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

Ladies and gentlemen, thank you for standing by. I'm [ Poppy], 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 2022 Results and 2023 guidance. At this time, I would like to turn the conference over to Mr. Gokhan Erun, CEO; Mr. Kursad Keteci, CFO; 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 2022 earnings and 2023 guidance call. Let me first comment on the operating environment. Despite all the challenges, we expect to end the year with a GDP growth of 5%. Budget deficit under control, only 1% to GDP. Current account deficit is expected to be around $50 billion. During the second half of the year, we have experienced a slowdown in the economy. TL-driven economy strategy is continuing. Central Bank is mainly using macroprudential measures to sustain the tightening and execution of the strategy. Global macro environment has more visibility in terms of interest rates and inflation. Therefore, we are observing a better risk appetite against emerging markets. Meanwhile, geopolitical conflicts are continuing. Current TL interest rates in balance between funding and lending is putting pressure, whereas positive global macro may support some normalization efforts needed for Turkish economy. Now I'm moving to Page 2 of our presentation. We posted TRY 52.7 billion net profit last year. Third year in a row, we kept our leadership in terms of ROE versus peers. ROE is at 57% and ROA is at 5.4%. I'd like also to add our inflation accounting, adjusted ROE is around 15%. Regarding our net profit, let me emphasize that there is strong over-cautious provisioning during the fourth quarter, last quarter. Our quarterly cost of risk was at 287 basis points. Pre-provision profit, PPP stood at TRY 78 billion, and PPP to gross loans improved to 14.1%. So some important drivers of the strong performance are as follows: year-over-year improvements in total NIM reached to 593 basis points and our NIM stands at 9.1%. Most importantly, we have achieved 74-basis point increase quarterly despite the challenges, thanks to our ALM capabilities, we mentioned also last quarter. TL loan-to-deposit spread widened 205 basis points annually thanks to exceptional cost of funding management. I'd like to mention also, we are close to achieve regulatory 60% threshold in terms of TL deposits and also by tomorrow, which we'll be earning -- this reported earning tomorrow, we expect to reach 60% threshold. So during the year, we keep focusing on increasing the TL funding through small tickets as well as gaining market share in targeted segments. With our new customer acquisition in our fold, we gained market share on consumer loans, TL individual demand deposit, TL deposit and also deleveraged our foreign currency loss. Moving to next page. We are well equipped to navigate through any uncertainty with very strong fundamentals. In terms of liquidity levels, our foreign currency LCR, FC LCR, is around 600%. Total LCR, 175%, as we speak now. Additional LDR is at the moment, 85%, given slightly lower, equally important, TL LDR is also 104%. FX liquidity is around 3x of our foreign currency dues in the coming 12 months. On capital front, our Tier 1 capital further improved to 16% -- 16.2%, thanks to consistently growing the strong internal capital generation. Now we have buffer more than 660 basis points versus regulatory limits for Tier 1. In terms of asset quality, we have continued our conservative provisioning despite limited NPL inflows. Throughout the year our NPL coverage is at 172%, as a result of our total loan coverage realized at 5.9%, and it is the highest level among peers announced so far. So now I'm leaving the floor to Hilal. She will give details behind our strong numbers.

Thank you very much, Gokhan bey. Good afternoon and thank you all for joining our call this afternoon. So I will start with Page 4. At Yapi Kredi, our strength in profitability sustained with solidified balance sheet. And again, this quarter, we have compared our performance and fundamentals versus to that of our peers that have already announced their results. So as of 2022, we have the lowest Turkish lira loan-to-deposit ratio, and this is further improved, standing at 104%. With our further cautious approach, in 4Q, as Gokhan bey mentioned on provisions, our loan loss coverage ratio increased to 5.9%, and this is the highest level among peers. Our Tier 1 ratio is at 16.2%. The buffer is 668 basis points, and this is the second highest level among peers and very, very healthy. Altogether, for the 5 consecutive periods, we have the highest return on tangible equity at 57% as of year-end 2022. Our interest margin reached to 9.1%, thanks to our ongoing achievements in our strategies, such as small ticket focus, best-in-class and agile asset and liability management. This is also the highest level among our peers. Also showing our strength in fee generation as Yapi Kredi, we have the best-in-class and the highest fee coverage of OpEx at 67%. Now I'm moving to Page 5, looking at our market share gains, mainly in small ticket lucrative products which is empowering our profitability and this is our main strategy and showing our achievements. In consumer loans, since 2020, we gained 210 basis points market share among private banks, we reached to 18.2%. General purpose loans was another 155 basis points gain, now our market share is at 18%. Car loans with 11-percentage point market share and we have the market share with 36% market share. On the funding side, Turkish lira customer deposit market share ramped up by 174 bps and now it's at 16.2%. And as a part of our strategy and ensuring the sustainability of this performance, the main driver is individual. Turkish lira individual demand deposit market share went up by a significant 3.4 percentage points. On the FX loans, you know that we are telling this story, and we are intentionally deleveraging and this trend continues in the fourth quarter as well. This is beyond private banks. And our market share came down 3 percentage points versus 2020, we are at 13.6%. And going forward, with our ongoing strength in customer acquisition, we will continue to grow our market share in selective lucrative products. Looking at the lending performance. Now I'm on Page 6. Our Turkish lira loans increased 84% in 2022, and this is above our guidance of around 65% increase. And as I mentioned, foreign currency loans, the deleveraging continues in the quarter, coming down 7% quarterly and 24% (sic) [ 25% ] year-over-year, which is in line with our guidance. Our bank-only foreign currency loans now stands at a limited $8.8 billion. Looking at the drivers of the strong Turkish lira loan growth, consumer loans went up by 58% to a 64% increase in general purpose loans. All loans went up 4x. Commercial installment loans went up 69% year-over-year. And all in all, with this performance, retail loan share in total, this includes SMEs reached 59% as of 2022. On the following slide, we are on Page 7. Our strong customer franchise further strengthens and will continue to support the core funding source, deposits, showing another 28% (sic) [ 29% ] significant quarterly increase, Turkish deposits went up 2.7x, in the year when demand deposits up by [ 2.4x ]. With ongoing deposit [ lirazation ] of efforts, foreign currency deposits came down 19% year-over-year. Share of demand deposits improved 2 percentage points. This is in a single quarter and now stands at 41%. On the Turkish lira side, the demand deposit side, we continue to increase the share, 2 percentage points improvement, quarterly gain at 25%. And foreign currency share in demand raised to 60%. This is a 7 percentage points increase in a single quarter. This performance is definitely better than the private banks' performance, and we gained 124 basis points market share in demand deposits, and we now stood at 15.6%. Turkish lira commercial deposit increase was also very strong, more than doubled versus last year. And despite this outstanding performance also in company deposits, the share of sticky retail deposits went up by 2 percentage points year-over-year, and now we are 68% of total. I also want to reiterate that -- and also Gokhan Bey mentioned, but I also want to emphasize it again. Turkish lira deposits in total on both individual and companies, we are very, very close to 60%. In 2022, we have gained a significant number of net new customers, around 3 million, and our strong deposit performance also shows the trust of our customers in Yapi Kredi. Now I'm on Page 8, our revenues. Our revenues reached TRY 101 billion and revenues to interest earning assets doubled at 11.4%. The strong performance was driven by core revenues and definitely timely actions taken by our treasury department and the trading line is also very supportive. In the quarter, normalized for the linker income, our net interest margin widened 74 basis points, bringing our annual net interest margin to 9.1%. This is an impressive 593 basis points widening. We had 180-basis point support from core NIM, 444 basis points support from securities. And please note that the negative impact arising from the regulatory changes stood at 55 basis points. Equally important, our Turkish lira time deposit costs improved 56 basis points. This is with ongoing deposit growth and despite the intensified competition. Our Turkish lira loan deposit spread came down a limited 67 basis points quarterly. And this performance is significantly better versus peers, actually 100 bps better on average. Looking at fees, our stellar fee performance, net fees increased 96% year-over-year with a 21% quarterly increase, which is above our guidance. Money transfer fees more than doubled; fee income through investment products more than doubled; bancassurance went up 46%; payments system fees also more than doubled; and lending-related fees also supported with an 81% year-over-year increase, so it's all across the board. We are investing on digital solutions with the intention of providing and sustaining the best-in-class, full-service model. And I stated, the new customer acquisition is also very supportive for our fee platforms. Moving to OpEx on Page 10. Our cost increase stood at 117% in the year. However, please note, we have short-ordered some expenses in 4Q and the impact on the growth is around 12 percentage points. And as we have mentioned at the beginning of the year, with a very strong revenue generation, alongside with our daily running bank business, we are heavily investing for the future, our customers and our people, so business growth and human capital. Our HR costs increased and above inflation level at 111%, and our business growth-related cost increase was at 210%. Looking at the running costs, they're under control, 80% increase. And looking at this performance, our adjusted ratio stood at 150% as of 2022. Looking at asset quality, quarterly NPL inflows were TRY 3.2 billion, and this is mainly driven by a couple of commercial files that we had already provisioned previously. Collections on the other hand improved further at TRY 1.2 billion. And please note that all these inflows and collections exclude NPL sales and write-offs. Our NPL ratio stood at 3.4% as of year-end, and we further increased the NPL coverage ratio to 76%. Stage II loans came down at 13% of our total loans, with more than 19% coverage, while Stage I coverage, it was very strong while we also increased it further in the quarter at 0.9%, and this shows our conservative approach in the quarter. All incorporated total loan coverage ratio stood at 5.9% and once again, this is the highest level among peers. On consumer and credit cards, quarterly additions were at similar levels through the year. SME net inflows continue to be negligible. Net inflows on corporate and commercial loans were still limited. And once again, these classifications were through already provisioned sides. We continued our prudence in provisioning. And as we have always mentioned, we did some precautionary provisions in the last quarter. And our cost of risk, excluding the currency impact, we stood at 147 basis points as of 2022. 4Q it's 287 basis points. So I think this shows the very high level. And our full year cost of risk is in line with our guidance. Support from collections in the year was at 55 basis points. And not that -- it's just I always trying to mention, the currency impact is at 87 basis points and is fully hedged. Moving to solvency. And we are on Page 12. Our capital ratios already improved, further improved in the quarter. And the lower threshold buffer is at, capital adequacy ratio is 615 basis points. And looking at CET1, we are at 14.7%, 668 bps buffer, Tier 1, 16.2% against 668 basis points buffer and our capital ratio is at 18.1%. So capital generation to net profit this year, again, very strong, and is further improved at 673 basis points. And please note that all figures I mentioned, excluding the regulatory forbearance impact. So moving to the next page. We are on Page 13. I'm very excited about this topic. Actually our new program, step. Before going into the details, I would also like to mention our latest important achievements. As a result of our intensive efforts, we have now become carbon neutral both Scope 1 and Scope 2 emissions. This is an improvement important success, but we will continue to work to meet our targets for Scope 3. We know that our responsibility on sustainability is not only limited to our banking operations. We are aware of the impact that we can create together with our stakeholders. Accordingly, the new program, step, Sustainable Preference Program, allows us to create awareness and transform our customers' behavior towards sustainability. For every sustainable life step, we are appointing step points through our app and our customers can donate these points to nongovernmental organizations, meaning we are creating a sustainable Yapi Kredi. At the moment we launched this, and we are trying to create a sustainable life cycle, contributing to environment, climate, and education. So back to numbers. So on Page 14, this is a summary of 2022 realization. I tried to go through every one of them during the presentation. But in summary, our return on tangible equity of 57% and inflation accounting return of tangible equity around 15% was above our guidance. Now I'll leave the floor to Gokhan bey for our 2023 guidance and closing remarks, and we will be taking your questions afterwards.

Thank you, Hilal. So this year is an election year. So therefore, we ran a couple of scenarios. Our guidance is summarizing an average of these scenarios in case of significant macro changes, then we may need to, of course, to revise our guidance as well. So our 2023 guidance for consolidated financials are, in terms of volumes, TL lending will be lower than 40%. We foresee further contraction in FX lending. In terms of core revenues, we expect NIM to be above 5%, thanks to our enhanced ALM management. Contraction is due to currency imbalance in Turkish lira rates, unfortunately, as well as also lower contribution from CPI linkers. We had a very strong increase in fees last year, diversification efforts, increase in number of transactions. And definitely, our leadership in payments system supported this performance. This year, also, we target to have above 60%, 6-0, growth in terms of fees with ongoing execution of our strategy. So in terms of cost, we'd like to keep investing on customer acquisition activities as well as keep improving our employees' living standards -- conditions. We will continue to keep the running costs under control and sustain cost savings in this area. As a result of this, we expect to have lower than 100% growth in total costs. On asset quality side, as mentioned before, we foresee the cost of running also to be around 100% because we have quite a buffer there from previous years. Overall, these performances will result to keep ROE at high 20s. More importantly, inflation accounting adjusted, ROE is targeted to be mid- to low-teen levels. I'd like to take this occasion to extend my thanks to our stakeholders who stand by with us and our dedicated employees who contributed to the achievements of our bank. It has been essentially since Turkish Republic is born, so in this memorable year, our bank and our employees will keep committed to our beloved country. On behalf of the whole team, I'd like to thank you all for joining our call. And now we can take your questions.

The first question comes from the line of Rozantsev Konstantin, JPMorgan.

Yes. I had 3 questions that I wanted to ask. The first one is about the lend quality. How sensitive do you see the lend quality to higher rates, assuming rates get hiked at some point and probably some protracted period of slow growth in the economy? And have you run any stress tests? And what do these suggest with respect to -- under what conditions do you see a significant market pressure on the lending policy for the bank? The second question is about the FX protected deposit scheme. Do you -- is there a risk in your minds that we may start seeing some increased outflows from that scheme in the near term or in your view, that's not a risk. That's not something to be worried about. And the last question is about the perpetual bonds in dollars that you have. It has a call option in January 2024. So what should be our expectation about the possibility of call of that bond?

Thank you, Konstantin. So first question, stress test, of course, we run it daily because it's a part of the risk management. Yes, there is a possibility that you might see higher rates. This is more on the central bank side for the second half of the year. But if you are talking about interest rates, at the moment, we are seeing already higher interest rates for the cost of funding side, especially for the deposit -- TL deposit side. So just to give you an idea of the market, some new inflows, these are not the FX protected ones, but the ones that are [indiscernible] deposit. On the markets, we are hearing 25%. Even marginally, we are hearing some banks paying 30% -- 31% to be able to reach this 60% threshold, which is not the case at least for our side, but 25% is at the moment, easily achievable. So we are seeing it already. The impact is already started to be seen on our balance sheet. For the -- and because of the liquidity or the capital issues, we do not see any threat even stress wise. So second question is the FX-protected deposit. We do not see any outflow at least from our side, from Yapi Kredi side, an outflow from the FX-protected deposits. And as the central bank lifted also the threshold, the cap on the FX-protected side TL portion, TL interest rate of it. So we do not see an outflow. On the contrary, it is helping us to -- as Hilal mentioned earlier, to be able to reach a 60% threshold in TL conversion side. And this FX-protected deposit is very much part of it. Third question was about the Tier 1, the perpetual ones. So of course, we have some time, we have a year to go in front of us. But the basic idea is whenever we are able to, we would like to call it. So because the coupon that we have, that is bearing quite a burden for us. So it is -- our first priority would be definitely to call it back. But we have still a year in front of us.

Yes, understood. That's extremely useful. And just if I could please ask for some additional color on the first question on the lend quality. So under what conditions -- there is an expectation that there should be some austerity period after the elections, after the policies revert to orthodoxy at some point soon or later. So under what conditions do you expect to see like a more prominent NPL problem for the bank. So where would rates need to go? For how long do they need to stay at those levels? For how long does the economy need to be in a period of like closed, next to 0, protracted...

Okay. Konstantin. Actually -- I get it. So you have basically 2 questions. First is linked to macro. And then second is specifically linked to the numbers maybe. The first about macro. So of course, this is one of the scenarios that there might be a rate hike further on. This is a part of -- this might be part of normalization efforts. That's -- during -- at the time we are in a transition phase. So it might be the case, one of the scenarios there might see a normalization and normalization might lead to normalization of the interest rates in general, not only for the deposit side. Because for the deposit side, it is there already. There is no cap, so it is free. And there -- as I told you, it goes up to 30%. And it seems that this 30% deposit that is the maximum average, let's say, new inflows, 20%, 20% plus , 25%. This is holding, I think, the Turkish lira against dollar. So one should not expect to have -- to see higher interest rates more than this. I think those levels are holding on. Just to bear in mind that also the inflation is going down. And by the end of the year, we might be seeing something between 30%, 40%, if it is also 40%. This kind of environments with those interest rates, it can halt the depreciation, devaluation of Turkish lira. This is my personal opinion. Second part, maybe Kursad?

Sure, Gokhan bey. And regarding this NPL evolution, asset quality deterioration, and Konstantin, currently, we are not seeing a deterioration in terms of asset quality. First, we should consider that big-ticket lending is not a situation in lending environment. Therefore, we don't need to expect a big ticket credit risk in coming future because the market is mainly going on retail lending. And in terms of retail lending, there is a huge liquidity and before the election, considering the budget deficit of the government, there is still room to put additional liquidity in the market, also at the minimum wage increases. Therefore, the possible asset quality deterioration doesn't seem to be in this year. Even it comes in next years since it's a widespread risk, it is easily manageable for all the banking system.

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

Could I ask you about your cost growth target for 2023? And you say that you've sort of pre-funded a part of 2023's costs in Q4. There's a slide talking about, I think, sort of 12% of the rise in '22 is related to '23 costs. And yet you're giving us guidance of somewhat below 100% when inflation clearly may start the year a bit below that or a fair amount below that and is going down. So can you sort of put a little bit more flesh on why you've given that sort of less than 100%. Is it just such a wide figure that you'll do a lot better than that? Or are there known costs in terms of your investments and so on that you feel that you need to do, which is going to keep cost growth high. It just seems, given what you said about what you did in year-end that, that's a relatively high amount? So a little bit more color on that would be helpful. And I just wondered what your CPI linker assumption was in the NIM forecast for 2023.

Alan, this is Kursad speaking. For cost growth target, we guided below 100%. And first of all, there is a pass-through impact coming from high inflationary environment in last year, which is impacting 2023. Therefore, I believe comparing the growth with the current inflation is not an ideal comparison, and there's a pass-through impact. Some of the pass-through impacts we have provisioned in last year, as well, as you know, there is an early retirement kind of additional HR things going to come. And that kind of things we provisioned. But all in all, for the last 4, 5 years, we have been guiding the market. In terms of costs, we will always keep growing regarding the business growth. Business growth, we mean a customer acquisition, investments, technology investments as well as additional further digitalization, we will keep growing even higher than what we guided, where we are applying efficiency is on our running cost. And these are the main cost-saving areas. As Hilal mentioned during the presentation, HR cost is also our priority, which has never been a cost-saving area for our strategy.

So what were the prefunded costs in Q4?

Prefunded cost, as I said, there's some provisioning for possible costs regarding the investments, IT investments and as well as this early retirement additional cost that may happen in '23. And if...

So if you had...

If I may...

Sorry, but if you haven't -- okay, go on.

For your second question, CPI linker assumption, we prefer to start the year on a quarterly basis for CPI assumption, linker assumption, in the first quarter, it's going to be somewhere around 40% level CPI linker's valuation.

At this time, there are no further audio questions, so we will proceed with the written webcast questions. Management?