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 9 Months 2024 Financial Results Conference Call and Live Webcast [Operator Instructions]. The conference is being recorded. At this time, I would like to turn the conference over to Mr. Kursad Keteci, CSO; and Ms. Hilal Varol, Head of Investor Relations and Strategic Analysis. Mr. Keteci, you may now proceed.

Good afternoon, and thank you all for joining our 9 months 2024 earnings call. Before going into details of our performance, I would like to share some information about the operating environment. Turkey's gradual normalization process continues and the preliminary positive results are being observed. On the other hand, the tight monetary policy stance remains in place due to uncertainty regarding the pace of disinflation process. Although inflation readings indicate a decline in the headline, the slower moderation in the service-driven inflation alongside the deterioration in pricing behavior and expectations has delayed the disinflation process. We observed a target slowdown in domestic demand in the third quarter, but yet to reach this inflationary target levels by the Central Bank. This slowdown in domestic demand has supported the improvement in current account deficit to be more visible, which is expected to be around even less than 1% of the GDP for the full year. The budget deficit is improving from its peak in January, and it is now at 4.8% of GDP as of September, but lagging behind the monetary actions. All in all, while the Central Bank remains decisive in its tight monetary stance, the uncertainty in this inflation process postponed the possibility of an easing in 2024. Looking at the development, there is a gradual improvement in Turkish lira loan deposit spread and net interest margin, although not at desired levels due to ongoing tight monetary levels and the implementation of additional macro prudential measures. The delay in the easing process is not allowing to pickup in the NIM as we had planned before. But for Yapi Kredi, we are improving both our net interest margin and Turkish lira loan deposit spread, and we are the only bank in this quarter achieving this. As we have been expressing since the beginning of the year, 2024 is a transitionary year and the process is underway -- and this process is underway. Also, 2025 will be impacted by this gradual normalization of the economy. Now I'm moving to the second page of our presentation. Our top line started to improve with 32% quarterly increase in pre-provision profit. Our core revenue margin has widened by 73 basis points quarterly with support from both net interest margin and fees part. While improving the top line, we have prudently set aside provisions and our gross provisions increased a healthy 47% quarterly and bringing our total coverage to 3.7% levels. Total coverage will be even higher at around 4% if we include the NPLs in 2024. All in all, we posted a TRY 5 billion net profit in this quarter and corresponding to 30% quarterly decline when the cumulative net profit stood at TRY 22.4 billion. Our return on tangible equity at 16.4% in this challenging operating environment and return on assets is at 1.4%. Some important drivers of our performance, if I would like to comment on. As we previously mentioned, the worst was over for Yapi Kredi at the end of second quarter. Since then, margins are gradually improving. Prolonged high rate environment and pressures from macro prudential measures are waiting on this improvement to reach our desired levels for the margins. Nevertheless, through active loan repricing and controlled cost of Turkish lira deposit, we successfully widened the loan deposit spread by 236 basis points quarterly. We had the highest contribution to our net interest margin from loan deposit spread among our peers announced so far. And overall, our cumulative net interest margin at 31 basis points as of 9 months. Net fee income went up by 5% quarterly and substantial 132% year-on-year. Operating cost increase in this quarter is at 13%, primarily driven by increase in HR costs due to salary increases. Thanks to our ongoing customer acquisition and strong penetration, our fees coverage over OpEx realized as high as 98%. Again, this is the highest level among our peers announced so far. And this robust top line performance enabled us to set aside further provisions in a prudent manner and bringing our total coverage to 3.7%. And also, I would like to comment that in terms of net NPL flow, our net NPL flow is the lowest versus our peers, again, announced so far. Moving to the third page. We have continued to maintain a solid set of fundamentals along with a well-positioned balance sheet, which enables us to be well equipped for the upcoming period. First of all, our strong customer base will further support our financial results. We had in the range of 16.5 million customers and more than 60% of those are efficient in terms of penetrated products. This showed itself in number of customer transactions, which realized 5x higher in 2024 compared to 2020. Share of demand deposits reached to 44%, again, the highest level among our peers, and this is mainly driven by sticky individual deposits showing further potential. We have a well-positioned balance sheet which will differentiate us from the competition in the upcoming rate cut period. Almost 30% of our liabilities are at short-term non-deposit funding, which will re-price earlier than average deposit maturities. Furthermore, thanks to excellence in our service model and strong customer base, our new Turkish lira loan pricing was around 400 bps above the sector average and also Turkish lira deposit rates were around 130 bps lower throughout September. This is just for the new lending and new deposit. On the foreign currency side, we are seizing the opportunity to expand our portfolio in a controlled way. We have widespread small ticket lending to eligible companies. This will also continue to support our overall spread performance going forward with a healthy asset quality output. On capital front, we are comfortably above buffers -- regulatory buffers, which stand around 272 basis points for Tier 1 as of 9 months. This buffer further widened recently and now stands at around 300 basis points. In terms of liquidity levels, our total loan deposit ratio is still significantly below 100% at 89%. And additionally, foreign currency LCR is about 330% levels and total is around 130% levels. Also, FX liquidity is around $9 billion, 2.2x of our upcoming foreign currency payment in 1 year. To strengthen and diversify our funding base for the growth cycle, we have secured around $7 billion worth of external funding within the last 12 months. Last but definitely not least is our Sound Asset Quality. Since 2018, after we set our new strategy, we have set aside around TRY 110 billion provisions, bringing the total coverage to 3.7% levels. Thus, we have a very well-covered portfolio, providing us room for potential deterioration as well as provision reversals following the normalization with collections. In a year in which we see normalization, mainly on unsecured consumer lending, we further increased our coverages in this portfolio, and Hilal will give some details about those. One of the main reasons that we are comfortable about our asset quality is the support from our salary customers. As of first 9 months 2024, more than 60% of our general purpose lending to salary customers and those salary customers' lifetime PDs are below 1% level. Since the establishment of the bank, payment services, payment business is one of our strengths. Our well-diversified and managed credit card portfolio is visible in terms of NPL generation also. And our credit card NPL ratio is 30 bps lower than the sector NPL, which has been the case for more than a decade. All-in-all, we are ready to seize all the upcoming opportunities and getting ready for the future. Now I'm leaving the floor to Hilal, and she will provide the details behind our numbers. Hilal?

Thank you very much, Kursad. I thank you all for joining our call today. I will start with Page 4. In the third quarter, we had a continued loan growth, and we are very selective in terms of lending, as you know, it's our strategy with ongoing repricing actions, leading to the best quarterly Turkish lira loan yield evolution among peers. Our quarterly Turkish lira loans were flat, while the year-to-date increase stood at 28%. We also continue to see the lucrative growth availability on foreign currency side with sustained demand. Accordingly, our foreign currency loans increased 10% in dollar terms in the third quarter, leading to a 30% year-to-date increase. Altogether, although we see some downside risk to our full year Turkish lira loan growth guidance, with the healthy growth in the foreign currency side, we maintain our total loan growth target at inflation, and we do not see any risk on that. As I have stated, we had a very active loan repricing throughout third quarter, seeing the positive impact on the yields. Our new Turkish lira loan pricing was more than 400 basis points above the sector throughout September, as Kursad mentioned, leading a significantly better loan yield evolution in the quarter versus our peers. We will continue our selective and lucrative lending strategy, which will continue to support our spreads further in the upcoming periods. On the funding side, our widespread customer base reaching to the edge of TRY 16.5 million continue to support our deposit base and Turkish lira cost of funding. Turkish lira deposits increased 2% quarterly and 28% year-to-date, reaching to TRY 790 billion. Our Turkish lira demand deposit base increased further 8% in the quarter, reaching to a very strong 54% year-to-date trend. More importantly, this performance is once again driven by individuals and our Turkish lira demand deposits in nominal terms reached to TRY 204 billion, and we maintained the highest level among our peers even in nominal terms. So going further up 2 percentage points above 2023 end, demand deposit share in total reached 44% of total. Once again, this is the highest level among peers. Turkish lira side and eyeing performance up by 4.4 percentage points to 26%, again, the highest level. Foreign currency deposits, on the other hand, increased 9% quarter-on-quarter and 5% year-to-date when the share of foreign currency demand deposits in total stood at a significant 70%. All incorporated, thanks to widespread customer base, we continue to price the deposits below the sector. In September, Turkish lira time deposit rates were 130 basis points below the sector, and we will still continue to price below the sector average and will continue to support our Turkish lira cost of funding. Now looking at Page 6. In the quarter, thanks to the strong support from the core revenues and ongoing support from trading, total revenues increased 18%, reaching TRY 229 billion, showing that the worst seems to be over for us in the second quarter, as we have mentioned. And we have already started to see the increase on our top line. Core revenue margin increased 70 basis points to 4.6% in the quarter. Thanks to the highest 236 basis points quarterly widening in the Turkish lira loan deposit spread, net interest margin improved 81 basis points over second quarter. As I have stated, our active loan repricing and control deposit costs supported this performance. Also visible from the contribution of our core business from the visible contribution from our core business, meaning loan and deposits, our net interest margin contribution is by far the highest among peers. The support is as high as 1.8% in third quarter and 1.6% as of 9M. This will be a key to our performance in 2025 and beyond. In the last quarter of the year, we are seeing the continuation of this performance. That being said, as also Kursad mentioned, the expected strong net interest margin improvement has been postponed with ongoing pressure from macro-prudential measures and prolonged tight monetary stance. As a result, we now foresee a downside risk to our around 2% net interest margin guidance, thus revenue margin guidance of around 6% for the full year. On the next page, fees, thanks to increasing customer penetration in terms of products to our customer base reaching to 16.5 million, our fees increased 132% year-over-year and 5% quarter-on-quarter amidst the contained loan activity in the quarter. The top support was to our payment system business, which net fee income went up 4x, making up 69% of our net fee base. That said, a strong support sustained on money transfer fees, up by 84%. Bancassurance investment products and all is thanks to increasing number of transactions and definitely coming from support from our strong customer base. Our fees to average interest-earning assets also improved to 3.8% as of 9M '24. This was 2.3% as of 9M last year. Once again, the ongoing customer penetration will continue to support our fees generation. With this performance, we are comfortable about our above 100% fee increase guidance for the full year. Moving to OpEx. Now we are on Page 8. In the quarter, we have maintained our top-notch efficiency, best-in-class as a proven track record. Our quarterly cost increased 14%, mainly through variable compensation mitigate our costs. Annual increase contained at 7%, thanks to ongoing cost elimination efforts and perfectly in line with our full-year guidance. More important, we maintained our best-in-class efficiency KPIs, fee coverage of OpEx at 98%, almost covering fully, and this is highest among peers and cost to average assets also by far the lowest at 3.5%. Asset quality in the quarter, as expected, NPL inflows were driven by unsecured consumer side, while collections from NPLs and recoveries from Stage II continued mainly through company side. Our NPL inflow stood at TRY 9.7 billion during the quarter, the lowest inflow we saw so far among the peers that announced. And net NPL inflows stood at TRY 7.9 billion during the quarter and TRY 15 billion as of 9M, once again, the lowest level among peers. And yes, collections decelerated a bit this quarter, but still very strong, bringing down the NPL inflows, as I mentioned. Looking at the segments, Quarterly average NPL inflows from consumer and credit cards increased to EUR 4.2 billion versus EUR 1.2 billion in 2023. And quarterly net NPL inflows from general purpose loans and credit cards were 2.6x and 5.5x higher than the average of last year, but it was very low last year, I have to mention it, respectively. So we are seeing the normalization. And still, our NPL ratio is more than 30 basis points better than the system in credit cards. Looking at the cost of risk levels, 9 months '24 cost of risk is at 23 basis points with a strong 98 basis points support from specific collections from NPLs and 163 basis points support from Stage II recoveries. Despite the limited inflows in Turkey, we have prudently increased our provisioning, which I will go into the details of in the next page. And with this performance, we are comfortable about our 75 basis points or lower cost of risk guidance for the full year. So looking at the stages as I mentioned we are on Page 10. Our total coverage further increased to 3.7% and adjusted for the NPL sales at 4%. And note that in the first 9 months, we sold TRY 4 billion NPLs with a price around 35%. The increase in the coverage is also driven by our unsecured consumer loans and credit cards, where we have further increased our coverage levels for the sake of conservatism. Regarding the increase in Stage II portfolio, I know you will be asking about it. We wanted to share it with you. 80 basis points is through change in contract conditions, which are not past due. And adjusted for that, our portfolio share is even coming down, and this is thanks to recoveries, and we still—we're conservatively [ crystallin ] our portfolios. I also wanted to note that. And this is all providing us comfort for the normalization cycle. Moving to Page 11, looking at our solvency. Our very comfortable buffers widened further, thanks to easing regulation on the retail side. And just to note the higher risk weight on the company side is still there. Our CET-1 ratio stood at 11.2% and buffer versus the regulatory threshold stood at 318 basis points and the most recent is 330. And we already started to see support from profits, and this will continue to come in further. This level is very comfortable and is significantly higher than our guided threshold of 200 basis points. Capital adequacy ratio is at 14.8% with 280 basis points buffer and today, we are even 300 basis points. And I want to note once again, these all are without regulatory forbearance. Looking at the sensitivities, the impact seems limited, and we are not seeing any risk on our capital. First 10% depreciation has 33 basis points impact on CET-1 and a limited 10 basis points on capital adequacy ratio and the breakeven U.S. Turkish lira rate is 80. And please note that all the calculations are [ set payables ]. The impact of the first 100 basis points per in the Turkish lira yield curve is also limited at 15 basis points. Looking at the breakeven level for the NPL ratio is as high as 7.5%. Just to note, we are at 3.1%, and this is signaling a significant march for us. So all incorporated, we are very comfortable. So on Page 12 is a summary of our guidance that I went throughout the presentation. In a nutshell, we foresee a potential downside to our return on tangible equity for the year-end 2024. As I have mentioned, this is mainly due to the prolonged tight monetary stand and further pressure from regulations on the net interest margin. Now I'm leaving the floor to Kursad for closing remarks, and we will be having your questions afterwards. Thank you. 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 achievement 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.

[ Operator instructions ] There are no audio questions at this time. I will now pass the floor to management for any webcast questions. Thank you.

Okay. I will start with the written questions. So we have a question from Valentina, Barclays. Can you please elaborate a bit more on your strategy this quarter that lead to loan deposit spread expansion? And how do you expect NIM to develop going into Q4 and 2025? What is the key difference of your strategy versus peers?

Thank you, Valentina. For net interest margin, our strategy is we would like to do as much as we can that we are able to control the margins, which is mainly loan deposits. And the other part of it is subject to rate cut cycle. And based on the rate cut cycle, everyone will benefit it. And for those rate cut cycle, again, our non-deposit funding proposition, we will be having some benefit before our peers due to earlier maturities. But for the loan deposit spread, since this is the only area that we can control and make some actions, we try to first lower our cost of deposits. And as I said throughout the presentation, our NIM deposit collection rate is around 130 bps lower than the sector. And this is one of the most important thing for our margins. Second, with our franchise, we are able to increase our demand deposits, which today 44% of our total deposit base. This is helping us, and we are doing a bit different than our peers. And also on the loan part, not only with the new lending, but also with the existing loans, we are able to reprice our loan book, and we have a much higher increase than our peers in terms of our loan book. This is the overall strategy. And what is going to happen in Q4 and especially in '25, it is all now linked to rate cut cycle and macro development. And if the rate cut cycle, we will be benefiting more. But for Q4, we are not expecting it to happen because rate cuts are not expected in this year, as you know. And also in 2025, macro prudential measures will stay for a while. And therefore, at least the first part of 2025, again will be challenging. But as you see in our figures, we will be aiming to improve our margins in this space, and we will be increasing it, I believe better than the market.

We have one audio question. Can we have it?

The first audio question comes from Butkov Mikhail with Goldman Sachs.

Just maybe to the tune of the previous question, I think you mentioned in the presentation that new loan pricing was over 400 basis points above the sector throughout the September. So I'm just curious how do you balance it against maybe the volumes growth? And then how do you see the competition why it is possible? What helps you to price it significantly above the sector, like over 400 basis points in September?

For the loans, as you know, the lending is kept by the regulatory limits. And on top of this, when you look at our third quarter financials, our Turkish lira loan growth is lower than previous quarters. And therefore, whatever we are lending is around 400 bps higher than the overall market new loan rate. And as a result of it, we have been doing it for this quarter. And the aim behind this to optimize the net interest margin. And as a result of this higher lending rate, our loan growth is lower and which is something that we deliberately did.

Okay. And so do you expect like this strategy to continue for a while, like to price yields higher at lower volumes or like.

Until the rate cut cycle starts and the compound cost of deposit rate gets lower, we will be targeting to price lending part a bit higher.

[Operator Instructions]

I will take a couple of written questions also. So one question from [indiscernible]. Based on your current projections, when do you foresee ROTE to exit CPI?