Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Transcript 2022-Q4

[Operator]

Hello, and thank you for joining us in anti-BBVA's 2022 financial results and 2023 operating plan guidance webcast. Our CEO, Mr. Rajat Basto; our CFO; Mr. Dinar and our Investor Relations Director, Ms. Anna Sage will be presenting today. As only, there will be a Q&A session following the presentation. And now I leave the floor to our presenters

[Handan Saygin, executive]

Good afternoon, everyone. -- for year 2022, we're honored to present to you another set of excellent financial results. As always, let me first remind you the macro backdrop we operated in year 2022. The main highlights are that there was robust economic activity. Domestic demand remained strong due to the support of countercyclical policies -- also exports and tourism activities were supportive. High activity results, the tax generation Fed government revenue streams, helping the budget deficit to end at a low and highly manageable level of only 1% of GDP. On the other hand, even though this growth continues pressuring inflation due to base effect inflation is on a downward track. On this slide, you'll see how the GDP growth has been faring on a quarterly basis. For the 9 months of 2022, the realization was already 6.2%. A -- as we witnessed deceleration in growth in the third quarter, continuing into the 4s, we expect the whole year's GDP growth to end around 5.3%. I -- on the inflation front, even though we witnessed some ease at year-end with the help of last year base, we remain cautious of the upside risks on the inflation outlook. -- given the high global inflation and commodity prices along with the above potential growth rates. Regarding current accounts, even though exports and tourism revenues in the year were supportive. The high energy bill carried current account deficit to high levels, like around 5.7% of GDP. It is also definitely worth mentioning the highly challenging and frequent regulatory changes happened in 2022. That we have to swiftly adapt in a dynamic and agile fashion. -- even under such challenging regulatory backdrop, we could deliver new records in earnings, both on a quarterly and cumulative basis for year 2022. I Quarterly earnings reached almost TRY 20 billion, validating 8 consecutive quarters of earnings growth. This took the cumulative earnings to BRL 58.5 billion, suggesting an earnings growth that is around fourfold of last year's BRL 13.6 billion. 2022 earnings not only signifies our sustained outperformance to our operating plan, but also the high-quality components to it as higher portion of the revenues are from core banking operations. The growth in core net interest income, meaning with the exclusion of CPI revenues was 2.5-fold Fee and commission income was twofold that of last year, whereas OpEx growth was managed to a level below average inflation. It obviously took the jaws to a level never seen before and cost/income to exceptionally low levels. A glance into our key performance indicators for growth, profitability and strength verifies our sustainable growth strategy, strengthening capital. In terms of growth, we booked a Turkish lira loan growth of 79%, a level much higher than our full year projection of above 50%. And -- in Turkish lira customer deposits, liraization efforts resulted in a Turkish lira deposit growth that was 2.4-fold that of last year end. And in terms of profitability, profitability recorded in 2022 was more than double the levels of 2021 and with an ROE of 51% and an ROA of 5.4%. This profitability served to significantly strengthen our capital -- and net income alone added 560 basis points to our capital equity ratio by year-end. During the year, we set aside further EUR 500 million of free provisions, bringing the total free provisions on balance sheet to BRL 8 billion. If all were accounted as part of capital, along with forbearance that adds another 1.8%, our capital adequacy ratio would have been 19.3% on a consolidated level. Notice also our foreign currency liquidity buffer of EUR 10 billion, that is actually double that of the total external debt level and have fold the short-term use of $2 billion. Regarding the components of this performance on Slide 7, asset breakdown reveals the high weight of the customer-driven portion, namely loans. -- pointing to our core banking priority. As of 2022 year-end, our consolidated total assets reached TRY 1.3 trillion. While performing loans domination and assets remain to be at a high 57%, securities share went up to nearly 16% due to the additions to offset the redemption as well as efforts to meet the regulatory requirements. Of the Turkish lira securities, 65% is CPI-linked and 28% is fixed rate, and the rest is FR Total loan growth for the year-end year was 56%. Last quarter alone, the growth was 11% and 14% in Turkish lira lending and 5% in foreign currency, all of which originated in our foreign subsidiaries. The slight foreign currency growth -- loan growth seen in bank-only figures -- it's purely due to the parity effect. Continuing with TL loans on this page. Turkish lira performing loans reached TRY 472 billion at end of 2022. In the pie chart, Turkish lira loan book can be rather described as well balanced among business and consumer with 51% business loans, 24% credit cards and 26% consumer loans. In line with the regulations limiting lending business loan growth in the last quarter outside of SME's cut pace. Still for the whole year, 85% growth was booked in business lending that yielded an annual market share gain of 92 basis points. In consumer lending, the growth has been relatively lower However, we have managed to increase our market share in the high-yielding consumer general purpose loans with rational pricing. High growth and market share gains also prevailed in credit card volume as it was up by 30% in the last quarter, bringing the total for the year to 27%. Moving to the funding. Notice how deposits dominate the funding sources both time and demand deposits as well as deposits like Turkish lira bonds issued and merchant payables fund nearly 3/4 of the assets. Demand deposits alone fund 1/3 of the assets actually at Garanti BBVA, when you add the free equity to it, meaning total free funds, fund and astonishing 50% of the interest-earning assets. This ratio, and I last looked at peers was only around high 20s. Borrowing share in funding assets has been further reduced down to 8.4%, and Total external debt is now EUR 5 billion, and you can see the foreign debt components in the pie chart on the bottom right-hand side. Continuing with how we performed in deposit growth on Slide 10. You will clearly notice the accelerated liraization of deposits through foreign currency protected Turkish lira time deposit scheme. Turkish lira deposit growth registered by year-end was 138% and versus a 16% shrinkage in foreign currency deposits in dollar terms. Last quarter alone, the shrinkage in foreign currency deposits was 8%. I -- looking at the sector data, analyzing foreign currency deposit conversion to Turkish lira, we come to a conclusion that we're the bank realizing the highest conversion to TL in the period. By year-end, our Turkish lira demand deposit exceeded TRY 113 billion, and this makes us proud and happy that customers prefer Garanti BBVA as their main bank to keep their Turkish lira demand deposits. This differentiating strength naturally feeds into our superior margin performance that is on next page. Now spare core margin generation capability our legacy, I should say, manifested itself with a core net interest income growth of $26 billion in a year. Combined with the growth in the denominator core margin expansion for the year 2022 ended to be 195 basis points, suggesting a beat to our operating plan guidance of 175 basis points. expansion. Core NIM core margin by year-end was 5.4%, including the CPI impact, total margin at year-end was 10.2%. And -- in the last quarter, with new regulations limiting growth as well as setting price cap on commercial loans, spread contraction was inevitable. We try to offset the negative impact with volume growth in the quarter. However, the denominator growth with the denominator growth, basically, we witnessed a quarterly margin suppression of 51 basis points in the last quarter. Main reasons behind our distinctive outperformance in core banking margin 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 as strong and support strong capital basically supporting our profitable growth strategy. Looking at the quality of our loan portfolio on Slide 12. The pie chart on the left-hand side shows our healthy breakdown of our loan portfolio staging. Out of BRL 790 billion of gross loans, $20 billion is in Stage 3 and TRY 107 billion or near 14% is in Stage 2. In 1 quarter, there seems to be a big jump of about TRY 15 billion for Stage 2 or a currency adjusted of about EUR 11 billion. And this has to do largely with the SICR bucket, where we did the IFRS 9 model recalibration that we typically do in the last quarter of each year. You can also see on the bottom of this page, our Stage 2 provision coverages that it had gone up to 20% from last year's 17%. -- as for the NPLs, even though our new NPL inflows remained muted and the ratio further improved down to 2.6% and -- we continue to increase the NPL coverage to 72%, which is actually in a write-down adjusted fashion is 83%. Accordingly, the total loan provisions on our balance sheet reached above PLN 40 billion. And this is against a total NPL of $20 billion or THB 32 billion, including write-downs. How this translates into risk costs or provisions, you can see on the next slide. where net cost of risk for the year ended at 130 basis points, in line with our operating plan guidance for net cost of risk below 150 basis points. You also see on this page that the big bulk of the provision increase occurred in the last quarter and has to do with the IFRS 9 model recalibration. Moving on to the topic of net fees and commissions. This is another major differentiating area where we feel confident as we have a long track record of being unrivaled. With the support of strong transaction activity in the year, we booked a net fees and commissions growth of 97% in 2022. We all are above guidance above guidance, actual results, which has -- the guidance was higher than 60%. This outperformance to the to our highly diversified fee sources, expanding customer base and continuously increasing existing customer penetration. Main contributors in doubling the net fees and commissions were from payment systems, lending and transaction activity. We are in talks in money transfer fees, Turkish lira loans and acquiring and issuing volumes among our private peers. Moving on to the operating expenses. -- year-on-year operating expense growth was 81%, of which 18% was due to the currency depreciation that's fully hedged. Therefore, adjusted net operating expense growth affecting bottom line was below CPI type of operating expense growth of 3% which is within the guidance figures. Overall in the year, because the total income growth, meaning with the inclusion of CPI-linked revenues, was much higher than the operating expense growth. cost/income ratio by year-end ended at an extraordinarily low level of 24% versus 33% last year. isolating the not-so sustainable revenues from CPI, a more meaningful ratio to look at could be fees coverage of operating expenses where 66% of our operating expenses in 2022 was covered by our fee income. Regarding capital, we sustained our strong capital movers and our capital generative growth strategy continues to strengthen the capital base. Net income generation alone added 560 basis points to our solvency in 2022. And our capital adequacy ratio without the bra sales forbearance increased to 16.8% from 14.1% in the beginning of the year. Our excess capital accumulated to TRY 48 billion on a consolidated level and without the barest for Bars by year-end. And as a secondary buffer, we have accumulated BRL 8 billion of free provisions -- if we were to include free provisions as part of capital, that would add 77 basis points to our capital adequacy ratio. On top of this, if we were to include also the BRSA forbearance impact, it would add additional 180 bps, technically carrying our consolidated capital ratio to 19.3%. -- now on Slide 18, you will see the summary of our 2022 performance relative to our operating plan guidance. We already went over each KPI explaining how we ended with this earnings outperformance. So I want repeated but rather just say we're stronger than ever starting a new year. And with that, let's move to the next page for our 2023 operating plan guidance. This, though, we should admit is a rather difficult guidance to give since we're in an election year. Uncertainties remain while regulatory changes are still happening. For that reason, we may end revisiting and revising guidance throughout the year. But based on our most recent knowledge and operating environment for year 2023 and First of all, we expect a lower GDP growth of around 3%. And parallel to this deceleration, we expect to book a Turkish lira loan growth of around average inflation. For foreign currency loan book, though, we expect to keep that flattish. We expect net cost of risk to ease to around 100 basis points given our already quite high provision coverages. Regarding core NIM, we expect contraction of around 185 basis points -- taking into account the removal of the price cap from the foreign currency protected deposits and the rising pressure on Turkish lira deposits in light of the recent regulations to increase diarization. Our fee growth, we feel we can deliver growth above average CPI given our historic strength in diversified face forces. And for the operating expenses, we expect to see around 100%, a level above inflation, basically that you're not used to see happening at guarantee, but this has to do rather with the base effect. In 2022, we had 3 pay raises to which occurred in the second half -- in 2023, the full year rollover impact will be in the books. All in, return on equity for 2023 likely will end above 28%. And -- now before we end and take your questions, let me also remind you some of our nonfinancial strengths. Open banking was 1 of the most important agenda items of 2022 and with our sustained leadership in digital, we're happy to say we were 1 of the pioneers of the system in Turkey, enabling our customers to view their accounts at other banks on guaranteed BBVA channels as well as being able to perform money transfers from these accounts. With our unique customer experience and platform security, we continue to offer brand new services to our customers every day. And our efforts are awarded with an ever-growing customer base. Our mobile active customers reached $13 million, which places us as the bank with the highest mobile and digital customer base in Turkey. Our mobile financial transactions market share is 19%, so roughly 1 out of 5 mobile financial transactions in the country go through TVA. Now with more than 86% of total assets -- total sales, sorry, going through digital channels, the share of brand and customer transactions has come down to 2.3% versus 6% prepandemic. And finally, customer monthly logins have increased a remarkable since beginning of the year. Now moving on to our achievements on ESG front. -- as Galant, our sustainability commitment is to build a strong and successful future. This year marked the eighth consecutive year and to remain listed in the Dow Jones Sustainability Index. We are proud to emphasize that we're the first Turkish company that could get qualified to be included in this index. We're also proud to say that we broke our own record by achieving 83 points this year. We had to revise this because we got the news just yesterday that we earned another additional point -- this places us as the fifth highest among global financial institutions. In line with our efforts to combat climate change, -- we were included in the global A list of the CDP climate change program in this year as well. BBVA has actually tripled its initial sustainable financing target for year 2025 and that was set in 2018 from EUR 100 billion to EUR 300 billion. And in parallel as guarantee we commit to contribute BRL 15 billion to sustainable finance until year 2025. Anti-BBBA has been a carbon-neutral bank since 2020 and and we reached our greenhouse gas reduction target 15 years earlier. -- where the first Turkish bank to announce call phaseout plan and became a signatory to the United Nations combined Zero banking alliances. 100% of our new electricity generation investments are allocated to renewable energy since 2014. And with all these great results, -- in our financial and nonfinancial strategic performance indicators, it is no surprise that we rank first in brand power among private peers. Now this concludes our presentation, and we leave the floor to you for questions. Thank you for listening. SP1 Hello again for the Q&A session. Just a quick reminder, you can either ask your questions by typing them into the Q&A area or by using razor hand button. And once your name is announced, you are welcome to ask your question. We have our first question from Johann Salado has SP999 Rent have 1 comprehensive question then. A couple of quick points. The first 1 is, could you give us the underlying assumptions of your budget like -- I mean, maybe you have already mentioned and I missed it, but inflation assumption first, then as policy rate, what do you expect? And do you expect the regulatory environment to continue as it is? So after the elections, these regulations stay in place? Or do you expect them to be East somehow. That's the first one. And the second 1 is, where do you see the biggest risk to this budget? I mean which lines are you more confident about and which lines are you less confident about? Then the quick questions are: first, the currency protected deposits now that the cap is raised -- where do you expect the rates to settle? The other 1 is in terms of dividends, do you think that it's possible to go to a higher payout ratio this year? And lastly, what would your swap adjusted net interest margin -- sorry, CPI includes net interest margin guidance peak -- thank you. .

[Recep Bastug, executive]

Thank you, Johan, for the question. The first one, our expectation is about Muromassumptions. GDP would be around 3% and yearly inflation. The average fund 5%. On the interest rate side, regardless of the policy rates sooner or later, deposit and loan rates will get close to each other. This current situation is not sustainable. As this negative margin environment continues, it wouldn't be so easy for us to make new business with the wholesale side. The second part of this question was regulations. I think that regulations will be in our life, tilt elections. I hope after the elections, we will be much more normalized after the direction. But through the election, this regulation will continue. The second one, the main risk, where do we see the risk. Let me go 1 by 1 are acting in more than 1 items. First 1 is the profitability. In 2020, ROEs were above 50%. This year, it may come down to below 30% levels, which points to a below inflation probability for 2 consecutive years. This is not sustainable. And also, this is also the fact that this year's CPI linkers income level is extraordinary high -- it supported profitability in a very strong way. This will disappear in 2023. That is the reason in a nominal way. The profit level will come down due to the CPI linkers impact. Second one, interest rate. Drink between policy rate, loan rate and deposit rate has been broken. There must be some kind of adjustment here until that adjustment bank will operate with negative spreads and normalization will take some time. Although the sector's capitalization is strong, this inevitable pressures banks profit. So the interest rate and profit level has very strong correlation there selling. Third one, I don't see any currency risk. This means that the banks if we look at the bank's balance sheet, the foreign currency loans has decelerated, whereas the TL side accelerated. And the foreign currency assets of the bank, the own high-quality foreign cancer assets are left. Therefore, we don't see any NPL risk for the sector due to exchange rate issue. The fourth one, I think the biggest risk, which is not pronounced at all is the salary promotion payments. These campaigns got out of control. due to the salary payments customer acquisition, it became very costly. Every bank's customer growth pace accelerated. However, this is not an organic growth as bank offer irrational payments to gain the customer. We believe that such way of customer acquisition is not profitable and not sustainable. You may follow these payments impact on OpEx, which will be more visible in coming quarters. In the next 3 years, I believe it will be the main headache for the sector to the nominal values would be close to NPL levels of the bank. The cost to bank's balance sheet will be very strong. This has to be taken into consideration. These are my personal views about sector risk as guarantee BVA attracting new customer results is our main strength. And for that, we will not be the part of this irrational competition to expand our customer base. We will continue to generate high quality and best-in-class learning in 2023 under these circumstances. -- deposit cost is around 25% to 30% levels. 25% rational level and currently competition hovers around this -- in foreign currency protected deposit scheme, all-in cost is currently around 18%. -- rollover ratio for FX protected deposit is around 60% again. And I think the dividend, as you know, the is positive about this issue because they made an announcement stating that they may let banks pay dividends in line with the capital adequacy ratios. So we will apply to pay dividends in line with our policy. We have comfortable capital level. So when BRSA turns the light green I think that we are going to get our approval, but we don't know about the levels of dividend. -- on the CPI adjusted NIM, I think it is around -- I'm not sure, guys, should I give this number or not? Yes. Okay. Then it will be around 350 bps deterioration. It should be, if I am natural -- it is the question, what is the Yes. Leading the CPI linkers. .

[Aydin Güler, executive]

Yes, because in the budget, you gave the net interest margin taking out the CPI linkers, I believe, -- so if CPI linker income was also included, how much contraction would you expect? If I add 1 more thing. What inflation assumption on CPI linkers I think -- the first part of your question is just answered it. .

[Recep Bastug, executive]

The second one, this year, the October inflation, we expect to be around 4% to 5%. So we started to the year a little below than this number for the valuation of CPI amount for 2023, it is below 4% to 5% over 20%. All right. Thank you very much. Thank you. SP1 I believe we have a question on the Q&A side a written question. So Lance is asking, will you be looking at issuing bonds when you repay your March maturity. .

[Aydin Güler, executive]

I think similar question we have got during our presentation. The answer is similar we will be opportunistic because we have more than $10 billion liquidity buffer. So we don't need it. But we have to be in the market as as guarantee. That is the reason we are going to be opportunistic. We are not in a position to pay a high cost just for it to be in the market. So most probably, we may renew depending on the prices. This price are not satisfactory, so we wouldn't be in the market. SP1 Is there a risk that outflows from fixed protected scheme pick up markedly or you do see this likely .

[Recep Bastug, executive]

The FX protected scheme, it has been in a reasonable level, then the rollover ratios are above 60%, and there is a new inflow to the program. And the existing program, I think as well come by the retailers and the companies. So as a bank perspective, I don't -- I'm not in a situation to answer about the macro impact of this, but as a bank perspective, this is a very reasonable 1 because it helps us to arrange our maturity mismatch -- so this program works very well. But that is 1 trend in the risk in this program. I need to underline that the treasury side has been decelerated but the Central Bank site has been accelerated. This is the trend. So under these circumstances, 60% of time deposits amount in the sector, reachable target overall over 50%. This ratio has appeared. So I think -- these are the things that I can tell about the protected scheme SP1 Our next question comes from -- could you please talk about how close you are to the regulatory limit of 60% of TRY deposits, total deposits looks like you were at 54% -- thank you. .

[Aydin Güler, executive]

Among the mid banks, we are 1 of the bank that has the highest foreign currency deposit -- that is the reason our homework is bigger than the other. As of now, we have the highest protected scheme or foreign currency conversion among the private peers -- we have, by far, the highest commercial amount. So we are doing our best reach threshold, and we are positive about that. SP1 We have a next question on the line from Med Amit please go ahead. .

[Alan Webborn, analyst]

I hope you can hear me well. We just checking. SP1 Yes, we can do you just fine. Thank you. Okay, perfect. Again, thanks for the detailed presentation and approximately once again. And also congrats on your quarter results as well. I have a follow-up question actually on the Turkish lira deposit portion side. I would like to get some guidance regarding to regulation on the ization objective by Turkish lira portion mandate in total deposits. As of 2022 year-end, I believe you're Turkish lipositive portion in total deposits has reached approximately 47% if I'm mistaken, but so considering the respective penalty on portions and an additional requirement between 58% to 60% level -- what should we expect from you in short term on that matter, whether you will be aggressive on Turkish lira deposit growth to reach 60% level? Or you will be just willing to bear the additional bond purchasing requirement as suggested by the regulation -- thank you. .

[Recep Bastug, executive]

Sell is at consolidated level, a solar one. We are above 50%, the first part of the question because our foreign international subsidiaries Netherlands and Romania, changed this picture. So Turkey, Garanti BBVA in Turkey is about 50%. As I said to the earlier question answered to the earlier question, we are positive to reach to the regulatory required levels -- and our biggest concern is to converge the foreign currency amount to Turkey. We are not going to be the part of harsh competition in TL deposit market. That is the reason organically, we are converting our foreign currency to tell in our own balance sheet. We do not -- we are not going to be the part of this harsh competition because we are paying around 25%. The marketplace to any amount of money. -- small, medium, big, it doesn't matter, but our approach is very simple. We pay 25% maximum to normal deposits. And mainly, we have been focusing on the protected scheme, and we are doing it in a right and reasonable way. That is the reason you are going to see more TL deposits, but mostly generated from protected scheme. -- that is SP1 Taking action within your balance sheet, not by attracting additional deposit competition. SP-2 Okay. Hello. SP1 Question from Sage image. We observed that private banks long net FX position scribed in the past couple of weeks. Would you please give the main reason behind this move and your view about the financial strength of the sector -- thank you. .

[Aydin Güler, executive]

The first part of the question, the new regulation between foreign currency asset and liability, the difference is subject to some different regulatory measurements. That is the reason every bank, every bank has to calculate this data monthly. That is the reason you see that picture. The second 1 about Turkish banking sector. Yes, we have problems. The profitability expectation for 2023 and the ROE is below the inflation. These are the problems. And I think, gave you some colors about other problems, but these are usual problems. In general, small medium or big size of private and state banks are very, very healthy. The capital adequacy ratio that are satisfactory. So the sector capitalization is strong. That is the reason we should be very comfortable about the future of the banking sector about the finance sector of Turkey. So we are very comfortable. SP1 Thank you. It seems like we don't have any questions. So this concludes the Q&A session. I now leave the floor to our presenters for closing remarks. .

[Recep Bastug, executive]

Thank you all for your participation. Despite the challenging environment, 2022 was a very successful year for the bank. I am really proud of my entire team and would like to express my great due to each and every one-off then for their commitment. In the upcoming period, the developments -- on the regulatory front, we will continue to be the key factor in our balance sheet management. In this inflationary environment, as always, our focus will be to sustain a strong capital structure via our customer-driven growth strategy. Thank you for your support and trust in us. I wish you all the best and look forward to address you again with another set of great results in the next quarter.