Turkiye Is Bankasi AS
IST:ISCTR.E
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
8.3584
17.62
|
| Price Target |
|
We'll email you a reminder when the closing price reaches TRY.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Turkiye Is Bankasi AS
You don't have any saved screeners yet
Welcome to the Isbank 2019 First Quarter Financial Results Conference Call and Webcast. I will now hand you over to Ms. Senar Akkus, the CFO; Ms. Gamze Yalcin, the Deputy Chief Executive; and Mr. Süleyman Özcan, the Head of Investor Relations. Speakers, the floor is yours.
Good evening. This is Senar Akkus speaking. Welcome to our conference call. I have with me Gamze Hanim and Süleyman Bey from our Investor Relations function. I will start with a very brief outlook for the economy and period highlights for Isbank. Then I will leave the floor to Gamze Hanim.
In the first quarter of 2019, the local economy remains under pressure by the ongoing opportunities regarding the protectionist trade measures and Brexit. These pressures were partially contained by the decisions of major central banks. Against this global backdrop, the fall in domestic demand in Turkey continued, although leading indicators in the first quarter, including PMI and confidence in these issues, suggested that contraction in the economic activity has lost momentum.
Strong exports have formed a new prognosis in this period. The low base effect in the second half will further support the recovery, we believe. Having grown by 2.6% in 2018, the Turkish economy is expected to post an annual growth rate of 1% in 2019, according to our economists.
In line with the recent domestic demand, accompanied by a decline in foreign trade deficit, trends in the country continued to narrow. However, the annual CPI inflation remained in double digits due to higher food and oil prices as well as the weakness in Turkish lira.
We also expect CPI inflation to be 16% at year-end 2019 in support of the NIM and by the favorable base impact in June and onwards. Against a volatile FX market and persistent inflation, we expect deposit rates to stay at its current level, at least until the inflation cost has sustainable improvement. And my guess, our baseline scenario assumptions do not include -- these don't include the renewal of elections in Istanbul. For this reason, the prolonged election period and its possible impact to fiscal policy as well as on financial markets may constitute a deviation from baseline forecasts. However, considering that Q1 numbers are going to be released at the end of May as leading indicators give mixed signals, we believe that it is still early to provide our macroeconomic forecast. In other words, we maintain our forecast, which were published and shared with you at the beginning of the year.
Let's move on to Page 3, where we have the main highlights for the period. In the first quarter of the year, we observed an improvement in swap adjusted NIM in line with our guidance. And our demand deposit base, which is the largest among peers, continues to support NIM. On the fee income side, our strong performance continues year-on-year. Fee growth reached 35%. Year-on-year OpEx growth remained at 16.7% below the CPI inflation. And the asset quality indicators were in line with our expectations again. Our capital adequacy ratio continues to stand above 16%, enabling us to expand loans at credit card levels.
Now I will leave the floor to Gamze for the details of Isbank's performance in the first quarter.
Thank you, Senar Hanim. Welcome all. Page 4 shows the major P&L items as well as profitability and efficiency indicators. As per our release, swap adjusted net interest income grew by 4.6%, despite weak loan demand as a result of higher Turkish lira and FX spreads. Fees and commissions income continues to support profitability, with an eye-catching year-on-year growth performance of 35%. As a result, adjusted operating income posted decent increases, both on q-on-q and year-on-year basis. Thanks to our controlled approach, OpEx growth was maintained below CPI inflation. Cost income ratio increased slightly to 38%, which is better than the expected range. We expect the profitability ratios to converge to the guided levels parallel to the improvement in operating environment in the coming quarters.
As we mentioned earlier, net interest margin and cost of risk are expected to improve gradually throughout the year. Please note that in the period, TRY 130 million of free provisions were set aside.
On Page 5, we have the main balance sheet items. Loan growth was muted both in Turkish lira and FX due to recent market conditions. Share of securities continues to increase, reaching 17% by the end of first quarter. In Q1, parallel to the sector trend, there was a transition from Turkish lira deposits to FX deposits. On the other hand, share of deposits in total funding increased in line with our dynamic balance sheet management approach. We further strengthened our liquidity profile with an FX LCR of around 300%. Demand deposits continues to support our low-cost funding base. Share of demand deposits and total deposits stood at around 27%.
On the next page, we have the net interest margin and spread evolution. Both Turkish lira and FX loan deposit spreads increased in Q1. As a result, swap adjusted net interest margin improved and stood at 3.3%, in line with our guidance.
On our next slide, I will be elaborating on the fee income performance in the first quarter. As you know, focusing on fee income is a part of our strategy that supports profitability. In that sense, we continue to achieve robust results in net fees and commissions generation in first quarter of this year. On a year-on-year basis, net fees and commissions grew by 35%.
As you will recall, we have been guiding around a 15% fee income growth rate in the last several years, and we have been doing even better than this. In the last 4 years, our average fee income growth was around 22%. This year, we target to be about 20%, and we believe that we will easily achieve this once again. Also in Q1, OpEx coverage of commission income increased to 54.4%.
We have the FX quality indicators on Page 9. Over the first quarter, we have seen some further increase in the NPL ratio, which is in line with our expectations. On the other hand, the NPL ratio is below the peer group average when adjusted for asset sales. For the year-end, our expectation for NPL ratio is around 6%. Due to the slowdown in economic activity and increasing unemployment rate, we should normally expect a deterioration in the quality of the retail portfolio. However, as a result of our cautious underwriting policies and low risk scores, NPL ratios in SMEs and retail segment, both in consumer loans and credit cards, are lower than the sector and private bank despite having similar market shares with peer banks. Net cost of risk was 171 bps. However, as per our guidance, we expect the net cost of risk to be around below 150 bps by the year-end.
The next page shows the capitalization levels. By the end of Q1, our capital adequacy ratio stood at 16.13%, with a slight decline compared to the year-end mostly due to Turkish lira depreciation. We believe the current level of capital adequacy ratio, which is well above the required minimum level of 10.55%, indicates a very comfortable base. Tier 1 ratio is 13.4% at the end of the period. The major elements which impacted the capital adequacy ratio during the quarter can be seen on this slide.
This concludes our presentation. Thank you for attending to the conference. And now we can take your questions.
[Operator Instructions] Our first question comes from the line of Mr. Ovunc Gursoy of BNP.
And congratulations for the strong results. My first question is in light of the current developments, what can you change in your 2019 guidance? What you see as an upside or downside in your guidance, I wonder about it. And second question is how do you see the current interest rate environment, actually, in terms of funding costs? And the -- what is your expectation from the CBRT going forward and its impact on your potential hike or potential cut of funding rates, what kind of impact you envisage? And the last question is about the provision incline. I see you set aside mostly provisions. What is your policy about this provisioning, free provisioning? And also, last quarter, you released some of the provisions, so I'm just trying to understand your mentality.
Thank you very much for the questions. I think the main areas to be revised can be the inflation, taking into account the recent movements in dollar-TL rates. We can expect an increase in this CPI inflation expectation. Of course, this will depend on the -- several key conditions. I mean if opportunity -- we are still living in an opportunity environment due to the renewal of elections in Istanbul, and this is one of the main puzzles which gives rise to the increase in dollar-TL rates.
Also, fiscal second -- the second half will be important. We still -- I think it will be more clear after the renewal of elections in Istanbul because the Istanbul is an important part of Turkish economy. And after the elections -- I mean the renewal of elections, we will monitor the concentration on the reform agenda. We have to concentrate on the reform agenda. That's why I think the disclosed amount is important in order to decide whether to revise our expectations for CPI inflation.
Of course, inflation expectations can have an effect of -- effect on our interest rate expectations. You might remember at the beginning of the year, we were expecting a rate cut from the CBRT in a dramatic manner. Our assumption was that the inflation will be lowering in the second half of the year. Depending on the inflation developments, maybe we can revise our interest rate expectations as well.
And for the interest rate environment, what I can say is that in the first quarter, although CBRT didn't change its rates, we experienced a decrease in the funding costs. And this like rate expansion in our net interest margin, actually, this was mainly due to the loan -- weak loan demands, as I always say. Depending on the weak loan demands, there was no competition among banks in deposits, therefore, we experienced a decrease in deposit costs. Nowadays, we see some increases in marginal pricings on deposits, but I don't think that this will have a contraction effect in our net interest margin since we are advancing our loan rates according to that. And also what we calculate for the second quarter is that the average cost of deposits will not reach to its third quarter levels, therefore, we believe that, that will not be a contraction in our mixed interest margins in the second quarter of the year.
As I said, the CBRT decisions will depend on the CPI trend. And I think we all have to wait until the end of June for this revision and expectation. About free provisioning policy, all I can say is that the will of the team in the market is very high, as you observed. And this causes fluctuations in our results, especially through provisions, especially through net interest margin, especially through trading income. Therefore, taking into account this volatility in the market, we are preferring to set aside free provisions for bad times, I can seem to say. It is not specific to a specific loan, but depending on the quarter developments in our profitability, we prefer to set aside free provisions or release free provisions in order to provide a stable income to our investors. This is our policy for free provisions. I think these all answered your questions.
[Operator Instructions] Our next question comes from the line of [ Tus Karea ] of Morgan Stanley.
I have a few questions. My first question would be, maybe, if you could give a little bit more color in terms of your provisioning. Last quarter, you gave a good update and detailed update on how your IFRS 9 model was working, especially because we saw a very favorable development last quarter. So if you could maybe update us on that. And also, talk a little bit about in terms of the NPL ratios and Stage II ratios you are seeing. On the NPL side, what do you believe is leading actually lower-than-sector NPL ratios at this moment? And on the Stage II, if you could maybe break it down in what is quantitative and qualitative, what is model-driven and what is, perhaps, a subjective assessment by the part of management.
And my second question would be on capital. If you could maybe just clarify to us, you have -- here in your chart, we can see that you have had 24 bps of decrease in capital led by mark-to-market losses in the period. Could you please clarify where those came from? And also, on the other -- where you reported a 15 bps increase, it would also be helpful to see where that actually was generated.
Okay. Let me start with the provisioning side. I had shared the parameters of our models in the year-end conference call. I mean we are including several parameters in our model, like industrial production, CPI inflation, dollar-TL rates, CDS levels and benchmark rates. This is a rolling model. I mean in order to reflect our expectations for the future, we are continuously revising our expectations and change our expectations for the rest of the year or over the medium term. And therefore, sometimes, the improvements in the short run can cause us to release provisions according to our model. But in the second quarter, this may change. Therefore, it is not easy to give an exact prediction about the next cost of risk or provisioning on a quarterly basis.
For this quarter, what I can say is that there are some reversals, as you see on the slide, which is TRY 758 million. I can say that more than half of these provisions, provision reversals, is coming from the transfer from Stage II to Stage III. And also, because of the small improvements in some indications like industrial production and dollar-TL rate expectations, there are also some derivatives from these general provisions, especially in the Stage I loans.
What can I say about the provisions is that we are growing in line with our expectation for the year. As you know, our guidance for the whole year was 150 basis points net cost of risk. And for the first half of the year, we had shared that the net cost of risk can be higher in the first half, and we see that it is 171 basis points in the first quarter. For the second quarter, it may be flat or a little bit higher, but in any case, in the second half of the year, we expect the same level, which is 160 basis points that we guided at the beginning of the year.
And for NPL ratio and the Stage II ratio, what I can say about our situation compared to the sector and our private peers is that thanks to the strong selector rating and scoring system and cautious lending approach, our portfolios are not being deteriorated as much as our peers, we believe. And the main difference is coming from the retail side, especially. When we look at the customer behavior scores, 93% to 98% of the customers, of our retail customers, lie in the low-risk score range, which is one of the most significant indicators of the risk profile of our retail portfolio. And given the credit agency-approved data, the scoring distribution of Isbank is much better than the sector and peer group banks. Therefore, I think our retail portfolio is being less affected by the economic slowdown and high unemployment. I think this is one of the differentiating factors for Isbank.
And for capital adequacy ratio, what I can say is that the -- some of our losses is coming from the marketable securities side, depending on the increase in commercial rates. That is the reason behind it. And I think you asked about the 16% -- 16 basis points effect. 3 basis points is coming from the change in general provisions, and 5 basis points is coming from the currency impact of our sub-debt. And again, 7 basis points is coming from the change in fixed rate of assets, excluding currency impact items. I think it is the answering your question. And I think you have no more questions. It's about...
Yes. It was just about breaking down the Stage IIs, if you may, how you are seeing the behavior of the Stage II loans, and yes, any color you could provide on that.
About Stage II, you mean? Actually, about Stage II, we do not expect a change in the share of Stage II loans by the year-end. At the beginning of the year, we had shared that it will be around 13% to 14% in the loans. And we are not changing this for the time being. And most probably, the share of Stage II loans in total loans will be around the first quarter level. And actually, if I can provide you with a bit of breakdown of Stage II loans, about the origination, I can say that 40% of the Stage II loans is coming from Bankasi. And 10% is a -- or 13% is due to overdue loans. And 5% is a significant increase in credit risk and 15% is coming from administrative decisions. I think that was one of your questions.
[Operator Instructions] And our next question comes from the line of Bob Kommers of UBS.
I have 2 questions. First is on the fee commission growth, particularly strong growth in the bank -- from the bank card operations, I was just wondering what was driving that. Was that higher margins? Or was it maybe volume growth? And my second question relates to your cost of risk guidance for the full year. So do you expect a lower cost of risk in the second half than in first half? And aside all the marketable scenarios you have behind it is how do you see your collections develop through the year? So there were lower in first quarter. Is that just a seasonal thing? Or do you expect maybe a higher collection rate in the second half? And are there any indications of bigger loans where you may have high collections towards the end of the year?
Let me start with the fees and commissions growth. In the first quarter, as you see on the slides, fees and commissions income increased by 35% compared to the same period in 2018. Fees on payment systems and credit cards as well as noncash loans played an important role in this development, increasing by 65% and 69%, respectively. This is in line with our guidance for 2018 -- '19. Actually, the main driver for these items, for these 2 items is the increase in interest rates because the commissions from the POS transactions as well as just use of our cards in other banks' POS is mainly driven by the CBRT interest rate. And since we compare the fees and commission income with the same period in 2018, when the interest rates were around 12% to 13%, an important part of the increase is coming from the interest rates, we can say. So the volume increase supports these items.
In each year, we expect the volume increase of 15% to 20% both in cards and POS transactions. This is what we expect for 2019 also. But for the first quarter, because it's just a very short period of time, for the first quarter, I can say that the main driver is the increase in interest rates.
As I said, we keep our guidance for the whole year in terms of net cost of risk. We expect the collection rate to be around 20% for the whole year. We believe that throughout the year, it will improve as a gradual recovery. Of course, this is our base scenario, as you can guess. Of course, we can always derive these expectations depending mostly on these macroeconomic developments. But as I said in the beginning of my conversation, that it is still early to revise our expectations for the economy. I think we need stability. Political stability is a very important thing for the rest of the year. After the renewal of the Istanbul elections, we believe that the management's view is focus on, concentrate on the reform agenda, and we will see a more favorable growth condition in the second half of the year, which is the reason behind the improvement expectations of Isbank about the net cost of risk.
And actually, for the transfers to Stage II and to Stage III loans, most probably, we will complete an important part of these transfers in the second quarter. Therefore, in the second half of the year, we will not be paying the same levels of provisions. This is what we expect in our base case scenario here.
And one final question is that collection rate, what was that in percentage terms in the first quarter?
It is slightly lower than 10%.
And we have no other questions. So speakers, back to you, please, for the conclusion.
Okay. Thank you very much for your participation. Have a nice weekend. We are looking forward to seeing you at our next conference. Thank you very much.
This concludes today's conference call. Thank you all for your participation. You may now disconnect.