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

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the Yapi Kredi conference call and live webcast to present and discuss the Yapi Kredi 2020 financial results. At this time, I would like to turn the conference over to Mr. Gokhan Erun, CEO; Mr. Kürsad Keteci, Strategic Planning and IR EVP; and Ms. Hilal Varol, Head of Strategic Analysis and IR. Mr. Erun, you may now proceed.

Thank you. Good afternoon, and thank you all for joining our 2020 earnings call. I hope yourself and your loved ones are well and healthy. As I have mentioned during our budget presentation on the 8th of January, we are seeing positive signs of recovery, thanks to the normalization steps taken. We are observing better CDS levels and also lira levels, Turkish lira levels, results. CDS reduced down to 300. Even as we speak, it's slightly lower than 300. And Turkish lira gained close to 15% against the dollar in the last 3 months. Also, Central Bank of Turkey keeps tight monetary policy to reduce the inflation. Normalization steps in gradual macro recovery will lead to an attractive investment environment in 2021 this year. Following a slight GDP growth of around 1% last year, we do expect to have around 4% GDP growth with year-end CPI of 10%, around 10%, for this year; policy rate with 2 percentage points real return throughout the year. Before starting the presentation, I would like to thank the dedicated workforce of Yapi Kredi for their extensive efforts and for their commitment to the country and to the bank. I now move to Page 2. Our net profit increased by 41% year-on-year and realized at TRY 5.1 billion. ROE (sic) [ RoTE ] realized at 12%, the highest level among our peers so far, and ROE at 1.1%. Pre-provision profit, PPP, generation is very strong, increasing 21% year-on-year. And PPP per gross loan reached 5.1%. Core performance strength is the driver behind the performance. We have improved net interest margin by 28 basis points year-on-year on a comparable basis as we have promised you at the beginning of last year. We benefited 100 basis points from loan-to-deposit spread improvement, thanks to well-managed loan yields and also outstanding performance in cost of funding in Turkish lira deposits. Our strong growth in demand deposit also helped us to improve our spreads. Despite all the challenges in the year, our fee income increased 4 percentage point year-on-year, thanks to our decisive strategy to increase the number of transactions. Number of transactions growth in money transfers was 42%, and we managed to maintain the payment system transactions stable despite a very low level during second quarters. Meanwhile, our strong focus and dedicated teamworks in bancassurance business, result in 53%, 5-3, percent increase in fee generation; and fees from investment products also up by 32% throughout the year. Our total provisions stood at TRY 8.5 billion, of which around TRY 4.3 billion is precautionary provisioning. And our total coverage increased by as high as 8.3%, including the provisions for risks and charges. We have increased -- just to give you some details around it, we have increased the coverage of postponed loans to 12%, a TRY 1.4 billion additional provisions; 62% coverage for the forbearance portfolio, TRY 570 million additional provisions; conservatively increased Otas coverage to 29%, TRY 200 million additional coverage provisions; and set aside TRY 2.1 billion COVID-19-related provisions. Our cost of risk is at 2.52 -- 2.51% as of the end of the year; and ordinary cost of risk, 1.2%, 120 basis points, excluding currency impact. Lastly, when we look at our fundamentals, in terms of total LDR, we are at 105% this year. As we mentioned earlier, LDR will stay lower than 110% at any time during the year. This limit is not an end-of-period target. We set our 110% limit considering the challenges, especially during the first half. But once we see the de-dollarization and which has already started with small steps, we will see improvement in terms of LDR during the last period of this year. We have solid liquidity with foreign currency LCR as much as -- high as 454%. Even as we speak, it is much higher, while total LCR at 148%. Tier 1 ratio at 13.6% without forbearance actions, despite the 150 basis points negative impact from the macro volatility. This level represents 105 basis point buffer against the regulatory limit. CET1, CET1 ratio, at 12.4% with buffer of TRY 435 basis points. Total CAR at 16.7%, buffers 475 basis points, internal capital -- thanks to our internal capital generation, which reached to 215 basis points in 2021 for total capital adequacy ratio. I would also like to thank our fixed income investors for their demand during our Tier 2 issue, which shows a strong trust. We reached, as you all know, $3.2 billion of order book, which is, for an issue of $500 million, 6.4x the book size -- the issue size. So we also managed to issue the greatest [ widening ] of any recent Turkish banking offering, revising the yield by 62.5 basis points to final pricing to close the deal at 7.875%. And as we speak, by the way, it is trading around 7.5 levels. So now I'm leaving the floor to Hilal.

Thank you very much, Gokhan. I hope you all, your colleagues and your loved ones, are well and safe. Continuing on Page 3. We continued our Turkish lira and small ticket volume growth in 2020. Turkish lira loans increased 26% year-over-year, higher than our initial guidance of mid-teen increase, being driven by retail loans, retail is up by 45% year-over-year, and some business loan growth. Foreign currency loans continues to deleverage in the year, coming down 4%. A coverage of the share of retail loans [ increased 48% ], corresponding to 6 percentage points improvement versus 2018. Turkish lira customer deposits were up by 4%, while our foreign currency deposits were stable. With the hands-on and a fair management on deposits, Turkish lira demand deposits increased 29% year-over-year with the share reaching 26%, a 10 percentage point increase over 2018. FX demand deposits up by as much as 77% in the year and the share of FX demand in FX deposits went up by 25 basis points to 44%. Overall share of demand deposits in total increased to 36% with an 18 percentage points increase versus 2018. The share of retail in time deposits went up by 5 percentage points to 67%. Moving to Page 4, revenues. Revenues surged 19% year-over-year supported by a 17% increase in core revenues, with 13 basis points widening in revenue margins standing at 5.13%. On a quarterly basis, we managed to maintain our margins in the range of 5.15%. Equally important, the timely actions of our treasury department supports our revenues in the year. Trading gains, excluding the ECL hedge, almost above year-over-year. Going forward, trading gains will continue to support our strength in revenue generation. Looking at net interest margin performance on Page 5. As we have promised at the beginning of the year, we were not aware of the COVID-19 and upcoming challenges at the time, our net interest margin widened 28 basis points year-over-year on a comparable basis and, including the linker contribution, 48 basis points improvement to 3.78%. Thanks to the successful hands-on and a fair management of the balance sheet, core net interest margins supported the NIM by 100 basis points. Securities, excluding linkers, 4 basis points, thanks to our treasury's actions, while the reserve requirements and other financial instruments had some negative impact on the NIM. In 4Q '20, our net interest margin was stable at 3.82% as the positive contribution of linkers offset the negative impact of increase in Turkish lira cost of funding, serving as a very strong hedge. Adjusted for the linkers, net interest margin tightened 98 basis points. Now I'm moving to Page 6. In 2020, our loan deposit spread widened 94 basis points with lucrative and a fair balance sheet management. Deposit costs improved 362 basis points, thanks to the contribution of demand deposits as well as timely actions taken. Loan yields, on the other hand, came down 267 basis points, better than the deposits, thanks to efficient repricing actions. [ As further seen ] for the whole system, quarterly spreads were under pressure with higher Turkish lira rate, resulting in 138 bps quarter-on-quarter tightening, deposit costs jumped 120 basis points, while Turkish lira loan yields improved 57 bps in the quarter. Moving to Page 7. Despite the negative impacts of the regulation and our support to our customers during COVID-19, our fees increased 4% year-over-year in 2020, better than our guidance of single-digit contraction, thanks to the ongoing diversification efforts and strong support from a number of transactions. As Gokhan Bey mentioned, bancassurance fees increased 53% year-over-year; investment products, up 32%. Equally important, as was the case in third Q, money transfer fees improved as much as 48% quarter-on-quarter, and payment systems up by 9%. As you can see on the right bottom chart, our monthly average transaction numbers on money transfers improved every quarter, resulting in a 42% year-over-year increase. Despite the very low level of second Q, with strength in third and fourth quarter of the year, payment system transaction number was up by 1% year-over-year. Moving to Page 8. Operating costs increased 17% year-over-year. Adjusted for the higher-than-expected FX impact, growth will be at 17 -- 15%, in line with our guidance. The increase was mainly due to COVID-19, 1% impact on cost growth; regulatory costs up by 33%, a 2% impact; business growth-related costs increased 25% year-over-year. Very importantly, despite the negative effect of COVID, we managed to keep our running cost increase at single digit. Our cost-to-income ratio improved 154 basis points year-over-year to 33.4%. In 2020, number of customers through digital onboarding more than tripled. Share of digital products sold increased 32 percentage points to 69% in 2020. Looking at asset quality on Page 9. Our total coverage increased further to 8.3% from 7.2% in 2019, including other provisions for risk and charges given our conservative provisioning ahead of 2021, by far the highest level among our peers announced so far. Stage I ratio at 78% with 1.1% coverage; Stage II at 15.6%, 16.4% coverage on a comparable basis; and NPL ratio based on bank-only financials at 6.8% with 69% coverage. Our consolidated NPL ratio was at 6.5%, in line with our guidance of around 7% level. We classified a couple of commercial [ loans ] as NPL in 4Q, which was already strongly covered. On Page 10, we have included the results of our postponements and forbearance portfolio 90 to 180 days past due. Our postponements came down 25% from the initial level of TRY 19 billion and at TRY 14 billion as of 2020. We have further increased the coverage level to 12% despite the healthy performance. Total provisions portfolio is at TRY 1.7 billion. Please note that the TRY 200 million of the portfolio is past due than 90 days and TRY 385 million with a dpd of 31 to 90 days. This performance shows how conservative we had been in provisioning of the portfolio. Looking at the 90- to 180-day past due portfolio under Stage II, since the beginning of the forbearance, we had been evaluating this portfolio as NPL. As of 2020, our portfolio is at TRY 1 billion with 62% coverage and TRY 620 million total provisions. Note that a part of these loans is likely to move to performing before becoming NPLs. This is a classic move that we witness from some of our customers. As a result of all, on Page 11, our cost of risk stood at 251 basis points by end 2020, in line with our guidance of below 300 bps level. It's really important to mention that 133 basis points of this are front-loaded precautionary provisions. You can also see that our quarterly cost of risk increased to 308 basis points, 142 basis points is the ordinary. I would also like to mention that our collection performance was strong even in these challenging times with a positive 45 basis points impact in 2020. Moving to Page 12. We have very comfortable levels of capital, more than 400 basis points buffer over the regulatory thresholds, excluding the forbearance. CET1 at 12.4%, limit at 8.05%; Tier 1 at 13.6%, that's 9.55%; and capital adequacy ratio at 16.7%, regulatory limit, 12%. As was the case in the previous 2 years, internal capital generation was supported at 203 basis points, plus 215 bps from profit and minus 12 basis points from business growth. Looking at sustainability on Page 13 and 14. We continue our achievements and processes in the sustainability as a strategic priority. It's a very important point for us. We are very proud that recently, we were included in the 2021 Bloomberg Gender Equality-Index, scoring above both the global and sectoral averages. I would also like to provide you an update on European Green Deal. We have started our training sessions with our customers to facilitate their energy transition and alignment with the European Green Deal. We will continue to inform you regarding the development and achievements on sustainability every quarter. Now I'm leaving the floor to Gokhan Bey for the summary of our strong 2020 performance, 2021 guidance and closing remarks. Gokhan Bey?

Thank you, Hilal. Well, Page 15. Regarding the realization of last year's guidance, it was a successful year in terms of improved fundamentals, healthy growth and also accelerated revenue generation. Year-end LDR realized at 105%, which is in line with the guidance; also CAR, 16.7%, higher than the guidance of 16%. TL loan growth was 26%, while we guided high teens, so because of obvious reasons that also the market reacted also in that way. In terms of top line, we successfully achieved our guidance for net interest margin, despite a more challenging environment that -- happy to say that we have not also changed during the year, the initial guidance. Then we had a slightly better performance on commissions, which is a 4% increase year-on-year. Yearly operating cost/income at 17%, excluding FX rate assumption difference at 15%, in line with our guidance as well, so which was also a check. Moving to also asset quality, NPL ratio at 6.5%, in line with our guidance of around 7%. And cost of risk at 251, which is also below 300 basis points guidance. And in terms of ROE, yes, we were saying that the guidance was 10%, 11%, happy to declare that we closed with 12% ROE, which is better than our guidance. Now I'm moving to our budget guidance, which is on Page 16. Our guidance -- looking at our guidance, as we have explained in detail during our budget meeting and throughout the presentation as well, our ROE 2021 guidance is at mid-teens. Drivers of the performance are as follows. LDR will stay below 110% anytime during the year. Capital ratios to be supported by internal capital generation, and cash will stay above 16%, this is what we expect. Turkish lira loan growth will be at high teens, also a good start -- if you look at the 2021, a good start in terms of TL loan growth as well. In terms of revenues, we expect net interest margin contraction, unfortunately, excluding the CPI linkers impact, mainly due to higher cost of deposits and a 30 basis point contraction there. With ongoing diversification efforts and also support from higher number of transactions, which will lead to commissions income to increase by mid-teens, we foresee the operating expenses to increase at mid-teens, too. Increase in costs, mainly due to regulatory costs as well as also business growth, so as we all know, as my team is all very well-known in terms of cost control, we expect limited increase on running costs, thanks to digitalization and cost control efforts of my team. In terms of asset quality, NPL ratio is expected to be lower than 7% without considering gain in write-offs and cost of risk to go below 200 basis points for this year, thanks to front-loaded provisioning that we did in 2020. So as my closing remarks, I hope 2021 will bring a healthier and safer year for all of us, first. Also, I believe, we at Yapi Kredi will ensure the continuation of strong and sustainable revenue performance through small tickets and transactional banking while maintaining our strong fundamentals and also conservative risk appetite driven by customer-centric approach. With are strong brands, rich organizational culture, fully committed workforce and support of our shareholders, we will seize the opportunities ahead of us and reach to greater achievements, which will also contribute to, of course, our country's economy. I would like to take the occasion to extend my thanks, as always, to our stakeholders who stand by us with trust and support and to our dedicated employees who contributed to the achievements of our bank. On behalf of those -- of the whole team, I would like to thank you all for joining our call. And now we can take your questions.

The first question is from the line of Webborn, Alan with Societe Generale.

Just 2 quick questions. Could you put the loan growth, the TL loan growth, of 4% in Q4 into the market context? We can see that you grew a little bit below the market, and I'm sure that was your choice. Could you talk to us about where your focus was in Q4? And is that focus currently the same? Or do you see any shift as the sort of net interest rate rises have come through? So it would just be interesting to see what your strategy and where your focus was in Q4. And the second question was simply whether you give us a view on Yapi's thinking about the sort of dividend announcement that the BRSA gave at the end of last week.

Thank you, Alan. First of all, we accelerated. If you look at our numbers, during the -- asset ratio at times, we deliberately chose not to grow on loan with lower rates, interest rates, rather than to meet the asset ratio with the shrinkage on the [ OR ], foreign currency, funding sites and expensive deposits. So this was the approach. But once we were comfortable and once the Turkish lira interest rates started to pick up, then we were very much in the game, in the competition, to grow in terms of Turkish lira loans. And -- but it starts to -- of course, especially in November and December, those were the times that it made sense for our bank to grow the loan with comfortable yields. That's why you see 4% growth here. And in terms of growth and breakdown of it, as we mentioned, the main strategy, being growing in the small tickets, it is a strategy that continues. And it is paying off, which is very obvious, I think, in our results. In terms of GPL, we are growing -- we are getting market share, an important market share by the way, and we are happy to see those results and without increasing the cost of risk appetite by the way, so -- which means that our field is performing very well there. In terms of the SMEs, we are growing there, too, but room to grow more. Especially on the SMEs and commercial segment, there we grew. But in terms of steel, growing in very big tickets, corporate tickets, still, if there is a pickup there and a margin there, of course, we will be there. But we'll be extremely careful with the yields, with the margins. As we are talking at the moment, the outstanding loan-to-deposit spreads is obviously, without taking into account the demand deposit, which is a big portion in our -- obviously, in our balance sheet, but if you don't take this into account then, most probably, for all the banking system, loan-to-deposit ratios are in negative territory with time deposit to loans. And there is a stock for this. That's why we have to be extremely careful about where we are lending and what kind of yields we are lending, and we are focusing more on the small ticket and which will continue throughout the year. And so far, I must tell that we succeeded. Even the start of this year, January, we saw a good start. Second question about dividends, as you mentioned, we welcome, of course, the BRSA's letter that the banks will be allowed up to 10% of their last year's profit to pay the dividend. As you all know, it will be up to, first, to the Board and then to the general assembly to decide for the dividends and subject to, of course, BRSA's approvals. This is at the moment what I can share with you.

The next question is from the line of Nellis, Simon with Citibank.

Could I just ask about fee income? I mean it still seems to be quite weak quarter-on-quarter. You have quite an ambitious target for this year. Can you just run through your confidence level on resuming strong fee growth? And what has to happen for that to occur this year?

For the fee growth, especially in 2021, our ambition is mainly on transactional banking and to continue our diversification both on money transfer, investment products, commission income as well as bancassurance. Also, please keep in mind that as the market leader in the payment business, we will continue to penetrate more to our small businesses to increase our commissions there. Therefore, for the mid-teen fee growth expectations, we are comfortable.

And how much is the higher rate environment going to impact the payment systems? I mean that alone should have a quite positive impact on fees, right, going forward?

In terms of fees, yes, but it also has an impact coming from the revolving part of the credit card outstanding balance. It both impacts the NII and fee part. And assuming that we will have mid-teens fee growth also for the credit card, I can't say more is on the increasing transactions for the payment business rather than the pricing.