Türkiye Is Bankasi A.S. (ISCTR) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Isbank's sixth Analyst and Investor Day. We are once again happy to host you as the executive team of Isbank. First of all, we would like to thank you for joining this event in person or through our webcast. Today, our presentation will cover our performance in 2019, which was another challenging year, as you know. And our strategic priorities for this year, which is expected to be a better one. Then we will have a question-and-answer session, which will be follow the cocktail reception for our guests who are here with us. Today, we will be again presenting together with Ms. Senar Akkus, our CFO; and Ms. Gamze Yalcin, our Deputy CEO, responsible for Investor Relations and FI functions. We have divided the presentation into 2 parts. First, I am going to talk about the macro picture and our strategic priorities initiatives, then Ms. Gamze Yalcin will be going into the details of our performances, expectations, targets. And finally, I'm going to conclude the presentation with the key takeaways. Let me start with the 2019 performance. Last year, this time, we had said that economic activity was expected to recover in the second half of the year, while the annual inflation would tend to decrease enabling Central Bank to make some gradual rate cuts and GDP growth would stay in the positive territory, for the full year, even though it would be very low and under its potential level. As of today, as we have expected, we see that there has been a decline in inflation, which gave Central Bank room for rate cuts starting from July onwards. Interest rates have come down significantly, economic activities started to recover in the second half and most probably, we will be observing a GDP growth of 0.5% for 2019. However, especially in the first half of the year, uncertainties due to the heavy political agenda, election agenda and geopolitical risks as well as high level of interest rates led to a weak domestic demand and lack of investments, investment appetite in the operating environment. These developments put pressure on the loan growth as well as the asset quality metrics beyond our expectations. Honestly speaking, in the first 9 months of the year. Due to the systemic factors, we have observed that asset quality deteriorated. We believe that this is an inevitable outcome of economic and financial conditions, given our dominant positioning within the market. As a result, in the fourth quarter, as you know, we revised our guidance for NPL, cost of risk and profitability ratios. On the other hand, as you see in this slide, we achieved decent results in the remaining part, remaining metrics, namely TL loan and deposit growth, net interest margin, net fees and commissions, OpEx, capital adequacy ratio, being in line with the guidance that we had shared. For return on average assets, it seems that we will be reaching the lower end of our initial target by the end of the year. We will go into the details of these performances in the coming slides. If I start with the recovery in Turkish economy. As you know, global growth has decelerated in 2019, largely due to trade wars, protectionist trade policies and slowdown in EU countries. During the year, monetary policies in advanced economies have moved toward easing in order to support economic activity. But meanwhile, as you know, geopolitical tensions have always remained on the agenda. In this environment, following the volatility, big volatility in financial markets, in the second half of 2018, Turkish economy has contracted by 0.9% year-on-year in the first 9 months of the -- of 2019. During this period, investment and consumption expenditures drag down the GDP, while net exports made a very positive strong contribution. Thanks to the contribution of net exports, together with the strong [ TRASM ] recovery, 12-month cumulative current account balance posted record-high surpluses during the year as contrary to the previous years. Along with the stabilization in currency, economic slowdown and favorable base impact, inflation declined as low as 8.55% in October. With the improvement in inflation outlook, economic slowdown -- with the improvement in inflation outlook, CBRT cut rates, as you know, by 1,200 basis points in the second half of the year. Improvement in risk perception towards Turkey became more evident throughout the last quarter. In 2020, along with the delayed demand, Turkish economy is expected to grow by 4%. The contribution of net exports to growth will cease due to the weak outlook in European countries and the high base effect on net exports, while mainly consumption expenditures will support the growth. In an environment where the geopolitical risks continue to be a major concern globally, consumer inflation is anticipated to fall to single-digit levels in 2020 with the prerequisites that the recovery in the output gap will be slow and the financial markets will be calm. Now I would like to touch on our strategic priorities. As you remember from our previous meetings, we have been implementing a well-balanced, prioritized and selective growth strategies in recent years, especially starting from the year 2012, depending on some difficulties regarding economic growth. This means that we were trying to focus on profitable segments that consume less of our capital with higher returns and thus, further supported our equity and new lending capacity. In the customer permit, we set very different targets for very different customer segments. For example, even if we did not assign very high loan growth targets. On average, we were acting more aggressive in SMEs, micro enterprises and widespread retail customer base in order to increase the total return. However, these priorities, which took place in all of our programs from 2012 to the second half of 2018, as I said before, have been replaced by new priorities since that time, since the second half of 2018 in order to manage the deterioration in asset quality, to improve the extremely weakened profitability, once again, and to manage the technological transformation process as a long-term initiative on our agenda. So in 2020, with an expectation of a slowdown in the deterioration of the asset quality, we believe that we are in a position to a large extent, to achieve the targets of improving the profitability again, with the support of the increase in net interest margin, which is about 4% at the beginning of the year. On the other hand, there are technological changes, as we all know, and this is essentially the topic of which we will see the positive impacts over the medium and long terms. Looking at our priorities in 2020, sustaining the solid capital base, we see that new customer acquisition, on which we have a special emphasis and efficiency and cost management have gained more and more importance. In this context, for 2020, we have defined our strategic approach as risk-oriented growth and sustainability -- sustainable profitability in the economic recovery period. Accordingly, we will continue to focus on selective growth with risk and return balance as always, supporting the capital base through sustainable profitability will be on the top of our agenda. Also, we will continue to focus on asset quality, cost efficiency will be another main focus area for us. Last but not least, enhancing the customer experience will still be among the main pillars of our strategy. This, of course, requires a very high level of technology and digitalized processes. In this context, digitalization, which has been at the core of our business strategy will again be the main initiative that will enable us to reach these targets. We have been approaching to the digital transformation with a comprehensive and multidimensional perspective, it's not limited to investing in technological infrastructure or equipment, but with a deep down approach to reflect its utilization in our business model as well as in our organizational alignment. As human contact will keep its importance, particularly at key moments in the sales process, we have combined our physical and digital servicing strategy flexibly and adaptively by positioning our branches and digital platforms as complementary to each other. As you know, from our previous meetings, we have achieved, in this long journey, a significant progress towards completing the technological infrastructure for digital transformation that we have been pioneering, and this year will be the year that we start to benefit from the tangible results of these efforts. Isbank's 6.7 million customers who actively used mobile banking until the end of 2018, now has increased up to 7.8 million by the end of 2019. On account of this, transactions held from channels other than branches as percentage of overall transactions has increased to 92%. Moreover, the increase in non-branch channels fee income has reached almost 60%, and with this improvement, share of non-branch channels in bank's overall fee income has risen from 20% to 26% as of November 2019. I think it shows the sustainability of our fee business, fee performance. Share of digital channels in retail sales for time deposits and for general purpose loans are 71% and 77%, respectively. In addition to this, we achieved increasing contribution of artificial intelligence to a vast number of competencies, including retail loan underwriting functions, pricing on a customized basis in retail loans and deposits, collection processes in retail loans -- in commercial loans, sales lead generation and cash optimization in ATMs. Our capabilities for analyzing customer expectations and behaviors have remarkably improved and now customer relationships are managed on an individual basis rather than segmented -- on a segment basis. Furthermore, we have finalized the transformation of our branches in terms of deployment of digital tools, digital equipment, applications and processes to fully utilize the technological developments and to enhance customer experience, sales potential, operational efficiency in line with our new branch model. With this transformation, operational work in the branches has been significantly diminished, and the focus on sales and customer relationship functions has increased. On the other hand, in 2019, direct sales force grew by around 50%. And in 2020, we expect a similar increase. The number of staff here will exceed 800 in 2020. Besides all these achievements, I'm also very happy to share with you that at the end of 2019, we launched [ TecCep ] means a single platform to reach all of your accounts through IsCep as being the first open banking application in Turkey, enabling our commercial customers to manage their other bank accounts through Isbank. As for further steps to be taken in 2020, we will be concentrating on the dissemination of digital transformation to the entire organization, with further utilization of AI practices, AI solutions, both in branches and digital channels, especially in processes that will enhance revenue generation and efficiency and widen the scope of agile organization. In brief, throughout our journey, we will always be positioning technology next to our workforce to enhance customer experience, while increasing efficiency and profitability as we believe that this is the key to long-term success. We are taking all these initiatives in order to prepare ourselves for our second century. As we believe that digitalization is the future, and we are designing tomorrow's banking today. This will trigger increased efficiency in all of our capitals. Here, I need to emphasize that our approach to capital does not only include the financial capital. We consider capitals, namely financial, human intellectual, social relationship manufactured natural capitals with an integrated and holistic approach. We aim to create value for all of our shareholders, stakeholders, through our robust and value-driven business model, which we call Isbank banking, not just in the short term, but also in the long term. Through this strategy, we look at future with great confidence and feel ready for our next 100 years. At this point, I have completed the first part. And now I would like to hand over to Ms. Gamze Yalcin, please.

Thank you, Mr. Bali. As you all know, we started 2019 with a historically low net interest margin. However, as we expected, it's gradually improved, especially in the second half as we decreased our funding costs significantly with the support of CBRT rate cuts. Accordingly, we expect to close 2019 with a full year net interest margin at around 3.6% to 3.7%, which is about our expectation range. Please note that quarterly NIM in Q4 is expected to be about 4.5%. In the second half of the year, in line with our flexible and dynamic funding management approach, we [ agree ] Our TL deposit base when interest rates started to decline, resulting in an improvement in our TL spreads. According to our baseline scenario for 2020, CBRT has still room for further rate cuts in line with the ongoing declining trend in CPI, although this might be somewhat limited compared to 2019. In this respect, we expect the swap-adjusted NIM figure to be between 3.8% to 4% in 2020. We will continue to manage the funding costs in a flexible and dynamic manner. In this context, we will be focusing on our unique widespread deposit base and demands deposits, thanks to the full range of services we provide through our extensive branch network and digital channels with the active utilization of AI for customized pricing in deposits. This will enable us to have higher rollover rates with lower costs through fine-tuning in pricing in a low interest rate environment. In addition to these, due to higher transaction volumes, we will also observe increasing contribution of float business. On the other hand, in terms of non-deposit funding, as always, we will continue to monitor the markets closely with a cost-oriented approach in order to make use of the opportunities that may arise. Fee income has always been one of the main focus areas. We achieved a remarkable performance in 5 consecutive years with an average growth rate of above 20%. This year, there will be a negative impact, resulting from the decrease in interchange fees due to the policy rate cuts and also the merchant fee cap limiting the fee growth on payment systems. Therefore, growth in net fees and commissions is expected to be around 10% in 2020. This is comparatively lower than previous years, but still indicating a double-digit growth. Our diversified fee base, especially in a low interest rate environment where savings will be in search of higher-yielding products will enable us to observe increases in asset management fees, combined with our long-standing expertise in capital market instruments. Additionally, the relatively higher loan growth will help us to cope up -- to cope with the negative pressures from the regulation change. Ongoing efforts to enrich the type and scope of fee-based services on digital channels will be supporting the fee growth this year as well. On the other hand, increased market shares and transaction volumes in both issuing and acquiring business in addition to optimization of existing pricing schemes, especially in relation with merchant fees will be another compensating factor. As you know, interest rates declined significantly in the second half of 2019, in line with the CBRT rate cuts. We observed the impact of these rate cuts on TL loan demand, especially in the fourth quarter. In this context, we are closing the year with a TL loan growth of 9% to 10%, whereas in the first 9 months of the year, TL loan growth was muted. In 2020, as we have already stated, given the declining trend in CPI, we believe there is still room further but limited rate cuts. Parallel to that, we have already observed a pickup in the loan demand. Initially, loan growth was driven by the retail loans. In 2020, also backed by the recovery in economic activity and restoring business and consumer confidence, we expect both retail and commercial sides to increase. In line with our selective growth approach, with a risk and return balance and market conditions, we expect a TL-driven growth on the commercial side, which is around 16% to 17%, while FX loans in USD terms are expected to be flattish. Our retail loan growth expectation for this year is also 16% to 17%. On the TL deposit side, we again observed a high increase in the last quarter, which took us to a level of 16% to 17% annual growth after a 9-month growth of 3%. In 2020, we will be maintaining our cost-sensitive approach. In that sense, we will continue to sustain our widespread deposit base as well as the demand deposits, which have a remarkable share of 27% in total. In 2020, we expect that TL deposits will increase by around 15% to 16%, while fixed deposits in USD terms to contract by 3% to 4%. This year, we expect total loan-to-deposit ratio to remain below 100%, while TL loan-to-deposit ratio to be almost flattish around 120% level. As you will remember, we were already expecting an increase in NPL flows in 2019, which was a system-wide trend due to the currency volatility and the slowdown in the economic activity back in 2018. On top of that, subdued loan growth stemming from the uncertainties related to geopolitical risks and election agenda, especially in the first half of the year, have also made a negative impact on asset quality indicators. As a result, we have seen an increase in NPL ratio, which we consider to be at manageable levels. As you know, we were also expecting a mild recovery in the beginning of the second half of 2019 and stated growth in loan started as early as in the fourth quarter. So we had to revise our guidance for the NPL metrics. In line with the economic trends, there was also an increase in the share of Stage 2 loans, and as you know, an important portion of Stage 2 is restructured loans. In Isbank restructured loans account for around 50% of Stage 2 loans. System-wide, total amount of restructurings, especially on the corporate side, reached a considerable amount during the year. Despite being not the largest lender in most of the cases or files, Isbank assumed an important role for the healthy completion of the restructuring processes. We believe that restructuring is a process that should be managed very carefully and responsibly on a selective basis. It is very crucial to determine whether the delinquency arises from the temporary cash flow problems or otherwise. Another important factor to consider is the commitment of the sponsors. During restructuring processes, we require additional collaterals, personal guarantees and a contingency plan for asset disposals in order to avoid any moral hazard risk. In 2020, we will continue to closely monitor these files, which have the potential to make a positive contribution to our recovery performance. All in all, given the more resilient macroeconomic outlook for 2020, we expect lower NPL flows and higher recoveries, and thus, the NPL ratio to remain flattish compared to its 2019 year-end level and to be less than 7%. Collection rate is expected to be around 17% to 18%. Therefore, we expect net cost of risk to improve and hover slightly below 150 bps with the support of both decreasing NPL flows and higher collections and loan growth. As for the Stage 2 loans, their share in total loans is expected to be flattish. In 2020, we also expect an increase in the Stage 3 coverage ratio, mainly driven by the aging of the portfolio. Certainly, digitalization will continue to contribute to the improvement in asset quality. In this regard, last year, we mentioned some of our projects as the optimization of our loan processes on an end-to-end basis, further improving our credit analysis and monitoring capabilities and redefining our thresholds and metrics in underwriting. Integrating countrywide network systems into our own banking systems for collection processes and monitoring and also optimizing our automated decision-making engine for retail loans. This year, we will continue to -- in our efforts to achieve further improvement in these areas as well as focusing on early warning and collection processes, income estimation, limit assignment and further digitalization of financial analysis function. There is no need to say that implementation of AI and robotic solutions play a very important role in all these initiatives. In 2019, our FX liquidity profile was maintained at a robust level, thanks to our strong stock of high-quality liquid assets, in line with our proactive balance sheet management. From a 5-year perspective, we can say that our liquid assets are well above our FX borrowings. In 2019, during our analyst and investor presentation, we had shared with yourselves that we would follow a cost-sensitive and an opportunistic approach in terms of wholesale funding. Due to high level of interest rates in the market and considerable increase in low-cost FX deposits and the decrease in FX loans, we did not prefer to have new FX issuances. Thanks to our strong relations with our correspondent bank, we achieved successful rollover ratios in non-deposit funding as we budgeted. This year, we will again have an opportunistic approach to wholesale borrowing facilities. We will be continuously monitoring the market conditions in line with our dynamic balance sheet management perspective. Though it's not a legal requirement yet in the Turkish banking system, as you know, in line with our efforts for keeping up with the international standards and practices, we have been measuring our liquidity also with net stable funding ratio from a longer perspective compared to LCR. Our NSFR in 2019 was well above our expectations of 100% and reached almost 130%. In 2019, we continued to further strengthening of our capital base, through net income growth and TL-denominated capital market instruments, mainly, we had 2 successful tier 2 issuances in Turkish lira. By the end of Q3, our CAR was 17.8%, being comfortably above the fully loaded Basel III requirements. In 2020, again, our targets will be maintaining CAR above 15% and Tier 1 ratio above 12%, both on bank and consolidated basis, whereas our baseline scenario indicates that our CAR will be flattish or above the current levels. In this slide, we present our 2020 expectations for the P&L items in detail. For 2020, in line with volume growth and improving NIM, we expect a strong swap-adjusted net interest income growth of above 20%. Fee income, as we discussed in detail, is expected to grow at a moderate rate, but still in the double-digit territory. OpEx growth will be lower compared to previous year at a level around mid-teens, while cost income ratio will remain in a range of 40% to 41%. Mainly driven by a higher net interest margin and a lower provisioning requirement in 2020, our profitability is expected to increase. We expect return on tangible equity to be around 14% to 15%, whereas return on assets to stand around 1.6% to 1.8%. As mentioned in our corporate film, we have been paying utmost attention to sustainability, not only in financial sense, but also in terms of our environmental and social impact. We have adopted an efficient governance structure for our ESG activities. Responsible financing is an important area where we use our transformative power as a bank. We assess potential environmental and social risks of all new investment projects worth more than USD 10 million by our environmental and social risk evaluation tool. Renewable energy projects constituted more than 2/3 of our total energy generation portfolio as at the third quarter of 2019. Our focus will be continuously increasing the share of renewable energy in our portfolio. We build and renovate our buildings with an environment-friendly approach. We have BREEAM and LEED certificates for our major buildings. We established our environmental management system in accordance with the ISO standards. We provide a working environment with a focus on employee satisfaction and competencies. Taking this opportunity, it's worth to mention that as Isbank, we have faith in women's ability to create a difference. Since the day of our establishment, we have been making continuous efforts for fully realizing the potential of women, both in social and work life. In addition to our support for women entrepreneurs, our equal opportunity-based employment policy is a reflection of these efforts. Today, we are happy to share that 56% of our employees are women, while at managerial level, the ratio is 40%. To sum up, we have an integrated approach to our ESG activities that covers all areas and stakeholders that we engage with. Our strategy is to be active in the global initiatives and be a part of global sustainability indices. You can find all the details of our ESG efforts in our integrated report published on our website. So this concludes my presentation. Now I leave the floor to Mr. Bali. Thank you.

Thank you. Thank you, Gamze. On this page, for your convenience, we provide a summary table for our 2020 guidance, which we have already mentioned during our presentation. Here, I would like to stress once again that 2020 will be a year in which our profitability will improve significantly, supported by the recovery in the economic situation and the operating environment as well as our well-balanced, selective and prioritized strategy and dynamic balance sheet management approach. To sum up, in 2020, we will be going after a selective loan growth in real terms, our focus on asset quality will continue. We will pay utmost attention to low-cost widespread deposit base, we will retain our cost-sensitive approach in non-deposit funding. Despite the negative pressures, resilience in fee income will be maintained. Cost management is again under spotlight and dissemination of digitalization to the entire organization will be another priority. And finally, profitability is expected to improve and sustain solid capital base. Thank you for your attention, and we will be at your disposal to take your questions from the -- also from the webcast. Please.

It's Waleed Mohsin from Goldman Sachs.

Where?

Just over here.

Back there.

I'll stand up. Yes. So just one question from my side. If we look at the NPL ratio as well as the Stage 2 guidance that you provided, it's not very different from what some of your competitors have provided 7% NPL ratio, around 14% Stage 2. But when you look at the net cost of risk guidance that you provided this year below 150 basis points, that's substantially different from what some of your competitors saying, which are saying 200 basis points or slightly above. Now in this context, a couple of things. One, I wanted to get a sense of why Isbank's cost of risk would be lower than the market. And number two, where do you see your normalized cost of risk. And if 150 basis points or below is your normalized cost of risk, why would you expect it to normalize ahead of competition?

This is one of the typical question raised in our investor meetings, especially in terms of the coverage ratio. First of all, we -- I would like to give some information about our model, our system, we reevaluate our macroeconomic forecasts and risk delinquency data used in our risk parameters model every quarter on a quarterly basis to reflect the changes in the macroeconomic situation conjecture and all of these metrics are updated, if needed. And secondly, evolution metrics might differ, such as past collection performance, the amount and the quality of the collaterals. In order to reach a conclusion here, in terms of especially risk assessment, I think we should analyze the risk or exposures of files on a case-by-case basis. Our coverage ratio for the future over the coming period is expected to increase gradually, especially depending on the aging effect.

Maybe I can add some general information about what we are expecting for 2020. In terms of NPLs, we expect an improvement in additions to NPL by almost 35% and on the collection side, I mean, recovery side, we expect an improvement again by around 40%. This is one of the main reasons behind the lower net cost of risk compared to other peers.

Just a follow-up, what do you see as a normalized cost of risk for the bank at what levels? And when do you...

Normalized?

Yes.

Yes. For -- as you know, for 2019, it was around -- it was less than 200 basis points. Now for 2020, we expect to be around less than 150 basis points. For the coming years, I think it will be normalized at around 100 basis points.

I have a quick question about the OpEx growth guidance, you expect something above inflation in 2020. I wonder the drivers of your expectation. And this year, you expect -- my second question, this year, you expect rates -- policy rate to come down further. When do you think these rate cycle come to an end -- [ increasing ] rate cycle come to an end as we see real rates are on the negative territory at the moment? I just wonder what are your thoughts about it.

For the OpEx increase, we have mentioned here in the presentation, it is going to be realized around 16% to 17%. Especially, it is related to the collective bargaining negotiations this year in 2020. I think salaries increase slightly above inflation and it will increase our OpEx increase -- it will influence our OpEx increase. Also, business development, marketing, promotion expenses, according to our expectations, will be higher this year due to the increasing competition and normalization of the banking sector. This is not a big thing. On the other hand, another factor, FX rates, CPI have some lagged effect on our expenses, especially in terms of IT expenditures. Additionally, continuing investment is on technological infrastructure due to the advances in technology. I think this is another area, as you know, in which we have some big investments, and we have not yet completed all of them. This is -- these are the factors behind the OpEx and the absolute level of -- in our program.

Maybe we should mention that in the retail side there is a high level of competition nowadays. For example, for salaries agreements, the prices for these agreements are coming to very high levels. And this is one of the main factors behind the increase in business development expenses.

On the net interest margin and the return on -- especially in TL interest rates -- interest, I can say that we have seen so far front-loaded rate cuts. And we think that when we prepare our business plan for 2020, it will continue, but not at the same level, at a moderate level. This means that we are going to see some contraction in our net interest margins because in the first quarter, as I said before, this is about 4%. But now at the end of the year, for the full year, we expect to be around 3.8% to 4%. Of course, it depends on the inflation outlook, if we see some major deviations in that sense, all these scenarios can change, of course.

Sam Goodacre from JPMorgan. You've just spoken about some of the pressures on costs this year. But during the presentation, you did speak about a relentless focus on cost management. So what are some of the initiatives you are taking? Or what is the potential to actually take out cost? Where are the areas where you can become more efficient? That's my first question.

First?

I'll have another one in a sec.

Yes.

Actually, as you mentioned, we are continuously investing in BT, IT technologies, and we are taking some advantages by using digitalization in some certain areas of costs. But since the investment amounts and the expenses are relatively very high compared to these improvements. Now we are not seeing the full effect of digitalization in terms of cost management. With the savings resulting from the digitalization to appear more in our results, I think we have to wait until the investments, especially on the IT side comes to an end. There are many areas that we are saving today in terms of expenses in different areas, especially we are reducing our costs by using digital products and digital tools. But they remain relatively very small compared to one-off items related to, especially IT and infrastructure expenses. But within time, this cost management advantage resulting from digitalization will become more apparent. I think we need to wait 2 or more years in order to see that.

In order to cope with these challenges that you mentioned, we have taken some measures, not only on the cost side, but also on the revenue side. As we shared in the presentation, first of all, we formed a very substantial organization. I mean direct sales force. The number of steps, as I mentioned before, will be around 800 and they are going to serve all the customers, all the branches and not depending on any physical place or branch, and they are equipped with technological devices, sign pads and 2 in 1 computer devices plus sign pads and this means that they are serving to their customers everywhere. These are the revenue generation capacity for the bank due to these digital -- digitalized processes as a result of our recent term investments. Also, another action in terms of the number of the branches. Last year, we have -- our number has decreased more than 8 -- 80 branches. And now in this program, it is around 40 branches. These are -- this does not mean that we are not only -- we are only going to close the branches. But if we see any opportunity, if we see any potential in any place, there is no categoric decision at that point. But this is -- this will also influence positively our cost structure. Also, in 2020, after many years, Isbank's number of staff will be less than 23,000, which is, for long years, is around 25,000. But at the same time, as you know, Isbank has a different model, not only in terms of business model, but also as a family, we have some basic principles inherited from the establishment. And in that sense, at the first stage, we should -- we shouldn't think that -- think easy solutions to solve the problem. We are trying to increase our business volumes and hence, our profitability and customer experience. In this -- in that sense, as we increase our revenue generation capacity, we can solve or we can cope with all these challenges.

Okay. I'd also be interested in your view on the longer term because you've spoken a bit about the second century that is pending. And that -- if I'm not [indiscernible] in 5 years. So if you think over the next 5 years, until that point, how do you think the industry here in Turkey will change and evolve? Whether it be from a landscape perspective or competition, the way you serve customers, what customers demand. So what will banking in Turkey be like in 5 years?

First of all, I would like to underline the -- one of the main characteristics of banking system, which still valid. This is an underbanked system, and underbanked, there are underbanked generations, young generations in this country. In this country, every year, more than 800,000 people join the workforce. In a developing country, this is a great potential for the banking system, especially if we take into consideration the digitalized banking system. On the other hand, there are 7 to 8 banks, which dominates the market for privately owned, private banks and plus 3 state-owned banks and their share in the market is around 75% to 80%. And more or less, all of these players have their own solid customer base. And in terms of the potential of the country, I think for all players, there is an opportunity. In that sense, the most important thing here is to keep -- is to maintain your competitive power, competitive capacity. In terms of some basic indicators of the banking system profitability is still in place, especially if you take into consideration the existing net interest margins, return on equity, in that sense, is satisfactory for our shareholders. And also the capital adequacy ratios, which is around -- or higher than 18%. This means that we can sufficient capacity for new lending, for creating new risk-weighted assets. In that sense, unless we see some unfavorable market conditions in the domestic market or in external markets, I think those kind of indicators will feed the banking system for the coming years.

This is [ Sergei ]. My question is on the volume side. In the presentation, we see that lending volume growth is slightly higher than the head of deposit volume growth. And you have mentioned that you will not be really active in the wholesale funding area. I would like to learn your strategy on that front for 2020? How this will be achieved?

For the higher loan growth, how this will be achieved?

Yes. It seems to be slightly higher than your deposit growth.

Yes. But we have to look at the existing absolute figures for that. And in that sense, we have a very well-diversified funding structure, not only depending on the deposit base. On the deposit side, as you know, through our very extensive branch network in all of the country and also through our very, very sufficient service capacity. We -- for many years, we have a very solid and stable customer base, especially in terms of deposits, but we have many other different sources to fund our loan portfolio, and there is no major difference between the increase of deposits and loans.

Actually as Gamze mentioned, we are cost-sensitive on the financing side. Although we aim to increase our deposits, especially Turkish lira deposits. We can change our scenarios within the year dynamically. This is what we are doing for years. On the cost side, for 2020, we are expecting an average of 1 percentage point decrease in cost of deposits. While the loan yields, average loan yields will go down by 3 percentage points, this is our calculation in our base scenario. And if we see a reverse trend there, our net interest margin guidance is based on this base scenario. If we see a reverse trend there, we can use other options like short-term Turkish lira borrowings or again, dollar-TL swaps. And on the wholesale borrowings, we are again, cost sensitive. We have a redemption of USD 4.7 billion in 2020 in terms of FX borrowings but our FX [ little deterioration ], our FX liquidity, daily FX liquidity is more than USD 11 billion. That gives us flexibility to manage costs and to decide whether to be in the international markets or in domestic markets.

And maybe we should look at the last year's performance, especially loan growth versus deposit growth as we show loan growth. TL loan growth was around 9% to 10%, but the TL deposit growth, was around 16% to 17%. This year's figures are more balanced. And especially in the last year and in 2008, especially the dollarization made the situation more difficult, especially for TL funding. But now we do not foresee such a dollarization will continue maybe at a moderate level, we can expect dedollarization and the Turkish Central Bank and the authorities are taking some measures to support the dedollarization process. As we see some changes in that sense, we can see new additional funding, especially in deposit market. Another issue, it is very related to the investment funds. According to some differences in returns, customers changed their preferences or shifted their funds from deposits to the investment on funds. I think in the -- if we take into the decreasing trend in TL interest rates, we can see reverse. And I think the difference between the returns of investment funds and deposits disappear, we can see some new additional funds coming to deposit side.

It's Alan Webborn from SocGen. Firstly, in terms of the drivers for loan growth that you see next year, could you give us a picture of where you see the near-term drivers to be? Presumably, that sort of retail, short-term corporate loans. When do you think investment loans are going to start to kick in? So could you just give us how you feel the trends are going to be within your target? That would be my first question.

Okay. First of all, domestic consumption expenditures and increase in SME working capital needs will be the main drivers of loan growth. And tourism sectors, it is in a very strong recovery process. Also the companies in that sector will be the -- one of the main driver for loan growth, for loan demand. I think we -- if we see some more favorable market conditions, we are going to see that this tendency will spread all parts of the economy, all parts of the sectors. For example, in energy sector, especially in terms of renewables went -- investments we see an opportunity there. The pricing mechanism, guaranteed tariffs for these investments will end in 2021. At the end of this year, so we have 1 year for these investments and these are attractive investment alternatives for -- not only for sponsors, but in terms of financing, but for banks. Yes?

Following on from that, when do you think your margins will start to fall? I mean will we see rising margins over the first sort of 2 quarters of 2020 and then gradually, it will come down. How do you see the dynamics in terms of your maturities...

On a quarterly basis, we expect to -- our net interest margin decrease, of course, depending on the asset pricing, especially if we take into consideration our duration gap, which is around 9 months in TL side of our balance sheet. This means that for the whole year, we are going to be influenced from these asset repricings. And the last quarter, it will decrease to roughly 3.6%?

Yes. On a quarterly basis.

On a quarterly basis, 3.6% or 5%, and we are starting with 4-point something. And I think for the full year, as I mentioned before, the average of net interest margin still will be sufficient -- at sufficient level with 3.8% to 4%.

Generally, we can say that in the first half of the year, it will remain above 4%. In the second half of the year, it will go down until it reaches to 3.6% in the last quarter on a quarterly basis.

And could I just ask a couple of questions about fees. You mentioned, I think, that you were looking to see what you could do in asset management fees to increase those. Could you just elaborate a little bit on where you think that's coming from? Is it more products? Is it just lower interest rates and more people going into those products? That would be interesting. You also said that the -- you were looking to broaden the digital -- that the products that were on offer within your digital area, and that was also an element of where you could get more fees from. Could you say what you're not selling or what you weren't selling in 2019 and what you will be selling in 2020 to improve that? And what do you think more broadly about fees for digital products? I think we all understand that digitalization achieves greater efficiency but it's also, I think, the public and customers aren't stupid and they know that it costs less to get something to them digitally than it does through a branch. And I wondered whether you feel the sort of the levels of fees that you're putting in place now in digital are sustainable or whether over time, they are likely to fall. And I [ hoped both ] finally, we've heard from a number of your competitors sort of early mentionings of open banking. And I wondered what your view of open banking, is it a threat? Is it an opportunity? And what's your approach?

As we emphasized very strongly during the presentation, the fee business, the fee income is the very much important driver in our income statement, and we have a very strong focus for many years. In the last decade, we have increased our fee business, our fee income higher than the main competitors, especially in the last 5 years. Each year, we have increased more than 20%. And if you take into consideration the base effect this is very important performance. And this shows the sustainability. For example, as we've mentioned in the presentation, the share of the digital channels fee incomes in the total fee income is increasing from 20% to 26% in the last 2 years. This also shows, as you mentioned, the sustainability of the income structure. And if we take into consideration the nature of these transactions, these are millions of different, very extensive banking transactions. In that sense, this is not one-off revenues for us. Automatically, we are trying -- we are getting these income source. And I think we are going to keep our same performance. But last year -- this year, there are some different negative regulations, which reduces the capacity or in fee income. And therefore, we determined comparatively lower target for this year, 10%, still double digit. I think we are going to realize it, maybe more. And our diversified fee base, especially in terms of asset management, which is one of the main area or strong area for Isbank and also insurance. And if you take into consideration the extensive branch network and digital channels, which achieved more than 90% in total transactions. I think we are going to continue, especially depending on this diversified nature of the fee incomes.

So is it asset management and insurance that you're going to be selling more of digitally? Because you said you're going to do more this year. Is that...

Sure. Sure. Also, the increase in loan portfolio will boost the fee income. Last year, for example, we have not benefited from this moment, especially due to the general situation. But now it is different. And as we show in the presentation, the share of the digital channels in terms of loans, retail loans is around 77%. And this means that we are going to raise some fee income from here.

And in terms of open banking?

Open banking. We mentioned the first application [ IsTecCep ] in the presentation. It depends on the APIs and the collaboration with the third parties. PSD2 directive in European zone. It was not -- it hasn't been yet introduced in Turkish banking system, but we have proactively started to implement in our issue -- in our bank. And in that sense, we have incorporated more than 30 APIs, and we are giving a very much importance to these collaborations with fintechs, with start-ups through different programs, as mentioned in the film workup, including workup program. And in that sense, we are going to disseminate all of these works in different fields because -- especially in terms of operational efficiency, it is very much important. There are 2 questions through webcast. Are you planning to distribute dividends from 2019 earnings? And how much do you expect your CPI linker revenues to change annually in 2020?

Let me answer the second one shortly, if you wish. We expect the CPI linker revenues to decrease by around 3% in 2020.

If you come to dividends, this is not in our authority. It is according to the existing regulations, BRSA determined the situation in Turkey. And as Isbank, we have a very basic principle and long-term strategy. A long-term policy is to share the value that we create with our stakeholders. And for many years we have done this. But now for the last year and in 2012, in 2018, BRSA has guided not to distribute profits in order to keep the existing strength or resilience of capital in the system. It is understandable to some extent, the rationale behind this regulation we understood. But I think, frankly speaking, at this rate or some -- another rate, I think it is more appropriate to allow the dividend distribution. To some extent, it might not be at the previous levels, but we can determine some optimized mid rates. And very recently, BRSA, at this point determined or sent a letter to Turkish banking association, not to distribute the dividends. But I think -- we are planning to meet BRSA to determine more optimized solution for dividend distribution. Of course, in the end, it's in the authority of the BRSA. There's no question through webcast. Okay. No question? Then we are inviting you to our cocktail reception at the Qubeley art gallery, maybe we can find opportunity to discuss those things. Also, maybe you can find an opportunity to visit our exhibition. Thank you very much for this very fruitful discussions.