Turkiye Is Bankasi AS
IST:ISCTR.E
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Turkiye Is Bankasi AS
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Welcome to Turkiye Is Bankasi Third Quarter 2020 Financial Results Conference Call and Webcast. I will now hand you over to Ms. Senar Akkus, CFO (sic) [ CEO ] ; Ms. Gamze Yalcin, Deputy Chief Executive, Ms. [indiscernible], Head of Investor Relations. Dear speakers, the floor is yours.
Thank you very much. Good evening, and welcome to our conference call. This is Senar Akkus. Gamze Yalcin and [indiscernible] are accompanying me. In this extraordinary and very challenging environment, we hope everything is well with yourselves and your loved ones. Gamze will go into the details of our performance as usual. But before that, I would like to give you a brief update of the macroeconomic outlook and some highlights for the third quarter.
In the third quarter of 2020, most leading economies [ performed better than us ], data is pointing to a strong rebound in economic activity. However, a challenging global outlook rate on trade, tourism and capital flows as the pandemic continued to spread. During this period, supporting monetary and physical policies have an impact containing the deterioration in global economy and financial markets. Recently, in position of lockdown measures in many countries is based on economic recovery prospects, while the focus is still on a vaccine and treatment developments. The Turkish economy has also rebounded in the third quarter despite the ongoing challenges of the pandemic. Leading indicators have shown that domestic demands are strong during this period. International trade and tourisms revenues also improved compared to the second quarter.
In the coming period, assuming that there will not be strict lockdowns, the economic activity is expected to continue to expand despite at a slower pace due largely to the recent tightening in financial conditions and the rising number of coronavirus cases.
Now we look at the main highlights of the quarter on Page 3, we see that strong Turkish loan growth was maintained in the third quarter. We further increased the coverage ratios and our net cost of risk stood at 271 basis points. Corona [ took a ] provisional stance and was supported by additional 3 provisions of [indiscernible] TRY 5 billion in the quarter, total balance reaching almost TRY 3 billion. Share of demand deposits reached a remarkable level of 41% and our cost-oriented funding management continued.
[ Robust ] adjusted NIM was maintained at 4.64%. Also a strong quarterly growth of 32% was delivered in net fees and commissions in a relatively normalized environment. This strong revenue growth and decline in OpEx led to higher profitability ratios compared to the first half. Our capital adequacy ratio continues to stand at a solid level, which is about 17%, excluding the impact of regulatory forbearance and indicating a 700 basis points buffer compared to minimum requirements.
Our liquidity levels also remained stellar with a total CAR of 474% and an FX LCR of 406%. Here, I will leave the floor to Gamze for the details of the bank's performance. Thank you.
Thank you, Senar. Welcome all. On Page 4, we have the major P&L items in addition to profitability and efficiency indicators. Despite prevailing challenges in the operating environment, we have achieved a remarkable pre-provision income increase in the third quarter. All into the still strong level of swap-adjusted net interest margin, in addition to the volume increase during the period from adjusted net interest income posted a different quarterly increase of 8%.
Thanks to our continuous efforts and recovery in the economic activity, quarterly net fees and commissions income growth was remarkable at about 30%. Income from [ participations ] was also notable at TRY 1.2 billion, providing a significant support to our operating income. Declining trends in annual OpEx growth continued this quarter and year-on-year OpEx increase further converged to our full year guidance of around 17%. In line with our prudent approach, we have set aside 3 provisions of TRY 1.26 billion in the quarter and further bolstered our provisioning cushion.
As of the end of September, our free provisions amount to almost TRY 3 billion. Consequently, despite the surge in provision expenses during the quarter, we achieved an improvement in our profitability ratios. Furthermore, our cost-to-income ratio decreased significantly and stood at 32.4% level.
Page 5 shows the main balance sheet items. In the third quarter, Turkish lira loans increased at a similar pace compared to the second quarter and posted a growth rate of 8.5%. Most of the growth was achieved in the first half of the quarter since the demands decreased meaningfully in the second portion due to higher interest rates. Demand for FX loans continued to be weak, accordingly, that was a slight quarterly contraction. On the liability side, thanks to our proactive and flexible funding management, we were able to contain costs. We have utilized cheaper alternative sources, such as repos and [ slot ] transactions rather than relatively extensive Turkish lira time deposits. Demand deposits continue to constitute one of our major strengths in maintaining a low-cost funding base and reached eye catching share of 41% in our total deposits.
It goes without saying that we persisted our strong liquidity over the third quarter and the liquidity ratios stood at comfortable levels once again with an FX LCR of 406% and total LCR of 174%. Our FX liquidity at hand, which is more than $14 billion U.S., as of the end of September, covers more than 3x of our short-term FX liabilities.
Next page shows the net interest margin performance. In the third quarter, we maintained a strong net interest margin level, thanks to our dynamic balance sheets management. Even though there was an increase in market rates, we were able to lower our cost of Turkish lira deposits on a quarterly basis. Despite the decrease in Turkish lira loan yields, quarterly slot adjusted net interest margin was almost flat due to the utilization of relatively cheaper funding sources. The contribution of CPI linkers to net interest income was almost TRY 1.5 billion in the first quarter, and the quarterly yield was 15.9% versus 13.3% in the second quarter.
Due to the increase in funding costs towards the end of third quarter, and net interest margin compression in the last quarter seems to be inevitable. On the other hand, we think that we will have no difficulty in keeping our slot adjusted net interest margin level above 4% in 2020 in accordance with our guidance.
We now see income performance on our next slide, in the third quarter, supported by the easing of lockdown measures, increasing economic activity and transaction volumes in addition to cancellation of fee waivers, we have registered a robust increase in our fees and commissions income. Parallel to the increase in their volume, credit card fees were the main driver of the quarterly growth. Year-on-year increase was realized in the positive territory as of the first 9 months. As you remember, our guidance was a flattish growth for the full year.
Next page shows the NPL and the provisioning trends. In terms of asset quality metrics, even excluding the forbearance measures, Isbank’s NPLs will be at 6.38%, still in line with our initial guidance in the beginning of the year. But we still keep the NPL guidance at less than 7% level.
Supported by the restart of legal proceedings after June, we have seen a substantial increase in our collections in the third quarter, nearly doubling second quarter levels. In line with our conservative stance in this period, coverage ratios continued to go up. Stage 2 coverage ratio increased to 16.24%, while NPL coverage ratio rose to 63.1% at the end of September. Our total coverage ratio stands at 5.8%.
On top of our more than enough provision base, we have a free provision stock of almost TRY 3 billion providing an extra buffer for any future risks. Our net cost of risk for the first 9 months stood at 260 bps, close to our guidance for the full year.
Next page shows the capitalization levels. As of third quarter, our reported capital adequacy and Tier 1 ratios were 20% and 15.6%, respectively. As you can see in the slide, excluding the impact of BRSA forbearance, the ratio stood at still solid levels. We believe that our capital ratios are strong enough to absorb the potential adverse fees in the economy as well as to sustain the growth whenever it has been favorable. During the quarter, as always, capital adequacy ratio was supported by our profitability.
This concludes our presentation. Now we can have your questions.
[Operator Instructions.] We have our first question from [ Constantine Rozante ], JPMorgan.
Two quick questions for me to confirm. The first one is with respect to performance of [ the LMS ] which benefited from [ the deferrals in March ]. Could you please confirm how do these exposures perform out of those which exited the deferral periods? What share goes to performing? What share needs some longer-term restructurings, [ get ] second deferrals? So that's the first question.
The second question, in the presentation on the funding slide, the Slide 13, there is a fairly sizable stock of funding during the next 12 months, which is classified as other funds borrowed. Could you please give some detail about what constitutes these exposures?
The first one is on the performance of loans, which benefited from payment deferrals since March. Could you please comment how these exposures performed? What proportion of those exposures go into second deferrals, go into longer-term restructurings, get back to the performing category? That's the first question. The second question on Slide 15, where you provide the maturities of funding of wholesale borrowings that the bank has. The bank has fairly chunky borrowings classified as the funds borrowed in the next 12 months. So could you please comment what constitutes these borrowings?
Okay. For the first question about the deferrals, I can say that since the beginning, we have a principal amount of more than TRY 40 billion, and the deferred installment amount was around TRY 8 billion. And in the third quarter, more than 90% of the loans have started to be paid. And again, more than 90% of these loans have been paid regularly. There is no problem with the repayment of these loans that -- we do not believe that there will be a major problem with the loan portfolio, which is deferred since the beginning of COVID-19. And about the other funding items, I can say that it is composed of both finances and also bilateral loans with some international institutions. Also, we have had 2 different euro loan payments in the second quarter and the fourth quarter of the year, which is amounting to $1.5 billion U.S. Of course, we have 2 [syndicated] loans, again amounting to $5.5 billion, roughly $5 billion U.S.
Understood. Thank you very much. But within other funds borrowed, you mentioned that bilateral loans, right, within…
Bilateral and [ post ] finance transactions, yes.
Our next question comes from Mehmet Sevim, JPMorgan.
My first question is on the fee and commissions rebound, which was quite impressive this quarter with the base up 32%. Could you please tell us how much of this is coming from the usual rebound and activity that we've seen? And how much is due to the measures that you have taken versus other banks, given the rebound is better than some other private peers that you have -- that have reported?
My second question will be on cost performance. Again, this was a better quarter as you had guided. But given the strong growth in the first half that we've seen, how comfortable are you still with your full year guidance? And my last question is just a very quick one. Could you please tell us your consolidated capital ratios, excluding the regulatory forbearance? That would be very helpful.
Okay. What I can say is that positive income in the second quarter of the year, because of the fee waivers, we had lost around TRY 100 million on a monthly basis. And this is for 2 months. And now if we take into account that the returns to our pre-COVID-19 levels, which is around TRY 500 million, we can say that the remaining part is coming from our business as usual. And for the last quarter, I can say that we are calculating that we will at least repeat its third quarter performance, and this will lead us to flattish or [ slow ] positive growth as of year-end.
And for the capital ratio on the consolidated basis, let me summarize them. Without the effects of the forbearances, which will end -- until the year-end, the total CAR is 15.97%. CET1 is 11.6% and Tier 1 ratio is 11.84%.
And my last question was on cost performance, which was better this quarter. Given…
Yes. As you know in the first quarter, the year-on-year increase was very high, which was about 30%. And we have said that it was in line with our budget, and it will decrease. As of September, it is 21%. And as of year-end, we are calculating that is it approach to our guidance, which is 17%. That can be a little difference due to the COVID-19 expenses, but we do not believe that there will be a major divergence from 17%.
[Operator Instructions.] We have no further audio questions. Speakers, back to you for the written questions. Apologies. We have another question from [ Valentina Stoykova ] from Barclays.
Thank you very much for the presentation. I have one question actually on your guidance. Can you please remind us about the key metrics of your full year 2020 guidance and whether you have made any changes this quarter? And then also, if you can also remind us of your sense -- capital sensitivities to Turkish lira depreciation versus the dollar, that will be great.
Okay. As you know, we had revised our Turkish lira loan growth. Return on tangible to increase return on average assets, net interest margins, swap adjusted and net fees and commissions growth as well as net cost of [fleet]. Actually, we do not feel to change any of our guidance. However, if you take into account that our structure loan growth has reached to 30% levels as of September, it is most likely that we will beat this guidance in a positive rate, it can be around 30% to 35%. In the last quarter, we expect this [ Turkish ] loan growth rate to be lower than the third quarter levels, and it will lead us to maybe 35% as of year-end.
On the other revisions, I can say that there are some size risks, but we are not revising them. As for the capital sense, I can say that a 10% change in the currency and in the value of Turkish lira has an effect of 55 basis points on our capital adequacy ratios. And for interest rates, I can say that a 100 basis point change in the Turkish lira interest rate has only a small effect, like 3 to 4 basis points on our capital adequacy ratio.
And do you also disclosed your excess capital without the [ lira ]?
Okay. For total cash, I can say that without the forbearance of the BRSA, we have an excess capital of TRY 42.5 billion. And if you take into account the forbearance [ institute ] the forbearances, it's TRY 39.8 billion.
And this is Basel III CAR minimum or BRSA minimum?
Yes. Yes. This corresponds to the buffer over the Basel III minimum requirements, including, of course, the buffers to be -- which are originating from being a systemic bank or countercyclical buffer.
Our next question comes from Alan Webborn from Societe Generale.
Could I ask you -- sorry, if I've missed this, but could you go through the -- how you see the dynamics of the net interest margin in Q4 from where you got to in Q3 to your year-end target? Clearly, I guess we're going to see some contraction in the core margin. But could you just talk us through how you see that? And also, given the changes in the interest rate environment and the weakness in the currency since the end of the third quarter. Where are you focused in terms of funding costs and deposits and so on, just give us an idea of how your strategy is at the present compared to how it was across the third quarter. That would be helpful.
Okay. Thank you very much. As you all know, since the beginning of the year, we were sharing with you that we were expecting a contraction in the second half of the year. But our assumption was different. We were expecting the deposit costs, the deposit costs, to remain stable in the second half, while the [ pactual ] loan yields continues to decrease. But after the CBRT rate hike, of course, the picture has changed a lot. Now we expect the contraction in NIM to be sharper in the fourth quarter, while deposit and, of course, funding costs entering to a new increasing pace.
What we observe from the market is that most competitive rates for Turkish lira deposits, which were below 9% as of June, have come to 14% levels; even higher. We see a corresponding increase in marginal loan prices. However, due to the maturity mismatch, the increasing plan in loan yields will show it's effect over a longer period compared to the deposit costs. I can say that the average cost of time deposits, our time deposits have increased by more than 2 percentage points compared to the third quarter average; whereas the average year [ contractual ] loan portfolio rose by only 25 basis points. This is an indication about the fourth quarter levels. Of course, we will benefit from our floating rate marketable securities. We had increased the share of floating rate bonds in our portfolio by almost 6 points since the year, and it will contribute to the net interest margins.
But in any case, we expect our net interest margins to go down below 4% in the fourth quarter. But the full year NIM will be higher than what we targeted and [ revised ] as about 4% -- we will remain about 4% for the full year, but the [ fourth ] quarter net interest margin will be below 4%. I do not want to mention any level for the next year for the time because we have still 2 months and CBRT actions can change the picture again. At each level, we will start the year 2021 will be a function of the CBRT actions in the last 12 months. I hope it is helpful for you.
Our next question comes from [ Tomasz Noetzel ], Bloomberg Intelligence.
Just I have 1 or 2 questions to follow-up. Can you just please repeat what was the amount of your free provisions as of 3Q? I think I have missed this one. And second question would be on the forbearance measures for NPLs and for your capital. I can see that on NPL ratio, NPL ratio, the impact have increased from around 30 basis points to more than 100 basis points in the first quarter. So we can see that there is some sort of deterioration in asset quality. But presumably, do you have this risk already covered with your current provisioning? And what will happen as of January 1 when this forbearance measures expire? Is there any talk with regulators right now to -- for some transition period, how you reported NPLs or do you expect it's going to be extended, given that we're having the second wave of the virus and heightened volatility so the outlook looks less positive than before?
Okay. For the 3 provisions, we have set aside an additional TRY 1.25 billion in the third quarter. And the total for the 9-month period is TRY 1.85 billion. Together with this stuff coming from the previous years, the total amount is TRY 3.975, almost TRY 3 [ billion ]. And for forbearances, regarding the NPS and also Stage 2 loans, I can say that, of course, we are taking into account the forbearances, while we are deciding our provision level. Together with the prevailing uncertainties regarding COVID-19, we believe that the current [ term loan ] is required at further elevated levels of provisioning in this context. We continue to increase the provisions for loans which are more than 90 days past due and still stay in Stage 2, and is increasing in the provisions of these loans in the third quarter corresponds to almost 20 percentage points increase in the coverage ratios of these loans.
I mean, we increased the coverage ratio of this loan by 20 percentage points. And until the year-end, our plan is to increase the coverage ratios again. As Gamze mentioned, these [ 3 ] forbearances, our NPI ratio would be 6.4%, and the Stage 2 loan ratio will be around 12%. For the same, of course, we do not want to comment on it. It depends on the BRSA's expectations for the next year for the COVID-19 issue. But under this volatility and certainty about COVID-19, there is a possibility that they can be delayed or that can be a transitional stage in order to remove these forbearances. But especially, we do not want to give any comments on this issue.
Thank you. We have no further audio questions. Dear speakers, back to you for the written questions.
We have 4 questions on the web about forbearance measures impact on CAR and [ NPL ], [ fee ] provisions, deferred loans. I think we have answered 3 of these 3 questions. The fourth one is about the share of restructured loans, I can say that it is 8.3% as of September end. There are no more questions on the web.
We have a last question from Simon Nellis, Citibank. Sir, please…
I joined a bit late, sorry, if you've already answered this. But have you provided updated guidance on fees and costs for this year, if you could? And then I have a question just on how much of your loan book remains in moratoria. And if you have any statistics from exposures, which have come off moratoria, how much -- what percentage of them paying normally and what percentage or maybe past due?
Okay. I can repeat some of them. For fees and OpEx guidance, we are not changing our guidance levels, which is 17% growth for OpEx and also flattish fees and commissions dropped. We are not changing these for the time being. We will catch or approach these revised levels. And for the deferrals, I mentioned that since the beginning, we have deferred more than TRY 40 billion loans with a deferred installment amount of TRY 8 billion. In the third quarter these ones have started to be paid and more than 90% of this portfolio have been repaid. And again, more than 90% of these repayments, what were realized without any difficulty. Therefore, we do not see a major problem with the asset quality of these loans for the time being. Of course, the market is very volatile. We are [indiscernible] developments in the market. But the repayment in the third quarter indicates that we will not -- we will face a major problem with the deferred loans.
We have no further questions. Dear speakers, back to you okay.
Okay, we thank you very much for your participation and consideration for our conference call. We are looking forward to see you at our Analyst Day in the beginning of January, I hope in better conditions. Thank you very much.