Türkiye Vakiflar Bankasi Türk Anonim Ortakligi (VAKBN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the VakifBank Audio Webcast Fourth Quarter 2021 Earnings Results Conference Call and Webcast. Thank you very much for standing by. [Operator Instructions] With that, I'll now hand you over to your host, Mr. Ali Tahan. He's the Head of International Banking and Investor Relations at VakifBank. Mr. Tahan, the floor is yours.

Thank you. Thank you very much, Rob. Good afternoon, everybody, and welcome to 2021 VakifBank year-end financial earnings conference call announcement. As always, we will be starting with the presentation. And thereafter, following the presentation, we will be sharing our 2020 budget verbally. And thereafter, as usual, we will be looking for to answer your questions. In the meantime, our accounting colleagues will be publishing our year-end financials at public disclosure platform, but for the sake of the time, we can start with the presentation. On Page 2, you can see the numbers related to our net income. This quarter, VakifBank delivered almost TRY 2 million (sic) [ TRY 2 billion ], which is slightly higher than the market consensus of almost TRY 1.9 billion. And this TRY 2 billion net quarterly P&L came despite additional TRY 300 million pre-provisioning setup. As you all know, in the beginning of the year, during the first quarter, we already set up TRY 400 million in the first quarter of the year. And on top of that, this quarter, we put additional TRY 300 million more pre-provisioning and by doing that total pre-provisioning amount, we set up in the entire year of 2021, reached to TRY 700 million and in our balance sheet, total outstanding pre-provisioning amount reached to almost TRY 1.8 billion. And with such quarterly P&L of almost TRY 2 billion, total full year 2021 year-end P&L came at TRY 4.175 billion. And in case we didn't set up such high amount of TRY 700 million total comparable net income of the year will be reaching to almost TRY 4.9 billion. And when we look to the details, of course, the most eye-catching development of the quarter seems to be coming from the core banking revenue generation capacity, especially thanks to additional support from CPI linkers portfolio. Our core banking revenues, consisting of net interest income and net fee and commission income materialized at some point, almost TRY 4 billion which was only TRY 5.9 billion a quarter ago, which represents almost 77% Q-on-Q increase. And more importantly, if you look at to do our pre-provisioning profit, we had a much more substantial and visible increase on a Q-on-Q basis, increasing from almost TRY 2 billion to above TRY 7 billion. During this quarter, this increase -- a very strong increase in pre-provisioning profit simply reflected in our coverage ratios especially Stage 2 coverage ratio and total NPL coverage ratio increase was very strong. Compared to a quarter ago, our total NPL coverage ratio increased from 126% to above the 141%, which is above 15% increase just in 1 quarter period of time. On Page 3, you can see the key highlights of the fourth quarter. Starting from the balance sheet side, again, similar to overall 2021, this quarter also was driven by Turkish lira lending growth. Our Turkish lira lendings were up by 9.3% Q-on-Q and 20.2% year-on-year. And similar to private banks and similar sector on the FX lending side, we have shrinkage in dollar terms in Q-on-Q by 4.5% as well as 2.7% year-on-year. And our total loss as a cumulative of what the Turkish lira and hard currency, especially taking into consideration the depreciation impact was strongly up by 20% Q-on-Q and almost to 26% year-on-year. We already discussed about core banking's revenue generation capacity of the bank in just -- especially in the final quarter of the year. And as a result of that, our core banking revenues reaching to TRY 10.4 billion, representing almost 86% of total revenue base in Q4. As expected and guided, one of the strong improvement in our ratios came from net interest margin side. Our reported net interest margin expanded by 192 basis points Q-on-Q and reached to almost 4.8%. And of course, the biggest contributor came from CPI linker portfolio. This quarter, we had TRY 3.9 billion interest income from our CPI linker portfolio. But on top of that, excluding this CPI, still our net interest margin recovery was meaningful. And this quarter, especially thanks to lower cost of funding, we had around 100 basis points improvement in our Turkish lira -- cost-of-debt between lending and deposit rate. On the P&L side, especially disciplined cost management was still in place during Q4. On a cumulative basis, our total OpEx growth came substantially lower than inflation at lower than 18% and both HR cost and non-HR cost increase were limited and lower than the inflation. Another important highlight of the quarter related to prudent and strong coverage ratios. Stage 2 coverage ratio, even though we had additional increase in terms of the ratio of Stage 2 within total loan portfolio. Still, despite that, we also had additional coverage ratio increase for our Stage 2 portfolio which was 13.3% a quarter ago. This quarter, it came at almost 15%. And on top of that, Stage 3 NPL cash coverage ratio materialize at 77%, which is the highest ratio in the peer group. And as a combination of total NPL coverage ratio further improved. And last point I would like to take your attention related to a strong liquidity position and to strong liquidity ratios, both for short term and long term. As you know, we are especially monitoring LCR ratio, total and hard currency LCR ratio to monitor short-term liquidity level which are extremely healthy and extremely strong. And on top of that, we already started to report long-term liquidity ratio indicator, which is a requirement of Basel III net stable funding ratio and not only in the short run but also in the medium and long run we have strong liquidity ratios. Our net funding save ratio stands at 116% as of year-end versus Basel requirement of minimum 100% threshold. On Page 4, you can see the P&L details in a different format prepared by our Investor Relations colleague, which is easy to read. For the sake of the time, I'm passing this page now. On the following slide, on Page 5, you can see the component of net interest margin, our cumulative reported net interest margin, which was 28% as of September increased to 2.8% arrear for the full year of 2021, which is in line with our guidance. And our swap-adjusted net interest margin also improved from 109 basis points as of September to 176 basis points, sorry, as of full year and right-hand side below chart, you can see the detailed information related to our CPI portfolio and CPI estimation. As of Q4, thanks to strong October to October reading of 2021, we adjusted our interest accrual with 19.9% inflation data and enjoyed almost TRY 3.9 billion interest income in just 1 quarter period of time. And as of first quarter, for the time being, we are using almost 40% October to October expectation for 2022. This is a simple function of CBRT year-end inflation expectation of 23%. If you take into consideration 22% year-end CBRT expectation then it takes us to almost 40% October to October CPI accrual. And in this scenario, we are expecting to have around TRY 4 billion interest income in the first quarter of 2022, which will be another quarter where we enjoy a good level of interest income from our CPI portfolio. And for the time being, our CPI linker portfolio continues to be accumulated. And as of today, we are having around TRY 57 billion CPI linker within our Turkish lira security portfolio. On Page 6, you can see the high quality core banking revenue details especially on the net interest income and net fee and commission income side. We have very visible and strong quarters, both Q-on-Q and year-on-year. And as of Q4, this core banking revenue consisting of 86% of our total revenue base. On Page 7, you can also see the detailed information related to net fee and commission income. Our fee and commission income growth were almost 33% year-on-year. Our quarterly net income -- net fee and commission income growth was slightly above than 21%. And on annual basis, on a cumulative basis, payment systems were contributing a lot with [ 47% ] year-on-year growth. And on the quarterly performance, cash loans, especially Turkish lira lending activity, was the main driver of quarterly fee and commission income growth. And as of 2021, fee-to-OpEx ratio further improved to 47%, which was 42% a year ago. On Page 8, you can see the details of OpEx, all OpEx top items HR cost and non-HR cost being consistent of administrative expenses. Their all cumulative annual growth were below the inflation which can be seen the disciplined cost management we were implementing during the full year. Starting from Page 9, we can move to OpEx side, starting with the lending activity. This quarter, our Turkish lira loans were up by 9.3% and full year, Turkish lira lending growth came at 20.2%, both of those numbers seems to be in line with the sector averages. In terms of the FX lending, this quarter, we had additional shrinkage, our FX lending was down by almost 5% in dollar terms. But still, despite -- thanks to mainly depreciation total lending growth came at 20% Q-on-Q, which is slightly lower than the sector average of 21.4%. In terms of the sub segment of the lending activity this quarter, we had 8% retail lending growth. We had 13% SME lending growth and we had around 30% [ corporate ] commercial lending growth. So unlike to private peers, both quarterly and annual Turkish lira lending growth mainly came from commercial segments in our case, rather than the retail and this is the differential point between us and the private banks. And in terms of the currency breakdown, as of year-end, 63% of total loans are coming from local currency, while the remaining 37% are coming from hard currency lending activities. On Page 9, this is also a regular page we are sharing. You can see the detail sectoral breakdown of cash loans as well as breakdown of FX loss as well as breakdown of project finance loss. There is no material change compared to our previous quarters. And in terms of the CGF, total CGF loss continued to be coming down. A quarter ago, total CGF loan outstanding balance sheet was standing at TRY 44 billion. Now thanks to additional collections, it is hovering around TRY 38 billion. And with the announcement of the new CGF package, which the details will be released shortly, there will be additional CGF loan exposure going forward. On Page 11, you can see detailed information related to asset quality. Starting with the NPL side. Our NPL ratio came down to 3.9% from 3.47% a quarter ago. And this NPL ratio decline is much more correlated with the denominator effect driven by mainly currency depreciation. However, if you look at from NPL inflow point of view, this quarter, we hit above the BRL 2.1 -- almost TRY 2.2 billion new NPL inflow, which is also a meaningful number. And on top of that, if you look at to the Stage 2 loans, we see a visible increase in the share of Stage 2 in total, it was 8.7% a quarter ago. And with the inclusion of 1 of commercial file coming from cement industry, we have increased in our Stage 2 category. Now it is approaching to almost 11%. Equally important, while the share of Stage 2 loans in total are picking up, conservatively and deliberately, we are also increasing our coverage ratio for Stage 2, it was 13.3% a quarter ago, but as of year-end, it materialized at 14.5%. And as a result of this conservative understanding, in this quarter, we had a very strong increase in our net cost of risk. Our quarterly net cost of risk came at 329 basis points. And therefore, it brought our full year net cost of risk to 102 basis points, which was only 72 basis points as of September on a cumulative basis. So those numbers speak itself. If we wouldn't have such strong coverage requirement or quarterly P&L will be much more stronger than what we are announcing. On Page 12 and 13, you can see the development on the liability side, starting with the deposit side, which is the main funding tool. This quarter, we had strong Turkish lira deposit cost. Our quarterly Turkish lira deposits were up by 6.4% versus sector average of 1.7%. On the FX side, however, we had slight shrinkage, our FX deposits were down by 1.5% in dollar terms. Especially in the middle of balance sheet makeup purposes, we simply gave exit to costly FX deposits, especially obtaining a fresh funding from China Development Bank amounting to CNY 3.5 billion by the end of the December. In terms of the breakdown of deposits, we don't have a material change in terms of the currency breakdown, 43% of total deposits are coming from local currency, while 57% is coming from hard currency. But 1 point I'd take your attention is related to share of demand deposit in total, thanks to also partly because of the depreciation, after a long period of time. We are having the share of demand deposits reaching to 25% in total, of course, compared to a peer group. This is a small ratio, but at least in terms of trend, it shows that we are in the right direction. On Page 13, you can see the breakdown of external funding. Especially, I would like to take your attention to ESG-linked funding. This year, in the year 2021, we had more ESG-linked funding transactions and out of total external funding activities of 2021, around 52%, more than half is coming from ESG-linked financing activities coming from syndication loss coming from sustainable Eurobond issuances and coming from IFI transactions. On top of that, we also had additional ESG-linked treasury transactions in the form of different treasury-related transactions like repos. And on top of that, our total sustainable finance amount reached to almost TRY 59 billion, which is also a very remarkable number as of year-end. And in terms of the breakdown of total external fundings, only TRY 4.2 billion will be redeemed in a year period of time and the remaining TRY 9 billion will be redeemed after 1 year final maturity. And for your information, our fixed LCR ratio is also hovering around 340% arrears of year-end. As of today, we are even higher. We are also having higher FX LCR ratio. And the last point, I would like to take your attention is related to capital and solvency ratios. Our reported solvency ratios in terms of Tier 2, Tier 1 and CET1 came at 14.85%, 12.88% and 9.96%, respectively. Excluding the temporary BRSA forbearance measures, our total solvency ratios will be 12.71% in the form of Tier 2, 10.86% in the form of Tier 1 and 8.4% in the form of CET1. At this stage, I would like to take your attention to different announcement of additional capital injection. Last week, we just announced we initiated the capital injection process related to TRY 13.4 billion which will be fully provided by [ Sovereign Wealth ] fund and we expect this capital injection process will be completed in a very short period of time. And in the middle of the page at the right-hand side, you can see the impact of this upcoming capital injection in our solvency ratio hypothetically, this TRY 13.4 billion capital injection would be resulting our total core ratio to hover around 17.4% on a reported basis as of year-end. Excluding forbearance measures, it would end up with almost 14.8% total cash. On the Tier 1 side, our Tier 1 ratio would be 15.4%. Excluding forbearance measures, it would hover around 13% and CET1 ratio would be reported around 12.5% on a reported basis again. And excluding the forbearance measures, it will be reaching to 10.5% [ arrear ]. For the efficiency of the time, I would like to stop at this stage, and the upcoming pages are regular appendix pages, covering many interesting topics. And before leaving the floor to Rob to move to Q&A at this stage, I would like to share our 2022 budget guidance numbers. And let me go through those details. And first, let me start with the asset slide and volume slide. On the TI lending side, we are expecting our Turkish lira lending growth to be in line with the sector. As you know, most of the private banks already disclosed the 2022 budgets. And our aim is to keep our strong market position in Turkish lira lending activity unchanged. So therefore, for the Turkish lira side, we are guiding in line with the factor Turkish lira lending growth. On the FX side, FX lending side, thanks to collection profile mainly because of -- coming from FX lending activities of the previous years. We are expecting a slight contraction in our FX lending growth in dollar terms and this are our guidance for the lending activity side. In terms of the net interest margin at core banking revenue, first, let me start with the swap adjusted net interest margin. We are expecting our swap-adjusted net interest margin to expand by 75 to 100 basis points on top of 2021 levels. And it will be mainly supported by additional CPI linker contribution. Excluding the CPI linker impact actually to be on the conservative side, we are expecting our Turkish lira core [ supply ] will be even tightening compared to a very conservative level of 2021 averages. And another point on the revenue side is related to fee growth we are expecting our fee and commission income growth will be hovering around 20% area. And on the cost side, we are expecting our full entire OpEx growth will be slightly above than the inflation, given we are coming from base small base effect and given especially year of 2021 we had a very disciplined cost management. And in terms of the asset quality, the ratio we would like to share with you is related to net cost of risk. Remember, as of 2021, our average net cost of risk was 102 basis points. And for 2022, we expect our average net cost of risk will be hovering around 150 basis points, which is almost 50 bps higher than the average of last year. And if we take all those expectations into consideration, it will take us to mid-teens average ROE for the full year. Especially, we are also taking into consideration the potential impact of upcoming capital injection, which will create additional equity base for us. But despite additional capital injection still, for the time being, we believe mid-teens average ROE for the full year of 2022 is realistic. I mean, this is my notes to share with you at this stage. And thank you very much for your listening. At this stage, I would like to hand over again to Rob to move Q&A session. Thank you.

[Operator Instructions] We've got a question from Mr. Sam Goodacre from JPMorgan.

Ali, thanks very much for the call. I just wanted to clarify a couple of points. So you're expecting inflation costs to grow slightly above inflation. And given that I think you said you're using an October to October CPI in your CPI valuation of 40%, we can assume that your -- that the average inflation for the year would be perhaps even slightly above that, is that right? But again, I suppose, on the strength of revenues, you would still expect positive operating [ jaws ] despite that cost pressure.

Thank you, Sam. Actually, when we are referring to above than CPI OpEx growth for this year. we are taking into consideration year-end CPI data. And to be conservative, we are at -- for the time being, using CBRT year-end CPI, which is 23%. However, this 23% year-end inflation will result in almost 40% October to October CPI because of the base effect. And for CPI linker portfolio, we will be using almost 40% October to October data inflation numbers. But for the OpEX for the time being, we are taking into consideration slightly above then 23% CBRT year-end numbers. I hope this is clarifying your question.

I just had a second question, Ali, which is on the capital injection. Could you let us know if there have been any other details announced like the price or the number of shares that they are going to subscribe to, et cetera?

Sure. Sure, Sam. Actually, following the board decision, we just applied for BRSA approval and CMB approval. It will be a very typical process we were going through in the last capital injection process of 2020. I hope if everything goes smoothly in a very short period of time, maybe till the end of this month this capital injection process will be completed -- will be completed totally. In terms of setting up the price, of course, it is not clear yet. We will be -- we will be discussing with the Sovereign Wealth Fund following the BRSA and CMB approval. But my personal understanding is the pricing deciding overall process will be very similar to last capital injection process of 2020, and in line with the CMB regulation and in line with the overall regulations we will be setting up the price. And once the price will be decided, our ultimate ownership structure will also be known because for the time being, apart Sovereign Wealth Fund, the existing shareholders will not be participating to right issue -- it is a [ private ] placement right issue format. Therefore, in accordance with the price, the stake of Sovereign Wealth Fund will be going up within our ownership structure, and it will be the biggest shareholder of VakifBank, while all the remaining shareholders will be diluted and their stake in the ownership structure will be coming down. But this ultimate ownership structure will be understood after setting up the pricing, and the pricing will be announced following CMB and BRSA approval. But my personal expectation is in a very short period of time, it will be understood and it will be announced.

[Operator Instructions]

Actually, let me go through the written questions in order not to spend too much time because as far as I know, [indiscernible] apart from VakifBank, there will be other, some companies announcing their year-end financials. So everybody seems to be very busy. And the first question in written format is coming from [indiscernible] is asking 2022 Turkish lira loan growth to approximately 75% of the sector average, taking into account TRY 13.4 billion capital injection, if that's correct to assume? Yes, it is correct. All budget numbers, including lending growth, including ROE, we will take into consideration this TRY 13.4 billion. How is the new CGF package to be funded, especially for loss a all-on 2-year maturity given Turkish lira offshore [indiscernible] shortage are already above prospective use of new CGF loss. That's a very good question, and this is also something we will understand during the restructuring process of new CGF. We are also looking forward to hearing the details from the related state administration bodies. But for the time being, this is unknown and we will see it. And of course, as always, we will be informing all parties once the details are known. And the second package -- sorry, the second question is coming from [ Lori Parks ] from JPMorgan. She is asking, can you discuss the impact of forbearance measures on NPL. Actually, as you know, NPL forbearance related to NPL definition change to an end as of numbers starting from the beginning of Q4, we started to use regular NPL definition and out of our total NPL inflow, which is TRY 2.2 billion almost in a 1 quarter period of time, which is also a very sizable number. Lets' say around 25% to 30% of this new NPL inflow as of Q4 are coming from this NPL definition correction, let's say. The remaining part of this TRY 2.2 billion are regular NPL inflows, I think that is explaining this question. And we have another question from BNP Paribas, [indiscernible] he is asking what is our strategy in 2022 in terms of provisioning and how do you forecast Turkish lira volatility to impact your cost of it. Actually, given the low visibility and given the fluctuations in the market, it is not easy to make assessment and calculations in terms of the potential impact of Turkish lira volatility in asset quality ratios and cost of fees. However, having said that, I should also add that our net cost of risk guidance, which is hovering around 150 basis points. I think compared to a peer group, compared to peer -- private banks, give us 1 of the most conservative cost of risk guidance, which will eat up from profitability, and this is one of the reason actually why compared to minimum 20% ROE guidance of peer group, especially coming from the private banks, we are expecting mid-teens ROE. It is also related to our much more conservative cost of risk guidance of 150 basis points. Once the details -- once we see much more color, especially once we have much more visible data related to first quarter of 2022, we may comment more healthily in -- for the full year. But for the time being, as a starting point, I think this 150 basis points seems to be a consolidated number, especially compared to private peers. I think this is also explaining your question and -- we don't have any written questions in the webcast. And as I understand, correct me if I'm wrong, Rob, there is also all the question at stage.

That is correct. We don't have any audio questions. So I guess we can move to the conclusions.

Thank you. Thank you very much. Thank you very much for all time and participation. As always, we are in your disposal if you have any follow-up questions during today or tomorrow, either myself or our Investor Relations colleagues, Yousoof, A.J. [indiscernible]. We are all here and ready to answer your questions. Thanks, again, for your participation and looking forward to meeting in the first part of the location.

Sorry, Mr. Tahan. We do have a late question. Are you able to take it?

We can.

Mr. Alan Webborn from Societe Generale.

Ali, sorry, I was -- I had to get off the [indiscernible] call to get on to yours, and I missed some of what you've said. So would you humor me and just tell me your basic guidance is at this stage. I heard the 150 bps cost of risk and I heard the mid-teens ROE, but that was it. So would you give me a favor and just recap what you said earlier?

Thank you, Alan. If it will be easier for you in order not to take the time of other participants, shall we send you via e-mail the details of our budget expectations.

That will be really helpful, Ali.

Thank you, and thank you again for everybody for participating.

Thank you very much, ladies and gentlemen. That does conclude today's webcast call. Thank you for your participation. You may now disconnect.