Fixed Income Analysis /
Turkey

Yapi Kredi: Q1 20 review – Better than Q4 19

  • Q1 20 net income of TRY1.13bn was slightly ahead of the Bloomberg consensus forecast

  • Revenue generation was solid, efficiency remains a strength and there is little concern about FC liquidity

  • Unsurprisingly, there is downside risk to previous guidance on asset quality and profitability

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

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Tellimer Research
22 May 2020
Published byTellimer Research

Better than Q4: Q1 20 net income of TRY1.13bn at Yapi Kredi (YKBNK) was slightly ahead of the Bloomberg consensus forecast of TRY1.07bn. The annualised ROE was almost 11%. Higher provisions meant the lender’s net result was 9% lower than a year ago. However, this result was much better than in Q4 19 when YKBNK disclosed net income of less than TRY300mn. These results follow much-discussed ownership changes at the bank. UniCredit’s ownership has declined to 20% and there are still questions about the long-term commitment of the Italian lender to Turkey.

Solid revenue generation: Operating revenue of TRY6.5bn was up both yoy and qoq. Lower deposit costs led to strong net interest income, fee income improved yoy despite regulatory curbs (but fell 4% qoq) and like Akbank and Garanti, YKBNK reported trading gains, rather than losses, in Q1 20.

Efficiency remains a strength: Operating expenses of TRY2.5bn were up 27% yoy as personnel costs and other administrative charges both increased. Management notes that higher regulatory expenses contributed to the yoy rise in costs. Yapi Kredi also disclosed a rise in other provisions, which we include in costs. The cost/income ratio was 37.7%, which is slightly higher than it was a year ago, but we think efficiency remains a strength.

Setting aside 'precautionary provisions': Yapi Kredi booked TRY2.6bn in expected credit losses, up from TRY1.9bn a year ago as the bank set aside ‘precautionary provisions’. Management noted that the ‘ordinary’ cost of risk would have improved yoy without this. The NPL ratio improved to 6.8% from 7.3% in Q1 20, partly due to writeoffs of TRY600mn. Yapi Kredi’s total NPL coverage exceeded 100%. The Stage 2 loans ratio improved too, though regulatory changes may have contributed to this.

Ample foreign currency liquidity: The overall and foreign currency liquidity coverage ratios were 206% (end-19: 190%) and 468% (end-19: 430%), respectively. Yapi Kredi disclosed 1-month liquidity of US$16bn. This exceeds total short term (US$4.2bn) and long-term (US$7.7bn) foreign currency external debt. Yapi Kredi’s LDR improved by over 4ppts in the quarter to 103% driven by strong LC deposit growth. We note that the LC LDR improved by almost 15ppts to 133%.

Capital ratios remain above regulatory minimums: The Tier 1 and total capital ratios were 13.7% and 16.6%, respectively, including the impact of regulatory forbearance. Management disclosed that the recent changes added 73bps to the Tier 1 ratio and 82bps to CAR. Importantly, the bank’s capital ratios remain well above regulatory minimums even without regulatory forbearance.

Some downside risks to previous guidance: As at other major lenders, Yapi Kredi is yet to make changes to previous 2020 guidance. However, the lender sees downside risk to NIM guidance of over 3.7% and expectations of high single-digit fee income growth. Yapi Kredi also sees risks to NPL ratio guidance of 7% and CoR expectations of 225bps. The FY ROE may be lower than the mid to low teens figure previously anticipated. Management still expects mid-teens cost growth and forecasts a loans/deposit ratio below 105%.