Albaraka Turk Katilim Bankasi AS

IST:ALBRK.E

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the Albaraka Türk First Quarter 2022 Conference Call. [Operator Instructions] But first, I will now hand you over to your host, Mr. Mustafa Cetin. He's the CFO of Albaraka Türk. Mr. Cetin, the floor is yours.

[Mustafa Cetin, executive]

Thank you very much. Thank you very much for joining us today for our investor presentation for the first quarter of 2022. I would like to talk about our financials first and then in the Q&A session, if you have any further questions, I will try to answer.

I will start with Page 3, Albaraka Türk first quarter of this year regarding the balance sheet, income statement and key ratio. The first part regarding the balance sheet, our total assets, year-to-date growth is 8.2%, and it reached TRY 117 billion (sic) [ million ]. Total funded credit side, we have almost the same year-to-date increase, 8.1% and it reached TRY 61.5 million levels. Our NPLs, on the other hand, increased 15% from TRY 2.8 billion (sic) [ million ] to TRY 4.3 billion (sic) [ million ] levels.

Our deposits has the same increase on the total assets on the credit side with 8.4% and it reached TRY 98.9 million. Our shareholders equity is TRY 4.8 billion (sic) [ million ]. It has 4% increase on year-to-date pace. On the income statement side, we have passed very profitable first quarter, just like the other banking sector numbers. Our net profit share income, year-on-year increase is more than 200 percentage. It reached TRY 811 million.

Net fees and commissions side. We have very sizable increase on debts again, more than 100% on year-on-year basis. We have TRY 159 million in net fees and commissions in the first quarter.

Our provisioning, we have very sizable provisioning in the first quarter which implies 430-ish-percent on a year-on-year basis. We have TRY 1.2 billion (sic) [ million ] provisions in the first quarter. On the expenses side, we have a personnel expenses and operational expenses, the main expenses of our income statements. The personnel expenses, the increase on year-on-year is only 24.4%. On the operating expenses side, which is 48.3%. This operating expenses mainly affected from the increase on the foreign exchange, also inflationary factors affect operation expenses side as well as personnel expenses.

On the personnel expenses side, we will touch in the further presentations. We have under inflation levels from personnel expenses side. As a result, our net profit has 251% percentage increase on year-on-year base and it reached almost TRY 200 million, TRY 194 million our net profit for the first quarter.

On the right-hand side, you see the key ratio. We have capital adequacy ratio in the first quarter of this year as 13.64%, which implies 126 bps decrease on the year-to-date basis. On Tier 1 side, we have 8.96% our Tier 1 ratio and our NPL ratio is 6.67%. It is slightly higher than the year-end NPL levels.

On the provisioning side, for NPL provisioning, we have more than 70% levels, which is almost the same as year-end provisioning stages. And it is a little bit higher than the year-end. It is 70.36%. Our net profit share margin, you see that there is a still positive development on the net profit share margin since our credit has higher returns. On the other hand, our cost of funding side remains stable. So as a result, our net profit share margin has been increasing. Our cost/income ratio, we have 22.6% cost/income ratio, which is better than the year-end figures on that side.

On Page 4, we have main highlights on the asset side. Our total assets reached TRY 117.8 million. Our total funded credits side is TRY 61.5 million levels and the total collected funds reached TRY 98.9 million. On equity side, on the right-hand side, you see still we have positive development, but at a slower pace. We had TRY 4.8 million equity in the first quarter of this year. The details of activity, you can see on the left-hand bottom side, common equity Tier 1, additional Tier 1 and additional Tier 2. The total is 13.64%. In the first quarter of this year, it was 14.90% at the end of 2021.

On the right-hand bottom side, you see the net profit share income and net profit share margin details. As you see net profit share income has been increasing, beginning with the last quarter of 2021. And in the first quarter of 2022, it is still going up. And I believe this year, if everything can be same in the Turkish economy and [ available ] side. If you don't have any fluctuations on the currency and other things, we will see most probably improvement on net profit share margin side as upward trend.

On Page 5, you see the asset composition details. The funded credit side is the major side on our assets, which is 52.2%. Securities portfolio has been increasing, it reached 16.7% ratio. Cash and cash equivalents, liquid assets 28.5% and others, 2.6%.

Below, you see the total securities portfolio figures. End of the first quarter, our total securities portfolio reached TRY 19.7 billion (sic) [ million ], which is the historical highest levels for the securities side. Since the securities income is better than the many cash credit side. Our treasury management would like to increase the securities portfolio because of the returns on the securities at latest quarters.

On the liquid asset side, you see we have 70% of assets are liquid assets. Liquid assets include cash and cash equivalents, financial assets measured at fair value through profit/loss, financial assets, measured at fair value through other comprehensive income. This is a definition of liquid assets, and it reached 47% levels at the end of the first quarter.

Securities yield on the other hand, you see the securities yield. It has been increasing, and it seems that it will continue this increase. And because of this increase side, our securities portfolio addition to our profitability has been rising.

On Page 6, you see the operational performance breakdown comparing to the same quarter of last year from TRY 1.4 billion (sic) [ million ] levels to TRY 3 billion (sic) [ million ] levels. As you see, there is a double increase on the profitability side. The major factors that additional income on the side is profit share income first. And then trading income also has a sizable positive effect on that side, plus fees and commissions and other factors affected this income developments.

On the right-hand side, on quarterly basis, you see the profit share income situation. At the end of the last quarter, you see there is a more than double increase on the net profit share income side. Starting from the last quarter of last year, it continued in the first quarter of this year and most probably we will see the same shape moving forward of this year, unless that is -- there will be unexpected development on the foreign currency or interest levels or other things side in the local and global economy.

On the left-hand bottom side, you see the net fees and commission development. As you see, there is a good increase on that side, and it is going up on a regular basis on quarter-on-quarter base and most probably we see the same shape moving forward.

On the right-hand bottom side, we see the cost and yield movement as net profit share margin, cost of collected funds and credit yield figures. You see the credit yield has been going up especially Turkish lira credit yield has been going up and foreign currency yield has been going down. And the Turkish lira side of our balance sheet has been rising, thanks to some factors in Turkish economy. And cost of funding side, cost of collected funds side still has been rising, but at a slower pace.

On Page 7, you see the funded credit portfolio details, the total funded credits in the local currency, Turkish lira in terms of foreign currency as Turkish lira and foreign currency in original USD terms. You see the Turkish lira funded credit has a 25% increase on a quarterly basis. So which means -- which in the case that our balance sheet has been going to -- coming from U.S. dollars and foreign currency. There are [ ongoing ] Turkish Lira denominated, I mean, credits and funding side. So it's a good -- as a result, if it reflects our balance sheet in terms of foreign currency and local currency distribution and it affects positively our profitability.

On the right-hand side, the foreign currency, as foreign currency, the credits has been decreasing as 30% levels, which indicates our credit portfolio in the foreign currency terms has been decreasing, Turkish lira currency has been increasing. So it's good in terms of managing the foreign currency and local currency problems in our portfolio, and it will affect positively, as I said, our profitability.

On the left-hand bottom side, you see the composition of total credits in terms of corporate SME and retail. Corporate credits, as you see, reached 70% levels, SME, 22%; and retail, 7.3% levels.

The currency composition on the right-hand side, you see the major part is 48% Turkish lira, 37% U.S. dollar, and 14.9% euro. In the previous quarter, these figures are less Turkish lira and more foreign currency composition we have in our funded credits, and it is getting better on Turkish lira increasing side.

On Page 8, you see the asset quality details. The gross funded credits by groups in terms of groups, Group 1, Group 2 and NPL. As you see, our NPL level reached 6.7% levels. On Stage 2, we reached 10.3% and Stage 1, 83% in our credit portfolio by groups.

On the right-hand side, you see -- on the right-hand side, yield on performing credits. Yield on performing credits, as you see, there is an upward trend, especially in Turkish lira credits. As I said before, you see the details here. It reached 17.1% at the end of the first quarter. On the other hand, the returns on foreign currency credits has been decreasing at a slower pace, and it is 4.2% levels at the end of the first quarter of this year.

On the left hand bottom side, you see there is upward trend on the cost of risk side because of the provisioning and the levels of the credits. And in the first quarter and the last quarter of previous year, we have sizable provisions set aside for our Stage 3, especially credits, also Stage 2 and Stage 1 also has been increased in terms of provisions.

So as a result, our cost of risk has raised 336 bps levels. On the right-hand bottom side, you see the provisioning core stage 2 [ loans ] and it is 70.4% levels it reached and it seems that we will keep almost the same levels moving forward for the next period of this year.

Asset quality sitting on Page 9, you see the details in terms of NPL development on a quarterly basis. As you see, there is an upward trend again on NPL generation side, and it is 6.4% levels as opening and it will be going on almost the same level. This is our expectation.

On the right-hand side, you see the NPL sector distribution and distribution 26.5% construction and real estate; and manufacturing 19.5%; energy, almost 15% levels; distribution is almost the same at our general credit composition. So we can say that in our NPL side, there is no specific sector affecting largely on the -- our NPL side. The distribution is almost the same with our original credit distribution. So we can say that there is no specific sector feeding the NPL side.

On the left-hand bottom side, you see the NPL formation trend. As you see, the last quarter of previous year and the first quarter of this year, our additions to NPL is higher than the previous quarter of last year. But it is -- as you see, it is going down in the -- moving forward, we see still we will have some additional NPLs, but it will be decreasing in terms of its size. Stage 2 credits on the sector distribution. We have construction and real estate sector and trading and manufacturing and energy sector, the major sectors for our Stage 2 loans.

On Page 10, you see the composition of total liabilities. The major part is funds collected as you see, and wholesale funding has been decreasing, but still it is 8.2% levels in our liabilities items. And shareholders' equity and others, you see 4.1% and 3.8% in our liabilities side. You saw the details on the left hand bottom side about these distributions, I don't read all these figures. You see the details in the chart.

On the right-hand side, the composition of funding base transfer of current accounts and participation accounts. The current account is important because it is a cost less instrument for banks, as you know, and if your current accounts is strong enough, it will help on the profitability side as a costless item in your funding base. So in our case, it is more than 42%. It is a very sizable level for current accounts, and it will help our profitability in terms of cost less items in our funding side. Our participation accounts also has almost 50%. So it is also relatively a positive effect.

And the transfer of relatively higher percentages in terms of cost of funding. And as you see in the first quarter of previous year, it was 18%. Now it is half of the percentage, as 9%, and it will affect positively to our profitability. And in the first quarter, you see the result and this fund transfer of side, decreasing funds borrowed side has positively affected our financials in the first quarter of this year. We have 2 equity-type borrowings in our balance sheet. One is Tier 1, the other is Tier 2 Sukuk. Our Tier 2 Sukuk's maturity is 2025.

On the other hand, our Tier 1 Suk is perpetual as you know. On Page 11, there are funding profiles in our collected funds. The total funds collected in terms of current accounts and participation accounts and also in terms of Turkish and foreign currency details, you see -- as you see, the foreign currency current accounts has been decreasing as well as the participation foreign currency accounts with 11% and 15%.

On the other side, the participation in Turkish accounts almost doubled. So it's also affecting our financials in a good manner. Since the participation, Turkish participation accounts, we can use in our liability side and we can use this on the credit side. So the margin between these 2 items has been increasing. And as a result, our net profitability has been affected from this situation in a good manner. And most probably, we will see the same shape moving forward for the second and third quarters, hopefully. On the left-hand bottom side, you see the cost of funds collected details.

You see the Turkish lira cost of funding has been increasing for the last 4 quarters. Now the last quarter of last previous year and this quarter of this year -- first quarter of this year, it is almost flattish, which means in terms of cost of funding side in terms of Turkish lira items will be stable, and it will again positively affect our cost of funding side.

On the right-hand upper side, you see the currency composition of funds collected Turkish lira, U.S. dollar and euro. Still we have major parties, U.S. dollar and euro terms, and Turkish lira side, hopefully, will be increasing moving forward.

The maturity composition of the funds collected side. The current account is the major part, 46.1% and up to 1 month; 13% up to 3 months; 30% up to 1 year, 5.8%; and more than 1 year, 5.4%. That was -- this is the distribution of our composition of funds collected side.

On Page 12, you see the off-balance sheet details and LGs-to-total asset is important on the right-hand upper side and it is 11.3% levels at the end of the first quarter. As the management decision, we would like to keep these levels considering the effect of this side to our capital vacancy ratio side. So we will keep these levels moving forward this year.

You see on the bottom side, the details regarding the guarantees and letter of guarantees, letter of credits on other side. These are the details you can see over there, the developments.

On Page 13, we have income cost dynamics. The first part is net profit share income. As we mentioned at the beginning of the presentation, we have more than 200% on a year-on-year base on the net profit share income side. With the effect of the FX protected deposit accounts, Turkish lira liquidity increased, and we mentioned this in previous slides. Therefore, profit share income increased with new disbursement. In this period, the increase in profit share expenses remained limited. And accordingly, the net margin is realized as 2.8% levels. And most probably, we will keep these levels. Maybe we will see a higher net profit share margin moving forward this year.

On net fee income side, still, we have a very good sizable increase on more than 100 percentage on yearly basis. We have TRY 159 million net fee income for the first period. And the commissions from remittances, service packages, letter of credit and credit limits are the main factors affecting net fee income side and our sales team is very successful to increase this net fee income side. And we are expecting the same good developments for the remaining part of this year.

Net trading income again is one of the major factors affecting our bottom line in terms of profitability. And as you see in the Turkish banking system, the major factors affecting the net credit income side is inflation indexed securities. In our case, yes, we have these inflation linked securities, but in our case as Albaraka Türk, we have investment fund participation certificates stemming from the real estate assets.

And as you see, the inflation in Turkey is extremely high, and it affected the price of this kind of construction-related participation certificates. And in this year, still, we are waiting for positive effect in our profitability side coming from both inflation-linked securities plus investment fund participation certificates mainly the certificates includes -- contains, sorry, construction and real estate side, and it will affect positively our balance sheet and income statement side for the remaining part of this year, stemming from the high inflationary environment. The other income, mainly the reversal of provisions, you see the same levels.

We have only 21% increase on a year-on-year base. On the provisioning side, you see a very sizable increase. The Stage 3 coverage ratio is 70%. As you know, the provisioning -- higher provisions effect on that side. So we have a very sizable provisioning for our -- especially the Stage 3 loans and as well as the 2 and 1 -- Stage 2 and Stage 1 provisioning side. We would like to increase as much as we can on the provisioning side moving forward.

The personnel expenses we mentioned before, and it is important that the cost of personnel expenses is under control, and it is less than the inflation environment, which is 24.4%. The number of staff has been decreasing. The major factor for this decrease, thanks to the digitalization of our operations and the effectiveness of our way of doing business. So we are able to conduct our business with less staff size. And it will continue during this year's digitalization and a more effective way of doing business, thanks to the developments on the technology and digitalization side. We have other costs with 222%. Again, this other cost is affected by depreciation of Turkish lira plus inflationary environment and still the other cost is also under control, and it's less than the inflation level we are living in our country.

As a result, our bottom line, the net profitability has been increased 2.51% on year-on-year basis, and it reached almost TRY 200 million levels, TRY 194 million. And it is in line with our expectations and plans in line with maybe a little bit better than our budget projections for the year-end, and most probably, we will revise our budget at the second half of this year.

Of course, considering the developments in our local economy and the global economy and developments. But it is almost certain that our profitability for the year-end will be higher than our previous plan. On Page 15, you see the financial ratio -- major ratios and the sectoral comparison on the ratio side, the first ratio is capital adequacy ratio. At the end of the first quarter, our capital adequacy ratio is 13.6% levels.

On the participation banking side, it is higher than 20% and banking sector again, higher than 20% levels. As you see, we increased our paid capital very soon earlier previous, I mean, base. So it will affect roughly 2 percentage on our capital adequacy ratio side, according to our calculations.

On the NPL side, you see we have 6.7% nonperforming loan ratio. In the participation banks and banking sector, it is less than 3% levels. And moving forward, I think in our case, we will reduce our NPL side and the participation and banking sector and clearly most probably will be higher terms. And in the mid -- I mean term, we will almost -- we will see, hopefully, the same NPL levels with the banking and participation banking sector averages. But it takes some time, maybe next year, we will see the same NPL levels in the sector.

On the provisioning side, our provisioning side is 70%, although this is less than the sector averages sitting, in our case, it came from 50% levels, 70% for Albaraka Türk considering that we have 3x higher NPL levels. It is a very sizable provisioning ratio, I think if our NPL will be 3%, 4% levels with the same provisioning shape, we will see more than 90% provisioning ratios hopefully, in the coming periods starting from next year, hopefully. And we see net profit shares margin may be important on that side. Still our net profit share margin has been increasing. But still, our performance is less than the partition and banking sector averages.

And in the long term -- in the mid term like NPL side, we will catch the sector averages as the network share margin. The cost/income ratio is important, I think. You see the cost-income ratio side, we came from 42% levels to 22.6% levels while our income net profitability has been increasing. Our cost-to-income side will be in line with the banking sector averages. You see we catch the banking sector averages on the cost/income side, and we will see the same positive development, hopefully, on the provisioning levels and also NPL side in the near future, hopefully.

Under staff per branches, also, you see our staff per branches has been going down. It was in the previous years. You may remember on that side, our average staff per branch is higher than the sector averages. And it is -- it was close to banking sector averages. Now we are better than banking sector plus participation banking sector, and it affects our cost side as personnel and other cost side has been decreasing.

So in terms of staff per branch, we are under the sector averages as 11.6% levels you see here. On Page 17 and 18, you see the details of our balance sheet and income statement side. We already told most of these items in our presentation.

And this is the end of the presentation. Thank you very much, again, one more time for joining us. And if you have any questions, I'll be happy to answer. Thank you.

[Operator]

Thank you, Mr. Chairman, the CFO of Albaraka Türk [Operator Instructions] I've got a question from [ Hakan Aygun ] from [indiscernible].

[Unknown Analyst]

My question is a general outlook of the sector in the brief remainder of the year. In this respect, how do you see the potentials and maybe some risk factors in the second half of the year, especially not just for Albaraka, but for the full banking system. And if there is any -- what kind of advantages could Albaraka have to differentiate itself from the rest of the sector, if any?

[Mustafa Cetin, executive]

Thank you very much, [ Hakan ]. It's a very good question. Actually, while preparing the budget for the 2022, our expectations for 2022 was in the first quarter, we expecting -- was expecting lower the cost of funding side, high inflations and higher credit rates. This is our expectation. And because of this, we -- in our budget in the first half of this year, we're right, we expect a higher return than of course, higher profitability. And while preparing our budget, again, for the second half of the year, we are not so precise, let's say, because since the situation in Turkey is sustainable or not, this is the question mark. Because, as you know, we have extremely higher inflation in the environment. On the other hand, our Central Bank's policy rate is still 14% levels. So this is a big problem regarding the sustainability of the environment.

So this big question mark, as you pointed out for me and our expectation as a sector, we should be really cautious on that side. So in our case, what we are doing in our situation to manage this situation, higher inflation, lower policy rate and sustainability. So this is what we have done in our treasury management, we would like to increase our securities portfolio, especially inflationary index securities, plus unlike the other banking sectors, as you know, we have Musharaka projects, and we have securities that contains real state. So it will affect in a positive way, in our case. Regarding that, the interest base and other things may be different in the second half of this year.

But on the inflation side, most of the economy affects things in the same manner that we will have higher inflationary environment. So in our case, as Albaraka Türk, I think this is important to mention. Still, we have higher securities that contains real estate figures and real estate is affected by the higher inflation case in our securities portfolio coming from the real estate side will positively help our financials this year. I think this is important in our case.

On the general economic agenda, we should be, let's say, not so relaxed on that side. Since the current environment may not be sustainable in terms of higher inflation and less interest -- policy interest rates. So we would like to take our decisions. Considering the situation, maybe it is -- it cannot be sustainable. But under any circumstances, for Albaraka Türk, most probably at the end of this year, we will see better shape in terms of profitability because of the reasons that I said. Thank you.

[Operator]

Okay. So just a few more questions. [Operator Instructions] There don't seem to be any further questions, Mr. Cetin. So if you'd like to conclude -- wait a minute, we do have one. Let's just have a look here. Yes, you have a question. Please go ahead.

[Unknown Analyst]

My question is about Musharaka project. There is a sharp increase in the real estate prices. My question is that are there any contribution in the first quarter from the Musharaka project and for the first quarter and the remaining part of the year? And what's your guidance for the full year?

[Mustafa Cetin, executive]

Okay. As you know, regarding the Musharaka projects, we have revaluations for these Musharaka projects at the end of the year in general. Most probably, we will see in the last quarter, the new valuation for our Musharaka projects and it will help us on profitability.

In our budget, we think that we have TRY 100 million contribution from Musharaka projects while preparing our budget expectations. But now we can -- we may wait, of course, further increase on the valuation of Musharaka side, as you mentioned, because of the higher inflationary environment. So most probably, we will see higher figures on that side and also this side is also positively affect our profitability of this year.

So at the beginning of this year, our guidance for the year-end net profitability was TRY 500 million. But most probably, you will see higher figures on that side, depending on the general environment in Turkey, if the current conditions, I mean, the lower policy rate and high inflation registration will continue at the end of the year. If this is the best scenario, we will see a sizable increase on the net profitability side.

In that case, under any circumstances, most probably, we will see higher figures on net profitability, maybe TRY 750 million, maybe more, we will see net profitability levels. Basically, if we have TRY 200 million in the first quarter, at the end of the year, we will see TRY 800 million levels plus additional contribution from joint venture projects. So you may see TRY 101 million levels, of course, depending on the sustainability of the current economic environment.

[Operator]

All right. So does that answer your question?

[Unknown Analyst]

I have another question about asset quality. In the last couple of quarters, there was an increase in the NPL ratio and the Group II ratios. Do you expect the same trend for the remaining of the year? And you increased your capital in the last couple of days. After capital increase Albaraka for the next -- for the next couple of years, how the guidance will evolve.

[Mustafa Cetin, executive]

The first part regarding the capital increase. As you know, we increased our capital from TRY 1.3 billion (sic) [ million ] to TRY 2.5 billion (sic) [ million ] as paid capital. So it will help in our core capital plus capital adequacy ratio side in a good way. So it will help our cost of funding side as well as our capital adequacy ratio side for sure. On regarding the NPL side, yes, you are right.

On the NPL, new NPLs in terms of new additions to NPLs plus provisions for credit portfolio, including NPLs plus Stage 2 loans has been increased. They are pretty much higher rates in the last 2 quarters, the last quarter of previous year and first quarter of this year, and it will not be going on at the same shape since we have potential, we have right to set some additional provisions, thanks to our profitability is extremely high in the first quarter of this year and also last quarter. So with this situation to be on the safe side to our credit portfolio.

Moving forward, we will not see the same increase on the NPL as well as the provisioning side.

So moving forward, we will see more profitability and reasonable NPL generation and provisioning cycle. So at the end of the year, most probably we will see more profitable bank, hopefully, at the end of this year.

[Operator]

Thank you, Mr. Cetin. Anything else? Okay. [Operator Instructions] We'll give you a few more seconds. All right. We don't seem to have any more questions, Mr. Mustafa Cetin. Please, would you conclude?

[Mustafa Cetin, executive]

Thank you. Thank you, sir. Thank you very much for joining us today. It's a pleasure for us to discuss the issues with our investors and analysts. So we will be happy to see the better figures moving forward, not only Albaraka Türk, but also the banking system as a whole and also our country. Hopefully, in the next period, we will see the same good news regarding our financials of our economy. Thank you very much again for joining us, and we will see "Inshallah" in the second quarter results. Thank you very much.

[Operator]

Thank you. Thank you, Mr. Mustafa Cetin, the CFO of Albaraka Türk. And that's it, ladies and gentlemen. This concludes today's webcast call. I want to thank you for your participation, and you may now disconnect.