Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Transcript 2020-Q3

[Operator]

Hello and thank you for joining us in Garanti BBVA's Third Quarter 2020 Financial Results Webcast. Our CEO, Recep Bastug; our CFO, Mr. Aydin Güler; 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]

Hello, everyone. It is great to be back with another set of excellent results in the third quarter of this unprecedented year 2020. Today, we would like to start our presentation with a macro review, what our big data analysis suggests that proxy and our most recent macro expectations.

On Slide 3, notice the graphics of our big data consumption index and investment index updated as of the October end. Consumption index suggests normalization in total consumption to pre-COVID level, and investment index suggesting recovery from the pre-shock levels.

On next page, the left-hand side graphic on the high-frequency hard data indicators show sharp recovery since mid-May, confirming our big data. The graphic on the right-hand side of the high-frequency soft data indicators such as confidence indices and PMI signals some deceleration. Accordingly, our most recent forecast, you will see on next slide, that indicates this year's GDP growth to be flat year-on-year and next year's 5.5% on top of the very low base of this year.

We'd expect further monetary policy tightening to reinforce stabilization in financial assets, particularly the exchange rate. We still forecast inflation to follow a disinflation path, realizing 11.5% and 10% at the end of this year and next year, respectively. Current account balance posts a surplus year reverted 5 on top of the extraordinary factors linked to COVID-19 and the export tourism revenues suffered during the year. On the other hand, particularly strong gold imports contributed to deficit to widen further. Normalization from now onwards will moderate the deficit.

Given the extraordinary conditions, just like everywhere in the world, fiscal supports weight on the budget balance, but Turkey's budget deficit to GDP is still expected to be below the average. Similarly, sovereign debt to GDP is expected to go up yet from a comparably low base. And Turkey will still remain one of the few countries in the world meeting domestic criteria.

Now let's move on to the third quarter financials on Slide 3 -- on Slide 7, sorry. Our sustainably robust revenue generation capability is once again validated. Our pre-provision income in the first 9 months of 2020 neared TRY 16 billion and represents a significant 41% of annual growth. However, the pandemic related to rising risks and uncertainties in this highly extraordinary time we're rolling netted higher provisioning. Thankfully, our strong revenue growth enabled us to proactively strengthen our loan loss provision coverages and as well set aside further free provisions.

In the third quarter, TRY 1.23 billion of free provisions are added to the pool of free provision, bringing the total in the balance sheet to TRY 4.33 billion. Even with the high provisioning and maintains low leverage of only 7.7x book, at Garanti BBVA, we could deliver an ROE of 13.3% and an ROA of 1.6%, suggesting a top line profitability, a quarterly income growth of 16% and a year-on-year EPS growth, earnings per share growth of 5%. If we had not set aside these precautionary free provisions, our EPS growth would have been a strong 39%.

Our solvency ratios remained robust at 16.9% for capital adequacy ratio and 14.2% for core equity Tier 1 without the BRSA's currency forbearance implications. If we were to take into account the full forbearance, the capital adequacy ratio would be 18.8% and core equity Tier 1 would be 16%.

Let's now look into the components of these results and start with the assets on Page 8. Assets as of September end exceeded TRY 0.5 trillion, TRY 526 billion, to be exact. Year-to-date growth has been well balanced among loans and securities with both registering 26% growth. Loans with 62% share in assets point to our main sustainable revenue generation source, whereas securities share remain below 14%.

In the third quarter, our Turkish lira lending growth was 4% after second quarter's 16%. Even though the originations remained strong in the quarter, much of the matured core tier working capital loans provided to [indiscernible] in the second quarter got replaced the consumer loans. And net quarterly Turkish lira lending growth ended to be 4%. Post increased loan pricing and lower maturities, we started to see relatively lower originations in the fourth quarter. However, since we have already achieved our annual Turkish lira loan growth target by 9 months, we see no downside in terms of meeting our Turkish [indiscernible] growth guidance for the year.

As for foreign currency lending, the low demand continues and the originations for short-term redemptions. As a result, as anticipated and guided, we had further shrinkage in foreign currency lending.

On next slide, in the pie chart, you can see more or less equally balanced Turkish lira loan mix among this in the same consumer. As expected, there was shrinkage in business banking loans with maturities hitting the period after a significant 33% growth in the first half. With support to short-term liquidity needs -- when we support short-term liquidity needs of corporates during the pandemic and the credit guarantee fund loans. It now seems like the businesses need time to digest these loans.

The quarterly growth of consumer and credit cards were 6% and 15%, respectively. On consumer side, the main driver was, again, general purpose loans with 9% growth in the quarter.

Looking at the funding side on Slide 10. Notice that demand deposits, time deposits and the deposit by Turkish lira bonds issued and merchant payables fund nearly 70% of the assets. This alone easily funds the loan book, suggesting a loan-to-deposit ratio under 100%. Notice also that 30% of the assets alone were 100% with funded with demanded targets versus 21% at the beginning of the year, suggesting an even more supportive funding mix as of the 9 months end.

As for the external liabilities, due to our shrinking foreign currency loan portfolio, as we've been cutting down on our internal debt on average by about 7% since 2013, borrowing share in assets is a limited 13%. So at September end, our total external views were $8.5 billion, of which $2.8 billion is due within a year. And against that, we had $11.3 billion of liquidity buffer. The year-to-date increase in the foreign currency liquidity buffer is mainly due to the freed reserves upon gaining a visibility for the central bank reserve requirements framework.

Another indicator of liquidity is that our liquidity coverage ratios for both total and foreign currency remains well above the required minimums.

Moving on to the deposits. Total growth year-to-date was nearly as much as lending growth. In the quarter, foreign currency deposits grew by 8% in dollar terms versus only 1% growth in Turkish lira deposits. In the first half of the year, TL deposit rates -- in the first half of the quarter, sorry, the Turkish lira deposit rates remained at low levels, and that triggered continuation of dollarization and gold accumulation. Even more pronouncing was the growth in total demand deposits.

Looking at the right-hand side, the year-to-date growth in demand deposits reached 79% on top of the 38% growth in 2019. Our strength continues with our high share of demand in total deposits. Now 46% of our total deposits are 3 months, significantly favorable level versus sector's average of 31%.

Looking at the demand share in TL and foreign currency deposits separately, it is 31% and 55%, respectively. Even though the portion of this robust growth can be attributed to currency, our relatively high share of salary accounts and strength in digital transactions clearly reflects as main differentiating factors in this performance.

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 76% for both Turkish lira and foreign currency declines. So these funding strengths contribute positively to our highest in sector margin performance.

So let's now move on to the next slide to see the margin performance in detail. Due to the increase in funding costs in the quarter, our core NIM was down by 41 basis points yet our core net interest income continued its upward trend, reaching TRY 4.8 trillion level. On a cumulative basis, by the end of 9 months, our core margin is up by 44 basis points. It is slightly below our full year guidance of 50 basis points. But thankfully to serve in times like this, CPI-linked hedge will kick in and compensate for the increase in funding costs when we do the CPI adjustments in the fourth quarter. This will likely take us to near our guided level of cumulative margin expansion for 2020.

Moving on to the topic of asset quality on Slide 13. Notice our gross loans. As it is seen on the left-hand side bar chart, near TRY 350 billion, of which TRY 20 billion is NPL and TRY 43 billion is in Stage 2 buckets. Stage 2 make up 13% of gross loans, and the breakdown of it is that 30% is the quantitative model outcome at ICR where 82% is not going to close at all even for a day. 46% is restructured. Its high rate is not a surprise due to the pandemic-related deferred loans and regulators' temporary measure on the NPL recognition day. In the remaining portion, 22% is watch list and 2% is past due.

In terms of bridge, Stage 2 coverage increase year-to-date was a strong 5% to almost 16% with restructured bucket carrying highest provisions. Actually, the total coverage increase year-to-date was substantial. We had a net increase of TRY 5.7 billion in provisions in the balance sheet, and this grown the total cash coverage of loans from 6.1% to 6.5%, which is higher than our current and expected NPL level at year-end. On top of this if we were to include free provisions, our total cash coverage would have been 7.7%. On a comparable bank-only basis, our total cash coverage is the highest among peers, indicating our relatively more prudent approach in provisioning.

We also would like to give you more color on deferred loans performance as this seems to be closely followed. We have postponed and restructured TRY 38.5 billion to date. It is about 12% of our performing loan portfolio. 36% of it is from retail portfolio. The rest is from business banking. Out of this TRY 38.5 billion, 81% has expired, meaning their postponement period ended. From these expired loans, 14% already paid their total debt in full, 69% resumed their monthly payments without any delay and 17% is the portion that either ask for a second deferral or what we call the portion solution in progress. And this amounts to roughly TRY 5 billion. Of this TRY 5 billion, we estimate roughly 1/3 to end up in NPL. And in that case, we plan to book this portion Stage 3 provisioning in the fourth quarter. As of the third quarter end, 43% of the deferred loans are followed under Stage 2 with a coverage of 21%.

On next slide, see the net new NPL that has been on the negative territory for 3 consecutive quarters. This was mainly due to the good start to the year in the first quarter. And later, the liquidity provided to the system during the pandemic and the regulatory easing on NPL recognition day led to NPL lower than anticipated. As a result, NPL ratio improved by almost 1 percentage points year-to-date and remains flat on a quarterly basis. The new NPL regulation on recognition day has around 40 basis points positive impact on the ratio.

Looking on the cost of risk chart on the right-hand side, in the quarter, the net provision booked was TRY 1.1 billion bringing the cumulative net cost of risk to 202 basis points, excluding currency impacts as that portion has no impact to bottom line due to our hedging mechanism.

Going forward, we still keep our below 300 basis points net cost of risk guidance for 2020. Now this suggests the fourth quarter provisions to be higher than the third quarter. And we expect our annual IFRS 9 model revision to get even tighter. And also, as mentioned earlier, we intend to provide all coverage-related provisions in this year.

Moving on to the fees and commissions. In the first 9 months, we managed to grow 5% despite the key regulation and COVID 19-related slowdown in economic activity in the first half. What has to achieve a positive growth was the early closure in repricing fee that likely won't be continuing into next year. If we were to adjust this portion, year-on-year net fees and commission growth would have been flat. Quarterly fees and commission income growth was 19% as lending-related and payment system fees recovered due to efficient economic activity.

In terms of the growth breakdown, the better-performing areas has been mainly the cash loan fees and insurance backed by the normalization in the economic activity. Brokerage and asset management fee performance was also eye-catching due to the increased activity in capital market instruments.

On the other hand, year-on-year growth in money transfer and payment systems fees remain in negative area as expected and guided due to the regulation change. Interchange and merchant fees came down in parallel to the lower rate environment versus the same period last year. Nevertheless, Garanti registered by far the highest net season commission revenues amongst the peers.

Let's now quickly look into expenses on next page -- on this page, I mean. Even though the 15% year-on-year operating expense growth still looks a bit higher than our guidance, the various expense from the currency depreciation, which actually has no impact to the bottom line, so when adjusted, the expense growth remains even below inflation level. And our OpEx is expected to converge to our guided level of below 10% by year-end.

On next slide, you will see our capital ratios. We preserved our strong capital buffers. Our consolidated capital adequacy equity ratio compared with the Tier 1 stands at 16.9% and 14.3%, respectively, suggesting TRY 20 billion of excess capital. Now this sums up our first 9 months to date performance for year 2020.

We can now gladly take your questions. Thank you for listening.

[Operator]

[Operator Instructions] We are taking the first question from Gabor Kemeny, Autonomous.

[Gabor Kemeny, analyst]

My first question is on your margin outlook, please. So how do you see the current dollarization impacting your outlook for margins? And how do you see the margin outlook going into 2021 under your baseline assumption for the interest rates?

And I understand you expect a decline next year in the interest rates on a like what-if basis. How do you think your margins would be impacted by an unexpected significant like 300, 400 basis point increase in the short-term interest rates? That's on the margins.

And just a clarification question on the deferrals. So the TRY 38.5 billion you show here, are you saying that only 19% of that has not yet expired.

[Aydin Güler, executive]

First of all, the margin outlook till quarter 3, we benefited a lot from the high margin. But unfortunately, there is a strong shrinkage on the margins. We will feel it mostly in quarter 4. At the end of quarter 4, it will touch to bottom. Then in 2021, it will start to recover. That is related with the TL side, first.

The second one, the margin outcome on dollar side or foreign currency side. I think Turkey as of now, maybe the Garanti BBVA, we have been paying the lowest interest rate to foreign currency in the world because our total cost of foreign currency deposits is less than 50 bps in balance sheet. Because as you see from our liquidity buffer, we have more than $11 million. That's liquidity. So under the circumstances, it isn't very normal for us not to pay too much interest on the other side. I think dollar margin, the foreign currency margin will be very strong in 2021 as we have in this year.

Declining interest rates next year, I think it is not easy to anticipate it. So under these circumstances, first, the rates will go up. It will -- the Central Bank cost of funding will be around 14% to 14%, 7,500 circumstances. And the cost of deposit will be below than this rate. It will be below 13% according to me.

So another question, the deferrals portfolio There is, I think, the number is quite clear that because this process, I think it has ended now. It started, as you know, in April and May. In the -- in June, July, it touched to the highest level. Then its speed has got slow. Then these are goals, 19% of the portfolio that was restructured as the last part of that period. That is the reason they didn't get their expiry date. That is the reason it is still -- we -- it has still didn't finalize their expiry day.

Here, the critical point, as Handan said, we have just TRY 5 million deferral amount that is not paid. Roughly 60% of them will be subject to another restructuring because mainly they are in Stage 2 wholesale funding type portfolio. But in the retail side, I think we will get more than TRY 1.5 million loans that -- those are candidate for Stage 2. So you may think that 1/3 of last portion, 17% will be subject to NPL. Those 19%, still, we are waiting, and we don't think there will be a serious problem related with that portfolio as well.

[Operator]

[Operator Instructions] It 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]

Oh, we made a strong preparation, but after Handan gave you the numbers. You change your mind. You didn't ask any question. We thank you all. We had a very strong quarter, and you see the results. I may tell you that our prudent approach, our conservative approach under the circumstances will continue. So we will thank you all, and we hope to see you soon take care of yourself. Have a good night. Thank you all.

[Operator]

Thank you all for participating in Garanti BBVA's Third Quarter 2020 Financial Results Webcast. Good evening.