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

Ladies and gentlemen, thank you for standing by. I'm Constantino, 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 2025 Financial Results Conference Call and Live Webcast. 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.

Thank you. Good afternoon, and thank you all for joining our 9 months 2025 earnings call. Starting with the operating environment, after a consecutive 15 months of improvement, inflation reading showed a slight uptick in September, exceeding expectations and reached 33%. Inflation trend still shows a significant improvement compared to 2023 and '24 levels. Direction for this inflation is still in place, but higher-than-anticipated inflation is resulting in a slowdown in the magnitude of rate cuts. In accordance with those, Central Bank continued its rate cut cycle during third quarter. Together with last week's comparatively limited one, as you all know, 100 bps, policy rate now stands at 39.5%, still providing a significant real return compared to a compound basis and 48% of compound policy rates versus 30% of inflation expectation. We anticipate that the tight monetary policy and the slowdown in economic activity will sustain. Headline inflation could end slightly above 30% in year-end and continue to decelerate next year. Equally important, the Central Bank continued to build reserves. Combined with the increase in gold versus dollars, gross reserves reached a maximum of $200 billion, and today, it is standing around $185 billion. And net reserves reached $80 billion, now it is around $70 billion. In this operating environment, we are seizing opportunities, thanks to our best-in-class asset liability management, deposit pricing strategies as well as our strong customer base. Now let's move on to our strong performance in the third quarter and first 9 months cumulative. I will proceed to the second page of our presentation. In this quarter, bottom line growth improved further, thanks to the acceleration in core banking revenues. As a result, we reported a net profit of TRY 15 billion, an impressive 33% increase compared to second quarter. Our net profit for the first 9 months reached TRY 38 billion, a significant 69% increase year-over-year. Before tax growth is even higher at 87%. As of 9 months '25, our return on tangible equity and return on assets improved to 23.7% and 1.7%, respectively. This performance gives us the confidence in confirming our mid-20s ROE guidance for the full year that we have given since the beginning of the year, and we have achieved that, as you all know. Looking at the details, core revenue margin improved by 62 bps quarterly, a significant 209 bps yearly. This improvement resulted in a strong 91% annual increase in our core revenues. Our net interest income quarterly increased by 35%, and this strong performance continues along with 14% quarterly fee improvement. We also witnessed improvement in our NPL flows, thanks to our underwriting policies and timely actions to manage the quality of our loan book. As you also remember, we have been guiding you that our peak in terms of retail NPL flows was in first quarter. Now it is in a deceleration mode. Some of the factors contributed to our performance are as follows: Our Turkish lira loan deposit spread widened 130 bps quarterly. This demonstrates our active loan and effective deposit pricing strategies and thanks to our best-in-class service model and strong customer franchise. We continue to price our Turkish lira deposits around 100 bps below market prices in this quarter. Additionally, our market share leadership in Turkish lira demand deposits continued, reflecting the effectiveness of our customer-oriented strategies. Our operating expense increase was 52% year-on-year as expected, as guided, and inflation pass-through risks still continue with challenging environment. Despite these challenges, our fee coverage over OpEx reached 97% for the first 9 months. In terms of asset quality, we outperformed the market and our peers. Hilal will give more details on those. Our net NPL inflows continued to decline and realized lower than the peer average for the fifth consecutive quarter. Equally important, we maintained our total coverage at 3.7%. If adjusted for NPL sales, it's 4.1%, while our cost of risk stood at 163 bps in 9 months '25, in line with our guidance. Now I am handing the floor to Hilal. She is going to provide the details beyond our exceptional performance this quarter.

Thank you very much, Kursad. Thank you all for joining our call today. I will start with Page 3. In the third quarter of the year, our prudent and lucrative lending strategies sustained. Turkish lira loans went up by 11% quarterly, while the year-to-date increase stood at 30%. We also continue to see the lucrative loan growth availability on the foreign currency side is changing every quarter and we are accordingly utilizing or not. Our foreign currency loans in this quarter increased 3% in dollar terms. This brought our year-to-date increase to 21%. In the quarter, our loan yields adjusted for credit cards continues to improve and positively diverging from the peer group with a 26 basis points quarterly increase, loan yield improved to 49.4%, which is higher than our peers. We are and we will be continuing our selective and lucrative lending strategy, which will continue to support our spreads further in the fourth quarter and always onwards, and we will act in an agile manner as always. Now moving to the funding side. We are on Page 4. Our strong and widespread active customer franchise alongside with agile pricing strategy supported the funding base as well as the cost of funding. Turkish lira deposits increased 6% quarter-on-quarter and 24% year-to-date. As Kursad mentioned, I want to once again emphasize our leadership position in Turkish lira demand deposits sustained. Our market share is 17.1% among price peers. Turkish lira demand deposit share stood at 28%, and this is the highest level. As you can imagine, our small ticket focused strategy continues to pay off. Please note that almost 90% of our Turkish lira demand deposit base is through sticky small tickets. And I think we have already proved that it sustains. Foreign currency deposits, on the other hand, increased 8% quarter-on-quarter, up 22% year-to-date. This increase is mainly due to the increase in gold prices as well as deductions from the FX protective deposit scheme. So all in all, our demand deposit share in total is very strong at 45%. So 45% of the deposits, we are not paying anything at all. Thanks to this strong deposit performance and our agile pricing strategies, Turkish lira deposit cost came down 103 basis points quarter-on-quarter, bringing down the year-to-date basis 232 basis points improvement. And please note that throughout the year, we have priced our Turkish lira time deposits around 100 basis points below the market average. This is based on simple rates, and we are sustaining this performance. Our Turkish lira LDR is at 93%, lower than 100%, and total LDR stands at 86%. So we are comfortable at these levels, and we still have level for going up on this. Moving to the details of our profit. I will start with our strong top line. We are on Page 5. Our revenues increased 23% quarter-on-quarter to TRY 59 billion and 82% year-over-year to TRY 153 billion. And this is thanks to the strength in core revenues, which improved 21% in the quarter and a hefty 91% year-over-year. Supported by the improvement in the net interest margin and strong fee income, core revenue margin was up by 62 basis points. It improved to 7.2% and bringing up the annual widening to 209 basis points. On the other hand, trading income, I cannot pass this, continues to support our revenues. Further, this is thanks to the timely actions taken by our treasury. Net interest margin restarted to improve as rate cut cycle is back and definitely thanks to our superior asset liability management. Continuously improving every month since May, net interest margin widened 55 basis points quarter-on-quarter to 2.3%, carrying up the cumulative net interest margin to 2.03%, meaning up by 130 basis points year-to-date. Our loan deposit spread contribution to the net interest margin stood at 3.9%. This is again significantly above the peers and showing the room for further improvement in our net interest margin. Another important point I want to share is our balance sheet. It is set to reprice with 30% of our funding is short-term nondeposit funding, meaning immediately repricing. So looking at the fees, we are on the next page, this robust performance we want to mention. We have increased our fee base by an additional 14% quarter-on-quarter and 50% year-over-year. We continue to leverage on customer franchise as well as sustaining our diversification efforts. Our payment system business further supported our fees, increasing 56% annually. Number and amount of transactions, very strong, supporting our money transactional fees, money transfer fees, 57% year-over-year increase. Bancassurance up by 64% annually. Investment products, 51%. So it's very well diversified. The support is coming from everywhere. Once again, the ongoing customer penetration will continue to support our already high level of fee generation. Now we can move to the next page here on OpEx, Page 7. Operating costs increased 15% quarterly and 52% year-over-year, as Kursad very well mentioned, in line with what we had been guiding. Our fees come close to a full coverage of OpEx, Thus, we are navigating the cost increase through investment in business growth and human capital, making 36% of our total costs. HR-related costs increased 48% year-over-year, running costs went up 59%, and this is mainly due to our ongoing IT investments for the future, we are investing for the future, exchange rate impact as well as the inflation pass-through impact. In the quarter, we have maintained our top-notch efficiency. In third quarter, our fees fully covered OpEx and annual coverage is very strong at 97%. It's almost full coverage, we can say. Cost to average assets are at 3.9%. Moving to asset quality, one of the hot topics on the agenda. I'm sure we will get some questions from you. We are on Page 8. Our prudent lending strategies are lending an ongoing improvement in asset quality. Net NPL inflows from unsecured consumer loans improved for the second consecutive quarter. NPL formation came down to TRY 13.9 billion when we had some normalization in the collections, which stood at TRY 5.8 billion in the third quarter. As a result, net NPL inflows came down further to TRY 8.1 billion. This is significantly below the peer average and going down every quarter, diverging positively. That being said, we contain our uncompromised prudency in provisioning. So looking at the details, net NPL inflows from consumer loans further improved 22% quarter-on-quarter to TRY 1.7 billion. The peer average, the peers I'm mentioning, the ones announced so far, at TRY 3 billion. And please note that this is thanks to 65% of our general purpose loans are to our payroll customers with a significantly lower lifetime PV to be precise around 1/3. Credit card net NPL inflows down by 10% to TRY 3.2 billion versus the peer average of TRY 4.6 billion. And this is thanks to our strong know-how and definitely time actions taken. NPL inflows from SME side is increasing, but it's coming from a very low base. Quarterly increase was around 25%. But again, it was very low. So it's going up as expected. And also looking at the share of SME loans in our total portfolio, it's still limited at 8.6% levels. And we are also selectively lending and actively working with our SME customers. Moving to Page 9. So for the fourth consecutive quarter, we are losing market share in NPLs, meaning performing better than the sector. Our coverage levels, however, showing no compromise from prudency and which stands at 3.7% adjusted for the NPL sales, even higher at 4.1%. All in all, our cost of risk stood at 163 basis points. It's a coincidence, but both on 9M and third quarter, it is 163 basis points, and this is within the full year guidance range. Noting that we will continue to be prudent in terms of our asset quality. Equally important, we have a very well diversified loan mix in terms of sectors. Higher sector share is lower than, once again, 7%. Now moving to Page 10, our solvency. Our Tier 1 ratio stood at 11.7%. Our buffer is at 217 basis points. Capital adequacy, on the other hand, improved to 13.9%. In September, we have successfully issued $600 million worth of AT1, which received approximately 3x demand from foreign investors. And this transaction also holds the distinction of being the first USD-denominated AT1 issuance in the world to increase this amount prior to completion. So in terms of -- the positive impact was around, if I'm not mistaken, 113 basis points. So in terms of sensitivities, the impacts are, I'm always repeating myself, but very limited, first 10% depreciation, 29 basis points impact on CET1, and limited 12 basis points impact on capital adequacy ratio. The breakeven U.S. to Turkish lira rate is around 70. And once again, all our status calculations, the impact of the first 100 basis points parallel shift in the Turkish lira yield curve is also limited at 15 basis point. Breakeven NPL ratio is far, far beyond what we are seeing, around 6.5% levels. Our recent level is 3.4%. And so all incorporated, we are comfortable with our capital levels for today. Internal capital generation will help us to build further buffers before the growth opportunities kick start likely in the second half of next year, hopefully. So moving to Page 11, you can see a summary of our guidance and realization as of 9M '25. So all incorporated, we are comfortable with our RoTE guidance, as Kursad also mentioned, mid-20s. We are at the moment at 23.7%. So now I'm leaving the floor to Kursad for closing remarks, then we will be happily taking your questions. Kursad?

Thank you, Hilal. I want to express our gratitude to our stakeholders for their unwavering trust and support. I also want to thank our dedicated employees for their invaluable contributions to the achievement of our bank. On behalf of the entire team, we would like to extend our heartfelt appreciation for joining us today. We are now open to addressing any questions you may have.

Operator, we can now have questions. We can start question session.

The first question comes from the line of Saraoglu, Cihan with HSBC.

Congratulations on the good results. P&L side looks really strong, but I have a question about capital. I noticed that in the quarter, your capital adequacy ratio, particularly CET1, dropped 20 basis points despite the increase in profitability. If you could shed some light on what's driving the decline there, that would be great.

Thank you, Cihan. And for the capital one , it is currently standing around 170 bps above regulatory limits. And the slight decrease quarterly, 20 bps, is due to asset growth. And as you all know, since the profitabilities of the banks are not easily catching up the asset growth, we are seeing all the sectors' solvency ratios declining. For our perspective, we have a 200 bps minimum regulatory buffer commitment, as you all know. And for the CET1, and we have been sharing this also in our one-to-ones with all of you. And we are the only IRB bank in Turkey. There are some couple of updates we are going to have for the RWA calculation. And as you know, being an IRB bank needs a validation by the regulators. And all in all, part of it at least is going to finalize until the end of the year, and we will again easily going up our commitment buffer for the CET1. That's why we are comfortable on those. And whenever we got this approval, we will be also updating the market. I hope this answers your question, Cihan?

Thank you very much.

There are no audio questions at this time. I will now pass the floor over to management to accommodate any written questions. Thank you.

We have 3 questions from Valentina. So I will start with the NII. Your NII growth was particularly strong. Are there any one-offs that helped the growth there? And how do you see the trajectory of NII and net interest margin developing in the next few quarters?

Valentina, for the NII growth, it's mainly driven by cost of funding decrease and the loan deposit ratio improvement. And what we are expecting for the upcoming quarters, this increasing trend to continue. In the fourth quarter, our expectation is to have close to 100 bps improvement in terms of NIM, in terms of quarterly. And for the year-end, year-end I mean just exit December, we will be somewhere close to 4% levels for the NIM. And it is going to keep improving next year in line with the rate cuts of the Central Bank and our expected peak in terms of NIM to happen between Q2, Q3 next year.

So next question is about NPLs. How much of the NPL inflow help on the retail side was due to the new forbearance measures put in place? I think the restructuring she is talking about? And where do you think retail NPL formation will normalize going into 2026? Do you see a pickup in SME NPL formation going forward? And how these expectations tie in with your macro rate assumptions and cost of risk expectations?

Since the beginning of the year, we have been actively making some restructuring for our retail portfolio regardless of the forbearance measures, as you mentioned, Valentina. We have started before the regulation started. That's why we are having some benefits on the retail side. Even what we are seeing, the ones that restructured from our own portfolio are now able to pay. And the ones who are paying in line with the payment schedule are also being converted to Stage 1. That's why we are seeing a benefit of making an early action for this chapter. And this retail NPL formation is in a decreasing trend for us, but we are seeing that in the market, it's still increasing trend. For our case, it is getting normalized more in 2026. But every quarter, we are able to see that monthly, weekly NPL flow on the retail, net NPL on the retail is improving. And the one, as you mentioned on the SME inflows, yes, SME inflows, we are seeing an increasing trend. That increasing trend has not reached its peak, also has not reached any historical highest levels ever, but it's an increasing trend. And the rate cut cycle is going to be crucial how this increase to continue. And therefore, we are observing now and making our prudent activities. And also, we are able to use the availability on the retail part using them for the SME NPL inflows. All in all, we are comfortable, together with SME and retail, for our total loan book in terms of NPL flows. But let's see the rate cut cycle magnitude and we will be able to make an expectation whether it is going to be peak in each quarter or not. We will be telling it so.

I think we covered your CET1 ratio and buffer question. So I'm skipping it. From Hakan Aygün. I would appreciate a lot if you could provide some insight about your expectations on major banking parameters such as net interest margin and cost of risk evolution in 4Q and full year 2026.

Hakan, for the net interest margin, we have given the trajectory. For the cost of risk this year, it's going to be in line with our guidance, 150 bps to 175 bps. And next year, we will be seeing somewhere close to 125 bps, 150 bps. But given the fact that we haven't done the budget yet, this is just an expectation. And then we have the budget we will be announcing on beginning of next year. But expectations are to be lower than this year of cost of risk.

Also a follow-up question, I believe. What could be the fee operating cost -- fee coverage of operating costs in 2026?

Both fees and OpEx are improving, growing more than inflation. And this has been the case for the last couple of years. That's why we are seeing quite high, close to at par comparison between fees and OpEx. Starting from next year, we will be seeing something close to 90%. As you know, the normalized levels of this is 80%, 85% max. The normalized levels, maybe end of next year, we are going to see that again. But for the next year -- beginning of next year, we will start seeing a declining trend on fee coverage over OpEx.

What was the major driver for the strong trading income in 3Q? How do you see the trading income outlook in 4Q?

Thank you for this question, Hakan, because this aligns the specific efforts of our treasury team together with our network and franchise needs this congrats. They have performed quite well in terms of trading income. It is purely customer transactions and as well as our treasury's own efforts. And we believe we are on good track, and we are not making any risky positioning, as always, as you know, but we are able to improve trading income. It has been supporting us for the last 2 quarters, and it's going to continue. Thanks again on your behalf to our treasury team as well as the franchise network.

I will take this one. Can you also share your FX liquidity, short-term and total FX wholesale funding? Our total immediate liquidity is around $10 billion and our short-term debt is $5.4 billion, around $2 billion of which is syndication, so 2x coverage. And our total wholesale that is around $12 billion. I think that covers the question. And once again, we got a question about our capital. Many thanks for the presentation. Congratulations again. Can you kindly repeat the minimum capital adequacy ratio and Tier 1 headroom that you are committed to maintain? Are you planning any further capital instrument issuance to support capital position?

Please, Hilal.

So as Kursad mentioned, we are committed to have a 200 basis points buffer on the CET1 part. And we believe that we will be reaching it shortly with the support of IRB. And regarding any further capital instrument issuances, we will be always opportunistic. We are always opportunistic. We have recently issued an AT1. And if the market allows, definitely, we would be issuing any capital or senior transactions, anything on the market, we are always looking to, but we do not have anything specific on the agenda at the moment, and we do not have any immediate needs. And let me put it in this perspective. So I'm just checking if we have anything left. I think we covered everything. One from Rajat. To reach year-end 2025 guidance, you should reach 4,85% NIM in 4Q. Is it possible under current macro environment?

Rajat, given the fact that I don't know your calculation, but in our own forecast, our guidance is improvement of 200 bps to 225 bps. We will be close to 200 bps improvement for the NIM guidance year-on-year, but I cannot confirm your calculation, 4.85% NIM. Let's keep up after the call together with you.

We can talk about the details how we do calculate. Last check. We don't have anything. Okay. So thank you very much for joining our call today. So if you have any further questions, we would be very happy to answer as myself and Zerdil is also here, our IR manager. She will be very happy to answer all the questions. Thank you all. Thank you, Kursad.

Thank you. Have a nice weekend.