Albaraka Turk Katilim Bankasi AS

IST:ALBRK.E

Earnings Call Analysis

Albaraka Turk Posts Strong 2023 with Profits Surging 151%

Despite global economic headwinds with high interest rates and looming inflation, Albaraka Turk triumphed in 2023 with net profits soaring by 151% year over year, reaching 3.4 billion TRY. They maintained expense control amidst rising costs and inflation, increasing return on assets to 1.9% and equity to 33.4%. Their non-performing loan (NPL) ratio improved to 1.7%, with provisions bolstered for future stability. The bank's proactive approach led to a healthy increase in performing credits by 45% and free provision reserves grew to 5.2 billion TRY. Albaraka Turk's positioning is strong as they prepare for looming economic uncertainties and shifting deposit structures in 2024.

Equity Growth and Funds Collection Surge

Investors would find encouragement in the company's increased equity, with a rise in the share of equities in total liabilities by 30 basis points, reflecting improved profitability. Furthermore, total collected funds experienced a robust 43.6% year-over-year growth, highlighting the company's effective capital accumulation strategy.

Significant Shifts in Currency and Maturity Composition

The company has strategically repositioned its currency exposure, with foreign currency protected participation accounts now constituting 28% of total funds collection, down from 35%. This indicates a concerted effort to align with the economic policies of the Central Bank of the Republic of Turkey (CBRT). Remarkably, the bank has nearly doubled the share of participation accounts with over 1-year maturity to almost 17%, offering potential long-term stability to its funding structure.

Steady Increase in Turkish Lira Holdings and Funding Costs

An effort to prioritize local currency led to an impressive increase of 18.9% in Turkish lira funds collection. This reflects a considerable expansion in Turkish lira current and participation accounts by almost 70.4%. However, increased rates from the CBRT led to a rise in the cost of funds collection by 300 basis points. Nonetheless, the inclusion of current accounts in the cost calculation helped moderate the overall cost of collected funds to 7%.

Profitability and Income Expansion

A pivotal story for the bank is the significant growth in profitability; strong fundamentals propelled net profit share income to jump nearly 59%. Fees and commission income bolstered this ascent, spiraling by over 600%, mainly due to augmented banking service sales. Even with operational expenses surging by 110.6%, mainly influenced by inflation, operational income grew by 67% while costs increased by 54%, indicating effective cost management.

Diverse Income Streams Show Mixed Trends

Revenue from a variety of sources revealed a mixed picture. Though fees and commission income dipped by 10% in the last quarter, the year-on-year rate impressively surged by almost 250%. Trading income also ascended by 70% over the year, thanks to substantial investment fund evaluation gains towards the end of 2023, painting a picture of effective asset management.

Provisioning and Ratios Indicative of Prudent Risk Management

The bank's risk management appears robust, with provisions for expected credit loss reducing by approximately 10% and the Stage 3 coverage ratio pushing up to 95.2%. This shows a healthy provision buffer for impaired loans. The capital adequacy ratio stood strong at 17.3%, but would be an even higher 20.5% if not for utilized free provisions, highlighting a strong capital position.

Upcoming Guidance for 2024

Investors and analysts keen on forward-looking indicators should note that the company plans to unveil its 2024 guidance in an upcoming meeting. This will be a critical opportunity to gauge the company's outlook and strategic direction for the future.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, welcome to Albaraka Turk Fourth Quarter 2023 Financial Results conference meeting. We will have a Q&A session following the presentation. [Operator Instructions] Now I will leave the floor to host. Sir, the floor is yours.

[Seyfullah Demirlek, executive]

Thank you, [Margaret]. Good afternoon, and thank you all for joining our 2023 year-end earnings call today. This is Seyfullah, head of Investor Relations and [ Sustainable ] [indiscernible]. Mr. Omer Emec is with me, our Assistant General Manager.

Before going into details of our presentation, I'm going to hand over to [ Arabi ]. He's going to share with us his review about the operating environment in Turkey. [ Arabi ], the floor is yours.

[Ömer Emeç, executive]

Thank you, Seyfullah. Hello, everyone. This is Omer speaking. Welcome and thank you for joining us. Today, we will be reviewing Albaraka Turk's year-end 2023 financial results. And I am going to start my presentation, as you know, as usual, by outlining the macroeconomic framework in which we operate. And later, I will share the highlights of our 2023 financial performance before giving floor to Seyfullah.

And let's start with macroeconomic [ outlook on ] Slide 1. The year 2023 started with market predicting a mild recession in the global economy. In state, 2023 showed us economic resilience largely led by consumption despite a high interest rate globally. On the other hand, the world economic growth outlook remains weak for 2024 with the effects of tight monetary policy and the weaker-than-expected recovery in China. The global PMI data showed growth in January for the third consecutive month, indicating that demand continues to be strong.

While headline inflation has fallen, core inflation remains persistent, [ especially ] the service sector, and still relatively tight labor markets. With rates at the peak, we expect global central banks to begin gradual [indiscernible] rate cuts in 2024.

On the other hand, inflation indicators, which remain above Central Bank standards, [ holds an outside ] risk that inflation may continue to be more consistent than the expectations. And this would require a longer period of higher interest rates.

In Q2, we expect annual growth to be above 4% despite the loss of momentum in the second half 2023. Coming in 2024 -- in 2024, we anticipate a more moderate growth compared to 2023 due to the delayed effect of tightening measures. Most inflation indicators point to a certain degree of normalization in prices.

Although headline inflation remains high, expectations are becoming more predictable with the support of monetary policy. In the latest inflation report, the CBRT maintained its 36% inflation forecast for 2024, as you know. We find it meaningful in terms of setting the target in the fight against inflation and growing the monetary policy framework.

On the other hand, considering the current demand caused by the [ rates ] and potential upsell rates, we expect headline inflation to be slightly above 40 percentage in 2020 (sic) [ 2024 ] year-end. It will be most probably peaking in May and enter downward trend in the second half of the year.

Now I am moving on Slide 2 for discussing the banking sector overview. In 2024, the Turkish banking -- in 2023, Turkish banking sector showed a solid growth performance. While the total assets of the banking sector grew by 64% compared to year-end, participation banks outperformed the sector with 73% growth. So the share of participation banks in the sector increased to 8.7%. The share continued to increase -- [ participation ] share continued to increase as a result of the realization targets. Loan growth was 56% in the banking sector and 65% in participation banks in 2023. Continuing to improve asset quality, the banking sector reduced its NPL ratio from 2.1 percentage at the end of 2022 to 1.6 in 2023. In the same period, participation banks managed to keep their NPL ratio below the banking sector by reducing it from 1.4 to 1 percentage.

In terms of net profit figures, the banking sector recorded a net profit of TRY 604 million in 2023. It means increasing its net profit by 40% percentage annually. Participation banks outperformed the sector in terms of profitability due to the lower funding costs and more supportive net share margin compared to sectors. In 2023, participation banks increased their net profit by 80% to TRY 53 billion.

Let's move to a discussion of our Albaraka Turk full year highlights on Slide 3. As Albaraka Turk, we had a successful year with our net income increase 2.5x, well above the sector average, and reached TRY 3.4 billion. Despite macroeconomic and regulatory challenges, we managed to significantly increase our net profit share income. And our revenue is also supported by the increase in our net trading profit.

On the other hand, we managed to keep our expenses at manageable levels despite rising market costs and the high inflationary environment. With our solid performance in revenue generation, we managed to increase our return on assets from 1.1% to 1.9% and a return on equity from 11.2% to 33.4%.

In 2023, we increased our profitability by keeping our asset quality in a very good position. We have closed the year-end with an NPL ratio of 1.7%, which is down from 1.9% in 2022.

As part of our prudent approach, we also continue to raise our provisioning ratios. At the end of 2023, we increased our Stage 3 provisioning ratio by 6.54 percentage points to 95.2%, which is well above the sector average. Apart from our ECL provision, we allocated TRY 3.4 billion [ for provision ] in 2023, which is a buffer against potential external or macro risk in the coming period. With that, we increased our free provision base to TRY 5.2 billion. This amount of free provisions may be perceived like profit reserves to support balance sheet and income statement in the coming periods.

One last point that is worth noting is the level of performing credits and collected funds. As you can see in graphs at the bottom right, our performing credits increased by 45% year-on-year. [indiscernible] realization has continued to inline with regulation. We increased Turkish lira share from 60% to 66% in our performing credits. And we increased the Turkish lira share in funds collected from 50% from roughly [ 60% ].

According to CBRT's exit targets from [indiscernible] to Turkish lira, our shares of FX protected deposits has came down from 35% in quarter 2 2023 to 28% by end of 2023, which means 7% decrease in FX protected depletes. We think this transition from the [ FX ] protected deposit, which is [ Karcam ], as you know, will continue to look towards 2024.

Now I will turn it over to Seyfullah for details on the year-end 2023 financial results. Thank you.

[Seyfullah Demirlek, executive]

Thank you, Omer [indiscernible]. Right now, I am moving on to the details of our financials. We are now on Page 4. As [ Omer ] [indiscernible] stated earlier, we had, last year, solid financial results, demonstrating the high increase in our profitability.

Our net profit was up by 151% year-over-year. The quarterly net profit remained almost same in the last quarter compared with the third quarter of last year. It should be noted that the Bank gained strong evaluation gains from its [indiscernible] projects and some [ securitized ] assets. Similar to the commercial banks, high turns generated from the CPI-linked securities. However, the Bank preferred to set aside to be a large portion of these evaluation gains as free provisions. Therefore, the solid improvement in net profit reflects the sound financials and well-managed assets and liabilities despite the challenging macroeconomic and regulatory environments.

The total operational income increased by almost 67% year-over-year thanks to well-managed assets and liabilities. Our bank generated strong net profit share income, including TRY [ 2 ] billion in valuation gains from profit and loss projects in the last part of last year.

Net trading income was also strong last year with high evaluation gains from the securitized assets, mainly backed by real estate. The Bank generated around TRY 3.5 billion from the investment funds booked under the securities portfolio.

The fee income also increased remarkably last year. Its share in the total operational income ramped up by 6.7 percentage points from 6.1% in 2022 to 12.8% at the end of last year.

As a result of a significant increase in the operational income, our profitability ratio demonstrated significant improvement in 2023. The return on average equity improved by 12.3 percentage points and 1.3 percentage points year-over-year and quarter-over-quarter, respectively. The return on average equity stood at 33.2% at the end of last year.

On the other hand, the return on average assets also continued to improve. It reached to 1.9% at the year-end of last year. The ratio increased by 80 basis points and 11 basis points year-over-year and quarter-over-quarter, respectively.

Regarding the [ profitability ] ratio, I would like to say that these ratios would be much higher if the Bank preferred not to set aside free provisions, which reached to TRY 5.2 billion at the year-end of 2023. TRY [ 3.4 ] billion in free provisions set aside in 2023 alone.

I am now moving to Page 5. Asset growth continues to be driven mainly by an increase in Turkish lira assets. Annual growth in total assets went up by 59%. The growth was lower than Turkish [indiscernible] and [indiscernible] banking sector averages because of the foreign currency deleveraging in our balance sheet. Our Turkish lira assets increased by 86% year-over-year, while foreign currency assets decreased by 2% in U.S. dollar terms year-over-year.

Share of cash and equivalents items in total assets ramped up by 4.2% year-over-year to 27.4% at the end of last year. This is due to increasing regulatory reserve requirements in the last quarter. Total funded credits still have a [ positive ] share in our total assets. Share of the securities portfolio remained the same in the total assets in comparison to the year end of 2022. Since the cash equivalents item in total assets increased positively, the liquid assets to total assets ratio remains at high levels.

When we look at the spread between the profit-yielding assets and [ those ] associated with the paying of profit-bearing liabilities, the [ difference particularly ] widen by 30 basis points at the last part of 2023, the positive impact of evaluation income received [ through ] P&L projects.

I am now moving on to Page 6. On the funded credit side, growth has been driven by Turkish lira-performing credits. Higher growth in total funded credits realized about 45% last year. This funded credits portfolio went up by 11.3% in the last quarter of 2023. The share of funded credit growth projects were up by 90 basis points in total assets quarter-over-quarter due to the impact of increased assets [indiscernible] P&L projects, mainly [indiscernible] [ weakening ] in the last part of last year. The share of [ CCD ] credits, in other words [indiscernible] portfolio slightly went down in [ the total ] funded credits portfolio in the last quarter. The NPL portfolio -- NPL ratio realized at 1.7% at the year-end of last year. It remains below 2% [ loss ].

Thanks to our foreign currency deleveraging strategy in total performing credits, the share of our foreign currency credit book shrank by 6% from 40% at the end of 2022 to 34% at the end of 2023. The foreign currency performance credits decreased by 23% -- performance credits year-over-year in U.S. dollar terms. On the other hand, Turkish lira performing credits increased by 61%, 62% almost, year-over-year. The funded credit yields, both in Turkish lira and foreign currency credits, increased remarkably in the last quarter of 2023 with the impact of CBRT rate hikes as well as P&L project returns [indiscernible].

P&L projects adjusted [indiscernible] total funded credits portfolio were up by 150 basis points quarter-over-quarter.

I am now on Page 7. The asset quality remains to be very sound with additional provisions. Looking at the [ detailed ] developments in our NPL portfolio, in 2023, [indiscernible] was TRY 2.2 billion. On the other hand, TRY [1.80] million for funded credits were written off last year. Provisions for funded NPL was around TRY 570 million. The coverage ratio remains at the 95% level, standing at one of the highest among the Turkish banks. Our cost of risk came down by 8.6% year-over-year. Our total credit provisions, as stated earlier, reached to TRY 5.2 billion at the end of last year. We set aside TRY 3.4 billion credit provisions last year [overall].

I am now moving to Page 8. Our securities portfolio reached to TRY 56 billion in 2023, increasing by 58.7% year-over-year. Our securities portfolio has gone up very significantly for the last couple of years because of the inflationary and regulatory operational environment.

When we look at the currency composition of the securities portfolio, foreign currency securities comprised of 61% of total portfolio. On the other hand, 39% of total securities portfolio was in Turkish lira and the year-end of last year. 19% of total securities was floating rates, CPI linked Sukuk and the rest of the portfolio was [ fee ] services.

Contribution of the securities portfolio income has been [indiscernible] to the bottom line, although the securities yields went down quite positively in the second and third quarters of last year. It picked up again in the last quarter of the 2023 due to the positive impact of [ high-yieldings ] growth, both after the [indiscernible] of CBRT in the second half of last year. Profit share income generated from the securities portfolio went up by around 65% year-over-year and reached to TRY 4.3 billion at the year-end of 2023.

I am on Page 9 now. Solid funds collection remains to be the main source of our funding base with increasing Turkish lira accounts. As we speaked in our previous presentations, composition of total liabilities slightly changed by additional Tier 2 book issuances which were issued in May of last year. Therefore, share of total borrowings went up by 5.4% from 11.6% in 2022 to 17% at the year-end of last year. Total participation funds, including the current accounts and participation accounts, consist of the largest portion of our total liabilities. Participation accounts point about 70% of our total liabilities and the year-end of last year. Share of other liabilities remains almost same in comparison to the year-end of 2022. Share of equities in total liabilities went up by 30 basis points year-over-year since our profitability went up significantly.

Total collected funds increased by 43.6% year-over-year and the share of Turkish lira collected funds in total funds collection make up by [ 21.0% ] [indiscernible] book last year, including foreign currency protected participation accounts. In fact, the foreign currency protected participation accounts has helped us deleverage the foreign currency funding base. However, share of the foreign currency protected accounts -- participation accounts has been coming down in line with the economic policy of CBRT. It was about 35% of total collected funds in the third quarter of last year, but it came down by 7% to 28% of total funds collection at the year end of 2023.

The current accounts for total [ deposits ] ratio came up slightly from 46.3% at the end of 2022 to 46.7% (sic) [46.8% ] at the end of 2023. Share of participation accounts with over 1-year maturity in our total participation funds increased quite considerably from 8.5% at the year end of 2022 to almost 17% at the end of last year.

I am now moving on to Page 10. Increase in Turkish lira funds collection was noteworthy in 2023, both Turkish lira current and participation accounts increased very remarkably by almost 18.9% and 70.4% year-over-year, respectively. Thanks to efforts for deleveraging foreign currency funds, foreign currency funds collection decreased by -- decreased very sharply last year. Foreign currency participation accounts came down by more than 40% in U.S. dollar terms year-over-year.

Cost of funds collection for total participation accounts increased by 300 basis points in the last quarter of 2023. This is due to the rate hikes of CBRT in the second half of last year. And we had current accounts in our calculation of cost of collected funds. It came down quite dramatically since share of the current accounts in our total fund collection has been at very high levels. Cost of collected funds, including current accounts, realized at 7% at the year-end of last year.

I am now on Page 11. As mentioned earlier, our profitability has improved significantly over the last couple of years thanks to strong fundamentals of the Bank. Increased profit share income and fees and commission income enabled us to further advance income generation capacity in 2023. Although profit share expense went up by over 100% year-over-year due to a rise [ personnel ] funding, profit share income also increased remarkably by almost 82%. And net profit share income increased by almost 59% year-over-year.

Growth in net fees and commission income was quite significant by more than 600% year-over-year. As stated in our previous presentations, this is mainly driven by growth in sales of banking services to credit customers.

On the operational expense side, expenditures in all cost items went up positively in year-over-year terms due to the high inflation in [ Turkish lira ]. Total operational expenses increased by 111% (sic) [ 110.6% ] year-over-year.

I am now moving on to Page 12. Well-managed assets and liabilities and operational expenses led us to significant both yield and cost improvements. Net profit share margin stands at a very high level. Strong fee income and efficient cost management supported profitability to increase in year-over-year terms. Our operational income increased by almost 67%, while operational costs went up by only 54% year-over-year. The net working share margin went up further with the positive impact of profit and loss projects credits [indiscernible] received in the last quarter of 2023.

On Page 13, we believe there are several reasons for the changes in the income statement items. Starting with the net profit share income, although cost of funding increased, net profit share income continued to increase due to higher credits and securities yields and additional support of profit and loss projects gained at the last part of last year, which was about TRY 2 billion. Although fees and commission income shrank by 10% at the last quarter of last year, it increased very significantly by almost 250% in year-over-year terms.

Net trading income increased by 58% and 70% quarter-over-quarter and year-over-year, respectively, thanks to strong investment fund evaluation gains received at the last part of 2023.

On the other income side, reversal of provisions due to collections from Stage 3 credits and [indiscernible] portfolio and asset sales increased this item. Although provisions for expected credit loss reduced by around 10% year-over-year, Stage 3 coverage ratio increased to 95.2% at the end of last year. As stated earlier, total free provisions increased to TRY 5.2 million and TRY 3.4 million of it was set aside in the last year alone.

On the personnel expenses, personnel expenses increased by 116% year-over-year due to increasing salary expenses in line with inflation and the base effect of bonus premium payments made at the beginning of 2023.

The last item, other costs, operational expenses also increased over 100% due to the high inflationary environment in 2023.

Moving on to Page 14, the details of capital adequacy ratio can be seen on this slide. The capital adequacy ratio stood at 17.3% at the end of last year. In fact, it would be higher -- it would be at 20.5% if free provisions -- if provisions -- free provision volume [indiscernible] just last year, as we stated in the past, TRY [ 3.54 billion ] [indiscernible] internal capital generation [indiscernible] our capital adequacy ratios.

At the very back of our presentation, on Page 15, you may find a comparison of [indiscernible] the financial ratios with the Turkish banking sector and the participation banking sector. And on Pages 16 and 17, you may find our summary of balance sheets and income statements actually.

And before moving on to the Q&A session, I would like to inform you guys that we are going to hold an Investor Day [indiscernible] [ Istanbul ] on February -- 28th of February. We welcome you all. We already sent your invitation. If you haven't received the invitation, please just contact us. So now I can say we can go onto the Q&A session. Thank you.

[Operator]

Thank you very much for your presentation. Now we will start our Q&A session. [Operator Instructions] We have a written from [indiscernible].

[Unknown Analyst]

Yes, [indiscernible] thanks for the presentation [indiscernible] can you share any of your [indiscernible] 2024 expectations?

[Ömer Emeç, executive]

Actually, we will be sharing our expectation in the meeting, Analyst Meeting, that will be held on the 28th of February. Yes, the General Manager will be sharing that. So we will be very happy to host all of you if you actually want to participate in that meeting. We are waiting for that meeting. We will be sharing our guidance for 2024 in the meeting.

[Operator]

We have another written question from [indiscernible].

[Unknown Analyst]

It is about the margins. Yes, [indiscernible] actually, as you know, the policy rate has been increased by Central Banks from 8.5% to 45%. Automatically, it has increased both -- on the commercial bank side, both the [ policy ] and credit side. Right now, for the participation bank sector as well, the credit yield is more than 50%, as you know. On the deposit side, we are mainly raising our deposits through our participation funds. While looking at margins, margins are somehow in line with year-end 2023 and slightly above the year-end 2023 fourth quarter. And actually, by -- in 2023, you have decreased our yield -- maturity in credit in a very short period due to we have already expected increase in the policy rate before the election. That is why our credit price adjustment has been already done. For 2023, we expect these are somehow in line with [ 2022 ] or in line with [ market ], which is, roughly speaking, a [ 4% ] margin, will be capped also in 2024.

[Operator]

Thank you very much. I don't see any return on your question. [Operator Instructions] Dear speakers, I think we have no other -- any other question. Back to you for the conclusion.

[Ömer Emeç, executive]

Thank you so much for joining us for the year-end results for 2023. We hope for, again, successful 2024 results. And also, we actually want to remind you that, again, of the Analyst Meeting, which will be held on 28th of February. We will be discussing the developments and our guidance for 2024. Thank you again for joining us.

[Operator]

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