Fixed Income Analysis /

Turkish banks: Valuations, results and the bugbear that is politics

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    7 May 2019
    Published by

    Strong results and competent management notwithstanding, near-term events such as the Istanbul election re-run and the planned delivery of Russian military equipment may dampen the Turkish bank bond recovery.

    Yapi Kredi reported results for Q1 on 3 May. Like Akbank, Garanti and TSKB before it, Yapi Kredi’s performance was better than expected. Net income of TRY1.24bn compared with the Bloomberg consensus forecast of TRY1.12bn. Net interest income and net fee and commission income were both stronger than a year ago.

    Yapi Kredi also reported a positive trading result, reversing losses of Q4 18 and Q1 18. Although costs rose significantly (partly due to “other” provisions, which we have added to this line), the bank’s efficiency ratio still improved. Almost even qoq deposit and loan growth meant there was little change in the overall LDR, though we note that there was a decline in TRY-denominated deposits in the quarter and, as a result, the LC LDR rose to c154%. The NPL ratio was almost flat qoq.

    On capital – which has almost always been a focus at Yapi Kredi – the equity/assets ratio is back below 10%, but the recent AT1 issue added 113bps to the bank’s Tier 1 ratio, which was 12.1% at end-March. Based on performance in Q1, Yapi Kredi is on track to achieve all targets set for this year. Please see Table 1, which shows key Q1 figures for four major Turkish banks.

    Our conversations today have centred around the decision of the election body to re-run the Istanbul vote. We highlight the following:

    • It is unlikely that the decision to re-run the vote would have come as a complete surprise to most people. As is well known, Istanbul accounts for more than 30% of Turkey’s GDP on some estimates and President Erdogan was once Mayor of the city. The AKP had also publicly called for a re-run. Although some may have preferred an alternative outcome (ie acceptance of the results), it is not clear that opposition rule in Istanbul would have been viewed as the very best outcome for our markets. There were already reports that the Mayor’s powers could be restricted if Istanbul was ruled by a party other than the AKP. It is unlikely that such restrictions would have been seen as positive.
    • According to the New York Times, the CHP had said that various Istanbul-related contracts would likely be scrutinised. It is important to stress that there is no ‘real proof’, according to the article, that anything is wrong with these contracts. However, such an investigation may well have led to additional concerns (justified or not) about asset quality in the banking system since lenders undoubtedly have exposure to such contractors and/or related entities.
    • The TRY weakened past TRY6/USD overnight. This may lead to renewed concerns about banks’ capital ratios, given the impact of a weaker local currency on risk-weighted assets. We cannot exclude a repeat of events in late 2018, including regulatory forbearance on MtM of securities books and permission to use historical exchange rates in capital ratio calculations. Even if such regulatory forbearance is not re-introduced, it is worth noting that, since the start of the year, Ziraat, Halkbank, Vakifbank, Akbank and Yapi Kredi, have all boosted capital. In addition, Alternatifbank has received a capital injection from its parent company and Kuveyt Turk has disclosed that there will be a capital boost in 2020.