Slightly better NI generation
Akbank announced TL1,051mn net income in 4Q18 in its bank-only financials indicating an ROE of 9.7%, above both our estimate of TL947mn and consensus forecast of TL971mn. Earnings beat was mainly driven by stronger NII, record-breaking fee generation and lower tax rate on a quarterly basis, which resulted in: i) 27bps expansion in swap-adjusted NIM ii) 15% q/q and –cumulative- 26% y/y improvement in fee generation.
Bank’s NII enjoyed TL817mn additional income from CPI-linkers in 4Q vs. 3Q.
Resilient NIM thanks to CPI-Linkers
TL loan-deposit spread declined 282bps q/q with 453bps increase in TL deposit costs. FX core spread remained more resilient with a mere 64bps decline q/q thanks to almost flat FX loan yield despite relatively stronger TL vs hard currencies. The bank has a NIM guidance of ≥3.5% suggesting ~30bps decline due to lower revenue expected from CPI-linked securities in 2019.
Strong momentum in fee performance
Quarterly net fee income reached TL974mn which is an historic high in quarterly terms, indicating 11% q/q increase, bringing cumulative y/y growth in to 26%. On the other hand, Opex in 4Q was up 19% y/y, while 2018 cumulative opex growth was also 19%, slightly below the inflation.
Declining total CoR on TL appreciation despite OTAS provisions
Net NPL inflows were inflated because of the treatment of OTAS exposure which was first transferred to NPL from Stage 2 and written-off afterwards. The bank stated that the impact of OTAS exposure on total CoR was 74bps. Adjusting for OTAS loan, annualized NPL formation rate would decline from 3.0% to 1.7%. Net CoR declined 133bps q/q to 3.0% with the help of lower specific coverage and reversal from general provisions as performing loans incl.
Stage 2 decreased nominally. Operating budget of 2019 foresees total CoR to remain below 300bps.
Trading moved to the negative territory
Akbank recorded TL821mn net trading losses in 4Q18 mainly due to TL704mn swap costs and the FX provisioning hedge.
Solid solvency ratios
On a reported basis, the bank’s unconsolidated CAR and Tier-1 ratios were 18.2% and 15.6% while consolidated ones were 16.8% and 14.3%. Thanks to the capital increase completed in Jan 19, 80bps positive impact on CAR will be seen.
We downgrade the Bank from Outperform to Marketperform
Akbank’s 3Q18 results were generally in line with expectations but we think the existing valuation is not attractive enough to call for an Outperform rating. Our 12m price target of TL7.55 offers an upside potential of 7% with 2019E 6.4x P/E and 0.7x P/BV.
Garanti: Outperform rating maintained
Earnings came in as expected
Garanti released TL1,062mn bank-only net income for 4Q18 yielding 9.1% ROE, in line with both our TL1,041mn estimate and consensus forecast of TL1,058mn. If adjusted for TL390mn additional free provisions, RoE would be higher at 11.8%. Total free provisions taken in 2018 increased to TL1.09bn, bringing the stock amount to TL2.5bn. The management stressed that they do not plan taking further provisions next year, though they did not give a clear guidance on the possibility of potential reversal.
Strong CPI linker income boosted NIM
TL loan-deposit spread dramatically dropped by 302bps q/q on higher deposit costs as duration mismatch between loans and deposits still plays out in the absence of lending growth recovery. CPI linker income came in at TL 3.44bn providing an uplift to the margin offsetting both core spread contraction and higher swap costs. Swap-adjusted quarterly NIM would be down 109bps q/q, if adjusted for CPI linker income. In the operating budget of 2019, the bank pencilled in a flattish net interest margin excl. CPI based on projections for core spread expansion throughout 2019.
Total net CoR dropped q/q on lower general provisions
Garanti’s NPL ratio reached 4.9%, up by 100bps q/q and almost doubled y/y. TL appreciation during the quarter led to reverse some specific provisions of previous quarters as the bank adjusts its foreign currency NPLs with current rates. However, trading line excl. swap costs recorded TL665mn loss given fx provisions (specific+general) are fully hedged against currency fluctuations.
Net CoR was 349bps in 4Q18, down from 488bps in 3Q18 as loan portfolio shrank by 10.2% q/q and the coverage of Stage II loans declined. Share of Stage II loans in performing loans remained flat at 16.5%, whereas its coverage was down from 11.8% to 10.7%. Specific coverage ratio slightly decreased from 60% in 3Q18 to 59%. Cumulative net CoR in 2018 was 283bps, of which 48bps was due to currency depreciation. The management guides for 7% NPL and <300bps Net CoR in 2019 driven by higher NPLs from its retail portfolio.
Opex growth remained below CPI despite higher costs in 4Q
Operating expenses grew 24.2% q/q on 21% increase in personnel expenses and amortization costs of bank’s facilities weighing on. Despite elevating costs on a quarterly basis, cost discipline was sustained with 15% opex increase y/y and 32.6% cost/income ratio.
Solid solvency ratios
The bank reported CAR and Tier I ratios 16.5% and 14.2% respectively on a consolidated basis. BRSA forbearance measures were lifted in the last week of December.
Outperform rating maintained
We deem Garanti well-positioned to tackle risks surrounding macro and sectoral outlook thanks to its robust revenue generation, cost control and decent capitalization. The bank is trading at 6.0x 19E P/E and 0.7x 19E P/B which is offering decent return in our view.
Excerpts from OYAK Securities company notes