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

Ladies and gentlemen, welcome to Isbank's First Half 2022 Financial Results Audio Webcast. The presentation will be given by Ms. Gamze Yalcin, CFO; and Ms. Nese Gulden Sozdinler, Head of IR and Sustainability. There will be a Q&A session at the end of the presentation. [Operator Instructions] Now I leave the floor to Gamze.

Hello, all. I hope everyone is safe and healthy. Thank you all for joining our second quarter earnings presentation. Despite challenges, both locally and globally, we are happy to present another strong set of results. We believe once again, we improved our sustainable performance, of course, thanks to our well-diversified balance sheet structured with a long-term perspective. Without further ado, I would like to share the period's highlights for Isbank. All the major performance indicators posted healthy and strong results, leading to a revision in our year-end guidance. Each asset class, indeed each and every business we are operating in, contributed strongly to our robust performance. But among all, please note that fee income generation was eye-catching due to our ongoing concentration. In the first half, we achieved the largest fee base among our peers with nearly 3-digit annual increase. Not abandoning our conservative stance within this challenging environment to weather the rainy days, we have further added TRY 2.2 billion to our free provision base, carrying the total amount to TRY 6.5 billion. Return on tangible equity exceeded 51%, pointing out a new record high level. Thanks to the 97% positive JAWS that was achieved in the period, cost-to-income ratio declined to 25.9%. Free provisions increased by around 60% versus 24% year-to-date asset growth. Please note that again, free provision buffer expanded on top of our prudent loan loss provisionings. As a result of strong support of profitability and optimization of risk-weighted assets, significant increases were achieved in our solvency ratios. So all in all, in line with the improved performance, our free provision income increased more than threefolds on a year-on-year basis, whereas bottom line was nearly 5x higher compared to the same period of last year. Now I will leave the floor to Nese for the details of the bank's performance within the period.

Thank you, Gamze. Welcome all, and thank you for joining our webcast. Page 5 shows the main balance sheet items. In the second quarter, we observed a pickup in TL loan growth compared to the previous quarter. Largest driver of this increase was SME loans, which is one of our focus areas. As the year-to-date growth reached 34%, we have revised our TL lending increase expectation to around 45%. In line with our budget, there was 3% decline in foreign currency lending. Looking at the funding side, there was around 10% additional quarterly growth in TL deposits, carrying the year-to-date increase to 46%. Naturally, bulk of the expansion came from new deposit schemes as we are among top performing banks in this area. Needless to say, in terms of demand deposit base, we continue to be the #1 among private banks. As of the end of period, nearly half of our deposit base is comprised of demand deposits, providing an impressive support to cost of funding. As for the external liabilities, our total external dues were USD 8 billion, of which USD 3.8 billion is due within a year. Against that, our FX liquid assets was 3x of short-term repayment amount. FX LCR was again remarkable at 454%. In Q2, we have secured another ESG-linked syndication deal with a decent rollover rate. On the next page, we have the net interest margin and spread evolution. At the end of first half, our swap-adjusted net interest margin stood at 6.3%. As a result of our agile balance sheet management approach, we have received remarkable outcomes in defending our spreads. Indeed, we expect to maintain existing spreads in the second half as well. Accordingly, we revised our swap-adjusted net interest margin guidance as above 5% with a conservative stance. But please note that there is still upside potential. On Page 7, we provide information about the securities portfolio and CPI linker contribution in detail. As of the end of June, share of securities in total assets stood at 16.8%. Looking at the composition of TL securities, you see that CPI-linked bonds have a share of 60%, while share of other floating rate notes and fixed securities is around 20% each, giving us an advantageous position in the current operating environment. In Q2, yield of the CPI linker portfolio stood at 58%. On our next slide, I will summarize the fee income performance. Fee income generation was remarkable this quarter. We have reached the largest fee base as of the first half with almost 100% increase. We are proud to acknowledge that our continuous efforts to enhance fee business is definitely paying off. Largest drivers of the strong growth were again, payment systems, lending-related fees and money transfers. Going forward, with this concentration, we will further enhance our performance in fee business. Accordingly, we revised our guidance as above 80% from 30% level. Next page shows the NPL and provisioning trends. In the first half, we have not seen a deterioration in our asset quality metrics. Our NPL ratio stood at 3% with declining inflows as well as outstanding collection performance, as always, quarterly net NPL formation was negative in Q2. Coverages across all stages pointed out prudent levels once again amongst the peer group. NPL coverage increased further by another 2 points. Major driver of the decline in share of Stage 2 was the reverse migration. Our total net cost of risk, including currency impact, stood at 83 basis points in the first half. We wouldn't expect a significant change in this trend for the rest of the year other than a slight normalization. Therefore, we revised our year-end cost of this guidance as below 125 basis points. Next page shows the capitalization levels. In Q2, despite the currency increase, capitalization ratios remained stable, thanks to the net profit generation in the period. Once again, please note that the sensitivity of our capital adequacy ratio to 10% depreciation in TL is limited to around 50 basis points. Next page provides a summary of revised guidance items for your convenience. So this concludes our presentation. Now we can have your questions.

[Operator Instructions] We have a question from Konstantin Rozantsev. So I guess there is a technical issue with Konstantin. I'm moving on to the written questions.

So I just wanted to clarify one point. I understand that some of the corporate deposits that are invested into this protected deposit scheme before you started to compare since late July. So I just wanted to confirm, what's the evidence that you've been observing at Isbank? What fraction of these deposits -- corporate deposits invested into this protected scheme, so what fraction of these deposits is being rolled generally within the scheme and what fraction leaves this scheme and kind of invested elsewhere?

Okay. Thank you, Konstantin, for your question. We have been observing a considerable amount has been accumulated under this type of product, I mean, the currency-hedged protected schemes. Currently, new deposit schemes constitute like more than half of our Turkish lira term deposits. We have achieved decent conversion rates both for the retail and nonretail segments, which provide us a great deal of flexibility as well as cost and liquidity advantages in shaping our asset and funding mixes in the current environment. Rollovers of these accounts also display a favorable trajectory. On the other hand, it might be a little early at this stage to provide an average figure. As you know, a large chunk of nonretail portion will be maturing in the coming days. And most probably, we will be seeing a more clear picture of the trend after observing the behavior of this segment. But I must say that for Isbank, for the retail segment, we observed about 10% levels, whereas for nonretail, about 20% levels.

Understood. But just to confirm, so for -- in terms of your expectations for August, is the management kind of comfortable with the fact that rollovers should go fine by corporates in the scheme or it's not as clear and we need to see the actual data? How comfortable is the management of the bank that's -- there wouldn't be any issues here?

For OpEx, we tend to keep our existing guidance level, which is in line with CPI. Coming to the current levels, as we discussed in our first quarter results teleconference, despite the collective bargaining process, we kept our wages and salaries component below inflation levels, at around 60% level, I can say. However, as you know, CPI still remains at high levels. Therefore, we increased provisions in this item as well. But please note that in line with the profitability increase, provisioning base also increases. On the other hand, in line with our cost control focus, non-HR expenses increased by only 71% when adjusted for provisions for our pension funds. So that's why we keep our OpEx guidance remaining at the same levels, which we disclosed in the beginning of the year.

Yes, that's very useful. And just to confirm, sorry, I think I was not very clear in my last question. But I just wanted to clarify how comfortable is the management that the majority of corporates invested into this FX protected scheme, which would roll within the scheme, so how comfortable is the management that there wouldn't be any significant drop in rollovers of corporates invested into the scheme in August?