TBC Bank: Firmly on Track to Meet Efficiency and Profitability Targets

TBC Bank: Firmly on Track to Meet Efficiency and Profitability Targets

The record high net income of GEL 45.6 mln reported by TBC in 1Q15 (17.9% implied annualized ROE) shows the bank is successfully coping with continued economic turbulence. As a result, TBC’s operating revenue is set to expand decently in 2015 on the back of surging non-interest income, SP Advisors, investment and consulting company said.

With operating expenses under tight control, the bank will nearly reach its mid-term C/I target of 45% already this year. On the other hand, asset quality pressures are likely to rise as the effects of the GEL depreciation take their toll. Although agency see full-year ROE edging down to 16-17% on increased loan provisioning and last year’s IPO-related effect on equity, a return to the mid-term target of above 18% is achievable in 2016. Agency keeps its 12-m target price for TBC Bank unchanged at USD 14.4/DR and maintain our BUY recommendation.

GEL depreciation boosts assets, but real growth subsides

"Broad economic uncertainty will slow the bank’s real asset growth in 2015. In 1Q15, gross loans were up 13.3% qoq (+1.4% excluding FX effects) and deposits added 12.1% qoq (+0.4% net of FX). Against the feeble 1Q15 reported growth, we downgrade our full 2015 projections – we now expect both deposits and gross loans will add 10% yoy in real terms (+27% and +25%, respectively, in nominal terms based on a 2015E exchange rate of GEL 2.3/USD), with growth back loaded in the 2H".

Surge in non-interest income supports operating revenue

"Net interest revenue rose 19% yoy in the 1Q and we expect this pace will be maintained throughout 2015. NIM compressed 0.2pp qoq to 8.1%, but we see no material downside risks in 2Q-4Q. Net fees and commissions were up 42% yoy and other non-interest income surged 94%, a sign of TBC’s skill at capitalizing on its extensive branch network".

C/I at historic lows in 1Q15, but it will retreat through 2015

"Despite the emergence of new costs related to the rebranding of post-merger Bank Constanta branches, TBC managed to restrain growth in operating expenses to 6.8% yoy in 1Q15. Management has indicated the full-year growth rate will be higher – close to 10% yoy. Even so, we believe the bank will close out the year with a C/I ratio close 45%, its mid-term target. As the bank gains scale and completes the Constanta branch rebranding, the ratio is sure to come down further. The 40% level is attainable over the next 5 years, in our view".

Cost of risk will likely be marginally above our 2.0% estimate in 2015

"Given the high dollarization of TBC’s balance sheet – 67% of loans are in foreign currencies – the lari depreciation and the economic slowdown have put a dent in borrowers’ ability to service their debt. SME and mortgage loans (jointly accounting for 1/3 of loans) were hit hardest – while 84% of all facilities in each group are FX-denominated, only 25-26% of borrowers are estimated to have FX-linked income. The short-term effect of the lari weakening was not material – the share of NPLs and restructured loans inched up 0.7% qoq to 4.4%. However, we believe the downside risk is still present. Management guided 2015 cost of risk at 2.0-3.0%, with the specific rate dependent mainly on future FX moves. We, therefore, raise our cost of risk assumption to 2.2%, from 2.0% previously".

Firmly on track to meet profit goals

Agency projects the bank’s net income will grow 13% yoy in GEL terms, but fall 10% in USD terms. "Looking forward, we see average annual net income growth of 17-18% (both in GEL and USD) over the next 5 years. The 18% ROE goal is entirely achievable in 2016 after a technical correction to 16-17% this year as a result of increased provisioning and last year’s IPO-related effect on equity", SP Advisors said.