Akbank TAS
IST:AKBNK.E
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Akbank TAS
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Ladies and gentlemen, welcome to Akbank first quarter 2018 consolidated Financial Results Conference Call and webcast. I'll now hand over to Akbank management team. Sir -- Madame, please go ahead.
Hello. Welcome to our conference call. Our introduction will be done by our CEO, Mr. Hakan Binbasgil.
Dear friends, welcome to Akbank first quarter 2018 financial results webcast and conference call. And this is Hakan Binbasgil speaking, CEO of the bank. And today, I have with me Türker Tunali, our CFO; [indiscernible] our EVP for FI and CIB; Ali Karaali our EVP for Treasury; and Ilknur Kocaer and Ebru Güvenir from our IR and.
Today we are happy to share another solid set of results where we performed better than our full year guidance. As you can see on Slide 2, we have reached an ROE of 16.6% within net income growth of almost 17%. Our high quality earnings reflect the strong core operating performance. Our first quarter swap adjusted lean reached [ 3.54% ], despite a lower CPI of 9% used for our CPI calculations versus 11.9% in 2017. This is important to highlight as 1% higher inflation equates to additional 4 basis points NIM and 30 basis ROE. We delivered an ROE -- ROA of 2% above our guidance of 1.8%. This was led by our TL loan book, where we grow selectively in high-yielding segments. Due to our digitalization efforts and bank wide initiatives, our fee income grew by 19%, well ahead of our guidance at the beginning of the year. On the liability side, we broadened our low cost TL deposit base and grow in more sticky FX deposits.
As a result, we were able to keep our LDR below our guidance at 104%, while improving our core spread. Our OpEx growth was 18.7%, ahead of our guidance due to first quarter 2017 being a very low base. Quarter-on-quarter, OpEx remains flat. Our 13% guidance for the full year is still intact.
Also important to highlight that our cost income ratio is still the best-in-class and we ended the first quarter at 34.8%, which is flat versus 2017 full year and slightly better than our guidance. Our superior and prudent risk management enabled us to end the quarter at 1.9% NPL and 34 basis net specific cost of risk, which are both well below our full-year guidance. As a result, we maintained solid solvency ratios.
Our capital adequacy ratio and Tier 1 were realized that 15.6% and 13.6%. We were able to preserve high solid ratios, despite higher dividend payout of 26.5% and weaker currency.
Our strong capital levels secure our continues growth prospects. Before handing over to Ebru, I would like to share some updates regarding our new branch model, which fully compliments our digitalization strategy. So far, we have transformed over 50 branches with our new model that is paperless, mobile, supported by advanced analytics with simplified processes and in the end state, cashless. We are transforming 7 or 8 branches per week. Our target is to reach 250 transformed branches by the end of 2018. In the meantime, we will also be rolling out a new software throughout our own branches in the second quarter of this year, which will further enhance our efficiency and sales effectiveness. I would like to underline that cash is expensive and unlike some other new branch models in the country, we would like to reduce the number of people in our branches that are touching cash. With this flows of fee, we are shifting most of the cash transactions and operational workload to digital channels and e-tailers, enabling our people to focus on sales, advisory and customer relationship management.
Feedback from our customer has been very positive. Our target is to further improve our cost income ratio by 2 percentage points. 1/3 of this will come from efficiency, while 2/3 from revenue enhancements. And the first results are very promising in achieving our midterm targets. Now Ebru will share our performance in detail. After which, we will be more than happy to answer any questions you may have.
Thank you, Hakan. Moving on to Slide 3. Our net income grew by 17% year-on-year to almost TRY 1.7 billion. Supported by our core banking revenue of 15% reaching TRY 3.7 billion. Our swap adjusted NII reached TRY 2.9 billion, up by 14% thanks to selective lucrative banking strategies. Once again, our eye-catching fee income up by 19% reached TRY 810 million. All this led to a quarter-on-quarter improvement in ROE and ROA, despite flat leverage.
Slide 4. Our digitalization effort continue to support our impressive fee income. Direct Banking fees make up 40% of our non-lending related fee. 2 areas noteworthy to mention are wealth management fee, up by [ 49% ] and payment system up 23%. In wealth management, we had shared with you earlier this year our reorganization. As a reminder, we created an EBIT position within the bank out efforts.
As of January 2018, we enabled account opening as well as new digital capabilities for equity transactions, such as a fine for IPO through mobile and Internet platforms. This led to almost double our investment account opening on a year-on-year basis. Therefore, our digital customer base our fee generation growth substantially.
Payment systems make up 48% of our fee and commission generations. The growth in first quarter was due to both credit card and segment. On the credit card side, annual fee income was up by 19% led by portfolio growth, upward pricing as well as reduction of rebates. Also credit card interchange fee income grew significantly by 27%, due to increase in credit card and debit volume as well as interchange fee fee rate.
As for the acquiring side, our net plus commission and fee income grew by 14%, thanks to increase our active merchant by 9%, along with fee policy and price increase.
Most importantly, we have improved our collection infrastructure earlier this year. We will continue to focus on profitable growth in payments systems.
On to Slide 5. In order to increase revenue generation with higher cost sales and lower cost, digital customer acquisition along with increased digital penetration are among the key focus areas of the bank. The result is in the numbers. New customer acquisitions to the bank through our digital channels increased by 25% year-on-year. Our active digital customers reached 4.3 million. As of first quarter, 66% of GPLs and 53% of credit cards were sold through our direct channels.
[indiscernible] Pioneer mobile first strategy, our mobile customers were up 29% year-on-year to 4 million active customers. Share of mobile in GPLs increased remarkably from 24% in first quarter 2017 to 45%. It is worth to highlight that our customers are happy with our mobile banking practices, as our net promoter score is at [ 5.69 ].
On to Slide 6. We continue on selective loan growth strategy. Our TL loan grew by 3% Q-on-Q, led by business banking up 4% and GPLs up by 6%, where once again yields enhancements took place the most. On the FX side, our loan book grew by 2% in dollar terms. As a reminder, due to our cautious lending policies, we have the lowest affect loan book among peers by the end of 2017.
On to Slide 7. Targeted lucrative lending growth continued in first quarter. Yield enhancement on a quarter-on-quarter basis in TL business loans and GPL were 103 bps and 104 bps, respectively. We preserved our market share in TL business loans, while continued to gain market share in GPLs. It is worth to underline 2 important areas regarding our GPL growth strategy: First, our 9.6% market share in GPLs is still significantly below our [ 4% ], and on natural market share of 10% to 11%. This gives us an opportunity to cherish the customer, while maintaining the quality of our book. Second, while are gaining market share, we maintained our average ticket size almost flat, resulting in a diversified portfolio. Therefore, our growth strategy is consistent with our prudent risk management approach.
On to Slide 8. In line with our prudent ALM policy, to support our loan with our deposit base, our deposit grew by 5% Q-on-Q. On the TL side, we successfully broadened our lower cost deposit base, while maintaining our portfolio side flat. We increased FX deposits by 3% in FX terms, which were more sticky by nature.
On to Slide 9. Our successful core spread management led for our first NIM to reach 3.54 ahead of our 3.5 guidance for the full year. It is critical to highlight that this is despite 2 factors: First, higher [indiscernible] of around $1 billion reaching the total amount of $3.9 billion, which had 11 negative impact on our NIM. And second, lower CPI was affected NIM by negative 13 BPS this quarter. Typical reminder, we are using 9% inflation in our [ 15.5 ] TL CPI portfolio calculation and everyone inflation NIM by 4 bps. Our swap adjusted NIM improvement was mainly led by our successful core TL spreads management.
On to Slide 10. Specific ALM is an essential part of our strategy. While improving our core spread and NIM on a quarter-to-quarter basis, we adjust our total LDR level 105 internal limit at 104. Almost 61% of our assets are funded by strong and stable deposit base. As a preparation for higher interest rate environment, we are further lowered our maturity as much on the TL side from around 5 months at the end of the year to almost 4 months. On the FX side, as you all know, our merchant mismatch continues to be 0. We continue to manage our portfolio within the limits of our high-quality liquid asset requirements, turning from our balance sheet structure. We are trying to keep our balance composition in 2018. And now, our CFO, Turker, will share details regarding our asset quality and changes to IFRS 9.
Thank you, Ebru. Now Slide 11. As you may remember, our full year net specific cost of risk guidance was 50 basis points under IFRS 9 with around 80% coverage. In first quarter, our NPL formation has developed slightly better than our guidance. Our net NPL inflows have amounted to TRY 220 million and our net specific cost of risk under IFRS 9 has rose to 24 basis points. If we would have continued our 100% provisioning full fees, our net specific cost of risk would have been at 42 basis points, still below 2017 realization as well as our 2018 guidance.
Our total cost of risk, including provisions for stage 1 and stage 2 loans was at 74 basis points.
On to Slide 12. As now some important highlights regarding IFRS 9 transition as well as first quarter provisioning. First, we want to give you some insight on the transition impact. On January 1, Day 1 net equity impact of IFRS 9 was as follows: our provisioning for stage 1 and stage 2 loans has increased by [ TRY 670 million ], whereas our provisions for stage 3 loans has decreased by TRY 591 million. Net effect from other balance sheet and off-balance sheet item was TRY 8 million. So in total, net equity impact was minus TRY 88 million, which is coming from IFRS 9 adjustment in our subsidiaries.
During first quarter, we have provided additional provisioning of TRY 273 million for stage 1 and stage 2 loans, mainly resulting from stage 2 loans. Additionally, our stage 3 provisions have increased by TRY 170 million. Overall, P&L impact was negative TRY 465 million. As a result, mentioned in the previous slide, our net specific cost of risk stood at 24 basis points, well below our guidance. And our total cost of risk is at 74 basis points.
Now Slide 13. After IFRS 9 conversions, we continued to provide strong coverage for our NPL's. Our total stage 1, 2 and 3 provisions are covering 154% of our NPL. Please note that this excludes our free provision of TRY 700 million. Our stage 2 loans are making up 10.2% of our total portfolio. I would like to underline that, first, we have classified our yield exposure into stage 2 loans and set aside provisioning, accordingly. Please note that during our refinancing of group, we have reduced our exposure and refinanced all in Turkish lira. Also we have no overdue payments from the group. So we could have kept the loan in phase I, but we have chosen a more prudent stance.
Please also note that we continue to provision for our OTAS exposure at 25% under stage 2 loans. We will continue with this approach and have hedged our provisioning amount against FX fluctuations. Please keep in mind, excluding OTAS and, our stage 2 loan ratio will be at around 5% levels. And now, back to Ebru.
Thank you, Türker. And now to Slide 14. Thanks to our solid solvency ratio, we were able to increase our dividend payout this year to 26.5%, which I hope made all of you happy. Our dividend yield have the highest increased among peers from 2.56% in 2017 to 4.12% in 2018. In first quarter, we issued a Tier 2 with the lowest mid-swaps ever recorded in Turkey, supporting our CAR by 55 basis points. As Turker mentioned earlier, despite our dividend payout and currency impact, thanks to our strong internal capital generation, we were able to end the quarter with 15.6 CAR and 13.6 Tier 1. Our strong solvency ratio will not only support higher dividend payout, but also our growth strategy.
And now on to our last last slide, but not least, obviously. In first quarter, we continue to deliver best-in-class income ratio at 34.8%. As you may recall, this is slightly better than our full-year guidance of 35%. The superior performance have come from our strong revenue generation. Also note that first quarter 2017 OpEx base was lowest of all quarters in 2017 in nominal terms. There was an acceleration trend in the following period, particularly, in the second half of 2017. Therefore, our year-on-year OpEx increase in first quarter was above our guidance, mainly due to the slow base effect. As we can see from the graph on the left-hand side, quarter-on-quarter, our OpEx remains flat. Thus, our 13% OpEx guidance for the full year is intact. We expect OpEx to start normalizing on a year-on-year basis going forward. Please also note that, our nominal OpEx base is significantly lower versus. Hence, even the minor nominal increases OpEx will translate it into temporary higher percentage increases on a quarterly basis. This concludes our presentation. Operator, you may now open the line for Q&A.
[Operator Instructions] Our first question comes from Gabor Kemeny with Autonomous Research.
Grabber from Autonomous. I have a few question on credit quality, please. First on the stage 2 exposure, can you talk a bit about beside yield is -- what drove the increase in the stage 2 bucket in the first quarter? And what sort of inflows would you expect into stage 2 going forward? A bit more broadly, can you give us a sense what early indicators do you tend to look at to monitor credit quality? And how do you see these developing given significant lira devaluation we saw recently?
Actually, besides, there were various files in our mainly in our commercial portfolio, but not significantly as groups. And when we are [indiscernible] reclassification of the loss from stage 2 from stage 2, as you know, we're looking for overdue faces for regular days of restructuring. Whether there is a significant credit quality -- credit rating deterioration in the borrowers compared to credit ratings at the acquisitions base. But as I also mentioned -- as I mentioned for group, actually, there was no overdue payments for. We had some downsizing in the exposures and it has been refinanced successfully, but we have taken a prudent approach. And thus, reclassified it as stage 2. As I mentioned actually, excluding OTAS and it years, our stage 2 exposure ratio will be at 5% to 6% levels, which is, I think, it's a very healthy level. So that's it actually.
And there was also question about FX lending and as we've also -- actually mentioned in our presentation and the level of FX lending that we have is actually significantly less to compared to some peers in the system and we continuously do stress testing and we are comfortable with the portfolio as it stands today. So I think we were all cautious, especially in [indiscernible] frank with you, because still negotiations with the other banks and so on. And that is actually the reason why we classified as for group 2. Otherwise, if you get the client from our point of view, I think quite honestly, there was no reason. And please also keep in mind that this is the TL loan. It's not FX loan anymore.
Maybe I can also add some additional information. As you know for stage 2 loans, we're providing lifetime expected credit -- lifetime provisioning. And it make you to opt the loan. The provisioning amount gets higher. If it gets shorter, it's similar to stage 1 levels because of the shorter term. And as you also know, provisioning on the collateralization is also taken into consideration. So these are all the factors we're considering when calculating our IFRS 9 provisions.
That's very useful. Thank you. And when you say you stress test your FX loan exposures, what sort of indicators do you tend to look at here? And how do you see these developing these days?
So we have different stages. We have the extreme case. We have the moderate case. So we put new values -- extensive values to FX rates, instead of having dollar like 4 lira as of today. There are different stages. It can be 5, it can be 4.5. And also we're also doing stress test on the level of interest rates in the country, and we're also doing stress test on the levels of growth in the system. So there are different parameters where we actually run altogether.
Any [indiscernible] on the trends you are seeing?
Would you repeat the question please? The trends? The trends, as we said, we're comfortable with the portfolio. So when you look at our loan mix, actually, it is quite a balanced portfolio. When you look at the, actually, the proportion of retail, we're very comfortable. When you look at the proportion of FX, we're also very comfortable. So I think that we're comfortable, quite frankly. And when you look at the amount of provisioning that we have. So it is roughly 154%. And I think given the quality of the portfolio, I think it's more than enough.
And this is excluding our free provision of [ TRY 700 million ].
So TRY 700 million is on top of this. It's not included in that figure.
Our next question comes from Deniz Gasimli with Goldman Sachs.
I have 3 quick questions from my side. One is a follow-up on asset quality and on your group 2 exposure. Just looking for some more information, if you're willing -- if you're able to provide on, I guess, 1 would be the increase that you saw in stage 2 from 5.4 to 10.2. It this mainly driven by [indiscernible] ? Is like the major reason for the increase? And if you -- I mean are you able to provide an exact exposure? And also what -- when is stage 2? What was the provision that you applied to this? And given, as you mentioned, it is now a TL loan and you've already classified it as group -- as stage 2. Do you foresee any future provisioning for this? Or you just going to remain in stage 2 bucket until reclassified back to performing. And also trying understand how long does it take to -- for a loan that's been in restructured to be moved from stage 2 to, let's say, stage 1? Or performing? As a follow up on that, on Otas also mentioned that you've provisioned 25% and you have a hedge in place. That is based on 4Q provisioning as well when you used your [indiscernible] provisioning as far as I understand. That is -- you've not have an incremental provisioning for Otas and this is just -- and so you don't expect any future provisioning on that just to understand. And my second question was on your credit cost. On Slide 12, you showed you have had a P&L impact of TRY 465 million and just trying to confirm with the statements that are released on the disclosure website that shows that allowance were expected credit losses was at TRY 703 million. If there was -- just trying to understand what the difference between the P&L in the presentation and the consolidated charge of [ 703 ] . And if I may, my last question would be on margin side. You've exhibit strong loan deposit spread profile this quarter supportive of margins. I just want to understand, given today's rate decision were -- equity rate was hacked by 75 basis points, which you know will eventually have the impact on funding cost. How do you foresee more margins and the spread progressing going forward?
Thank you, Dennis for extensive questions. We'll first start with the increases in stage 2, I guess, will explain.
Okay, actually, as you also mentioned, our stage 2 ratio help increase from 5.4% to 10.2% level. When we go into detail, actually, around TRY 1.5 billion is 2.3 -- TRY 2.4 billion is coming from consumer loans and consumer credit cards and remaining TRY 8 billion is coming from commercial loan files. And as I mentioned, [indiscernible] is a major contributor to that increase in commercial loan files. Regarding Otas, have mentioned, we're providing 25% provisioning. We have allocated 25% provisioning at year end, and we continue to keep our 25% provision. What does it mean? FX related increases in -- on our [indiscernible], plus interest is also taken into consideration, and thus -- this -- there will be always an incremental P&L charge in each quarter, as -- like in this quarter. So we're -- as a result -- to summarize, we're increasing our provisioning amount for Otas in parallel to FX appreciation and interest accruals. Then you asked us regarding the difference between TRY 465 million P&L impact on Page 12 versus on our financial statements of [ TRY 703 million ]. Like in the past, we're booking our -- we're booking collections from previous years under other income line. And for the first quarters, it amounts to TRY 260 million. So when you take this collection effect into consideration, you will come this net P&L impact on Page 12.
Okay. And there was a question about NIM. We're actually quite positive on the NIM side, despite the Central Bank adjustment today. And because of couple of reasons: First of all, as we have previously mentioned, we have decreased our -- further decreased our maturity in the bank from 5 months to [ 2 4 ] months. So this is 1 factor. And the other reason is actually, still both the loan yields are still having a positive trends. So still there is yield enhancements, still going on. So this is good news. And the bank also did an excellent job in the first quarter in controlling it's deposit cost. So -- we also think that today's Central Bank adjustment was also [indiscernible]. So if you look at the so swap rate today, if you look at the bond prices today, the impact was very marginal. And we think that -- even if there is some impact on the deposit cost, it will be something marginal. And I think this is something that we will be able to compensate by managing our deposit cost through further making more -- penetrating into smaller deposits, increasing our demand deposits. And also, again, continuing with the asset -- the bond yield increases on the asset side. So I think still there is some upside for us in the second quarter. So we're positive on that.
Dennis, you actually had another question regarding our provisioning levels for stage 2. Our stage 2 provisioning coverage is at 13% levels. Excluding Otas cash, it will be still above 7% levels, which we believe is quite strong level taken into account our long portfolio composition collateralization and maturity profile.
Understood. Thank you very much. And if I can just follow up, would you be able to answer on how long does it take for restructuring loan stage 2? When and if does it get classified to stage 1 are performing? Or is there like -- at this stage, it's kind of unclear.
Okay, there are various factors, actually, like asset -- credit rating developments, et cetera. But based on [indiscernible] if I'm not mistaken, at this 1 one year waiting period is required for restructured loans to be reclassified into stage 1.
Our next question comes from Ahmet with JP Morgan.
Just a quick follow up on your Otas exposure please. You mentioned that you're increasing provisions based on FX difference and [indiscernible] interest, but will we see an incremental jump in provisioning, let's say, from 25% right now to 35% as more time is passing under IFRS 9. Or for this to happen there's loan need to go into stage 3? And do you see those going into stage 3 in any -- in the medium-term? And finally, can I also please confirm with you that you've restructured your total exposure to yield TL now. So this is part of the TL loan book.
Just an update on Otas. So we all know that we cannot continue with the existing owners. So there will be some sort of ownership change. So there are a lot of discussions nowadays, this is something that we would like to actually accelerate with the government. So whether there will be sales to a different party or one of the options that we're working on actually is to -- for a temporary period of time actually, owning Turk telecom for a while and selling it's -- ourselves. Because when you look at the existing contracts, [ 65% ] of the, actually, shares are pledged to us. So this is a possibility. So this is something that we're working on. This is one of the options and if that is the case, but of course, there should be a consensus among the lenders. So if this realizes, actually, we think this will be easier for us to sell this strategic company to another group. So this is one of the options. If this is one of the case, this actually group 2 loans, you're right, can turn into an NPL. But at that moment, of course, we will do evaluation. So we think that the amount of reserves that we have -- provisions that we have will be enough to actually more or less absorb this NPL. So if that is the case, still there will be no impact on the P&L or the capital adequate ratio of the bank. So this is one of the options that we're actually evaluating with different parties seriously, nowadays. So this is an option for us.
Thank you very much. And finally, can I confirm the exposure is part of the TL loan book now?
Yes, is TL. But just to clarify one point, was initially TL as well. So it is not because of the restructuring that we converted into TL. So originally, before the restructuring, actually, it was TL rated. And this was actually to finance the local domestic business. So there is no over due nothing actually. Our relationship -- our owner is actually okay. So -- but given the amount of discussions with the group of banks and so on, that is the reason actually why we reclassified under group 2 loans. And that's why we have some provisioning for that. But for the time being, we're comfortable with this.
Our final question comes from Alan Webborn with Societe Generale Cross Asset.
Could you give us a flavor of how much impact on the lending volumes in Q1 have the government supports schemes being helpful they have been? And again...
Hi Alan, it's Ebru here. Sorry, your voice is not very clear. Your question was sorry?
Question was, how much the ongoing and you government support scheme being too late volumes in the first quarter? That was the first question. And then again, more generally, what do you feel about the ongoing momentum in was not going to be a heavy electoral period across Q2 when clearly, and is certain budget where it was in anybody's mind. So we're going to be an impact short-term on growing volumes projects being turn potential support programs until the electrical crisis is sorted out. So I wonder what you think about that environment now.
First of all, [indiscernible] the impact of CGS bond was was somewhat negative in the first quarter. So approximately I would say around [ 1 billion ] or so, which is something very small compared to the rolling that we have. So the impact was more in the last year. But in 2018, it's impact is less. Not only for Akbank, for the system overall. That's a fact. And regarding the elections, I think, we have only 2 months. So today, more or less I can say everything is less like usual.
Alan, can you please move your phone, because the lines are getting mixed up. If you could, thank you. Go ahead please.
And regarding the impact of the elections, what I was saying it was only 2 months away and I think this is something positive for the economy, because there will be clarification as quickly as possible. So I think that this is good for the system. It is good for new -- clarity is good for new investments for more borrowing appetite for growth and so on. So, I think, business will be as usual I would imagine in the second quarter. And this is something very new, quite frankly, which happened about only a few days ago. But when you look at the numbers and so on, it's too early to judge. But it's good to hear that there will be some clarification as quickly as possible in this system. So I think this is positive for the economy.
[Operator Instructions]
I guess, there are no further questions. Hakan, do you want to do the closing remarks?
Yes, maybe final words just before we close the session. The banking sector is one of -- as you all know, Turkish economy's key pillars. One of it's fundamental strengths, and no doubt, Akbank remains crucial player in the system. And Akbank, as you all know, standouts with its stability, focus on sustainability, strong financials, effective risk management, asset quality, efficiency, high level of digitalization, outstanding mobile banking, superior infrastructure. And we're also very excited, as I mentioned during my previous comments, about our new branch model, which we believe will be a new benchmark for the sector. Not just in Turkey, but I think it is also globally. And we will continue to focus on innovation and differentiate Akbank in the sector. And Akbank, our people remain our key, most important asset, as we venture into the future, I'm honored to be working with such a highly motivated and dedicated group of people. And I am very -- as I always tell you, they are much convinced that our team is the best in our sector and I would like to thank each and every one of them. And I also would like to take this opportunity to extend my deep gratitude to our customers and our shareholders. And thank you all once again for joining us today. And I hope the call has been helpful and we look forward to seeing you soon. Bye-bye now
Ladies and gentlemen, thank you for participating. You may now disconnect.