Turkiye Is Bankasi AS
IST:ISCTR.E
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Turkiye Is Bankasi AS
Earnings Call Analysis
Q3-2024 Analysis
Turkiye Is Bankasi AS
In the third quarter of 2024, Isbank faced a macroeconomic backdrop characterized by tight monetary policies and fluctuating global market conditions. Despite these challenges, there was a notable resilience within the services sector while industrial productivity appeared less optimistic. The company anticipates an annual inflation rate of approximately 43% by year-end, alongside a projected GDP growth of about 3%. These figures suggest a complex environment for consumer spending as retail sales indicate a downward trend, setting the stage for potential disinflation as consumption slows. This cautious yet optimistic view is reinforced by improvements in risk perception and external balance, which support a real appreciation of the Turkish lira【4:0†source】.
In Q3, Isbank achieved a remarkable increase of 41% in swap-adjusted net interest income on a quarter-over-quarter basis. This performance was bolstered by effective asset repricing efforts, even amidst rising funding costs. Clean trading income similarly soared, recording a 5% quarterly uptick and a substantial 63% year-over-year increase. Net fee income saw a striking rise of 13% in the quarter, accumulating a 155% annual growth rate, signaling a robust performance in fee-generating services【4:1†source】【4:2†source】.
While total operating income rose by 15%, operating expenses surged by approximately 30% due to salary adjustments and one-off payments related to the bank's 100-year anniversary celebration. Notably, the bank managed to keep its non-HR expense growth below the average annual inflation rate, suggesting effective cost control measures were in place. The bank's coverage of operating expenses improved to an impressive 82%, with a cost-to-average asset ratio remaining stable at 3.8%【4:2†source】.
Initially, Isbank had set a guidance for a year-end net interest margin (NIM) of approximately 4%. However, due to escalating funding costs and a delayed rate cut cycle, this expectation has been adjusted downwards. As of now, the bank's leaders indicate a 2% to 3% NIM is likely in early 2025, with monetary easing anticipated from January. They expressed commitment to weathering current pressures while looking forward to enhanced profitability metrics as the operating environment improves【4:1†source】【4:6†source】.
Isbank's asset quality remains exceptionally strong, with a non-performing loan (NPL) ratio of 1.9%, attributed to prudent management policies and solid collection efforts. While there has been a slight increase in NPL inflows, particularly concerning credit cards, these levels are manageable, supported by a robust portfolio strategy that includes significant focus on SMEs. The bank's cost of risk currently stands at 104 basis points but is expected to normalize at around 150 basis points in the coming year【4:8†source】【4:10†source】.
As of the third quarter, Isbank reported a capital adequacy ratio of 15.4% and a common equity Tier 1 ratio of 12.6%, indicating a robust capacity to absorb potential economic shocks while sustaining growth. The bank's liquidity metrics remain stable, with an FX liquidity buffer of $8 billion to $9 billion, which provides assurance regarding its capacity to meet short-term obligations【4:3†source】【4:10†source】.
Looking ahead, Isbank is poised to continue leveraging its diversified balance sheet and strong market positioning to drive growth. The management highlights a strategic focus on areas such as SME lending and export financing underpins their growth strategy. As they celebrate their 100-year anniversary, the commitment to create sustainable value for stakeholders remains paramount, coupled with expectations for improved profitability as monetary conditions are forecasted to ease【4:8†source】.
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Ladies and gentlemen, welcome to Isbank's Third Quarter 2024 Financial Results Audio Webcast. Today, our presenters will be Ms. Izlem Erdem, CFO; Ms. Nilgun Yosef Osman, Head of IR and Sustainability.
[Operator Instructions] Now I hand over to Izlem.
Thank you, Ozge. Welcome to our earnings presentation for the third quarter. This is Izlem speaking. Thank you all for joining us. Please let me start with a short summary of macro outlook. In the third quarter of 2024, the lagged impacts of tight monetary policy were more effective on industrial production, while services sector displayed a relatively resilient outlook in general.
Besides the increasing volatility in the global markets in August, the inertia in the services prices continues to be the main issue as there is still backward indexation. Thus, the underlying trend of inflation remained higher than expectations in the third quarter.
Additionally, higher-than-expected monthly inflation in the recent months also delayed the rate cut expectations. We anticipated annual inflation to hover around 43% at the end of 2024 and GDP growth to be around 3% for the full year.
On the other hand, despite the temporary volatility, declining trend in retail sales is expected to support the disinflation process as the consumption expenditures tend to slow down. Improving risk perception accompanied by better external balance outlook and strong reserve accumulation resulted in several rating upgrades. This trend suggests that real appreciation of Turkish lira will continue in the last quarter as well.
As you know, we celebrated our 100th year anniversary at the end of August together with all our stakeholders. It was a memorable and proud moment for all of us. As we are moving into our second century, we will continue to create sustainable value for our stakeholders.
Against the backdrop of this macro and operating conditions, we registered improvement in our swap adjusted net interest income despite ongoing pressure on funding costs. Strong clean trading income generation continued to support the revenue base in this quarter as well.
Our continuous remarkable performance in fee generation business supported the profitability. Needless to say, asset quality indicators remain intact and we sustained our best-in-class performance in asset quality metrics in the third quarter.
Last but not least, we maintained our solid capitalization levels. These levels are definitely strong enough to absorb any potential adversities in the economy as well as to support future growth. This is valid for the liquidity levels as well.
On the next slide, we have the major P&L items as well as the profitability and efficiency indicators. Despite ongoing pressure due to additional macroprudential measures in the third quarter, we managed to increase our swap-adjusted net interest income by 41% on a quarterly basis, benefiting from asset repricing while keeping the cost of funding under control.
At the same time, our sustainable performance on clean trading income improved further in this quarter by posting 5% quarterly and 63% annual increase. Thanks to our continuous efforts, outstanding net fee income generation continued, registering a quarterly increase of 13% carrying the annual growth to 155%.
On a quarterly basis, our total operating income increased by 15%. OpEx, on the other hand, increased around 30%, mainly on the back of salary adjustments and a one-off payments to our employees as a celebration of our 100-year anniversary. However, please note that this was already taken into account when we were budgeting this year's OpEx. It is also noteworthy that we kept our non-HR expense growth well below the average annual inflation level, leading to a below CPI total OpEx growth, indicating our controlled stance in managing costs.
Thus, the coverage of operating expenses increased to a strong 82% and cost average asset ratio stayed at 3.8%. All in all, our return on equity as of the end of September stood at 20.5%.
Now I will leave the floor to Nilgun for the details of the bank's performance.
Thank you, Izlem. Welcome all, and thank you for joining the webcast. In this slide, you can see the main balance sheet items. In the third quarter, we managed our loan growth in line with our strategic priorities, taking into account monthly lending caps.
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 quarterly TL lending growth was 9.6%. FX lending, where we still observe healthy demand from corporates increased 4.2% in the third quarter.
We continue to be active in export finance. At the same time, tourism continues to be a key area for us. On the funding side, we maintained our concentration on widespread granular core deposit base. There was around 10.8% quarterly growth in TL deposits, while FX deposits increased by 6.7%.
During this period, we continued to stay in line with the regulatory threshold for the conversion rates from KKM to conventional TL deposits. Needless to say, we maintain the largest demand deposit base among private banks. As of the end of this quarter, 42% of our deposit base is comprised of demand deposits providing substantial support to our funding cost base. Moreover, core deposits that are sticky in nature make up around 70% of total deposits.
As for the external liabilities, our total external deals were $8.1 billion. Our short-term deals were $4.1 billion, of which nearly half of it is consisted of syndicated loan facilities. Against that, our FX liquid assets are more than enough to cover short-term repayment amount. FX LCR was again at comfortable levels with 356%. FX wholesale funding continued to be an integral part of our efforts to maintain an optimal mix on the liabilities side.
In order to manage the maturity profile efficiently and diversify our funding sources in the third quarter, we obtained over $500 million with a 10-year tenure under our DPR securitization program, carrying the total amount of DPR financing over $900 million for 2024.
ESG remained priority in FX wholesale funding. On top of being able to obtain a more diversified base of ESG-related funding instruments, their share in total funding stayed at high levels. By the end of third quarter, share of sustainable funding stood at around 62%.
Going forward, we will continue to evaluate potential transactions based on market conditions as well as the needs of our balance sheet management and continue our cooperation with our counterparties for FX wholesale funding transactions.
On the next page, we have the NIM and spread evolution. Even though interest rates reached a plateau, high funding costs and broad caps, which somewhat limited the loan repricing continued to put pressure on our margins. Additionally, termination of right-way swap operations with CBRT resulted in a shift in the composition of short-term funding to report transactions.
As you already know, over the course of the third quarter, during the increasing volatility in the financial markets, CBRT has taken additional tightening measures carrying the average cost of funding to higher levels close to the upper band.
Thus, the ongoing pressure on funding costs delayed the expected margin recovery. In such an environment by keeping the cost of funding under control and benefiting from asset repricing, we managed to increase our swap-adjusted net interest margin by around 90 basis points.
Currently, our NIM is signaling an upward trend, which suggests a sustainable improvement in the positive territory. After this transitionary period, we believe that 2025 will promote a favorable operating environment in which our balance sheet will have the capacity to attain sustainable profitability metrics. As of the end of September, share of securities in total assets was 19.2%.
Looking at the composition of TL securities, we see that the share of fixed income securities was 41%. We continue to maintain the diversified structure of the book. Our CPI linker portfolio makes up of 32% of TL securities, contributing to our income base by TRY 14.6 billion in the third quarter. As you know, for the valuation of CPI linker portfolio, unlike our peers, we are using 12 months ahead CPI expectations. Therefore, we continue to benefit from stable and consistent revenue stream from this portfolio.
Moving on with net fees and commissions. As we always emphasized in recent years, we have been focusing more strongly on the fee-generating businesses as a way of posting income base without consuming capital. We have concentrated our efforts to grow business volume of products and services, which provides fees and commissions as well as widening active customer base.
We also recalibrated the pricing tools and practices to improve this revenue stream. Accordingly, fee income generation was again remarkable in this quarter. We achieved quarterly increase of 13%, carrying the annual growth rate to an impressive level of 155%.
Also, please note that this year, we increased our number of digital customers by around 1.5 million, contributing to a sustainable fee base in the long run. Drivers of the strong growth were again across the board with an eye-catching performance of payment systems, growing by 253% annually.
Next page shows the NPL and provisioning trends. We sustained our best-in-class performance in asset quality metrics in the third quarter. Our NPL ratio stood at 1.9%. This performance is owed to our selective and prudent policies, strong collection performance as well as technology and AI-based decision-making mechanisms in lending.
NPL inflows in this quarter suggest a slight increase, especially on credit card side, which is a natural outcome of high interest rate environment and slowdown in economic activity. However, it is noteworthy that we haven't seen a significant pickup in commercial flows, including SMEs, which is a strategic growth area for us. Additionally, it is important to mention that there isn't any sector-specific issue according to our portfolio analysis.
Needless to say, our strong collections continue to support asset quality indicators. In this period, we successfully sold an NPL portfolio comprising mainly retail loans amounting to TRY 1.5 billion with a solid recovery rate of 35.1%. Our total net cost of risk, including currency impact, stood at 104 basis points. Furthermore, as part of our cautious approach, our NPL coverage ratio stood at 73%, highest among peers.
Next page shows the capitalization levels. Our capital ratios remained at solid levels at the end of Q3. Capital adequacy ratio without the BRSAs forbearance measures stood at 15.4%, while common equity Tier 1 was at 12.6%. 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 100 basis points increase in TL interest rates is around 8 basis points.
Before moving on to the Q&A session, let's take a look at our guidance. We performed mostly in line with our guidance items for 2024, with the exception of net interest margin, which has downside risks compared to our expectations due to delayed rate cut cycle.
Accordingly, this might have an impact on our ROE guidance levels. On the other hand, we have already started to observe positive NIM trajectory starting from Q4, which will be supported by the monetary easing throughout 2025.
This concludes our presentation. Thank you all for your attention. And I will now like to open the floor for questions.
At the moment, we have a question from Mehmet Sevim, JPMorgan.
I have just a couple of questions, please. One, on the NIM evolution so far. Clearly, it's evolving behind the initial expectations. You've explained the reasons very well. But if you look at the current guidance, that would have implied an exit level of 4% at year-end. And clearly, we're quite far from this level. So could you please guide us how to think about the NIM evolution into the year-end and also into 2025 with now the delayed rate cut expectations?
And just another question on asset quality, if I may. Obviously, things are still well under control, but I'd love to understand how you're seeing the trends in the individual segments and especially in the corporate and SME book as we go into 2025, also taking into account the delayed rate cut. Some of your peers are now talking about 200, 250 basis points of cost of risk in 2025. Can I ask where your views are on this?
Thank you, Mehmet. First, I will touch on the net interest margin evolution. As you know, in our second quarter call, we announced that our guidance for the year-end net interest margin for an exit NIM of around 4%. But unfortunately, the third quarter developments revealed that it will not be possible. Especially if you think about the developments in the third quarter, I can say that the most important challenge regarding the net interest margin trajectory was the still elevated course of funding costs.
In addition to lack of any relaxation with respect to deposit cost, due to macroprudential measures, termination of right-way swap operations with CBRT, this resulted in a shift in the composition of short-term funding to repos. As you already know, over the course of the third quarter, during the increasing volatility in the financial markets, especially in the global markets, CBRT has taken additional tightening measures carrying the average cost of funding to higher levels close to the upper band of the interest rate corridor.
Thus, the ongoing pressure on the funding cost delayed the expected margin recovery. And on top of this, pressure from reserve requirement obligations also continued. Despite all these challenges, we managed to increase our swap-adjusted net interest margin by around 90 basis points by optimizing, let me say, our funding mix.
As the monetary tightening continued throughout the first 9 months of the year and expected rate cuts have been postponed, this also put pressure on our year-end net interest margin guidance. And as you might recall, as you might remember, we mentioned that we were expecting 2 rate cuts from the Central Bank in November and December in total, 500 basis points rate cuts.
But the recent inflation figures, especially trend in the seasonally adjusted inflation figures and the announcements coming from the Central Bank reveals that the possible rate cuts cycle, not only the rate cut, but let me say the monetary easing postponed to the next year. We might see a rate cut in December, but the probability has decreased significantly. That's why we can say that the NIM guidance, there is a downward risk on the NIM guidance. But I can say that as of the fourth quarter, we are in the positive NIM territory.
All in all, we can say that there is significant downside risk to our 2024 full year NIM guidance. But for the next year, it is still early to make concrete comments as we have just started our budgeting process.
As you all know, there are still some important milestones that we will be focusing, especially these, let me say, milestones will have an impact on our assumptions such as the upcoming inflation report as well as the remaining 2 months monthly inflation trend, not only the headline installation, but the seasonal adjusted figures as well.
However, I can give you a vague color with regards to our preliminary expectations, which indicates a range of 2% to 3% net interest margin level for the beginning of the next year. For sure, the coming days and 2025 is expected to provide a more clear picture in terms of the policy framework as well as the NIM trajectory in line with the disinflation process. It is highly possible that throughout the year the expected gradual monetary easing cycle will provide a strong improvement in generating net interest income.
So if I shift to your second question related to the asset quality. In fact, during the last few years -- during the last 2 years, our NPL ratio has followed a downward trend and stood at comfortable levels. And this is the case even for this year. At the end of 2023, our NPL ratio was 2.1%. And as of end of September, this figure declined to 1.9%.
This was mainly driven by our prudent policies, healthy portfolio structure and strong collection capabilities as well as the economic activity hovering around the potential growth figures. But for this year, as the economy is cooling down, we still continue to implement prudent policies and with good, let me say, strong collection platforms.
So the outcome of the prevailing economic conjuncture or the operating environment, especially the tight monetary policy, although there are some risks, the prevailing stance does not create a significant deterioration in our NPL ratio, mainly thanks to our prudent policies.
As for credit cards, I have to mention it, in line with what we have already anticipated as a result of macroprudential measures alongside higher rates, it is inevitable to see deterioration to some extent. This has, in fact, been reflected on our monthly inflows.
On the other hand, despite some limited increase in NPL ratio of credit cards, I can say that the NPL ratio for the credit cards still stands at around 2.5%, which is quite manageable. And due to the moderate share of this item in total loans, it doesn't have a significant impact on our overall NPL ratio.
So we are not observing any worsening in the asset quality indicators of SME segment, neither in the form of heightened flows nor any deterioration in early warning signals -- and especially our main strategy, the lending strategy was to have a growth, especially on the exempted areas, of the SMEs and the good performance of the SME lending, and a relatively low NPL ratio, which is hovering around 1% -- 1.1% level, proves that we are right in our strategy, and we are implementing the right policies in handling this special segment, which we feel ourselves comfortable.
So I can say that as a result, needless to say, our strong collections continue to support asset quality indicators. And as we have stated in our presentation, our cost of risk stood at around 104 basis points. But as the economy goes down, we are expecting an upward trend. But for the next year, I can say that we can see our cost of risk to be around 150 basis points, which can be regarded as a slight normalization. So we feel ourselves in terms of cost of risk for the coming conjuncture.
That's very helpful. If I may just ask on the first question and thanks again for all your views there. But you mentioned early trends suggest 2%, 3% NIM levels for the beginning of 2025. So that will be basically the first few months after the rate cut. Is that fair to assume?
We are expecting it in the first quarter. We are not just expecting the rate cut, but any kind of monetary, let me say, easing will be important for us. That's why it will be a total package for us. That's why we will be one of the banks which will have the most positive impact coming from the monetary easing. That's why, as I mentioned, we might even see a rate cut from Central Bank in December.
But taking into consideration the wage adjustments of January, we can say that starting from January, I think the rate cut cycle and the accompanying, let me say, macroprudential easing will start. And that's why at the start of the year, maybe in January, we will -- be highly possible that, we will see a 2% to 3% net interest margin.
At this point, we can take some written questions. Valentina Stoykova from Barclays have a few questions. First of all, she asks the amount of our FX liquidity by the end of the third quarter. And also, she has a question regarding whether we will exercise the call option that will be upcoming next year?
So I will first touch on the FX liquidity. As of end of September, we have a solid FX liquidity buffer of around $8 billion to $9 billion. And more than 1/3 of this FX liquidity is composed of funds used for swaps and the rest of the FX liquidity is composed of money market placements, unencumbered cash and bank notes and securities. And our FX Turkish lira swap utilization is around $2 billion.
And in the presentation, we mentioned that our short-term FX liabilities is around $4.1 billion. This means that we are quite comfortable in terms of our FX liabilities debt service. So we feel ourselves comfortable with the prevailing liquidity. And I can say that our FX LCR, again, at comfortable levels at around 356% level.
The second question is related to call options. Yes, considering our upcoming 2025 call option, we will assess and make our decision according to the conditions in the financial markets.
As far as I can see, we have no more questions that have not been answered. So I hand over to our presenters for closing remarks.
Thank you very much for your participation. We think today, we have disclosed another good set of results, indicating our expertise and judgment in navigating both favorable and challenging operating environments. We feel confident that our diversified balance sheet structure will provide strong support not only to banking sector, but also to the Turkish economy in our next centennial. Regarding the details, let's be in touch. Looking forward to see you all in person soon. Thank you very much.