Yapi ve Kredi Bankasi A.S. (YKBNK) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Yapi Kredi 2019 Conference Call and Webcast. [Operator Instructions] Today's speakers during this conference call are Mr. Gökhan Erün, CEO; Mr. Marco Iannaccone, COO; Mr. Massimo Francese, CFO; Kürsad Keteci, Strategic Planning and IR ESP; and Ms. Hilal Varol, Head of IR and Strategic Analysis. Dear speakers, the floor is yours.

Hello. Good afternoon, and thank you all for joining our 2019 full year results and also 2020 guidance call. Before going to the details of our performance, let me share with you some comments about the operating environment. Turkey has gone through a strong rebalancing during 2019, last year. Turkey had scarce surplus, domestic demand altered and inflation improved significantly, from 25 levels down to 11.8% until October 2018 -- since 2018. Starting the last quarter of 2019, we see first signs of strong, very strong actually, improvement after 3 quarters of contraction. Third quarter GDP was at positive territory by 0.9%, and the expectation for the first quarter is also -- so actually, we are expecting higher than 5% or 5.5% growth for the last quarter of last year. Industrial production. IP increased by 5.1% year-on-year, and this is highest annual growth for the last 16 months and improving constantly for the last 3 months following yearly contraction for the 12th consecutive month. PMI also an important indicators, improved during the fourth quarter. And also in January, PMI improved 1.8 percentage points month-on-month. And after 21 months, it improved above 50, materializing at 51.3. Other indicators also showing good signs. Capacity utilization, consumer confidence index, all real sector confidence index, they're all indicating that a moderate recovery is taking place. CDS levels, also an important sign, going down to 240 levels from the peak of 500. This rebalancing ended up with lower TL rates, obviously, by rate cuts of Central Bank, 12.75 percentage points. And all these developments were in line with our expectations, as you very well know. As I iterated during 2019, Turkey again positively differentiate itself within emerging markets, thanks to the actions to restore the foreign investors' confidence. And then we have prepared here ourselves, we will continue to act in good faith with corporate approach in order to overcome this negative operating environment and actualize the further potential of the country. So regarding Yapi Kredi's performance in 2019. 2019 was a year where we further improved the strength of our balance sheet, to be ready and agile enough for seizing opportunities of improving macro scenario. Important developments are reducing LDRs, loan-to-deposit ratio, below 100 [ as necessary ], and lowest TL LDRs, this is also 1 of the important metrics that we are following, 124. Solid liquidity with LCR 190%; increased capital buffers against regulatory limits, around 400 to 450 basis points; and lastly, reaching adequate level of provisions, a cost of risk of 3.12. Thanks to continuous improvement in fundamentals and revenue generation, our stock price also significantly outperformed the banking index by 19% and also 4% in the last 3 months. Before starting the presentation, I would also like to thank the dedicated workforce of Yapi Kredi for their extensive effort during and for showing, again, their commitment for the country and, of course, for Yapi Kredi. I'm now moving to Page 2. In a year of transition, we were successful to accomplish our real-term volume growth and strong revenue generation, too. Net profit at TRY 3.7 million, corresponding to 9.8% of ROTE, excluding the provision for penalty for insurance business. Our performance was driven by strength in core performance, where our NIM widened by 26 basis points and excluding the CPI impact, of course. And fees grew by 28% year-on-year. If you look at the NIM widening of 26 basis points, we benefited around 100 basis points from loan-to-deposits, yearly improvement. Thanks to a change in composition of deposits towards individual together with strong demand deposit [ important too ], our quarterly NIM improvement was close to 80 basis points. Another strong quarter for fees. We managed to increase the fees by 9% and 28% year-on-year, many thanks to transactional banking that we focused already in the last 2 years. Cost growth at 15% year-on-year, where we have the best-in-class operational efficiency gains. Running costs of the bank growing in a much lower pace at single digit. And I would like to add, as these gains are driven by continuous investments and also process improvements. We achieved 14% TL loan growth, very close to our guidance of 15% at the beginning of the year. Loan growth is well diversified, in line with our small ticket strategy. We were able to increase our TL deposits also by 13%, mainly via individual deposits as well as a hefty 49% increase, 49% increase in our customer TL demand deposit base, too. In line with our aim to strengthen the balance sheet, we provided provisions for 3.12%, in order to reach adequate level of provisioning for the loan, especially for the Stage 2 and Stage 3 loans. We will give more details on asset quality in the coming pages. These successful results are backed by solid fundamentals, mainly 190%. LCR and FC LCR, 430% levels. In terms of LDR, 97%. TL LDR reduced to 124%, especially with retail deposits and also cautious FX, foreign currency lending, and our capital ratios improved significantly. Thanks to ongoing internal capital generation, CET1 at 12.5%, with 400 basis points buffer against the regulatory limit. As all of you recall, we are committed to keep minimum 200 basis points against the limit and Tier 1 ratio at 13.7% and to total cash at 16.7%, buffer of 464 basis points. Having said that, now I'm leaving the floor to Marco Iannaccone.

Thank you very much, Gökhan. In 2019, we managed to maintain our PPP aligned with the 2018 level. We recorded a strong core NII and fee generation compensating for the lower security income due to interest. Cost growth clearly under control. In the year, we have decided to increase the level of ECL, mainly on some big-ticket item. And due to this decision, the profit before tax shows a decline of 23% year-on-year. Keeping very high strong fundamental, we have further improved our liquidity level with an LDR lower than 100% and SCR as high as 190%. On the FX side, the USD 10 billion short-term liquidity versus the USD 4.9 billion runoff in the year, including the syndications as well, with very strong foreign currency LCR level at 430%. As Mr. Gökhan already mentioned, capital levels are very strong, with Tier 1 capital at 13.7% with a buffer above 450 basis points on the regulatory limit. Looking at Page 4, we have guided at the beginning of 2019. We had the growth mainly focusing on Turkish loan. TL loans increased 13%, with the substantial improvement in the lending rates and better customer sentiments. The deleveraging on FX in the side continue. Foreign currency loan came down 17% year-on-year and such decline on the FX side is mainly due to lack in demand, especially for long-term investments loan. We see in the first months of 2020 that there's no material improvement on the demand side for foreign currency. As you can see in the bottom left chart of this page, the diversification in lending growth towards small tickets was substantiated, and retail portion of the lending of the loans increased by 6 percentage points in total loans booked in -- since 2017. This composition change is supporting the loan yields, of course, and the bank will continue to focus on small tickets in line with our medium-term strategy. Moving to Page 5. Very solid liquidity management, resulting in above sector and the TL deposit growth year-on-year. In the last quarter of 2019, our TL deposit increased as much as 10% when we witnessed a slight decline on the foreign currency side. Foreign currency LDR improved 10 percentage points in 2019, and it is now at the level of 75%. The annual increase in deposit has been mainly driven by demand deposit and individual deposits. Ongoing reduction of the share of big tickets in the portfolio is, of course, supporting the cost of funding evolution also at the beginning of 2020. We had a remarkable 49% increase in TL demand deposit, resulting in a 47% increase in total demand deposit. As a result of this outcome, the share of demand deposits in total increased as much as 5 percentage points, reaching the level of 23%. And again, this is mainly driven by the small ticket strategy. Subsequently, we gained 177 basis point market share in TL individual demand deposit since 2017. In line with our small ticket strategy, individual deposit market share increased 100 basis points, reaching the level of 13.6% in the year 2019. Now moving on Page 6. We generated TRY 19.7 billion revenues in 2019, and our revenue increased 5% on nominal terms year-on-year, in spite the negative impact of the linkers. Thanks to consistent improvement in commercial core revenues through both net interest income and fees. If we make an adjustment for the net income impact coming from linkers, also taking into account the cost of funding dynamic, we could say that the revenues increased in the range of approximately 20% year-on-year in 2019. Core revenues margin further improved by 52 basis points over the previous year to 4.8%, again, excluding the effect of the CPI linkers. Looking at 2019 exit, core revenues margin is as high as 6%. Moving now on Page 7. Looking at net interest in 2019, the NIM realized at 3.4%. NIM came down by 70, 7-0 basis points over 2018, again, mostly due to the linkers. Excluding this effect, the NIM improved by 26 basis points. Thanks to 56 basis points support from LDR spread, including swap costs, mostly driven by improvements in loan yields. If we then look at the quarterly development, NIM is positively impacted, thanks to core performance improvement of 75 basis points. Also in the quarter, the decline in the deposit costs were significantly higher than the repricing on the loans, and our 2019 exit NIM is at 4.2%, which is even higher than the 4% as of the fourth quarter of 2019. Looking at Page 8. Loan-to-deposit spread improved close to 100 basis points, precisely 98 basis points over the third quarter of 2019. We had the successful execution of a small ticket strategy, focuses on demand deposit and timely loan growth with the environmental tailwind. Funding costs were the main driver of the improvement, which came down as much as 203 basis points, thanks to effective or better cost of funding management, mainly composition changes. Despite a lower interest rate environment in lending, we witnessed a controlled decline of 104 basis points in the total loan yield. Moving on Page 9, you can find the details of our strength in fee generations. Net fees increased during the year as much as 28%, further accelerating in the last quarter, [ 9% ], which is higher than our guidance of mid-teens that we had for the year in [ '19. ] We will achieve this result through strong contribution from payment system as well as the ongoing effective pricing in noncash loan. Money transfer and bancassurance are among the best contributors of such a remarkable growth. On Page 10, cost increase was slightly lower than the average CPI at 15%, with a cost income ratio at 37.5%. The increase in cost income was due to the dynamic of the CPI link income during the year. Looking at the cost breakdown, the main driver of the increase was the regulatory costs, which came up as much as 42% year-on-year. Business growth-related costs increased by 24%, while the running costs increased only by 7%. Further improvement on digital side is supporting our running cost evolution. The share of digital in total product sold improved to 36%, with further support from the increase in the share of digital transactions. In 2019, 43% of our transactions were then performed through digital channels and 39% through ATMs. The share of branches transaction came down to 8%. Now looking at the asset quality on Page 11, the asset quality indicator, we have accelerated the recognition of the big tickets in the last quarter of last year, some of which was planned for 2020. As a result, the bank-only cost of risk increased 24 basis points over 2018, it came at a level of 3.12%. Looking at the quarterly evolution, the increase is more visible with the increase of cost to risk by 147 basis points to 446 basis points. As you can see from the bottom chart, the main reason in our classification -- the reclassification on Stage 3 and also from Stage 2 given the increase in the coverage. And I would like to give you more detail about the asset quality evolution on the next page. So Page 12, we see that the provision per gross loans, increased further to 7.2%, which is, again, the highest among peers. In the quarter, we have classified big tickets Stage 3 from Stage 2, while increasing the Stage 2 coverage further. As a consequence of these actions, Stage 2 share in total loans came down to 15%, while the coverage increased to 13%. Again, the highest level among peers that I've already announced the results as of today. The Stage 3 ratio increased to 7.4% accordingly. And here, you will see that the NPL ratio -- NPL coverage has been realized at 62%, with a slight decline quarter-over-quarter. To provide you some further insights on the energy and real estate. The coverage of Stage 2 risky energy file increased further to 37%, which was 26% as of 9 months, while we increased the Stage 3 coverage further to 58%. When it comes to real estate loans, the coverage, Stage 2 went up to 2 percentage points to the level of 15%. Moving to the next page, regarding the capital level. Here, we feel very comfortable, as Gökhan mentioned before. We have continued to generate internal capital in the last quarter of 2019 as well. As a result, our CET1 ratio improved to 12.5% significantly, 400 basis points higher than the regulatory threshold as well as our targeted minimum level that we communicated. At least 200 basis points buffer, again, over regulatory thresholds. Tier 1 ratio stood at 13.7% when the carry is as strong as 16.7%. When it comes to internal capital generation, in the last year, this was as high as 160 basis points. And now I would like to leave the floor to Gökhan now to provide 2019 realization versus guidance and 2020 guidelines. Thank you, Gökhan.

Thank you. Thank you, Marco. Regarding the realization of 2019 guidance, it was a successful year in terms of improved fundamentals, healthy growth and also accelerated revenue generation. We have beaten our guidance on fundamentals for both LDR and also CAR. We achieved a growth of 14% for the TL loans, so very close to a guidance of 15% as well as achieving 13% of deposit growth. So for revenue perspective, we have beaten both NIM and fee guidance, thanks to execution for small tickets and also transactional banking strategy. NIM improved 26 basis points and fee growth was at 29%. In terms of costs, we are in line with our guidance of below average inflation, which was 15.2%. Our cost growth was 14.6%. After the acceleration of provisions, which we have been planned for upcoming years, we have exceeded our cost of risk guidance of 300 basis points and NPL ratio of below 7%. Lastly, in terms of profitability, we closed the year with 9.8 ROTE, excluding the impact of the insurance penalty, which was slightly below our expectations. Moving to Page 15, about the 2020, this year, guidance. With respect to our guidance, as I stated at the beginning of our call, Turkey have gone through a strong rebalancing during last year, and we see first signs of the recovery, strong improvement actually for this year. From a global perspective, we expect to see those steps of global central banks. This will be helping also Turkey, too. From domestic perspective, economic recovery is gaining momentum, and retail is still and will be the frontrunner as of now. Pick up in the activity will be reflected into the labor market for sure. Therefore, our macro scenario for 2020, represents a year that Turkey will start growing in a healthy and sustainable way. Our GDP growth expectation is around 4%. Main driver of GDP seems to be consumption together with the accelerated investments in the second half -- after first half -- after second half of the year. Inflation is expected to be single digit, around 9%. TL depreciation is limited with inflation. Policy rate will further come down, aligned with inflation evolution as a result of macro scenario. In terms of fundamentals, we will keep our LDR below 105% and sustain ample liquidity levels. CAR will be higher or equal to 16%, thanks to our internal capital generation efforts. In terms of volumes, we'll continue to focus on TL lending as we did last year. We wanted to have high-teens growth, while focusing on value-generating segments and slight contraction in FX lending, but not much. In terms of core revenue, we expect to have NIM higher than 3.7% on a comparable basis with 2019, thanks to effective assets and liability management of the bank. Due to already known regulatory changes, we expect to have single-digit growth in terms of fee. We will keep focusing on efficiency and target to keep cost growth at mid-teens, and mainly coming due to increase in regulatory costs. In terms of asset quality, we expect to have strong improvement in terms of cost of risk costs. And yet, it is not the year of normalized levels, normalized levels being between 100 and 150 basis points. Our target is to have around 225 basis point cost of risk for this year and NPL ratio to be around 7%. All in this evolution of each line item is expected to end with mid- to low-teens of ROTE for this year. We will be continuing to execute our strategy that we announced back in 2018. So we will keep gaining market share in small ticket segments, further improve demand deposits. We'll keep prioritizing liquidity, LDR. And also to get that coupled with that execution of small tickets. We'll continue to keep conservative risk appetite, as we had started to do so for the last 2 years. Going forward, I mentioned the continuation of this performance, while, of course, maintaining our strong fundamentals driven by customer-centric approach. With our strong brands, rich organizational culture, committed growth and support of our shareholders we'll see the opportunities ahead of us and reach to greater achievements, which will also contribute to our country's economy. I would like to take this occasion to extend my thanks to our stakeholders, who stand by us with trust and support; and to our dedicated employees, who contributed a lot to the achievements of our bank. On behalf of the whole team, I'd like to thank you all for joining our call, and we can now take your questions.

[Operator Instructions] The first question comes from Deniz Gasimli from Goldman Sachs.

I have 2 questions from my side. One is regarding your margin guidance. Just -- I mean, you're guiding for NIM of at least 3.7% for 2020. Just to get a comparable number right. I think it's -- the 2019 number is 3.4%. So that implies at least 30 basis point margin expansion for 2020. So in that term, I just want to understand what are your maybe expectations for the year as the year progresses because you start 2020 with a margin at around 4% from what I see. So where do you see it maybe moving in the first quarter and then throughout the year? And if you could also share your expectation in terms of the rates, where do you see rates going in 2020? And what would that mean for your margin expectations? Do you maybe foresee that -- do you expect deposit costs to continue to trend down given that they've already come down quite meaningfully? Or would you maybe expect some pressure on margin on deposit yields given that private banks are quite keen on loan growth during the year? And just -- on the second question, your asset quality. In your 2020 guidance, you shared that there is ongoing conservatism in coverage levels. So I want to ask you if that implies that you would look to increase your coverage levels from where they're at now and if that's what factors into your cost of risk guidance?

Deniz, so maybe I should start with the deposit rates. Deposit rates are still continuing. At least the flow that -- the new flow that we are seeing, so it is below 10%, even 9.5%. But I think we started to see an inertia there. So -- which means that also, as you already have said, that the TL loan growth is also continuing aggressively on the banking sector in general, not only for the state but also for the private bank side as well. I think this is putting some pressure for the opportunity that the TL rates will go down significantly. So we already started to see some inertia there. This is true. But of course, as the Central Bank, if any room for the inflation, that we see that the Central Bank cut rates, then the deposit rates should further go down, so especially for the TL side. This is what we are seeing.

And, Deniz, also for the NIM evolution in 2020, as you stated, in last quarter, NIM is at 4%. An and it's mainly coming from the improvement in loan deposit spread and what we are seeing in general. So this spread is improving. But as you also know, it is only aligned with that inflation flow and inflation evaluation. In overall, our expectation is to have better NIM in the first Q, and then we will start seeing NIM compression for the coming quarters. But again, let me talk about up and down, so we are not talking about a huge up and down between the quarters. For your second question about the asset quality and guidance, we are targeting in cost of risk around 225 bps. We are maintaining our coverages, for both total coverage as well as NPL coverages. And the main improvement is coming from our NPL inflow through individual and SME segments, as you may expect. And therefore, we believe that there will be less inflow. Since we've already seen the improvement in the last couple of months, we believe it will continue, and we will have less NPL flows from retail segments, and it is going to be the main driver as there is no significant big tickets that we are assuming in our budget.

Just to clarify, when you say that you're seeing some inertia on the marginal deposits, are you -- do you mean that there is maybe some competition on deposits that's translating it -- add some pressure on deposit rates? Or yes, if you could clarify that.

The competition is much stronger for the TL deposit cycle as well. This is what we are -- that's where I am saying it's on. So the competition side, obviously, as the TL LDR of the sector will be also pushed, so that's why the TL deposit competition will be stricter in 2020, this year.

The next question comes from Ovunc Gursoy from TEB BNP.

I have a couple of questions about the NIM guidance, does it include CPIs or not? I want to know. And in terms of bps, what improvement do you expect in 2020? And second question is the ongoing process with UniCredit, how -- what level are you at the moment in the process, whether it is approved by the EU authorities or not? I want to know. And the last question is about your asset quality. What risks do you see as far as your asset book -- loan book is concerned in 2020?

This is Marco speaking. I will take first the question on the ongoing process. This is a question, of course, that is for [ Coach ] and UniCredit, which are listed companies, and we'll communicate accordingly when the time comes. As customary, we understand that the closing of the transaction is subject to regulatory approval, which we understand are well on track. When the closing will take place, the market will be informed timely.

So about the maybe asset quality, what we are seeing, so starting from this year, I think it's last month, looking at January, I think the risk cost compared to our guidance, what we are seeing, the inflow slowed down on the NPL side. And the biggest risk, what I see is if the macro will not be the same that we expect, which means if Turkey does not grow at a pace of 4%, then for the general, not only for Yapi Kredi itself, but for general banking sectors, we may have some issues about, for example, the restructured loans. So because all the restructured loans are based on the plan that Turkey will perform in the coming years, including the 2020. I think this is the only risk that we are having in general, the banking sector and as Yapi Kredi as well. And which, by the way, I do not see that as a risk because I have seen the last quarter of last year, which is the fourth quarter of last year. We have seen strong growth. So I think this will also be helping the beginning of this year and also the first half of this year for sure, which means there is little chance to be concerned about the restructuring loans as well.

And, Ovunc, regarding to your question about the NIM. Our CPI linkers, assumption is 8.5%, which is in line with 2019 realization. And therefore, when you look at the NIM, it will be on a reported basis, on a comparable basis. And we are seeing it is going to be above 3.7%, which corresponds minimum [ Turkey ] increase in 2020.

The next question comes from Gabor Kemeny from Autonomous Research.

I have a couple of questions, please. First is on your ROTE guidance, which is low- to mid-teens-, it's a little bit broad. Can you perhaps elaborate on the moving parts here? Is it the restructured loans and how the restructured loans would perform over this year? And the other question is on your collection performance, which improved quite significantly in the fourth quarter. Can you elaborate on what helped you improve the collection efficiency? And how sustainable is this improvement?

Gabor, regarding the ROTE guidance, we are seeing low- to mid-teens, as you mentioned. There is no specific reason behind it, either the performance of restructure. And it is somewhere between low-teens to mid-teens, and that's why we were not able to say either mid-teens or low-teens. I think it will be easy for you to get what it is. And regarding the collection performance, as you mentioned, on a quarterly basis, we had around 38% increase in our collection. And it's mainly coming from retail business, the performance we are seeing. It depends on both our change of the model. We are more on the regions to have more close to customers, to increase our efforts through the collections and as well as these collections are coming from the CGF and portfolio evolution, and these are the 2 main reasons that we have. And we expect to continue and try to increase it more in 2020 budget guidance.

Understood. Can you clarify how the CGF portfolio evolution drove the collections?

And you mean the process, how we collect? Or you mean as of today, the results of some KPIs?

Yes. I mean, yes, the last, that would be helpful, please.

Regarding the process, as you know, when we have the client with a payment -- is due payments about 90 days, we are booking it as an NPL. And then with all the files and with all the details, we are applying to treasury, and there is a process within treasury and after this analysis and reviews, they are paying back to us. And this is the process, and we don't see any cuts in this process. It is going on track. And then we look at our CGF portfolio, we have 1 of the lowest realization of the NPL ratio compared to, say, compared to total bank line as well as the other banks, because on a monthly basis, we are able to get -- to report CGF that we can follow our performance.