Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Analysis

Garanti BBVA's Strong First Half Performance and Guidance for 2024

Garanti BBVA reported robust financial results for the first half of 2024, booking TRY 44.6 billion in net income, a 32% year-on-year growth. The bank achieved a 3.7% return on average assets and a 34.2% return on average equity. Core banking revenue grew 63% year-on-year, with net fees and commissions tripling due to high payment systems fees. The bank expects stable margins, forecasting a total margin around 5.1% for the year. Asset quality remains strong, with provisions of over TRY 55 billion. Despite challenges, the bank maintains a solid capital position and continues to lead in Turkish lira lending.

Macroeconomic Overview

The first half of 2024 has seen a stable economic environment, with Garanti BBVA projecting a 4% GDP growth for Q2, which is expected to bring the annual GDP growth for the first half of 2024 to about 5%. The bank's GDP forecast for the full year remains optimistic at 3.5% due to this strong performance. Inflation has started to ease and is expected to decline below 50% by September and reach 43% by the end of the year.

Financial Performance

Garanti BBVA has delivered an impressive financial performance in the first half of 2024, reporting a net income of TRY 44.6 billion, marking a 32% year-on-year increase. When adjusted for last year's provision reversals, this growth becomes even more significant at 40%. The bank's core banking revenues grew by 63% year-on-year, demonstrating sustained sequential growth. On a quarterly basis, the bank registered a net income of TRY 22.1 billion. This performance suggests a year-to-date return on average assets of 3.7% and a return on average equity of 34.2%.

Margin Performance

The bank's net interest margin (NIM) performed well, with a cumulative margin of 3.6% in the first half, expected to end the year close to last year's total margin of 5.1%. Notably, Garanti BBVA's fee income, primarily driven by their Payment Systems business, experienced a three-fold growth year-on-year, hitting TRY 42 billion. Two-thirds of the net fees and commissions stem from their leadership in payment systems.

Digital and Operational Efficiency

Garanti BBVA's digital transformation strategy is evident, with nearly 16 million digital active customers and 90% of their sales occurring digitally. The bank managed to keep quarterly growth in operating expenses at a modest 7%, with annual growth at 71%. Efficiency indicators showed a cost-to-income ratio at 42% and a strong 93% coverage of operating expenses by fees. This demonstrates the bank's focus on tight cost management and increased operational efficiencies.

Capital and Risk Management

The bank's consolidated capital adequacy ratio stood at 15.2%, with a core equity Tier 1 ratio of 12.8%, showing robust capital strength. Despite the large net income, higher risk weightings on loans impacted capital generation. The non-performing loan (NPL) ratio remained manageable at 1.9% after NPL sales and write-downs. The bank also reported strong provisions, amounting to TRY 70.4 billion, the highest among private banks, which offers a 4.6% total cash coverage.

Loan and Deposit Growth

Garanti BBVA experienced significant growth in Turkish lira loans, achieving a robust 27% increase in the first half. Foreign currency lending saw a 4% growth. The bank maintained a selective and profitable loan growth strategy while adhering to regulatory loan growth caps. Additionally, Turkish lira deposits grew by 17%, while foreign currency deposits decreased by 9% in dollar terms, resulting in a low share of foreign currency deposits in total.

Guidance and Future Outlook

Garanti BBVA has kept its guidance unchanged, expecting net interest margins to improve in the second half of the year. They foresee an end-of-year net interest margin around 5%. The bank anticipates the cost of risk to normalize to 125 basis points for 2024, expecting higher risk levels in 2025. Overall, the bank's strategic focus on customer-driven growth, effective risk management, and digital transformation positions it well for continued strong performance.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, and thank you for joining us in Garanti BBVA's First Half 2024 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 leave the floor to our presenters.

[Handan Saygin, executive]

Good afternoon, everyone. We're very pleased to be with you all on another earnings call presenting our stellar results. Despite the market complexities and challenges of the first half, we continued to deliver improvement in banking performance. Before getting into our financial performance details, let's as usual, go over the broader macroeconomic environment we're in.

We now cast annual 4% GDP growth in the fourth -- second quarter. Accordingly, we expect almost no change quarter-on-quarter. This will likely take the annual GDP growth in first half '24 closer to 5%. Taking into account the strong performance of first half, there seems to be upside for our 2024 GDP forecast of 3.5%. In terms of the interest rates, we expect the Central Bank to stay on hold until late 2024, along with the macro-prudential tools support affecting liquidity management and credit policies. Depending on how close they get near the year-end inflation target, the CBRT would remain restrictive longer than we expect in our baseline. Inflation trend on the other hand, started to ease in June, we now forecast consumer inflation to decline below 50% by September, on strong favorable base effects and finish the year at 43%.

On next slide, the rebalancing that has already started in the economy will result in much lower external financing pressure. Current account deficit in the first half already reached $26 billion. We now expect the current account deficit to diminish to $20 billion or 1.6% of GDP by year-end 2024, down from last year's $45 billion. This will be achieved with improving net trade deficits, strong tourism revenues and lower net gold imports on top of de-dollarization.

On fiscal side, we expect fiscal prudence to continue to help the targeted disinflation path. We expect the year-end budget deficit, excluding the earthquake spending to remain within the [ most ] criteria of 3%. Now time for the financial results. Contrary to the expectations, Garanti could continue its earnings growth and booked TRY 44.6 billion in the first half of 2024. This represents a 32% year-on-year growth or -- even 40% when adjusted with last year's free provision reversal.

On a quarterly basis, even though the sequentially rising earnings trend was maintained in our bank-only figures, there seems to be slightly lower net income in the consolidated figures. This has nothing to do with the subsidiary's performance, but with the recognition of the real estate valuation gains under equity at consolidated level, versus net income at Bank only. So even in that, most likely the weakest quarter of the year, we booked TRY 22.1 billion of net income. This suggests a year-to-date return on average assets of 3.7%, and a return on average equity of 34.2%. On core -- our core banking, namely customer-focused approach continue to result in sustained sequential banking revenue growth, which was another 7% in the quarter and 63% year-on-year.

Accordingly, our core banking revenue generation remains to be the highest in sectors and our inherent strength. Contributors to core banking revenues are, for NII, for net interest income, where we could grow by another 18% in the quarter. Pure trading, where we could largely sustain last quarter's outstanding gains with supporting FX transaction gains in the absence of derivative mark-to-market gains. And net fees and commissions, where we could grow by a further 13% in the last quarter. Getting to these results, of course, require high share of customer-driven asset mix. As you can see in the pie chart on the Slide 7, that the performing loans make up the majority of the assets, almost 56%.

We booked 9% Turkish lira lending growth in the quarter while sticking to the imposed loan growth caps and continue to register higher growth in the preferred areas such as investment, export, credit cards and earthquake-affected area loans.

Accordingly, our first half Turkish lira loan growth ended to be a robust 27%. In foreign currency lending, we booked a growth of 4% year-to-date. That is totally in line with our guidance and growth projections. On the securities front, as many of you know, we're never aggressive, but rather opportunistic.

In the quarter, we did replace our redeeming securities and even accumulated a bit more 10-year fixed-rate securities and CPI-linked [ warrants ] that are 3.5% real rate attached. Nevertheless, the securities share in assets remains low at around 15%. Looking in that into the loan portfolio on this next page, you can see our Turkish lira loan mix on the left-hand side and the growth in each area on the right. You may have already noticed the sector's lower Turkish lira loan growth figures in line with the intended slowdown in Turkish lira lending imposed by the Central Bank in its efforts to fight against inflation. Our selective and profitable loan growth strategy is naturally preserved while abiding fully to the regulatory loan growth caps. Our Turkish lira performing loans reached TRY 952 billion upon the 27% Turkish lira loan growth in the first 6 months of the year.

Notice that the quarterly growth was relatively lower versus the first quarter in credit cards and business loans, whereas the consumer loan growth of 11% was sustained and we could register market share gains, especially in the high-yielding consumer GPLs, including overdraft. Our market share in general purpose loans among private banks neared 19% and in credit cards to 22%. Also in business banking, we have more than 20% market share. Even though there seems to be a slight quarterly drop in the second quarter, we have booked 68 basis points of market share increase year-to-date, and actually have succeeded in growing our market share on average by 75 basis points per year, over the last 5 years.

In total, we maintain our leadership in Turkish lira lending. Moving on to the quality of the total loan book of TRY 1.5 trillion, 88% is in Stage 1, 10% or TRY 156 billion is in Stage 2. Isolating the currency impact, which has affected largely the restructured portion of Stage 2. Stage 2 increase of a significant TRY 18.5 billion was largely due to the increase in the SICR portion, namely those expected small ticket size, retail and credit card loans.

Since the coverage of the SICR is relatively low, this high inflow diluted the Stage 2 coverage to 19% from 21%. Notice actually that the strong foreign currency loans coverage of 43% in Stage 2 and the 8% coverage for Turkish lira loans remains. For the NPLs, you can see on next page, the net NPL inflows in the quarter suggest deterioration, yet normalization after last year's exceptional low base. 86% of the new NPLs relate to retail and credit cards portfolio, as expected, upon the end of the [ cheap ] funding period.

Credit card portfolio NPL increase versus last year was 5.5-fold and retail was 2.5-fold for 6 months into the year. The ratio post-NPL sale and write-downs remained at 1.9%, though with the continued strong collections on the wholesale business, and successful execution of timely NPL sales.

We sold a total of TRY 4.2 billion of NPL for TRY 1.9 billion. Suggesting $0.45 on the dollar NPL in the first half. We will continue with our NPL sales in this inflationary environment as long as there is positive spread between the NPL sale price and the legal process time cost. With these, we could secure attractive recovery via being first mover in NPL sales in the first half of the year. Our total provisions on balance sheet, including the written-down portion now accumulate to TRY 70.4 billion. This is the highest provision level among the private banks and represents a 4.6% total cash coverage. On the next slide, we'll see the translation of this into cost of risk.

Even though net provisions, excluding currency and the earthquake-related provisions of last year, spiked 4.5-fold year-on-year, the continuing strong commercial business recoveries supported the year-to-date net cost of risk. 66 basis points of net cost of risk in the first half, fares lower than our guidance of 125 basis points for the year. However, we stick to our guidance for the whole year parallel to the expected rise in NPLs and no ease in our prudent provisioning. On the funding side, deposits dominate our funding with 71%. Despite the high interest rates, the high weight of demand deposits remain to be the key financial differentiation in terms of our margin out-performance. Borrowing' share in funding assets remains low at under 6.5%. Total external debt as of the first half was $4.3 billion, of which 44% relates to securitizations, 29% to sub-debt and 20% to syndications.

$1.2 billion of the external debt is due within a year. And against that, we have a 5-fold, $5.9 billion buffer in foreign currency liquidity. Overall, our leverage remained to be the lowest among peers at 8.3x the equity. In the second quarter, post the local elections, we exhibited an accelerated conversion from the Foreign Currency Protected Deposits Scheme to standard Turkish lira deposits -- time deposits. Turkish lira deposits increased by 17%, whereas foreign currency deposits decreased by 9% in dollar terms in the second quarter. Accordingly, we ended the first half with a historic low share of foreign currency deposits in total. Even though we managed probably the most sizable Turkish lira deposit portfolio in high interest rate environment, Garanti continues to lead in customer demand deposits share in total with 39% versus the average of private peers of 34% for bank-only figures.

Comparatively, this grants a significant funding advantage and continue to support our superior margin performance. Our margins were resilient quarter-on-quarter and could even book a 5 basis point improvement in the core margin. Our core net interest income, including the swap costs, further increased to TRY 10.6 billion from TRY 9 billion, suggesting by far the highest level among peers and validating one more time, our legacy of highest core net interest income generation capability.

Our improving for net interest income performance is owed to, timely loan growth, repricing and duration gap management, effective management of funding costs and full utilization of CBRT's remuneration potential. With the ongoing increase in loan yields, stabilized deposit rates and currency, we expect to see a more visible core margin expansion in the second half of the year. Therefore, we keep our flat margin guidance for the whole year that suggests on a cumulative basis, our total margin of 3.6% in the first half, will end the year around the last year's total margin of 5.1%.

As for net fees and commissions on Slide 15, there has been a 3-fold growth year-on-year driven by the Payment Systems business. Accordingly, of the near TRY 42 billion of net fees and commissions booked, 2/3 related to our strength in the payment systems. Recall that we ranked #1 in issuing volume, acquiring volume and the number of credit card customers. Even though we're also #1 rank in Turkish lira cash loans and noncash loans as well as money transfer fees, the extraordinarily high growth and the payment systems diluted their contribution to the net fees and commissions. Key reasons behind our robust fee performance are the strength in relationship banking and digital empowerment, contributing to not only growth in our active customer base but also penetrate further the existing customers.

Our digital active customers now reached almost 16 million and digital sales in total is 90%. As for the operating expenses performance, quarterly growth was a mere 7% and the annual growth pointed to 71%, post the currency adjustments. The lower growth in non-HR-related costs suggest increased efficiencies, feasible customer acquisition and tight cost management. On the HR side, post growth is actually slightly higher than inflation. Higher figure is due to the timing of wage increases. Year-end growth for operating expense will remain above inflation, as guided. Efficiency indicators are that the cost to income was 42%. These coverage of OpEx was a strong 93%, and operating expenses and average assets were 3.7% in the first half.

As per capital, the quarter end consolidated capital-ex ratio without the BRSA's forbearance was 15.2%, and core equity Tier 1 was 12.8%. Both remained well above the regulatory and ICAP requirements. When we look at the year-to-date trend of capital, it seems that our capital generation, even though we booked the largest net income, could not compensate the negative effect of market and credit risk. This actually relates to the regulation that imposes higher risk weightings to loans. Under the condition of normalized risk weightings, our [ capital-ex ] ratio would be around 150 basis points higher than recorded and be 16.7%. The foreign currency sensitivity on our CapEx ratio remains low at 18.3 basis points negative, for every 10% depreciation thanks to our $500 million Tier 2 issuance in the first quarter.

In summary, we earned the Olympic Gold Medal in the financial [ pent-up law ]. In the first half 2024, we recorded the highest net income via sustained increase in core banking revenues. The year-on-year growth in the core banking revenues was 63%, reaching TRY 81 billion in only 6 months. On the fee side, our diversified fee-generating businesses, along with the extraordinarily high payment systems fees tripled year-on-year and brought the fees coverage of OpEx to 93%. On the asset quality front, we started to see more normalized retail and credit card NPL inflows as expected and guided. However, first half net cost of risk remained low due to the continuing strong collections from the wholesale business. Our total provisions on balance sheet with above TRY 55 billion is the highest among private banks.

On the capital front, we remain solid. We had TRY 65 billion of excess capital as of the half year-end, when calculating without the BRSA forbearance. Our progress in business growth continues. Today, every 1 out of 2 bank customers has an account with Garanti BBVA, and our digital active customers with almost 16 million, is the highest in the sector. In conclusion, our agility and financial resilience once again validated our unmatched leadership. Thank you for listening. It's now time to take your questions.

[Operator]

[Operator Instructions] The first question is coming from Mehmet Sevim.

[Mehmet Sevim, analyst]

I have just a few of them. So first of all, you're clearly exciting ahead of your peers when it comes to margins. And as we can see that also in the delivery so far. Can I just ask here what the contribution of the remuneration is to the NIM that you receive from the conversion efforts of KKM deposits? And as we go into the second half, how would you expect this to evolve?

And also maybe based on that, if you could also give us your thoughts about your overall guidance going into the second half, that would be very helpful. And another question I had is just on the growth trends. Clearly, growth is limited, but some of your peers have accelerated their efforts in FX lending. And as far as I see, you're tracking a bit behind there, with the volumes up much smaller than your peers. If I could ask why that's the case? And specifically, do you have any different views on what's going on currently in the FX lending in the market? Or what is really driving that?

[Recep Bastug, executive]

Thank you, Mehmet. The first question, we've fulfilled all mitigation from CBRT. That is the reason, 100% without any loss, we have got full remuneration from Central Bank and total amount is around TRY 11 billion in the first half. So it is added to net interest margin.

The second one, net interest margin guidance. We don't see any risk on our flattish net interest margin guidance in the second half of the year, especially in the fourth quarter, we are expecting to see a more visible improvement in margin. And as repricing on the asset side will continue, more or less stabilized or maybe even lower deposit costs. So with the recovery of the second half, we are going to be around to guidance. So we don't need to change our guidance as well. In the foreign currency credit side, we did this growth in 2023, when market was stable, we increased our loan portfolio, and we got 220 bps market share in 2023, markets followed us with a lag. That is the reason what you have seen in this year was done last year by us. That is the reason. This is not related to risk appetite. This is just related with pricing issues, because last year's pricing were 2%, 3% above of this year.

So in line with your first or second question, this is another contributor to net interest margin. So we are just managing our portfolio in a profitable way. That is reason.

[Operator]

And the next question is coming from Jihan [indiscernible].

[Unknown Analyst]

Congratulations on the very strong results. My question is rather a broader one. So we see a significant divergence between your profitability performance versus peers. Part of it comes from net interest margin, but part of it comes from elsewhere. So if you could just elaborate on what strategic decisions that you took in the last few quarters that created this divergence? That will be useful.

Beyond that, I have a couple of specific questions as well. One is your swap costs seems to have increased a lot Q-on-Q. Is that related with utilization or just pricing? In general, are you making any changes to your guidance? You said that net interest margin, you're keeping the guidance, but what about fees or overall profitability?

[Recep Bastug, executive]

Okay. Thank you, Jihan. The first question. I think this is mainly related to the balance sheet structure. We have the highest share of interest earning assets. This is -- this is one of the main indicator. The second one, we have the highest share of non-interest-bearing liabilities which is the result of having the largest demand deposit based on pre-equity.

And also, as Handan mentioned, our balance sheet is able to create impact for a larger customer base. So our priority is always been customer-driven asset growth, rather than betting on securities income because, as you know, last year, securities were the main differentiators. But this year, securities is a little income consuming issues.

So we didn't invest too much to securities. It's always, always we are on assets -- our assets are customer-driven and funds are customer driven as well. And equally important, we are the best in class in this management with our right pricing in lending and funding. As you see, the spreads are over the market averages. These are the main differentiator. The second part of your question, this is -- the swap cost is related with the volume amount of swaps. So in terms of interest rate. We are in line with market. So there is not any exceptional issues.

Last question. I think in the guidance side, we don't -- we are not going to make any change with our guidance. All our guidance is valid. We don't need to make any changes.

[Operator]

The next question is coming from David Taranto.

[David Taranto, analyst]

As my colleagues have mentioned your margin performance has been impressive in a rather challenging quarter. I know it's quite early, and there are many moving parts here, but would you kindly give us some color on how you see the outlook in 2025, which should be a year of easing policy rates? Would it be fair to expect an expansion on top of the second half margins, which, as you highlight, should be higher versus the first half margins?

Second question is on asset quality. It has been more resilient than initial expectations so far this year. Considering the lagged effect of the macro slowdown and the aging impact on accounting, would it be fair to push out higher cost of risk expectations into next year? And finally, on NPL sales, i remember back in 2018, 2019, the proceeds on NPL sales were like $0.05 on a dollar. And back in 2015, '16, they were around 10%, 15% on a dollar. Now we are talking about 40%, 45% levels.

I appreciate that the inflation has been supporting the collection performance here. But are there any other reasons behind the strong pricing levels for these NPL sales?

[Recep Bastug, executive]

I think the year-end net interest margin, in the last quarter margin, will be the signal, right signal for 2025. As we mentioned, there will be a correction because our net interest margin is 3.6% in the first half. So the -- our guidance is about -- around 5%. So I think it's going to be around 5% and positively above 5%. This is an expectation, but it's going to be shaped in line with the inflation, plus with the policy rate, which will be another result of the inflation. So what is our expectation? The year-end inflation will be around 43%. So in line with that inflation rate, there will be some rate cuts. So those rate cuts will help bank to reach better net interest margin level under the circumstances, decrease in the cost of deposits. And also in line with that decrease in the credit yields always will create banks to reach better net interest margin.

So as as a [indiscernible] a specific level, I think that it will be over 5%. But how much? I may tell you a reasonable answer in the last quarter, fourth quarter, not now. But as of now, it will be over 5%.

The asset quality, as you know, our 2024 guidance is 125 basis. This is mainly created by retail portfolio, credit card and retail portfolio. Wholesale is on the positive side, wholesale in total, there are really strong collection from wholesale. That is the reason it is balancing. So we are going to end up the year around 125%. But that is very strong signals we have been getting from the market. There will be deterioration in wholesale portfolio. This deterioration doesn't mean that, it will be a problem. So it is normalization because in Turkey, Turkey's circumstances, cost of risk, 125% cost of risk is the reasonable one. What we have witnessed during the last 3 years, 60 bps, 70 bps, that is the reason there is an accumulated amount of NPL, will be subject to the banking sector in 2025. This is normalization. This is normalization.

But with the impact of this delayed normalization, we are going to see cost of risk levels above 200 basis point in 2025. Then the NPL sales, yes, we are opportunistic here. As we see reasonable rates, we did it. And we will continue to do it in that manner as well. So we are on the positive side. We will continue in the first half, we made TRY 4.2 billion NPL sales. I think in the second half, there will be another 2 to 3 tranches, which will be around this TRY 4 billion levels.

[Operator]

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

[Recep Bastug, executive]

Thank you all for your participation. I am extremely pleased with our outstanding financial performance, which I believe will once again positively differentiate in the sector not just in terms of level but also in terms of quality. Our assets and finding our customer driven and equally important, we are the best-in-class in this management with our right pricing in loans and deposits. Therefore, we end up with the highest core NII in the sector. We are the only bank generating fees that can fully cover its OpEx. We refrained from irrational competition in customer acquisition, which has material costs on bank's balance sheet in short term and medium term.

We are the most prudent bank in terms of provision allocation as we operate with comfortable buffers. We have positioned the balance sheet for sustained growth and profitability. We are confident in our team's ability to deliver continued value to shareholders, customers and employees. Thank you, again, for your time. Hope to meet you soon.