Asset quality surprised on the downside…
·
Garanti Bank
recorded TL718mn earnings in its 2Q12 bank-only financials, down by 17% QoQ and
24% YoY; and
marking a quarterly RoAE of 15.3%. The results came slightly below both the
consensus estimate of TL748mn and our estimate of TL751mn on higher than
expected specific provisions for NPLs due to some worsening in asset quality.
·
The highlights of
the quarter can be summarized as: i) selective lending continued in 2Q12 with increasing market share in
consumer loans and decreasing market share in FX loans ii) market share gains
in deposits, driven mainly by TL retail deposits as average TL time deposit
cost of Garanti Bank was well above the sector at 10.3% in 2Q12. iii) NIM
increased by 12bps QoQ as the positive impact of a 40bps QoQ improvement in
loan-deposit spreads is reduced by the quarterly decline in TL FRN and CPI
linker yields. iv) fee income contracted by 6% QoQ bringing the YoY fee
contraction to 3% in 1H12, owing to the
negative impact of accrual methodology
and lack of account maintenance fees in the quarter. v) other income increased
by 27% QoQ in 2Q12 thanks to the TL32.6mn gains on the TL201mn NPL portfolio
sale. vi) provision expenses doubled QoQ due to a significant rise in special
provisions for NPLs. vii) thanks to the NPL sale, NPL ratio eased slightly to
1.8% in 2Q12, yet would have been up by 15bps QoQ if there weren’t any NPL
sale. viii) specific cost of risk doubled QoQ to 100bps in 2Q12 as NPL
additions increased by 31% QoQ, while collections managed to cover only 19% of
the NPL additions in the quarter. iv) loans under close follow up also
increased by 6% QoQ, which is also not promising for 3Q12.
·
1H12 loan growth
stands at 4%.
Garanti Bank maintained its selective lending strategy in 2Q12, gaining market
share in the relatively more lucrative consumer lending, while refraining from
growing in FX loans. The management maintained its 18% loan growth guidance for
2012, which implies 13% loan growth for the remainder of the year. Management’s
loan growth guidance is too bullish, in our view. We believe that 14% loan
growth is more reasonable for Garanti Bank in 2012 assuming a stable currency
for the rest of the year, which implies 9% loan growth for 2H12.
·
A potential upward
adjustment on fee revenues might be on the agenda. At the conference call, management mentioned
that banks are not fully complying with the BRSA’s recent amendment on the
accrual methodology of documentation fees. Management believes that some banks
are collecting documentation fees in other names such as intelligence fees on
which accrual accounting is not applied, making the YoY fee growth comparison
among banks to be misleading. Garanti Bank management stated that they will ask
the BRSA to bring a standard to this issue. Recall that in its 2Q12 financials,
Halkbank made an upward adjustment in its fee revenues as they received a clarification
from the BRSA on this issue. Should BRSA bring a standard for all banks, those
banks that have booked their fee revenues more conservatively up to now, such
as Vakifbank, Yapi Kredi Bank and Garanti Bank will be the main beneficiaries.
Garanti Bank management also stated that they expect this issue to be resolved
within 3-6 months.
·
20bps YoY NIM
improvement guidance maintained. At the conference call, Garanti Bank management maintained its 20bps YoY
improvement guidance for 2012. Considering that inflation switched to a
declining trend in May, our 8.5% YoY inflation projection for October-end
implies 28% contraction in CPI linker yields in 2H12 compared to its 1H12
level. Management sounded very upbeat regarding the loan-deposit spread
evolution for 3Q12 as TL time deposit costs are currently 100bps lower than its
2Q12-end level along with QoQ stabilizing loan yields. In order to reach the
20bps YoY NIM improvement, we calculate that Garanti Bank should attain 4.1%
NIM in 2H12, which implies a 20bps decline compared to its 1H12 level.
Considering the decline in CPI linker yields in 2H12, the management’s
full-year NIM guidance implies that the bank should improve its loan-deposit
spreads by another 20bps in 2H12 compared to its 1H12 level. We believe that
the recent decline in deposit costs is more related to a slowdown in loan
growth pace in 3Q12 rather than the recent decline in average CBT funding cost.
In fact, the CBT reduced the amount of total CBT funding to TL17bn levels from
the TL30bn in 2Q12, while decreasing the average CBT funding cost to 7.5%
levels from previously 9%. Considering the decline in liquidity level, the
easing in average CBT funding cost should not have a major impact on funding
costs as the funding structure of the sector is quite tight with a 103% loans /
deposits ratio. Thus, we believe that any potential improvement in loan-deposit
spreads (on the back of declining deposit costs) can only be achieved with
sluggish loan growth. In that sense, lower deposit costs may result in a QoQ
widening in loan-deposit spreads in 3Q12 in line with Garanti Bank management
guidance, yet spreads should definitely contract QoQ in 4Q12 on higher deposit
costs and lower loan yields. Thus, we also attach lower probability to a 20bps
improvement in Garanti Bank’s loan deposit spreads in 2H12 over its 1H12 level,
which makes the 20bps YoY NIM improvement guidance hard to achieve as well.
·
All in all, Garanti
Bank’s 2Q12 results surprised us on the downside in terms of asset quality
performance. The quarterly NPL generation of TL225mn came well above our
expectations although the management named TL67mn of these NPLs as one-off,
which might not be the case. The above sector deposit costs of Garanti Bank
especially on the TL front in 1H12 also raises questions on the necessity of
the subdebt repayment in 1Q12. We also find the management’s 2012 loan growth
and NIM guidance optimistic. It is also worth to add that we expect Garanti
Bank’s CPI linker yields to fall from 19.7% in 2Q12 to 3.4% level in 3Q12,
leading to a post-tax TL300mn negative impact in 3Q12 financials. We will be
revising our recommendation and valuation for the bank
BGC Partners
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