Turkiye Vakiflar Bankasi TAO

IST:VAKBN.E

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome to the VakifBank Audio Webcast Second Quarter 2021 Bank-Only Earnings Results Conference Call and Webcast. Thank you very much for standing by. [Operator Instructions]

With that, I will now hand you over to your host, Mr. Ali Tahan, the Head of International Banking and Investor Relations at VakifBank. Mr. Tahan, the floor is yours.

[Ali Tahan, executive]

Thank you, Rob. Good afternoon, everybody, and welcome to VakifBank 2021 Second Quarter Earnings Announcement Conference Call. As usual, I have all the Investor Relations colleague with me. And let me go through the important pages of the presentation, as usual.

In our presentation on Page 2, this quarter, we have quarterly net income of TRY 660 million, which is around 10% higher than the market consensus for the second quarter of the year. And for the first half of the year, with such net income in the second quarter, first half net income came more than TRY 1,410 million. And during the period of 2021 in the first half, we didn't touch our free provisioning, which is roughly TRY 1.5 billion.

One of the important highlights of the quarter, which may be essential for you also is related to increase on the core banking revenues. Core banking revenues, consisting of net interest income and net fee and commission income is up by 19% Q-on-Q, reaching to more than TRY 4.2 billion. And apart from that, we also kept our coverage ratio strong. Stage III NPL cash coverage ratio remained flattish Q-on-Q at around 79% area. Stage II coverage ratio continued to be flattish at around 14% area. And as a result of that, our total NPL coverage ratio remains strong at more than 123% as of June end.

On Page 3, you can see the highlights of second quarter. The details of those points will also be highlighted during the rest of the presentation. And therefore, I am skipping for Page 3 and Page 4.

On Page 5, you can see the data and information related to net interest margin. Reported net interest margin during the second quarter came at slightly more than 2%, which is up by 22 basis points compared to a quarter ago. And the quarterly net interest margin improvement actually came from everywhere. We have a very sluggish increase in our cost of risk, but most of the improvement on quarterly net interest margin came through additional interest income on securities. But still, in terms of the CPI estimate, we are one of the most conservative banks in the Turkish banking space.

In the first half of the year, we used 14% CPI estimate for the entire CPI portfolio. And given the inflation outlook for the second half of the year, we believe we have additional upside in terms of boosting our interest income from CPI portfolio. This second quarter net interest margin grew our first half net interest margin slightly lower than 2%. Our first half net interest margin materialized at 1.94% for the full first half. And swap adjusted-wise, second quarter and first half net interest margin, swap adjusted net interest margin came at 89 basis points and 82 basis points, respectively.

At the right-hand side of the chart or the below chart, we also depicted as usual in a very detailed way the information related to total money market funding. If you can see during the quarter, our total money market funding further increased from TRY 103 billion in average to almost TRY 113 billion. And equally important, quarterly average cost of money market funding also increased from 16.4% to 18.5%, which is in line with the Central Bank policy rate fluctuations.

On Page 6, you can see the revenue breakdown. As we also discussed in the beginning of the call, core banking revenue improvement was visible in this quarter. We have almost 19% Q-on-Q increase in our net interest income, and we have additional, a more than 20% increase in our net fee and commission income. And those 2 items makes around 73% of our total revenues, and the breakdown of total revenue is also depicted in the below chart.

The next page, Page 7, is related to fee income. This is also another good part of our quarter in the financials. Our net fee and commission income is up by more than 20% Q-on-Q. And as a result of that, annual fee income in the first half of 2021 came at 9.3% on a year-on-year basis. And as a result of this improvement in our net fee and commission income, all KPIs related to fee income also improved like fee over total revenues as well as fee over operating expense. The focus on the fee reflected in the second quarter financials, which is also promising for the rest of the year.

Another important highlight of the P&L is related to cost management. During the first half of 2021, we had a very disciplined cost management. As you can see on Page 8, our annual OpEx growth came below than inflation at 11.5%. We had especially very disciplined management on the HR cost side. HR cost is up by only 8.6% on a year-on-year basis, and non-HR cost increase materialized at 13.7% during the same term. And out of total OpEx, around 40% is coming from HR costs, while the remaining 60% is coming from administrative costs.

Starting from Page 9 onwards, we are shifting to asset side, starting with the lending growth. This quarter, we had relatively decelerated quarterly lending growth. Total lending growth during the quarter came at 2.4%. We had slightly low Turkish lira lending growth. Turkish lira loans were up by 0.9%, and we had flattish FX lending growth in dollar terms. Our quarterly lending growth numbers are lower than sector numbers. But still on a year-on-year basis, on a cumulative basis, we are growing faster than sector across all the products, both in total as well as local currency and hard currency.

At the right-hand side of the chart, you can see the breakdown of quarterly lending growth. Especially in the second quarter, residential mortgage lending growth was very visible with 7% Q-on-Q growth. We also had a very strong appetite for GPC lending or the retail lending. But thanks to collections, monthly regular collections, net-net, we had a minus 1% contraction. And we had flattish FX lending growth in dollars. We had some slight increase, like 3% in our corporate and commercial Turkish lira lending. We also had additional contraction in our SME lending portfolio, mainly coming from principal collections.

Page 10 and 11 is also very important for the performance of our lending portfolio. I just want to take your attention to CGF loan amount, which is located at the left-hand side, the lower chart on Page 10.

In terms of the total CGF outstanding loan portfolio, which was almost TRY 64 billion by the end of the year. It came down to TRY 57 billion by the end of first quarter. And thanks to regular principal collection, now by the end of June, it came further down to TRY 50 billion. Across all CGF loan portfolio, we are collecting back, and they are performing well. And at the right-hand side of the lower chart, you can also see the breakdown of CGF in terms of segmental breakdown. Almost half of it still are coming from SME CGF loans. Around 16% are coming from retail CGF loans and the remaining 33% coming from corporate and commercial CGF loans.

Page 11 is a new page. We are transparently showing the performance of all support loans we generated during the period of 2020. Since the beginning of COVID-19, since the beginning of first quarter 2020, we provided around TRY 25 billion fresh loan to our retail customers. And out of that, 44% are under the guarantee of CGF and 56% non-CGF. And those non-CGF loans are mainly residential mortgage loans. And out of this TRY 25 billion, so far, we collected back slightly more than TRY 4 billion in principal. And as a result of that, now as of June end, the outstanding portfolio is almost reaching to TRY 20.9 billion. And in terms of the classification, around 94% of those support loans on the retail side are at Stage I, around 4% of them are at Stage II, and only 2% of that became NPL.

Then we look into the details of commercial support loans. Total exposures under the commercial support loans reached to TRY 73 billion. Again, out of this, around 63% is under the guarantee of CGF, remaining 37% non-CGF. And out of this TRY 73 billion exposure since the beginning of COVID-19, so far, we collected back around TRY 18.8 billion. And as a result of that, our outstanding exposure under all kind of support loans seems to be holding around TRY 53.8 billion by the end of June end.

And in terms of the classification of this portfolio, 97% under Stage I. Only 2% is Stage II. And only 1% so far became NPL. And those figures shows up very clearly that the performance, collection performance of those loans are very good. And the Stage II as well as NPL ratios are lower than total outstanding lending portfolio of VakifBank.

At the same page, we also showed the classification of COVID-19-related deferral loan payment performance. So far, all of them became due. All of them have to perform. And by the end of June, out of those deferred loss, 88% under Stage I. Only 10% is Stage II. And 2% only out of those entire deferred loans became NPL. We believe those numbers also show and confirm our argument that in terms of the collection performance, those loans are okay and performing well.

The next page, Page 12, is related to asset quality. This quarter, we had flattish NPL ratio at 3.66%, again, with the definition of 180 days NPL definition. If we normalize our NPL definition with 90 days deferral, then our NPL ratio will be 52 basis points higher than 3.66%.

And similarly, our Stage II portfolio as a percentage of total loan portfolio came also flattish at 8.2%. Again, when adjusted with the regular Stage II definition, our Stage II ratio will be 56 basis points higher than 8.2%. Out of the total Stage II, around 43% of total Stage II are coming from SICR-related defined loans. Only 15% are coming from the loans between past due 90 days to 180 days. And the remaining 42% is coming from restructured loans. For your information, we don't have any restructured loans under Stage I category. All of the restructured loans are classified as Stage II.

At the right-hand side, you are also seeing the coverage ratios for Stage I, Stage II, Stage III as well as NPL ratio. And on top of those strong coverage ratios, strong cash coverage ratios, we also maintain our free provisioning amount of TRY 1.5 billion.

The next page, Page 13, is related to deposits. In terms of the deposit growth, this quarter, similar to lending deceleration, we also see some slowdown in terms of deposit collection. Total deposits are up by 0.5% Q-on-Q. All of them are coming from Turkish lira deposit growth. Turkish lira deposits are up by 2.1%, but we had a 6.1% shrinkage in dollar terms in our hard currency deposits. Similar to loans story, again, on the deposit side also, despite such relatively lower-than-sector deposit growth, still on a year-on-year basis, we are having higher annual deposit growth both in total as well as in Turkish lira and hard currency.

During the quarter, thanks to our strong liquidity conditions, we simply gave exit to costly deposit accounts in order to maintain our core spread relatively stronger. And that was the main driver of contraction, especially on the hard currency side deposit.

In terms of the portfolio of deposits, we continue to have very diversified and stable deposit portfolio, out of which 41%, actually 43% coming from retail, 16% coming from state and the remaining 41% mainly coming from SME and corporate and commercial deposits. And within the deposit portfolio, the share of demand deposits increased to 22%, still below the sector average. But compared to year end, which was holding around 20%, we have a very sluggish increase in the share of demand deposits in total.

The next page related to external funding. As we also discussed in the last earnings conference call, we had all-time high DPR securitization in the beginning of the year with a total amount of $1.750 billion. It was not only the biggest DPR issuance of Vakif, but also at the same time, it was the biggest DPR issuance of entire Turkish banking sector. It was timely and compared to others types of external funding with the same similar maturity, it was a cost savings.

On top of that, turning to second quarter, we also realized our first sustainable-related syndication loan facility with the participation of 34 banks. We received $1.1 billion fresh syndication loan. And compared to a year ago, we had 105% rollover ratio. And as of end of June, we are having around $14 billion total international funding, which is extremely diversified and coming through different funding tools. And at the same time, our FX LCR ratio by the end of June is hovering around 270%, way higher than 80% minimum ratio. And by the end of June, again, we are having around $5 billion, which is more than $6 billion at the moment free hard currency liquidity. And further information, until the end of the year, we only have a $500 million eurobond redemption in the month of October.

The next page is related to solvency ratios. Our solvency ratio, total CAR ratio came at 15.13%. Our Tier 1 ratio came at 13.22%. And our CET1 ratio came at 10.52%. At the right-hand side, you can also see our solvency ratios without BRSA forbearance measure. We believe we are still in comfortable position and a relatively good level compared to what BRSA requirements are.

For the sake of the time, I just want to stop here and leave the floor to Rob again to move to the Q&A session. Thank you. Thank you very much.

[Operator]

[Operator Instructions] We've got a question here from Mr. Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

Could you just talk about how you see your existing guidance for the full year after the second quarter performance, where you see upside risk or downside risk, that would be really helpful. And I did also see that the mortgage growth was quite good in the second quarter. And I just wondered if there was anything specific going on in that part of your business.

[Ali Tahan, executive]

Thank you, Alan. Related to guidance update, actually, in terms of the ROE, we are still sticking to our full year guidance of high single-digit ROE for entire 2021. But at the same time, after seeing first half results, without changing the ROE guidance, we should also have some fine-tuning in terms of the details of this.

One downside to our guidance may be related to full year net interest margin. Just to remind you, according to our estimation methodology, last year, we had 4.3% net interest margin. In the beginning of the year for 2021, we were guiding 3% for the full year. And in the first half of the year, our first half net interest margin came below than 2%.

Of course, for the second half of the year, thanks to better performance of cost of risk as well as thanks to potential additional interest income from CPI portfolio, there should be some increase in our quarterly and semiannually net interest margin compared to first half of the year. But still, it will not be enough to deliver 3% net interest margin for the full year. So therefore, there should be some downside risk to our full year net interest margin guidance of 3%. That should be one point to take into consideration.

On the other hand, as a positive update, fee income so far seems to be better than our initial guidance. Just to remind you, in the beginning of the year, we were guiding flattish fee income for the full year. But as of first half 2021, we are up by 9.3% compared to a year ago. And given the fact that base effect will fade away in the second half of the year as well as there should be some additional positive impact from the regulatory changes, which is also published today in official newspapers, we should also change our fee guidance like low double-digit growth in our fee income. That should be the second change to our full year guidance.

Another one would be related to OpEx. I mean, in the beginning of the year, we were guiding high teens growth for the OpEx. But in the first half of the year, it came well below than CPI at 11.5%. This disciplined cost management should continue in the second half of the year. And therefore, we see additional upside to our OpEx growth. Rather than high teens, realistic OpEx guidance for the full year should be mid-teens for the full year, rather than high teens. And the new OpEx guidance should be mid-teens. These 2 items are positive. The last 2 items are positive.

Another and last important change to our guidance should be related to net cost of risk. In the beginning of the year, when we were sharing our net cost of risk guidance, we were thinking that there should be some normalization in the definition of NPL to 90 days again. And within that assumption, our net cost of risk guidance was 150 basis points. But now given the fact that the forbearance on the definition of NPL is still on the table, and it will be effective minimum until the end of September and maybe and probably to our understanding, it will be effective even after the end of third quarter. This new NPL definition, the NPL definition with forbearance, this should also change our net cost of risk guidance to less than 50 basis points for the full year. And indeed, the first half numbers also confirms this. So rather than 150 basis points, full year net cost of risk with the forbearance NPL definition, now we are also changing our net cost of risk guidance to less than 50 basis points.

So these are the important guidance updates after the second quarter financials. For the rest of the guidance points, they shouldn't have any change. But in terms of the changes, I believe those 4 points are important and that's it. For the second question related to mortgage business, sorry, Alan, you can ask if you have any additional question related to guidance.

[Alan Webborn, analyst]

Yes. Just one, could you tell us what's the impact of what's happening on your fee income in terms of the regulatory changes and how that affects you?

[Ali Tahan, executive]

Actually, given the fact that the new regulation was published today, our marketing departments and strategy departments are still trying to assess the impact of this regulatory change, especially given the fact that the new regulation allows banks to have some flexibility in terms of charging fee over the restructuring of commercial files, there should be some meaningful implications, but this is still under assessment. But my point is, given the fact that in the first half, we already have 9.3% increase, and it was an increase for a period where high base effect will be much more visible, we believe that the second half, this high base effect will also fade away. And on top of that, there should be also some additional upside coming from these regulatory changes. As a result of that, we are changing our fee income guidance to low teens.

[Alan Webborn, analyst]

Yes. No, I've got that. That's fine. I understand that it's all quite new, so that's great. And the last question was simply on, in an overall cautious lending activity in the second quarter, I think mortgages were quite strong. So I just wondered if you had a comment on that.

[Ali Tahan, executive]

That was the second question. Yes, we are growing relatively faster on the mortgage business. We generally love mortgage business because of its lower capital consumption and because of its nature in terms of creating relatively much higher cross-product sales. And therefore, even though our mortgage rate is not necessarily the lowest one in the market, still thanks to some big campaigns, we had huge high-quality demand coming from high-quality customers. And deliberately, that was an area we were growing, mainly because of the low consumption capital reality as well as the potential cross-selling capacity.

[Operator]

We now have a question from Mr. Waleed Mohsin from Goldman Sachs.

[Waleed Mohsin, analyst]

A couple of questions from my side. First, I mean, if you could talk a little bit about the loan growth strategy from here. Obviously, you elaborated on the mortgage strategy. But overall, I mean, just how do you see loan growth evolving from here, especially given where capital stands, I would love to hear your thoughts on how do you think about capital relative to your loan growth aspirations going forward. That's my first question.

Secondly, very good delivery on credit losses, and you talked about Stage III and Stage II coverage, which obviously is one of the best in the sector. Curious to hear what you think is a normalized gross or net cost of risk for the bank because if we look at this quarter, gross cost of risk was only 110 basis points, net cost of risk, obviously, almost close to 0. So I just wanted to see where these normalized numbers sit once in a more normal environment.

And maybe if I could add just a last third question. On the net interest margin side, you talked about the potential upside from the CPI linkers, but very curious to hear how your margin, excluding CPI linkers, shapes up going forward given that loan spreads should continue to widen as we go through the rest of the year.

[Ali Tahan, executive]

Thank you, Waleed. Let me first start with the first question, which is related to lending growth. I mean, just to remind you, for the full year of 2021, we were guiding around 16% total lending growth. Of course, it was mainly coming from local currency side. And on top of that, we were also guiding low single-digit FX lending growth in dollar terms.

So in the first half of the year, we already fulfilled our target in terms of hard currency lending. But in the second half of the year, we would like to still grow on the Turkish lira lending side, in line with our full year guidance. So from today's perspective, we can say that our full year lending growth guidance of 16% in total is doable and realistic. And in the second half, the focus will be much more on the Turkish lira lending side given the fact that we already fulfilled our full year target on the FX lending side.

In terms of the Turkish lending side, of course, we also have a strong appetite for retail general purpose consumer lending. I mean, by looking at minus 1% contraction and by making a comparison to prior year, one can reach the conclusion that we don't have appetite for GPL. No, this is not true. On the contrary, we have appetite for GPL lending. But because of the GPL lending excessively we generated last year, each and every month, we collect a lot of principal, and it is not easy to put, marginally increase on top of those huge number of monthly installment collections. Therefore, net-net, you may see some contraction on the GPC side, but it doesn't necessarily mean that we don't have appetite for this product. On the contrary, we have appetite for high-quality customers. We are trying to do our best, but thanks to a very strong number of monthly installment collections, net-net, in this quarter, we are minus 1% shrinkage.

The same, to some extent, is also true for SME. But on the commercial segment, rather than SMEs, we prefer more growth on the corporate and commercial segment because of their lower cost of risk and better asset quality performance. Therefore, on the commercial segment, for Turkish lira lending growth for the second half of the year, these refer to growth more on the commercial and corporate sector rather than SME. But on the retail side, we have appetite, especially for GPL and mortgage at the same time. And those areas will be the main driver of second half lending growth.

In terms of the normalized level of cost of risk, actually, if you look at from a longer-term perspective, our cycle average gross and net cost of risk hovers between about 25 and less than 100 basis points, respectively, for gross and net. But in this specific year of 2021, the numbers were a little bit different than our cycle average. It is simply related to the fact that during the years of 2019 and 2020, despite denominator effect, despite a modest sector lending performance, we still put excessively and conservatively provisioning for our lending portfolio.

And last year, for example, our net cost of risk came at more than 200 basis points. This is almost 2x higher than our cycle average net cost of risk. Therefore, in the first half of the year, we see some correction of this cycle average net cost of risk performance. And on top of that, this forbearance, which is still effective in terms of the definition of NPL and Stage II also requires relatively lower net cost of risk ratio. But in a normalized world, with normalized NPL definition and normalized Stage II definition, gross cost of risk and net cost of risk for VakifBank portfolio should be 195 and less than 100 basis points, respectively, for gross and net cost of risk.

For the net interest margin guidance, indeed, for the second half of the year, we are much more optimistic compared to first half of the year, even excluding the CPI portfolio. Of course, depending on realized October to October CPI data, we will have additional upside from CPI portfolio. But even if we exclude CPI impact, still, there will be some additional positive contribution from cost of risk evolution coming from both Turkish lira cost of risk as well as from FX cost of risk. And for the time being, our FX cost of risk are way higher compared to Turkish lira cost of risk level. Of course, Turkish lira cost of risk will improve further and the increase and the improvement on the Turkish lira cost of risk will be much more visible compared to additional improvement in our FX cost of risk. But net-net, my point is still, despite such improvement in the cost of risk as well as despite such additional interest income support from CPI portfolio, still, we will miss our initial 3% net interest margin guidance for the full year. I hope those are helpful for your questions, Waleed.

[Operator]

We've got a couple of questions coming in on the written side. [Operator Instructions]

[Ali Tahan, executive]

Rob, if you don't mind, we would like to go over the questions provided in a written format.

[Operator]

Absolutely. Absolutely. We can move on to that. Yes.

[Ali Tahan, executive]

Thank you. The first question is coming from Ali Kerim bey from Gedik Yatirim. Ali Kerim bey is asking the amount of bank excess capital.

According to our internal data, by the end of June, our total equity, regulatory equity is more than TRY 68 billion. And after all regulatory capital requirements, we have more than TRY 12 billion excess capital. I believe this is the answer for your question, Ali Kerim bey.

We have also another question from Sadrettin Bagci from Garanti BBVA Asset Management. Sadrettin bey is a senior bank analyst, saying that thanks for the presentation, Ali bey. You said probable downside risk on NIM guidance. Loan to deposit spread may be narrowing, but don't expect high CPI linker yield offsetting the negative impact. Thank you.

Actually, Sadrettin bey, we are expecting positive contribution to our net interest margin, both coming from cost of risk as well as additional upside from CPI portfolio, but both contribution is not enough to deliver 3% initial full year net interest margin guidance. That's a valid point.

And Ali Kerim bey is also asking one additional question related to guidance on the ROE. We are making some fine-tuning to our guidance in terms of net interest margin, cost of risk, fee income and OpEx. But net-net, those impact will neutralize each other. And therefore, at this stage, we don't want to change our high single-digit ROE guidance for the full year. These are the written questions provided online to us. At this stage, we don't have any further question.

[Operator]

Should we leave the lines open a bit longer or should we move on to the conclusion, Mr. Tahan?

[Ali Tahan, executive]

I believe we can come to the conclusion with final words. Thank you very much for everybody for their time and participation and looking forward to talking to you soon again. Thank you very much.

[Operator]

Thank you very much, Mr. Tahan. And that, ladies and gentlemen, concludes today's webcast call. Thank you for your participation. You may now disconnect.