Albaraka Turk Katilim Bankasi AS

IST:ALBRK.E

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome to Albaraka Türk Second Quarter 2021 Financial Results Conference Call. [Operator Instructions] I will now hand you over to Mr. Mustafa Cetin, CFO. Sir, the floor is yours.

[Mustafa Cetin, executive]

Thank you very much. Welcome to our second quarter investor presentation. I'd like to talk about our financial highlights in the first session. And then in the Q&A session, I'll be trying to answer your questions.

Let's start with general figures related to balances and key ratios. Our total assets has reached TRY 79 billion, which means 14% year-to-date increase according to year-end figures. Our total funded credits reached TRY 46 billion, which implies 13.5% increase again on a year-to-date basis. Our total NPLs, also 9% increase and TRY 2.2 billion. Our deposits, including interbank funds, is TRY 61.6 million, which is roughly a 20% increase on a year-to-date basis again. Our shareholders' equity is TRY 4 billion roughly, which is 1.1% year-to-date increase [ reconciled ].

On the income statement side, our net profit share income dropped from TRY 768 million to TRY 594 million, which is -- on year-on-year basis implies 22% decrease, mainly stemming from the cost of funding. I will explain the details later in the presentation. On the other hand, our net fees and commissions increased more than 70%. It reached TRY 170 million from TRY 100 million. And the provisions for loan loss has also increased 25% on a year-on-year basis, which is TRY 520 million. Again, the operating expenses, which is including personnel expenses, you see 20% increase, TRY 728 million, but I will explain later in the presentation again.

The personnel side is -- the increase on the personnel expenses is only 7% levels. Other expenses, including impairment expenses on asset for sale, for instance, has caused some additional increase on the operating expenses side rather than the personnel expenses. And the bottom line is TRY 13 million, which is also a very weak figure considering last year's TRY 63 million, which implies a 79% decrease on a year-on-year basis again.

On the key ratio side, the first ratio, capital adequacy ratio, is 13.88%. Tier 1 ratio is 9.3% and our NPL ratio is 4.65%. The provisioning on debt bonds Stage III loans is 61.5%. The NPL side, you see slightly getting better figures. On the provisioning side, again, slightly higher figures you see over there.

Our net profit share margin dropped from 3.28% to 2.52% levels because of the increasing interest rate environment [indiscernible]. Our cost of funding side effect, you see the net profit share margin decrease on a year-on-year basis. The cost/income ratio -- and -- again, we have higher figures because of the weak income side because of the cost of funding side. And I will later -- the details in the presentation on these figures.

On Page 4, you see the developments on the total assets, total funded credits and total collected funds side. You see our total assets is TRY 79 billion; our total funded credits is TRY 46 million; and the total collected funds, TRY 61.7 billion. These 3 figures have been going upward on a quarterly basis, you can see slightly increase on the trend.

On the net profit side, on the right-hand side, you see the -- on quarterly basis, second quarter of the last 2 years, which was TRY 50 million, TRY 62 million -- TRY 63 million, and our latest figure is TRY 13 million net profit we disclosed.

On the left-hand bottom side, you see the equity portions, the common equity Tier 1, additional Tier 1 and additional Tier 2. You see the differences between the last year's year-end and the current situation. There is a slightly increase on the capital adequacy ratio side. And there, you see the details of the common equity, additional Tier 1 and additional Tier 2 parts.

On the right-hand side, we talked at the beginning our net profit share margin has been decreasing. Remember, this is -- the calculation of net profit share margin is on trailing for the last 4 quarter basis, which means while we see the decreasing net profit share margin on the chart, actually, the cost of funding side increase affects this net profit share margin.

Since this is a blended calculation on the net profit share margin, most probably, we will see weaker figures maybe 1 quarter more. But in reality, I will explain in the presentation later, our net profit development has been getting better and better slightly. The cost of funding side reached the highest levels. And on the other hand, our net -- our income from profits -- from credits has been going up. So the net margin on monthly basis start to increase slightly. I will explain again this in the -- later in the presentation.

On Page 5, we see the asset composition. The major part is funded credits, and our securities portfolio reached 14.6% levels. On the left-hand bottom side, you see the developments on the total securities, which reached TRY 11.5 billion, and the securities portfolio has been rising. And the cash and cash equivalents 23.6%, and other assets 3.5% levels in our asset distribution.

On the right-hand side, you see the liquid assets development. Roughly, over 30% of our assets are liquid, you see. On the right-hand bottom side, you see the securities yield. Again, this has been dropping. But let me remember, this is the blended and trailing for the last 4 quarters. So in reality, on a monthly basis, it start to rise. But since this is the last 4 quarters blended average, this is still dropping down. But in reality, on a monthly basis, there is an upward slope we can see.

On Page 6, you see the operation performance breakdowns. Key movements in the income from TRY 2 billion to TRY 2.9 billion. Main factor comes from the profit share income and others. And fees and commissions also has positive effect. And the trading income has negative effect. Also on the trading income side, I will explain later in the presentation some details why -- the reasons we see the trading loss rather than income on this quarter.

On the right-hand side, you see the net profit share income on a quarterly basis. As I said earlier, our -- although our net profit share margin has been decreasing, you see the net profit share income started to rise slightly. Our second quarter's net profit share is better than the first quarter results. Most probably, we will see the same trend in the third and fourth quarter of this year.

On the left-hand bottom side, you see the net fees and commissions income developments. You see there is still upward trend on the net fees and commissions side. And most probably, we will see the same trend again in the third and fourth quarters in this year.

On the cost and yield movement side on the right-hand bottom side, you see the credit yields. As I said, there is a slightly upward trend on the yield side, especially on provisioning side and also foreign currencies the same case. Our net profit -- net credit yield has been going up, and our net profit share margin on the other hand is still going down because of the blended accounting calculation methodology. But the net profit share margin, as you see, started to increase on a quarterly basis.

On Page 7, we see the funded credits portfolio, Turkish lira credits, foreign currency credits and FX index credits and total credits, you see the figures. FX index is very tiny figures, and it has been going down to 0 levels because it is not the case for the banking system as FX index credits on the FX credits and Turkish lira credits is the case according to legislation. Our Turkish lira credits on a year-on-year basis, 27% increase we can see, and it reached TRY 22.3 billion. And our foreign currency credits, on foreign currency basis, again, 10% increase on year-on-year basis. So the total credits as Turkish lira equivalent, we have a 28% increase on a year-on-year basis. It's a very high increasing rate, actually.

On the bottom left-hand side, you see the composition according to the segments. The corporate credits is the major factor -- major part of our credits. SME is a little bit decreasing, but still 26%. And retail is roughly 9% level.

On the right-hand side, yield on performing credits we can see. Again, the last quarter, you see Turkish lira loans started to increase on -- even under the trailing calculation methodology. And FX blended also is very small increase we can see on the blended yield side again from 8.8% to 8.9%. Most probably, we will see higher trend in the third and fourth quarter again on this yield on performing credit side.

The currency composition, on the other hand, of total funded credits roughly 48% Turkish lira and others U.S. dollar and euro credits. On the funding side, the composition of the total funding base according to the currencies is a little bit different. I will explain later in the presentation on the funding side.

Asset quality on Page 8. You see the group 1, group 2 and group 3 parts of our total funded credit side. Our NPL ratio has dropped from 4.91% to 4.65% on a quarterly basis, which was, again, at the year-end -- at the beginning of this year is -- was 4.82%. Cost of risk is 201 bps for the last quarter of this year. And our provisioning side has been slightly increasing. It reached 61.5% levels after second quarter.

Again, on Page 9, you see the quarterly trend on NPL formation side. Additions, collections and net NPL and net NPL formation rate you will -- you see on the left-hand upper side. So again, there is a good decreasing trend on the NPL formation side. You see it was TRY 473 million at the end of the last year. Now it is, on quarterly basis, TRY 90 million, net NPL formation you see.

On the right-hand side, you see the sectoral distribution of the NPL formation. This distribution is very likely -- very similar to our credit portfolio. So we cannot say there is a specific sector producing NPL. This NPL production is very similar to the -- our loan book. So you can see the details on the right-hand side.

Stage II credits and sector distribution on the right-hand bottom side you can see again. The largest part is construction, the same with the NPL side again. Our credit portfolio also has -- the largest part is construction. So the distribution is almost very similar in each.

On Page 10, you see the funding profile. The funds collected part is the major part again, 78%. And the wholesale funding is 13.2% level. Shareholders' equity, 5.2%; and others, 3.5%.

On the right-hand side, you see the composition of the funding base in Turkish lira base; funds borrowed, current accounts and participation accounts. I think on this chart, the current account development is very, very important. We have 36% current accounts, which is cost-free funding base for the bank and it is very important. And 36% is relatively very successful figure in the banking industry as a base of current accounts.

We have, in our books, one Tier 1 and one Tier 2 items in -- as supporting the equity side. The maturities you see one is 2030, the other is 2025. Tier 2's term is 2025, which means 4 years later, it will be going 0, repaid. And the perpetuity 10 years -- use 10 years of, I mean, alternative. We can close it at 2030. Otherwise, it's a perpetuity, as you know.

On the left-hand bottom side, you see some figures related to funds collected, wholesale funding and shareholders' equity details. On a year-to-date basis, you see the developments on the details in funding and the shareholders' equity side.

On Page 11, the funding profile for collected funds, you can see the details. The current account and participation account development on a year-to-date basis, you can see. The current account increased 13.6% and TRY 26.3 billion. The participation accounts has increased 24.4% on a year-to-date basis, and it reached TRY 35.4 billion.

On the right-hand upper side, you see the currency composition of funds collected. Turkish lira part, as you see, is only 29%. The major parties, U.S. dollar, with 42.3% -- sorry, and the euro is 17.8%. So to close the gap between the funding side and the credit side, we have some derivatives in our treasury management. So like other Turkish banking system, we have exposing to dollarization in terms of funding side. You see the distribution in terms of currencies in this slide.

The cost of funding side -- you see the cost of funding side has been increasing on -- this is again -- let me remember, this is the blended for the last 4 quarters income side. So still, it has been going up. But on the monthly basis, the cost of funding side reached their highest levels. So from now going forward to year-end, most probably, we will see equivalent, maybe less cost of funding side according to the interest rate environment in Turkey and inflation, of course.

According to the developments we will see in the remaining part of this year, the cost of funding side most likely will be decreasing. But on the worst scenario, we see almost the same cost of funding levels on monthly basis. Most probably, it will be the case.

On Page 12, you see the off balance sheet details. Our off balance sheet LGs to total asset ratio is roughly 13%. It is the -- I mean for the last 4 quarters, we see this 13% levels, considering LGs to total assets ratio. Most probably, we'll see the same rate in terms of off balance sheet exposures going forward.

On Page 13, you see the details in income cost dynamics side. I think we need to explain some details because this quarter's net profit is relatively weak. There are some main reasons on that side, and I'd like to explain this as much as I can.

The first side, the major factor, which bottom line stems from the net profit share income side. And although our net profit share income increased 34.5%, our expenses on the profit share account increased 55.4%. So -- and also the expense on the funds borrowed is -- reached more than 140% on a yearly basis. So which means our cost of funding side, although our participation accounts is relatively less, profit share expenses produced, but some alternative products, we have Sukuk in our portfolios to collect higher profit share-seeking customers. We offer this product. And of course, this product should be high -- should be offering higher returns to deposit holders.

So because of this, in our portfolio, our Sukuk issuances increased. And since the cost of funding side for this Sukuk issuances is relatively higher, it is very similar to the commercial bank's interest rate levels. So because of this mainly, our cost of funding side negatively reflected our net profit share income. This is the case for the first and second quarter of this year. Because of this, our net profit share income dropped 22%, 23% levels on a yearly basis.

On the other hand, our fee income increased more than 70% levels. The major factor affecting this is CBRT. The Central Bank of Turkey was exposing fees on the foreign currency reserves -- required reserves. Now it is suspended. And because of this positive effect, our net fee income has increased with more than 70% levels.

Net trading income, you see there is a loss figure over there. It was, 1 year ago, TRY 70 million. Now it is minus TRY 17 million. This is -- this needs some explanation. In our books, we have money market products in our portfolio. It is something similar with the repo transactions. We called [ work ] transactions in participation banking jargon.

And because of some regulations on that side, our repo transactions changed into selling transactions. So because of this change in our books, we have -- at the year-end, we have more than TRY 1.6 billion equivalent real estate investment fund in our books. It was in our balance sheet before as repo and [ work ] transactions -- at the money market transaction figures. Now it is sold to deposit holders, to the customers.

So because of this, there are some effects on the P&L side. Before, in the [ work ] transactions, in the repo transactions, the cost of funding side is according to the accrual basis before. When we changed this from repo style to selling, ultimate selling to customers, now on the selling side, the cost of funding is paid in advance rather than on accrual basis before. So because of this -- this is also right under net trading income side.

So because of this, we see that there is a high drop on that side. But the good news is, in our books, in our P&L side, if we did not do this exercise, it will be, going forward, on accrued basis in our expense -- profit share expense entries. Now it is paid in advance, which means moving forward from now, we will not see this expense in accrued basis. It is already paid.

So which means in the -- going forward, we will see better net profit share income side because of this -- it is paid in advance, so we will not write on accrual basis expenses. So it will be positively affected moving forward, this drop on the net trading income side. I think this is important. This is one of the reasons that we have weak figures -- net income -- net profit figure on -- in the third quarter -- sorry, second quarter of this year.

And the other item is other income. Other income is mainly stemming from the reversal from prior year's provisions, which means we have a strong collection performance in the second quarter. And because of this, our other income reached TRY 481 million levels.

Our provisioning for the Stage II also has been increasing. And the coverage ratio is [ thin ] because of this increase on the provisioning side, more than 60%.

As I said at the beginning of this presentation, our personnel expenses is under control. As you see, our increase on the personnel expenses side is only 7.4%, while the CPI inflation in Turkey is 17.5% in June.

Other costs -- also, this effect in the second quarter's P&L figure in a negative way, mostly stemming from the impairment expenses of assets held for sale. Actually, in these figures, we have one-off items. It is also important, we have to explain this. One of our profit and loss projects coming from several years ago has closed [ Flora Residence ], namely. And this -- because of this closing the profit and share musharakah project, we are right in the second quarter, one -- it is -- it was only onetime, TRY 31 million. It has also affected the second quarter P&L figure, this one-off closing -- one-off profit and loss -- all profit and loss projects closing.

And because of these developments in the second quarter, our net profit is only TRY 13 million we disclosed, which means -- I mean what I explained this, most probably in the third and fourth quarter, we will not see these negative effects and one-off closing on the musharakah side. So since you will not see these effects, most probably, in the third and fourth quarter, we will see extremely better figures on net profit side.

On Page 16, you see some ratios on the market comparison year-to-date -- on a year-to-date basis. Our capital adequacy ratio is 13.88%, while participation banks is 16.5%, and the banking sector capital adequacy ratio is 17.75%. Our NPL ratio is 4.65%, and the participation bank's average NPL ratio is 3.41%, and banking sector is 3.61%.

The provisioning side, our provisioning is 61%; while participation banking sector, the average is 83%; and the banking sector is 60 -- sorry, 76.9%. So net profit share margin also. We have -- our net profit share margin dropped from 3.27% to 2.52%; the participation bank's net profit share margin on the other hand, 3.5%; and the banking sector is 3.7% levels. These are the main ratios of Albaraka Türk, participation bank and banking sector averages. You see the details on Page 16.

And you see the details in 18 -- Page 18, our summary balance sheet. On Page 19, the details of the summary income statement. We already talked about the main items on this side.

And then this is the end of my presentation. We can pass to Q&A session.

[Operator]

[Operator Instructions] There's no question, Mustafa Bey. Would you like to conclude the conference call?

[Mustafa Cetin, executive]

Thank you very much. If any question later, our colleagues in Investor Relations can help you. Also, you can always reach directly to my telephones. Thank you very much. Hopefully, we will meet again in the third quarter results in a better position.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may disconnect now.