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

Ladies and gentlemen, welcome to the VakifBank Audio Webcast Fourth Quarter 2024 Bank-Only Earnings Results webcast. [Operator Instructions] Now with that, I will leave the floor to our hosts, and they are Mr. Ali Tahan, the Head of International Bank Investor Relations; and Ms. Ece Seda Yasan Yilmaz, the Head of Investor Relations, both from VakifBank. Sir, Madam, the floor is yours.

Thank you, Rob. Good afternoon, everybody, and welcome to our year-end earnings presentation conference call. For those of you to whom we couldn't introduce, Ece recently appointed as Head of Investor Relations, former Head of IR, Nihan, took a new role within the bank. And following that, Ece became the new Head of IR and going forward, we will be covering all your questions and queries related to VakifBank and Turkish banking sector together with Ece and the team. And after this update from our organizational change, let me go back to presentation starting with the first page. Probably as expected and have guided, this quarter came very strong, the strongest quarter of the year in terms of bottom line. As you can see on the left-hand side below chart, reported wise, our net income on the Q4 came at TRY 13.2 billion which is up by 64% compared to a quarter ago and which is higher than the market consensus of TRY 12.1 billion. Equally important, apart from this strong P&L numbers, additionally, we also booked additional TRY 6.5 billion free provision during the quarter. Therefore, total free provisioning amount increased to TRY 15 billion from a quarter ago of TRY 8.5 billion and adjusted with this quarterly free provisioning set side, our adjusted P&L in the quarter will be TRY 19.7 billion, which is up by 145% compared to a quarter ago. And this is clearly the strongest P&L performance of the bank within 2024 and on top of that, maybe more importantly, even compared to most of the private peers, this is clearly a number advocating and supporting our convergence story. This with strong Q4 results created our reported ROAE at 25% quarterly. Adjusted with the free provisioning, it will be even higher at almost 37%, and thanks to this with strong Q4, total reported net income materialized at above TRY 40 billion, which is up by 61% compared to the previous year of 2023. And please note that 61% net income growth for VakifBank in a year where Sector net income growth was only up by 6%. Clearly, this was also another very strong outperformance KPI of VakifBank compared to sector average. And this is also clearly supporting our convergence story again. And this free provisioning adjustment for the full year net-net we booked -- we set aside in total, TRY 4 billion. As discussed, we booked TRY 6.5 billion in the Q4. But in the previous quarters, we released TRY 2.5 billion. So therefore, net-net, during the entire year of 2024, we set aside TRY 4 billion. Adjusted with that, full year cumulative net income would be TRY 44.4 billion, which is up by even 77% increase compared to previous years. Please also note that thanks to this additional free provisioning, effective tax rate of the quarter also came stronger and higher than usual. So our free provisioning amount, which is TRY 15 billion outstanding number at the moment, it can be considered as hitting capital. And in order to support the P&L and in order to decrease the earnings volatility between the seasons, it can be utilized and released back again at any time. The last point on this page is related to another important P&L item at the top line, which is coming from the core banking revenues in some of net interest income and net fee and commission income. This is also the best part of our P&L. Our strong profitability mainly supported and backed by core banking revenue generation capacity. Both Q-on-Q wise and year-over-year wise, the numbers are strong and outperforming the certain sector averages. For the full year, we almost generated TRY 146 billion core banking revenues which is up by 87% year-over-year comparison. And as you can see, the sector average was about 58%. And this has remain our edge [ where ] overall profitability, we had outperformed compared to sector average numbers. For the time of the -- sake of the time, I am skipping some pages, and I would like to take your attention to net interest margin side, which details can be seen on Page 5. I mean there are a couple of points we would like to explain in detail of net interest margin front. First of all, of course, this quarter, reported net interest margin came very strong at the above 5%. The lion's share of this drop, maybe one of the strongest quarter net interest margin, of course, attributable to additional CPI revenue. Adjust -- even adjusted with this CPI revenue, I mean, excluding this additional one-off CPI impact, still, we will end up with very strong P&L of 3.8%, which was 2.7% a quarter ago, because during this quarter, the corrected entire CPI interest with the actual October to October CPI [ data ] of 48.6%. Just to remind you, in the previous quarters, our CPI estimate was much more conservative and lower compared to prior periods, especially. Therefore, in this quarter, we had a very strong room for correction purpose. A quarter ago, for example, the CPI estimate we used in September was less than 44% for the entire cumulative portfolio, but all the collections materialized in accordance with the actual number of almost 49%. Therefore, this created additional TRY 11.4 billion interest income from the CPI portfolio. Of course, this is the main driver of the very strong quarter net interest margin. But my point is even excluding the CPI impact, especially core spread expansion was very strong. And this is also equally creating additional boost in our total net interest margin. At this stage, I would like to take your attention to Turkish lira core spreads especially. As you can see on the right-hand side below chart, overall, Turkish lira core spreads further increased to 2.33% from a quarter of 1.3%. So just in one quarter period of time, even before the -- before the start of rate cut cycle, we enjoyed additional 1% Turkish lira core spread expansion, which is also another very important factor behind such quarterly strong net interest margin performance. And I believe such strong recovery of 1% just in 1 quarter period of time, it's clearly better compared to most of the private peers even. Of course, the main driver of such outperformance can be understood by the composition of Turkish lira portfolio in terms of interest rate structure. During period of 2024, deliberately, we shifted the loan portfolio more in favorable fixed loan rather than floating. And as a result of that, as of year-end, the share of fixed rate Turkish lira loans increased to 60% versus 41% a year ago and such timely shift within loan portfolio enabled us to deliver very strong Turkish lira core spread performance in Q4 despite rate cut cycle just started. Going forward, the more we turn into fixed, of course, the more duration gap increased between Turkish lira assets and liabilities. But given we are in a rate cut cycle, this kind of additional increase in duration will create additional upside for net interest margin articles throughout 2025, and we will also enjoy especially each and every quarter of 2025. Another point I would like to take your attention is related to OpEx. On Page 7, you can see OpEx numbers and KPIs, especially the most eye-catching development of the year is we outperformed all cost-related KPIs during entire 2024, including both cost income ratio, as well as cost over average assets. As you can see on the right-hand side, cost income ratio for the full year of 2024 came at 40% versus sector average of 42%. And on top of that, cost over average asset ratio came in 2.2% for the full year versus 2.9% for the sector average. And this clearly shows that VakifBank, thanks to work cost discipline as well as thanks to strong income generation capacity, we outperformed the sector in terms of all OpEx-related KPIs. With Page 8, we would like to turn your attention to a lending side. As you can see from the headline, total loan portfolio for the first time exceeded TRY 2 trillion level at our total asset size for the first time also exited TRY 4 trillion level. And in this manner, the share of lending in total assets materialized at around 50%. And in terms of the lending portfolio, especially in Q4, our lending growth was above than the sector, both in Turkish lira as well hard currency. As you can see, we have 1 percentage point higher Turkish lira lending growth in the final quarter of the year compared to sector, 7.3% Q-on-Q growth for the sector versus 8.4% Q-on-Q growth for us. So therefore, on the Turkish lira lending side, we have additional 1 percentage point increase additional growth. And this is mainly driven by the retail side. If you can see on the left-hand side below chart, Q-on-Q retail lending growth was up by 16%. And this is especially the area where we had relatively higher growth on the Turkish lira lending side. And this retail growth mainly came from both credit card business as well as total retail overdraft loan portfolio. And when we look at the hard currency lending, we had another strong growth on hard currency lending. In dollar terms, we had 4.6% Q-on-Q hard currency lending growth in hard currency versus sector revenue of 2.7%. So in this manner, in Q4, both Turkish lira lending growth as well as hard currency lending growth came stronger than the sector averages. For the full year of 2024, our total lending growth and hard currency lending growth was slightly lower than the sector average, despite additional momentum we had in Q4. And on the hard currency lending side, we are slightly above than the sector in terms of hard currency lending growth for the full year of 2024. So therefore, thanks to these results, we are still keeping our first ranking among the top listed banks of Turkey in terms of market share, both in Turkish lira lending as well as in hard currency lending. Another point I would like to take your attention is related to asset quality. On Page 4, you can see the numbers and ratios related asset quality. Let me first start with the ratios. NPL ratio and Stage 2 ratio almost flattish compared to previous quarters. NPL ratio came in 1.79%, which is up by only 2 basis points and share of Stage II loans in total loan portfolio came at 7.9% versus 8% a quarter ago. So in this manner, ratio-wise, NPL ratio and Stage 2 ratios were flattish Q-on-Q. However, of course, especially NPL ratio, if we look at from a 1-year period of time, increased almost 50 basis points from 1.3% to 1.8%, which is understandable and reasonable because of the current macro developments as well as because of the impact of denominators actually lending growth normalization, let's say, but still is 1.8% both in line with the sector average, as well as those ratios are well below than the cycle 3% area. The headline of the quarter for the asset quality is normalizing quarterly net cost of risk levels. As expected, and as guided, we have much higher net cost of risk ratios in Q4 compared to first 3 quarters of the year. Net cost of risk of the quarter came at 172 basis points, which was 85 basis points a quarter ago. And thanks to this relatively high net cost of risk of the quarter, full year 2024 average net cost of risk came at 33 basis points. And on top of that, as we discussed, we also had additional TRY 6.5 billion free provisioning this quarter, which brought full year outstanding total pre-provisioning amount to TRY 15 billion. In Page 11, we can move to liability side. I'm starting with the deposit side. This quarter, we have a relatively less stronger growth on Turkish lira deposits and total deposits, which is very similar to lending comparison compared to sector averages. In terms of Turkish lira deposits, Turkish lira deposits are up by almost 17% versus 10% for the sector, and total deposit growth was up by 10% for Q-on-Q versus 6% for the sector. One very important point is during 2024 in line with our strategy and in line with our focus, we created more granular deposit base, thanks to additional shift in favor of both retail as well as demand deposit. As you can see as of 2024 year end, the share of demand deposits totally increased to 26% versus 22% a year ago. Of course, compared to peer group, this ratio is relatively still low. There is still room to improve and to go but it clearly shows we are in the right direction. And each and every quarter, hopefully, we will see higher ratios of demand deposits within total deposit portfolio. Equally important related to granular feature of deposit portfolio, the share of retail deposits further increased to 48% as of year end versus 39% a year ago. So it shows 9 percentage point increase in favor of retail deposit shares. And especially in terms of market share, we gained almost 2 percentage point market share, both in retail deposits as well as demand deposit. Both of them now are more than 10% threshold and approaching to our natural market share of 12% to 13%. So each and every quarter going forward, with still additional focus on those areas, we expect our market shares both on retail as well as the demand deposits will be even further approaching to our natural market share. One relatively new slide in our presentation, Ece and her colleagues are inserting is related to the products we were heavily using during 2024, which helped us to penetrate across all segments. And these products, including the products we put on the right-hand side like V-Part, Sky SME or Sky Limit or like Vinov. These are all sector-leading products, and these are very welcomed by the entire VakifBank customer base. We didn't only become the second biggest bank of Turkey in terms of asset size and lending market share or deposit market share, but also in terms of transactional banking and in terms of all subsectors, we became even much bigger player. This is very visible in terms of the KPIs and numbers shown on the left-hand side of the page. As of 2024, with 18% market share, VakifBank still the biggest trade finance hub of the country. And on top of that, especially on the Turkish lira deposit side, we became the market leader which was positioning as number 5 a year ago. So my point is, thanks to this kind of sector-leading and very fit products, which is completely targeting the financial needs of our customer base, we further increased our penetration and we further gained momentum, especially on transactional banking side. The other page is related to wholesale borrowing, which is also part of our department's responsibility. Entire year of 2024 was a very strong year, very successful year in terms of wholesale borrowing transactions for entire Turkish banking sector and -- proudly and has evolved as 1 of the biggest the biggest wholesale banking bank of the country. We are also 1 of course. In total, we had $11.5 billion fresh funding, which is by diverse and which is coming from different sources. Some of them are also quite new not only for VakifBank, but also for the entire commercial state banking industry, like public issuance AT1. So that was a period for us as well as for the sector to further diversify the wholesale funding activity. And in terms of the maturity profile, out of total international funding, most of them like 3 quarters is coming from long-term funding with $15 million for us and only this time $5 million, $4.7 billion is short dated, including 1 year syndication loans as well as post financing launch. That was a very successful area for us, especially during the entire year of 2024 and with the current supportive macro conditions, we believe new diversed and pioneer products and new kind of cooperations will be created during 2025 phase wise. The last slide, I would like to take your attention is related to solvency ratios. Thanks to strong profitability, our solvency ratios increased further during Q4. Total CAR materialized at 16.1%. Total Tier 1 materialized at 13.5% and total CET1 ratio materialized at above the 11%. And please note that, all those numbers are the strongest ratios be enough during 2024 which is also in line with our guidance we provided previously. Just to remind you, thanks to internal generation capacity and thanks to a good level of RWA numbers, we will keep saying that, we are targeting higher and better solvency ratios at every quarter compared to previous quarters. And indeed, during 2024, the year-end numbers came as strongest. And of course, it will be further increasing during 2025 thanks to very optimistic budget assumptions, which we will share shortly. The last point I'd like to take your attention is related to bank-only versus consolidated ratios. This is the numbers solvency ratio on a bank only basis. Consolidated numbers will be announced next week, but as of today, we understand that consolidated capital ratios will be like 40 basis points higher compared to bank-only numbers. So my point is, we are also utmost care to the efficiency and profitability of our subsidiaries and as a reflection of this strategy, we will be having even higher and stronger capital ratio on a consolidated basis compared to bank-only numbers. These are the points and the slides, we would like to take your attention. We will be finishing to Q&A, but before that, if you don't mind, we would like to also share our guidance and expectation for 2025. And thereafter we can reach to Q&A session. In terms of guidance, let me first start with lending side. In terms of lending, both in Turkish lira and in hard currency, our initial starting point, conservative numbers are relatively humble compared to what you heard from the private peers. Starting with Turkish lira lending growth, the official budget shows, it will be mid-teens growth actually for the full year of 2025 compared to 2024, mid-teens structured lending growth. For the hard currency lending, we are guiding high single-digit hard currency lending in dollar terms due to high base effect of 2025 actually as well as some restrictions from the regulators as well as the redemption profile of current hard currency loan portfolio. So on the lending side, to summarize, on the Turkish lira side, midteens Turkish lending growth and on the hard currency side, high single-digits hard currency lending growth in dollar terms. In terms of swap adjusted net interest margin guidance, we are guiding 2 percentage point improvement in 2025 compared to 2024. Just to remind you, in terms of the nominal numbers, last year in the year of 2024 full year swap adjusted net interest margin came at 2.3%. And we are guiding an additional 2 percentage point increase which coincides to 4.3%. Again, this is also relatively much more conservative because the assumptions are much more conservative in terms of both CPI as well as in terms of rate cut expectations. On the net fee and commission income side, net fee and commission income side, we are expecting fee income growth to be mid 20s and for the OpEx, the budget is above than average inflation. All those and 1 final pointn before RWA. On the net cost of risk side, we are guiding 100 basis points net cost of risk during 2025 which is totally related to aging of the current NPL portfolio. As you know, the more NPL portfolio age, the more we increased the provisioning, and we increased the net cost of it. Given during 2024 and 2025, we have relatively more NPLs, young NPL portfolio. For the net short term of 2025, net cost of risk should be expected to hover around 100 basis points but for the upcoming years, of course, it should be approaching to cycle average, let's say, of 150 to 200 basis points. But for 2025 only, we are guiding 100 basis points net cost of risk. All those numbers will take us to mid-20s average ROE. At this stage, we would like to take your attention that our assumptions and starting point is relatively conservative, both in terms of lending growth as well as in terms of net interest margin improved expansion capacity. But realistically speaking, there is additional upside and risks are on the upside to beat those numbers as we're speaking. So therefore, even though the official budget refers to mid 20s average for the year, realistically speaking, we believe there is additional upside and there is additional room to deliver higher ROEs than mid-20s. And these are the notes, we would like to share with you. Thank you very much for listening to us and with pleasure now we can switch to Q&A session. Thank you.

Thank you, Mr. Tahan. [Operator Instructions] All right, so let's open the floor to everybody. Mr. Tahan, would you -- perhaps if you got some written questions as well.

[indiscernible] We've 2 questions from Mikhail Butkov. Mikhail is asking maybe ask, what unlike market assumption on rates and inflation you assume in your guidance? Thank you, Mikhail. Actually, in terms of the macro assumptions, we are taking into consideration the macro numbers and ratios provided within medium-term program of the government. These are taken as given and we are making the budget assumptions on top of this macro ratios and numbers. This is the starting point. And we have another question from [ Vinod Nagendran ]. [ Vinod ] is asking Could you please provide some color on your hard currency debt refinancing requirements for 2025 and any plans to issue Eurobond in Tier 1 and Tier 2? In terms of Eurobond redemption, we only had 1 redemption this year and it already materialized with the amount of $750 million. So for the rest of the year, we don't have any Eurobond redemption. But very recently, we also issued a very fresh DPR with the amount of $700 million with the real money investors actually. It was 10-year DPR. For the first 5 after so many years of break, we issued fresh DPR with real money investors, and the maturity were higher than compared to our previous transactions on the DPR side. So as the biggest DPR bank of the country, we also had a very strong start to the year in terms DPR issuance. For the DCM activities, I mean, we don't have any plan for a Tier 1 and Tier 2 because thanks to public issuances of last year, we already fully utilized AT1 bucket as well as Tier 2 bucket. However, as a regular issuer on the Eurobond market, opportunistically, we may look for the senior unsecured issuances. In our budget, we have 1 public issuance for senior unsecured. But timing-wise, given we don't have any reduction for the rest of the year, we will not be in hurry, especially given last year, we had 3 different DCM activity once in year, in Tier 1 and Tier 2. We believe we should put some break. And in the meantime, we should diversify with other funding sources like DPRs, like stretch IFI fund so multinational financial institutions, et cetera. But normally speaking, in our budget, we have only 1 Eurobond issuance plan in our budget. And the second question of Vinod, NPL Stage II loan evolution, which sectors are expected to see deterioration, if any? Thank you also very much for this question, especially in terms of NPL ratio, as we showed in the presentation, we closed the year of 2024 with 1.8% NPL ratio. For the NPL ratio expectation for 2025, we are expecting it may go up to 2.5%. So a year-over-year basis, our NPL ratio may increase by 70 basis points from 1.8% to 2.5%. And in terms of the NPL inflow, we expect this time more NPL to come from micro SMEs and SME segment in general. Just to remind you, in the year of 2024, most of the retail -- most of the NPL inflow was coming from the retail exposure, but this time, for the year of 2025, we are expecting more NPL inflow from SME. And when we look at the SME sector wise speaking, it is well diverse. It is coming from every subsegment starting from manufacturing to textile, you name it, a lot of sectors. So as long as it is SME, especially micro SMEs, it may be potential sort of NPL during 2025. But my point is, those ratios, those asset quality related issues will always be manageable for Turkish banking sector as well as for Vakif. And given the potential in our net interest margin recovery, we believe very strong net interest margin, hopefully in the year of 2025 will create additional room to composite the negative impact of asset quality deterioration. And in this manner, we are quite optimistic for 2025 and mainly in the year of 2025, we will enjoy and deliver 1 of the highest annual net interest margins in the last 10- to 15-year period of time. And therefore, this strong net interest margin performance will create additional flexibility to manage all asset quality related issues without giving up from efficiency and without giving up from profitability. Valentina was also asking another question related to issues plans we already offered, and she is also asking about the hard current liquidity as of 2024 in dollar terms. It was mainly as far I remember, but we can double check, Valentina, but our IR colleagues are saying that as of 2024 year, hard currency liquidity levels are hovering around [indiscernible] liquidity timing, $5 billion amount. And these are the questions on the retail side. We don't have any written questions actually.

Mr. Tahan, I don't see any audio questions coming through. [Operator Instructions] But I don't seem to see any coming through, Mr. Tahan, if you have any more written questions. Otherwise, we can conclude.

Thank you, Rob. We don't have any further question. With -- to the occasion, we are wishing a very good evening to all participants, and thank you very much for your patience and understanding. We are at your disposal as always together with IR colleagues for any follow-up questions. Looking forward to a meeting in the first possible occasion again. Thank you.

Thank you, Mr. Ali Tahan, the Head of International Banking Investor Relations and all our other hosts from VakifBank. And ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect. Thank you.