Fixed Income Analysis /

Vakifbank: Q2 review – Not the strongest quarter

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    14 August 2019
    Published by

    We are assigning Buy recommendations to Vakifbank’s (VAKBN) US$-denominated senior and subordinated bonds. The senior bonds, which mature between 2021 and 2024, yield between 6.6% and 8.6%. We acknowledge that the outlook for emerging market risk has become more uncertain recently, and this may impact the performance of VAKBN bonds in the near term. However, we do think indicative yields on VAKBN senior bonds look decent relative to similarly-rated securities issued by lenders in other markets. 

    Turning to the subordinated bonds, Vakifbank has three of these securities outstanding: maturing in 2022, 2025 and 2027. We think modest buybacks may continue to support the VAKBN 6% 2022 bond. We note that at the end of June, less than 14% of the VAKBN 6% 2022 security was included in capital ratio calculations, and this is one of only a handful of ‘old style’ Tier 2 Turkish bank bonds outstanding. The VAKBN 8% 2027 bond is callable in 2022 and is still fully included in capital. It is a relatively small issue (cUS$228mn outstanding). The spread multiple versus the VAKBN 5.625% 2022 senior security is more than 2x and is close to the highest this multiple has ever been. The once-only call on the VAKBN 6.875% 2025 bond is in February 2020, which is now only a few months away. We think that there is a non-zero probability of Vakifbank exercising this call. This is the first ‘new style’ Tier 2 security issued by a Turkish bank coming up to be called. Early redemption would be positive for Turkish banks, in our view, as it may indicate that banks are more comfortable with the outlook for the operating environment. It is possible that the banking regulator may permit the call, given the potential positive spillover effect of such a decision. Importantly, Vakifbank management has not ruled out exercising the call.

    In some ways, performance in Q2 19 was largely in line with expectations. However, net income was weaker than in both Q1 19 and Q2 18. We expect the bottom line to improve in the second half and note that Vakifbank targets a FY 19 ROE of at least 10%. Consolidated net income of TRY486mn in Q2 19 was down more than 50% on a very strong Q2 18 result. Bank-only net income of TRY368mn compared with the Bloomberg consensus forecast of TRY379mn. Core revenues rose yoy, offsetting higher swap costs. Further, costs were flat qoq, and less than 20% higher than a year ago. Provisions were lower than in Q1 19, and the bank’s H1 19 cost of risk improved yoy. In H2, Vakifbank expects to release a portion of the TRY917mn in free provisions set aside in previous periods. In addition, as at other banks, the recent rate cut is seen leading to improved margins, and swap costs are expected to fall, which should be positive.