Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Analysis

Bank Delivers Strong Growth Amidst Inflation

The bank announced another record-breaking results call, underscoring a resilient performance with core banking revenues up 51% year-on-year and net income growth surpassing expectations due to rising efficiencies and improved asset quality. Core net interest income jumped by 93%, driven by increasing loan shares and customer activities, while fees and commissions soared by 121%. Despite inflationary pressures and currency depreciation leading to a projected 70% consumer inflation by year-end, the bank's robust fee growth and trading gains contributed to a return on equity (ROE) of 41%. The capital adequacy ratio remains strong at 16.5%, reflecting the bank's adept balance sheet management. Looking ahead, the bank aims to navigate rising interest rates and maintain robust earnings, with no expected regulatory changes on fees. Additionally, the bank champions ESG initiatives, striving for net zero by 2050 and holding a distinguished place in the Dow Jones Sustainability Index.

Celebrating a Century of Progress and Addressing Inflation

The bank proudly acknowledges record performance, aligning its success with the Turkish Republic's centennial celebration. Despite flourishing, underlying macroeconomic challenges persist, principally inflation, with year-end consumer price inflation expected to be around 70%. The institution expects a rebalance, noting a positive trend in economic policies post-election, aiming for the year-end GDP growth to be approximately 4.5%.

Impressive Financial Performance Amidst Macroeconomic Adversity

The bank continues to maintain notable growth in core banking revenues, a testament to high-quality and sustainable earnings. Core banking revenues saw a 20% quarter-on-quarter increase and a 51% year-on-year jump, while net income growth surpassed expectations due to rising efficiencies and positive asset quality. And even though net interest income surged by 93% quarter-on-quarter, pure trading income normalized. Fee and commission growth climbed impressively by 61% in the same period, mainly driven by payment system business and digital banking advancements.

Leveraging Asset and Loan Growth

The bank has expanded its Turkish lira loan portfolio by 13% quarter-on-quarter, iterating its dominance in lending, particularly among SMEs. Its prudent approach to lending is evidenced by a well-structured loan book with a satisfactory NPL ratio remaining under 2%, attributable to a balanced mix of business, credit card, and consumer loans. Furthermore, deposits remain the primary funding source, indicative of the bank's strong positioning and relationship with its customers.

Effective Management of Capital and Interest Margins

Focusing on capital management, the bank achieved a capital adequacy ratio of 16.5% and core equity Tier 1 at 14.4%, attributing these strong numbers to internal capital generation. The cumulative core margin reached 2.2% after adjustments for additional remuneration, a sign of positive momentum in spite of a challenging interest rate environment. Looking toward the future, net interest margin expansion is expected in 2024 as the bank predicts a more favorable environment.

Proactive Response to Regulatory Changes and Economic Uncertainties

In addressing market risks, the bank acknowledges the irrationality of ongoing promotion competitions, which could lead to increased operational expenses across the sector. Nonetheless, management is confident in its ability to continue delivering strong performance. As for regulatory concerns around fee growth, there is no current expectation of new regulatory actions which can be attributed to the bank's strategy of generating high fee income levels related to market penetration.

Balancing Sustainable Growth with Social Responsibility

Demonstrating a blend of financial acumen and social conscience, the bank engages in initiatives such as improving financial literacy among women and spotlighting its cultural contributions. Its consistent recognition in the Dow Jones Sustainability Index, and the bank's aim for decarbonization confirms its dedication to ESG matters, which are integral to its brand and operational ethos as it embarks on a new century.

An Optimistic Outlook Amidst Normative Transformations

While sharing gratitude for the bank's achievements, the bank sees the broader measures implemented by the economic administration as steps in the right direction. It highlights the significance of customer-derived revenues, hinting at a sustainably strong performance moving forward. The executive's closing words underline a resolved focus to bolster the Turkish economy through continued robust contributions, paralleling the bank's distinguished legacy.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and thank you for joining us in Garanti BBVA's Third Quarter 2023 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]

It's great to be with you at another results call. And this, honestly, it feels great and makes us proud to be able to consistently announce new record results, be a significant player in the economy, especially in the year, marking Turkish Republic's 100th year anniversary. We celebrate full heartedly our century old Republic and our supercharge as we start the second century.

Before our results review, I will brief you on the macro backdrop we're operating in. After the election, at the end of the second quarter, the new economic administration has moved to more orthodox policies and gradual [Technical Difficulty] deceleration in the domestic demand. However, inflationary pressures, both external and internal still remain and pose upside risk to the expected inflation path.

Overall, the current policy seemed to be on the right track to rebalance the economy. Recall that we had already witnessed an above 4% first half growth. Combined with the resilient global growth outlook, we expect the year-end GDP growth to be 4.5% this year. The recent tax hikes, high wage adjustments, the sharp currency depreciation lag pass-through, unfortunately worsened inflation expectations. We now expect year-end consumer inflation to be close to 70%. As for the current account deficit, given higher energy prices and the low growth in our trading partners, we expect $49 billion of deficit by this year-end, alluding to a level around 4.5% of GDP.

Before getting in the numbers, the 9 months recap of our financial performance is that core banking revenues continued to be the main components, the main driver of our profitability suggesting the earnings high-quality and sustainable nature.

We continue to outperform in the fundamental lines like core net interest income, next season commissions, pure trading and asset quality. We call our core banking revenue generation capability, our inherent strength. In the third quarter, we could grow our core banking revenues by 20% quarter-on-quarter and by 51% year-on-year. Thanks to increasing efficiencies and favorable asset quality trends, the net income growth was even higher in the quarter.

Excluding the free provision reversal, quarterly earnings growth was a strong 27% or 30% on a reported basis. The 9 months results suggest a return on average equity of 41% and a return on average assets of 4.5%, a level much above what we anticipated and guided in the beginning of the year. Now before moving on with the components contributing to this result, I would like to walk you through how we fared in terms of core banking revenue generation. Recall that last quarter, we shared with you that there was additional funding costs meaning additional remuneration related to foreign currency protected deposit scheme, the KKM, booked under the trading line.

Adjusted with those funding costs, our core net interest income in the quarter improved by an amazing 93% or TRY 5.5 billion. Pure trading, on the other hand, dropped by TRY 5 billion upon normalization given that lower currency volatility affecting net FX buy and sell activity as well as normalized gains on security and derivative transactions. Net fees and commissions grew by further TRY 4.6 billion or 61% in the quarter. These fundamental banking revenue generation lines combined led to a highly successful 20% growth in the quarter, validating the high quality as well as the sustainable nature of our earnings performance.

Main reason for this high quality is owed to our strategy of growing assets via customer activity. Performing loan share in assets make up 54%, whereas securities share, including some limited regulatory-driven fixed-rate security additions remain at 15%. We started seeing the impact of the tightening measures of the new economic administration. And in the third quarter, there was a noticeable slowdown in loan demand. Yet we could register a net TRY 75 billion or 13% growth in Turkish lira loans bringing the year-to-date growth to 43% and sustain our #1 position in Turkish lira lending. In this period, our [ core interest ] loan growth fared flattish.

On this page, you can see the lower growth pace in Turkish lira loans, especially in consumer and credit cards, whereas relatively higher growth was booked in short-term SME loans. Our performing loans reached TRY 674 billion as of September end. In the quarter, we booked market share gains in Turkish lira loans, Turkish lira business loans and particularly in SME loans, where the consumer loan side as we insisted on reasonable pricing, we lost market share in the last quarter. However, our leading position in consumer loans as well as in credit card issuing and acquiring volumes among private banks still remain.

The current mix of the Turkish lira loan book is that 44% business loans, 31% credit cards and the rest, 25% consumer loans.

Looking on Slide 8. The quality of the loan book of TRY 1.1 trillion, 86% is in Stage 1 and TRY 138 billion or 12.2% is in Stage 2 and even though Stage 2 share got diluted in a currency adjusted manner, there was actually a couple of billion lira of increase in the quarter attributable to the SICR portion. The coverage for Stage 2 remains at a strong 20% level. Our highly prudent staging and provisioning remain.

As for the NPL on the next page, net NPL inflow in the quarter remains very much muted with only TRY 248 million, given the supportive growth environment and strong collections. NPL ratio further improved to under 2% while our total provisions on balance sheet, including the write-down portion is more than TRY 60 billion. This is the highest provision level in the sector and represents a total cash coverage of 5.3%. We can see on the next slide how this translates into risk costs or provisions. Net cost of risk as of 9 months of the year ended to be 55 basis points. Isolating the earthquake-related portion in the prior quarters, quarterly provision increase was 54%, relating mainly to the increase in the SICR portion of Stage 2. Despite our continued high prudency in the provisioning, overall, our net cost of risk is very better than our guidance that was expected to be around 100 basis points.

On the funding side, deposits dominate the funding sources, funding alone 3/4 of the assets. All the funding sources as per our legacy are closely and actively managed and delivering superior margins. At Garanti BBVA, demand deposits alone fund more than 30% of the assets. This is a clear reflection that where customers choice as their main bank. Naturally, this strength contributes quite positively to free funds and interest-earning assets, which fares about 40%, a ratio that is well above the average in the industry and key financial differentiation in terms of margin outperformance. Borrowing share in the funding assets, on the other hand, stand at 6.7%, total external debt is now $4.1 billion, and you can see the breakdown of our foreign [ debts ] in the pie chart below. Securitizations make up nearly half 21% of the external debt is in the form of syndications.

Of the total foreign currency debt of $4.1 billion, $1.4 billion is due within the year. Against that, we have a foreign currency quick liquidity buffer of $4.7 billion. In line with the regulations, dollarization efforts continued. In Turkish lira deposits, even though quarterly growth seems low, or nil actually due to the currency difference accruals of the foreign currency protected Turkish terms deposits. Adjusted with the accruals, there was actually 12% growth in Turkish lira time deposits. Turkish lira demand deposits in the period reached TRY 150 billion. Despite dollarization efforts, foreign currency deposits remained flattish in the quarter, due to customers seeing us as safe haven, especially with foreign currency demand deposits, exceeding $17 billion.

The rising interest rates, given the imposed rate caps have carried loan prices to more satisfiable levels and led to normalization in loan-to-deposit spreads. Accordingly, Turkish lira core spreads, meaning loan-to-time deposits, adjusted with the foreign currency protected deposit schemes, additional remuneration could improve in the quarter by about 400 basis points on average. Its reflection on the core margin was a positive 135 basis points increase quarter-on-quarter to 2.4% from its all-time low level of 1.1% in the second quarter.

CPI impact on margin was also up as we revised our CPI estimate in valuing the linkers to 55% in the quarter from 35% that we used in the first half. This brought our 9 months to date CPI estimate used in valuation to 48%, which is a level that is, at the moment, lower than the peers. However, we will adjust -- we will all adjust to the same inflation reading level by year-end.

In the meantime, we continue to manage the balance sheet to the rising interest rate environment and aim to reduce the duration gap. On a cumulative basis in the 9 months, the core margin drop was 204 basis points. For this line, our guidance was that we would expect to see around 185 basis points contraction by year-end. If not, we're faring in line with that guidance. The real look into core margin, meaning including the extra remuneration portion that is under trading, brought our cumulative core margin to 2.2% at the end of 9 months.

Moving on to the performance in net fees and commissions, we could grow our net fees and commissions by 121% year-on-year. Higher growth was seen in Payment Systems business, helped by the rising interest rates and our #1 rank in both issuing and acquiring volumes as well as us serving the highest number of credit card customers. Our 9 months-to-date commission income alone neared TRY 27 billion. Other contributors to this robust fee performance are definitely the strength in relationship banking and digital empowerment contributing to not only grow our active customer base, but also penetrate further the existing customers. Our digital banking customers are quickly rising near $15 million, $14.3 million in this was active mobile banking customers at end of September.

In year, recall that our growth guidance was around average inflation, our performance so far suggests there is upside to that guidance. As for the operating expense performance on Slide 15. Quarterly OpEx growth was 14% and an annual growth was at 110%. Of this 10% related to the currency without impact to the bottom line due to the fact that portion gets hedged and 4% related to the earthquake donations. Adjusted figure of 96% annual OpEx growth suggests that we fare in line with our OpEx growth guidance of 100% for the year.

Our well-managed cost performance manifests itself in the best-in-class efficiency ratios, which can be listed as cost/income ratio of 35%. Fees coverage of operating expenses ratio of 69% and OpEx average assets of 3.1% as well as having the highest core banking revenues per branch and per employee figures.

As per capital, we could further strengthen in the quarter's with mainly our internal capital generation capability. Without the BRSA's forbearance, our consolidated capital adequacy ratio was 16.5% and our core equity Tier 1 was 14.4%. The foreign currency sensitivity on our capital adequacy ratio is that for every 10% depreciation, it is 39 basis points negative. Wrapping up the financial part of the presentation and inform you as to where we stand relative to our beginning of the year guidance is that in Turkish lira loan growth, we may end up lower than what we anticipated in the beginning of the year due to the regulatory growth caps. In other guided lines, we don't have any revisions. It is just that the 9 months ROE return on equity suggests clear upside due to robust fee growth, high trading gains and better-than-expected asset quality.

Now moving on to our nonfinancial value creation. We take pride in being the first bank from Turkey to declare interim decarbonization objectives for the year 2030, with the ultimate aim of attaining net zero by 2050. We're proud to say that our efforts on ESG issues are recognized by various credible international agencies as we're the only company from Turkey that has been in Dow Jones Sustainability Index for the eighth consecutive year with a current score of 83, which is actually the fifth highest in the global banking sector.

Our success, which is evident in our leadership in brand power can be attributed to not only the robust financial foundation, but also to our unwavering dedication to creating value in ESG matters, the commitments that forms the cornerstone of our broader social initiatives. One notable social initiatives champion is the women who know their accounts project. The program aims to empower women by providing them with essential financial literacy skills, ultimately fostering economic independence and financial inclusion.

In this program, we're collaborating with financial literacy and inclusion association as well as the foundation for the support of women's work. These are 2 of the top nongovernmental organizations in their fields. As part of our enduring commitment to community investments lately commemorating the Centennial of the Turkish Republic, the photographic exhibit titled 100 years ago, 100 years later, Mustafa Kemal Pasha's path to the Republican photographs is being showcased at our cultural platform, [indiscernible].

Investing in our community expands to our valued employees whose happiness and well-being are of high importance. This commitment to our team satisfaction was recently acknowledged to our receipt of the 2023 [ UED ] awards as the #1 company and finance sector that young people would like to work for. This and our strong performance and employee loyalty pools are testaments to our ongoing dedication to creating a supportive and rewarding work environment.

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

[Operator]

[Operator Instructions] Hello again for the Q&A session. Due to a technical issue, we will only be able to accept all your questions. [Operator Instructions] The first question comes from Waleed Mohsin.

[Waleed Mohsin, analyst]

Three please questions from my side. Number one, if you could share some insights on your early assessment of how we should think about 2024 especially in terms of your net interest margin expectations. If you cannot share 2024, perhaps some thoughts on how the fourth quarter is faring so far, especially in terms of net interest margin, that will be extremely helpful.

Secondly, on asset quality, pretty robust display throughout the year. But I was wondering given where rates are, with the recent rate hikes, some of the pass-through takes time any particular sectors where you're seeing early signs of stress or perhaps the impact of rates flowing through, so your thoughts on where we could see some let's say, stress or impact would be extremely helpful.

And my third and final question is on the fee line. Again, a very solid fee growth from your side. When we look at the sector so far, the three banks that have reported, all three have shown very strong quarter-on-quarter and year-on-year growth. I was wondering if there is any risk of any regulation around fee especially given rates are going up, so that's impacting customer repayment or can impact customer repaymentability. And then fee, obviously, is also adding to the customer burden. So is there any risk around regulatory action on the fee line?

[Recep Bastug, executive]

Thank you, Waleed. Let me start with the first one. Net interest margin performance. In 2023, the banking sector operated with negative margins. We expect margins to become more positive towards the year-end and continue to be in the positive territory in 2024. Thus, we expect to see net interest margin expansion in 2024. What differentiates us from the sector is our performance in net interest margin and mainly [indiscernible] interest of margin, the reflection of core banking strength and our management skill shows itself core banking revenue generation capability. So it is our strength coming from penetration to the market. The second question, asset quality.

As of now, in 2023, we don't have any problem as you see the cost of risk are at very reasonable level. But with the rising interest rate environment, we expect some deterioration on the retail side in 2024. But this deterioration wouldn't hurt the banks, the balance sheet and NPL ratio. So it will be manageable. On the corporate side, for the past 3 years, they were able to book quite a lot of gains and build very strong capital. I would like to add that in my 24, 25 years experience, I have never seen corporates to be this deleveraged. So due to this positive impact, we don't expect corporates to have any issues in 2024, maybe in 2025, it's going to happen. So we will have time to talk about it related to asset quality.

And the fee regulation. No, I don't expect anything because what we have generated is the result of very strongly higher related fee income levels. I think there is no room for new regulation, and I don't expect any regulation.

[Waleed Mohsin, analyst]

Got it. That's extremely helpful, as always. Maybe one just follow-up. So in terms of, let's say, risks or factors that you are closely monitoring within the banking system. Anything that we should be mindful of? Because given the normalization in rates or the progress towards rate tightening, the banking sector seems to be navigating that quite comfortably. So your thoughts on key risks at this moment will be extremely helpful.

[Recep Bastug, executive]

What my concern is the promotions. I underlined this issue in our earlier sessions, I think that in the market, this promotion competition, it is not logical. This is not a big risk, banks can manage it, but the P&L impact of these promotions, we are going to see more deterioration in the OpEx in the sector. But this is in between for the big banks. This is not related with small banks.

And the second issue is the margin management. Today, still, all the banking sector are in negative margin environment. I think there really improvement, but this improvement will not be so sharp. That is the reason the second -- this margin management is the second issue, but these are not too big concerns for us. These are the main topics that we are going to focus on in 2024.

Answer to your question, but not too much risk. I want to underline it.

[Operator]

The next question comes from [indiscernible].

[Unknown Analyst]

Thank you for the presentation as well. I wanted to ask about your NIM guidance, you mentioned you would expect the NIM to expand next year, if I understood you correctly. And in that context, I wanted to ask you where you would see the inflation next year because inflation obviously pushed up the margin a bit, I think, this year and sort of constitute a high base in '23. So I was wondering what kind of inflation assumption goes into that preliminary guidance. So that's the first question. And the second question is I was wondering if you could quantify the impact of increasing interchange on fee growth, rather, I should say, in the third quarter.

[Recep Bastug, executive]

So the first question, CPI next year, the average CPI will likely be around 55%. And this year, it will end 55% and the average will be around -- average will be around 50%, the year-end number will be 69 to 70. Next year, year-end number, as you know, the [indiscernible] inflation target is 33%. Our expectation is one notch above that level. This is our expectation. So the year average will be around 65% to 70% levels, but the year-end numbers is one notch above the medium-term plan.

Your second question, we are just underlying our core [indiscernible] that is the reason maybe this is our difference. And the fee growth and interchange rate -- this interchange rate, I think this level is not satisfactory in terms of monetary tightening policies. So we expect more increases [ straight ] interchange fees. In general, with the key performance of the bank, I think you are going to see very similar performance as you see in the third quarter. Fourth quarter will be very similar to third quarter.

[Operator]

Our next question comes from [indiscernible].

[Unknown Analyst]

To regulations. As per last week's sort of regulation adjustment, it seems that there is not much venue left to buy out these bonds in terms of [indiscernible]. So I wonder what you think about your bond portfolio, will there be need to buy out more bonds in the remaining quarters and in terms of the regulations, obviously, the regulator would like to see more Turkish lira time deposits to gain share within the overall bucket. Will you be in a position to pay off 8% commissions in terms of the rollovers? Or will it be a sort of easier process for you not to pay commissions, not to buy bonds rather than rolling the DDM deposits.

[Recep Bastug, executive]

The total amount in the third quarter, TRY 16 billion fixed rate security, we bought due to regulatory issues. This quarter, as you know, with the regulation change was 2 weeks ago. So according to the regulation with this structure got totally changed. So the commissions will be subject and there won't be any security issue according to new regulations. So what we performed in September -- just little bit September, there will be some regulatory purchases, but it will be very, very negligible, maybe 20% of total, what we bought in the third quarter. So TRY 4 billion, maybe TRY 5 billion in September. We needed to buy. After September due to regulation, there won't be any regulationary issue for securities. Now the name of the game is commissions and details of the commission calculation is not clear yet. We are going to get those formula in coming days. So that is what we have in the portfolio is around TRY 60 billion fixed rate security and that is it. We don't need to buy any other security.

[Unknown Analyst]

And as a follow-up, do you find it easy to [indiscernible] convince depositors, especially the ones who convert from FX to FX [indiscernible] Turkish lira accounts to Turkish lira deposit. Do you think the latest policy rate hike would induce more deposit rate competition would lead higher rates in the past arena.

[Recep Bastug, executive]

In the market, deposit rates are in between 50% to 40% levels. So these are very attractive rates for deposit holders. Under these circumstances, with this protected scheme, we are able to convert 5% of redeemed amount and this is our track record or very historically during the last 3 months, we have been converting 5% of redeemed amount of protected scheme. So the reason behind this one is the high-yield deposit rates. It is up, as I said, 40%. That was 40%, 45 to 50%, depending on maturity, depending on the amount. With these rates, we are able to convert 5% monthly, so it was another threshold if we meet these targets, then we don't need to pay any commission. That is the reason we -- as a bank, we are always trying to be over 5%. And up until now, we are above that levels.

[Unknown Analyst]

Thank you very much. Very helpful.

[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]

Thank you all for your participation. This quarter is marked by the gradual normalization steps taken by the new economic administration. These steps are in the right direction and important to restore the confidence. Naturally, there is a process, and we are just at the beginning of it. As a bank, we are actively managing our balance sheet parallel to this process, the fundamental factor that distinguish us from our peers is in the financial results is that a significant portion of our revenues come from customer. And for this reason, they are sustainable. Yesterday, we celebrated the 100-year anniversary of our Republic. We take pride in serving and contributing significantly to the Turkish economy over the last 77 years, as we start the new center of Republic, our contribution will remain robust. This is our utmost priority and duty looking forward to meet you all again with another set of stellar results. Thank you very much.