Turkiye Vakiflar Bankasi TAO

IST:VAKBN.E

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, welcome to the VakifBank First Quarter 2023 Conference Call and Webcast. Thank you very much for standing by.

There will be a Q&A session following the presentation. [Operator Instructions] And with that I will now hand you over to your host, Mr Ali Tahan. He is the Head of International Banking and Investor Relations at VakifBank. Mr. Tahan, as always, the floor is yours sir.

[Ali Tahan, executive]

Thank you, Rob. Good afternoon, everybody, and welcome to VakifBank First Quarter 2023 Earnings Conference Call.

As all this, let us briefly walk through the important highlights of the quarter and thereafter, together with Nihan, we are more than happy to answer your all possible questions. If you can see on the first page in this quarter, in line with the market consensus, we delivered a slightly above than TRY 4.5 billion net income, which is up by 50% compared to the first quarter of previous years. Apart from this quarterly year-over-year net income growth, as you know, this quarter, for the Orca region, we donated TRY 12 billion and to compound it the negative impact on the P&L at the same time, we equally released TRY 12 billion from the 3 provisioning. So this 3 provisioning and donation created no P&L impact, although -- and after releasing this TRY 12 billion free provisioning. Now we are still having around TRY 7 billion provisioning in our balance sheet.

And apart from that, during 2 quarters, during the quarter, our coverage ratio, especially NPL coverage ratio and total NPI cash cover ratio continued to increase to provide more specific numbers in terms of NPL cash coverage ratio it further went up to above 83%, which was 81% acquired rego and at the same term total NPL coverage ratio continue to increase above on 215%, which is again an all-time high NPL coverage ratio. So while we were delivering this core net income, we were also including to strengthen our provisioning numbers.

The next page are the important highlights of the quarter related to our balance sheet and P&L. Of course, one of the most visible developments of the quarter was related to robust total revenue growth driven by both high catching fee income growth as well as supportive trading income. In this quarter, our annual fee income came at 136% year-over-year. and our quarterly fee income growth came at 14% compared to Q4 of last year. Thanks to the very high catching fee income performance. Fee-to-OpEx ratio came above 51%, 51.3% in this quarter, which is 1 of the highest in the last couple of years. And apart from this, very strong fee income, our revenue generation capacity also supported by a strong TRY 2.3 billion trading income. This rating income is also double up compared to the same term of the previous year. And also 19% up compared to a quarter ago.

And out of this TRY 2.3 billion trading income we also had around TRY 500 million swap cost, which decreased almost 52% year-over-year at almost 40% Q-over-Q. Apart from this robust total revenue generation capacity on the balance sheet side, on the lending side, especially -- this quarter, we had retail heavy quarterly lending growth, mainly supported by earth quake support packages in the form of general purpose consumer loans. The ECN credit cards and retail over draft. In this quarter, we had total lending growth of 16.5% Q-on-Q. And of course, this was mainly driven by Turkish loans. Turkish loans are up by 2.8%. And as we mentioned, it was mainly driven by the retail side. On the FX side, FX loans were flattish Q-on-Q, and on year-over-year terms, it was down by 6.9% compared to the same term of the previous year.

Another important highlight of the quarter was related to interest structure of the balance sheet, similar to what we did in the [indiscernible] we also continue to make our special year purchase interest earnings assets coming from more floating rate assets rather than fixed. And above first quarter, -- within our Turkish lira loan portfolio, almost 80% now became floating and only remaining 21% are coming from fixed rate loans dominantly coming from the retail side. And the same is also true even for Turkish lira securities in terms of the interest rate structure out of total TI securities as of first quarter and 83% are coming from floating rate. Turkish lira securities coming from both floating as well as CPI and only 17% is coming from fixed rate Turkish lira securities. So this kind of composition of both Turkish lira securities and Turkish lira loss puts us at more advantage of position and creating a much robust hedge mechanism against a possible change in the interest rate environment.

Apart from this, another important development came in the form of capital injection. In this quarter, we had TRY [indiscernible] injection by the main shareholder of Turkey fondant -- and as a result of this capital injection, our paying capital amount increased to TRY 9.9 billion, which was TRY 7.1 million previously. And this capital injection created almost 284 bps positive impact in our formal ratios both in the form of total cars as well as in the form of CET1 and Tier 1 ratios. Apart from that, benefit and solid liquidity levels also maintained during the quarters -- in terms of short-term liquidity level, our hard currency LCR continued to remain strong at 466% and total LCR came at 177% , one of the highest in the last couple of years. And apart from this very strong short-term liquidity levels, we also had around $7.1 billion, free hard currency liquidity and more importantly, in terms of net stable funding ratio, net stable funding ratio as of first quarter end came at 131%, one of the strongest in the peer group. And variable than the requirement of 100%.

And on the LTD ratios, loan-to-deposit ratios, we also see a further decrease in our total loan-to-deposit ratio, which came down to 87%, which was 94% a year ago. And more importantly, as of first quarter, our Turkish lira loan-to-deposit ratio further came down to less than 100% a lira came at specifically at 96% which was 116% a year ago. Another important highlight for the quarter was related to a very remarkable international funding transactions. We just announced today a new rollout for our May syndication with the amount of $825 million, with the participation of 5 new banks compared to a year ago with the total participation number of banks of 36.

And apart from that, maybe more importantly, in this quarter, we also issued $2 billion DPR factivation, deep the participation of 9 different international investors and this $2 billion DPR at once was the biggest DPR issues not only in the entire history of VakifBank, but maybe in the entire history of Turkish banking sector. Therefore, especially the DPR issue was very remarkable with the 5-year final maturity profile. Apart from those 2 remarkable fresh international funding transactions, we also had a Eurobond resumption in the beginning of the year with the amount of $650 million without any fresh amount issue.

On Page 4, you can see the P&L details, item by item on a year-over-year and Q-over-Q basis. One important development is related to effective tax rate similar to Turkish banking sector in general in the first quarter. Our effective tax rate also came negative at minus 1.5%, mainly because of the free provision reversal as well as heavy donation amount under our OpEx with the amount of TRY 12 billion. So because of those 2 items in the first quarter, our effective first effective tax rate actually came negative.

On Page 5, you can see our net interest margin. Reported price in the quarter, our net interest margin came down to 1.8%. And [ semi, ] we have a flattish CPI linkers contribution in Q1 versus Q4 of last year. Our comparable deposit net interest margin would be 3% EBIT is more or like in line with our full year guidance. And similarly, our swap adjusted net interest margin would be 2.8% with the similar assumption of CPI contribution. As you know, this quarter, our CPI expectation for October to October came down to 27%, a quarterly got of 85% with the full collection of the full year. But just to be on the conservative side, we decided to start to 44% which promises additional potential interest income for upcoming quarters and this 44% CPI estimation produced around TRY 9.7 billion interest income out of our CPI portfolio. As of first quarter end, the CPI linkers portfolio share in our shareholder equity already exited 100% threshold at 104%.

And maybe more importantly, unlike many would like to many peer group tax average real yield in our CPI linker portfolio remains strong at CPI plus 2% per lira. As you know, in many cases, the average yield for CPI portfolio is below the CPI itself. But in our portfolio, we still have the advantage of above our CPI 2% above real yield for our CPI portfolio. Another important development related to this page can be seen on the left-hand side below chart, related to total money-market funding. Our quarterly average total money market funding active to even lower compared a quarter ago. Here, you can see a downward decrease in plant given the fact that the real liquidity talks providing channel between Turkish deposit gathering rather than money market. And in line with this declining trend quarterly average cost of money market funding also came down to less than 9%, in line with the policy rate 8.9% more precisely.

And equally important in terms of the swap usage, swap usage also in a downward declining trend which came TRY 842 billion during the entire first quarter and swap cost also declined to TRY 511 million which was above than TRY 800 million even a quarter ago. On next page, you can see the fee income -- commission income growth across the board. Factor wide speaking, we also see a similar trend by looking at the RSA data we understand that sector fee income growth on annual base also above 120%. In our case, this number is even at strong rate, 136%. In line with the sector also, we also understand there is also a sort of trade-off between interest income and fee income. Maybe interest income in our loan portfolio was lower than our past year but to some extent, it was compounded by a relatively higher fee charge. And therefore, the main contributor effect came from cash lending-related fees, which makes around 51% of total fee income breakdown and followed by payment system.

In terms of quarterly and annual growth, cash lending was the most strongest contributor in terms of quarterly fee income growth, and it will also be a case for the annual growth rate with above 174% area. And as a result of this strong fee income performance, our fee to OpEx ratio delivered of the higher the ratio of 51.3%. The next page is related to OpEx. Again, by looking at sector, we understand that sector also at around 150% year-over-year OpEx growth, excluding TRY 12 billion donation in the first quarter. Our comparable OpEx growth year-over-year will be 163%, which is more or less in line with the sector average. And in terms of the breakdown HR versus non-HR, we see a slightly higher increase in our non-HR OpEx growth be 200% year-over-year. While HR cost increase remained at 116%. And therefore, as a result of that, in terms of the breakdown of Opex, the share of HR cost further came down to 27%, while [indiscernible] all other non-HR costs constitute around 63% of total remember, debt ratio was around 40 to 60. But because in last year, OpEx growth mainly driven by [indiscernible] non-HR OpEx growth side. Now the ratios slightly changed.

On Page 8 on books, we can see the developments related to balance sheet starting with the lending growth. Overall, in this quarter, VakifBank total lending growth was TRY 16.5, it was almost 23% and [ 6 ] lending wise, it was flattish. All of those numbers are slightly above and sector growth and therefore, across the board, we continue to gain market share and ranking in total landed market shares remained as #2, which is same compared to -- which is same compared to 2022 year end. And in terms of the quarterly lending growth, retail lending growth is very visible as you can see, quarterly lending growth is 38%. And out of this, in this quarter, we provided around TRY 9.4 billion. Earthquake support package loans to retail customers living in the earthquake region. That was 1 of the main driver of the core to retail lending growth. This GPL growth also followed by a very strong retail credit card and retail over growth. And as a result, most of the quality in the Turkish lending growth came on the retail side. On the non-retail side, it was a much more ballast and relatively stable lending growth.

On the SME side, we see around 13% and on the corporate and commercial side, we see around 11% quarterly growth. And as of first quarter Turkish lira loss makes 73% of total loss, while the remaining 7% is coming from FX loans. The share of FX loans each and every quarter started to decline. Remember, [indiscernible] around 33% in regular times. Now it came down to 27% as of first quarter. Page 9 is related to loan portfolio, especially in this quarter, CGF flows are remarkable. As you can see on the left-hand side below chart, this quarter, we have bought earthquake related and other CGF loan exposure. In this quarter, for the SMEs, we had fresh exposure of TRY 1 billion. But more importantly, other CGF loss under different CGF packages which are not covering cost related CGF loss increased to TRY 16.4 billion, which was TRY 9 billion a quarter ago. So especially on the retail general product consumer side as well as on the SME and corporate and commercial lending side. This quarter, CGF coverage was very visible across the board.

On Page 10, you can see the ratios and numbers related to asset quality. NPL ratio in line with sectors continue to came down at 1.8%. But NPL coverage ratios increased, especially this increase is very visible in the form of NPL cash coverage ratio, which materialized at 83.3% as of March, which was 81.1% a quarter ago. In terms of the Stage 2, similar to NPL ratio, Stage 2 ratio in the total loan portfolio also went down to 7.2% which was 8.3% a quarter ago. And NPL Stage 2 core ratios remained more or less flattish around 1.4% on the highest in the peer group banks also. And apart from NPL ratio and Stage 2 ratios, this quarter, we still have positive net cost of risk with the precise number of 69 during 2 quarters. And this decline compared to a year ago, more or less also in line with our initial budget expectations. And conservatively, out of the 69 bps net cost of profit, we also provided around 20 bps net cost of risk proactively for loss be provided for the earthquake region.

Page 11 related to deposit especially in this quarter, as you know, because of the regulatory environment, Turkish lira deposit gathering was very important. And one of the targets for the bank was to make Turkish deposits in the total deposit portfolio at a higher percentage. And as of first quarter end, in terms of those regulations, we exited 60% threshold for both retail and commercial segments in terms of TR products or total deposits. Retail TI deposits made 62% of total retail deposits. And on the commercial side, this ratio was even stronger at 64%. So therefore, we successfully delivered to exited 60% threshold, which resulted us not to accumulate additional long-dated fixed or Turkish lira securities.

Equally important, apart from this target of Turkish deposit composition. In terms of the total deposit growth, we had around 11% total deposit growth, again similar to lending side, that was also mainly driven by Turkish lira side. Turkish lira deposits were up by almost 22% Q-over-Q and on the FX deposit side, because of this regulatory environment, we had around 7.8% contraction in our FX deposit portfolio in dollar terms which is also in line with the overall sector trend.

And because of those developments in terms of the currency breakdown, around 2/3 of our total deposits now in the form of local currency and only 1/3 in the form of hard currency deposits mainly coming from euro and total accounts. And the first quarter also a fixed index deposit portfolio reached to TRL 184 billion. And out of this outstanding amount we see a balanced distribution among retail and corporate clients. Although this total amount for 7% are coming from retail accounts, while the remaining 53% are coming from the corporate accounts. And the result of those numbers and those developments we see additional declines in all loan-to-deposit ratios, banded loan-to-deposit ratios, Turkish lira loan-to-deposit ratios as well as FX loan-to-deposit ratios has made for the first time, a fixed loan-to-deposit ratio even came lower than 70% per lira.

On Page 12, you can also see the developments related to wholesale borrowing and external funding transactions. The PR funding, as we discussed in the highlight was very remarkable with the $2 billion fresh DPR issuance with the participation of 9 different international banks out of those 2 the banks from U.S., 2 banks from U.K., 2 banks from Japan, 1 bank from Gulf region and 2 banks from the Continental Europe. So it was a very well-above DPR issuance with the participation of well diversified location banks. And it increased our again, total wholesale borrowing amount to $13 billion despite $650 million redemption Eurobond production in the being across the year. And above today, our free hostile liquidity stands at $7.1 billion, very comfortable levels which provides 1.4x coverage for the upcoming 1-year period of time. And net stable funding ratio also remains strong at 121%.

On the solvent -ratio side, as you know, this quarter, there is a very limited differential numbers between reported solvent ratios versus solvency ratios without BRSA for various measures. Those numbers are now very similar to each other. And especially after TRY 32 billion fresh capital injection in the quarter which boosted our capital ratio by 284%. Our solvency ratios continued to increase. Total CAR came at 15.9. Tier 1 ratio came at 14.3, and CET1 ratio came to 12.6%, including TRY 7 billion free provision to our hypothetical capital ratios. Our CAR ratio, Tier 1 ratio and CET1 ratios will be 16.5%, 14.9% and 13.3%, respectively. And all of those numbers are above the regulatory requirements as well as valuable than our internal capital losses. And therefore, we believe this capital injection, but also very timely and was very effective. For the sake of the time, I don't want to go through the remaining part on the Appendix page. Thank you very much for your patience. And if you have any questions, we are more than happy to answer. Please let me hand over to Rob the stage.

[Operator]

All right, ladies and gentlemen. As Mr Tahan said, we are now, time now for the question-and-answer session. [Operator Instructions] But right now, we'll see if we'll have the floor open to see if there are any audio questions. And if not, we'll move on to the written questions.

All right, Mr. Tahan. We don't seem to have any audio questions coming through. If you would like to start with the written questions, that would be great.

[Ali Tahan, executive]

Thank you, Rob. To my knowledge, we don't also have any written questions. I mean today is a very critical day for Turkey, especially following the election outcome yesterday. And normally, we are supposed to announce our first quarter financials as of last week.

But because of the head office movement and because of some issues related to logistics and movement. We couldn't make it last week, sorry for this last minute change actually. And we are the only remaining department still working at the old head office division, and this is the last conference call we are making from here and going forward in a very short period of time, we will also be moving to our new head office location.

And with 2 locations, we would like to thank everybody for the participation. And we will like to also know you in case you have additional follow-up questions. I will be at your disposal. We are available all the time. But with 2 locations, we would like to thank you and say goodbye as of now.

[Operator]

Thank you, Mr. Tahan. So with that, that concludes this webcast. And we want to thank you very much for your participation. You may now disconnect. Thank you.