Akbank T.A.S. (AKBNK) Earnings Call Transcript & Summary

Dear friends, this is Kaan Gur speaking, CEO of Akbank. Thank you for joining our first quarter earnings call. Before we begin, I would like to acknowledge the earthquake that was felt in Istanbul and surrounding areas has deeply affected all of us. Thankfully, we have had no adverse news from our colleagues or the wider community. In times like these, the safety and well-being of our people and communities remain our top priority. Our thoughts are with everyone impacted, and we wish a swift recovery to all. Now before going deeper into domestic outlook, I would like to briefly touch upon the global backdrop and its repercussions. In this slide, I would like to talk about the headwinds, especially for the banking sector in this year. As you know, recent shifts in both domestic and global conditions have created a more complex and challenging landscape for the banking sector. Globally, trade policies and reciprocal tariff announcements have heightened uncertainty, filling concerns over growth and inflation and triggering a broad risk of sentiment. Domestically, evolving political landscape ultimately prompted monetary tightening measures aimed at containing financial market volatility. Over this period, funding costs increased by approximately 550 basis points, while we anticipate a rate cut cycle to resume in the second half, monetary conditions will stay tighter than previously projected throughout the year. Next slide, Actually, the progress, I'm going to talk about it towards macro stabilization despite challenging backdrop. We know tightening measures and Central Bank fixed interventions have helped contain the impact of recent unprecedented developments on the exchange rate. We believe that curbing depreciation is key to sustaining this inflation targets. However, tighter financial conditions and a slowdown in external growth pose potential risks to overall growth. While the decline in commodity prices, coupled with euro appreciation will help keep the external deficit at manageable levels. Both slower economic growth and lower commodity prices such as oil, will contribute positively to the disinflation process. Next slide, proven resilience and of course, the amid challenging cycles I'm going to talk about. Actually, this is the time let's turn to our bank achievements during the existing backdrop. Dear friends, we have entered the year with a robust total capital position at 17.4% and 13.8% Tier 1, providing a solid buffer to support future growth. Our deliberate and timely extension of our maturity mismatch last year is a clear validation of our dynamic asset liability management strategy. This outcome reinforces a strong and resilient net interest margin trend as this inflation takes hold and the rate cut cycle resumes. Customer acquisition remains very strong, reaching 14.6 million, up 73% over the last 3 years, underscoring the strength of our franchise and brand. Robust customer growth and digital capabilities are driving fee income growth consistently outpacing the market. Our disciplined fee to OpEx approach strengthens profitability with efficiency gains paving the way for scalable recurring revenues. As a result, our fee-to-OpEx ratio improved further to 92%, reflecting superior efficiency and disciplined cost management. Our prudent risk reward-driven lending strategy has effectively maintained asset quality at healthy levels. Simultaneously, our investments in digital have not only strengthened customer engagement and boosted recurring revenue, but also play a key role in enhancing our risk management capabilities. These foundations position us well for consistent high-quality growth in an evolving macro environment. Moving on to first quarter achievements. I would like to start the year, especially good news, 22.7% return on equity and 2% return on assets. This is slightly better than our quarterly forecasted trend. We continue to leverage our strategic balance sheet positioning to support our margin also by optimizing deposit costs. Our regulatory-driven low Turkish lira loan-to-deposit ratio offers a built-in buffer as the environment normalizes. Additionally, in fees, we have gained 100 basis points market share among private banks since the start of the year, bringing the total to 350 basis points over the past 2 years, driven by robust customer acquisition and sustained momentum in key segments. While our strong trading income is driven by exceptional treasury management, robust customer-related business and dynamic securities management, we remain committed to a disciplined provisioning approach, having further strengthened our Stage 2 plus 3 coverage. In summary, we have effectively repositioned our balance sheet to fully capture the advantages of this inflationary environment. Within this slide, actually, I would like to emphasize that we continue to make strong progress with most of our 3-year strategic goals within reach by year-end. Strong customer growth and deeper penetration into the micro segment driven by digital innovation are reinforcing the pillars of future recurring revenues. Our only shortfall is in Turkish lira time deposit share. Why? Because of the -- due to funding optimization and regulation-driven low Turkish lira loan-to-deposit ratio. Our journey never stops. We stay focused on constant improvement. Our robust solvency ratios strengthen our market position, driving progress in key priorities. The first, expanding customer relationships; second, enhancing operational efficiency and lastly, investing in talent and technology. This strategically positions us to deliver sustainable return on equity that will outpace inflation, provided the operating environment normalize. I will now pass it over to Ebru to walk through our first quarter results. Following that, Turker and I will be happy to answer any questions you have. Ebru, this is your turn. Thank you.

Thank you, Kaan Bey. As you have just mentioned, we started the year solid, supported by sustained fee income momentum and dynamic ALM execution. Our revenue increased by 42% year-on-year to $50.499 billion during the quarter. We saw a robust 62% year-on-year uplift in fee income, continuing to provide strong support to our core revenue performance. Without any doubt, strategic investments made over the years and strong commitment to increase our fee chargeable customer base are fueling the consistent growth of our recurring revenue stream. Meanwhile, during the quarter, our treasury management once again emerged as one of the bank's top-performing areas in delivering high returns. The strength of our treasury performance stem from both agile balance sheet management and healthy customer-driven business. All in all, we started the year exceeding our quarterly projections with net income up by 4% year-on-year to $13.732 billion and resulting in an ROE of 22.7%, ROA of 2% for the quarter. Let's dive into the first quarter financial performance and key drivers, starting with the balance sheet. In the first quarter, we pursued selective growth in TL loans, prioritizing yield optimization and capitalizing on our strong market position across key targeted segments. We recorded 4% year-to-date growth in our TL loans. Our loan portfolio composition demonstrates our effective ALM approach, focusing on yield accretive segments and proven success in achieving our targeted growth areas. Our disciplined lending and proactive risk management underscores our dedication to maintain solid asset quality across all loan segments. While digital and analytical excellence drives our growth strategy, we remain focused on diligent tracking and individual assessment of our corporate and commercial loan portfolio. This disciplined approach underpins the strength and resilience of our asset quality. Our risk return focused loan pricing and growth strategy aim to sustainably support and strengthen margins. Moving on to our FX loan book. It remained flattish following a successful and proactive growth achieved last year. The relatively flat performance was driven by redemptions along with growth caps being tightened during the quarter. Please note that our already deleveraged FX loan book and significantly mitigated FX risk as well as our strong FX liquidity present notable room for future growth. Accordingly, we will continue to utilize our strength in corporate and commercial banking to grab market share, including investment loans. Moving on to the securities slide. Our proactive approach in securities portfolio management, which enabled us to adapt swiftly to evolving market conditions continues to be key to preserving margin resilience. The timely positioning in TL fixed rate securities offering higher yields resulted in solid profit realization during the quarter. Meanwhile, we maintained our leading position in high-yielding corporate bonds, which constitute 7% of TL securities and 55% yield at around 1-year maturity. Our TL floating notes are mostly TLREF indexed with decent spreads. As previously communicated, the share of CPI linkers in total TL securities has already declined by 32 percentage points to 45%, in line with our strategic approach while continuing to deliver a positive real rate. On the funding side, we maintained our disciplined funding mix, whereby deposits have continued to be the main source of our funding. Our deposit base remains strong and well diversified, accounting for 61% of our total liabilities. At the same time, our low-cost and sticky TL time deposits saw a quarter-on-quarter increase of 4 percentage points, reaching 62%. TL demand deposit share in total TL deposits also increased by 310 basis points during the quarter to 16.2%. On top of our strong and widespread deposit base, our TL LDR remains low at 83%, enabling cost-effective funding strategies. Let's move on to the P&L. We had started the year solid with a NIM of 2.3%, in line with our quarterly projections. Accordingly, our CPI normalized NIM improved quarter-on-quarter by 132 basis points. Thanks to our strategically designed and well-positioned balance sheet, supported by a proactive approach in extending duration of TL loan portfolio and favorable 83% TL LDR, we achieved a robust TL spread evolution during the quarter. As a reminder, our timely TL positioning in TL balance sheet resulted in the highest TL maturity expansion among our peers, which can be seen in the year-end financials. This underscores our proactive and agile ALM approach. As for the remaining of the year, our robust balance sheet is set to drive further NIM enhancement despite the short-term reversal of the rate cut cycle which may be delayed in the anticipation of margin expansion. Additionally, our yield optimization efforts through tactical security portfolio management continue to create substantial opportunities for NIM evolution in the coming period. Moving on to the fee side. Our fee income increased by a robust 62% year-on-year with the contribution of all business lines demonstrating our strong customer acquisition, comprehensive product portfolio and diversified income base. As highlighted earlier, we remain dedicated to enhance our sustainable recurring revenues and have already achieved significant milestones in expanding our fee chargeable customer base, thanks to our robust customer-centric initiatives and innovations. Without any doubt, our digital initiatives have been the driving force in both our customer growth and substantial fee income. As a testament to our digital capabilities, 75% of our new-to-bank customers were acquired via digital onboarding. Meanwhile, our digital channels have achieved an impressive share, accounting for around 90% of our general purpose consumer loans and commercial installment loans, above 60% of our credit card sales and time deposit account openings, and more than 70% of our bancassurance products sold. Moving on to the next slide. As highlighted earlier, we have already reached our 2025 strategic target to increase fee to OpEx ratio above 80%, thanks to the nonstop enhancement in our fee chargeable customer base. With the fee income growth outpacing OpEx growth once again in first quarter, our fee to OpEx ratio remained robust at 92% -- having reached a new peak in fee income market share last year, we recorded additional 100 basis point gain among private banks as of February this year, bringing our share to 17.4%. This translates into 3.5 percentage points gain since 2022, highlighting the effectiveness of our customer acquisition strategy and well-diversified fee income base. Moving on to the costs. Focus on efficiency remains a key priority. We began the year better than our guidance with OpEx rising 35% year-on-year. Also, cost-to-income ratio improved by 5 percentage points to 51% since year-end. Starting this year, we anticipate a significant improvement in cost-to-income ratio, driven by a more favorable revenue outlook and the normalization of pricing behavior aligned with the ongoing disinflation trend. Our long-term ambition in cost-to-income ratio remains firmly in the mid- to low 30% range, in line with historical averages, driven by a commitment to sustainable growth and enhanced operational efficiency. Let's move on to asset quality. Retail-led NPL inflows remain a persistent trend across the sector. Meanwhile, our focus on risk return remains with machine learning-based credit decision models, excellence in advanced analytical capabilities across retail segments, diligent tracking and individual assessment of our corporate and commercial loan portfolio as well as prudent provisioning, which have all enabled us to maintain a sound asset quality. As a testament to our diligent asset quality practices, the relative strength of our portfolio is evident in the credit bureau statistics. Examples include a higher nondelinquent balance ratio and lower 1- to 30-day overdue balances in both general purpose consumer loans and consumer credit cards compared to our peer average. Please also note that our NPL ratio remained at 3.3% within our full year guidance despite no NPL sale during the quarter. Meanwhile, the share of Stage 2 plus Stage 3 loans in our gross loan portfolio considered -- which are obviously considered potentially more problematic, remained limited at 9.8% in total, while we continue to increase our already solid coverage ratios. In first quarter, our total provisions reached almost TRY 54 billion, thanks to our continuous provision reserve buildup. Our coverage ratio for Stage 2 plus Stage 3 loans increased further by 140 basis points year-to-date to a solid 29.4% amid ongoing risk management discipline. Excluding currency impact, our total net cost of credit stood at 197 basis points, consistent with the trend over the past 2 quarters and in line with our 2025 projections. All in all, we expect our net cost of credit to remain within our guidance range of 150 to 200 basis points. Our total capital, Tier 1 and core equity Tier 1 ratios without forbearances remain robust at 17.4%, 13.8% and 12.5%, respectively, despite adverse effects stemming from operational risk adjustment, which is a sectoral regulatory implementation during the first quarter of every year. FX credit risk, mainly driven by currency impact, securities mark-to-market impact and dividend payment. Meanwhile, our successful $500 million worth of Tier 2 issuance during the quarter helped mitigate some of the adverse effects, boosting our capital by 102 basis points. As for the sensitivity, 10% depreciation in the lira results in around 25 basis point decrease in our capital ratios, while the impact diminishes for higher amounts of changes. And 100 basis point increase in TL interest rate results in a 9 basis point decline in our solvency ratios, again with diminishing impact. Our robust capital reserve continues to safeguard against market volatility and challenges, providing critical resources for sustained and profitable growth. On this slide, you may find a summary of our sound first quarter performance. As highlighted earlier, we started the year solid with quarterly ROE outpacing our initial projections. Newly emerged headwinds ahead, including short-term reversal of rate cut cycle, may postpone the expected NIM enhancement. However, we believe it is too early to comment on our full year ROE guidance given the fact that our strong fee income evolution, exceptional revenue generation capability may mitigate the ROE impact of the NIM evolution, especially considering the uncertainty regarding the duration of the current headwinds. Before moving on to the Q&A, I'd like to share a few highlights regarding our nonfinancial performance. As shown in our ESG video at the beginning of the webcast, we maintained strong momentum in delivering measurable progress in our 2025 sustainable action plan. A key milestone was our CDP scores upgrade with both climate change and water security ratings rising 2 levels to A leadership, a strong sign of our environmental progress. Our sustainability performance has also led to our recognition in S&P Global Sustainability Yearbook 2025, where we earned the industry mover definition. These achievements highlight our growing leadership in sustainability both locally and globally. We remain committed to advancing a low-carbon and inclusive economy in line with our long-term objectives. This concludes our presentation. Now moving on to the Q&A session. [Operator Instructions]

So the first question is regarding the NIM trajectory going forward and the spread evolution that we have seen in the quarter so far. Turker?

Thank you, Ebru. Actually, surely, the latest developments have impacted our initial projections for this year. As you may recall, we were expecting a gradual rate cut cycle throughout the year, continuing also after the latest rate cut as well. Therefore, actually with gradual spread improvement starting from first quarter then second quarter and until the end of the year. But with the latest developments and actually, in the first quarter, up until like towards end of March, we've seen this progress. And we started the year with a relatively lower -- like weekly net interest margin, but with gradual improvement throughout the weeks, we were able to meet this 2.3% NIM for the first quarter, and we were able to also observe core spread improvement roughly like 4 percentage like on the TL side, loan-to-deposit spread. But since that time, actually, since 20th of March, with the first move of Central Bank and then the rate hike recently, we are observing that the deposit costs have gone up in the market. Nowadays, we are observing rates up to high 40s. Surely, we have also adjusted our lending rates on the marginal book. Currently, we are pricing our marginal loans at mid- to high 50s, depending on the duration and the product type. But also on the -- as I said, on the deposit side, we are observing like high 40s of rates. Therefore actually, like in the first 4 weeks of this month, like we've seen some like tightening in the core spread loan deposit. It is still higher than the end of the '24 entry. But not to forget also the wholesale funding cost has increased from 45% levels at the beginning of the year to 49% levels nowadays. So therefore, what does it mean for our full year NIM trajectory? Since we are not expecting a rate cut in this quarter, probably it will be challenging to improve our net interest margin in the second quarter. But starting from third quarter onwards with the expected rate cycle to resume, we expect to like again to improve our core spreads until the end of the year. But having said that, as we have also like summarized at the end in Page 19, probably like meeting this 5% net interest margin, like is quite challenging. And so probably there's a downside risk to this net interest margin. But there are still like moving parts in the market. Let's wait and see and like how Central Bank is going to act in the coming weeks. And that's for this question.

Okay. The next question is basically -- thank you very much for your presentation and interest. Coming from [indiscernible] Securities. Do you think it is possible to reach 30% in return on equity in such a difficult environment? We understand that you have not revised your targets, but will there be a revision in the second quarter? I'll be very happy if you could elaborate on this a little.

Okay. Actually, since actually, we were able to finish the first quarter ahead of our initial projections for the overall profitability for the bottom line. I think it's a bit early to discuss any downward revision on the ROE guidance because as Ebru has mentioned, like on the net interest margin side, yes, there are some challenges, but there are other parts of the P&L, which have performed better than we have originally expected, like the fee income growth, like way above the full year guidance, like at 62%. And also like in times of that like movements in the markets, like with widening spreads, also, we are trying to leverage our strong capabilities on the treasury marketing side. So that has also helped to our bottom line in the fourth quarter. So therefore, actually, it's a bit early to like make a downward revision on the ROE. So we are sticking to our full year ROE guidance. But surely, whenever needed, so in the coming quarters, we may -- we are always -- we will always consider, if needed, to make revisions in the guidance, but it's a bit too early.

Okay. And again, the next question comes from Valentina from Barclays. You mentioned downside risks to your NII and NIM for 2025. What offsetting factors do you see? And do you think these will be enough to meet the guidance? We've already answered that question. Also, the core equity ratio has decreased considerably -- the core equity has decreased considerably versus full year of last year. Where do you see the core equity by the end of the year? And how do you plan to achieve it?

Actually, maybe we can go to this slide again, like our capital slide. As you know, there are always like 2 major factors, which is always impacting the first quarter, it is like for the whole sector. First of all, the banking sector revises its operational risk amount at the beginning of the year. And this was the case in our bank as well. So it had an impact of minus 70 basis points. And on top of it, again, like first quarter specific, the dividend distribution of 34%. So in total, 1% impact has hit our capital. And the latest exchange rate developments as well as the rate developments had some impact on the credit risk as well as securities side. But I think going forward with the internal capital generation, like, i.e., the profitability starting from second quarter onwards, we can expect a gradual improvement in our capital adequacy ratios. But like with 17.4%, which is one of the highest ones in the sector, it really gives us a strong advantage for growth.

Okay. The next question comes from Cihan from HSBC.

Sorry, can you hear me now?

Yes, we can hear you now.

I have a couple of quick questions. One is you mentioned by the beginning of your presentation that higher-than-expected interest rates mean a slowdown in the economy and you're witnessing increased inflows from particularly retail. So in light of that, is it fair to assume that cost of risk is likely to materialize towards the higher end of your 150 and 200 basis points guidance? That's the first question. Second question is, can you give us some color about the asset quality evolution at SME? You've gained significant market share in SME in the last couple of years as part of your strategy. But I mean, do you think that this could be a source of vulnerability? And the last question is about -- let me stop here. I can't remember the third question. I'll...

Let's start with the first two, and then if you remember, you can ask the third one.

This is Turker again. Actually, with regard to the slowdown, like expected slowdown in the economy or moderation in the economic growth, maybe as of today, like we can say we may end the year with the cost of risk at the upper bound of our guidance like maybe close to 100 basis points. But also, there are always like case in our legacy book on which we are working. And there may be always some like big ticket collections and reversals, which may create upside potential in a positive manner on the cost of risk. But as of today, we can stick to this like close to 200 basis points cost of risk guidance. With regard to asset quality evolution lately, actually, when we look at the fourth quarter evolution [indiscernible] second quarter so far, actually, as I said, it is mainly retail credit cards and to some extent, also SME, but mainly micro. But still our footprint on the -- even though we've increased our market share is still like it is lower than -- our market share on the SME side is lower than our blended market share on the commercial loan book. So therefore, actually, we were able to cherry-pick while growing this segment. And also we are, as Ebru has mentioned, not only on the GPI side, but also on the micro side, we are using our AI-based models to like diversify to make risk-adjusted pricing and to cherry-pick the right customers. And so far, the asset quality evolution, both on the SME side as well as the consumer side has evolved in line with our expectations. So therefore, actually, as of today, we don't see any downside risk to our cost of risk guidance stemming from the SME portfolio.

All right. And last question is about your bond portfolio. I appreciate that the carry on the bonds are negative at the moment with very high cost of funding from Central Bank. But if we think about the longer duration like 5 years, et cetera, and if indeed there is this inflation, those could be really very [ lucrative ]. So is the bank considering to increase its bond portfolio given where the rates are?

Actually, like our agile balance sheet approach. So it also covers our managing our securities portfolio, like depending on our expectations. Yes, time to time, we may further increase our securities book as we did towards the end of the year and from which we have benefited in the first quarter while like realizing this [ capital ] gains. So this is an area which our treasury department is always actively analyzing and assessing.

[Operator Instructions] I think there's -- let me just see. Yes. So Thomas from Bloomberg is saying, can you please elaborate more on your NIM and spreads? We just talked about it, I guess. And can you please help us understand the wholesale funding impact basically on the NIM, the wholesale funding impact on the NIM?

Actually, like as of today, the wholesale funding cost like close to 49% is quite close to the deposit cost. And continuously, we are like balancing our TL funding mix between the deposits and the wholesale funding. Fortunately, we have also significantly like high securities book, so therefore, actually, which we can also utilize in repo funding. But it's really an optimization between deposits and wholesale funding, while also as we also know, there are still some ratio requirements of the Central Bank for TL deposit share, et cetera, which we also have always in our radar, which is by the fact, actually, we are already above the 60% threshold. And so we are comfortable in meeting the ratio as well.

The next question comes from Bulent Sengonul basically from [indiscernible] and saying as the rates increase, do you have any concerns that the strength of the trading income seen in the first quarter will be sustained in the second quarter or for the rest of the year for that matter?

Actually, it really depends on the movements and also on the customer demand. Our treasury marketing department is quite active like in reading customer needs and in responding to our customers' needs with innovative solutions. So we will always tap this area.

Okay. I guess there are no more written questions. It's 5 days short and sweet. We keep it. If you have any further, please do reach out to our Investor Relations team, do not hesitate. We will always be happy to help. And Kaan Bey, I would like to leave the floor to you to kindly share your closing remarks.

Thank you, Ebru. I would like to take this opportunity to thank you all our employees for their dedication. And side by side, we will continue building a future of meaningful impact built on our trust, innovation and shared success. And to all those who have joined us today, I really appreciate your trust and support. I'm looking forward to seeing you with many of you in the near future. Keep well. Thank you.