Earlier today, UniCredit (UCGIM) announced that it had sold its entire holding of the Yapi Kredi (YKBNK) 13.875% Perp. Like Koç Holding, UCGIM held US$200mn of the US$650mn security. The prerequisite minimum holding period was 180 days, which has now lapsed. Indicative levels on Bloomberg suggest that Yapi Kredi bonds are weaker today, but so is much of the Turkish bank bond universe. Below, we highlight a few points worth considering following today’s news. The UniCredit disposal does not change our view. We still have a Buy recommendation on the YKBNK 13.875% Perp. See more on Yapi Kredi’s recent performance here.
- Yapi Kredi beat, UniCredit missed: Q2 19 net income at Yapi Kredi was TRY1.21bn. This exceeded the Bloomberg consensus forecast of TRY1.02bn. At UniCredit, net income of EUR1.85bn in the second quarter came in significantly below the EUR2.2bn Bloomberg consensus forecast. The H1 19 return on tangible equity (RoTE) at YKBNK was higher than at UCGIM (12.5% versus 8.8%). At Yapi Kredi, management has maintained all previous 2019 expectations, even though several H1 19 metrics including margins, fee income growth, the LDR and NPL ratio were better than previously guided. At UniCredit, FY 19 net income, capital, costs and CoR targets have been confirmed but revenue guidance has been lowered.
- Internal capital generation at YKBNK is strong: Q2 19 net profit at UCGIM added just 18bps to that Group’s CET1 ratio. Internal capital generation added 101bps to Yapi Kredi’s total capital ratio in H1 19. This compares with the 85bps boost to Yapi Kredi’s CAR from the AT1 issue. The YKBNK AT1 issue added less to CAR than to the Tier 1 ratio. This is probably because the sum invested by UniCredit was not new money – YKBNK repaid a portion of a subordinated loan previously provided by UniCredit, as we discussed in a previous report. It is possible to argue that internal capital generation at YKBNK is now quite strong, and the Turkish bank is better able to make it on its own than it was before.
- There seems to be a pattern emerging: In Q3 18, an unexpected EUR850mn writedown on UniCredit’s Turkey business meant that UCGIM reported net income of just EUR29mn. This compared to the Bloomberg consensus forecast of EUR875mn. As a result of adjustments made at that time, sensitivity to TRY volatility at UCGIM reduced – a 10% adverse FX move now has a net impact of a +1bp on UniCredit’s CET1 ratio. Further, as highlighted earlier, the US$200mn investment in the YKBNK Perp was mostly ‘recycled,’ from Tier 2 into Tier 1. We acknowledge that the TRY4.1bn rights issue completed by Yapi Kredi in H1 18 was made possible, in part, by UniCredit’s commitment, and comments from UCGIM management suggest the Group remains committed to Yapi Kredi. However, UCGIM has clearly stated its intention of reducing intra-group exposure by end-2020. In addition, recent actions suggest that (i) UCGIM may not believe YKBNK requires help, or (ii) UCGIM may be facing additional regulatory (or other) pressures, which preclude further investment in businesses including Yapi Kredi.
- The ties that still bind – significant links remain: UniCredit is still in a 50:50 joint venture with Koç Holdings. That JV – Koç Finansal Hizmetler A.Ş or KFS – still owns 81.9% of Yapi Kredi. Given Yapi Kredi’s market cap of TRY22.6bn, the KFS stake is worth cTRY18.5bn (cUS$3.4bn at the current exchange rate). As an aside, the book value of YKBNK was TRY40.5bn at end-June (US$7.4bn at end-June exchange rate). UCGIM remains exposed to YKBNK equity, which still ranks below all Yapi Kredi bonds covered, including the YKBNK Perp. In addition, looking at Yapi Kredi’s H1 19 report, Tier 2 capital from UniCredit accounted for more than 30% of non-equity instruments included in total capital at end-June (equivalent to cTRY3.3bn of the TRY10.4bn total).
- Potential ratings implications? In June, Moody’s downgraded a number of Turkish banks. At that time, Moody’s still assessed the likelihood of support for Yapi Kredi from UniCredit as ‘very high’ resulting in a one-notch uplift to Yapi Kredi’s adjusted baseline credit assessment rating. There may be concerns about Yapi Kredi’s ratings if UniCredit takes further steps, which suggest a change in the likelihood of support for Yapi Kredi. The Garanti BBVA example may be helpful in assessing this. Moody’s revised its view on the probability of support for Garanti BBVA (GARAN) from BBVA to ‘low’ from ‘moderate’. However, a reassessment of the likelihood of government support offset the impact of the revised view of the likelihood of support from BBVA. We discussed Moody’s downgrades in more detail in another report.