HALK 1q - Earnings Update

Halbank beat expectations with TRL709mn 2Q net income above consensus of TRL619mn. Bank managed to improve NIM by 20bps QoQ as focus was once more high yield lira lending. Although annual OPEX growth was higher than expectations, the major deviation was in fee income. Bank released 1Q accruals which they had set aside –as many banks- due to legislation change. With the revision, bank posted fee income which is comparable to last year, up by 27% as of 1H12. Collections are slightly below expectations and so is new NPL formation. With the TRL51.5mn set aside voluntarily, general provisioning is slightly up - COR increased to 1.47%. ROE during 1H12 corresponds to 26.5% - adjusted with voluntary provisions, ROE is 27.5%.

It’s all Lira lending… Halk managed 12.2% lira loan growth since YE while FX lending growth was negligible at 1.3%. The current lending environment supports SME banks. Halkbank being the leader in the segment, benefited from SME loans which is slightly shy of GPL yields. Despite consumer loan growth since YE was only 9.1% with lagging GPLs, bank could still improve margins due to the core operational segment. Halkbank tapped major lira deposit in 2Q which distorts deposit cost calculations. The decline in LDR with 10.5% deposit growth in Q2 should normalize as deposits are replaced with the Eurobond issued.  

Fees are not comparable with peers… Unless other banks joins Halkbank and Isbank in the current accrual methodology, other Tier I banks’ figures will not be fully comparable. Still, 1H12 fee growth is 27% compared to 1H11, despite 36% QoQ decline in off-BS L/C portfolio which was another source of fee income. Although OPEX seems to be slightly out of control, it can be tolerated with the current level of profitability and fee growth. Bank managed to improve Fee/OPEX and CIR figures by 4pps and 2.9pps, respectively during the 1H12 compared with same period last year.

Asset quality is maintained… Despite accelerated pace of fresh NPL inflow, with slightly improved collection performance bank managed to contain deterioration in loan specific COR. Yet, TRL51.5mn set aside voluntarily increased total voluntary provisions to TRL245.5mn. The provisioning is for loans extended before 2006 during when banks had to set aside 50bps for general provisioning.  

CAR is improved slightly with selective lending to 14.7%... Basel II effect is manageable at 70bps. Although ROE exceeded our expectations at 28.1%, higher fees in 2012 will reflect as lower income in 2013. Therefore, we maintain our TRL17.25 and OUTPERFORM rating for the time being and expect the consensus to move towards our YE NI expectations.