2025 senior bond has performed well: We downgrade our recommendation on the TSKB (TSKBTI) 6% 2025 bond to Hold from Buy. The bond is up over 3ppts versus the issue price of 99.47, and current valuations are no longer out of line with the rest of the bank’s bonds. We reiterate our Hold recommendations on TSKB’s other securities, including the TSKBTI 7.625% subordinated bond, which still yields almost 6.5% to the March 2022 call date.
Net income up yoy: Consolidated net income of TRY736mn was 11% higher than in the previous year, generating a return on equity of 15.6%. The yoy improvement in the bottom line was driven by solid core revenues and a 14% decline in provisions. Capital ratios improved yoy and though the bank’s liquidity coverage ratios fell, these ratios remain above regulatory minimums.
Good core revenues: Operating revenue of TRY1.65bn was flat yoy, as solid net interest income and net fee and commission income were offset by wider trading losses. Net interest income was 11% higher than in the previous year, driven by lower TRY funding costs. Bank-only annualised NIMs improved sequentially in every quarter of last year. Net fee and commission income was 27% higher, at TRY65mn reflecting higher advisory fees. We note that TSKB expects even stronger fee income growth this year. Lower FX-related gains meant that TSKB reported a trading loss of TRY419mn for the full year, even though consolidated derivatives losses narrowed to TRY489mn from TRY616mn. As mentioned earlier, weaker trading and other income was offset by solid core revenues.
Efficiency remains a strength: Operating expenses rose 22% yoy to TRY255mn, as both personnel and other administrative costs increased. TSKB’s consolidated cost/income ratio was 15.5%, up from 12.7% in 2018 but still among the lowest efficiency ratios in our coverage universe.
NPL ratio is still relatively low: Although the full year provision charge was lower than in 2018, TSKB booked higher charges in Q4 19 (TRY145mn) than in both Q3 19 (TRY80mn) and Q4 18 (TRY99mn). The NPL ratio was 3.4% at end-19, which was 20bps higher than at the end of September. The ratio of Stage 2 loans also increased qoq, but we note that the bank does not expect this ratio to rise this year. Management commented that ‘most’ restructuring discussions have been completed.
LCRs lower than in previous period: The overall and foreign currency liquidity coverage ratios were 126% and 84%, respectively. These ratios fell from 262% (overall LCR) and 156% (FC LDR) in the previous period, but remain higher than the regulator requires. We note that TSKB repaid what was its debut USD-denominated eurobond in October 2019 and issued a TRY400mn 5-year senior bond earlier this year, the first since the 2018 crisis. The bank also secured additional funding from DFIs in 2019, and disclosed US$780mn in undrawn DFI funding. TSKB also disclosed cash and equivalents of cTRY1.6bn (4% of total assets). We expect the US$350mn bond due in April to be repaid and note that DFIs account for 67% of TSKB’s total funding, while syndicated loans and bonds make up 26% of this total.
Capital ratios improved: The Tier 1 and total capital ratios were 12.1% and 17.4%, respectively. Both ratios were higher than at end-18, primarily reflecting good internal capital generation. This offset the 13% yoy rise in risk-weighted assets. The equity/assets ratio was 12.3%, up from 10.9% at the end of the previous year.
Guidance suggests 2020 should be a better year: TSKB disclosed guidance for 2020. The issuer expects bank-only FX-adjusted loan growth of 3-5%, a net interest margin of 4%, fee and commission growth of at least 50%, opex growth of less than 20%, a cost/income ratio under 15% and a return on tangible equity of more than 16%. TSKB also expects a flat Stage 2 loans ratio, and a non-performing loans ratio of less than 3.5%. Further, the issuer has guided for Tier 1 and total capital ratios of over 12.5% and 18%, respectively.