4Q20 net income in line & 2021 targets optimistic
Halk’s 4Q20 net income of TRY510mn (62% QoQ, -36% YoY) was in line with expectations. FY20 net income reached TRY2,600mn (51%) indicating 6.9% RoE, lowest among peers. Key 4Q20 takeaways were 1) decelerating volumes, 2) sharp spread contraction, 3) spike in CPI linker income, 4) positive trading, 5) low cost of risk (CoR). Management guides for low double digit RoE in 2021 (BofA: 7.4%) due mostly to <1% CoR expectation (private peers: c.2-2.5%; Vakif: 1.5%). Underperform rating maintained.
CPI linkers and trading mitigated the revenue pressure
TRY loan growth stood at 1% (sector: 3%) and FX loans contracted by 2% (sector: flattish). Deposit growth was higher thanks to strong FX inflows (TRY: 2%, FX: 11%). Core spreads contracted sharply on higher funding costs where TRY spread was in the negative territory. This led to more than 50% contraction in NII despite the significant increase in CPI linkers’ contribution (+TRY2.2bn QoQ). Trading gains (excl SWAPs) at TRY585mn was a strong contributor to revenues following the large loss in the previous quarter. Fee growth (-6% QoQ, -10% YoY) was weak given the decelerating activity.
Total coverage below sector average
NPL ratio increased by 20bp to 3.8%. The positive impact of forbearance measures on NPL ratio was 150bp as of 4Q20. Stage 2 loans were up by 70bp to 8.4%. Net CoR was low at 74bp. Halk’s total coverage (provisions/gross loans) increased by 20bp to 3.7%. However, this remains almost half of private peers’ average and 1.5pp below Vakif.
Double digit RoE target for 2021
Halkbank’s 2021 guidance indicates a low double digit RoE. Breakdown is as follows: i) Low teens of loan growth (TRY: mid-teens growth, FX: c10% contraction), ii) mid-teens of deposit growth with de dollarization (TRY: 23% growth), iii) 100bp NIM contraction, iv) Better trading income (lower SWAP costs and FX losses), v) mid-teens of growth in fees & costs; vi) 100bp decline in cost of risk (to <1% level). The bank does not expect a material change in the capital ratios in 2021.
Guidance exposed optimism in market expectations – U/P
We reiterate our U/P rating on Tupras with a new PO of TRY69/sh (+15%). We continue to believe that the market is too optimistic on a post-COVID refining macro recovery and see a c.20% downside to consensus EBITDA in 2021E. Our estimates and Tupras’ own refining margin guidance also suggest limited dividends in 2021E (0-4% yield). Lastly, Tupras’ current valuation looks stretched to us at 10x EV/EBITDA in 2021E (40% premium to history) as it already assumes a meaningful EBITDA recovery from current levels, while sources of additional upside, such as a potential return of Iranian crude, remain vague.
Anticipating a long recovery path in refining
Tupras announced a net refining margin guidance of US$2.5-3.5/bbl for 2021E, which implies only partial recovery in refining macro. The company assumes only moderate upside in middle distillate and gasoline cracks with HSFO cracks actually weakening and crude differentials remaining tight. This is in line with our view of a prolonged recovery path in refining macro as we see:
1) refining capacity closures offset by new greenfield projects launch,
2) high inventories,
3) low utilisation rates, and
4) only gradual unwinding of OPEC+ cuts preventing any immediate upside.
Dividends to stay limited in 2021E
Tupras’ guidance also implies a weak 2021 dividend outlook with an estimated yield of 4% at the top range. We see a 1% dividend yield in 2021E implying a c.80% downside to consensus DPS. We believe that the market not only overestimates the EPS recovery but also overestimates the maximum allowed payout by local regulatory requirements.
Material return of Iranian oil exports is unlikely near-term
Potential return of Iranian crude has been flagged as one of the sources of upside for Tupras recently as, on our estimates, Tupras used to make extra US$3-3.5/bbl on Iranian crude purchases vs a similar quality basket. Yet, the road to an agreement could be long and complex and a material return of Iranian oil exports is unlikely near-term due to mutual distrust and to numerous problems in re-establishing the agreement, as was noted by experts at our latest Washington Policy trip
Source: BoFA Securities