Akbank TAS
IST:AKBNK.E
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Akbank TAS
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Ladies and gentlemen, welcome to Akbank Fourth Quarter 2018 Consolidated Financial Results Conference Call and Webcast. I will now hand over to Mr. Hakan Binbasgil, CEO. Sir, please go ahead.
Dear friends, welcome to our 2018 full year financial results webcast and conference call. Today, I have with me Türker Tunali, our CFO; and Ebru GÜVENIR from our IR and Sustainability team.
Let me get straight to the numbers. We ended the full year with 13.6% ROE and TRY 5.7 billion net income. This is a relatively low profitability for Akbank, and the main reasons behind this were core spread compression on back of rising cost of funding, deleveraging and abundant provisioning. Excessive volatility in the currency, low growth and higher interest rate environment had a negative impact on asset quality. With prudent IFRS 9 implementation and the new staging rules, there was a rise in our provisioning expense. Still, we were able to end the year with a robust solvency ratios, 16.8% for total capital and 14.3% for Tier 1. Proactive risk management actions played a key role in our solvency ratios. We deleveraged our FX loan book, we reduced our FX securities and FX [ variable ] funding. As a positive, these actions have helped us reduce FX risk-weighted assets and our capital sensitivity to FX moves going forward. We were also cautious, as usual, in peer lending.
We have always been disciplined in our liquidity management and ended the year at 98% total LDR and 72% FX LDR. Both are significantly below sector averages.
On top of all these, our best-in-class operational efficiency of 32.3% provides flexibility in a high-inflation backdrop.
As we shared during our Analyst and Investor Day on January 8, our branch restructuring, our new branch model, along with our investments in digital, are paying off on the cost and revenue side. Therefore, we will continue to invest in our future. Our forward-thinking strategies, solid liquidity and strong capital will give us significant competitive advantage in capturing growth and sustainable profitability going forward. And now, Ebru will share our performance in detail. And then we will be more than happy to answer questions.
Thank you, Hakan bey. Despite deleveraging and higher funding cost, our top line grew 29% to TRY 17.1 billion, supported by higher CPI linker income. Our cost adjusted NII reached TRY 13.4 billion, up by 30%. Our OpEx growth was at 19%, ahead of our guidance due to higher inflation and currency depreciation. Our net income was down 5% year-on-year while our preprovision income was up by an outstanding 39%. In 2019, we foresee lower CPI income contribution. However, we still target mid to high teens preprovision income growth. Our low cost base gives flexibility to us. As proof, we delivered a superior cost to income ratio at 32.3%, significantly below our guidance of 35%.
After 2019, P&L expenses which are roughly 40% of OpEx, will be impacted from pass-through effects of 2018's high inflation and currency depreciation will impact mainly IT expenses. Thus, we are still aiming to maintain our cost income ratio below 35% for the full year. As we guided on January 8, we started 2019 with low profitability due to tight
[Audio Gap]
growth and less CPI linker income contribution. Therefore, as budgeted, our first quarter 2019 cost to income ratio is expected to start at a higher level than our full year guidance and then normalize throughout the year.
Despite rising funding cost and low lending pace in fourth quarter, our quarterly swap-adjusted NIM was up by 11 bps Q-on-Q to 4.11%. This was supported by higher CPI linker security deals while our Q-to-Q full year swap-adjusted NIM was at 3.98%, well ahead of our guidance of 3.5%. In 4Q, our Q-on-Q [ fund utilization ] remained flat at USD 2.4 billion on average. However, swap cost was higher at TRY 704 million. Below, you may find our quarterly swap cost on a short-term basis.
For first quarter 2019, funding costs have started to come down over the last few weeks. Our new lending activity is moderate, led by TL corporate loans. This indicates a slight positive TL loan growth for us, which supports our guidance. Core spreads, which are still low, have been gradually improving, mainly since the decline in funding cost. First quarter 2019 swap adjusted NIM is currently below our full year guidance. This is totally in line with our expectations as we budgeted for NIM to improve on a sequential basis and our cumulative NIM to be equal to or above 3.5% for the full year.
Despite our deleveraging and lower new loan generation, our fee income growth has continued to be robust, reaching above TRY 3.7 billion, up 26%, which is significantly above our 15% full year guidance. Once again, payment systems, which make up 53% of our fees, have performed very strongly, up by 43%, thanks to both issuing and acquiring.
Issuing side was affected positively from the increase in interchange fees and 14% year-on-year volume growth, thanks to our solid customer portfolio. Agile managed acquiring side resulted in steady price adjustments, along with a 15% volume increase. We had strong performance in noncash loan, where fees were up by 55%. Wealth management fees were up 31%, thanks to our strong cooperation with our subsidiaries Ak Yatirim and Ak Portföy as well as leveraging our digital platform and our consolidated organization.
Direct banking fees, which are all transactions outside of the branch, are 49% of nonlending fees. Our direct customer base has reached 4.7 million, up by 15%. 69% of general purpose consumer loans and 55% of credit cards are sold through direct channels. In 2019, we expect to keep the strong performance in fees and end the year above 20% fee growth. So far, we are performing in line.
We have transformed 228 branches to our new branch model as of 2018. We aim to transfer around 100 additional branches in 2019. In order to realize the benefit of this new branch model quicker, we have already opened up the new screens and analytical models to all of our existing branches as of end of third quarter. Many of you have had a chance to visit our branch earlier this year and get insights into how we have been simplifying life for our customers and also our team. For branches that have been operational in the new model over 1 year, migration of cash transactions to E-tellers is about 60% and income generated is up by 30%.
Now let's talk about our balance sheet. On a consolidated basis, total loans now make up 60% of our total assets, up from 56% in third quarter, while liquid assets are at 6.5%. Our security book is 16% of our total assets. Deleveraging in our loan book during fourth quarter was more or less parallel to private peers.
In TL loans, our market share as of year-end stood at 8.2% while FX loans was at 7.2%. Our TL loans were down by 11% year-on-year. Our TL loans make up 55% of our total loans. Our FX loans were down 18% in FX terms. However, please keep in mind that we have written off around TRY 0.6 billion Otas loans. Excluding this write-off, our FX loans would have contracted by
[Audio Gap]
All in all, our total loan growth was at 1% for the year.
As we shared with you earlier this year, we target to grow around 10% in total loans in 2019, which will be led by TL loan growth. Our strong capital will no doubt give us a significant competitive advantage in achieving this return-focused growth. We believe loan growth will accelerate in the upcoming months as yield will continue to come down. And as I mentioned earlier, we have already started to see early signs on the TL side.
During the first 9 months, we took some proactive risk management actions and made a significant reduction in our FX securities book from $9 billion to $5 billion. In fourth quarter, we maintained our FX securities book at $5 billion. Our TL securities book was up by 13% Q-on-Q, mainly led by fixed securities, resulting in a 4% growth for the full year. In 2019, we will be proactive in treasury operations.
Onto the funding side. We have a well-diversified and disciplined funding mix. Deposits, which make up 59% of our total liabilities, were up by 4% year-on-year, of which 39% is TL and 61% is FX. 80% of the TL deposit base is SME and retail, which is less price sensitive and secure in nature. Also, our demand deposit base increased from 18% in 2017 to 20% in 2018. We will continue to broaden our deposit base and increase our share in demand deposits. And our new retail banking model, where we have merged the consumer and SME business units, will be an important driver for this.
Our total LDR is at 98%, well below sector's average of 114%. And our FX LDR is at 72%, which is significantly below sector's 99%. We have a well-diversified borrowing mix, which make up only 17% of our total liabilities. Our first indication rollover is in April, which is around $900 million. Due to our strong FX liquidity and our expectation for flat FX loan growth in FX terms in 2019, we plan less than 100% rollovers in syndicated loans. We do not have any capital market redemptions until 2020. Plus, we have ample FX liquidity to serve more than 2 years of wholesale funding without borrowing $0.01 from the market. However, we will be opportunistic in our wholesale funding strategies, depending on the pricing.
And now onto asset quality. First, I would like to give some insight regarding the new structures ex Otas loans. As we guided, additional 3% provision will set the tide for the ex Otas loan before the new structure. After which, 33% coverage and loan was written off. Due to IFRS 9 classification rule, the new loans to the newly formed SPV has been booked under loans measured at fair value on the asset side. Therefore, this new loan will no longer be subject to staging rules. This also impacts the ratios we have shared with you in the past quarters. So for comparability purposes, we have adjusted third quarter stage 2 coverage ratio and total coverage ratio. Our stage 2 loans of TRY 29.4 billion make up 13.2% of our loans. Comparability among banks is difficult due to different macro and model parameters.
As we guided, improvement to stage 2 during fourth quarter, which includes all of our restructured loans, were mostly corporate and commercial and in a very diversified manner. Around 70% of our stage 2 loans is nondelinquent. Our coverage for stage 2 loans stand at 9.8%. As for our stage 3 coverage, it remains 58% with strong collateralization. We have set aside TRY 100 million of free provision in fourth quarter, reaching a total of TRY 550 million. Our total coverage, excluding the free provision, is at 106%.
Our total NPL reached 3.8%. However, due to our deleveraging, this ratio is inflated to some extent. Inflows into stage 3 were mainly commercial and SME. Still, our NPL ratio fared better to private peers average of 4.6%.
For 2019, we have guided for less than 6% NPL, excluding any potential NPL sales. As major corporate files have been dealt with last year, we believe 2019 NPL inflows will be mainly SME and customer driven.
Looking at the previous cycles of loan growth and NPL formation, we can say that NPL is a lagging indicator. As a result, we expect NPL to continue trending higher throughout the year, which is in line with our budget. On a positive note, so far, collection performance continues to be supportive.
Our total cost of credit reached 257 bps for the full year. Once again, our deleveraging should be taken into consideration while assessing this ratio. 40 bps was due to model update, 50 bps was due to currency depreciation which was 100% offset by our long foreign currency position and therefore, had no impact on net income. So excluding the model and currency impact, net cost of credit was at 167 bps.
The total impact of Otas in cost of credit was 74 bps for the year. Please note that in third quarter, currency depreciation increased this cost of credit significantly, which you can see in the graph here as well. This, as you know, had no net P&L impact but inflated the cost of credit. In fourth quarter, the TL appreciation impacted cost of credit favorably, which was offset by the trading loss. So again, net-net, no P&L impact.
We will continue to prudently apply IFRS 9 provisioning as we've guided for cost of credit below 300 bps for 2019. So far, we are operating in line.
Despite the volatility and currency depreciation, we ended the year with very healthy and solid solvency ratios. Our CAR is at 16.8% and our Tier 1 is at 14.3%, well both above regulatory requirements. Since our capital increase was completed in January 2019, these ratios do not include 80 bps additional impact that will be coming this year. We will continue to optimize capital deployment and achieve high sustainable returns for our shareholders. And also in short, sustainable long-term dividend payment. Now onto the last slide.
To sum up, we have shared with you throughout the presentation, the actual figures on the slides. 2019 will be a year of rebalancing, which we believe is healthy. We have acknowledged the challenges and taken actions accordingly. We are excellently positioned in the market with our solid capital, strong liquidity, robust infrastructure, best-in-class efficiency and digitization. All of these give us significant competitive advantage to capture sustainable profitable growth going forward.
This now ends our presentation and operator, you can open the lines for Q&A.
[Operator Instructions] Our first question comes from Sam Goodacre, JPMorgan.
Hi, Hakan bey, and team. I've got 2 questions. First one obviously is one that you've been asked quite a lot before, Hakan bey, is related to your dividend. I think before you've reiterated that the long-term divi payment is intact. There's still, I think, a bit of a question mark perhaps about any dividend related to 2018, and there seem to be mixed messages coming out of various banks. So are you in a position yet to confirm if you shall be recommending to the board a dividend payment? That's my first question. And the second one is about deposit costs, which already in decline, appear to have decoupled somewhat from the Central Bank rate, given we haven't had any loosening in policy from the CBT. Could you perhaps tell us a little bit about the trajectory in deposit costs you've seen to date? So from pricing versus back book and obviously in line with the fact that you expect deposit costs to come down further throughout the year, but perhaps you could just explain this decoupling from that Central Bank rate.
Sam, thank you very much for the 2 important questions. Regarding the dividend, I will make a similar statement to what I said actually during the Investor Day on January 8. So this year is kind of in a way, a transition year. So as you know, there was actually a letter from BRSA telling us that there will be a minimum core capital levels just to apply for dividend payments. And also, we have actually just completed our rights issue about almost a week ago. So this year, I mean, officially, the bank has not made the decision yet. But having said this, given the letter by BRSA and our recent rights issue, I mean, I think it's unlikely for this year. But having said this, the level of capital actually is progressing very well as Ebru just mentioned a couple of minutes ago. So we have abundant capital for the time being. And on top of this actually, we also have to add this rights issue, so roughly both on Tier 1 and both on total capital, I think we have to add another, roughly speaking, 80 basis. So we have, actually, a lot of capital. So as the management team, we are aware of this. So as I mentioned before, we would like to work with capital buffers where the minimum is 12, our internal limit is 14. So I'm aware of the fact that the current level of capital is well above this. But our long-term strategy is the same, so there's no difference in that, sustainable and good returns for our shareholders. So we will evaluate this in due course. So dividend payments are -- we are aware of the fact that this is very important for our shareholders, so we will optimize that capital. But 2018, I'm not sure about this, but we are aware of this and we are also aware of the pressure. I mean, of course, we have to maximize the returns, so we will see what we can do. And regarding the deposit cost, actually, the trend is quite positive for the bank. As you know, there has been quite a long time where the cost of time deposit was greater than the yield on our loans. So that was the case for quite a while, for a couple of months. So the good news is nowadays, when you look at the portfolio, the numbers are improving. So the trend is still continuing, deposit costs coming down. And one of the reasons for this until today is the sector was also deleveraging. But looking forward, of course, as we are management, it's important for everybody, it is also important for us. But so far, it was so good. But for how long will this continue? We will see over time. And also, it really depends on the inflation in the country. And also at the macro level, the economy is also doing well. So inflation was coming down for the last couple of months. Also, current account deficit, there is significant improvement in this. So current account deficit is approaching around USD 20 billion levels, which is very good news for Turkey, imports, exports, so it's good for us. So we will see over time. My estimation would be deposit costs, still coming down but it also will be -- it will be dependent on the level of inflation in the medium term, long term as well. But the trend is also positive and positive in the sense that it is coming down.
[Operator Instructions]
There is one question on the webcast asking about the forbearance impact. As you all know, the forbearances actually were lifted as of the end of last year, so there's no forbearance impact in terms of our capital numbers. These are all back to old days capital figures, both for Tier 1 and total capital.
We have a follow-up question from Sam Goodacre, JPMorgan.
Yes. I feel I'd just take the opportunity to ask a bit more about the 30% increase in income you have seen at those branches where you have had the transformation. So could you tell us if that 30% is from new clients who are attracted to your new branches, is it from higher cross-sell to existing clients? Basically, give us a bit more color and granularity on that sharp increase in income you're experiencing when you transformed your branches.
Sam, I think it is both. First of all, with this -- all that artificial intelligence, machine learning, there's this kind of brain, let me say, that we have implemented in our multichannel distribution, not only in branches but across all channels. So this is really helping us to improve our cross-selling opportunities. So whenever a customer comes, actually, depending on the customer needs, depending on our previous analysis, I think that the bank is much more productive in cross-selling its products. So I think this is one key factor in that increase. And the second one is actually -- and the new branch environment is really significantly different than the existing experience in our country. So therefore, there is this word of mouth in the market. Service quality is actually exceptional in those branches. People -- actually, our people are also mobile with iPads and everything, so they are selling inside the branch and also, they are visiting our customers outside the branch, and new customers as well. So all these things altogether actually gives us actually outstanding number. So I think it's mixed, existing clients as well as new client acquisition. And also, the bank is a 70-year old bank, so we have active customers, like roughly 8 million. But on the other side, we are still having some customers with not that much of activity. So these new technologies are also enabling us to catch some of that unused potential in the bank. So as a result, we were able to obtain those numbers.
Sam, here's Türker. You asked actually -- I just want to also give you some color with regard to deposits -- how deposit cost is evolving. Actually, when we look at the back book at the end of year and nowadays, at the back book level, we were at around 21%, 21.2% levels at the end of the year. Within this 1 month, it was down around by 80 bps. And when I look at the closed book, front book is again around 40 basis lower than the back book, so which gives more improvement area in deposit cost.
[Operator Instructions]
There's a question coming in from the web. Would you be interested in Tier 2 or a Tier 1 issuance?
A Tier 1 issuance, probably not because we have heard about our level of capital, so we really have a lot of buffer. And on top of that, it's an expensive product. So because of these 2 conditions, it is very unlikely in our case. Tier 2, we will be tapping the, actually, markets, wholesale markets, whenever the price is right. The existing level of pricing will be probably a little bit high for Akbank for the time being because we have a lot of liquidity, FX liquidity as well. But it all depends on the, actually, market conditions.
And there's another question from webcast. Will you be hedging your provision expenses for currency in 2019? Yes, we will continue with the same approach.
[Operator Instructions]
Okay, there's another question on the web. What is the share of your restructured loans in stage 2? The restructured loans basically in our stage 2 are around 36%, 37%.
And there is another question again from webcast. What is the reason behind the lower effective tax rate in the fourth quarter? As your Ministry of Finance had announced tax -- administered a law in May 2018, which was also impacting net profit of foreign branches, so we have reflected that impact into the fourth quarter results.
There's a question regarding if we are considering any NPL sale in 2019. We haven't budgeted or announced our 6% NPL guidance regarding -- including this, so it depends on the market conditions. So there's actually a downside in this to our NPL, if we do sell any NPLs. Are there any further questions?
There is no further questions on the audio. Dear speakers, back to you for the conclusion.
Dear friends, once again, thank you for your kind attention. As you know, we are fully committed to transparency and as usual, we will continue to be on the road throughout the year and look forward to meeting many of you in person. Have a good evening and thank you very much once again.
Bye-bye.
This concludes today's conference call. Thank you for your participation. You may now disconnect.