Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and thank you for joining us in Garanti BBVA's Third 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. [Operator Instructions] The presentation will now start. So I leave the floor to our presenters.

[Handan Saygin, executive]

Hello, everyone. Thank you for attending our third quarter 2022 financial results call. We're honored to once again present to you another set of outstanding results. And before jumping into the financials, let me, as usual, briefly touch upon the macro backdrop we're operating in.

The main highlights are that the economic activity despite weakening global demand remained strong due to the support of countercyclical policies as well as exports and tourism revenues. On the other hand, continuing loose domestic policies above potential growth rates and commodity prices, pressure inflation, presenting upside risks on inflation.

On next page, notice that the GDP growth continues after a post pandemic growth of 11.4% in 2021, first half of 2022 growth was 7.5%.

Our big data indices suggest deceleration for the second half. This deceleration is faring milder than expected so far. And accordingly, we now expect a 6% GDP growth for -- by the end of this year, for year 2022. On the inflation front, with the help of last year base, we will likely see some ease by year-end.

Now our 9 months financial results on Slide 5. We had a new record in earnings. And with that, nine months net income more than quadrupled that of the prior years.

We booked TRY 38.7 billion of net income in the first 9 months of the year, while setting aside TRY 500 million of free provisions. Quarterly loan earnings growth was 40%, 41%. When adjusted with 40% -- when adjusted with free provisions reaching 81 -- 18 -- sorry, TRY 18 billion.

Pre-provision earnings growth in the quarter was also a strong 51% stripping out the CPI-linked revenues that contributed additional TRY 7.4 billion in the third quarter, there was still a meaningful growth, indicating the high quality nature of our earnings.

Our earnings quality is largely driven by expanded loan to the deposit spreads translating into a core net interest income growth of 168% year-on-year. Next season, commissions growth of 85% versus a well-managed cost growth of 82% year-on-year. Basically, we could keep the jobs wide open.

Summary of our [ solid spend ] is actually a reflection of our capital generative growth strategy and sustainable one, that is. The main highlights in terms of growth is that we booked a Turkish lira loan growth of 56% in the first 9 months to date versus our full year guidance of 50%.

And highly likely we sustained our #1 ranking among private peers. In Turkish lira customer deposits, the year-to-date growth was an eye-catching 87%, where we ranked #1 among private peers in time deposits as well as demand deposits.

Moving to profitability. Profitability at this time surged to more than double the levels of December '21 and -- '21 and Garanti BBVA registered an ROE of 49% and ROA of 5%. If we hadn't set aside free provisions ROA and ROE would have been 5.1% and 49.3%, respectively.

This high profitability serves to further strengthen our capital where net income contribution to capital adequacy ratio was around 200 basis points quarter-on-quarter and capital adequacy ratio improved to above 16%. And this is without the forbearance measures of the BRSA and the pre-provisions we have on balance sheet.

During the quarter, we satisfied further TRY 500 million of free provisions, bringing the total free provisions on balance sheet to TRY 8 billion. If all were accounted as part of capital along with forbearance, our capital adequacy ratio would have been 18.9% on a consolidated level. Notice also our foreign currency liquidity buffer of more than $10 billion is actually more than quadruple the short-term need of $2.4 billion and almost double the total external debt level.

Now as usual, let's start looking at the components of this super performance, starting with the asset side on Slide 7. Our consolidated total asset size now has reached TRY 1.2 trillion. Asset growth and composition need to be strategically and dynamically managed to deliver desirable results. Accordingly, loans and assets have the highest weight and our priority has always been core banking and generating sustainable customer-driven revenues.

Even though we continue to book profitable and selective growth in Turkish lira loans and maintain the record net nominal increase of TRY 52 billion per quarter, there was further decline in foreign currency lending due to sizable redemptions.

On the securities front, we added both CPI and fixed rate securities to the portfolio in order to offset the upcoming redemptions and meet the regulatory requirements, of course. Note that the eye-catching growth of CPI linkers include the mark-to-market and IRI differences of the CPI-linked portfolio. Including this accounting difference, the CPI book size is currently at TRY 76 billion, up from TRY 63 billion in the prior quarter.

Continuing with Turkish lira loans. Turkish loan book reached TRY 412 billion as of the end of 9 months. In the pie chart, Turkish lira loan book breakdown suggests a slightly higher weight of business loans versus the consumer and credit cards with 54% business loans, 21% credit cards and 25% consumer loans. Short term and selective business loan growth of 14% in the quarter and 72% year-to-date yielded a year-to-date market share gain of 68 basis points.

In consumer lending, the growth has been relatively lower. However, we have managed to increase our market share year-to-date in high-yielding consumer general purpose loans at rational price levels. High growth and market share gains prevailed in credit cards as well. Credit card volume was up by 27% in the quarter and 74% year-to-date.

Moving to Slide 9 to how we fund the assets. Deposits dominate the funding sources. Both time and demand deposits as well as deposits like Turkish lira bonds issued and merchant payables fund almost 3/4 of the assets.

Demand deposits alone fund 1/3 of the assets and this is a clear differentiating strength of Garanti BBVA, pointing to a much higher level of free funds versus peers. Free funds fund 46% of the interest-earning assets that guarantee EBITDA, while at peers this ratio stands at only around mid-20s.

Borrowing share in funding assets is further reduced down to below 10% to 9.2%, with the redemption of our $750 million eurobond in September. Total external debt is now $5.6 billion, the breakdown of which you can see in the pie chart on the bottom right-hand side. Against this debt, we have almost double debt size in foreign currency quick liquidity.

A detailed look into the deposits on Slide 10 show that there has been further significant growth in Turkish lira deposits and even higher growth in demand deposits in the quarter.

Turkish lira demand deposits alone exceeding TRY 90 billion and having the highest market share in TL demand tells clearly that customers prefer Garanti BBVA as their main bank.

The realization efforts are continuing through foreign currency protected Turkish lira time deposit scheme, which led to a year-to-date shrinkage in foreign currency deposits and growth in Turkish lira deposits. Year-to-date growth in Turkish lira deposits reached 87% and year-to-date shrinkage in foreign currency deposits was 9% in dollar terms.

Sustainably favorable story about our deposit structure is its high share of demand deposits in total. It stands at an enviable level of 47% and compares very favorably to that of the peers.

Within Garanti, Turkish lira deposits, 28% is 0 cost demand deposits versus at peers, this is 22% on average. This differentiating strength contributes noticeably to our margin performance that you will see on the next page.

Superior core margin generation capability has actually become our legacy. We can say it is our distinguishing quality. The reason we stress so much the core margin is that it is representative of the customer-driven portion or core banking activities related interest margin.

Even though CPI-linked securities contribution this past quarter to margin NIM cannot be denied, we see core banking related margin to be more sustainable. Of the cumulative NIM of 8.9%, 5.3% was the core NIM.

In the last quarter, we could further expand our core margin by 100 basis points bringing the year-to-date expansion to 184 basis points, up from 3.5% at the beginning of the year to 5.3%. It stays on track with our budget guidance for the margin expansion of 175 basis points.

Accordingly, core net interest income is at its historic high levels. It has increased TRY 3.3 billion in the last quarter and an astounding TRY 19.3 billion year-on-year, suggesting almost triple the levels of last year's 9 months.

Main reasons behind this distinctive performance can be attributable to our effective and dynamic balance sheet management, namely healthy loan growth, disciplined pricing and diversified funding portfolio, ability to attract new customers and continuously expand our customer base and strong capital supporting our profitable growth strategy.

Now looking at the quality of our loan portfolio on Slide 12. The pie chart on the left shows our healthy breakdown of our loan portfolio staging. Also, TRY 710 billion of gross loans, TRY 92 billion or 13% is in Stage 2 and TRY 20 billion is in Stage 3.

In that currency impact isolated look into Stage 2 shows that there is net TRY 0.5 billion reduction in Stage 2, owed to the strong recoveries booked in the quarter. Despite this improvement, we continue to further strengthen our Stage 2 provision coverage to 21% from 18% in June.

For the NPLs on next page. Net NPL inflow we see in the quarter was in line with our expectations. Thanks to strong collection performance and continuing strong economic activity, net new NPL inflow, excluding the currency impact in the quarter was TRY 458 million.

While NPL ratio fell below 3% to 2.9%, we continue to increase our coverages even further in line with our prudent stance. Consequently, our NPL coverage has increased to 71%, while the total provisions on balance sheet increased to TRY 37.2 billion.

Both the NPL trend and the coverage level that you see on the line chart suggests a very strong picture moving in the right direction. Now how this translates into risk costs or provisions, you can see on the next slide. 9 months net cost of risk was registered at 106 basis points -- 106 basis points, 1.1%, we can say, slightly higher than last quarter due to macro model adjustments done in the quarter.

However, it is still far better than our guidance of less than 150 basis points, suggesting no risk to our year-end guidance. On a cumulative basis, you will notice the significant provisioning increase of 185% that has to do with last year's low base. Recall that a model recalibration was done in November of last year.

Moving on to the topic of net fees and commissions. We booked another strong net fees and commissions growth in the quarter, which brought the cumulative year-on-year growth to an astounding 85%. Almost TRY 1 billion increase in net fees and commissions in the quarter was backed by strong performance in payment systems, lending and transaction activity.

We are top in money transfer fees, Turkish lira loans and acquiring and issuing volumes among private peers. And each of these areas, we registered fee growth that was double of last year, as you can see from the graphs on the page.

The strength in these areas are not only the main contributors to our outstanding fee base but also demonstrate once again the fact that we remain to be the customer's choice as main bank. Our expanding customer base, along with broader penetration support our diversified fee-base.

Moving on to the operating expenses. Year-on-year, OpEx growth was 82%. This figure though, includes currency depreciation impact that inflated the growth by 20%. Since currency denominated expenses are fully hedged at Garanti, The impact of depreciation for these expenses does not affect the bottom line.

Isolating that portion, the net OpEx growth was 62%, suggesting a well-managed cost growth that is below average inflation as guidance. Overall, due to jaws being wide open, meaning income growth exceeding OpEx growth, cost income ended at an all-time low level of 24%, down from 36.5% in last year's same period. Roughly 2/3 of the operating expenses continue to be covered by fee income.

Regarding capital, as can be expected of the outstanding performance that our strategy yielded, we could further strengthen our capital. Net income generation alone added 186 basis points in the quarter and 422 basis points year-to-date to our solvency.

Capital adequacy ratio on a consolidated basis without the BRSA's forbearance increased to 16.2% from 14.1% in the beginning of the year. We currently have TRY 38 billion of excess capital calculated on the consolidated level and without the variances, forbearance. And as a secondary buffer, we have TRY 8 billion of free provisions.

Now let's move on to some of our nonfinancial strengths. In our continuing transformation to the new era, we positioned mobile as the main gateway and reached 12.6 million mobile access customers. This places us as the bank with the highest mobile and digital customer base in Turkey.

We are the sector leader in digitalization. Our main focus on customer empowerment through digital and mobile remains. And numbers clearly actually prove that we are the top choice of the customers with mobile as a main gateway.

Our net active customer growth in mobile had exceeded the growth in digital customers since end of 2019, with a net increase of $4.9 million in a period of only 2.5 years.

Now with more than 86% of total sales going through digital channels, the share of brands and customer transactions have come down to 2.3% level versus 5.8% pre-pandemic level as you can see and the customer transaction breakdown chart on the right hand.

Customer's monthly long-ins had increased a remarkable 139% versus pre-pandemic levels. On digital, our market share speaks for itself with mobile financial transactions market share of 19%. So roughly 1 out of 5 mobile financial transactions in the country go through Garanti. We will keep on using this strength to create value while helping to increase the financial health of our customers.

Now moving on to the update on sustainability on the next 2 slides. At Garanti BBVA our sustainability commitment is to build a strong and successful future. Our parent group BBVA further increased its commitment to -- commitment of EUR 200 billion to EUR 300 billion in financing to combat climate change and support sustainable development by 2025.

And likewise, at Garanti BBVA, we also pledged 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 Sustainability Index. We are proud to emphasize that we are the first Turkish company that could get qualified to be included in this index.

Garanti BBVA has been a carbon-neutral bank since year 2020, and we reached our greenhouse gas reduction target 15 years earlier. We're the first Turkish bank to announce coal phase-out plan and become a signatory to the UN-convened Net Zero Banking Alliance.

We have also adapted PACTA methodology to manage our Scope 3 emissions and to reach net zero targets. We're using the power of finance towards a more sustainable future. Our sustainable finance mobilization in 9 months to date has already been TRY 19.9 billion versus TRY 8.8 billion in 2021.

BBVA has actually tripled its initial sustainable financing target for year 2025 that was set in year 2018, from EUR 100 billion to EUR 300 billion as they had already exceeded that level by now that they did such adjustments.

And in parallel, as Garanti BBVA, we commit to contribute around TRY 150 billion to sustainable finance until 2025. On the governance side, we're recognized with the highest corporate governance rating score by Corporate Governance Association of Turkey.

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

[Operator]

[Operator Instructions] So Valentina has a question. She asks, can you please confirm the short-term 1-year FX wholesale maturities out of the USD 5.6 billion total external debt?

[Recep Bastug, executive]

The answer of your question is as follows: $1.2 billion syndication, $500 million euro bond and $400 million bilateral loan, $200 million DPR in general. This is the breakdown of our short-term external debt.

[Operator]

[Operator Instructions] So we have another question from Girish. He asks, with HR costs growing more or less in line with the inflation, how does the bank retain the critical talent?

[Recep Bastug, executive]

Thank you very much. In this presentation, we have been talking about the numbers. But in general, we don't touch to the point people who generate this number. This is the most important, I think, the equity of this bank, the people. So we pay attention towards our talent. What I can tell about this issue, our main asset is human capital. We value our employees and take necessary actions to keep the turnover rates -- ratios low.

So our turnover ratio has always been below the sector. We have had special programs for [ tailored ] and a turnover ratio for those payment group is quite reasonable for us always there are specific approaches for these people. And again, I want to thank you for this question.

[Operator]

Our next question comes from Alan Webborn.

[Alan Webborn, analyst]

One quick question on sustainability. Am I right that this TRY 150 billion target is new now? Or did I miss that in the first half? So there's a Garanti target of TRY 150 billion of sustainable finance into 2025 in the context of the EUR 300 billion that BBVA is pledging.

Could you just repeat how much of that is done and how much is there to go? And is it relatively easy to get to that target? So just to go through that again would be the first thing.

And the second one was, and clearly, the economic growth background quite good. You've done better than your budget, your revised budget for TL loan growth certainly for this year after 9 months. Given the big events that you've got coming up in sort of midyear next year, I mean at the moment, do you feel your commercial strategy in any way needs to change? Do you become more prudent? Are you concerned about the sort of what happens in 6 months? I mean I know you've been talking about different scenarios, but we're not much more than 6 months away from an election. And I just wondered how you feel commercially you're going to be operating in the run-up to that point.

[Recep Bastug, executive]

Okay. The first part of your question is sustainable lending issue. As you know, BBVA increased their commitment from TRY 200 billion to TRY 300 billion. So in line with BBVA, we have increased our commitment as well. In terms of euro terms, the number would be around EUR 10 billion to EUR 12 billion, our contribution to BBVA's big picture.

But as you know, the investment upside of the community is the crucial issue at this topic. This will be the minimum numbers. I hope we are going to be in an investment period for the economy. So we like to do more. But our contribution to that number would be around EUR 10 billion to EUR 12 billion.

Second question, the loan growth. Our strategy is very simple. Till to election, we like to be in the short run in our commercial lending strategy. So after the short term, after the election, depending on the situation that we are going to price-up we may change our strategy.

But now we are in the short term and also the market is asking for short term. So that is an equilibrium between demand and supply. That is the reason. We are going to see our balance sheet, which has a reasonable duration gap due to this lending strategy. I think that after the election, depending on the new structure in position, we may change our -- we may reshape our strategy.

[Alan Webborn, analyst]

And can I ask where are you on sort of TL duration? And are you looking to reduce it further in the short term? Or are you happy where it is now?

[Recep Bastug, executive]

No, we are very happy with the current situation. It is very comfortable for us. [ We wouldn't exchange it ]

[Alan Webborn, analyst]

Okay. And where are you now, approximately?

[Recep Bastug, executive]

I'm looking to my colleagues. Am I able to say the current number?

[Handan Saygin, executive]

Yes. The current duration...

[Recep Bastug, executive]

I know do you want to not say it or not. 70 days. Around 70 days.

[Handan Saygin, executive]

It could be lower, but...

[Recep Bastug, executive]

70 days. Around 70 days.

[Operator]

We have a question from [ Giran Ferodo ].

[Unknown Analyst]

Can hear me?

[Handan Saygin, executive]

Yes, we you're right now.

[Unknown Analyst]

Okay. Thank you very much for the presentation. My question is about the strategy going forward with regards to the securities maintenance through. So where is the bank with regards to the 50-50 TL/FX deposit split requirement to avoid buying those fixed rate securities.

And how are you pricing the commercial loans? Are you pricing them at the lower end of the rate caps to avoid these securities? And also if you could provide us with some guidance on how you expect lending spreads to evolve in the coming quarters?

[Recep Bastug, executive]

First of all, we are close to 50%, and we have already reached 20% margin rate. So our intent close, we don't see any problem for fulfilling that threshold. The answer to -- second question is answered.

Frankly speaking, I don't want to give more color in front of the competition, which brackets we are [ aggressive ]. It depends on to customer. It depends on the amount of security that we have. So it may change. But we -- as you have seen in our presentation, our core NIM is improving. So you may differentiate our position with the others.

The answer is very simple. But as I said, I don't want to give more color about this pricing. We are growing in a profitable way.

[Operator]

We have a question from Valentina. She asks, can you talk about 2023 outlook? And impact from the new regulations on your financials? Do you see any risk on your forward tracks to guidance?

[Recep Bastug, executive]

It is not easy to announce the '23 guidance as of now because we have been in a volatile environment, as you know. But it seems that until the election, the growth will be on positive side and also -- the negative net interest rate environment will continue.

So through this year-end, we are -- stick with our guidance. There won't be -- there may be some positive differentiation. You will see them, but there won't be any negative issue. Cost of risk NIM and other related important topics, we are on the positive side. You will be seeing much more positive than our guidance. There won't be any deterioration until year-end. For 2023, it is early to talk about it.

[Operator]

Don has a question. Do you expect to close the new loans indication, refinancing in the coming months? Any guidance on pricing?

[Recep Bastug, executive]

We don't have any foreign clients to funding needs, and we have ample foreign currency liquidity around over $10 million. So our syndication rollover will be in December -- 1st of December. The process has not been completed yet. Therefore, I cannot state a level. The pricing level is very simple in Turkish economy.

The big banks price are very close to each other. As you know, our [ up buck ] has just announced the pricing, most probably our price will be around that level as well. But we are not quite sure what will be our appetite with that price. So we have more than 1 month for from the closure of the syndication. We will decide depending on the price level and the demand amount.

[Operator]

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.

[Recep Bastug, executive]

We are very pleased to announce a record high quarterly earnings. We highly value the customer-oriented portion of our performance and are committed to grow with our customers. Even during the pandemic, our team has not lost touch with any of our customers and has proven their agility and adaptability.

I am proud of my entire team for thriving even in this very challenging macro backdrop and would like to thank each and every one of them. So in this opportunity, I would like to thank you all for your continued trust and support. Look forward to our meeting again in the next quarter with, again, another set of great results. Have a great evening.