Solid bank-only performance: We reiterate our Hold recommendations on Vakifbank (VAKBN) senior and subordinated bonds and assign a Hold recommendation to the recently-issued VAKBN 5.25% 2025 senior bond. Considering the VAKBN 8 % 2027 bond, indicative spread differences and multiples relative to Vakifbank’s senior bonds suggest there may be even more room for this bond to tighten. However, this seems unlikely at the current time. Concerns about the weaker TRY and changes to fee income regulation may impede bank bond performance. Having said this, we note that Vakifbank’s (bank-only) performance in 2019 was very strong – net income of TRY2.8bn beat consensus expectations. Further, liquidity metrics improved capital ratios remain well above regulatory minimums, despite recording significant loan growth. Vakifbank expects fee income to fall slightly this year, but the bank still forecasts a 14% ROE, as margins are seen improving and the cost of risk is expected to decline. We note that the issuer is yet to publish consolidated figures. As such, our comments are based on bank-only results for 2019.
Beat versus consensus: FY 19 net income of TRY2.8bn was almost 33% lower than in 2018, primarily reflecting higher swap costs and higher provisions. We note that the pre-provision result was 24% higher than in the previous year, and the FY result exceeded the Bloomberg consensus forecast of TRY2.6bn – a very strong beat. In Q4 19, net income of cTRY1.3bn was more than 2x the Q3 19 level, and the annualised ROE improved to 16.1%.
Very strong core revenue generation: Operating revenue of TRY18.5bn was 16% higher than in the previous year, driven by solid core revenues. Net interest income improved as deposit costs fell in both LC and FC, leading to wider core spreads. The decline in LC deposit costs was most noteworthy – this improved to 10.01% in Q4 19 from 17.32% in Q4 18. Net fee and commission income of cTRY4bn was 74% higher than in the previous year, driven by the cash loans and insurance businesses.
Efficiency ratio improved: Operating expenses totalled TRY6.7bn, just 4% higher than in 2018, as increases in personnel and other administrative costs were offset by a decline in other provision expenses (which we include in costs). The efficiency ratio was just over 36%, about 4ppts better than in 2018.
Deterioration in asset quality metrics was unsurprising: Vakifbank booked allowances for expected credit losses/provisions of TRY8.2bn last year, up from TRY4.4bn in 2018. As mentioned earlier, this led to the decline in the net result. We think the rise in provisions should be seen in the context of an extremely challenging operating environment. We note that total non-performing loans increased to TRY17.3bn from TRY10.8bn at end-18 and TRY7.6bn at end-17. However, very strong loan growth (particularly in TRY) helped mask this, in part, and the NPL ratio, which was 5.6%, was only 1.2ppts higher than in the previous year, partly due to the reclassification of BRSA-earmarked loans (some past due Stage 2 loans were reclassified as NPLs, and these were mainly loans to the construction and energy sectors). Stage 2 loans increased to TRY31.6bn from TRY19.8bn, and now account for 11.5% of loans (end-18: 8.96%).
LDR was down yoy: The overall loans/deposit ratio was 116%, down from almost 130% at end-18, which we see as positive. There was a 40% rise in customer deposits in 2019, with strong growth in both FC and LC accounts. The weaker TRY did contribute to this, but the bank noted that FC deposit growth was still quite strong in USD terms, at 37% versus the sector average of 16.6%. We note that demand deposit growth was also strong. Vakifbank’s overall and foreign currency liquidity coverage ratios were 130% and 510%, respectively. Both ratios were higher than disclosed in 2018 (overall LCR: 112%, FC LCR: 264%). Cash and equivalents totalled TRY42bn, accounting for just over 10% of total assets.
Increase in RWAs led to lower capital ratios: The Tier 1 and total capital ratios were 13.6% and 16.6%, respectively. Both ratios were lower than at end-18. The impact of internal capital generation and subordinated bond issuance was offset by a number of factors including RWA growth (driven by LC mortgages and general-purpose loans) and the weaker TRY. The equity/assets ratio was 7.9% (end-18: 8.6%). The bank stressed that the TRY852mn in free provisions can be used to boost the core capital position at any time and does not see the need to boost capital in other ways.
2020 guidance – normalisation and recovery: Vakifbank expects 5% GDP growth this year. This is significantly higher than in 2019, and the forecast shows that 2020 is expected to be a much better year. The bank expects normalisation and recovery of profitability and other metrics. Vakifbank guides to high-teens LC loan growth, and flat-to-slightly-up FC loan growth. Together, this should result in blended lending growth of 15%. Deposit growth is expected to be in line with this, and as such the LDR is not seen changing materially yoy. On asset quality, management has guided to an NPL ratio of 6.5-7.0%, and a Stage 2 loans ratio of 12-13%. However, Vakifbank expects its net cost of risk to be slightly lower than in 2019, when this was 193bps. NPL coverage is expected to increase slightly (by a couple of points) this year. Vakifbank guides to 40-50bps net interest margin expansion yoy. On net fee and commission income, Vakifbank was previously expecting low single-digit growth this year, but changes in regulations (effective from March 1) mean that the bank now expects a slight (low single-digit) contraction in fee income this year. The regulatory changes primarily impact the corporate and commercial businesses at Vakifbank – management notes that the retail fee business was already quite heavily regulated. Importantly, the potential upside to NIMs means the bank has not altered its guidance on profitability due to changes in fee regulations. No further changes in fee regulation are expected. On costs, opex growth is expected to be 13% this year. The bank expects a full-year ROE of 14% in 2020, up from 9.1% in 2019.