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

Hello, everyone, and thank you for joining our second quarter earnings call. This is Kaan speaking. I hope you're all well. Let me start with what has changed since our last earnings call. First of all, the operating environment has proven more challenging than we had anticipated with continued geopolitical tensions adding uncertainty to the global domestic outlook. At home, the disinflation process is progressing more gradually. The expected easing cycle has been pushed back and macro prudential measures have been tightened further. At the same time, the continued rebuilding of the Central Bank's reserves remains an important source of confidence and reinforces the credibility of the broader policy framework. For the banking sector, the implications are clear. Higher funding costs are likely to persist for longer, delaying the pace of margin recovery, while asset quality remains a key area of focus in restrictive operating environment. Taken altogether, these developments have also pushed out the timing of sustainable real return on equity generation for the sector. The direction of travel remains intact, but the path is proving longer and more demanding than previously expected. Against this backdrop, we have revised our return on equity guidance for this year to 23% to 25% from high 20s. Of course, Ebru will share all the details. Going forward, disciplined balance sheet management, strong capital, prudent provisioning and resilient customer franchise have become even more important. Our focus is, therefore, not only on managing the current environment, but also on ensuring that we are well positioned to capture the opportunities that will emerge as conditions eventually normalize. One of Akbank's key strengths has always been our ability to adapt. Our adaptability comes from disciplined strategic decision-making rather than reacting to short-term market developments. As the operating environment evolved, we made deliberate choices to further strengthen our balance sheet and the resilience of our franchise. We continue to reshape our asset mix towards higher-yielding assets while maintaining selective and disciplined loan growth and gradually reducing the share of securities in our balance sheet. While optimizing our asset mix, we maintained resilient provision buffers and remain prudent in asset quality. Our risk management is reflected in a 380 basis point reduction in our share of private bank's NPLs since the beginning of last year. This includes a further 130 basis points improvement year-to-date. On the funding side, we continue to capitalize on the strength of our customer franchise. This enabled us to increase our 0 cost demand deposit market share among private banks on a quarterly basis by 120 basis points through disciplined liability management. The strength of our customer franchise continues to drive resilient fee generation with quarterly fee income covering all of our quarterly operating expenses and supporting strong operating leverage. Most importantly, our robust capital position of total capital, 16.4% and Tier 1 of 13.3% provides the strategic flexibility to turn today's disciplined decisions into tomorrow's growth opportunities. And on that note, before moving to the financials, let me briefly touch on how we are positioning at Akbank for the new future. Our strategy is built around transforming how we serve our customers through a stronger advisory model, next-generation digital capabilities and a scalable bank-wide approach to AI. We are redesigning our service model by expanding relationship-led coverage where advice creates the most value. At the same time, we are making digital the primary service channel for our mass consumer and SME customers. This allows us to serve more customers while enhancing customer experience and productivity. Digital and AI go hand-in-hand. We are evolving our mobile application into AI-powered financial companion and building integrated digital platforms that simplify banking for businesses. Our AI strategy is built to scale, integrated across the bank and supported by a robust governance framework. Rather than deploying AI in isolated use cases, we are building a common infrastructure that allows us to embed AI across the bank from customer interactions and relationship management to back-office operations and software development. This enterprise -- this enterprise-wide approach gives us confidence that AI will become a meaningful driver of both productivity and future growth. Finally, we are continuing to strengthen our subsidiaries and ecosystem partnerships, creating additional growth opportunities beyond our core banking franchise. Taken together, these initiatives reinforce our ability to deliver sustainable growth, strong returns and long-term shareholder value. I will now pass it over to Ebru to walk you through our results in more detail. Following that, we will be happy to answer any questions you may have. Ebru, over to you. Thank you.

Thank you, Kaan Bey. As you have just mentioned, while the long-term direction remains intact, higher funding costs are delaying both margin recovery and the sector's real ROE generation. In the first half of this year, our net income was up by 38% year-on-year to TRY 34.333 billion and resulting in an ROE of 22.2% and an ROA of 1.9%. During the same period, our revenues increased by 45% year-on-year to TRY 140.320 billion. Net interest income expanded by 95% year-on-year, driven by our agile balance sheet management and relatively lower funding cost environment compared to the same period of last year. Our strong customer franchise continued to drive resilient fee generation, delivering 35% year-on-year fee income growth and fully covering quarterly OpEx. However, as the higher for longer rate environment proved more persistent than anticipated, we revised our NIM guidance to reflect a slower margin recovery. While resilient fee income, disciplined cost management and strong asset quality continue to support earnings, the slower margin recovery has translated into a downward revision in our full year ROE guidance from high 20s to 23% to 25%, as you just mentioned. Now let's dive into the quarter's financial performance and key drivers, starting with the balance sheet. As Kaan Bey highlighted, we remained disciplined in our lending strategy, prioritizing risk-adjusted growth while optimizing maturity and enhancing yields in our target segments. We continue to restructure our asset mix, increasing higher-yielding assets while gradually reducing the weight of TL securities in our balance sheet, a strategic shift that has been underway for the past few years. This strategy has translated into a meaningful shift in our asset mix with the share of TL loans in total TL assets rising by 7 percentage points to 59% since 2024, while the share of TL securities, excluding corporate bonds, has declined by 3 percentage points in the same period. Most importantly, we have achieved this without compromising our prudent approach to asset quality while preserving strong coverage ratios. Our selective TL loan growth focus has contributed to the 8% year-to-date growth in TL loans and noteworthy market share gains in business loans among private banks. As a result, we remain committed to our full year TL loan growth guidance of over 30% shared at the start of the year. Turning to our loan mix. We maintained a well-balanced and strategically diversified loan book across segments. Portfolio resilience is underpinned by the strong diversification with no single sector accounting for more than 8% of our business loans. We continued to proactively monitor sector-specific risks and take early actions where needed, actively managing portfolio concentrations to preserve strong asset quality. Meanwhile, we continue to grow our FX loan book, delivering 3% year-to-date growth in U.S. dollar terms despite a more restrictive operating environment. While tighter regulatory caps led us to modestly revise our full year foreign currency loan growth guidance to high single digits, execution remains strong. We delivered a 30 basis point quarterly market share gain and continue to progress towards our 2028 strategic ambitions. Moving on to securities. We remain dedicated to actively repositioning our securities portfolio, aligning with the evolving macroeconomic environment while enhancing the yields. On the TL side, we increased the share of TLREF indexed bonds by 6 percentage points since the end of 2024, while reducing fixed rate securities by 7 percentage points to improve carry in a higher for longer interest rate environment. During the same period, we increased the share of foreign currency securities in total securities by 8 percentage points to 35%, primarily through timely buildup of NIM accretive Eurobond investments. As a side note, we maintained our leading position in blue-chip corporate bonds, representing around 8% of our TL securities. So overall, our timely yield-focused portfolio actions have continued to support margins while positioning us for a resilient performance going forward. On the funding side, our strong customer franchise has continued to support deposit cost optimization while providing flexibility in meeting Central Bank's ratio requirements. We achieved 130 basis points year-to-date increase in TL demand deposit market share among private banks while maintaining a healthy 55% share in sticky, low-cost TL time deposits, reinforcing the strength and the stability of our funding base. Looking ahead, our well-structured balance sheet and sound deposit mix are expected to support gradual and sustainable NIM improvement. Let's move on to the wholesale funding side. Our transaction since the beginning of the year reaffirmed international investors' confidence in our franchise despite heightened geopolitical volatility. During the quarter, we successfully completed a $500 million Tier 2 issuance at an 8.25% yield with an order book exceeding $1.2 billion, demonstrating continued strong investor demand. We also exercised the call of the outstanding Tier 2, maintaining our consistent track record. Our diversified funding strategy continues to provide us with reliable access to international funding markets across different market environments. Moving on to the profitability. Let's start with the net interest margin. Heightened geopolitical uncertainty and tightened funding conditions continue to weigh on margins during the quarter. However, our proactive and disciplined balance sheet management helped contain the pressure to some extent. As a result, swap-adjusted NIM declined by a moderate 25 basis points to 3%, primarily reflecting higher TL funding costs. Looking ahead, we expect a more gradual margin recovery as monetary conditions are likely to remain tighter for longer. We believe our disciplined balance sheet management and strong deposit franchise position us well to navigate this environment. But still, taking all into consideration, we have revised our year-end swap adjusted NIM guidance to 3.2% to 3.5% range from around 4% levels. As a side note, during the quarter, we valued our CPI linkers at 30% and every 1% change in CPI has 6 bps NIM and 40 basis point ROE impact on a full year basis. Our fee income increased by a robust 35% year-on-year in the first half, keeping us well on track with our full year guidance of above 30%. Our diversified fee income base supported by broad product offerings continues to strengthen earnings resilience and visibility. We remain focused on expanding recurring fee streams through customer-centric innovations and deeper client engagement. Looking ahead, we will continue to leverage our digital capabilities and AI-driven hyper-personalization to further expand our fee income base. Strong fee generation and disciplined cost management have drove our fee-to-OpEx ratio back above 100% with cumulative ratio reaching 94% for the first half of the year. OpEx growth was up 37% year-on-year in the first half and expected to moderate towards the full year guidance of low 30s, thanks to our continued focus on cost control and operational efficiency. Accordingly, we remain confident in achieving our full year fee-to-OpEx ambition of around 100%. However, net interest income dynamics continue to be key determinants for our cost-to-income ratio, which remained around 52%, leading us to revise our full year cost-to-income ratio guidance to high 40s from low 40s. Looking ahead, we remain focused on disciplined cost management while leveraging AI to further improve scalability and efficiency. Moving on to asset quality. As expected, early signs of asset quality deterioration have become more visible across the sector, reflecting the broader macro environment. Against this backdrop, we further strengthened our relative positioning, reducing our NPL market share among private banks by 130 basis points year-to-date, building on the significant improvement we achieved last year. Our loan book is a reflection of our disciplined underwriting standards and well-diversified portfolio with Stage 2 plus Stage 3 loans contained at 11.5% of gross loans and restructured loans remaining limited at 4%. At the same time, we continue to strengthen our reserve buffers with total provisions reaching nearly TRY 85 billion. Accordingly, our coverage ratios remained solid with growth coverage at 3.8% and Stage 2 plus Stage 3 coverage at 28.1%, reinforcing balance sheet resilience. Excluding currency impact, net cost of credit stood at 220 basis points during the first half of the year, broadly in line with our full year guidance, while NPL ratio remained stable at around 3.5%. We continue to enhance our collection capabilities through AI-powered voice agents, which was just launched during second quarter. Early signals indicate improving customer engagement and increase our promise to pay rate significantly. This supports a more proactive, scalable and data-driven collection model, reinforcing our disciplined approach to asset quality management. Looking ahead, we remain confident in our ability to navigate the evolving macro environment with cost of credit and NPL dynamics remaining well manageable within our full year guidance. Moving on to capital. Our strong capital base remains a key strategic advantage, providing the flexibility to navigate cycles while continuing to pursue disciplined growth. Our total capital, Tier 1 and core equity Tier 1 ratios have improved to 16.4%, 13.3% and 11.3% in second quarter, respectively. These were supported by risk return focused loan growth, continued RWA optimization and the gradual easing of the quarter-specific adverse effects in the first quarter, including operational risk adjustment and dividend payment. In addition, improved market sentiment and better bond pricing enabled a partial reversal of mark-to-market losses in second quarter. As for sensitivities, a 10% depreciation in TL results to around 25 basis point decline in our capital ratios, while the impact diminishes for larger foreign currency movements. Similarly, 100 basis point increase in TL interest rates has around 5 basis point impact, highlighting the limited sensitivity and strength of our capital. Overall, our solid capital buffers provide competitive advantage and a strong foundation to deliver sustainable profitable growth going forward. On this slide, you may find a summary of our first half performance as well as our revised guidance, which I did share with you in detail throughout the presentation. As previously highlighted, headwinds related with geopolitical developments, which resulted in the rate cycle to pause has shifted NIM expansion to second half of the year with a more gradual pace than initially expected. While resilient fee income, disciplined cost management and strong asset quality continue to support earnings, the slower margin recovery has translated into a downward revision in our ROE guidance. As reflected in our first half performance, we continue to make solid progress towards our 2028 strategic targets, which we shared at the beginning of this year. And last but not least, before moving on to Q&A, I'd like to share that we are extremely proud to have surpassed our 800 billion sustainable financing target for 2030 ahead of schedule, reaching 841 billion by the end of the second quarter. Looking ahead, we will continue to raise our ambition and set new targets in sustainable finance later this year. This concludes our presentation. Now moving on to Q&A session.

[Operator Instructions] The first question comes from Ashwath. can you hear me? Yes, we can hear you loud and clear.

I just have 3 questions. The first is on the NIMs. So I guess the exit rate is around slightly lower than your full year revised guidance on your NIM. So when do you first expect some of the rate cuts or potentially normalization in the policy rate to begin? That will be my first question. The second question is around the cost side. Are there any initiatives in place beyond the ones you mentioned in terms of AI, et cetera in order to rein in some of that cost growth or OpEx growth, especially if, for example, the top line growth does not pan out to be as positive as anticipated with the rate cuts into the back end of this year? And the last question is on asset quality. So currently, I understand it's slightly ahead or above your full year guidance of around 200 basis points. How confident is the bank in being able to maintain that 200 basis points net cost of risk, excluding currency, especially if, for example, rate cuts or the normalization in policy rate does not happen sometime this year?

Hi Ashwath. This is Turker. Thank you very much for your questions. To start with the net interest margin side, as you rightly mentioned, so like the second quarter was like -- the exit from second quarter was like in [indiscernible] terms close to 3% and still we are in July preserving our cumulative NIM at around 3%. So when can we expect a gradual improvement in the net interest margin to meet our guidance? Definitely, it will go hand-in-hand with Central Bank's decisions after Central Bank has skipped the last MPC meeting and kept 40% unchanged. Probably the next date would be like -- the next MPC meeting in September, where we can expect that Central Bank again returns back into 1 week of funding like in effective terms of 37%. If the global environment also allows maybe it's also possible that they make this move before September. But apart from this move like equalizing the weighted average cost of funding to the policy rate of 37%, I think there will be limited room for further rate cuts towards the end of the year. But anyway, with this expected normalization in the Central Bank funding rates and which are also, to some extent, also observing some easing on the deposit pricing side, we expect that -- we expect gradual improvement in the net interest margin towards the end of third quarter and maybe mainly in the fourth quarter that we can reach this guidance -- revised guidance we've shared. And hopefully, like if the environment allows more to the 3.5% side. So that's how we see the net NIM trajectory for the time being. With regard to costs, Akbank has always this strong muscle like to maintaining cost discipline whenever needed. And so we are always looking at all areas in our OpEx where we can like make some savings also take into consideration efficiency and also without hurting our customer business. So this is an ongoing process. So it's not like a onetime action. So therefore, with all these actions, we believe that we can meet the 30% year-on-year growth guidance for full year. With regard to cost of risk, yes, as of today, we are slightly above 2%, which we have guided for full year. But also, we are always revising our lending processes. Whenever needed, we make these changes in the lending criteria. And also in the first 6 months of the year, we have also kept our provisioning also quite strong, which may also give some flexibility to us in the second half of the year. So therefore, actually, as of today, we feel confident meeting this revised -- unchanged guidance, sorry, for cost of risk. But as I said, to repeat myself, we are always revisiting our decision criteria like maturity profile, profile, collateral, et cetera, et cetera. So that's how we are responding to this uncertain environment.

Next question comes from David Taranto.

My colleague has already covered most of my questions. I just have one on capital. Capital has become a bigger investor focus again, I think. Could you update us on the IRB process and the potential CET1 benefit? And given the slower pace of capital generation, would you consider to lower payout this year to preserve capital?

Thank you very much, David. Yes, we are in the process of our IRB application. So probably maybe somewhere next year. This also depends on the BRSA permission and the process on their side as well. But we can expect around 2% uplift to our capital ratio, both Tier 1 and CET1 as well as capital adequacy ratio, all of them will be similarly impacted. But having said that, when I look at the capital adequacy evolution of Akbank in the second quarter, despite the moderate profitability and moderate profit -- internal profit generation, still, we were able to slightly improve our capital adequacy ratio. Just to recall, in the first quarter, we had all these onetime impacts, like dividend payout, risk adjustments, mark-to-market losses. So risk and dividend payout was onetime, and there has been some reversal on the mark-to-market side. So -- and also the ongoing optimization of RWA has helped us to slightly improve our capital adequacy ratio. So with the profitability projections we had and also the growth projections within the growth capital of the Central Bank, I think we can preserve this capital adequacy ratio at these levels. And probably it's too early to talk about dividend payout for next year and the stance of Central Bank -- BRSA, sorry. But just to recall, the impact of payouts on capital like for full year is quite limited within -- considering limited payout ratios therefore, but we can maybe discuss more details towards the end of the year or maybe beginning of the year next year.

Next question comes from Mehmet Sevim.

I had one question on the NPL balances. It seems the collection performance was very strong in the second quarter, effectively offsetting most of the increase in gross inflows. I was just wondering what's driving this and whether you see this as sustainable going forward? And my second question is on the fee outlook. You've kept the guidance at above 30%. Technically, you are within the guidance, but I was wondering if there is realistically upside to that number, whether you're expecting some maybe easing or slowdown in the second half?

Hi Mehmet. For NPL side, actually, that was like a big ticket collection in the second quarter, but for which also like we had to make some interest accrual and some interest collection, which has also, to some extent, also increased both sides of the NPL moved for the second quarter. But in net NPL formation terms, it's actually similar to the first quarter. So this like big ticket collection is also impacting this like maybe some synthetic increase on both sides of the NPL collection as well as [indiscernible] NPL formation. With regard to fee outlook, hopefully, we can do better than that. So like maintain the 34% or maybe even grow higher than that, but that will also depend on the growth in the sector, like considering also growth caps, loan growth which is also like lending -- is also a significant driver of the commission income generation. But definitely, you know our strength. We will do our best to further improve the fee income and also like meet this 100% fee-to-OpEx ratio target we have by the end of the year. With regard to payment system side, maybe what could be maybe like the potential downside risk like the cap on the payment system side. But I think considering the almost no change in the interest rate environment, we can keep it for the time being.

Next question comes from [indiscernible].

My question is regarding the guidance side. Firstly, in your macroeconomic assumptions, what is the major risk you are taking regarding the oil prices? In your base scenario, is high oil price a reason for this cautious stance related to inflation? Or do you see other factors that would affect the economy in the second half of the year? And the other question is about your TL growth, loan growth and FX loan growth. It's -- you didn't change it. You maintained TL loan growth at higher than 30% and loan growth also maintained almost the same. Is it consistent with the macro outlook you're assuming? Could you further elaborate that?

With regard to macro assumptions, actually, since we already like 6 months have passed, and we have more visibility in front of us. Yes, maybe oil prices may change. But on average, I think also in the system, there's some lack of visibility. So therefore, we expect volatility with regard to inflation outlook like -- okay, it may be maybe 29% or 31%, but really a plus/minus 30% I think is a reasonable assumption for time being. And considering the positive real rate policy of Central Bank is also why we've kept the policy rate at 37% by the end of the year. Your second question was...

What's your loan growth?

Yes, loan growth and FX loan growth. But already, we are at 18%. And maybe just to recall the growth caps, on the SME side, in 8 week terms, SME side, like the cap at 4.5%, GPL 3%. And also considering some like business we are getting in exempt areas, I think that achieving 30%, 30% plus is, I think, it shouldn't be an issue. With regard to FX loan growth, yes, the growth caps are much tighter there. But since the notional is followed and even like maybe one single ticket, which is exempt from growth cap like may support -- create some further growth. So there actually like 3% first half realization, high single digit, maybe like 8%, something like that. There, actually, again, so probably we will be ending the year around these levels, I can say.