Aenza S.A.A. (AENZAC1) Earnings Call Transcript & Summary

Welcome, and thank you all for joining our third quarter earnings call. I hope you are all well. This is [indiscernible] speaking, Group Head of International Banking. I have with me Mr. [indiscernible], Head of Investor Relations as well as our ER Manager, [indiscernible]. I'm very delighted to be back and honored to take the leadership of our international banking group as we celebrate our 86th foundation year. We are broadly serving our customers, supporting our real sector, creating value for our SMEs and contributing to development of the Turkish economy in line with our mission. Halkbank, with its outstanding achievements, stands out as the fourth largest bank in terms of asset size in Turkey. We are aware that recently geopolitical tension may cause some additional uncertainties on growth and inflation outlook. On the flip side, the market friendly policies, high priority for restoring price, stability, normalization in monetary and fiscal policies, stable decline in risk premium and reduction in risks regarding contingent liabilities such as KKM are much appreciated by the sector actors in general. I believe that the transition to more market-friendly operating environment will definitely be beneficial for the banking sector. Furthermore, syndication of the notable global central banks in rate cuts and potential positive impacts of the rate cuts on global output will also support the Turkish economy onwards. Before moving to our bank, I would like to share a brief view on Turkish economy. The monetary policy tightening means in order to rebalance the economy and restore price stability. Along with the tightening steps, household demand has started to cool down. Unfortunately, lack of strong support from external demand also had a negative impact on GDP growth. Therefore, we expect 2024 GDP growth to be around 3.5%, in line with the medium-term program forecast. Central Bank has built up the colossal FX reserves and gross reserves hit a historical record level with the USD 157.4 billion. Moreover, the current account deficit recovered to USD 11.3 billion level as of August and exceed all expectations. All in all, the reserve allocation ratio, which is an important risk factor for the international rating agencies in their rating methodologies improved beyond market expectations. Therefore, we can see that credit rating agencies will continue to increase Turkey sovereign rating and rerating derivative in new area will continue to unfold. This inflation process has now started after the CPI peaked above 75% in May. After the impacts of strong base effects in recent months, headline CPI slipped below the policy rate and enter a positive real interest rate parity in term of export calculation. We are seeing that economy management is very confident about getting inflation below 20% in 2025. In this context, the economy management underlined that they will coordinate the application of the monetary, fiscal and income policies. In summary, sooner or later, December or January, CBRT will start to cut the policy rate with the help of the positive real interest rate conjecture dramatically improving the current account balance and rebrand portfolio inflow. Therefore, looming interest rate cut will create earnings growth momentum in our balance sheet due to the high Turkish lira asset composition and increasing fixed interest rate loan share as part of our total loan with high yields. Let's move to key indicators of banking sector. Despite the regulatory environment, banking sector prefer to remain resilient. On the other hand, normalization of the market rates in the orthodox policy regime to have recovered operating environment for core banking activities by contributing to positive margins. 2025 will be the year of benefiting from the shifting in banking trends. All in all, we at Halkbank ended the quarter with comparatively solid financial results despite all the restrictive credit policies and macroeconomic challenges, which stemmed from both the weak household and external demand. Looking forward, I can assure you that our journey ahead will continue to be one of the progressive growth, collaboration and full of the energy. Now Mr. [indiscernible] will provide you insights regarding our third quarter performance. Following his presentation, we will be available to address your questions. Thank you very much.

Thank you, [indiscernible]. Let me start with the first page. Total assets increased by 30.8% year-over-year and amounted to TRY 2.9 trillion in the third quarter. The main driver was the solid growth of the securities portfolio. On the TL side securities, we managed to expand by 12.7% quarter-on-quarter due to ongoing earthquake spending by the treasury and the high volume of securities issuances continues, while higher TL loan rates put additional pressure on the loan demand. To sum up, the share of total securities in our assets increased slightly to 25.6%. On the flip side, the loan share in our total assets gradually decreased to 48.8%, along with the weaker loan growth. On the other hand, the liquid assets share is currently above 20%, owing to the increase on required reserve ratio. On the next page, you may see our securities details. On the right side of the page, it's seen that CPI linkers share increased to 43%. CPI linkers valuation rate was revised down to 55% from 60%. We managed to increase our CPI linkers income despite valuation rate adjustments. CPI linkers income reached TRY 78 billion in the third quarter due to the following: Firstly, the volume effect. Amount of CPI linkers in our portfolio continued to increase with the widening real rates. Secondly, there was more CPI linkers reduction during the second quarter, while the reduction during the third quarter were lower. So we saw effect of those reductions was much more than it was supposed to be in the second quarter. Finally, average real rates on the CPI linkers portfolio increased compared to the second quarter. However, we will see the biggest impact of the revisions in the last quarter because technically, all the prior [indiscernible] effects accumulated on the last quarter due to the continuing CPI assumption revision through the previous 3 quarters. Turning to Page 3, details of loan growth. Total loans were up by 4.9% quarterly, predominantly driven by business loans, mainly in the form of FX funds. As for SME loans, they mostly grew on the standard segment categories and in TL. On total loans, below sector growth reflects the tight monetary policy, restrictive credit policies and the weak TL loan demand given the current high rates. The significant loan growth on FX side offset a mild TL loan growth. Therefore, we have a limited contraction on our total loan market share. Following page shows more details on our loan portfolio. TL loans make up 73% of total loans, while FX loans make up almost 27%. Our cooperative loans were successfully repriced for not only new utilization, but also for the existing portfolio during the second quarter. Since then, we have seen a significant improvement on TL back book loan yields in Q2 and in Q3 as well. The repricing contribution will continue in the following quarters. Please bear in mind that nearly 20% of our total loan book are comprised of cooperative loans. So structurally, our balance sheet is more TL enhanced compared to our peer banks. So we expect earnings growth momentum to be our story in 2025. Asset quality details are on the next page. Similar to the sector, we have also had some NPL inflows during the third quarter. Half of those flows derived from a one-off NPL. The remaining half of flows were generated by all segments. Accordingly, NPL ratio deteriorated to 2% from 1.5% in the previous quarter despite no NPL sales. At the same time, our Stage 2 ratio increased slightly to 7.5%. On the top right-hand side, NPL coverage stands at 62.4%, in line with the sector average. We maintain our prudent approach to provisioning. Further details on NPL ratios are on the next page. You may see corporate commercial loans NPL ratio increased while consumer loans NPL stayed below the sector. We also witnessed a slight deterioration in SME segment. In addition, we saw an increase on credit card NPL ratios, but their share within our total loan book was almost 3%. Moving to further details of asset quality on Page 7. We have not faced any hard landing in the Turkish economy despite higher for longer approach of CBRT. As anticipated, risk levels realized below expectations, we released some performing loan provisions. On the other hand, we continued to strengthen Stage 3 provisions during the quarter. As you may see on the left-hand side of the page, our total loan coverage ratio is at a healthy 3% level. Turning to liabilities on the next page. Loan-to-deposit ratio decreased to 61.2%. On the right-hand side table, we see that deposits share within our total liabilities are hovering above 80%. It's a clear signal that Halkbank will be the main beneficiary in the coming quarters given the upcoming rate cut cycle. Only 4.3% of our total liabilities are derived from FX wholesale funding versus sector average of 17.3%. Details of deposits are on the following page. Total deposits are up by 8.2% quarterly and almost 30% on a yearly business. TL deposits increased by 11.2% quarterly. In terms of FX deposits in USD, they contracted by 1.4% quarter-on-quarter as dedollarization continues. On Page 10, we will see further details of deposits. Demand deposits jumped by almost 15.7% quarter-on-quarter due to the bank's main focus on rising demand deposit market share. Moreover, TRY deposits account for nearly 2/3 of our total deposits. On Page 11, cost yields and spread details. Another positive development was that TL core spread returned back to the positive territory after 6 quarters. Digging deeper, TL loan yields have increased by 241 basis points, while TL cost of deposits declined by 200 basis points. So our TL core spreads improved by roughly 440 basis points, blended spreads improved by 63 basis points. Moving to P&L item on Page 12. Net fees and commissions continued to grow through the quarters. It grew by 12.9% quarterly and 172% year-on-year, both above the inflation rate, mainly due to the continued progress in payment systems. Next page, details of profitability. Total operating revenues are up by 48.7% quarter-on-quarter, 61.7% year-over-year, driven by the yearly improvements on net fees and commissions. As you may see in the right-hand side, net trading loss came in at TRY 1.7 billion in Q3, while refers to almost 80% improvement compared to the previous quarter. We reported a net income of TRy 2.960 billion, down by 40% quarterly, implying that ROE came in at 11.3% on the cumulative basis. On Page 14, we have cost details. OpEx was down by minus 1.4% quarter-on-quarter, supported by our efforts on cost cuttings relating to the state saving plan. Now the solvency ratios. Reported consolidated CAR came in at 13.9%, up by 33 basis points, while CET1 ratio realized at 10.20%, up by 10 basis points compared to the previous quarter. If we exclude forbearance, CAR and Tier 1 would be roughly 160 basis points lower and CET1 will be roughly 140 basis points lower than the reported ratios. Those are my final remarks. Now I will hand over to [indiscernible].

Hello, dear guests. This is [indiscernible] speaking, Head of Investor Relations. Before we proceed to Q&A session, I would like to touch upon some important issues. We have managed capital buffers well in 2024 by adjusting our loan appetite, optimizing securities portfolio classification and recovering TL core spreads. Moreover, higher risk-weighted asset practice rollback of BRSA in consumer loans also supported our capital adequacy ratio. As of now, we have enough capital buffers. On the other hand, as announced on the public disclosure platform, we got authorization from our Board of Directors up to TRY 40 billion sub-debt issuance. We applied for this issuance to the Capital Markets Board of Turkey. We notified the BRSA2. In addition to regulatory preparations, we are in contact with qualified investors and trying to measure the potential demand. Moreover, internal capital generation will enable us to sustain or even boost our capital buffer through 2025. Our TL cost spreads already migrated to positive territory and potential decline in cost of funding after the looming rate cuts will boost our profitability. Furthermore, we are implementing balance sheet strategies. We are lowering the maturities of deposits and densely granting fixed rate loans, except overdraft loans and credit cards. Additionally, Turkish lira dominated asset structure will also generate tailwinds to our profitability. Finally, we are one of the state-owned bank. As you know, Turkey Wealth Fund owns the majority of Halkbank's shares. Over the last year, Turkey Wealth Fund has injected capital proactively when it was needed. Now we have enough buffers, but if it is needed, Turkey Wealth Fund stands ready to inject further capital. Now we can start our Q&A session. [Operator Instructions] It seems there is no question. Thank you for your participation in our earnings call. I want to thank you again on behalf of our friends on behalf of our department. Have a nice evening. See you next time.