Albaraka Türk Katilim Bankasi A.S. (ALBRK) Earnings Call Transcript & Summary

Good morning to you. Welcome and thank you for joining Albaraka Turk's First Half 2026 Financial Results Call. I am Seyfullah Demirlek, Head of Investor Relations and Sustainability. Joining me today is our Chief Financial Officer, Mr. Yasin Kaynar. Yasin will begin with an overview of the macroeconomic environment and the banking sector. I will then take over to walk you through our financial results for the first half of 2026 followed by a brief assessment of our performance against our full year guidance. After the presentation, we will have a Q&A session and be happy to take your questions. With that, now I would like to hand over to Yasin bae. Yasin bae, the floor is yours.

Thank you, Seyfullah. Good morning to everyone and thank you for joining us. Before diving into the details, let me briefly share our assessment of Albaraka's current market backdrop and how it has shaped up during the first half. As shown on Slide 3, global markets have recently been shaped by ongoing geopolitical developments and commodity market fluctuations. While temporary, signs provide brief relief to oil prices, subsequent breakdown of risks, renewed volatility in energy markets and upward momentum to global inflationary pressures. Consequently, inflation outlooks deteriorated across both advanced and emerging economies. Core targets now appears achievable pleasingly over the medium term prompting central banks to reassess the disinflation timelines alongside the current growth prospects. If you look at the first chart, the policy rates across major central banks, including the Fed, ECB, Bank of England and emerging market peers; you will notice that global policy rates remain elevated. Market expectations for rate cuts have largely receded and participants are now weighing the possibility of further rate hikes because persistent inflation risks. Turning to the domestic front. The Turkish economy solidly maintains its tight monetary policy stance in a challenging global environment. Although the macro prudential issues support inflation crisis, global energy costs pressures in the services sector and these [indiscernible] are creating headwinds while the government is passing [indiscernible] energy price hikes begins to pressure on costs. It causes additional burden in public finance. In spite of higher global uncertainty, Turkey's monetary policy and strong foreign exchange reserves have helped improve market conditions and support the country's risk perception. At the same time, elevated global geopolitical risks continue to make the long-term outlook more uncertain. Looking ahead to 2026, tight global financial costs, higher energy costs and weaker internal demand are expected to put upward pressure on inflation and the current economics in 2026 while also leading to expectations of more moderate economic growth. Next, I will highlight key developments in Turkish banking sector on Slide 4. Turning to banking sector. We observed a sustained performance in the first half of 2026 despite the challenges caused by tight monetary policy NOI. In the first half of 2026, the Turkish banking sector assets growth reached 12% compared to year-end 2025. Participation banks continued to outperform the sector recording a 14% expansion over the same period and lifting the share in the total sector assets to 9.3%. On the credit side, total cash credits in the banking sector expanded by 16% in the first half while participation bank posted a higher growth of 20%. Certain regulations are encouraging banks to prioritize targeted segments by limiting growth-based credit expansion. As a result, overall credit growth has moderated. Assets quality has continued to affect the deliberate impacts of monetary tightening. The sector's NPL ratio moved up by 0.28 percentage points to 2.63% whereas participation bank quoted a 0.46 percentage point increase to 2.30%. The NPL ratio is expected to persist in the medium term alongside tight financial conditions. Nevertheless, NPL metrics remains [indiscernible] In terms of profitability, the sector delivered a moderate performance in the first half of 2026 with net income increasing by 25% year-on-year in Turkish banking companies. Participation banks supported a 26% increase over the same period. Turning now to measures. In the second half, [indiscernible] I think market volatility hit, leading to an increase in funding costs across the sector. This upward shift in liability pricing has put renewed pressure on margins and consequently on profitability for the period. The sector's return on assets slightly decreased to 2.2% while return on equity experienced a minor decline to 25.9%. I will now move to Slide 6 to share the highlights of Albaraka's financial performance in the first half of 2026. In the first half, core net income increased by 47% year-on-year to TRY 3.1 billion. Excluding the one-off impact of last year's TRY 7 billion free provision reversal by 141% quarter-over-quarter to TRY 2.2 billion. Looking at all profitability ratios. Return on assets increased to 1.6% while our return on equity increased by 4.2 percentage to 29.9%, our performance in the Turkish banking sector in terms of capital efficiency. On the revenue side, excluding the free provision reversal in first quarter 2025, our total operating income grew by 55% year-on-year to TRY 15.7 billion surfacing inflation. On the cost side, operating expenses grew by 47% year-on-year mainly driven by personnel expenses while growth in expense items side relatively continued. Despite a more challenging macro environment considering peak ratio and rate cuts, our net operational income increased by 279% year-on-year to TRY 6 billion in the first half excluding the free provisions reversal. Looking forward, profit margins are expected to remain flat due to high funding cost, slow adjustments in asset pricing and intense competition. However, potential inflation costs in the later half of 2026 are likely to gradually ease the pressures, setting the stage for a [ rapidly ] normalization in margins. At this point, I will hand back to Seyfullah to walk you through the details of our performance. Seyfullah, over to you.

Thank you, Yasin bae. Let me now walk you through our financial performance starting with our assets composition and growth. During the first half of the year, our assets increased by 14.6% year-to-date reaching almost TRY 535 billion representing 37.5% year-on-year growth. The most notable development on the asset side was the increase in the share of funded credit from 49.5% at the year-end to 51.8% while the share of cash and cash equivalents and securities declined in line with our asset allocation strategy. As shown in the waterfall chart, funded credits continue to be the main driver of asset growth contributing TRY 72 billion during the first half. On the currency side, Turkish lira assets recorded 22.2% year-to-date growth while foreign currency assets remained broadly stable at USD 5.2 billion. Turning to margins. Our swap adjusted net profit share margin remained at 3.4%, in line with the level reported at the end of 2025. Including income from investment funds, our margin reached 4.3%. Let's now turn to Page 8 where we present our funded credit portfolio. Our funded credit portfolio increased by 20% year-to-date to TRY 284.3 billion representing almost 48% year-on-year growth. Asset quality remained resilient with Stage 1 funded credits accounting for 91.1% of the portfolio while Stage 2 and Stage 3 represented 7% and 1.9%, respectively. Looking at the currency breakdown, Turkish lira funded credit increased by 27.2% year-to-date and reached almost TRY 162 billion. Foreign currency funded credits remained broadly stable at USD 2.5 billion. Selective funded credits continued to increase during the period with Turkish lira selective funded credits rising from TRY 27.9 billion to TRY 40 billion while foreign currency selective funded credits increased from USD 300 million to USD 600 million. Turning to credit yields. Total credit yield increased to 34% in the second quarter of this year. Turkish lira credit yields remained stable at 53.4% while foreign currency credit yields also remained stable at 10.4% Finally, looking at the segment breakdown of our funded credits. We maintained a balanced portfolio structure. The corporate segment accounts for 52% of the portfolio, SMEs represent 39% while the retail segment remained stable at 9%. Let's now turn to Page 9 and look at our asset quality. During the first half of the year, our NPL portfolio increased to TRY 5.5 billion. New NPL inflows amounted to TRY 2.2 billion while collections reached TRY 700 million. Write-offs remained at a minimum level. As a result, our NPL ratio increased to 1.93%. Despite the challenging operating environment, our asset quality indicators remain among the strongest in the sector. In addition, our NPL ratio remains below our full year guidance of 2.5%. Looking at the cost of risk, it remains well under control at 1.8% as of the end of the first half. And finally, our provisioning ratios continued to normalize during the period. Our Stage 3 provisioning ratio stood at 74.3% remaining close to our full year guidance of 75%. Stage 2 provisioning also continued to normalize while our overall coverage levels remain among the strongest in the sector. Let's now turn to Page 10 and look at our securities portfolio. Our securities portfolio increased to TRY 95.3 billion by the end of the first half. During the period, we further increased the share of Turkish lira denominated securities to 69% of the portfolio in line with our portfolio allocation strategy and market conditions. Within our Turkish lira securities portfolio, CPI linked Sukuk accounted for around 11% of the portfolio. In addition, approximately TRY 22 billion of securities portfolio consists of the Bank's own securitized assets. Turning to portfolio yield. Total securities yield increased to 17.9% mainly driven by the improvement in Turkish lira securities yields while foreign currency securities yield remained broadly stable. As a result, profit share income generated from our securities portfolio reached TRY 7.1 billion during the first half representing a 72% increase compared to the same period of last year. Moving to Page 11 where we present our funding structure. We maintained a well diversified funding mix during the first half. In the second quarter actually, participation accounts was our largest funding source accounting for almost 33% of total liabilities followed by current accounts at 28.8% and borrowings at 23.4%. Looking at the liability growth bridge. Participation based accounts made the largest contribution to liability growth adding almost TRY 30 billion during the period. Borrowings contributed around TRY 22 million while current accounts added TRY 7.3 billion. Foreign exchange movements also supported the increase in total liabilities. Turning to our borrowings. The portfolio reached around TRY 145 billion by the end of the first half this year. We maintained a diversified funding base across alternative funding sources. Turkish Sukuk issuances and subordinated Sukuk supporting both funding flexibility and cost optimization. Looking at the maturity composition of our funds collected. Current accounts represent 46.7% of our total funds collected while the remaining portfolio remains well distributed across different maturities supporting a balanced funding portfolio. Moving on to Page 12 where we present our deposit structure. Starting with current accounts, Turkish lira current accounts declined by 13.7% during the first half mainly reflecting movements in precious metal accounts such as gold and silver while foreign currency current accounts remained broadly stable at USD 2.8 billion. Looking at participation accounts, Turkish lira participation accounts increased by almost 51% during the first half reaching almost TRY 150 million while foreign currency participation accounts remained broadly stable at around USD 600 million. Turning to funding cost. The cost of participation accounts declined during the second quarter with the total cost decreasing to 31.1% mainly driven by the decline in Turkish lira participation account 38%. And including current accounts, our total cost of funds collected declined to 15.6% reflecting the benefit of our strong current account base and efficient funding structure. Moving on to Page 13 where we present the main drivers of our profit share income and fee generation. Profit share income increased by 61.6% compared to the first half of last year reaching TRY 43.7 billion. The increase was mainly driven by higher financing income supported by stronger securities income and income from required reserves. Within financing income, selective financing contributed TRY 3.2 billion. In addition to that, valuation gains on profit and loss project base contributed a further TRY 1.7 billion during the first half of this year. Profit share expenses increased by 37.5% compared to the first half of last year reaching almost TRY 35 billion. The increase mainly reflected higher profit share expense on especially Wakala participation accounts and borrowings in line with our funding mix during the period. Turning to fees and commissions. Net fees and commission income increased by around 12% compared with the same quarter last year reaching TRY 1.4 billion supported by continued growth in our fee generating banking activities. Moving on to Page 14 where we summarize our P&L performance for the first half of the year. Net profit share income remains the main driver of our revenue growth increasing by 425% compared to the first half of last year and by 74% comparing to the previous quarter. Partially performance was also supported by TRY 1.7 million of valuation gains on 4% lost project basis. Net fees and commission income continued to grow supported by higher business volumes and commission rates with quarterly performance also remaining positive. Net trading income remained under pressure primarily reflecting elevated swap funding costs during the quarter. Other income declined from the exceptionally strong base of the previous year primarily due to the TRY 7 billion free provision reversal recorded in the first half of 2025. On a quarterly basis, the decrease mainly reflects the absence of the gross provision reversal recognized in the previous quarter. Nevertheless, other income in the second quarter included approximately TRY 500 million free provision reversal bringing total free provision reversal in the first half of this year to around TRY 700 million. Provisioning remained broadly stable compared to the previous quarter reflecting our prudent provisioning approach. Personnel expenses increased broadly in line with inflation on a yearly basis while declining by 31% compared to the previous quarter due to the base effect of bonus payments recorded in the previous quarter. Non-personnel expenses increased by 45% compared to the first half of last year while declining by 6% compared to the previous quarter reflecting our continued focus on cost discipline. Moving on to Page 15 where we present our capital adequacy position. Our capital adequacy ratio moderated during the first half of the year. Core CAR declined to 8.4%, principal CAR to 11.6% and total CAR to 15.6%. Including our TRY 1 billion free provisions, these ratios would have been 8.8%, 12% and 15.9%, respectively. As we discussed in the previous quarter, around 320 points of the decline mainly reflected the expiration of the temporary regulatory treatment introduced by BRSA for FX rates. Looking at our capital structure. The composition of our regulatory capital remains broadly unchanged. It's above our contribution from core capital, addition of the Tier 1 and Tier 2 capital. And finally, the movement now capital adequacy ratio mainly reflected the combined impact of high market credit and operational risk-weighted assets during the period partially offset by the contribution from Tier 1 and Tier 2 capital. Moving on to our final slide before the Q&A session where we provide our half year assessment of our 2026 guidance. As you can see, our performance during the first half of the year remains broadly in line with our full year expectation. Credit growth reached 20%. Our NPL ratio remained below 2%. Our Stage 3 provision ratio stood at 74.3%. And our swap adjusted net profit margin reached 3.4% or 4.3% including income from the investment fund. Our return on equity reached 29.9%, already close to the upper end of our full year guidance range. Based on our first half performance; our current expectations for the remainder of the year, we are maintaining our full year guidance without any changes. At this stage, we don't see any need to revise our guidance and continue to believing it reflects our prudent outlook under the current macroeconomic environment. And this concludes the presentation section now. We will now move on to the Q&A session.

[Operator Instructions] So we have one question. So we observed 425% increase in net dividends supported by projects valuation gains of approximately TRY 1.7 billion and [indiscernible] TRY 3.2 billion. Is that core dividend net income sustainable when we exclude this one-off effect. The question came from Ahmed. Actually these are not dividend income. This is -- especially the credit card profit and loss projects. So we have some balance on our asset side as profit and loss project. So we gained some profits from those projects so we received some profit shares income from those projects in the first part of this year.. So I just wanted to clarify this point. And I'm going to give the floor to Yasin bae for the following-on question actually. Is the growth in core net income or we can say profit share income sustainable when you exclude these one-off effects? In fact I can also answer this question. We can say the growth is sustainable even if we exclude these one-off effect. Also, I would like to clarify one point as well. Selective lending is not exemptional one-off. So what do you mean by selective lending? There are some growth caps for the credit teams and there are some exemption areas. So we quote those exemption areas as selective credit areas. So we are going to continue to gain income from those selective standing in the coming periods. Also, we are going to receive some "valuation gain" in the last part of this year actually. If there's any further questions, we are happy to answer your questions.