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Vakifbank VAKBN Stock, Company News and Analysis

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İŞ INVESTMENT – Vakifbank VAKBN TI Company Report 2Q16 – 10.08.2016

Review of BRSA Solo 2Q16 Financials

Actual vs Estimates

Results were broadly in line with expectations. Vakifbank posted TL587mn solo net earnings in 2Q16, merely below the market expectation of TL596mn (IYM: TL578mn). Vakif delivered 12% RoE with a flattish bottom-line on a quarterly basis when adjusted for TL86mn income from Visa stake sale in 2Q. Vakif reported slightly better income from securities trading, offsetting the negative impact of higher than expected costs.

Highlights of the Quarter

Growth revives in harmony with the market. Customer loans posted 4% quarterly growth riven by improving retail and project finance lending. On the funding side, Vakif relied on FC-wholesale borrowings and let go costly deposits so that total customer deposits came down 1% QoQ whilst reaping the benefits of its branch network expansion attained in the prior year by growing in mass retail and demand deposits. Despite falling short of initial guidance in 1H, the bank management preserves its FY loan growth guidance of 15-16% owing to improving loan demand along with supportive macro and regulatory environment.

NIM remained flattish. Core spreads headed north thanks to easing deposit costs along with continued re-pricing of back book while management revealed more room for further expansion in core spreads going into 3Q, which will likely be followed by a flattish 4Q. Thanks to higher contribution of CPI-linkers in 3Q, the NIM is expected to widen 30bps QoQ and the management anticipates 15-20bps annual NIM expansion for the full year vs. the budget guidance of flattish outlook, which will likely mitigate the negative impact of slower than anticipated loan growth this year. Fee growth remains sluggish. Net f ee i ncome post ed onl y 1% YoY increase in 1H16 vs. 20% growth articulated in the budget guidance.

Consequently, the management revised down net fees growth guidance to low single digits but believes current resurgence of quality loan demand and slowdown in fee rebates could mitigate the negative repercussions of fees being off the target. Likewise, cost increase guidance has been cut down to 8% annually vs. the initial guidance of 12-13% vicinity.

Net NPL formation accelerated. There has been no big ticket  file or sectorial concentration among the inflows but the bank sees NPLs coming from retail loans granted to non-payroll customers and unsecured SMEs, both of which are recognised as NPL sensitive segments during economic slowdowns. Net NPL additions realised at 141bps in annualised terms and the NPL ratio deteriorated 12bps QoQ to 4.1% in 2Q. The management stated that Vakif will book c.TL150mn income (TL120mn post-tax) from a legacy NPL (TL90mn principal recorded as provision reversal under other income and TL60mn interest income) probably in the third quarter. Closewatch and restructured loans continued to stay flattish albeit at a higher level compared to peer banks.

Impact on Valuation & Outlook

Investors may welcome the improved guidance. Despite weaker than expected growth, Vakif enjoys better than anticipated margins evolution going into 2H while lower net fees will be offset with favourable costs outlook. The management anticipates 20%+ EPS growth for this year and 13% RoE vs. the initial guidance of 12%.