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

Ladies and gentlemen, thank you for standing by. I'm Costantino, 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 2024 Financial Results Conference Call and Live Webcast. At this time, I would like to turn the conference over to Mr. Kursad Keteci, CFO; and Mr. Hilal Varol, Head of Investor Relations and Strategic Analysis. Mr. Keteci, you may now proceed.

Good afternoon, and thank you all for joining our first half earnings call. Before going into our performance, I would like to share some information about the operating environment. Turkey's gradual normalization process continues and the preliminary positive results have supported the outlook, whereas the tight monetary policy stance is sustained. During the second quarter, central bank has built up extensive foreign currency reserves. Swap-adjusted net reserves improved by $90 billion since March and currently standing around [ $25 billion ]. FX linked deposit balance also decreased by a total of around $30 billion since end of 2023. Altogether, TL depreciation pressure is totally eliminated. Looking at the inflation, June [ print ] showed the first signal of improvement and is expected to continue in that trend. Also, the improvement on the current account deficit is more visible and expected to be around $20 billion, $25 billion for the full year. Budget deficit is also improving from its peak in January, and currently it's at around 4.8% of the GDP as of June. All in all, improvements in macroeconomic data is visible, and as we have been expressing, 2024 is a transition year [indiscernible]. As these improvements continue, 2025 and '26 will be quite positive than this year for sure. Alongside with the positive trends, we now witnessed a gradual improvement in TL loan deposit spread and net interest margin, which were under pressure mainly in the first half of the year. Now I'm moving to the second page of our presentation. I would like to start sharing our strategic pillars that solidifies the outlook for upcoming periods, mainly in 2025 and '26 as well as second half of this year. Our strong customer base will further support our financials. As we speak, number of customers exceeded 16 million. Our customer acquisition strategy is asset under management focused rather than free-lending motivation. The main acquisition point is still our strong branch network, our service model and as well as our sales force. We also see digital onboarding as an important tool, but we are closely monitoring profitability and penetration levels and decide accordingly. This strategy creates a long-lasting relationship with our customers and provides us more room for product penetration, which will further support our balance sheet and profitability. Another important point, we have the highest salary and pension customer base, which is now above 6 million. This will continue to support our demand deposit base, deposit pricing and number of transactions, thus, altogether, revenue generation. We are very careful on salary customer acquisition with a detailed model focusing on IRR generation, also keeping the acquisition cost under control. Thanks to this strategy over the years, more than 60% of our customers are efficient in terms of penetrated products, and this level continue to improve. Our service model and sales force efforts results is better than peers' customer satisfaction levels in between. Share of demand deposits domestic reached to 43%, highest level among our peers announced so far. This is driven by sticky individual deposits showing further potential. We have gained more than 500 basis points market share in TL individual demand deposits since 2022 within the private banks and reached to 25% market share of demand deposit in TL as of June end. Our second important pillar is the repricing for the future. We are gradually widening our TL duration mismatch and getting ready for the rate cut cycle. We are increasing the duration of TL assets, whereas TL funding duration gradually reduced. Our widespread customer base will differentiate us within the competition in terms of core spreads. Thanks to excellence in our service model and customer base, our new TL loan pricing is around 250 bps above sector average. And also on TL deposits, we are 140 bps lower than the market. This improving trend will support our net interest margin performance in the rest of the year. As you also see our net interest margin composition, our core spreads is positive and much more higher than our peers. Regarding the foreign currency side, we have been deleveraging our foreign currency loan portfolio since 2018, and now we are seizing the opportunity to expand our portfolio in a controlled pace, especially widespread small ticket lending for our eligible companies and with the [ hedge ] spread. This will also continue to support our overall performance going forward with also a healthy asset quality level. To strengthen and diversify our funding base for the growth cycle, we have secured a $7 billion board of external funding within a year period. Last but definitely not the least is our sound asset quality. Since 2018, after we set our NIM strategy, we have set aside close to 100 billion TL provisions, bringing our total coverage currently around 3.5% levels. Thus, we have a very well-covered portfolio, providing us room for potential deterioration as well as provision reversals for the following normalization periods. In a year in which we expect the normalization mainly on unsecured consumer lending and net NPL inflows to previous year's gross loans stands at a limit of 1.6% for our portfolio. This is thanks to limited NPL inflows, but more importantly, the change in our collection strategy that already show a visible improvement in the collection ratio. As of the first half, our collection ratio increased by 50% versus 24% levels in 2022. A part is related with the recent macro trends, but the significant part of the improvement is driven by our own efforts [ that we ] sustain. One of the main reasons that we are comfortable about asset quality is the support from our salary customers. As of first half, around 60% of our general purpose lending is to our salary customers, of which their lifetime P/D levels are below 1%. Since the establishment of the bank, as you know, payment services are among our strengths. Our well diversified and managed credit card portfolio is visible in terms of NPL generation also. As of the first half, credit card NPL ratio is limited to 1.4%, and it is around 50 bps lower than the sector. And another important point is we are constantly lowering our concentration in lending portfolio. As of first half, higher sectoral concentration in overall exposure came down to 6%, which is much lower than our minimum -- maximum 10% threshold. What I would like to say in this page, all in all, the worst is over. We are ready to seize all the upcoming opportunities and getting ready for the future. If we go to the first half results briefly, our cumulative net profit is $17.4 billion, and return on tangible equity of 19.5% and return on asset of 1.7%. As you know, we always keep our fundamentals at the highest possible and strong levels, that's why our solid liquidity continues. FX LCR more, than 500% levels, total LCR 141% and our total LDR is 89%. And our capital buffers in terms of CET1 is 280 bps given this macro backdrop, which is higher than our minimum 200 basis point threshold. And prudent loan provisions continues, and we have 3.5% total coverage as of the first half. Now I am leaving the floor to Hilal, and she will provide the details behind our numbers.

Thank you very much, Kursad. Thank you all for joining our call today. I will start with Page 4. In first half, our lucrative and selective lending strategy sustained, and we had 10% increase in Turkish lira loans quarterly and year-to-date growth stood at 28%. Foreign currency loan demand sustained in the quarter, and we have further increased the portfolio by 9% quarterly, reaching to 18% on a year-to-date basis. Once again, our foreign currency lending is also all across the board, so no big secret, no concentration, so we are not increasing our concentration, and small ticket sizes for the eligible companies which have the level of the spread. Talking about lucrative, regarding general purpose loans, we had 30% year-to-date increase with 92 basis points market share gain among 5 banks. On the credit card acquiring volumes, now it's much more profitable than last year. We gained 128 basis points market share. Looking at the business loans, our growth is 26% year-to-date, with 40 basis points market share gain, mainly driven by Turkish lira commercial installment loans that went up by a strong 60%, and we gained 129 basis points market share. We maintain our real Turkish lira loan growth guidance for the full year, but increase on the foreign currency loans is reasonably up. So now we forecast several digit increase, and it was previously low single digits. So the lucrative learning strategy will support our spreads going forward. On the funding side, we are on Page 5. We had another quarter of eye-catching demand deposit growth, and this is driven by, once again, individual deposits. Turkish lira deposits increased 16% quarterly and 25% year-to-date, reaching to TRY 774 billion. While the growth is mainly slow, Turkish lira demand deposits increase was very strong at 32% quarterly and 43% year-to-date. I believe we have now a proven track record on sustainable [ core ] performance. We gained 232 basis points market share since end 2023, and our market share is at 20.9%. So thanks to this performance and definitely thanks to our strong customer base, we have not just have the highest Turkish lira deposit share in total at 24%, but also the highest amount at TL 189 billion. Looking at the individual Turkish lira demand deposits, which is obviously sticky, we gained 410 basis points market share year-to-date and reached to 25.1%. Thus we have TRY 20 billion difference in nominal terms with our closest peer that announced so far. Foreign currency deposits, on the other hand, declined 11% quarter-on-quarter and 4% year-to-date. And the share of foreign currency demand deposits in total stood at a significant 73%. The share of foreign currency deposits in total is coming down, and we are witnessing some dedollarization. All incorporated, our demand deposit market share at 17% and our total demand deposit -- so deposit share is at 43%. And again, this is the highest level among our peers that announced so far and this will continue to support our cost of funding in the upcoming period. On Page 6. In the first half of the year, we recorded TRY 55.7 billion of revenue, increasing 6% year-over-year in a very challenging macro backdrop. Core revenues up by 14% and support from our treasury trading line is sustained. In terms of net interest margin, we have seen the bottom I can say, in the first half, at 33 basis points due to higher Turkish lira funding costs, slower Turkish lira repricing [ yields ] on the growth cap and ongoing regulatory impacts. We have already started to see the improvement in the NIM, with loan repricing gradually coming visible in the back book. We are seeing it almost every day, and Turkish lira cost of funding stabilizing, even easing slightly. With improvement NIM in every quarter, we expect the NIM to be at around 2% by the end of the year when the exit NIM. So the starting point of next year will be above -- we expect it to be above 4.5%. Our core revenue margin stands at 4.6%, and now with around 6% level for full year. That one is supported by our strong fee platforms that I will go through in the next page. Showing our strong core business profitability, thanks to loans -- Turkish lira loan deposit spreads and also for foreign currency side is supporting as well, but a higher level of demand deposit support is there, also the contribution from loan deposits, so our net interest margin is at 1.5% as of first half, and this is the highest level amongst peers announced so far. This performance will support our net interest margin from second half of the year and onwards. So moving to the fees. So another impressive quarter for us in terms of fees, thanks to consistently increasing number of transactions with higher customer penetration level in terms of products. And support from credit card business is visible, bancassurance is supporting investment products, and this is despite the slowdown in lending-related fee growth. Net fees increased an additional 15% quarterly and annual growth stood at 173%. And this provides us comfort in revising up our fee growth guidance above 100%. It was -- as you would recall, it was above 80% previously. Our fees to average interest earning assets also improved to 3.7% as of first half, it was 2.2% last year. Payment system fees is supporting definitely our fee base, surged 4.8x year-over-year. The increasing trend in number of transactions consistently supporting our money transfer fees, that's more than doubled. Bancassurance fees, they are also doubled year-over-year. So once again, the ongoing customer acquisition, along with increasing penetration, will continue to support our fee generation through a number of transactions. And I believe this is another proven track record for us. Moving to the OpEx here on Page 8. In the quarter, we have maintained top notch efficiency. And our quarterly cost increase was limited at 7% and an annual increase contained at some 78% with -- this is thanks to ongoing cost elimination efforts. And now we foresee our cost increase to be lower than 65%, it was lower than 80% previously. The main support is from running cost increase, which increased 65% year-over-year. Our efficiency KPI is definitely the best-in-class and better than our peers. Consolidated fees, fully 100% cover OpEx, and bank loan with fee generation is even above our costs. Cost to average asset ratio also by far the lowest at 3.4%. And so we had another impressive performance on this front. Looking at asset quality. In the quarter, we had classified one big ticket to NPL, which was [ lost ] and 3, 4 reasons. Even with this, thanks to strong collection performance, net NPL inflow stood at TRY 5.3 billion. Looking at the segments, we have always started to see some normalization on our secured consumer loan side, meaning the [ consumer loan ] and credit card, but it's under control and even below what we had been anticipating. Quarterly average NPL inflows from this segment are 2.5x above the low levels of 2023. And it's mainly driven by credit cards, in which we just have 1.4% NPL ratio. As Kursad mentioned, this is around 50 basis points lower than sector. So it's going better than what we have initially expected. SME still limited inflows. Normalization likely to come late in late 4Q, maybe it might be in the first quarter next year. So showing our strength, net inflows to gross loans is at 1.6%, a slight increase versus 1.5% level last year. And improvement in collection performance is definitely impressive at 50%, doubling from 2022. Looking at the cost of risk levels. In first half, cost of risk is at minus 3 basis points, with a strong 119 basis points support from specific collections. On top, we are also seeing important recoveries from Stage 2. All in, corporate -- on the corporate and commercial segment with limited inflows, strong collections, cost of risk is at negative territory compensating for the gradual normalization in unsecured consumer sites. With this performance, mainly strong collections, we now foresee the year-end cost of risk to be below 75 basis points. If you recall the previous guidance, it was around 100 basis points. Looking at the stages and our coverage levels. Our total coverage is strong at 3.5%. And if we adjusted for the NPL sales, this is still at 3.7% strong. And I just want to mention that in first half, we sold TRY 2.1 billion NPLs with a price of TRY 40. Also, one important point is we are prudently increasing the coverage level of unsecured consumer and credit card loans, and the strong platforms in corporate and commercial stage side prevails. Moving to our solvency. Our CET1 rate just stood at 10.9%, and buffer versus the regulatory threshold stood at 280 basis. And this is, as we mentioned, in a challenging environment. And this is still above our guided threshold of minimum 200 basis points. Capital adequacy ratio is at 14.3%, with 233 basis points buffer. Please note that this is without regulatory forbearance, but includes the negative impact of higher risk weight implementation and the impact is around 150 basis points. In the second half of the year, with support from internal capital generation, we foresee the CET1 capital buffer to emerge to 320 basis point levels. Thus, we are comfortable with our solvency. In terms of sensitivities, the impacts are very limited. First 10% depreciation has 28 basis points impact on CET1, and just 4 basis points on capital adequacy ratio, the impact of the first 100 basis points per last year in Turkish lira yield curve is just 15 basis points. And I just want to mention this again, these figures are not linear. So looking at Page 12, this is a summary now for our guidance revisions. I went through all of them throughout the presentation. Just one more, in these all revisions, we end up with now, for our return on tangible equity, to be at mid- to high 20s at the end of 2024. Now I'm leaving the floor to Kursad for closing remarks, and we will be taking your questions. Kursad?

Thank you, Hilal. I would like to take this occasion to extend our 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, we would like to thank you all for joining our call. And now we can take your questions.

The first question comes from the line of Butkov Mikhail with Goldman Sachs.

I have a couple of questions. So first one is on net interest margin. What level of remuneration for the conversions have you received in the second quarter and included in your net interest margin? Then on the cost of risk, we can see that, yes, Stage 1 and Stage 2 cost of risk was negative. Was it supported by the reversals of provisions and in which particular segment? And maybe more broadly, how do you see cost of risk development into the year 2025 next year? And lastly, what appetite do you have or not for the -- any more FX issuances given that the first half of the year was generally quite strong for the Turkish banking sector?

Thank you, Mikhail. And for your first question, net interest margin within the net interest margin level of remuneration for reserve requirements, we are fully eligible for reserve requirements remuneration in the second quarter, and you can take a positive impact on the NIM close to 1% level. And for the cost of risk side, asset quality, yes, we have reversals in terms of Stage 2 and Stage 3, which are mainly driven by our collections. And in our presentation, we tried to give our collections impact, which is 119 bps coming from specific collections between the Stage 3 collections. These collection sector are related to -- some of them are related to energy, some of them are related to construction sectors. And also in Stage 2, we have some cost of risk reversals, which are also mainly due to decrease of the risk in our Stage 2 portfolio coming from company sites and mainly on the construction sector. And for your third question, FX issuance, as we always say, we are opportunistic in this issuance market, and we have already been on the market quite much during the first half of the year, specifically during the first quarter of the year. We believe we have covered the majority of our funding needs. Apart from this, what could be the activity in the market will be totally opportunistic.

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

I have 4 questions, please. The first one is about the NIM. Thanks for the NIM progression chart on Page 6. It's very helpful. I was wondering if your fourth quarter NIM expectation includes the rate cuts. And second question is about the swaps. Your swap costs have remained elevated in the second quarter, how has been the utilization so far in the third quarter? I know it's still a bit early days, but onshore swaps have been down at the sector level. Have you increased your offshore exposure? How should we think about the swap cost in the third quarter? Third question is about the asset quality. Stage 2 loans remained somewhat flattish, but the breakdown has changed. There was a shift from regular Stage 2 loans to restructured Stage 2 loans. Was that driven by a big ticket item or a collection of small ticket loans? And finally, it seems that there was around 4 billion of mark-to-market or revaluation loss under equity in this quarter. What has been the driver of that?

Thank you, David. For the first question, again -- going with your first question then. Fourth quarter rate cuts, yes, we have -- we are assuming a rate cut in the fourth quarter. And in this fourth quarter, we believe that there could be a 2 set of rate cuts, and it could be somewhere around below 45% levels if we see -- if the Central Bank sees inflation is decreasing, in a decreasing trend. Therefore, our fourth quarter exit of 4.5%, more than 4.5% net interest margin includes these rate cuts. And there was another question on the online combining this with debt. If this rate cut is going to happen in the first half of next year, which we don't assume, then this will shift our net interest margin recovery. It will shift to first quarter. And for your question for the swap cost, during second quarter, swap volume approximately decreased by 25%, 30% in terms of volumes. But as you know, the policy rate increase mainly hit second quarter. Therefore, the pricing impact is much higher than first quarter. That's why you see swap cost is higher than first quarter. For the upcoming periods in the third quarter, it's going to be very low in terms of volume, as you also mentioned. And we assume that swap costs will be somewhere around $10 billion level, close to $10 billion, EBITDA is than $10 billion levels. This is our assumption. And for your third question, I think it was for the recoveries and also collections on the portfolio. Yes, there were some couple of big tickets, midsized ticket collections. As I mentioned in the first question, some of them from the construction, some of them from the energy and a couple of bits and pieces, including some retail collections. Just to give you the sense on a quarterly basis, we are averaging more than 3 billion, 3.5 billion collections, pure collections on our NPLs, and that's the main impact for our cost of risk reversal. And it's going to -- for future quarters, for the upcoming quarters, as we are always mentioning, yes, there is going to be some pressure on the asset quality with the tightening in the market. And it depends on how it's going to impact asset quality, it depends on how deep the tightening will continue, which is also linked again to rate cuts. And that's why if it's going to be quite deep. And then 2025, we will be talking some asset quality problems. But currently, we believe at the end of third quarter, fourth quarter, we will start seeing a bit more NPL inflow coming from unsecured lending on the personal loans. But as we stated at the beginning of the presentation, our portfolio is quite strong in terms of lifetime P/Ds. Therefore, we believe we are comfortable.

And just one thing. So regarding the Stage 2 loans, the restructured portfolio seems to be increasing. It's mainly from -- sometimes we are lengthening the [ maturity or ] pricing to loans. One way is [ that ]. And the second one is the big ticket recovery that we are having, as Kursad mentioned, mainly from Stage 2, and it is construction and energy related. So it's changing the composition of it, you're right, but it's not showing any worsening. On the other hand, it's showing a strengthening in terms of Stage 2 portfolio.

Thank you, Hilal. And for your last question, 4 billion mark-to-market loss is purely related to our marketable securities portfolio in line with the policy rate increase and interest rate increase on the security portfolios overall the market. I hope it works and if anything we missed, please ask.

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

I just had a couple of follow-up questions. First of all, on the real TL loan growth target that you have for this year. Clearly, in the second quarter, we've seen some slowdown, but you're pretty much in a good shape. But thinking that you have delivered about 27% or so growth so far this year, where do you see the trends there for in the second half? And could you translate this into number? Essentially, the assumed inflation is still 60% average this year, how should we think about that real target that you're communicating? Secondly, on the coverage declines that we've seen, is this basically just a function of the NPL sales and collections that you've done maybe from highly covered portfolios? Or was there any other color that you could share there? And secondly, thank you for the views on the asset quality in 2025. Yesterday, we heard from one of your peers that the wholesale book could see some deterioration in 2025, following the worsening in consumer books this year. Are you seeing any signs of stress in the books so far or anything that would indicate this? And if we think about cost of risk next year, would you say that this could be above the normalized levels then? And did you have any maybe figures to share at this point?

Thank you, Mehmet. For the real Turkish lira loan growth, as you mentioned, it depends on the inflation, but maybe it is better to share our inflation expectations. We believe it's going to be somewhere low 40s. That's why we believe according to that market scenario, we will be a bit more than the inflation levels in TL lending. In case you mentioned, if you are talking about 50%, 60% of inflation, then we are going to be discussing something as -- if it going to be. And therefore, for sure, we will be revising accordingly but this is purely related to our inflation assumption of low 40s. And the second question, coverage decrease. Yes, it's mainly related to NPLs, yes, as well as the collection efforts and this collected portfolio, collected loans, are mainly with high coverages across the full coverages. That's why collecting them with also the risk balance, but we are also removing 100 -- close to [ 100, 9x 100% ] of provisions. It impacts the coverages. Other than the collections, we are not touching any remaining provisions of the existing NPL portfolio just to be secure. And the cost of risk next year and asset quality worsening on account of the wholesale book, asset quality worsening retail started, we are able to see it. We see an increase in NPL inflow, as we also shared in the presentation. For the small and micro companies, yes, it's also visible but we haven't seen yet for the big commercial and conglomerates regarding the asset quality worsening. Also the yesterday comment from one of our competitors, it may happen for that wholesale book. It depends again according to how deep a country is going to tighten. And that's why we believe it is so crucial about rate cut planning and this tightening levels. If tightening sustains, yes, then we could be starting to talk for this wholesale book, but we don't see it yet. And for that reason, our cost of risk assumption, as you see, we revised it down for this year lower than 75, but it's going to be, we believe currently, that it's going to be higher than this year's. We can easily say. I am not able to say the normalized, because since the new IFRS growth, we are always, every year for the last 5 years, talking about normalized cost of risk, we haven't seen it yet. Let's hope that it's going to be normalized next year, I also share. And I would like to also share your question that you have sent us through a mail about the CPI linkers impact on our NII. And with the funding cost of the CPI linkers in NII, we are talking about for the first half TRY 15-something billion income coming from the CPI linkers. I hope it works.