Fixed Income Analysis /

Yapi Kredi: FY 19 review – All about provisions

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    5 February 2020
    Published byTellimer Research

    Worth holding on to: We reiterate our Hold recommendations on the senior and subordinated Yapi Kredi (YKBNK) bonds. We acknowledge that all bonds have already performed well, especially the YKBNK 8.5% subordinated bond, which has tightened relative to other YKBNK securities since Vakifbank announced that it would call a similar bond. The call date is now just over a year away, and we currently expect Yapi Kredi to exercise this option. Regarding the YKBNK 13.875% Perp, while the cash price is quite high, we think the spread difference of over 300bps and spread multiple of almost 2x versus the YKBNK 5.85% 2024 senior bond still looks attractive. Strong internal capital generation – which resulted in higher core capital ratios at end-19 – is also a positive for the YKBNK perp.

    Ownership in focus: UniCredit previously announced that it would sell part of its stake in Yapi Kredi, reducing its holding to just under 32% by selling a c9% stake to Koç Holdings. The joint venture with Koç Holdings, Koç Financial Services, will be solely-owned by Koç Group. The transaction is expected to close in the first half of this year. UniCredit Group’s right to appoint board members or senior executives of Yapi Kredi is to be removed. Five non-independent directors were appointed by UniCredit, and most of these board members are well-known to the market. UniCredit may wish to reassign these executives to other group operations, and Koç Holdings may wish to appoint more representatives. While numerous, significant board changes are a risk, we note such changes will not benefit UniCredit or Koç Holdings and expect any changes to be more measured. We note that the spread differences between Yapi Kredi senior bonds and Koç Holdings (KCHOL) securities have narrowed, possibly in anticipation of Yapi Kredi being consolidated by KCHOL (though cross-default language in the KCHOL bond documentation only appears to apply to guaranteed subsidiaries). We believe support would be made available to the bank in the unlikely event that it is needed.

    All about provisions: A 26% increase in provisions/allowances for expected credit losses turned a yoy rise in operating profit into a 25% drop in the pre-tax result. Net income fell to TRY3.6bn from TRY4.7bn and the consolidated ROE at Yapi Kredi declined to 9% from 13.5% in the previous year. We welcome the decision to set aside additional provisions, which we see as prudent. We note that asset quality metrics are expected to improve this year.

    Revenues higher than in 2018: Operating revenue exceeded TRY21bn last year, as core revenues were particularly strong, and collections were higher than in 2018. Net interest income was up 7% yoy, at TRY15.5bn as loan-deposit spreads improved, offsetting the impact of much-reduced income from CPI linkers. Net fee and commission income of TRY5.5bn was over 30% higher than in 2018, driven by strong performance in the payment systems and transactional banking businesses. As at other Turkish lenders, changing regulations will likely impact fee growth, which is seen moderating this year.

    Efficiency remains a strength: Operating expenses rose 12% yoy to TRY7.7bn. Personnel costs increased, and so did other administrative expenses (reflecting higher regulatory costs and depreciation charges). The cost/income ratio was just over 36%. While this ratio was higher than in 2018, it still compares well to many banks in our coverage universe and is lower than Yapi Kredi reported for 2017 and other prior years. 

    NPL ratio to fall this year: The consolidated NPL ratio was 7.3%, up from 6.6% at end-Q3 19 and 5.4% in the previous year. Yapi Kredi disclosed full year provisions of cTRY9bn, up from TRY7.1bn in the previous year. In the fourth quarter alone, provisions were almost TRY3.3bn, close to 80% higher than in Q3 19. As mentioned earlier, this had a negative impact on the FY 19 net result. In Q4 19, the rise in provisions meant that pre-tax profit fell to TRY396mn from TRY1.2bn in the previous quarter and TRY1.5bn in Q4 18. Management commented that provisioning was ‘accelerated’ leading to the higher charges. We note, positively, that the bank-only Stage 2 loans ratio improved to 15.1% at end-19 from 16.2% at end-September 2019, and Yapi Kredi expects the NPL ratio to fall to c7% this year.

    Liquidity metrics improved: Yapi Kredi’s loans/deposit ratio improved to 107% from 111% at the end of the previous year, reflecting a 10% yoy rise in customer deposits (particularly individual demand deposits). Both FC and LC deposits rose yoy. The issuer also reported cash and equivalents of TRY81bn, up more than 30% versus end-18, and accounting for close to 20% of total assets. The overall and foreign currency liquidity coverage ratios were 190% and 430%, respectively. Both ratios were higher than in 2018 (overall LCR: 136%, FC LCR: 226%). 

    Higher capital ratios: The Tier 1 and total capital ratios were 13.7% and 16.7%, respectively, up both qoq and yoy driven by solid internal capital generation – a common feature among major Turkish banks. At end-19, total capital included cTRY3.1bn in subordinated loans from UniCredit. We estimate that this accounted for c93bps of the total capital ratio. In the unlikely event that Yapi Kredi is required to repay this early, we think the impact on capital ratios would be manageable.

    Some improvements expected this year: Yapi Kredi provided guidance for 2020 as part of its results disclosures. The issuer expects ‘slight contraction’ in foreign currency loans, local currency loan growth in the high teens and high single-digit fee growth. Yapi Kredi also expects a net interest margin of at least 3.7%, mid-teens cost growth, a total cost of risk of 225bps and a mid-to-low teens ROE. The issuer further guides to a non-performing loans ratio of 7%, loans/deposit ratio of less than 105% and total capital ratio of at least 16%.