Fixed Income Analysis /

TSKB: Q3 review – Still a Hold

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    6 November 2019
    Published byTellimer Research

    Annualised ROE of almost 16%: We are keeping our Hold recommendations on the TSKB (TSKBTI) senior and subordinated bonds. The TSKBTI 2021 and 2023 senior bonds are already quoted tighter than the closest comparable securities issued by Isbank. The TSKBTI 7.625% 2027 subordinated bond is still quoted wider than the Isbank (ISCTR) 7% 2028 security, suggesting that there may be more value in that TSKBTI bond. However, we note that the TSKBTI 2027 has performed quite well already – the YTM has declined to 8.3% from a historic high of 17.3%. Q3 19 consolidated net income of TRY189mn was down qoq, but much-improved versus Q3 18. The annualised ROE was almost 16%, on our calculations. At bank-level, weaker net interest income (due to the reduced contribution from CPI linkers) and derivatives-related losses meant that TSKB reported below-consensus net results. Having said that, we do think there were a number of positives in the bank’s latest disclosures, including greater clarity on asset quality and improved capital ratios.

    Lower CPI linker contribution and derivative losses impacted revenues: Q3 19 operating revenue of TRY375mn was down 11% on the previous quarter. Although net fee and commission income rose (driven by strong advisory fees), TSKB disclosed a wider derivatives-related loss. Further, net interest income fell to TRY490mn from TRY512mn in Q2 19, reflecting the lower contribution from CPI linkers. Management noted that a 1ppt drop in CPI takes TRY15mn off net interest income. However, going into the end of the year, TSKB expects other banking income to offset the reduced contribution from CPI linkers. Management also noted that the impact of domestic rate cuts was less significant than at other banks, given the foreign currency-focused nature of TSKB’s balance sheet.

    Costs down versus Q2: Operating expense of TRY61mn was lower than in the previous quarter, as both personnel and other administrative costs declined. However, weaker revenues meant that the cost/income ratio was higher than in Q2 19; though this ratio remains below 20% and continues to compare well with most peers’ efficiency ratios. 

    NPL ratio and CoR guidance revised: TSKB disclosed that two large files were moved to Stage 3 from Stage 2, following the now-infamous directive from the BRSA. As a result, the ratio of Stage 3 loans increased to 3.2% at end-September. Management emphasised that there has been no material change in the total amount of Stage 2 plus Stage 3 loans, and this is expected to remain the case through to year-end. However, TSKB did revise its previous NPL guidance – the NPL ratio is now expected to be below 5% by end-19 (previous guidance: 4%). TSKB also revised its FY 19 cost of risk guidance to c130bps from c100bps. Despite all this, provisions fell to TRY80mn in Q3 from TRY191mn a year ago. Comments from management suggest there are limited concerns about further, significant asset quality deterioration.

    Debut eurobond redeemed: The overall and foreign currency liquidity coverage ratios were 259% and 122%, respectively. Both ratios were lower than disclosed in the FY 18 report (overall LCR: 262%, FC LCR: 156%). The issuer noted that what was its debut eurobond (a US$350mn senior issue) was repaid on October 30. Further, the bank still has US$865mn in undrawn DFI funding available. TSKB’s funding structure remains a strength – the average maturity of its liabilities is 12 years, while the average maturity of its loans is 5.5 years. Management noted that recent news regarding Halkbank has not impacted discussions with funders.

    Capital ratios up qoq: The Tier 1 and total capital ratios improved to 12.2% (end-Q2 19: 11.1%) and 17.6% (end-Q2 19: 16.4%), respectively. TRY strength is likely to have contributed to this, and so did the 3% decline in gross loans. Management also emphasised the contribution of strong internal capital generation – this has added 1.6ppts to the bank-only CET1 ratio since the start of the year. A 10% depreciation in the TRY takes 70bps off CAR and 90bps off the bank’s Tier 1 ratio.