Fixed Income Analysis /

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

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%.