Turkiye Garanti Bankasi A.S. ($GARAN)

Good afternoon, and thank you for joining Garanti BBVA's First Quarter 2026 Financial Results Webcast. Today, we are joined by our CEO, Mr. Mahmut Akten; our CFO, Mr. Atil Özus; and our Head of Investor Relations, Ms. Ceyda Akinç. Following management's presentation, we will open the floor for questions. [Operator Instructions] Without further ado, I will now hand over to management.

Hello, everyone. We are pleased to be with you again following another quarter of strong financial performance. Before getting into our financial performance details, let's, as usual, go over the macroeconomic environment we are in. Following 3.6% annual growth in '25, we now cast a moderate GDP growth of 2.5% to 3% in first quarter. Although this probably remains a possibility, the physical destruction in the region suggests that the recovery on supply side will take time. Therefore, we evaluate such high risk to our 4% GDP growth forecast for '26. We have revised up our year-end policy rate assumptions from 32% to 35% alongside a higher inflation outlook. In line with our above 30% inflation expectation until September, we expect CBRT to keep this funding rate at 40% until June, and if conditions allow, limited rate cuts might resume in July. Moving into current account balance, increased energy prices, and weaker export performance due to subdued external demand, put the pressure on the current account deficits. We now expect current account deficit to GDP to be around 3.2% versus around 2% estimate in the beginning of the year. Despite availability in fiscal room, depending on the increasing external financing needs, the fiscal support on growth will be kept modest. Now moving into our financials, I will start with the headline figures. We had a solid start to the year. In the first quarter, we delivered a net income of TRY 34 billion, corresponding to 32% annual increase and 25% quarterly increase. Our return on equity was 30% and once again supported by core banking revenues. As you can see on the right-hand side, core NII went up by 12% Q-on-Q with the support of expanding spreads. Strong increase in trading income was mainly backed by higher foreign currency buy and sell activity. Net fees and commissions income maintained its growth pace in the first quarter with the increasing contribution from money transfer, insurance and asset management fees. As always, we remain focused on capital generative growth, which is clearly reflected in our sector-leading CET1 ratio of 12%. A big part of this success comes from our asset mix on Slide 7. Our total assets reached TRY 4.8 trillion and loans make up 56% of total assets, which supports our recurring revenue generation. In this quarter, I would like to acknowledge that due to the ongoing sale process of our Romania subsidiary, related balance sheet and P&L items have been reclassified under assets held for sale and discontinued operations. Therefore, in our earnings presentation, we have shown Romania impact separately in previous quarter's figures for fair comparison. Quarterly and yearly growth figures also exclude Romania for fair comparison. In foreign currency securities at the quarter end, $3 billion short-term placement to high-quality liquid assets led a temporary increase in foreign currency securities balance. In TL Securities -- in TL Securities composition, I would like to highlight that we increased floating rate notes. Moving to Slide 9 for further insight on the loan portfolio. In the first quarter, we maintained growth pace in credit cards and business banking loans. We preserved our disciplined pricing stance in loans and delivered healthy growth in all loan categories. If we move on to the asset quality, in the first quarter, consumer and credit cards related flow to Stage 2 and 3 continued, share of Stage 2 in total loans modestly increased to 11% due to flow to SICR and restructuring. Increasing SICR portion reflects our prudence since 84% of SICR portion is nondelinquent at all. Due to the respective regulation, restructuring in consumer loans gained pace, notably. Our Stage 2 coverage ratio declined slightly to 7.5%, mainly due to mix effect and improved repayment performance in certain individual assessed loans. I highlight that there is no change in our prudent provisioning and aging policies. Higher risk segments are supported by strong collateral structures and coverage buffers, particularly in SME and wholesale portfolios. If we move on to the next cost of risk on Page 11, net provisions declined slightly in the first quarter from the high base of 4Q. On an annual basis, provisions increased due to the retail inflows and normalizing collections from the wholesale book. As a result, consolidated cost of risk realized at around 2%, parring in line with our expectations. Now moving into the other side of the balance sheet, not only in assets, but also in funding, we rely on customer-driven sources. Total customer deposits exceeded TRY 3 trillion, constitutes 66% of total assets and remain TL heavy. Share of free funds is by far the best among peers, which mirrors our net interest margin strength. In TL demand deposits, due to point-in-time data, there seems to be a slight decline. But on an average basis, we continue to expand our TL demand deposit base. On foreign currency side, deposits increased by 3%, 1/3 of that growth was due to gold price increase related impact compared to December end. Moving on to external funding, we maintained our diversified funding mix. Our total external debt currently stands at $9.5 billion, of which $3.7 billion is short term. Against this, we maintain a comfortable and strong foreign currency liquidity buffer of $9.4 billion. Now let's move on to net interest margin on Page 15. In the first quarter, we were able to expand our net interest margin by 25 basis points with the support of increasing loan-to-deposit spread, as you can see on the right-hand side. As you may recall, in our previous earnings webcast, we had expected a decline in the first quarter margin, however, until March, TL deposit costs fared below our expectations. Coupled with timely loan growth and duration gap management, we were able to expand our core spreads notably. In this net interest income base, for prudence, we used 23% assumption in our first quarter CPI valuation, while current expectations points to a potential realization closer to 28% by October. As a result, our net interest margin reached 6.1%. We continue to have, by far, the highest net interest margin and net interest income level among major peers and our aim is to preserve this leading position. If we move on to the other P&L items fee, our fee base remains robust, up by 42% year-over-year and 4% Q-on-Q. Payment system fees continue to be the main driver of the growth. In this quarter, contribution from money transfer insurance as well as asset management fees gains momentum. We are #1 in money transfer fees, and in life and non-life insurance piece. This leading stance is a result of our expanding customer base and increased digital engagement. While in every 2 banking customers in Turkey, Garanti BBVA customer. With over 2.4 million new customer acquisitions, our total number of customers has reached 30.6 million. With 18 million active mobile customers, 1 in every 5 mobile banking transactions in Turkey is conducted through Garanti BBVA Mobile. If we move on to the operating expenses, we are keeping costs under control, growing in line with the budget and was up by 57% year-over-year. Quarterly HR cost growth reflects annual salary adjustment. As we have been communicating, our strategic investments to enhance customer experience and increase customer penetration support our revenue generation capability. As a result, a significant portion of our operating expense base is covered by fee income, and we have the lowest cost-income ratio. Our capital generative growth strategy continues to support solvency. Consolidated CET1 realized at 12%, while capital adequacy ratio reached 16.2%. We maintained sector-leading capital ratios even after 20% dividend payout and annual operational risk adjustment. This too had 1.4% impact on par in the first quarter. The foreign currency sensitivity on our capital adequacy ratio remains limited with 12 basis points negative for every 10% depreciation. We have a strong TRY 149 billion excess capital, which will support us to absorb any volatility. With that, let me walk you through our '26 operating plan guidance and our current outlook. First, start with macro assumptions on the left as they form the foundations of our planning framework. Back in January, our baseline scenario assumed 32% policy rate and 25% inflation. However, given the ongoing conflict in the Middle East, we have revised our year-end policy rate assumption upwards to 35%, alongside a higher inflation outlook. As I mentioned earlier, in line with our expectation of inflation remaining above 30% until September, we expect CBRT to maintain funding rate at around 40% until June with the possibility of limited rate cuts resuming in July. Under this updated macro framework, while we continue to track in line with our balance sheet growth targets, and our P&L performance remains broadly aligned with our expectations on fees, costs and provisioning, we do see some downside risk on our net interest margin guidance due to higher funding costs. Let me elaborate on this. In the second quarter, we expect average funding cost to increase compared to first quarter, contrary to our initial projections. While we had anticipated a gradual improvement in store spreads, rising funding costs since March has weighed on this trend. We have already incorporated this increase into our loan pricings. However, due to duration gap, the positive impact on yields will come with a lag. Higher-than-expected CPI is another buffer to offset this impact. In first quarter, for prudence, as I mentioned, we used 23% in the valuation of CPI increase. Overall, we continue to expect margin expansion for the full year, even under a more conservative funding cost assumption. As loan repricing catches up, we expect margins to recover relatively quickly in the second half. A faster-than-expected normalization in funding costs would further support this recovery. In terms of return on equity, at the beginning of the year, under 25% inflation assumption, we guided for mid-single digits real return. With the revised inflation outlook and the pressure on margins, there is some downside risk to our real return. However, in nominal terms, we may still be able to deliver our targets. Please note that expected contribution from the sale of our Romanian subsidiary may provide additional support towards the year-end. This concludes my presentation. We are now happy to take your questions.

[Operator Instructions] We have a written question. Should we expect a NIM compression in second quarter.

Yes. We already see the impact in the month of March as expected with the cost of funding increase by Central Bank is reflected on the deposit pricing as well, but at the same time, when we did the projections for NIM for the full year at 6.1% from last year's average of 5.3%, we already achieved that NIM in the first quarter beyond our expectation. So the slight increase in the funding cost and compression in the second quarter, actually funding costs increased by more than 250 bps, but also, as Ceyda mentioned, we incorporated the cost of funding into the loan pricing already. Therefore, we'll get a slight NIM compression in the second quarter, but third and fourth quarter, we will correct it again, and we might be likely getting very close to the NIM guidance we had last year. So overall, that's the reason Ceyda mentioned in nominal terms, we are not expecting much of a change from our expectation in terms of ROE, in terms of profitability guidance, but the timing of the expected NIM between the quarters will be different than as we planned. That's what we can say.

Also, we can add the CPI linker assumption will be better than the original guidance, which was 25%. Now CPI will be higher. So this would also support of NIM to help us reach original guidance.

Yes, it's a good point, Atil. I forgot to mention that we incorporate in our first quarter is only 23% actually. So we have been, as usual, very conservative about these type of assumptions going forward. but very likely, this will be significantly higher in the second quarter as we see more data on inflation October to October. Inflation will be higher than our projection. So that will support -- so there isn't much of a difference from the -- our original baseline. It's just the timing of NIM margins in terms of realization might be different than what we initially thought.

There is an audio question from Furkan Vefa.

Is my voice clear?

Yes, we can hear you right now. Please, go ahead.

My first question is with higher inflation, do you see any upside on fee generation? And my second question is what are the rates for loans and deposits right now that you see?

Let me start off, and then Atil add up. Higher inflation upside in fee generation, it might have a positive impact in terms of payment fees as the interest rate comes down, fee generation assumptions in original base has been assuming that there's further decrease in inflation going forward and at some point, might have an impact on fee generation, especially in payments. And typically, most of the commissions we have is in, especially money transfers, typically uptick once a year. So any inflation this year might have a positive impact in next year. But having said that, higher interest and inflation will have other impact on, for instance, asset management or brokerage because inflation is reflected in returns, especially given that we are #1 in terms of asset management volume, for instance, the returns should be higher with inflation and this will convert to higher commissions. So if you look at it, there are certain items, we will benefit from higher inflation next year, but there are certain items will benefit this year and like this type of insurance and asset management and brokerage fees. And then there are items where we were expecting lower fee generation toward the end of the year, which might not happen. So overall positive. In terms of rates for the -- if I move to the second question, in terms of deposit rate and loan rate, I'm relatively confident on the numbers, but we have an increase of the right on deposit funding initially up to 250 bps or so.

Yes, exact timing. The new deposit-taking rates increased by around 200 basis points and new lending rates increased by more than 300 basis points.

Yes. And then, Furkan, we did something. We are relatively conservative in terms of long-term view. And we actually -- not knowing this will happen, but we have hedged our deposit to an extent by increasing the deposit duration. So we benefited overall in our stock of deposit funding from a longer duration, both on commercial and retail, but more on commercial. And that also benefits us in this time, I can tell that. And also, we shouldn't forget about the swap rates back to a bit more normalized right now. So offshore funding cost is not as low as February, but it's coming back to normal. And in terms of credit size, this 300 bps increase is also related to decrease in duration as well, which will benefit us in the coming months. Overall, there is an immediate impact in NIM compression, but it's not substantial given that we have hedged ourselves ahead of the game to an extent on the funding side, and then reflected both on mortgages and other items, position ourselves on the lower duration and higher versus sector. And there is a weekly data on these items. We see clearly that we are pricing it correctly versus the sector. Does that answer your question?

Our next question comes from David Taranto.

I have a quick question. Could you quantify the expected impact of the Romanian subsidiary sale on the P&L and also on the capital given the RWA impact? And in addition, would the proceeds be treated as a part of the regular payout? Or would any gain be considered separately in your payout calculation at year-end?

First of all, yes, we are expecting over EUR 100 million worth of positive profitability from the Romanian sales. Atil, what was the capital impact?

It's close to 80 basis points or so, 80 basis positive.

Yes. That gives us extra buffer, which is good. And your second question was regular payout, could you repeat?

Would this one-off sales gain proceeds be treated as a part of the regular payout at year-end? Or would you -- would that gain be considered separately when you decide on the dividend payments?

No, we do our regular dividend payments once a year with the regulatory accruals. At this point, that's going to be kept in capital, not a part of distribution.

It looks like we don't have further questions. But thank you for all joining today. I just want to add the last question because it reflects our perspective on growth. We have sold the Romanian operations, but we have been always focused on the business plan. Business plan meaning sustainable profitability, and we did have a plan for Romania as well. So even though it looks very good price, it was part of our business. In a few years, we were going to be there. And this is valid for the remaining of our business as well, and this is reflected on a really solid start of the year. We have been mostly conservative in our assumptions, including CPIs, including provisions, including how we look at the business and the hedges, I mentioned, for instance, even last year, and then on top, our base focus is -- our main focus is customer and so preserving our sector-leading capital positions on top to be able to grow sustainably. In this period, there have been a lot of uncertainties, both globally and locally, but as we have seen in Turkey, there has been very fast stabilization after the war start overall. It has been a bit of hiccup in March in terms of the funding costs going up that not expected and that was not the part of the plan. And January, February, when you look at the numbers, and I think when you look at the sector numbers as well, it has been really significantly positive. As I mentioned, we achieved our NIM, given with very conservative assumptions, our average year numbers in the first quarter. Therefore, with a strong balance sheet and effective risk management, we should be able to manage to hit the baseline projections, but going forward, as I said, what's important is a long-term view, and we will continue to build on our product portfolio of subsidies, and then once again provide you a very strong second quarter and third quarter going forward. Therefore, if there's no other questions, I would like to, again, thank you for everybody and hope to see you in the next earnings call sharing and look forward to sharing another strong set of results. Thank you, and have a nice evening.