Turkiye Is Bankasi AS
IST:ISCTR.E
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Turkiye Is Bankasi AS
Earnings Call Analysis
Q1-2024 Analysis
Turkiye Is Bankasi AS
In the first quarter of 2024, Isbank demonstrated resilience in a challenging macroeconomic environment. Domestic economic activity remained robust despite tighter monetary policies. Monthly inflation exceeded expectations, driven by increased minimum wages, fluctuating energy prices, and backward indexation effects. The Central Bank of the Republic of Turkey (CBRT) responded by raising the policy rate to 50% in March. This move, along with positive ratings from international agencies, showed growing confidence in the Turkish economy. Isbank expects a gradual decline in inflation, taking year-end inflation to 40-45%, and GDP growth slowing to 3.5%.
Net interest margins (NIM) faced pressure due to ongoing rate hikes and additional quantitative tightening measures. Despite these challenges, Isbank has focused on spread and margin management. Asset repricing has begun to support margin expansion, and with funding rates reaching a plateau, improvements are anticipated in the latter half of the year. Asset quality remains strong, with the bank showcasing superior NPL performance and sustaining solid capitalization levels. The NPL ratio declined to 1.9% from 2.1%, with high collection performance and the highest NPL coverage ratio among peers at 76%.
Despite pressure on net interest income, Isbank's profitability was supported by its fee generation capabilities and trading income. Net fee income saw a remarkable annual growth of 215%, with a 15% increase quarterly. The bank maintained its leadership position in fee income, driven by strong performance in payment systems and other key areas. Income from participations also added to net income. Due to these efforts, Isbank's return on equity stood at more than 31% for Q1 2024, and its overall profitability received a significant boost.
Isbank maintained strong capitalization, with solid capital adequacy ratios. The common equity Tier 1 ratio was at 13.3%, and the capital adequacy ratio stood at 16.3%. The bank's strategy focused on cost-sensitive and rational pricing approaches, ensuring a robust core deposit base. Despite a slight decrease in TL deposits, FX deposits saw an uptick. Isbank redeemed $1.25 billion of senior euro bonds in April, ending Q1 with a total external liability of $6.5 billion, more than covered by FX liquid assets.
Isbank's strategic focus remained on selective loan growth, especially in productive sectors like SME businesses, exports, and investments. With the stabilization of macro conditions, the bank expects a pickup in FX loans, continued support from export finance, and benefits from increasing tourism activities. ESG funding continued to be a priority, with sustainable funding making up 45% of their total funding by Q1’s end. Isbank's issuance of a TRY 4.5 billion green bond in April was a notable milestone.
Going forward, Isbank expects a flattish NIM trajectory in the second quarter due to the impact of recent rate hikes. However, an improving trend is anticipated from Q3 onwards, with significant improvements expected in Q4. The bank remains comfortable with its macroeconomic assumptions and expects strong fee income to continue supporting profitability throughout the year. Isbank's guidance for the year includes a fee income growth exceeding 100%, indicating a strong financial outlook for 2024.
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Ladies and gentlemen, welcome to Isbank First quarter financial results audio webcast. Our event will be hosted by Ms. Izlem Erdem, CFO; and Ms. Nilgun Yosef Osman, Head of IR and Sustainability. [Operator Instructions]
Now I hand over to Izlem.
Thank you. Hello, and welcome to our earnings presentation for the first quarter. This is Izlem speaking. Thank you all for joining. Let me provide a summary of the period with respect to macroeconomic environment and Isbank's performance before leaving the floor to Nilgun for the details. In the first quarter of 2024, domestic economic activity showed remarkable resilience despite the tighter monetary policy stance. During this period, due to base year impact, industrial production recorded a limited annual increase, while demand indicators remain strong. This suggests that demand side inflation pressures continued.
During the first quarter of the year, monthly inflation exceeded expectations, primarily driven by the increase in the minimum wage, fluctuating energy prices and the impact of backward indexation. Accordingly, following the January rate hike, CBRT made another significant move by raising the policy rate to 50% at its March meeting. This decision strengthened the already tight monetary policy stance. It's not worth that the positive assessment and rating upgrades from international credit rating agencies have confirmed the growing confidence in the Turkish economy.
This anticipate a gradual decline in monthly inflation figures taking the year-end annual inflation to 40% to 45% levels and a slowdown in GDP growth to 3.5%. Given the current level of USD TL, we reiterate our expectation for a real appreciation of the Turkish lira throughout the year. Against the backdrop of this macro and operating conditions as we expected the pressure on net interest margins prevailed in the first quarter as well.
In that respect, spread and margin management has been our primary focus. Although repricing of assets has been a supporting element for the expansion of margins, ongoing rate hike cycle, along with additional quantitative tightening measures, mainly in reserve requirements have put a further pressure on net interest margin and delayed the expected improvement in margins.
Going forward, we expect the improvement to become visible as the funding rates have now reached a plateau. On the other hand, our continuous remarkable performance in fee generation capabilities and clean trading income performance as well as sustained contribution from our subsidiary portfolio supported the profitability. Needless to say, asset quality indicators remain intact. In the first quarter, once again, we demonstrated expertise in managing asset quality displaying a strong collection performance and highest NPL coverage ratio among peers, resulting in a superior NPL performance on a comparable basis.
Last but not least, we maintained our solid capitalization levels. These levels are definitely strong enough to absorb any potential adverse teams in the economy as well as to support future growth. This is valued for the liquidity levels as well, which currently hovers around 350% for the FX LCR, even after the reduction of $1.25 billion of euro bonds in April.
When we come to the fourth slide. On this page, we have the major P&L items as well as profitability and efficiency indicators. The increasing pressure on net interest income, which is the natural outcome of prevailing tightening policies is offset by other core banking items, such as green trading income increased by 229% annually. Thanks to our continuous effort, outstanding net fee income generation continued posting an impressive quarterly increase of 15%, carrying the annual growth to 215%.
On top of that, we sustained largest fee base among peers. Income from participations has also provided a notable support to our net income. Annual increase in OpEx is around 52%, well below the inflation levels. All in all, our return on equity in the first quarter stood at more than 31%. I want to also recall that in the last quarter of 2023, we have topped up our free provision base by TRY 3.5 billion bringing the balance to TRY 10 billion in order to be comfortable in an environment where monetary and quantitative tightening process will continue for a while in order to tackle inflation. As the visibility has already improved, we released TRY 4 million of free provisions in this quarter.
Now I will leave the floor to Nilgun for the details of the bank's performance.
Thank you, Erdem. Welcome all, and thank you for joining the webcast. In this slide, you can see the main balance sheet items. In the first quarter, we strategically managed our loan growth taking into account monthly limitations. We continue to be selective and our focus was on productive areas such as SME business, exports and investments most of which are exempt from these limitations. Our TL lending growth was 13.5%. In line with our budget, FX lending increased 1.7% in the first quarter. With the stabilization of macro conditions, we expect a pickup in FX loans going forward. We plan to continue being active in export finance in which we have a share of around 16%.
We will also benefit from the increasing tourism activity in the country. On the funding side, we maintained our cost-sensitive and rational pricing approach. Additionally, we kept our focus on widespread granular core deposit base. In the first quarter, TL deposits posted a decrease while FX deposits slightly increased in this quarter. As you know, Isbank has the largest demand deposit base among peers. In Q1, where deposit rates stayed at high levels, share of demand deposits stood at 45%, providing substantial support to our funding cost base.
Moreover, core deposits that are sticky in nature make up around 72% of total deposits. Increase in our non-deposit funding base is a reflection of our flexible and cost-oriented approach to attain optimized funding composition. Regarding the external liabilities, as you know, we redeemed our $1.25 billion 2024 senior euro bonds, which matured in April. After this redemption, our total external views are $6.5 billion, of which $3.8 billion is due in the next 12-month period.
Against that, our FX liquid assets are more than enough to cover short-term repayment amount. ESG remained as a priority in FX wholesale funding. On top of being able to update a more diversified base of ESG-related funding instruments, their share in total funding have been increasing. By the end of first quarter, share of sustainable funding stood at around 45%. Going forward, we will continue to evaluate potential transactions for FX wholesale funding based on market conditions as well as the needs of our balance sheet management. We would also like to share our recent transaction, which is a very special milestone in celebrating our 100th anniversary. In April, we have issued TRY 4.5 billion of 100th anniversary green bond in the domestic market, which is the first green bond public offering.
On the next page, we have the NIM and spread evolution. In the first quarter of the year, market conditions remained tightened with continued rate hike cycle. Deposit costs were also in an upward trend. On the other hand, loan rates were also increasing in a gradual manner. With the ongoing repricing of the loan portfolio, TL spreads will continue to improve going forward. On the FX side, we benefited from our high demand deposit base as well as very low deposit cost and better FX spread than our peers. Since FX loan growth is expected to pick up slightly, this will continue to support our interest income base.
In this quarter, pressure on funding cost and margin evolution continued to be the major challenge in our operating environment. Thanks to our efforts, trading income helped to offset some of these pressures. On the other hand, we expect NIM to gradually improve throughout the year. As of the end of March, share of securities in total assets was 20.4%. Looking at the composition of TL securities, we see that the share of fixed income securities increased to 43%. However, we continue to maintain the diversified structure of the book, enjoying the benefit arising from the support of floating rate notes with a share of 57%.
Our CPI linker portfolio makes up of 34.2% of TL securities, contributing to our income base by TRY 12.3 billion. As you know, for the valuation of CPI linker portfolio, unlike our peers, we are using 12 months ahead CPI expectations. I would like to mention once again that expected downward trend in CPI in the second half of the year will help us grow the merit of our methodology by providing us a relatively consistent revenue stream from linkers in 2024 and beyond.
Moving on with net fees and commissions fee income generation was again strong in this quarter, thanks to our diversified business model and solid customer base. We achieved a quarterly increase of 15%, carrying the annual growth to an impressive 215%. Thanks to our strategic efforts, we have maintained our leadership position as having the largest fee base amongst our peers. Drivers of the strong growth were again across the board with key catching performance of payment systems growing by 391% annually. It is important to note once again that we achieved the highest fee base in payment systems, asset management and cash loans.
Next page shows the NPL and provisioning trends. In the first quarter, we have seen further improvement in our asset quality metrics. Our NPL ratio declined to 1.9% from 2.1% as of the end of 2023. Net NPL formation was limited in Q1 thanks to our strong collection performance and declining inflows. In this quarter, inflows were largely across the board. Our total net cost of risk, including currency impact, stood at 56 basis points for the first quarter.
Furthermore, as part of our cautious approach, our NPL coverage ratio stood at 76%, highest among peers. Next page shows the capitalization levels. Our capital ratios remained at solid levels at the end of Q1. Capital adequacy ratio without the BRSAs for variance measures stood at 16.3% while common equity Tier 1 was at 13.3%. Slight decline in capital adequacy ratio compared to the year-end can be mainly associated with seasonal impacts such as operational risk calculation and dividend distribution. We believe that our capital ratios are strong enough to absorb any potential adversities in the economy as well as to sustain the growth whenever it is deemed favorable.
As we always share, sensitivity of our capital adequacy ratio to 10% depreciation in TL is around 35 basis points. while sensitivity to a 100 basis points increase in TL interest rates is around 8 basis points. This concludes our presentation. Thank you for your attention. And I would now like to open the floor for questions.
We have a question from Mikhail Butkov from Goldman Sachs.
I have a couple of questions. One is what net interest margin trajectory do you -- any comments on that for the remaining quarters of this year in the light of the recent hike? And also in terms of guidance, what areas do you see tracking better or maybe behind in terms of the key metrics so far relative to the guidance which you shared earlier this year.
In terms of NIM, I can say that while maintaining our view with respect to general trends for NIM, I can say that a 500 basis point rate hike in March put an additional burden on net interest margin for the first and second quarters. In this regard, NIM may stay flattish throughout the first half of the year. But since the fund increase seems to have reached their peak levels with the support of ongoing asset repricing we expect NIM to be in an improving trajectory going forward. For the second question, you have asked for the guidance. You asked which one is the better fee income or?
I'd rather asked, so looking at how the first quarter shaped up. But what areas in your guidance, do you see -- what is potential for revisions? Let's put it this way.
First of all, we still haven't changed our guidance for the year old we will be monitoring, especially the second quarter, and then we might revise our expectations. But it seems that nowadays, we are comfortable with our macroeconomic assumptions. As I mentioned, we will be looking for the second quarter in order to make an assessment for the revision of our guidance. But it seems that we have a very strong fee income in the first quarter.
And as you might remember, we -- our guidance for the whole year was a fee income growth above 100%, which means that we have already a higher fee income growth in the first quarter, and we expect this trend to continue throughout the year, which means that our profit -- there will be a strong support coming from the fee income to our profitability throughout the whole year.
Yes. Thank you very much for this clarification. And also net interest margin, you mentioned you expect an improvement trajectory going forward. But on the timing for more significant improvements. Do you expect it to be in the second half of the year or already from the second quarter?
Yes, we expect the second quarter a flattish course in fact, because the rate hike was at the end of March, which means that our second quarter will be under the impact or under the pressure of last rate hike. In this sense, as the asset repricing going and as we have already reached the plateau in terms of our deposit costs. We are expecting the improvement in the net interest margin starting from the third quarter. And it -- that will be a significantly say improvement in the last quarter, according to our expectations on NIM.
At this point, we have some written questions. First one comes from [indiscernible] from [ Tech ] securities. She asks about our holding plans, what is the time line? And do you plan on IPO in 2025?
Thank you very much. As you know, we are still in -- the, let me say, approval process of the demerger transaction. As we disclosed before, we are using the year-end figures, 2023 figures in this process. And we have already provided the necessary documentation and application process in line with the year-end figures. And we are waiting for the approval both from the domestic policymakers and from abroad. That's why it will take some more time. And as you might remember, the overall transaction should be completed in 8 months' time, latest by the end of August 2023.
If we use the year-end figures of 2023, so we -- if the approval comes in this period, that we will go to our general assembly for this approval as well. We cannot say anything about IP opportunities because, first, we have to establish the, let me say, holding company, namely we call it [ Tibush ] and then we want to see the performance of the company because we are expecting to umbrella company to have a synergic let say, way of management of our subsidiaries. And then as the performance increases, in the future, we might consider whether there will be an IPO or not, but it is too early to comment on it.
Valentina Stoykova from Barclays have several questions. First of all, she asks if we have any -- if you see any upside or downside risks for our guidance. I guess this question has been already answered. On top of that, she asked about our issuance plans going forward, especially AT1 and about our intention for the call option that will be in question in 2025.
Yes, we are generally monitoring the market in order to decide whether to have, let me say, a new issuance, we are ready in terms of documentation, but the timing is important for us. That's why the market conditions will be important.
We will continue to monitor we may have an issuance at any time as the market conditions becomes relevant for us. That's why we will continue to monitor the trends in the market.
Maybe I can add about the call option. So as you have mentioned, we have a call option in the beginning of 2025. And so we will evaluate it according to the market conditions. Again, we still have time for the evaluation, taking into account, of course, investor perception.
I believe that's all with respect to respect to questions.
Now I'm handing over to presenters for closing remarks.
Thank you very much for your participation. We believe today, we have disclosed another strong set of results, indicating our expertise in weathering challenging operating environment. Regarding the details, let's be in touch, looking forward to see you all in person soon. Until then, stay safe and healthy. Thank you.