HALKB: 2Q Preview, Target Price & Rating Revision – Uphill Battle

Higher funding and credit risk costs remain as risk factors

Following the strong loan growth in 2020, higher funding costs and credit cost risks stand as the key pressure factors on profitability this year and in the mid-term. Considering upside risks to inflation and TL rates, we expect NIM pressure to continue in the coming periods for Halkbank. We expect more visibility on asset quality dynamics with possible removal of NPL recognition rule extension (from 90 days to 180 days) after September. However, in view of the Bank’s relatively low coverage build-up and high loan growth, headwinds are likely on this front. Thus, we expect the Bank to report a weak net income of TL1.6bn (3.9% ROE, -39% y/y) in 2021.

Another weak quarterly results estimate on negative spreads in 2Q

Our TL64mn 2QE solo net income corresponds to 0.6% quarterly ROE (1Q: 0.6%). Although we expect the Bank to report NII as TL1.2bn in 2Q following negative NII of TL99mn in 1Q, we estimate NIM to remain at negative territory (2QE: -0.1%, 1Q: -0.6%) due to the further decline in TL spreads and higher swap costs of TL1.4bn (1Q: TL711mn). Moreover, trading loss of TL2.1bn (1Q: TL642mn loss) would pressure the bottom line. Parallel to the negative NPL inflows mainly thanks to the BRSA measures, we estimate negative provision expenses of TL400mn (1Q: +TL1.2bn); also due to the quarterly fall in NPL coverage ratio by c500bps. We expect fee income to be up by 79% y/y (TL972mn) whereas OPEX would be up by 5% y/y (TL2.1bn).

Low ROE estimate of 3.9% in 2021, way below the guidance

In the view of last year’s strong loan growth at lower rates and this year’s higher funding costs, we expect stressed NIM levels (2021E: 0.5%, 2020: 3.5%) to limit the bottom line. Although lower cost of risk (2021E: 44bps, 2020: 180bps) would support profitability, considering the Bank’s relatively low provisioning buffers and strong loan growth in 2020, uncertainty in asset quality trend poses risk to mid-term profitability. Addition to the risks over asset quality; need to strengthen capital position of the Bank (14.6% CAR, 12.0% Tier-I as of 1Q21) might occur due to higher lending activity by state banks −as part of supportive measures in the post-pandemic period. Overall, we lower our full-year net income estimate to TL1.6bn (3.9% ROE) from TL4bn, 31% below Bloomberg consensus. HALKB trades at 2021E 7.4x P/E and 0.27x P/BV, and has outperformed BIST-100 by 11% in the last 3 month period.

Target Price lowered to TL4.10 from TL5.70

In line with the abovementioned dynamics, we lower our Target Price to TL4.10 from TL5.70, while downgrading our recommendation to Underperform from Market Perform. Our valuation is based on 9.7% sustainable ROE (previously 10.5%), 16.0% risk free rate (previously 14%) and a 7% equity risk premium (unchanged), resulting in 2021 Target P/BV of 0.25x (previously 0.33x). We underline upside risk to our Target Price in case of sharper than expected decline in inflation and long-term interest rates leading to lower COE and higher Target P/BV. Conversely, further weakness in TL, higher inflation and elevated funding costs are the key downside risks.


Source: Y.F. Securities Research