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

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the Yapi Kredi conference call and live webcast to present and discuss the Yapi Kredi 9 Months 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, 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 Q3 earnings call. This weekend, it will be a century since the great founder of our nation, Mustafa Kemal Atatürk, declared the establishment of the Republic of Turkey. I would like to take this occasion to celebrate one of the most significant milestones in our nation's history. In this deeply important year for Turkey, I'm proud to announce our new initiation Snowball for the Future. At Yapi Kredi, we aim to support next generation through creating an awareness on the importance of preschool education. This will be another gift by our franchise with the motto of stronger future comes with stronger generations. Hilal will provide further details during the presentation. Before going into our performance, I'll share with you some information about the operating environment. Turkey is in the gradual normalization process through actions both in fiscal and monetary side. In the past, for monthly policy meetings, committees, the Central Bank hiked the rates by 21.5 percentage points to 30%. As central banks also signal, we believe that further rates hikes might follow. The rate is targeted to reach ex-ante positive real interest rate. Alongside with the monetary policy, the tightening sustains with some macro and also micro prudential measures in order to shift the expenditure-driven growth to a value-added production-driven growth. Looking at the budget deficit perspective, it is expected to have a budget deficit above 6% of GDP by the end of the year. inflation, on the other hand, remains elevated and likely to continue to be high for a while. It will be crucial to maintain the tightening measures of those. Most importantly, there are also measures to reduce the FX protected deposit scheme as needed. With all these gradual normalization steps, we are observing high rates and high inflation period, which is positively impacting the margin. On the contrary, measures related to exiting the FX protected deposit scheme has negative impact on the cost of funding. thus also spend. Accordingly, it will take some time to have stability in terms of margins. Therefore, asset and liability management is the key to manage the volatility. In this aspect, as we have proved so many times, it is the most important muscle for Yapi Kredi. Our first quarter result is again a proof of this strength. Now I'm moving to Page 2 of our presentation. We posted TRY 48.7 billion net profit as of September 2023, corresponding to a 38% year-on-year improvement. Our quarterly net profit stood at TRY 24.6 billion. When normalized for the CPI assumption change for the valuation of our linker portfolio, the quarterly increase is 19%. This bottom line increase once again proves our timely execution of ALM strategies. Our ROE is at 46% and ROA is at a strong 4.5%. Some important drivers of the performance are as follows: During the quarter, thanks to our successful ALM capabilities and stronger customer franchise, we managed to widen our TL loan to deposit spread by an extensive 208 basis points. We managed to keep the increase in cost of TL deposits at estimated 121 basis points despite tough competition and policy rate hikes. During this quarter, we managed to keep cost of new TL time deposit flow 200 basis points lower than the system -- the sector. On top, the increase in TL demand deposits supported our cost of funding. TL loan yields, on the other hand, improved 329 basis points in a single quarter. Our NIM for the first 9 months is at 5.8% above our full year guidance of equal or above 5%. Net fee income went up by healthy 49% quarter-on-quarter and more than doubled year-on-year. Thanks to our strength in lending-related and also money transfer fees as well as strong contribution from all our subsidiary groups. On top of the robust core revenue performance, our trading income continued to support our bottom line in this quarter, thanks to the timely actions taken by our treasury. All incorporated, our revenues increased 55% year-on-year in third quarter with a 15% increase and is normalized with the linker income. NPL collections in this quarter were record high at TRY 2.7 billion. The net NPL inflows were at negative territory, once again, recovery supported our cost of risk by 79 basis points in the first 9 months. As a result, our cumulative cost of risk stands at only 331 basis points. Now moving to Page 3. In this quarter, we had retained our strong fundamentals, which also indicates our potential for the future. In terms of liquidity levels, our LCR is around 430%, total also around 200% as we speak. Additionally, our total LDR is significantly below 100% at 78%. On capital front, our Tier 1 capital further improved in this quarter, thanks to consistently strong internal capital generation despite the macro backdrop. Tier 1 ratio now stands at 15.8%, and we had 630 basis points buffer versus regulatory limit for Tier 1. In terms of asset quality perspective, total loan loss coverage stands at 5.2% and NPL coverage at 152%. The slight decrease in total loan coverage is mainly due to our tiered loan growth since we maintained our increased coverage at all stages in the quarter. Now I'm leaving the floor to Hilal to provide more details.

Thank you very much, Gokhan bey, and thank you all for joining our call today. First and foremost, I would also like to celebrate the century of Turkish Republic and the centuries to come. Moving to the details of our 9 financials. We are now on Page 4. Our lucrative lending strategy has paid the quarter and supported our loan yield further in the first quarter. Following our limited Turkish lira loan growth in the second quarter with negative margin spread, our Turkish lira loan growth accelerated to 12% in third quarter alongside with positive marginal spread generation. Our Turkish lira loan growth is at 30% year-to-date, and we continue our selective lending strategy. As a result, our top-in-class Turkish lira loan yield further improved in the third quarter of the year. Foreign currency loan yield leveraging continued in the quarter, coming down 4% quarter-on-quarter and 10% year-to-date. Our performing foreign currency loans now stand at a limited $7.7 billion in line with our multiple focused strategy retail loans including SMEs. So the total reached to 65% as of 9M '23 on an FX adjusted terms. On the funding side, we are now on Page 5, we had high testing demand deposit growth in the quarter, thanks to our intact customer base also supporting our spreads. Turkish lira deposits increased 5% quarter-on-quarter, while Turkish lira demand deposit increase was at 17%. And this is in a single quarter driven by individual Turkish lira demand deposits where we increased our market share by 134 basis points in a single quarter. Our year-to-date increase in Turkish lira deposits reached 47%, still above our Turkish lira loan growth. As we have mentioned during our second quarter call, our strong deposit growth in the first half '23 allowed us to get rid of some high costly Turkish lira company time deposits in the third quarter. The share of demand deposits in total increased to 43% in September 2023. The share of Turkish lira demand deposits in Turkish lira deposits increased 238 basis points quarterly and stood at 22%. Our FX customer deposits in dollar terms came down by 9% year-to-date, while demand deposits were up by 8%. As a result, the share of foreign currency demand deposits in total increased to 72% in 9M '23. Now moving to Page 9 (sic) [ Page 6 ] . Thanks to our agile time pioneer ALM strategies, revenues increased 55% year-over-year to TRY 99 billion. On a quarterly basis, the increase is at 15% normalized for linker income and this is supported by the strength in sustainable core revenue generation. Please note that we have revised up our CPIS and look forward to valuation of linkers increase to 60% in 9M '23 from 40% in first half. Core revenue margins widened 98 basis points quarter-on-quarter in the third quarter with a 44 basis point support from core revenues, showing the sustainable revenue-generating capability of Yapi Kredi. The support from treasury activities continues, thanks to proactive management. Now moving to Page 7. We had a remarkable spread expansion in the quarter as we guided during our first half earnings call. Again I have to mention our pioneer ALM strategies. Our Turkish lira deposit pricing was 200 basis points below the sector average during third quarter. As a result, the increase in Turkish lira cost of funding was limited at 173 basis points during intensified competition alongside with higher interest rate. Turkish lira lending yields on the other hand, improved 329 basis points and our Turkish lira loan deposit spread widened 208 bps to 3.2%. With the normal [indiscernible], as you know, last quarter our foreign currency spreads were very wide with normalized. Despite that, the expansion on the blended loan deposit spread was also very strong at 110 basis points, reaching to 6.5%. All incorporated, our net interest margin improved to 5.6%, 33 basis points expansion in the third Q, of course, again normalized with the linkers, bringing to cumulative net interest margins to 5.8%, creating an upside potential to our full year guidance of above or equal to 5% net interest margin. On next page, we have stellar fee performance across the board as always. Net fees more than doubled year-over-year with an additional 49% quarterly increase. Our fees to average interest-earning assets improved further to 2.5% as of 9 months from 1.7% as of 2022. Money transfer fees up by 139%, with ongoing certain number of transactions. Fee income to investment products up by 135%. Bancassurance up 90%. Payment system fees stood at 114% year-over-year alongside with lending related increasing 146%. Thanks to our ongoing strong performance, we see an upside potential to our full year fee year growth guidance of above or equal to 90%. I'm also very happy to say, according to the 2022 management report that announced recently, we are 17th in the Europe and 42nd second in the world based on number of transactions on the acquiring side, top ranking among Turkish banks. Moving to the OpEx, we are now on Page 9. Our year-over-year cost increase stood at 131% as of 9 months. This is mainly due to the inflation pass-through impact, earthquake-related costs and our ongoing business growth and human capital investments. The quarterly increase was, on the other hand, limited at 11%, even though the salary adjustments. Main driver of the increases is again business growth-related costs, increasing 248% year-over-year, and our HR cost increase is close to 100%, while the running costs were up a contained 67% year-over-year. Our efficiency KPIs are best-in-class. Fees to OpEx further improved at 75% and cost to average assets stable at 3%. With this performance, we maintain our full year cost growth guidance of below 120% level. Now moving to asset quality, we are on Page 10. Our sound collection performance continues to support our cost of risk. Quarterly collections stood at a record high TRY 2.7 billion. While the inflows were slightly below the collections resulting in negative net NPL inflows in the quarter. Specific collections in the first 9 months reached TRY 5.6 billion. As we have previously mentioned on consumer and credit card NPL inflows, we are seeing some normalization, but it's still very limited and at a very comfortable level. However, SME net NPL inflow continued to be negligible. All incorporated, our cost of risk stood at 31 basis points as of 9 months, while the cost of risk, excluding the collections, stood at 110 basis points, showing our prudence in provisioning. Given the ongoing strength in collections, thanks to extra efforts of our collections team and the network, we now see a downside potential to our around 100 basis point cost of risk guidance for the full year 2023. Moving to Page 11, are very comfortable and further strengthened solvency ratios. All our ratios improved on a quarterly basis, thanks to the support from our sustained internal capital generation. Our Tier 1 and CET1 improved around 90 basis points quarter-on-quarter, while the quarterly increase on the capital equity ratio is at 82 basis points. Now are buffer sources and regulatory threshold stands at 580 basis points and above. The multiple environment has 141 basis points negative impact on the capital ratio while the support from the profit as high as 511 basis points and this is significant level the business growth impact of 233 basis points. In terms of sensitivities, once again, the impact is limited, every 10% depreciation has 35 basis points impact on Tier 1 and 30 basis points impact on capital equity ratio. The impact of 100 basis points highlighted in the Turkish lira yield curve is also limited at 200 basis points. And as we always mentioned, these figures are not leaner. Now moving on Page 12. To celebrate the 100 years of our republic and honoring future at Yep Kredi , we are starting an educational campaign called Snowball for the Future, [indiscernible] for the development of our children under the age of 6 in our country. There are 9 million children under the age of 6 in Turkey. With this project, which we designed with the guidance of Professor Selçuk Sirin in New York University and his team of academics, we will support our children, especially those living in economically disadvantaged area to develop their social, emotional and physical skills. We will launch the project in the earthquake zone first in 17 states that are affected. Our first goal is to support our children in the region to overcome the trauma of the earthquake. Afterwards, we are aiming to spread the project with the cooperation of nongovernmental organizations to the whole country. The preschool education starts with parents. Accordingly, we will provide parental education, quake awareness and provide extra support to them to raise the people of Turkey, our children. On top, we are providing an educational set and volunteer support for the children, we aim and focus to have good people love good citizens; support social development our children; provide education on emotional development, support their physical development; last but not the least, support their cognitive development. We can -- you can read the details from our website that we provided a link. And if you want to launch our movie, I'm sure you saw at the beginning of our presentation by clicking the link also. On Page 13, we are providing a summary of our guidance for 2023. I'll run through the potential upside and downside potential throughout the presentation, but in a nutshell with a potential upside to our top line guidance, net interest margin and fees and downside potential to cost of risk. We foresee an upside potential for above 30% return on tangible equity guidance while maintaining our inflation accounting ROTE of mid- to low teens. Now I'm leaving the floor to Gokhan bey for closing remarks, and we will be taking you to your questions. Gokhan bey?

Thank you, Hilal. I'd like to take this occasion to extend my gratitude to our stakeholders who stand by us with trust and support and to our dedicated employees who contributed to the achievements of our bank. On behalf of whole team, I'd 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 questions, please, from my side. First, I mean, you've had very strong net interest margin trends. If you could perhaps provide a mark-to-market on what you've seen in this particular quarter, if there's anything that you can highlight. I know, Hilal, you mentioned some of this during your presentation, but maybe you can provide a more detailed mark-to-market in terms of what trends you're seeing in terms of competition or deposit costs during the fourth quarter, that would be very helpful. And then secondly, I know it's early, but perhaps a look through into your early thoughts into 2024. What could we expect on some of the key line items, whether it's asset quality or margins, that would be extremely helpful?

Waleed, this is Kursad. For the -- for your first question about [indiscernible] for the competition in this fourth quarter. And specifically, as you are also following the low lending rate as well as the deposit cost, we still see on the lending rate there is an increase. The increase in the lending rate in the sector, it is not as much as in the third quarter, but the trend is still on the upside. For deposit costs, there is a huge variance, I will say, in terms of competition. We are hearing even more than 50% levels for Turkish lira deposit rate. But when we look at the flow for the market, it is increasing and the speed of increase is still the same as third quarter. Whereas Yapi Kredi, also remember, since the second quarter, we are applying a different strategy, and we are able to manage our deposit costs, which we are not part of this competition, and our average flow is something around 30% levels for the TL deposits. And for this competition, I would say those what we will need -- as Gokhan bey mentioned at the beginning, we will need more time for stability on the margin. That's why asset/liability management is crucial. And for your second question, if I understood correctly, about the trend on the asset quality. For the asset quality, what we are still seeing and also forecasting and the retail part, the asset quality worsening may happen for the coming periods. As you also know, the lending rate increases are mainly impacting the retail individuals mostly. Although we haven't seen too many increase in the flow, yet, there is an increase in the NPL inflow for the retail, and it may be deepened in 2024. Since it is a widespread risk, it is manageable for all the banks in Turkey.

Just one follow-up. Maybe some early thoughts on '24 on net interest margin as well.

Can you please repeat again? I couldn't understand.

Sorry, on net interest margin, some early thoughts on your -- what could we expect in terms of next year -- early next year. I know you haven't provided '24 guidance as yet, but given what you're seeing in the market, how do you expect net interest margin to trend in 2024?

Well, it unfortunately doesn't have any information that we can share with you. As soon as we start preparing the budget, we will give you some information. But unfortunately, we don't have it yet.

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

Congratulations on the strong results. I just had 2 follow-up questions, please. Firstly, just on loan growth. If you could give us maybe some more color on your expectations from here? And maybe in the early months of 2024 on the back of high rates, that will be very helpful. And do you expect a shift in basically demand or in your appetite to lend to corporates from here as obviously, lending yields have improved quite significantly. And secondly, in terms of cost of risk, which is still tracking very, very low. I'm just wondering if you expect any one-off model adjustments whatsoever in the fourth quarter given it seems like you're still keeping our guidance of 1% for the full year.