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

Ladies and gentlemen, welcome to Turkiye Is Bankasi year-end 2020 Financial Results Conference Call and Webcast. I will now hand over to Ms. Senar Akkus, CFO; Ms. Gamze Yalcin, Deputy Chief Executive; and Ms. Nese Gülden Sözdinler, Head of Investor Relations and Sustainability. Dear speakers, the floor is yours.

Thank you very much. Good evening to all, and welcome to our conference call. Gamze Yalcin, our Deputy Chief Executive; and Ms. Nese, our Head of Investor Relations are accompanying me in the call. We hope everything is well and everyone is healthy and safe. I would like to start with a brief update on the macroeconomic outlook and the highlights for Q4. Then Gamze Yalcin will go into the details of our performance in the last quarter. After the strong recovery recorded in the fourth quarter of 2020, global economy has decelerated in the last quarter as restricted measures were reintroduced due to rising COVID-19 cases and a variants of the virus in December. However, the deceleration was not as large as expected. Manufacturing activity largely remained solid. During this period, leading central banks and governments have continued to provide support to the economies and financial markets. Despite the continued challenging global outlook and concerns regarding the speed and the success of vaccination process, a cautious optimism prevails, particularly for the second half of 2021. Turkish economy has also performed stronger-than-expected in the last quarter of the year despite the pandemic and monetary tightening measures. Leading indicators have shown that the continued improvement in economic activity was broad-based across sectors, international trade and tourism revenues also continued to recover. Unlike many other countries, Turkish economy is expected to report a limited positive GDP growth in 2010. In the last quarter of the year, along with the policy normalization steps as CBRT's increased emphasis on price stability. Turkish financial markets have also displayed a better outlook. Under the uncertainty [ over that with relation ] as a result of the pandemic, we expect Turkish economy to continue to recover in 2021. Now we look at the Page 3, we see the main highlights of the quarter for Isbank. Turkish loan growth for the full year was realized around 35% as guided. Share of demand deposits reached an outstanding level of 42%. Additionally, we closed the year with a strong swap-adjusted net interest margin around 4.4%. Annual net fees and commissions income growth was in the positive territory. Meanwhile, conservative stance in provisioning was maintained. Cumulative net cost of risk stood at 262 basis points. OpEx growth was contained despite challenging environment. Our capital adequacy ratio continues to stand at a comfortable level of 18%, well above minimum required levels. Our liquidity levels remained best-in-class with a total LCR of 169% and an FX LCR of 436%. Now will Gamze -- Gamze will continue with the details of the bank's performance in the last quarter of the year.

Thank you, Senar. Welcome all, and thank you for joining the webcast. On Page 4, we have the major P&L items as well as the profitability and efficiency indicators. In the fourth quarter, we have seen a decline in our swap-adjusted net interest income due to rising funding costs as well as slowdown in volume growth during the period. Nevertheless, this item posted a robust increase of 50% on an annual basis. We managed to have a positive growth in net fees and commissions as a result of our continuous efforts in such a challenging environment. Income from participants amounting to TRY 1.1 billion in the quarter, once again, provided a notable support to our income base. Year-on-year OpEx increase was in line with the expectation that we disclosed in our Analyst and Investor Day and stood at around 20%. Our prudent approach towards provisioning, which we carried throughout the year was maintained in the last quarter as well. This was obviously aimed to create a safety buffer against uncertainties. On the other hand, our pre-provision income posted an eye-catching increase of 55% compared to the previous year. Mainly because of credit provisioning during the year due to extraordinary conditions, our return on tangible equity stood at 11.7% by the year-end. If an adjustment is made for the pre-provisions that we set aside in 2020, the ratio will be registered at mid-teen levels. Our cost-to-income ratio for the year was decent at 33%. Page 5 shows the main balance sheet items. In the last quarter, there was a slowdown in Turkish lira loan growth as expected. We have closed the year with an annual Turkish lira loan growth of 35%. There was a slight quarterly contraction in FX loans in the fourth quarter as well. Consequently, in 2020, FX loans declined by around 6%. In the last quarter of the year, our focus on cost oriented and flexible funding management was maintained. In this regard, there was a slight decrease in Turkish lira deposits in favor of Turkish lira nondeposit funding, which has more attractive rates, reaching 42% of our deposit base, demand deposits continue to further support our low-cost of funding. As you know, Isbank has the largest demand deposit pace among peers. Last but not least, we kept our liquidity buffers at strong levels. By the year-end, total and FX LCR stood at 169% and 436%, respectively. Our readily available FX liquidity, which is around USD 14 billion as of the end of December, corresponds to more than 3x of our short-term FX liabilities. On the next page, we have the net interest margin and spread evolution. We closed 2020 with a swap-adjusted net interest margin of around 4.4%, in line with our guidance for the full year. In the fourth quarter, finally, the inevitable impact of rising Turkish lira funding costs was reasonable on our core spread. In this regard, quarterly adjusted net interest margin stood at around 3.5%. With a quarterly interest income contribution of around TRY 1.6 billion, CPI-linked securities supports the net interest margin. Please note that for the valuation of CPI-linked portfolio, unlike our peers, we are using 12 months that have CPI expectations that are disclosed in the monthly central bank expectation surveys. In line with the ongoing tight spend in monetary policy, net interest margin is most likely to bottom out in the first quarter of 2021. Outward asset repricing suggest a potential net interest margin recovery towards the year-end. We expect a swap-adjusted NIM in the range of 3.6% to 3.8% in 2021. On our next slide, I'll be touching on fee income performance. As you all know, 2020 was a challenging year with regards to fees and commissions. Pandemic-related slowdown in transaction volumes and waivers on top of regulatory changes presented constraints for fee income generation throughout the year. Nevertheless, we counted on our everlasting efforts to expand our fee income base by diversifying the fee sources, enriching the size and scope of fee-based services, optimizing tariffs and enhancing customer experience through digital channels as a key to promote fee growth. As a result, we were able to finalize such a year with a positive growth figure. Lending-related fees and asset management fees were the major drivers of the fee and commissions growth in 2020. 162% annual increase in asset management fees were particularly noteworthy as a reflection of our success in translating our expertise and leading market share in investment transactions to fee generation in a period in which there was elevated interest in alternative investment products. For 2021, we expect fees and commissions income to increase by around 15%. We believe that we will have no difficulty in achieving this thanks to our continued strong focus on this area. This year, we anticipate payment systems to rebound and be the main supporter of the growth. Next page shows the NPL and provisioning trends. In the fourth quarter, we have observed [ a normalization ] in NPL additions due to the portion that has started to exceed 180 days. On top of that, collection performance continued to improve. In 2020, our collection rate stood at 15% on a cumulative basis. At the end of the day, our NPL ratio, excluding forbearance, stood at 6.5%, in line with our guidance for the year. Please note that this ratio includes a significant improvement potential going forward taking into account the ongoing restructuring negotiations regarding certain sale. Conservative provisioning approach was maintained in the period. Our coverage ratios for all 3 stages continues to go up. Our total coverage ratio, including free provisions reached to an impressive level of 7.2%. We believe that this frontloaded provisioning will provide a comfortable base in 2021 in terms of managing risks and uncertainties. Our cost of risk for 2020 stood at 262 bps in accordance with our guidance. Business as usual, net cost of risk, excluding currency impact, and the effect of revision of macroeconomic parameters and its reflections on [indiscernible] was around 160 bps, which is close to a normalized level. For 2021, as our [ prudent stance ] in provisioning will be carried on, net provisions are expected to be flattish, while coverage ratios for all stages continue to surge. Under the assumption of flattish provisioning, net cost of risk is calculated to improve and [ forwards ] slightly [ below ] 260 bps. Next page shows the capitalization levels. As of the year-end, our capital adequacy and Tier 1 ratios excluding the impact of BRSA forbearance were 18% and 14.2%, respectively, on a bank-only basis, indicating once again solid levels. In the last quarter of the year, profit generation was the main element supporting to capital adequacy ratio. We believe that our capital ratios are strong enough to absorb the potential adverse fees in the economy as well as to sustain the growth whenever it seems favorable. This concludes the presentation. Now we can have your questions in our Q&A session. Thank you.

[Operator Instructions] The first question comes from Alan Webborn from Societe Generale.

Just 2 quick questions. One, clearly, your swap costs were a lot higher in Q4. Could you just talk us through sort of volumes and your strategy there and whether that is continuing in the first quarter of this year? And then just a very small point of detail. Looking at the the P&L, it seems that you made a very small provision, free provision right back in the fourth quarter of TRY 100 million. And I just wondered what that was for. Was it was it balancing a fine or something else? Could you just tell me why you did that?

Thank you very much for the questions. Regarding swap costs, I can say that we employed more of the swaps in the fourth quarter. The increase in swap costs mainly came from the increase in average balance as well as the increase in swap costs. I can say that it is 50-50. I mean 50% of the increase came from the increase in average balance while the rest came from the increase in the costs. For 2021, I can say that we will continue to employ swaps, depending on the cost levels of alternative instruments, of course. But we have a high level of FX liquidity. I can easily say that the average balance of swaps will be higher than the levels in 2020. If we add the average swap cost increase in 2021, I think it will not be surprising to see swap costs to increase at a high level in 2021. And for free provision reversal, actually, this is not an important amount. But as you know, we are setting aside this provision for extraordinary circumstances. As you know, we include an administrative fine of TRY 110 million. We set aside some provision for it and also the provision for the pension fund realized which is relatively higher level than we expected. This is just for it. And we still have TRY 2.9 billion free provisions as of year-end 2020.