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New recommendation for Yapi & Kredi Bank:  Limited upside on revised TP of TL3.10

Net income to fall 19% q/q on higher swap costs and trading losses Our estimate for Yapi Kredi 2Q19 BRSA…

New recommendation for Yapi & Kredi Bank:  Limited upside on revised TP of TL3.10

Net income to fall 19% q/q on higher swap costs and trading losses

Our estimate for Yapi Kredi 2Q19 BRSA solo net income is TL1.0bn (-19% q/q, -18% y/y), corresponding to a quarterly ROE of 10%. We expect trading losses and higher swap costs versus lower provision expenses to account for most of the drop quarterly net income, while spreads remain resilient in a quarter of rising funding costs.

We expect operating expenses to increase in line with inflation (+8% q/q, +19% y/y), while fee income growth to come in at an impressive TL1.2bn. Provision expenses are likely come down TL1.6bn (-19% q/q). Despite the quarterly drop from a high base, we would regard these numbers as a resilient performance during a difficult quarter.

7% above consensus on 2019E net income; risks remain for 2020

Despite an estimated quarterly drop in 2Q net income, we maintain our 2019 net income estimate at TL4.6bn (previously TL4.7bn), 7% above the Bloomberg consensus, given the expected drop in TL funding costs following CBRT’s rate cuts could positively impact 2H19 NIM. Front loaded and conservative provisioning policies in the past quarters have created a buffer for the private banks, which may lead to lower full year cost of risk versus the guidance and current consensus estimates for 2019. That said, we still see successful tackling of the growing NPLs as a prerequisite for a major shift in growth and profitability for Turkish banks in 2020. Our TL5.6bn 2020 net income estimate for Yapi Kredi (+34% y/y, 12.5% BRSA solo ROE) is 3% below consensus.

 

Target Price revised to TL3.1 with upside risks in case of lower CoE

Our valuation is based on 14.0% sustainable ROE (previously 13.0%), 16.0% risk free rate assumption (unchanged) and a 5% equity risk premium. We underline upside risks to our TL3.1 Target Price in case of a further shift in the yield curve, which recently carried the 10-year TL bond yield to 17% and 2-year yield to 19%. A sustained drop below these levels would require an adjustment to our risk free rate assumption and target P/BV for the Bank.

We still find the valuation discount to peer private banks as unjustified Yapi Kredi is trading at a 34% discount to Akbank and Garanti average 2019E P/B of 0.77x versus 0.51x, and at a 33% discount on 2019E P/E of 7.0x versus 4.7x. We attribute this discount to higher risk premiums attached to the Bank’s loan portfolio and relatively lower capitalization, which may lead to a higher re-rating in case market prices a Goldilocks scenario for the Turkish economy and the banking sector.

Downgrade to Market Perform on limited potential upside

Key upside risks to our valuation are lower cost of risk, lower TL funding costs, declines in benchmark bond yields, risk free rate and CoE.

 

Experts from YK Finance stock report Serhan Gok

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