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 joining us for our fourth quarter 2021 financial results over webcast. [Operator Instructions] The event will be hosted by our CFO, Ms. Gamze Yalcin; and our Head of IR and Sustainability, Ms. Nese Gulden Sozdinler. [Operator Instructions]
Now I leave the floor to our presenters.
Hello, all. This is Gamze speaking. Welcome to our third quarter financial results conference call. First things first, we hope everyone is safe and healthy. So as always, let's start with the recent trends in our operating environment and then focus on Isbank's performance in the third quarter.
Turkish economy has largely sustained its recovery trend in the first quarter of the year. Industrial production increased by 11.7% year-over-year and manufacturing PMI signals expansion. Exports continues to show a strong performance, while tourism revenues displayed an improvement. During this period, the fiscal outlook also reflected a prudent, positive stance as the budget deficit contracted by 56.5% year-over-year in the first 9 months. The rising tax revenues was not perfect during this period.
On the other hand, inflation and inflation expectations continue to remain elevated in the first quarter. And as you all know, financial markets have been displaying some volatility in which Turkish lira has been under pressure. Despite this volatility, the banking sector maintained its resilience. Turkish lira loans continue to be the main driver of the volume growth, whereas FX loans in USD terms remains in the declining territory. There are both supply and demand towards sectors that generate a fixed revenue, such as exports and tourism. This trend seems to continue.
On the other hand, retail side might be slower going forward due to macro prudential regulations. The volatility in the financial markets has caused a delay in the dedollarization expectations for the short term. On the funding side also, ESG of these following instruments prevails fair performance. Last but not least, digitalization continued its strong pace in the quarter. As the largest private bank of Turkey with our dominant market position and [indiscernible] [ at full speed ], we continue to pioneer these trends.
When we look at the highlights of the period for our bank, we see a remarkable fee growth performance within around 30% year-over-year increase. Thanks to the repricing of FX plus adjusted net interest margin increased together with this strong support from all P&L items such as fee income, collections, content, OpEx, income from subsidiaries, we achieved significant improvements in our profitability matrix as can be seen on the slide.
In the -- in line with the recovery in the economy, asset quality metrics also improved. However, we maintained our cost of risk figure at a prudent level. With the further top up during the quarter, our fee provisions exceeded TRY 3 billion, indicating our conservative sense. Last but not least, capital and FX liquidity remained solid as always.
Now I will leave the floor to Nese for the details of the bank's performance.
Thank you, Gamze. Welcome all, and thank you for joining the webcast.
On Page 4, we have the major P&L items as well as the profitability and efficiency indicators. In the third quarter, thanks to FX repricing, we achieved a 19% increase in our core adjusted net interest income. Outstanding performance in fee revenue continues. Quarterly increase was strong at 14% turning the year-on-year growth further up to 30%.
As a result of our diversified business model, we once again recorded an eye-catching contribution from our participations. Adjusted for one-offs, annual OpEx increase remains firmly to the guidance and below CPI. On a quarterly basis, there was 9% decrease in this item. Thanks to [ all track ] asset quality indicators, coupled with our [indiscernible] of provisioning, provision expenses declined. However, net cost of this was still at a [ cautious ] level. All in all, net income posted a strong 37% quarterly growth while earnings before tax more than doubled.
Please note that we have also set aside TRY 200 million of fee provisions during the period, topping up our base to above TRY 3 billion. Our bottom line for the first 9 months stood at TRY 7 million. As a result, profitability matrix improved significantly as you can see on the top right-hand side of the slide. Our quarterly return on tangible equity was around 18%. Value adjusted ratio for the fee provisions and the actual CPI level, recurring tangible equity would have reached 20%. In the quarter, there was an improvement in the cost income ratio as well.
Page 5 shows the main balance sheet items. We continued our selective and well-balanced growth policy in 2021 and the year-to-date increase in our TL loan book was in line with our guidance at 13.2%. There was a slight quarterly increase in foreign currency lending, mostly originated from the exports business.
If you look at the funding side in the quarter, TL deposits posted a strong growth. The increase in the first 9 months reached 25%, standing above the sector average. On a year-on-year basis, FX deposits were still at the declining territory. Needless to say, we continue to have the largest demand deposit base among private banks.
In Q3, share of demand deposits stood at about 42%, contributing to lowering our funding costs. Please note that [ 52% of FX ] deposits are in the form of demand deposits, while share in TL stood at 27%. As for the external liabilities, our total external dues were USD 10.4 billion, of which USD 4.7 billion is due within a year. And against that, we have USD 14 million of liquidity buffer, threefold of repayment amounts as of the end of September. FX LCR was, again, [ stellar ] at 530%.
On the next page, we have the net interest margin and spread evolution. In the third quarter, we still observed an upward pressure on the funding costs, yet we managed to keep the increase in TL deposit rates at a limited level. On the other hand, contribution of asset repricing, both on the loan and securities side, reinforced its significance. Consequently, our quarterly net interest margin increased by 23 basis points. Quarterly TL cost spread expanded by 60 basis points. We expect an even better spread evolution going forward.
This quarter, we have seen a positive contribution of CPI linkers, but at a relatively modest level due to our valuation methodology. We valued our CPI linker portfolio, it's a ratio of 12.94% in the third quarter. If we use the actual CPI for valuation, our quarterly swap-adjusted NIM would be 33 basis points higher. Please note that ongoing FX repricing, coupled with declining TL funding costs will continue to positively affect our net interest margin for the rest of the year.
On Page 7, we provide information about the securities portfolio and CPI linker contribution in detail. Sale of securities in total FX was flattish at 17.3% at the end of September. On the other hand, quarterly yield of TL securities increased by 119 basis points, boosting its support to net interest income. Yield on CPI linkers on the other hand was 20%. As already mentioned, the estimates we used for the valuation of the CPI linker portfolio in the third quarter was 12.94%, which was the expectation in CBRT survey for 12 months ahead. Should we use the actual CPI for valuation, quarterly net interest margin and return on tangible equity would be 33 basis points and 344 basis points higher, respectively.
On our next slide, I will summarize the fee income performance, which proved to be outstanding in the third quarter as well. On a Q-on-Q basis, fees and commissions posted a 14% increase, mainly supported by cash flows and payment systems. Cash lending-related fees were up by more than 30% in the period. Annual growth came close to 30%, overachieving our year-end growth expectation. Please note that OpEx coverage of fee income improved by around 2 percentage points in the third quarter.
Next page shows the NPL and provisioning trends. As we have left the first 9 months of the year behind, we can comfortably say that progress of FX quality indicators is on trend. In the third quarter, share of Stage 2 decreased by around 110 basis points, largely owing to the charter of 1 [indiscernible] back to Stage 1. Reclassification was performed, taking into account the significant risk reduction since the repayments were being carried on regularly and without problem. On the other hand, quarterly NPL inflows posted a limited increase due to a one-off file, which were transferred to NPL in the period.
As a matter of fact, we have performed the 3 classifications proactively. Yes, there is a restructuring process on the table and the collection capability is promising. Provisioning was already [ over cautious, but ] bottom line was not impacted.
In addition to our robust in-house collection performance, we had done asset sales with a portfolio amount of TRY 351 million and a remarkable recovery rate of 15% in the third quarter. Our net cost of risk displayed a decrease in line with the general trend in the sector and stood at 100 basis points for the first 9 months. This indicated a still prudent level, especially if our conservative coverage ratios across all stages are taken into account.
Next page shows the capitalization levels. In Q3, capital adequacy ratio and Tier 1 was flattish despite the currency increase. Capital adequacy ratio was around 17%, while Tier 1 was 13%, excluding the impact of forbearance measures. Over the period, net profit generation and fixed asset revaluation were the largest contributors to the capitalization. Once again, please note that the [indiscernible] of our capital adequacy ratio to 10% depreciation in Turkish lira is limited to around 45 basis points.
So this concludes our presentation, now we can have your questions. [Operator Instructions]
We have a couple of virtual questions. Let's start with going over them. First is from Valentina Stoykova. It is about the overall FX liquidity as of Q3 versus our overall [ expense ] and asking an update over our redemption plan and Q2 redemptions next year.
Okay. Thank you very much for the question. To start with, needless to say we continue to have the largest demand deposit base, as you know, amongst the private banks in Turkey. And with a strong demand deposit base, I must also say that within our FX deposits, 52% of it is in the form of demand deposits.
And as for the external liabilities, I believe the question is mainly regarded with the external liabilities. Our total external dues, around USD 10.4 billion and USD 4.7 billion of this amount is due within a year. And against that, as of September end, we have USD 14 billion of liquidity buffers, which is threefolds of repayments amount. And once again, as we mentioned during the presentation, our FX LCR ratio again at very high levels, more than 500% level.
Regarding our FX funding plan, of course, within the general funding plan of the bank. Of course, we will continue to extend our maturities. Of course, we will continue to try to hedge the capital base against depreciation in Turkish lira. We will continue our transactions in the domestic and international debt capital market. But as we always shared, thanks to the strong FX liquidity position and thanks to the solid robust capital base of the bank, we will be cost sensitive in terms of these type of transactions. So if you remember this year, and it was also the case for last year, we redeemed our Eurobonds. And -- but as I said, we will be cost sensitive but opportunistic in terms of going over with this type of domestic and international debt capital market instrument. I hope this answers -- helps with the questions.
And another question from Valentina. If there will be any updates on our 2021 guidance and our expectation about 2022 on the key areas such as loan growth, margins, asset quality, profitability and [ tax ].
Thank you, Valentina, for the question. If you remember, we revised our initial guidance set in the -- which we announced in the beginning of the year, while we were presenting our second quarter results. And accordingly, we shared with yourselves that we are observing an improvement in the asset quality matches as well as the strong performance in the fee income growth. But we mentioned about the downside in terms of net interest margins.
When we look at the revised guidance metric, I can say that we continue to see the strong support from the fee income. We continue to see an improving trend in line with the CBRT's actions in terms of net interest margin. And this provision's easing due to the improvement in the operating environment. Definitely, these will help in terms of improvement in this profitability metrics. But I must also mention about -- around the 20 bps, let's say, downside in the net slot adjusted net interest margin guidance for the full year. But I must say that profitability metrics are definitely in the improving area.
Another recent question is from [ Yahuz Seyhamna ]. He asks, the biggest risk to capital going forward, is it a fixed fluctuation or NPL?
As we always say, we believe that we do have a strong capital base when you look at our capital levels, even without forbearance regulations, you will see that they are all on a very safe zone. But of course, Turkish lira depreciation has an adverse impact on the capital ratio, even though we have this FX leveraging -- FX fee leveraging in our loan portfolio in line with the operating environment. And even though we have our strong capital instruments in terms of FX supporting our capital base according -- against the Turkish lira depreciation, of course, the volatility in the financial market, especially in the form of a TL depreciation, has an adverse impact.
And as we always say, it is limited to -- let's say, 10% depreciation in Turkish lira is limited to around 45 bps level. So we can say that the -- both the denominator and the numerator side has some mechanisms behind it protecting the capital adequacy ratio. But of course, Turkish lira's depreciation has an adverse impact. But as I said, it is limited to 45 bps level, so this helps us to feel ourselves in the confidence zone in terms of capital adequacy ratio.
We have a question from Waleed Mohsin. [Operator Instructions]
Yes. A couple of questions from my side. Firstly, I wanted to understand for the remainder of the year and into next year, when you think about your loan book, which part of the loan book would be focusing on for growth?
The reason why I ask this question is you've had very strong growth in the GPL side, and we hear from some of your competitors that they're obviously reducing the focus on that book and you see lower growth going forward. So I want to understand what's going to be your strategy for growth, which is the loan book will focus on. And if you've seen anything in terms of competition, both from private sector peers and public sector, what's happening on the pricing side, both on the lending side as well as the [ default ] side. So if you could elaborate on that, it would be very helpful.
Secondly, you've shown strong growth on the digital side. We see most of your transaction pending. Most of them are originating from the different channels I wanted to see when do you expect this impact to flow through onto the cost side, whereby I mean that when can we expect cost growth to start following behind inflation? So any guidance on that cost improvement side would be helpful. Yes, these are my 2 questions.
Okay. Thank you, Waleed. To start with the first question, we think this year has been a balancing period for the market players. Mainly this year, as you can see from the results, the performance of the bank -- private bank seems to be more active in terms of lending compared to last year's figures.
In terms of our growth strategy, we stick to our collective lending policy with a long-term view. And we have a balanced lending profile in this year as well. As for positioning in the sector, we expect to preserve our market share going forward. And in terms of retail, nonretail lending, as you can see from our figures, we do have a more balanced growth amongst the sector.
In terms of -- regarding the other part of your first question, we are supportive -- selectively supporting mostly the exports industry as well as the manufacturing industry, especially -- which takes part in post-substitution production, let's say. So this, I believe, helps you with the first question.
The second question was related with the digitalization and when it will be reflected on the cost structure. I must say that first of all, as you can see from our financials, our cost contained in a very successful manner. It is contained at a level less than inflation figures in that plan. But as you know, digitalization is a long journey. And of course, you -- we need to continue to keep up with the developments in the digitalization area as well. And this will be continuing in that sense.
But to give you an idea, we will be -- we are working on our next year's operation plan as well as our strategic initiatives for the next 3-year period. And we will be sharing with yourselves the -- how the digitalization will be reflected on our profitability and efficiency ratios in the presentation.
So for the time being, please note that our IT investments continue in a very cost-controlled manner, but in line with the need of the development to catch up the digitalization trends. Definitely, improvement in the profitability metric will also help us to see an improvement on the efficiency metrics as well.
That's very helpful for the 2 questions. If I might ask one final question. On your asset quality side, I mean, you've seen good improvement across the year, and we're seeing an improvement across the sector as well. So what I want to understand is what tail risks or what risks do you see at this moment? Or what sectors or segments are you monitoring most closely at this period although the economy has rebounded strongly and that's reflecting in the asset quality? But perhaps any segments which you're monitoring closely, which could present tail risk from the asset quality side?
Thank you, Waleed. First of all, thanks to the well-diversified loan portfolio of the bank that we do not observe that kind of adverse impact on the asset quality metric. And I must say that when you look at the performance in the economy, especially the increasing exports, the increase in tourism revenues, definitely help us to see more returns coming from the -- from, especially, these sectors.
But these are -- having a well-balanced and diversified loan portfolio helps us to overcome any kind of, let me say, obstacles in that time. But -- and then you look at the asset quality metrics, definitely, we observed this improvement and it's also reflected on our net cost of risk figure. Maybe mentioning about an impact of the ending of the forbearance measures will help you. But as I said, there is no specific sector that I can mention right now. The only reason is the well-diversified portfolio.
I must say that is a clear reflection of our open communication with yourselves all the time. And as you know, we are sharing the impact of forbearance measures on our asset quality metric. And by the ending of the forbearance measures, I can say that asset quality performance will be very much in line with our guidance, which we said before. But we will be seeing like around 65 to 67 bps increase in our reported NPL figures. But as you'll see, it's already -- it has always, in the last 3 years, been reflecting on our presentations.
And another little question is from [ Angeli Doshi ] and asks about [ the dollarization ] trend following the latest CBRT policy decisions and our expectations for CBRT policy for the remainder of 2021.
First of all, the volatility in the financial market has caused the delay in the dedollarization expectations for the short term. And definitely, we are observing -- for example, we usually see a selling appetite, for example, from the retail side, when Turkish lira depreciate. But this might be reflected on the corporate side as an appetite to buy. So definitely, these balances each other. And with this high level of inflation, we -- that's why we don't see -- we don't observe a definite, a strong dedollarization trend. Definitely, this high inflation environment delays the dedollarization for ourselves.
In terms of policy rate, as you know, the -- it is very -- depending on the inflation and some figures. CBRT makes these decisions accordingly. But in a very rough manner, we can say that we might see an extra 100 bps levels rate cuts in the coming meetings.
Another question is from [ Sumario Worolo ] about how the public banks' recent announcements of pulling down TL corporate rate down to 16%, affects our competitiveness and growth going forward.
By -- before touching upon this competitive environment, I remember that I am missing one of the -- Waleed's question. Sorry about that Waleed. You asked me about the interest rates in the markets and I must answer this question first. And I believe this will also provide a kind of answer to [ Sumario's ] question as well. And the marginal deposit rates are hovering around 16% levels for RK. And ported loan portfolio, this is very differentiating according to the segments, according to the borrower, according to the product type, et cetera.
So this is -- this will not be a correct answer to saying a one-size-fits-all interest rate for the loan portfolio. And as you all know, we have been utilizing AI capabilities, digitalization in our pricing of the loan portfolio. And this will -- that's why on a customized based pricing, we can mention, but marginally, let's say, in the -- in terms of marginal rate, for example, for a GPL product, hovers around, let's say, 20% level, where for the business line, it might be around 18%. But as I said, these are not even [ indicated ] because of the increased digitalization capability and the pricings are customized according to the borrowers' credibility, performance, the product side. So I believe that will be this pace.
Then the -- in terms of competition in the market, as I said earlier [ to Marina ], this is more like a balancing period. Of course, we are running the bank not on a quarterly basis, but with long-term strategy, but tirelessly managing the balance sheet, but the strategy and the perspective tends to be longer term. And last year, it was the state-owned banks, who were mainly active in the market, whereas this year, the private banks. So there is a balancing definitely in the markets when we look with a longer -- within a longer perspective, so I am not saying that there is a competition that's why -- that -- in the market, in that sense. So it is -- rather than a competition, it is a balancing period in that space, not a competitive one in terms of the lending activities.
And as you know, there are also the macro prudential regulation in place for the retail lending. So for each side, as you can see -- clearly see, we approach with a longer-term perspective. And definitely, we do have a balanced growth between the retail and the nonretail segment in general.
There are two questions mainly from [ Thomas Notsa ]. One is about our fee provision, the rationale of it. And the second one is about the fourth quarter, if the CPI boost will also boost fourth quarter net interest income and our guidance about NIM.
In terms of the first question, this is not a unique certainty that we developed for this quarter, as you know, our setting aside fee provisions continue for a very long time. And it's just like [indiscernible] conservative spend. It is not set aside for a specific purpose. But definitely, in line with our conservative spend, I must say.
In terms of the CPI income, yes, but at a modest level, I must say, because we used the expectations for the next coming 12-month period in that plan. And as you know, we also share with yourselves the adjusted figures. And I must say, it will be at a modest level. But in terms of NIM expansion, as CPI income is also included in the net interest margin, definitely, we expect to see more expansion compared to the previous quarters in terms of swap adjusted NIM, hovering around 3% levels on the upside -- with the upside, I must say.
Simon Nellis is online. [Operator Instructions]
Sorry, joined a bit late to the call, so sorry if this has already been asked. But in previous quarters, you've told us in the presentation how much the reversals were for Stage 1 and 2 and Stage 3. I think it was [ TRY 754 million ] for Stage 1 and 2 in the first half and [ TRY 1,228 million ] for Stage 3. Can you give us those numbers for the 9 months? That would be my first question.
Of course, Simon, maybe -- in this, we continue with our conservative, prudent stance in terms of coverage ratios across all stages. And our colleagues will be sending you the details after the presentation.
And then just if you could summarize any revision to guidance that you may have provided because I missed the first half of the call.
Yes. No, it's okay. Indeed, yes, the question has been up, but most of them will, of course -- no, no, no, we will be, of course, summarizing...
If you [indiscernible], you can send them to me as well. Sorry, I don't want to...
No, no, no, we can shortly say that -- as you know, while we were presenting the second quarter results, we made a revision in terms of some of the items compared to the ones which we had in the beginning of the year in January, is shared with yourselves. So definitely, we are sticking with this revised metric, but the fee income performance continues with an upside. Net cost of this continues, the improvement continues with an upside.
But I must say that even though we observed a much better -- on a quarterly basis, much better performance in the swap adjusted net interest margin, in very short, I must say that I might see a downside in terms of the class-adjusted NIM guidance of around 30 bps, let's say. But all in all, the profitability metric are carrying an upside in terms of the guidance items.
Sadrettin Bagci asks about our estimates regarding 2022 fee and OpEx growth, net interest margin. Some of it we answered, but mainly the end markets growth rate, we can...
In terms of the next year, as I said, we are -- our budget for the next year, it hasn't been finalized yet. But we can say that last year, fee income -- the last -- did I say last year? Sorry, I mean this year. This year, compared to last year, fee income growth shows an exceptional performance. Last year, if you remember, there was the COVID [ fee base ], there was the regulation limitations, et cetera. But this year, definitely, we see an upside outperforming in terms of fee income growth.
But next year, we will continue to our -- the -- to show our best in terms of fee income growth, but it will be difficult to have this very strong fee income growth each and every year. So the base will be -- there will be a base effect. And of course, we will do our best, but we might not see that much of a strong fee income growth for next year.
In terms of OpEx, we will continue to have a cost control -- we will continue our cost control approach in terms of OpEx. In terms of net interest margin, we expect to start with a higher swap adjusted net interest margin for the next year. And as you know, it is very much shaped with the CBRT's policy rates within the sector. But thanks to our strong demand, people did pay and tends to book contribution coming from the repricing of the assets. We will have a much better swap adjusted NIM for next year. But as always, we will be sharing the guidance that speak -- to yourselves in January. We are still working on the details.
Valentina Stoykova again asks about our ESG initiatives and what we are currently working on.
Indeed, we have a special interest on ESG issues, which is a very clear need, reflected on our asset side of the portfolio. When you look at our commitments in the transformation of the economy in Turkey, the transformation of not only the retail sector but also the retail segment with our products and with our lending activities. I believe it is a strong indicator of how we approach through ESG issues rather than just mentioning about our organizational concentration, et cetera.
Just to give you a clear insight, that our renewable energy generation project is just a simple strong indicator on that issue. On top of that, our strong commitment to [indiscernible] interest in agriculture, agro industry with integrating this climate with methodology in our FX lending and in our lending activities. I believe this is a strong indication of our commitment to the transformation of this ecosystem.
On the liability side, of course, with the increased interest in the global market and in the domestic market, of course, the funding is based on ESG-linked activities, transactions again. As you know, nowadays, we are in the syndication renewable process. And just like the other syndication we will -- we had in the first half of the year, this is again an ESG-based one. And as a recall, as you remember, we have been the first bank from the Turkish banking system who issued 100% Green Bond, that's in 2019 when the economy was in a recovery period.
So definitely, instead of explaining in detail, I believe, within this earnings presentation, it makes much more sound saying that it is clearly reflected in the details of our lending activities and funding sources. But of course, we can provide more details, information on our ESG projects. As you know, we are a bank. Rather than saying this, we would like -- we prefer to reflect and to talk with figures, and it is clearly reflected in the financials.
So I can't see any further unanswered questions. So Gamze, now would you like to give your concluding remarks?
Thank you, Nese.
Thank you very much for your participation. We think today, we have, again, disclosed a good set of results and -- in this challenging environment. Regarding the details, as a team, we are always here to answer your questions. But definitely looking forward to see you all in person soon. Until then, stay safe and healthy. Thank you very much for your participation.