Turkiye Vakiflar Bankasi TAO

IST:VAKBN.E

Earnings Call Analysis

VakifBank's Q1 2024 Earnings Surge with Strong Net Income and Robust Growth

VakifBank reported a strong Q1 2024, with net income rising by 20% QoQ to TRY 12 billion, and 167% YoY. Consolidated net income hit TRY 13.3 billion, driving a 28% ROAE. The core banking revenue surged by 168% YoY, indicating robust performance. Despite an 85% YoY increase in OpEx, the bank maintained a stable cost-to-income ratio around 30%. VakifBank's total lending grew by 7.2%, with notable growth in corporate and commercial lending. The bank's guidance revised FY average ROAE to 30%, reflecting the strong first-quarter outcomes.

Strong Financial Performance Amid Sector Challenges

VakifBank reported a robust net income of TRY 12 billion for the first quarter of 2024, reflecting a 20% quarter-on-quarter and a staggering 167% year-on-year growth. This performance significantly outpaces the broader Turkish banking sector, which saw a 15% contraction in the same period. Consolidated net income was even higher at TRY 13.3 billion, equating to an impressive return on average equity (ROAE) of more than 28%, slightly above market consensus expectations.

Core Banking Revenues and Trading Income Surge

The bank’s core banking revenues, which include net interest income and net fee & commission income, grew by 168% year-on-year, far exceeding the sector average of 78%. Net interest margin, however, witnessed a steep decline from 5.3% in the previous quarter to 3% due to a decrease in income from CPI-linked bonds. Despite this, the net trading income surged by 135%, aided by exchange gains and active trading activities, reaching TRY 6.5 billion.

Operating Efficiency and Cost Management

Operating expenses rose by 85% year-on-year and 19% quarter-on-quarter, a trend the bank expects to normalize to a 50% full-year growth rate by the end of 2024. Despite the high expense growth, VakifBank managed to maintain a stable cost-to-income ratio of around 30%. Fee income also grew significantly, driven mainly by the payment systems, contributing to a better fee-to-operating expense ratio of 72%.

Strategic Shift in Loan Portfolio

VakifBank continued to shift its loan portfolio towards high-quality business lending. Corporate and commercial lending now makes up 55% of the total loan portfolio, with a market share gain to 13.7%. Meanwhile, the share of retail lending declined to 10.4% from 13.3% a year ago. Total lending grew by 7.2% this quarter, with equal contributions from Turkish lira and hard currency loans.

Stable Deposit Base and Wholesale Borrowings

The bank’s deposit portfolio showed a slight growth of 2.1% despite a contraction in Turkish lira deposits. The composition tilted further towards retail deposits, which rose to 42%. VakifBank was active in wholesale borrowing, securing $700 million through DPR issuance and $500 million from a single counterparty. The bank also executed its first AT1 issuance, raising $550 million, showing strong investor confidence.

Asset Quality and Provisions

Non-performing loan (NPL) ratio remained stable at 1.3% with new NPL formations mostly offset by collections. The bank's provisioning policy saw changes, reflecting a more normalized macroeconomic outlook, though it maintained its TRY 11 billion in free provisions. Stage 2 loans saw a slight decline to 7.5%.

Outlook and Revised Guidance

VakifBank anticipates revising its full-year average ROAE guidance to 30%, up from the initial high teens, reflecting strong first-quarter performance. While anticipating short-term pressures on profitability and net interest margins, the bank remains optimistic about the second half of the year, supported by stable funding channels and favorable liquidity conditions.

Earnings Call Transcript 2024-Q1

[Operator]

Right here. Okay. Ladies and gentlemen, welcome to the Vakifbank Audio Webcast First Quarter 2024 Bank-only Earnings Results. We will have a question-and-answer session following the presentation. [Operator Instructions] And with that, I'll now hand you over to your host, Mr. Ali Tahan. He's the Head of International Banking and Investor Relations; and Mr. Zeynep Nihan DINCEL, Head of Investor Relations. Sir, Madam, the floor is yours.

[Ali Tahan, executive]

Thank you, Rob. Good afternoon, everybody, and welcome to First Quarter 2024 Earnings Presentation Conference Call. Our financial footnote not published at the public disclosure platform yet, but according to information from our accounting department, it will be published both bank-only financials as well as consolidated financials in a very short period of time.

Without making you waiting for the results, our Investor Relations colleagues already started to share investor presentation and all necessary information via e-mail to you. And within this concept, we would like to also start our presentation. Starting with the first page, this quarter, we have the net income number of TRY 12 billion, which is up by 20% Q-on-Q and 167% year-over-year.

As you can see in the middle of the page, compared to sector numbers, we are outperforming net income growth substantially, both on Q-on-Q as well as year-over-year basis. During the first quarter, the Turkish banking sector had 15% Q-on-Q contraction. But in our case, it was a positive to 20% up. And on the annual basis, Turkish banking sector delivered 43% year-over-year increase.

Our increase was very higher than this. And those numbers are bank-only numbers. The net income numbers are even stronger at a consolidated level. On a consolidated level, we are announcing TRY 13.3 billion net income which corresponds to 28% -- more than 28% average ROAE. And equally important, in this quarter, we didn't touch our free provisioning as of year-end numbers, we had TRY 11 billion free provisioning in our balance sheet and without any reversal from this free provisioning, we announced TRY 12 billion as strong quarterly net income and the market consensus was also hovering around TRY 11.7 billion. So our number came slightly above the market consensus.

That Bank only P&L take us to 27% quarterly ROAE versus sector average of 28%. So in this manner, we are flattish to sector average and above than our initial budget guidance for the full year. And in terms of the details, core banking revenue increase is also in line with net income growth. Core banking revenues, consisting of net interest income and net fee & commission income is also up by another 168% on annual terms, which is way above compared to sector average of 78% year-over-year basis.

Another eye catching strong performance came in the net trading income in this quarter, of course, excluding the swap cost, thanks to exchange gains as well as thanks to additional income coming from the trading activities. In this quarter, we delivered TRY 6.5 billion net trading income, excluding swap cost again, which is referring to 135% annual growth.

And the last point in this slide is related to pre-provisioning profit. Again, we outperformed in terms of pre-provisioning profit growth on year-over-year basis. It was up by 83% for VakifBank specific versus sector average of 20%. The next slide, we would like to take your attention is Page 5, actually, just to use the time effectively and maybe to provide some more time to do Q&A, we would like to take your attention to some important slides.

And net interest margin side on Page 5 is important. This quarter, our reported net interest margin came at 3% and swap adjusted net interest margin came at 1.3%. Of course, compared to, especially quarter ago, we are witnessing a dramatic decline from 5.3% to 3% on a reported net interest margin level and on a swap adjusted net interest margin level, we are seeing a contraction from 3.9% to 1.3%.

This is mainly driven by, of course, the CPI linker impact because last quarter, as you can see on the left-hand side above chart, we were accruing our interest income, with the realized October to October inflation debt of 61.4%. This quarter, in line with the private peer groups, we are also starting to do year with 40.7% October to October inflation data.

And as a result of this revision in the CPI numbers, interest income we enjoyed from our CPI-linker portfolio decreased from TRY 33 billion (sic) [ TRY 33.1 billion ] to almost TRY 17 billion (sic) [ TRY 17.7 billion ]. This is the main driver of quarterly net interest margin contraction, which is quite similar with the private peers. How they were assuming our CPI linker's contribution would remain same Q-on-Q wise, thereafter, our reported first quarter net interest margin would be 5.6%, which corresponds to additional 30 bps positive increase.

And likewise, first quarter swap adjusted net interest margin would be 3.9%, which is almost flattish compared to a quarter ago. This quarter, swap cost numbers further increased to TRY 10 billion, as you can see on the left-hand side below chart, despite swap usage decline from TRY 145 billion a quarter ago to TRY 118 billion in this quarter.

Swap cost because of the increase in the overall cost of funding increased from TRY 7.3 billion to TRY 10 billion. And therefore, average cost of money market funding further increased to 41% this quarter, which was 27% a quarter ago. The last point we would like to mention is related to average interest rate evolution of Turkish lira floating loan portfolio in a year period of time, thanks to very short maturity profile of floating, especially commercial loan portfolio.

Year-over-year basis, average interest rate increased from 14% to 52%, which corresponds to a very dramatic and visible increase. Equally important on a quarter time, it increased 7 percentage points from 45% to 52%. So therefore, on annual basis, we are witnessing 38 percentage point improvement in our total yield in our floating Turkish lira portfolio. And as you can see, out of total Turkish lira loan portfolio 72% is of first quarter floating, which is providing us a better outlook with the upward repricing of loan portfolio, especially for the upcoming quarters.

On Page 6, you can also see the detailed numbers related to net fee & commission income. Part of our core revenue generation capacity, we also have a very strong performance on the fee income. Fee income is up by 159% year-over-year from TRY 4.1 billion amount to TRY 12.6 billion, which also corresponds to a 12% increase on a Q-on-Q basis. Contribution of payment system to the fee income for the first time maybe exited 50% threshold.

So a strong fee income in line with the average private peers also mainly driven by a very visible contribution from the payment systems. And payment system share in our total fee income a year ago was almost 1 quarter even inside 1 quarter with 24.4%. But as of first quarter, that number increased to almost 53% and, this is the main driver of very strong fee income growth, both Q-on-Q as well as on annual terms.

And as a result of that, fee-to-OpEx ratio further improved both year-over-year and Q-on-Q and materialized at 72%, which was 51% a year ago and which was also 64% a quarter ago. Despite OpEx growth, fee income growth was outperforming OpEx growth and therefore, fee-to-OpEx ratio continued to improve further. The next slide is related to OpEx side.

OpEx is up by 85% year-over-year and 19% Q-on-Q. But despite such relatively high OpEx growth, we managed to maintain our cost-to-income ratio to hover around 30% area. It was exactly 30.6% a quarter ago. And now as of first quarter, it is hovering around 30.8% area. And in terms of the HR cost and non-HR cost breakdown, 61% is coming from non-HR cost versus 39% is coming from HR cost. HR cost is up by 94% year-over-year and 22% Q-on-Q.

And on the non-HR side, overall cost is up by 80% year-over-year and 18% Q-on-Q. We expect in the upcoming quarters, overall annual OpEx growth will be normalizing towards our full year OpEx guidance number of 50% area especially because of the very low base effect of first quarter 2023, we started to the year with 85% annual OpEx growth. But over the quarters, we expect it will normalize and it will become in line with our full year guidance of 50% OpEx growth by the end of 2024.

And with the Page 8, we can shift to offset site and starting with the Lending, similar to last year, a strategical shift in our loan portfolio continued in favor of high-quality business lending portfolio. In terms of the composition, now 55% is coming from corporate and commercial lending. 26% is coming from SME lending and retail has a 19% share in our total loan portfolio.

And in terms of the market share gaining, we increased our corporate and commercial lending market share to 13.7% as of first quarter 2024, which is up by almost 80 basis points compared to a year ago. We have almost a flattish market share in our SME lending with 15.5%, which was almost same a year ago, so there is no change in terms of market share in our SME loan portfolio compared to a year ago. And in line with our shift and in line with our focused area, we see some sort of decline in our market share on retail lending side. Retail market share was 13.3% a year ago, but now it came down to 10.4%.

And in terms of the overall quarterly growth, total lending growth in this quarter was 7.2%, and it was mainly well distributed between both Turkish lira lending as well as hard currency lending. Especially because of the high rates of Turkish lira lending, we also started to receive a very high-quality demand for hard currency lending. And we have 4.2% Q-on-Q Turkish lira lending growth and another 4.1% hard currency lending in dollar terms.

And most of the lending growth during the quarter came during the month of January and February before Central Bank of Turkey put a cap of 2% monthly lending growth. The next page is related to breakdown of loan portfolio in terms of currency, 2/3 is coming from Turkish lira loans and 1/3 is coming from hard currency loans. And in terms of the interest rate structure in our Turkish lira loan portfolio, 72% is coming from floating rates, which covers almost entire non-retail lending and the remaining 28% is coming from fixed rate loans, mainly coming from the residential mortgage as well as general purpose consumer loans on the lending side.

And on the hard currency side, similar ratios, 69% coming from the floating rate and 31% coming from the fixed rate especially in recent quarters, in line with the increase of the interest rate levels, we started to change in favor of more fixed rates rather than the floating rate.

The next page is related to asset quality. On the asset quality side, starting with the NPL side, ratio-wise, it was flattish at 1.3% Q-on-Q. In terms of the new NPL inflows, we have around TRY 2.8 billion new NPL formation. To some extent, it was covered by collections. We had around TRY 1.5 billion collections during the quarter and therefore, cumulative NPL amount further increased to above than TRY 21 billion as of first quarter.

And in terms of the Stage 2. Stage 2 ratio is slightly declining from 7.8% a quarter ago to 7.5%. In this quarter, especially as we can see on the coverage ratio side, we have a slight decline in our coverage ratios for both Stage 1 coverage ratio, Stage 2 coverage ratio, and NPL coverage ratio as well as the total NPL cash coverage ratio. For Stage 1 coverage ratio, it was 1.3% a quarter ago, but this quarter, it came down to 0.9%.

For Stage 2, it was 24% a quarter ago. But as of first quarter now, it came down to 22% area. And for the NPL cash coverage ratio, it is slightly down from 81% a quarter ago to 80%. As a result of those 3 subcategories, total NPL cash coverage ratio came down to 2.67% (sic) [ 267% ] from 311% a quarter ago. But despite this decline, still compare to sector average, our conservative and pre -- over provisioning policy is very visible.

Total NPL cash coverage ratio of the sector is at 242%, which is 25 percentage points lower than our own numbers. This coverage ratio declined for entire loan portfolio Stage 1, Stage 2, and NPL is a shift -- is the outcome of shift in our IFRS modeling with the much more normalized macro expectations for 2024. And given we were already and we were too much over provisioned, we decided to change our IFRS provisioning policy in line with this macro-normalization-base case scenario, and this is reflected as a decline in our entire coverage ratios.

But one final point, despite both NPL Stage 2 and Stage 1 cost-ratio decline, on the free provisioning side, nothing changed, and we are still keeping TRY 11 billion free provisioning in our balance sheet. With Page 11, we can move to deposit side. Deposit was relatively muted this quarter, total deposit growth for our coupon in the quarter was 2.1%. We have a similar to sector. We are also witnessing a small shrinkage in our Turkish lira deposit base. We see 2.4% contraction in our Turkish lira deposits Q-on-Q.

On the hard currency side, we have slightly increase 0.5 percentage point increase in dollar terms in our FX deposits. These deposit numbers compared to sector, we believe this is in line with the sector trend. Especially in the month of March, the more we are approaching to local elections the more we witnessed deposit holders decided to invest in other alternative tools.

And therefore, especially Turkish lira deposit growth was relatively muted and negative. But after March, starting with April quarter-to-date in the second quarter, we also witness this trend is also reversing in the second quarter so far. Unlike the first quarter, we are witnessing a very strong Turkish lira deposit growth following the post local election period. Despite this trend, still as of first quarter end, our total deposits for the first time exceeded TRY 2 trillion threshold and our total assets also for the first time, exceeded TRY 3 trillion threshold. And in terms of the deposit composition, of course, the bulk is mainly coming from the very granular base of retail deposits with the share of 42% followed by corporate and commercial deposits of 32% and 17% total deposits are coming from the SME side.

State deposits only have a 9% share in our total deposit portfolio. Eye catching development on the deposit composition is the shift of our deposit portfolio in favor of granular base, especially compared to a year ago, we have a 5 percentage point increase in the share of retail deposits from 37% to 42%, which is indicating a very stable and much more healthy deposit composition.

The following page is related to wholesale borrowings, especially this quarter, we were quite active in terms of wholesale borrowing activities. In the first quarter, we had 2 very catching transaction, one of them was related to a fresh DPR with the amount of $700 million with the participation of 6 different investors with the maturity of 5 years, and all of them were outright DPR issuance and therefore, VakifBank broadly issued the biggest outright DPR transaction with the amount of $700 million in Turkish banking space.

And apart from that transaction, we also have a fresh funding with the amount of $500 million with one single counterparty with a 3-year maturity structure. These are the very important wholesale transactions of the quarter. Of course, on the DCM side, we also have a similar security eurobond redemption in March with the amount of $600 million.

But in the middle of April, we also have the first time ever, AT1 issuance of Vakif and that was also the first public deal AT1 issuance from the entire state banking space with the amount of $550 million. It was with a maturity profile of [ PERP Non-call 5.25 ]. And this transaction received almost 3x order book from the investor community.

And as of first quarter end, with the very supportive macro conditions currently, we are enjoying, we are having around $9.3 billion free hard currency liquidity. And in the upcoming 1-year period of time, given our short-term, redemptions are growing around $5.1 billion, including both May syndication and November syndication. We have 1.8x coverage compared to our upcoming deals. And in the beginning of next week, we will also announce May syndication, and we will also have above than 100% rollover with the participation of almost 50 banks in the deal. And out of those 50 banks, 14 were the newcomers, which is well interested by the global banks all over the different continents, let's say.

And the last part, I would like to take your attention is related to sustainable funding. As of first quarter, VakifBank carry, on the liability side, $5.2 billion sustainable funding coming from syndications, Eurobonds, IFI and Repo and other Collateralized Funding transactions. And given our sustainable lending portfolio under sustainable finance framework is also hovering $5.3 billion.

It represents a perfect match in terms of sustainable funding versus sustainable lending. At the last page, we would like to take your attention is related to capital ratios. As of first quarter, our total CAR report wise came at 13.54%. Our Tier 1 ratio came at 12.17%, and our CET1 ratio came at 10.52%. Similar to what we are doing for many quarters, we are also showing transparently our solvency ratios without BRSA forbearance measures. And in this case, our total CAR will be 12.57%. Tier 1 ratio would be 11.21%, and our CET 1 ratio would be 9.66%. But of course, assuming we are reversing back our TRY 11 billion free provisioning, thereafter. Those numbers will be up by almost 70 basis points on top of all the solvency ratios, I mentioned without BRSA forbearance measures. And of course, the recent AT1 issuance are not reflected on those ratios, hypothetically, the AT1 issuance we executed in mid-April will create 100 basis points positive impact both in our Tier 1 ratio as well as Tier 2 ratio.

These are the points we would like to take our attention. The remaining pages are regular appendix page, but for the sake of the time, we would like to stop here and leave the floor to Rob again for the Q&A session. Thank you.

[Operator]

Thank you, Mr. Tahan. All right, like Mr. Tahan said, we will now start our question-and-answer session. [Operator Instructions] So the floor is now open for audio questions or written questions.

[Ali Tahan, executive]

I would like that at this stage, given we believe there is no question from the participants. We'll relate it to guidance. Actually, in terms of the guidance, we would like to review our full year guidance after announcing the second quarter financials in August because clearly, we understand that there will be need some revision to our full year guidance. However, for the time being, what we would like to share with you is, I mean in the beginning of the year, when we were talking about full year profitability guidance, we were referring to high teens average ROAE for the full year.

However, as of first quarter, our first quarter average ROAE came at 27%. Of course, profitability in line with the net interest margin evolution will be under pressure in the very short term, but we expect it will be very supportive, especially in the second half of the year. But those details will be shared in detail after announcing the second quarter financials.

But as of today, we just wanted to highlight that we will be revising our full year average ROAE numbers to 30% area, which is in line with the first quarter numbers, instead of initial high teens average ROAE numbers. Let me pause here again because as far as I understand, there are some written questions. If you don't mind, Nihan will read the questions, and we will be trying to answer all together.

[Zeynep Nihan DINCEL, executive]

Thank you, Ali. The first question came from [indiscernible]. Given CBRT's reserves are dwindling, how would you handle FX liquidity? And sorry, Ali, there is another question from [indiscernible]. What percentage of new Turkish lira corporate commercial loans are at floating rate? And do you think those rates have peaked in the system? Thanks again.

[Ali Tahan, executive]

Thank you [indiscernible], and especially as of today, hard currency liquidity seems to be very in good shape as we also depicted in the presentation, as of first quarter, we are enjoying $9.3 billion hard currency liquidity. And all the external funding channel seems to be working very properly, syndication, DCM, Eurobond, especially trade finance and equally important private placements under GMTN programs.

They are all contributing to hard currency liquidity. On top of that, recently, Turkish banks also started to also indirect swap transactions with the international banks. And this is also helping cost in terms of, especially, Turkish lira liquidity with much more favorable cost of funding because with the swap transactions compared to deposit pricing, banks are capable of generating relatively low cost of Turkish lira funding which is supportive for the overall net interest margin evolution.

In terms of the deposit rates, deposit rates -- Turkish lira deposit rates, depending on the maturity profile, they are active from the maximum waiver of course, hovering around 55% to 60% area. But of course, in case the maturities are extending above than 3 months, especially. The numbers can be even much more attractive from deposit holder point of view because like-on-like basis because of the additional costs attached with the reserve requirement, especially for 3 months and 6 months deposit rates, it makes sense from treasury management point of view to offer even higher deposit rates compared to 1 month from Turkish lira deposit rates.

So my point is for these 2 questions. We believe hard currency liquidity conditions and channels are working very effectively in all sub manners. The challenge for the treasury department is to raise relatively lower cost of Turkish lira liquidity rather than hard currency. And in this manner, given lending, especially in the second quarter, seems to be way lower compared to first quarter. And given that we shouldn't expect in our base-case scenario. According to our Chief Economist, we don't expect additional rate hike from Central Bank of Turkey because as of today, we understand additional rate hike means additional inflation pressure.

So going forward, maybe tightening will be in other forms, especially via sterilization of Turkish lira rather than additional rate hike. So therefore, given our Chief Economist and in-house view, doesn't expect any rate hike. And given lending activity and lending demand for Turkish lira is relatively muted, especially after the caps introduced by Central Bank of Turkey starting from the beginning of March, we shouldn't expect additional pressure on the cost of Turkish lira deposits.

On the other hand, thanks to availability of swap transactions, Turkish banks may be in a position to raise Turkish lira liquidity, which is much more attractive compared to cost of Turkish lira deposits.

[Zeynep Nihan DINCEL, executive]

We have Valentina's questions from Barclays. Can you share with us forbearances capital ratios, the first one. And also she is asking for the FX liquidity amount as of first quarter '24.

[Ali Tahan, executive]

Thank you, Valentina. Actually, these are in our presentations on Page 13, at the right hand side. Of course, these are also bank-only numbers. Consolidated numbers are slightly above the bank-only numbers. Our total CAR without forbearance measures is at 12.57%. Our Tier 1 ratio is 11.21%, and our CET 1 ratio is 9.66% Right to that table, we are also showing the impact of all TRY 11 billion hidden capital potential. Assuming we are also reversing back, those numbers will be 13.19%, 11.83% and 10.28% respective for total CAR, Tier 1, and CET1 ratio. And for the hard currency liquidity amount, this is also shown in our presentation on Page 12, at the right-hand side above chart, as of first quarter, that number is almost $9.3 billion.

[Zeynep Nihan DINCEL, executive]

Valentina has another question regarding revenue distributable items as of first quarter, but we will send -- we will share the information just after the call.

[Ali Tahan, executive]

Yes. Thank you, Nihan. We don't have any written questions and answers with Rob. If there is any participants would like to ask in person, we are more than happy.

[Operator]

Thank you, Mr. Tahan. Yes, just quickly, I got a few more minutes, folks. [Operator Instructions] Just a few more moments, but we don't seem to have any audio questions. Back to you, Mr. Tahan, for any written questions.

[Ali Tahan, executive]

Thank you, Rob. Actually, we don't have any written questions. Without ado, we would like to thank you for all the participants for their time and interest together with myself, Nihan, and all the Investor Relations colleagues, we are at your disposal, and we are in notice if there is any follow-up questions, as always, please do not hesitate to contact with us. But for the time being, we would like to thank everybody for their time, and thank to you, Rob, for this event and looking forward to talking to you again in the upcoming first occasion.

[Operator]

Thank you, Mr. Tahan. Yes, indeed, thank you to you, sir, for your presentation. And that said, ladies and gentlemen, that concludes today's conference call. And once again, thank you for your participation.