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

Welcome to Türkiye Is Bankasi First Half 2020 Financial Results Conference Call and Webcast. I will now hand you over to Ms. Senar Akkus, CFO; Ms. Gamze Yalcin, Deputy Chief Executive; [ Nache Goldan Sesdenlar ], Head of Investor Relations. Dear speakers, the floor is yours.

Good evening to all, and welcome to our conference call. Gamze Yalcin, our Deputy Chief Executive; and [ Nache ], our new Head of Investor Relations are with me. We hope everything is well with yourselves and your last month in the challenging environment. Before going into the details of our performance, I would like to give you a brief update of the macroeconomic outlook and the highlights for the second quarter, as I always do. I'm starting with Page 2. COVID-19 crisis has reached its peak in the second quarter of 2020, leading economies contracted its historically high pace. Strong monetary and fiscal measures have also supported the economic outlook and financial markets. After registering listed outflows in March, capital flows towards emerging economies improved during the second quarter. On the other hand, widespread normalization steps have been introduced, the global economy has shown some signs of recovery as of June. However, the uncertainty about the debt and solution of the pandemic has persisted and continued to weigh on global risk sentiment. Against this backdrop, Turkish economy is also expected to contract at double-digit rates in the second quarter. Leading indicators show that most of the negative impact of the outbreak was experienced in April. Recent developments in the financial markets, on the other hand, imply that the second half of the year will face a high level of volatility. And continuing with Page 3, starting from June, normalization steps have been introduced in Turkey, triggering domestic demand. The significant improvement in the leading economic indicators, such as retail sales, other automotive sales, capacity utilization ratios, industrial production and PMI support our expectation for a robust economic recovery in the second half 2020. As you know that there will not be a second wave of the pandemic, the recovery in international trade and travel are also expected to have positive impact on external demands in the coming period. For 2020, our current expectations for GDP growth and CPI inflation are 0.1% and 9.3%, respectively. Next page shows Is Bankasi's response during this period. In line with the strong demand that followed the easing of restrictions, we continued our efforts to support the real sector and households. Our CVS loan disburses from 2020 packages reached around TRY 6 billion. Loans corresponding to 13% of the loan books were subject to deferrals with a deferred payment amount of around TRY 7 billion. Focusing on the digital transformation ever strongly. In this period, we further increased our digital penetration. Number of active digital customers reached 8.6 million. Transactions held through non brand channels as a percentage of overall transactions has increased to 96%. Share of digital channels and retail sales for TL time deposits and general purpose loans reached remarkable levels of 86% and 82%, respectively. We also continue to ensure the safety of our workforce, of course, while normalizing the branch also. On Page 5, I'd like to share the main highlights for the quarter. Turkish lira loan growth continued in the second quarter, year-to-date change reaching 20.2%. Conservative stance in provisioning was maintained quarterly net cost of risk slightly increased to 260 basis points. Cost ratios increased further besides TRY 500 million free provisions versus aside in the second quarter. Strong performance in net asset NIM continued. Net fees and commissions income was almost flat year-on-year in the first half. Funding growth are mainly driven by Turkish lira deposits, which increased 13.4% on a Q-on-Q basis. Profitability ratios increased slightly despite higher provisioning. Cash stood comfortably at 16.6% before the adjustment for the regulatory forbearance. And lastly, our liquidity levels remain robust with a total LCR of 172% and a fixed LCR of 413%. At this point, I'll leave the floor to Gamze for the details of the bank's performance. Thank you.

Thank you, Senar. Welcome all, and thank you for being with us. On Page 6, we have the major P&L items as well as profitability and efficiency indicators. Turkish lira funding costs continued to decline in the second quarter, thanks to our dynamic balance sheet management, also supported by the further rate cuts from CBRC in April and May. However, downward repricing trend in loans, at the same time, caused a slight decline in our spreads. All in all, backed by the growth in Turkish lira interest-earning assets, our swap-adjusted net interest income increased by 5.9% quarterly, leading to a more than 80% increase on a year-on-year basis in the first half. As we all expected, the second quarter was a challenging period for the fee income generation due to the regulatory and COVID-19-related issues. On a year-on-year basis, we managed to keep our net fee income almost flat by the end of the first 6 months of the year compared to the same period of 2019. Our OpEx contracted by 6.2% quarterly, thanks to the decline in HR expenses. As you may remember, there were some one-off items in the first quarter, and we started to observe a normalization trend afterwards. The annual increase in OpEx came down to 28% from the last quarter's 36% level. Although there is a slight downside risk, we do not expect a significant divergence from our guidance of 17% in terms of OpEx growth for this year. As we mentioned, we set aside TRY 500 million of additional free provisions in the second quarter, and our total free provision amount reached TRY 1,725 billion as of the end of second quarter. Looking at the return on tangible equity. We saw a slight improvement driven by higher net interest income and lower OpEx compared to the first quarter. Our return on tangible equity, which was 10.7% in the first quarter, increased to 11% by the end of the first 6 months of the year. In the same period, our return on average assets stood at 1.2%. Cost-to-income ratio was 36.4% by the end of the first half, still indicating a better level compared to the guidance range of 40% to 41%. Page 7 shows the main balance sheet items. In the second quarter, Turkish lira loans continued to increase at a slightly slower pace compared to the first quarter and posted a growth of -- growth rate of 8.5% largely driven by business loans. For the commercial side, CGS was an important contributor, and our disbursement amount for 2020 packages reached around TRY 6 billion, as of the end of June. Another nonretail items that supported the quarterly Turkish lira loan increase was working capital loans, which were landfill corp rate. On the retail side, as the main driver, general purpose loans posted an increase of around 12%. Demand for FX loans remained weak as expected, accordingly, there was a slight quarterly contraction. With our focus on dynamics and flexible funding management we benefited from decreasing cost of deposits over the quarters. Our Turkish lira deposits grew by 13.4% quarterly, more than offsetting the contraction in the first quarter. There was also a slight increase in FX deposits in the second quarter. In total, our deposits increased by 13.7% year-to-date. Turkish lira loan-to-deposit ratio stood at around 133% by the end of the quarter. Demand deposits continues to support our low-cost funding base by reaching a remarkable share of 37% in our total deposits. As for non-deposit funding, we continue to utilize money market transactions over the second quarter. At the end of April, we repaid our Eurobond with the amount of USD 150 million. In May, we renewed our syndicated loan agreement with a total amount of USD 798 million with a rollover ratio 77.5%, in line with our funding strategy for the year. Last but not least, we maintained our strong liquidity over the second quarter and the liquidity ratio stood at comfortable levels once again, with an FX LCR of 413% and total LCR of 172%. Our FX liquidity at hand, which is around USD 14 billion at the end of June, covers more than 250% of our short-term FX liabilities amounting to USD 9.4 billion. Next page shows net interest margin and spread evolution. In the second quarter, thanks to our flexible approach in balance sheet management, we were able to decrease our Turkish lira deposit costs further despite the strong volume growth. The repricing on the loan side was also continuing, so we ended up with a slightly lower swap-adjusted net interest margin compared to the first quarter. As you may know, we were already expecting a gradual downward trend for net interest margin in 2020 due to assets repricing. However, thanks to contain costs, the first half slot adjusted net interest margin hovers well above our budget expectation of 3.8% to 4% level. Considering this, we anticipate the swap-adjusted net interest margin to be above 4% at the year-end. And our slot cost for the quarter stood at TRY 909 million. We have fee income performance on our next slide. In the second half, the pressure from regulations, coupled with COVID-19 impact kicks in and thus, season commissions remained flattish on a year-on-year basis. As always, we have continued our efforts towards enhancing and diversifying our fee base and certain items such as mutual fund management fees, delivered strong performances, partly offsetting the constraints. Taking into account the current environment, we obviously feel the necessity to realize our original guidance of around 10% fee growth, indeed we aim to maintain a flattish fee base in 2020. Next page shows the NPL and provisioning trends. In the second quarter, it flows to NPL and collections were both limited as a result of the new classification criteria and the impact of the COVID-19. Also, supported by the increased lending activities, we have seen an improvement in the NPL ratio. However, without forbearance measures, the NPL ratio will be around 6.6%, still in line with our guidance. We expect to see an increase in normalization in the collections in the second half of the year. In the second quarter, we have maintained our conservative approach and further increased the coverage ratios for all of the 3 stages. Quarterly net cost profit slightly increased to 260 bps, 24 bps of which come from the currency depreciation and around 35 bps from the update of the macroeconomic expectations. Looking at the current trends in the operating environment impacted by the virus outbreak, we have made a revision to our guidance. And now we expect a net cost of risk around 250 bps for the full year. We also have an additional buffer of, as I mentioned earlier, TRY 1,725 billion of free provisions, TRY 500 million of which we set aside in the second quarter. Next page shows the solvency ratio. As of first half, our reported capital efficacy and Tier 1 ratios stood at 19.8% and 15.6%, respectively. As you can see in the slide, excluding the impact of BRSA forbearance, the ratios still stood at comfortable level. We believe that our capital ratios are strong enough to absorb the potential adverse fees in the economy as well as to support the balance sheet growth when it seems favorable. In the first half, in addition to organic capital growth, the successful and timely Tier 2 issuance in the beginning of the year further supported our already comfortable capital base. Now I leave the floor to Senar, once again, for her to sum up our revisions to 2020 guidance.

Thank you very much, Gamze. We have mentioned our guidance updates moving along the presentation elements. But to sum up, we expect such loan growth reached around 30% by the end of the year. PRU-wise, our return on tangible equity and return on asset expectations as 11% to 12% and around 1.2%, respectively. Our swap-adjusted NIM expectation for 2020 is above 4%. We will be targeting a flattish fee base. And finally, we expect net cost of risk around 250 basis points for the year. This concludes our presentation. We will be happy to answer your questions. Thanks.

[Operator Instructions] First question comes from Deniz Gasimli, Goldman Sachs.

I just want to ask comment on your margins. Obviously, there's a lot of volatility in the market over the past days. Was the lira also as well as today, what we saw in press report is that the Central Bank has suspended the auction at the 1 week repo rate as prepared to maybe can confirm that, which effectively implies that the funding will be at overnight lending rate, which in a way, implies a 150 basis point rate hike that happened, just call the switch of the funding to our upper bond interest rate. So I just want to get your thoughts about that. When you think that there was a potential like 150 basis points effective rate hike, how does that change the way you think about margins for the year? From what I've been hearing, there has been some uptick in, let's say, consumer loan yields, given that there's all of demand. So in a way, do you think that banks and your bank, especially has started to pricing higher rates? Or is it kind of a bit early to think about what the 150 basis points will do for the -- for banks and for Is Bank? So any thoughts on this would be much appreciated.

Okay. Thank you very much for the questions. Yes, we are now entering into a new period. What we understand from the CBRT's announcement and its actions today, they will increase the average funding rate by changing the composition of Turkish lira funding to domestic banks. And we see the signs of it, there are some limits to, for example, report facilities to primary dealers and also targeted additional liquidity facility. Now we have outlook into an increasing interest rate environment. Obviously, the Central Bank still closely watch the developments in the market. Also, the debt and the duration of the pandemic will be determining the course of Turkish lira interest rates. Today, we see also an increase in Turkish lira loan pricing and Turkish deposits at a minimum level of, as you said, 150 to 200 basis points. Of course, we will manage this. In the first half of the year, our net interest margin was above our expectations actually, the rate cuts of the Central Back in the first half helped us to manage funding costs. And we achieved a net interest margin, which is above our expectation at the beginning of the year. We have room there. We are working -- the developments are new, as you know. We are working in different scenarios. But in a gradually increasing Turkish lira funding cost environment, we calculate that our net interest margins will not fall below 4.75% for the whole year. But taking into account the latest development the volatility in the market and also the uncertainties are concerned about the pandemic. I refer to revise it at about 4% taking a cautious stance. This is what I can say for the time being. As you know, this is a very new development and a new change in the market conditions. Actually, we were already expecting a contraction in our net interest margin, even before these developments. But the 3 of the contraction now will be determined according to the actions of the CBRT, of course, the course of the pandemic. I think we are strong enough to manage these changes and the interest rates during the last 5 months. Of course, this is also important to start the year 2021 with a strong NIM if we take into account the uncertainties continue in the market and about the pandemic. The gradual increase in the interest rates -- I mean, the actions of the CBRT will enable us to manage the NIM, changing the composition of funding, changing the composition of our balance sheet, therefore, we proceed very positively. Is it clear?

Very clear. And just to confirm one thing, you just -- you said that given the changes today, you expect deposit cost to go up by 150 to 200 basis points. Did I hear that correctly?

For the market, you say? The order for the market is now -- is at a minimum level of 150 to 200 basis points, both on the loan and deposit side. And one question about the consumer loans, I think, we will see the same trends there. Actually, we plan a lower rate of growth for Turkish lira loans in the second half of the year. I think this will not change our plans in the second quarter of the year and in the first half of the year. Turkish lira loan growth was mainly coming from the commercial side. A 30% of the loan growth was coming from the consumer loans and especially mainly from GPL. This row in interest rates will not change the composition of this flow pacing in the second half of the year, we again expect around 30% of the loan growth coming from the consumer loans and CBR side.

Next question comes from [ Konstankin Rezontov ], JPMorgan.

A couple of questions from my side. Could you please confirm what the total principal amount of landfill benefited from payment deferrals since mid- to late March to date? And also, if there is some data, how -- what fraction of these is already followed under stage 2 and what is not? And the second thing, also, with respect to those loans, which benefited from these deferrals, I believe it's still too early to understand what's -- what is the quality of these borrowers going to be. But could you give some guidance, what's your current expectation in terms of -- what portion of these levels could go into longer-term restructurings and require some sort of additional provisioning? So these are the 2 questions for me.

Actually, I think we will say that a great majority of the deferral refers to Stage 1. In the past, as you know, we have made improvements for Stage 2 loans in terms of restructuring and making some improvements in the interest payment structure. But we give special emphasis on this issue is that we are deferring the launch, which are not having payment front. I mean a great majority of these loans, which are subject to deferrals, do not have any overdue amount. In this sense, we believe that the quality of this portfolio is very high. But of course, by doing these deferrals, we had made some assumptions. I mean one of these assumptions was that the business life will be close to normal after July. And it is mostly based on the assumptions that will not be a second wave. There are still uncertainties. Of course, we can face additional picture in the coming months. But again, on that there not be any second where in the pandemic, we can easily say that we will not be hurt by these deferrals in 2021. In income I can say they are monthly in Stage 1.

Okay. And that's very clear. And just on the quantum of these loans, what is the total principal balance of these loans that benefited from these deferrals?

The principal amount is more than TRY 40 million and the deferred amounts -- I mean, deferred installments of these loans are amounting to TRY 7 billion as of June.

Sorry, how much?

And it is also manageable in terms of liquidity management.

Okay. What did you say the amount deferred? You mentioned, just the line was not very clear. Would you mind repeating, please?

Sorry I couldn't understand the question.

Would you mind just repeating, please, the final numbers? The line was not very clear, apologies.

The total amount is -- the total principal amount is more than TRY 40 billion as of June -- as of the end of June. And the actually deferred installment amount is TRY 7 billion -- around TRY 7 billion.

[Operator Instructions] Next question comes from Mehmet Sevim, JPMorgan.

Can you talk about your OpEx expectations and targets for the remainder of the year, specifically because with the first half run rate of around 28%, your full year target of 17% implies quite a drastic reduction in the second half. And also, could you please share your consolidated capital ratios with us, both with and without forbearance?

Okay. So the OpEx growth, I can say that the growth rate for the first half is completely in line with our expectations. This is what we have planned in our business program for the year. Because, as you know, we had a collective widening agreement this year. And also, we have some one-off personnel expenses related to pandemic and also related to the performance of our employees. Therefore, it is not dialoguing from our expectations for the half year. And we have said that in the first half, this will approach to our year-end target, which is 17%. Again, we are maintaining this expectation. That can be a slight increase due to the pandemic, but we will manage -- we want to manage it by limiting some expenses like advertisement or some IT expenses. That's why we are still believing that we can get 17% as of year that can be a slight increase in that, around 18%.

Great. And if you could also share your consolidated capital ratios with us, that will be very helpful.

Okay. Without forbearances -- I mean, without taking into account the forbearances, it is, for CAR, 15.3%. And for Tier 1, it is 11.50%. And what we are announcing today is that -- let me share it with you. Q1 ratio is 13.8%, and CAR is 18.1%.

[Operator Instructions] We have a question from [ Valentina Stark ] of Barclays.

Yes. I was just wondering whether in addition to the ratios, you can also give us the number for your excess capital, within the doubt forbearance. That's my first question. And then second question is, what do you include in the forbearances calculations? Do you take into consideration the 0% on your FX sovereign bonds portfolio? Risk weight?

Yes, we are improving them. We are including 3 forbearance. One of them is a 0 risk weight for FX holdings. The other one is about the currency, I mean, the fixing of the currency. And also, the third one is about the MCM of governance activities. Taking into account all of this, we are calculating the capital adequacy ratio.

That's very clear. And about excess capital?

Just a second. Actually, didn't work something we are reporting and sharing discussed and maybe we can reach to you after the presentation. If it is okay for you?

Yes, absolutely fine. And then I have some more questions, if I may. If I may ask them? So the other question is around...

Go ahead. Sure, sure, sure.

We're on the asset ratio, where we actually stand right now with regards to the threshold of 100%? And do you have any information on how this ratio might change going forward, especially given the meeting that BRSA had yesterday with the bank executives? And then the other question that I had was on FX liquidity. Can you disclose this and how it compares versus your short-term maturities?

Yes. I think the asset ratio on it has profited very well. Actually, it's not designed to give a support to credit growth. Since the beginning of the introduction of the ratio, we are evolve this threshold, and we are still keeping the same levels. Therefore, we didn't need to change our strategy for related to the nominator and still denominator of the ratio. And we are still keeping our asset ratio, about a reasonable level of 100%. And for asset ratio, again, if you take into account the explanation from the BRSA side, depending on the latest situation and depending on the high level of growth in the first half of the year, there will be some improvements, we see that there can be some improvements in favorable banks regarding the asset ratio. But of course, it will depend on the cost of the Turkish lira interest rate. The fees, paid and the depth of the pandemic. It is dependent on BRSA. I think they are positive about to make some improvements in the asset ratio changes -- the changing some components impact in favor of the Turkish banks, we believe. But in this composition, I mean, with the current composition of the ratio, we don't have any problems. We are calculating that we will not face any problem in the near future about the ratio. FX liquidity, I can say that it is USD 14 billion.

Sorry, how much?

USD 14 billion, 14, 1-4.

Okay. And the composition?

USD 7 billion of it is using -- is being used in swaps. I mean they are subject to full transactions. They are using USD 7 billion for FX swaps. And UDS 6 billion of it is composed of liquid assets, slight money marketplace, FX reserve, under reserve, option mechanism and unencumbered cash and bank notes. And we have also another USD 1 billion of unencumbered securities, and in total, it's reaches to USD 14 billion.

[Operator Instructions] We have no other audio questions at the moment -- No, we have, from Alan Webborn, Societe Generale.

Could you just talk us through the trading income number in Q2? And how much of that was FX hedging, if at all? So could you just tell us what -- what that look like and I think -- sorry, if I missed it, the line wasn't clear, but you talked about, I think, you're expecting an improvement in recoveries in the second half of the year. Could you just explain a little bit of where you were in Q2 and how you see that going forward, that would also be helpful. And does it have anything else? And what's your view in terms of FX loan demand as we go through the rest of the year as well? That was it.

About rising income for the second quarter, I can say that the positive impact was around a TRY 500 million. And I can give a breakdown of -- 40% of it is coming from our long FX position, 40% is coming from capital market transactions, and the remaining part is coming from the increase in the valuation of our purchaser hedging insulin like fruit currency swaps. I think it's clear enough, I think. And also about the collections. As you know, we all suffered from the physical constraints in the first half of the year due to the pandemic, since all legal proceedings and hearings were for suspended until June 15, we have seen a decline in collection from enforcement proceedings. In the second half, now we are living in a normalization period. Since the regulation is that in place and normalization is continuing. In the sense, I can say that in the second half of the year, let me give an improvement rate, for example. A 50% improvement in the collections compared to the first half of the year. In the second half of the year, again, assuming that there will not be a second wave in bundling.

Okay. And then just on FX lending.

All have any important item in agenda, therefore, we don't expect major increase in our FX lending. Our people are talking about some projects, but they are not certain yet. Therefore, I don't want to give you wrong information about it. I do not know if they will be in the agenda in this year. Therefore, at the beginning of the year, as you know, our expectation for FX lending was flat, that can be some lending above exporters, I mean, export-oriented lending can take some place in the last 5 months. But in any case, we will not see our FX lending about 419 year-end levels. There is not a big ticket or important item in our agenda.

[Operator Instructions] Speakers, we do not have any audio questions. Back to you.

I think there are 2 questions about the same subject on the webcast. It is about the possibility of Eurobond issuance in the remaining half of the year. As you know, in the first half of the year, we issued a subordinated bond of USD 750 million. We had a redemption of, again, USD 750 million in senior months. For the rest of the year, taking into account the high level of FX liquidity and taking into extract the repayments of the bank for the following 12 months, we are not in need of additional issuance. However, of course, we are always opportunistic in this area. And we all know the current conditions so that allow us to make a new one currently, but we will be following the market. As you know, we are a record borrower in capital markets, and we are always ready to follow from the market, and we are doing our preparations then in order to be ready when the market conditions allow us to make an issuance. We will be closing -- we will be watching closely in the market. And if we can come to better conditions in terms of CDs levels, in terms of the risk perfection towards Turkey, we can benefit from it. But in this environment, we see the possibility in low, to be honest. The third question is, again, if I have to issue a few robots. I answered this part. It is also above whether we consider a per payment. I can exactly say that we don't have any plans to debate apart of our Eurobonds. I think there are a couple questions. We thank you very much for being with us in this challenging environment. It's very valuable for us. We hope to talk to you in better and healthier conditions at our September financials conference call. Thank you very much, and have a nice evening.

Ladies and gentlemen, this concludes today's conference call. Thank you all for attending. You may now disconnect.