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

Ladies and gentlemen, thank you for standing by. I am Maria, 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 First Half 2022 Financial Results. At this time, I would like to turn the conference over to Mr. Gokhan Erun, CEO; Mr. Kursad Keteci, Strategic Planning and IR EVP; and Ms. Hilal Varol, Head of Investor Relations and Strategic Analysis. Mr. Erun, you may now proceed.

Thank you. Good afternoon, and thank you all for joining our first half results earnings call. Before going into details of our strong performance, I'd like to spend a few words regarding the operating environment as always. The inflation remains elevated due to ongoing high global commodity and also energy prices. As is the case all around the world. We expect the high inflation levels to stay in the remainder of the year. During the quarter, there have been considerable number of macro prudential measures taken by especially Central Bank of Turkey. These measures are leading indirect tightening in the economy. And in terms of currency, TL weakening is unfortunately continuing. I'm moving now to Page 2 of our presentation. In first half, our net profit went up more than 5x year-on-year to TRY 19.2 billion. We have reached 50% ROE as of the first half of 2022. Our ROA, return on assets reached to 4.3%, showing a continuous improvement. Pre provision profit PPP, went up by 283% year-on-year, and our PPP to gross loans stood at 10.8% as of first half. Most importantly, yearly revenue growth was 214% where cost growth only 70%, so which brings the jaws ratio that everybody knows to 144%. Some important drivers of the performance are as follows: year-to-date improvements in total NIM reached to 325 basis points and our NIM reached to 6.4%. TL loan deposit spreads widened to 282 basis points quarter-on-quarter, thanks to 171 basis points higher TL loan yield and also 111 basis points lower TL cost of deposits. In terms of efficiency, we do have best-in-class performance still with fee coverage of OpEx at 79%. And cost asset ratio limited at 1.8%. Quarterly cost of risk increased to 139 basis points with precautionary provisioning strategy of ours. Moving to Page 3. We are further strengthening our rock-solid fundamentals during times of volatility, which is, I assume, very important. Enhanced liquidity level as of today, our foreign currency LCR stands above 680% and total LCR higher than 165% where our LDR loan-to-deposit ratio is now below 100. Our TL LDR improved 30 basis points year-on-year to 136%. As we speak, we are talking lower numbers nowadays. We will continue to maintain high levels of liquidity. We have $10 billion worth of liquidity, 2.2x of our foreign currency due in the next 1 year. So we have plenty of foreign currency liquidity on our balance sheet. And moving forward to strong capital base, our Tier 1 capital further improved to 14.6%, thanks to consistently strong internal capital generation, basically profit -- now we have more than 470 basis point buffer versus regulatory limit on each solvency level. Coverage levels, we have continued our conservative provisioning despite the limited NPL inflows. As a result, our total coverage is now at 6.1% with ongoing strength in coverage performance. I'm moving to a customer-oriented approach. We keep creating convenience to our customers to fill their needs. We continued customer acquisition during the first half that we very much like and proud our digital customer penetration reached to 89%, close to 90% now. Our seamless digital onboarding is quite strong, 5x higher year-on-year and helping to improve digital transformation. So now I'm leaving the floor to Hilal. She will give details and about our strong numbers.

Thank you very much, Gokhan Bey. Good afternoon to you all, and thank you for joining our call. We'll start with our lending performance on Page 4. Our Turkish lira loan growth stood at 36% year-to-date and 61% on a year-over-year basis. FX loan deleveraging continues in the quarter coming down 10% year-to-date and 15% year-over-year. In line with our strategy, we gained further market share among private banks and lucrative small tickets. This trend continues. Consumer loans went up by 21% year-to-date, and we gained 67 basis points market share. And looking at general purpose loans with 26% year-to-date and 50% year-over-year increase. We increased our market share by an additional 71 basis points on a year-to-date basis. Also, I want to emphasize that, please note that last year, we gained 110 bps, and this is on top of it. Commercial installment loans up 48% year-to-date, resulting in 120 bps market share gain. As the market leader in card business, we gained 46 basis points and 37 basis points market share in the year on debit card and credit card turnover, respectively. All in all, retail loan share in total reached to 58%. Funding side on Page 5. Once again, we had Turkish lira driven deposit growth through the contribution of sticky small tickets. Turkish lira deposits increased 51% year-to-date with an additional 44% increase in demand. Foreign currency deposits came down 13%. On Turkish lira individual deposits, we gained 36 basis points market share. This is again versus prior peers. Individual demand deposit market share up by 34 basis points. Share of demand deposits stand at 42%, Turkish lira at 26% and foreign currency at 54% as of first half '22. And these numbers are improving scenario as you know. Now moving to Page 6. revenues. Revenues surged 25% quarter-on-quarter and 198% year-over-year. The support was mainly through core again, going up by a very strong 23% quarter-on-quarter and 181% year-over-year. We also see ongoing support from the trading line, thanks to timely action taken by our treasury. In the quarter, Turkish lira loan deposit spread widened as much as 282 basis points, thanks to ongoing loan repricing impact and lower Turkish lira cost of funding. Turkish lira loan yield went up by 171 bps while Turkish lira deposit costs improved 111 bps with a this is with ongoing support from demand. And showing our agile ALM management, margins are improving in every quarter. Quarterly increase in the second quarter was 61 basis points. This number is normalized for the linked to income and stellar 325 basis points jump over 2021. The support to core NIM was very strong at 91 basis points. And as of first off, our net interest margin stands at 6.4%. On next page, you can see our strong fee performance. Net fees up by 76% year-over-year and 24% quarter-on-quarter. As a repetition of the previous calls, I know I'm repeating this a lot. But I cannot mention just one component for this strong performance. It's all across the board. Money transfer fees up by 118% year-over-year, our number of transactions are going up where supported. Fee income to investment products, up by 76% year-over-year. Bancassurance, 38%. And as the market leader, once again in payment systems, fee increased 85% year-over-year, and lending-related fees also supported with a 73% increase. Moving to OpEx. We are on Page 8. Costs increased 70%, and this is with continuous investments in business growth and no sacrifice on HR. Business growth-related costs almost doubled while the increase in HR costs were at 75% year-over-year. Our best-in-class performance in efficiency KPIs further improving. Fee coverage of OpEx at 79%. Cost-to-average assets were limited at 1.8% and cost/income ratio at 20%. Now I'm moving to Page 9. So as Gokhan Bey mentioned, the utilization efforts are very supportive, and we are focusing a lot. We are increasing our digital customer penetration. This reached to 89% in first half. Digital onboarding were important and were supported 5x higher than last year, and we are seeing an increasing trend every quarter. Number of credit cards sold via digital, up by 81%, general purpose loan sales, up 93% year-over-year. Note that digital share in GPL sale is around 80% of total. Looking at our third quarter on Page 10. Quarterly NPL inflows were limited at TRY 2.5 billion, mainly due to a couple of big ticket files and actually one where the collections were very strong at TRY 1 billion. Please note that inflows and collections exclude NPL sales and the impact of LYY classification and write-off. All in all, net NPL inflows in the quarter volumes at TRY 1.5 billion on consumer and credit cards that we are seeing some slight increase, but still very, very limited. SME net inflows negligible. And despite these limited flows, we continued our prudency in provisioning and cost of risk increased to 92 basis points in first half. Support from collection were as high as 195 bps. And as a note, currency impact is excluded in our calculation, but as just as a note, is 123 basis points in first half. And as you all know, this part is fully hedged. I'm on Page 11 and again, showing the very strong coverage levels at all stages, Stage 1, close to 1%. Stage 2 at 19%. And excluding this more on the LYY, we are even seeing an increase on the coverage ratio. Stage 3 covers despite the NPL sales in the quarter, stable at 69%. And our NPL ratio is at 3.7%. Looking at the robust capital levels, we are on Page 12. As also solvency levels, we have more than 470 bps buffer versus the regulatory threshold. CET1 at 12.9%; Tier 1, 14.6%; and capital adequacy ratio at 16.7%. And looking at capital generation to net profit is very, very strong at 350 bps on a year-to-date basis. So we are on Page 13. As we promised with you, we have included the initial outcome of inflation accounting based on our internal calculation, return on tangible equity. This is the real return on top of inflation is in the range of mid- to high single digits. And this number is on a comparable basis, corresponding to a significant year-over-year and year-to-date improvement. Also, we have adjusted the linker valuation to provide you a comparable ground. Capital ratios, the impact of inflation accounting will be positive. Given all these uncertainties, we are keeping our guidance or guidance at this point. Now I'm leaving the floor to Gokhan Bey for closing remarks, then we will be taking questions. Gokhan Bey?

Thank you, Hilal. Thank you very much. I believe as [indiscernible] will ensure the continuation of strong and sustainable revenue performance through small tickets and transactional banking, as always, while maintaining our strong fundamentals and our conservative risk appetite, driven by customer-centric approach. With our strong brand, our reach, our organizational culture, fully committed workforce and support of our shareholders, we'll seize the opportunities ahead of us and reach greater achievements, which will also contribute to our country's performance. 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 to the achievements of our bank and showed commitment to the country and to the bank. On behalf of the whole team, I'd like to thank you all for joining our call. Now we can take your questions.

The first question is from the line of Gursoy Ovunc with OYAK Securities.

Thank you for the presentation. Congratulations for the good set of results. Of course, like the analyst, I wonder about the second half of the year. Do you think this good performance is sustainable going forward? How do you see the funding environment, specifically on the FX side? I would like to hear your views on syndications and also Eurobonds, -- if you can give some color about these issues, I would really appreciate.

Thank you, Ovunc. About the second half operating environment, it will be, I think, more difficult than the first half, specifically as looking at the global environment, the central banks making rate hikes, even tomorrow, we'll be hearing from Fed -- very recently, we heard ECB 50 basis points, and the target is obviously getting higher. So in that kind of environment, the second half will be tougher than the first one. This is no doubt for us. But on the funding side, whether we have worries, as I mentioned, first, let me talk about Turkish banking sector or Yapi Kredi specific. In terms of liquidity, we do not have an issue. We are quite well funded. That's why on that front, liquidity-wise, I do not see any concern going forward for this year or even, as I mentioned, for a year in front of us because we have enough foreign currency liquidity, 2.2x higher than our redemptions. So we are all well prepared as always in the last 5 years. So this is on liquidity side. But whether it will be impacting our bottom line, the P&L, that is on the other side, which means that the cost of funding is going up. Also on the -- for especially on the foreign currency funding side. The deposit rates are going up. That's why, obviously, the LIBOR is going up. The risk premium is also going up. The CDS levels are going up. That's why it will have a negative impact to the P&L. So just to expect as strong as the first half results in terms of funding, et cetera, et cetera, it might be in the cost of funding, et cetera. It might be not the case. So -- but on the other hand, this is on the cost of funding and P&L side. On the syndication side, we do not see an issue as we always seen in the last 30 years at least to my experience. So most probably we'll be rolling our syndications over. But the percentage is, I don't know whether it will be 90% or 85% or 95% or 100%. This has to be seen. We have a few months ahead of us. But as we speak, normally, in this kind of environment, we should be able to roll it over our syndications. Maybe it will be a little bit more costly for us. But in terms of liquidity, I do not see an issue for these indications. Last point about the Eurobond side, we have always been opportunistic about the markets. And if and when we see an even opportunity where the cost is the right level for us. We might be in the market on the market. But having said that, having those high CDS levels, Turkish Eurobond sovereign bonds being around 11%. I do not think that it will be feasible for the bank, for our bank at least to borrow. Just we have to think of the asset side of the balance sheet as well, which is looking at our foreign currency loans that we've mentioned also during the presentation, it is coming down significantly. Just to recall, 4 years ago, slightly higher than 40 years ago. Our foreign currency loans were $22 billion, give and take. Now it's down to close to $10 billion, $10 billion to $11 billion of foreign currency loans. And so it is going still as we speak, and it is still going down. It is still going down. We still expect the foreign currency loans to come to $10 billion levels by the end of the year, which means that deleveraging continues. Our customers are more cautious, thanks to 2018 crisis that volatility that we had. That's why they are still deleveraging their balance sheet. The only remaining part is basically the export loans or the FX-linked income companies that we are keeping, but the others still deleveraging. So that's what -- that's why I do not need additional foreign currency liquidity as we are speaking above 600% foreign currency as we do not need excess foreign currency funding as it is also impacting our bottom line.

Thank you. I have one more question. I also wonder about TL loan growth trajectory going forward. I understood from your remarks that it will be difficult going forward to extend more TL loans. But how do you see the -- also the impact of regulations on TL loan growth? I wonder about it. Could you give some color on that as well?

Sure. As always, we've been very transparent to the market. You know me. So in terms of TL performing loans, obviously, there are regulators actually BRSA and also mainly Central Bank of Turkey, they are taking those measures, macro prudential measures. I think because of one issue, so maybe to slow down slightly the economy and also to see some deleverage on the balance sheet. So if this is the case, then going forward, because of this only for the -- from -- because of the regulations, it has an impact that will be slowing down for sure for the second half. That is for sure. And also this real another, the TL loan interest rates are going up because of obvious reasons that the Central Bank is putting lots of additional burden costs on our balance sheet to the liability side, that, unfortunately, we have to reflect those costs to our customers. And in that case, because of this aim or because of this action of the regulators, the TL loan yields are also going up. If they do not reverse their burdens or costs on the liability side than on the TL loan side, the interest rates will be staying elevated. So this is what we are seeing. That's why with those rates, obviously, the growth will be slowing down.

The next question is from the line of Saraoglu Cihan with HSBC.

My first question is a follow-up to Ovunc's question. So you mentioned that rising funding costs in the second half may put pressure on the P&L. So does that mean that we are going to see lending spreads contracting in the second half of the year? That's the first question. Second is, could you give us some color about the rollover ratio of currency protected deposits -- that's the second one. And the third one is -- so you mentioned on the inflation accounting that your ROE is going to be somewhere between 5% to 10% as far as I understand. But in the first half of the year, inflation was quite high. And in the second half of the year, probably inflation is going to be less than in the first half of the year. So under that condition, would your inflation adjusted ROE increase in the second half of the year?

Okay. This is Gokhan. Thank you. Loan-to-deposit spread -- our projection is not that it will come down. So which means that we are trying to keep our spreads or even widen our spreads. As I mentioned earlier, so there will be a slowdown in the loan-to-deposit loans, TL loans, but also gives us some more cushion for the liability side that we can control our cost of funding of the TL deposit, for example. So which means that we'll be trying to keep our margins as much as possible. So -- and as we speak, actually, we are doing it. So as of today, which is we are almost in August. So there we do not see a contraction. This is the good news. This is thanks to our strong ALM management. And you asked about the rollovers ratio of the KKM this famous Central Bank or the government protected, FX-protected TL deposit. The rollovers are going very well. Until now, even the government side or on the other hand, on the Central Bank's deposit side. Both are going well on the rollovers. But for the Central Bank deposit sites, Central Bank protected site. That, as you very well know, that we have seen the majority part was coming from the corporates. So, and this has yet to be seen in the coming months, in the coming 2 months. That's why let's see, just it's a little bit early to talk about the second part, the Central Bank deposit part. That has to be seen. So August and September. But as, of course, there's an important penalty of the Central Bank. They are putting important pressure on us. But it is the customer's decision after all. So let's see how it goes. But on the other line for the government supported side, this is going well, and it is also rolling over with more than 100%, I might say.

If I may, for the inflation part, Cihan, your question, our first half ROE year-on-year as a significant improvement versus last year, first half ROE at applied inflation accounting. But from the monetary loss point of view, as you know, monetary losses arising from monetary position and especially from the capital. This monetary loss is year-to-date inflation is calculated over year-to-date inflation. Therefore, if I were you, I wouldn't expect a widening of ROE at the year-end, our aim would be based on our performance to keep it at these levels.

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

I was just hoping you could kind of walk through where in your credit book, you're getting worried about credit quality. I mean it seems NPL inflow is pretty modest, things are okay. But where do you see stress? What kind of keeps you up at night? That would be my only question.

Again, for the stress, I think in this very volatile environment, it is not easy to say now because it is quite early. And secondly, one thing important is there is an important amount of liquidity being carried on from last year in the economy as well as due to the sales with the inflationary impact on the sales revenue generation. The companies, the other individuals had an access to the liquidity. And therefore, we could not be seeing any stressful area or sector. And -- but what we are doing is most importantly, we are making our new loan disbursement as much as we can in the small tickets. We are not going on the bit because, as you know, for our strategy for the last 4 or 5 years. And with the small tickets and widespread in terms of sectoral distribution, we are managing the bank lending. But as of now to your question specifically, there is no 1 or 2 single sectors or areas under stress. Let's wait for a couple of months, even quarters, to say about it.

There are no further audio questions. I will now hand over for any questions from our webcast participants.

Okay. We have a couple of questions. And the first one is the first two is regarding the inflation accounting trajectory. Can you give some guidance on the trajectory of inflation accounting and its impact on financial results?

Rigor for the inflation accounting trajectory, it's still -- waiting from regulatory decision. We are making our preparations accordingly. And as we promised, we shared some information about what are the results. But from the IFRS perspective, international reporting standard, it has already started. And therefore, when we have any IFRS reporting, it will be under inflation accounting. But for the local accounting, we are still waiting regulation and their decisions. And just we are making our preparation and keeping -- getting ready for a possible change to inflation accounting.

And also a follow-up question from Valentina -- and can you also talk a bit more on hyperinflation on P&L and equity. You mentioned mid- to high single-digit ROE. Does this include any provision reversals? Any additional color will be greatly appreciated.

Valentina. First of all, this bottom line figure does not have any reversal for any provision, and we are keeping our conservative approach on the provisioning -- and it has only application of inflation accounting as well as CPI linkers valuation and considering that our loan-to-deposit ratio is improving for a couple of quarters. We are hugely benefiting from core revenue performance. And at the bottom line, we have a better performance. We have over the inflation a real return on the top of inflation, but there is not any kind of a reversal or unreal income figures in these figures.

We have, again, two questions from -- I will try to [indiscernible] and Valentina on asset quality. Rates can you give details on the new NPL inflow of TRY 1.5 billion in the second quarter. Is there a specific case? Or is this across the board?

Yes, [indiscernible]. It is a kind of a single case in energy sector, which we have been waiting for it is already planned. It was already in Stage 2, and it was highly covered in Stage 2. And when we move it to Stage 3, I can almost say it is a fully covered new NPL inflow. It is not something that create [indiscernible].

And Valentina ask, can you talk a bit on more detail about asset cost trends that you have seen recently? Do you see accelerating corporate NPL inflows in second half 202? Where do you see full year cost of risk? Will it be closer to 150 basis points versus 92 basis points in first half.

I think in the previous answer, we have touched upon the second half evolution, especially for the asset quality. But specific to cost of risk question of Valentina, we are keeping our guidance, as you see, we increased it in the second quarter under 10, 40 bps levels. We would like to be, again, conservative in this period. And therefore, we are not changing it, and we believe it will stay below 150 bps.

We have one question from Valentina. Do you expect more benefit on capital ratios from IRB in the second half of 2022.

No, it was the final one we got, which was, again, in an amortized way of applying IRB. What will happen from this point, there will not be any bulk change. It will be only changing based on our internal models.

And we have one question for Gokhan Erun. Can you give information on the process of Turkish lira lending restrictions on companies with FX liquidity. Can you expect revisions on current regulatory framework.

I think the impact is limited to a few 100 companies that is also announced by the regulators. So in that sense, I think those ones that are affecting having the excess liquidity, I think we'll be starting to see that they will be converting some part of their excess cash to Turkish lira because in that kind of environment with restrictions for those companies to continue with the existing level of growth. They have to be funded. And basically, most probably, we'll be seeing some colors in the coming weeks for them. But on the other hand, of course, this is having a negative impact on our TL loan growth. But as we always focus on the smaller tickets, the small tickets are not affected by this regulation.

So we have 2 questions from [indiscernible]. Would you please provide a bit more detail on your statement of 2.2x FX assets over FX liabilities. So what I can say is our FX liquidity is -- this is short-term effect liquidity at $10 billion. And our sort effect that in the upcoming 1 year is at $4.9 billion. And please note that $1.6 billion worth of it is syndication. We, as you know, we rolled over in a pretty good way last -- in the last one. And if we're looking at FX liquidity to break down, what I can say is we have around TRY 1 billion cash. We have around 2, 2.5 in correspondent banks. We have around 3.5 billion net swaps and Central Bank fee is around 3 billion, and the rest is the non-covered securities that we have. And another question from [indiscernible] Would you please share win retail segment potential NPL inflow. What I can say is that until inflow on the retail is still very limited, [indiscernible] while we are seeing the recoveries are also going very strongly, and we are not seeing any deterioration on the retail side so far. Okay. So we don't have any further questions. Now we have one, I think, on the audio side.

Yes, we have a question from Soroka Oleksiy with ING.

Actually, my questions have been answered. I wanted to ask about the impact on lending, which I guess you have just addressed. But maybe to clarify. So in terms of net interest margin, you do expect the margin to decelerate at least in the second half of the year because your full year guidance is 100 basis points impact -- increase rather, whereas in the first half, you had 325, if I remember correctly. So it will be you'll have to be more modest than the second half. Am I reading it correctly?

So we are a bit conservative about our guidance. You are correct. I hope that we'll be doing better than our guidance. But still, in this kind of environment, that Central Bank is taking measures on squeezing the liquidity, decreasing the refunding of Turkish banking sector at the moment. These have obviously a negative impact on the interest rates, which means that interest Turkish lira interest rates are rising at the moment. Because as you very well know, on the regulation side, for example, they are not taking into account or they are taking only half of the CPI linkers, for example, as the collateral, so they are funding only half of it at the moment, which means that they are decreasing the funding on the banking side as the Central Bank. And as the Central Bank is squeezing the liquidity, therefore, the cost of funding might be going up. And therefore, we've been careful about the guidance. But if those actions were to balance at some point, and we are not squeezed more by the Central Bank of Turkey, then we should be able to beat our guidance by the end of the year. This was our concern. So tightening of the Central Bank, at least on the liquidity side.

Right. Okay. And again, from this measure, I mean, I don't know how to quickly describe it, but lending limits to companies with FX liquidity. And you were saying that this will not have a disproportionate impact on you. If we talk about loan growth of 36% in TL in the first half, if I again remember correctly. Is that going to have a material impact? Like what are we talking about that you can put it in some framework?

I got your point. So I cannot share, of course, obviously, any numbers for the second half, but there will be a deceleration that is for sure. But as we are more focused on the small tickets, which is first the SMEs basically and also on the business banking and also on the retail side, we've been very active, and we are gaining more market share on every product that we are supplying to the customers. There, we are growing, and we will continue with the retail banking side. So that's why to decelerate further as strong standby, I do not expect it. So -- because for the big tickets, okay, that's fine. We've been always very careful about those. But on the other hand, we will be growing on the retail for the small ticket for the business banking and SMEs will be growing. We have room to go, and we'll be getting market share there. And it's really the lucrative part for us.

We don't have any further questions, I believe, right?

That is correct. There are no further questions.

So I thank you all for joining our call. And as always, if you have any further questions, as the IR team, we are always will be in your demand, let's say. So you can call us any time. And thank you, Kursad, Erun, and thank you very much.