Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Transcript 2020-Q4

[Operator]

Hello, and thank you for joining us in Garanti BBVA's 2020 Financial Results Webcast. Our CEO, Mr. 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]

[Audio Gap] kind of a year we went through in our geography in terms of macro and regulations.

So on Slide 2, notice the annual growth over the quarters. The global pandemic hit Turkey in March right when we were on a strong growth momentum. It resulted in a severe GDP contraction in the second quarter. Authorities reacted strongly using both conventional and unconventional measures to tackle the spillovers of the shock. But near 10% of GDP support was provided to the economy, where the banking system played a key role disbursing Credit Guarantee Fund low-cost liquidity.

Regulations such as payment deferrals and some forbearances helped the sector to continue [indiscernible]. Asset ratio, whilst one of the milestones at that time to boost lending, total Turkish lira lending growth the sector booked in the year exceeded 40%.

Following these expansionary policies and other normalization steps after the lockdowns, a rapid recovery was attained by the third quarter. With this uplift, fourth quarter growth was managed to tone down a bit. And actually, we now expect even higher than our initial projection of 1% GDP growth for Turkey. Our most recent calculations point to a GDP growth near 2%. This will highly likely make Turkey register one of the highest GDP growth figures in the world in such a year.

On the other hand, the expansionary policies igniting rapid recovery in domestic demand resulted in worries about external sustainability in the Turkish economy. [indiscernible] backed by uncertainties in global financial markets resulted in sizable portfolio outflows from the emerging economies, especially in the second quarter.

Rapid depreciation in currency and faster-than-expected increase in commodity prices pushed up prices further, and we ended last year with a consumer inflation at 14.6%. Current account balance reverted fast from a surplus to a deficit first due to extraordinary factors linked to the COVID such as poor export and tourism revenues; and secondly, strong domestic demand and high gold imports.

Net gold imports increased to a historically high level of $20 billion for the year. However, excluding net energy bill and gold, the balance still remained in surplus.

On the monetary policy side, the Central Bank started to tighten the monetary stance as of the end of July actually. The new economic management team that took office early November switched to run rate policy and provided a very strong commitment to remain tight for a long period time to fight against inflation. They also reverted to previous regulations boosting lending, such as the abolishment of the asset ratio and CBRT's good bank criteria.

On the fiscal front, the rapid recovery in indirect taxes, backed by the strong domestic demand, helped to compensate some of the pressures on expenditures, and budget deficit worsened to only 3.5% of GDP at the end of the year from 2.9% in 2019. Therefore, even with this deterioration, public debt to GDP ratio remained under 40%, meeting the Maastricht criteria, remaining as an exception in the world.

Now let's look at our financial results on next page and see that even in an unprecedented year like 2020, our sustainable revenue generation capability yielded a pre-provision income growth of 30%, taking our pre-provision income to near TRY 21 billion level. This strong level is a record high, ensuring the sustainability of earnings growth potential in coming years.

In 2020, the pandemic-related rising risks and the uncertainties necessitated higher provisioning. Thankfully, we could not only strengthen our loan loss provisions, but also could set aside a total of TRY 2.15 billion of free provisions, bringing the total in the balance sheet to TRY 4.65 billion.

Even with this significant provisioning, we could book a net income growth of 2% and deliver a top line profitability with ROE of 11% and an ROA of 1.3%. If we had not set aside these precautionary free provisions, our ROE and ROA would have been 14.4% and 1.8%, respectively.

Our solvency ratios, on the other hand, remained robust at 16.9% for capital adequacy ratio, and this is without the BRSA's forbearance -- currency forbearance implications. If we were to take into account the full forbearance, our capital adequacy ratio would have been 17.4%.

Let me now walk you through the components of these results, starting with the assets on next page, this page. Assets of the year-end reached TRY 541 billion, representing an annual growth of 26%.

Looking at the mix. Loans continue dominating, and actually its share went up to 62% from 60.5% a year ago. This is the customer-driven portion contributing to our sustainable revenue stream -- revenue generation stream. Securities' share in assets, on the other hand, remained below 14%.

In the last quarter of the year, our Turkish lira lending growth was 6%. This rose our annual growth to 33%, to a well above level than our revised guidance of 25%. Actually, majority of the last quarter got booked in December at relatively higher yields, so we can effectively defend the continuing margin pressure.

As for foreign currency lending, the year ended with further shrinkage as guided. The quarterly growth in foreign currency lending is mainly due to parity.

On next slide and the pie chart, you can see that there is slight weight increase on the business lending versus consumer. In the last quarter, the increased mobility restrictions and higher rates moderated, especially the demand on the consumer side. Consumer lending was 4% versus 7% in business lending. With year-to-date growth of 40% in business, 28% in consumer and 21% in credit cards, we gained market share across the board among the private banks.

On the funding side on the Slide 6, notice that demand deposits, time deposits and deposits like Turkish lira bonds issued and merchant payables fund nearly 70% of the assets. And this alone easily funds the loan book, suggesting a loan to deposit ratio under 100% and even close to 90%. Notice all that near 30% of the assets alone were funded with demand deposits versus 21% in the beginning of the year, suggesting an even more supportive funding mix as of the prior year.

Looking at the other liabilities, notice the portion, borrowings, came down to 12.2% from 13.9%, since we've been shrinking in our foreign currency loan book. In parallel, we have been carrying down on our external debt on average by 67% a year since 2013. So as of 2020 year-end, our total external dues were $8 billion against a foreign currency quick liquidity buffer that reached $12.5 billion. The year-to-date increase in the foreign currency liquidity buffer is mainly due to the freed reserves upon the ease in the Central Bank's reserve requirements.

Liquidity coverage ratios you see here on the bottom right-hand side for total and foreign currency also suggests that our liquidity is well above the required minimums.

Looking in more detail at the deposits on Slide 7. Notice the 9% growth in Turkish lira deposits in the last quarter took our Turkish lira deposit growth for the year to 26%. The last quarter's growth was slightly above our usual pace. However, we chose to do this so that we keep the balance sheet composition balanced, especially given the higher Turkish lira lending growth.

This opportunity proved to us once again that when we start paying near the market rates for short term, actually large or mid commercial time deposits, customers prefer Garanti BBVA. Even though this strategy move has slightly diluted the weight of retail and SME deposits and TL and FC to 73% and 77%, respectively, our overall strategy to grow in mass in lower ticket deposits remain.

Our historically sustained well above the sector level demand deposits grew by 76% in 2020 on top of the 41% growth in the prior year. Even though more usual growth in total demand can be explained with currency for the foreign currency demand deposit increase, we, as Garanti BBVA, would still outperform the sector by large. And our strength continues with our high share of demand in total deposits.

In the quarter, foreign currency deposits grew by 4% in dollar terms, taking the year-to-date growth to 6%. Recall that we had seen a peak in dollarization and gold accumulation during the year. Now this funding strength says you may also expect to contribute positively to our highest in sector margin performance. So let's now see the margin performance in detail.

Increasing funding costs continued to take its toll on the core NIM in the quarter. However, CPI linkers came to the rescue once again and limited the suppression. Net interest income, including the swap costs, could remain resilient despite the significant increase in funding costs in the quarter. Notice the quarterly net interest income revenues on the right-hand side that the suppression is limited to less than TRY 100 million or only about 2% for the quarter. We were able to book TRY 5.6 billion of net interest income in the quarter versus TRY 5.7 billion in the third quarter.

On a cumulative basis, our full year margin was up by 21 basis points for the year. It is below our full year guidance of 50 basis points expansion. However, a portion of the mix is due to higher loan volumes, especially on a consolidated basis, because bank-only margin expansion was 35 basis points. With the impact of foreign currency assets inflating the denominator and also due to the fact that bulk of the last quarter growth is accounted in the denominator, while their revenues will accompany in the coming period.

Also taking daily interest earning averages -- asset averages in the denominator versus the average of period, as in time, explains part of the variance. Nevertheless, 5.4% margin for the year remains to be the highest among the peers. And the high-yielding volume we booked at year-end will be supportive of our currently squeezed loan to deposit spread and most likely allow us to deliver an exceptional and positive spread in the first quarter, even though the trough in margin is expected to be seen in the first quarter.

Moving now to the topic of asset quality on Slide 9. Notice in the gross loan breakdown and the increasing breakdown, the increasing bucket of Stage 2 to 16.6% from 12.5% a quarter ago. In nominal terms, it suggests around TRY 15 billion increase in Stage 2 in the quarter. Almost all is due to rise in the SICR bucket, meaning Significant Increase in Credit Risk bucket, after our IFRS 9 model calibration update in November.

This update affected probability of default of each file. So even though we substantially increased the coverage of all the files in Stage 2, because of the high weight of SICR in Stage 2 that had lower provision coverage as 90%, is very much like Stage 1 with no delinquency at all. That caused reduction in overall Stage 2 coverage ratio to 14.7%.

Extension of the temporary forbearance on NPL recognition date to June 2021 and those files to remain in Stage 2 at year-end, we had a total balance of TRY 1.3 billion of loans under this forbearance at end of 2020. Also during the year, given the extraordinary circumstances, as you know, we had postponed the loan payments for all the customers that asked for one.

On the next page, we'd like to share with you the performance of these deferred loans. We had granted loan deferrals for a total portfolio of TRY 40 billion by year-end, forbearance to 11% of our performing loan portfolio. 34% of it is from retail portfolio, including credit cards. The rest is from business banking. Out of this TRY 40 billion, 85% has expired, meaning their postponement period ended.

So when we look at the payment behavior of the expired loan deferrals, they have been faring far better than what we initially feared. 74% resumed their monthly payment without any delay. And actually, a 1/4 of these already paid their debt in full. 17% asked for a second deferral. The ones in here are no surprise to us. They are your usual suspects and names that we had already provided for. And 9% is the portion, what we call, solution in progress (sic) [ process ]. We estimate roughly 1/3 of this portion as the likely candidates for NPL. As of the year-end, 57% of the deferred loans were followed under Stage 2 with an average coverage of 20%.

On next page, you can see the NPL evolution and net cost of risk. Starting with NPL on the left-hand side, notice that all throughout the year, net new NPL inflows were negative. This was part due to the change in NPL recognition days, part to extending loan payment deferrals and part to strong collections performance throughout the year.

As a result, NPL ratio improved, while NPL coverages continually increased such that, at year-end, before management took the decision to write down a portion that is 100% covered, the NPL cash coverage was as high as 71%. This move reduced the NPL level of balance sheet by TRY 4.4 billion to TRY 16.1 billion, taking the year-end NPL ratio to 4.5% with 63.4% coverage.

Note that the NPL forbearance impact on year-end NPL ratio was about 35 basis points positive. Even though we expect to see the pandemic-related full NPL hits in year 2021, we accumulated as much provisions as possible for this risk in year 2020.

Notice in the net cost of risk chart on the right-hand side that we finished the year with a net cost of risk, excluding currency, because that portion is fully hedged, with 231 basis points. This suggests that the last quarter's net provision expenses were the highest of the year as we guided. This is largely owed to our IFRS 9 model calibration I mentioned earlier, making our provisioning the most conservative in the sector. Yet, we ended the year with much lower net cost of risk than our guidance of below 300 basis points.

Now moving on to the fees and commissions. In 2020, we managed to report a positive growth of 5% despite the fee regulation and COVID-19-related slowdown in economic activity in the first half. 6% positive support was owed to early closure and repricing fees that would no longer recur. Actually they were already quite insignificant in the last quarter. So despite the lack of that support, our fee generation in the last quarter remained robust. And for the year, we generated a total of TRY 6.6 billion in net fees and commissions. This level is, again, a new record high and by far the highest in the sector.

Contributors to this strong performance continued to be payment systems and money transfer fees, even though their contribution this year was lower, still make up more than half the fee revenues. There's also incontestable contribution from our financial subsidiaries to our fee income, including insurance, brokerage and asset management, leasing, factoring, you name it. All in, we ended up beating our net fees and commissions guidance of low single-digit shrinkage for year 2020.

Let's now jump into how we fared in operating expenses on next page. To sum up, actually it was an outstanding cost management year. And given the high performance in revenue generation, our jaws got wide open. Accordingly, we could improve our cost-income ratio further to mid-30s.

Even though the 15% year-on-year operating expense growth still looks a bit higher than our guidance of below 10%, and that guidance back then was based on an average inflation assumption of 9.5% for the year, the variance largely stems from: one, the currency depreciation, which has no impact to the bottom line because of the full hedge; and secondly, from a lot of expense that had a preset provision. So when adjusted, the expense growth of 9% not only meets our operating expense growth guidance, but also suggests an OpEx growth well below the actual average inflation of 12.3% in the year.

On next page, you will see our capital ratios. We preserved our strong capital buffers. Our consolidated capital adequacy ratio and core equity Tier 1 stands at 16.9% and 14.3%, respectively, well above the minimum requirements, suggesting TRY 21 billion of excess capital.

Now the next page lays out our record CAR -- report card, sorry, report card, the realization versus the guidance. I already tried to explain throughout the presentation how we performed versus guidance. Just one thing maybe here to point out is that, as you can see once again, we outperformed in most of the fundamental line items.

It still delivered 11% ROE, because given the global environment and rising uncertainties, we chose to set aside significant preprovisions. And our profitability ended with 11%, which is seemingly in line with the guidance of low teens. However, the fundamental performance, meaning ROE adjusted with the free provisions, suggests 14.4%, a clear beat, in a year like 2020 that has been never been experienced before anywhere in the world.

So this sums up our financial performance messages for the year 2020. We can now gladly take your questions. Thank you for listening.

[Operator]

[Operator Instructions] We are taking the first question from Alan Webborn.

[Alan Webborn, analyst]

Could you put a little bit of more color on the growth in the TL deposits in Q4? That 9% was clearly high, and presumably, maybe rates will rise even quite a lot across the quarter. So -- I mean I know you said you wanted to sort of match loans and deposits, but perhaps you could put a little bit more color on that for me. That will be helpful.

So secondly, could you talk a little bit about how loan yields have been moving? How you feel sort of repricing has been going? Have we already seen the impact of higher rates on demand? Or is that something we're going to see more in Q1? That was the sort of the second question.

And I guess, the sort of third question was fees. Fees have clearly been a good performance relatively this year. Do you think that the other driver is going to be the same in 2021? Do you see any difference, given the sort of the change in -- the sharp change in the rate environment that we've seen across Q4?

[Aydin Güler, executive]

Thank you, Alan. You have 3 questions. The first one, the growth in TL deposits in fourth quarter. First of all, we are trying to manage our balance sheet in a reasonable level. And some part of funding comes from Central Bank, as you know, with swap mechanism and the remaining part from the deposits from customers. We try to keep it in a balance. That is the reason, in order to put it in a level that we decide, we increased our deposit party from our clients. But it was mainly from corporate and commercial clients just in overnight deposit term.

We did not pay too much interest rate to long run, high amount and high yield. So it was under control. It was just for that purpose in the fourth quarter. It will not continue like that. And also, it doesn't mean that we were aggressive, because when we pay at the level of competition, always customer prefers Garanti. That is the reason our aggressiveness means that to pay in line with the competition. That was related with deposit side.

Second one, the loan yields. As you know, in the second quarter of 2020, there was an asset allocation issue in the country. Unfortunately, even though Garanti BBVA was not in that position, some of the banks in the market decreased rates in order to fulfill their needs. So it take down -- it took down the interest rate to 7%.

In that period, our policy strategy was to give that loan up to 1 year, because we were quite sure that, that would be a period that the interest rate would go up. That is the reason, in the second quarter of 2021, those low-yield loans will mature and they will be closed. So at the end of the second quarter, we will get its positive effect in our balance sheet.

Now how the environment is? Garanti BBVA is one of the unique bank in the country with positive spread, I may tell it to you. Always, we have the highest net interest margin in the country. But under the circumstances, with the high cost of deposit environment, our stat -- or yield of credits in our stats, still we have positive spread, and it is getting better and better. At the end of the second quarter, it will be around our normalized level.

The -- some part of your question was, is there a demand in the market? There has not been a strong demand, but this is a -- according to us, this is a big economy, always there are reasonable transactions in the market. So Garanti BBVA is able to get the valuable transaction from the market. So we are doing business, but demand was not so strong.

The second part -- the third question, fee and commissions revenues for 2021. As you know, 2020 was the toughest year. Due to regulationary effect, we wouldn't expect 5% increase in our commissions and fees in 2020. But we did a good job. We took our precautions and, thanks to our colleague, we created very good picture in this partly apart -- so 5% growth in 2020 is very, very good result according to me.

In 2021, it will continue. According to our guidance, we put very aggressive targets, mid-teens, increasing the net fees and commissions. I think it is not easy, but it is doable. And also, it includes not only bank, also the subsidiaries' commissions. So with the help of our subsidiaries, I think that we will be beating our targets by year-end. So you will see here next year-end mid-teens commissions increased growth in Garanti's number.

[Operator]

And we are now taking the question from Gabor Kemeny.

[Gabor Kemeny, analyst]

My first question is about the Stage 2 loans. And I think you mentioned that the increase we saw was related to the SICR loans. Can you talk a bit further about what drove this increase, given that your macro assumptions still assume a meaningful recovery? I think you assume a 5% GDP growth. And then in particular, if we look at retail, I think you show an increase in the Stage 2 loans there as well to 23%. Would you be able to talk a little bit about how you see these exposures performing?

And my final question would be how to think about your funding costs going forward, because in -- yes, in the fourth quarter, we saw, I think, an increase in your lira funding costs and also a decline in the demand deposit and an increase in the swap costs. If you could talk a bit about these drivers going into the first and second quarter?

[Aydin Güler, executive]

Let's start with your last one. So in the last quarter, yes, it is obvious that the highest cost of funding over the year we have seen. So the Central Bank policy rate increased to 17%, and markets started to pay 18% to 19% up to 1 year. That is the reason the cost of funding we paid the most throughout the year. Still, as a percentage, we have highest percentage in demand posting in TL terms.

In terms of percentage, you have seen a decrease in that, but that is mainly because of the denominator effect, because we -- our time deposit amount is around TRY 100 billion. That was the highest amount we have reached over the year. That is the reason, as a percentage, it decreased. But there is one reality that when the interest rate goes up, like this one, it's -- we have seen negative effects on the demand deposit. This is -- there is one-to-one correlation between these 2 dynamics. That is very normal according to us.

But still, we have the highest demand deposit percentage in our total TL deposit portfolio. So the Stage 2, the reason behind that increase is just calibration, macro calibration and assumptions. We don't have any other issue here. But as you know, Garanti BBVA is always conservative and prudent. That is the reason there may be some -- much more protective calibration methodology we may use. Other than that, there is not any problem.

And also, I may give you the number that after this deterioration related to IFRS 9 calibration, just 1% NPL we have been getting from those portfolio. So you see TRY 14.7 billion increase in Stage 2. In our current number, total effect it's owed to NPL will be less than 1%. So it is under control. That has not any problem with that amount as well. Did I miss anything?

[Gabor Kemeny, analyst]

Maybe on comment on the retail Stage 2, in particular, and the retail exposures, how you see those performing in this lockdown situation?

[Aydin Güler, executive]

Yes. In retail party, frankly speaking, in this environment, under COVID-19 environment, we would expect much more NPL than this level. But surprisingly, it doesn't get deteriorated. So our NPL mainly, the inflow in NPL portfolio, 25% from retail and credit cards, 75% just from wholesale funding. And during last 2 to 3 years' period, this picture has not changed. So I don't expect any other picture than this one. Still, retail portfolio will be maximum 1/3 of new NPL inflow. 2/3 will be -- consist of commercial and corporate party. So it doesn't give any negative signal under this environment.

[Operator]

And we are taking the next question from Konstantin from JPMorgan.

[Konstantin Rozantsev, analyst]

I have 2 questions, which I wanted to ask. The first one on trends in external debt. Bank has been repaying external debt recently. And just looking to understand prospectively what's going to be the trend. Are you going to be, on a net basis, incurring or paying external debt prospectively, and composition-wise, if we should expect any major changes by major types of these debt? So that's the first question.

The second question, the bank has dollar-denominated subordinated bonds, which has a call option next year. Could you please provide some guidance whether we should expect -- what we should expect about this goal? And potentially and current market conditions, what would be your decision if market conditions stay exactly as they are right now?

[Aydin Güler, executive]

I'm sorry, I was talking, but it was on mute. So I will start again. For our external debt strategy, as you know, our current liquidity buffer is around TRY 12.5 billion. So we have very higher liquidity with foreign currency cash. The country as well in the same situation. Total deposit amount in the country has reached $250 billion. So it has stopped. It is flattish during the last 2 months. But we are highly dollarized economy.

So under the circumstances, year-by-year, Garanti's external debt amount has been decreasing. But still, we are one of the key player of this country in the international market. So we are opportunistic. We are not in a situation to pay high yields just for being there. But the composition, I think, will be similar to our existing portfolio. According to the conditions in the market, we may do some deals, but -- we can do everything, but we have not decided anything, because our balance sheet as of today doesn't need any borrowing. But it doesn't mean that we will not do that. We will do it in the right time in the right place.

So the second question, call option next year to Tier 2, yes, we will do it. It is normal operation under normal circumstances. It is the normal attribute for Garanti. So we will [indiscernible] in debt. So as I gave you an answer in the first part of my explanation, according to the market condition, we may renew it, but we will see, because that is just 1.5 years ahead. I think that is enough.

[Konstantin Rozantsev, analyst]

Sorry, can you hear me?

[Aydin Güler, executive]

Yes. Yes, we hear you.

[Konstantin Rozantsev, analyst]

Just to confirm on your -- on the second question, if possible, once again. So you're looking to exercise the call option next year regardless of market conditions. Is that what you meant?

[Aydin Güler, executive]

Yes, we will use our call option rights. We will pay it in due date. Are we going to renew it? I think we have 1.5 years ahead to the transaction, but most probably, we will renew it.

[Operator]

Right now, we have a couple of questions from the Q&A section. So I will be reading the first one. We have a question from Vinod from AllianceBernstein. He asks about our Eurobond refinance plans. Will Tier 2 bonds redemption decision in [ 2010 ] be based on economics or general market tracks of calling? And deposit de-dollarization trends in Turkey, do you see de-dollarization happening in second half of the year?

[Aydin Güler, executive]

The -- let me start with the second question. I think de-dollarization has stopped. And also, I hope with the positive regulation and actions made by Central Bank will help us to change the mood to the positive side. So I hope it to decrease. I think that it is in the highest level. And thanks to that, it has stopped. It has been flattish during the last 2 months. With this environment, I think it will come down, I hope. The second one, Eurobond issuance plan, we have not decided anything. There has not been any issuance in our agenda in the short term.

[Operator]

Okay. We have a second question from Klim Fedoff, Lord, Abbett. Can you please talk more about the large NPL write-off in the quarter? Was that in this relation to any particular segment? Any more color would be appreciated.

[Aydin Güler, executive]

Our total write-down amount is TRY 4.3 billion. So just 70% of it -- 75% of it comes from wholesale, the remaining parts retail and credit cards. It is very in line with our NPL portfolio, 25% from retail and credit cards, 75% from wholesale, including SMEs. It is very similar picture to our NPL portfolio.

[Operator]

We have a final question from Deniz Gasimli. Could you clarify, do you expect that only 1% of TRY 14.7 billion of new Stage 2 will become new NPLs in 2021?

[Aydin Güler, executive]

I gave this number, but let me repeat it. According to our experience, just maximum 1% of that SICR bucket will go to NPL, less than 1%. So most probably, you will see very serious part of it will come -- will go back to Stage 1 as the economy gets normalized.

[Operator]

Okay. It seems like we don't have any more questions on the line or on the Q&A text area. So this concludes the Q&A session. I'll leave the floor to our presenters for closing remarks.

[Aydin Güler, executive]

So 2020 has been a challenging year, without a doubt, but Turkey managed to grow even in this extraordinary environment. As for our results, our financials suggest that we are very well positioned to start the new year.

Thank you all for listening to us this afternoon and hope to meet again face-to-face in the future. Have a nice day.