Is Yatirim Yapı Kredi bank share analysis: Margins have been under fire, solid non-interest income weathered the storm

Actual vs Estimates

YKB posted TL 11.5bn solo net earnings in 2Q23, in line with the consensus. YKB posted TL 11.5 bn. solo net earnings in 2Q23, 11% better than our estimate yet in line with the consensus figure of TL 11.4bn. YKB felt the heavy burden of high TL funding costs in 2Q which resulted in possibly the bottom of its margins throughout 2023. The net earnings came down 9% QoQ while it is also down by 4% over the same period of 2022.


Quarterly annualized RoAE came out as 34% with some 500bps erosion over the 1Q22 print. Higher than expected net trading gains and better fee income realization led the deviation between our estimates and the actual figures. As estimated, swap adjusted NIM retreated c. 240bps in the second quarter vs. 1Q22 margin on the back of heavily felt TL funding costs which spurred the overall interest expenses by c. 50% in 2Q alone while interest income growth remains more muted at low 10%s.


Lower CPI linker gains as the bank revised down its CPI assumption to 40% from 45% and spiked TL deposits costs took a major toll on the margins in the second quarter of the year. YKB classified a large commercial file as NPL, which was fully provisioned beforehand hence the net CoR excluding the currency impact came out as merely 32 bps which was also driven by the robust collection performance of the bank in the quarter.

These numbers once again confirm that the asset quality trends have been utterly higher for the bank for some time.  Net trading gains contributed to the overall profitability to a great extent where the pure trading gains reached TL 7.9bn more than doubling its 1Q22 level. The results imply that the bank will likely past over the worst period in terms of margins given that the incremental TL loan spreads started to head north in 3Q22. The potential gains on CPI linkers and the set-to-improve loan spreads led the management to revise up its 2023 guidance to 30% (+) from high 20%s as the initial guidance.

Also, the bank increased its annual fee income growth to above 90% from above 60%, while opex growth was revised up to lower than 120% from the old lower than 100% level. As a result, we also increased our 2023-24 NI estimates by c. 20%


Highlights of the Quarter

Margins plunged but solid ALM management points to an early recovery in spreads if monetary policy gets normalized. As regulations leave little room to move on the lending side, the bank has been focusing on the funding front through increasing retail market shares both on the lending and deposits, creating more volumes to bypass the asset yield pressures. Refraining from TL business loan placements, the bank selectively extended loan in the retail segments. Swap adj. NIM retreated to 3.2%, losing some 240bps over the 1Q22 print, where TL loan spreads still remains in positive territory.

YKB booked TL 8.2bn gains from its CPI linkers which was TL 9.7 bn a quarter ago on the assumption of annual CPI figure of 40% (recall that YKB used 45% annual inflation CPI assumption in 1Q22). YKB comfortably exceeded the 60% threshold in its TL deposit to total deposit ratio, hence its low yielding TL bond purchase remained limited. The last figure in this item is TL 52bn, or 4.1% of total assets. The bank is good positioned to take advantage of higher interest rates to re-price its loan book if the rate is set to rise in 2H23 as its TL duration gap has been lowered to less than 3 months. More importantly, the bank will have an ample room to revalue its CPI book at higher actual CPI figures, which will be a major catalyst for the earnings in 2H23.


Robust collections carry the asset quality at higher levels


Although a large commercial file was transferred to the NPL group from the close watch category, the fully provisioned structure led the bank to set aside almost no provision expense for this file. The strong collections continue to sketch the faith of the asset quality, leading merely 32bps net CoR excluding the currency impact in the quarter. Total coverage ratio stood at 5.65% (adjusted for NPL slae), one of the highest prints in the sector as the bank continued to increase coverage especially in the SME segments.


Fee income gained further momentum


Net fee income increased 28% on quarterly, also up 106% on annual basis, driven by the increasing transaction volume, higher consumer loan placements, and better credit card fees. Non-lending related fees also registered a strong growth momentum as bancassurance and wealth management played key roles here. Operating costs increased 17% QoQ while the annual cumulative increase is 140%, which was driven by the salary adjustments, and weaker TL related extra burdens.

The management revised up its 2023 guidance on the both metrics where it now targets above 90% net fee growth in 2023 while the cost growth will be less than 120% for the full year

Impact on Valuation and Outlook

Despite the margin hiccups, we still see a major re-rating story in YKB . Market share gains in the retail segments have been increasingly paying off amidst this volatile environment and hostile regulatory pressures. Yet, the harsh regulatory and heavy cost environment in 2Q23 put a major dent on the margins, which will head north for the remainder of the eyar. Robust non-interest income generation on its retail strength through fees and the spiked FX transaction volumes will be  major shelter to keep the RoAE at higher than the guided level in our view.

We also increased our 2023 net income estimate to TL 52bn from TL 45 for YKB. We think that the results are neutral to a great extent but the benign margin outlook in 2H23 will set a solid (Editor’s comment:  Report ends here).


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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 and has contributed to the financial daily Referans and the liberal daily Radikal.