Turkiye Vakiflar Bankasi TAO

IST:VAKBN.E

Earnings Call Analysis

VakifBank Reports Strong Q3 2024 Results with Increased Profitability

In Q3 2024, VakifBank achieved a net income of TRY 8 billion, a 12% increase from the previous quarter and an 81% rise year-over-year, reaching a cumulative total of TRY 27.2 billion for 9 months. Core banking revenues surged by 195% annually. The bank's total assets surpassed $104 billion, marking a historic milestone. Net interest margin improved, with Turkish lira loan yields rising by 230 basis points. For Q4, guidance indicates further growth, anticipating the highest net interest margin performance to date, supported by favorable CPI-linked securities. However, ROE expectations for the year have been adjusted to the low 20% range.

Robust Profitability and Growth

In the third quarter of 2024, VakifBank reported a net income of TRY 8 billion, marking a 12% increase from the previous quarter's TRY 7.2 billion. This impressive performance brought the cumulative net income for the first nine months to TRY 27.2 billion, an extraordinary 81% increase year-over-year. Notably, this growth was achieved without any adjustments to the free provisioning amount, which remained stable at TRY 8.5 billion. The return on equity (ROE) for the quarter stood at 16.4%, while the nine-month average ROE was significantly higher at 19.5%. The substantial jump in core banking revenues, which surged 195% from approximately TRY 40 billion to TRY 90 billion year-over-year, highlights the bank's strong financial health.

Historic Asset Milestone

This quarter marked a historic milestone for VakifBank, as total assets exceeded $100 billion for the first time in its 70-year history, reaching over $104 billion. This significant leap from the previous quarter's asset base of $95 to $98 billion underscores the bank's robust growth trajectory, reaffirming its position as the second-largest bank in Turkey based on total asset size.

Exceptional Net Interest Margin Improvement

The bank's performance in managing net interest margins has also been commendable. The Turkish lira loan yields increased by 230 basis points quarter-on-quarter, while the cost of Turkish lira deposits decreased by 40 basis points. This culminated in a net improvement of 270 basis points in the core spread, underscoring the bank’s strategic management of loan deposit spreads. This improvement is regarded as best-in-class among Turkish banks, reflecting effective interest rate strategies and asset allocation.

Resilient Fee Income Growth

VakifBank saw an impressive annual growth in fee income of 104%, with a quarter-on-quarter increase of 15%. The fee-to-OpEx ratio enhanced to 65%, significantly up from 58% a year ago, exemplifying the bank's efficiency in generating income while managing operational costs.

Asset Quality and Risk Management

During the quarter, the net cost of risk normalized to 85 basis points, reflecting a strategic approach to risk management. Although the non-performing loan (NPL) ratio increased slightly to 1.8% from 1.47%, it aligns closely with the sector average. The increase in the NPL ratio was primarily attributed to inflows in retail and credit card segments, which remained under control in the broader context.

Active Funding and Capital Strategies

VakifBank has been remarkably active in the wholesale funding markets, raising nearly $9 billion through various transactions since the beginning of the year, including a recent successful issuance of $500 million in sustainable Eurobonds at a yield of 6.95%. Additionally, a Tier 2 capital deal of $700 million printed in July bolstered the capital adequacy ratio (CAR) by 130 basis points, bringing it close to 16%.

Outlook and Adjusted Guidance

Looking ahead, the fourth quarter of 2024 is expected to deliver the strongest net interest margins and overall profitability of the year, driven by continued improvements in core spreads and potential seasonality effects. However, the bank has adjusted its full-year ROAE guidance from a previous target of around 30% to a more realistic range in the low 20s. This downward revision is largely a result of limited recovery in net interest margins relative to early year expectations.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to VakifBank Audio Webcast Third Quarter 2024 Bank-only Earnings Results. Now we will have a question-and-answer session following the presentation by our speakers. [Operator Instructions]

Now with that, I will hand you over to our hosts for today's webcast. They are Mr. Ali Tahan, the Head of International Banking and Investor Relations at VakifBank; and Mrs. Zeynep Nihan DINCEL, who is the Head of Investor Relations at VakifBank.

Speakers, over to you.

[Ali Tahan, executive]

Thank you, Rob. Good afternoon, everybody, and welcome to VakifBank Third Quarter 2024 Earnings Presentation.

As usual, we will start with the presentation and to save time and to use the time effectively, we will skip some slides, and we will focus on some important highlights.

Starting with the earnings and profitability on Page 2. This quarter, in line with the market consensus, our quarterly net income came at TRY 8 billion, which is 12% up Q-on-Q wise compared to TRY 7.2 billion in the second quarter.

And that TRY 8 billion quarter net income brought 9-month cumulative net income number to TRY 27.2 billion, which is up by 81% compared to same term of the previous year. And at this stage, we would like to also highlight that in this quarter, we didn't touch to our free provisioning amount. There is no free provisioning reversal or there is no free provisioning addition. So TRY 8.5 billion free provisioning remained intact on Q-on-Q basis.

And this number achieved without any free provisioning reversal. Taking those numbers into account, quarterly average ROE came at 16.4% and 9-month cumulative average ROE came at 19.5%.

And when we look at the core banking revenues, which consists of net interest income and net fee and commission income, the growth, especially on the annual terms, seems to be even stronger at 195% from almost TRY 40 billion a year ago to almost TRY 90 billion in this quarter. And this is also very eye-catching indeed.

The next page is the key highlights of the quarter. First of all, the most eye-catching part of the quarter for us is the milestone in terms of the history of the bank. For the first time in the last 70 years, we have a total asset size above $100 billion. A quarter ago, it was hovering around $95 billion, $98 billion. As of this quarter, now it is above than $104 billion. So this threshold of $100 billion asset size materialized as of this quarter for the first time. And therefore, this is an important milestone in our history.

And as a result of that, we are keeping our strong second ranking position among Turkish banks in terms of asset size ranking.

And secondly, we will also discuss in detail, this quarter, especially compared to private peers, our relative net interest margin performance seems to be indeed satisfactory. And especially in terms of the components of net interest margin, we are happy to see that we performed best-in-class Turkish lira core spread improvement on Q-on-Q basis. Our Turkish lira loan yields increased by 230 basis points Q-on-Q.

And our Turkish lira cost of deposit decreased by 40 basis points. As a combination of those two, net-net, we have 270 basis points improvement in our Turkish lira core spread performance, which is the best among the peer group of the Turkish banking sector.

Another important highlight of the quarter is strong net fee and commission income. This is also in line with the sector trend. As of September, year-to-date, sector's net income growth capacity seems to be also very strong, and this is also the case for Vakif.

We have annual fee income growth of above 100%, 104% is a specific number. And this is also the case for the quarterly evolution. Q-on-Q-wise, our fee income increased by 15%. As a result of such strong fee performance, fee to OpEx ratio further increased to 65%, which was 58% a year ago. And this 65% is also one of the highest in the last decade average, let's say.

Another important point for the quarter is related to asset quality metrics, especially this quarter, in line with our guidance and in line with our expectations, we are witnessing normalization both in terms of net cost of risk as well as in terms of NPL ratio.

Net cost of risk materialized at 85 basis points Q-on-Q in this quarter, which was negative, as you can remember, in the first half of the year. So this quarter, we see some sort of normalization in terms of net cost of risk.

And on the NPL ratio side, our NPL ratio further increased to 1.8%, which is also exactly the NPL ratio of the sector. So we are not different than the sector average in terms of NPL ratio. But compared to a quarter ago, we are witnessing around 30 bps increase in our NPL ratio, which is mainly coming from retail and credit card inflow actually.

And another important quarter of -- another important point of the quarter was related to ongoing very active international funding transactions. Since the beginning of the year, we raised almost $9 billion funding from our wholesale borrowing activities and especially in the end of quarter, in the beginning of Q4, we also successfully achieved another fresh $500 million sustainable Eurobond issuance with the yield of 6.95%. And this transaction itself is also important given it was the only Eurobond transaction conducted by any Turkish FI with the yield inside 7% level.

Apart from that, in the beginning of third quarter in July, we also successfully printed another capital deal in the form of Tier 2 with the amount of $700 million. After a very successful additional Tier 1 issuance in April, we continue to benefit from very supportive Eurobond market, and we further diversified our wholesale transaction with a fresh Basel III convertible Tier 2 transaction.

To continue with the presentation, I would like to take your attention to Page 5 to give much more detailed color in terms of net interest margin and expected net interest margin for the upcoming quarter.

The first point I would like to highlight is related to relatively very conservative and moderate CPI estimation, especially compared to private peers. As of third quarter, we used 43.5% October to October CPI estimation numbers. And this number compared to other banks who are using 47%, 48% CPI in the third quarter seems to be creating also additional contribution in Q4.

As you can see in the middle of the page on the right-hand side, given October to October annual inflation announced at 48.6%, it means that in Q4, we will enjoy additional TRY 10.3 billion more interest income from CPI linker portfolio as correction, and it will further boost our net income capacity as well as our net interest margin performance in the final quarter of the year.

Another point I would like to take your attention is related to net interest margin levels. Despite such relatively humble and moderate CPI estimations, both net interest margin performance as well as swap adjusted net interest performance in the quarter came relatively better compared to peer group banks.

Reported net interest margin came at 3%, which is flattish compared to a quarter ago. But because of the decline in our swap usage and as a result of that swap cost, we see a very significant improvement in our swap adjusted net interest margin. Our swap adjusted net interest margin improved from 1.25% a quarter ago to 2.37% area. And this is, again, with very moderate CPI estimation numbers.

On the right-hand side, we also showed what would be our third quarter net interest margin if we assume to use materialized October to October CPI expectation. In that case, rather than 3% reported net interest margin, our actual reported net interest margin will be 4.58%. In a similar way, again, our swap adjusted net interest margin would be 3.94% instead of 2.37%.

So in this sense, clearly, we delivered relatively high net interest margin levels despite very modest CPI expectation. But the good thing is that hidden potential will be reflected in the final quarter of the year, which will support both Q4 net interest margin as well as Q4 net income. Because of this reality, by far and because of also additional seasonality impact, by far, we understand that Q4 will be the strongest quarter of the year, both in terms of net interest margin performance as well as in terms of overall profitability.

On the right-hand side below chart, we also show in detail improvement in our Turkish lira core spread, which we labeled as best-in-class. A quarter ago, it was a negative Turkish lira core spread business with 1.39 bps (sic) [ 1.39% ] contraction. But this quarter, thanks to very high yield repricing on the lending side as well as cost disciplined deposit management, now we switched to positive territory from negative territory a quarter ago.

So from minus 1.39% area to positive 1.31 bps (sic) [ 1.31% ] area, which means Q-on-Q-wise, 270 basis points improvement. And this 270 bps improvement is also one of the highest among the other peer group banks. And we expect this Turkish lira core spread improvement will continue, especially in the Q4. So therefore, net-net, both in terms of security yield as well as in terms of overall Turkish lira core spread point of view, we are expecting to announce best quarterly net interest margin metrics in the final quarter of the year.

And these are the notes we would like to share on the net interest margin side. For the sake of the time, I will skip fee income side and OpEx side. There is no much value on those slides.

And I would like to take your attention to Page 8 on the lending side. This quarter, unlike to first half of the year, our quarterly lending growth seems to be slightly above than the sector averages. This is especially the case for Turkish lira lending as well as overall lending.

On Turkish lira side, we had 6.6% Q-on-Q growth versus 6% for the sector. And on the hard currency side, we also had another strong growth in dollar terms with 7.8%. As a result of that, total lending growth in quarterly terms came at 8.6%, which is slightly above than the sector average.

I think this timing difference, especially with the peer group banks, also helped us to deliver relatively better net interest margin rather than the first quarter, rather than the second quarter, having slightly higher quarterly lending growth also created additional benefit in terms of net interest margin performance. And we are still keeping our strong position in terms of ranking as #1, the biggest bank of Turkey among the listed banks, of course, both in total lending as well as in Turkish lira lending and in hard currency lending. And we also have a very especially strong market share on corporate and commercial lending, where the real lending growth came not only in this quarter, but also since the beginning of the year.

Q-on-Q wise, on the corporate and commercial side, we had 8% growth. On the SME side, we had 11% growth. And on the retail side, we had like 7% growth. And on the retail side, especially the growth was mainly coming from overdraft lending as well as from the retail credit card business.

Another page I would like to take your attention is related to Page 10 on the asset quality. I mean, as we also highlighted in the beginning of the presentation, NPL ratios, both for the sector as well as for the bank increased further. But still compared to overall historical data, those ratios seems to be humble and moderate numbers.

Our NPL ratio increased from 1.47% to 1.77%. And when we compare with the sector, I think we are almost at the same page. Sector NPL ratio is 1.73%. We also have a very slight increase in terms of the share of Stage 2 in total lending. It further increased from 7.9% to 8% and especially, because of the regulations, we see some additional increase on the restructured loans. And this is the main driver of Stage 2 increase. But as we discussed, NPL ratio increased mainly attributable to the NPL inflow coming from retail and coming from credit card side, which is the guidance we were sharing since the beginning of the year. But still, those metrics are under control.

And we were talking about normalized net cost of risk levels. This quarter, we had 85 basis points quarterly net cost of risk, which was minus 28 basis points in the second quarter. And we also expect another similar net cost of risk for the final quarter of the year. So that total annual net cost of risk of 2024 will be coming to slight positive territory as we guided a quarter ago.

On the next page, on the deposit side, this quarter, all the deposit growth was coming from the Turkish lira side. Deliberately, just to also keep our net interest margin levels strong, we were giving exit to hard currency cost deposits. This quarter, we had 3.3% contraction in our hard currency deposit portfolio.

However, total Turkish lira deposit growth was at double digit with 10.1% Q-on-Q growth, and that was the main driver of total Turkish lira -- total deposit growth. One eye-catching development on the deposit side, which is also a positive development from our side is the further increased share of retail and demand deposit.

Total share of demand deposits further increased to 28%, which was 22% in the beginning of the year. And in a similar trend, we also see additional increase of share of retail deposits, which is much more granular to 47%, which was 39% in the beginning of the year. So those developments on the -- this kind of portfolio shift within total deposit portfolio is also helping us to create a much more sticky and granular deposit portfolio, which is also supportive from net interest margin point of view.

The last page I would like to take your attention is related to capital. As you can see on Page 13, our total reported CAR almost reached to 16%. But of course, 130 bps increase we enjoyed, thanks to Tier 2 issuance we printed in July with the amount of $700 million. This transaction itself boosted our Tier 2 ratio by 130 basis points.

Other part of the increase in our total CAR is mainly related to internal capital generation capacity and profitability. But especially this quarter, this kind of additional contribution from Tier 2 issuance was also remarkable.

These are the points we would like to share related to presentation. Before leaving the floor to your questions, we would like to also spend 1 minute in terms of guidance and expectations for this year. The only change in our guidance will be related to overall profitability, which is also the case for other Turkish banks, because of the current environment, as you are all aware very well. All the banks changed their ROE expectation in a downward trend, and it is also the case for Vakif.

Rather than previous 30% average ROAE, the realistic full year guidance for the average ROAE will be changed to low 20s instead of 30% ROAE. And this is mainly the function of relatively limited recovery in our net interest margin compared to expectations in the beginning of the year. So low 20s seems to be the much realistic guidance for this year, and this is the only change, and this is purely driven by net interest margin performance.

For the sake of the time, I would like to stop here and leave the floor to Rob again. If there is any audio questions, we can start with that. And thereafter, we can switch to written questions. Thank you.

[Operator]

Thank you, Mr. Tahan. Thank you, Mr. Ali Tahan, the Head of International Banking and Investor Relations at VakifBank. Thank you so much for that presentation. So right, as Mr. Tahan said, you can now ask your questions. [Operator Instructions]

In the meantime, I don't see any audio questions. Mr. Tahan, if you'd like to begin with the written questions until we get an audio question, if we get one. Thank you. Over to you.

[Ali Tahan, executive]

Thank you, Rob. We have two written questions. Nihan will be reading, and I will trying to be answering it.

[Zeynep Nihan DINCEL, executive]

Thank you, Ali. The question came from Valentina, Barclays.

Could you please elaborate a bit more on your strategy that you have adopted regarding your Turkish lira loan deposit spread management? What you did differently versus peers? Going forward, how do you see net interest margin development in 4Q and 2025? What key macro assumptions do you use?

[Ali Tahan, executive]

Thank you, Nihan. Thank you, Valentina. For a quick question (sic) [ answer ] to this question, actually, what we did differently compared to peers is related to loan portfolio, we were growing actually. Since the beginning of the year, we were growing much faster on corporate and commercial lending. Most of the private peers were growing on retail side. But rather than retail, we were preferring to grow on corporate and commercial lending. And every quarter, we are also switching from floating to fixed portfolio within our corporate and commercial lending portfolio.

And secondly, maybe the approach in terms of residential mortgage business seems to be also critical. We are still behind the competition on residential mortgage business. Year-to-date and Q-on-Q, we have a contraction in our residential mortgage portfolio. But as far as I understand, it is not the case for private banks, especially.

They have a relatively bigger appetite compared to our appetite. So I think this kind of differential in terms of lending composition, corporate commercial versus retail and having too much appetite on residential mortgage or not as well as fixed floating change composition, these are relatively different.

And as a result of that, in terms of loan yield, I mean, without taking into account the cost of Turkish lira deposits, just in terms of by looking at Turkish lira loan yields, I think we are at the top of the list. And this is simply a function of this strategy. We are much more optimistic in terms of overall core spreads in Q4. As I tried to explain, in Q4, not only we will enjoy a very additional strong contribution from CPI linkers compared to peers, because we are still using very humble numbers as of September, which is not the case for most of the peer banks.

So therefore, relatively speaking, we will have additional advantage on security yield. But on top of that, thanks to this strategy, we are implementing since the beginning of the year, we will also see the highest Turkish lira core spread performance in Q4.

So therefore, from every component point of view, Q4 net interest margin will be the best compared to previous quarters. For 2025, the budget for -- as well as the macro, I mean, in terms of the macro, we are mainly using the official government macro expectations they announced on medium-term program. But for the banking sector and for our own numbers, the budget process is still under discussion. It is not finalized yet.

Once it will be completed, of course, we will be discussing more in detail. But preliminary data suggests, of course, in the first quarter, especially, there will be a substantial decline in the interest income from securities, because we will start CPI estimate number at 25% in the first quarter. So therefore, in terms of the first quarter, let's say, there will be too much contraction on security yield. But to some extent, it will be compensated by additional improvement in our Turkish lira core spreads.

Equally important, of course, the timing and the level of interest rate cut from Central Bank of Turkey will also be very critical in terms of net interest margin evolution. So therefore, net-net, next -- for the next year, the budget is still under discussion, it is not finalized yet.

But Q1 specific, Q1 2025 specific, all the banks and us, we will have a hit from security portfolio, because especially, as Vakif, we will start using with 25%, which is the official government CPI expectation for 2025 year-end. So from 48% to 25%, it will create too much contraction.

But on the other hand, most of this negative impact, hopefully, will be compensated by additional improvement in the Turkish lira core spread business side. So these are the important positive and negative side of the first quarter net interest margin outlook. Once the budget is ready, of course, we will start communicating with a detailed explanation. Thank you.

[Zeynep Nihan DINCEL, executive]

We have one more question from Valentina. You have been quite active this year on the wholesale markets. How do you see current market conditions? And do you have more appetite for Eurobond issuance?

[Ali Tahan, executive]

Indeed, especially this year in terms of private placements, in terms of Eurobond issuances, in terms of every wholesale funding transactions, this is the best year maybe, the most active year in the last decade.

And as VakifBank, maybe we are one of the most active issuer bank on the Eurobond side between the period of September 2023 to October 2024, within 13 months period of time, we printed four different public Eurobond issuance, two of them were senior sustainable Eurobond issuance and the other two were in the form of sub debt, both Tier 1 and Tier 2. Of course, in such frequency, in a very short period of time, this is unprecedented. We don't have any comparable period in the past, similar to what we experienced in the last 13 months period of time.

As long as macro conditions remain strong, we would like to active on the wholesale market also. And especially, we would like to also use our DPR program much more frequently going forward, because we will also have sizable redemptions within our DPR program.

And to the extent possible, we would like to refill our program capacity with additional fresh DPR issuances. And apart from that, of course, we will also continue to cooperate with IFI entities from different parts of the world for ESG labeled projects.

So especially in this manner for next year, wholesale transactions, DPRs and fresh new different IFI transactions will be much more visible. Of course, we will also continue to look for Eurobond issuance. But given we had too much in recent period, maybe compared to 2024, it will be used less frequently. And rather than the regular Eurobond issuances, we will be focusing more on DPR and IFI.

Thank you, Valentina.

We don't have any other written questions. If there is no any other audio questions actually, we can turn off.

[Operator]

Mr. Tahan, I just want to remind the folks, we can -- just a 1 minute or 2 minutes. This is a golden opportunity for you folks to ask Mr. Tahan, anything you'd like. He is an expert in this field. And just a reminder, just another 1 minute or 2 minutes. [Operator Instructions]

Mr. Tahan, if there is no other information that you would like to mention, I think, yes, you can conclude. That would be great.

[Ali Tahan, executive]

Thank you. Thank you, Rob. Thank you, everybody, for the time and for the participation. As usual, together with Nihan, [ AJ ] and all IR colleagues, we are at your disposal at any time. If you have any follow-up questions, please let us know. And thank you very much again for your time.

[Operator]

Thank you very much, Tahan. It's been an absolute pleasure. Thank you, ladies and gentlemen, for your participation. That now concludes today's conference call. You may now disconnect. Thank you.