Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and thank you for joining us in Garanti BBVA's First Quarter 2021 Financial Results Webcast. Our CEO, Mr. Recep Bastug; our CFO, Mr. Aydin Guler; and our Investor Relations Director, Ms. Handan Saygin, will be presenting today. [Operator Instructions]

The presentation will now start, so I'll leave the floor to our presenters.

[Handan Saygin, executive]

Welcome, everyone. Thank you all for attending our financial results call for the first quarter 2021. We're very happy that, despite all the odds happening in the world these days, we're still able to deliver stellar results and are here to proudly present them.

Before we start with our financial results performance, let's first briefly go over the new macro outlook that we have to re-evolve -- and that had to re-evolve in the quarter with strong factors affecting expectations.

Starting the year, the GDP growth momentum has actually fared higher than our anticipation. We now cast a yearly growth rate of 5.5% in March for the first quarter's GDP growth. Our big data proxies and other high-frequency indicators have started to jump, being backed by both the base effects and the reopening of the economy in March. However, given the latest developments, we remain cautious and maintain our 2021 GDP growth forecast at 5%, while keeping an upside bias due to both continuing strong activity and the positively revised global growth forecast.

Benefiting the current account expectations, we witnessed a continuing import demand and pickup in exports following the strengthening external demand, which could still initiate a correction in current account deficit as of March. However, due to higher faring commodity prices and a relatively low contribution from tourism revenues, we now expect current account deficit to be $27 billion at the end of the year, corresponding to roughly 3.7% of GDP.

Continuing with the inflation outlook on next page, we revised our forecast on the upside led by the higher oil price assumptions and our revised exchange rate forecast. Inflation will likely remain close to 18% during the second quarter and decline only gradually to around 17% in October and finally end the year at 15%, helped by the favorable base effects in the last 2 months of the year.

Based on this inflation outlook, expect the Central Bank to stay on hold till September and start an easing cycle only very gradually thereafter, ending the year with 16% policy rate. In other words, a total of 300 basis points rate cut is assumed by year-end.

Regarding the budget deficits -- budget balance, budget deficit to GDP ratio declined to 2.3% in the first quarter, down from 3.4% at the end of 2020. This was with the support of strong tax revenues and controlled expenditures. Due to worsening COVID situation, we slightly revised our forecast up to 3.8% for budget deficit to GDP ratio for the year-end. Even with this revision, budget deficit to GDP will continue to remain below emerging markets average.

Now let's move on to our financial results, and here we had just a remarkable start to the year 2021. Our earnings of TRY 2.5 billion in the first quarter is our record-high quarterly profit to date, suggesting a hefty annual growth of 51% and a quarterly growth of 122%. Underlying factors to this visible surge is not purely attributable to normalizing net cost of risk post heavy provisioning last year, but also to our sustainable revenue generation capability that can be seen in our historic pre-provision income records.

These outstanding results, especially in a quarter of inescapable margin pressure, is attributable to well defended margins with the support of healthy loan growth, active management of funding mix and strengths we get from more than 19 million customers that prefer to bank with us, keep their sight deposits and choose to do their banking transactions. With this customer-driven strength in the end, we are able to generate not only the best in sector margins, but also the fee and commission income revenues.

In this quarter, given the further volatility and continuing uncertainties, we chose to further boost our free provisions and NPL coverages. With an addition of TRY 150 million to our free provisions in the first quarter, our total free provisions on balance sheet reached TRY 4.8 billion. Even after such prudent provisioning and continuing low leverage, we were able to deliver a return on equity of 16.7%, suggesting mid- to high teens as guided, and a return on asset of 1.9%. Now if we haven't set aside the free provisions, these ratios would have been 17.3% and 2%, respectively.

Let's now move on to the components of these results and start with the assets. Year-to-date asset growth continued to be customer-driven and in high-yielding asset classes. Loan share in assets went up to 62.5%, while securities share neared 13%.

In the first quarter, our Turkish lira lending growth was 6%, alluding to a pace that is more than double that in the sector. This growth is a wealth -- this growth as well signals the level that we're well on track to meeting our Turkish lira lending growth projection of mid-teens for the year.

As for foreign currency lending, we had further 4% shrinkage in dollar terms in the quarters. This is fully in line with our anticipation. On the securities front, we continued to strategically manage the portfolio by some opportunistic purchases of Turkish lira securities and had a eurobond sale.

Now on the next page, let's look in more detail to our Turkish lira lending growth. How we can summarize for the quarter is that it has been timely and healthy. We're able to book growth across the board with rational pricing and market share gain. Even though in net growth, consumer and credit cards registered relatively better, 9% and 8% level kind of growth, Turkish lira business loans were also in the positive territory, despite the heavy flow of redemption post a high-growth year.

In the pie chart on the left-hand side, you can see a balanced Turkish lira loan mix among business and consumer. On consumer side, the high-yielding general purpose loans were again the front runner, with 10% growth in the quarter. In auto and mortgage loans, we preserved our leadership position among the private banks.

On the foreign currency loans, the story is a reverse to that in the Turkish lira. We have a continuous striking book. This strategy has been in place that Garanti BBVA since 2015 from a level that used to be as high as $26 billion on a consolidated and $22 billion on a bank-only basis.

Notice in the line chart on the right-hand side that this is also true for the sectors, as anticipated given the late currency news. At Garanti, the shrinkage has been even more, and the market share loss since 2017 alone has reached 2%. Foreign currency loans and total lending now make up 38%.

Evaluating the portfolio in terms of currency sensitivity and how we manage the risk, we wanted to explain in detail what they are. Of a consolidated total of $16.5 billion of foreign currency loans, $4.6 billion are those disbursed by our international subsidiaries to companies abroad with natural hedge. The bank-only total is $11.9 billion. Of this, 13% is to exporters, 56% relates to project finance loans and the rest is mainly working capital loans to blue chip names and multinational.

Foreign currency sensitivity analysis is periodically conducted on this portfolio, foreign currency portfolio, the whole portfolio. And covering at minimum around 72% of the wholesale portfolio, we do that, so that we can proactively do the necessary staging and provisioning.

So far, about 3% of the analyzed portfolio is identified as risky. And accordingly, we have been following them under Stage 2 with close to 35% coverage. Provisioning of these firms alone has increased by 10% year-on-year.

Let's now jump to the funding side on Slide 8. Notice that demand deposits, time deposits and deposits like Turkish lira bonds issued and merchant payables account nearly 70% of the assets. This alone easily funds the loan book, suggesting a total loan-to-deposit ratio under 100%. Notice also the sustained high level of demand deposits funding assets. As for the external liabilities due to our shrinking foreign currency loan portfolio, we have been cutting down our external debt. Borrowing share in assets is a limited 12.5%.

As of the March end, our total external dues were $7.7 billion, of which $2.4 billion is due within a year. And against that, we have $11.9 billion of quick liquidity buffer, in other terms nearly fivefold the need we have in it. The year-to-date reduction in the foreign currency liquidity buffer is mainly due to our foreign currency securities sales and redemptions.

Other indicators confirming our high liquidity are the liquidity coverage ratios, that, for both total and foreign currency, our liquidity remains well above the required minimum.

Now moving on to the deposits, Slide 9. In the quarter, we had some dedollarization following a heavy dollarization year like last year. Accordingly, our foreign currency deposits shrank by 6% in dollar terms versus a 1% growth in Turkish lira deposits. In the first quarter, to defend the margin pressure, we refrained from high deposit pricing and rather concentrated on growing our mass market deposits.

Our very visible strength in total demand deposits remain. Even in a quarter of more attractive deposit rates, our demand deposits could still grow by 10%. Demand deposit share in total is an outstanding 44% compared to 31% average in the sector.

We stand out both for Turkish lira demand deposits to TL customer deposits and also same applies for the foreign currency demand deposits in total foreign currency deposits. This is a clear reflection that Garanti is customers' preference as their main bank. And as I tried to stress earlier, this is why we're able to deliver sustainably strong revenues. The funding strength alone contributes positively to differentiate us in the sectors with the highest margin performance.

Now speaking of margins on next page, as expected and guided, there was a 1 percentage point drop in the quarterly margin to 3.9% from 4.9%, and about half of the drop is attributable to CPI impact, and its contribution in the last quarter was overstated due to the year-end adjustment period. Even though the CPI linker volume remains good, the CPI reading used in the first quarter was 8% lower than the year-end adjustment level.

On the core margin side, suppression was inescapable. However, we could limit the contraction by a dynamic management of asset growth and funding mix. Increasing loan yields will continue to support the margin, and following the stabilization in funding costs and possible easing towards the end of the year, we will start seeing sequential expansion most likely starting in the second half of the second quarter.

Even though the interest rates are at a higher level than what we assumed in our operating plan, we don't see a downside risk to our full year guidance of 100 basis points of margin contraction, including swap expenses. Higher funding costs likely will be offset by higher CPI linker income, and we will continue to limit the contraction via rational prices and volumes.

Moving on to the topic of asset quality on Slide 11, let's start with the loan portfolio breakdown in terms of staging. Notice that our gross loans, as it is seen on the left-hand side, the bar chart, of our total that exceeded TRY 380 billion -- TRY 382.6 billion to be exact. 4.4% is NPL, 17% is in Stage 2, and the rest, 79%, is in Stage 1.

Looking at Stage 2 breakdown on the right-hand side, 38% is SICR. This is related to the quantitative model outcome, with conservative threshold limits restricted per European Banking Association requirements. The second largest portion in Stage 2 is the restructured portion as expected during the pandemic. Notice that in the quarter, watchlist share in Stage 2 has gone up to 25%. This explains roughly half of the growth in Stage 2, and it relates to a few files that were subject to individual assessment.

The rate of the increase, roughly 45% of the increase in Stage 2 is due to currency depreciation. With the inclusion of a few individually assessed files, the average coverage ratio of the Stage 2 further increased to 15.8% from 14.7% in the last quarter.

By the end of this quarter, the 90 to 180 days files balance classified as Stage 2, was TRY 2 billion. The increase is mainly due to timing of the collection for one big file amounting to TRY 500 million. That amount will be collected within the second quarter, and the balance will decrease accordingly back to roughly TRY 1.5 billion.

Our 30 to 90 days files balance is TRY 2 billion as well. However, out of this amount, we only follow TRY 209 million under Stage 1 since the rest of the amount, TRY 1.8 billion, is already captured by our model in SICR bucket or some of them are in the individually assessed portion. This is an outcome basically of our prudent thresholds we use in our IFRS 9 model.

Next page is our usual page regarding the deferred loan portfolio payment performance. Actually, in this quarter, we saw that the demand for deferral portfolio evolves to be a business as usual trends, meaning we do not see additional COVID-related restructuring needs here anymore.

Going into details, the deferred loan portfolio was TRY 42 billion at the end of the quarter, and 87% of this amount has already expired. Out of the TRY 37 billion that expired -- that equates to TRY 37 billion. So out of that, that expires, 78% resumed their monthly payments without any delay. And actually, 1/4 of these already paid their debt in full, 13% asked for second deferral and 9% portion in solution in process.

We have now almost 1-year historic data to anticipate potential NPL inflows out of this portfolio. And accordingly, we expect around TRY 2 billion to TRY 2.5 billion to fall into NPL at the end of the day, which alludes to a similar NPL ratio to the rest of our model.

We apply the same prudent approach on classification and provisioning to this portfolio as well. 55% of the total balance has been classified as Stage 2 with 21% coverage, and Stage 3 coverage of this deferred portfolio loan is as high as 59%.

On next page, looking at the NPL evolution, notice that the net new NPLs continue to be negative for 5 consecutive quarters. To remind you, last year, this was mainly because of the liquidity provided to the system during the pandemic and the regulatory easing on NPL recognition days. These conditions still remain. However, we should not undermine the continuing collection strength.

In the first quarter, the collections booked near TRY 800 million. The slight increase in the nominal NPL in the quarter is all attributable to currency devaluation that went up from TRY 16.1 billion to TRY 16.7 billion. So this is all attributable to currency devaluation.

NPL ratio ended to be 4.4% at the end of the quarter, and NPL coverage further increased to 65.6% from 63.4%. This NPL coverage ratio is after the write-down of the NPL that's 100% provided. So if we had not done a write-down, our NPL coverage ratio would have exceeded 73%.

Looking on the cost of risk chart on the right-hand side, you can see normalizing net cost of risk, especially after last year's heavy provisioning. And despite further provision buildup in the quarter, net cost of risk as the first quarter -- as of the first quarter ended was 1.3 percentage points.

Moving on to the fees. Despite the high base of last year, as the new regulatory framework on fees became effective after March 1 of last year, we could book an outstanding performance in the quarter and could resume our typical double-digit growth momentum in fees and commission. Accordingly, in the quarter, we grew our base that is highest in the sector already by a solid 16% year-on-year and 20% quarter-on-quarter.

In terms of the growth breakdown, the better performing areas have been mainly the cash loan fees and insurance. These are again the result of our expanding customer base with more effective penetration. Payment system's performance here is eye catching. This strength here does not only relate to the increasing interest rate environment, which support merchant fees and interchange fee, but also the fact that we could begin to lead the transformation in the business during the pandemic. The ability of customers to receive their credit cards without going to the branches, make remote and contactless payments naturally gain heavy importance.

And at Garanti BBVA, as a pioneer in the business, we continue to offer innovative solutions to meet the needs of our customers. In this context, with Bonus Diji that we launched in 2020, we enabled our customers to apply for a bonus credit card from their homes without going to the branch and make e-commerce or QR transaction on physical POS terminals via BonusFlas. Our customers enrolled to more than 10 million campaigns in the first quarter of the year, a figure that is 108% higher compared to the same period last year.

Let's now quickly look at the operating expenses on Page 15. Our operating expense growth was 12% on an annual basis, bearing an upside on the average CPI guidance we have announced for the full year. The currency depreciation impact constitutes 4% of the annual growth, which actually has no bottom line impact since it is 100% hedged. Our cost income ratio remains in the high 30s, 37.8%, and OpEx to average assets was 2.4%, and fees coverage of OpEx, again, went up to above 60% level.

Now on this next page, you will see our capital ratios. Our capital buffers continue to remain strong, even without the BRSA's forbearance measures. Our consolidated capital adequacy ratio and core equity Tier 1 stands at 15.8% and 13.3%, respectively, suggesting TRY 18 billion of excess capital when we take into account the minimum required level of 12.1% for year 2021. When calculated using the currency forbearance, our capital adequacy ratio and core equity Tier 1 ratios would have been 16.6% and 13.9%.

Now this sums up our first quarter performance for year 2021. We can now gladly take your questions. Thank you all for listening.

[Operator]

[Operator Instructions] We have Alan on the line.

[Alan Webborn, analyst]

Could you talk a little bit about how you see risk costs after the first quarter of the year, whether there's sort of an inevitable sort of break in economic growth that you're going to get in the next couple of weeks is going to be more serious? Just to give us a view of what you saw in Q1 and how that reflects on your views for the rest of the year given the existing guidance, that would be helpful.

And I guess, secondly, I think it's clearly quite impressive that you feel able not to change your margin guidance for the year given the changes in the underlying assumptions, I guess, for the full year. But perhaps, could you put a little bit more color on what specifically you will be looking to do to sort of keep that in check as we go through the rest of the year?

[Aydin Güler, executive]

Thank you, Alan. On the cost of risk, as you know, our guidance for this year was to be below 200 basis points. So in terms of number, we are there. But by far, on the positive side, we are there.

The main reason, thanks to the system's liquidity, I think the NPL inflow is lower than what we expected. So also due to the collection side, we were very strong in the first quarter. So the cost of risk, I think, will be continue to be below 200 basis points, so we will not change our guidance.

But will it still at this level? I'm not sure about that because in terms of cost of risk, this quarter was very promising and a successful quarter. That is the reason I hope the quarter -- the coming quarters would be like similar to this one. We would like it close this quarter, but I am not sure about that because that is a devaluation effect, because the interest rate is around 20%, 21%.

Under the circumstances, we will get some outcome. So all in all, we'll be lower than 200 basis points higher than this quarter level, I think, but I cannot tell what will be the exact number for the rest of the year.

The second part of your question, is there any need for change, any change for margin guidance? No. As you remember, when we announced that 100 basis point deterioration in our net interest margin as our guidance, I think some of few reacted because our competitors' guidance was about 30 basis points.

These are prudent. We were not expecting to get another 200 basis points up in 2020 in March. So it affected our margins badly. But all in all, we will not change our guidance, 100 basis point deterioration or not more than that. A lower deterioration or close to 100 basis point will stay there as a guidance number. We will not change it.

I'm sure that under this circumstance, because why do we -- if you remember our presentation, our expectation was likely strong. We were expecting CBRT's funding rates come down at the fourth quarter. It is well today. The rate cut will happen in the last quarter according to us. For the most positive approach, the last month of the third quarter.

Under these circumstances, it means that, still, we are going to have some margin problems, debt problem, then that will affect our net interest margin. So the reiteration will be less than 100 basis points, but close to that point. So all the players in the market has to change the NIM guidance close to Garanti's math. This is our expectation.

[Operator]

We have a question from the text area. [ Kunaj ] is asking, can you give color on trading gains, which was quite high, even accounting for provision hedges? How sustainable are they?

[Aydin Güler, executive]

It is very short answer because we -- our trading income has mainly 3 parts. The first and biggest part is FX by itself. This is a sustainable income source for us. The third -- the second one is mark-to-market valuation of hedging instruments. Due to market volatility periodically, we may see fluctuations on trading income given the mark-to-market valuation of these instruments. At the end of the day, when those transactions next year, the net impact is 0. So this has to be deducted positively or negatively from net trading income.

The second -- and third and the most important part, securities trading. So this quarter, there are reasonable securities trading income. So FX, buy and sell income and securities trading is the answer to your question. There are other party mark-to-market, as you know, positively or negatively, just applicable to that quarter, but at the end of the transaction date, its net impact is 0.

[Operator]

We have a question from Mehmet Sevim. He's asking, I see that TRY 825 million other provisions that you booked this quarter. Is this related to LYY? And if so, can you remind us to what extent this was hedged?

[Aydin Güler, executive]

It is not related to LYY. This is our general approach for free provisions. It is just related for prudent purposes. That is it. So for LYY, as you know, the mechanism is very simple. Our -- we have a valuation of Turkish Telekom in terms of our exposure in U.S. terms. Therefore, U.S. TL rate cost daily impairment gain or loss TR dominated, Turkish Telekom valuations is updated semiannually, so please keep in mind that its impact on impairment losses in our balance sheet is 100% hedged.

[Operator]

And we have a question from [ James Soilo ]. He's saying that we didn't see an updated guidance in the slides. Do you have any updates to the previously given 2025 guidance?

We saw that the consumptions remained below the previously given mid-teens guidance, and now Q1 came high teens. Why do you think consumption expectations remain below Garanti's guidance? Can Garanti end the year in high teens ROE?

[Aydin Güler, executive]

In general, first of all, in our guidance, there may be positively changes that the first one, I think the TL loans dropped. We made changes upward side because this year, inflation, the average inflation will be around 16.5%. So the credit growth, at least, will be minimum to 16.5% and more.

So our 3 months performance shows a step. Our TL loan growth would be higher than this amount. It may be the one, maybe we will change it. So the return on average equity mid-teens, as you see, that is true number in the presentation. Without free provisions, it is low. Mid-teens fixed free provisions, it is...

[Handan Saygin, executive]

Higher end, higher end.

[Aydin Güler, executive]

Close high teens. I think the question was the competitors, they are rivals, we'll...

[Handan Saygin, executive]

So consumption, the expectations, maybe higher because of the performance. But we didn't officially -- so far, there's no change.

[Aydin Güler, executive]

No, no. We will not change it because this is in terms of net interest margin. This quarter is the worst one. We hope there will be some recovery in coming quarters. In order to give the right answer to your question, we need to see the coming quarter as well. Maybe if you ask the same question in our next presentation, we can talk more precisely on the numbers.

[Operator]

We have a question from Gabor. He's asking what trends do you expect in dollarization under your base net interest rate outlook.

[Aydin Güler, executive]

I think, as you see from the numbers, dollarization trend has changed. It's smooth because from year-end to today, total decrease in the dollar deposit amount is about $10 million. So -- and the retail also saw $19 million. Corporates and commercial companies, both $9 billion, roughly.

So when this volatility -- according to the volatility's level, still [indiscernible] are selling their dollar deposit. Last year, we were to talk dollarization, but this year, that is the dollarization. If -- and then this moves, I think it has been triggered by the volatility.

I think that dollarization -- I may say, I can't -- I am not 100% sure, but the dollarization has stopped. Dedollarization has started, but how it will accelerate, we have to wait and see. So the first quarter, roughly $10 billion. They sold. Total dollar deposits came down to $219 billion from $ 229 billion.

[Operator]

And we have one question from Bulent Sengonul. Why did you book LYY Telekom dividends? Secondly, there is an increase in past due portion of Stage 2. What were the drivers?

[Aydin Güler, executive]

Sorry, I need to get the second part of the question, but I will give you the first part answer. First, LYYs, dividend is paid in end of April, so we allocate those numbers cash basis. That is the reason we collected in April. You will see that number in April's P&L in net commission party. So in our first quarter, that is not any TL -- or the TTL amount collected from Turkish Telekom. It is collected in April, You will see it in the second quarter.

[Operator]

And the second part of the question was, secondly, there's an increase in past due portion of Stage 2. What were the drivers?

[Aydin Güler, executive]

It is, I think, natural outflow. That is not any critical files. So from Stage 1 to Stage 2, that is 2 big files under structure. But those are 2 files, which we are very confident about that. Very well known, very well-structured and collateral site -- collateral sites, 2 big blue chip companies. I don't see any problem with that. So just related with 2 companies, movements from Stage 1 to Stage 2.

[Handan Saygin, executive]

And there's no currency impact.

[Aydin Güler, executive]

There isn't currency impact, but real effect is those 2 companies restructuring.

[Operator]

And seems like we don't have any more questions. So this concludes the Q&A session. I leave the floor to our presenters for closing remarks.

[Aydin Güler, executive]

So thank you all for your attendance. At Garanti BBVA, we completed the first quarter with very successful financial results. I am proud by the way our bank has been overcoming this challenge. Our strong capital free loan provisioning levels and high revenue generation capability likely will remain as the main differentiator for Garanti among the competition.

I would like to thank my colleagues for their efforts and contribution in achieving these remarkable results as well as to our stakeholders who support and trust us in our journey. I hope to be with you with even better results in coming quarters. Please take care of yourself and your families, and stay safe. Thank you very much.