Halyk Bank - Early AQR Findings Not Bad; BUY

The National Bank of Kazakhstan (NBK) has published its initial asset quality review (AQR) findings. While the final results for individual banks will only be released in February, initial sector-wide findings do not look too scary, with the NBK reporting that if the effect of potential additional provisions was fully taken into account, the sector-wide CET1 would drop 3 pp to 12.5%; hence, it sees no sector-wide capital deficit. We think Halyk Bank will be less impacted than most, and we see little risk to the emerging dividend story. Also considering the supportive macro environment (4.8% 2020E GDP growth), we continue to like the investment case, retaining our BUY call.> AQR: Not too scary. The AQR, completed in late 2019, covered 14 of the largest Kazakh banks accounting for 87% of sector assets and 90% of loans. At a consolidated level, the possible negative capital effect from higher provisions is KZT450 bln ($1.2 bln, or 19% of CET1 capital), based on end-1Q19 data. If applied in full and treating the 14 banks as a single unit, this would reduce the CET1 (under local accounting) from 15.5% to 12.5%, leaving a 5 pp capital buffer over minimum requirements. However, it is unlikely banks will instantaneously be required to write additional provisions; rather, there will be individual recommendations and action plans for banks, and the AQR results do not take into account provisions written since April. We do not have any further details for Halyk Bank yet, but if we were to take a straightforward pro rata share of the additional negative capital impact (hence, 46% of Tier 1 capital as of April 1, 2019, or KZT206 bln) - which we think is a highly conservative and unlikely scenario - this would cut about 4 pp off its standalone CET1. Using October 1 capital and RWA data, this would reduce its standalone CET1 to 17.5%. We stress that, first, we think it highly unlikely that Halyk Bank would take a pro rata share of the potential negative capital impact, and second, that it is unlikely banks will simply be required to create new provisions in a short time frame.> Could the AQR affect thinking about dividends? There has been no further update on Halyk Bank's possible plans to renegotiate its bond covenants to enable it to pay out above 50% of earnings in dividends. Importantly, Halyk Bank's management does not see the AQR having an impact on its thinking here, which sounds positive to us. We retain our 50% 2019E payout (implying a 10% dividend yield), and we still incorporate payout increases for 2020-21 (60% and a 12.1% dividend yield, and 70% and a 14.5% dividend yield, respectively). > All well on the macro front. We remain upbeat on Kazakhstan's macro outlook. The tenge has rallied nicely so far this year, supported by high oil prices, and we expect 4.8% GDP growth in 2020, helped by fiscal stimulus. > Bottom line: Still good value, BUY. We lift our 2020-21E net income forecasts 1-2% per year. They are now 7% above the Bloomberg consensus. We see Halyk Bank retaining strong 22%+ ROE in 2020-21. Halyk Bank trades on a 4.9 2020E P/E and 1.1 P/BV, which look attractive for a mid-20s ROE bank that is well capitalized and also offers a 10%+ dividend yield. We raise our target price to $18.25 on a shorter discount period and updated USD/KZT rate (380).