In this briefing:
1. Yapi Ve Kredi Bankasi: Inexpensive but Consumer Exposures May Be the Next Shoe to Drop
Key metrics/signals at Yapi Ve Kredi Bankasi As (YKBNK TI) underline positive fundamental momentum and quality-value, embodied in a high PH Score™ despite macro imbalances, asset quality stress, and structural challenges. The bank mostly exceeded its 2018 targets, especially on profitability, efficiency, and non-interest income, though loan growth was reined in as cost of risk and asset quality deteriorated. Improvement was helped by a TL4.1bn rights issue in June, 2018. For 2019, YKBNK targets continued cost-growth below CPI, mid-teen fee income expansion, an NPL ratio <7%, CoR at <300bps, stable liquidity (LDR at 105%), a somewhat surprising pick-up in lending (+15%), and a modestly higher CAR (>15%).
In 2018, the banking sector grew its deposit base and credit portfolios by 19% and 14% YoY. Profitability was high with ROATE at 14%. CAR stood at 16.9%. NPL ratio at 3.8% understates eroding asset quality in the system as a broader definition of loan impairment signals emerging loan quality weakness, capital stress, and difficulties at this stage mainly for large corporate borrowers though we are concerned that this may morph into a broader asset quality imbroglio with the economic slowdown and elevated unemployment. Turkey is though a growth market for finance: mortgages at 4% of GDP and household liabilities/GDP at 16% point to potential. But that growth is best balanced.
Banks have been bearing the brunt of government interventions to bolster the economy for awhile now. The sizeable expansion of state loan guarantees was the main driver behind the acceleration of bank credit growth (now sharply moderating given elevated lending rates and tighter standards), largely funded externally and with a partially dollarized deposit base, resulting in a deterioration of the gross FX position. In addition, the relaxation of macroprudential measures was a driver of rampant asset growth. Steps have been taken to enhance risk management, report quasi-fiscal operations, including CGF, and limit borrowing in foreign currency. (There is some USD360 bn of non-financial corporate debt, half of which is external). Banks have been active in equity and FI markets of late to plug the gaps caused by capital and asset quality erosion. In Q418, three state banks were subject to what looked like a back-door recapitalisation when the lenders sold TL11bn of subordinated debt, reportedly to a government unemployment fund. Akbank has since boosted its capital base too with a rights issue and a syndicated loan.
Renewed FX volatility arising from policy missteps, such as electoral-induced easing, and a subsequent pass-through to already high cost-push inflation, would deepen the slowdown and destabilize the fragile macro situation. Tight monetary policy (one-week repo rate at 24 per cent), lower global oil prices, weaker domestic demand and a stronger Lira can moderate Inflation towards <15% though high food prices are exerting an upward impact on prices. The current account is stabilizing.
The KOC Group and Unicredit are YKBNK’s main shareholders. Energy, finance, and auto are the main contributors to KOC Group Profit, representing 87% of the bottom line in 2018.
Post rights-issue shares of YKBNK are not unattractively priced, trading on an earnings yield of 30.5%, a P/B of 0.42,and a franchise value of 8% with the tailwinds of a quintile 1 PH Score™. Shares seem to be catching up with peers of late, buoyed by an improved B/S and FY18 results. We are though concerned about further asset quality deterioration as the corporate debt malaise is joined inevitably by greater consumer stress and toxicity. Free Float stands at 18%.
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