VAKBN: 2Q Review & Target Price Revision: Prevailing Legacy of 2020

2Q results slightly above estimates on lower CoR

The bank announced its 2Q21 solo net income as TL660mn (-12% q/q, -57% y/y) slightly above the estimates (YFe: TL594mn, cons: TL635bn), corresponding to 5.5% quarterly ROE (1Q: 6.4%). Net interest income rose by 19% q/q to TL3.2bn (YFe: TL3.5bn, -42% y/y) mainly thanks to higher CPI linker income of TL2bn (YFe: TL1.8bn, 1Q: TL1.4bn, with yield assumption raised from 11.6% to 14%), pushing up swap adjusted NIM by 15bps to 0.89% in 2Q. The Bank announced trading loss of TL1.5bn (1Q: TL505mn loss) in line with our estimates mainly due to higher swap costs of TL1.8bn (YFe: TL2bn, 1Q: TL1.6bn). Fee income was up by 42% y/y to TL1.1bn (+21% q/q) whereas OPEX was up by 7% y/y to TL2.2bn (+73% q/q). On the asset quality side, NPL ratio inched up to 3.66% in 2Q from 3.65% in 1Q due to new NPL inflows. Provisioning expenses dropped by 58% q/q to TL1.4bn (-55% y/y), implying net CoR of 11bps (1Q: -24bps). Free provision buffer remains unchanged at TL1.5bn in 2Q.

Higher funding and credit risk costs continue to limit profitability

In the view of last year’s strong loan growth with lower rates, higher funding costs and credit cost risks remain as the key pressure factors on profitability this year and in the mid-term. Bank management highlighted the downside risks to 2021 NIM guidance of 3%, despite of the expected improvement in spreads and CPI-linker contribution in 2H21. Considering upside risks to inflation and TL rates, we expect depressed NIM levels (2021E: 1.1%, 2020: 3.7%) continue to limit bottom line in the coming periods for Vakifbank. Although lower cost of risk (2021E: 79bps, 2020: 202bps) 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 profitability. We expect more visibility on asset quality dynamics with possible removal of NPL recognition rule extension (from 90 days to 180 days) after 3Q or 4Q. Addition to the risks over asset quality; need to strengthen capital position of the Bank (14.5% CAR, 12.6% Tier-I as of 2Q21) might occur in case of 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 TL3.5bn (7.9% ROE, -30% y/y) from TL5.8bn, 8% below Bloomberg consensus. VAKBN trades at 2021E 5.3x P/E and 0.37x P/BV.

Target Price lowered to TL4.30 from TL5.65

In line with the abovementioned dynamics, we lower our Target Price to TL4.30 from TL5.65, while maintaining our Market Perform recommendation. Our valuation is based on 11% sustainable ROE (previously 12%), 16.0% risk free rate (previously 14%) and a 7% equity risk premium (unchanged), resulting in 2021 Target P/BV of 0.32x (previously 0.44x). 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