Yapi ve Kredi Bankasi AS

IST:YKBNK.E

Earnings Call Transcript 2023-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 2023 financial results and live webcast.

At this time, I would like to turn the conference over to Mr. Gokhan Erun, CEO; Mr. Kursad Keteci, CSO ; and Mr. 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.

At the beginning of February, our country faced one of the worst natural disasters in history. Earthquake hits southeast part of country and impacted 11 cities. Unfortunately, there has been above 50,000 casualties and more than also 100,000 injured people. We have -- Yapi Kredi lost, unfortunately, 10 colleagues. We are deeply saddened by this tragic loss of life and devastating injuries. I believe that our country is strong enough to get over this.

During this period, we have been carrying out our work in the field uninterruptedly to heal our wounds. I also would like to add that, after securing our employees, we started to serve our customers in these 11 cities with our alternative distribution channels in an uninterrupted manner.

Let me give couple of information about the operating environment as well. In terms of economic activity, we have seen a slowdown due to earthquake. Apart from this, we see limited activity on the grounds compared to last year. Central Bank is continuing to use macro prudential measures to sustain the tightening. TL-driven economic model is putting pressure on Turkish lira rates, especially in terms of funding cost. The situation puts pressure on our spreads, unfortunately.

Lastly, public spending is increasing due to earthquake-related costs and as well as costs incurred from early pensional law. Election is an important event ahead of us. After the election, these imbalances are expected to be minimized in order to keep the market dynamics.

Now I'm moving to Page 2 of our presentation. We posted TRY 12.6 billion net profit, corresponding a 74% year-on-year increase. Our ROE is at 39.7%, close to 40%, and we kept our leadership among our peers enough so far in a challenging operating environment. RoA is at 4.2% in the quarter. I would also like to add, our inflation accounting-adjusted ROE is at mid to low teens, in line with our full year guidance.

Some important drivers of the performance are, despite the intensified competition in Turkish lira deposits and regulatory pressures on lending rates, we maintained our TL loan-to-deposit spreads at positive territory. We also controlled 197 basis points increase in TL cost of deposit and 115 basis points limited decline in the lending yields on a quarterly basis. Our TL loan-to-deposit spread stood at 177 basis points, thanks to our ongoing agile and strong ALM strategies.

[ ALM side ] with lower contribution from CPI linker securities, our NIM stands at 5.6%, in line with our full year guidance which is above 5%. Net fees and commissions more than doubled year-on-year and increased 13% quarter-on-quarter, thanks to strength in lending-related and also money transfer fees as well as strong contribution from our payments systems business. Our NPL collection increased an additional 31% in the quarter to TRY 1.5 billion with limited NPL inflows. And our net NPL inflow were negative at TRY 144 million.

With a conservative approach always, our cost of risk was at 38 basis points. Our operating expenses increased 168% year-on-year mainly due to inflation pass-through impact. On top of that, first quarter, we had around TRY 150 million earthquake-related costs. Excluding the earthquake costs, year-on-year growth would be still [ above 100, ] 149%. Also from another point of view, compared to 2020, 2022 quarterly average, the cost increase was limited to 57%.

This year, we kept our focus on increasing TL funding through small tickets, benefiting from strong customer acquisition, and we continued to gain market share for TL individual deposits so that which is they are, of course, sticky deposit base.

Looking at our fundamentals, we are [indiscernible] to navigate through any uncertainty that may arise in the future, in the near future. In terms of liquidity, our foreign currency LCR is around 650%, total LCR around 190% as we speak. Additionally, our loan-to-deposit rate further improved down to 81%. Equally important, TL LDR improved 13 percentage points to 91%.

Our FX liquidity is around 2.5x of our foreign currency dues over 1-year period, so very strong liquidity balance sheet management. On capital front, our Tier 1 capital remains at -- very strong at 14.8% post dividend distribution and flat impact of operational risk, thanks to consistently strong internal capitalization as well. Now we have 525 (sic) [ 523 ] basis points buffer versus regulatory limits for Tier 1 ratio, so above 500 basis points or 5%.

In terms of asset quality perspective, in the quarter, we have further increased our NPL coverage to 177%. The slight decrease in total loan coverage is mainly due to the increase of Stage 1 lending. So lending was strong in the first quarter, yet still a very strong level of 5.7%, the highest among peers so far. Our over-provisioned portfolio is affirmed by the recent sale of the NPL, which took place very recently, at 31% for individual portfolio and 21% for our SMEs which means that there will be a profit written out of this NPL sale.

Now I'm leaving the floor to Hilal. She will give details behind our strong numbers.

[Hilal Varol, executive]

Thank you very much, Gokhan bey. Good afternoon and thank you all for joining our call this Friday afternoon. Once again, we are deeply saddened by the earthquake and our hearts are still at the regions.

I will start with Page 3. Our small ticket concentrated Turkish lira lending continues to support the profitable growth. Our Turkish lira loan increase was 9% quarter-on-quarter. And looking at the drivers [ against ] small tickets, so consumer loans went up by 14%, and this was driven by general purpose loans. And also, I have to mention that auto loans continued to increase a strong 23% in the quarter.

Foreign currency loan deleveraging continued as we mentioned at the year-end coming down by 1% quarterly and 25% year-over-year. Our bank-only foreign currency loans now stand at a limited $8.7 billion.

All in all, retail loan share in total, once again, I have mentioned, this includes SMEs, so small tickets, reached to 60% as of first Q. And this is on an FX-adjusted term, and which is now -- which was 49% as of 2021, so there is a huge increase there.

On the following slides, I'm now on Page 4, our strong customer franchise further strengthened and continues to support the core funding source, deposits, showing another significant 26% quarterly increase. Turkish lira deposits went up by 163% year-over-year. Increasing 2 percentage points in a single quarter, retail deposit share in total reached 70%. Turkish lira demand deposits increased a solid 11% in the quarter to TRY 103 billion, and the share in total Turkish lira is 22%.

Our FX customer deposits in dollar terms came down by 7% quarter-on-quarter, showing the Turkish lira conversion, while demand deposits were up by 9%. As a result, the share of demand deposits in total increased to a record-high level of 71% in first quarter. All incorporated, share of demand deposits in total now stands at 41%.

Looking at the market shares that we gained on small tickets, on Turkish lira individual deposits, we gained a significant market share among [ price ] banks in a single quarter, 165 basis points. And now our market share reached to 16.5%. And equally important, Turkish lira demand deposit market share gain was 81 basis points, and this is again in a single quarter, bringing up our market share to 20.7%. On Turkish lira individual time deposits, our market share is 15.7% with 186 basis points increase in the quarter.

I also want to mention that Turkish lira deposit share in total on both individuals and companies is comfortably about 60% since mid-February.

Now moving to Page 5. We managed to have, as Gokhan bey also mentioned, a positive Turkish lira loan deposit spread in the quarter, this is 1.8 percentage points, despite the intensified competition on Turkish lira deposits and pressure on Turkish lira lending rates. Turkish lira deposit costs increased by 197 basis points on a quarterly basis, and this is coming from a very low base of 4Q when Turkish lira loan yields came down [ account of ] 115 basis points. And this decline is the lowest level we have seen so far among [ our prior experience ] announced.

Accordingly, our revenues reached TRY 25.6 billion in first Q, with revenues [ through ] interest-earning assets reaching to 9.2%. This level was 7.3% in first Q last year. The strong performance was driven by core revenues and I have to mention timely actions of our treasury department supporting the trading [ line ].

In the quarter, normalized for the linker income, our net interest margin came down 402 basis points quarter-on-quarter and 347 basis points over 2022, and it now stands at 5.63% which is in line with our full year guidance of above 5% net interest margin, and we start -- now we are seeing, as we mentioned in our last presentation a normal [ ratio ].

With [ larger ] loan-deposit spreads, core NIM had 232 basis points negative impact. And we valued our CPI linkers with 5% with inflation expectation in the quarter. Recall that this was 85.5% in 2022. This has lowered the contribution of securities by 192 basis points. Since last year, nondeposit funding costs are coming down. Accordingly, it had a positive impact of 48 basis points on our net interest margin evolution.

Moving to next page. We had stellar fee performance and it is driven by across the board I cannot imagine a single [ item ] again. Net fees more than doubled year-over-year with a 13% quarterly increase and fees [ so ] average interest-earning assets improved further to 2.1%. Money transfer fees more than doubled. This is a number of the transactions that are going up for us. Fee income through investments products doubled. Bancassurance, up 79%. Payments system fees, 98%, almost doubled, we can say and along with lending-related fees also more than doubling.

We are always investing [ to ] digital solutions with the intention of providing and sustaining our best-in-class service model. And new customer acquisition is also supporting our key performance and, I believe, is visible.

Looking at OpEx, our annual cost increase stood at 168% in the quarter. As Gokhan bey mentioned, this is mainly due to the inflation pass-through impact and includes earthquake-related costs which we [ show ] TRY 650 million in the quarter.

I believe that also, it is more fair to compare the first quarter's figures with '22 quarterly average and which is showing an increase of 57%. Accordingly, we are comfortable that our annual increase will [ come reach ] to our guidance of below 100% throughout the year. Main driver of the increase is again business growth-related costs increasing 359% year-over-year. Our HR cost increase was at 98%, but I want to note that the salary adjustment impact will be seen in the second quarter as we are adjusting salaries twice a year. And the first one is timeline in April.

Our efficiency KPIs. We are proud to say we are best-in-class comparing with our peers announced so far. Cost to income at 29%, the lowest; fees to OpEx at 63%, it is the highest; cost to average assets at 3% and this is the lowest level.

Moving to asset quality, we are on Page 8. We had record-high collections in the quarter at TRY 1.5 billion. NPL inflows, however, continue to be very limited at TRY 1.4 billion and accordingly, the net NPL inflows were negative at TRY 144 million. As a result, our NPL ratio came down to 3.2%.

On consumer and credit cards, quarterly additions were lower than the quarterly averages that we had last year at TRY 679 million. SME net inflows continue to be negligible. Net inflows on corporate and commercial loans were negative at TRY 830 million, thanks to strong recoveries.

Quarterly cost of risk stood at 38 basis points, and 20 basis points of which is related with precautionary provision for earthquake. And the decline in cost of risk is mainly due to our [ all the ] provisions book in general and our precautionary provisions that we set aside in the previous years. Our cost of risk level was -- we are close to 150 basis points last year.

And looking at the components, support from collections were as high as 337 basis points. And this is just as a note and is not included in our net cost of risk calculation. The currency impact is 27 basis points and it is fully hedged.

Also, we want to mention our conservative provisioning levels. We are on Page 9. Our total coverage came down marginally to 5.7%. However, the decrease is purely due to the change in composition in terms of stages. Stage I balance, the share increase in total, and since it is relatively low-provisioned portfolio in nature, the total coverage [indiscernible]. However, we have maintained the high level of coverage at all stages and we still have the highest total coverage among our peers announced so far.

Stage I loan share increased to 84%, still with a very strong 0.9% coverage. The share of Stage II loans came down to 12.8%, while the coverage maintained at 19.2%. And also, I want to mention that we have further increased the coverage levels at all stages for SME segment.

Please also recall that, as Gokhan bey mentioned and I want to state it again, we have announced very recently our NPL sales. And the level of income generated from NPL sales also affirms our conservative approach in provisioning.

Moving to Page 10, looking at all capital levels. We have 450 bps and above buffer versus regulatory thresholds at all ratios. We had some declines as a result of 15% dividend payout we had in the quarter, 88 basis points impact. And [indiscernible] operational risk impact, 111 basis points. That being said, the contribution from internal capital generation continues. We had 159 basis points support from profit, while business growth impact was at 99 basis points.

In terms of sensitivities, the impact is very limited for us. [ Every 10% ] depreciation has 34 basis points impact on Tier 1 and 29 basis points on capital adequacy ratio. The impact of 100 basis points [ per last year ] in the Turkish lira yield curve is limited at 6 basis points on capital levels. And I also want to mention that these figures, both figures are not leaner.

On Page 11, we showed our 2023 guidance. At the moment, we are maintaining our full year guidance, and we mentioned them through the presentation.

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'd like to take this occasion to extend my thanks to our stakeholders who stand by us with trust and support as always and to our dedicated employees who contributed to the achievements of 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 Mohsin Waleed with Goldman Sachs.

[Waleed Mohsin, analyst]

Three quick questions from my side. Number one, on your excellent performance on credit quality. If you could provide a little bit more detail on which sectors are driving recoveries. It's quite significant. And if we remove the impact of the earthquake, your net credit loss was only 18 basis points. And I mean, the recoveries are at record levels. So any commentary around that will be extremely helpful. So that's my first question.

Second, I wanted to get your thoughts on -- a little bit more on how you will be managing the balance sheet going forward. Obviously, post election period could be a little bit more volatile in terms of FX and interest rates. So I wanted to get a better sense of how you would manage your securities portfolio in particular going forward.

And my third and final question, I mean, you kindly provided your sensitivity to rates and FX, which seems to be quite limited compared to your peer group. Any other numbers that you can share perhaps in terms of any stress test that you've done with regards to different macro scenarios would be very helpful. These are my 3 questions.

[Gökhan Erün, executive]

Thank you, Waleed, for the question. I'll take the second question, balance sheet post election. And then I'll leave the floor to Kursad and Hilal to answer the other questions. For the post-election side, I think, as you mentioned also from the sensitivity side and stress test that we run through, we prepared the balance sheet very well as much as possible for the post election. Obviously, there will be -- this trend cannot continue as it is, so macro prudential measures, et cetera, that has to change at a point.

For example, let me tell you that, for example, on the deposit side, cost of TL deposits is increasing, which means that we are already -- which is not dependent on the Central Bank funding which we show in the past, which means that we are seeing the impact of the, what you call, post-election developments. Already we are seeing that on our balance sheet, which means that TL interest rates hike on the funding side is happening already. So this is something that we were expecting a little bit later on our balance sheet, but which is happening at the moment, which means that on the balance sheet, we are seeing that impact already most of the part.

The second is on the lending side, we have been very careful on the lending side with very much short durations. So that the duration gap remains around 3 months or even lower for the Turkish lira side or also similar to the foreign currency side. The duration gap is very limited. That's why we have a good potential to land in the upcoming period for the lucrative TL lending side and the balance sheet is very much prepared for that. If you look at the liquidity, as I mentioned, liquidity is very strong. So we can grow whenever we would like to.

But what we did, we got prepared ourselves for the post election. So we did not grow the balance sheet too much. So we have enough capital to grow. We have enough provisions or even very prudently more than enough provisions on the balance sheet so that we are well prepared for the post-election period of time.

Securities and liquidity, I mentioned. You also asked about the securities. Yes, there has been a period and it is still we are going through that period that if we are here to lend to our customers and we are doing that, [indiscernible] we cannot let the franchise go away. We're still acquiring new customers and we are growing. So this is the value of the bank. And this is not a onetime thing. So we'll be growing further.

That's why we are lending. And because of the macro prudential measures of the Central Bank, we are also buying the securities with relatively lower interest rates. But what we did so far, I think till now we were the first bank to reach a 60% conversion. So that's why the security amount that we bought is limited to around TRY 30 billion also on the balance sheet that -- we managed that to keep it low compared to our peers, I think.

So of course, this had an impact on the net interest margin, obviously, because the impact we are seeing instead of spreading it out for 5 years or 10 years with low interest rate securities, we bought less securities with low interest rate, but also we get -- we got the hit on our P&L on our NIM with the highest TL cost of funding. So this is more or less the first quarter's story in a nutshell.

But securities-wise -- also, the good thing that the treasury did very well there, I must tell you that during February and March, the treasury did very well not to buy securities with 10% levels or so. Instead either we bought some securities in advance with higher interest rates. This was the, of course, agile balance sheet management of Yapi Kredi and we are very much proud of managing it..

So this is the answer for the second question. But also, in general, how we see post-election side as well. But I'll leave the floor to Kursad and Hilal to answer the other questions.

[Kürsad Keteci, executive]

Thank you, Gokhan bey. And Waleed, thanks for your questions. Regarding the recoveries on nonperforming loans, we could say it is a diversified collection performance. But if we go in deep, what we are seeing in terms of sectors, we are seeing recoveries from tourism and as well as energy sector. But they are not big tickets, they are just totaling around 10%, 15% total recoveries specific to these sectors.

But I would like to mention here more in terms of recoveries and it is coming exactly due to the lending policies and procedures. And the lending policies are so strong that -- and we are prudently classifying our customers to Stage II and III. And then if we have the collections, we are recovering more than the others. And another affirmation of it, we just sell the NPLs for our retail and SME portfolio. For the individual portfolio, we sold them at 31%, and the SMEs at 21% levels, which is also justifying our prudent lending policies.

Regarding the stress test scenarios, yes, we are having some stress test scenarios. And let me try to give some details. And first of all, from the Turkish lira duration gap, our average duration of Turkish lira loans is just 5 months. And when we look at the total Turkish lira duration, it's something around 3 months levels. And therefore, in case of a rate hike risk, we will be first benefiting from our lending book because there are some caps for the lending where the deposit rates are already high. It will be beneficiary.

And for the capital, what we have, the sensitivity 100 bps [indiscernible] as Hilal mentioned, the 6 bps and 10% of the currency devaluation is something around 35 bps levels. And for the liquidity, we already have strong liquidity in FX LCR, close to 700%. And total LDR is [ 110 80% ] we don't see any big important change on these ratios in case of sensitivities or stress test.

For the asset quality, maybe it is better to mention. If we look at the NPL ratio, which may trigger the capital ratios, it is something close to 15% of NPL ratio with the current coverage levels. And therefore, our balance sheet is quite strong against some possible shock scenarios.

[Operator]

The next question is from the line of Sevim Mehmet with JPMorgan.

[Mehmet Sevim, analyst]

Maybe as a way of follow-up, could you please talk about the individual drivers of your relatively strong spreads performance compared to your peers particularly? I understand both loan yields and funding costs seem to evolve relatively better in this environment where you really can't do much given the high amount of regulation. So what is it that you do that is leading to this relatively better performance in this environment?

And secondly, clearly, we are in an environment of many uncertainties, and there are multiple scenarios that we're looking at. But given the very strong performance in the first quarter of almost 40% RoTE, I'm wondering if your high 20s RoTE guidance still applies? Or is that now a more conservative guidance? And if so, what would lead to that RoTE from here? So what would need to happen that we go down to the 28% levels from here?

[Gökhan Erün, executive]

Thank you, Mehmet. The first question, I think, is we go -- with the retail side, recall that there was no caps or limitation during that period of the Central Bank. Whenever we see there opportunity, we [ land ] on the retail side and with better margins than our peers. That is for sure. We know the market's rates. Without having a cost of risk, thanks to our risk management efforts, we are landing with better rates, especially on the GPR side, we've been very strong at that level.

Once we had some limitations thresholds from the Central Bank, we slowed down. So we said, if we land, then we land with higher rates or we slow down. Instead of getting into market share competition, we try to avoid the buying -- the purchase of the TL securities. That's why the margins are better.

For the guidance side, whether the 40% -- having a 4% ROE in the first quarter and whether the guidance will be a little bit conservative for the year-end, well, there are lots of uncertainties in front of us. Some of them is happening already at the moment. Once we see, for example, April margins, while it's not going in the right direction, the TL cost of funding is going up. The competition is obviously -- is moving and this was the last day of the competition for this 60% also 5% conversion of the Turkish lira deposit. There, I think the pressure that we are seeing on that front. That's why, especially for the second quarter and third quarter, we have some doubts for the performance. Later on, it might also recover. But any comments, Kursad?

[Kürsad Keteci, executive]

Yes, Gokhan bey. I would like to add one thing on top. Mehmet, as you know, besides the nominal RoTE we are publishing, our guidance is also saying in terms of inflation accounting basis, we are targeting to mid- to low teens. And as of first quarter results, we are at exactly this level. And that's why we are also keeping our current guidance levels, and we try to reach our guidance throughout the year.

[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 written questions. Thank you.

[Hilal Varol, executive]

We have a couple of questions from the web, from [ Valentina ]. Good afternoon. Can you please share the [ liquidity ] the amount as of first Q short-term [ FX debt ] and total. So our liquidity is around TRY 8.5 billion; short-term debt is $3.5 billion -- it is dollars, sorry, not Turkish lira, obviously. Short term debt, $3.5 billion and $1.3 billion of which is syndications. Total FX external debt is lower than our liquidity, $7.5 billion.

One question from [indiscernible]. I missed the CPI linker estimate. Is it 35? No, it's 45. We used 45 for the quarter.

We have a couple of questions from [ Kunar ]. Would you think that [ total loan-deposit spread ] will continue to shrink in second quarter? [ Kunar ], actually, we are doing our best to maintain this. And hopefully, we will continue with this level of positive spreads at least on total as we are very selective in lending. And as you know, with our small ticket contribution, we are controlling our deposits rate.

What is the amount of regulation [ imports volume ] on your balance sheet? It is around 3% of our total assets, I can say. Any concerns on FX liquidity given current trends? As I mentioned, our -- we have had the FX liquidity covering more than our FX [ stat ]. Accordingly, we don't have any problems about liquidity. And as Gokhan bey also mentioned during the call, liquidity coverage ratio is higher than 600%, very, very high level, so not concerned about FX liquidity.

And from [ Valentina ], how do you see your NIM trajectory from here? Kursad, would you like to take this? Or would you like me to...

[Kürsad Keteci, executive]

Sure, Valentina. Regarding the NIM trajectory, it totally depends on how the macro scenario will evolve. And if we see rates to increase, especially for the normalization on the loan part, we will be benefiting where the deposit rates are still high. And if this is going to be the base scenario, we would like to perform in line with our NIM trajectory of this quarter. And as you know, we already targeted the guidance above 5% of net interest margin, and we will be keeping our net interest margin in line with the guidance. This is our target.

[Hilal Varol, executive]

So we don't have any question on what's left. So as a whole team, we thank you all for participating in our call. And if you have any further questions, you can reach our IR team and myself during the night also. So thank you very much for spending the Friday afternoon with us.