Turkiye Vakiflar Bankasi TAO

IST:VAKBN.E

Earnings Call Analysis

Surpassing Expectations with Notable Growth

The company posted a notable third quarter, with a net profit of TRY 9.5 billion, exceeding analyst expectations by roughly 10%. There has been a significant increase in net income, bringing the year-to-date total to TRY 15 billion. Core banking revenue displayed robust performance, with net interest income and trading income doubling from the previous quarter. The third quarter net interest margin was 3.2%, while swap adjusted it stood at 2.7%. Quarter-on-quarter lending growth was strong at 9%, and asset quality improved with NPL ratios decreasing to 1.5%. Despite a higher than guided net cost of risk due to earthquake provisions, mid-teens full-year return on equity (ROE) guidance was bested, likely closing the year near 20%.

Impressive Profit Growth with a Boost from CPI Linkers

The company reported an unusual net profit of TRY 9.5 billion for the quarter, which not only surpassed consensus estimates around TRY 8.3 billion by approximately 10% but also showed a significant uptick from the previous quarter. The financials reflected a robust third-quarter performance, pushing the cumulative net income for the first nine months to TRY 15 billion. Core banking revenue saw a substantial rise, driven by net interest income and trading income, which collectively doubled to TRY 21.4 billion from the previous quarter.

Net Interest Margin and Fee Income Indicate Strong Core Business

The net interest margin (NIM) rose marginally to 3.2% on a reported basis, with a swap-adjusted NIM of 2.7%, showing limited improvement in Turkish Lira core spreads due to higher deposit funding costs. However, expectations are set for a more visible NIM improvement in the fourth quarter. The quarter also saw a surge in fee income, reaching TRY 7 billion, a notable jump from TRY 5 billion in the previous quarter, and reflecting an annual increase of over 125%.

Cost Efficiency and Asset Quality Controls Underpin Profitability

The cost-to-income ratio improved remarkably to 35%, and the company projects this to drop even further to around 30% by the year's end, thanks to powerful revenue generation capabilities. On lending, growth was broad-based, with both the Turkish Lira and FX segments contributing positively, leading to a robust market share. Asset quality metrics remained strong, with non-performing loan (NPL) ratios declining to 1.5% and a conservative approach towards provisioning in anticipation of future macroeconomic challenges. However, provision expenses did rise, particularly for covering Stage 1 loans against the potential impact of GDP contraction.

Capital Adequacy and Liquidity Remain Solid Despite Regulatory Changes

The company successfully reopened the Eurobond market with a $750 million sustainable Eurobond issuance, boasting the highest maturity, largest amount, and lowest yield among Turkish banks. Additionally, they secured $500 million in 5-year funding and expect successful rollover of existing facilities. The capital adequacy ratio was reported at 14.7% on an adjusted basis and 13.1% on an unadjusted basis, signaling reliable solvency.

Strategic Positioning in the Face of Inflation and Regulatory Tailwinds

The bank deliberately increased its Consumer Price Index (CPI) linker portfolio in response to high inflation, anticipating that this strategy will yield significant interest income in Q4. Furthermore, regulatory changes, such as the easing of fixed index deposit requirements and more investor-friendly policies from the new Central Bank, have been beneficial. This allowed for a more advantageous cost structure, particularly lowering the cost of Turkish Lira deposit funding, which is expected to support the net interest margin in the forthcoming quarters.

Full Year Outlook Indicates Optimism Despite Deviations from Guidance

While the net cost of risk for the first three quarters was 50 basis points above the 100 basis points guidance, largely due to the earthquake-related provisioning, the company anticipates a strong Q4 performance. Consequently, the expected return on equity (ROE) for the full year is close to 20%, surpassing the mid-teens guidance. This is attributed to higher volume growth and better-than-expected fee and trading income, despite a net interest margin that may slightly fall short of expectations.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, welcome to the VakifBank Third Quarter 2023 Conference Call and Webcast. [Operator Instructions] Right now, it is my privilege to hand you over to your host, he is Mr. Ali Tahan, the Head of International Banking and Investor Relations for VakifBank. Sir, the floor is yours.

[Ali Tahan, executive]

Thank you, Rob. Good afternoon, everybody, and welcome to VakifBank Third Quarter 2023 earnings presentation. In this evening, we will try to minimize the duration for the presentation part. And if there are any questions related to third quarter financials and for upcoming quarters, it would be our pleasure to answer them.

Starting with the presentation. In this quarter, we are having a net profit of TRY 9.5 billion. Considering the consensus while following around TRY 8.3 billion. We are announcing roughly taking 10% higher compared to market expectations. Of course, compared to second quarter, we have a very dramatic increase in our net income as expected. And the result of relatively strong third quarter financials on a cumulative basis in the first 9 months of the year, our total net income came at TRY 15 billion and on top of that, we -- I didn't touch to our pre-provisioning. And still we have around TRY 6.7 billion pre-provisioning in our balance sheet.

In terms of the details, core banking revenue, especially this quarter as well as net interest income and trading income was very visible. NII and trading income cumulatively in this quarter materialized at TRY 21.4 billion, which is almost double compared to previous quarter. And after such strong core banking revenue generation capacity because of having relatively good level of coverage ratios, our pre-provisioning profit also came strong at TRY 18.6 billion.

In terms of the other cases of the presentation, just to briefly mention, I would like to take your attention to Page 5, which is related to net interest margin, CPI and core spreads. In this quarter, our quarterly reported net interest margin came at 3.2%. Swap adjusted wise -- swap adjusted net interest margin came at TRY 2.7 billion.

Compared to previous quarters, we see a limited improvement in our Turkish Lira core spreads evolution, especially because of the relatively higher cost of deposit funding, especially in the second half of the quarter, total improvement in our Turkish Lira core spreads business cost rate and it became limited.

However, in terms of the Turkish Lira core spread point of view, especially in the current environment, incremental lending and incremental loan generation seems to be producing a very strong net interest margin as a combination of both better loan yield, which is also a reflection of increase in the proliferate and increase in the [indiscernible] as well as relatively compared to third quarter levels, of course, or compared to late third quarter.

As of now, we have relatively lower marginal cost of deposit so therefore, the limited improvement in third quarter on Turkish Lira net interest margin, hopefully, will be much more visible in Q4. And on top of that, I would like to also highlight the important highlights related to our CPI portfolio.

Just to remind you, in the second quarter, as October to October CPI expectation we used 34%. In this quarter, we revised it to almost 51% and this 51% compared to private peers, of course, a relative number because most of the private peers used 60% as of third quarter for this CPI and as of today, October to October data is certain, and it will be adjusted in accordance with the number of 61.4% and based. And based on this 61.4% October to October realized data, in the first -- in the fourth quarter of the year, we would enjoy around TRY 32 billion interest income in just 1 quarter out of our CPI portfolio.

And it will have more than 120 basis points positive impact in our quarterly net interest margin. So to bottom up in terms of net interest margin in third quarter we had significant contribution from CPI linkers, but we had a very limited improvement in our Turkish Lira core business. But in Q4, we will enjoy both even as strong CPI contribution as well as we will also enjoy a very visible and very significant contribution from our Turkish Lira core spreads point of view. So therefore, clearly, Q4 net interest margin will be the strongest quarterly net interest margin of the year.

The last point I would like to take your attention is related to total money market funding, especially in terms of the average swap usage in Q2, our average swap usage seems to be almost doubled compared to a quarter ago. It was around TRY 51 billion in the second quarter. But this quarter, it was hovering around TRY 100 billion and as of today in Q4, that number still going up. And this average -- this swap usage mainly conducted with Central Bank of Turkey is also helping us in terms of lowering cost of deposit funding because we are -- swap usage, we have enjoyed to access relatively lower cost of Turkish Lira funding.

On the next page, you can see the numbers related to fee income similar to strong NII and trading income increased as we discussed in the first page. We also see a very eye catching and strong growth on the fee side, both Q-on-Q wise as well as on a year-over-year basis. Q-on-Q wise, our fee income reached to TRY 7 billion, which was slightly more than TRY 5 billion quarter ago. And on a cumulative basis in the first 9 months of the year, our total fee income reached to TRY 16.3 billion which corresponds to a more than 125% increase on an annual basis.

All the fee income sources, of course, contributed to such a strong performance, but among them, especially the contribution from payment systems both quarterly as well as annually seems to be very significant. On quarterly terms, we have almost 90% growth on the fees receiving from payment side. And on an annual basis, it is almost 165% increase.

Next page is related to OpEx. I mean, OpEx growth, excluding to donation, we had to earthquake region seems to be in line with the sector adjusted life but rather than the OpEx growth, thanks to strong revenue generation capacity, especially in third quarter, we also witnessed improvement in all KPIs related to cost side, like cost/income and for other ratios. And we expect, especially the normalization on the cost/income ratio side will be even much more visible in Q4. And as of third quarter, our cumulative cost/income ratio came down to 35% and by the year end in a very strong revenue generation capacity environment, we expect this ratio to further come down to 30% area for the full year of 2023.

On Page 8, you can see the numbers related to lending. This quarter, our total lending growth was almost 9% but this time, we see growth is coming from both Turkish Lira side as well as from the FX lending side also. This is something not the case we were seeing in the first half of the year. Remember, in the first half, entire lending growth was growing and coming from the Turkish Lira side. But for this quarter, we also have positive contribution from FX lending also in dollar terms.

But net-net quarterly lending growth in both Turkish Lira as well in FX Lending was above-than-sector averages. And therefore, we continue to grow market share in all lending areas and we are still keeping our strong second ranking in terms of the market share.

In terms of the breakdown of lending in this quarter, the biggest contribution seems to be coming from the non-retail segments, including corporate and commercial as well as SME lending. On the retail side, it was relatively muted. It was limited to 5% and it was mainly driven by credit card business. Excluding the credit card business, we almost had a very limited growth on the retail and especially on the mortgage side, we had Q-on-Q contraction.

After the lending numbers and quarterly lending dynamics, I just want to take your attention to Page 10, related to asset quality. In line with the sector and as a result of the denominator effect and to currency depreciation effect, of course, NPL ratios continue to come down. And end of this quarter, it came down to 1.5% area. But the most important development in the asset quality in this quarter was related to net cost of risk. In this quarter specific, our net cost of risk ratio came at 235 basis points area and this is mainly for the Stage 1 category rather than Stage 2 and Stage 3.

So therefore, in terms of currency ratios, stage 3 coverage ratio and Stage 2 coverage ratio didn't change too much on a Q-on-Q basis. However, the real change came from the coverage on the Stage 1 category and as a result of this strong increase in the quarterly net cost of risk, cumulative 9 months total net cost of risk came at almost 150 basis points.

For the full year numbers, just to remind you, we were guiding 100 basis points net cost of risk and this is almost 50 basis points higher than our initial guidance. And the gap between the actual versus guidance can be attributable to the provisioning related to our exposure in the earthquake region. For the earthquake region, the cumulative basis set aside around 60 basis points net cost of risk, and therefore, total net cost of risk came at 150 excluding this earthquake impact, actually, we are in line with our net cost of risk guidance.

On the liability side, in this quarter, I would like to take your attention to Page 12 related to wholesale borrowing. As a -- following the elections, following the perception in the investor appetite and following the improvement in the [indiscernible], as a regular issuer, we reopened the Eurobond market for Turkish banking sector in the beginning of September. And with the strong participation from international fixed income investors coming from all over the world with the granular base of 180 different investor accounts, we achieved to print $750 million sustainable Eurobond issuance with the yield of 9.125%. And we would love to mention that among the Turkish banks who came for Eurobond market in the year of 2023, we had the honor of having the highest maturity, the biggest amount and the lowest yield Eurobond achievement at VakifBank.

Of course, it was not only wholesale borrowing transaction of the quarters. Apart from that, we also secured $500 million fresh funding under a secured program with one single counterpart, international counterparts with the final maturity of 5 years. So especially in terms of fresh transactions, these very successful Eurobond issuance and is very fresh $500 million 5-year funding seems to be very eye catching. And we are at the final stage of rolling over our November's indication. And we are, as of today, happy to say that we are in a position to make it above than 100% ratio easily, which is also the case for the other Turkish banks who completed their syndication of our so far.

And the last page is related to capital ratios. We have the total cut of 14.7% on a reported basis without various measures, our total CAR is slightly above than 13.1%. And on the below chart, we also put in detail the evolution of our solvency ratios from second quarter to the third quarter and that was the last page. I just wanted to take your attention.

Thank you very much for your interest. And if doable, we would like to continue with the Q&A session. Thank you.

[Operator]

[Operator Instructions] All right. Mr. Tahan. We don't seem to be getting any audio questions. If you would like to -- oh, wait no, do we. No. If you would like to begin with the written questions that would be great. We have an audio question. It's Cihan from HSBC. Let's just pop him on. Please go ahead, sir.

[Cihan Saraoglu, analyst]

I have a quick question about the provision expenses. What's the reason behind the increase in the coverage ratio for Stage 1. That's the first question. And the second question is, could you remind us of your full year '23 budget? And what sort of changes there would be after the 9 months results.

[Ali Tahan, executive]

Especially for the first question for the dramatic increase for stage 1 coverage ratio. This is just a conservative approach we made in our scoring modeling because of the potential GDP contraction going forward. And because of the potential slowdown in the economy in some areas conservatively and in a front-loaded manner, we just wanted to increase our provisioning ratio and we reflected this conservative approach to our scoring models. And based on those assumptions, the new model suggested to provide additional coverage ratios for some risk factors, and this is mainly related to this understanding.

In terms of the full year guidance, just to remind you, we were saying in terms of the volume side on the lending side, we were simply saying on the Turkish Lira side, we will be growing in line with the sector. But in the first 3 quarters of the year, we are slightly having a growth above than sector. So this is overshooting. On the FX lending side, we were guiding single-digit contraction. I think it is still doable, and we shouldn't change this guidance.

On the revenue side -- on the fee side, we were guiding around 100%. And in the first 3 quarters, it is 126%. On the top, adjusted net interest margin side, we were guiding swap adjusted net interest margin for the full year, like 3.5%. But in the first 9 months of the year, it is hovering around 2%. For the Q4, there will be upside to have a better net interest margin for sure because of both better CPI contribution as well as because of better Turkish Lira core spreads business. But given we are hovering around 2% and even the full year about 3.5%, I think the number will be hovering around 3% realistically rather than 3.5% for the full year.

In terms of the net cost of risk, we were guiding around 100 basis points. But for the first 3 quarters, it is 150 basis points. 50 basis points higher than the guidance. And the main divergence is related to earthquake-related risk. For earthquake related risk, we set aside 60 basis points, and these is the main driver between the actual numbers and the guidance numbers. But net-net for the overall average of the year, we were guiding mid-teens full year ROE.

And in the first 3 quarters, it is slightly above 15%. Q4 will be strong probably for the full year. Our full year average ROE will be close to 20%. So there is upside to our full year ROE guidance compared to our guidance numbers, even though net cost of risk will be higher than guidance. And even though net interest margin side will be lower than slightly our guidance, thanks to relatively bigger and higher volume growth as well as thanks to better contribution from fee income and trading income. I think rather than initial guidance of mid-teens ROE, we will be finalizing the full year with close to 20% average ROE. I hope those cover your questions, Cihan.

[Operator]

All right. [Operator Instructions]

[Ali Tahan, executive]

In the meantime, we have a written question from Mehmet Sevim, JPMorgan. If you don't mind, we would like to continue with this question. Mehmet is asking a couple of questions. Some of them already asked because these are exactly the same questions, Cihan about asking. The only remaining question is related to CPI linker portfolio, Mehmet is asking, it seems your CPI linker portfolio grew significantly in third quarter. Is this an equal impact or strategically increasing to the size of your portfolio and if so why?

Actually, this is already a good point, Mehmet. Thank you very much for this question. Rather than the first option -- rather than the actual impact, it is indeed related to deliberate at further accumulation of CPI portfolio. During the auction of third quarter we were deliberately continuing to accumulate more CPI linker portfolio. And there was also [indiscernible] average CPI yield declined. Actually, if you go back to presentation on Page 5 at the chart left-hand side above chart, this is also something we are putting. A quarter ago, average real rate was hovering around 2% and now it came down to flat area. However, on the other hand, CPI amount increased from TRY 140 billion to TRY 194 billion.

So especially during the auctions of July and August, we deliberately continued to accumulate from the new auctions at the expanse of giving up from the real yield. Our treasury management believes this is a good strategy and this is a good hedge in the environment of relatively high inflation environment. As a result of this strategy, especially in Q4, we will continue to enjoy more interest income from our CPI portfolio.

Apart from this, we don't have any written questions on the deck.

[Operator]

All right. And we don't seem to have any audio questions coming through either. So if you have no more written questions -- oh, we've got one. We've got an audio question. Valentina Stoykova from Barclays. Here we go.

[Valentina Stoykova, analyst]

Yes, thanks a lot for the presentation, very detailed presentation and a good set of results. So congratulations on that. My question is related to the recent regulatory changes and how do you see them impacting your financials going forward? And also, what are [indiscernible] plans until the end of the year and next year?

[Ali Tahan, executive]

Thank you, Valentina. Thank you very much for your good remarks related to earnings. In terms of regulations, of course, especially with the new economy administration and with the new Central Bank administration, regulation wise, it is relatively an easy environment for us. Each and every day, we are seeing more investor-friendly market-friendly policies to be implemented by especially new Central Bank administration and the more we see less regulation and the regulation from Central Bank, it becomes much more comfortable in terms of PLM management and balance sheet management for all the banking sector.

And the most important recent regulation change seems to the easing on the [indiscernible] index deposit. And when we look at the numbers, indeed, in line with the sector, we also see contraction in our [indiscernible] portfolio, fixed index deposit portfolio.

And especially on the one hand, the numbers are going strong, but on the other hand, the regulation that ask Turkish banking sector to hold more fixed rate, long-dated security requirement, this is also fading away. However, of course, fee payment punishment in case the KPI related to [indiscernible] not maintained still on track. There is still a regulation, which is effective as of today. So this is the only remaining part. But [indiscernible] portfolio is going strong, and this is the most visible impact of the different regulatory changes and this is also very visible in our portfolio.

And by looking from June to September, of course, we are seeing contraction in our [indiscernible] But apart from this contraction from second quarter to third quarter, we see even an accelerated level of contraction from September to today within Q4. For [indiscernible] portfolio in total seems to be coming strong with accelerated pace. So this is the biggest impact.

However, in terms of regulation, of course, Central Bank is providing structural liquidity to build up resource with swap mechanism. And we are such swap mechanism Turkish banks are enjoying to access relatively lower cost of funding, which is helping cost in terms of -- especially in terms of lowering the cost of Turkish deposits, this is the biggest upside for us.

And on top of that, all the regulations related to interest rate cap on commercial loan portfolio, this is also no longer the case. There is no cap for any commercial loan products anymore. But of course, in the current environment, given the interest rates are relatively higher compared to previous terms, it is -- we don't witness too much demand for fresh lending.

So therefore, on top of swap usage via Central Bank of Turkey, this kind of leg of demand driven by relatively high interest rate environment, enable banks to lower cost of deposit funding, which is a very good indicator, especially for the Turkish Lira net interest margin outlook for upcoming quarters.

[Operator]

Anything else Ms. Stoykova? All right. Thank you so much. All right, Mr. Tahan, we have no more audio questions. So if you have anything else or any written questions, if not, if you could conclude, that will be great.

[Ali Tahan, executive]

Thank you. Thank you, Rob. Thank you, everyone. I mean our Investor Relations colleagues are at your disposal as always. If you have any follow-up questions, please let us know and with this occasion, we would like to wish a good weekend ahead of Friday and looking forward to talking to you again in the first possible location.

[Operator]

Thank you, Mr. Tahan. Thank you so much. Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation. You may now disconnect.