Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Transcript 2020-Q1

[Operator]

Hello, and thank you for joining us in Garanti BBVA. First Quarter 2020 Financial Results Webcast and Conference Call. Our CEO, Mr. Recep Bastug; our CFO, Mr. Aydin Guler and Head of Investor Relations, Ms. Handan Saygin, will be presenting today.

Kindly note, there will be a Q&A session following the presentation. The presentation will now start. So I'll leave the floor to our presenters.

[Handan Saygin, executive]

Hello, everyone. Thank you for taking the time in these days to join and listen to our earnings announcement of first quarter 2020. Before jumping into our quarterly results, we wanted to inform you where we stand and what we expect in light of this highly undesirable new fact that entered our lives.

COVID pandemic hit the world economy as well as the Turkish economy through supply, demand and financial channels. We revised down our macro expectations based on the V-shaped recovery assumption. Governments and regulatory bodies announced timely measures and packages to mitigate impact and these measures' contribution to GDP, hopefully will likely prevent having negative annual growth. During this period, our priority has been to protect the society's health, starting with our customers and employees and to support turning the wheels of the economy. For this purpose, we took a set of precautions at our workplaces and our branches, we introduced and implemented support packages that will bolster the economic measures announced by the government.

In the following slides, I will talk about our actions in detail. But before that, we wanted to share what our big data suggests and how it supports our V-shape recovery assumption. Per our debit and credit card spending patterns, we saw a big hit in consumption. However, we also started to see some stabilization signals. Total consumption is now converging to positive territory with the support of growth in retail food sales. Airlines and hotels witnessed a big slump as expected. Pandemic has already reduced first quarter '20 yearly GDP growth down to probably 6%. It had started at a much faster pace, but what we expect right now for the first quarter is 6%. And we revised down our GDP growth assumption to 0% from our beginning of the year expectation of 4%.

We envisage a big slump in second quarter. This actually would be 4x larger than the adjustments during 2018 sudden stop. After second quarter shrinkage, we are expecting to see a partial recovery in the second half. And economy should recover back to its potential growth rate of 5% in 2021. During this unprecedented period, governments and regulatory bodies announced series of measures to cope with the global pandemic shock and mitigate the impact. On monetary side, so far since the outbreak, Turkey's Central Bank has cut rates by 200 bps and also reduced foreign currency reserve requirement ratio by 500 bps for banks meeting the good bank criteria. Central Bank also provided liquidity support via repo auctions and longer-term swap facilities. We estimate the potential impact of these measures to be roughly 1% positive on GDP. On the banking side, the new credit guarantee fund limits were introduced to meet the business' liquidity and working capital needs. Initially, a total of TRY 64 billion limits -- TRY 64 billion limit was assigned to the bank. Additional limit assignments is likely and announced forbearances will also support banks' lending appetite. Thus banking sector's contribution is estimated to be around 0.5% to 1% positive to GDP.

On the fiscal side, economic stability shields announced package, excluding the credit guarantee funds' guarantee, totaled TRY 75 billion. We estimate fiscal measures to contribute 0.5% to 2020 growth. So putting all these together, announced measures will support GDP in the range of 2% to 2.5% and our V-shaped scenario will unfold, hopefully.

Now on Slide 7, Turkey, as you know, together with the world is going through a period never experienced before. Our first and foremost priority in this period is without a doubt the health and safety of our employees, their families and the society. So within this scope, we formulated and started implementing all of the necessary measures without wasting time. Currently, 92% of our headquarters staff and 61% of our branch staff work from home. On the other hand, 100% of our call center employees are serving our customers from their homes as home agents and able to meet even their record high call volumes seen in this period.

Besides these measures, it's also highly important to economically support the nationwide struggle, of course. We have started providing the opportunity to postpone the principal interest and installment payments as well as credit card debts according to needs of our customers. Within this scope, we have postponed and restructured the payment of more than -- or close to 500,000 loans at an amount of over TRY 21 billion to-date. We're 1 of the 2 banks that have so far made the most disbursements out of the TRY 24 billion guarantee limit of credit guarantee fund package for OpEx and check payments, and we do aim to keep our leading position in this regard.

In this period, business continuity and uninterrupted customer service was very critical. As a bank, investing heavily in digital channels for 25 years, we managed to make a swift transition without experiencing any disruption whatsoever in our operations. Now nearly 25,000 Garanti employees fully equipped to function from their homes to continuously serve and meet customers' needs. More than 1,000 call center agents became home agents within only 10 days. And home agents could comfortably meet customer calls, despite the volume that more than doubled during this time. Number of customers visiting branches dropped by about 2/3, and we identified 250 branches as backup branches and temporarily closed them. In the meantime, we heavily promoted digital channel usage. Accordingly, we have seen the highest monthly increase in digital banking customers in March. It was about double the already high pace it used to be. So even though the branch visits declined, amount of money transferred transactions, for instance, didn't come down due to digital banking. Around 500 functions are available in our mobile banking application. Even now the future is available for loan postponements, and we could develop this for digital channel -- for digital channel usage within a very short period of time, as short as a week. So thanks to our robust infrastructure, we haven't experienced any system interruption despite record high number of unique customer logins per day. I mean, it was as high as 3.2 million a day.

Now let's move on to the financial results for the first quarter. On Slide 10, you will see our proven capability in generating sustainable revenues. The start to the year was strong, and pre-provision income reading was TRY 5.3 billion in the first quarter, representing a strong annual growth of 37%. Whereas for net income, a similar positive growth could not be booked. The unprecedented circumstances that surfaced towards the end of the quarter necessitated revisiting not only the macro projections, but also the loan portfolio for COVID impact, and we had to rerun our IFRS 9 model with a new set of macro.

Thankfully, our strong pre-provision income levels enabled us to preemptively increase our loan loss provisions, while maintaining the TRY 2.5 billion pre-provisions in the balance sheet. Net income result in the quarter was TRY 1.68 billion, representing an ROE of 12.4% and an ROA of 1.5%, so similar level to that at year-end 2019.

On next page, let's start looking at the fundamental contributors to our financial performance. We had a solid start to the year in terms of lending growth. It actually fared pretty much in line with our operating plan expectation. In the quarter, we booked a Turkish lira lending growth of 5% and foreign currency lending growth of 2% in dollar terms. Main contributors to the Turkish lira loan growth were general purpose loans on the consumer side and business banking costs. On the foreign currency lending side, export loan disbursements and the absence of sizable loan redemptions in the quarter led to this growth. Recall that due to some anticipated redemptions in the year, we guided shrinkage in foreign currency lending this year.

In Turkish lira business lending, on the other hand, growth is expected to pick up in the following quarters, backed by the limit increase in the credit guarantee fund scheme. Of the TRY 24 billion credit guarantee fund limit to be used for OpEx and check payments, we had TRY 3.6 billion guarantee limit assigned to us. With an average 80% guarantee, this translates into a total TRY 4.5 billion in credit guarantee funds linked lending. And we immediately started the disbursements to the SMEs under this new program. Growth here likely will be more visible in the coming quarters. So overall, our loan mix continues to be a well-balanced one among consumer, Turkish lira business and foreign currency loans.

Let's now look at the components of the balance sheet on next page, on Page 12.

In the asset breakdown, loans constitute 61%, securities 13% and reserve requirements 11% of the assets. FX funding continues to be predominantly with deposits. Deposits and deposits like items such as Turkish lira bonds issued and merchant payables fund more than 2/3 of the assets. Borrowings fund only 14% of the assets. And overall, our leverage remains at a low level of only 7.3x the shareholders' equity. Looking into the liquidity indicators, they also remain at very comfortable levels. Liquidity coverage ratios are at multiples of those minimum requirements. And foreign currency quick liquidity buffer is almost fourfold to short-term external deals. So it is $10.2 billion of foreign currency liquidity versus short-term deals of $2.6 billion.

Now on next page, you will see the deposit performance in the quarter. There was 4% growth in Turkish lira deposits and 2% shrinkage in foreign currency deposits. The shrinkage on the foreign currency side is largely attributable to the parity change. If we were to exclude the parity impact, foreign currency deposits were actually flattish in the quarter. The most striking in deposit performance continued to be on demand deposits. Demand deposits' growth in the first quarter was 16% on top of the 38% growth booked in 2019. This brought our demand deposits to total deposits ratio to a new record level of 35% versus sector's average of 26%.

So this clear strength indicates that Garanti is customers' choice as their main transaction bank where they like keeping their salary accounts. Another good indicator about the deposit base is the high share of SME and retail depositors in the total. These depositors tend to be more sticky and relatively lower cost due to average size.

Now moving now on to the P&L items. Let's start with the margin performance on Slide 14. As anticipated and guided, cumulative margin went up by almost 70 bps to 5.9%. CPI impact was flattish at the first quarter end -- as of the first quarter end and inflation estimates used in CPI calculation in the first quarter was same as last year's rating of 8.5%.

On a quarterly core margin basis though, there was an 11 bps drop quarter-on-quarter. Even though the deposit costs continue to go down in the quarter, with the new fee regulation becoming effective, there was a significant pickup in loan repricing towards the end of the quarter. This meant spreads coming down from their high base earlier than their normal fare. So -- and this will highly likely reflect more visibly on margin in the coming quarters, also -- as also the deposit cost drop from hereon is expected to be relatively lower. Combined with the measures to mitigate the COVID impact, the margin expansion of 70 to 80 bps that we had guided earlier in the year seem to have a downside risk.

Let's now move on to looking at the quality of the loan book. You can see on the loan portfolio breakdown that TRY 37.5 billion or 13% of the loans are classified as stage 2. 33% of stage 2 loans relates to significant increase in credit risk, the SICR portion, which is the quantitatively assessed portion per IFRS 9 model outcome and is based on internally defined part thresholds, as many of you are familiar.

Within Stage 2, you may notice this time the significant drop in the past due portion. This is due to the regulators nowadays defining past due files as those that are 90 to 180 days past due. The ones that are 30 to 90 days past due are now followed under either the watch list or the SICR bucket. That's why the past due portion that used to be about 10% now is only 1%. Now even though there is much shuffling within -- there's such shuffling within stage 2 and NPL inflows may be delayed, we continue providing as much we find necessary to be on the safe side.

Given the global deterioration in macro due to the pandemic, we preemptively increased coverages significantly. Our total cash coverage ratio went up to 6.4% from an already high level of 6.1% at year-end. Loan provision increase in the quarter alone was TRY 2.4 billion. Not only there was significant coverage increase for those files that are not yet moved to NPL, meaning more than 90 days past due, but we also increased stage 1 and stage 3 coverages significantly, as you can see on the bottom left-hand side.

On next page, unfortunately, we anticipate that this pandemic will affect all the sectors in 1 way or another. Obviously, there will be certain sectors being more affected than others. So on Slide 16, on this slide, you can see our coverage increases for loans, operating in certain sectors.

Let's now move on to the next page to see the NPL and net cost of risk levels. You will notice on the left-hand side that there was no deterioration in the NPL ratio, it was 6.5%. We actually had net collections of TRY 500 million in the quarter, nearly TRY 500 million -- I mean, around TRY 500 million. TRY 515 million net flows negative. The recently announced change in BRSA NPL recognition days will postpone the NPL recognition. However, when it comes to provisioning, we will continue to provide prudently for our internal assessment. As you can see on the right-hand side, next cumulative cost of risk mounted to 317 basis points, excluding currency impact. Even -- which is already hedged, as you know. Even though the start to the year was very good. And in the first 2 months of the year, cost of risk was faring below 100 basis points, we felt the need to revisit our portfolio. Revised the macro input of our IFRS 9 model and do individual assessments to companies that are operating in relatively riskier sectors, as mentioned on the prior slide. This meant significant additions to our first quarter business as usual flow impact of 108 basis points of net cost of risk.

Moving on to the fees and commissions slide. The first quarter performance has been strong, even though we do not expect it to be sustainable, bearing in mind the recent fee regulation.

It is worth mentioning that due to the regulation, we anticipate a clear downside to our initial guidance for the full year. It was in the high single-digit level. The lower economic activity due to the pandemic will also have an impact on the fee performance. In terms of the growth breakdown, the better performing areas have been mainly the cash and noncash loan fees and insurance backed by the solid lending growth in the quarter. Both the share and the growth of payment systems has been limited due to the fee regulation as interchange and merchant fees, as expected, came down in parallel to the lower rate environment. Money transfer fees growth has been limited as well due to the introduced caps on these as of March 1.

Let's now quickly look into expenses on next page. Even though the 21% year-on-year operating expense growth looks high, higher than our guidance, costs are totally under control, and series of actions for COVID has also been put in progress to further tighten our costs, such as renegotiation of contracts, rental agreements and so forth. So we do target to end the year with an OpEx growth as guided in the low teens.

On next page, you will see our capital ratios. We could preserve our strong capital buffers. Our consolidated capital adequacy ratio and core equity Tier 1 stands at 16.6% and 14%, respectively. And calculated without the forbearance introduced by BRSA. So with the forbearance, these ratios would have been 17.5% and 14.8%. Looking at the evolution of the capital adequacy ratio from 2019 year-end to the first quarter, the net income had a positive impact of 45 basis points, while the currency depreciation took away 62 bps. Due to the high lending activity in the quarter, market and credit risk had a negative impact of 70 basis points. The operational risk is recalculated annually and hits the first quarter of each year. Impacted -- its impact was a negative 36 basis points. And our Turkish lira reference index subdebt issuance of TRY 750 million was able to contribute a positive 21 basis points. Taking into account the minimum required level of 12.1%, we have an excess capital of TRY 17 billion on a consolidated basis.

Now in the next section, you will see the sum-up of our messages regarding where we stand and how we fare relative to our beginning of year guidance. Post-COVID environment, highly likely will necessitate revisions to our guidance. It is clear that the risks are on the downside for margins, fees and provisions. At this time, it looks like lending growth and operating expense growth will be met. However, for those with downside risk, it is not easy quantifying in the midst of this stormy period. So size of the impact will also depend on the duration of the pandemic at this stage, be informed that there is downside risk to our return on equity guidance. Yet still, be also aware that our balance sheet remains strong even while we run severe risk scenarios.

So thank you for listening. This ends my presentation. Thank you for listening, and we can now take your questions.

[Operator]

[Operator Instructions] We are taking the first question from Deniz Gasimli, Goldman Sachs.

[Deniz Gasimli, analyst]

So yes, hope you're doing well. And I just want to ask a few questions on provisioning. So one is, obviously, this quarter has been a sizable adjustment to cost of risk from, as you pull the assessment of exposures post COVID-19 as well as the macro overlay adjustment under IFRS 9. So I want to ask do you see a possibility of further similar adjustments in future quarters? Or did you decide to kind of take the most over the bulk with this quarter so as to minimize the impact of this in future quarters? Or is it possible that this will occur in coming quarters? That's my first question.

Second question would be about 2 provisions. And I know you've been asked about it many times before, but obviously, have a very strong pre-provision buffer of TRY 2.5 billion. Is there any scenario under which you envision using it this year? Or you're just keeping it for now and -- as an additional buffer? A third question, just on provisions, looking at the quarterly breakdown of your results. There is a TRY 1.8 billion reversal of provisions. Just wanted to get any color if you have on this side of the reversal? And the last question is, there's around TRY 728 million of other provisions. Excluding pre-provisions -- this considered pre-provision charges this quarter. Is this because of -- it is driven by LYY? Is my question. And sorry for too many questions.

[Aydin Güler, executive]

Well. So Deniz, let me start related with the provision issue. As you know, in the -- the COVID effect started to affect the balance sheet, I think, mid of March. So in the first quarter, in general, as we even we didn't need to allocate the amount of provisions under normal circumstances. But with the coronavirus effect, so we have to be prudent with the macro assumption. Yes, you are right, more than TRY 2 billion provisioning here, we take aside. I think it will continue. First answer to your questions, because we are going to get the real effect of coronavirus issue in the second quarter.

Yes, that second quarter are provisioning. I cannot say the number, but the -- I think provisioning mode will be very similar to this period. The address may change due to macro issues, due to individual assessment, I don't go that detail. But 100%, there will be similar mode. Regardless of the number, we will be very preemptive and prudent in provisioning. So you will see that in the second quarter as well. This was the first one.

So yes, the reversal of the provision, I think this is -- net provision is the answer here. That is the seasonality so the net provisioning is the answer, I think. The third one because there are -- there were 4 questions. What was the third one?

Yes. [indiscernible] Otas issue. Yes, our provisioning, this period, 400 -- TRY 550 million due to the valuation of the company. Every quarter, we have to adjust our number with that valuation. So this period, TRY 550 million provision due to currency depreciation related to mark-to-market valuation of [indiscernible].

And also, I have to recall that every quarter, the interest that we have been charging to LYY is credit is also subject to provisioning. The amount is TRY 100 million plus those TRY 550 million. So in total this quarter, TRY 650 million provisioning, you will see due to LYY.

[Deniz Gasimli, analyst]

Very clear. And so last question on the -- any visibility on the usage of pre-provisions? Or as of now, you're just keeping them?

[Aydin Güler, executive]

The pre-provision, other -- our balance sheet is strong enough to originate new provisions. So in the second quarter, under these circumstances with these outcomes, we are able to allocate reasonable provision. So if that is not any urgent issue, I don't think so. We will not touch that amount. It will stay as it is.

[Operator]

Now taking the next question from Gabor Kemeny.

[Gabor Kemeny, analyst]

Thank you for the presentation. First question is on the broader pre-provision profitability, which is very impressive. Indeed, you flagged a couple of headwinds from the erosion of customer spreads and fee regulations coming in. But on the other hand, you were talking about moderating cost inflation. Can you give us a sense how you expect the pre-provision profit to develop from where we were in Q1? Second question was on the debt moratorium. Can you just reconfirm, please, that you mentioned the TRY 21 billion of debt is under the moratorium now, which will be around 7%, 8% of your loans? And how you think about the asset quality outlook on this amount? Have you set aside any provisions for these loans? And the final question would be on your macro assumption. As I understand, the 0% GDP growth is now your base case. What probability do you find to a significant recession? And what would be the rough -- roughly the ECL impact, the provision impacts from making that your base case?

[Aydin Güler, executive]

Gabor. First of all, the pre-provision income. I think, yes, in EBD first quarter compared to the last quarter, we have very strong growth there. As you see, our income -- pre-provision income increased 16%. I think the -- the level, it is impossible to get those 16% increase in the coming quarter, there will be in terms of percentages, it will be lower in terms of increase, but we will keep this amount of satisfactory pre-provision income in the second quarter as well because the source of debt pre-provision income is still that. Yes, we got some negative impact due to fee regulation issue. I have to give you a clear picture of that in the first quarter, the first 2 months was exempt of regulationary effect because we start to apply the regulationary limits after February. It was valid for just March. So 2/3 of the first quarter, we benefited from the environment from the regulationary exemption. Under current circumstances, yes, the COVID issue and the fee regulationary negative impact, it will affect our provision -- pre-provision income but may be flattish maybe a little below than that we will have similar amount of pre-provision income in the second quarter. This is the first side. The second one, the moratorium as of today, we started to restructure our clients' loan after 18th of March. As of today, 500,000 clients with the volume of TRY 21.3 billion restructured. According to the regulation, according to the needs of the company, we postponed. So we postponed their credit to a reasonable maturity. So we don't announce any moratorium or something like that. This is just postponed. It is very normal operation. So amount is huge, but under the circumstances, this is very normal. So we are confident that amount -- this happens all over the world. This is not applicable to Turkey. So this -- we shouldn't call it as moratorium. This is just deferral. This is just postponement. So I'm sorry, what was the third one?

Our -- we have 6 different risk scenarios, Gabor, from good one to the worst one. I can comfortably state that our balance sheet is ready for all these risk scenarios. So it was not -- this COVID was not the name of the worst scenario, but our worst scenario is much more versus than this one. So we are in line with our risk scenarios under the circumstances. We are very comfortable.

[Gabor Kemeny, analyst]

Okay. Maybe you can just give me a sense what sort of probability do you assign to these recession scenarios at this stage?

[Aydin Güler, executive]

I think we are in the middle -- we are at the bottom now because in the first quarter, as you know, the 15 days of the first quarter was with COVID. We started to feel the real effect of COVID issue, I think this quarter. This quarter, 100% we will be impacted by COVID issue. So what will be the outcomes of this one, I think it is inevitable there will be unemployment. There will be unemployment. There are too many different scenarios. I hope we finalize it by this quarter. So the damage will be less but if not, it will go up. So -- and in original scenario, our unemployment rate was about 11% by year-end. But unfortunately, it will be by far below of that number. This is the first one. The second one, GDP will fall. GDP will fall because this quarter, as you see in the presentation, we are expecting minus 9% negative growth. So if it ends in the first quarter, the third quarter 5%, the fourth quarter will be 1.8%.

[Handan Saygin, executive]

Hello, everyone. This now concludes our Q&A session. I leave the floor to our CEO for closing remarks. Thank you.

[Recep Bastug, executive]

Thank you all for your participation. As a nation, together we do our work, we are going through a period, which we have never experienced before. Financially, we are confident with our performance. Thanks to our solid capital, liquidity and strong revenue generation capability. With this confidence, we will continue to support this challenge by meeting the increasing demands with our knowledge, experience and strong presence in the sector. All of us will continue to follow closely the developments caused by global pandemic. I fully believe that we will overcome these difficult times of uncertainty. Show solidarity.

Please take care of yourself and your families and stay safe. Thank you.