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

Ladies and gentlemen, thank you for standing by. I am Mina, 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 2023 financial results and live webcast. At this time, I would like to turn the conference over to Mr. Gokhan Erun, CEO; Mr. Kursad Keteci, CSO; and Mrs. 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. Before going on the performance of the bank, I'll share with you some information about the operating environment. Now the election is behind us and the gradual normalization in the macro environment started with the appointment of the new Fin Min, Mehmet Simsek and the governors. In the past 2 monetary policy meetings that were held after the election, the general -- the Central Bank hiked the rates by 900 basis points to 17.5% on top. We are witnessing a gradual and small release in terms of macro, and also micro prudential measures. From a budget deficit perspective, we foresee some actions to increase revenue through tax and also some lease hikes. As a global backdrop, also started to support as Fed likely to stop the rate hike cycle in the upcoming months, even next month. Inflation, on the other hand, is likely to remain high through the rest of the year. Also, there is a currency impact, tax increases and also deterioration in, unfortunately, pricing behavior. With all the developments and actions taken so far, the pressure on Turkish lira spreads started to ease, and we are witnessing an impressive -- an improvement from the bottom in June going on, and we foresee this trend to continue in the rest of the year. Now on Page 2 on the presentation. Page 2, we posted TRY 24.1 billion net profit first half, corresponding to 26% year-on-year increase. Normalized with the linker income, our net profit increased 4% quarter-on-quarter. PPP, pre-provision profit, increased 12% quarter-on-quarter. Our RoTE is at or close to 37%, 36.8% to be exact. Our RoA, return on asset, at 3.6%. I would also like to add our inflation accounting adjusted, ROE, is in line with our full year guidance at mid-to low teens. Some important drivers of the performance. During the quarter, we witnessed an intensified competition in Turkish deposits alongside with ongoing regulatory pressures on lending rates, caps, on the lending rates or limitations. However, thanks to our successful ALM management. We managed to have just 66 basis point contraction in Turkish lira loan deposit spread quarterly. So moreover, supported by the foreign currency balance sheet, FX balance sheet, total loan-to-deposit spreads improved to 5.4%, further supporting the bottom line. Our NIM is at 4.3%. When we -- when the CPI reading for our linker portfolio is at 40%. So net fees and commissions more than doubled year-on-year and increased the hefty 28% quarter-on-quarter, thanks to the strength in lending related and also money transfer fees, as well as strong contribution from all our subgroups. On top of a robust core revenue performance, our trading income was very supportive in the quarter, thanks to timely actions taken by our treasury team. Ongoing strength in NPL collections continued with an additional TRY 1.4 billion recovery in the quarter, supporting cost of risk by 253 basis points in the first half. As a result, our cumulative cost of risk, COR, stands at 33 basis points. So I'm moving to Page 3. In the second quarter, our main focus was further strengthening of the fundamentals via profitable Turkish lira lending and solidifying our sticky deposits base. In terms of liquidity level, our foreign currency LCR, around 540% and total above 200% as we speak. Additionally, our LDR improved 5 percentage points -- 5% in a single quarter at 76% and TL LDR at 87%. So this is a 4 percentage point improvement also quarter-on-quarter. Capital front, very solid as well. Tier 1 capital further improved in the quarter, thanks to consistently strong internal capital generation profit. Tier 1 ratio now stands at 15%, and we have more than 540 basis point buffer versus regulatory limit for Tier 1. So liquidity, capital and now asset quality. Total loan loss coverage stands at 5.4%. The slight decrease in total loan coverage is mainly due to fully covered TRY 1.8 billion worth of NPL sales in the quarter. And that's why the sale proceeds were around 30%, which also shows how much well provisioned or prudentially we are covering our NPL portfolio. Now I'm leaving the floor to Hilal, and she will give you further details.

Thank you very much, Gokhan bey. Good afternoon, and I thank you all for joining our call today. On Page 4, in the first half of the year, we had a profitability-focused Turkish lira growth with ongoing deleveraging in foreign currency. Turkish lira loans increased 6% on a quarter-on-quarter basis, reaching to 16% year-to-date increase. Our Turkish lira loan yield, which was top of the range in the first quarter, widened further in the second quarter as a result of our lucrative growth, which will continue in the rest of the year. Foreign currency loan deleveraging continues in the quarter, coming down by 6% on a quarter-on-quarter basis and 7% year-to-date. And our bank-only foreign currency loans now stands at a limited $8 billion. In line with our small ticket focus, retail loan share in total further increased in the quarter, reaching to 64%, and this is on an FX adjusted term. On the funding side, we are on Page 5. Our persistent focus on small tickets continue supporting our sticky deposits base, and showing another 13% quarterly increase. Turkish deposits went up by 42% on a year-to-date basis, increasing 3 percentage points in a single quarter and 5 percentage points year-to-date. Retail deposit share in total reached 73% in total. Our Turkish lira deposit share in total has been consistently above 60% since mid-February this year. And the ease in the regulation alongside with our high levels with the agile ALM management, these all will continue to provide us further room to manage cost of funding better than setting the rest of the year. The share of demand deposits in total increased 63 basis points year-to-date, reaching to 42% in first half. Turkish lira demand deposits went up 13% year-to-date and is now at TRY 105 billion. Our foreign currency customer deposits in dollar terms came down by 8% year-to-date, while demand deposits were up by 8%. As a result, the share of demand deposits, at foreign currency demand deposits in total increased to 71% in first half. On Turkish lira individual deposits, we gained 96 basis points market share among priced banks year-to-date. And equally important, individual demand deposit market share gain was 47 basis points. Moving to Page 6. Thanks to our successful and agile Asset and liability management. Turkish lira loan deposit spread came down a limited 66 basis points quarter-on-quarter despite the intensified competition on deposits and pressure on lending rates due to the regulations. We managed to achieve the Turkish lira spread cost by 1.1%. And equally important with support from foreign currency, total loan deposit spread widened 55 basis points on a quarterly basis to 5.4%. Accordingly, normalized for the linker income, our revenues increased 14% and reached to TRY 27.9 billion in second Q. Revenues to interest earning assets increased to 9%. Cumulative revenues down 49% year-over-year to TRY 52 billion. And the strong performance, both in first half and second quarter, was driven by the core revenues, but also trading line, and this is thanks to success of our treasury department. Please note that we have revised down our CPI estimates for the valuation of the linkers to 40% from 45% in first quarter. And in the quarter, normalized for the linker income, our net interest margin came down 154 basis points to 3.65% and 476 basis points over 2022 to 4.34%. In the quarter, core net interest margin support was 22 basis points along the regulatory impact was of a negative 25 basis points on the NIM. And as Gokhan bey stressed out, our balance sheet is the best position for the normalization. Accordingly, we foresee our net interest margin to improve in the rest of the year, and we will meet our guidance of above or equal to 5% by the end of the year. Moving to the next page. We had a stellar fee performance and it's once again across the board. Net fees more than doubled year-over-year with an additional 28% quarterly increase, and fees to average interest-earning assets improved further to 2.2% from 1.7% as of 2022. Money transfer fees up by 136%, with ongoing certain number of transactions. Fee income to investment products, again, doubled. Bank issuance up 82% year-over-year. Payment fees up 90%, along with lending-related fees increasing as much as 128% all across the board. Our best-in-class digital full service model and new customer acquisitions are also supporting our fee performance. And thanks to our strong fee performance so far, which we will continue through the year. We are revising up our fee increase guidance to above 90% from above 60%. Moving to OpEx. We are on Page 8. Our year-over-year cost increase stood at 150% in first half '23, mainly due to the inflation pass through impact earthquake related costs and our ongoing business growth and capital investments. Main driver of increase is again business growth related costs, increasing 317% year-over-year. Our HR cost increase was at 102%, whereas the running costs were up a controlled 76% year-over-year. Looking at the quarterly average increase versus 2022, OpEx went up by 70%. Our efficiency KPIs are best-in-class. Fees to OpEx further improved at 66%, and cost to average assets stable at 3%. We are revising our cost increase guidance to below 120% from below 100% given the inflation pass through impact and earthquake-related costs. Looking at our set policy, we are on Page 9. Our stock collection performance continues to support our cost of risk. Collections in the first half were as high as TRY 2.9 billion, and the positive support to the cost of risk is as much as 253 basis points. In the quarter, we classified a [ big ticket filed as ] NPL, which we had previously provisioned and wages. On consumer and credit cards, there's a limited increase in the inflow, but still were controlled and low at TRY 1.5 billion of first half '23. If any net inflow continues to be negligible at TRY 64 million, and all-in corporate quarterly cost of risk stood at 30 basis points and on a cumulative basis at 33 basis points. The decline in cost of risk from last year is mainly due to [Technical Difficulty] provisions book in general and [indiscernible] provisions that we set aside in the previous years. In the quarter, we sold TRY 1.8 billion worth of NPLs, which was fully covered with a price around 30%, showing our conservative provisioning approach. Adjusted for the NPL sales, we maintained our total loan coverage level at 5.7% in the quarter. With a very conservative approach, we are maintaining our full year cost of risk guidance at around 100 basis points levels, although we do not foresee any material increase in net inflows. Moving to Page 9 (sic) [ Page 10 ], and this is showing our very comfortable solvency. Looking at the capital levels, we have 500 basis points above buffers versus the regulatory thresholds at all ratios. And both our Tier 1 and capital equity ratio improved quarter-on-quarter. The macro environment had a 116 basis points negative impact on capital adequacy ratio, while the support from profit is as high as 311 basis points, which is significantly above the business growth impact of 134 basis points. In terms of sensitivities, the impact -- it is limited, as you can see. AOE 10% depreciation has 77 bps impact on Tier 1 and 32 basis points impact on capital adequacy ratio, and these are [ capital payable ] calculations. The impact of 100 basis points [ interest rate ] in the Turkish lira yield curve is also limited at 11 basis points. And also please note that both figures are not linear. On Page 11, you can see a summary of our guidance revision, which are quite to mention through the presentation. With advanced level equipped, we are now revising our return on tangible equity guidance to above 30% from high-20%, while maintaining inflation accounting RoTE guidance at mid- to low teens level. Now I'm leaving the floor to Gokhan bey for closing remarks, and then we will be taking your questions. Gokhan bey?

Thank you, Hilal. So I'd like to take this occasion to extend my thanks as always to our stakeholders who stand by us with trust and support and also to our dedicated employees who contributed to the achievements of our bank. And on behalf of the 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 Mohsin Waleed with Goldman Sachs.

Two quick questions from my side, please. So first on the net interest margin. It would be helpful if you could talk about when you expect normalization on an overall level. So I'm thinking here, when do you expect net interest margin to drop, whether you think you have already somewhere in July, August? Or would you expect some more pressure? And if you could talk about the drivers [ a little bit ], how you're seeing the trends into the third quarter so far? I would imagine that the TL loan-to-deposits that still continue to contract, whereas you've got a good momentum on the FX side. So your comments on that front will be very helpful on the net interest margin trajectory. Secondly, I mean, on the cost of risk side, as you alluded to, you have significant buffers on the NPL side. Your credit losses have been well contained. Your guidance again is unchanged, which seems mainly reflecting prudence. However, if you kind of think about cost of risk for credit losses into the next 6 to 12 months, how do you see that trending? Are you seeing any early signs of the rebound in rates, the inflation trajectory starting to hurt asset quality at this moment. These comments will be very helpful.

Hi, Waleed. So first, about the net interest margin. I think we have seen the worst in July in terms of net interest margin, it bottomed up. There are good signs that normalization efforts is helping the balance sheet. One side is the risk premium of Turkey is dropping. And because of this, also normalization efforts on the Central Bank, they are increasing their rates. So there is a convergence of the Central Bank reference rate and the deposit rates as we expect normally. In the past, we have seen because of the regulatory pressures as the Central Bank rate was standing at 8.5%. Because of the regulatory pressures, basically, the regulations, we were heavily affected. And there has been, as we said, and fierce competition in the Turkish lira. Deposit side to match the ratios, Turkish lira deposit ratios so that we did not buy those low interest rate long term securities, Turkish lira securities or less amount compared to our competitors. So in that sense, I think normalization, although baby steps, but it's continuing, which means that in terms of Turkish lira cost of deposits, it's going down, so I must say. This is the good thing. On the other hand, as the Central Bank is hiking the rates, so which means that the caps on the Turkish lira loans also increasing, which gives us an upside to balance off loan-to-deposit spreads. So of course, this will take some time, but it's going in the right direction. This is the first thing. On the foreign currency net interest margins, at least for the foreign currency balance sheet. We do not see any sign of the cost of deposits going up. So we have enough liquidity in Turkey even as we speak. And that's why the time deposit is that we have in terms of amount is very much limited. The demand deposit over -- the FX demand deposit is highly appreciated definitely and helping our balance sheet in terms of net interest margin in general. This is the good news for you. Second is the asset quality, the NPL inflow, the cost of risk. Yes, we are -- as we also mentioned during the presentation, cost of risk. In terms of cost of risk, we are trying to be very conservative, very prudent. Also, the recent sale of the NPL portfolio showed us that how much we've been prudent as we got 30% out of this fully provisioned portfolio. This is a good sign. In terms of future, whether we are seeing any NPL inflow even in the last 1 or 2 weeks, there is no something that alerts us or keeps us awake during the night. But there will be a slowdown just to keep in mind. And this is also -- I think this view is also reflected in our guidance of 100 basis points, less than or around 100 basis point asset quality cost of risk. So there will be a slowdown in the economy. This is what we are seeing. So -- and coupled with that, there might be an increase in net NPL inflow. But we do not expect any huge inflows. No big ticket items coming in. Actually, on the opposite, we might be seeing some of the recoveries as the asset prices go up. And that's why, especially the ones that are well collateralized, we might be seeing some reversals from our provisions. This is how we are seeing. But to be on the safe side, we are still keeping on the asset quality total cost of risk around 100 basis points.

Next question comes from the line of Rozantsev Konstantin with JPMorgan.

I had 2 questions that I wanted to ask. The first one, you mentioned early in the call that you observed that Turkish lira deposit rates are now falling. So could you please comment why is this happening? Do you observe that there has been some easing in this regulation, and so competition for lira deposits is not as acute as it has been. So why do we see this trend? And at a high level, could you please maybe share the view? So what's Turkish lira deposit rates do you perfectly market at the moment for FX-protected accounts and for the term lira deposits outside of the scheme? And where do you see this trending in the coming periods? That's the first question. The second question. So from the data and from some qualitative comments in the past, I understand that there has been some evidence of FX cash leaving the banking system before the elections. But this trend has reversed. And conversely, after elections, things have been seeing some inflows of FX cash from retail. Have you observed the same trends on your side even moderate? And could you please rationalize why has this been happening before industry elections?

Thank you, Konstantin. First question, actually, you asked 2 questions, 1A, 1B. I think first, the TL deposit easening. Cost of funding easening. Yes, it is easing. In terms of regulation, there has been some improvement in favor of the banks. For example, the 60% ratio in terms of the Central Bank is -- was pushing us towards this 60% Turkish lira deposit balance sheet -- on the balance sheet and 40% dollar deposits and even more pushing it up to 70% levels. That has changed, as I mentioned, small steps, but down from 60% to 57%. This helped the TL deposit competition to ease a little bit. Those are the regulations that are helping us. Also, lots of technical details. But conversion ratios, et cetera, in the past that was pushing the Turkish lira deposits, even touching close to 50% during the second quarter. Although we did not quote those levels, but in terms of markets, we have seen that. We heard those quotations. Now it is easening. So this is the first A answer for you. Second, I think 1B is the -- where we are at the moment. Pricing the Turkish lira deposits below 30% -- below 30%, which means this is the remarks that we are quoting. So which is at the maximum, at the margin level from 40% plus levels, now below 30% at the moment. So this is happening, and this is helping definitely in terms of net interest margin. And this has to be -- actually, if you ask us, there's the normal way. So if you buy something at TRY 10 and we should be able to sell it at least TRY 13, TRY 14 rather than buying it TRY 10 and selling it at TRY 7, and banking should not be a loss-making business anyhow. So this is the first question -- answer to your first question. Second question was the FX, cash reversal, cash outflow from the system. Yes, we have seen that before the election, Konstantin, for some -- for a few weeks, we might say accelerated in the last 1 or 2 weeks, but it is totally reversed. And every day, as we were talking actually a few minutes ago, I was looking also at the daily reports from the bank and still it continues. So the reversal, the cash inflow is continuing to come in, to put in the system. There are several reasons. One is definitely the tourism sectors. At the moment, we are seeing it, and we are feeling a strong tourism sector income. This also includes the cash portion from the tourists as well. So this was the first thing. And most probably the second thing from the local retail customers. After the election, as we -- the risks are over and we see -- we have more clarity and more rational system is continuing. I think this is also helping to those cash, FX cash coming to the system. I think it's a sign of the strength of -- it shows that how much the locals are believing in the strong Turkish banking system in general.

Okay. That's extremely useful and what I needed to know. Just a quick clarification on the second question. Before the elections, you mentioned you still observed some outflows of FX cash. What's contributed to that? What factors contributed to those moderate outflows before election?

I think I answered that already. So a few weeks we have seen that. And after the election, it reversed.

The next question comes from the line of Sevim Mehmet with JPMorgan.

I have just 2 follow-up questions, please. One on the trading income, which was very strong this quarter. And I understand FX volatility played a visible role in that. But were there any parts that are more sustainable? And please, could you give us your thoughts on how much of the trading income would be sustainable at least for the next few quarters and where you'd see this line? And my second question is on capital, more specifically on RWA density, which seems to have come down quite significantly this quarter. You do mentioned in the presentation some optimization measures, but could you please walk us through the drivers of that again and guide us on how to think about RWA growth going forward?

Thank you for 2 good questions, I think, Mehmet. One is the trading income. I think those levels, I'm not sure whether we'll be seeing it because they're -- the most important part was coming, as you well mentioned, is coming from the volatility, FX volatility. And with the customer flow, we enjoyed this strong FX income, trading income. The volatility came down nowadays. So that's why we should not be expecting high FX income as much as this FX trading income in the coming years. Of course, the flow is there. So in terms of customer numbers, if you look at the last 4, 5 years, what we have achieved, we almost by the end of the year, hopefully, will be almost doubling our number of customers in the last 4, 5 years, which means that the inflow is there already and we are enjoying it. But the higher margins out of this FX volatility, I do not expect to see further. But on the other hand, definitely, it's not only limited to FX inflow, but also some trading activity on the securities as well. So as the market will be more balanced and rational with the words of the Finance Minister, Mehmet Simsek, more -- if the markets get more rational, which means that there will be more opportunity for our treasury teams so that they will be making more money. So the liquidity will be coming back. If you look at the liquidity on the Turkish lira securities at the moment, that market, which is very limited. So that will be increasing. Hopefully, we will be seeing a better appetite from the fund investors into Turkish lira fixed income. And if this is the case, definitely, I'm sure that we'll be making more money out of the Turkish lira fixed income side as well. So this is the first part. We have high hopes for that. So for that, the macro prudential measures will be smoothened or easening on the macro prudential measures -- back to rationale days. So this is the first thing. Second thing, the capital, yes, especially through the end of the second quarter, as I mentioned, borrowing or cost of time deposit was for the marginal amount -- for the margin was above 40%. So borrowing at 40% or more and lending because of the regulations, less than 14%, 15%, having a marginal of 25%, 30% did not make any sense to us. Even with the flow, whatever you do with the cross-sell, et cetera, you cannot compensate it. That's why our decision was not to lose definitely the -- our franchise, the customer franchise, but to be very careful what we are doing or in terms of lending. That's why the RWA, as my team mentioned during the presentation, we've been very careful, and it has been a deleveraging process for Yapi Kredi during the second quarter, especially in May and June. So this has been the case. But now we have more clarity, more visibility. And although small steps, but we are seeing that the -- at least on the lending side, we have better rates in terms of deposit funding, we have better rates, at least we do not make any losses. And we have hopes that with the cross-sell, et cetera, we can make money out of that. So here we can leverage again our franchise, our field, our customer base as we can grow. So this was the answer for the RWA deleveraging process for the second quarter.

Ladies and gentlemen, there are no further audio questions at this time. I will now pass the floor over to management for any written questions.