Turkiye Garanti Bankasi A.S. (GARAN) Earnings Call Transcript & Summary

Welcome, everyone, and thank you all for joining us here in person and all those that are attending to the web stream. Today, our presentation will have -- will be threefold. First, we'll be talking about what kind of a macro scenario we're expecting and a little bit background. Then we're going to give you some status updates for 2019, how we're faring relative to our operating plan guidance. And then later, we'll unveil the 2020 operating plan. So let's start with the economic picture. Turkish economy has been rebalancing rapidly after the recent financial shock that we lived mid-second half of 2018. All the macro indicators now are moving in the right direction. We lived the rapid disinflation, and interest rates have, after doubling in 2018, they dropped to half the levels by the end of 2019. And with the drop of the interest rates, we did start seeing a V-shaped recovery in economic growth. And this also brought with it a sharp correction in the current account deficit, and we actually ended up with a surplus there. When we look at our indicators, the big data indicators that we follow through the big data we have access to, like we can see the retail sales through our credit card activity, and what we see is that there is a pickup in momentum in retail activity. So this V-shaped recovery is seen more clearly also in here. So it looks like that momentum is continuing, and it's going parallel with the official retail sales and private consumption data. On the investment side, we also see a pickup. This data, we gathered from our loan applications for investments. Even though right now it's in the negative territory, it looks like in a quarter or 2, it's going to go up to the positive territory. And again, this data has been acting in parallel to the industrial production and total investments under GDP. These are the figures announced by the CBRT and TurkStat. So the macro scenario. The macro forecast that we anticipate for 2020 holds in it the 4% GDP growth and inflation rate dropping down to 8.5% by year-end. And with that, we expect the CBRT funding rates to ease another 300 basis points by year-end, and we expect current account deficit this time by year-end 2020, given the higher GDP growth. And we anticipate the budget balance to be within the country criteria, 3%, and unemployment improving, a bit parallel to the government's projections. Now let's -- sorry. This is the retro. I'm not going back. Now this is the macro background I shared with you, but let me just -- let's just remind you what we have done since 2015. I mean since then, the macro conditions, they were very volatile. If you remember, we had significant devaluations, interest rate changes and so forth, coup attempts, all that. But despite this volatile macro conditions, regardless of these conditions, we were able to deliver what we guided to in the beginning of the year. And so we either beat the guidance each year or ended up in line. Even in a year like 2018 where interest rates doubled from 12 to 24, we ended up meeting the guidance and even set aside TRY 1.1 billion in pre-provision. Going on to 2019 performance versus guidance. Many of you are familiar with our 9 months' results. Most of these lines either in line or faring better-ish. So it looks like 2019 year-end will be -- there will be a clear beat in the margins because of the faster-than-expected rate drop. And also, there's going to be a clear beat in the fee growth. Many of you are familiar with that given the rate environment. We benefited, and the -- ended up fee growth was superior to our expectations as well. So either each line will be either in line or a beat. So this suggests an ROE delivery for 2019 at the upper end of the corridor that we guided. So now let's move on to the 2020 operating plan. In here, our double-digit asset growth will continue. And again, that will be driven by loans. So 60% of our assets will continue to be lending book, and securities portfolio will remain around the same levels. In the Turkish lira, we do expect growth in the high-teens, given the 4% GDP growth projection expectation. And the growth will be across the board. But still, the Turkish lira business banking loans will be the front runner. And especially, we do anticipate this year Turkish lira investment loans to be more in Turkish lira-denominated. So we do expect a higher growth in Turkish lira business banking. You're familiar that the pent-up demand in consumer lending surfaced in the fourth quarter. So we do expect the continuation of that with increasing momentum as our big data also suggested. So overall, in Turkish lira lending, we do expect growth in the high-teens. In the foreign currency lending book, our shrinkage, the last 5-year shrinkage likely will continue because redemptions are significant. Yet, probably, there will be a pickup in the export lending, but it doesn't seem like it will be sufficient to compensate the redemption. So we do expect further shrinkage in foreign currency lending. On the funding side. Assets, 62% of the assets will continue to be funded with deposits. And so we'll focus on maintaining our low-cost and sticky deposits. And you know that, by far, we have the highest demand deposit base that we always value a lot. About 30% of our total deposits are so-called free funds for us. And what we aim in terms of deposit growth is to sustain the loan-to-deposit ratio. So loan-to-deposit ratio will remain flattish versus 2019, and it likely will remain below 100%. On the borrowing side, which make up about 15% of the assets, which is around 15% of the assets, that level will be -- that's the level we estimate. Even though there is about $2.6 billion of redemptions in 2020, a big portion of this relates to syndication rollovers. In the borrowing side, we'll continue our opportunistic approach. So if -- when markets are -- pose attractive rates, we may -- we will choose to be present in the market. But at the moment, the operating plan calls for no increase in borrowings because over the years, like, for instance, just last year alone, we had $3 billion redemption. So the external debt actually reduced by about $3 billion. And when we look at the foreign currency liquidity, we have abundant liquidity. The liquidity levels stayed high despite these significant redemptions. And as I mentioned since foreign currency lending, we don't expect growth. The dependency definitely diminished. But nevertheless, to manage the duration, we like to be present in these markets. Now let's move on to the P&L items. Let's start with the margin. As many of you are familiar, we have the highest margins in the sector. We deliver consistently the highest margin. The latest reading, the 9 months 2019 reading also suggested a year-to-date core margin improvement in the 9-month core margin improvement of 60 basis points. And on top, we do expect further expansion because of the significant funding cost drop, especially in the fourth quarter that hit the fourth quarter figures. So 2019 end, it will be -- the core margin expansion likely will be very close to the CPI-related margin suppression. So first of all, this suggests -- the swap-adjusted NIM excluding CPI level, the core margin we call, suggests that we'll surpass our core margin guidance significantly because our guidance was flat guidance year-on-year on the core margin side. On top, in 2020, we do expect further 70 to 80 bps increase in the core margin. So this will bring our total margin near 6 or -- and the core margin and -- close to 5. So when we look at the spreads -- I mean the spread evolution, it's very clear that there's going to be a inevident margin expansion because the start of the year, if you recall, the rates are very high. We used to have TL loan yields of 23% versus TL time deposit cost of 20%. And when rates dropped, the pass-through to the funding was faster. So when we look year-on-year, the -- on average, for instance, we had about 850 to 900 basis points drop in funding costs versus only about 500 basis points drop in TL loan yields. So the spread year-on-year is higher. So this will reflect positively on the core margin. And the fact that the Turkish lira loan mix is also -- loan mix because of the nature of it, the TL loan duration in about 1 year is helping us also to sustain these high NIMs for longer periods. So now let's move on to the NPLs. Given the higher economic activity, higher growth expectation, we do expect lower NPL inflows and higher collections, not just because of the economic activity but also because of the prudent loan classification so far, that will be the case. So we do expect NPL ratio, though -- well, in terms of the collections, we expect initially the collections to be heavier on the retail side. So smaller tickets retail recoveries we anticipate in the operating plan. And we expect the larger ticket ones more towards the year-end or largely maybe even in 2021. So we do expect normalization levels to be reached more in year 2021. So most of the year, it looks like the NPL ratio will fare around 7% and then end the year at 6.5%. Now the ratio, of course, will be helped by higher denominator growth as well -- higher denominator. So in terms of the net cost of risk, excluding the currency impact, I'd like to guide because you may be familiar, we 100% hedge the currency. So the portion that affects the bottom line is what we guide. We do expect the net cost of risk easing, improving down to around 200 basis points versus our 2019 guidance of less than 300. So that improvement we do expect and -- but this 200 basis points still won't be the normalized levels. As I said, most likely, those levels will be achieved next year. Let's quickly look at the payment system -- the net fees and commissions growth. Now in payment -- in net fees and commissions, many of you are familiar, we have this historic track record of delivering double-digit net fees and commissions growth each year despite having the highest base in net fees and commissions. Now 2019 was no exception. And in 2019, actually, we were very positively surprised. I mean the growth was such that it was almost double our anticipation and guidance because the rate environment helped. The rate stayed high for longer period than what we anticipated in the budget. So 2019 fee growth ended up to be in the high-teens. The rate environment helped the payment system fees. So payment systems contribution in 2019, as many of you are familiar, was hefty. But 2020, that won't be the case because merchant's fee cap was introduced very recently. On top, we're expecting lower rates, so that will affect also the payment systems fees negatively. So we're not expecting growth in the payment systems fee category. Nevertheless, the growth in net fees and commissions other than the payment systems will continue to be double-digit. Actually, most likely, they will be in the high-teens, so that in net fees and commissions, we will end up a growth in the high single digits for year 2020. So let's -- moving on to the operating expenses. Our disciplined approach will continue. Since 2015, you may recall that we've been guiding you operating expense growth around average CPI. And in 2019, again, that was the case. We will continue to guide you -- I mean the business as usual operating expenses will continue to go up about average CPI. But on top, we do anticipate two things. One is the regulation change on the saving deposit insurance fund, which caused an increase in the insurance limits as well as the insurance premium rate. So that will have an additional 1.5% impact on the operating expense growth. And also, the increasing share of IT investments to enhance IT platforms and infrastructures. This is also in efforts, of course, to enhance the customer experience. That project will add another 2% to our business as usual average CPI-type of OpEx growth. So that will bring, all together, the operating expense growth for 2020 to the low-teens. But since the growth in operating expenses are -- continue to be still lower than the revenue growth, our jaws will remain open. And also, the cost income ratio, which already is one of the best-in-class level right now, we're in the mid to high 30s, we will see further improvement there in the cost income, in the efficiency ratio. We do anticipate about 2 percentage points further improvement in 2020, given higher growth in revenues versus operating expenses. Now to sum up our 2020 guidance, we do expect Turkish lira lending in the high-teens. We expect further shrinkage, continuing shrinkage in foreign currency lending. We anticipate an NPL ratio around 6.5%. We expect net cost of risk, excluding currency impact, to be around 200 basis points. We expect further margin expansion on top of the highest margin base. We have 70 to 80 bps further expansion. We expect a fee growth of high single digits. And we expect operating expense growth in the low-teens. Now these all allude to an ROE for 2020 in the high-teens, assuming no increase in leverage. So as many of you may be familiar, our leverage is one of the lowest. It's 6x equity -- debt-to-equity ratio. With that, we do project to deliver an ROE in the high-teens. So the year-on-year EPS growth will mainly come from the margin expansion and lower provisions. So this ends our presentation. And now we can open the floor for questions. Thank you. Ali?

A couple of questions from my side. The first one is you mentioned that deposit growth to the loan-to-deposit ratio effectively is similar levels in 2019 and this by expecting higher growth on the deal side in 2020. So in terms of deposit gathering, given that deposit rates of foreign income is down suddenly, and coupled with the take rate at its form so effectively, the real rate of return on firstly rate quality is very low. How do you expect -- or what do you expect in terms of market bandwidth in terms of foreign currency? Do you expect the foreign currency to be leading in 2020? So just want to get a sense of this double-digit deposit gathering that you experience out for 2020, how easy will it be in this current environment, especially in brick and mortar?

Thank you. The answer to your question, yes, it will be easing. As of today, we are paying less than 10%. So the answer to question, the real -- what is the real rate over that, as of today, there is nothing. So the inflation, according to the assumptions, inflation is coming down. So next year, it will be coming down as well because the policy rate as of today, 12%. Next year, there will be 300 basis point decrease according to us. So following with this decrease in the rates, the deposit trends will come down, and we can really be -- under this scenario, there won't be too many real rate over the deposit amount.

In such a scenario, do you expect -- I mean then that gets the real rate [indiscernible] kind of will get whether -- and this won't be a single vendor deed already. But in the case where real rates were really low, maybe we'll see a trend of that being back for that already?

I don't expect because dollarization actually stopped because it reached to 50% of the total deposit amount in the sector, and it stopped there. So under these circumstances, we have been surviving the last 3 months, like this one. So there has not been any moot to that direction as well.

Understood. And just as a second question. So you've been as a CEO in September. It's just been 3, 4 months. But just want to get a sense of how does the bank strategy change for a quarter under your leadership?

This bank's strategy doesn't change according to the CEO. There is a very strong structure in the bank. So my mandate, there are some subjects in front of me, and that is the priorities of the new CEO. The financial health of the clients, financial health of the bank, that is the first one. Sustainability, by far, one of our pioneer priority than the gender equality. Like this one, reaching more customers and managing the bank as one team, those are my priorities. But as I told you, the strategies are set up for long term, and I'm the part of this bank for 30 years' period. I'm not new to the bank. That is the reason no one should expect any strategic change with new CEO.

Gabor from Autonomous. Following on from the rates topic. If you assume 300 basis points further rate cuts, it would imply roughly -- I mean it's close to the inflation rate. So nearly 0 real policy rate. Can you share with us what sort of currency assumption do you have in this environment? So what do you expect -- how do you expect the lira to develop this year? And also, can you give us a sense how would your -- how would your planning be impacted in terms of margins and asset quality if rates were not to drop, so if the rates were to, like, stay stable this year?

It is very simple to answer but very tough question. Our expectation, us $6.4, year-end 2020. The first answer to the question. Then the -- roughly to make 7% devaluation. Related with the asset quality, I think in terms of asset quality, we have not expecting any surprises. There will be inflow to NPL amount, but all the big-5s are usual suspects. That has not been any surprise to us. But the inflow amount has been decreasing. And also in 2020, the recovery amount will go up. So under those circumstances, NPL -- in terms of NPL approach, we will have a better year in 2020.

Okay. So do I understand correctly that you would not expect your asset quality targets to change in a stable rate environment?

If I understand you -- if I don't understand you wrongly, in this rate environment, we are expecting -- no, we don't expect any deterioration.

Sure. But if we don't get rate cuts?

No problem with us because if -- because there are two sides, deposit and credits. One reflects to the other. If that is not straight, that's because we are expecting decrease in the credit lending yield as well. If there is no rate cut, so there won't be any decrease in the lending yield as well. That is the reason, still, we are there with net interest margin will be close to 500 basis points. So there won't be any changes in our guidance.

Okay. This is [ Sergei ]. My question is also on the asset quality side. First of all, I would like to learn which small segments will be more problematic in terms of new NPL formation? And secondly, what will be the currency impact -- the amount of the currency impact on the net cost of risk? And also, do you believe that worst is behind in terms of the acceleration of new NPL formation.

Okay. Let me give the answer to the first part, then Aydin will give the answer to the second one. 2/3 will come from business lending, corporate commercial. And I think 1/3 will come from retail side. This will be the portion of new NPS structure -- new inflow structure in 2020.

And also, the last question is...

Yes, let me answer this one. You asked how much is going to be affected by currency in your cost of risk. But we are fully hedged as in the presentation, Handan told us, clearly. So I mean exchange rate is from 6 to 6.4. 4 is like 7% devaluation but fully hedged by your FX gain and loss figure. So there won't be any effect on the bottom line. But it is theoretically, as Handan again stated, the 200 basis points, maybe that 7% FX will be in the gross fashion. It's like maybe 30 bps but it is hedged through the long position, let's say, because it is opening your position by your provision FX. So we're fully covered in a technical way.

And the last question is about the stage 2 loans, the level of the stage 2 book and the weight of stage 2 loans in total lending book. Is it similar to previous year? Or do we expect any ease on that front as well?

It will be very similar. This year, we are going to end up with 14.8%. Next year, it will be 15%.

It's Sam Goodacre, from JPMorgan. You've spoken about increased IT investment this year. Could you detail some of the specific projects you're undertaking, and particularly, what you feel currently is lacking in the customer experience arena? And perhaps give us a bit of a qualitative feel for where you consider yourselves to be versus the competition in your tech, your platform, your digitalization, et cetera.

This is mainly our infrastructure. We are really designing the -- our platform. This investment will continue -- started last year but the biggest portion will be done this year. It will last about, I think, 2.5 or more years. So this -- this old infrastructure of the bank will be changed totally because we need to do that. So of course, it will directly affect the customer satisfaction. So we are doing it for that reason. Also, that creates 1% increase, which is very high amount in our OpEx. So very critical investment to us.

In addition to that, Sam, we also need to move our disaster recovery center from Izmir to Ankara. It's another IT platform unit to again establish. And also, it's quite why we are saying, we need to rerun the bank from Ankara if something happens in a bad fashion.

And could you perhaps let us know your view on tackling the rising threat of fintech and what fintech looks like here in Turkey. We heard from one of your competitors that they're trying to tackle it via an in-house solution, establishing their own fintech-type hub. So what is Garanti BBVA's approach to this issue?

Tough question. I think expert with that, Didem, can you please help us?

I think until now we have been viewing the fintech ecosystem with regards to mainly collaborating with fintechs, both collaborating fintech services in our operations as well as customer-facing features and functionalities. But what's the new area is actually opening up for us is open banking. So it's going to be an important element of really providing the APIs to fintechs. And also the payment initiation services will allow for us and for other fintechs also to gather information of customers and act upon payment initiation or account aggregation kind of services. I think the mid- to near-term priorities for us with regards to working in the fintech arena will be working on open banking. That's also BBVA's vision. And it's a very, let's say, material topic for the next phase in the Turkish ecosystem as well.

Yes. My question maybe just following up on the -- do you see any regulations coming in the future either on the banking or other topics that will impact like across the Europe a number of [indiscernible] impacted by certain regulations that will require CapEx or changes in the SDIF premium. That would be my first question.

We have had many, many regulation in 2019. So it affects our balance sheet size and amount. So I think the most part of the regulation, according to me, we have had in 2019. But of course, there may be some regulations. I think one is coming -- it is related with the fees and commissions on business life. That was under construction in Central Bank's side. Other than that, mostly, we have had all regulation in 2019. Just the biggest and very critical one is commissions and fees in business life.

How far along are they in sort of constructing that?

I think within 1 month or 1.5 months it's going to be clear.

And then my second question is your dividend. You mentioned the outlook for dividend payment [indiscernible] amount.

BRSA made a soft announcement this year. It will be better for banks not to ask a dividend. But our policy rate is up to 30% dividend payment. So we are talking with BBVA. According to their guidance desire, we'll go to BRSA and talk about this issue. So there is nothing finished yet.

Any more questions? If there are -- okay, Alan.

I was waiting for Alan.

When you're done with your -- you say that lending this coming year is driven mainly by [indiscernible] as you say, the federation. Where you see the lending coming from. I mean the GB growth, 4%, [indiscernible], do you really see your big corporate clients ready to invest in new capacity? Is it also -- is it rather just a catch-up for the last couple of years? What do you feel the mood is in terms of looking for this investment in [indiscernible]? That was my first question. And the second question. It seems to me that the way that the government is trying to create better growth is sort of slightly different this time around. Clearly, the state banks appear to be vehicles for lending growth. The CGF, which was a more equal way to provide lending to the economy is not the way that they do it now. And how does that change, in your view, the competitive environment for getting these loans? Is the playing field less equal? Is it more a carrot and stick approach? It seems to me that they penalize you if you don't lend, but they are more focused on the state banks. How do you feel that environment is changing? That was the second question. And the third question was where is, in the fee lines, in the nonpayment fees, where is the greatest risk? Because digitalization essentially is about saving costs, and fees eventually disappear. And where do you think the sort of the fee structures are most at risk in terms of how you provide services to clients at the moment? They may get cheaper to provide, but will fee income suffer as a result as digitalization continues and there's much less handwork, if you like, in providing services?

Okay. The first two question is, I think, it's connected to each other. First of all, the lending growth, we are expecting more growth in business lending but very, very close to business lending there will be also retail lending as well. That will be both increasing. The market average will be around 12.4% or 13% according to our assumptions. And our growth will be around 15% or more. So where does the demand will come? I think the first one is working capital needs and inventory. It's because we have been getting the signals. But the investment is not now. We have been getting these signals from the market. Investment appetite is coming, but we are going to see that appetite, I think, third quarter or fourth quarter. During the first half of the year, mainly working up to the needs, inventory financing, some receivable financing and business lending. But the investment, I think the last part of the year we may talk much more precisely. Competition with the state banks, I think in the last quarter of the last year is the answer. What's going to happen to -- in this year? Last quarter, I think the competition were equal between state banks and the retail banks because at the end of the third quarter, total growth of lending growth of retail private banks is around 1% -- was around 1%. End of the year, total reached to 5%. Our growth is close to 10%. So during the last 9 months of the last year, as you mentioned, the state banks dominated the market. But then the private banks entered the picture, so that is an equilibrium in the sector as of today. So I expect similar picture in 2020. So competition will not be as the first 9 months of 2019 and 2020. In terms of -- to the other question, yes, this digitalization killed some fees and commissions but -- and also the digitalization according to us is the most profitable source of fees and commissions as well. We are making very reasonable money due to the digitization because we -- 47% of our fees are coming from digital. That is the reason. Digital is killing some part. But on the other side, digital is very profitable to Garanti Bank, and it is increasing. It is increasing. Maybe another approach to your question, fees and commission, next year, as Handan mentioned, in total, the payment system will be -- its contribution will be limited. But to conventional fees and commissions growth, we are expecting, I think, low-teens or high-teens. Yes, high-teens.

High-teens, yes.

So do you think the retail customer will continue to pay for digital services? Or do you think, in the midterm, they will simply be free because the cost of delivering them is so much lower than other methods? Would you even keep charging?

These regulation in fees and commission is in retail side as of today. So we are not able to charge too many commissions to the retail. In business side, it is different. So that is the reason government is planning to put some obstacles there. So in the retail side, I think there won't be too many changes in the picture.

If there are no further questions on the floor, let's ask, Yasmin, do we have any questions online? Through the web?

There are no questions on the line. I'll leave the floor for closing remarks.

Thank you. Thank you for joining us today in the announcement of 2020's budget. Turkish economy is rebalancing sharply and 2020 will be a good year. Growth will be there, and we will deliver about sector in lending. We are targeting to deliver high-teen return on equity on the back of expanding margin and lower provision. We hope everyone has a wonderful year. So this is the conclusion of our presentation. Thank you again for your joining us.

Thank you for joining us.