Albaraka Turk Katilim Bankasi AS

IST:ALBRK.E

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, welcome to Albaraka Türk 2023 First Quarter Financial Results Conference Call. [Operator Instructions] Mr. Ömer Emeç, Chief Strategy and Transformation Officer and Chief Economist; Mr. Seyfullah Demirlek, Head of Investor Relations Manager, will be with us today here. Sir, the floor is yours.

[Seyfullah Demirlek, executive]

Good morning to you all. Thank you for joining our call today. This is Seyfullah Demirlek, Head of Investor Relations Department at Albaraka Türk. Before we begin our presentation, I would like to extend my condolences to people who lost their souls in the earthquake disaster, and we have condolences to their loved ones.

I am with our Chief Economist and Transformation and Strategy Assistant General Manager, Mr. Ömer Emeç, who will begin the presentation. I'm now leaving the floor to Mr. Ömer Emeç.

[Ömer Emeç, executive]

Yes. Thanks, Seyfullah. Thank you for all for joining us today. Actually, I will be giving a brief actually presentation regarding macroeconomic dynamics for global economies as well as Turkish side and [indiscernible] and then I will be giving floor to Seyfullah to give details.

Actually, we are very honored to somehow -- as you know, we have actually announced our results yesterday and compared to general banking sector and participation sector, the sound result is making us happy, actually, but before giving the kind of details, I want to give details about a short brief regarding market economic dynamics for Turkish market as well.

First of all, as you know, after the pandemic, global interest rate has been increased so much. And later on that, after pent-up demand, the PMI in global right now is somehow, especially on manufacturing side, is below 50, which is, as you know, threshold. But services side, right now above actually threshold, which is also, let's say, result and actually root cause for the core inflation in global.

As you know, yes, headline inflation in global is somehow decreasing down. But when we look at the details, especially this inflation is coming down due to the energy crisis as well as the slowdown in manufacturing side, but services side, especially, which is affecting core inflation, we see inflation inertia, especially on core inflation side. This is why -- after the global -- banking -- bank crisis, not banking crisis because it affected some of banks in global side.

There was an expectation regarding the interest rate decrease will be coming a bit shorter due to that kind of crisis, but later on that once we have seen the numbers of inflation, especially on core inflation side, we see both Fed and ECB further increase their interest rate, especially this week. But we -- as a general actual expectation, we see that is the top levels on the inflation side and especially somehow after this, interest rate will be coming down, especially starting end of 2023 and beginning of 2024.

For Turkish side -- Turkish market economic side, as you know, for 2021, the growth was 11% roughly. And for 2022, the growth roughly at around 5.6%. For general assumption, for 2023, our expectation is generally 3 percentage for whole year. But due to the election, the uncertainty that will be coming from monetary policy side, we see there are downside risk. But given the circumstances, our expectation right now, 3 percentage with some downside risk.

Actually, on the inflation side, due to the -- especially baseline effect, our inflation has been coming down. And right now, our inflation is around 43%. And for the general -- for the end of the year and the average of interest inflation side, as you know, the baseline has been just finished -- for 2022, baseline has been finished. This is why our expectation for inflation side is roughly around 40 percentage for 2023.

But we see some risk on upside risk, especially that may come up due to the potential exchange rate movements. In that kind of microeconomic environment, when we look at the growth of the banking sector on total assets, we see the growth is, for banking sector, around 8 percentage. For participation banking sector, it is about 11%, mostly driven by largely entered public banks, their growth rate is higher than the banking sector. This is why the growth is roughly around actually 12% for first quarter of 2023.

When we look at the funded credits side, the growth again is -- actually the market growth dynamics for both participation banking and banking sector is similar. When we look at the participation banking growth, it is like 18 percentage. At the same time, banking sector has grown around 12 percentage.

But the most important dynamic in here, both in banking sector and participation banking sector side, we see from FX credit -- the shift from FX credit to Turkish lira credit. This is coming both from new Turkish lira credit. This is due to the monetary policy on liability side affecting the asset side as well, the credit side. This is the first reason. And the second reason, some of FX credits converting to Turkish lira, it was also regarding that.

For NPL side, we see both growing asset size and -- as well as NPL provision write-off, the result of that kind of environment. For banking sector, NPL ratio has been decreased from 2.1% to 1.9%. And for participation banking sector, the NPL ratio has been coming down from 1.4% to 1.2%.

Actually, in net profit side, when we look at the banking sector, banking sector growth, roughly around 70 percentage growth in net profit side. As we look at the details, for banking sector, yes, due to the cost of funding, net [indiscernible] coming down, but at the same time, the revenue coming from the other side, trading side, net fee and commission reversal, that has been supported for banking sector.

But when we look at the participation banking sector, the growth is again higher than banking sector side. This is due to the -- as you know, banking model of the participation banks. As you know, cost of funding -- increased cost of funding has been not reflected at the same scale for the participation banks. So that has also affected participation banking. And the net profit side has been roughly around 23 percentage higher than the -- the net profit increase 23 percentage higher than the banking sector side.

Actually for Albaraka Türk, I will be just giving that summary and then give floor to Seyfullah for further details.

Actually, Page 3, you may see our net profit has been increased from TRY 194 million to TRY 517 million. This is actually a huge increase, both compared to banking sector and participation banking sector as well. This is due to, as you know or as you may see from our income and cost dynamics side, actually, profit share income has been increased by 80 percentage, profit share income (sic) [ expense ] has been increased by 84 percentage. Yes, there has been an increase in profit share expense, but this profit share expense somehow a bit in line with our profit share income as well.

And as you know, profit share income as a volume is higher than profit share expense. So 80 percentage increase in profit share income has been supported our net profit share income, so we can -- our core margin -- core banking margin has been increased so much. Net trading income also somehow aligned with 2020 -- first quarter of 2022.

And operational increase -- expenses, it is actually due to the inflation and as well as some other -- expenses has been increased like 144%. But these numbers, especially, as you know, due to our financial results -- for good financial results for 2022, we have distributed that a big amount of promotional premium to our employees. When we exclude that, actually, promotion and premium are actually growth is a bit lower than the debt numbers.

The number is exactly 106%, roughly speaking. This is why this actually around 35 percentage of increase is coming from our premium payment for the employees. And provision expense also is in line with our -- actually roughly in line with our first quarter 2022. This also our actually precautionary asset quality management approach, it is due to that factor.

As you may see, in line with that profit generation capacity, our ROE and ROA has been increased. When we look at the asset quality side, as you may see from NPL ratio, NPL ratio has been decreased from 1.9% to 1.5%. And provision ratio for Stage 3, as you may see from numbers, it's roughly speaking 90-percentage coverage, roughly speaking, in core, actually Stage 3, actually customers. When we look at the Stage 2 side, and there has been increase and roughly speaking, 21 percentage provision for Stage 2.

And apart from that, this is also another important transformation for our balance sheet side. When you look at the FX and Turkish lira credits composition track, when we look at that, for year-end 2022, the share of FX credit was 60 percentage. Just within 3 months, within 1 quarter, we have increased that amount from -- that share from 60 percentage to 66 percentage. So there's a huge transformation from FX credit, both this is somehow converting from FX to Turkish lira as well as growth that's coming from Turkish lira new credits.

Also, you may see from collected funds, the transformation on liability side. When you look at the foreign currency, foreign currency share in total collected funds, that was actually 54% for year-end 2022. And right now, it is 47 percentage. Again, a 7 percentage decrease in FX side.

This is a general picture regarding our growth -- macroeconomic environment and our results. As you may have seen, yes, we see some uncertainty in macroeconomic dynamics, global economics and banking sector. But given that uncertainty, our result is very sound, both in terms of net profit income and cost dynamics, our asset quality and transformation on the balance sheet item.

So right now, I will be giving the floor to Seyfullah to give more details about that transformation.

[Seyfullah Demirlek, executive]

Thank you, Ömer. I will start with our profitability on Page 4 on our presentation. Our net -- our profitability has continued to rise on back of strong operational revenues. Our net profit increased significantly by 166% year-over-year and around 13% quarter-over-quarter. This solid increase achieved thanks to our enhanced operational income generation capacity.

The gross operational income went up by about 51% year-over-year. The largest share of total gross operating income equates to net profit share income. This share was up 7% year-over-year. Also, other operating income also increased. It is shared now total operating income from 18% to 25% year-over-year. Other operating income actually mostly consists of reversal of provisions due to collections from NPL portfolio and asset sales.

Our return on equity and return on asset has been rising for the consecutive last 5 quarters since our solid financial performance has been improving. Return on average equity went up from 5.6% at the end of first quarter of 2022 to 23.4% at the end of last quarter. Similarly, return on average assets were up from 0.3% at the first quarter of 2022 to 1.2% at the end of last quarter.

I am now moving on to Page 5, on the balance sheet side. Growth in our total assets were only 4.2% year-to-date. Since the Turkish banking sector has been very tightly regulated for the last 1 year at other banks, our bank has focused on fulfillment of regulations and acquisition of a successful asset and liability management.

When we look at the composition of our total assets, which hasn't been changed very much in the last quarter, at the end of last quarter, funded credit consists of the largest portion in our total assets by about 52%. Our securities portfolio was the second large part of our total assets by around 25%. The share of cash and equivalents came down from 23% at the first quarter of 2022 to about 19% at the end of March of this year.

Actually, idle cash has been utilized as funded credits in the last quarter. Therefore, our liquid assets to total asset ratio were down further, which was realized at almost 31% at the end of first quarter of 2023. Increase in our asset yield still was higher than increase in the cost of liabilities, which helped us improve our profitability. At the end of March 2023, asset yields reached to 10.3% and the cost of liabilities reached to 5.3%.

I am now moving on to the next page. Our funded credits portfolio has become healthier on the basis of increasing Turkish lira performance credits. Gross funded credits increased by 3.2% in the last quarter, share of Stage 3 credits. In other words, our NPL portfolio came down further, which was only 1.5% of total gross funded credits, which is below the sector average.

Our NPL portfolio came down very significantly by over 70% year-over-year basis at the end of last quarter. Almost all foreign currency NPL has been cleared up, which helped us make the asset quality further improve. Thanks to our current deleveraging strategy, the share of our foreign currency credit book shrank to 34% in our total performing credits at the end of first quarter this year.

Our Turkish lira performing credits increased by about 22% year-to-date at the end of last quarter. And when we look at the credit yield, both Turkish lira and foreign currency credit yields remain at good levels. Profit and loss, when we adjust the yields, excluding the profit and loss projects in our calculations, breakdown of yields for total funded credit portfolio were up by 70 basis points in the last quarter.

I am now on Page 7. Our asset quality further improved in the last quarter with an NPL ratio of 1.5%, as I mentioned earlier, which was below the sector average. When we look at the details of development in the NPL portfolio, new inflows into the portfolio were variable in the last quarter. Also collection wasn't much high. Around TRY 230 million NPL were written off in the last quarter. Since our NPL ratio has been very low and our provisioning ratio has been up to around 90%, our cost of risk came down by 20 basis points year-to-date at the end of last quarter. Our total free provisions reached to TRY 1.885 billion at the end of last quarter.

I am now moving on to Page 8, on the securities portfolio side. Our securities portfolio increased by 8.4% in the last quarter. Our securities portfolio has gone up very significantly for the last 1 year due to the inflationary operational environment and CBRT [ crisis ].

When we look at the currency composition of the securities portfolio, foreign currency securities comprised of 62% of our total securities portfolio at the end of the last quarter and 30% of securities portfolio on the Turkish lira side portfolio was floating rate actually. Rest of the whole securities portfolio was fixed rate.

Since our securities portfolio has been growing, the yield of the portfolio has been rising. At the end of 2023 first quarter, yield of total securities reached to 10.8%. Securities portfolio income in total went up by 107% year-over-year.

I'm now on Page 9. Composition of our total liabilities slightly changed by the additional Tier 2 sukuk issuance in the last quarter. However, participation funds constitutes 75% of all the total liabilities. Due to USD 100 million Tier 2 sukuk issuance, share of the borrowings in total liabilities went up to 11% in the last quarter, which was at 6% at the end of last year, actually. Growth in total borrowings increased by almost 4% year-to-date. Total Tier 2 sukuk portfolio were up by 46.4% in the last quarter.

Let me look at the deposits. Our collected funds through participation and current accounts increased by 1.3% from the last year-end to the end of March 2023. Thanks to our utilization strategy, share of foreign currency funds went down from 44% to 47% (sic) [ 54% to 47% ]. And FX participation accounts helped us achieve Turkish lira conversion in our total collected funds. FX collected deposits also helped us extend the maturity of our deposit base.

At the end of 2023 first quarter, participation accounts for over 1 year constituted 11% of our total deposits, which were at 8.4% level at the end of last year. Participation accounts from 3 months to 1 year in total deposits went from 3.4% at the end of last year to 4.1% at the end of last quarter. Share of participation accounts from 1 month to 3 months increased by 10 basis points year-to-date at the end of March 2023.

I am now on Page 10. TL funds collection continue to increase by the help of FX-protected deposit scheme, actually. It can be seen that our Turkish lira participation accounts showed a solid increase by almost 21% year-to-date. But on the other hand, the Turkish lira current accounts were up by around 2% year-to-date.

Foreign currency deleveraging caused a sharp decrease in our foreign currency participation accounts, which were down by over 22% in terms of Turkish lira equivalent and 24.4% in terms of U.S. dollar equivalents in the last quarter.

Although funding cost has already been rising in the market, our cost of collected funds has been a steady increase in total and foreign currency funds and it kept downward trend in the Turkish lira funds an in the last quarter. High currency accounts to total deposit ratio enables us to keep cost of our deposits [indiscernible].

I'm now moving on to Page 11, on the income side. Our profit share income increased by around 81% year-over-year, and profit share expense increased by 84% year-over-year, and the net profit share income increased by about 77% year-over-year.

On the operational expense side, the personnel expenses equated to a largest portion of our total operational expenses, which was 61% of our total operational expenses at the end of March 2023. Total operational expense, the increase was 144% year-over-year, as Ömer mentioned, due to the higher inflation and premium payments to employees actually.

When we look at the net fees and the commission income, which also supports our profitability in the last quarter, the net fees and commission income increased by 35% year-over-year and the fees and commission paid decreased in the last quarter because we have already fulfilled the Turkish Central Bank's regulations on the Turkish foreign currency composition rules. Because of that, we paid less commission to CBRT.

On Page 12. When we look at the breakdown of our income, can be seen that profit share income largely decreased to our total income by 64.4% at the end of first quarter. It's share went up from 58.8% at the last year-end to 64.4%. This solid increase has shown the enhanced income generation capacity of our bank recently actually. While total income increased 65% year-over-year, total cost increased by about 58%. Net profit share margin has kept rising since last year-end and reached to 4.9% at the end of last quarter.

On Page 13, you can see explanations of -- explanations for cost/income items. Net profit share income, which increased by about 81% year-over-year, and profit share has continued to increase since net profit share margin kept rising, both quarter-over-quarter and year-over-year basis, actually.

When we look at the net fees and commission income, although fees and commission paid raised by 238% year-over-year due to a large amount of commission, which was TRY 108 million in the last quarter paid to central bank, net fees and commission income increased by 34% year-over-year.

Net trading income shrank by 7% year-over-year, despite 91% year-over-year increase in the foreign currency transaction income. This is due to reduction of income generated from capital market transactions by about 50% year-over-year.

Other income increased over 100%. Reversal of provision due to collections from Stage 3 credits and asset sales increased our other income in the last quarter.

When we look at the provisioning, Stage 3 coverage ratio has been increased to almost 90% and total fee provisions increased to total TRY 1.885 billion.

Personnel employee expenses went up by 189% year-over-year, although personnel expense increased that much high year-over-year due to increasing personnel expenses in line with the inflation and bonus premium payments the first quarter, actually.

When we look at the other costs, operational expenses increased rapidly due to the high inflationary environment.

I'm now moving on to Page 14. You can see that our adequacy ratio is at a comfortable level, especially when we get our free provisions through our total equity. The capital adequacy ratio reached to 16.7%.

At the end of our presentation, you may find out ratios in comparison with participation banking and banking sector for the last year-end and also for first quarter this year, and summary of balance sheet and income statement are also at the end of our presentation.

Now I'm going to leave the floor to Mr. Ömer Emeç for closing remarks. And then we can move on to question-and-answer session.

[Ömer Emeç, executive]

Thank so much, Seyfullah. Actually, let me briefly give details regarding our strategic priorities in the coming period. As you know, banking sector is highly regulated right now by central bank and BRSA regulations. As you know, once you're developing a strategy, you are always -- should be looking at first thing first.

So our first things right now are to somehow complying to central bank regulations. As you know, if not, we are somehow having lots of commission reflection on securities side, the things like that. That's why our one of main, actually, focus right now and motivation is regarding complying to regulation.

And secondly, actually, after the election, yes, maybe there will be changes on the macroeconomic dynamics, and we are following up. And as you know, Seyfullah already mentioned about the free provisions side. Right now, we have roughly TRY 1.9 billion to somehow buffer that potential risk that's coming -- that can be coming in.

So both our transformational Turkish lira on both performing credits as well as NPL side. In the past, our FX portfolio in total, our NPL portfolio was high. Right now, it is very, very limited, almost none. So a potential hike on FX side may be affecting some corporates depending on their balance sheet. But as you know, Turkish real sector FX position is very favorable compared to past.

And since there's expectation -- general expectation on exchange rate, we actually estimate that actually potential negative effect will be lower and as well as our existing NPL book is actually 97 percentage of it right now having Turkish lira, so it shouldn't be affecting our existing NPL book.

And for general -- apart from that, we want to actually increase our cross-sell in our sales activities and building an emerging -- actually enhancing our platform ecosystem with a focus on API and service banking. As you know, we are amongst one of the actually best in terms of API platforms. We know the trend and the actually banking sector will be coming from here. We are well prepared for that. We want to increase that side, and we want to increase our -- improving our mobile infrastructure.

And we want to increase the utilization, especially on digital sales capacity side, both for our customer and for our internal system. Automation and actually increasing our channel migration and digital customer acquisition side. Apart from that, we want to somehow transfer our organization into a more favorable in terms of new trends for employees.

As you know, after COVID, there has been a huge change in employee behavior as well. We want to be prepared for that. This is my general actually guidance regarding strategic priorities.

Thank you for attending our, actually, presentation. We have -- we will be welcoming for your questions, comments and opinions.

[Operator]

[Operator Instructions] All right. It seems like we don't have any questions. Gentlemen, if you would like to conclude, the floor is yours.

[Ömer Emeç, executive]

Okay. Thank you so much for attendance. Actually, we are welcoming -- we will be welcoming in any question or opinion in any time, so both Investor Relations and including me directly, we will be welcoming for your questions, opinions.

And apart from that, actually in coming period, both Seyfullah, our Head of Investor Relation, and me, we want to try to visit yourself in order to have a direct link, direct communication for discussing that result and other actually opinion side. Thank you for your attendance.

[Operator]

Thank you. And this now concludes today's conference call. Thank you for your participation.