Yapi and Kredi Bank:  Valuation justifies looking past macro risks

23% q/q increase in 3Q20E net income on trading gains

Our 3Q20 BRSA solo net income estimate is TL1.63bn (+23% q/q, +67% y/y), corresponding to a quarterly ROE of 14.5% (2Q20: 12.9%). Main reason of increase in quarterly net income would be higher trading gain of TL900mn (2Q20: TL153mn) thanks to the profit taking in securities and FX hedges. Another source of improvement in quarterly results would stem from 6% quarterly increase in NII to TL4.1bn, implying a slight NIM expansion thanks to the controlled deposit costs, relatively low loan growth in 2Q and lower swap costs of TL200mn (2Q20: TL341mn). We expect a 18% y/y increase in operating expenses, whereas fee income would increase by 2% y/y to TL1.3bn. Elevated provisioning costs of TL2.9bn (+41% q/q, +50% y/y) would continue to limit profitability improvement due to the uncertainty in NPL ratio.

Raising our 2020E net income to TL5.2bn from TL4.1bn

We increase our 2020 net income estimate for the Bank to TL5.2bn (+43% y/y, 12.3% ROE), 19% higher than the Bloomberg consensus of TL4.3bn. In view of the Bank’s controlled deposit costs and loan growth, we expect possible recovery in loan yields and higher security yields (with higher CPI-linker income) to limit the negative impact of increasing trend in funding costs on NI. On the other hand, elevated level of provisioning costs, due to the low visibility on macroeconomic growth, and volatility in FX & interest rates, remain as limiting factors on profitability. Additionally, fee income would shrink by 2% in 2020 mainly due to the regulation impact.

Target Price revised to TL3.1 from TL2.6 

Our valuation is based on 14.1% sustainable ROE (previously 12.8%), 0.59x target P/BV (previously 0.50x), 14.0% risk free rate (previously 14.5%) and a 6% equity risk premium (unchanged). Hence our target price increased to TL3.1 from TL2.6 on lower CoE and higher earnings estimates. Although further increase in long-term interest rates poses a risk to our valuation via higher risk free rate, shift to positive TL real interest rates may lead to continued downward trend in Turkey’s CDS; and lower our equity risk premium assumption.

Attractive valuation comparing to the peers

YKBNK trades at 2020E P/BV of 0.42x and 2020E P/E of 3.8x, implying 15% and 19% discount comparing to the private Banks under our coverage, respectively. Yapi Kredi’s strong capital (15.7% CAR, 13% Tier-I without BRSA forbearance as of 2Q20), prudent lending policies and relatively high profitability (3Q ROE: 14.5%) render YKBNK very attractively valued.

Upgraded to Outperform recommendation with 34% upside potential

Higher funding costs, higher than expected provisioning costs and volatility in FX rates are the key downside risks on our valuation. On the other hand, stabilization in FX rates, return to normal levels of GDP growth and recovery in asset quality are the key upside risks.



By Serhan Gök

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.