Fixed Income Analysis /

Ziraat: Q1 results highlights – All-round solid performance

  • Consolidated net income of TRY2.5bn was c50% higher than a year ago primarily reflecting strong net interest income

  • The cost/income ratio improved yoy; NPL ratio remains below 3%

  • LCRs are still high and capital ratios are above the required minimums

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
26 May 2020
Published byTellimer Research

All-round solid performance: Ziraat (TCZIRA) reported results for Q1 20 on 15 May. Net income of TRY2.5bn was about 50% higher than a year ago, primarily reflecting strong net interest income. This helped offset higher costs and provisions. A change in the method of accounting for the insurance business (due to the announced disposals) and in deferred tax amounts impacted some yoy comparisons, but performance in Q1 20 looks solid overall. The annualised ROE was 13.4% (Q1 19: 10.9%) on our calculations. Ziraat Bank’s NPL ratio remains relatively low, at less than 3%. However, there was a significant increase in Stage 2 loans in Q1. This will be an important thing to monitor over the next few quarters. Positively, the issuer set aside more than TRY900mn in free provisions, a useful cushion against potential asset deterioration. Regulatory forbearance notwithstanding, capital ratios still declined qoq, which was a little disappointing. This has since been addressed – as at Halkbank and Vakifbank, the Turkey Wealth Fund has completed a core capital injection of TRY7bn at Ziraat, which could add up to 115bps to capital ratios. The issuer’s liquidity coverage ratios remain very high and Ziraat has no eurobonds due this year. Management disclosed that the lender was able to secure a US$1.1bn syndicated loan last month, which shows that Ziraat Bank has retained access to foreign currency wholesale funding, even in the current challenging market. We reiterate our Hold recommendations on TCZIRA USD-denominated bonds.

Very strong net interest income: Operating revenue of TRY9.1bn was 45% higher than a year ago, solely driven by strong net interest income. Consolidated net fee and commission income fell 8% yoy to TRY753mn, and Ziraat Bank disclosed a trading loss of more than TRY2.1bn reflecting FX-related losses. In addition, other operating income fell to TRY853mn from TRY1.26bn a year ago, as provisions reversals reduced and as there was a change in the way some insurance/pensions income was booked following the announced disposals. Net interest income of almost TRY9.6bn was up over 70% yoy as interest expense fell by close to a third, a trend seen at other Turkish banks. Core spreads improved yoy in both local and foreign currency. 

Modest improvement in the efficiency ratio: Personnel costs and other administrative expenses both increased yoy. Ziraat Bank also disclosed TRY943mn in ‘other’ allowances, up from TRY207mn in the previous year (we include this in total costs). In all, operating expense of TRY4.2bn was over 40% higher than a year ago. However, solid revenue growth meant the cost/income ratio improved by 1.2ppts yoy on our calculations, to 46.1%.

Worth watching Stage 2 loans: An 8% qoq rise in gross loans helped mask the 5% increase in non-performing loans and the NPL ratio improved to 2.8% from 2.9%. The issuer disclosed that at bank level, YTD loan growth took 20bps off the NPL ratio while regulatory changes meant that ratio was 15bps better than it would otherwise have been. The coverage ratio improved to 104% from 98%, reflecting an 11% qoq rise in reported balance sheet reserves. Ziraat booked TRY2.1bn in provisions during the first quarter. While this was lower than in Q4 19, the charge was more than 70% higher than a year ago. What probably explains this yoy rise is free provisions – the lender disclosed that TRY910mn in free provisions were booked at the bank in the first quarter. Turning to Stage 2 loans, the total increased to TRY29.6bn from TRY22.2bn at end-19.This figure will be important to watch over the next few quarters. 

Near-term liquidity should not be a concern: Ziraat Bank disclosed cash and equivalents of just under TRY48bn (6.4% of assets), down from TRY64bn (9.2% of assets) at the end of last year, as the issuer grew the securities and loans books instead. However, the overall LCR was 156% (end-19: 147%) and the FC LCR was 457% (end-19: 496%) showing that near-term liquidity should not be a concern. Based on Bloomberg data, TCZIRA last issued a eurobond in 2017. The next eurobond maturity is in April 2021, when a US$500mn security is due to be redeemed. As mentioned earlier, TCZIRA recently secured a new syndicated loan, showing that the bank maintains access to foreign currency wholesale funding. Turning to deposits, the qoq increase in LC deposits outpaced LC loan growth at Ziraat Bank. As a result, the LC LDR improved by c.70bp to 135.8%. The FC LDR was more than 2ppts lower than at end-19, at 58.4% as FC loans fell 6% qoq while FC deposit balances were down only 1% (both qoq changes are in USD terms).

Capital ratios remain above required minimums: The consolidated CET1 ratio was 12.8% (end-19: 13.6%). The Tier 1 and total capital ratios were 14.6% (end-19: 15.4%) and 15.6% (end-19: 16.4%), respectively. The qoq decline in capital ratios primarily reflects the impact of balance sheet growth. At bank level, Ziraat disclosed that regulatory forbearance added 1.6ppts to the CET1 and Tier 1 ratios, and 1.7ppts to the total capital ratio. Ziraat Bank also disclosed that the TRY7bn capital injection from the Turkey Wealth Fund is expected to add 110-115bps to the bank-only CET1 ratio, which was 13.5%. This capital injection shows that Turkey’s authorities remain willing to provide support to state-owned lenders.