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

Dear friends, this is Kaan speaking. Thank you for joining our second quarter earnings call. Now before going deeper into the domestic outlook, I'd like to briefly touch upon the global backdrop and its repercussions. Global economy is facing various challenges, mainly characterized by elevated level of uncertainty pertaining to trade policy and their potential impact on growth and inflation. Besides fiscal concerns in advanced economies, particularly in the U.S. and Japan as well as geopolitical tensions have been major sources of volatility recently, amplifying the lingering difficulties. While financial markets are extremely sensitive to the news flow on tariffs and geopolitical tensions, recent positive developments on these fronts have supported global risk appetite and broad sentiment for emerging markets. Domestically, macroeconomic conditions in the second quarter was challenging for the banking sector. Swift and strong monetary response against evolving political and global landscape had resulted in a sharp rise in the funding cost, which is up to 49%. This postponed the previously anticipated margin expansion, leading us to revise our full year guidance. Monetary measures have successfully restored financial stability and the Central Bank restarted reserve accumulation in May. Now gross reserves have broadly reached pre-March levels, while net reserves remain somewhat short of this level, but steadily improving. Regarding macro trends, demand conditions and economic activity are moderating due to the tight financial conditions. We project a mild economic growth this year around 3% with downside risks associated with monetary tightness and external outlook. Exchange rate stability, mild course of commodity prices and this inflationary support of demand conditions create a conducive environment for the continuance of the ongoing downtrend in inflation. We anticipate the recently started rate cut cycle to resume in the rest of the year, while monetary conditions are likely to stay tighter than previously projected. Looking forward to next year, we expect the disinflation process to continue, while the pace of this improvement will depend on the macro policy design. With a cautious and prudent approach, maintaining a tight monetary and fiscal policy mix is key for sustained this inflation. As Akbank, we acknowledge the short-term cost of disinflation, which we deem essential for a long-term and permanent improvement in the banking sector's operational environment and profitability. We will continue to closely monitor risks stemming from the global outlook, including rising protectionism and geopolitical tensions as well as the domestic developments. Based on our potential implications for the financial sector, we will adjust our positioning accordingly. As we enter a pivotal phase in the cycle, I want to highlight 6 core strength areas that position us to maximize the opportunity in a rate cut environment. Each one is a deliberate outcome of our strategy. And together, they give us a structural edge as the macro landscape shifts. First, capital and liquidity. We have maintained a fortress balance sheet. Capital levels are strong. Liquidity is ample, giving us flexibility, optionality and ammunition. Second, agile balance sheet aligned with regulation and market cycles. We have actively managed our asset and liability mix to stay ahead of the cycle while remaining fully compliant with evolving regulatory requirements. This agility ensures we can respond quickly to the market shifts without compromising prudence. Third, our funding mix. We moved fast to optimize our funding mix. We gained market share in widespread consumer deposits, while higher cost deposits were actively reduced. This has already started to support margins. Fourth, our security books has been tactically structured. We have extended duration and locked in yield where it comes. As rates fall, we expect meaningful margin tailwind from this positioning. Fifth, efficiency is our advantage with fees covering 100% of our costs in the second quarter. We have achieved a superior fee to OpEx ratio in the sector, which underscores the scalability of our operating model and the strength of noninterest income streams. Also important to underline that cost containment remains disciplined even as we invest selectively for future growth. I am very happy to share that our achievement in future OpEx has already significantly exceeded our 3-year objective, which we have shared in several occasions. Last but not least, risk is tightly controlled. Provisioning remains prudent. Coverage ratios are robust. We are focused on disciplined growth, anchored in risk-adjusted value creation, protecting returns for long-term shareholders. Everything we have built, the capital, the funding structure, the portfolio is aligned to convert this easing cycle into margin expansion and sustainable value creation. Execution remains strong with the majority of our 3-year strategic objectives well within reach or already delivered. Our only shortfall is in Turkish Lira time deposit market share, which I already mentioned in the previous slide as an outcome of our funding optimization as well as regulation-driven low Turkish Lira loan-to-deposit ratio. Our journey never stops. Customer growth driven by retail and digital channel is accelerating fee-based and customer-driven revenues. Backed by a well-structured rate-sensitive balance sheet, this forms a scalable, resilient earnings platform with strong momentum and long-term growth potential. I will now pass it over to Ebru to walk you through our second quarter results. Following that, Turker and I will be happy to answer any questions you have. Thank you.

Thank you, Kaan Bey. Our first half net income was up by 3% year-on-year to TRY 24.852 billion and resulting in an ROE of 20.1%, ROA of 1.8% for the first half. During the same period, our revenues increased by 39% year-on-year to TRY 96.828 billion. As Kaan Bey just noted, our robust 60% year-on-year growth in fee income remains a key revenue anchor, partly offsetting the delayed recovery in NII. Strategic investment over the years, especially in digitalization, alongside deepening customer engagement and cross-sell efforts continue to fuel steady growth in our recurring revenue stream. However, the unanticipated tightening in monetary policy triggered a downward revision in our net interest margin guidance since our margin evolution was directly linked to our rate cut expectations. Therefore, despite the mitigating factors such as robust fee income, disciplined cost management and well-controlled asset quality, the lower NIM trajectory has resulted in downward revision in our ROE guidance for the full year to above 25%. We achieved 13% year-to-date growth in TL loans, surpassing the TRY 1 trillion mark and remaining committed to our full year loan growth guidance of over 30% shared at the start of the year. Our loan composition breakdown remained unchanged year-to-date as we continue to pursue selective TL loan growth with a sharp focus on yield maximization and extended maturities. We leveraged our strong positioning in priority segments while remaining fully aligned with regulations. Risk discipline stayed intact. 85% of our GPLs were preapproved and 35% were to our salary customers. As you all know, we extended the maturity profile of our loan book last year and maintained this positioning year-to-date. This helps manage our duration gap effectively and positions us well as the rate cut cycle is reinitiated. We expect to start seeing NII uplift from third quarter onwards. Our risk return focused loan strategy supported by proactive ALM is designed to support margin expansion and drive long-term value. Our foreign currency loan book grew by 3.7%, building on the strong momentum from last year, which led us to reduce our full year growth guidance to mid-single digit. This year's slow performance reflects elevated redemptions and tighter regulatory growth caps. Our lean FX loan book, low-risk exposure and solid foreign currency liquidity provide headroom for future expansion. We plan to leverage our strong presence in corporate and commercial banking to grow our share, particularly in investment-focused loans. Moving on to the securities slide. Our securities portfolio grew by 15% year-to-date, now accounting for 24% of total assets. Our TL securities were up by 14% year-to-date, while foreign currency securities increased by 9% in dollar terms. We are well positioned with long-duration, high-yielding TL fixed rate securities and TLREF bonds offering wide spreads. We have also strategically decreased our CPI-linker exposure, which also has positive spread. Our proactive yield-focused securities portfolio management has allowed us to swiftly adapt to shifting market conditions and remains a key driver of margin resilience going forward. On the funding side, we sustained our disciplined funding strategy with deposits continuing to serve as a primary source of funding. Our deposit base remains robust and well diversified, representing 63% of total liabilities. Our low-cost and sticky TL time deposits saw a year-to-date increase of 4 percentage points, gearing the share in total to 62% as of second quarter. Meanwhile, thanks to our strong franchise, we tactically increased our market share in small ticket widespread consumer-only TL time deposits during the quarter. Please also note that TL demand deposit share in total TL deposits has increased by 240 basis points year-to-date to 15.5%. On top of our strong and widespread deposit base, our TL LDR remains low at 82%, offering substantial room for funding cost optimization in this inflationary phase. Moving on to the P&L. On the margin front, a strategically optimized balance sheet and timely actions to extend duration of TL loan portfolio enabled a solid start to the year, supported by favorable spread development. However, in second quarter, margin pressure intensified due to the pause in the rate cut cycle as well as the unexpected monetary tightening. As a result, swap-adjusted NIM contracted by 35 basis points quarterly to around 2%, reaching its trough in second quarter. The delay in the anticipated NIM improvement in second quarter can be attributed to 3 factors: First, the CBRT increased the wholesale funding rate from 42.5% levels to 49%, resulting in a 250 basis points effective increase in the quarterly weighted average funding cost. This indicated an even tighter stance than the beginning of the year in real terms. Second, on the asset side, due to the loan growth caps, the upward adjustment in loan pricing had limited impact on back book yields. And third, elevated reserve requirements continue to put pressure on margin evolution. To put this in figures, on average, reserve requirements make up around 10% of TL assets and 20% of our FX assets. And although we were eligible for the maximum remuneration on this front, the interest rate earned for TL reserve requirements remained at low 30% levels, significantly below the TL funding rate. And as you all know, for the foreign currency reserves, we received zero remuneration. As Kaan Bey mention previously, we expect the rate cut cycle to continue during the second half of the year, supporting recovery in quarterly NIM starting from this quarter onwards, with visible progress anticipated in the fourth quarter. As a reminder, our robust balance sheet remains well positioned to drive margin enhancement underpinned by 3 strategic actions. First, we restructured our balance sheet by extending TL maturity mismatch last year, representing the highest TL maturity expansion among our peers as reflected in our year-end financials. Second, on the funding side, we pursued cost optimization strategies through tactical increase in widespread TL time deposit market share and maintained the low TL LDR of 82%, both of which will enable margin support as this inflation unfolds. And third, on the securities side, we focused on yield maximization and longer duration through targeted security portfolio management, which will also create substantial opportunity for NIM improvement in the coming period. Still, given the monetary conditions are likely to remain tighter than previously expected, we are revising our year-end swap-adjusted NIM guidance to the range of 3% to 3.5% from around 5% level. As a reference, our year-end policy rate expectation has also been revised up to 36% from the previous 30.5%, which we had taken into consideration at the beginning of the year. Our fee income increased by a robust 60% year-on-year, reflecting our strong commitment to expanding the fee-generating customer base through innovative customer-centric initiatives and diversified product offerings. We have already achieved a significant milestone in diversifying our fee base, demonstrated by the solid contribution from all business lines. To name 3 of the key drivers, starting with payment systems, the strong 60% year-on-year growth in payment systems was underpinned by more than just rate dynamics. It also reflects our effective customer engagement and extensive product capabilities. Second, bancassurance fees. They surged by 63% year-on-year as we maintained our #1 position in total insurance commissions among private institutions since 2023. Digital bancassurance sales exceeded 70% of total sales, contributing further to growth. And third, money transfer fees rose by 58% year-on-year, reflecting higher transaction volumes and digital channel migration of the transactions. These achievements have led us to revise up our full year fee income growth guidance for this year. Accordingly, we now project our fee income growth to remain robust at 60% for the full year. I am delighted to share that we exceeded our 2025 strategic target to increase fee to OpEx ratio above 80%, thanks to our strong customer acquisition and ongoing improvement in the fee chargeable customer base. With the fee income growth outpacing OpEx growth once again, our quarterly fee to OpEx ratio reached 100%. Building on last year's record high fee income market share, we gained an additional 80 bps market share among private banks year-to-date as of May, bringing the share to 17.2%. This marks a 3.3 percentage point increase since 2022, underscoring the strength of our customer acquisition strategy as well as our well-diversified fee income stream. Moving on to OpEx. Focus on disciplined cost management remains a key priority. Operating expense rose by 35% year-on-year in the first half. This realization is below our initial expectation, allowing for a positive adjustment to our full year guidance to around 40%. Our cost-to-asset ratio is at 3.8% as of first half. Meanwhile, our long-term ambition and cost-income ratio remains firmly in the mid- to low 30% range, in line with the historical averages, driven by commitment to sustainable growth, enhanced operational efficiency as well as the normalization of pricing behavior aligned with the ongoing disinflation trend. Moving on to the asset quality. Retail-led NPL inflows remain a persistent trend across the sector. During this time, our focus on optimizing loan portfolio through disciplined risk framework has enabled us to maintain sound asset quality, which was supported by excellence in advanced analytical capabilities across the retail segments, automated and AI-based credit decision models, diligent tracking and individual assessment of our corporate and commercial loan portfolio as well as prudent provisioning. Our NPL ratio remains at 3.4%, which is within our full year guidance. Meanwhile, the share of our Stage 2 plus Stage 3 loans representing potentially problematic exposures remained low at 8.7% of our gross portfolio. Please also note that the restructured loans represent only 2.7% of the total portfolio. In first half, our total provisions reached almost TRY 58 billion, thanks to our continuous provision reserve buildup. Meanwhile, our coverage ratio for Stage 2 and 3 loans stands strong at 32.7%, and this reflects disciplined risk management practices. Excluding currency impact, our net total cost of credit stood at 193 bps on a cumulative basis, which is consistent with the trend over the past 3 quarters and in line with our full year projections. So all in all, we expect our full year net cost of credit to remain within our guidance range of 150 to 200 bps. Our total capital, Tier 1 and core equity Tier 1 ratios without forbearances remain robust at 17.4%, 13.8% and 12.6% as of second quarter. As for the sensitivity, 10% depreciation in TL results in around 30 bps, sorry, decrease in our capital ratios, while the impact diminishes for higher amount of changes. And 100 bps increase in TL interest rates results in a 9 bps decline in our solvency ratios, again, with diminishing impact. Strong capital reserves continue to safeguard against extraordinary market challenges and fluctuations, offering critical resource for long-term profitable growth. On this slide, you may find a summary of our first half performance as well as our revised guidance, which I shared in detail throughout the presentation. So I'm not going to repeat. So maybe we can move on to the last slide before moving on to the Q&A. I'd like to share a few highlights regarding our nonfinancial performance. As highlighted in our ESG video, we sustained strong momentum in the second quarter, advancing our sustainable action plan with measurable results. We are on track with our long-term sustainability goals. Notably, we have reached like 66% of our 2030 sustainable finance target as of second quarter. As Akbank, we are also pleased to be among the first institutions reporting under ISSB standards with Turkiye playing an active role in this transition. Actually, our first Turkey's Sustainability Reporting Standards report aligned with ISSB has just been published recently today. The English version will follow in August. These efforts reflect our continued commitment to building a low-carbon and inclusive economy in line with our long-term objectives. And this concludes our presentation.

Now we'll be moving on to the Q&A session. Please do raise your hand or type in the Q&A box if you have any questions. And for those of you who are joining us by telephone, please send your questions by e-mail [email protected]. David, I think the first question comes from you. Please go ahead and ask your question.

I have 3, please. The first one is about the deposit rates. Do you expect deposit rates to decline broadly in line with the policy rate? Or are you assuming a more limited adjustment at the system level to mitigate the risk of dollarization here? I mean, how conservative are you on your assumptions here? The second one is about NIM. In your original operating plan, you were expecting NIM to peak around 6% levels in the fourth quarter with 30.5% of policy rates. Given the updated macro assumptions and the operating plan, where do you now see the peak net interest margin? And when do you expect to get to that level? Is it in the first half of next year? And finally, could you share the approximate share of fixed rate Turkish lira instruments in your AFS securities book? And if possible, a quick sense of mark-to-market sensitivity, please? For example, what would 100 bps parallel move in the yields imply in terms of mark-to-market gains or losses?

David, this is Turker. Thank you very much. With regard to deposit rates, actually, what we've experienced so far is actually after this rate cuts, we were able to reflect this rate cuts to our marginal pricing. Maybe like to give you some figures. Currently, we are pricing marginal deposits at around 42% to 43% levels. And with the existing rates, we are able to maintain the ratio requirement of the Central Bank. I understand your question. Surely, in the upcoming MPC meetings, to expect rate cuts and the reflection to the -- whether we can pass it through to our deposit rates. In our base case scenario, we have assume that we will be able to mostly reflect it to our deposit cost. And not to forget, actually, in the second quarter, especially, we have broadened our small ticket deposit base, which will also give us some flexibility in the repricing of the deposit portfolio. With regard to net interest margin, on that side, like as you have rightly mentioned, so we were expecting exit NIM -- we expect that the exit NIM into '26 would be like 6% by the end of this year, but probably under the current like macro assumptions, probably it will be like go up to 5% to 6%, around maybe 5.5% levels in the fourth quarter. So we can expect if this like macro trend continues into '26 with like further deflation and like further post rate cuts in next year, probably we can see the peak somewhere in like maybe in the first quarter of next year, maybe in the second quarter. And again, maybe like around 6% levels. With regard to the securities part, maybe Ebru can contribute on that.

Yes. On the securities part, actually, 70% of the Turkish lira fixed bonds are in the AFS portfolio, which equates to around 25% of the total TL securities. I can get back to you regarding the overall impact. But what I can say is for the capital impact, actually, we just shared, David, that 100 bps rate movement has around, let's say, 9 bps impact on the capital adequacy ratio. And the next question comes from Cihan from HSBC.

I have 2 questions. First one is with regards to your fee income. When do you expect Central Bank to start lowering the reference rate, which feeds into the formula for the interchange fees? That's one. Second is, does your net interest margin guidance include the recent cuts in the cap rate for credit card loans and overdraft loans? And third, a very small technical question. I see that your tax expense this quarter is very low. So it's a very low effective tax rate. And last quarter, it was actually a high effective tax rate. So if you could give us some guidance about how we shall think about the effective tax rates for the full year?

Cihan, this is Turker. With regard to this like adjustment of the interchange fee rates by Central Bank, actually, I don't have a definite answer. But as you may recall, last time, like in the first quarter when the policy rate came down from 50% to 42.5%, even at that time, it was kept unchanged. Maybe in September, in the upcoming MPC meeting, maybe they may want to touch it for the first time. But for the majority of this year, maybe at least 3 quarters, like it gives surely support to our fee income generation. This is also quite observable like when we look at the breakdown of the fee income composition like around 70% of fee income coming from payment systems. But maybe starting from like fourth quarter onwards, we may see some adjustments, but its impact will be negligible because at the same time, the volumes are increasing. And with rates coming down, probably like fee income components like brokerage fees, which was quite muted this year because of the high-interest rate environment may start to kick in. But as of now, actually, I don't know exactly when we may see some revision on that. With regard to your third question, tax -- effective tax rate, as you know, in the second -- the corporate tax payment happens in the second quarter. And after the finalization of our corporate tax income calculation for '24, like some of the accrual we had for '24 corporate tax was [indiscernible] so there was some reversal on that front. And on top of it, we do this indexing within this partially within like inflation accounting, so where we are indexing our fixed assets and prepaid expenses. But what I can say is actually like this relatively low effective tax rate was more unique for this quarter, probably third quarter will again come to fourth quarter levels at these levels. And secondly, if I understand, you meant the restructuring scheme, that's right, on the credit card side and its impact on the net interest margin.

Not just the restructuring scheme, the 300 basis points rate cut also led to a cut in the cap rates for the overdraft loans and the credit cards. I was...

Actually, it was like -- it's embedded into our forecast because we are well aware that it's directly linked that -- these interest rate caps are directly linked to the post rate environment. So these go both like -- these go hand-in-hand. So therefore, it is embedded into our revised NIM forecast. And with regard to maybe like since the topic has been opened. With regard to restructuring, it's a quite new like regulatory scheme, and there are still some question marks in the banking sector, which we are trying to clarify with BRSA. And also this restructuring scheme may also impact like the limit usage of the credit card owners. So we really have to see how this demand will look like. And maybe once we have more clarity on that, as we really see like a more relative reasonable sample size, maybe we can talk about. But as of today, we don't expect like in net terms, negative impact because maybe on one hand, maybe there is some interest income loss. But at the same time, you have some [indiscernible] on the NPL formation. But let's wait and see actually, as I said, how the demand will look like and how these question marks are going to be clarified with the regulator.

Thank you, Cihan. And there's a written question. In the meantime, if you have any further questions, please do raise your hand or you can type also in the Q&A box. Can you please guide us to what ROE would you deliver if cost of risk is near 150 bps and what it would be at 200 bps? We can share some sensitivity on that. Around 10 basis points cost of credit has around 35 basis points impact on ROE. So you can calculate the differences basically that would happen with the 10 basis point move. Currently, I don't see any further questions that are being raised. So maybe we can move to you, Kaan Bey, for the closing remarks. This concludes our presentation. And I mean, obviously, we're always here to help and to answer questions. So if you want anything else, please reach out to our Investor Relations team. And Kaan Bey, the floor is yours for the closing remarks.

Yes. Thank you, Ebru. Before we close, I want to reiterate that we remain in a position of strength. Our well-structured balance sheet, disciplined execution and proactive positioning will enable us to capture the early benefits of the evolving rate environment. At the same time, customer growth as well as deepening our relationship, particularly through digital and retail channels is accelerating fee-based and customer-driven revenues. This combination gives us a scalable, resilient earnings platform with clear visibility for sustainable long-term value creation. I would like to take this opportunity to thank all our employees, Akbankers, for their dedication, hard work and consistent focus on execution. And to all those who have joined us today, thank you very much. Thanks for your trust and your continued support. Thank you.