2Q19 Earnings Preview

2Q19 Earnings Preview

July 22, 2019 2Q19 Earnings Preview Flat spreads with no major asset quality problem TL mn 2Q19E 1Q19 2Q18 Chg. QoQ Chg. YoY Banks will begin announcing their 2Q19 earnings on July 25, spearheaded by Akbank. The deadline for the BRSA AKBNK 1,201 1413 1602 -15% -25% results is August 19. We estimate a total net profit of TL4.1bn for the banks HALKB 315 305 1113 3% -72% under our coverage in 2Q19, implying a 23% qoq and 39% yoy decline. ISCTR 934 1458 1528 -36% -39% The main highlights of 2Q19 are: i) flattish core lending spread qoq, ii) almost zero loan growth iii) drop in COR, despite a 30bps rise in NPL ratio VAKBN 400 651 1074 -39% -63% Akbank and Yapi Kredi have distinguished themselves YKBNK 1,020 1241 1227 -18% -17% from their peers on the back of relatively solid spreads supported by declining deposit costs. TSKB 191 185 166 3% 15% Main highlights of the quarter: FX-adjusted loan growth is almost zero in 2Q19, vs. 3.9% Total 4,060 5,254 6,710 -23% -39% in 1Q19, in which the decline in SME loans is partially compensated for by retail loan growth. Looking at the stock values, TL lending spreads are P/E (x) P/BV (x) ROE % almost stable, despite the rise in deposit rates. That said, the FX lending spread is also supportive due to the currency impact. 19-June- 2019E 2020E 2019E 2020E 2019E 2020E 19 The sector’s swap average volumes increased from USD37bn in 1Q19 to USD46bn in 2Q19, mainly due to the heavy swap usage of state banks. Along with almost AKBNK 6.6 4.8 0.8 0.7 13.0% 15.5% flat swap costs qoq, the trading line remained negative. The rise in swap rates is around 1-2pp qoq, which is also HALKB 4.9 3.3 0.3 0.2 5.5% 7.6% negative for the margins. CPI linkers were not supportive for 2Q19 as the banks ISCTR 4.7 3.4 0.5 0.5 11.6% 14.4% lowered their CPI estimates used for linker valuation. As a result, swap-adjusted NIM has contracted by just 10bps VAKBN 3.9 2.9 0.4 0.3 10.6% 12.8% qoq for our coverage. On the provisioning front, we expect to see a slight YKBNK 4.7 3.7 0.5 0.5 11.7% 13.1% decrease in COR due to lower flows and no major currency impact. The NPL ratio of the sector rose by TSKB 3.5 3.1 0.5 0.4 14.8% 14.3% 30bps qoq to 4.6% in 2Q19. On the fee income side, we expect a 35% rise yoy in Average 5.4 4.0 0.6 0.5 10.9% 13.2% 2Q19 due to higher repricing and a 15% rise in opex yoy in 2Q19, hence below inflation. Source: Garanti Securities Market impact: We expect a neutral market reaction to the 2Q19 results. Our model portfolio includes Akbank and Yapi * We do not provide any estimates and recommendations for Garanti Kredi with a slight overweight in banks. (26%, vs. 25% market Bank, since Garanti Securities is a wholly-owned subsidiary of Gar- anti Bank weight). Analyst: Recep Demir, CFA Sales Contact: +90 (212) 384 1132 +90 (212) 384 1155 [email protected] [email protected] Please see the last page of this report for important disclosures. July 22, 2019 Chg. Chg. TL mn 2Q19E 1Q19 2Q18 Chg. QoQ YoY 1H18 1H19E YoY QoQ increase decrease reason Ann. Date Stable loan growth with an improvement in LDR. The TL lending spread is flattish, along with 40bps improvement in FX Akbank 1,201 1413 1602 -15% -25% 3,312 2,613 -21% lending spread. Akbank has revised down 25 July its CPI linker valuation estimates to 12% from 14%, which has led to flattish swap adjusted NIM The NIM is up by 50bps qoq due to a low base and flat deposit costs. Yet, the trading line is not supportive due to a Halkbank 315 305 1113 3% -72% 1,903 620 -67% sharp increase in swap costs. The NPL 5-9 Aug ratio is up by 50bps due to the recognition of a big ticket energy loan /s as Stage III. We expect to see 30bps NIM contraction qoq due to rising deposit costs. While the Isbank 934 1458 1528 -36% -39% 3,335 2,391 -28% subsidiary contribution is significant for 5-9 Aug 2Q19, the rising opex and negative trading line dent the bottom-line. We expect to see 40bps swap-adjusted Vakifbank 400 651 1074 -39% -63% 2,125 1,051 -51% NIM contraction qoq due to a rising swap 5-9 Aug burden and deposit costs. The TL lending volume is up by 5% qoq, while the FX loan book is down by 5% in Yapi Kredi 1,020 1241 1227 -18% -17% 2,471 2,261 -9% the same period. The swap-adjusted NIM 01 Aug is flat qoq, despite a lower CPI estimation for linkers. The swap adjusted NIM is flat qoq and the lower provision qoq was the main reason TSKB 191 185 166 3% 15% 325 376 16% behind the qoq improvement in bottom- 02 Aug line. Total 4,060 5,254 6,710 -23% -39% 13,470 9,314 -31% Source: Garanti Securities 2 Please see the last page of this report for important disclosures. DISCLOSURES AND DISCLAIMER RESEARCH Important Disclosures This document is distributed by Garanti Securities, an investment services company supervised by the Capital Markets Board of Turkey (CMB). Garanti Securities is subject to the Policy on Conduct in the Securities Markets which establishes common standards for activity in these entities’ markets, but also specifically for analysis and analysts. This policy is available for reference at the following web site: www.garantiyatirim.com.tr All Equity Analysts are subject to Garanti Securities Corporate Procedure for “Financial Research Activity and the Regime Applicable to Research Analysts.” Material information about proprietary models used in ratings of securities in this report is available from the Head of Equity Research. Ratings on stocks are updated as analyst (s) views on the outlook for the business of their corporate issuers and/or valuations of the issuers ’ securities change in a meaningful way. Garanti Securities has established reasonable physical and informational barriers, along with compliance reviews and policies, to minimize potential conflicts of interest in preparing reports on corporate equities. Garanti Securities owned a net short position exceeding 0.5% of the total issued share capital of the following companies covered in this report: NA Garanti Securities owned a net long position exceeding 0.5% of the total issued share capital of the following companies covered in this report: NA The research analyst or a member of the research analyst's household has a financial interest (including, without limitation, whether it consists of any option, right, warrant, future, long or short position) in the securities of the following companies covered in this report, and the nature of such interest is having those securities in their accounts: N/A In the past twelve months, a member of a research analyst’s household has received compensation from the following companies covered in this report: NA The Analyst (or a household of an analyst) holds an executive or board position (please specify such as Director, Executive Manager or Manager) in the following companies that may be covered in this report: NA The Analyst has received compensation for investment banking services from the following companies covered in this report: NA Garanti Securities beneficially owned at least 1% of the common equity securities of the following companies covered in this report: NA The analysed company beneficially owned more than 1% of the common equity securities of Garanti Securities (please specify the managerial prerogatives and other material financial relations as credit agreements or lease agreements between such parties): GARAN RESEARCH RESEARCH In the past twelve months, Garanti Securities has had, or currently has, as corporate and investment banking clients the following companies covered in this report: ASELS, ENJSA, GARAN, MGROS, MPARK, SO KM, TAVHL In the past twelve months, Garanti Securities managed or co-managed the public offerings of the following companies covered in this report: ASELS, SOKM In the past twelve months, Garanti Securities has received compensation for investment banking services from the following companies covered in this report: ASELS, ENJSA, GARAN, MPARK, SOKM.In the next three months, Garanti Securities expects to receive or intends to seek compensation for investment banking services from the companies covered in this report: DOAS, GARAN Garanti Securities makes a market/provides liquidity in the securities of the following companies covered in this report: NA Garanti Securities or the Analyst is party to an agreement with regard to the preparation of recommendations for the following companies covered in this report: NA Garanti Securities has received compensation for non-investment banking, securities related services or products within the past 12 months from the following companies covered in this report: AKSEN, DOAS, MGROS, PG SUS, TAVHL, TTKOM Garanti Securities has received compensation for non-securities related services or products within the past 12 months from the following companies covered in this report: NA Garanti Securities trades or may trade as a principal in the debt securities, or related derivatives, that are the subject of this report. Garanti Securities is subject to a Code of Conduct and to Internal Standards of Conduct on the Security Markets, which details the standards of the above-mentioned overall policy.

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