets. Like Vakifbank, this was driven by especially strong TRY loan growth. Halkbank’s equity/assets ratio was 6.8%, flat qoq but down from 7.3% at end-Q3 18.