Yapi ve Kredi Bankasi AS

IST:YKBNK.E

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, and thank you for joining the Yapi Kredi conference call and live webcast to present and discuss the Yapi Kredi First Quarter 2022 Financial Results. At this time, I would like to turn the conference over to Mr. Gokhan Erun, CEO; Mr. Kursad Keteci, Strategic Planning and IR EVP; Ms. Hilal Varol, Head of Investor Relations and Strategic Analysis. Mr. Erun, you may now proceed.

[Gökhan Erün, executive]

Thank you. Good afternoon, and thank you all for joining our first quarter earnings call. Before giving the details of our strong performance, I'd like to spend a few time regarding the operating environment. Looking at the inflation, ongoing higher global commodity and energy prices, tension between Ukraine and Russia, unfortunately, are all affecting inflation evolution all around the world as well as in our country. Accordingly, the high inflation levels are likely to stay in the remainder of the year.

During the quarter, as expected, the Central Bank of Turkey remained on hold. The volatility in the Turkish lira and cost of Turkish lira deposits cooled down following the moves from the authorities. Exchange rate protected deposit scheme helped to keep funding rates stable and below 17%.

Lastly, in terms of growth, there are macro-prudential actions being carried on by almost every day. Target is to have growth through investments, activities rather than the expenditures-driven growth.

In terms of our performance, I'd like to emphasize that we are continuing to improve our stainable profitability with solid fundamentals. Our priorities are enhanced liquidity levels. Our foreign currency LCR stands above 600% and total LCR higher than 200%, where our LDR, loan-to-deposit ratio, is at 95%. Equally important, our TL LDR improved 13 percentage points year-on-year to 132% level.

Rock solid capital base. Our Tier-1 capital further improved to 13.3%, thanks to consistently strong internal capital generation and also support from IRB phasing impact. Now we have more than 370 basis point buffer versus regulatory limit.

Customer-oriented approach. We keep creating convenience to our customers to fulfill their needs. During the quarter, we acquired more than 700,000 new customers and grew more than 500,000 in a quarter. Also, our digital customer penetration reached to 86%. And our seamless digital onboarding is quite strong, 5x higher year-on-year, and helping to improve digital transformation.

Last, but not least, employee-oriented approach. We are stronger with all our people and keep improving job satisfaction as well as providing the environment for them to reach best place to work.

Before starting the presentation, I would like to share an important news regarding our sustainability efforts. Our MSCI ESG rating upgraded by 3 levels to AA from BB, and we have been classified as the leader in Turkey. We are also among the best-in-class banks globally in the scope of managing the most significant ESG risks and opportunities.

And now I'm moving to Page 2 of our presentation. In the first quarter of this year, our net profit more than doubled quarter-on-quarter and went up 5x year-on-year to TRY 7.3 billion. We have reached to 42.3% RoTE, best within peers, at least so far. Our risk reached to -- our ROA reached to 3.5%, showing a sustainable improvement. Pre-provision profit, PPP, ramped up by 67% quarter-on-quarter and 184% year-on-year. Our PPP to gross loans stood at 8.7% as of first quarter.

Some important drivers. Quarterly NIM widened a further 138 basis points to 5.02%. Loan repricing sustained. TL loan yields went up by 100 basis points quarter-on-quarter. Improved funding costs also supported our significant core revenue generation. Our timely accumulation of linkers, proud to say, continued supporting our NIM, creating a great hedge to our profitability.

In first quarter, CPI linker portfolio reached to 92% of our capital, highest among our peers so far, again, visible in our NIM and also profitability performance.

Fee income. We had another strong quarter with 22% quarterly increase and an increase was 54%. This performance was supported by each component with ongoing focus on transaction numbers.

Cost growth remained below inflation at 50% year-on-year, where our continued focus on business growth. In terms of efficiency, we do have the top performance with the highest fee coverage of OpEx among our peers at 82%. NPL inflows continued to be limited, so to say, very limited in the quarter at TRY 1.3 billion, where recoveries continued to improve in the quarter. We had TRY 1.25 billion, roughly TRY 1.3 billion, worth of collections. So all in all, the net NPL inflow were almost 0, just TRY 68 million.

Now I'm leaving the floor to Hilal to give the details of our strong performance.

[Hilal Varol, executive]

Thank you very much, Gokhan Bey. Good afternoon to you all, and thank you for joining our call. I will start with our lending performance on Page 3. In the quarter, we had 14% quarter-on-quarter increase in Turkish lira loans, whereas FX loans were flat. Again, in this quarter, we gained further market share among private banks in lucrative small tickets.

With a 7.5% year-to-date and 47% year-over-year increase in GPLs, namely general purpose loans, we increased our market share by 51 bps quarter-on-quarter. This is on top of 110 bps gain last year. Please note that around 50% of our generation is through our salary customers.

Commercial installment loans. 14% quarterly increase, resulting in 37 basis points market share gain in a single quarter. All in all, retail loans share in total reached 55%.

We are on Page 4, funding side. It was very strong Turkish lira driven and, again, through sticky small tickets. Turkish lira deposits increased 29% quarter-on-quarter with an additional 22% increase in demand. Foreign currency deposits came down 6%. On Turkish lira individual deposits, we gained 45 basis points market share versus private banks in the quarter. Individual demand deposits market share up by 42 basis points. Looking at the share of demand deposits, it went up 7 percentage points in the year to 42%, Turkish lira at 26% and foreign currency at 52%.

Moving to Page 5, revenues. Revenues increased 39% quarter-on-quarter and a hefty 132% year-over-year, and the support was mainly through core, going up by a very strong 49% quarter-on-quarter and 124% year-over-year. Also, the support was to trading gains and it is sustaining. Our margins, both revenue and net interest margins, are improving each and every quarter since the beginning of last year. Quarterly increase in the first quarter was at 128 basis points on core and 138 basis points on net interest margin, and this is thanks to our agile ALM management.

Now looking at the year-to-date evolution of these margins. Net interest margin widened 185 basis points and core revenue margin up by 174 basis points versus 2021. That's better than our guidance of 100 basis points widening for the full year. This performance was an outcome, once again I will have to mention, of an agile asset and liability management. And it's not just driven by 1 single balance sheet item, but through all, core, securities, other funded [indiscernible] assets. So you name it.

On next page, very strong fee performance. Net fees increased 54% year-over-year with a 22% quarterly surge. Once again, I cannot mention just 1 component for this strong performance. It's all across the board. We are improving in our areas of strength and adding on top in diverse [ case networks ]. Money transfer, up by 106% year-over-year. Number of transactions are going up, as Gokhan Bey mentioned. Investment products, 48% year-over-year; bancassurance, 30% with new products on the digital shelf. Digital share is up 5 percentage points year-over-year at 55%. As a market leader, payments system's fees increased 63%. And lending-related fees also supported with 52% increase.

Moving to OpEx. We are on Page 8. Cost increase well controlled at 50%, lower than the inflation. And as we have stated during our guidance call, increasing business growth-related costs, that we will not sacrifice, balanced with the ongoing elimination actions and support from digitalization in the running costs. Accordingly, our fee coverage of OpEx, improving every year, reached to 82%. This is the highest level among peers so far. Cost/income, record low, 21%, not likely sustainable, but again, among the best in the system. Looking at the bank-only jaws, you can see it is wide open at 83%. Revenues are increasing significantly above the costs.

Now I am moving to Page 9, digitalization. We are definitely increasing our digital customer base, adding in the first quarter, just in a single quarter, 425,000 new customers. Annual increase at 1.6 million. Monthly average new GPL origination to digital went up by 80%. And it's very important to mention that. More than 80% of our GPL sales is fully digital, meaning no human touch. Definitely including digital transactions through our branches, we are almost at 100. Digital onboarding, very important for us, 5x higher than last year. Number of credit cards sold via digital up by 61%, and as a result of all, the share of digital in total transactions now stands at 69%.

Our set policy on Page 10. As Gokhan Bey mentioned in detail, quarterly NPL inflows were very limited at TRY 1.3 billion when the collections were very strong, and I have to, once again, mention, best among peers so far at 1.25 level. This excludes NPL write-offs that we had in the quarter.

Net NPL inflows as a result was very limited at TRY 68 million. On consumer and credit cards, we are seeing a slight increase, still very, very limited. SME inflows, negligible, when we are seeing ongoing negative flows, meaning very high collections in corporate and commercial. Hence, cost of risk in the quarter, adjusted for the fully hedged currency impact, stood at 39 basis points. Support from collection as high as 79 basis points. As a note, currency impact is at 124 bps in first Q. This trend gives us the comfort of maintaining our below 150 bps cost of risk guidance for the full year.

I'm on Page 11, very strong coverage levels at all stages, once again. Stage 1, close to 1%. Stage 2, with a further increase at 20% and just announced, no addition to Stage 2. Stage 2 coverage, slightly down to 69%. And our NPL ratio improved 60 basis points to 4%. Total coverage, high level, sustained at 6.7%. These levels definitely are not sustainable because of our ongoing very healthy lending growth.

Robust capital levels that you see on Page 12. At all solvency levels, we have more than 350 bps buffer versus the regulatory threshold; CET1, at 11.6%; Tier-1, 13.3%; and capital adequacy ratio at 15.5%, not mentioning that they are without regulatory forbearances.

Capital generation to net profit, very strong at 150 bps, and this is in just 1 quarter. It's an important Phase 3 impact of IRB adoption as the only bank in Turkey, supported capital adequacy ratio by 90 basis points. We have 105 bps negative impact to deductions in the quarter, and this is given the high level of [indiscernible], and it's due to linker portfolio, and this amount will disappear through the year.

On the last page of our presentation, but definitely not the least, are sustainability. With our commitment on Scope 1 and Scope 2 emissions, we will be carbon neutral this year and Scope 3 by 2050. Sustainability-linked funding is increasing, at the moment at 30% of our wholesale funding, and we are aiming to further increase the share. We are increasing our financial inclusion via new sustainable products continuously. We have nature-friendly mortgage and auto loans, ESG-linked investment funds via Yapi Kredi Invest. We are working on ESG advisory services, sustainable credit cards and, you name it, so on and so forth, lots of products we are working on.

All these efforts are further resulting in improving in rating. MSCI with a AA rating. We are the leader in Turkey and among the best in class globally. We are included in 2022 Bloomberg Gender-Equality Index. We are among the 4 companies included in the Sustainability Yearbook S&P Global.

Now I'm leaving the floor to Gokhan Bey for closing remarks, and we will be taking your questions. Gokhan Bey?

[Gökhan Erün, executive]

Thank you, Hilal. I believe we, as Yapi Kredi, will ensure the continuation of strong and sustainable revenue performance through small tickets and transaction banking as the strategy while maintaining, of course, our strong fundamentals and conservative risk appetite, driven by customer-centric approach.

With our strong brands, rich organizational culture, fully committed workforce and support of our shareholders, we will seize the opportunities ahead of us and reach to greater achievements, which will also contribute to our country's economy. I would like to take this occasion to extend my thanks to our stakeholders who stand by us with trust and support and to our dedicated employees who contributed to the achievements of our bank and showed commitment to the country and to our bank. On behalf of the whole team, I'd like to thank you all for joining our call. And now we can take your questions.

[Operator]

The first question is from the line of Konstantin Rozantsev with JPMorgan.

[Konstantin Rozantsev, analyst]

I had a couple of quick questions to ask. The first one is about the FX-protected deposit scheme in retail. So I assume that some of the deposits that have originally entered into the scheme from retail have already started maturing. So I just wanted to ask for some statistics, what fraction of those deposits maturing within this scheme and retail is being enrolled within the scheme as opposed to what percent leaves the scheme and goes into conventional deposits of retail?

The second question, again about FX-protected scheme, both for retail and corporates. Could you please confirm if the amount invested into the scheme continues to grow? And maybe please comment on the pace of this growth in the funds invested into the scheme and how you see this in the coming couple of months?

And lastly, in terms of the foreign funding trends into the end of this year, so how do you see the environment? And are there any specific types of foreign funding you'll be doing to focus on more in the remainder of the year? Or rollover should be pretty consistent and so the composition of foreign debt not change as much in the near term?

[Gökhan Erün, executive]

Konstantin, let me answer briefly the first question and also the second one, and then I'll leave the floor then to Kursad to answer to give some details about it. About the -- first, about the FX-protected deposit scheme. I think it's -- so far, it's working well, not only for the sector, but for our bank as well. There are 2 components of it. One -- as you know, one part is the treasury-linked part, which is not the conversion, but mainly an inflow from the TL deposit. That part is doing extremely well and still, every day, the amount is growing on the treasury-linked, this is how we call it, TL deposit side.

If you move to the FX conversion, the Central Bank FX-protected deposit scheme, that has not accelerated too much. It started slow. And I can tell you that still Yapi Kredi is slightly below 5% threshold at the moment, but we are getting there. But it takes time. So to convince the Turkish lira depositors to this FX deposit -- protected deposit scheme was easier than the ones that for the deposit holders -- depositors that were holding in FX currency and then converting into Turkish lira.

So in a nutshell, the TL deposit side is working very well. FX-protected TL is working very well. For the FX conversion deposit, that requires some time. So still, the pace is not there. And the -- it is -- why it is obvious? It is because of the measures brought very recently by the Central Bank, either you call it a carrot or stick, mainly stick not the carrot. That's why we feel also for the sector, it is not going in a pace that the Central Bank wants. So this is the -- in a nutshell, the first part of your question. And if you want to give any details, Kursad, about this?

[Kürsad Keteci, executive]

Sure. For the first 2, you have asked about purity and rollovers. On the retail part, majority were coming, and we see the rollovers are -- constantly they are rolled over. But as Gokhan Bey mentioned, there are also additions on the retail part, especially for the treasury products. On the corporate, as you may know, the maturities, we have not seen yet. In the mid of summer, we will be experiencing maturity and the rollovers.

[Gökhan Erün, executive]

Well, so in that sense, some maturities came along, and it is adding up. So because in the beginning, I think, flat -- the TL depositors, treasury product, made 27% flat, so making more than 100% year-on-year. So that's why the appetite is there for the treasury product.

For the other side, still, as I mentioned, it is not very strong still. And coming to the foreign funding side, as we mentioned during the presentation, the liquidity, especially foreign currency liquidity is extremely high in the bank. So looking at the FX LCR more than 600 or so, we don't have any problems with rollover of the syndications whatsoever, although the pricing wise it is a little bit costlier, but still.

So in that sense, we do not have an issue on the funding side. Whether we'll be on the market for an issue, we'll be opportunistic. Yapi Kredi has always been, at least in the last 4, 5 years, has been very active on the market. And we are trying to be extremely investor-friendly on our site, making the transactions, giving some new issuance premium or fronted time to time if it is in a good shape, calling the Tier-2s, et cetera, or sub-debt. In that sense, we still think that we would like to be investor-friendly for the market. But whether the market and our ambition will match that's more to be seen. But from existing levels of the market that we are seeing, CGF being 600 basis points or above, it is not very logical. It doesn't make any sense for our bank to borrow at these current levels.

[Konstantin Rozantsev, analyst]

Understood. That's very clear. Apologies, I could have missed the number that you mentioned, but could you please repeat what fraction, what percent of FX-protected deposits in retail, which matured like in the past month or so have been reinvested into the scheme have been rolled within the scheme? So I assume it should be a high number, right? But is there some indication of the level? What percent kind of stays within the scheme?

[Kürsad Keteci, executive]

Konstantin, you can assume it is more than the original amount, the rollovers, because it is -- every day, it is totally adding up new ones. And the specific rollovers, you can assume even close to 100% because with the interest accrual already, they are rolling it over.

[Gökhan Erün, executive]

So it is the [ capitable ], the initial amount plus the interest and plus also some more new money coming in.

[Operator]

The next question is from the line of Nellis Simon with Citibank.

[Simon Nellis, analyst]

I was quite impressed by the customer acquisition number. Can you just unpack what kind of customers you're adding? And how you're doing that, that would be interesting.

[Gökhan Erün, executive]

Sure. It's mostly, obviously, the retail customers, and specifically looking at the segment, it's more about mass segment, definitely. And it's not only 1 channel that we are acquiring customers. One side is the pensioners, for example, let me start from this side, the pensioners, they have -- which was a segment that the bank was a little bit lagging behind, but we are adding up. We are getting there, I think, very swiftly. So the pensioners that have got also saving accounts, that is helping also our TL depositor, foreign currency deposit on that side. This is 1 channel.

The other channel is the salary payments that we are making and acquiring from the large corporates, not limited to, of course. We are also acquiring some salary payments from the SME segment -- SME and commercial segment, too.

Another channel is the digital channel and digital onboarding. So as you know, in Turkey, in almost a year now, we are able to onboard the customers fully digital, and this is helping a lot. So only through mobile and through talking visually, we can onboard the customers. Of course, this is a segment that might be a lower income segment for us or a new starter to their careers, a younger generation, but it is helping to acquire those customers.

And on top of it, we are also very active, especially this year, on the performance marketing side. And this is also helping to add up customers, digital customers through this. But this is in total numbers. But also on the SME segment, we know that we are getting market share of -- in terms of number of customers from the SME segment, too. So it is a full slide full segment that we are acquiring customers. And this is one part. And the only missing part was actually the customers that we were acquiring from the branches that were a little bit stalled during the pandemic times. And we -- as you know, we have a very strong field employee staff that is very capable of acquiring customers.

So that is also moving ahead at the moment as the -- the branches are almost full every day. So we are seeing almost double the customers that we had last year per branch customer inflow doubled compared to the same month last year. So the pandemic is almost over, and we are acquiring customers also without strong fear.

[Simon Nellis, analyst]

Interesting. Actually, can I also ask a question on the impact of all of the macro-prudential regulation that's been coming in, the new reserve requirements, I guess, the -- yes. I mean -- and what else do you think is on the horizon on the regulatory front, if anything?

[Gökhan Erün, executive]

Okay. Well, what is on the horizon? I do not know, very frankly. Unfortunately, all of a sudden, every day...

[Simon Nellis, analyst]

They seem to come up with something new every day.

[Gökhan Erün, executive]

It is, it is. And I think I have the right to complain about it. It's not only you, but also I'm complaining to every person, every regulator that I meet. So obviously, there are macro-prudential measures. And in the past, it was more on the BRSA side. Now we are seeing that the Central Bank is being active, very active on those measures.

We got the message, obviously, and we are moving ahead, accordingly. The impact -- there are several impacts about this. Where should I start, I don't know. So adding up, it makes an important amount of -- amount. But adding up, first, the April [ movement ], which was [indiscernible] $65 million plus there are 2 other measurements, plus also not only the macro-prudential measures, but also the tax hike for the financial institutions, unfortunately, from 20% to 25% for this year from 23%, about 25%. All adding up, close to 10% of the revenue is impacted by the measures, unfortunately. This is where we have to cope with. We got the message. I hope also the regulators are getting our messages, too.

[Operator]

Ladies and gentlemen, there are no further audio questions at this time. I will now turn the conference over to management for any webcast questions. Thank you.

[Hilal Varol, executive]

We have a lot of questions, I can say, on the webcast. So we'll try to start to start with one. Do you see any upside or downside risk to your [ present ] guidance. Ovunc is asking.

[Kürsad Keteci, executive]

Thank you, Ovunc. Looking at the results of the first quarter, obviously, we are seeing an upside on the revenue generation as well as on the fee income part. These are putting a very positive possible upside in the coming quarters we can talk about. On the lending growth, we have mentioned about high 20s that is, we can say, still irrelevant.

In terms of return on equity, we have guided to be above last year since we see this it to be going to be above. We are confirming it when we come to the next call, we can talk about more precise ROE level. And the other possible upside is on the cost of risk, but it is still a question mark to say as boldly as I said for the revenues. But all in all, I can say there are upside risks for all our guidance.

[Hilal Varol, executive]

So another question from Ovunc. How do you see your numbers and [ I'm seeing ] a couple of more on this if you adopt inflation accounting?

[Kürsad Keteci, executive]

Yes. Inflation accounting, in order to have an impact analysis for inflation accounting, we need to see event start, and this is still being analyzed and questioned and discussed by the regulators. You know in Turkey, there is a separate accounting body, and there is also BRSA and other regulators. We are aware that they are in talks to decide when to start or should it be started. That's why we are not able to make any calculation yet. But as far as we see the clarity, we will be informing all of you.

[Hilal Varol, executive]

One more from Kunal [indiscernible]. Can you please touch base on new risk-weighted asset regulation on your Tier-1 given your IRB approach?

[Kürsad Keteci, executive]

Looking at the announcement, the sense of the announcement, it is related to all banking system, I believe, and in all banking system we will see some changes in the future in terms of regulation. We don't know, but it is not just specific for banks who are making a standard approach, we believe because the sense of the macro-prudential efforts are the same as we know. And therefore, we are still awaiting answer from the regulator.

[Hilal Varol, executive]

One more question for you. Could you provide some details on the components of loan growth in first Q '22? And how you expect its components to evolve as the year progress? When do you think business lending will start to slow down? And how quickly will retail start to improve? Alan Webborn is asking.

[Gökhan Erün, executive]

This is about the TL loan growth. Maybe 2 components: foreign currency and TL loans. Foreign currency loans, we do not see a growth potential for the FX loans, not because of the spreads but for the asset quality. There are not many investments in Turkey at the moment. So that's why -- and if any, that has to be financed by TL loans, lessons learnt from the past. That's why we are trying to diminish -- decrease our FX loan portfolio further down. We started from 22% down to 12% and going down.

So for the TL loan growth, I think it will also slow down because of the macro-prudential measures or any measures that is given by the regulators. And for these sectors, taking the messages with strong impact on the P&L, unfortunately, I think there has to be a slowdown. The cost will be definitely reflected to the customers, to Turkish lira loan customers. That's already started among the sector and is upgraded. We also -- even Monday morning, starting from Monday morning, we also reflected our numbers.

So TL loan growth will be slowing down, but not to forget, if we have a year of, let's say, 40%, 45% inflation growth, so I cannot tell that 25%, 30% loan growth is too much for the sector. This will be a fair comment, at least from my side, because it's -- in real terms, it's a negative growth. That's why -- there will be a growth -- further growth in -- on Turkish lira loans, but the regulators want us to lend on specific segments.

I do not see at the moment at least such an appetite from these limited segments. That's why from the other segments, there is still the appetite. And from the elevated interest rates, I think there will be still some appetite, but less appetite compared to first quarter. And any other questions that I missed?

[Hilal Varol, executive]

No.

[Kürsad Keteci, executive]

For this question, specifically, no.

[Gökhan Erün, executive]

Okay.

[Hilal Varol, executive]

There are 2 more questions, I will take them. Congratulations on the strong retail as well as [indiscernible] investment. If [ annual ] inflation pressures go to moderate in the coming months and quarters, how will this affect your earnings?

So it means that there will be a good opportunity in the market [ at a normal pace ] and that is what we are getting as Gokhan Bey mentioned in detail. So our main target on the medium term is always [ beat ] the cost of equity once everything normalizes. That will be my answer.

And one more question from [indiscernible]. Swap costs came down remarkably in the quarter. Is there a specific reason to it?

It is because of this FX deposit scheme. FX deposits are coming down, so our swap volume is going down and, as a result, our swap cost is coming down.

[Operator]

Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

[Hilal Varol, executive]

Okay. So thank you very much, everyone. If you have any further questions, I know that it's Friday and everyone is listening to us. Thank you all for joining, once again. If you have any further questions, you can reach our IR team and me always. Thank you.