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

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Isbank's First Half 2021 Financial Results Teleconference and Webcast. [Operator Instructions] Today's events will be hosted by Ms. Gamze Yalcin, the CFO; and Ms. Nese Sozdinler, the Head of IR and Sustainability. As usual, the call will be followed by a question-and-answer session. Without further ado, I would now like to pass the line to Isbank's management team. Ladies, the floor is yours.

Hello from Istanbul. This is Gamze speaking. Welcome to our second quarter financial results conference. Nese, our Head of IR and Sustainability; and myself, will be hosting the call. But first thing first, we hope everyone is safe and healthy. So as always, let's start with the recent trends in our operating environment and then focus on Isbank's performance in the second quarter. On Page 2, you can see the economic developments in the second quarter. As you remember, in the first quarter, the economy recorded a higher-than-expected growth performance. To be specific, a 7% growth was achieved on a year-on-year basis, thanks to the strong domestic demand, along with the investment expenditures and of course, the support coming from the net exports. In the second quarter, we again observed that the economic activity continues to present a positive up, high annual rise in industrial production, strong exports and the low base signals a high annual growth rate for the second quarter as well. So in the first half, Turkish economy demonstrated a strong growth momentum. However, for the remaining part of the year, we might see a momentum loss in the annual growth rate compared to the first half due to the tight monetary policy and high base effect. Despite this, with the support of the strong performance in the first half, we expect the economy to expand at 6% in the year as a whole. Of course, the overall macro outlook will continue to be affected by the course of the pandemic and by the policy implementation of the advanced economies and by the CBRT, of course. For the following years, we forecast a growth performance closer to long-term growth average of Turkish economy. Regarding the inflation, it's seen that strong domestic demand, rising commodity prices on global scale and strong FX pass-through impact due to increasing volatility in the financial markets put upward pressure on inflation. CBRT continues with the tight monetary policy stance, but we foresee a limited decrease in inflation due to the high base effect in the last quarter. When we look at the trends in the banking sector, first of all, annual rate of increase in loan growth continues to be on a decelerating trend since the third quarter of last year. But Turkish lira loans continue to be the main driver of the churn growth rate. Normalization in economic activities has led to a relatively strong demand, and we observed an increase in retail lending, especially in June. However, banking authorities, prudential regulations, together with the tight monetary policy stance, seems to weigh on domestic demand, and we expect a lower loan demand at the year-end. In line with this trend, our Turkish lira loan growth forecast for this year stands at around mid-to high-teens levels. On the dollarization front, as you know, uncertainties and high financial volatility leads to dollarization, and in the first half, we observed a slight de-dollarization. If you look at the recent sector data, it is seen that since the year-end, Turkish lira deposits grew by 14.5%, while FX deposits declined by 1.3% in USD terms. And Isbank, since the year-end, our Turkish lira deposits increased by around 18% and share of FX deposits in total decreased to 61.9% from 63.5% level. 88% of our TL time deposit accounts were opened through digital channels, while the amount of these accounts increased by 31% since the beginning of the year. So within this operating environment, when we look at the highlights of the period for Isbank, we see a continuation in the normalization of asset quality metrics leading to an upside in our cost of risk items. Fee income growth surpassed our expectations, which brings us another upside. Capital adequacy and liquidity coverages once again stood at solid levels, well above minimum required levels. We maintained our leading position in terms of demand deposits with a remarkable share of 42.2%. Within the quarter, we have seen an increase in our core spreads by 50 bps, but cost of funding is still imposing pressure on our net interest margin guidance. All in all, in the first half, our return on tangible equity slightly exceeded our initial guidance. Now I will leave the floor to Nese for the details of the bank's performance.

Thank you, Gamze. 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 second quarter, relatively stabilized but still increasing funding costs were partially offset by upward asset repricing. As a result, quarterly swap-adjusted net interest income increased modestly. Rebound in fee income was remarkable. Payment systems being the largest driver, net fees surged 12% quarterly and about 27% annually. Thanks to our diversified business model, we once again recorded a remarkable contribution from our participation. Year-on-year OpEx increase remained in line with guidance and below the inflation. As a result of resilient asset quality metrics and front-loaded provisioning approach, provisional expenses continue to normalize on a gradual basis. In the first half, return on tangible equity stood close to 13%, slightly exceeding the guided level. Page 5 shows the main balance sheet items. In the first half, our Turkish lira lending growth was 7.8%, which was largely across the board. Due to the front-loaded growth in 2020, we think that this year will be a balancing period for all players in the market. We still expect TL loans to be the main driver of the growth in the remainder of the year at a mid- to high-teens rate. Foreign currency lending was stable compared to the previous quarter. Let's continue with the funding side. In the quarter, TL deposits posted a strong growth of 11.6%, further decreasing our TL loans and deposits ratio. On a year-to-date basis, TL commercial deposits grew by 14.9%, and their share in total TL deposits stood almost at 27%. At the same time, TL saving deposits increased by 20%. As you know, Isbank has the largest demand deposit base among peers. In second quarter, despite the continued increase in interest rates, share of demand deposits stood at about 42%, pulling down our funding cost base. Please note that 51% of FX deposits are in the form of demand deposits, while share in TL stood at 28%. As for the external liabilities, in the period, we had a successful ESG-linked syndication renewable process with more than 110% rollover rates. Besides, we resumed a USD 750 million of senior unsecured euro bonds. As of the June end, our total external dues were USD 10.5 billion, of which USD 4.7 billion is due within a year. And against that, we have USD 14 million of liquidity buffer, 3/4 of prepayment amounts. FX LCR was again stellar at 467%. On the next page, we have the net interest margin and spread evolution. In the first half, swap-adjusted net interest margin was flattish at 2.5% level. During the quarter, we have seen an upward moment in the loan yields, which partially offset the increase in funding costs. This is reflected on our quarterly TL core spread with an increase of 50 basis points. Please note that in our NIM calculations, we valued our CPI linker portfolio with a rate of 12.12% in the second quarter. If we use the actual CPI for valuation, our quarterly swap-adjusted NIM would be 35 basis points higher. Taking into account the current trends and expectations, we might see around 50 basis point deterioration in our year-ending guidance. On the other hand, please note that higher returns on assets compared to flattening costs on liabilities started to positively affect our net interest margin for the rest of the year. On Page 7, we provide information about the securities portfolio and CPI linker contribution in detail. Our securities portfolio makes up 17.5% of our total assets, parallel to Q1, and it continues to support our net interest income. Our CPI linkers and other sorting rate now stand as a natural hedging item for our fixed assets. In Q2, share of CPI linkers in TL securities increased to 48.4% by 100 basis points, and quarterly yields stood at 18.7%. In the second quarter, net interest margin contribution of CPI linkers was around 127 basis points. As I already mentioned, we used 12.12% for the valuation of the CPI linker portfolio in the second quarter, which is CBRT surveys expectation for the next 12 months. If the valuation was performed according to the actual CPI, we would obtain TRY 914 million additional interest revenue in half 1. And accordingly, net interest margin and return on tangible equity would be higher by 35 basis points and 277 basis points, respectively. I'm continuing with Slide 8, which touches upon our income performance. Second quarter was a remarkable period with regards to fee income growth. Fees posted a 12% quarterly increase while 28% on a year-on-year basis. Payment systems and noncash lending fees were the major contributors. As you know, for 2021, we guided fees and commissions income to increase by around 15%. However, as a result of the strong economic activity, along with the low base effect, we expect fee income growth to be around mid-20s. We anticipate the support of payment systems to continue in the rest of the year. Accordingly, we observed an increasing trend in the share of payment systems in total fees and commissions. Please note that within this quarter, we [ booked the LYY consent fee ], which we had received in April through Türk Telekom dividend distribution amounting to TRY 40 million as a one-off. Next page shows the NPL and provisioning trends. Thanks to our prudent underwriting standards, our portfolio displayed a sound track record in terms of asset quality metrics. This strength has been sustained in the second quarter. With decrease in inflows and increase in collections, our net NPL formation rate declined to a 0. Adjusted for asset sale in Q1 and the write-down transaction, which was performed in Q2 with an amount of TRY 868 million, our coverage ratios continue to improve. By the end of Q2, adjusted Stage 3 coverage ratio was around 66%. Our net cost of risk stood at 130 basis points, pointing out a gradual normalization. And in the quarter, we conducted our annual IFRS model update, alongside the review of macro estimates, and this resulted in a 58 basis point impact on our quarterly net cost of risk. Excluding periodic IFRS revisions and currency impact, quarterly net cost of risk stood at 33 basis points, indicating the resiliency of underlying asset quality dynamics. Therefore, we revised our cost of risk expectation as below 150 basis points for 2021. Next page shows the capitalization levels. In Q2, capital adequacy ratio and Tier 1 slightly increased by around 10 basis points and continue to stand at comfortable levels. Capital adequacy ratio of close to 17%, while Tier 1 was around 13%, excluding the impact of forbearance measures. Over the period, net income generation and mark-to-market valuation gains of securities portfolio were the largest contributors to the capitalization. Once again, please note that the sensitivity of our capital adequacy ratio to 10% depreciation in TL is limited to around 45 basis points. All in all, in a period marked with both gradual normalization and ongoing uncertainties, we believe that we achieved distant results not forgoing our prudent approach. This concludes our presentation, and now we can have your questions.

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

You mentioned that you saw acceleration in retail demand in June. Could you tell us sort of where that was coming from? Is it more your appetite? Was it GPLs? Give us an idea of what was supporting that. And could you remind me where you're -- I think you've said sort of mid- -- is it mid- to high-teens TL loan growth you see for the full year? Is that stable of where you were before? Or is that an improvement? So could you give us a view of the dynamics and how you're thinking about loan growth after the end of the first half? And then just a precision, you're saying that the NIM is going to be 50 bps below the 3 -- 3.6% to 3.8%. Is that what you're saying? So NIM is going to be possibly 3.1% to 3.3%. Is that what you're telling us? And are core spreads a little bit more sluggish than you were expecting? What -- is there anything new in there that sort of changed your mind and why you're being prudent?

Alan, thank you very much for the question. First of all, to start with the retail loan growth. Indeed, this is mainly related with the normalization in the economic activities. And we definitely observe strong demand. And when we look at the market, the demand is mainly coming in the form of GPLs and credit cards. Coming to the second part of your loan growth question. In the -- as you remember, our initial expectations for GDP growth for this year was 3.5%, the GDP growth rate. This was reflecting our cautious optimism in the face of prevailing uncertainties. But when we look at the normalization in the economic activity and the strong manufacturing industry, et cetera, et cetera, the reasons what we stated during the presentation, indeed, we observed around 5% growth in the first quarter in TL loans and limited growth, 7.8% growth in TLs in the second quarter, a continuation in the domestic demand as well as the base effect derived from last year's COVID introduction period. When we set the guidance for this year in the beginning of the year for TL loan, indeed, for the loan growth rate, we said that it will be limited to around 10% to 12% level. That's around low-teens levels. But please note that we set our strategic planning and guidance for a 3-year horizon. And if you remember, last year, we had a front-loaded loan growth, especially TL loan growth by around 35% level. And this year, again, we foresee that the growth will mainly drive from the Turkish lira loan side again in a more balanced way. But definitely, the normalization of the economic activities after the lockdowns with increasing the pace of the vaccination process. We see that this pent-up demand, strong domestic demand is coming, as I said earlier, mainly in the form of credit cards and general purpose loans. So by looking for -- when we look for the whole year, we believe that there is a prudential regulation. If you remember, they have recently announced some increases in the risk weight for retail loans, so in a way, limiting the utilization of retail loans in that sense in order to control the inflation within the country. So definitely, we believe that in the second half, there will be a decelerating trend in the banking sector as a whole. And the -- saying that no major changes in the TL loan expectation, indeed, we will be observing the initial -- we set the guidance at 15% to 16%. So we can simply will be around this level. During the presentation, we said that it will be around mid- to high-teens levels, but we believe that it will be hovering around, again, the levels for the TL loan growth. Coming to your question regarding net interest margin guidance. If you remember, in first quarter, there was an unexpected interest rate increases, which immediately affects our -- the deposit costs in the markets, indeed. And therefore, as Isbank, as always, we try to -- tried our best in terms of effectively thriving the alternative sources of funds in the market. And when we look at the second quarter, we can say that there seems to be a stabilization in terms of cost of funding. But definitely, some of the swap contracts are renewed in the second quarter. And therefore, we see a kind of, again, a continuation in that sense, an increase in the continuation in this high cost of funding rate. But definitely, it seems to be stabilized right now, and we don't expect to see higher increases -- more increases in that spend. So we are saying that due to the increase in the cost of funding in the first half, let's say, we are revising our NIM guidance by around 50 bps. In the beginning of the year, as you rightly put it, we provided yourselves a Brexit a range for our NIM guidance, swap-adjusted NIM to be 3.6% to 3.8% level. So you can consider that we will be having a 50 bps lower, you can say the -- keep the Brexit at 50 bps lower, like 3.1% to 3.3% levels for the swap-adjusted NIM. Of course, in the second quarter, we are expecting to see the positive contribution coming from the repricing of our assets. And definitely, we have started to see them. And in the coming months, we will be ordering them in a more fashionable way. And all in all, we came up to revise our NIM guidance with around 50 bps levels. I believe that was -- these were the questions. If I'm missing any answers to any part of your questions, please remind me.

We will now be moving to Can Demir from Wood & Co.

Hello, can you hear me?

Yes, Can.

Okay. That's great. Again, I have 2 questions, if I may. So the first question is about the demand deposits, and there is so much demand deposits flying around these days and the interest rates, especially on the lira side of the balance sheet is so high. So the first question is, so why do you think that is the case? And the second question is the loan growth. Obviously secured unsecured consumer because there's not so much to do in other businesses because the state banks do what they do. They are too aggressive. So that obviously kind of pushes you to unsecured lending, I guess. And the question there is, how long do you think the competition will remain benign in the consumer space or unsecured consumer space among private banks? So that's the second question.

Okay. First of all, to start with the bank deposits, of course, there are still some uncertainties under the CPI link conditions in the market. And some are looking for, searching for higher yields. So you can consider these may be their reasons. But for Isbank, I must definitely mention about the high quality of services, et cetera. And this has been the case for ages, and it continues. As you know, we have a strong demand deposit base amongst the private banks within Turkey, thanks to the high quality of services, thanks to Isbank's high reputation in that sense. So we continue to keep our sticky demand deposits. So I must say that for Isbank's case, this is sticky deposits, and this has been the case for ages, I'd like to repeat myself. The second question is related with why retail and why unsecured loans in the market and in competition. To start with, for Isbank, indeed, when I was answering Alan's question a minute ago, I mentioned about that we are expecting to see and mid- to high-teens levels of Turkish lira loan growth rate for this year. And when we set our business plan for this year, we expect to see a balanced growth between the retail and the nonretail segments of the balance sheet. And in the quarter, in this quarter, specifically, the reason why retail is more than nonretail in the sector is mainly related with this pent-up demand after the lockdowns. After the -- with the introduction of more vaccination processes, of course, it increased the expenditures, it increased the appetite of people. And we are all human, and we locked down for so long, and we, of course, start to increase our spending in that sense. When you look at the Isbank's asset quality and when you look at our NPL ratios, especially for GPLs and for credit cards, they are as low as like 1.8% for the GPLs and less than 3%, like 2.8% for the credit cards. And so we believe that we are -- we have a good sense of differentiating the risky and the nonrisky ones in our asset portfolio. And also, please note that 94% to 99% of our portfolio remain in the low-risk core categories when we will get our risk scores. And when you look at Isbank's credit bureau scores, you can see the same results in that sense. And another important point I must mention, I believe, like half of the GPLs are extended to payroll customers. So we don't feel that they are that much of uncollateralized in that sense. So I hope this answers your questions, Can.

Yes. Thank you, Gamze. Thank you.

Our next question comes from Mr. Simon Nellis from Citibank.