Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Transcript 2019-Q4

[Handan Saygin, executive]

[Audio Gap]

with the support of declining funding costs in the last 2 quarters, we had a clear beat to our flat core margin guidance for the full year. To give you more insight on the significant core margin expansion of the last quarters, from September to December, our monthly outstanding Turkish lira time deposit cost drop was about 550 basis points versus our Turkish lira loan yield drop of a limited 300 basis points. This is, as you can relate, is due to the longer duration of our Turkish lira loan book, creating more resilience on loan yields in a lower interest rate environment.

The cat chart below demonstrates this point well. In the core margin expansion of 2019, loans yields contribution was a positive one, 73 basis points, whereas the deposit costs on a cumulative basis were the suppressing component.

Please recall that in the first half of the year, Turkish lira time deposit cost and the book was around 21%. Following the rate cuts, it dropped significantly, and as of December end, Turkish lira time deposit cost went below 11%. Yet on a yearly basis, 2019 average was higher than 2018 average.

This picture likely will reverse this year. Meaning, in year 2020, we expect positive contribution to margins from deposits and the suppressing component will be, this time, the loan yields, but at a likely slower pace.

To demonstrate better and show you our track record in margin management, let's see the chart on Page 8, showing the margin trend since 2015. On the upper half of the page, you'll see the evolution of both the core margin and the CPI contribution to our margins. The performance of the CPI, in other words, our hedging instruments, is well verified and serving the purpose at times of volatility.

In 2019, as previously mentioned, we were able to compensate the lower CPI income contribution with a core margin expansion of 80 bps. At the bottom half of the slide, you can see that the expansion in both Turkish lira and foreign currency spreads continued by year-end 2019, and the start to 2020 was the peak level of 2019.

Let's now move on to looking at the loan book classifications in more detail. We preserve our prudent approach in staging and coverage levels. You can see on the loan portfolio breakdown that TRY 37.7 billion or 14% of the loans are classified as Stage 2 loans. 36% of Stage 2 loans relates to significant increase in credit risk, SICR portion, the quantitatively assessed portion per IFRS 9 model outcome, is based on internally defined type threshold, as many of you are familiar. And in here, 86% of the files are not delinquent at all, and the rest being less than 30 days past due. So given the low-risk nature of these files, the SICR coverage is only 2.7%. The restructured files are 32% of Stage 2 and watch list is 27%. Past due portion is 5%. There has been some movement to Stage 3 from this bucket. Since the ones moving to NPL buckets where the highly covered ones, it's diluted slightly to Stage 2 coverage to 10.5%.

However, our total cash coverage ratio remained high at 6.1%. And these are no -- I mean -- and when we look at the sectoral breakdown of the Stage 2, we see that there are no significant changes in terms of sectoral breakdown, other than 1 energy loan moving to NPL.

On next page, we can clearly see the quarterly NPL inflows. NPL inflows started to improve after its peak level in 3Q '19. In this quarter, we benefited from the new BRSA regulation that allows to move highly covered loans to off balance sheet. All in, quarterly net NPL inflow realized was TRY 1 billion, and our NPL ratio ended the year at 6.8%, a level that is in line with our guidance of less than 7%. As a side information, leasing and factoring NPLs had 22 basis points impact on our reported 6.8% NPL ratio. So excluding those, it would have been 6.6%.

With the anticipated and budgeted NPL inflows and the respective coverage increases, the cumulative net cost of risk ended the year at 249 basis points when excluding the 23 basis points currency impact, which is 100% hedged and has no impact to the bottom line. Our cumulative net cost of risk is also totally in line with our guidance of less than 300 basis points. Our fees and commissions growth ended up to be much better than our initial guidance of low teens.

On next page, you can see that we recorded an annual growth of 23% on top of the highest pace in the sector. This is largely due to better-than-anticipated growth in money transfer fees, payment systems fees and insurance fees. Better-than-anticipated growth in the payment systems fees were largely attributable to the high interest rates that prevail for a big portion of the year. Such growth, though, won't be repeating this year due to the lower-rate environment and the recently imposed cap on merchant fees. Recall that the merchant fee cap got effective as of November 1, 2019. We target to keep our payment systems fees flat this year and generate the growth in the other fee categories, as we guided. Notice also the digital channels' significant contribution to the noncredit-linked fees, it is 45%, and almost 1 out of 2 products sold is end-to-end digital at Garanti.

Now moving on to operating expenses. Operating expenses remain under control and at utmost discipline. Year-on-year OpEx growth recorded was 18%. This growth includes couple out-of-budget and "out of our control" expenses, namely the increase in the savings and deposits insurance fund limits and the increase in premium as well as the elimination of 5% incentive from government that we used to receive for our private pension fund. Now these 2 items added 3 percentage points extra to our OpEx growth. So excluding these out-of-budget items, our OpEx growth came in line with our guidance and was actually even below the realized average 2019 inflation rate of 15.5%.

Since revenue growth was higher than the expense growth in 2019, we were able to keep positive [ growth ] and further improve our efficiency. Cost income ratio was realized at 39.4%, and this ratio compares very favorably, not just in Turkey, but also to Bloomberg, emerging Europe's regional banks' average.

Now let's also touch base on our solvency, on next page. Our capital adequacy ratios remained strong and well above the regulatory requirements with a consolidated capital adequacy ratio of 17.8% and a core Tier 1 ratio of 15.4%. Taking into account the minimum requirements on a consolidated basis, we have around TRY 18 billion of excess capital. This excess capital amount does not even include the TRY 2.5 billion of total free provisions we had set aside over time. So if we had -- if we were to include those -- such provisions, our capital adequacy ratio would have been near 18.5%. The contributors to capital movements can be seen in the cat chart below. The biggest positive contribution to the ratio in the last quarter was, again, the net income; whereas the negative contribution came from the 5% currency depreciation in the quarter and the market and credit risk due to the increased lending activity.

Overall, in the year, we improved our capital adequacy ratio by a strong 130 basis points.

So to sum up, once again, we continue to deliver what we guided in the beginning of the year. Our track record proves that, regardless of macro conditions, we either beat our guidance or deliver results in line.

Now this concludes our presentation. Thank you for listening. We can now take your questions.

[Operator]

[Operator Instructions] We are taking the first question from Deniz Gasimli, Goldman Sachs.

[Deniz Gasimli, analyst]

Just 2 questions from my side. I mean want to get your concerns on margin trend so far into the year. I mean your fourth quarter margins did really well, and you're guiding for around 70 to 80 basis points core margin expansion in 2020 as well. So I mean, I just wanted to understand what are your kind of preliminary thoughts about how margins are trending so far given that deposit costs have come down meaningfully at the end of 2019? Do you see them staying at this levels, especially that we may see more rate cuts? Or do you see that now that banks are planning to grow more significantly in 2020, there might be some upside pressure on marginal deposit rates? That would be my first question.

And the second question, when you were guiding for 6.5% NPL ratio for 2020, what's kind of your -- is there an expectation you have for the amount of write-offs that you might do as per the new BRSA regulation? And if there is, can you -- I mean, what's the budgeted kind of amount of write-offs that you're planning to do that brings you to your NPL target?

[Technical Difficulty]

[Recep Bastug, executive]

Sorry, sorry, do you hear me now? Because there is some problem here. We -- I'm not sure whether you heard my answer or not?

[Deniz Gasimli, analyst]

Sorry, yes, we can hear you now, but not before, yes.

[Recep Bastug, executive]

Okay, okay. Let me start from the beginning. So my answer to your question, the net interest margin will continue to go up in the first quarter. So it will hit a high at the end of first quarter, then it will start to diminish in a slightly way. So by year-end, we will be around this level in net interest margin.

So in terms of cost management or in cost trend in time deposits, in 2019, it started with August to the year-end roughly 500 or 600 basis points, more than 500-basis-point decline we have had in cost of deposit. It will continue, but it will not be in the same speed. So it will get a little slower, but it will continue, still there are improvements. There are improvement. On the other side, decrease in the loan yield will continue. So we will have positive margin. We don't have any problem with net interest margin management. But as I told you, it will be a little lower than what we will get in the first quarter. This is the first part.

The second one, if -- yes, there will be some write-off or write-down in NPL. If we don't do it, under normal circumstances, our NPL will be between 7% to 8% level. But after those write-off or write-down numbers, it will be around 6.5%.

[Operator]

Taking the next question from Gabor Kemeny, Autonomous.

[Gabor Kemeny, analyst]

I have a question on asset quality. It seems that there were some moves between -- within the Stage 2 loans between the restructured and watch list exposure. It looks like the share of restructured loans has increased quite significantly. Can you elaborate a bit on that and perhaps on the likelihood of some of the Stage 2 exposures moving to the NPLs in the next few quarters?

[Handan Saygin, executive]

Gabor, I mean, in Stage 2, actually, between stages, there may be moves from Stage 1 to Stage 2, Stage 2 to Stage 3, and also within Stage 2 among the buckets of watch list, restructured and past due, it's normal. But this time, I know the move seems to be big, but that is largely attributable to the fact that there were actually 3 large files that were already restructured but tracked under watch list. And following our recent internal audit review for Stage 2, in the last quarter, we decided to move them to the restructured bucket where actually they belong. So there will be no further such files actually. There are not such files left in watch list bucket. So right now, the new classification is the correct one.

[Recep Bastug, executive]

So Gabor, there is no change with the total Stage 2 number. That's why it was -- that restructure was done in 2018 one, and the second one in 2019. Frankly speaking, we forgot to put it to the right place. Our internal audit warned us to change the place from watch list to restructured portfolio. There has not been any change in the total number, just the reclassification of those 3 files in Stage 2.

[Handan Saygin, executive]

Yes.

[Gabor Kemeny, analyst]

And there was no meaningful change in the coverage of these exposures?

[Recep Bastug, executive]

No, no, no. Everything is as it is.

[Handan Saygin, executive]

Just reclassification.

[Gabor Kemeny, analyst]

And just a quick follow-up on the margins. Can you remind us where you are -- where are you pricing the lira time deposits these days? And where is the back book pricing relative to that?

[Recep Bastug, executive]

Max, max, we paid 10%. That is max. And 90%, 95% loan portfolio is priced less than 10%, and the existing average is around 950.

[Handan Saygin, executive]

They were similar digits.

[Gabor Kemeny, analyst]

Yes, actually quite similar. Okay.

[Operator]

The next question is from Alan Webborn, Societe Generale.

[Alan Webborn, analyst]

I think you mentioned in your introductory remarks that you've had -- that corporate loan growth would accelerate in future quarters. Is that something you think you're going to see in the first half of the year? Or do you think that's more sort of second half? I'd just be interested to see what you think because I felt the idea was pent-up consumer demands and working capital and then maybe more investment loans in the second half of the year. And I just wondered how you feel today about those sorts of trends. Second question was just how you feel the competition is? Clearly, the Q4 was a good quarter, more demand, cheaper rates. How do you feel the competitive environment is? And where most of -- where is the strongest competition coming from in your view? And the third question was, if I looked at the numbers correctly, there was another TRY 150 million of free provisions taken in Q4, I think. But I mean, when do you stop taking those? That would be interesting.

[Recep Bastug, executive]

Sure. The first question for -- first answer to first question, yes. As we noted in the operational guidance, the trend from the retail side started. It started, I think, at the end of September. Then, our anticipation was to get the similar signal with 3 to 4 months lag. Now we started to feel it. But this demand doesn't show that there is a strong investment appetite in the commercial and corporate side, but it -- the signal says that it is coming. In the second half of the year, I think we will get some reasonable investment demand from that side. That is the trend.

Competition, last year, there was a harsh competition in state -- with the state banks. So their growth was much more than higher than us and also than other private banks. But this year, competition is reasonable, so everyone in the market is doing it in a logical way. So I don't see any problem this year, there won't be -- so -- differences between growth rates of the bank in the sector.

The third one, yes, we are strong enough to allocate some free provisions that we don't give any address for those free provisions. Where do we start, stop, we don't have any strategy related with that. It will stay in there at -- with this amount. If there is any necessity, we can use it. But frankly speaking, it seems that there won't be any necessity. It will -- it may stay around that level, but we want to keep that amount without touching because it is kept there for rainy days.

[Operator]

We have a question from Simon Nellis, Citi.

[Simon Nellis, analyst]

Just 1 question kind of on the risk of regulation going forward. You had very strong growth in GPL lending in the quarter. And I mean, clearly, the regulator is trying to rein back consumer and promote more corporate. I mean are you worried that some kind of regulatory macro prudential regulation could come into play to kind of restrict your growth in the consumer side versus corporate? And then on the fees, I think you mentioned back in January that the regulator was kind of collecting data on business banking fees. Is there any update on whether they might be closer to imposing any regulation there?

[Recep Bastug, executive]

Okay. The first one, our growth target for 2020, the business side is higher than the retail side. So the composition in our portfolio will not change dramatically. As you remember from the presentation, 30% business side, 30% retail and 40% foreign currency. There won't be too many changes between business and consumer side in terms of percentages. Foreign currency side, don't know, it depends on the [ provisioning ] level. So our appetite in business lending is much more than retail. But retail is a very profitable business to Garanti Bank. We don't stop growing there as well.

The regulation side, yes. Currently, CBRT is working on a new regulation on business commissions. There is a high probability it will be finalized within the first quarter. However, the purpose of regulation would be to prevent unreasonable pricing in the sector. At Garanti BBVA, our commission rates are always rational. Therefore, we wouldn't expect any impact regarding these regulatory changes. So we don't see any reason for us to change our targets. We don't expect any hit from here.

Already, we have seen sizable impact from regulatory changes from payment system and other issues. But from the business life, there will be something, but we are already in line with the coming regulations because we are doing the things in a rational way.

[Simon Nellis, analyst]

Okay. So -- and then just on the consumer lending. So you don't think -- you think the current minimum reserve requirement restriction is enough and that the regulator probably doesn't have to do anything else to kind of promote corporate lending over consumer?

[Recep Bastug, executive]

I think retail side has already been regulated, so I don't see any problem there.

[Operator]

In fact, 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 for your attendance. Three weeks ago, we have been together with you to share our guidance, and we hope that this year will be a better year. We are confident with the economy. We are confident with the sector, and we are very confident with our performance throughout the year.

With this confidence, we will continue to support the economy by meeting the increasing demand with our knowledge, experience and strong presence in the sector. We will maintain our leadership among the private banks.

Our strong capital and profitability likely will remain as the main differentiator for Garanti among the competition. I hope to be with you with better results in coming quarters. On behalf of Garanti employees and -- we wish you all a pleasant evening. Thank you.