Fixed Income Analysis /

Isbank FY 19 review: Consensus-beating performance

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    10 February 2020
    Published byTellimer Research

    Still worth holding on to: We are keeping our Hold recommendations on Isbank’s (ISCTR) USD-denominated bonds and assign a Hold to the recently-issued ISCTR 7.75% Tier 2 bond. Like other Turkish securities, Isbank bonds have widened recently. We think this may reflect a combination of factors including a weaker TRY, broad concerns about the impact of the novel coronavirus on global growth, more frequent reports of casualties in Syria and possibly profit-taking. Spread widening may also reflect concerns about the impact that additional restrictions on fees may have on banks’ profitability. We believe stronger net interest income and lower provisions should at least partly offset weaker fee growth and expect profitability to remain solid at Turkey’s major banks.

    Very strong results: Consolidated net income of over TRY7bn was down 7% yoy. However, bank-only net income exceeded the Bloomberg consensus forecast. Akbank and Garanti BBVA reported in-line results, while higher provisions at Yapi Kredi led to a modest miss. Isbank’s performance was especially strong in Q4 – net income of over TRY2.5bn was up from TRY1.6bn in Q3, reflecting solid core revenues and much lower swap costs. On our calculations, the annualised ROE exceeded 14% in Q4, making this the strongest quarter in 2019.

    Solid core revenues and insurance contributionOperating revenue of more than TRY35bn was up from TRY31bn in the previous year, reflecting strong core revenues as well as stronger performance in the insurance business. Net interest income rose to cTRY23bn, as LC deposit costs fell by more than 720bps in the year. Isbank expects net interest income to remain strong in this quarter. Net fee and commission income of TRY4.6bn was over 20% higher than in the previous year, partly driven by lending-related fees. Additional restrictions on fees, which banks can charge, may put pressure on this revenue stream this year. However, stronger net interest income and lower provisions should help offset the impact of lower fees on the banks’ profitability. 

    FY efficiency ratio up yoy: Staff costs and other operating expenses both increased yoy, and so did other allowances (which we include in operating costs). In all, operating expense was 23% higher than in the previous year, at TRY18.2bn. As a result, the consolidated income ratio rose to 52% from 48% in FY 18. We note, however, that this ratio improved qoq – to 48% from 57%.

    NPL ratio and coverage improved qoq: Isbank booked TRY8.6bn in allowances for expected credit losses last year. This was 24% higher than in 2018. We note that Isbank set aside TRY300mn in additional free provisions in the final quarter of last year, taking the total amount to TRY1.125bn (end-18: TRY1.2bn). In Q4 19 alone, allowances exceeded TRY2.4bn, up from TRY1.4bn in Q3 19 and TRY947mn in Q4 18. There was a significant yoy rise in total non-performing loans. However, the qoq change was relatively modest, at 5%, reflecting much lower NPL additions and stronger recoveries. The consolidated NPL ratio was 6.1%, 20bps better than at end-September 2019. There were no NPL sales in Q4 19. The aforementioned increase in allowances meant that Isbank’s coverage ratio was almost 5ppts higher than it was at end-Q3. Isbank expects a CoR of under 150bps and NPL ratio below 7% this year. 

    LDRs down, LCRs up: Isbank’s LDR improved to 108% from 123% at end-18 and 113% at end-September 2019. Deposit growth was particularly strong, at 22% yoy and 12% qoq. We note that Isbank’s foreign currency and local currency LDRs improved – the LC LDR is now less than 140%. Isbank reported cash and equivalents of cTRY76bn, accounting for more than 13% of total assets. The overall and foreign currency liquidity coverage ratios were 183% and 314%, respectively, up from 123% (overall LCR) and 189% (FC LCR) in the FY 18 report. Liquidity metrics have clearly improved, which we think is positive.

    Capital ratios up yoy: The Tier 1 and total capital ratios were 13.2% and 16.4%, respectively. Both ratios were higher than at end-18, reflecting solid internal capital generation. The equity/assets ratio was 11.6%, 50bps higher than at the end of the previous year.