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

[Audio Gap] versus same period last year. The drop in return on equity and return assets versus year-end results is purely attributable to the exceptionally high CPI at revenues of last year. Looking briefly also to some key performance indicators showing our strength in liquidity, revisioning and capital is that in the first quarter, for the first time, it's not ever for -- at minimum last 15, 20 years, our Turkish loan to Turkish lira deposit ratio dropped below 100% to 93%, and our core recurrent loan set ratio at 60%. [indiscernible] coverage of 4.8% is double the revenue ratio. Our go provisions of TRY 1 billion remains on balance sheet. And our consolidated capital adequacy ratio 16%, suggest a well-capitalized level. Now let me explain the comment led solid results. As of the first quarter end, [indiscernible] reached TRY 1.5 trillion. In the quarter, even regulatory requirements led to an out of an ordinary increase in Turkish lira securities, the highest rate in aspects remain to be the customer-driven with long sharing assets of 55 plants pointing our core bank securities reached almost 17% due to TRY 40 billion trade security agency book to meet requirements. Accordingly, the share of fixed rate in Turkish lira securities went up to 39% from 28% with rest being CPI link and IFRS. Note that all the new additions are booked under our held-to-collect portfolio so to eliminate the value fluctuations as a cap. Total loan growth in the quarter was 9%, 10% growth was in Turkish lira loans and 3% growth in foreign currency loans owed to the current attractive export loans. Continuing with Turkish lira loans this page, Slide 8. Our performing loans reached TRY 520 billion by end of the quarter. Both the magnitude and the area of lending was shaped in light of the new regulatory framework and closely monitored. Accordingly, Turkish lira loan growth cut pace to 10% in the fourth quarter -- in the quarter, sorry, from the mid-teens and prior quarters. Crazy higher growth remained in credit cards and consumer loans with 28% and 16%, respectively, while business loan growth turned negative on a consolidated basis. Accordingly, in the pie chart, you will notice the growing weight of consumer mark, 45% share in to 4 business. We have a leading position in Turkish lira loans, consumer loans, credit cards, among private banks with market shares of 19.5%, 20% and 23.3%, respectively. In line with the regulations, limiting lending and negatively affecting business loan growth, in business lending, we launched last year's market share gains in 1 quarter and now have 17.5% market share. SME loan market share loss though was relatively limited, and our market share remained above 20%. Moving to the deposit-dominated funding sources, both type and demand deposits as well as deposits like Turkish lira bonds issued and merchant payables fund nearly 3/4 of the assets. Demand deposits alone continue funding more than 30% of the assets despite the more attractive foreign currency protected time deposit scheme rate. Even though there has been a regulatory driven increase in the average interest earning assets due to the securities portfolio additions in the quarter, free funds, meaning demand deposits and free-equity total still remained very high. But mathematically speaking, now fund 38% of the interest-earning assets versus 50% last year. This inorganically lower rate of 38% is still superior and differentiates us. Borrowing share in funding assets has been further reduced down to 6.9%. Total external debt is not $4.4 billion, sorry. And you can see the foreign debt components in the pie chart on the bottom right-hand side, that is predominantly in securitization and syndications. Against this total debt of $4.4 billion, of which $1.4 billion is due within a year, our total foreign currency liquidity buffer is $5.3 billion. So still sustaining almost full fold to short-term need as buffer. The drop in foreign currency liquidity buffer in the quarter versus year-end mainly relates to the regulations supporting realization which you will clearly see on this slide where there has been an accelerated growth in Turkish lira deposits in the quarter, supported by these realization efforts. The drop you see in foreign currency deposits fueled the Turkish lira time deposit growth or in other words, foreign currency protected TL had positive. So there was an extraordinarily high growth of 40% in Turkish lira time deposits in just 1 quarter versus 11% growth in Turkish lira demand deposits. Even though this regulation imposed much higher growth in Turkish lira time diluted our Turkish lira demand deposits share in total to 22%, with demand deposits exceeding TRY 125 billion, we still hold the highest Turkish lira demand deposit base among private peers. And this differentiating strength manifests itself in our superior margin performance that's on next page. Even though our superior core margin generation capability, which is our legacy remains, partially the drop in margins was well anticipated, especially from its peak global at the end of last year. Quarter margin drop was a significant 640 basis payments, largely due to CPI adjustments. We used 31% inflation estimate in our CPI value calculations in the quarter. The quarter margin in the core margin was well anticipated and guided given the regulatory price caps on land and the removal of the deposit price gap on the foreign currency protected deposits. Core margin drop on the other hand, was relatively limited 625 basis points Q-on-Q from 5.7% in the fourth quarter last year to 4.4%, and it was flat year-on-year. In here, we admit we will be seeing a lag effect of deposit costs in the second quarter. First quarter core margin reading of 4.4% includes a limited quarterly average time deposit cost increase of 50 basis points. Also, it will be fair to show the effect of increased funding costs that were in the form of option premium costs offered to foreign currency protected deposit holders booked under the trading line. Adjusted with those costs, quarterly core margin drop was actually or could have been actually, let me say, 217 basis points, bringing the core margin to 3.1%, which is still a level that is superior in the sector. Now moving to the subject of asset quality. The main message here is that we continue to prudently increase presence. The share of Stage 2 hit 14% level, increased from TRY 107 billion at year-end to TRY 220 billion, mainly with files that are impacted by devastating earthquakes. Earthquake-related files now make up 10% of Stage 2 and has 8% coverage. Even though this has caused a slight drop in the Stage 2 coverage ratio to 18.4%, the coverages remained very strong, where average foreign currency loan coverage is 28% and SICR portion is actually a very low risk. Of the first quarter 2022 SICR portfolio, only 1% ended up in NPL by end of first quarter 2023. As for the NPLs, NPLs are on an improving trend, helped also by the low interest rates customers have been enjoying. The increase seen in the net new NPL in the quarter relates to the temporary booking of one big file that was under the Credit Guarantee Fund program. So it is soon to be recovered. Despite an improving NPL ratio, we continue building provisions. With total provisions exceeding TRY 41 billion, we have the highest provision level in the sector. How this translates into risk costs or provisions, you can see on the slide, where net cost of risk ended 80 basis points in the quarter, of which 65 basis points was due to the impact of the earthquakes. Just to remind you and explain you the reason for the quarterly seeming drop in provisions that has to do with the big box set aside in the last quarter, post our annual IFRS 9 model recalibration. Moving to the topic of net fees and commissions. We could more than double our net fees and commissions on an annual basis and grow by 8% on top of last year's high base. TRY 6.6 billion of net fees and commission generation capability in just 1 quarter is owed to the strength in relationship banking and digital empowerment. Main contributors remain money transfer fees, where our #1 rank here is a clear representation that customers choose Garanti BBVA as their main bank. Besides the money transfer fees as well as cash and noncash fees contribution to net fees and commission growth remained high. Moving on to the operating expenses. Year-on-year OpEx growth was 127% of which 9% was due to the currency depreciation that is fully hedged. Still high annual growth can be explained with low base effect as the multiple salary adjustments we had last year occurred post first quarter. So expect the growth in operating expenses to converge the guided level of 100% by year-end. Quarter-on-quarter growth of 31% includes earthquake-related donations and costs related to relief efforts as well as SDIF premium increase that typically hits first quarter. Given the operating circumstances in the quarter, cost-income ratio at quarter end was 38% and fees coverage of OpEx was 55%. Regarding capital, capital remained strong. Income generated in the first quarter alone could compensate the operational and market and credit risk increases starting in the year. The drop in the capital adequacy ratio to 15.9% at quarter end, relates largely to the dividend payment and regulatory changes that led to increase in risk weights on commercial loans and general purpose loans. We sustained our sole capital buffers. We have TRY 44 billion of excess capital on a consolidated basis and without any forbearance impact. And as a secondary buffer, we still hold on to our TRY 8 billion of free provisions. If we were to include free provisions as part of capital, that would take our capital adequacy ratio to 16.5%. On top of this, if we were to include also the BRSA forbearance impact, it would add another 31 basis points, technically carrying our consolidated capital adequacy ratio to 16.8%. The foreign currency sensitivity on our capital equity ratio is that for every 10% depreciation, it is 35 basis points negative. Now this wraps up our financial presentation. Now allow me also to inform you on our value creation on the nonfinancial side as well. Now one of the highlights marked this quarter is our announcement in turn, the organization targets for 2030 to achieve 2050 next. We're the first bank from Turkey to do so. Open banking was one of the most important agenda items. And like always, we were one of the pioneers. And now we're happy to say we are a hub for other banks accounts. Our customers' first choice and the numbers clearly support that with 13.4 million mobile customers, we have the highest digital and mobile customer base. Diving deeper on our value creation and starting with employee satisfaction, which is crucial in our value creation, our hybrid working model allows for a healthy work-life balance. We are proud to be included in Bloomberg Gender Equality Index for 7 consecutive years. And these contribute to employee satisfaction, resulting in a poll result that was 4.3% -- 4.3 out of 5. And that is far above the sector average, reflecting on our employee loyalty. Creating sustainable value beyond serving the largest customer base is our goal. Recently launched ecological steps, helping our customers track their carbon footprint with easy and contests. Gamification is an important tool in taking care of our earth and taking care of our future. In line with responsible banking model, for us, sustainability has moved beyond financing. We have so far mobilized TRY 57 billion in sustainable business. We also focus on managing the direct impact we have through our community investment programs. As of 2022, our contribution reached TRY 72 million. Along with these, we care about what shouldn't -- we shouldn't finance. We have been carbon neutral since 2020. And as you will notice on the next slide we have been the first Turkish bank to set and announced internal decarbonization targets for 2030 in 4 carbon-intensive sectors, power, automotive, iron and steel and cement in line with the Paxton Methodology. With the targets we set at the -- as part of the Paxton Methodology, we track our customers progress in their decarbonization processes and offer them financial support for their investments in new technologies and production methods along the way. We are proud to say that our efforts on these issues are recognized by various credible international agencies. We're included in 11 sustainability indices. To name a few, for instance, Dow Jones Sustainability Index, we raised our score from 75% to 83%, which is the fifth highest in global banking sectors. We are qualified for the Global A list in 2022 in the climate change program of CDP as the only Turkish bank. CDP has remain of the well-recognized environmental reporting initiatives. And with all these great results in our financial and nonfinancial strategic performance indicators, it is not surprised that we rank first in brand power among private peers and ranked #1 in Net Promoter Score for SME, commercial and mobile banking. Now this concludes our presentation, and we'll leave the floor to you for questions. Thank you for listening.

[Operator Instructions] So our first question comes from Waleed.

Thank you for the detailed remarks in terms of highlighting Garanti's stronger balance sheet profile. So I mean, continue with that, I wanted to ask 2 questions, which are interlinked. Number 1, given that there is expectation around policy normalization during the second half of the year, if you could share to the extent you can, some results from stress tests in terms of how you've kind of stress tested the balance sheet to different scenarios, whether it's FX devaluation or a sharp increase in rates that will be quite helpful if you can share that. Secondly, I mean knowing the profile of Garanti and how you've actually navigated previous episodes of economic uncertainty. Just wanted to kind of get a sense of the agile management techniques that you would have or deploy as we move into a more normalized or more kind of orthodox policy environment in terms of how you intend to deal with your bond portfolio and risk management. And perhaps linked to that, if you can talk about any potential for risk weight optimization that you can undertake as well. Those will be my questions.

Okay, Waleed, and thank you for joining and asking the question. Firstly, related with the stress test, and I think this covers the remaining part of your question first, interest rate. Our balance sheet is very well prepared for any outcome because our drain gap in TL balance sheet is less than 3 months. But the most important thing is that the correlation between inflation policy rate, loan rate and deposit rate has been broken. These rates must have a certain relation among each other until that correlation is established again, bank will operate with negative spreads and normalization will take some time. Secondly, exchange rate in Turkey banks does not carry material currency risk and balance sheet. While banks assets are growing, their foreign currency assets are shrinking. Only high-quality foreign currency assets are left. Therefore, we don't see any NPL risk for the sector due to exchange rates. Thirdly, asset quality, we expect NPL inflow to remain under control as the strong economic activity helped real sector's profitability. Retail and wholesale have benefited from the low interest rate environment in the last 2 years, therefore, cost of risk faring at low levels. In case of interest rate hike, there will be an adjustment not in '23, but in '24 and '24, we may consider normalized net cost of risk level as TRY 125 million to TRY 150 million levels. To sum up, what can I say as proven by our track record, our balance sheet is very well positioned for any outcome. Second question is related with capital adequacy ratio and interest rate impact on that. So interest -- increase in interest rates affect negatively the valuation of held to collect and sale portfolio and capital ratio. But loan rates will also increase if there is an increase in interest rates. And as I said, our duration gap is very suitable for adaptation to the new environment. So we will start seeing expanding in margins, but of course, lending demand will also cut face in an increasing interest rate environment. Since there are many moving parts in the balance sheet, it wouldn't be fair to give you a figure as there is no linear correlation. So my comment is that our balance sheet is very well positioned for any outcomes. So we are able to manage our capital adequacy ratio easily in this volatile environment.

[Operator Instructions] Seems like we have a written question from Mehmet Sevim.

So he asks, what is the current share of CBI pledged fixed rate long-term bonds in your total assets? Can you provide capital sensitivities to higher interest rates arriving from the secured portfolio?

So the regulatory was our security portfolio increased about around TRY 50 billion amount. And we are able to manage this environment with these levels. So what mean in the balance sheet will be the final amount of fixed security. I think this answer is enough. Okay.

Our second written question sorry, can you please elaborate on sustainability of much muted deposit cost increase in first quarter?

The deposit cost increase was limited due to 2 reasons. We met 60% results towards the March and therefore, cost of deposits will come with a lag. Secondly, what you don't see directly under NII is the premium cost paid to customer around the FX protected deposit scheme to support conversion. We transparently presented it in our net interest margin chart. However, I should also underline that this cost did not get fully reflected to the bottom line as we had hedging instrument that could largely offset this premium cost. And thirdly, always, I'm proud of saying that we are able to generate low cost of deposits compared to the market conditions. Okay.

We have a short question everything question again. What is the biggest risk in the sector?

The risk in the sector, we may talk about 3 main topics. The first is margin management. The correlation between inflation policy rate, loan rate and deposit rate, as I said, has broken. This rate must have a certain relation among each other until the correlation is established again, we are going to be under negative margin pressure. So although the sector's capitalization is strong, its current situation inevitably pressures bank's profits. Again, the profitability to last year's earnings were supported with extraordinary high CPI increase revenues. This year, due to lower seat guide reading and expected core margin suppressions, earnings will be lower. However, in the long run, it will adjust when the correlation among interest rates are reestablished. We are currently in a transition period. Thirdly, the biggest risk item in the sector for the next 3 years is cost of acquiring customers. Half of bankable population is already guaranteed customers. The important thing is how to deepen the relations with this customer. Current competition is based on acquiring customers at all costs. The weight of promotions paid to the salary customers in OpEx will increase significantly. And unfortunately, these expenses will not translate into profit for the banks.

Seems like we don't have any more questions. So this concludes the Q&A session. I now leave the floor to our presenters for closing remarks.

Thank you all for your participation. I would like to once remember our citizens, we have lost in the devastating earthquake. There is still damage that need to be repaired and will heal our wounds together. Start to 23 was strong, and we achieved a strong set of results demonstrating our residency under any circumstances. As guaranteed, we are ready with our strong and healthy balance sheet competition. We will continue to generate high quality and best-in-class earnings in 23 under any circumstances. Thank you for all -- for your support and trust in us. I wish you all the best.