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

Well, welcome, everyone. We're very happy to host all of you, even though it's virtually in our head office. And it's been a very different year, very different setup. But we're very happy that we're all back in good health, meeting you again, and we look forward to meeting you in person. Today, I'm here with our CEO, Recep Bastug; and our CFO, Aydin Güler. We'll be talking about our operating plan guidance. But before that, as usual, I'll touch upon our macro projections to give you the scenario we base our projections on and also give you a static update before moving on to our projections for this year. So starting with the macro, let's first take a look at our big data as that's a good proxy indicator for us. We see that even though there is some loss of momentum due to the recent confinement measures, the domestic demand continues to be strong on the back of goods consumption and machinery investment. Accordingly, the GDP growth for 2020 may even surpass our forecast of 1%. For 2021, this recent momentum will be supportive on top of last year's low base. And so for that reason, we expect a GDP growth of 5%, with the assumption that there will be stabilization in financial assets, parallel to improvement in risk premium and normalization led by the vaccine developments. As for inflation, we expect elevated levels until May 2021 and start to decline only very gradually thereafter. This will require the continuation of the tight monetary stance for a long period of time. We expect inflation to decelerate to 10.5% at the end of the year, helped by the sizable base effects in the last quarter. So our assumption is that the Central Bank will start a gradual easing cycle as early as October, reaching 14% by the end of the year. Moving on to the other macro indicators like current account deficit and budget deficits, we see 2021 as a rebalancing year and expect this equilibrium to be reduced. Current account deficit will decline on top of the expected normalization led by vaccines and moderation in import demand on tighter financial conditions. In 2021, budget deficit is expected to be much lower than our initial anticipation during COVID on the back of increased tax revenues due to higher economic activity. Going into 2021, fiscal space will likely continue to be used in a targeted fashion, even though first half may be elevated. In the second half, it will likely decelerate, parallel to the increase in economic activity and budget deficit to GDP will end up with a very manageable 3.6% level. Now moving on to our status update. We had guided for TL lending growth around 25%. It -- we now see that it will be higher than 25%. The foreign currency lending growth to be -- to shrink and that we keep that guidance. We're going to see a shrinkage in the foreign currency lending. NPL ratio, we had guided that it would be less than 6.5%. That still remains. And even though we do plan some write-downs, before the write-down, we're going to be still meeting less than 6.5% NPL level. Net cost of risk, we have guided for that to be less than 300 basis points, and that we keep that as you're all very familiar. In terms of the margin, now margin got pressured most in the fourth quarter. And the most likely fourth quarter 2020 will be the lowest margin reading of this year due to the higher-than-anticipated funding post increase that pressures the floor margin. But nevertheless, our CPI book will continue its health basically and deliver the guided net -- guided margin. So the guided level is less than -- I mean, an expansion of 50 basis points. In terms of fee growth, we have guided high single-digit shrinkage in our July revision. And we revised it now to shrinkage that is in the low single digit. And when it comes to OpEx, you may have seen in our 9 months' results that we had some uncontrollable parts to the OpEx. So we are now expecting OpEx growth higher than 10%. The reason is because of the uncontrollable part that we had stated in the -- in our latest earnings call. Those are the currency impacts, higher-than-expected devaluation, COVID impact and inflation. So -- but all in, the ROE will be -- will end up in the low teens as guided. So -- but this figure also includes pre-provisions we set up -- set aside during the year, significant free provisions. So isolating those free provisions, we actually could have delivered the ROE in the mid-teens. So now let's move on to the 2021 operating plan. Now looking at the asset mix on Slide 9, we don't expect any deviation from last year's composition. Assets will continue to be customer-driven for sustainable income and loans portion is significant, 63% of the total. In terms of lending growth, we expect Turkish lira loans to grow in the mid-teens. 2021 loan growth will be most likely across the board at a more normalized level. Given the high growth we've seen last year, there will be significant redemptions also. Turkish lira business banking loans will continue to be the front-runner, but they will be at a slower pace versus 2020. We expect to see an expansion in receivable financing as well, so that will help the lending growth. In 2020, firms mostly used their inventory. And in 2021, companies will be in need of working capital to build their inventories' backup and also meet the increased consumption demand in an environment with higher economic activity. So this will drive the growth on business side. And with the removal of COVID-related restrictions and increased mobility, consumer demand will likely follow. As for the foreign currency loans, we do expect again shrinkage, but even though because in the project finance book, there will be significant redemption. We will likely compensate the portion of those with export loans. But in the end, it seems like shrinkage in foreign currency lending will continue. On the funding side, on Slide 10, we will continue to manage our funding mix actively as we have done historically. So deposits will continue to lead in terms of the funding source and continue to fund 65% of the assets. On the deposit side, we will maintain our focus on demand deposits as well as usual sticky and low-cost deposits. Borrowing share in asset is projected to be a limited 12%. In 2021, we have a total of $2.5 billion of redemptions coming up; $1.5 billion is related to the syndicated loans; about $500 million, there is Eurobond redemption that's coming up; and $500 million DPR redemption. Since the lending growth -- in TL, lending growth, I mean, it's mainly Turkish lira driven. There is strong foreign currency liquidity buffer of more than $11 billion. So there doesn't seem to be an urgent need to renew our Eurobonds. So -- but however, depending on the market conditions and our balance sheet needs, we will continue to be opportunistic on that front as a major market player. I would also like to mention that 40% of our foreign borrowing in 2020 has been ESG linked. Also, I would like to mention that our strong capital levels remain as a funding source. So on Slide 11 -- moving on to Slide 11 and looking at the margin performance, as I mentioned briefly earlier, given the high interest rates, we expect contraction and normalization trends from our all-time high level. So allow me actually to quickly remind you the historic performance. We had reached about 5% margin level in year 2018, helped by the extraordinarily high CPI reading. This affected, of course, our CPI revenues positively when the CPI reading was 25% back down. In 2019, the sharp drop in interest rates supported the margin. The drop was from like 24% levels down to 12% levels in just 1 year. And in 2020, further support was due to the high volumes, along with our effective funding management. Now given the higher funding cost environment, fund contraction for year 2021 seems inevitable. Our assumption is that average funding cost from the Central Bank in 2021 will be 16.5% versus 10.5% in year 2020. So 600 basis points increase in funding cost is suggesting that's very significant funding cost increase. So given the latest hike in December 2020, margin will see its lowest level in the first quarter 2021 and then afterwards it will gradually increase. That's our prior assumption. Pace of improvement will be limited to loan yield increase in the second and third quarter because we assumed funding costs -- high funding cost to be flat all throughout 3 quarters in the year. So we expect this tight stance in the monetary policy to continue. So margin improvement, we assume, will gain pace only late in the year, so only in the last quarter and that will be gradually. So based on this scenario, we guide our margin. So at this point, also, I would like to remind you that as for margin, we consistently deliver the highest level in the sector. Now let's move on to asset quality. In 2020, contrary to the expectations, NPL inflows ended up to be extraordinarily low due to the forbearance measures taken during the pandemic, such as long installment deferral and easing NPL recognition days. As NPL forbearance has been extended till the end of June 2021, the portion that was supposed to be in 2020 will inflate to NPL inflow of '21. So even though the hit to '21 NPL will be visibly high, when we look at the average of the 2 years, meaning the average of 2020 and 2021, it will still be lower than the NPL inflow levels of 2018 and 2019. As for collections, we're keen on sustaining strong collection performance and even further improvements. As for the ratio, I have already given you heads up that it may include write-downs of the ones that are 100% provisions, NPLs, and this may bring the ratio way under 6.5% actually for year 2020. Of course, at this time, we cannot disclose the amount of the write-down, but it will be an amount that is, as I said, 100% provided and it won't affect the bottom line. It will just -- the ratio will be adjusted, bring the ratio level down a bit. So -- and in our operating plan guidance, we assumed also further write-downs in 2021. And including the write-downs, we project an NPL level that is less than 6% by the end of the year. Note that since the planned write-downs already have, just -- I mean, just I want to stress this a lot, already have 100% coverage, there will be no additional bottom line impact, either for 2020 and also for 2021. Now looking at the cost of risk side, you have seen already in 2020 that we have booked as much as possible the COVID-related provisions last year ahead of time. So we think that the worst in terms of cost of risk is behind us. But normalization in cost of risk will likely be seen as early as in the year 2022. So we project 2021 net cost of risk to improve by about 100 basis points year-on-year to less than 200 basis points. Now let's move to the fees and look at the performance there. We expect to resume our double-digit growth momentum on top of the new fee base of 2020 post regulation and assets as of March of last year. We expect the fee growth to be in the mid-teens. Please recall that as guarantee, we're able to generate by far the highest fee income in the sector. Our higher lending penetration reflects very positively to our fee growth that is higher than the sector average and this will again support our fee growth in year 2021. Also, our strength in payment systems will once again attest itself very visibly in the fee performance, given the relatively higher interest rate environment that affects all card-related fees. Increased digital banking activity in this environment -- in this COVID environment and top banking transaction volumes increased by 50% compared to the same period last year, reinforced our fee generation capability as well. Also, we continue to have strong contribution from subsidiaries from brokerage, from asset management, from insurance. Their strong contribution will continue. Now moving on to OpEx growth. In 2020, there were 3 items, as I mentioned earlier, that deviated us from our OpEx guidance of below 10%, which are higher-than-expected average inflation, which when we did their guide budget, we assumed the average inflation to be 9.5%, whereas it ended up to be 12.3% for the year and -- I mean, on average, I'm sorry. And this, of course, on top of this, there was significant currency depreciation and additional COVID-related expenses. So these uncontrollable parts basically will push the OpEx growth above 10%. I mean COVID had roughly about 1% negative impact. Currency depreciation adds nearly 4% to our OpEx growth. However, this portion, as you may be familiar, has no bottom-line impact and that is 100% hedged in the currency portion. And in year 2021, considering all the post-COVID cost efficiency improvements we did last year, we will manage the OpEx growth to around inflation. All in, this guidance actually suggests a cost-income ratio that remains below 40%. Now in summary, we -- based on this macro scenario, we're projecting a Turkish lira lending growth in the mid-teens. We are projecting further shrinkage in foreign currency lending. We are expecting NPL ratio to be lower than 6% by the end of the year, including the write-downs that are 100% provided for. We expect about 100 basis points improvement in the net cost of risk, bringing it under 200 basis points. We expect margin contraction that is about 100 basis points, and this is based on the assumption that the tight stance will continue throughout the year and only gradual cuts will happen after October of this year. And we expect fee growth of -- in the mid-teens on top of this new fee base. And we expect operating expenses grow parallel to the CPI. And we expect return on average equity to end up in the mid-teens. So this actually wraps up our presentation. And now we can take the questions you may have. Thank you for listening.

[Operator Instructions] We're taking the first question from Simon.

You mentioned that you have the highest NIM in the sector. And I've always been curious why that's the case. Can you just elaborate on why you think that's the case and what's driving that? And do you think that leadership will be maintained going forward and why? That will be my first question.

Simon, first of all, we will continue to be the highest net interest margin provider in the sector as well. Our calculation is based on the rate cuts will be on the last quarter of the year. So if that happens earlier, that then quarter -- that quarter so directly, our net interest margin deterioration will be less than that level. So we don't have any problem. We will continue to provide the highest net interest margin in the market. But in order to be at the safe side, our calculation was done that rate cut will be on the last quarter. That is the first part. The second one. Yes, we -- our strength comes from our service quality and our penetration. So as a result of it, we have been collecting highest demand deposits as a portion in the sector. It will continue to be like that in 2021 as well.

Could you hear me? Sorry, I think I was on mute. I couldn't get off mute.

Yes. No, we can hear you.

Great. Yes, yes. I guess my second question would be just on cost of risk. So it's still at a reasonably elevated level this year. Can you just walk through kind of the upside and downside risks that you see to cost of risk in the NPLs this year? And then when do you think you'll go back to a more normalized level? And what do you think that new normalized level is given the outlook that you have for the economy in the world? I know it's quite difficult in this environment.

No. First of all, let me give you some feedback related without this year's NPL. As I guided -- according to our guidance, it will be less than 6.5%. But let me give you some insider information, it is less than 6%. So as of -- at the end of this year, apple-to-apple without any write-off, without any write-down included to the calculation, our NPL ratio by the end of 2020 will be less than 6%. Handan, she's likely giving you the numbers below the guidance, but that is reality. There will be deterioration in 2021, for sure. The reason behind that, I think you catch up during the presentation, Handan tried to underline that average of 2020 and 2021's total will be less than '19 and '18. It means that, that is a shift among some NPL portion due to COVID-19 issues to 2021. That is the reason 2021, there will be an extra NPL inflow. But is it under control? Yes, totally it is under control. And I think 90 -- more than 90% of them are provisioned within this year. That is the reason the impact to P&L will be negligible. It is under control. We don't see any problem with that. Cost of risk this year, according to our guidance, it is less than 300 basis points. Next year in -- this year, in 2021, it will be less than 200 basis points. And if it goes like that, 2021 will be a normal year in terms of cost of risk. Gradually, it is getting better and better, Simon.

And where do you think normalized cost of risk is kind of after?

2022.

But what is that level?

The level between -- 2022 will be the first year under IFRS 9 environment. We will calculate a normal year cost of risk, it will be between 125 to 150 basis points.

We are taking the next question from Deniz Gasimli, Goldman Sachs.

Just wanted to follow up on asset quality guidance. You obviously mentioned that there is a certain amount of NPL sale baked in, in the estimates. Would you be able to share exactly what kind of anticipated impact from NPL sale or write-off for the next year guidance? Also, maybe do you expect any inflows on the deferred portfolio or, as you said, it has been performing duly well, so you do not expect any meaningful impact from that? So in general, like when you think about the NPL inflows and NPL sale and write-off, how would you break it down? If you're able to provide that granularity, it will be much appreciated.

Thank you, Deniz. First of all, this year, we did write down. But we cannot share with you the numbers and the percentages, but serious amount of write-down has been booked by the end of the year. In 2021, it will continue the amount. I cannot say you the amount, but it will be, again, a reasonable amount. Write-down numbers will be more than write-off or selling the NPLs to the third party. We will continue to write down our NPLs. The deferred portfolio's effect, it is very simple. Our deferred portfolio's volume is TRY 40 billion. Our calculation, 5% of those TRY 40 billion will be subject to NPL. There are too many details. If you would like to hear, I will give you that. But as a result, it was TRY 40 billion, just 5% of which TRY 2 billion will be subject to NPL and 50% of it from retail and credit cards and remaining partly from wholesale portfolio.

And regarding maybe Stage 2 to Stage 3 inflow, is there any anticipated number you have on that?

In 2020, yes, but first, you will see an increase in Stage 2. By the end of 2020, because of macro calibration, you will see an increase in Stage 2 portfolio by the end of year -- this year from retail portfolio due to macro calibration you will see an increase. In 2021, yes, there will be an increase, 1 part maybe from SICR. The second part will come from individual assessment. I cannot tell you the exact number, but there will be an increase in Stage 2 side. In Stage 3, yes, NPL in Stage 3, there will be an increase as well. I think increased amount will be around 100 basis points. I am saying around, 199 -- 99 or 75 basis points, I don't give you the number. Around 100 basis points increase you will see in NPL. I am telling you this number apple-to-apple without any write-off, write-down included to that number. You will see, as I said, 100 basis points up in NPL ratio, around 100 basis points.

The next question is from [ Sanjay ] from Balaji Global Securities. Hello, can you hear us? Okay, I think there is a problem currently with the line. [Operator Instructions] Okay. We have one question from Simon.

I'll ask another as others are having technical issues. Just on the loan growth side, your 15% TL loan growth target is a bit lower than Akbank. So you're just being conservative? Or are you still a bit worried that the aftershocks of these rate hikes in the macro turbulence is going to lead to demand? Or are you being just cautious? What's behind that TL loan growth forecast?

First of all, we think that under this environment, the credit rate is around 18% to 20%. It is not easy to get that volume in the first half of the year. It will not be too easy. And also, there will be very strong redemption in the first half of the year as well. Because of the asset ratio, sector increased its volume in 2022 and redemption time is coming in the first half of the year. That is the reason, under this environment, according to us, even if we want to accelerate our loan portfolio, it will not be too easy according to us. It may be subject to see that kind of increase in the last quarter of the year or third quarter. Under these circumstances, I don't know how my colleagues from Akbank -- my friends for Akbank think that it depends on the portfolio. But sector will not reach to 15% average as well. That is the reason we are prudent. We are a little cautious and conservative. That is the reason we are -- we stick with our 15%. That is normal, maybe aggressive number because under this level, there won't be any mortgage business. And also GPL, the maturities has been taken down from 60 months to 36 months. So all these things unfortunately affects the demand side negatively. And also, it depends on mainly wholesale demand, and it will be under pressure. So under this environment, we think that our number is very reasonable.

Yes. No, sounds logical to me. And then just a question on OpEx growth. You're saying that it will grow below or in line with inflation. I guess do you mean average inflation because, I think, average inflation will be a bit higher than your year-end forecast of 10.5%? So can you just elaborate a bit there?

First of all, our OpEx, our number for 2021 was equal to -- or we plan to have according to average inflation. But unfortunately, our average inflation estimation was about 9.5%.

Yes, 9.5%.

Yes, 9.5%, but it ended up with 12%. This year, 2021, average inflation, according to our estimation, it will be around 13.7%. So our OpEx will be in line with those 13.7%, maybe. It can be a bit less, it can be a bit small, but it will be around it.

We have a question from Mehmet Sevim, JPMorgan. Mehmet, can you hear us? Okay. Again, the same problem with the line, I think. [Operator Instructions] Seems like we don't have any more questions. So this concludes the Q&A session. I'll leave the floor to our presenters for closing remarks.

Okay. There is not any more question, let's close the session. First of all, 2020 was a successful year in terms of meeting our guidance despite the challenging conditions resulted from COVID-19. 2021 will be a tough year, but we think we will achieve our goals. So thank you for listening to us. I wish everyone a healthy year and, hopefully, see you all in person next year. Thank you very much.