Banca Transilvania First Impression 3Q 2010

A lower effective tax also helped, but worryingly non-interest expenses surged. Nevertheless, the bank's profitability remains well below pre-crisis levels.

Loan growth outperformed the market: TLV seems to have gained market share, with a growth in gross loans of 2% qoq. With deposits posting a growth of 1% qoq, loans/deposits ratio inched slightly up to 82.4%. NIM for the quarter narrowed somewhat from the peak of 5.33% reached in 2Q 10 to 5.08%, better than our projection of 5.0%.

Non-interest expenses disappointed: Trading income posted a better than expected rebound after the loss from 2Q 10 while F&C had a robust evolution given the weak economy. TLV said that it recorded an increase in the number of clients' transactions, driven by a higher number of cards issued. Non-interest expenses posted the highest yearly rise over the past two years, driven by higher personnel expenses, as the bank paid higher salaries and increased the headcount.

Risk costs of 456 bps: They were even better in relative terms than our expectation of 489 bps, coming in at 456 bps, up from 437 bps in 2Q 10 but below the record 618 bps reached in 1Q 10. TLV has not disclosed a proper metric for NPLs, but there is no doubt that they continued to climb. The risk costs' performance was probably helped by a slight decrease of the coverage ratio.

Outlook and recommendation: This set of results fits into our scenario of a recovery in P&L based on an easing of the risk costs but the surge in non-interest expenses adds another uncertainty. For the moment we maintain our TP but put our recommendation under review.