Vakif Bank - NIM Contraction Offset by Asset Quality Improvement

Vakif Bank published its 2Q17 financials yesterday, reporting TRY897 mln in standalone net income, beating our estimate of TRY840 mln and the consensus estimate of TRY843 mln thanks to stronger than expected NPL collections and a slightly lower NPL coverage ratio. ROE came in at 17.0%. Net income was up 53% y-o-y but down 27% Q-o-Q in 2Q17, while in 1H17 it expanded 92% y-o-y to TRY2,121 mln. If the bank had maintained its NPL coverage ratio at 84% instead of lowering it to 83%, the bottom line would have been around TRY70 mln lower. The main positives included strong loan growth of 14.1% Q-o-Q supported by the Credit Guarantee Fund (CGF) facility, a stable LDR, sustained strong fee growth (36% y-o-y in 1H17), good asset quality (backed by NPL collections and a 7.4% Q-o-Q decline in Category 2 loans) and a 44 bp Q-o-Q improvement in the CET1 ratio to 12.8%. The only real negative was a 93 bp Q-o-Q drop in NIM due to a contraction in the loan/deposit interest rate spread and a TRY130 mln Q-o-Q decline in interest income from CPI linkers. We may see a slightly positive market reaction to the results.