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

Ladies and gentlemen, welcome to Isbank's 2026 first half financial results audio webcast. The event will be hosted by Ms. Ebru Ozsuca, Deputy CEO; Mr. Mehmet Turk, CFO; Ms. Nilgun Osman, Head of IR and Sustainability. [Operator Instructions] Now I leave the floor to our presenters.

Welcome to our earnings presentation for the second quarter. This is Ebru speaking, and thank you all for joining us. Before we turn to our financial results, I would like to briefly go over the macroeconomic backdrop of our operating environment and share our view for the remainder of the year. In the second quarter, the impact of the geopolitical tensions on the Turkish economy has become more evident. Even though the possibility of a peace deal increased in June, the conflict reescalated again in July. Against this global backdrop, the innovative uncertainties have made it harder to build long-lasting forecasts, yet due to a higher level of energy prices, 2026 year-end expectations for the current account deficit, inflation and [ post rate ] increased in the second quarter while expectations for the GDP growth declined in Turkiye. Despite this change in expectations, the [ pure motor post stands ] and maintenance reserve offers have supported risk perception towards Turkiye. Central Bank kept 1-week repo auction suspended and continue to fund the markets through the upper bound of the interest rate cordon. Meanwhile, macro prudential measures were tightened to sustain macro financial stability. Although normalization in [ 1 topic is ] delayed under current circumstances, assuming the expected renewed ceasefire or peace negotiations remain on track, we expect that CBRT will be able to resume easing cycle in the coming period. Let me take you through the highlights. Throughout the quarter, we have witnessed a stabilization of the funding [ cost ], where it can be assumed that deposit rates have reached a plateau. On the other hand, the asset repricing is still an ongoing process, which will provide further support to margin improvement. Fee income performance was once again remarkable, and we posted the highest quarterly increase among our peers. We believe, as a result, our strong positioning in this area will be sustained in the coming period. Asset quality indicators were intact. Both the NPL ratio and the net cost of risk remained within our guided levels. Last but not least, our capital and liquidity positions were maintained at solid levels. Here, I would like to point out that as you might have already seen in our public announcement, we have obtained BRSA's approval to transition to the internal rating space approach. Accordingly, as of the next quarter, we will be disclosing our capital ratios in compliance with internal rating-based approach, which is anticipated to provide further uplift to our capital ratios going forward. We will share the specific details in the relevant slides. Turning to the major P&L items. As a result of elevated funding costs, swap adjusted net interest income declined quarterly, while posting 181% year-on-year increase on a cumulative basis. Fee performance was once again strong with year-on-year growth of 40%, in line with our guidance. Our diversified fee base helped us achieve the [ sales ] outcome, payment systems, asset management and bancassurance assurance all supporting the annual increase. Annual OpEx increase moderated to 65% on a year-over-year basis from 70% in Q1. Subsidiary income continued to contribute steadily to the bottom line, up around 25% in the quarter. In the first half, return on equity was 14%, while return on tangible equity stood at 17%. Going forward, profitability ratios will strengthen as NIM recovers and core banking income gains momentum. Accordingly, we expect the year-end return on equity will increase to 20% and return on tangible equity to around 25%. Now I leave the floor to Nilgun for the details of the performance.

Thank you, Ebru. Welcome all, and thank you for joining our webcast. In this slide, you can see the composition of our balance sheet. As of the end of first half, loan book continued to make up more than half of total assets, while share of the securities portfolio stood at around 17%. Consistent with our lending strategies, TL loans account for 65% of the book against 35% in FX. Within securities, TL shares stands at 70% and FX at 30%. Moving on to the next page. In the second quarter, TL loans grew by 6.3%, bringing year-to-date growth to over 14%, in line with our full year guidance of around mid-30s. During this period, while maintaining our focus on productive segments where our expertise and tailored solutions differentiate us, lending growth was broad-based across the portfolio, reflecting our strategy of being the main bank of our customers. On a year-to-date basis, retail loans grew by 16% while TL non-retail loans posted a 12% increase. FX lending was 2.2% year-to-date, in line with our projections. On the securities side, in the second quarter, besides the shorter-term fixed bonds, floating rate notes, mainly TL [ ref 1s ] have been our primary preference. All in all, we believe that under current market dynamics around 54% of floating rate composition will continue to contribute to our margin progress. During the period, the income contribution of CPI linkers stood at around TRY 12 billion, indicating a moderate increase compared to the previous quarter. Turning to the funding mix. Deposits remained as our primary source of funding, accounting for 67% of total liabilities and close to 3/4 of our funding base. Our deposit base reached TRY 3.4 trillion over the quarter, proving our leading position among private banks in total deposits. As for the currency composition, TL's share rose to 57% from 55% at the end of March. Beyond deposits, we continue to strengthen our presence in capital markets and to make use of alternative external funding opportunities, in line with our strategy of diversifying our wholesale funding sources and extending the maturity profile of our liabilities. In this period, we have successfully closed our $1.3 billion equivalent sustainable syndicated facility with a 1-year tenure and continued issuance under our GMTN program with a sustainability focus. Additionally, in July, we successfully executed a $500 million [ 12 non-call 7 ] Tier 2 Eurobond issuance, marking the longest tenor Tier 2 market transaction across the SEMEA region. We maintained our concentration on wide spreads, small ticket granular deposit base. TL deposits grew by around 8% over the quarter, which brings the year-to-date increase to 11.4%. On the FX side, deposits declined by around 6% in the quarter. Our demand deposit base continues to rank first among private banks. As of the end of the second quarter, 43% of our deposits is comprised of demand deposits, providing substantial support to our funding cost base. Both TL and FX demand deposit shares were slightly higher than the previous quarter, nearly at 16% and 78%, respectively. In terms of composition, the retail share of our deposit base increased in the quarter, reflecting our continued focus on granularity. On the next page, we have the spread and net interest margin evolution. In March, at the initial phase of geopolitical tensions or defending our NIM under the uncertainty of the duration of the conflict, we relied more on swap and repo funding, which carried lower costs relative to marginal deposits. As a result, deposit costs were not significantly affected in the first quarter. However, as geopolitical risks proved persistent in the second quarter, deposit costs gradually went up inevitably. All in all, swap adjusted net interest income grew by 181% compared to the same period of previous year, while it came down quarterly. Nevertheless, swap adjusted net interest margin has been kept around 3% for the first half. Going forward, even with the assumption that interest rates will stay at their existing levels, as cost increase being fully reflected to the deposit base, several factors are at play to support margin evolution simultaneously. Securities book was already contributing, as mentioned. On top of that, upward pricing adjustment of loans will become more visible as the repricing progresses. Taking into account that we haven't observed any easing on the monetary policy system, coupled with ongoing geopolitical tension, we are revising our swap-adjusted net interest margin guidance for 2026 to the range of 3.2% to 3.4%. Needless to say that this indicates a delay rather than a disruption in the expected margin trajectory, which would resume into 2027, in line with the ongoing disinflation process. Moving on with net fees and commissions. Fee income grew 39.4% year-on-year in the first half, in line with our full year guidance. Quarterly increase was remarkable at 19%, highest level among peers. All major fee lines contributed to growth. Payment systems continue to account for the highest portion of our fee base at 68%, growing 40% annually. Asset management stands out with 70% growth, supported by remarkable annual expansion in assets under management. Bancassurance grew 55%, while lending-related fees and money transfers contributed 21% and 25%, respectively. The strength in asset management is closely tied to our digital reach, powered by a massive digital footprint of 16 million customers. 97% of all non-branch transactions and 80% of our commission revenue from digital channels is generated through [ Ische ]. We expect to sustain this momentum going forward by leveraging our digital channels and continue to improve the overall customer experience. Year-on-year OpEx growth stood at around 65% in the first half, while fee to OpEx ratio increased to 83% in Q2. As seasonality continues to smooth out for the remainder of the year, we see ourselves emerging to the full year guidance of mid-40s. Turning to asset quality. The trajectory was broadly stable in the second quarter, with key indicators generally tracking as expected. Compared with the previous quarter, net NPL formation rate was largely steady. On the other hand, collection rates remained robust at 20%, and the NPL ratio was 3.8% as of the end of June. Quarterly cost of risk was at 237 basis points, bringing the first half figure to 222 basis points within our guidance level. Coverage ratios remained solid, with the total coverage ratio for the loan book rising to 4.1%, indicating the highest level among peers. Overall, the portfolio continued to perform in line with our budget expectations. We are confident with respect to our full year guidance of an NPL ratio of around 4% and the net cost of risk below 250 basis points. Next page shows the capitalization levels. At the end of June, our capital adequacy ratio increased to 15.4% and common equity Tier 1 rose to 12.1%. As we have mentioned, starting from next quarter, we will be disclosing our capital ratios in compliance with the IRB approach in the calculation of credit risk. We expect the optimization that will be derived from this methodology to provide further support to our capitalization levels. If calculated with this approach for dual figures, IRB approach would have delivered an impact of 190 basis points on our capital adequacy ratio and 220 basis points on our common equity Tier 1 ratio. Also, our July Tier 2 issuance will provide positive impact of around 78 basis points on capital adequacy ratio. As always, we believe our capital ratios are strong enough to ensure sustainable growth of our asset base. Sensitivity of our capital adequacy ratio to a 10% depreciation in TL is around 25 basis points, while sensitivity to 100 basis points increase in TL interest rates is around 5 basis points. Before moving to Q&A, we would like to touch upon our revised guidance. As we have mentioned, as a result of the delay that funding dynamics import on the improvement of net interest margin this year, we revised our 2026 guidance to 3.2% to 3.4%, with an expected recovery trajectory to continue into the next year. In parallel with this, for 2026, we update our return on equity expectation to 20% and return on tangible equity expectation to 25%, respectively. This concludes our presentation. Now we can open the floor for your questions.

At the moment, as far as I can see, there are no audio questions. We have a couple of written questions from [ Thomas Netzer ], [ Work Intelligence ]. So the first question is, could you please discuss rate and CPI assumptions in your guidance? And what's your view on 2027?

For this year, our year-end CPI assumption is around 30%. And the post rate could come down to 36% or more flattish, I can say. And of course, the trajectory of the inflation going forward will be mostly dependent on the energy and food prices. So going forward, for the year 2027, although we have not budgeted yet, but our preliminary expectations is the CPI could come down to 25% levels. In this respect, if the case goes like this, and we can expect the policy rate to come down just below 30%. There was somewhere around 28%, 29%. But as I said, these are not official expectations at the moment. But as a preliminary assumption, I can give those levels to you.

Moving with [ Tomasek's ] second question. If the 1 week repo was to stay at 37%, what will be your NIM?

I do understand the question, saying that the average cost of funding coming down to 37% levels. So the policy rate and average cost of funding will be at the same levels. Assuming the question is like that, I can say that our NIM guidance levels will be in range, which we have set 3.2% to 3.4% at the moment.

We have a question from Olson Evremos, [indiscernible] Company.

Thank you for the presentation. I'm looking at your profit and loss, but I see the trading line weaker quarter-over-quarter. And also, other operating profits surprised me on the downside. Could you give some more color as to what's going on?

In the second quarter, when we look to the whole trading line, as you can guess that the second quarter, we benefited from the comparatively lower cost of swap funding. Therefore, the volumes and the cost rose. But of course, these are already reflected to our swap adjusted net interest margin. And on the FX trading side, we are continuing to use the market opportunities. So of course, it is mark-to-market valuation effects are also having a reflection. But I can say that in the whole -- when we look to the whole first half year, it is -- we are just having a flattish trading income, excluding the swap costs.

Thank you very much. Also in the presentation, I saw the pension expense as well. Could you give some color on that too?

First of all, on the other operating income, I think that was your question, the first question. As you know, there is seasonality on the other operating income due to the reversals recorded in the first quarter, which are primarily about the collections. So that's also reflected in the seasonality in the second quarter as well. And with regards to the pension fund provisions, we have an actuarial assessment in the pension fund, and we accordingly set aside provisions every other quarter. And this quarter, it was around TRY 1.7 billion.

Well, we have another question from Ashwath PT, Goldman Sachs.