Turkiye Is Bankasi AS
IST:ISCTR.E
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Turkiye Is Bankasi AS
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Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Isbank Q1 2021 Financial Results Teleconference and Webcast. [Operator Instructions]
Today's event will be hosted by Ms. Senar Akkus, Deputy Chief Executive; Ms. Gamze Yalcin, the CFO; and Ms. Nese Sözdinler, Head of IR and Sustainability. [Operator Instructions]
So without further ado, I would now like to pass the line to the Isbank management team. Ladies, the floor is yours.
Good evening, ladies and gentlemen. This is Senar Akkus speaking. Thank you for attending Isbank's financial results call for the first quarter of 2021. Before starting, I would like to inform you that Isbank forgot to place Nese at our ranks. I had transferred my duties related to the CFO position to Gamze hanim, so she'll be hosting the earnings call from now on. I will continue to carry my responsibilities and duties regarding our group companies. At this point, I should say that it's such a pleasure for me to meet you at these teleconferences in the last 3 years. I thank you very much for your interest and support to our bank and our teams. I wish Gamze success in her new assignment and also wish good health and good luck to all of us in today's challenging environment. Now I'm giving the floor to Gamze hanim. Thank you very much.
Thank you, Senar hanim, for your kind words. So from now on, Nese and myself will be presenting the financials. Moving on with today's agenda, let's briefly go over the recent macro outlook as well as the trends in the banking system.
As of the 4 months of this year, leading indicators have shown a continuation of a recovery trend. We observed strong manufacturing activity as well as a solid export performance in the first quarter. Despite pandemic conditions, tight monetary and cautious fiscal policy, we can say that the domestic demand remains firm. We believe that the recent restrictive measures and the vaccination process will contain the spread and the pandemic will lose its grip on the economy, especially in the second half.
Taking into consideration the recent volatility in the financial markets and the trend in inflation, cautiously we achieved our 3.5% GDP growth expectations. However, depending on the pace and length of the pandemic as well as the inflation outlook, there might be an upside risk on this expectation.
Due to rising global commodity prices and depreciation in the Turkish lira, inflation continues to be a concern for the Turkish economy. Along with the [ perceived ] tight monetary policy stance, we expect a downward trend in inflation in the second half. We anticipate the year-end consumer inflation to surpass our previous forecast of 11% and to be realized at around 13% level according to our preliminary calculations. But of course, upside risks on inflation forecast will be closely monitored as well.
On the banking sector side, along with the tightening measures, annual loan growth has decelerated. As expected, Turkish lira loans continued to be the main driver as in the last year. Demand for FX loans remains weak. On the deposit side, we observed a decline by around [ USD 15 billion ] in FX deposits compared to the year-end. But the annual rise in FX deposits in USD terms was still at high levels with 10% level.
So within this operating environment, when we look at the main highlights for this quarter starting with the gross figures, we can say that Turkish lira loan growth was decent at 5%, Turkish lira deposits grew by 5.5%, whereas FX deposits contracted by 7.7%. Share of demand deposits stayed at a strong level of 42%, once again indicating the highest base among private banks.
Due to rate hikes and funding cost increases, NIM, net interest margin, was under pressure beyond expectations. Asset quality indicators were on track. Net cost of risk stood at 167 bps. Annual OpEx growth was limited due to high base of previous year. Income from subsidiaries continued to support profitability. Capital adequacy ratio continued to stand close to 17%, well above, again, minimum required levels, indicating a comfortable level for the future growth potential. Our liquidity was robust again with an FX LCR of 472% (sic) [ 482% ] and a total liquidity coverage ratio of 167% level.
Now I leave the floor to Nese for the details of the bank's performance, and I'll be with you again in the Q&A session. Please, Nese.
Thank you, Gamze hanim.
Welcome all and thank you for joining our webcast. On Page 4, we have the major P&L items as well as the profitability and efficiency indicators. In the first quarter of the year, due to increase in funding costs, a decline in swap-adjusted net interest income was inevitable. But with the contribution of valuation, trading income-adjusted net interest income stayed in line with our budget.
There was a base effect in fee growth as a result of regulations that were introduced last year after margin [indiscernible] as well as the pandemic impact. In the remaining quarters, we expect fee growth to be in line with our guidance of 15%. Thanks to our diversified business model, we once again recorded a remarkable contribution from our participation. Year-on-year OpEx increase was limited also owing to the high base of last year. As a result of benign asset quality trends and strong [ product ] provisioning approach, provision expenses started to soften in the first quarter. Compared to year-end, there was a slight recovery in the return on tangible equity. On the other hand, the increase cost-income ratio was a result of the circumstantial pressure on the revenue side.
Page 5 shows the main balance sheet items. In the first quarter, our Turkish lira lending growth was 5%. As expected, TL loans have been the main driver of growth. TL loans will most probably continue to lead the way in the second half as well. On a demand basis, roughly 1/3 of TL loan growth came from the retail segment. The 2/3 of it was on nonretail segment.
As for foreign currency lending, we had a further 4.3% contraction in USD terms in the quarter. Half of the shrinkage is related with the parity impact.
If we continue with the funding side. In the quarter, we had some NIM [indiscernible]. Accordingly, our foreign currency deposits shrank by 7.7% in USD terms versus a 5.5% growth in Turkish lira deposits. In currency-adjusted basis, the decline in FX deposits was around 5%. As Gamze emphasized, we dynamically managed the balance sheet, optimizing the cost of alternative sources of funding, [indiscernible] concentrated more relatively expensive time deposits.
Our loan-to-deposit ratio continued to stand below 100%. As you know, Isbank has the largest demand deposit base amongst peers. In Q1, despite the rise in interest rates, share of demand deposits was stable at 42% of our deposit base, continuing to further support our low cost of funding, once again indicating the customers preferring to be with Isbank. Please note that half of FX deposits are in the form of demand deposits, while share in TL increased by 50 basis points to 27.4%.
As for the external liabilities as of the March end, our total external dues were USD 11.4 billion, of which USD 4.8 billion is due within a year. And against that, we have USD 14 million of liquidity buffer. We have nearly triple of the upcoming reduction. FX LCR was again stellar at 482%.
On the next page, we have the NIM and spread evolution. In the first quarter, swap-adjusted net interest margin was around 2.5%, which is an inevitable outcome given the current market dynamics. In line with our guidance, we started the year with a [ low ] net interest margin. Our NIM contracted by 90 basis points in the first quarter. Although there may be some downside risks to our full year NIM guidance, stabilization in funding costs and repricing of our loan and securities portfolio will help to mitigate the repercussion of this challenging environment. We will continue to monitor the developments until June and consider making a revision if suggested by macro indicators at that time.
On Page 7, we provide information about the securities portfolio and CPI-linked contribution. Securities portfolio, which makes up 17% of total assets, continued to support net interest income through a slight upward repricing. Our CPI linkers and other floating-rate notes, which constitute more than 70% of TL securities, stand as a natural hedging item for our fixed assets, which also displayed their contribution in the second quarter.
CPI-linked securities had a share of 47.4% in TL securities and their quarterly yield stood at 16.1% in Q1. As you know, we are using 12 months ahead of CPI expectation for the valuation of CPI linkers portfolio. On the other hand, if we use the actual CPI level, net interest margin and return on tangible equity would be higher by 30 basis points and 230 basis points, respectively.
On our next slide, I will be touching on fee income performance. As you may know, in recent years, we have been strongly focusing on the fee generation. What we have done is we have concentrated our efforts to grow business loans in products and services, which provides fees and commissions, and recalibrated pricing tools are tracked consistent with this revenue stream. On the other hand, in 2020, pandemic-related slowdown in transaction volumes and waivers on top of regulatory changes presented constraints for fee income generation. Certainly, these developments did not keep us from closing the year in the positive territory. For 2021, we expect fees and commissions income to increase by around 15%, which we believe is achievable. We anticipated payment systems to bounce back as the main supporter of fee growth.
The reason that our year-over-year increase is below the guidance, on the other hand, is simply the base effect since a certain portion of 2020 Q1 was exempt from both the regulatory and pandemic impact.
Next page shows the NPL and provisioning trends. In Q1, underlying asset quality indicators projected these 2 trends. Our net NPL formation rate for the quarter declined to 72 basis points. During the quarter, we have sold an NPL portfolio of around TRY 745 million in exchange for TRY 72 million, indicating a remarkable recovery rate compared to similar transactions in the market. The reason for a slight decline in stage 3 coverage ratio, well, this transaction is a portfolio sold was 100% provisioned for. If the provisioning data adjusted for this sale, Stage 3 coverage ratio will stand at 64.4%.
As you know, our net cost of risk guidance for 2021 year-end is below 250 basis points. Currently note that our net cost of risk expectation does not exclude currency impact. While our reported cost of risk stood at 167 basis points in Q1, without currency impact, it was 92 basis points. Of course, on top of improvement in the NPL additions, our prudent provisioning approach enabled us to reach this outcome. It goes without saying that our solid pre-provision base amounting to around [ TRY 2.9 billion ] provides an additional buffer against any unforeseen risks.
The next page shows the capitalization level. As of the quarter end, our capital adequacy and Tier 1 ratios, excluding the impact of BRSA forbearance, was at close to comfortable levels despite the currency impact. With the, the [indiscernible] capital adequacy ratio to 10% depreciation in TL is around 45 basis points. We believe that our capital ratios are strong enough to adapt to potential adversities in the economy as well as to sustain the growth to enable [indiscernible].
And this concludes our presentation. Now I think we can have your questions.
[Operator Instructions]
Our first question comes from Mr. Alan Webborn from SocGen.
Apologies if you've gone through this already as I came on a bit late. But what has Q1 told you so far about where you are versus the targets that you set out at the beginning of the year? I appreciate it's a bit early days and that Q1 was going to be a difficult quarter in terms of parts of the result. But, I mean, could you just sort of walk us through where you think you are now? That would be helpful.
Secondly, are you concerned that the sort of the lockdown that you're unfortunately experiencing in Turkey at the moment will have a dampening effect on activity in the second quarter?
And lastly and specifically on the margin performance, how do you see sort of Q2 performing moving versus Q1? And clearly, the -- I mean, I guess, further improvement is likely to come in the second half, but I'd just be interested to see how you feel current conditions are.
Okay. Thank you very much for the question, Alan. Briefly, I must say that we are not deviating from our baseline scenario. And let me also share with you that, of course, our guidances for the year-end, for the total year, is derived from our macro expectation, how we see the macro environment and then the banking system, and then the expected guidances for the bank itself.
If we start with the -- to give you a color on this, [ regional ] side is needed, let me say. As you know, there's a trade-off between growth, current account deficit and inflation figures in Turkey. While looking at the messages of the office, it seem share that price stability is the priority in the policy stance of Turkey. And we know that for a sustainable growth, it's important to control the inflation first.
Our GDP growth expectation, which is, as we shared with yourself in the beginning of this year in January, it's 3.5%. It could be considered as cautiously optimistic. But taking into consideration that price stability is the core issue and we need to see how's the pace of the recovery in terms of the pandemic risk, if we will be seeing a potential improvement [ through this ], it's -- the economic activity and the trend in inflation, so we need to see all of these indicators' performance and then we might reconsider our guidance for macroeconomic picture.
Of course, we will be -- we are still in the monitoring phase. If needed, in June or onwards, we might go for a revision on some impacted guidance items like net interest margin or growth rate, et cetera. Let me give color and it is also related with your third question, according to my notes.
I should say that our swap-adjusted net interest margin for the whole year was around 70 bps contraction, and we expected to see the bottom in the first quarter. This is what we shared with yourselves in the beginning of this year during the investor and analyst meeting presentation. So in line with this guidance, our net interest margin contracted by 90 bps on a quarterly basis in the first quarter.
Although there might be some downside risks to our full year net interest margin guidance, stabilization in funding costs and repricing of our loan and securities portfolio will help us to mitigate these repercussions of this challenging environment in the first quarter. We expect net interest margin to be flattish in the second quarter with a potential of gradual expansion to start not earlier than the end of second quarter. Most probably, margin widening will be evident in the second half of this year. So for this as well, I can say that we will be closely monitoring the trends for considering a revision in June or onwards if necessary.
I would say on your question -- the last question from your -- amongst your questions, is what's the impact of lockdown by the economic activity into, we must say that there are many exceptions defined and the economic activity in this continues. And when we look at on a sectoral basis, which is also continuing in the second quarter as well just like in the first quarter, the manufacturing industry and the export industry's performance are high. So we don't expect to see a major deterioration in the economic activity. Thank you, Adam. I hope...
We have registered a question earlier from Ms. Valentina Stoykova from Barclays.
Okay. We'll be moving to the next question. The next question comes from Mr. Mehmet Sevim from JPMorgan.
Yes. Just one clarification from me on the effective tax rate, which was quite low this quarter. Could you please tell us what's caused it? And how do you see it develop in the coming quarters, I think, given also the recent developments?
And just on the cost base, could you please talk about the trends there a little more in detail? I see a 10% year-on-year decrease in the HR costs but a 25%, 26% increase in other costs. So how do you -- what kind of trends are you seeing there at the moment? And again, how do you -- how would see it develop in the coming quarters?
Okay. Thank you, Mehmet bey. So starting with the tax question. As you know, we have been introduced with new corporate tax rates. But the regulations will be effective in the second half, starting from the 1st of July. So therefore, in the first quarter, we used 20% for both current corporate tax obligations and deferred tax calculations. But inevitably, the overall rate for the corporate tax at the year-end will be 25%.
Here, I would like to emphasize that the corporate tax rate is not the only factor which determines the tax provision levels of the bank, and it will not be correct to give a precise indication about the effects of the latest tax rate changes. The -- as you know, the valuations of securities and derivatives as well as the share of subsidiaries' income in total will all be effective for the coming quarters. But for this quarter, let me mention once again that we use 20% not only for the current corporate tax obligations but also for the deferred tax calculation.
So the other question was the -- related with the OpEx. It's by looking at my notes. So I can see so -- yes, so to start with, we continued our OpEx growth in this quarter, and that's why we keep with our guidance. As you know, first of all, we had a very limited, even less than 5%, FX expenses in our total OpEx figure. So even though we observed FX volatility, Turkish lira depreciation, we don't see the contribution coming from this FX movement in our OpEx base. And on top of that, we keep our cost control management perspective. And especially, I can say that during the pandemic period, marketing, maintenance and administrative expenses were all limited.
Going to your question about the components of HR costs within OpEx, for this part, we had a one-off expense in terms of HR, and this is mainly related with the one-off bonuses, we can say. So I should mention that it's still -- that's why it's still just contained for the growth of this OpEx figure.
Our next question comes from Sadrettin Bagci from [ Guaranty Bank Asset Management ]. [Operator Instructions]
Michael, if no further questions or if the lines of the participants are not good enough to convey their questions, they can always reach us through our contact numbers, emails. But I guess we do have a question coming from the webcast. And let me see the question and read the question. It is about, "Can you please talk about your deferred loans portfolio?"
Okay. The total amount we have deferred so far is around TRY 42 billion. The outstanding principal amount of deferred loans is around TRY 26 billion by the end of the first quarter. The share of deferrals with the total loan book is limited to 7%. And I should also say that approximately 2/3 of the deferred loans are in nonretail segments.
Regularly, paid portions both in retail and in nonretail segments are at high levels, like more than 90% and around 80% of them are classified under Stage 1. Coverage rates for Stage 1 is more cautiously determined at almost 2.5%. So this reflects our conservative approach in terms of coveraging this deferred loan portion even though the regularly paid portions in both segments are at very high levels.
For Stage 2 coverages for this portfolio, it doesn't significantly deviate from our Stage 2 coverage averages, which is also determined on a very conservative stance.
I guess from the webcast, there is another question coming from the -- related with the FX liquidity of the bank. So we shared the figures during our presentation. The total FX liquidity of the bank is USD 14 million. I can say the components of this figure. Like 2/3 is the FX swap and the remaining 1/3 is related with the money markets transaction, unencumbered securities, [ bank notes ]. It's a very liquid portfolio that we keep.
The other question is related with our maturing liabilities, I guess, from the webcast. Also, I can say that in the coming next 12-month period, our maturing FX liabilities amounts to USD 4.8 billion. Let me remind you once again that when you look at our FX liquidity amount and compare it with our maturing FX liability within the next coming 12-month period, I can say that we're nearly 3 [indiscernible] we have for this maturing performance.
Another question coming from the webcast. Sorry, I cannot see.
About the NPL [indiscernible] issue.
Okay. Maybe we should mention about the NPL, the NPL inflows, the collection performance altogether. In the first quarter, as you know, as I said earlier, we observed a sustained recovery in economic activities mostly driven by manufacturing and export industry's performance. So I should say that the reason why we have lower NPL inflows is related with the strong performance of the recovery, especially both in manufacturing and export industries in which we are well positioned. And I can say that, I mean, we had only 1 big-ticket file during this period which is classified under Stage 2.
We had an asset sale within this quarter, as we disclosed earlier, with a recovery rate of 9.6%. We sold TRY 745 million. And I should say that thanks to the conservative and prudent provisioning stance of the bank, that it was already provisioned by 100% level.
So when we look at the trends for -- in these coming quarters for NPL or net cost of risk, I should clearly say that it's very much related with the macroeconomic conditions, with the pace and length of the pandemic, the vaccination rollout, the strengthening sectoral recovery, the inflation outlook.
But we are -- if you remember, we set our guidance for NPL -- even without forbearance, we expect it to be less than 6.5%. And if you'll remember, we also had shared a -- also with -- the cost of risk figures with yourselves, which is less than 250 bps. While looking at quarter's net cost of risk figures, we can say that we are facing with a kind of normalization in terms of the net cost of risk figure. So we are still keeping our original issued guidances, but I can say that we can see an improvement in these guidances, which is very much related with the economic performance.
Another question is regardless with the forbearance by the BRSA. As you know, yes, we are saying introduced -- during the [indiscernible] adverse impacts of the pandemic, introduced forbearances for the capital adequacy ratio and the NPL recognition. And as you know, we are very comfortable with our forbearance measures, that indeed, as a reflection of our transparent communication with yourselves all the time, we provide both with and without forbearance metrics in our presentation. So when you look at the relative -- related slides in our presentation, when you look at the NPL with and without forbearance, you will be seeing that we are comfortable in our figures.
We know that BRSA is working on this issue. But whatever the decision of the BRSA will be, we will be comfortable with our results to present yourselves.
Another question. It's a follow up from Mehmet bey's question, I guess. "Could you maybe explain why there was one-off bonus payments for employees last year? Was this related with COVID-19?" And now this is unusual payment to our employees related with the performance of them. And this year, it's a little bit lower than the last year's figures basically. This is very much related with the performance of the employees that was, for sure, not related with cost.
Thank you. We'll give another 30 seconds for any additional questions.
I guess no further questions?
Yes, correct. I'm seeing no further questions. I'll pass the line back to you for your concluding remarks.
Okay. So then thank you, all for participating in this teleconference. Though this was a challenging quarter, thanks to my colleagues' dynamic balance sheet management and the expanded revenue generation capability, which is historically proven, so we are proud to present you with results. Looking forward to see you all soon. Until then, stay safe and healthy, everyone. And you know that whenever you have a question in your mind, please contact us. We'll be ready to answer your questions. Thank you.
Thank you very much. We'll now be closing the lines.