Turkiye Vakiflar Bankasi TAO

IST:VAKBN.E

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the VakifBank Third Quarter 2022 Earnings Results Conference Call and webcast. [Operator Instructions]

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

[Ali Tahan, executive]

Thank you, Rob. Good afternoon, everybody, and welcome to VakifBank Third Quarter Earnings Conference Call. I am Ali Tahan, and together with Han, we are all together with the entire Investor Relations team.

Starting with the presentation, starting with the first page. This quarter, we announced 5.6 billion Turkish [indiscernible] reported net income, and bringing in the first 9 months of the year reported net income to above the TRY 15.6 billion, which corresponds to above the 600% increase compared to the same term of the previous year.

In the beginning of the quarter, we had TRY 4 billion, total free provisioning. This quarter, we added additional TRY 5.5 billion more free provisioning. And as a result of that, total preprovisioning increased to $9.5 billion -- TRY 9.5 billion. And those numbers are also reflected in our average RA numbers. The post wise in the first 3 quarters of the year, we delivered slightly [indiscernible] 29% average ROE. However, just with 3 products, we're setting aside since the beginning of the year. Our average RIA this time will be increasing to almost 4%. And we had a very strong also provisioning profit, which is even much stronger than the increase in our reported net income, our pre-provision net profit increased by about 100% in the first 9 months of the year compared to same term of the previous year. And as a result of that, our total coverage ratios, including cash NPL coverage ratio, included Stage 2 coverage ratio and total NPL covering ratio continued to increase, and we delivered all-time high NPL cash coverage ratio with 167%. Next page, you can see the other important key highlights of the quarters other than net profitability and strong provisioning. One item worth mentioned to point out is related to net interest margin. In the first 3 quarters of the year, our reported net interest margin expanded by 250 basis points compared to an entire year of 2021 and materialized at 5.3% almost. Which was 2.8% a year ago and a similarly [indiscernible] net interest margin also expanded by 317 basis points to 4.9% area, which was less than 1.8% during the entire year of 2021.

On top of this, [indiscernible] interest margin performance, given October inflation data is announced, and given we had 58% October to October CPI estimate in our September financials. There is additional interest income we will enjoy during the first quarter, given October to October inflation data announced 85%. Because of this correction during Q4, we will enjoy TRY 29.4 billion interest income from our CPI portfolio, which means compared to third quarter, we will have additional TRY 18 billion more interest income, which will boost our Q4 profitability. At this TRY 18 billion additional interest income will create 6.5 percentage points positive impact in our Q4 reported net interest margin level.

The second point is related to fee performance. All revenue items were very solid during the first quarter -- first 3 quarters of the year, and this is also very visible in our fee income generation capacity. Our fee income growth came at 133% on a cumulative basis year-over-year and quarterly fee income growth [indiscernible] 29%. As a result of such data high-catching fee income growth fee to OpEx ratio further increased to 64%, which was 47% in the entire year of 2021. And this 64% also corresponds to one of the highest fee to OpEx ratio.

Another point is related to lending growth, we continue to have proactive lending strategy driven by mainly short-term and floating rate Turkish lira business lending growth. Total lending during the quarter was up by 9.5% Q-on-Q and almost 39% year-to-date, and all demanding growth in the quarter came from Turkish lira functional lending was up by almost 12% Q-on-Q. While we see another contraction in our FX loan portfolio. We had 5.2 percentage points sharing reach in our FX loan portfolio. Another important point to mention is related to a conservative balance sheet management. During, especially third quarter of this year, we experienced all-time low Turkish lira duration mismatch, which we at least to a quite a period of time, which was regularly holding around 3 quarters. Apart from this Turkish duration mismatch construction, the offer enjoyed all-time low Turkish lira and blended loan-to-deposit ratios, respectively, we had 83% and 103% total and Turkish lira loan-to-deposit ratio as of September.

As the final point, I would take your attention related to a very solid and strong and comfort to do liquidity ratios by all means by all KPIs, including [indiscernible], including total [indiscernible], including net stable funding ratio as well as in terms of us liquidity. Total LCR came at 20%. Hard currency ICR came at 482%. All of those ratios and KPIs are way higher than the minimum regulatory thresholds. And as of September and we enjoy around $9 billion accuracy liquidity. On page 4, you can see the quarterly and annual growth of P&L items. I'm just keeping this page for the sake of the time.

On page 5, you can see the details of net interest margin. Our quarter unit interest margin came at 5.6%, which grow to first 9-month cumulative net interest margin to 5.3%. And, of course, the main support during third quarter also came from a CPI portfolio during third quarter, we take into consideration 58.2% October to October CPI estimation. And as a result of that, we enjoyed TRY 11.2 billion interest income.

But in Q4, we will make all calculations with the estimate of 85%, and we will make a reflection of correction for the full year. And as a result of that, we will enjoy 29.4 billion interest income from our CPI portfolio. CPI Linkers during September reached to 120% of our shareholder equity. And pivotal also the highest ratio in the peer group bank in Turkey. Next page is related to fee income. I mean, the only point I would like to take your attention is related to the graph, I put at the left-hand side below chart. In terms of the breakdown of fee income, -- can payment systems fees generated by cash lending and fees generated via non cash lending activities, especially during this quarter, cash landing related fees coming from our Turkish lending activity was relatively stronger and grew by almost 50%. And to follow-up by additional contribution from payment systems and market side. Out of total fee income breakdown, as of September, 46% now is coming from cash landing related fees. Followed by fees, via payment systems with 25% stake and there after 17% contribution coming from non cash-related fees. Next page is related to cost side, OpEx side, disciplined cost management on track. On a cumulative basis year-over-year, our OpEx growth came at 70%, which is lower than headline inflation and between HR cost and non-HR cost, we have relatively higher increase in our HR costs with 74% annual increase, while the increase in our non-HR cost came at 67%.

As of amount of debt, in terms of the breakdown of OpEx, the HR cost now has a rate of 43% in our total OpEx, while the remaining 57% is coming from administrative and other HR cost items. As another KPI, apart from to OpEx, is also verve on the cost-to-income ratio side because of disciplined cost management as well as because of merest revenue generation capacity. In the first 9 months of years, our cumulative cost income ratio also came down to below 20% at 19.8%. On page 8, we can see the composition of lending growth, especially during this quarter. The main growth activity was coming from short-dated floating rate Turk sugar, corporate and commercial lending, which is up by 13%. On the SME side, we had 6% quarter in the growth. And on the retail side, especially because of the contraction in our residential mortgage portfolio, we had limited 4% quarterly retail lending growth because of this selective lending strategy within our long composition, the share of corporate and commercial lending further increased to 58%, while the share of SME lending came down to 22%, and the share of retail lending came down to 20%.

And at the right-hand side, you can see also the currency brake down. As of September, around 2/3 of our total loan portfolio is coming from local currency, while the remaining 1/3 is in the form of hard currency. And in the hard currency lending side in dollar terms, this quarter, we had additional 5 percentage point contraction, which is also in line with the sector [indiscernible].

And on the lending side, we keep our strong position in terms of market share with a market share over [indiscernible] and we keep our strong position as the second biggest lender of [indiscernible]. Page 9 is related to breakdown of loan portfolio in terms of sectoral breakdown as well as in terms of the breakdown of our FX lending value [indiscernible] profits. And we also put additional information related to future portfolio, which is [indiscernible] as of September, total CGF exposure within our financials came down to almost TRY 27 billion, which was TRY 12 billion to TRY 9 billion in the beginning of the year. So, in line with our expectations, we see regular collections from both colit-related as well as precurated CGF portfolio. The next page, page 12 is related to asset quality. Asset quality remained an impact with all-time high coverage ratios, [indiscernible] in terms of the coverage ratio for Stage 2, which is above than 19% for the first time. And Stage 2 and Stage 3 NPL cash coverage ratio also came more than 80%. And because of -- especially this conservative additional provisioning policy. In the first 9 months of the year, our net cost of risk materialized at 175 basis points net cost [indiscernible]. Which was 2 basis points a year ago in the same period of time as give in previous section of our conservative provision policy. In terms of ratios, NPL ratio came down to 2.4%, which is down by 22 basis points on a Q-on-Q basis, mainly because of the denominator effect [indiscernible] because of the strong collection performance -- and in terms of the share of Stage 2 in our total loan portfolio, similar to NPL ratio, it also came down to 9.2%, which was 9.5%. However, as you can see, within the composition of Stage 2 loan portfolio, there is a shift from FICR part to restructure part. Mainly because of a reclassification of a one single spec commercial files. The next page, page 11, is related to deposits. Deposits are strong, especially both in TL and FX deposit side. We're glad to announce that. It was another quarter we were increasing our market share in the deposit market and deposit competition. These are having higher quarterly deposit growth both in Turkish lira as well as in hard currency, and therefore, total market share in the deposit market almost reached 12%, which is also in line with our market share, like in total asset size and total lending side. Similar to rating and now on the project side also, we are the second biggest bank of Turkey. And in terms of the adcom of deposits, our total deposits are Turkish lira heavy, [indiscernible] percent of total deposits are coming from local currency deposits, while the remaining 47% is coming from hard currency deposits. And another point related to deposit guideline [indiscernible] to index deposits our FX index deposit portfolio further increased to TRY 155 billion, which is above the 70% regulatory threshold. And out of this TRY 155 billion FX index deposit, 55% is coming from the retail accounts, while the remaining 45% is coming from the corporate side. Because of relatively higher deposit growth in quarterly terms compared to lending growth, our loan-to-deposit ratios continue to decline, and therefore, both [indiscernible] and Turkish lira as well as hard currency loan-to-deposit ratios came at all-time growth numbers. The next page is related to wholesale borrowings. I mean the most important development of the quarter was related to our coal decision related to the [indiscernible] compatible Tier 2 with the amount of $218 million, similar to our investor front approach back in 2020. It was the second consecutive call option [indiscernible]. And we redeemed it in the beginning of November. As of September, our wholesale borrowings is materializing the amount of $11.2 billion. And out of this, $3.8 billion will be coming to maturity within a year period of time. And to remaining $7.4 billion will be redeemed after 1 year maturity. And even above today, we are having around $9 billion free hard currency liquidity. We have a coverage ratio of 2.4x compared to our short-term obligations. And despite volatility we are since in the region as well as globally, still, we remain active on external funding side. And so far, in the first 3 quarters of the year, we had around $600 million fresh international funding, which we enjoy via post financing, bilateral loans and via private placements under our GMTN program. On the next page, I would like to take your attention related to forward ratios. Our reported T2 came at 15.77%. Our Tier ratio came at 13.9%, and our CET1 ratio came at 11.69%. Without the [indiscernible] measures, as you can see at the right-hand side above chart, those ratios starting with total car, Tier 1 and CET1 will be, respectively, 14.4, 12.6 and 10.6 percentage points. However, as we think in the beginning of this presentation, our total fee provisioning amount more than doubled in just a quarter period of time. And as of today, in our balance sheet, we have around TRY 9.5 billion to originate. In case, if we decide to put them through our P&L, that after those solvency ratios will be again going up to 15.5%, 13.7% and 1.7% in terms of the solvency ratio, which is also very important. The last point I would like to touch upon on the progress side. After the redemption of dollar-denominated Tier 2, during the month of October, we also had a fresh local currency Tier 2 issuance with the amount of TRY 3 billion against a 10-month maturity, and it was Basel 3 comparable Tier 2. And this TRY 3 billion fresh, Tier 2 issuances will have around 4 0, base positive impact in our reported Tier 2 ratio. For the sake of the time, I would like to stop here. I'm pleased the floor to Rob again. Thank you very much for your time and listening.

[Operator]

[Operator Instructions] We're going to begin with [ Mehmet Chetan ] from JPMorgan.

[Unknown Analyst]

I have 2 questions, please. First of all, on the amount of the significant free provisions that you've created this quarter. Can you please provide color on the rationale behind the move and the methodology in terming the amount of the provisions that you've created, given your cash cow is at now at very unusually high levels. And given also the fourth quarter, we'll see an even stronger top line, would you expect to see another significant provision creation in the last quarter of the year? And my second question is on the general operating trends that you're seeing in the fourth quarter so far, particularly on the margin side. If you could give us any color on where you're pricing new TL deposits and when you are pricing new TL loans and how we should expect the core margin ex CPI to evolve over the next couple of quarters? That would be very helpful.

[Ali Tahan, executive]

Thank you, [indiscernible]. Actually, let me first start with the first question, which is related to the rationale behind such high fee provisioning. Actually, we just management acquisition, there is no specific reason to put such free provisions. And for the Q4, actually we haven't discussed in detail yet. But given the profitability will be very stronger compared to any other previous quarters under normal conditions. You may expect to see more additional fee provisions in quarters, this is some sort of additional safety buffers for additional or potential scenarios for upcoming quarters. But for the pre-provisioning amount in the third quarter, there is not specifically [indiscernible] a simply senior management precision.

For the second quarter, in terms of the net interest margin and call suspension, excluding CPI [indiscernible] portfolio, for the time being, we see cost of TI deposits and cost of TI funding started to increase again as a result of recent regulatory changes and different regulatory new policies especially bank seems to be having a big appetite to collect Turkish lira deposits just to create a balanced Turkish lira health currency, deposit composition. So, therefore, compared to third quarter, so far in the final quarter of the year, cost of Turkish deposits seems to be relatively higher. But on the lending side, of course, lending activities are mainly, and largely, Turkish lira, business loan, and it float increase, which is mainly to proliferate. So therefore, [indiscernible] environment, we understand that we may see additional Turkish lira cost increase in the final quarter of the year compared to third quarter. But of course, the potential contribution from CPI linkers with some massive and so huge. So net-net, there will be a sizable increase in our net interest margin because as you also depicted in our presentation, additional TRY 18 billion interest income will be reflected in Q4, which can translate at 650 basis points, a quarter interest margin positive impact. So therefore, overall core simulate interest margin will be very strong, but excluding the CPI linker side because of the mainly increase in the cost of Turkish lira funding, Turkish lira costs will be diminishing. I hope all answers [indiscernible] for the moment please.

[Operator]

[Operator Instructions]

[Ali Tahan, executive]

Well, in the meantime, if you wish, we can switch to written questions. We have one online question. Nihan will read the question and to the example possible, I will try to answer.

[Unknown Analyst]

Thank you, Ali. This question came from progressing margin [indiscernible]. Ali, thanks for the presentation and congratulations on the financials. How do you see the core operating net interest margin, both in fourth quarter in 2 and [indiscernible] results for 2020?

[Ali Tahan, executive]

Thank you, [indiscernible]. Actually, for the first part of the question, that was also the question of [ Mehmet ] from JP. I mean, excluding CPI linkers, on the Turkish lira side because of the increase in the Turkish lira cost of funding, we understand that Turkish costs [indiscernible] will be diminished in Q4. But despite that, because of the massive contribution and additional interest income from CPI, the profit overall net interest margin will be very strong. For the next year, the budget discussions for the next year under review, we are also checking the issue internally. Of course, it may be on a year-over-year in terms of the full year net interest margin. There may be some construction on interest margin, both excluding the Turkish lira CPI linkers and overall net interest margin, but let us leave to study internally more in detail. And hopefully, in a very short period of time, we will be providing our preliminary budget discussions for the time being, it's a little bit earlier. And whilst our internal budgets will be completed thereafter, we will communicate it.

Our hope for this provision policy today. We have additional questions online. We'll continue with the other questions.

[Unknown Analyst]

I'll take some questions came from [indiscernible]. Can you please provide a breakdown of our host wholesale equity?

[Ali Tahan, executive]

Thank you, [ Angela. ] Actually, out of this, pretty hard to [indiscernible] liquidity, which is falling around $9 billion. Around, let's say, 1/3 of hard currency fee liquidity annually, which is around $3 billion is in the right way swap mechanism with the Central Bank of Turkey. Apart from that, another long talk is coming from [indiscernible]portfolio, and the remaining part is coming from mainly growth and cash and other accounts. But the bulk of this fee liquidity is coming from either short-dated Eurobond and/or coming from right pace mechanisms with Tsantanco purchase. Thank you.

[Unknown Analyst]

The next question is from Eletro Sotera from [indiscernible] general. Could you go to existing 2022 guidance in the light of your comments today?

[Ali Tahan, executive]

Actually, [indiscernible] a very much for this question. I mean, compared to our revised budget expectations, especially on the balance sheet side in terms of the Turkish lira lending cost and in terms of the FX and lending growth, I think there is no need to change. Just to remind you on the Turkish lira lending side, we were simply guiding our Turkish lira lending growth to be in line with the sector and our FX lending to be having shrinkage in balance.

I think for the time being, there is no need to change this guidance. For the cost of -- net cost of [indiscernible] actually, we will saying it will be similar to first half numbers, which was holding around 150 basis points. I think this is also realistic, even though there may be some upside for net cost of risk. I think this 150 basis points area seems to be also realistic. For the swap adjusted interest margin, that will be the area actually we need to revise because -- I mean because of delays October to October data, we understand that there is additional upside to net interest margin for the full year.

And further than first half numbers, maybe we should guide 100 bits higher compared to first half numbers. And for the fee income side, this is also another up 5 points. We will guiding slightly lower than first half numbers. But given strong momentum in Q3, and given it may further continue during Q4. We may also have additional upside on the fee income side.

So therefore, so far, both for one interest margin side and for the fee income side, there should be additional positive revision to our previous guidance and [indiscernible] as a result of that is also the case for the average ROE. We were guiding 20% average of a year, which was the numbers we announced in the first half of the year, we were guiding that number can be taken also for the full year of 2022. But given where we are now and given the additional contribution we will enjoy from CPI linkers in the final quarter of the year. There is also additional upside for the full year averaging.

But of course, we will decide when we are announcing the Q4 financials. Because similar to what we did in the third quarter of the year, we may also decide to put some of the profit into for more provision purposes, it may be in the form of additional NPL cash coverage ratio increase. It may be in the form of additional Stage 2 coverage ratio increase or simply it may be in the form of additional fee provisioning increase. So therefore, to sum up, especially in terms of average of the year, which was 30%, 3-0 as of June next year. There is additional upside to our 30% average [indiscernible] guidance. But as of today, it's not halted to provide a specific number simply because of our certainty related to provisioning for [indiscernible] following in Q4. Thank you.

[Unknown Analyst]

There is another question from Angela, can you, through the decision to call the Tier 2 notes, how do you balance [indiscernible] concern versus the economization of [indiscernible]? How does the regulator play a role in the decision?

[Ali Tahan, executive]

Thank you, Angel. Actually, I mean, as you know, we were always investor friendly. We were always market friendly, and as a state bank, we have this possibility of domestically of acting more sensitively than another bank. So at this stage, economic rationale can, at the secondary level, given our state bank focus and given our name in the fixed income market. So therefore, therefore, and because of the, also strong [indiscernible] liquidity position, we thought it would be much rational decision to call it than not to call it. And overall, we understand that our core division to fit extremely positively by the investor community. And this is also a supporting argument from our side, in terms of building this critical decision. In terms of the regulator, regulator in Turkey always plays a part. They were always doing a debt to support the banking sector. Of course, this reputational concern but also a point for the regulator and similar to transparency decision. This time, again, we witnessed the approach of the regulator was also very supportive, very constructive and many markets, frankly. And after taking to green light from the regulator, we announced our call decision. We believe it was the right decision given our State Bank focus. And given the side of the bank, 5 of the [indiscernible] in the Turkish banking sector, as the second bigger bank of Turkey as having a balance sheet with a total of almost $90 billion, let's say, not to call a bond with the amount of $228 million. We believe it was not the right approach. So therefore, to make it shortly, rather than the economic rationale, reputational concern at the state bank focus and the contract approach of the regulators, the combined effect of those 3 take us to the conclusion that we should call it. Thank you, Angela, for this question. Padros. Rob, at this stage, we don't have any written [indiscernible].

[Operator]

We have now all your questions, and that seems to be it for the written questions. Is that right?

[Ali Tahan, executive]

Yes, this is [indiscernible] of written questions. For the time being, we would like to thank to all participants for their time and interest. And as usual, both myself, our Investor Relations colleagues. We are at your disposal for any follow-up questions. You can reach us to us via from e-mail or whatever means you'd like to use. And with this occasion, we would like to thank you again and looking forward to seeing in the first part of location again.

[Operator]

Thank you, Mr. Tahan. Thank you for your presentation. That's it, ladies and gentlemen. This concludes today's webcast call. Thank you so much for your participation. You may now disconnect.