Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and thank you for joining us today in Garanti BBVA's First Quarter 2022 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. As always, the presentation will be followed a Q&A session.

So I now leave the floor to our presenters.

[Recep Bastug, executive]

Hello, everyone. This is Recep Bastug. Before we begin, we appreciate your understanding for moving our earnings call to today, and apologies for inconvenience. We have moved our earnings date due to BBVA's price revisions on the final call. We wanted our shareholders to be fully informed regarding the bank's financials so that they have sufficient time to evaluate and make an informed decision. I believe you will understand our efforts to be fully transparent.

So after this explanation, I will give the floor to Handan to make her presentation.

[Handan Saygin, executive]

Thank you, and welcome, everyone. Thank you again for attending our first quarter 2022 financial results call in such short notice.

Before diving up into our stellar results, let me start with a brief macro backdrop. The main highlights are that: there is still strong economic activity; currency stabilization efforts likely will have positive impact on inflation in the coming period; post-pandemic world demand remain supportive.

Looking into this slide, we see that the growth still remains resilient despite the high global volatility. Given China's COVID restrictions, the war in Ukraine and the severe sanctions, all reinforce both higher inflation and deceleration in growth. In this environment, Turkish economy continues to prove its resilience. We now cast near 7% GDP growth in the first quarter of the year. Consumption and exports remain supportive on this positive performance.

We expect the full year GDP growth to be 2.5%, which is 0.5 percentage points lower than our guidance in the beginning of the year. We revised it down following the implications of the war in Ukraine, as you can expect. Actually, potential changes in global value chains in the new post-pandemic and post-war era, this might even work to benefit Turkey in the mid to long term.

Regarding inflation, risks remain on the upside, given the continuing supply side problems and loose policies. We expect the year end inflation to be 50%, helped by the base effects in the last 2 months of the year.

On the external side, post-pandemic world demand, remain -- on the external side, the demand, especially post-pandemic world, remains supportive for both exports and tourism revenues. However, increasing energy bill and lower global demand are the downside risks on the current account deficit. On the budget balance, we expect countercyclical fiscal policies to continue, which will likely result in a wider deficit in our expectations.

Now on to our first quarter 2022 results. Start to the year has been stellar. We booked a new record high profitability in the first quarter. Net income reported of TRY 8.3 billion, was double that of the prior quarter and triple year-on-year. Key drivers of this strong profitability have been mainly: the net interest income growth, largely backed by robust loan originations and lower cost deposit base. That will also support from the CPI book, of course; trading growth, driven by FX buy and sell activity; fee and commissions growth, supported by the strong performance in Payment Systems, lending and transaction activity; reduced need for provisioning, due to already high provisions we have on balance sheet; and there was also a strong contribution from the subsidiaries.

This quarter, following BRSA's approval, both Garanti Fleet and Garanti Payment Systems were added to our consolidated financials. Positive contribution of these subsidiaries is around TRY 260 million in the quarter. We've also revised last year's financials to improve this change.

Moving on to the next page. We wanted to clearly display how the performance is building up on an already proven track record. Turkish lira loan growth booked in the quarter was a robust 17%, significantly higher than the sector growth of 12%. In this period, our customer acquisition resulted in a net customer growth of more than 1 million -- 0.5 million, suggesting a bead to our existing customer growth trend.

Our record high profit in the quarter translates into an ROAE of 38% and an ROAA of 4%. We were also able to further strengthen our capital ratios. Our capital adequacy ratio increased to 14.8% from 14%, whereas our core equity Tier 1 ratio increased to 12.2% from 11.3%. On top of this, we have accumulated so far the highest free provision amount in the sector with TRY 7.5 billion on balance sheet. And in terms of liquidity, we sustain our high total liquidity. On the foreign currency side, for instance, we have $11 billion of buffer versus a total external debt of $7 billion.

Now continuing with our strategically managed asset composition and growth. Asset breakdown continues to be heavier on customer-driven sources, largely loans, almost 58% of the assets, which points to be the sustainable -- which points, obviously, to the sustainable nature of our revenues.

As I mentioned, Turkish lira lending growth booked in the first quarter of 2022 was a strong 17%. Foreign currency lending growth booked was a positive 2% in dollar terms due to the timing of a bulky loan. Overall, for the year, with the upcoming redemptions, actually, we expect shrinkage in this portfolio.

There was also some security purchases across the board in both Turkish lira and foreign currency sides this quarter. The share of securities in assets went slightly up to 14.3%. New CPI linker prepurchases more than offset the redemptions, and our CPI book reached TRY 53 billion, including the accrual as well as the IRR and mark-to-market difference.

Continuing in more debt with Turkish lira loans. You may see the well balanced breakdown of our Turkish lira loan book in the pie chart with a slight increase in business loans compared to 2021-end. The significant 28% quarterly growth booked in the Turkish lira business banking is definitely eye-catching. It also meant significant market share gains of 83 basis points among private banks.

New consumer loan originations in the quarter also remained as strong as in the fourth quarter. Also, in the credit card business, we continue reinforcing our leadership and have the highest market shares in both acquiring and issuing volumes, both nearing 18%.

Now moving on to how we fund the assets, notice on slide -- on this slide that the funding mix, deposits, both time and demand deposits and the deposits like Turkish lira bonds issued and merchant payables, fund more than 70% of the assets. Also, notice the share of demand deposits, funding alone more than 1/3 of the assets, which is certainly contributing to our significant performance in free funds to interest earning assets.

Notice also on this chart, the borrowing's share in funding assets. Its only around 11%. Total external debt stands at $6.8 billion, of which $3.5 billion is short term. Against this, there is foreign currency liquidity buffer that is well above the debt, and that meets more than threefold the short-term need with nearly $11 billion, as I mentioned earlier. Funding contributors show that we are highly liquid and our active management of funding sources remain to be the main differentiating factor.

Detailed look into the deposits, on Slide 11, show that this quarter, there was a strong 30% growth in Turkish lira deposits versus 6% shrinkage in foreign currency deposits, which is a natural outcome post the dedollarization initiatives introduced with the foreign currency-protected deposit scheme. This scheme resulted in a remarkable 35% growth in our Turkish lira time deposits where we ended the quarter with 10% market share in this scheme.

Despite this unusually high Turkish lira time deposit growth in the quarter, Turkish lira customer demand share in TL deposits remained higher than the sector average, which was also the case for our foreign current deposits. And in total, this corresponds to the fact that half of our total deposits are demand deposits, undoubtedly reflecting the preference of the customers choosing us as their main bank.

Also validating this is that Garanti has the highest Turkish lira deposit base, both in time and demand among private banks. This well differentiated deposit base contributes noticeably to our margin performance that you will see on next page.

In terms of the margin performance, there was further expansion on top of the high base of the last quarter, driven by the further drop in funding costs and our outperformance in lending booked in the quarter. Turkish lira loans to Turkish lira deposit spreads increased by another 36 basis points, and this translated into a core margin expansion of 20 basis points to 4.4%. And this represents a level, actually, that is significantly above that of our nearest peer.

Combined with the positive impact of CPI linkers, first quarter total margin was 6.6%. Notice here that the core margin, meaning the sustainable customer-driven portion, in total, remains to be the biggest component of the margin at Garanti BBVA. This is also evident in the net interest income evolution that can be seen in the chart below.

Core versus the total net interest income, including swap costs, TRY 7.5 billion out of TRY 11 billion of the total net interest income comes from the core business, result of our lending business and funding mix management, representing our core and well proven competitive edge -- competitive strength.

Moving on to the topic of asset quality on Slide 13. We maintain our commitment to manage the loan portfolio in a healthy way and stage it proactively. Out of TRY 585 billion of gross loans, TRY 89.7 billion or 15% is in Stage 2, and TRY 19.2 billion or 3% is in Stage 3. In depth look into Stage 2 shows that the mix has not changed much, and the amount when isolating the currency impact suggests slight improvement owned to strong recoveries incurred in the quarter. Yet, we continued strengthening our provisions, and the Stage 2 coverage level reached 17%, up from 16.8% in December 2021.

Now moving on to NPLs. Notice on this slide that the collection performance in the first quarter was higher than the new NPL inflows. Adjusted with currency, NPL sales and write-downs, the net new NPL was a minus TRY 102 million, contributing to the improvement in the NPL ratio. Helped also by the lending growth in the ports, NPL ratio at quarter end was 3.3%, with a further increased NPL coverage of 67%. If we have not written down the 100% provisioned loans since year 2019, our NPL ratio would have been 5% and the NPL cash coverage would have been a significant 79%.

Looking at how they translate into cost risk -- cost of risk and provisions, you can see on this next slide, Slide #15. Despite lower-than-expected net new NPL inflows, we make no compromise on our disciplined and prudent provisioning. Furthermore, we incorporated lower GDP growth expectation into our macro model in March. Still, net cost of risk, which is at 1.1% by the end of the first quarter, is realized far better than our anticipation of below 150 basis points for the full year.

Recall that our annual IFRS 9 model recalibration took place in the fourth quarter last year. And from this high base, net provisions, excluding currency, declined 48% Q-on-Q. Currency depreciation impact, as you can see on the right-hand side corner of the page, is 153 basis points, which has no impact to bottom line as it is full hedged.

Moving on to the topic of net fees and commissions. Our unrivaled fee generation capability once again got manifested with a new record high growth of 55% on top of the highest base in the sectors. Higher-than-expected economic activity, solid growth resulted in lending-related fee growth of nearly 60% year-on-year.

Money transfer fees registered a striking growth of 96% on the back of digital empowerment and best-in-class customer experience. 95% of money transfers goes through digital. We also exhibited the positive impact of 7/24 FAST system for local money transfers. We rank tops in FAST transactions as well.

Payment system's fees 69% annual growth was also substantially supportive, given the rise in credit card volumes. We gained market shares both in acquiring and issuing volumes and reinforced our leadership position.

Moving on to the operating expenses. Year-on-year OpEx growth was 61%, of which 19% was due to the currency depreciation, which was fully hedged and therefore had no negative bottom line impact. So we can say that the net operating expense growth was 42%, much lower than the revenue growth booked, leading to -- of course, to a significant improvement in our efficiency ratio. Cost income, as a result, ended at an improvement 28% from 34% last year, whereas the fee coverage of operating expenses increased to 61%.

Regarding capital, we sustain our strong capital buffers, and our capital generative growth strategy continues to strengthen capital base. Net income generation alone added 119 basis points to our solvency ratio in the first quarter. And our capital adequacy ratio without the BRSA's forbearance increased to 14.8% from 14% in one quarter.

We have currently TRY 21 billion of excess capital. And as a secondary buffer, we have TRY 7.5 billion of free provisions. Notice that free provisions, if we were -- if were to be included as part of capital, would add another 1 percentage point to our capital adequacy ratio.

Summarizing our first quarter performance: Garanti outperformed in Turkish lira lending and registered 17% growth versus 12% in the sector, gaining healthy market shares and customer growth; the annual growth in core revenues, meaning the net interest income excluding CPI linked revenues plus fees plus trading revenues, was a remarkable more than double that of the last year, which is 103% year-on-year; wide open jaws leading to further improvement in efficiency. The cost income ratio is an incredible 28% now versus 34% at year-end last year; cost of risk faring better than expectations with strong recoveries and muted NPL inflows; and strong capital position with ample buffers, core equity Tier 1 ratio without the BRSA's forbearance is well above the minimum required level of 12.2%.

Now allow me to share with you some of our nonfinancial strengths as well. As Garanti, we continue to lead the way in digitalization in the sector. Our continuous investments in digital since the late '90s to enrich customer experience and meet the growing digital trends clearly carry us to the forefront with being the top choice of the customers. Our digital as well as mobile active number of customers exceeded 11 million mark already, representing the highest digital and mobile customer base among peers.

Customer empowerment through digital and mobile and our service focus to improve the financial health of our customers clearly differentiated us in attracting the new ones. Our net active customer growth in mobile has exceeded the growth in digital customers since the end of 2019, with a net increase of 3.4 million in a period of only 2 years and a quarter.

Now with more than 85% of total sales going through digital channels, the share of branch in customer transactions has come down to 3% level, as can be seen on the right-hand pie chart. Customer monthly logins have increased a remarkable 120% versus pre-pandemic levels. And lastly, on digital, our market share speaks for itself. Our mobile financial transactions market share of 19% is almost twice of our fair market share.

Moving on to the update on sustainability on Slide 22. At Garanti BBVA, we are guided with a clear push. That is to bring the age of opportunity to everyone. This purpose consists of 6 strategic priorities, one of which is helping our clients transition towards a sustainable future.

Our parent group, BBVA, committed to provide EUR 200 billion in financing to combat climate change and support sustainable development by year 2025, and likewise, at Garanti BBVA, we also pledge to contribute increasing amounts of financing towards the same goal. This year marked the seventh consecutive year earned to remain listed in the Dow Jones Sustainable Index. We are the first and the only Turkish bank that could get qualified to be included in this index.

Garanti BBVA has been a carbon neutral bank since 2020. Even though this greenhouse gas reduction target was set for the year 2035, it was achieved 15 years earlier. We're also the first Turkish bank to announce a coal phaseout plan and the first and only Turkish signatory to the UN-convened Net-Zero Banking Alliance.

Our commitments to sustainable development manifests visibly in our climate change action plan. In line with this action plan, the new project finance loans provided since 2014 has been 100% renewable energy projects. At the end of year 2021, the percentage of green assets to project finance loans reached 24%. In 2021, we increased our sustainable finance mobilization by 103% year-on-year, both in green and social financing, totaling to TRY 8.8 billion. We have also adapted PACTA methodology to manage our sustainability risk for carbon-intensive sectors.

Regarding our achievements in the last 3 months of the year: we invested $71 million to Turkey's largest rooftop solar energy project; provided our first ever circular economy loan as well as realized the first ESG-linked repo transaction; started the production of our Environmental Bonus Card, the first of its kind in Europe, using recyclable materials. We plan on expanding this initiative to all our credit card brands.

Aside from these, we're planning to implement various sustainability engagement projects this year, in terms of both public engagement, sectoral know-how and capacity building. Accordingly, we collaborated with World Wildlife Foundation Turkey starting this quarter for a 3-year project, by providing grants to local initiatives to carry out projects for forest fire prevention.

We also published our 2021 Integrated Annual Report entitled, How Does a bank create Value, covering both our nonfinancial activities throughout the year and our economic indicators. With this, for the first time, we disclosed our bank's concrete contributions to 16 sustainable development goals and exactly 59 sustainable development targets with the aim of preventing greenwashing risk. In the future, we will continue our investments in sustainability and encourage our society and our customers to make a transition to a greener and a more sustainable future.

Now this ends our presentation, and we leave the floor to you for questions. Thank you for listening.

[Operator]

[Operator Instructions]

So our first question comes from Waleed Mohsin.

[Waleed Mohsin, analyst]

Congrats on a very solid set of results. Three questions from my side, please. Firstly, we saw for the last couple of days some regulatory changes being made to the reserve requirements for certain loans. Just wanted to get your thoughts on how this impacts the bank. And if you have any quantification of how -- what the impact for the bank would be? So that's the number one question.

Secondly, I was just wondering in terms of the success of the new FX-linked deposit scheme, -- in that context, do you still expect any changes in monetary or fiscal policy from the government, especially given that despite the fact that dollarization levels have come down and the deposit scheme has succeeded on that side, but some of the challenges such as inflation still remains.

And even on the regulatory changes that we saw on the reserve requirement, it seems there was some language where, which suggested that there could be some more kind of changes on the reserve requirement side to effectively invest on the issues currently.

My third and final question is on your guidance. Off to a very strong first quarter. Are you making any changes to your guidance for full year 2022?

[Recep Bastug, executive]

Okay. Waleed. The first question on regulation. I think there has been I'm sure different regulationary impacts we have had during the last 2 weeks. The first one, increase in the penalty, the commission based on not reaching the conversion rate for [indiscernible] how it is related to protect deposit.

The second one, elimination of remuneration. The third one, increasing the corporate tax to 25%. The fourth one, the last one, reserve requirements for TL loans. Total impact to this year would be less than 10%, [ TRY 222 ] net income. So this is the impact of those 4 regulations to our balance sheet, less than 10%. it's more than 5%.

So the second, do we expect any policy changes. As I see, no, because the Minister of Finance, Central Bank, they are fully committed with this monitoring policy. So we don't expect any change in the short term.

In terms of our guidance, do we expect any changes? Guidance revision is inevitable because when we announced that guidance, the inflation rates were around 20% levels we have been experiencing is 60%. So as you know, our operating plan guidance was overall conservative as we had taken into account the possibility of higher funding costs towards the end of year. So current trends suggest a significant beat to our operating plan.

That seems to be clear upside in Turkish lira lending growth. If you preserve the current base, your loan growth can easily surpass 40%. Both fee and OpEx growth will be impacted by the higher inflationary environment. But we are expecting the sheer growth to more than offset OpEx growth.

On the other side, the OpEx in our guidance was in line with the inflation. But under new circumstances, it will be below the inflation level. So all in all, related to the guidance, there will be some positive changes. But in order to be at the safe side, we need to sign some time to share the next guidance levels with you. Not trends positive timing-wise, we need to wait a little more.

[Waleed Mohsin, analyst]

Perfect. That's very clear. Just one follow-up, if I may. On the provision side, you've obviously had a very good experience during the first quarter. And that's in the context of you withstanding very high inflation levels. Are you starting to see any signs of this inflation manifesting itself into asset quality? I mean, obviously, you're very well provisioned. You talked about the pre-provision buffers. So obviously, that will provide you with a buffer and it will cushion the impact. But are you seeing any signs of inflation feeding into different parts of your loan book impacting asset quality? Any early signs of that?

[Recep Bastug, executive]

As of now, the answer to this question, no. Why? Because the inflation is 60%. Rates -- the applicable rates in the market for wholesale side is around 20% for retail, it's around 27% to 30% level. So under these circumstances, inflation has not reflected is caused due to credit prices.

So under these circumstances, we don't see any impact of the inflation at the current cost of lending cost of deposit. So under these circumstances, we don't expect any asset deterioration due to inflation. But if it happens, if the cost of funding goes up to inflation levels, then we may think to consider its impact on the asset quality.

But as the initial finance and CBRs are fully committed with the existing policy, I don't expect to see that kind of asset deterioration. So our guidance was below [ TRY 150]. Still, we are committed with our guidance.

[Operator]

So our next question comes from Konstantin Rozantsev.

[Konstantin Rozantsev, analyst]

Congratulations on the results. I wanted to ask two questions. The first question is about the bank's subordinated points in dollars, which has a core date something late May this year. So it seems to me that the notice period announced has already expired. Could you just confirm if this is actually the case? And if this has an effect prior attempt [indiscernible] smart quotes on the reasons for this [indiscernible] base plan?

And secondly, the FX projected deposits. Could you please confirm in terms of the pace of conversion into this scheme in retail and in corporate, do you see in the market versus the pace of conversion to slimming down, accelerating across this segment?

[Recep Bastug, executive]

Thank you. First -- I mean, the first question, Tier 2. As a management decision, we have decided not to exercise the call option on our Tier 2, where our contract calling a subset is an option. We know the main practice call at the end of the fifth year and issue a new one depending on the need. However, Russia gain and other uncertainties, significant increase the cost.

So with this in mind, I can announce that we have decided to exercise our right to roll our Tier 2 issues. Once we have more visibility, we may call Q2 before its second 5-year period and issuing a different amount, either more or less. So as of now, this is a management decision related to Tier 2.

Your second question, conversion rates in the retail, across the board, all over the country, it is around 3% to 4%, level that to Garanti BBVA, this is among these rates. So in wholesale side, company side, there was very strong conversion. But in retail, it is around, let's say, 4% level in total. But in coming days, CVIT with the penalties with other incentives are asking us -- has asked us to increase that level as well. So we try to increase this commercial level in retail. But the answer to your question, it's around 4% level in the sector.

[Konstantin Rozantsev, analyst]

Could you confirm what do you mean by 4%, that 4% chart?

[Recep Bastug, executive]

4%, with the amount that converted from dollar deposits base to CL was 4%, meaning the total as of today, total amount converted from retail was $8 billion. So that $8 billion represents the 3.5% to 4% of total retail. It was its volume in the country.

[Konstantin Rozantsev, analyst]

Understood. But on an ongoing basis, so as previous deposits mature, some of these presumably should be rolled into this new [indiscernible] on purpose. So on an ongoing basis, you see the pace of conversions accelerating or slowing down in REIT markets?

[Recep Bastug, executive]

So the due date, 80% of existing commerce amount continues in the same program, 80% of the existing one. Because we started it, I think 20th of December last year. So the first 3 months, the metric is 3 months, first 3 months ended amount due subject to everything. Due date, 80% its minimum [indiscernible]. So 20%, they may use that money, but the program in general approach is successful. So 80%, we have 80% roll rates of existing volumes.

[Konstantin Rozantsev, analyst]

Understood. And do you keep attracting mature deposits percentage scheme. So 80% of the existing ones which mature they're rolled within the same scheme that extract being used?

[Recep Bastug, executive]

Yes, there are fresh amounts every day we have added. As of now, it is not right to give the exact number, but when we started, I think maybe to the last month, 1.5 months ago, our percentage, Garanti BBVA's percentage of this protected deposit amount among the total TL deposits was around 30% level. Now this is by far day by day, the amount goes up.

[Operator]

And seems like we have -- with these questions, we have replied quite a few of the written ones as well. So if there are any additional questions, I will leave the floor to our presenters for closing remarks. Yes, seems like there aren't any additional questions. So I'm leaving the floor for closing comments.

[Recep Bastug, executive]

So I want to mention a few points before ending this call. Our focus has always been and continues to be growing in customer-driven assets, namely lending our core business will differentiate in terms of securities sharing assets. And we wanted to highlight our efficient management in this volatile environment. It is visible on our strong first quarter results, and you will continue to see such strong results from us. Even after the recent regulation introduced, we still keep our full year guidance with upside potential.

Thank you for much -- thank you very much for attending. So we really appreciate your understanding about this meeting. See you soon.

[Handan Saygin, executive]

In next quarters.

[Recep Bastug, executive]

Thank you very much. Bye-bye.