Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2021-Q4

[Semih Tufan, executive]

[Audio Gap]

loan growth will be 20% level. FX loan growth will be flat at around [ 1%, 1.2% ] level. Turkish lira deposits growth will be 24%. FX deposit growth will be minus 2.8%. Net interest margin is expected to be flat at around 400, 450 basis points. ROE is expected to be low double digits. And NPL will be flat 3%, 3.5% level. Cost of risk will be around 170 basis points.

Now I would like to give the floor to my colleague [ Kamar ] for going through the presentation. And after the presentation, I will be happy to answer your questions.

Thank you.

[Unknown Executive]

Welcome, everyone. This is [ Kamar ] from investor relations team. Thank you all for joining us today.

Starting with Page 1. Total assets increased by 32.5% year-over-year to TRY 901 billion in the fourth quarter. Looking at the asset mix: The share of loans saw a slight decrease to 57.4%, while securities share stayed at -- almost at 25%.

As for the remaining items, the liquid assets stand out. Its share in the total assets climbed up to 14% from 9.6% at the beginning of the year, thanks to the adjustments made by CBRT regarding reserve requirements. In terms of FX liquid assets, our standing -- our outstanding swap transactions declined to roughly $3.8 billion in Q4, which was $6.7 billion in the previous quarter. Since we have lessened our average swap usage to TRY 48 billion in the fourth quarter from TRY 56 billion previously and we witnessed more than a 300 bps easing of swap rates during the quarter, our swap costs declined by 25% quarter-on-quarter.

The next page shows the details on our securities portfolio. Its share within our total assets inched up to almost 25%. On the right-hand corner of the page, you see the classification of securities. We diversified our portfolio opportunistically in line with CBRT's forecast [ paths ]. Accordingly, we continued to increase the weight of CPI linkers in total portfolio during fourth quarter. In light of recent CPI realizations, we revised our annual CPI estimation to December CPI print of 36% from estimated inflation rate of 19% that was -- we used in the third quarter.

In an opportunistic manner, CPI linkers [ volume ] increased by almost TRY 14 billion within the fourth quarter and reached up to almost TRY 63 billion, which is reflected as a growth of 29% quarter-on-quarter and 56% year-over-year. CPI linkers share make up 32% of total shares -- total securities. Similarly, its share in TL securities reached 48% in the -- 2021. As for the interest income on securities, it was the highest level quarterly where we posted both in terms of total securities income and CPI linker gains. CPI linker income posted roughly TRY 11 billion, which accounts to a 260% increase quarter-on-quarter. CPI linker gains make up almost 57% of total securities income.

Switching to the next page, Page #4, we see the breakdown of loan portfolio in terms of customer segmentation. We closed the year with a moderate 21% year-over-year loan growth. The large part of this growth came in, in the fourth quarter due to not seeing much appetite at the first 3 quarters of 2021. In Q4, our total loan book raised almost 17% quarter-on-quarter. On currency side, TL loan book managed to grow by 7.5%, while shrinkage of FX loan book was by 1% quarter-on-quarter.

During the fourth quarter, we continued to maintain our support to SMEs and raised our SME portfolio by roughly 7.8% quarter-on-quarter. By doing so, we preserved our market share of almost 70% in SME business. As for business loans, we utilized TL loans to the corporate segment for their working capital needs. However, the quarterly increase of 33.8% in the business loans was mostly driven by currency weakness. Excluding TL depreciation, business loans will increase by almost 6% quarter-on-quarter.

On the next page, we have further details on loan book. Looking at currency-wise: TL loan book makes up almost 72% of total loan book. The remaining 28% consists of FX loans which almost [ wholly ] belong to our corporate customers. The bank has a solid loan book, thanks to its well-diversified structure and low-risk segments. SME book seems more balanced now with a 41% share. 50% of SME book is guaranteed either by the CGF or unique cooperative loan scheme. Therefore, 50% of SME loans are structurally quite secure. The remaining 40% of our loan book belongs to the corporate companies, and roughly 37% of our corporate loans consist of project finance loans. To add more, retail loans has a 16% share in our total loan book.

On the bottom right-hand side of the page, you see retail loans in more details. Mortgage loans have a 62% share in the retail book, which are inherently well collateralized. As for the rest, almost 31% of retail book belongs to customer -- consumer loans. 54% of these loans have been extended to pensioners and payroll customers, and a further 15% of them have been guaranteed under the coverage of CGF.

Flipping to the next page, Page #6. Asset quality dynamics has fared much better than the expected 2021. You see roughly TRY 500 million increase in our NPL portfolio compared to previous quarter. In the year, we had TRY 4.2 billion collections, whereas NPL inflow were only TRY 3.8 billion. Our net inflow were negative at almost TRY 400 million for the year, thanks to our cautious provisioning policy and strong collection performance. Even with the lift of staging for variances, we closed the year with an NPL ratio of 3%, which is below the sector average. Moreover, we had only negligible amount of write-offs and no NPL sales during year.

Considering the ending of staging for variances by the end of December, there were roughly TRY 600 million of [ new ] NPL flow in the last quarter. Accordingly, we witnessed only 10 bps increase on our NPL ratio. On the top of -- on the top right-hand side of the page, you see NPL coverage has reached up to 72.9% from 60% previously. Despite not witnessing any standing -- any standard problematic loans, we maintained our prudent approach to be on the safe side. On the other hand, the share of stage 2 loans within total loans increased a tad, but its coverage also has risen to 14.6% from 5% in the previous quarter.

The following page compares the NPL ratio by segments. Considering their share of 85% in total loan portfolio, corporate, commercial and SME loans NPL ratios stayed far below sector average. On the other hand, you may notice an incremental increase in consumer loans NPL ratio in the last 3 quarters. As we said earlier, the deterioration in consumer loans NPL ratio stems from our pandemic-related loan package support loan for basic needs. Recall that this package makes up only 5% of our retail book as of December. Moreover, collateral structure is the main driver behind our below-sector NPL ratios. 13% of SME book and 15% of our consumer loans are under CGF scheme, and both of them generate almost 0 NPL. Also, 37% of our SME book consists of cooperative loans, and they create only 10 basis points NPL historically. As for the rest of the retail book, mortgage loans only have 15 basis points impact, whilst pension and payroll customers create only [ 15 ] basis points NPL. All in all, 34% of our total loan book has NPL generation below 50 basis points.

More details on asset quality metrics are on the following page. Even though we saw some divergence throughout the year, our total cost of risk eventually closed the year with 240 bps on cumulative basis, which should be seen as a reflection of 60 basis point year-over-year improvement compared to last year.

We have taken necessary actions for holding strong coverage, especially in the fourth quarter. In line with our conservative stance, we increased coverage ratios across all [ states ] in the fourth quarter. Stage 2 further increased from 5% in the third quarter to 14.6% by the end of December. Stage 2 -- stage 3 improved by -- improved from 60% in the third quarter to a robust 73% at year-end. Our total loan coverage ratio stepped up from 2.8% in the third quarter to 4.1% by the end of December.

Let's move on, Page 9, presenting details of liabilities. We have switched our funding base through low-cost interbank funding facilities in order to take advantage of the ease in CBRT's policy rate in the fourth quarter. Despite [ being on ] interbank funding, we still see loan-to-deposit ratio came stable at a comfortable level of 85%. Although TL LDR increased to 148%, it is still below 151% of sector. FX LDR inched up to 40%. As for FX wholesale funding, we feel comfortable to -- comfortable at a current 3.6% share in total liabilities versus sector average of 19.6%.

More details on deposits are on the next page. The deposits maintain as our main funding source. Total deposits have reached almost TRY 624 billion with a 17% increase quarter-on-quarter mainly stemming from currency weakness. On the currency basis, TL deposits declined by 4.8% quarter-on-quarter, while FX deposits in USD terms fell by 8.5% quarter-on-quarter.

As you may know, the recent FX-protected TL deposits enabled a significant amount of customer switch from FX to TL. And its reflection to our deposit base will became -- will become more visible in the coming quarters. With the inclusion of commercial deposits and tax advantage, those products gained more momentum. By utilizing digital channels, customers are able to access these products much easier. As of February 8, we start to extend those for nonresident citizens FX deposits as well.

More details of deposits are on the Page #11. The share of demand deposits in total deposits picked up by more than 5% to 25%, which is an additional contribution to our low-cost funding base. Looking at current-wise: TL deposits still have a significant 41% share in total deposits versus FX deposits having share of 59%. As you may notice on the bottom right-hand side, our cost of TL deposits has declined by 170 bps quarter-on-quarter on the back of easing on policy rate [ intra ] quarterly.

Cost, yield and spread details are on the next page. There has been a 400 bps cut on policy rate since September. Thanks to our dynamic balance sheet management, we have seen a significant 250 bps improvement in our blended core spread. On the back book, TL deposits -- TL deposit costs declined roughly 170 basis points. And TL loan yield was up by 30 basis points on a quarterly basis. Therefore, TL core spread have picked up by 200 basis points.

Moving on, P&L items on Page 13. NII boosts almost 4x higher quarter-on-quarter than the previous figure on the back of widened spread and strong contributions from CPA linkers. In terms of headline NIM, it has improved by 910 basis points on a quarterly basis and almost 290 basis points on a cumulative basis and reached 11.9% and 4.1%, respectively. The swap-adjusted NIM improved to 10.7% on a quarterly basis and almost 2.9% on a cumulative basis. As for net fees and commission income, we managed an increase of nearly 11% quarter-on-quarter and reached a stellar 93% increase compared to the same quarter of the previous year.

Turning to Page #14, you see quarterly net income realized at TRY 1,293 million in the fourth quarter. Thanks to the recovery in the core revenues, especially in the fourth quarter, ROE reached to 12% quarter-on-quarter and closed the year with a 3.5% year-over-year.

Switching to the next page, we have details of operating expenses. Disciplined cost management remained as our strong muscle despite unpredictable currency volatility and elevated inflation backdrop. Operating expenses increased by only 21% year-over-year on a cumulative basis. Turning to the Page #14, you see quarterly net income realized at TRY 1.293 billion in the fourth quarter.

On the next page, we have details on solvency ratios, Page 16. Kindly note that BRSA's forbearance measures are included in the ratios presented here. Our reported unconsolidated capital adequacy ratio came at 14.5%. If you rule out BRSA's forbearance measures, negative impact will be roughly 290 basis points on CAR, 260 basis points on Tier 1, 200 basis points on CET1 on the -- both consolidated and unconsolidated basis.

Last but not least, our nonfinancial strength are on the next page. We have been taking solid steps in the -- in terms of further integration of digitalization into our business model. Accelerated digital engagement and continuous investments fared much better than expected 2021. To make it concrete: We add up almost 700,000 digital customers in 2021. As such, the number of digital customers increased to 4.5 million by the year-end. Moreover, more than 60% of consumer loans are utilized through digital. And almost 50% of credit card sales comes from our digital channels.

On the left-hand side, you see more detailed view of customer transactions. While the number of digital transactions raised by 35%, our mobile transactions realized an increase of 48% year-over-year. With support of increased digitalization, nonbranch channels' share in total transactions reached at 96% at year-end.

These were my final remarks for our presentation. Thank you for your patience. Now I would like to leave the floor to your questions you may have.

[Unknown Executive]

[Operator Instructions]. Yes, Alan, you go ahead.

[Alan Webborn, analyst]

I guess I wanted to understand what you were using for your CPI linker numbers for 2022 in terms of inflation. So that would be helpful. Secondly, could you give us a view of how you see the sort of breakdown between loan yields and funding costs across the next year? I mean, do you have room to sort of still [ reprice up for a bit ] your lending book? How do you feel that that's going to progress in terms of your overall view of margins being -- or NIM being flat in 2022? That will be the second question.

And thirdly, I think the -- you've had the announcement of the capital increase, haven't you, but when do you think that will actually be sort of in your numbers? I guess, will it be sort of before the end of Q1, or will it be Q2? And it's interesting that -- despite the recapitalization, that you have a fairly moderate view in terms of the loan growth that you're looking to do this year. And perhaps you could just explain why you're still relatively cautious compared to your -- some of your peers in terms of the lending growth that you're looking to do this year. And that would be great.

[Semih Tufan, executive]

Thank you, Alan. Let me start with your last question why we had a relatively moderate or moderate loan growth compared to our peer groups. As you know, in 2020, in support to the credit loan packages which was announced by the government, we were quite active on lending side to provide a strong support to these packages and recorded more than 60% loan growth on the Turkish lira side. Considering this significant loan growth that we recorded during 2020, with effect from the beginning of the 2021, as you know, mainly due to the front satisfied loan demand -- and the second reason is the escalated funding costs. During the first 3 quarters in 2021, our loan growth was quite muted for these reasons, but when it comes to the last quarter in the 2021, we recorded 7.5% loan growth on the Turkish lira side, which is pretty close to the peer group average. I think that it -- this answer is satisfied on your side.

When it comes to CPI linkers, we used, by the year-end, 36% for the evaluation (sic) [ valuation ] of our CPI linkers. We were using 19% in the last -- in the third quarter 2021, but after the latest CPI print, yes, which was announced by the TÜIK statistic institution, we adjusted our evaluation rate to 36% level for our CP linkers. We are planning to use this level for the next 2 quarters. During the first quarter and the second quarter, we are planning to use 36% for the evaluation. In the third quarter, we are planning to use 30%. And in the last quarter, we are planning to use 28% level for the evaluation.

Loan yields, regarding your question of loan yields and funding costs. As I said, during the first 3 quarters, we saw relatively high funding costs, but after the rate cut made by the CBRT in the last quarter, we saw a significant shrinkage on the funding costs on TL side. And the -- we immediately saw this positive impact on our spreads and margins. We think that this trend will continue during at least the first half of the year. In the second half, we may see some calm-down on CPI side due to the base effect primarily. So we have some minor room for repricing on our stock loan yield, and accordingly, we expect to see a little bit more recovery on the spread. Let me give you the recovery level that we saw in this quarter on our Turkish lira core spread. It's around 200 basis points. We increased our Turkish lira core spread in the last quarter. When it comes to the FX side, we recorded 360 basis points increase on our FX core spread, while it was minus 120 basis points in the third quarter. That's why our core spread in the last quarter increased to 6.6% left. When it comes to capital increase issue: In the last week, on Wednesday, if I am not wrong, we applied -- we made our public disclosure that we increased our capital in the amount of TRY 13.4 billion. And we already applied the capital market [indiscernible] in the last week. And I think that, within a couple of weeks, we will get the approvals. And the figures will be reflected to our balance sheet within the first quarter. I think that I touched all the questions.

[Alan Webborn, analyst]

Yes. I mean I guess the 20% loan growth for 2022 in terms of TL looks relatively cautious. Is -- does that reflect the sort of the situation in terms of capital? Or is that a -- is that just you being prudent at this point in the year? I mean given clearly there's a wish to support business, a wish to support exports and so on, but when we're seeing inflation at such a high level in -- at least in the short term, your 20% TL loan growth forecast for 2022 is quite moderate, isn't it?

[Semih Tufan, executive]

We are not cautious. At the first step, I need to say we are not cautious in terms of the loan growth, but as I said, especially during 2020, we have already recorded a huge, significant loan growth. We lent more than TRY 300 billion; TRY 320 billion, if I'm not wrong. We lent to the market in all segments customers during 2021, and it created a moderate loan demand during 2021. As you see, all the, especially, state-owned banks, loan growth was muted during this year, but as you know, in the weekend, the government announced new packages aiming at the export product-producing companies, for their funding needs; and the -- [ for the ] companies having the investment projects, for -- partly for their working capital needs, in amount of TRY 60 billion level. And it seems that roughly 10% of this package will be lent by ourselves. Of course, this guidance can be subject to the adjustment in future. We will see the picture at the end of the first quarter; and we may change, we may adjust our growth expectation for 2022.

[Unknown Executive]

[Operator Instructions] I think we have no further questions, but there are some written questions. Gizem, please go ahead.

[Gizem Yücesoy, executive]

We have 2 questions from Mehmet Sevim. First one is, "Can you please talk about your 2022 expectations?" And the other question is, "Can you also give us an update on the [ effects from the ] deposit scheme, so far? Are you able to say more on the level of conversion, so far?"

[Semih Tufan, executive]

Thanks for the question, Mehmet. I think that you are asking yield -- our expectation for this year for -- in terms of the loan growth, the deposit growth. As I said on my speech, we expect to see Turkish lira loan growth at 20% level. FX loan growth will be flat. We expect to be flat. When it comes to deposits side, the Turkish lira-denominated deposit growth will be around 24%. And we expect a shrinkage on the FX deposits growth at around 2.5%, 2.8% level. And we think that we will achieve a flat net interest margin. I mean 400, 450 basis points net interest margin by the year-end. We are targeting low double digit in terms of ROE in this year mainly because of the low funding costs. We are planning to benefit from this advantage, and the -- we think that we will achieve low double-digit ROE by the year-end. If we need to talk about the NPL ratio: We expect to see a flat NPL ratio by the year-end. I mean 3%, 3.5% level. And in terms of total and gross cost of risk, we expect to see 170 basis points in terms of total cost of risk.

When it comes to your second question, regarding the FX-protected deposits. As of today, we reached TRY 52 billion volume, including the treasury side and CBRT side. Treasury FX-protected deposits amount TRY 23.5 billion. When it comes to CBRT side, it's around TRY 28.5 billion level. For the CBRT side, we received the demand from the real person in amount of TRY 11 billion; and the rest, TRY 17.5 billion, we received from the legal persons. If we need to talk about the average interest rate that we offered for these products: For the treasury side, we offered in terms of the average interest rate 16.25% level. For the CBRT side, as you know, the interest rate that we offered is a little bit higher than that we offered for the treasury. It's around 18.5% level for the CBRT but in total blended term, our total average interest rate for this product that we offered, 17.4% level.

[Gizem Yücesoy, executive]

Semih [indiscernible], we have another question, from David Taranto. What is the 2022 outlook for costs and fees?

[Semih Tufan, executive]

We think that we achieved a good year in terms of the generation of net fees and commissions. We increased our net fee and commission generation more than 50% in this year. And you -- in terms of the OpEx and in terms of the net fee and commission generation, we expect to see a growth in line with the CPI print. We think that, during the first half of this year, we touched 50% CPI print. And then mainly due to the base effect, we are thinking of that. We will see some calm-down in terms of the CPI print, with effect from the second half of the year. That's why we are anticipating that the growth in the OpEx and in net fee and commission generation will be 1% or 2% higher than the CPI print for the whole year.

I think that we have no further questions. Thank you for joining us, and have a good evening. Thank you.