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

Ladies and gentlemen, thank you for standing by. I am Geli, 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 9 months 2022 financial results. At this time, I would like to turn the conference over to Mr. Gokhan Erun, CEO; Mr. Kursad Keteci, Head of Strategy and IR; 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 9-month earnings call. Let me first celebrate 99th anniversary of Turkish Republic, which was last Saturday, 2 days ago. Next year, it will be a century since the new Turkish Republic was born. And I believe Turkish Republic will celebrate second, third and many more centuries. Regarding to the operating environment at third quarter, I can summarize that both local and global operating environment was not supportive. Rising interest rates all around the world as well as inflationary pressures are unfortunately continuing. On top of these 2 important facts, political issues in the U.K. and Europe and monetary decisions in Japan are putting more pressure on global economy. There is still uncertainty where dollar rates will settle. All these constraints are leading, unfortunately, outflow from emerging markets. Locally, ongoing macroprudential measures heavily impacting us, these are taken by central bank of Turkey. And these are leading indirect tightening in the economy; and we have most probably seen around 5% growth, GDP growth, for this year. Now I'm moving to Page 2 on our presentation. In 9 months, our net profit reached TRY 35.3 billion. We posted 55% ROE (sic) [ ROATE ], the highest level among peers announced so far. Our ROA further improved by (sic) [ to ] 5%. Pre-provision profit, PPP, stood at TRY 50 billion. And PPP-to-gross loans improved to 12.6% as of 9 months with a continued, of course, controlled cost cut. Some important drivers of the performance are as follows. Year-to-date improvements in total NIM reached to 438 basis points, and our NIM stands at 7.5%. TL loan-to-deposit spread widened 206 basis points year-to-date, thanks to 286 basis points higher TL loan yields, when -- where deposits costs increased a limited 80 basis points. The conversion [ trend ] of our balance sheet towards TL sustained, which will further support our spread evolution going forward. In terms of efficiency, we do have a best-in-class performance with fee coverage of OpEx at 76% and cost-asset ratio limited at 2%. Despite the limited NPL inflows, we continued for cautious and prudent provisioning. Accordingly, cost of risk stood at 91 basis points. This quarter, we mainly focused on increasing TL lending through small tickets as well as gaining market shares in targeted segments. We gained market share on consumer loans, TL individual demand deposits and TL deposits; and also deleveraged on foreign currency loans. Meanwhile, we keep acquiring new customers. And we gained above 1 million customers in a single quarter, so as a result of this balance sheet management, as you see now, we are able to achieve a 50% thresholds target for TL deposit share in total for both individuals and companies. I would like to thank our dedicated network and colleagues for this effort. Page 3. We are well equipped to navigate through any uncertainty with very strong fundamentals in terms of liquidity, strong liquidity; foreign currency LCR around 600%, total LCR around 160%; additionally, LDR, loan-to-deposit ratio, at 87%. Equally important, TL LDR improved 33 percentage points year-on-year to 113%. We have 11 billion worth of liquidity and which is 2.4x of foreign currency dues in the next 1 year. Capital front, strong capital. Also here, Tier 1 capital further improved to 15.5%, thanks to constantly also strong internal capital generation. Now we have in the range of 560 basis point buffer or above versus regulatory limits on each solvency ratio. In terms of asset quality perspective, we have continued our conservative provisioning despite limited NPL inflow, very limited NPL inflow, throughout the year. As a result, our total loan coverage realized at 5.8% and also the highest level among peers announced also so far. Now I'm leaving the floor to Hilal. She will give all the details behind our strong numbers.

Thank you very much, Gokhan bey. And good afternoon to you all and thank you for joining our call. I will start my presentation with Page 4. And as Yapi Kredi, we have the best-in-class fundamentals ensuring the sustainable profitability. So we have compared our performance and fundamentals versus 2 of our peers that already announced their results. And looking at liquidity, as of 9 months, we have the best, so lowest, Turkish lira loan-to-deposit ratio, standing at 113%. In terms of FX liquidity coverage ratio, we have the strongest and highest level at 587%; and this level is significantly higher than our peers. Showing Yapi Kredi's strength in fundamentals, our loan loss coverage ratio, as Gokhan bey also mentioned, is the highest at 5.8% while our prudent approach sustains. Altogether, for the fourth consecutive period, we have the highest return on tangible equity, which hit 55% as of 9 months. Our net interest margin reached to 7.55%, thanks to our ongoing achievements [ in ] strategies such as small ticket focus and best-in-class agile asset and liability management. This is the highest level among our peers announced, so far. Showing the strength in both revenue generation and controlled OpEx increase, as Yapi Kredi, we have the best-in-class and the highest fee coverage of OpEx, which further improved, standing at 76.2%. Now I'm moving to Page 5, how we achieved these strong results. Our market shares in small ticket, lucrative products show that -- shows the excellence in strategic execution. In consumer loans, since 2020, we gained 190 bps market share [ among private banks ]. And now we reached to 18%. General-purpose loans was another 167 bps gain. Now our market share is at 18.2%. [ Auto loans, car ] -- and now we are the market leader with almost 10 percentage points market share gain, which now stands at 35%. On the funding side, Turkish lira deposits market share went up by 180 basis points. And we're at 16.3%, mainly driven by small tickets and individuals, such as Turkish lira demand deposits market shares increased 6.5 percentage points to 19.1%. On the FX loans, however, we continued deleveraging beyond private banks. And our market share came down an intentional 2 percentage points to 14.7%. Very importantly, in a single quarter, in just 3 months, we have gained more than 1 million customers, ensuring our market share in the lucrative small tickets and selective products. This will continue. So I am on Page 6, looking at our lending performance. Our Turkish lira loan growth stood at 59% year-to-date, and we increased 17% on a quarter-on-quarter basis. And we mentioned that FX loan deleveraging continues in the quarter as well, coming down 11%. And we came down 19% year-over-year. These trends will continue in the last quarter of the year with upcoming maturities. Looking at the drivers, definitely against small tickets. Consumer loans went up by 31%. And it is mainly general-purpose loan-driven. 143% increase in auto loans and consumer installment loans up by 61% on a year-to-date basis. All in all, retail loans, this includes SMEs, share in total reached 59% as of 9 months. And so one important point is all the single-sector share, looking [ at the risk ], is now below 10%. You know we have been mentioning that we have a target on this. On the funding side. We are on Page 7. Our impressive growth in customer franchise further strengthened and will continue to support the core funding source, deposits. Showing a significant 38% quarterly increase, Turkish lira deposits more than doubled year-to-date with an additional 76% increase in demand. With ongoing [ conversions to ] Turkish lira, FX deposits came down 17%. Share of demand deposits now stand at 39%, Turkish lira at 23% and foreign currency at [ 52% ]. I am also very happy to mention once again that our FX-protected deposits conversion ratio in both individuals and companies are comfortably above the regulatory requirement, the threshold of 20%. And equally important, Turkish lira deposit share in total on both individuals and companies already outpaced 50%. And once again this is thanks to the strength and dedication of our [ network ] and definitely the trust of our customers in [ Yapi Kredi bank ]. Now I'm moving to Page 8, revenues. So revenues reached to TRY 63.8 billion, with "revenue to interest-earning assets" ratio going up more than 2 percentage points to 13.4%. The strong performance was driven by core revenues and as well as timely actions by -- taken by our treasury department further supporting the trading line. Our net interest margin widened 438 basis points on a year-to-date basis, and this is mainly supported by core, 125 basis points; 311 bps coming from securities, while the negative impacts arising from regulatory changes were at 55 bps. In the quarter, total deposit spreads -- loan-deposit spread came down [ a mere ] 9 basis points, although coming from a very high base of second Q; as well as a very strong [ 30 points ] increase, once again, [ 38% ] quarterly. And ongoing repricing, loan repricing, supported this performance in the quarter. Our unique Turkish lira deposits performance in the quarter, alongside with more than 1 million newly acquired customers, will support our cost of funding in the rest of the year. Thus, we foresee a widening. And it is very important to mention that, due to these regulation, regulatory changes, we are managing the balance sheet as a whole, so we are focusing more on the net interest margin evolution. On the next page, our stellar fee performance via leveraging the digital capabilities on top of our own strengths; net fees up by 86% year-over-year, with a 19% quarterly increase. Once again, I know I'm repeating this every quarter, but I cannot mention just one component. It is all across the board. Money transfer fees more than doubled with [ certain ] number of transactions. Fee income through investments products doubled; bancassurance, up 38%. And as the market leader, payment system fees also doubled year-over-year. And lending-related fees, they were also very supportive, some 5% increase. We are investing on digital solutions, with the intention of providing and sustaining the best-in-class full-service model. Looking at our OpEx. We are on Page 10. As we have mentioned at the beginning of the year, with the very strong revenue generation alongside with our daily running-the-bank business, we are heavily investing for the future, meaning our customers and our people. Our annual cost growth stood at 93%, while HR costs increased above-inflation level of 96%. Our business growth-related costs growth is 130%. And looking at the running costs, however, is the costs sustained below the inflation, which is 69%. With this performance, our jaws ratio further improved to [ 159% ] as of 9 months. Moving to Page 11. And as a pioneer bank in digital banking, we are ensuring strategic achievements also through digital banking. [ Yapi Kredi saw our ] digital customer penetration further increase to 91%, and please note that this is even in a quarter with stellar number of customer acquisitions. Digital customer number increased 2.6 million in a year, digital onboarding 4.5x higher than last year. And monthly average mobile log-in number went up 37%. Number of credit cards sold via digital, up by 71%. General-purpose loan sales, up by 73% (sic) [ 83% ] year-over-year. Note that digital share in GPL sales is also increasing and, as of now, at 82%. Looking at our asset quality performance. Definitely we continued our prudent and proactive risk management, ensuring the long-term resilience. And as Gokhan bey mentioned, our net NPL inflows were very limited. Quarterly NPL inflows were at TRY 1.4 billion. And the strength in collections continued, TRY 930 million collections in the quarter. And just a note: that inflows and collection all exclude NPL sales and write-offs. All in all, net NPL inflows in the quarter [ were limited rhythms, again ], at TRY 422 million. Our NPL ratio stood at 3.4%, with a coverage of 69%. Stage 2 loans are 14% of our total loans, with more than 19% coverage, while stage 1 coverage, very strong at 0.8%. On consumer and credit cards, we are seeing a slight increase on NPL -- net NPL inflows, but this is even lower than as we anticipated at the beginning of the year. And SME net inflows continue to be negligible. With strength in collections, net inflows on corporate and commercial loans were at negative territory. And despite all these, we continue our [ prudence in provisioning ], as was the case since 2017. And our cost of risk, this excludes the currency impact, stood at 91 basis points. Support from collections was strong at 60 bps. As a note: The currency impact is at 105 bps in 9 months [ and it is for the half ]. Looking at our solvency numbers, we are on Page 13. All the solvency numbers, so the ratios, are improving. And we have 560 bps-and-above buffers versus the regulatory thresholds [ as all ]: CET1 at 13.9%, 584 basis points buffered; Tier 1, 15.5%, 594 basis points buffered; and capital adequacy ratio at 17.6%. Capital generation-to-net profit, very strong, further improved at 532 basis points. And once again, we wanted to share our inflation accounting results. These are based on our calculation. Return on tangible equity, so again the real return on top of inflation, further improved versus last quarter, is in the range of low to mid-teens. And this is corresponding a good improvement, a significant improvement, on a year-over-year and year-to-date basis. And definitely all the numbers are comparable, and we have adjusted the linker valuation accordingly. The impact on the capital ratios will be positive. So given, though, we are already very close to the year-end, we wanted to revise our 2022 guidance, as we had very strong achievements. On the volumes, we now foresee in the range of 65% Turkish lira loan growth. Note that our year-to-date growth stood at 59%. And we will continue to focus on small ticket, so individuals and SMEs. As I mentioned, deleveraging on the foreign currency side sustains with ongoing payments via our customers, so we foresee high-20s reduction. With further improvements [ to expect ], we expect above 7.5% net interest margin for the full year. Fee growth will outpace the inflation through our strength in payments, improving transaction numbers, investment products [ at all single item that you can name ]. And we now foresee in the range of 90% increase in costs with ongoing customer acquisition efforts. And note that we are adjusting the compensation for our employees twice a year, which we will have the last one in the last quarter. We already had it this month actually. And we maintain our cost of risk level below 150 bps. Just to note: This is an extremely conservative provisioning assumption. All incorporated, we increase our return on tangible equity guidance to above 50%. And if inflation accounting will be implemented, that's double digits on top of inflation. Now I am leaving the floor to Gokhan bey for closing remarks. And then we will have your questions. Gokhan bey?

Thank you, Hilal. I believe that, as you have heard, we will ensure the continuation of strong and sustainable revenue performance through small tickets and transaction banking while maintaining our strong fundamentals and also conservative risk appetite, driven by customer-centric approach. I would like to thank to -- all the stakeholders who stand by us with trust and support; to our dedicated employees, especially for this quarter, very strong results, 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 us. And now we can take your questions.

The first question is from the line of Sevim, Mehmet, with JPMorgan.

I'd be very interested to hear more about your quarterly TL deposit growth, which at about 40% was significantly above the system average. You did talk about collective branch effort, but are you able to give more color on how you're able to achieve this really and what segments the growth comes from? And would you also be able to tell us where you would see TL deposit growth in the full year of 2022? And just 2 questions on your new guidance, if I may. One, your TL loan growth guidance implies a slowdown into year-end, which I guess is understandable given the restrictive regulations, but assuming all else equal, would this also be your expectation for the [ first quarter's ] of 2023 as well? And on FX loan growth, what's driving this accelerated shrinkage in FX loans in the second half of the year? Is this simply prescheduled maturities, or is there something else that's driving it? And if it's prescheduled maturities, how should we see this trend in 2023?

Okay, yes. So mainly 3 questions but leading to ALM in general, asset and liability management. For the TL deposit, it's a joint effort and so it's not only one segment, but obviously this was also driven by the central bank's regulations, macroprudential measures, however you call it. That's -- during the presentation, I mentioned that we reached 50% thresholds in total Turkish lira deposits individual and also for the corporate side. And what we're hearing from the market, from -- at least from the ones that have already announced the numbers, they are close to achieving that threshold, but we have achieved it already, so which means that we are a little bit ahead of our competitors in reaching the TL deposit 50% threshold. Obviously it has a cost, Mehmet, because it is marginally -- of course, it is more expensive compared to the [ stock ], but we achieved it. And looking at the pros and cons. The pros side was the costs side, the regulation from the central bank, the commissions that we were going to pay [ of ] the securities that we want to buy. That's why we -- I think we are the leader in terms of conversion, Turkish lira conversion. That's why it was very much widespread, starting from very small individuals, going up to even corporates. This was one thing. On the other hand, also the foreign currency deposit, as you may see from the numbers also, shrank a little bit so that the ratio was met by our bank. This was the first answer. I think, for the TL loan side, obviously we will be slowing down with those rates, and it's 17%, not to be able -- just shying away to buy those 10-year bonds, Turkish lira bonds, at 10%. Anything [ around -- above ] 17% is not good for the bank. It's [ not good ] for the coming years, which bears important risks for the balance sheet of the bank. That's why we will slow down, definitely. And we are lending very short term, normally 3 months, maximum 6 months, not more than that. This is one side. This is for the corporate side -- corporate and commercial side. For the other sides, for the Turkish lira loans side for the consumer: Consumers will grow. There we do not have an issue. As Hilal mentioned earlier, in auto, for example, we took the leadership, which we had to, actually if you ask me. So because this is the bank, this is the group that knows the auto business more than any bank, any group in Turkey, that's why we took the leadership. And I am very proud of it. And so Turkish lira loans consumer growth will continue, but having said that, especially on the mortgage loan side, we are careful. We are careful about not to put additional pressure, additional tension to the balance sheet, as unfortunately we already bought some part of these 10-year bonds having higher maturities in our balance sheet, causing higher-duration gaps. That's why we do not want -- very similar to our competitors, we do not want to lend longer maturities with those rates, with those existing rates. That's why Turkish lira loan will be slowing down. It is early to comment on 2023. We are at the moment of making the budget for next year, but I must say, if those macroprudential measures continue as it is, or even tightening of those circumstances that we are hearing that there is also a possibility to tighten even further for these macroprudential measures, then the appetite on our side will be very limited, starting even for next year, at least for the [ first quarter's ]. So we are looking. This is a transition period. This is what we are seeing. Everything has to again normalize so that we move on with the -- with an environment that the demand, also supply, is somehow balanced. So that's why, TL loans side, if under certain [indiscernible] under these conditions, first quarter will be also low risk appetite from our side. FX. Last one was the FX loan decrease. Yes, this was done intentionally. And this is done -- it has been more than 4 years, almost 5 years, that we have been deleveraging on foreign currency loans side because of -- first, I mean, because of the assets quality; deleveraging on the customer's balance sheet, also to have less exposures on the customer side, on the customer's balance sheet side on the FX exposure side, so which means that we are going to deleverage further. We understand that -- from time to time, we are hearing from the central bank that they do not want those FX loans to decrease, but for the assets quality, for the healthiness of our assets quality, we have to continue with the FX deleveraging. So whenever -- there are redemptions coming in. And we also have customers very much [ willingly ] have their say to pay it, pay their FX debt, back to the banks; and if possible, to borrow in Turkish lira loans but, of course, for short-term maturities. For the longer maturities, unfortunately, it is not possible to do so.

That's very comprehensive and useful. If I may, would you be able to remind us where your front-book TL deposit rates are at the moment?

Mehmet, this is Kursad speaking. Yes, front book, as you know, it is that there is a regulation linked to addition of fixed bond buying. And this week, depending on where you would like to stay in the regulation, it varies from 17%, 18%, to 24%, 25% levels. Therefore, it depends on our optimization efforts. I think this answer will be fine for you.

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