Vakifbank (VAKBN TI) - Low ROE; swap costs upset: Downgrading to Hold
VAKBN’s 2Q19 net income of TRY368m (-44% q-q, -66% y-y) was in line with both BNPPe (TRY377m) and RT consensus estimates (TRY377m). Core revenues went up 9% q-q on a wider core spread, higher securities yield and a peer-topping fee growth driven by payment systems. But higher trading losses on elevated swap costs (1.7x q-q) weighed on earnings. Opex growth y-y remained above inflation at 20% (private peers: 14%) on high non-HR costs, while net provisioning expenses declined on lower provisions under currency impact and lower NPL inflows. Net total CoR slid q-q, while NPL coverage jumped 76bp q-q. ROE dropped to 5.1% (peers: 9.8%) from 9.1% in 1Q - the 2nd lowest ROE among peers in our coverage after Halkbank. Adjusted for coverage, ROE would have been 6.4% in 2Q.
We cut our 2019-21E EPS by an average 30% as we lower our NII estimates on heavy swap utilization by VAKBN in 1H19. Hence we lower our GGM-based TP to TRY5.21 (TRY5.66 earlier) and downgrade the stock to HOLD from Buy.
Turkiye Vakiflar Bankasi (Vakifbank) is a banking and financial services company based in Turkey. Co. offers products and services that cover corporate, commercial, investment and small-scale enterprise banking as well as the retail and private banking sectors. Co. also provides financial leasing, portfolio management, real estate, insurance and factoring services through its financial participations. Co.'s deposit products include time and demand deposits, as well as loans comprise spot loans, foreign currency indexed loans, consumer loans, automobile and housing loans, working capital loans, gold loans, foreign currency loans, eximbank loans, and pre-export loans.
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