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

Good afternoon, and thank you for joining Garanti BBVA's First Half 2026 Financial Results Webcast. Today, representing Garanti BBVA, 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. You can either use a raise hand function or submit your questions through the Q&A box. Without further ado, I will now hand over to management.

Hello, everyone. We are pleased to be with you again following another solid set of results. First, let me begin with macroeconomic environment we are in. GDP growth was 2.5% in the first quarter, and we now cast a similar level as of June. Activity is expected to recover modestly in the second half of the year, thus we maintain our 3% growth forecast for the full year. On the right-hand side, you can find our inflation and interest rate forecast. Higher food and energy prices slowed down the improvement in headline inflation. Nevertheless, preserved tight financial conditions and fiscal discipline have supported our 30% year-end CPI forecast. Authorities continue to pursue a carefully balanced policy mix, combining gradual monetary normalization with tight macro prudential measures. Therefore, we expect the funding rate to gradually converge towards the policy rate by September. The timing of the first easing step remains data dependent and may be affected by oil price volatility. If conditions allow, limited rate cuts might resume in the fourth quarter. Moving into current account deficit. Weak foreign demand and high commodity prices lead to a worsening in external balance, yet resilient tourism revenues and moderation in economic activity could prevent further deterioration. We now expect current account deficit to GDP to be around 3.5% versus around 2% estimate in the beginning of the year. Evolution of energy prices will determine the external outlook. Fiscal discipline on the right-hand side continues to support macroeconomic stabilization. Expenditure discipline remains broadly intact, while income taxes continue to support revenue performance. We expect fiscal deficit to be close to the medium-term plan target of 3.5% in '26. Now moving into our financials. I will start with the net income. In the first 6 months of the year, we generated TRY 64 billion in net income, up by 20% year-on-year, while recording 28% return on equity. Well-defended NII, robust fee generation and stronger contribution from financial subsidiaries reinforced solid earnings delivery. On a quarterly basis, we had a single-digit decline in net income, mainly due to lower trading income and increased provision that I will elaborate more on the following slides. I would like to highlight that we used 27% CPI rate in the valuation of CPI linker's income. If we had used 30% rate, our net income would have been close to TRY 2 billion higher. Our diversified revenue sources once again enabled earnings resilience. Now moving into Slide 7. Against a challenging macro backdrop, we managed to defend our sector-leading core banking revenues. Strong fee generation and the growing contribution from our financial subsidiaries have cushion cyclical pressure on net interest income and trading. I will discuss net interest income and fees in more detail on the following slides. Here, I would like to briefly touch on trading income. In the first quarter, the upward shift in swap curves resulted in mark-to-market gains on our swap portfolio. As swap curves normalized in the second quarter and these short-term positions matured, this positive contribution faded. Lower client activity, client foreign currency activity also weighed on the trading income. Therefore, we had lower trading income in the second quarter. That said, trading income represents less than 5% of our gross income and more sensitive to market volatility, our earnings profile continues to be driven by sustainable core banking revenues, namely interest income and fee generation. As a result, we delivered 43% year-on-year growth in core banking revenues. If we look at our asset mix, our total assets reached TRY 5.2 trillion and loans make up 55% of the assets, supporting sustainable and recurring revenue generation. We maintained our growth pace both in TL and foreign currency loans. In foreign currency securities, you may notice a sharp decline in the second quarter. This mainly reflects the maturity of our $3 billion short-term placement made in high-quality liquid assets at the end of the first quarter. Excluding this temporary impact, our foreign currency securities increased modestly Q-on-Q. In TL Securities, we continue to selectively increase our floating rate notes. Moving to Slide 9 for further insight on TL loan portfolio. We maintained our disciplined growth strategy, further strengthening our presence in mid and small enterprises while reinforcing our leading position in general purpose loans and credit cards. Now let's look at the evolution of our asset quality. As our loan mix continues to evolve towards consumer lending and credit cards, we continue to proactively identify and classify these exposures. Accordingly, the Stage 2 share in total loans increased modestly to 12%, mainly reflecting higher SICR classifications, as you can see on the right-hand side. Importantly, 84% of the SICR portfolio is non-delinquent at all, highlighting our prudent and forward-looking risk management approach. The higher share of early-stage SICR exposures also lowered our Stage 2 coverage ratio. Consumer loans and credit cards now account for around 75% of the SICR portfolio, consistent with the evolving loan mix. Here, I would like to also mention that around 55% of new general purpose loans are originated to salary customers, while credit card revolving rates have remained broadly stable at around 35%. In terms of restructured loans, as you can see on the chart, it declined during the quarter following the migration of previously restructured loans into Stage 3 with the end of the related regulation. If we move on to NPL inflow, the trend observed in Stage 2 was also evident in NPL inflows. Around 70% of new NPL inflows was coming from consumer loans and credit cards. And the end of restructuring regulation resulted in a temporary increase in NPL inflows during the second quarter and effect may also continue in the third quarter. We expect it to normalize in the fourth quarter. In terms of cost of risk, as we discussed on the previous 2 slides, cost of risk increased during the quarter, reflecting 3 main factors. First, we updated our provisioning models to incorporate the latest macroeconomic assumptions. Second, we continue to see NPL inflows from consumer loans and credit cards as our loan mix shifted towards these segments, largely due to regulatory caps. Third, the end of the restructuring regulation led to the migration of previous restructured bonds into Stage 3. While the first 2 reflect our portfolio strategy and operating environment, the regulatory migration effect expected to normalize in the fourth quarter. As a result, we continue to expect full year consolidated cost of risk to finish within the guided range, though towards the upper end due to combined impact of these quarter-specific factors and higher for longer interest rate environment. If you look at annual comparison on the right-hand side, first half '25 cost of risk benefited from exceptionally large provision reversals as provision reversals normalized in '26, the year-on-year comparison naturally resulted in higher blended cost of risk. Moving on to funding. Similar to our asset strategy, we continue to rely on customer-driven funding sources. Total customer deposits reached TRY 3.5 trillion, constitutes 66% of total assets and remain TL-heavy. Importantly, our share of free funds continues to be the highest among private banks, providing a key structural advantage for margin resilience. On the foreign currency side, half of the decline was due to gold price-related parity impact, while the remaining decrease reflected customer shift from foreign currency into TL assets. On external funding, we maintained our diversified funding mix. Total external debt currently stands at $9.8 billion, of which $4.5 billion is short term. Against this, we maintain a comfortable foreign currency liquidity buffer of $6.1 billion. We further diversified our funding mix in the second quarter. We successfully completed our first thematic syndicated loan. In addition, we completed 3 thematic bond issuances in line with Orange bond principles and climate change adaptation. And more recently, in July, we completed TRY 4 billion asset-backed securities issuance, further optimizing our capital structure. Moving on to net interest income. Our first half margin performance continued to stand out. The funding cost headwinds that emerged in March became more pronounced in the second quarter, putting pressure on margins and TL loan deposit spreads. Even so, we limited the quarterly decline in net interest income to just 5%. This quarter, as I mentioned in the beginning, we also revised up our CPI estimate to 27% from 23%, yet current inflation expectations still point to further upside. Assuming a 30% CPI assumption, net interest income would have been around TRY 3 billion higher and year-to-date net interest margin expansion would have been 20 bps higher. Let's move on to the P&L item, fees. Our first half fee performance remains one of the strongest in the sector. Our fee base was up by 42% -- 39% year-over-year and 12% Q-on-Q. Strength in payment systems continued to be the main driver of the growth. Money transfer fees, insurance fees as well as asset management fees further gained momentum. And over the past year, we welcomed 2.4 million new customers, bringing our total customer base to 31 million. We also maintained our leadership in customer satisfaction, ranking first in Net Promoter Score across retail mass, SME and mobile banking. Now moving into operating expenses. We are keeping our costs under control, growing in line with the budget and was up by 45%. We continue to have the lowest cost/income ratio among our peers. As always, we remain focused on capital generative growth, which is clearly reflected in our sector-leading capital ratios. Supported by strong earnings generation, we maintained our common equity Tier 1 ratio at around 12%. There was a limited decline in capital adequacy ratio due to sub-debt amortization impact. The foreign currency sensitivity to own capital adequacy ratio remains limited, and we have a strong TRY 149 billion excess capital, providing ample capacity to absorb market volatility while supporting future growth. With that, let me walk you through '26 operating plan guidance. I will begin with the macro assumptions on the left as these form the foundations of our planning framework. Our January baseline macro scenario was assuming 32% policy rate with 25% inflation. Since then, ongoing geopolitical development, as you're all aware, and heightened uncertainty they have led us to revise our macro assumptions twice. Our current base case assumes that funding costs will gradually converge towards policy rates by September. And now we expect year-end inflation to be around 30%. Against this macro backdrop, we maintain our loan growth guidance for both TL and foreign currency loans. As discussed earlier, we also remain on track to deliver our full year consolidated cost of risk guidance, although quarter-specific factors and higher for longer interest rate environment are likely to keep us towards the upper end of the guided range. Turning into margins. We have consistently communicated since April that funding costs will normalize only gradually. While we continue to expect margin expansion this year, the pace of improvement is likely to be modest than initially anticipated. Going forward, evolution of funding costs and macro prudential measures will continue to be the key swing factors for margins. In terms of fees and OpEx, we are also on track with our expectations. Finally, regarding profitability, the upward revision to our inflation assumption naturally creates downside risk for our real ROE outlook. In nominal terms, however, our guidance looks achievable depending on rate evolution. This concludes my presentation. Now we can take your questions.

Welcome to the Q&A session. [Operator Instructions] Let’s begin with our first question from Mehmet Sevim, JPMorgan. Mehmet, please go ahead.

I have just one question on the deposit balances, please. It seems you've grown your deposit -- TL deposit base quite significantly this quarter. I'm aware of the regulations, but I was wondering if this is simply a function of regulation? Or was this a deliberate decision to shore up liquidity maybe to be a bit more comfortable later in the year? Or was there any other reason behind it, given obviously your TL loan-to-deposit ratio declined about 10 percentage points in a single quarter. So I'm trying to understand if the steep NIM drop maybe is partly related to that and maybe if this is front-loaded and may result in a better performance later in the year. And connected to this, how are you thinking about the NIM evolution over the coming quarters, say, if in different scenarios of the rate trajectory?

Thanks, Mehmet. Good questions. Number one, the decrease in NIM is mostly related to the post-war increase in the policy rate, or not more than policy rate, it is really funding rate by Central Bank, which has been increased. So when we did have the first quarter, we had only 1 month of higher cost of funding, which was not reflected on the total deposit base. Therefore, I think we discussed this in the last meeting as well, we'll see NIM being affected with the cost of funding, and we have seen that over our customer base. Yes, deposit balances, we typically go beyond ratios regardless and especially quarter-ends, we have more inflow. But we also optimize sometimes duration based on our beliefs as well. So we see an opportunity to grow, but we actively manage our deposit base is partially reflected in our numbers. But really, the real story is higher cost of funding and maybe more issues in the sector in terms of competing for deposit costs with the ratios at times. And that's the reason overall cost of funding has been higher than the first quarter, that's affecting NIM. Going forward, when you look at the 3 lines in the last chart that shows our January, April, and I think it was June or July. Going forward, the policy normalization is not going to happen before September, it looks like. So this is a much higher funding estimate than we have initially told, which is affecting the NIM. We may not or may or may not hit the 75 bps that we have forecasted. It's a bit hard to say at the moment. But in the beginning of the year, late last year, when we discussed about the NIM improvements, we have been always, as you know, Mehmet, relatively cautious because there is so much variable. And we typically put numbers that we believe that we can hit. It is still 75 bps achievable, but there is risks around it. The third quarter cost of funding will be still relatively high. The NIM will be relatively flat, but fourth quarter, we expect more improvement. But we are actively trying to manage between swap lines between onshore, offshore and deposit funding. Right, Atil? Would you like to add anything?

Yes. Indeed, I mean, conservatively speaking, I think, as you said, the third quarter net interest margin could be similar to the second and fourth quarter will be increasing, but also there's an upside risk. I mean, even in the third quarter, we may see some improvement in net interest margin. So compared to our 75 basis point improvement, our improvement could be modest, maybe I mean 20, 25 to 40 basis point improvement we can see over last year.

Maybe, Atil, it's only 1 month data, but in July, we have seen further improvement in cost of funding actually.

Already, I mean compared to exit deposit costs, we already achieved more than 100 basis point decrease...

In a single month, but it will be sustainable, but further improvement will only come probably in September when...

Yes, sir.

Further reduction happens. So that's the reason 1 month, 100 bps doesn't give us a lot of information, but it looks like we might be better than this quarter or flat cautiously, but very likely not below what we have achieved in terms of NIM. And the fourth quarter at the moment looks a lot better. As I said, 75 bps is still achievable, not an easy target, but still achievable depending on how things evolve. And if you look at the last 6, 7 months of 2025, there was a good flow and even January and February was very good month in terms of cost of funding. But situation with the war and further tightening of policy rate or funding rate has deferred our new development -- NIM development is like this, but we are hopeful that it will be better based on the 1-month information as well. Hopefully, this answers your questions.

Our next question comes from Ashwath from Goldman Sachs.

I have a few questions. The first, I think it was mentioned that if the inflation assumption was to be revised upwards at 30 basis -- I mean, 30%, that would add another 20 basis points in terms of the NIM. Perhaps that's also one of the levers that could be used, I suppose, in addition to lower funding costs if the rate cuts do happen or the policy rates normalize. Just want to check my understanding on that. And the second part I wanted to ask was around fee growth and OpEx. Fee seems to be performing better than the guidance range, whereas OpEx is also at the lower end. So potentially, is that another lever to help achieve your ROE target for the year or at least close to it? And the final question I had was around the impact of the Romanian subsidiary sale. I was just wondering if you could quantify the impact of that in terms of an expectation of ROE in terms of basis points? And also whether that's embedded into your guidance of that -- whether it's embedded into your guidance for the year when you're saying potentially downside risk to positive real ROE, but are you actually considering that? Or is that something that is a bonus that could help you at the end of the year if it were to close, but not inside your guidance?

Good questions, 3 or 3 plus. I'll go with the first two ones and the last one to Atil, who has been spending a lot of time on the subsidiary sales. But overall, the inflation assumption, 27% to 30%, it's just -- it happens to be the case that we have not adjusted in the second quarter just on time. But I think major competitor in the sector, everybody is accelerating to 30%. I want to mention that because if we have made the adjustments, we're almost making the same number with Q1 despite funding costs being significantly higher. These are, at the moment, within our forecast to reach to 75 bps improvement. As I said to Mehmet as well. I'm optimistic we will get close if we might hit the number or we might get very close, which includes this assumption. And now you mentioned on your second question, fee growth and OpEx. Those are really good points. Ceyda didn't mention those upsides. But in fees, actually, if you see -- if you look at the numbers, we have been always very strong and payment area in terms of customer acquisition, in terms of fee generation, it has been really year-over-year 35%, 36% is above inflation, good growth in fees. But also, you probably noticed 2 more areas, I mean, insurance and brokerage and securities. There, we had 65% to, I think, 79% or so improvement. These are areas we have focused a lot in the past. I mentioned transactionality and wealth management areas is very important for us in terms of ROE improvement as well and light capital approach. And for instance, in asset management, our company 2 years ago was #5 in terms of ranking and profitability and now it's #1. Similarly in other areas as well, leasing, factoring, we are #1 in profitability to #1. So we really care about those contributions. But on the fee side, especially on wealth management, which is very important for us. And I think in OpEx, we will try to optimize further our OpEx going forward as well. There might be some upsides there in terms of contribution to the numbers by the year-end. But always, we look at OpEx, partially investments as well because majority of the OpEx cost also comes from customer acquisition costs. That's reason I don't want to say we are very committed that we'll have further upside. If we see opportunities for long-term sustainable growth in terms of investing in customer acquisition or technology, especially on AI side, we have been continuing to invest and we see the results, we'll continue to do so. But on both sides, we have extra pluses because of our strategy. And third one question for you about...

Romania.