Back to Buy on GARAN 2027: We reiterate our Hold recommendations on the Garanti BBVA (GARAN) senior bonds and upgrade the GARAN 6.125% 2027 subordinated bond to Buy from Hold. We see most value in the subordinated bond, which is callable in 2022. The sub/senior spread multiple still exceeds 2x and the spread difference is almost 240bps.This spread difference has narrowed, but is still wider than in H1 18.
Decent performance overall: Garanti BBVA reported net income of TRY6.2bn for 2019, 7% lower than in the previous year but still a very solid result. Revenue generation remained strong, and cost growth was relatively modest. However, provisions rose, leading to the yoy decline in net income. We note that the bank’s capital and liquidity metrics remain strong, and asset quality may improve this year.
Solid fees and other income drove yoy revenue growth: FY 19 operating revenue of cTRY31bn was 9% higher than in 2018, driven by solid fee and commission income, and higher collections and provisions reversals (included in other operating income). FY 19 net interest income of TRY20.7bn was 1% lower than in the previous year, partly reflecting the lower contribution from CPI linkers. We note that loan-to-deposit spreads improved in both local and foreign currency, and Q4 19 net interest income was 8% higher than in the previous quarter. Overall, revenue generation remains a key strength, in our view.
No concerns about efficiency: Operating expense of TRY3.4bn was higher than in the previous quarter, partly reflecting regulatory costs. As a result, the cost/income ratio was c42%, up from 36% in Q3 19. We note that this ratio improved yoy. For the full year, there was a less significant rise in costs, and the FY 19 cost/income ratio was slightly better than in the previous year.
Asset quality may improve this year: In Q4 19, net new NPLs were less than half the Q3 19 level, partly due to write-offs of cTRY820mn, as well as stronger collections and slightly higher NPL sales. Garanti BBVA’s consolidated NPL ratio was 6.6%, up a modest 10bps qoq. More write-offs are planned this year. This may help curb further rises in the NPL ratio. We note that management has guided for a c6.5% NPL ratio this year.
Liquidity remains strong: Garanti BBVA reported cash and equivalents of just over TRY72bn, up from TRY67bn at end-18, and accounting for almost 17% of total assets. The foreign currency and overall liquidity coverage ratios were both 207%, higher than that disclosed in the FY 18 report. In addition, the foreign currency liquidity buffer now exceeds total outstanding external debt (US$10.8bn versus US$9bn). Garanti BBVA repaid a EUR500mn eurobond in July 2019 and a US$750mn eurobond in October 2019. Neither bond was replaced. The bank has no eurobonds due until 2021, but management did not rule out returning to the market (though Garanti BBVA will remain ‘opportunistic’ regarding this).
Capital ratios improved: The equity/assets ratio was 12.6%, up from 11.7% at the end of the previous year. The Tier 1 ratio was 15.4% and the total capital ratio was 17.8%. Both ratios were higher than at end-18, primarily reflecting strong internal capital generation. Further, the TRY253mn subordinated debt issue placed in the final quarter of last year added about 7bps to the total capital ratio. Management stated that based on consolidated figures, the issuer had excess capital of TRY18bn at the end of last year. This suggests that subordinated eurobond issues are less likely in the near term.