Turkiye Vakiflar Bankasi TAO

IST:VAKBN.E

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, welcome to the VakifBank Bank First Quarter 2021 Bank-only Earnings Results Conference Call and Webcast. [Operator Instructions] I will now hand over to Mr. Ali Tahan, Head of International Banking and Investor Relations. Sir, the floor is yours.

[Ali Tahan, executive]

Thank you, and welcome to First Quarter 2021 VakifBank Bank Earnings Announcement Conference Call. As always, I have all the Investor Relations colleague with me, starting with Nihan, Head of Investor Relations. Without taking too much of your time, I would like to directly jump to the presentation, as always. In the meantime, our financial results will be published at the public disclosure platform in 10 minutes, and thereafter, at the same time, our colleagues are also sharing all necessary documents and presentations via e-mail, video.

Turning back to presentation on Page 2, starting with the net income side. This quarter's in line with the market consensus. We have $750 million, TRY 50 million net income, quarterly net income, which is up by 12% Q-on-Q. Our quarterly net income would be TRY 1.150 billion, in case we wouldn't have TRY 400 million free provisioning. As you know, by the end of 2020, we already have around TRY 1.1 billion free provisioning in our balance sheet. And on top of that, this quarter, we set aside additional TRY 400 million free provisioning, and therefore, total free provisioning amount reached to TRY 1.5 billion as of first quarter end.

Apart from the free provisioning side, this quarter, we continued to have further increased coverage ratios. NPL specific cash coverage ratio further increased to 79%, which was slightly above than 76% a quarter ago, and this 79% itself is the highest NPL cash coverage ratio among peer group bank. And total coverage ratio automatically increased to above than 126% area, again, one of the highest among peer group banks. And Stage II coverage ratio remained flattish at around 14% area. So on top of additional increase in our provision ratios, we also had additional free provisioning.

And this TRY 750 million quarter net income came despite very conservative CPI estimate. As you can see in the middle of the presentation, in the first quarter, October CPI estimate used at 11.63% based on 9.4% year-end CPI expectation. And compared to other peer group banks, those ratios are extremely low, which can be translated as potential interest income support for upcoming periods and quarters.

For the efficiency of the time, I would like to skip Page 3 and Page 4 in the presentation and continue with the Page 5, which is related to revenue breakdown. This quarter, we continue to generate a good volume of revenues, reaching to around TRY 6.6 billion total revenue volume, which is up by almost 12% compared to a year ago. Of course, despite top line pressure, despite net interest margin pressure, we successfully executed additional revenue generation, especially through strong NPL collection as well as through additional support from our trading activities.

And in such a period where we are at a negative part of net interest margin cycle, we manage successfully to create additional revenue income through different tools and channels, which can be a good indicator with the normalization on the top line. Driven by net interest margin outlook, we believe we'll continue to generate relatively strong revenues on upcoming quarters.

On the fee income side, we had a contraction on a year-on-year basis because of the -- mainly the difference on the lending side. Just to remind you, in the first quarter of 2020, we had relatively strong lending growth, which boosted especially lending-related fees. But this quarter, lending growth compared to a year ago was relatively modest. And as a result of that, due to this lack of base effect, we had contraction on a year-on-year basis on the fee income side. However, if you look at on a quarterly basis, our fee income is up by over around 14%, especially thanks to additional fee income generated through insurance and payment system.

The next slide, Page 6, is related to net interest margin, spread and cost. On the net interest margin side, as guided and as expected, we have relatively low net interest margin level this quarter. Reported net interest margin came at around 1.8%. It would be around 2% in case we would estimate 14% October-to-October CPI estimate. As you -- as we discussed in the beginning of the call, we used 11.63% for the first quarter.

The left-hand side, the low chart is very critical. This is related to CPI estimation and CPI income. Very recently, following the change our year-end CPI expectation to 12.2%, which was 9.4%, automatically, we also revised October-to-October CPI estimate, which is essential for the interest income calculation for the CPI portfolio. And following this revision, now we have additional upside to generate interest income from CPI portfolio, and full collection for the first half will be reflected to -- reflected in second quarter. On a Q-on-Q basis, with such a revision on the CPI expectation, we expect additional TRY 650 million more interest income from our CPI portfolio in the second quarter, which will boost our second quarter net interest margin around 44 basis points.

And on top of that, on the spread side, especially on the TL core spread side, we understand that the worst is over as of first quarter. And starting from second quarter onwards, TL core spreads will also support our overall net interest margin outlook. Thanks to both positive outlook on the core spread side as well as thanks to additional support from CPI portfolio, we understand that each and every quarter, net interest margin will be relatively better compared to previous quarters. And therefore, at this stage, we would like to keep our full year net interest margin guidance of 3% is unchanged.

At the right-hand side of the chart at a similar format, we also providing detailed information related to money market funding and the details of swap usage attached with the swap cost.

The next slide is related to OpEx. OpEx seems to be under control. Our cost-to-income ratio, which is the most critical part, seems to be still on a -- in improving track. It is further going down to around 33% area, which was 37% a quarter ago. And generally speaking, OpEx growth seems to be in line with our guidance, and there is nothing unusual here.

With the slide, starting from Page 8 onwards, we may move to balance sheet side, starting from the lending side. This quarter, in the first quarter of the year, we had 6% overall quarterly lending growth. In terms of the composition within the currency, we have around 4% Turkish lira lending growth. And on top of that, similar to Q4, they have a limited hard currency lending growth in dollar terms, and its hard currency lending is mainly granted for working capital purposes to blue chip corporate companies of Turkey. And in this sense, 6% quarterly lending growth seems to be in line with the sector.

Within the Turkish lira side, we have slight shrinkage in our general Turkish consumer lending side, and therefore, most of the TL lending growth came from SME, corporate and commercial lending side. The contraction for the GPC is related to big amount of GPC loans we extended last year. Because of the monthly installment collections, we collect a lot of loan at every month, and it is not easy to replace them. Of course, we are also eager on that front because of the relatively lucrative lending year. But because of the size of the repayments, on a Q-on-Q basis, we have slight contraction on the GPC side.

The next slide, we also put some important information to Page 9. At the left-hand side of the page, you can see the sector breakdown of our cash loan portfolio. The right-hand side above chart is also very important. We put quarterly evolution of our CGF loans, CGF loans extended during 2020, which are COVID-related non-retail and retail CGF packages, as well as we also had additional CGF exposures coming before 2020. A quarter ago, total CGF exposure was almost 46% -- TRY 46 billion (sic) [ TRY 64 billion ].

Now it is coming back to TRY 57 billion area. On a Q-on-Q basis, we had around 10% contraction in our CGF portfolio, which can be understood as a good sign of their asset quality and payment performance. This 10% contraction just in 1 quarter period of time shows the quality of our CGF portfolio.

At the right-hand side below chart, we also put detailed information related to deferral loans. As you know, during the pandemic period for second quarter and third quarter, we provided the deferral option to all our loan customers. And total amount of installments deferred -- coming from deferred loans was TRY 21 billion. Almost all of them had a grace period, and their grace period now by the end of first quarter is over. And when we check their performance -- payment performance, we see strong results there, around 89%, almost 90% of deferral loans are paid on time without any problem.

Only 10% seems to be have some problems. And out of this 10% -- 11%, 10% seems to be at Stage II as of quarter end. And only 1% of this TRY 21 billion already became NPLs by the end of March. So this is also a clear indicator in terms of the performance of the deferred loans because that was a point of concern for many investors. And so far, the payment performance of those deferred loans seems to be at satisfactory levels.

The next page, Page 10, is related to asset quality. In line with the sector and the peer group, our NPL ratio also came down slightly. It was almost 4% by the beginning of the year. As of March end, it is holding around 3.65%. And NPL -- apart from the NPL ratio, the share of Stage II in total seems to be also flattish at 8% area. Of course, we also put in a very transparent way the regulatory impact of NPL definition. If we go back to regular NPL definition, meaning counting 90 days instead of 180 days, our NPL ratio would be higher, additional around 70 basis points. Instead of 3.7%, we would have around 4.4% NPL ratio. That would be the impact of the current regulatory for [ BMF ] introduced by the BRSA.

Our gross cost of risk during 2 quarters came around 280 bps, which is slightly above than our guidance, but net cost of risk came at the negative territory because of mainly 2 reasons. The first reason is related to strong NPL collection. Indeed, during the first quarter of 2021 thanks to strong collateralization, we had good level of NPL collections out of NPL portfolio. That was very visible, and that was the main driver of strong NPL collection capacity. And the second reason is related to revision in our IFRS modeling.

Our IFRS Committee convenes at every quarter, given the dynamic process of nature. By looking at the market levels and dynamics, we review macro parameters on a quarterly basis. This time, relatively more optimistic macro expectations resulted in some provisioning reversal on the asset quality stack, and that was the second driver of negative net cost of risk.

Page 11 and Page 12 is related to the liability side. Starting with Page 11 on the deposit side. This quarter, we had around 4% overall deposit growth. And in terms of the currency breakdown, we had around 1% increase in our local currency deposits. But in line with the sectors, especially during the end of the quarter, we had some shrinkage in our FX deposit portfolio. But still, in terms of the market share, VakifBank is still very active and strong player on the deposit side. Our market share on the deposit side is holding around 12%. And in terms of the currency breakdown, we still carry local currency heavy deposit composition, which is not the case for the sector.

And within the deposit composition, around 20% is coming from the demand side, while the remaining 80% is coming from the term side. And in terms of the customer classification, retail, state, and SME and corporate commercial deposits have a balanced deposit portfolio. Around 17% is coming from the state deposit side, around 40% is coming from the retail deposit side, and the remaining 44% is coming mainly from institutional, corporate and commercial deposits.

The next slide, Page 12, is also related to our external funding. As of March, we are having around $15 billion total external funding. That makes around 18% of our total liabilities. We had 2 remarkable transactions since the beginning of the year. One of them was related to DPR. In March, we issued $1.750 billion total DPR issuance. And that number itself is the biggest DPR issuance, not only in the history of VakifBank, but also in the entire history of Turkish banking sector. So it was a very remarkable transaction, and 7 banks participated to our DPR issuance. And the minimum maturity came at 5 years, although maturities were hovering between 5 to 7 years. So the minimum maturity for such big DPR issuance came at 5 years.

And on top of that, very recently, we also closed our first syndication deal of the year. Compared to a year ago, we had 105% roll-over ratio. And with the participation of 38 banks from all over the world, we obtained $1.1 billion, 1 year syndication loan. It was also another remarkable transaction following the competition of the DPR issuance. And as a result of both very big external funding transactions, our hard currency LCR continued to be very strong at above than 300 bps area -- 300 percentage area versus 80% minimum threshold.

The last page, I would like to take your attention is related to capital. Our CET1, Tier 1 and Tier 2 ratios materialized, respectively, 10.9%, 13.6% and 15.5%, respectively. All of them are stronger and comfortable compared to minimum required solvency ratios, and as always, we also put in a very transparent way our solvency ratios, without BRSA forbearance measures. This is also something you can see at the right-hand side. For the efficiency of the time, and given the fact that we are at the full lockdown, I would like to stop here and leave the floor to Mitra again to move to Q&A session. Thank you.

[Operator]

[Operator Instructions] We have a question from [indiscernible] from [indiscernible].

[Unknown Analyst]

[Audio Gap] the fact that you have set aside TRY 400 million in free provisions, yet you have made significant provision reversal, giving more sort of positive macro environment. How should we reconcile these 2 facts, maintained?

[Ali Tahan, executive]

[indiscernible], thank you very much, but can you repeat the question again? We couldn't hear you properly.

[Unknown Analyst]

Sure. Just asking how should we reconcile the fact that you had set aside TRY 400 million in free provisions, yet you have also had the provision reversal based on that sort of macro environment. So how should we think about that? Because in my opinion, free provisions would set aside for rainy days, yet your macro assumptions are getting positive, so you had provision reversals. So how should we reconcile these 2 facts?

[Ali Tahan, executive]

Thank you. Thank you very much, [indiscernible]. Related to provisioning, on the cost side, I mean, I think there is nothing unusual compared to previous quarters as a reflection of our conservative approach. We continued to put very strong and big number of provisions for both Stage I, Stage II and Stage III portfolio. But this quarter, the additional revenue generation capacity came through the reversal of the provisions. This quarter, compared to regular cycle, we had additional provisioning reversal.

But that was something we were focusing since the beginning of the year because we were budgeting that each and every quarter, net interest margin and top line will perform in a better shape. And therefore, especially in the first quarter and second quarter, to the extent possible, we targeted to push our branch managers, portfolio managers at the field to follow their NPL customers and NPL receivables. And that was a deliberate action taken by the top management. And we had additional campaign and additional motivation to push our colleagues in terms of the NPL collection.

And by looking at the financials, we understand that it work out. We had additional support from the NPL collection. And this is mainly related to our strong collateralization. Because under such macro conditions, especially if you are in a position with strong physical collateralization, then you have the chance to collect more NPL. But if you have a lending portfolio which is relatively weaker in terms of physical collateralization, then it is not easy to make such big amount of NPL collections. So my point is especially related to NPL collection side.

On the one hand, because of this relatively negative outlook on the top line, that was our motivation since the beginning of the year to push and to focus on the NPL collection side. That was our message to the field since the beginning of the year. And secondly, our strong physical collateralization enabled us to collect such strong amount of NPL collections. Of course, going forward, it will not be the case. There will be a trade-off between top line and NPL collections each and every quarter, starting from second quarter onwards. Net interest margin, net interest income and fee income will support more but at the same time, the support from NPL collections will decrease, so that it will be in a much more sustainable way, in terms of the total revenue generation capacity.

For the free provisioning side, to the extent possible, we would like to keep those free provisioning in our balance sheet. As you know, for the full year of 2021, we guided high single-digit average of the year. In case we are there with our strong fundamentals and revenue generation capacity in our base case scenario, for the rest of the year, we don't want to -- or we don't plan -- we don't have any plan to make any reversal out of our total free provisioning amount, which is TRY 1.5 billion as of March.

[Operator]

We have another question from Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

Could you -- what was the actual amount of the macro revision? And -- in terms of its impact on the P&L in Q1? And can you just talk us through, in an environment where interest rates went up 200 basis points towards the end of the quarter, you're now in a full lockdown for 5 weeks or whatever it is, why you decided to make a positive macro change at this point? That would be interesting. Were you just particularly being conservative before? Just give us a little bit of flavor on that, that would be helpful.

I think sort of secondly, do you think that -- I think you're telling us that you think that the net interest margin will start to pick up in the second quarter. Presumably, the majority of the improvement that you're expecting will come in Q3 and Q4. Could you sort of just perhaps tell us where you see the inflection point? Have we passed it? Or is it going to be early in Q2, just to give us an idea of that? That was the second point.

And I guess perhaps 3 -- I know you just touched on the margin. But in terms of the guidance that you provided at the beginning of the year, could you give us at least a qualitative view of where you think you are after the first quarter?

[Ali Tahan, executive]

Thank you, Alan. For the IFRS modeling part, I mean, this is a regular stuff we are doing every quarter. With the support of all related head office division heads, we review our IFRS modeling based on macro expectations as well as market dynamics and pricing. Some quarters, we may be much more negative, and we may put more provisioning requirement. For example, Q4 was such period. During Q4, because of the IFRS expectations, we put additional provisioning for our Stage I and Stage II portfolio. But this quarter, it was just vice versa. Next quarter, who knows, depending on the market conditions, we may change again. So my point is it is very a dynamic process, and we are taking a lot of parameters into account at the same time. One quarter ago, the situation was different than first quarter.

So my point is, it may change again in second quarter. It's totally a dynamic process. In terms of the amount related to IFRS modeling provisioning, more or less, it is similar to free provisioning amount, which is around TRY 400 million. So you can assume this free provisioning amount also put for such as to compensate the impact of such IFRS modeling related provisioning reversal.

For the second question on the net interest margin side, yes, you are right. First quarter was the lowest quarter in terms of net interest margin. And the good news is, starting from second quarter onwards, we will have additional support, both from security portfolio, because of the CPI mainly, as well as because of the improvement in our Turkish lira core spreads. As you know, the negative repricing of core spreads and contraction on the core spread already started in Q4 of last year, and it continued during the entire first quarter of 2021.

But according to our [ M&S data ], according to our internal data, we understand that starting from second quarter onwards, TL core spreads will also create additional positive impact in our quarter net interest margin. So we are stick to our initial net interest margin guidance. Just to remind you, we will keep thinking that each and every quarter, we will have additional improvement in our net interest margin compared to a quarter ago. So we are still at the same page.

We still believe second quarter will be better than the first quarter and second half will be better than the first half. And therefore, without any rate cut expectation from Central Bank of Turkey, we still expect 3% annual net interest margin is doable. In case we have additional interest rate cut from Central Bank of Turkey, of course, it should create additional upside to our consolidated net interest margin. But for the time being, we don't want to change it yet.

And in terms of the overall guidance, I mean, we are so far in line with our expectations in terms of lending growth, in terms of net interest margin, in terms of average ROE, et cetera, and therefore, at this stage, we don't want to change any guidance of 2021 for the full year. We still believe that the guidance we shared in the beginning of the year seems to be doable without, hopefully, no need to make any provision reversal out of our free provision amount.

I hope those are helpful for your questions, Alan.

[Operator]

[Operator Instructions]

[Ali Tahan, executive]

It is already -- it is already 7 p.m. in Turkey, and given the fact that we are at the full lockdown, if you don't mind, we would like to stop here. Of course, we are at your disposal via e-mail and call all the time, myself, Nihan, Yusuf, [indiscernible], all Investor Relations colleague. But for the time being, because of the specific situation related to full lockdown, we would like to ask for your permission. Thank you very much for your interest and time, and looking forward to talking to you in person in the first possible occasion.

[Operator]

Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation. You may disconnect now.