Fixed Income Analysis /

Isbank: Q4 review – Much-improved

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    13 February 2019
    Published by

    It’s already been a good year: Isbank’s US$-denominated bonds are 100-280bp tighter than at the end of last year. Like other major Turkish banks, this lender’s bonds no longer offer double-digit yields. Improved market sentiment has clearly contributed to this performance, and we think the recently published results are also positive for Isbank’s bonds. The potential transfer of CHP’s 28.09% stake in Isbank (the Ataturk shares) to the Turkish Treasury continues to generate headlines. As discussed in our previous report, Isbank management has emphasised that its pension fund remains its largest shareholder. Isbank has also noted that the Ataturk shares have been held by the Turkish Treasury in the past, and that ownership did not impact the management of the bank. 

    Solid Q4 performance: Bank-only FY 18 net income exceeded the Bloomberg consensus forecast and FY 18 consolidated net income was 21% higher than in the previous year, generating a return on equity of c15%. Performance in the fourth quarter was particularly strong. Consolidated net income exceeded TRY2bn, and was 50% higher than a year ago, reflecting strong revenue generation as well as qoq and yoy declines in operating expenses. Further, Isbank disclosed provisions of less than TRY1bn for Q4 18. The improved contribution from Isbank’s subsidiaries is also worth highlighting – management noted that this was up 75% compared to a restated figure for the previous year. We note that TSKB recently reported impressive results. 

    Strong revenue generation partly driven by CPI linkers: FY 18 operating revenue of almost TRY31bn was 30% higher than in the previous year, driven by solid net interest and net commission income. A change in the CPI expectations used boosted the valuation of the bank’s portfolio of CPI linkers in Q4, and at bank level, income from CPI linkers increased to TRY1.4bn in Q4 18 from TRY1.02bn in the previous quarter. In addition, Q4 net fee and commission income was up both yoy and qoq, at almost TRY1.1bn, reflecting higher fees on payment systems and non-cash loans. However, Q4 18 operating revenue was lower than in Q3, reflecting higher LC deposit costs and higher swap costs, but was still 15% higher than in Q4 17.

    Cost/income ratio was better than in 2017: FY operating expenses totalled TRY14.7bn, 14% higher than in 2017, which we consider a modest increase given the rate of inflation. As discussed earlier, revenue generation in 2018 was quite strong. As such, the FY consolidated cost/income ratio improved to 47.6% from 54.2%, on our calculations. For the fourth quarter, the cost/income ratio was 46.2%, down from 54.8% a year ago and 47.4% in Q3 18. We note that Q4 18 costs were lower than in both Q3 18 and Q4 17, reflecting lower pension fund provisions and the bank’s decision to delay certain IT and communications-related expenses. 

    Less than TRY1bn in provisions in Q4: The consolidated Q4 provision charge was just TRY966mn, down from more than TRY3bn in the previous quarter. Management attributed this to a recovery on a large problem loan, the stronger TRY, a decline in NPL inflows and positive changes to model parameters in the fourth quarter. The bank also reversed some of the free provisions set aside in 2017. Isbank’s NPL ratio, which was 4%, remained lower than at some of its peers. Management reiterated previous guidance for a non-performing loans ratio of c6% this year.