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 Türkiye Is Bankasi Quarter 1 2020 Financial Results Conference Call and Webcast. I will now hand you over to Ms. Senar Akkus, CFO; Ms. Gamze Yalcin, Deputy Chief Executive; Mr. Süleyman Özcan, Head of Investor Relations, your speakers. The floor is yours.
Thank you very much. Good evening, and welcome to our conference call. This is Senar Akkus speaking. Gamze and Süleyman , they are with me. As you know, they are from our Investor Relations function. As we are going through challenging times, we hope all is well with yourselves and your loved ones.
Before going into the details of our performance, I would like to give you a brief update of macroeconomic outlook in this environment, the measures taken by the authorities to cope with the COVID pandemic, Isbank's response and the period highlights for Q1.
In the first quarter of 2020, COVID-19 crisis has disrupted global economy in an unprecedented way. In a time frame of peak, global growth forecast for 2020 turns negative in March. In order to mitigate the damaging economic impact of the COVID-19 pandemic, Central Bank led by the Fed conducted rate cuts and took several liquidity measures while government stepped in with loosening their fiscal policies, announcing support packages.
Despite these strong measures, the uncertainty about that and duration of this crisis caused financial markets to plummet. Capital flows towards emerging economies registered its record outflows during the first quarter. Against this backdrop, Turkish economy has also faced a decline in exports, lower domestic demand and large capital outflows, particularly in the last month of the quarter. However, the Turkish economy is still expected to register a strong growth in the first quarter, thanks to the solid performance seen in the first 2 months of the year. On the other hand, the pandemic will have a more pronounced negative impact on the growth outlook in the second quarter, as it will be also the case in the rest of the world.
The pace of annual growth in 2020 will be shaped by the developments in the second half of the year. If the pandemic loses pace in the second half, a strong recovery can be recorded during this period, still ensuring the limited positive growth for the whole year. The negative effects of coronavirus outbreak necessitates public expenditures to support economic activities. So far, the government has taken fiscal measures, including credit guarantees, tax deferrals and various transfers reaching a total amount of TRY 200 billion. Other than higher public expenditures, weak economic activities will be a drag on the group's performance. Having increased to 2.9% in 2019, positive GDP ratio is expected to rise further in 2020.
After the coronavirus crisis started to surface, authorities took several measures to increase liquidity and support credit flow of the real sector. The Central Bank also cut the policy rates by 200 basis points in 2 meetings to 8.75%. The current inflation outlook implies that CBRT policy team have a limited room to further reduce the interest rates.
Despite the recent depreciation in the Turkish lira, the shortfall in international commodity prices, especially oil prices, and this inflationary impact of aggregate demand conditions affect the inflation outlook favorably. We expect annual CPI to remain at 2-digit levels in the first half of the year. On the other hand, for the year-end, we see our single-digit inflation expectations.
On Page 4, you can see Isbank's response to pandemic. As you know, our continuous aim is to reel the bank close to the customers. And in these challenging times, we came forward with timely responses in order to support the real sector and households in every possible way. Just to mention some of these actions, we have deferred loan payments of our customers who are negatively affected from the pandemic. We have waived money transfer fees from digital channels. We have provided additional loan limits where needed. We have increased daily cash withdrawal and contactless payment limits. We have actively utilized our recently introduced CGF package limits, expanding TRY 2.4 billion in a short time frame, supporting the SMEs primarily. We are continuing our SME financing through CGF mechanism with the lately increased guarantee limits to TRY 5.1 billion. Besides, we have taken all the necessary actions in order to ensure the wellbeing of our customers and employees.
Actually, this period allowed us to test the effectiveness of our digital infrastructure in terms of remote working, and I can definitely say that this experience proved to be very successful for Isbank. As a matter of fact, as you all know, we have started to largely invest in our digital infrastructure quite earlier, so we answered these challenging times very prepared. As the best organization, we were able to continue our operations seamlessly while 90% of our headquarter employees and 65% of our branch staffs were working from their homes.
On Page 5, we have the main highlights for the period. In the first quarter, we achieved a strong TL loan growth, which is 10.8%, mainly driven by general purpose consumer loans and non-retail loans. NPL formation and collection were in line with our expectations for the first quarter. Our coverage ratio increased through higher loan loss provisioning and additional free provisions were set aside in this current challenging environment, of course.
Robust FX liquidity profile was sustained and foreign currency LCR increased compared to the previous quarter. Funding mix proactively managed, well managed, with strong focus on cost and liquidity. Cost of key analytics funding continued to decline. Share of demand deposits in total deposits reached 32%, contributing to the low-cost funding base. Strong adjusted NIM performance continued in Q1 with a level of 4.9%. Year-on-year net fees and commissions growth up 16.1%. This suggests a strong start to the year if we consider the downside risk for the coming quarters. Our capital adequacy ratio also stands at a comfortable level, which remains above 17% even before the adjustment for the regulatory forbearance.
Now I will leave the floor to Gamze for the details of the bank's performance.
Thank you, Senar Hanim. Welcome, all, and thank you for being with us. We, once again, wish you and your dear ones are all coping well with the situation.
On Page 6, we have the major P&L items as well as profitability and efficiency indicators. In Q1, despite some downward repricing in the loan book, TL funding cost also continued to decline with the contribution of further rate cuts from the CBRT, and we achieved to maintain our TL core spreads and strong NIM performance. Strong volume growth on the TL side also supported our swap-adjusted net interest income performance, and we posted a 7.5% quarterly increase while the year-on-year growth was at 74%. We will discuss the details and the sustainability of the fee performance in the relevant pages, but I can say that fee income growth in Q1 was still in double-digit area at 16% on a year-on-year basis. We believe that this will provide us a buffer for the coming quarters in which fee income generation will become more challenging due to regulatory and COVID-related issues.
Despite being higher than around 17% guidance for the full year, year-on-year OpEx growth for the first quarter was mainly in line with our budget expectation. The increase was mainly due to the provisions for collective bargaining agreement and other personnel expenses to be realized in the second quarter and seasonally high one-off expenses.
Since these are the times that require being prudent, we were heavy on loan provisioning in Q1, and this created a drag on return on tangible equity, which stood at 10.7% by the end of the period. We also set aside TRY 100 million of free provisions in the first quarter. Cost-to-income ratio was flat at 38.7%.
Page 7 shows the main balance sheet items. In Q1, the recovery in TL loan demand was still in place, and we achieved a decent performance in TL loan growth. In the first quarter, retail loans, especially general purpose loans and non-retail loans both contributed to the growth. In this period, we aim to meet all the financing needs of our customers that fits into our prudent underwriting approach. On a dollar basis, FX loans was almost flat compared to year-end.
In the first 3 months of the year, our focus on cost-oriented and flexible funding management continued. In this regard, there was a decrease in TL deposits in favor of TL non-deposit funding, which had more attractive rates. During the quarter, as you all know, we made a successful Tier 2 issuance in international debt markets amounting to USD 750 million, further supporting our already solid liquidity and capital base. Demand deposits continued to further support our low cost of funding with a share of 32.1% in total deposits. Lastly, we maintained our liquidity ratios at comfortable levels. By the end of March, total and FX LCR stood at 216% and 524%, respectively.
On the next page, we have the net interest margin and spread evolution. In Q1, we achieved a slight Q-on-Q increase in our swap-adjusted NIM, which stood at 4.89%. The front-loaded interest rate cuts by CBRT, coupled with our cost-sensitive and dynamic-funded management, supported the NIM performance in Q1, leading to a continuation of the decline in funding costs, including the cost of swaps.
By the end of Q1, we are significantly above our swap-adjusted net interest margins guidance of 3.8% to 4%, yet this is normal since we started the year at a high base, and the normalization is likely to occur throughout the year as the repricing continues. However, Q1 performance suggests that there might be some upside risk as well. The swap cost for the quarter declined to TRY 847 million from TRY 1.1 billion in the previous quarter.
On our next slide, I'll be touching on fee income performance in the first quarter. The first quarter of 2020 was another period in which we achieved a remarkable fee income performance despite the regulatory changes that were effective as of March and the negative pandemic impact that started to prevail in the second half of March. The quarterly increase, which was mainly driven by cash loans and mutual fund management fees, was 16% above our guidance of 10% increase. Of course, going forward, this guidance might have to be reviewed since the regulations, especially on the commercial side, as well as the negative repercussions of pandemic on fee business could not be taken into account during our budget process.
In the meanwhile, thanks to our diversified fee base, as we always mention, ongoing efforts to enrich the tightened scope of fee-based services on digital channels and relatively high loan growth. We are doing our best in terms of compensation and delivering a decent performance.
On Page 10, we have the asset quality indicators. By the end of Q1, our NPL ratio declined to 6%. If the easing provided by BRSA regarding the due dates taken into account in the classification of tandem loans hasn't taken place, the ratio will stand at around 6.28%, still indicating a lower level compared to the year-end. It goes without saying that the loan growth performance in the first quarter also contributed to the decline in the ratio.
There wasn't any NPL sale or chunky write-offs in the first quarter. Due to the COVID pandemic, we were on the conservative side in terms of provisioning and Stage 2 and Stage 3 coverage ratios increased accordingly. Net cost of risk for the first quarter stood at 249 bps. This figure is no doubt higher than our expectation of below 150 bps for the full year. However, there is definitely the currency depreciation and the virus outbreak impacts that needs to be taken into account as well.
We haven't revised our net cost of risk guidance yet as well since we believe we need to monitor the evolution of the situations further to come up with a clear insight. There's a downside risk in terms of net cost of risk guidance, yet, the duration of the COVID-related issues and the length of the normalization process will be crucial in that regard.
Next page shows the capitalization levels. As of Q1, our reported capital adequacy and Tier 1 ratios were 18.4%. Capital adequacy ratio still stood at solid levels, above 17% level. We believe that our capital ratios are strong enough to absorb the potential adversities in the economy as well as to support the balance sheet growth. The successful and timely Tier 2 issuance in the first quarter further supported our already comfortable capital base.
And this concludes my presentation. Now we can take the questions to answer. Please go on.
[Operator Instructions] Our first question comes from Mehmet Sevim, JPMorgan.
My first question will be on provisioning, please. And I'm sorry if this is in the presentation as I do not have the presentation for the moment. I just wanted to check the breakdown of provisions. And specifically, what is the impact of COVID-19 outbreak that you've taken already in the first quarter.
And also you mentioned the currency depreciation impact. So what is the impact coming from currency depreciation? And can I also confirm that this is not hedged in your accounting?
And also in terms of the cost growth, it seemed quite high this quarter. I think that was 36% year-on-year. Can you please tell us the reasons behind that? And how do you see cost growth evolve in the remaining quarters?
Okay. Thank you very much for the questions. As you know, we have guided net cost of risk at 150 basis points for 2020. But as you see, for the first quarter, our net cost of risk is above this average. But there is an increase in the coverage ratio of Stage 2 loans by almost 2 points. And also, we see an increase in the NPL coverage from 50% to 59%. What we have done in the first quarter is that, of course, we have increased this new recognition date from the BRSA into our model; however, we haven't changed our model yet since our economists believe that there is still not sufficient macroeconomic data in order to rerun our statistical model. And the macro models in the sense used for IFRS 9 were not updated after the pandemic. After the introduction of new recognition days in our model, we reassessed our portfolio and increased the provisions for some kind of loans, which were mainly overdue for more than 90 days, and also, we increased the coverage ratio in some sectors, which are expected to be highly affected by coronavirus. And in total, it added to our net cost of risk by almost 55 basis points -- I mean coronavirus effect. And also before the currency depreciation, our net cost of risk increased by 43 basis points, this is the breakdown of our provisions.
Although we are above our guidance -- I mean average guidance for the year, we are not revising our net cost of risk guidance for the time being. As I've said, after seeing the developments in the second quarter and after revising our macro expectations, we may be in a position to revise our net cost of risk guidance, but we still believe that it is early still to do that. Also, taking into account the coronavirus risk, we set aside another TRY 100 million as free provisions. As you know, we have a balance of -- we had a balance of TRY 1.1 billion as of year-end. Now it is TRY 1, 225 million as of March 2020, and it provides a cushion for us, of course, in terms of profitability.
And about the hedge of currency impact, I can say that it is included in our trading income. I mean we are carrying -- we are carrying a long position in terms of a couple of TLs. And we can say that the impact of currency on the provisions is almost hedged by the dollar fee acquisition of the bank.
And about the high OpEx growth, I can say that this is mainly due to the personnel expenses. And it is also due to the provisions for a collective bargaining agreement and some personnel expenses to be paid in escrow. Also, we see some seasonal effects coming from health expenses. This is why we are seeing a high growth for OpEx. But it is -- it was in our budget, therefore, we are still in line with our budget. That means, we are keeping our OpEx growth guidance of around 17% for 2020.
[Operator Instructions] As we have no further questions, dear speakers, back to you for the conclusion.
Okay. Thank you very much for joining us. I think there are no questions on the web as well. Keep safe and healthy. We hope to see you in better conditions in the beginning of August. Thank you very much, again, for being with us. Thank you.
Thank you. This concludes our presentation. Thank you for participating. You may now disconnect.