Albaraka Turk Katilim Bankasi AS

IST:ALBRK.E

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to Albaraka Türk 2022 Third Quarter Financial Results Conference Call. [Operator Instructions] I will now hand you over to Mr. Mustafa Cetin, Albaraka Türk CFO. Mr. Cetin, the floor is yours, sir.

[Mustafa Cetin, executive]

Thank you very much. Welcome to our third quarter investor presentation. I'd like to give some details about our financials in the first phase. And then if you have any question in the Q&A session, I will try to reply your questions.

And I'd like to start with the third page of our presentation. Albaraka Türk, in summary, balance sheet income statement and ratios, I'd like to talk about first. The total assets has reached TRY 145 million. It means 33% year-to-date growth. The total funded credit side, we have 23% year-to-date growth. Again, it reached TRY 66.9 million levels. Our NPLs dropped from TRY 3.8 million to TRY 1.7 million levels, which implies 55% decrease on a year-to-date basis. The deposits has reached TRY 120 million, which is again 32% year-to-date increase. The shareholder's equity has reached TRY 7.5 million levels, and on year-to-date increases the 61% on shareholders' equity side.

Income statement figures are on the bottom side. The net profit share income is TRY 3.2 million, which was less than TRY 1 million levels in the same quarter of last year. On year-on-year growth is 245%. Net fees and commissions, we have a 100% increase on that side, and we have TRY 548 million net fees for the third quarter. The provisioning side, on the other hand, we have a very huge increase on that side from TRY 7 million -- TRY 700 million level to TRY 3.1 million, which implies 324% increase on year-on-year base. Personnel expenses, on the other hand, despite the high inflation in our country, the growth is only 39% levels. The increase is very limited because of our measures to control our cost side and decreasing our staff levels to reach an optimal level in terms of expenses.

Operating expenses, on the other hand, again, we have 43% increase on that side, it's pretty huge inflation. It has also implied that the expense side of our bank is extremely followed by the management, and it is under control. As a result, our net profit reached TRY 900 million levels at the end of third quarter. It was only TRY 51 million in the same quarter of last year.

On the right-hand side, you see the key ratios, and the first ratio is capital ratio side. It is 17%. It was 14.9% in previous year. And the Tier 1 side is 11.6%. Again, we have a roughly 2% increase on the Tier 1 side. And the capital ratio is also -- we have a 2% increase on a year-to-date basis. On NPL side, on the other hand, we have a huge improvement on that side, as you see. It dropped from 6.3% to 2.3% levels, which implies roughly 400 basis point decrease on the NPL side. The provisioning side is -- we have 71% provisioning for bad loans. It also the same provisioning levels on year-to-date basis, roughly 100 bps year-to-date improvement. And net profit share margin is roughly 4%. It was only 2.3% levels at the year-end. The cost/income ratio, as you see, the drop from 43% to 22% levels. When we compare these ratios with the market averages, we see improvement in a good way at the end of the presentation.

On Page 4, you can see the main highlights of our financials. First, the asset side. Our total assets reached TRY 145 billion and total funded credit is roughly TRY 70 billion, and the total collected funds reached TRY 120 billion. On the left-hand bottom side, you see the distribution of our capital base. The common equity Tier 1 additional Tier 1 and additional Tier 2. The total is, as you see from 15% to 17% levels improvement on a year-to-date basis. On the right-hand upper side, you see the equity figures. As you see, we have TRY 7.5 billion equity levels and we have cash injection in the second quarter this year. You will see this plus our net profit as the retained earnings has been increasing our equity levels. And net profit share income and net profit share margin [ beat ] as you see on the right-hand bottom side. We have roughly 4% net profit share margin. And our net profit share income development, you see from TRY 1.4 billion to TRY 4 billion levels for -- at end of the third quarter, you see the case.

On Page 5, you see the composition of our assets. On the left-hand upper side, you see the composition of total assets, the major part is funded credits, roughly half of the total assets. And our securities portfolio has reached 20%. And cash and cash equivalents is 30% because of the -- our paying attention to the management side, and 1.7% other assets. On the left-hand bottom side, you see the total securities portfolio distribution, roughly TRY 30 billion we have total securities portfolio in our books and the major part is held to maturity, available for sale, the marketable securities and the legal part is available for sale is the distribution of our securities portfolio in our books. On the right-hand upper side, you see the liquid assets situation. We have TRY 55 billion liquid assets in our books and which implies 38% of our total assets. And the securities yield, you see the movement. It started from 6% levels to it reached 11% levels. And most probably, we will see 10% and 11% levels moving forward starting from this period on the securities yield side.

On Page 6, you see the operating performance breakdown in terms of profit share income, fees and tradings and other contribution to our profitability. The major part comes from profit share income at TRY 3.7 billion; and then trading income, which is roughly TRY 2 billion. Our fees income is also supporting our income side with TRY 300 million and others TRY 250 million, and it reached TRY 10.8 billion level in third quarter of this year.

On the bottom side, left-hand bottom side, you see the net fees and commission income developments on quarterly basis, and it reached roughly TRY 200 million levels at the end of the third quarter. On the right-hand upper side, you see the net profit share income on quarterly basis. We reached the top in the second quarter of this year with TRY 1.3 million. And this quarter, it dropped to TRY 1 million. Most probably in the fourth quarter, we will see almost flattish, maybe a little bit less net profit income side because of the increasing, especially Turkish lira, cost of funding side. The cost & yield movement, you see on the right-hand bottom side, you see our Turkish lira credit yield has been rising, reaches blended ratio, blended rate, and because of this, it is still moving up. And most probably, it will be flattish for the next period in terms of credit yield side, especially in Turkish lira side. And net profit share margin is most probably, again, flattish for the last quarter as a blended rate, roughly 4% levels.

On Page 7, we see the funded credits portfolio details. As you see in terms of Turkish lira, total funded credits, we have year-to-date 60% increase from TRY 23.6 billion to TRY 37.5 billion levels. On the other hand, on the foreign currency funded credits it dropped 3%, which means our credits have been turning from foreign currency to Turkish lira currency. The situation is almost the same on the funding side, again, in terms of participation funds. We have a transformation from foreign currency and Turkish lira side on the liabilities side as well as on the funded credit side. The composition of total funded credits on the left-hand bottom side, you see the details in terms of corporate credits, SMEs and retail side. The major part is corporate credits, we start at 3% -- sorry, at 63% and SMEs roughly 30% and retail side is 7.4% of our total funded credits. The currency composition of total funded credits is the major part is Turkish lira, almost half of our credits are Turkish lira-denominated. 36.8% U.S. dollar and 11.4% euro credits of our total funded credits.

On Page 8, you see the asset quality details. There is gross funded credit by groups, details you see on the left-hand upper side. The major part is 86.6% group 1, 11% group 2 and 2.4% NPL side. You see the details. The total figure is TRY 71 million. On the cost of risk side, you see the developments. We have the highest cost of risk figure for the end of the second quarter. And it will -- it start to drop, and you will see most of all in the last quarter again, less figure then the third quarter level of 394 bps as cost of risk. On the right-hand upper side, you see the yield on performing credits side. For Turkish lira credits, we have 20.5% yield. And on the blended side, we have 11.6%. And on the FX-denominated side, we have a 4.2% yield on the performing credits. On the provisioning side, as you see Stage 3 credits. We have a dramatic drop on the second quarter because of write-offs. And we have TRY 1.2 million Stage 3. And our provisioning ratio for these loans, the loans is 71.2% levels as provisioning ratio.

On Page 9, we have asset quality accounting, and NPL ratio, as you see, dropped from 6.4% levels to 2.3% levels. And most probably in the last quarter, our NPL ratio will be at less than 2.3% levels and maybe we will close this year at 2% levels in terms of NPL ratio. On the left-hand bottom side, you see the trend of NPL on a quarterly basis. You see there is a decrease starting from year-end of previous year, and it has been slowly decreasing in terms of NPL additions, collections and net NPL formation rate.

On the right-hand side, you see the NPL and Stage 2 credits sector distribution. The major parts in the both side is construction and real estate. And the second one is trading side. And we have other sectoral distribution. And our NPL Stage 2 credits distribution is almost the same distribution we have in the Stage 1 credits. Again, construction, trading and manufacturing and going on. So we don't have any specific sector for NPL generation side. The distribution is almost similar with the credit total and general credit distribution in terms of sectors.

On Page 10, the funding profile details you can find on the left-hand upper side, the funds collected in the major part as 83% of our liabilities; and then wholesale funding, 7.3%; equity is 5.1%; and others, 4.6%. This is the distribution of our liabilities side. On the left-hand bottom side, you see the details in terms of funding, wholesale funding, equity and other liabilities, et cetera. You see the details. And on the right-hand upper side, the composition of funding base details you see. So we have 71.8% year-on-year base increase. It reached TRY 131 million. It came from TRY 76 billion levels. And on the right-hand bottom side, we have 2 subordinated loans. One is Tier 2, the other is Tier 1. And you see the maturities in terms of Tier 1 and Tier 2 items in our books. Tier 2 is 2025, and Tier 1 is Sukuk Perpetual which is longer than 2030 in terms of maturity.

The funding profile side, Page 11, you see the details. The total funds collected details, you can see the current account is TRY 55.6 million, which implies 21% year-to-date increase. The total funds collected year-to-date increase is 32.5% and the total funds collected as you see, TRY 121 million levels. Current account in terms of foreign currency has been decreasing and the Turkish lira accounts in terms of Turkish lira local currency has been increasing. On the participation side, you see the difference in a full year basis. You see the participation accounts in terms of Turkish lira, local currency is 3x higher than the previous period year-end and the participation accounts for foreign currency 31% decrease you see. This situation is because of our month instrument has FX warranty, Turkish lira deposits accounts type. So this is the reflection of the situation like the other banking system in our bank. This reflects -- these figures reflect this situation.

On the left-hand bottom side, you see the cost of funds collected details in Turkish lira levels, 15.15% cost of funding, and as you see, there is an upward trend on that side. And most probably at the last quarter, we will almost see the same trend as cost of funding side, especially Turkish lira has been, is expected to rise a little bit more for the end of -- for the last part of this year. On the right-hand upper side, you see the currency composition of funds collected. The U.S. dollar is the -- first, currency is 42% levels of our funds collected side. 25% Turkish lira, 12.7% euro and 9.1% precious metals, gold and a little bit silver. Maturity composition of funds collected. The current account is the major part at 46% levels, after 1 month 11%, after 3 months 31%, up to 1 year 3% and longer down 1 year is 7.5% in our funding base. This is the maturity distribution of our funds collected.

On Page 12, we see the off balance sheet details. You see the details in terms of letters of guarantees, credits and others. On the right-hand side, you see the LGs to total asset rate. It is less than 12% lows, 11.1% at the end of the third quarter. And we would like to keep these levels at 11%, the LGs to total assets ratio.

On Page 13, you see the income-cost dynamics in terms of net profit share, income, fee, trading and other [ skite ]. The cost side is net profit share income. As you see, we have a 245% increase on year-on-year base on the net profit share income side. It reached TRY 3.2 million. It came from less than TRY 1 million at the end of the last year. Net fee income is again TRY 548 million. Net trading income, we have TRY 2 million net trading income side. The major reason for these increases high income generated from investment fund, the participation certificates and CPI linked securities in our books. And other income reversal of prior year provisions and some asset sales in our books. In Other Income reversal of prior year provisions and some asset sales in our books. 1 is TRY 880 million as prior year's reversals. And we have TRY 121 million sales of assets income in Other Income figure.

On the provisioning side, we have a very huge provisioning effort, as you see, at the end of the third quarter, Stage 3 coverage ratio is again 71%, free provisions increased TRY 800 million, which is important, I think, because we had TRY 100 million free provisioning at the end of the last year. And we added additional TRY 700 million provisioning in our provisions. So it will help to reach 70% provisioning ratio of our bad loans. And most probably, we will keep this situation at the end of this year. We will have more free provisioning for our bad loans. We would like to increase our provisioning ratio at the end of the year.

The personnel expenses, as I said previously, the increased only 40% levels, which is extremely less than the inflation increase in Turkey. So as I said, because of the optimization of our step size, we will see at the end of the presentation that the staff per branch for Albaraka Türk has been dropping for 2 years' time. So in terms of staff of the branch side, our cost of personnel is under control, thanks to these efforts to reach optimum staff size. The Other Cost is increased again, but less than the inflation increase in Turkey. So we have only a 43% increase on the Other Costs side. As a result, our net profit has reached TRY 400 million (sic) [ TRY 907 million ] Turkish lira levels. It was only TRY 51 million at the end of last year.

This is the end of financial details, and I'd like to add a report about the ratios. Let's check the comparison. The cost ratio is [ capital adequacy ] ratio again at the end of the year of last -- at the end of last year, we have a 14.9% capital adequacy ratio. At the end of the third quarter this year, our capital adequacy ratio reached 17% levels which is a little less than the sector averages, the banking sector and participation sector averages, but the improvement is very well and we closed the gap between the banking sector, capital adequacy ratio gap moving forward. The NPL ratio side, we have a very bright business on that side. As you see, it dropped from 6.3% levels to 2.19% levels.

And as you see, in the participation banking side, we are under the -- we are over the sector averages. But for the banking sector comparison, Albaraka Turk is better than Turkish banking sector averages in terms of NPL ratio side, as you see at the end of the third quarter. The provisioning ratio, again, we have 87.7% (sic) [ 78.7% ] provisioning ratio for Stage 3 -- Stage 3 credits. And it is also a good development on the site. The loan to deposits, we have 59.3% loan-to-deposit ratio. You see the other details. Our net profit share margin is important on the side again. Our net profit share margin is still under the participation banking and banking sector averages.

But as you see, we increased our net profit share margin from 2.35%, that was to 4% levels for the third period of this year -- fourth quarter of -- the third quarter of this year. The cost/income ratio is also important. I think, again, our cost/income ratio has dropped from 43% to 22% levels. Staff per branch, as I said, is here, you can see the details. As you see, Albaraka Türk staff per branch is 11.81, and it is better than the participation and banking sector averages. Participation banking sector staff per branch is 13% and banking sector average is 18.5% levels. Thanks to the transformation that we have been living in our bank in terms of digitalization, our cost side has been decreasing. So we have been benefiting on the cost side. Controlling our cost is stemming from this approach, and it will continue moving forward.

So this is the end of my presentation. And if you have any questions, I would like to answer, if you like. Thank you very much.

[Operator]

[Operator Instructions] So we have a question.

[Unknown Analyst]

I'm [ Stefan Medava, Mars Chena imed ]. I have a couple of questions. The first one is about the regulation change. We have seen some regulation change from banking regulator or Central Bank in the last couple of months. How this regulation change affects your operation, especially for Turkish lira deposit ratio should be higher than 50%. And it brings some additional bond purchase. And do you expect any additional regulation change from the regulator? First question is about that. You can answer this question, and I will ask the other one.

[Mustafa Cetin, executive]

If you like, you can ask all questions, and I will answer together.

[Unknown Analyst]

Okay then. My second question -- the question is about inflation accounting. How will it affect your financials? Could you give some details if you apply inflation accounting to your financials? And my third question is about -- there was a registration from Islamic [ Vilcoms ] Bank some of its shares yesterday. And what's your comment for this registration?

[Mustafa Cetin, executive]

Okay. Thank you very much. Let's start with the regulation side, if you like. Actually, I have been in the sector more than 25 years. And in the last year -- this year, I mean, the regulation came from the Central Bank is much more than the rest of my career. So I think Turkey has been doing under a very interesting circumstances in terms of regulations, especially coming from the Central Bank of Turkey. As you see, up to now, the Central Bank of Turkey, we have result requirements. This [ what I mean at on ] this kind of requirement from Central Bank traditionally. And the regulation in Turkey comes from the BRSA, Banking Regulator and Supervisory Agency we have in Turkey as a regulator, the banking system. But nowadays, the Central Bank of Turkey has been releasing regulations, additional regulations because of the interest rate policy of the government to follow the government's position side. So because of this, we have, I think, more than 7 or 8 regulations coming from the Central Bank, additional regulations.

So it has been continuously new regulations. And most probably, I believe we may face in the near future, the new ones because in every couple of weeks, we have new regulation and all regulations are a little bit surprising to the sector. So for the time being, the major effect of these regulations, especially coming from the Central Bank, is you have to buy some government securities with longer terms more than 5 years for the deposit. If your deposits at the bank -- foreign currency deposits is higher than the Turkish lira deposits. And then you have to expose this regulation, and the major problem that Turkish banking system, including Albaraka Türk, face is because of this regulation. And because of this regulation, almost 12% of your total foreign currency deposits is subject to this regulation, and you have to buy 12% of total foreign currency deposits as long-term government securities. So because of this situation, the long-term government securities yield dropped 10% levels.

As you see, we have a very huge inflation. The last figure is wrong, am I not wrong, is 85% levels. So this is -- the situation is a little bit, let's say, problematic. So it is not sustainable. It cannot be a sustainable situation in terms of these rates. Most probably, we will see less inflation or higher returns on the security and the yield side. So this situation is, as I said, a problematic situation and the banking sector of Turkey have to deal with the situation, including Albaraka Türk. We would like to increase our Turkish deposits and we would like to change our foreign currency deposits to Turkish lira deposits.

And as far as we reach 50% of Turkish lira and foreign currency deposits, we will not be exposed this situation as 12%. That was maybe 5% will be enough if we reach this situation. And our related departments has been working on this issue. And the second thing is, the foreign currency Turkish lira credits, we have special sectors that the government would like the banks to extend the credit for not all the sectors, but special sectors like SMEs and exporters, they would like to -- like bank to extend the credits only these sectors, not all other sectors. So this is another problem for the Turkish industry, not the banking system, but in general, the Turkish economy because some companies are in difficulty to reach the credits.

So this is my personal view that this situation is not a sustainable situation. And most probably, we will see additional regulations to fix this situation, I think, in a short run. This is my personal expectation. And so as a result, the regulations from especially Central Bank is on the way. And most probably, we will see additional regulations moving forward, basically. But the regulations are, in general, surprising in their natures. So I cannot estimate which -- what kind of regulations will be coming moving forward. Unfortunately, this is the situation. In terms of inflation accounting, on official side, Turkey has match inflation accounting standards. And according to the international standards on IFRS side, in Turkey, we should apply inflation accounting principles. But in Turkish accounting authority once not applied inflation accounting for this year, in terms of tax regulation side, it is delayed 2023 year-end according to the tax authority, the inflation accounting will begin in 2024.

Most probably, the accounting authority in Turkey will decide in line with this situation. This is my personal view again. But if Turkey applied -- is to apply the inflation accounting side and the banking system by its nature, will be negatively affected from this situation because, as you know, banks run with a higher equity levels, and we don't have any [ military inter stocks ] in our asset side. So if you consider an invest company that they have stocks in their assets, and they have limited equity plus bank credits in their books, so they will benefit from this situation, most probably. But in terms of banking side, since our equity is relatively higher than the real sector, we are negatively affected by the inflation accounting, if it is applicable in Turkey. And to your third question...

[Unknown Analyst]

Do you have any internal study for your bank? Do you have any numbers if you are to apply [ nant ]?

[Mustafa Cetin, executive]

Actually, in our group level, our Albaraka Banking group is in Bahrain. And in Bahrain, they use IOP standard. IOP is bank standards they use in Bahrain. And both in Bahrain and Turkey, they don't use inflation accounting. So in the group level reporting also, we applied the same accounting, not an inflation accounting. So we don't have any concrete figures, but we have some estimates on the side, and it will drop to some extent because of the situation that I said, because of the equity -- higher equity of the banking system, and it is the same for Albaraka Türk.

Your third question regarding IDB, Islamic Development Bank, as you know, in the -- at the end of the first quarter, we have cash injection in our equity. And our Islamic Development Bank has also participated this increase -- capital increase side. And as far as I understand, because this is their decision. As far as I understand, since our share price has been higher than the 6 months earlier. So most probably, they would like to realize their profit, I don't know. But what I guess is since they increase the capital in the capital injection side at -- in the first quarter, they would like to set at this much as far as I understand. This is I believe the situation.

[Operator]

So since we don't have any other questions. So if you would like to conclude.

[Mustafa Cetin, executive]

Thank you very much. We are -- as I said, we are a Turkish banking system, not only Turkish banking system, a Turkish economy, has been living very interesting times because of the government's heterodox, let's say, in the [ economic policy ]. So nobody is 100% comfortable about the results of this heterodox policy of the government. We will be see together -- we'll be seeing together and maybe after the election, everything may be changed in terms of government economic policy applications or maybe it is going in the same way, but under any circumstances, next year will be a very interesting year.

So the banking system and all Turkish economy is -- as far as I understand, tend to keep their position and they would like to be cautious about the future developments. So Albaraka Türk is also in the same way. So I would like to keep our measures to cope with any risks that we will see and we will face in the near future. So hopefully, at the year-end, we would like to see all of you again in a better figures and positions, hopefully. Thank you very much for joining us.

[Operator]

Yes, ladies and gentlemen, this concludes today's conference call. Thank you for participation.