Turkiye Vakiflar Bankasi TAO

IST:VAKBN.E

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to VakifBank Third Quarter 2020 Earnings Results Conference Call and Webcast. There will be a Q&A session following the presentation. [Operator Instructions] I will now hand you over to Mr. Ali Tahan, Head of International Banking and Investor Relations. Sir, the floor is yours.

[Ali Tahan, executive]

Thank you. Thank you, Shirley. Good afternoon, everybody, and welcome to VakifBank Third Quarter 2020 Earnings Presentation Investor Conference Call. I am Ali Tahan, Head of International Banking and Investor Relations. I have all the Investor Relations team with me, starting with the Head of Investor Relations, Nihan, and other colleagues, [ Mintas, Yusuf, Barna and AJ ]. And without taking too much of your time, I will spend 5 to 10 minutes for the presentation. This is a very busy day on the political front. We don't want to take too much of your time, and we may leave more time for the Q&A session.

Onto presentation part, on Page 2, as usual, we are starting with the earnings and ratios. Our third quarter net income came slightly above the market consensus at TRY 1,100 million, which brought full year net income number of 2020 in the first 9 months of the year above the TRY 4.3 billion compared to same term of the previous year, which means we have almost 185% increase in our net income. And we all saw strong net income, pre-provisioning operating income increase on a cumulative basis from slightly more than TRY 5 billion as of first 3 quarters of 2019 versus above than TRY 10.7 billion in the same period of this year. And such strong P&L brought our cumulative ROAE number to 15% in the first 9 months of the year versus sector average of 11.6%. And our full year -- actually, our first 9-month average ROAE would be even higher at 16.5% excluding the CET1 injection impact.

So in this sense, VakifBank delivered a very strong set of results in such a challenging time. And this strong profitability came despite additional provisioning increase, despite additional coverage increase. As we can see at the right-hand side below chart, our Stage II coverage ratio further increased to 13.6%, which was 12% a quarter ago and which was 5.9% only in the beginning of the year. So we have a very dramatic increase in our Stage II coverage ratio. And on top of that, our total NPL coverage ratio also further increased to almost 125% level as of September end, which was hovering around 110% as of June. So Q-on-Q-wise, we also have a very visible increase in our total NPL coverage ratio. And on top of those proactive coverage ratio increases, we didn't touch our pre-provisioning. We are still keeping our TRY 852 million pre-provisioning in our balance sheet.

Next page, Page 3, is related to important highlights of third quarter. For the time being, I will skip this page because we will be discussing the details at later stages.

On Page 4, you can see the quarterly and cumulative P&L evolution. I am also passing quickly this page.

On Page 5, you can see the revenue breakdown. VakifBank continued to have sustainable and solid revenue breakdown, which is mainly driven by core banking revenues, consisting of net interest income and net fee and commission income. And at the right-hand side below chart, you can also see the breakdown of net fee and commission income. And as we guided, because of the main regulatory impact on a cumulative basis in the first 9 months of the year compared to same term of the previous year, we had 10% contraction, which is more or less in line with our guidance.

Page 6 is important, which is related to net interest margin. Our quarter net interest margin came down to almost 4.2% which was 5% a quarter ago. So Q-on-Q-wise, our reported net interest margin decreased around 80 basis points. And swap-adjusted net interest margin came down 54 basis points from 4.3% to 3.8%. And therefore, this contraction, quarterly contraction in our net interest margin, resulted our cumulative net interest margin to materialize at 4.6%. Just to remind you, we are guiding flattish net interest margin for the full year compared to 2019, which is 4.2%. And as of September, we are better than our guidance so far.

Of course, Q4 net interest margin will be further squeezed because of the additional core spread tightening. But as October CPI data is out, we have additional gain from our CPI linker portfolio. October inflation data announced at 11.8%. And as a result of that, we will have around TRY 2.2 billion interest income in the final year -- in the final quarter of the year, which was TRY 1.1 billion in third quarter. So Q-on-Q-wise, we will have additional TRY 1.1 billion interest income from our CPI linker portfolio, and such additional interest income will boost our quarterly net interest margin by 90 basis points.

At the right-hand side of the chart, you can see the details of money market funding in terms of the total amount, cost of money market funding, average swap usage, average swap cost, as usual, in a very transparent way, we are also showing those details in our presentation.

Page 7 is related to OpEx. We have a flattish OpEx evolution in terms of the nominal amount. On a cumulative basis, our OpEx on a comparable basis is up by almost 23%. But despite such OpEx growth, still, our cost-to-income ratio further improved to below than 30% on a cumulative basis, which was 39% as of September 2019. So in this sense, this is showing clearly efficiency improvement, especially in terms of revenue generation capacity of the bank. At the right-hand side, you can see the breakdown of OpEx between HR cost and non-HR cost, especially on a cumulative basis. We see more increase in our non-HR side, especially related to administrative expenses. And on top of that, our branch number came down to 938, which was 943 in the beginning of the year.

With Page 8, we can move on to asset side and asset growth. We continue to maintain our very diversified and stable loan breakdown. On Q-on-Q, at VakifBank, we had 11.3% total lending growth, which is mainly driven by local currency lending growth. Turkish lira loans were up by 10.2% Q-on-Q, and our FX lending was flattish in dollar terms. And in terms of the breakdown of quarterly lending growth, especially on the retail side, we had a much more visible lending growth driven mainly by residential mortgage lending. Our mortgage loans were up by 35% Q-on-Q, which was followed by general purpose consumer lending on the retail side with 12% Q-on-Q growth. On the nonretail side, business loans, mainly driven by SME and commercial segment, was visible with 11% Q-on-Q growth versus 3% SME lending growth. In terms of the currency within loan portfolio, above 70% is coming from local currency lending versus around 29% is coming from hard currency lending. And at the right-hand side above chart, we can also see the portfolio breakdown between SME, retail and corporate and commercial lending. Compared to September 2019, we see a slight decline in terms of share of corporate and commercial lending, while portion of retail lending as well as the portion of SME lending increased slightly.

And as you can see on the next page, on Page 9, this increase is much more related to CGF lending, similar to third quarter -- similar to second quarter. We see additional CGF-related lending growth in third quarter, especially in the form of general-purpose consumer lending on retail side as well as SME lending growth on the nonretail side. And as of September, we provided almost TRY 45 billion fresh CGF loan to nonretail customers, while we provided additional almost TRY 10.7 billion CGF loans to retail customers in the form of general-purpose consumer loans. And at the right-hand side below chart, you can also see the segment breakdown of CGF lending among retail, SME, corporate and commercial lending. Of course, lion's share goes to SMEs, which is in line with the first CGF usage as well. At the left-hand side above chart, you can see sectoral breakdown of overall cash loans. And we also put separately the breakdown of project finance in terms of the energy infrastructure service and other segmentation. I believe those data will be useful for detailed analysis.

This Page 10, we may move to asset quality. On the asset quality front, our NPL ratio further came down Q-on-Q, which was 4.3% as of June. It came further down to 3.73%. However, we had additional increase in our Stage II. The share of Stage II increased from 7.8% as of June to 9.3% as of September. And of course, within NPL ratio, we also have some impact out of this temporary BRSA forbearance measures. And according to our data, these temporary BRSA forbearance measures is creating 41 basis points positive impact in our NPL ratio. In other words, rather than reporting 3.7% NPL ratio, under normal conditions our NPL ratio would be above than 4%. So in this sense, we have some positive impact out of these regulatory forbearances.

On the net cost of risk side, in line with our guidance, first 9-month net cost of risk ratio came at 204 basis points, in line with our full year guidance of 205 basis points. However, on a quarterly basis, we see some contraction from 243 to 162 (sic) [ 161 ]. But still, cumulative net cost of risk is in line with our guidance. At the right-hand side below chart, you may also see coverage ratio change in terms of Stage I, Stage II and Stage III, especially the increase in our Stage II coverage ratio is very visible. It was 5.9% in the beginning of the year. Now it is almost 14%, and we are still putting a very conservative NPL specific cash coverage ratio at 75%. Therefore, total NPL coverage ratio further increased to 125%. I believe those coverage ratios are one of the highest among peer group bank in Turkey.

On Page 11, we may shift to liability side. And starting with the deposit side, which is the main funding tool within our total liabilities, which is 62%. We are also becoming a bigger player in the deposit side. We are gaining steadily and surely additional market share gain in our total deposit portfolio. As of September, our market share further increased to 11.4%, which was 11% a quarter ago. So therefore, VakifBank continued to gain more market share within total deposit growth quarterly. We had 17% total deposit growth Q-on-Q. And in terms of the currency breakdown, we had 13% TL deposit growth versus we had 9% fix deposit growth in dollar terms. And as a result of that, our loan-to-deposit ratios continue to came down. And in terms of the breakdown of deposits in currency, we have much more Turkish lira heavy deposit composition, which 55% is coming from local currency deposits, while the remaining 45% is coming from hard currency deposits. This is a little bit different than the composition of the sectoral deposit portfolio, where Turkish lira deposits have 46% share versus 54% of total deposits are coming from hard currency. And in terms of the demand deposit as of today, around 1/5 of our total deposits are coming from demand deposit, while the remaining 80% is coming from term deposit. And at the right-hand side, you can also see the deposit composition in terms of retail, state and other. Other mainly refers to SME and corporate deposit.

Next page is related to international wholesale borrowing, which is very well diversified. As of September, we are having around $12 billion total international funding. And those $12 billion have 17% share in our total liabilities. This quarter, especially, we are very glad to announce that we have a new agreement with World Bank, with a fresh loan amount of $250 million, with the final maturity of 23 years, including 7 years grace period. And that loan will be used to finance micro SMEs mainly who are suffering from the negative impact of COVID-19. And the important feature of this loan is this is the biggest IFI borrowing in the entire history of VakifBank. So in the middle of such a challenging environment, VakifBank added a new success in terms of diversification of wholesale borrowing, and it was very visible. And on top of that, thanks to a good level of relationship with our correspondent banks, we continue to continue to get bilateral and post-financing from our correspondent banks, and the total amount since the beginning of the year in the form of bilateral and post-financing reached to $940 million, which is also a very sizable number.

As of September, we are also comfortable in terms of hard currency LCR, which is standing at 242% versus 80% regulatory threshold. And you can also see the breakdown of external debt between short term and long term. In the short term, up to 1 year, we have $4 billion reduction, including everything, like syndication, Eurobond, covered bond, post financing, bilateral loans, IFI borrowing, et cetera, versus $7.6 billion in the long term. And we are at the final stage of closing our syndication loan, which will be announced late November. And hopefully, we will also announce good rollover ratio for this upcoming deal.

The last page I would like to touch upon is related to solvency ratios. At the left-hand side, you can see our reported solvency ratio in the form of CET1, Tier 1 and Tier 2. CET1 ratio came at above than 12% as of September, Tier 1 ratio came at above than 15%, and total CAR came above than 17%. Of course, those numbers are account -- taken into consideration with BRSA forbearance measures. At the right-hand side, you can see what would be our solvency ratios without such forbearance measures. But at end of the day, especially thanks to TRY 7 billion CET1 injection in the middle of second quarter, we believe we are comfortable in terms of solvency ratios.

The next page is our appendix, where you can see more detailed information related to our sustainable banking approach, which is a very important topic in the top management and in terms of our strategy as well as digitalization, composition of assets and liabilities, security portfolio, retail lending portfolio and other pages.

For the sake of the time, I would like to stop here and leave the floor to [ Shireen Egan ] for the move to Q&A. Thank you.

[Unknown Attendee]

All right. Thank you, Mr. Tahan.

[Operator Instructions] All right. The first question is from Mr. Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

Just a couple of questions from me. I noticed that your mortgage lending was very, very strong in the third quarter. And perhaps could you talk us through a little bit as to what you were doing there? I mean clearly, rates presumably were rising across the quarter. That would be helpful.

Secondly, could you talk a little bit about -- I think you said that you were in line with your NIM targets for the full year. But could you talk a little bit about what we've seen over the last few weeks in terms of rising market rates tightening and so on. Just to give us an idea of how you're managing those sort of shifts that we've seen going through the third quarter and now, obviously, into the fourth quarter with the weakness in the lira as well, just to give us an idea about how you're managing that.

And then perhaps could you just run through your -- the guidance that you've been giving across the year to give us an idea of where you think you are ahead of it now or where it's going to be a little bit tough to achieve?

[Ali Tahan, executive]

Thank you, Alan. Let me first start with the first question related to mortgage lending. Most of the quarterly mortgage lending came through the first month of the quarter, which is July specific because the mortgage rate we were offering during July were much more attractive compared to the rates we were offering during August and September because -- in line with the increase in cost of funding, both coming from Central Bank funding as well as from deposit funding. We started to increase gradually our mortgage lending and overall lend decrease since the beginning of August. So therefore, the mortgage rate during July, from borrower point of view, were much more attractive compared to August and September. And just to remind you, we were offering mortgage launch with 0.64 for the first home as well as 0.74, per month of course, for the second usage form. But of course, these are the rates we were offering during July and late second quarter. But starting with August and September and as of today also, in line with the increase in our cost of funding, we gradually increase our mortgage rates.

Today, we are offering a mortgage portfolio with a rate of 1.2% per month. So there's a huge increase on a monthly basis in terms of the rates. Of course, these are not helping us in terms of TL cost evolution. But repricing already started as of third quarter because, as you know, we are having like 6 months duration gap between our assets and liabilities. And first part of this offer already reflected in our third quarter net interest margin in terms of TL cost to debt contraction. It will have additional impact during second -- during Q4. And on top of that, each and every day, cost of Central Bank funding is also going up. So the outlook for TL cost to debt seems to be additional tightening and additional modeling during Q4. It's a combination of both asset repricing as well as increased cost of funding. But the favor of the quarter in terms of net interest margin, as we discussed, will come from CPI linker portfolio. They will have sizable additional interest income out of our CPI portfolio. So to some extent, the negative impact of cost of debt contraction in Q4 will be compensated by additional CPI linker gain.

To sum up, of course, overall margin will be lower as of Q4 compared to Q3. But still, despite that outlook, we believe our full year net interest margin guidance is realistic and conservative.

Just to remind you, we were guiding flattish full year net interest margin for 2020 versus full year 2019, which was 4.2% according to our estimation methodologies. But in the first 9 months of the year, our cumulative net interest margin came at 4.6%. So we have still room to make our full year guidance achievable. But of course, you know as very -- we are all the time looking to the issue for most conservative side. We don't know how overall cost of funding will evolve for rest of the quarter. But as of today, we can say that in our base case scenario, we may have additional upside from our full year net interest margin guidance. So there is nothing wrong or there is nothing unexpected at this stage.

But starting from Q1 onwards, especially starting from the late Q1 2021, we may see some normalization and improvement in our TL cost of debt in our base case scenario. But of course, it is pure also linked to cost of funding and cost of deposits as well as cost of Central Bank funding. But in our base case scenario, we expect recovery and normalization in our TL cost of debt during Q1 2021, but clearly Q4 2020, we will see further tightening.

And in terms of overall guidance. I mean, of course, ROAE guidance was also conservative. We were guiding low teens for the full year. But given the fact that in the first 9 months of the year, we already delivered 15%. Despite additional net interest margin contraction outlook, still we may see some upside in our full year ROAE guidance. But one very important thing will be related to provisioning and coverage ratio since the beginning of the year. Each and every quarter, we are putting more and more provisioning, especially for our problematic Stage II and Stage III portfolio.

The level of provisioning for Q4 will also be very critical. But in our base case scenario, low teens ROAE seems to be easily doable. But apart from that, the other guidance numbers and ratio seems to be also in line with our expectations. And one additional upside can be related to loan-to-deposit ratio because especially in the last couple of quarters, VakifBank is gaining more and more market share on the deposit side with more granular deposit portfolio. And as a result of that, our loan-to-deposit ratios keep going down.

Just to remind you, in the beginning of the year, we were guiding flattish loan-to-deposit ratio, which is hovering around 110. But as of today, we are even lower than 105. So this is something maybe we may see additional upside. But apart from loan-to-deposit ratio and apart from ROAE, the other part of the guidance seems to be extremely realistic. I hope these are helpful for your questions, Alan.

[Alan Webborn, analyst]

Very helpful, Ali.

[Ali Tahan, executive]

Thank you.

[Unknown Attendee]

All right. Any more questions, Alan, or you're fine with that? Okay.

[Alan Webborn, analyst]

Yes.

[Unknown Attendee]

Okay. So our next question comes from [ Gusan Varel ] from [ Yapikredi Terma ]. I do apologize for the pronunciation. Hello?

[Unknown Analyst]

I didn't ask a question.

[Unknown Attendee]

Yes. You indicated you wanted question, [ Gusan Varel ] from [ Yapikredi Term ].

[Unknown Analyst]

No, I didn't indicate. I didn't.

[Unknown Attendee]

I see. All right. Fair enough. Okay. [Operator Instructions]

[Ali Tahan, executive]

[ Rob ], actually today, overall agenda in Turkey seems to be very busy. Everybody is expecting more and more enactment from the spokesman of the government. So today, we may not be as active as in the past. So therefore, if there is no additional question, let me thank all the participants.

[Unknown Attendee]

Actually -- sorry, Mr. Tahan. There is one from [ Constantin ] from JPMorgan.

[Unknown Analyst]

One quick item to confirm about. In terms of the bank's borrowing strategy from abroad in the wholesale markets, could you please confirm, over the medium term, what's the bank's strategy in this respect? Should the bank be accumulating or redeeming external borrowings on a net basis? And in terms of composition, will it change substantially from the current structure or not?

[Ali Tahan, executive]

Thank you, [ Constantin ]. As you know, especially on the international funding side, VakifBank for so many years acted as a very pioneer and as few banks. So we would like to continue this approach, and we are open to different ideas, different suggestions. And we are closely monitoring all the trends globally taking place on the FI side.

Our strategy is to active as much as we can in all possible fronts because duration is something we are looking for out of our total international borrowing, which is the missing part on the domestic front. And as you can see in our presentation, it will be extremely well diversified coming from different channels and different tools. We will try to keep this composition. For next year, in the short term, we have 2 redemptions on the DCM side, one, a covered bond issuance maturing in April 2021 with the amount of EUR 500 million and one senior unsecured maturity with an amount of $500 million, which we will make the payment in October 2021.

Under normal conditions, especially on the DCM side, if market conditions are in good shape and if we see a good window of opportunity, we would like to be active on that front, and we would like to keep our regular issuer stuff. But it all depends on market conditions. Apart from the DCM side, we are also looking for new concepts like sustainable Eurobond issuance and/or we are looking also for other collateralized type of funding, especially for the purpose of lowering our hard currency cost of funding. So we will continue to be active on all possible fronts. We will be monitoring the market closely. In our base case scenario, especially on the DCM side, we would like to be a regular issuer.

[Unknown Attendee]

All right. Thank you so much, sir. Thank you very much. All right. We'll just see if there are any more questions. [Operator Instructions] All right. We do have a question from Sam Goodacre from JPMorgan.

[Samuel Goodacre, analyst]

I've just noticed the slide where you're talking about offering certain transactions for free on digital platforms and whatnot during COVID. Would you be able to tell us the impact that, that had on your net fee and commission income as well as a bit of color on the ease with which you may be able to reinstate those sorts of fees going forward? Or would it be very difficult at this stage to resume those fee streams?

And then just a second question on capital. It's a clarification really. If you could clarify for us what your consolidated capital ratio is without forbearance.

[Ali Tahan, executive]

Thank you, Sam. Let me start with the second question. For the consolidated solvency ratios without BRSA forbearance measures. Actually, you can deduct more or less like 20 basis points on top of bank-only financials. I mean on the CET1, actually, it is more or less similar. Nihan just informed me that our consolidated CET1 ratio without forbearance measures will be still 9.8%. Our Tier 1 ratio will be 12.2 instead of 12.35 on a bank-only basis, and our total CAR will be 14.11, which is 14.23 on a bank-only basis. So to provide an answer to your question, CET1, more or less same. On a CAR and Tier 1 basis, we have like 10 to 15 basis points differential between bank-only and consolidated.

For the first question, actually, it was a measure we took to protect the health of our employees as well as our customers in terms of providing those banking services freely at digital platforms. But it was temporary. Of course, it was creating a negative impact in terms of fee and commission income. We don't have a firm number in our mind. But clearly, it is creating a negative impact.

But on the other hand, it is also creating a positive impact especially in the form of involving more in the cash flow of our customers, which is automatically resulting in more increase in our deposit portfolio. So all policies have in some ways, may have some negative impact. But on the other hand, it may also have, at the same time, positive impact. Those policies, for example, providing all banking services fleet during the pandemic environment, of course, it is creating a negative impact in terms of fee income generation capacity.

But on the other hand, it is an attractive point so that we are enjoying a relatively good level of cash flow and deposit gathering. Net-net, P&L impact will be negligible. But very frankly speaking, I don't have a firm number in terms of the specific impact on net fee and commission income. Let us sit internally on that, and hopefully, tomorrow our colleagues will provide you a more detailed answer.

[Unknown Attendee]

Thank you, Sam. All right. Just a moment, we'll get to the written Q&A. We will leave a few moments for audio questions. Just your final couple of moments. [Operator Instructions] Our written Q&A is coming up in a moment.

All right. So if there are no more -- wait a minute, we do have a question. Indeed, we do. No? Yes, we do. Hear me out. All right. [Operator Instructions] Final couple of moments, and then the Q&A.

All right. I think we'll move on to the Q&A, Mr. Speaker. We don't seem to have any other audio questions. So Mr. Tahan, if you'd like to move to the written Q&A, that would be wonderful. Thank you.

[Ali Tahan, executive]

Thank you. Thank you, Rob. Actually, my friends informed me that there is no unanswered written question on the webcast. We already answered all the questions when we are discussing on the Q&A section. Therefore, let me take this opportunity to thank to all participants for their availability and interest. And we would like to also inform you that we are at your disposal. If you have any follow-up question, we are available during this night as well as tomorrow and anytime. So feel free to reach out to us if you have any other question. But apart from that, for the time being, I would like to finish the call here, and thank to everybody for their participation. Thank you. Thank you, Rob.

[Unknown Attendee]

Thank you, Mr. Ali Tahan, the Head of International Banking and Investor Relations at VakifBank. So ladies and gentlemen, that concludes today's webcast call. We'd like to thank you for your participation. You may disconnect now.