Turkiye Garanti Bankasi AS
IST:GARAN.E
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Turkiye Garanti Bankasi AS
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Hello, and thank you for joining us in Garanti BBVA's Second Quarter 2020 Financial Results Webcast. Our CFO, Mr. Aydin Güler; and Head of Investor Relations, Ms. Handan Saygin, will be presenting today. [Operator Instructions]
The presentation will now start, so I'll leave the floor to our presenters.
Hello, everyone. Hope all of you and your loved ones are safe and well. Today, we have 3 parts to our earnings presentation. Given significant changes in the environment due to the global pandemic, we will start our first half earnings announcement with a macro review and end with 2020 guidance revision.
Let's first start with some data comparison and see how the situation in Turkey is relative to some other countries. Despite the recent jumps in new case in certain countries, Turkey has proved to be successful to combat COVID-19 since the beginning. This is largely owed to the fast targeted measures like the limitations for the younger and older mobility and the restrictions on intercity traveling, obligations to wear a mask. With this, the death toll has also been limited, very much thankful to the well-equipped and well-coordinated health system. And we also had the advantage of our majority young population.
Our data -- big data indicators suggest that consumption is adjusting rapidly with the somewhat start of normalization following the ease in some restrictions. See on Slide 4 that after the initial big hit of the shock, both our big data indicators and other high-frequency indicators all have started to recover since mid-May where we observe a rapid turn back to pre-shock levels in our big data as of July. The positive evolution in our machinery investment property is promising to support the potential future production capacity.
On next slide, it is evident that except for the services sectors, other sub-sectorial confidence signal a V-shaped recovery. It still needs to be confirmed by hard data, which we have started to observe in early indicators.
Moving on to Slide 6. We have a new macro forecast. Our monthly GDP indicator now casts a yearly GDP growth rate of minus 7.7% in June and minus 4% in July. So despite this, we still maintain our 2020 GDP forecast at 0% with higher contribution from domestic demand. Recent credit boost, looser policies, normalization pattern, they all remain supportive, while uncertainties about a second wave, second round effect of the shock in terms of employment and financial stability and still poor trade activity all over the world are the downside risks on growth outlook. Looking at the tourism sector, it remains one of the downside factors where we also started to check in real time with our new big data product. So far, very limited recovery is observed in the tourism inflows, which could easily be reversed with the increased number of international flights.
Now moving on to the financials. We once again validate our sustainably robust revenue generation. Our pre-provision income in the first half alone exceeded TRY 10 billion, representing a significant 39% of year-on-year growth. However, the anticipated rising risks given the unprecedented times we're all in necessitate higher provisioning.
Our strong revenue growth enabled us to preemptively strengthen our loan loss provisioning, satisfy further free provisions and still deliver a top line profitability. In the last quarter, we set aside TRY 600 million of free provisions, bringing the total free provisions to TRY 3.1 billion on balance sheet.
Even after such high provisioning, we were able to deliver a solid quarterly income, net income of TRY 1.7 billion in the second quarter of 2020, similar to that in the first quarter. Our TRY 3.3 billion first half net income alludes to a return on average equity of 13.1% with a low leverage of 7.3x the book and an ROA, return on average assets, of 1.6%. Our solvency ratios remained robust even without recent BRSA's forbearance at 17.4%. If we take into account this forbearance, capital adequacy ratio would be around 100 bps higher at 18.4%.
Let's now look into the drivers of this high performance, and starts with the assets on next page. There was strong loan-driven asset growth in the quarter. Assets near TRY 490 billion. Notice in the asset breakdown on the left-hand side that loans' share in assets went up from 60.5% to 63.3%. Also, securities' share in assets went up to 14% from 13.4% in the first half. We had about TRY 9 billion of FRN and CPI linker redemptions. And those were replaced with new additions, mostly with Turkish lira and fixed -- foreign currency fixed rate treasury bonds at the time of high new fixed rate issuances.
In the last quarter, we took the opportunity to add $550 million of fixed rate treasury Eurobonds, yielding around 6.5% to our securities portfolio. Also, we replaced our Turkish lira FRN and CPI linker redemptions with slightly better-yielding near 11% fixed rate securities. The super growth performance was actually in Turkish lira lending with a significant 16% growth in the last quarter. The main driver was largely the short-term working capital loans to blue chips to meet their liquidity needs in this difficult period. The Credit Guarantee Fund loan disbursements of total TRY 6.6 billion also supported the quarterly Turkish lira lending growth, bringing the first half Turkish lira lending growth to 21%.
As for foreign currency lending, the low demand continued, and the originations felt short-term redemptions. And as a result, we had a 1% shrinkage in foreign currency lending in the quarter and no growth year-to-date.
On next slide, you may notice in the pie chart the increased weight of business banking loans as the growth in Turkish services/banking lending alone was a record 28%, whereas consumer lending up until June, given the lockdown due to COVID, remained pretty muted. The blue-chip big names were the first ones to request funding due to high uncertainty resulting from COVID-19. And in this environment, as always, we continue to empower. During this time, as part of government fiscal measures, new Credit Guarantee Fund lending packages also became available and contributed roughly 20% of the growth in Turkish lira business banking loans.
In Credit Guarantee Fund loans, we have been allocated a total TRY 6.6 billion limit so far this year in the first 6 months. And we already utilized TRY 5.2 billion of the limit as of the end of second quarter. This corresponds to a TRY 6.6 billion loan volume -- Credit Guarantee Fund-related loan volume. We have the second highest market share in terms of Credit Guarantee Fund loan utilization.
The quarterly growth on consumer and credit cards were 4% and 3%, respectively. On the consumer side, the main driver was general purpose loans with 7% growth in the quarter. Since the beginning of June, with the start of normalization phase, consumer demand recovered such that by the end of the quarter, general purpose loan and mortgage weekly originations were back at pre-pandemic levels. We anticipate the consumer demand to continue in the second half and replace the redeeming short-term business loans with higher-yielding consumer loans. As a result, by year-end, we expect to be back on balanced composition again in Turkish lira lending among consumer and business loans.
Looking at the funding side on Slide 11. Notice that despite the high lending growth, our liquidity remained very strong. Liquidity coverage ratios for both total and foreign currency remained well above the required minimums. Deposits alone can fund the loan book. And due to our shrinking foreign currency loan portfolio, we have been cutting down on our external debt on average by 10% since 2013. Borrowings' share in assets is a limited 13%. As of the end of first half, short-term external dues were $2.3 billion. And against that, we had $9.3 billion of quick liquidity buffer. Actually, in July, the good news is that we became eligible for the CBRT's reserve requirement framework. This allows us to place less reserves for our liabilities or, in other words, release of extra liquidity. So nowadays, our foreign currency liquidity buffer stands at around $11 billion, almost quadruple the amount necessary for our short-term external dues.
Maybe one side note here to add is that now that we are eligible for the CBRT's reserve requirement framework, we started to receive remuneration for our Turkish lira reserves as of the third quarter.
Moving on to the deposits on deposit side. We were able to increase our Turkish lira deposit base by 9% in the quarter and 14% year-to-date. On the foreign currency side, we had a 4% shrinkage in the quarter, bringing the full year shrinkage to 6% in dollar terms.
Looking at the right-hand side, the strength of Garanti continues with its demand deposit share in total deposits. Demand deposits year-to-date grew by a significant 52% on top of the 38% growth seen in 2019. Such a robust growth in demand deposits can be attributable to high lending activity in this quarter and also to the low interest rates. The portion of demand in total improved further by 9 percentage points in the second quarter alone and reached a new record high of 44%. This is significantly above the sector average of 31%. And this clearly shows not only the customers' trust in us but also their preference to use Garanti as their main bank.
Another strong aspect of our deposit base is the high weight of retail and SME deposits. The share of SME and retail customer deposits is near 80% in both Turkish lira and foreign currency deposits. These funding strengths contribute quite positively to our superior margin performance.
So let's move to the next slide to see the margin performance in detail. On a cumulative basis, core margin was up by 61 basis points as of the first half versus 2019. On a quarterly basis, despite the accelerated and significant loan repricing, margins held up well. Nominally speaking, we were able to increase our core net interest income further by about 6% and reached a core net interest income level of TRY 4.7 billion in the quarter alone.
Slight quarterly margin contraction was actually a function of the strong interest-earning asset growth in the quarter. As you can clearly see on the Gantt chart below, loan yield suppression was visible due to the pace pickup and downward look on pricing. In this period, higher-than-expected decline in funding costs supported the margin performance. Yet note that the downward trend in deposit costs now has come to an end.
So -- and one more point I want to mention in here is the CPI linker's contribution to the margin. It has been limited on the back of lower CPI rating used in the valuation. We used 7.5% CPI estimate in second quarter, and that brought the full year average CPI estimate used in our revenue calculation to 7.8%. In the meantime, during the quarter, due to the redemptions, our average CPI volume dropped to TRY 26 billion from TRY 29 billion in the prior quarter.
Let's now move on to look at the quality of our loan book. You may see on the loan portfolio breakdown that TRY 39.9 billion or 12% of the loans are classified as Stage 2. 30% of Stage 2 loans relate to significant increase in credit risk, the SICR portion, the portion that's quantitatively assessed per IFRS 9. 44% of Stage 2 is the restructure. That 3% is past due portion. The increase in restructure, that past due bucket, is because of the regulators, the Turkey rate forbearance on NPL recognition days and increased restructuring and postponement of loan installments. The loans that are 90 to 180 days past due are currently followed under the past due bucket. As of the first half, they totaled TRY 1.5 billion. Post-COVID, we accommodated all customers that needed to postpone their installment loan payments. So far, more than 800,000 loans totaling TRY 35 billion were deferred. Roughly 34% of this is followed under Stage 2. That's why the restructured portion that used to be about 36% is now 44% of Stage 2. Notice the significant increases we have done for each bucket because of that.
As discussed in the first quarter, NPL inflows may be delayed due to the regulation on NPL recognition. However, we continue to set aside the necessary provisions in a preemptive and prudent manner. Loan provision increase in second quarter alone was TRY 1.4 billion on top of the last quarter's TRY 2.4 billion. We continue to increase the coverages of both Stage 2 and Stage 3 loans and maintain the coverage ratio of Stage 1 despite the significant 16% Turkish lira loan growth in the quarter.
On next page, you can see our coverage increases for loans operating in certain sectors that may be more directly affected by the pandemic than others. You can clearly see the further provisions built up by sector and their stage breakdown on this slide.
Moving on to the next page, you can see the NPL and net cost of risk level. There seems to be quarterly drop in new NPL inflows. And this is, of course, entirely due to the regulation change on NPL recognition days. Collections also came down due to low economic activity. We had a net collection of TRY 456 million in the quarter and a write-off in the amount of TRY 272 million, bringing the net new NPL, excluding the currency, to TRY 374 million negative. BRSA's temporary NPL forbearance, meaning increasing the NPL recognition days to 180 days from 90 days, had 50 bps positive impact on our first half '20 NPL ratio.
Together with the strong lending growth-related base effect, NPL ratio decreased to 5.9% from 6.5% in the previous quarter. Net cumulative cost of risk improved to 244 basis points excluding the currency impact. The improvement compared to first quarter is mainly supported by the preemptively set aside COVID-related provisions in the prior quarter and less provisioning due to macro adjustments this half. Of course, lending growth also supported the quarterly drop.
Moving on to the fees and commissions. The first half performance still has been strong even after fee regulation and COVID-19-related lower economic activity. As we saw the full impact of fee regulation past mid-March, our net fees and commission income declined on a quarterly basis. However, on an annual basis, it delivered a strong 7% growth, as you can see. However, this growth will not be seen by year-end due to the new regulation and COVID-19. We anticipate a clear downside to our initial guidance for the full year.
In terms of the growth breakdown, the better-performing areas has been mainly the cash loan fee and insurance backed by the solid lending growth in the quarter. Growth in payment systems was negative due to the fee regulation. Interchange and merchant fees as expected came down in parallel to the lower rate environment versus first half 2019. Money transfer fees growth has been negative as well due to the introduced cap on these as of March 1.
Let's now quickly look into expenses on next page. Even though the 15% year-on-year operating expense growth still looks a bit higher than our guidance, costs are totally under control, and year-on-year growth will convert to our full year guidance. There has been some uncontrollable lines that contributed to the higher-than-anticipated growth, namely the hefty 15% currency depreciation year-on-year and increase in SDIF premium and branch fees' impact. On the other hand, we took a series of actions post-COVID to further tighten our costs, such as renegotiation of contracts, rental agreements and so forth. As a result, you may expect lower operating expense growth than our initial guidance.
On next page, you will see our capital ratios. We could strengthen further our capital buffers. Our consolidated capital adequacy ratio and core equity Tier 1 stands at 17.4% and 14.8%, respectively, calculated -- these are calculated without the forbearance introduced by BRSA. The forbearance adds about 100 basis points to our capital adequacy ratio and common equity Tier 1. So with the forbearance, our ratios would have been 18.4% and 15.7%, respectively.
Looking at the evolution of the capital adequacy ratio since first quarter, our net income continued its positive contribution with 45 basis points while the currency depreciation took away 19 basis points. Even with the high lending activity in the quarter, market and credit risk had a positive impact of 29 basis points mainly due to change in risk weighting of foreign currency trading receivables.
Taking into account the minimum required level of 12.2% for the capital adequacy, we have TRY 21 billion of excess capital on a consolidated basis.
Now this sums up our first half performance. Let's now quickly look at the 2020 guidance before we end our presentation. Now as you highly likely expect, COVID-19 environment necessitated revision to our initial guidance. On growth side, in the first half of our Turkish lira loan growth reached -- I mean in the first half, our Turkish lira loan growth reached 21% already. For the full year, we're expecting growth to be around 25%. That means we're expecting some normalization in lending growth in the second half.
As I mentioned earlier, the growth in business banking loans so far were mainly short term. These short-term loans will mature and likely will be replaced with consumer loans. As we expect in the second half, in line with our V-shaped recovery, a pickup in pace in consumer lending.
On foreign currency lending side, we keep our shrinking guidance -- shrinkage guidance as there is almost no demand there. On margin side, we revised down our margin expansion guidance to 50 basis points from 70 to 80 bps. Now higher-than-expected decline in funding costs is supportive, yet downward trend in loan is also higher than our initial expectations due to the accelerated repricing activity that took place especially after the reduction imposed on early repayment penalty rates. Fee regulation that came into effect in mid-March also require us to revise down our initial growth guidance. Payment systems and money transfer fees are the most impacted lines. As a result, we're now expecting high single-digit shrinkage in fees.
Given the circumstances, we felt the need to revisit our OpEx and took series of actions to, at minimum, compensate the pressure on the fees, such as the ones I mentioned on operating expense slide. For instance, under this initiative, we could reduce our rental expenses by 20% so far. We took new lessons from this pandemic. Our solar technological infrastructure was a true enabler. We could shift to remote working model at early stage and provide uninterrupted customer service. Now we're evaluating our current service model at our branches as well as our head office. New opportunities actually arose, and we're now reviewing the sustainability of this in the long run.
And finally, asset quality. Before coronavirus, we were planning to revise down our 200 bps cost of risk guidance since the first 2 months' performance was very promising. However, COVID-related provisioning burden is inevitable. And therefore, we revised our net cost of risk guidance to below 300 basis points. It is the fact that due to postponements, we haven't seen the real COVID impact on our NPL ratio. Of course, as we mentioned earlier during the presentation, we're doing necessary provisioning, coverage increases, yet the question will be how the postponed loans will be paid going forward. Our aim is to set aside all COVID-related provisions this year. So putting all together, higher volumes and lower operating expense likely will wipe the pressure on fees. However, the pandemic-related necessary provisioning likely will bring the net cost of risk closer to 300 basis points rather than below 200 basis points we initially guided. And for that reason, our 2020 profitability is now projected to end up in the low teens rather than the initially anticipated high teens.
And now with this note, my presentation is now finished, and we can gladly take your questions. Thank you for listening.
[Operator Instructions] We are taking the first question from Alan Webborn, Societe Generale.
Could you expand a little bit more on the operating cost target? I mean it does seem, after sort of maybe 15% in the first half, quite a drastic reduction. I mean I can understand that structurally, there may be things that you can do. But I mean in order to get down to below 10% in the space of 6 months seems quite, I mean, quite drastic. So could you possibly put a little bit more color on that to show us, I mean, how you're going to achieve that? I think that would be very useful.
And secondly, in this sort of dynamic in the second half for loan growth, I mean what you're telling us is that TL loan growth is going to be about 4% in the second half. I mean are you expecting to see shrinkage in TL business loans? Because I mean you just sort of feel, I mean, what's been the motivation? Have corporates been taking precautionary loans that they didn't really need? And are they now paying them back? Or are they getting them from elsewhere? I just wanted to understand that sort of dynamic when the economy is presumably picking up in the second half. That would also be quite interesting to see.
Could you talk a little bit about your collection experience and how that's been progressing across the second quarter and when you think that will go back to a more normal level? That would also be useful. And do you have any sort of -- do you view the sort of the TRY 3.1 billion of free provisions as part of the sort of COVID armory? Or is that -- should we think of that as being something separate?
Well, let me start with your operating cost target question. Our target for this year, our revised guidance, is less than 10%. So we aim to deliver an OpEx growth of high single digits, you can assume. There will -- we're going to be helped by base effect a bit in the second half. So gradually, the year-on-year growth will converge to our target level.
Your second question on the loan growth, well, yes, we already grew 21% in the first half. You suggest guiding 25% for the whole year, suggest only additional 4% growth. But what's going to happen, I tried to explain is that because the growth in the second quarter was predominantly Turkish lira business banking loans -- and big portion of this was short-term working capital loans. We had -- we grew mainly with the short-term financing needs of the blue-chip corporates. So as they will mature, likely the demand this time will come from the consumer side. And so that's why the year-on-year net growth likely will be seen around 25%.
So don't expect the first half pace to continue in the second half. Because of the pandemic, all these blue chips in need of -- thinking that they may be -- because of the rising uncertainties, just precautionary, they wanted to get funding, and those were accommodated. Those loans were given. But as they redeem, they will be replaced likely with this, right now, rising consumer demand -- consumer loan demand. So that's why we have 25%, around 25% for our total year lending growth.
Regarding the collection experience, well, it's only since June that normalization kind of started. So first quarter, as you can see from the figures, it was exceptionally high. Second quarter towards the end, the normalized level started. And actually, starting with the third quarter and starting with July, we see normalized levels again. But April -- March and April, May was pressured, as you can imagine, because of the COVID and lockdown and all that. So -- but right now, as of July, we're back on track to normalized levels. For instance, regarding these TRY 35 billion loans we deferred, we -- our risk -- currency risk right now is down to like near TRY 32 billion from TRY 35 billion. So already, we started receiving installments payments on those that were deferred. So we seem to be doing okay under these circumstances. I mean we're happy to see this normalization, of course.
Regarding the free provisions, maybe our CFO may want to add there, but we have no progress...
I mean free provisioning, as you call, it's free, so nothing to do with IFRS 9 at all. It has nothing to do with loan, what's -- in a rigid way, so you might need this sort of free provision. So that is how it is. So I don't want to comment on this so long.
Excuse me, as I understand it, I mean the reason that you've taken TRY 600 million of free provisions in the second quarter is because under the regulations, there are limits to how much sort of Stage 2 provisioning you can actually put in when there's no...
No, no, no. I mean it is free because whatever you do -- for example, the Stage 2, we already put our PDs to one level. So we already factor -- although it is passing 90 to 180 days to be NPL, so we keep it in Stage 2. But in the provisioning side, we already factor in. So what are the missing part? When they go into Stage 3, you only need to put extra for LGD figure. So for PD, they're already factored in your IFRS 9 model. So put free, nothing to do with Stage 2 at all.
Okay. But I mean which -- but there's still -- you've still taken TRY 600 million of free provisions in the second quarter. And presumably, the reason for that is you're expecting more NPLs to come through once the regulatory forbearance...
No. When you say this -- you, I think, are not correct, Alan, because when you say if there are -- presumably, you are taking it into account, you should have changed your model in IFRS 9. So...
So why did you say...
So your model is there and you factor everything together while you are provisioning accordingly, so you shouldn't be provisioning free at all. So free is free.
Okay, okay. We'll agree on that one. Can I just ask you, lastly -- I think you had talked about reducing rents by 20%. I mean are you actually going and saying, look, to landlords or whoever rents your property...
Exactly, that's what we do. I mean all the field is working on this. Also, we incentivize our branch manager on this. Also procurement, all team is working after COVID-19 effect. So we've been going to landlords and asking for discount or reducing rent expenses. And otherwise, are they going to offset it? They say yes. So not only the rent. I mean we go every contract. I mean really, every contract, personnel, transportation, services, a lot of personnel expense, everything is being negotiated by our team. So really, really, we had, I think, good results, I must say.
There are a couple of questions we received via text, and we will now try to address that.
Now the first question is, can you please share with us the amount of deferred payment loans as of second quarter? I think I already mentioned that. It's TRY 35 billion considering more than 800,000 loans.
Accounts.
Accounts.
Any color on the sector exposures and recent dynamics on demand for these loans could be -- would be highly appreciated.
TRY 2.5 billion of this already paid. So the balance is now 32% -- TRY 32 billion. About 60% is SME and retail. The rest is corporate and commercial.
The second question, can you please share with us where you stand regarding the asset ratio requirement and whether you're changing your funding and lending strategies to meet this requirement going forward?
No, I mean our message was that we didn't need to change any strategy. We comfortably meet the asset ratio.
Yes, yes, exactly.
And when it was first introduced in April, we were already very close to 100% threshold. Now with the riding demand due to COVID, actually, now even suggest nice buffer above that. So -- and we didn't have to change anything structurally basically.
The third question is, can you please give us a breakdown of your FX liquidity?
Well, about half is swaps, and the rest is like money market, unencumbered securities and reserve option mechanism. Now the -- and some is freed from the reserve option mechanism due to the fact that now we -- our reserve lira...
When you come to $11 billion liquidity net after being a good bank, of course, you have extra swap facility amount of maybe around $6 billion and $6.5 billion. But when we are talking about the 30th of June, it's another dynamic. So it is $4.5 billion around -- yes, swap. Yes.
As of June.
Yes, exactly.
Yes. About half is swap. But now the picture changed a bit with freed-up liquidity. I think swap share, half of it.
Exactly. With the regulation end of this, it is almost more than 80% in the swap line.
Okay. And the fourth question, the last question, could you please update us on your issuance plans for the rest of the year?
Under these circumstances, I mean you have enough liquidity. I don't think the balance sheet needs such an issuance. Of course, we have some redemption but no Eurobond issuance, I might say.
For this year, yes.
For this year, yes.
I guess this is all the questions. Yasmin, do we have any others?
It seems like we don't have any more questions. So this concludes the Q&A session. I'll leave the floor to our presenters for closing remarks.
Well, thank you all for listening. We're very pleased that under the circumstances, we were able to deliver again outstanding results. Our sustainable pre-provision income generation remained very strong. And even under such a test, we delivered -- sustainably delivered what we promised. So the revision has to do purely with the net cost of risk increase, the expected increase in the net cost of risk. Otherwise, we are well on track, so staying strong numbers like that...
So you are saying numbers speak for themselves. This is -- there's no questions, too much questions. So numbers are good.
Numbers speak for themselves. And hopefully, we'll come back 3 months later with again good set of results. So thank you all for listening, and please stay safe and healthy. See you later. Bye-bye. Have a great summer. Bye-bye.
Bye-bye.