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

Ladies and gentlemen, thank you for standing by. I'm Popi, 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 2023 financial results and 2024 guidance live webcast. At this time, I would like to turn the conference over to Mr. Gokhan Erun, CEO; Mr. Kursad Keteci, CSO; and Ms. Hilal Varol, Head of Investor Relations and Strategic Analysis. Mr. Erun, you may now proceed.

Good afternoon and thank you all for joining our '23 earnings and '24 guidance call. Before going into our strong performance, I'd like to share some information about our operating environment. Turkey is in the gradual normalization process -- to reaction, both in monetary and also on the physical side. Last week, Central Bank hiked the rates by an additional 250 basis points to 45%, reaching to an [indiscernible] positive lira rate, signaling to remain on hold until the improvement in the inflation. Alongside with the monetary policy, the tightening [ such things ] with some [ macro ] handles, some macro prudential measures in order to shift the expenditure driven growth to a value-added production-driven growth. Tightening is helping to reduce current account balance and also the budget deficit. '23 full year budget deficit stood at 5.4% of the GDP and excluding the offtake -- one-offs, 1.7%. Inflation on the other hand, remains elevated and likely to continue to stay around these levels. After seeing the tightening and base in fact, it is expected to decrease through the second half of the year. Now I'm moving to Page 2 of our presentation. We posted TRY 68 billion net profit last year. We kept our leadership in terms of ROE versus peers for the fourth consecutive year. ROE is at 45% and ROA at 4.5%. I'd like also to add that our inflation accounting adjusted ROE is at 14.5%, which is slightly better than our mid-low teens guidance. Some important drivers of the performance are as follows: In the last quarter of the year when Turkish lira marginal spreads went back to positive, we started to gain market share at all TL loan subsegments, alongside with the lending growth, thanks to our successful ALM capabilities and strong customer franchise. We managed to widen our TL loan-to-time deposit spreads by 55 basis points. Our '23 net interest margin is at 5.4%, beating our full year guidance of equal to 5% or above. Price level among our peers so far. Net fee income went up by another 26% quarter-on-quarter and up by healthy 142% year-on-year, above our guidance of 90% increase. This is thanks to our strength in payment systems, lending-related activities and money-transfer fees. So operating costs increased last year, also contained at 106%, below our guidance of 120% increase. Running costs increase is limited to 74% thanks to our increasing number of customers and transactions. Our fee coverage or OpEx realized at 78%. NPL collections in the quarter continued to be very strong at TRY 2.2 billion, thanks to our ongoing efforts. Total recoveries in the year reached TRY 7.8 billion, supporting our cost of risk by 71 basis points. As a result, our cumulative cost of risk stands at 14 basis points as of last year, significantly better than our 100 basis point guidance for the year. I'm moving to Page 3. In the third quarter, we continued our solid fundamentals and to [ reallocate ] normalization. In terms of liquidity levels, foreign currency LCR 505% and total 160% additional of LDR is significantly below 100% -- 82%. Capital front, Tier 1 capital is supported by consistent strong internal capital generation despite the macro backdrop. Tier 1 ratio now stands at 15.3%. And we have buffers of 575 buffer against the regulatory limit. In terms of asset quality improvement, total loan loss coverage stands at 4.4%, and we maintained highest level amongst our peers and NPL coverage at 148%. Slight decrease in total loan coverage is mainly due to our [ TL ] loan growth, fully covered NPL sale of TRY 1.4 billion and also collections both on stage 2 and stage 3. Lastly, I would like to mention our leverage, increasing inflation levels and diminishing loan-to-deposit spreads led us to lower our leverage during 2022 and also last year. Our leverage used to be close to 12% before 2022. And we ended the leverage at 10.45%. Thanks to our capital buffers as well as our more than 15 million customers, we'd like to increase again our leverage in line with the macro normalization. Now I'm leaving the floor to Hilal, she will provide further details about our strong numbers.

Thank you very much, Gokhan bey, and I thank you all for joining our call today. We are on Page 4. As Gokhan bey mentioned, we have the best-in-class profitability while maintaining top-notch fundamentals. The [indiscernible] are demand deposit share in total is the highest among peers at 42.1%. We have the highest level of foreign currency LCR, which is above 500%. Regarding prudency in asset quality, our total loan coverage is also above the peer group at a conservative 4.4%. Our superior ALM strategy, timed actions ongoing -- focus on lucrative small tickets, supported the net interest margin, and we have ended the year with the highest level among peers at 5.4%. Fee coverage or OpEx continues to be at the top at 78.2%. All incorporated, for the fourth consecutive year, we marked the highest tangible ROE among peers at 45.1%. Now diving to the details of our strong performance. We are on Page 5. In 2023, our controlled and lucrative lending strategy sustained throughout the year and continue to support our loan yields. In the last quarter of the year, we had 19% increase in Turkish lira loans and annual growth stood at 57%. This is above our guidance, but below the inflation. As a result, we have maintained our top-in-class Turkish lira loan yields in the last quarter of the year. Thus, on a cumulative basis for the full year 2023, we also have the highest level of Turkish lira loan yields among our peers that announced so far. For insurance loans, we're more or less stable in the quarter, but declining 9% year-over-year. On a bank-only basis, we believe that we are close to the bottom level with bank-only touching to $7.6 billion. And we have started to witness some pickups in the demand from eligible companies. In light of our lucrative small-ticket focused strategy, retail loans [ faring ] total, we stood 68% as of 2023 on an FX adjusted terms. On the funding side, we are on Page 6. We have another quarter of eye-catching demand deposit growth thanks to our intact customer base, reaching above [ 60 ] million and counting. This is also supporting our Turkish [indiscernible]. Turkish lira deposits increased 10% quarter-on-quarter, while demand deposit increased on Turkish lira [indiscernible] at 7%. Annual Turkish lira deposits increased, reached to 64%, Turkish lira demand deposit increased to that -- 42%. Our Turkish lira demand deposit market share in the quarter is among private banks increased 69 basis points. Very importantly, once again, driven by individual Turkish lira demand deposits to have -- we increased our market share by an additional 54 basis points quarter-on-quarter, reaching to 112 basis points year-over-year market share gains to 2023, and this is once again marking our strength. As a result, the share of demand deposits in total stood at 42% in 2023, highest level among peers announced so far. The share of Turkish lira demand deposits in Turkish lira deposits stood at 21%. Our foreign currency customer deposits in dollar terms came down by 8% year-over-year, while demand deposits were up by 6%. As a result, the share of foreign currency demand deposit in total increased 10 percentage points to 70% in 2023. Now moving to Page 7. Once again, marking our agile and timely pioneer ALM strategy, revenues increased 33% year-over-year to TRY 135 billion. Our revenues have been supported by sustainable core revenue generation that went up by 20% year-over-year, reaching to TRY 112 billion. As a result, our core revenue margin stood at 8.2% as of year-end. This is the highest level among peers announced so far again, and this is once again showing our strength and sustainable core revenue generation. On top treasury activities continue to support the revenue, thanks to proactive management. In the quarter, our lender Turkish lira spreads widened, and this is thanks to [ controlling-ly ] increase in cost of deposits, ongoing repricing in Turkish lira loans as well as the support from demand deposits. In the quarter, wider foreign currency spreads also supported our net interest margin [indiscernible]. All in all, in 2023, our net interest margin materialized at 5.4% above our guidance at 5% or above level. And adding the credit card piece on top, the ratio would be at a strong 6.9%. On the next slide, we had a superior fee performance once again and always all across the board. Net fees increased an additional 26% quarter-on-quarter, bringing the annual growth to 142%, which is significantly better than or above 90% increased guidance for the year. Our fees to average interest-earning assets improved further to 2.8% from 1.7% as of 2022. Money transfer fees up by 132% with ongoing certain number of transactions, fee income to investment products more than doubled, bancassurance up 89%, payment system fees surged 174% year-over-year alongside with lending-related fees increasing as much as 129%. Once again, the ongoing customer acquisitions, along with the increase in the penetration supported and will continue to support our fees generation. Moving to the OpEx, we are on Page 9. Our year-over-year cost increase contained at 106%, which is better than our full year guidance below 120%. The increase in the year was mainly due to the inflation factor impact, earthquake-related costs and our ongoing business goals and human capital investments. Main driver of the increase is again business growth related costs, increasing 161% year-over-year, while the running costs were contained at 74% year-over-year. Our efficiency KPIs are best-in-class. Fees to OpEx further improved at 78% and cost to average assets at 3.2%. Looking at our asset quality, we are on Page 10, our robust collection platform continues to support our cost of risk. Quarterly collection stood at a very high level of TRY 2.2 billion when the inflows were at TRY 3.3 billion. And the net NPL inflows was just at TRY 1.1 billion. Total collections in the year, which stood TRY 7.8 billion going up 81% year-over-year and supporting the cost of risk by 70 basis points. Consumer and credit card NPL inflows, we are seeing some normalizations there, but still very limited at TRY 4.5 billion -- also in 2023. SME net inflow, this is continuing to be negligible as you can see, very limited at TRY 256 million. As a result, our NPL ratio further improved to 3% and once again, thanks to limited inflows, strong collections and some fully covered NPL sales. Despite TRY 1.4 billion full covered NPL sales in this quarter, we have slightly increased the NPL coverage to 70.5%. And note that the sales proceeds were at a very strong 39% for the sales, also selling our conservative provisioning approach. All incorporated, our cost of risk stood at a limited 14 basis points as of 2023, significantly better than our around 100 basis points guidance for the year. And once again, this is thanks to the strength in the collection performance. Cost of risk, excluding the collections stood at 84 basis points, also showing our ongoing prudency in provisioning. Looking at the total coverage ratio of 4.4%, we have maintained the highest level among peers announced so far. Now moving to Page 11, our very comfortable solvency. Our CET1 range stood at 13.8%, a healthy 573 basis points buffer versus the regulatory threshold. Tier 1 ratio stood at 15.3% with 575 basis points buffer. Please note that we have already redeemed our $650 million worth of AT1 on 16th of January this year, and this was the first call date. The impact on Tier 1 ratio is around 100 basis points. And even adjusted for these reductions, our buffer is at a healthy 425 basis points. On the other hand, our capital adequacy ratio stood at 16.9%, with more than 490 basis points buffer. The negative impact arising from the redemption of AT1 on capital adequacy ratio will be further offset by the recent and the successful Tier 2 issuance worth of $650 million at a cost of 9.25% and the demand on the deal was above 3.7x. The macro environment had 220 basis points negative impact on capital adequacy ratio, while the support from the profit is as high as 667 basis points, significantly above the business growth impact of 381 basis points. In terms of sensitivity, the impact is limited. First, 10% depreciation has 42 basis points impact on capital -- CET1 and 25 basis points impact on capital adequacy ratio. The impact of the first 100 basis points per -- in the Turkish lira [ yield curve ] is also limited as to -- basis points, and are -- once again we want to mention that these figures are not linear. On Page 12, you can see the summary of our strong results versus the guidance, which I have mentioned through the presentation, but in a nutshell, Turkish lira loan growth was above the guidance. So they will -- remains below inflation. Net interest margin above our guidance. Fee growth significantly better than the guidance. Cost increase, below the guidance and cost of risk significantly better, thanks to robust collection platform. All incorporated, our 14.1% (sic) [ 45% ] RoTE is better than our guidance. And very importantly, inflation accounting ROE is slightly better than our guidance at 14.5%. Now I'm leaving the floor to Gokhan bey for 2024 guidance and closing remarks. Gokhan bey?

Thank you, Hilal. So 2024 this year will be a transition year. We expect to have more growth and stability during the second half of the year. As a result of this recovery, next year, '25 will be fully normalized levels hopefully. The '24 guidance for consolidated financials are in terms of volumes, we target lira -- Turkish lira lending growth. Following year of slowdown foreign currency loans on the other hand, are already at minimum levels. So we started already to grow there to -- for the FX loan -- with the FX loan demand. So we target low single-digit increase for this year. In terms of core revenues, we expect NIM to be above 4.5%. And well, the margins will be under pressure for the first half, but second half, it will recover. In the past 2 years, our performance in the fees has been very strong, diversification efforts, as Hilal mentioned earlier, a number of transactions, small ticket payment systems definitely supported the performance. And this year, we target to have an 80% growth in terms of fees with the execution of strategies. In terms of cost, we'd like to keep investing on business growth for sure, without sacrificing on the talent side. And also, on the other hand, we'll continue to keep the running cost under control and sustained cost eliminations in this area. We already started to work on that. On asset quality side, we foresee the cost of risk to be around 100 basis points higher than last year with some normalization in unsecured retail lending, NPL inflows. So overall, as a result of this performance, inflation accounting, adjusted ROE is targeted to have some improvement for this year. Now I'd like to take this occasion to extend my thanks to our stakeholders who stand by us with trust and support and to our dedicated employees, who contributed to the achievements of our bank. 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 Sevim Mehmet with JPMorgan.

Gokhan bey, I have one question on your loan growth guidance given this differs slightly from what we've heard from your peers so far. It seems like you're increasing your appetite to lend this year. And also, you mentioned you want to increase your leverage now. Can I ask why you've chosen to do this now at this point in the cycle given the monetary policy is still very tight and things are still readjusting. So any color on your thought process here? I would really appreciate. And secondly, also, what do you expect this growth to come from, which sectors? And do you see a strong pipeline? How's demand evolving? Color on this would be helpful as well. And maybe lastly, while your leverage increases, how do you see the trajectory of your capital ratio in accordance with that?

Thank you for the questions, Mehmet. So loan growth -- as I mentioned during the presentation, last year was not the year to grow, definitely, especially the second and third quarter, because with the negative interest margins it was better to slow down also to decrease the leverage and to get as much as possible, lowest hit from the negative interest rate margins. So -- but what we are seeing is -- this year, it will be a normalization year. And already, we are seeing starting from the fourth quarter, last quarter, that at least on the lending side, the rates are favorable compared to the cost of deposit side. In that sense, we are growing -- we already started to grow on each segment -- on all the segments. So loan growth -- well, for the Turkish lira loan growth, still the demand is not too high. It is limited. Yes, we know. And also there are some thresholds that the Central Bank is imposing by 2%, 2.5% and 3% for the auto loans, for the commercial loans, et cetera. But still, we would like to hit those levels and also even at those levels, of course, it comes with penalty of buying some securities, but looking at the levels of the securities what we are seeing in the rate. So this might be also favorable for the time. So we very much believe in Turkey, and what the Minister Mehmet Simsek started with the -- these new policies. We are very much behind his policies. That's why we'd like to grow in that sense. So this is the Turkish lira loan growth. And coupled with that the foreign currency loan growth, we are coming from the levels of $22 billion of foreign currency loans. It was back to 2018, and we have been deleveraging those -- FX loan portfolio since then. But I think it is the right time today especially with this to support the exporters or the companies, the clients that have FX income. So we can lend them. And as the CDS levels of Turkey is also going down. I think it made sense to lend them with favorable rates. So in terms of -- when we are talking about the -- during the presentation, the FX LCR is also very much compared to peers, also high on our bank. So we are very well positioned in terms of liquidity and capital and also on the client base to grow. That's why what I mean is this year is the year for Yapi Kredi to grow again hopefully, better than the sector. So this is in general and throughout all the segments, not only the commercial-wise, corporate-wise, but throughout the segment, including the retail and payment side as well. The last question you was asking the -- about the capital buffers. I think as we did -- when we were in London, actually, the first week of January, it was right -- I think on the 8 or 9th of January. When we were there, we saw the appetite. When we attended the conference, we saw the appetite, and we decided to take the opportunity to issue the Tier 2. I think it went very well. We are extremely happy with the results. And also to pay back the Tier 1, we got the Tier 2. So in terms of capital and equity ratio, we have important buffers still to go. And in that sense, I do not have any doubts about the capital buffers. And on top of this, the internal capital generation will definitely continue. So with this positive loan-to-deposit margins.

And Gokhan bey, if I may, it's something for the Turkish acqisition, Mehmet. Also, just keep in mind that we are the only bank in Turkey applying IRB in terms of RWA with the help of the normalization in macro, there will be a much more free space than before, comparing this normalization. It is also something beneficial for us.

The next question comes from the line of Taranto David with Bank of America Merrill Lynch.

Could you elaborate a bit on your macro assumptions behind the guidance. We would be particularly interested on GDP growth, inflation and policy rate expectations on your side. And the second question is on the book value. The book value growth in the period was a tad lower than the quarterly net income. Is it because of unrealized mark-to-market loss on securities? Or was there other drivers behind this? And finally, as for the CPI linker income outlook, what CPI assumptions are you using in valuations? And do you provide NII or ROE [ since '22 ] changes in the CPI?

David, this is Kursad. For your question, macro expectations for '24. And we have an inflation assumption around 40% for the full year. And within GDP of [ 33.5% ] growth. For the policy rate, our assumption is on second half together with the positive signals of decreasing inflation we can start seeing a decrease on the policy rate, and we are not expecting too much rate cut by the way. It will be still in terms of [indiscernible] it will be a positive lira rate and therefore, let's say, 5 percentage levels -- 5 to 7.5 percentage levels decreased. And for your second question, book value decreased. As you very well guessed, it is due to other comprehensive income booked under equity. That's the reason that you don't see the same growth from the equity compared to P&L. And CPI assumption is 40%. We are applying for the full year. And the sensitivity is every 1% is impacting 10 bps in terms of net interest margin, I would say, in terms of gross revenue it is something around TRY 900 million -- sorry TRY 1.5 billion. Yes, sorry, my fault.

It used to be in the past I think...

Yes, TRY 900 million.

But now TRY 1.5 billion.

The next question comes from the line of Rozantsev Konstantin with JPMorgan.

Apologies, I may have missed some details, so I apologize if some of that has been answered. But I had 3 questions that I wanted to ask. The first one is on the lending growth. So as I'm aware, there are these monthly gaps on lending growth in different segments of [ TRY ] lending. So I just wanted to understand how the bank manages growth in these segments, which are affected by these caps relative to these limits. And my sense is that there has been some market practice that banks have -- they've got some released securities from prior regulations, and they are allocating the securities to grow a bit in excess of these limits. So I just wanted to ask in addition to do you buy additional securities, additional fixed rate government bonds to allow for higher growth as well? The second question is about the protected deposit scheme. So my sense is that there has been some recent market practice where banks have been extending tenures of these FX protected deposits to -- allegedly to reduce the reserve requirements. So could I please ask, has this activity been prominent across the dominant part of this protected deposit base? And does this introduce risks with respect to how quickly this scheme is being unwound because the maturity is -- in this scheme could be more sparse, and it would take a longer time to -- for the stock to mature. The third question is about the -- do you have some cost of risk or cost of credit expectations for 2025? So for '24, the guidance is quite [ benign ] and for 2025, I'm curious as well.

Konstantin, thank you for the questions. I think the first question was answered but -- very shortly. Lending growth, yes, there are caps penalty if you exceed that, there is a penalty of buying securities. In terms of lending growth, we'd like to grow also from time to time, meeting those caps. And we are not hesitant to buy Turkish lira securities with the market levels, at least, especially we very much believe also leading in the new economy team added by Mehmet Simsek for the longer maturities, I think there is a value to buy those securities from time to time, even without the penalty. So in that sense, we are very comfortable about lending growth. For the projected deposit scheme. In the beginning, last quarter and also beginning of this year, there has been a wind down definitely on the protected deposit scheme to Turkish lira more -- going to Turkish lira. But I think that there are limits to that, too. So I think as those winding down will be slowing down as well. So from now on, we'll be seeing either the customers will be going to Turkish lira deposits with the existing levels of interest rates or staying with the FX-protected deposit scheme. And we believe that seeing the FX levels at the moment, and the slowdown of the devaluation, I don't think the customers will be converting their Turkish liras or their fixed deposit schemes to foreign currency. And the last question was for the '25 cost of risk, it's too early to mention or let's see the trends for -- as I mentioned to you, it will be a transition year. So let's see what goes on, especially the second half of the year that we can have a [ cause ] for '25, but earliest in the second half of this year.

Understood. Just a quick clarification on this protected deposit scheme. So -- have you seen a prominent activity of the type where banks were extending tenures in the FX protected deposits. So to reduce...

Yes.

And so does it introduce risk on the pace with what -- with which this deposit scheme is being unwound because maturities won't happen too quickly too often, and they're going to be distributed further on in time. And that -- does it reduce risk in terms of how quickly the scheme can be unwound?

Yes, Konstantin. So we are seeing that the maturities are extending. So from 3 months to 6 months. This is that I can say from our portfolio, almost half of the FX protected scheme is now moving to 6 months. So this shows also first that also the customers are very much believing in the product. And also, then the [ angle ] that -- where it is beneficiary also for us with less reserve requirements for the bank. And the extra commission that we are paying on top of the FX protected scheme is higher for the 6 months compared to 3 months.

Ladies and gentlemen, at this time, there are no further audio questions, and I would like to pass the floor over to Ms. Hilal Varol to proceed with any written questions.

Thank you. So I will -- we have a couple of questions. Some are answered. So looking at the net interest margin evolution and how it will stay for the full year by quarters, first half, second half? And the second one, are you expecting a possible decline in NIM on a year-over-year basis, Gokhan bey?

So for the NIM, so the year started very -- really difficult, very hard, I must tell. So first quarter, it will be the lowest I think, in terms of net interest margin. But that we'll be seeing a recovery, especially on the third quarter with the cost of deposits coming down, and also a rebalancing of our balance sheet as well. So looking at our Turkish lira duration gap, around 90 days. So which means that in 3 months' time, we should be able to recover it. Of course, with the condition that the rate hikes are over at the moment, and we have seen the highest 45% rate from the Central Bank. In that sense, most of the third quarter and more favorable fourth quarter will be the best for this year. But first quarter will be the most difficult one that I feel for sure. Any questions?

We have some other written questions...

So one is what is the nominal ROE guidance for 2024? And what will be the most important hurdle in attaining this part?

Thank you so much for the question, our nominal ROE guidance -- since it is not a guidance, I can only say what it means, 14.5% inflation accounted -- more than 14.5% inflation accounting ROE. It means nominally if something [indiscernible] Turkey and the most important hurdle we will say is the inflation, and we should see a decrease in inflation in the second half of the year. It will be crucial. It is the most important hurdle internally, locally. Also, from the international markets, if there is something happening, it may impact negatively also our macro.

One last question we have. From [ Oleg ], do you plan to come back to the Eurobonds market this year with a senior issue?

Yes. I think we have 2 more reductions this year, 1 in June and the other 1 is in October, I think. So we'll be opportunistic, definitely. With the existing CDS levels, I think we have to see better levels of the CDS and now we're around 330. It's also the global should be helping us. So in that sense, if and when we see Fed cutting interest rates, I think it will be favorable for us to be on the market again, because in terms of liquidity, I think we did our job. So with the trade loans, with these indications with [ TRY 800 million ] last year, and [ TRY 650 million ] this year. I think we did our job, and we will be opportunistic for the remaining of the year.

We don't have any other questions -- just one, Waleed, do you expect any major differences in effective tax rate for '24 -- some marginal tax rates?

Waleed, the effective tax rate, especially in '23, there have been lots of changes, also partial implication of inflation accounting and currently not to your question, but if there is any regulatory changes happening and that could be. But as of now, we don't have an expectation to have a lower effective tax rate.

I think we have a follow-up from the David Taranto. Can we connect to him?

Can you hear me?

Yes.

Sorry, I have one follow-up question. I know it's a bit early to ask this right now. But given the quarterly progression of NIM and earnings, it seems that the exit ROE from 2024 will be quite substantially higher than the full year figure. So all else being equal, with the visibility you have so far, would it be fair to expect a better ROE in 2025?

Yes, definitely -- definitely. I think for the investors in general and for the analysts, I think 2025 is the year that the banking will be much, much, much better profits than '24 and definitely also '23. That's why '24 is a little bit mixed. So that's why transitory. So it will be a transition year.

So thank you all. We don't have any further questions. If you have any further questions, you can always contact with our Investor Relations team and myself. Thank you all for joining the call.