Net income misses expectations Halkbank announced TRY305mn solo net income in 1Q19, below market consensus of TRY393mn and our estimate…
Net income misses expectations
Halkbank announced TRY305mn solo net income in 1Q19, below market consensus of TRY393mn and our estimate of TRY349mn. Net income dropped by 61% y/y and 4% q/q. Quarterly ROE stood at 4.2% vs 4.4% in 4Q18.
Despite the improvement in both TRY and FC core-spreads, q/q margin contraction was mainly led by swap costs and lack of substantial CPI-linker revenues q/q. On the other hand, net tax gains (TRY190mn), free provision release (TRY29mn) and dividend income (TRY377mn) were major contributors in 1Q19. Halkbank’s Tier-1 ratio declined by 67bps q/q, led by robust loan growth in 1Q19 (+11% q/q in TRY lending), while AT1 issuance (EUR900mn) in April was guided to raise Tier-1 by 188bps.
The reason for HOLD rating
We expect the results to have negative impact on share performance, due to missing expectations by a wide margin. We keep our HOLD rating for Halkbank. Our target price stands at TRY8.3/sh, under the assumption of 16.5% risk-free rate. Each 50bps change in RfR would impact our target price by c.4%. Based on our ‘19E estimates, Halkbank trades at 2.4x P/E and 0.2x P/BV.
1Q19 performance highlights:
Halkbank’s swap adjusted NIM contracted by 110bps q/q. TRY and FC loan-deposit spreads both improved by 34bps and 178bps q/q, respectively. CPI-linker revenues also declined by c. TRY1bn q/q, which was one of the main reasons of NIM contraction. Wholesale borrowing costs (blended), making up c.30% of interest expense, increased by 114bps q/q. Net trading & fx loss stands at TRY431mn in 1Q19 (vs. TRY189mn in 4Q18).
Fee income grew by 52% y/y. Non-cash loans and payment systems were major contributors of fee income, constituting 27% and 40% of total fees, respectively. On the other hand, operating expense increased by 27% y/y.
Halkbank recorded TRY190mn net tax gains, benefiting from tax law on repatriation of capital. Moreover, dividend income of TRY377mn had a notable support on total revenues.
The Bank’s NPL ratio stood flat at 3.3%, thanks to strong loan growth providing a denominator impact on the ratio. Stage 3 loans’ provisioning ratio stands at 73%.
Net NPL origination in 1Q19 realized at TRY702mn vs. TRY1,057mn in 4Q18. Stage 2 loans’ share in total loans increased to 6.6% in 1Q19 from 6.4% in 4Q18. We calculate net cost of risk rose to 96bps in 1Q19 from 79bps in 4Q18.
Halkbank’s CAR and Tier-1 ratio declined q/q by 82bps and 67bps, to 13% and 10%, respectively. The Bank guided that AT1 issuance (EUR900mn) in April would increase CAR and Tier-1 ratios by 185bps and 188bps, respectively.
In 1Q19, strong growths in TRY loans (+11% q/q) and securities (+13%), were mainly funded by TRY Repo (+32% q/q) and FC deposits (US$ +17% q/q).
By Yapi and Kredi Invest Research team