Akbank TAS
IST:AKBNK.E
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Akbank TAS
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Ladies and gentlemen, welcome to Akbank 4Q 2019 financial results announcement.
I now hand over to Ebru GÜVENIR, Head of IR and Sustainability. Madame, please go ahead.
Thank you, operator, and hello, everybody. Welcome to our fourth quarter 2019 financial results webcast and conference call. This is Ebru. You are also familiar with my colleagues who are here with me today: Türker Tunali, our CFO; Levent Çelebioglu, our EVP for Corporate and Investment Banking; and Ilknur from our Investor Relations team.
I'd like to kick things off by going over a number of key highlights of 2019. We completed the year with solid core operating performance. Our full year NIM expanded year-on-year well ahead of guidance despite negative impact from CPI lingers. We achieved superior fee generation and preserved our best-in-class cost-to-income ratio despite delayed loan growth and our low leverage. We realized better-than-guided cost of credit, which was despite proactive NPL recognition. As a result, we have further reinforced our capital strength, underlining our dedication to healthy and profitable growth, which already started to accelerate in fourth quarter 2019.
Now on to the next slide. On Slide 3, you may find the details to our strong core operating performance. Our 12-month top line grew 13% year-on-year to TRY 19.2 billion. Our 12-month swap-adjusted NII reached TRY 14.2 billion. In fourth quarter, our fee income continued its strong pace of 9 months, reaching TRY 5 billion for the full year. Our full year net income was down 6.2% year-on-year at TRY 5,352,000,000. The net income was negatively impacted by cumulative TRY 940 million LYY negative mark-to-market adjustment, impacting ROE by 1.5 percentage points for the full year as well as lower CPI income for the year.
Our pre-provision income was up by 8.1% year-on-year to TRY 14 billion and by an outstanding 32% quarter-on-quarter. Please note that year-on-year growth in PPI reached 35% when adjusted for lower CPI income. This is just to do an apple-to-apple comparison to 2018 pre-provision income.
Our OpEx was up 4% quarter-on-quarter and up by 18.6% year-on-year for the full year, slowing its pace. Please note that there was close to 2 percentage point impact from increase in STIF premiums and depreciation expense coming from the recently completed major data center investments. That being said, our low-cost base continues to give the bank flexibility as our cost-to-income ratio remains best among our peers at 32.9%.
Our top adjusted NIM expanded by almost 60 bps despite the negative 33 bps CPI adjustment, reaching 4.71% for the quarter. On a full year basis, we ended the year at 14 swap-adjusted NIM, but -- up by close to 20 bps, this was significantly above our guidance. Please note that this improvement was achieved despite 83 bps negative impact coming in from significant decrease in the CPI.
So what supported our NIM? On the TL side, 12 percentage points of rate cuts during the second half of the year, from 24% to 12%, reflected very favorably to our deposit costs. To put it in the numbers, our quarter-end marginal deposit cost for second quarter was 22%, which was down to 14% at third quarter and around 10% to 10.5% by year-end. As of today, followed by the 75 bps rate cut in January, our marginal deposit rates have eased down further to around 9.5%, while our back book is still around 10%.
Also, we had shared previously during slow loan growth period at a rate cut cycle, we were very active on the security side, especially on the fixed rate bonds, gaining significant market share among our peers. Average duration and yield of these purchased securities in 2019 will continue to be a supportive factor in our NIM evolution throughout this year.
On the foreign currency side, due to our strong foreign currency liquidity and low foreign currency loan demand, we were able to improve our foreign currency core spread with the easing in the deposit side. We also continue to dynamically manage our average TL funding cost by optimizing repo, swap and money market activities. All of these, once again, underline our effective balance sheet management.
As of January, we are currently operating around 5% NIM. We had shared during our guidance on January 7 that we expect full year NIM to be around 4%. This will take into consideration a total of 150 bps rate cut starting second quarter 2020 with 50 bps per quarter. As we already witnessed 75 bps rate cut in January, we see upside to our full year swap-adjusted NIM guidance by around 40 to 50 basis points.
On this stage, you may also find the details of our swap costs and CPI linker income. Our swap cost includes short- and long-term swaps, which was around TRY 750 million. During the quarter, due to the decline in swap rates, we increased our swap utilization by around TRY 5 billion to TRY 29 billion. Our added short-term swap utilization is around TRY 19.8 billion. Our long-term swap utilization remained flattish around TRY 9 billion. Our CPI linker income for the quarter was at TRY 403 million. For 2020, the portfolio amount for CPI linker income calculation stands at TRY 23 billion. We are starting the year with around 9% October-to-October inflation expectation, and every 1 percentage point inflation change will have 6 bps NIM impact.
Now on to our fees. We had a remarkable leap in our fee income growth, which was up by a superior 33.4% year-on-year to TRY 5 billion, well above our 20% full year guidance. Strong performance was just across the board. Payment systems, which make up 49% of our fees, was up by 22% year-on-year, supported by both issuing and acquiring. You all know that regulation change on payment systems started to be effective as of November. As a result, share of payment systems in our fee breakdown was down from 51% in third quarter to 49% as of year-end. But despite this, total fee income was up by 8% Q-on-Q.
Business loan fees, which is 22% of total, was up by 69% year-on-year, led by strong performance in cash and noncash. Our money transfer fees, which are 8% of our total fees, was up by 17% due to increase in number of transactions and repricings. Bancassurance fees, which is 6% of total, was up by 41% year-on-year, driven by both lending and non-lending-related areas.
Non-lending-related bancassurance sales were up by 45% year-on-year. Digital sales have been very supportive as digital premiums to total premiums are up by 5 percentage points year-on-year to 27%. Wealth management fees, which are 6% of our total, were up by 22%, thanks to the strong innovative product development as well as the state-of-art investment experience in our mobile and new improved end-to-end processes. For 2020, we've guided for high single-digit loan growth -- fee growth. We expect payment system fees to remain flattish while nonpayment start is expected to grow around 20%.
We have a simple, digital and experience-focused operating model. Our digital customer base is about 5 million. Please note that cost of a digital customer is double that of nondigital. Digital banking-related fees make up almost half of non-lending fees. 69% of general purpose consumer loans and 55% of credit cards are sold through digital channels. All of these will continue to support the sustainability of our revenue base.
And now on to our balance sheet. Our total assets were up by 2.1% quarter-on-quarter and 9.2% year-on-year to TRY 387 billion. Total net loans were up by 5% -- 5.9% quarter-on-quarter. Loans make up 54 -- 55.4% of our total assets, up 2 percentage points from 9 months 2019. FX loans are less than 38% of our total loans. TL business banking loans are around 41%, while consumer loans including credit cards are around 21% of our total loans.
Securities are around 22% of our assets, up almost 6 percentage points from the end of 2018, where position was taken strategically. Our optimized and responsible asset allocation, along with our low leverage at 7.1x and robust capital of 19.7%, will continue to support our competitiveness and growth, which was already the case in fourth quarter 2019. Sustainable long-term shareholder value is always at the focus of our capital deployment strategy.
Our TL loans were up by 9.3% quarter-on-quarter and 13.6% year-on-year to TRY 133 billion. The increase was diversified across all segments. Business banking loans were up 9.1% quarter-on-quarter and 15.3% year-on-year to TRY 88.2 billion, which includes Corporate, Commercial and SME and make up 66% of our total loans -- total TL loans. Our strong relationship with our customers will continue to support growth in this segment.
As for the consumer side, we grew 11.3% quarter-on-quarter, 9.3% year-on-year, reaching TRY 31.5 billion. Quarterly growth in consumer loans was led by around 20% growth quarter-on-quarter in higher-yielding general purpose consumer loans. 60% of our GPLs are preapproved. Separately, 41% are salary customers. We believe our investments in advanced analytics will continue to be a supportive factor in retail banking.
FX loans were down by 4.5% quarter-on-quarter and 14% year-on-year as FX loan demand continues to remain weak. We have a balanced loan portfolio. Energy generation makes up around 6% of our total gross loans. Since 2016, 100% of our new loan originations in energy generation have been to renewable projects. As of today, 77% of our energy generation loans are renewables and 52% are government-guaranteed. 7% of Stage 2 and 5.7% of Stage 3 are energy generation loans.
Real estate loans are around 9% of our total gross loans. Real estate loan portfolio is predominantly project-financed. The LTV of our real estate book is around 65% to 80% with most up-to-date valuations. It is also worth to highlight that 20% of the real estate book is FX cash collateralized. As we guided on January 7, due to some latest developments, we moved a well-collateralized commercial file to Stage 3. We have also moved a well-collateralized loan from Stage 1 to Stage 2. As a result, these moves, 14.7% of Stage 2 and 24.6% of Stage 3 are now real estate loans.
Construction is less than 4% of our gross loans. 60% of construction book is FX and 70% of FX part is government-guaranteed on debt assumption. 5.3% of Stage 2 and 5.1% of Stage 3 are construction loans. We believe we have taken significant fundamental measures in terms of classification and provisioning of our loan book. This is why we have guided for the start of the normalization trend in cost of credit from 2020 onwards, and I will come back to this subject later.
As mentioned earlier, the share of our securities book in total assets increased by almost 6 percentage points to 22%. Our total securities book is up by 47% year-on-year, mostly led by growth in second quarter and third quarter in anticipation of easing rate cycle. There was also a mix change between TL and FX, which started in second quarter. The TL securities are now 58% of our securities book, up 4 percentage points from year-end. We have increased the TL portion of our securities book significantly, mainly through fixed securities. As you can see on the right-hand side of the slide, there has been new enhancements throughout our portfolio.
Our TL securities are up by 58% year-on-year to TRY 48 billion. In our TL securities book, there was also a significant shift in composition between CPI linkers and fixed-rate securities. Our fixed securities portion is now at 45% of our total TL securities, up from 27% at the end of 2018, while CPI linkers are at 47%, down by 13 percentage points. Small TL rate securities are only 8% of the total TL securities book.
Our foreign currency securities remained flattish, around TRY 6 billion quarter-on-quarter, up by 20% year-on-year. We utilized some of our excess foreign currency liquidity to increase our foreign currency securities book throughout the year.
So to sum up, average marginal yield of our fixed-rate bond portfolio purchased in 2019 is around 18% with an average maturity of 1.5 years. Average marginal yield of our FX securities purchased in 2019 is around 6% with an average maturity of around 3.5 years. So as a result, both our TL and FX securities will be supportive factors for our NIM throughout 2020.
And now on to the funding side. We have a well-diversified and disciplined funding mix. Deposits continue to be our main source of funding, making up 63% of our total liabilities. Our total deposits were up by 17% year-on-year to TRY 245 billion, while our demand deposits outpaced this growth and was up significantly by 26% year-on-year. 39% of our total deposits is in TL and 61% is in FX. The mix has changed in favor of TL deposits by 2 percentage points quarter-on-quarter despite lower deposit rates and TL depreciation.
22% of our deposits are demand, 77% of the TL deposit base remains to be SME and retail, which is less price-sensitive and secure by nature. Most importantly, our TL LDR remains flat despite accelerated loan growth during the quarter. Our FX liquidity continues to be very strong with an FX LDR of 51%. Our focus remains on broadening our deposit base.
We have a well-diversified borrowing mix, which is around 14% of our liabilities. We have reduced our short-term wholesale borrowing by TRY 2 billion over the last 2 years. Our total wholesale borrowing is around TRY 8 billion with an average maturity of around 3 years. As we guided on January 7, we have redeemed our $500 million Eurobond due in January. Due to our ample FX liquidity and low FX loan demand, we will be opportunistic in our borrowing strategies depending on pricing.
And now on to asset quality. Our Stage 2 loans of TRY 30 billion make up 13.2% of our gross loans. 40% is in FX and provisions are fully hedged with FX loan provision. The increase in FX composition is mainly due to the real estate loan I mentioned earlier, which has strong collateralization. Our Stage 2 coverage ratio is at 11.1%. Our restructured loans remained at TRY 17.8 billion, flat Q-on-Q, and are all followed under Stage 2. Only 8% of Stage 2 are past due 30 days while around 77% are nondelinquent. Our Stage 3 coverage is at 56.2%. Excluding the write-off from the vintage portfolio and NPL sales impact, our Stage 3 coverage would have been 60%.
We ended the year with 6.6% NPL. As we had mentioned and also guided on January 7, this was mainly due to the real estate commercial file. Our solid collection performance continues to be diversified among corporate, SME and retail segments as well as various factors. Collection performance so far this year has continued to be strong. We expect this to continue throughout the year. Also, please note that we expect Stage 2 plus Stage 3 in our total loans to decline in 2020 by a few percentage points from the year-end level of around 20%.
Our cumulative cost of credit ended the year at 280 bps, below our guidance of 300 basis. This is despite the fact that we have proactively and prudently recognized NPLs in third and fourth quarter of last year. As I just mentioned, when we adjust for the NPL and write-off of our Stage 3 coverage ratio is actually up to 60%. This most certainly underlines our adequate provisioning policy.
On the left-hand side, you might find the P&L and bps impact breakdown of our provisions. On a side note, Stage 3 recoveries for fourth quarter was at TRY 204 million, amounting to TRY 639 million for the full year. Currency impact remains immaterial. We expect cost of currency evolution to start improving as of first quarter of 2020, and initial signs of January are very supportive of our full year guidance.
Our superior capital position continues to improve in fourth quarter despite the accelerated growth. Our total capital reached 19.7% and our Tier 1, which is equal to CET1, is at 16.9%, both significantly above regulatory requirements.
A few highlights. Internal capital generation continues to be one of the key drivers of our robust solvency ratios. Improvement in interest rate environment has positively impacted mark-to-market adjustment of our securities, while the negative impact from the currency depreciation on our capital was mitigated by the Tier 2 to some extent. We have an outstanding TRY 22.8 billion excess total capital and TRY 20.3 billion excess Tier 1, both according to Basel III minimum requirement.
So to sum up the results, we ended the year with strong core operating performance, led by solid beat in NIM and fee growth. Our robust core operating performance of fourth quarter continues at the start of the year. We had a significant improvement in core in 2019, and as I mentioned earlier as well, started the year with 5% NIM. The strong NIM, along with the earlier than anticipated rate cut, will create upside for our full year NIM guidance.
Our cost of credit remained below guidance despite proactive NPL recognition. Asset quality trend in January is very supportive of our 2020 guidance. So the main deviation in our 2019 ROE came in from 2 areas: delayed loan growth and the mark-to-market charges of LYY loan. I had already mentioned earlier that this impact was around 1.5% on our ROE. As for 2020, our mid-teens ROE guidance already contains a potential mark-to-market at similar levels.
To sum up, we are starting 2020 with a superior capital position, strong liquidity, optimized asset composition and low leverage and expect all of these to support our growth ambitions for increased profitability.
Operator, you may now open the lines for Q&A.
[Operator Instructions] Well we already have a question from Deniz Gasimli from Goldman Sachs.
Just 2 questions on asset quality, please. So your NPL ratio at year-end is at 6.6%. And as you've discussed previously, your NPL guidance for 2020 is below 6%. And I suppose it's also driven by the special some write-offs, similar to what you've done in the fourth quarter. So do you share what's the expected kind of amount of write-offs, maybe in bps terms, that you expect to do in 2020 that will bring the NPL ratio to below 6%? And that's the first question. The second question, your Stage 3 coverage now is at 56%. Is there any maybe target or need to increase this coverage as the year goes on in 2020?
Deniz, this is Türker. Let me start with your first question. This less than 6% in the NPL guidance for 2020 contains some write-offs per latest real estate legislation as well as some potential NPL sales. The impact of both is at around 1% level. So if we exclude that 1% so the NPL ratio would be at around 7% levels for year-end of 2020. That's the first thing.
And with regard to the second question on the coverage, we will continue to -- with our prudent IFRS 9 methodology and reflect the results to our coverage, NPL coverage. So it will, for sure, depend on the composition of NPL book as well as the collateral. But what I can say is probably, we will at least stay -- we will stay at least at these levels. But just to remind you again, as Ebru has mentioned, if we exclude the impact of the write-offs and NPLs in last 4 -- into last quarter of -- in the fourth quarter of last year, actually, our coverage of NPL portfolio was slightly up to 60%. So you can't take it as a proxy so we will stay at least at these levels.
[Operator Instructions] Next question comes from Gabor Kemeny, Autonomous Research.
I firstly have a question on margins. Can you help us reconcile your -- the change in your margin outlook? I think you have noted that you mentioned a 40, 50 basis point upside to your initial guidance following the recent 75 basis point cut. Does it mean that you see such a NIM upside from a 75 basis point cut? Or do you now expect further rate cuts to come? And the other question on fees. Which part of your fee income do you think is more susceptible to regulatory changes? And it would be useful if you could please elaborate a bit on the 20% growth you see on the nonpayment side, how you see lending fees developing, in particular?
Gabor, this is again Türker. Let me start with the NIM evolution actually for this year. As Ebru has mentioned in her presentation, we had -- our fourth quarter average NIM was at around 4.7% but it was the average. So we have started the year, we kept 5-ish NIM and still, we are operating at around these levels.
With regard to our guidance of -- total guidance -- NIM guidance of equal or above 4%, actually, this guidance was done. This -- the budget process was done during November period before we were -- we actually see such a NIM at around 5% levels. And the first rate cut actually came before our expectation. So for full year actually, we are expecting in total of 200 basis points rate cut for 2020, around these levels. And when we take this NIM of 5% nowadays, for sure, it's obvious in the coming quarters, we will have some gradual decline towards the end of the year. But on average, we feel very comfortable that there is an upside of roughly 50 basis points to our guidance of 4%.
Just maybe to add one thing. When we were guiding during the guidance time, we wanted to show that -- we wanted to actually cap the downside on the NIM at 4% because at that time, that's where the NIM was around. So we wanted to say that the 2020 NIM will not be below 2019 NIM. And as Türker mentioned because we were expecting delayed rate cuts towards -- mostly towards the second half of the year, always the impact on NIM from that would have been delayed. Now having earlier rate cuts obviously has an impact. And as we ended around 5%, that also has an impact. So those 2 create the upside.
Yes. And with regard to your second question, yes, there are nowadays some discussions and -- which has also come to the press today that the regulator is working on some legislation on the fee side for commercial customers. Actually, we'll see how it will end up. But we are operating in a competitive market so all the banks are applying similar fees to their customers. So whatever the impact will be, the impact will be at similar magnitudes among the banks. But we'll see how that potential regulation will come up.
That's very useful. Just to clarify, did you mention that the discussion is about the fees you charge to corporate as customers?
Yes, corporate, commercial. So in the past, there was a regulation task for -- for retail customers. Probably, this would be now on the commercial side.
But just to add one thing on that side. This is why we have shared so much detail regarding our overall fee breakdown because we wanted to show that it's not just one area. There are other areas that we can also diversify our fee base.
[Operator Instructions] We have another question from Alan Webborn from Societe Generale.
Could you just confirm? I think you said that your 2020 mid-term -- mid-teens ROE guidance included a further 1.5% impact from LYY. Is that true and on what basis is that in terms of FX changes and so on? Could you just clarify that?
Alan, this is Türker again. Yes, you are right actually with your understanding. Our mid-teens ROE targets contain further potential mark-to-market adjustments to that LYY loan. And then we made that assumption, we have -- we assumed that the valuation of the company will not change, and there will be some FX Turkish lira depreciation in line with inflation as well as there will be some interest accrued on the loan.
But having said that, while you look at the company and maybe also Levent may give some additional feedback on the LYY process as well. When you look -- when you only look at actually market cap evolution of the company in the last 1 year, it has almost doubled. And the gap between our book value and the market cap has diminished considerably. Actually, despite that positive trend, we want to stay cautious in our budget and we have assumed additional mark-to-market adjustments. Maybe some -- maybe also Levent can give some feedback on the profit side.
As you follow in the market that current valuations of the LYY, it's very close to the -- or actually the loans on our books. That even means that even today that we, first of all, we have no intention to. But even we made an SPO that we don't need to make any additional, let's say, provisioning on that.
But to be on the safe side, even the latest valuation on December that the value has increased, which has been done by an independent valuation company, increased substantially. Normally that, banks take a kind of mid-range from the valuation. But this time that in order to be on the safe side, we take the lowest value they saw in their, let's say, maximum and minimum values that we take to lowest value. So it gives us a cushion for 2020.
A few words that, currently, we already got -- Morgan Stanley has already sent the teasers to potential buyers. And we get some positive returns that some of the companies has already called us that show their interest. And we are updating the business plan, which I believe that it will have also a positive impact on the valuation on the positive side. And also, we will prepare the due diligence for due diligence data room. And I hope that after first quarter, after March, then there will be certain activity by the interested parties.
Well, it seems that we have no further question on the line. I give back the floor to the company.
Okay. So there's one more question coming in from the web. What sort of migration was there from Stage 2 to Stage 3 in 2019? And how do you expect that to evolve in 2020?
As Ebru has mentioned during her presentation, we believe we have taken all necessary fundamental actions, measures in terms of classification as a provisioning of our loan book. And in the -- and because of all these measures we have taken, we are expecting a normalization in 2020. When we put that into figures, in 2019, the migration from Stage 2 to Stage 3 was roughly at 25%. For this year, for 2020, we expect that migration to go down to mid-teens levels. And the trend in the first month, maybe it's too early days, shows a positive trend and in line with our expectations.
Okay. Are there any further questions? All right. So maybe it's time to now end the call. Thank you for all for your kind attention. We are fully committed to our transparency as you know. And as usual, we'll continue to be in touch with and in close contact with all of you throughout the year. Thank you for being with us on a Friday evening as well, and have a lovely weekend. Bye-bye.
Bye.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.