Fixed Income Analysis /

Isbank: Q1 20 review – Net income up yoy

  • Net income of TRY1.5bn was up yoy, driven by solid core revenues

  • Funding costs fell sharply leading to a significant improvement in net interest income

  • The FY net interest margin may be better than previously guided; management sees downside risk to CoR guidance

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
22 May 2020
Published byTellimer Research
Net income up yoy: Results season in Turkey continue on May 8, with solid figures from Isbank. Q1 20 consolidated net income of almost TRY1.5bn was down on a very strong Q4 19 result, but up 17% yoy. The annualised ROE was 9.1% on our calculations. Good core revenues drove the yoy improvement in the bottom line. Coverage ratios increased, liquidity metrics improved and capital ratios remained well above the required minimums, even before regulatory forbearance. 
Net interest income was very strong: Operating revenue exceeded TRY10.6bn and was more than 20% higher than a year ago, driven by very strong net interest income. NII rose by a third yoy, to TRY6.6bn as funding costs fell sharply due to rate cuts and an increase in the share of demand deposits. Management disclosed that the cost of LC-denominated deposits fell to 7.31% from 9.64% in the previous quarter and 15.63% a year ago. FC-denominated deposit costs also declined. Net fee and commission income improved yoy, despite the regulatory challenges. This was driven by the cash loans and mutual fund fees. Isbank expects fee income generation to moderate in the near term. The issuer reported a trading loss of TRY439mn, a narrower loss than in Q1 19. 
One-offs contributed to a rise in costs: Operating expenses totalled TRY5.8bn in the quarter, up 32% yoy as both personnel and other administrative costs increased. Management attributed this to seasonal one-offs and provisions for a collective bargaining agreement. ‘Other’ provisions (which we include in costs) also rose. The cost/income ratio was just under 55%, up from 51% a year earlier. 
Additional free provisions set aside: Non-performing loans rose just 1% in the quarter, partly reflecting changes in regulation which delayed recognition of impaired loans. The NPL ratio was 5.7%, down from 6.1% at the end of last year, reflecting not just a modest rise in NPLs but also a 9% increase in gross loans. At bank level, Isbank disclosed that the NPL ratio would have been 28bps higher without regulatory changes. Isbank booked provisions of TRY2.8bn, higher than in both Q1 19 and Q4 19 as the bank set aside additional amounts to address the anticipated impact of the pandemic in future quarters. TRY weakness also contributed to the rise in provisions. Provisions against Stage 2 and Stage 3 loans increased, and Isbank set aside TRY100mn in free provisions, taking the total to TRY1.225bn.
No eurobonds maturing this year: Net TRY-denominated loan growth was very strong, at 10% qoq driven by general purpose consumer loans and non-retail loans. As a result, the LC LDR increased to 158% from 139% at the end of last year. In contrast, the FC LDR fell c1.7ppts in Q1 20, to 84.1%. Liquidity metrics have improved – the overall LCR was 217% (end-19: 183%) and the foreign currency LCR was 476% (end-19: 314%). Cash and equivalents accounted for more than 26% of total assets, and rose 10% qoq. We note that Isbank has no USD-denominated eurobonds due this year and the next bond matures in June 2021.
Subordinated bond issue boosted CAR: The consolidated Tier 1 and total capital ratios were 12.7% and 16.9%, respectively. At bank level, these ratios were 14.4% and 18.4%. Excluding regulatory forbearance measures, the bank-level Tier 1 and total capital ratios were 13.3% and 17.2% respectively, significantly higher than the minimum requirements. Isbank issued a US$750mn subordinated bond earlier this year, which added almost 1.2ppts to the bank level total capital ratio in the quarter. The equity/assets ratio was 10.5% (end-19: 11.6%). Management believes capital ratios are strong enough to weather potential challenges. 
Downside risk to CoR guidance: Margins are expected to normalise through the rest of the year. As a result, even after the strong performance in Q1, NIM guidance of 3.8-4% has been maintained (though management does see upside risk to this). Isbank also guides to fee income growth of 10%. This may be weaker than anticipated, even after solid fee income was reported for Q1, due to the impact of regulations and of the pandemic. While Isbank is yet to revise the FY net cost of risk forecast of 150bps (even though net CoR in Q1 was almost 250bps), management acknowledged that there was downside risk to guidance.