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HALKBANK:  HOLD

Net income misses expectations Halkbank announced TRY305mn solo net income in 1Q19, below market consensus of TRY393mn and our estimate…

HALKBANK:  HOLD

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

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