U.S. Markets closed

Edited Transcript of AKBNK.IS earnings conference call or presentation 28-Apr-20 3:30pm GMT

Q1 2020 Akbank TAS Earnings Call

Istanbul May 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Akbank TAS earnings conference call or presentation Tuesday, April 28, 2020 at 3:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kamile Necat Ebru GÜVENIR

Akbank T.A.S. - SVP of IR & Sustainability

* Sabri Hakan Binbasgil

Akbank T.A.S. - CEO, Director & Member of International Advisory Board

* Türker Tunali

Akbank T.A.S. - CFO

================================================================================

Conference Call Participants

================================================================================

* Deniz Gasimli

Goldman Sachs Group Inc., Research Division - Associate

* Gabor Zoltan Kemeny

Autonomous Research LLP - Research Analyst

* Mehmet Sevim

JP Morgan Chase & Co, Research Division - Associate

* Simon Nellis

Citigroup Inc, Research Division - MD

* Soroka Oleksiy

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. I am Gail, your Chorus Call operator. Welcome, and thank you for joining the Akbank conference call and live webcast to present and discuss the first quarter 2020 financial results. At this time, I would like to turn the conference over to Mr. Hakan Binbasgil, CEO. Sir, you may now proceed.

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [2]

--------------------------------------------------------------------------------

Dear friends, we are going through unprecedented times. I hope that you, your families, your colleagues and your loved ones are all doing well. And our thoughts are with all those on the front lines in this global struggle against the pandemic. Nowadays, the health and well-being of our people, customers and community is our top priority.

Akbank entered this challenging environment with robust capital, solid liquidity, low leverage, highest level of efficiency, low operating cost base and last but not the least, with outstanding talent and technology. Therefore, we will be able to absorb the potential damages of this difficult period relatively well. Before I give Ebru the floor

for first quarter results, I'd like to share a few thoughts on recent developments, operating environment and Akbank, in particular. So much has changed since I met with many of you in person at the beginning of the year. Actually, Turkish economy started the year well on track for growth, with pickup in business activity and consumer demand. However, activity began to slow down in March as the first COVID-19 case was announced on the 10th of the month. Since then, a comprehensive set of measures have been taken by the government to ensure the health and safety of our citizens. Now the new positive cases seem to be stabilizing.

On the economic front, policymakers have taken numerous monetary, fiscal and regulatory actions to support businesses and households in this challenging environment. And additional measures are likely to be introduced if and when needed. Our base case expectation is a gradual recovery in the second half of the year once the spread of the virus is under control. Now it is too early to quantify the magnitude of the impact. The duration of the economic slowdown in our export markets will also be a critical element in our recovery.

Our #1 priority was the safety of our people and our customers while maintaining our business continuity and service quality. To achieve this, we were proactive in taking a number of bold measures. We already had a crisis recovery plan well in place before the pandemic, and we started very early to think about which actions we would take if and when the virus became an issue in Turkey. As an early precaution, we limited business travel and face-to-face meetings. To ensure the health and safety of our people following the first COVID-19 incident in the country, we immediately activated remote working in mid-March. We started providing remote access for medical advice, conducted daily health surveys and also introduced the support line.

As you all know, over the last several years, we have been investing significantly in our technology and people in order to achieve our holistic and integrated digitization vision. And I'm happy and proud to say that in a matter of days, not weeks, Akbank was able to switch to a new operating model. As of today, roughly 90% of our headquarters and central operations people, 80% of corporate and commercial branch employees work from home, full-time and very efficiently. Roughly 80% of our retail branches are open, with reduced hours. And around 50% of retail brand staff work at premises on a rotation basis. We were able to adapt to this new way of remote working seamlessly with full business continuity and without compromising our service quality. This was due to our high level of digitization, technological infrastructure, proactive planning and execution capabilities. And I also have to say that the commitment of our people and the team spirit embedded within our culture have been fundamental as we navigate through this extremely unusual period.

For 72 years, we have been there for our customers and community through many difficult cycles, and this one is no exception. We have been proactively and frequently contacting our customers to understand their needs. Our people working remotely have played a key role in this, supported by advanced analytical tools and technology. We have been extending loans to help businesses and consumers facing difficulties. In order to alleviate customers with cash flow burden, we started to defer installments in March that were due by the end of April to June. As of today, with this installment deferral, we gave support to around 340,000 customers, mostly SMEs and consumers whose total bond balance with the bank is around TRY 14 billion. The total deferred installment so far is close to TRY 3 billion.

We also started to assist businesses through the CGF facility. For the convenience of our customers, we have also provided fee waivers on our digital channels, which also encouraged further migration. We gave how-to assistance to those customers that have been reluctant to use digital banking.

Operational continuity and service quality have been crucial during this period. Our teams have taken numerous measures to ensure a quick but seamless transition to remote working while still servicing our customers through all channels, including branches, ATMs, POS terminals, customer contact center and central operations. This pandemic has fast forwarded our efforts in digitization. It's a unique opportunity to extensively test our vision and what we have been trying to do so far, including digital, meaning physical and digital branch model, remote and digital banking capabilities, resilience of our systems and capabilities of our people. And I'm very happy to say that Akbank has passed this test with flying colors.

I briefly touch upon our economy. We had a very positive start at the beginning of the year. In our base case scenario, we believe the recovery trend in the second half of the year will be able to offset some of the negative impacts of this pandemic. This inflation trend would likely to continue, followed by the rate cuts. And Turkish economy is now more resilient after significant deleveraging over the last few years and current account rebalancing. Low oil prices will certainly help. However, it will take a while for our tourism to recover. Despite the challenges though, we are strong believers in our country's long-term growth potential with our favorable demographics, young population and entrepreneurial spirits. Having said that, we will be going through a challenging period, and everyone will be impacted. However, Akbank remains one of the best-positioned banks in the region to navigate through this difficult period. Our robust capital, solid liquidity, lower leverage, highest levels of efficiency, low operating cost base and, last but not the least, our outstanding talent and technology are all important enablers. I believe our stable and aligned management, prudent stance and our long-term vision have been tremendously instrumental in our position of strength.

On this slide, you can see how the bank has reinforced its capital and liquidity despite the challenges over the last 2 years. We have reduced our wholesale funding to around USD 7 billion, while our sound and stable deposit base remains our main source of funding. During the same period, we optimized our asset composition and reduced our leverage. Despite our low leverage, we have generated sound pre-provision income and set aside significant reserves of almost TRY 13 billion over the last 2 years. And our low operating cost base has contributed to our end results. As you know, we have been extensively leveraging our digital capabilities with our 5.2 million active digital customers. And during this COVID-19 period, our digital banking has flourished even further.

Akbank Mobile has continued to be a very resilient platform. The number of average daily financial transactions through Akbank Mobile from mid-March has increased by 16%. The share of mobile in our financial transactions is up by further 7%. Share of digital and credit card sales and general purpose loans sold skyrocketed to almost 80% of the total. What we have been focusing on for many years is now paying off extremely well.

Ebru will now share our results, after which I'll be more than happy to answer your questions.

--------------------------------------------------------------------------------

Kamile Necat Ebru GÜVENIR, Akbank T.A.S. - SVP of IR & Sustainability [3]

--------------------------------------------------------------------------------

Thank you, Hakan Bey. I'd like to kick things off by going over a number of key highlights of the first quarter. We started the year with solid core operating performance and preserved our best-in-class cost-to-income ratio. Cost of credit remained in line with our guidance, while we maintained significant capital buffers and realized an ROE of 9.6%. This performance was despite muted loan growth, regulatory changes on fees and LYY mark-to-market negative adjustment of TRY 871 million, which was mainly led by TL depreciation.

Also, due to the prevailing uncertainties, we proactively set aside TRY 250 million pre-provisions this quarter. While adjusted for our pre-provisions, our ROE for the quarter was at 11.5%. Our total pre-provisions have now reached TRY 900 million.

On Slide 15, you may find the details of our strong core operating performance. Our first quarter top line grew 33% year-on-year to TRY 5.8 billion. Our first quarter swap-adjusted NII was up by an outstanding 45% year-on-year, reaching TRY 4.5 billion, while our fee income was up by 6% year-on-year, reaching TRY 1.3 billion. Our full year net income was down by 7.5% year-on-year, 2% Q-on-Q at TRY 1.303 billion. As I mentioned in the previous slide, the net income was mainly negatively impacted by the TRY 871 million LYY negative mark-to-market adjustments as well as the TRY 250 million pre-provisions we set aside. However, we continue to generate solid pre-provision income, which was up by almost 18% year-on-year to TRY 4 billion.

Our OpEx was up by 15% Q-on-Q and 22% year-on-year. However, there was a one-off impact from the insurance penalty of 4% and also the STIF premium increase for the sector, which took place in the third quarter of last year, had 2% impact. Adjusted for these, our OpEx was up by around 16% year-on-year.

Also, current remote working conditions have naturally created some cost savings. As a result, we expect OpEx to converge towards our full year guidance of mid-teens in the upcoming quarters. And that being said, our low-cost base continues to give the bank flexibility as our cost-to-income ratio remains best among our peers at 33.8%.

Our total adjusted NIM continued to expand, reaching 4.83%, up by 12 bps Q-on-Q. Our better-than-expected 2019 exit NIM, earlier-than-anticipated rate cuts, which started in January and strategic securities mix all continue to create an upside to our full year NIM guidance. However, please note that although rate cuts may continue in line with this inflation trend, we are already experiencing a gradual decline in NIM, and this gradual decline may continue going forward depending on the competitive environment in the market.

On this page, you may also find the details of our swap costs and CPI linker income. Our swap cost includes short-term and long-term swaps and was around TRY 740 million. Our average short-term and long-term swap utilization amounted to around TRY 30 billion. Currently, nowadays, this figure is down to around TRY 22 billion.

Our CPI linker income for the quarter was at TRY 647 million. For 2020, the portfolio amount for CPI income calculation stands at TRY 23.1 billion, and we are currently using 9% October-to-October inflation expectation.

Our fees were up by 6% year-on-year to TRY 1.3 billion. Our performance was impacted mainly by regulatory changes enacted in November of last year in payment systems. Payment system fees were down by 24% year-on-year and now make up less than 40% of our fees. It used to be around 50% of our fees in 2019. Also, there were regulatory changes in the quarter that negatively impacted money transfer fees. On a positive note, our wealth management business showed an outstanding performance as their fees were up by 93% year-on-year. This was due to accelerated wealth management client acquisition by utilizing all distribution channels with our product innovation and value-added services as well as end-to-end redesign of mobile investment transactions. Another positive contributor was our bancassurance fees, which were up by 24% year-on-year, driven by both lending and also nonlending.

Digital sales continue to be very supportive in this area. Digital premiums to total premiums is up by 12 percentage points year-on-year.

For 2020, we guided for a high single-digit growth in fees. Following the additional regulatory changes that were brought in first quarter and the waiver that we are proving to our customers due to COVID-19 as well as a slowdown in the economic activity, it will be difficult to meet our fee income guidance. Depending on how long the current situation prevails, our year-on-year fee growth could even be negative for the full year.

And now on to our balance sheet. Our total assets were up by 9% year-to-date at TRY 421 billion, while our total net loans were up by 2% to TRY 219 billion. Loans now make up 52% of our assets. FX loans are 39% of our total net loans due to TL depreciation despite the muted demand. TL business banking loans are 39%, while consumer loans, including credit cards, are at 22% of our total net loans. Our securities remained around 21% of our assets. Our optimized and responsible asset allocation, low leverage and robust capital will be a supportive factor in creating sustainable long-term shareholder value.

Our TL loans remained flattish, while foreign currency loans were down by 5% quarter-on-quarter. On the TL side, consumer loan growth almost reached 11%, dominated by 14% growth in GPO. As Hakan Bey mentioned earlier, digital channels play an important role in this area. Around 60% of our GPLs are preapproved and separately, 39% of the salary customers. We believe our investments in advanced analytics will continue to be a supportive factor in retail lending.

We maintain a balanced loan portfolio. It is well diversified, but still in this unprecedented time, the effects will be built across all sectors. I will share some additional details on certain areas, which may be relatively more impacted. Real estate loans are around 8% of our gross loans. Our real estate portfolio is predominantly project finance. 20% of the real estate book remains to be FX cash collateralized. As you may remember, in fourth quarter, we had moved a well classified commercial file to Phase 3. We have also moved a world-class a loan from Stage 1 to Stage 2. By the end of first quarter, real estate loan share in Stage 2 and Stage 3 remained at similar levels versus year-end. Energy generation makes up less than 7% of our total gross loans. Since 2016, 100% of our new loan originations in energy generation have been to renewables. As of today, 77% of our energy generation loans are renewables and 54% are government guarantees.

Retailers make up 5% of our total gross loans. Our retail clients and their sponsors are financially strong and expert in this field. They are national and global players, which benefit from economies of scale. Our supermarket clients are nationwide chains with high business volumes and highly experienced in retail. They are still carrying on their operations via stores and especially home delivery services and preserve their high business volume.

Construction is less than 4% of our gross loans. 67% is in FX and 72% of the FX part is government guarantees on that discussion. This year may be a difficult year for tourism globally. Our tourism loans make up only 3.5% of our total gross loans. As you know, 2016 and '17 were challenging years for tourism industry in Turkey. We at Akbank supported our clients during these difficult days, and eventually, the industry had intended performances in 2018 and 2019. The portfolio consists of well-known brands and in a normal year, our hotel clients group occupancy rates are around 80%, which is quite high. We believe even if international travel is still bantering the high season, domestic tourism activity will help, to some extent, alleviate the negative impact.

Transportation and logistics is around 3% of our total gross loans. Business volume in logistics with natural distribution network has increased as a result of changing shopping habits. As I mentioned earlier, after a significant increase in 2019, the share of our securities book and total assets remained flattish Q-on-Q at 21%. Our total securities book is up by 7% Q-on-Q. 57% is in TL, of which 47% is fixed rate securities. As you can see on the right-hand side of the slide, in a declining interest rate environment, our asset yields, hence NIM, will continue to benefit from our TL securities mix. Our foreign securities, which are down 2% Q-on-Q to $5.8 billion will also be a supportive factor in our NIM progression.

And now on to the funding side. We continue to have a well-diversified and disciplined funding mix. Deposits, our main source of funding make up 64% of our total liabilities. Our total deposits were up by 11% Q-on-Q to TRY 271 billion, while our domestic deposits outpaced its growth and were up significantly by 19% year-on-year. The currency mix has remained stable, 39% in TL and 61% is in FX. Demand deposits are 23% of our total deposits. 73% of our TL deposit base remains to be SME and retail, which is less price-sensitive and secure in nature. Most importantly, our TL LDR has improved significantly by 11 percentage points and now stands at 126%. And our FX liquidity continues to be very strong with an FX LDR of 48%. Therefore, our total LDR has further declined to 84%, significantly below sectors' 104. Our focus remains on broadening our deposit base.

We have a well-established hotel funding profile, which is less than 13% of our total liabilities. Our total wholesale borrowing is now down to around $7 billion, with an average maturity of around 3 years. As we guided, we redeemed our $500 million Eurobond at the beginning of the year. We successfully rolled over $605 million syndicated loan in April with 29 banks from 15 countries in a period marked by volatility and a decrease in access to global liquidity. The amount exceeded our initial target of $500 million to $600 million. And the cost improved by 25 bps in the dollar tranche to LIBOR plus 2 25 and 40 bps in the euro tranche to LIBOR plus 2 compared to our March 2019 syndication deal.

Short-term portion of our redemptions, i.e., up to the next 1 year, amount to $1.7 billion versus our foreign currency liquidity buffer of over $10 billion. Due to our ample FX liquidity and low FX loan demand going forward, we will be opportunistic in our borrowing strategies, depending on pricing.

And now on to asset quality. Our Stage 2 loans declined from TRY 30 billion to TRY 28.4 billion Q-on-Q and from 13.2% of loans to 12.2%. 44% is in FX and provisions are fully hedged with FX loan provision. Our Stage 2 coverage ratio was up to 11.8%. Our restructured loans remained flattish since third quarter of 2019 at TRY 17.6 billion and are followed under Stage 2. Only 10% of Stage 2 are past due 30 days, while 78% are nondelinquent. Our Stage 3 coverage is at 58.8%. As I mentioned earlier, due to the prevailing uncertainties, to build up reserves, we have proactively also set aside TRY 250 million pre-provisions, taking the total to TRY 900 million.

Our NPL ratio remained flattish at 6.7%. There were no NPL sales or write-offs during the quarter. For the quarter as a whole, NPL formation slowed down considerably quarter-on-quarter. As we guided at the beginning of the year, Stage 2 plus Stage 3 share in our total loans started to improve as of first quarter. However, we are yet to see the impact of COVID-19. There have been sector-wide payment holidays and also regulatory forbearances of Stage 2 and safety recognitions extended to 90 and 180 days, respectively, which started towards end of March. Both had almost no impact in -- as of first quarter.

Because of these forbearances, increase in Stage 2 and Stage may 3 not happen until third quarter of this year. Having said that, we will not deviate from IFRS 9. And as we did in the past, we will still book necessary provisions for potentially problematic assets even before classifying them into Stage 2 or Stage 3.

Our cost of credit for the quarter was at 201 bps, in line with our full year guidance of 200. 33 bps was due to currency depreciation. We haven't made changes to our macro assumptions in the model, but revise probabilities of scenarios, which had an impact of around 15 to 20 bps. In second quarter, when we have more clarity on the outlook, we will also assess adjusting our macro assumptions and/or apply overlays. Therefore, there may be an upside to our cost of credit guidance, which is currently too early to quantify.

Also, as I shared earlier, we have booked a negative mark-to-market adjustment of TRY 871 million for LYY, driven mainly by sales depreciation. This figure is almost equal to 2019 full year mark-to-market adjustments. In our 2020 guidance, we expected a higher amount of mark-to-market adjustment for LYY compared to 2019's figure of TRY 940 million. Lira's performance -- Turkish lira's performance will be an important factor for future mark-to-market adjustments. Because of all these prevailing uncertainties is why we actually have booked the TRY 250 million of pre-provisions during the quarter.

Despite lira depreciation, we ended the quarter with 18.8% total capital and 16% Tier 1, excluding the forbearances announced in March and April, obviously. We have an outstanding TRY 20.9 billion excess total capital and TRY 18.2 million excess Tier 1, both according to Basel III minimum requirements. Including the March forbearances regarding mark-to-market losses on securities that were brought before March 23 and fixing foreign currency rate of RWA calculation to last year's year-end, our CAR would have been over 20% and Q1 over 17%. And our excess total capital and Tier 1 would have been at TRY 25.1 billion and TRY 22.1 billion. As you know, there's been new forbearances announced in April. And nowadays, when we take these new considerations, the April forbearances and RWA calculations, it's even higher at 22%, the total capital.

A few highlights on the capital evolution. Internal capital generation continues to be one of the key drivers of our robust insolvency ratios. Operational risk, which had a negative 31 bps negative impact is calculated on a yearly basis, and we had a similar impact on our total capital during first quarter of 2019. As a result, our capital levels remain a source of strength.

To sum up, I have shared with you the figures on this slide throughout the presentation. Due to prevailing uncertainties, we haven't yet revised our guidance but have shared with you our initial thoughts regarding upside and downside for each line. 2020 will no doubt be another challenging year, but we believe we have the necessary ammunition to manage it effectively. Operator, you may now open the lines for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

The first question is from the line of Kemeny Gabor with Autonomous Research.

--------------------------------------------------------------------------------

Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [2]

--------------------------------------------------------------------------------

It's Gabor. First question, on the loan payment holidays. I think you mentioned that TRY 14 billion of debt is under the loan payment holidays. Can I confirm this number and that this is 6% of your loan portfolio? Have you classified any of these exposures as Stage 2 as of the first quarter? And have you set aside any provisions for these exposures? It would also be interesting if you could share some sensitivities you may have done on these loans in the payments holidays, how this might behave after the moratorium?

And my second question would be around the Credit Guarantee Fund. Can you talk a bit about how do we stand on the setup on the utilization of the Credit Guarantee Fund? And how this might impact your growth, your lending appetite and your credit quality?

--------------------------------------------------------------------------------

Türker Tunali, Akbank T.A.S. - CFO [3]

--------------------------------------------------------------------------------

Gabor, this is Türker. Maybe I can answer your first question. First of all, to make it clear, yes, this amount was at around TRY 13 billion to TRY 14 billion, but this is the total unpaid principal balance of these customers. But the amount for which we have given payment holiday was roughly -- was close to TRY 3 billion. So the postponed amount amounted TRY 3 billion. But the impact of -- but the action we have taken by the end of the first quarter was (inaudible). This was less than TRY 1 billion for the total book, so it was very limited. And we haven't changed their classification.

But actually, we have to see how the situation will evolve because, as we also know, from the announcement of ISP and ECB EVA, so just given -- just allowing payments for this does not mean putting those loans into Stage 2. So we'll see how the performance of these customers would evolve in the coming months. So we'll observe cautiously. But we want -- we always want to apply IFRS 9 prudently. Even though because of the excessive grant by the BRSA, even though we don't change the stages, we will be -- we may increase our provisioning for the customers in their existing scales. So maybe in the coming months, we will have more clarity. It's also true for the IFRS 9 models as well, actually.

As Ebru mentioned, by the end of the first quarter, we have shifted the probabilities of macro assumptions to the negative side. But once the things settle down and we have more clarity on the macro outlook towards the end of the second quarter, we will also reassess our assumptions in our IFRS 9 model, and we will also inform you accordingly once picture is a bit more clear.

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [4]

--------------------------------------------------------------------------------

And let me answer the second question related to CGF. I think this time, the CGF has been designed pretty well. So there are actually so much limitations and restrictions, whom we lend. So just to give you an example, there are actually 2 different programs under this CGF program. One is for check guarantees, and the other one is for financing the invoices, rents, salaries and so on. So in other words, banks are, at this time, restricted while they are doing their lending. And the major reason for this is to make sure that this financing goes to the right companies, to the right targets. I think it is very well-designed this time. And because of this, of course, there's a lot of operational prerequisites that the banks have to go through. It's not like in the earlier -- very early CGF programs, the lending was actually pretty fast. So because of the additional procedures in this case, it takes a little while for the banks to achieve the targets.

So what would be the impact of this on our bank? We are participating. And I think this is something useful for the economy and for our portfolio as well. But it goes relatively slowly. So when we reached the finance state, I would imagine we would book something like maybe TRY 1.5 billion to maybe TRY 2 billion. So it's not like something very significant compared to the size of the portfolio.

--------------------------------------------------------------------------------

Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [5]

--------------------------------------------------------------------------------

Understood. And this TRY 1.52 billion would be by when? And the other follow-up question I would have is what GDP growth do you now assume for 2020, roughly?

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [6]

--------------------------------------------------------------------------------

This roughly TRY 1.5 billion to TRY 2 billion, I think it will take a couple of weeks time, I would imagine. So in a month time, maybe a couple of weeks, maybe a little bit shorter. I think that is the number that we would be able to reach, I guess.

--------------------------------------------------------------------------------

Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [7]

--------------------------------------------------------------------------------

So this is just the first limit -- first utilize -- the utilization of the first loan, right?

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [8]

--------------------------------------------------------------------------------

Yes, more or less, yes. So it will take a few weeks. Regarding the growth, Gabor, I think it's a bit difficult because we don't have all the data regarding the health recovery. But the recent numbers are actually, I have to say, very encouraging because the new cases are declining sharply. And also recoveries in the system is now bigger than the new cases. So that is a very good sign. So now people are more optimistic regarding our health issues in the country. So lots of precautions have been taken in the country. And as you probably know, there has been a lot of investment in our health sector in the country over the last several years: the capacity, the number of hospitals, the beds and all that stuff. So I think the country is actually, nowadays, handling this situation relatively well.

So now there is this actually expectation for businesses to come back to life again, let me say, at the beginning of May, reopening and all that. So I think that will be happening starting from the 1st of -- the end of May or the beginning of June. So this is relatively good news. So if -- this is our base case scenario. So if this happens, I think during the second half of the year, we will be able to start growing again and regain some of the losses that will be happening in the -- especially second quarter of this year. So in short, I mean, again, this is a very rough, rough figure. But I think Turkey can go either way, something around 0%. It can be a plus number as well or a slightly negative number. So this is our base case scenario for this year. We can be more clear when things are more solid in terms of when we go back to real life, businesses start again, SMES, they're opening their shops and so on.

--------------------------------------------------------------------------------

Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [9]

--------------------------------------------------------------------------------

That's helpful. And finally, let's say, at the end of the second quarter, you would assume a negative GDP growth, let's say, 3%, for example, that would then mean that you would set aside further provisions on the back of that. Is that right?

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [10]

--------------------------------------------------------------------------------

So first quarter will be a growth. Second quarter, yes, it will be a negative number. So it depends when we have more clarity. As you know, we are a very cautious institution, cautious management. So this is the reason, actually, where we had this TRY 250 million provisioning. And there is actually no evidence for additional cost of credit and so on. But just to be precautious, we put that TRY 250 million aside. So I think this approach, we will continue to have.

So starting from the second quarter, third quarter, depending on the development, yes, we will be provisioning. So it doesn't -- I think Ebru explained that very well. So it doesn't really have to be under Stage 2, Stage 3 because, as you know, there are some regulation changes in the country, but we will continue to look at our portfolio. And when we feel that we need to reserve some provision more, we will certainly do that. And we have the capability, as you know.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Mehmet Sevim, JP Morgan Chase & Co, Research Division - Associate [12]

--------------------------------------------------------------------------------

My first question will be on loan volumes, please, and specifically on TL loans. As the growth figures continue to look quite subdued compared to the sector trends, especially in the corporate segment. From a strategic perspective, what was the driver behind your decision to let go some further market share this quarter, especially in the quite supportive environment, I would assume, as well as your very comfortable capital ratios? And how do you see the trends evolve in the remainder of the year, not only in terms of the general loan growth trends, but also in terms of your appetite to lend?

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [13]

--------------------------------------------------------------------------------

I think we have to go further into details regarding the loan growth. Akbank actually has gained market share, especially like -- more like on the retail side, smaller loans. I think that the bank did a very good job.

So the reason why we had a relatively stable growth in the first quarter was basically coming from the corporate area where with the declining interest rates in the country, actually, there was a lot of competition, especially in big loans. And these were like really short term, all night lending. These are like blue-chip companies in the country. For us, at that time, it didn't really make too much sense for us to lower our rates and keep those balances, so this is basically the major reason behind this. Otherwise, the growth appetite of the bank, utilizing our excess capital, so we were still sticking to what we have said at the beginning of the year. And these loans are relatively easy for us to actually gain back. But on the retail side, mass, it's a bit more and more difficult job. And when you see like GPS and so on, Akbank did a very good job, actually. So it's not a huge issue for the banks to recover some of these big corporate loans.

And I think I missed your second question though. So did I answer...

--------------------------------------------------------------------------------

Mehmet Sevim, JP Morgan Chase & Co, Research Division - Associate [14]

--------------------------------------------------------------------------------

Yes, that was very useful, Hakan Bey. My second question, which is similar, is do you see any impact on the shape of the balance sheet overall with the recent introduction of the BRSA's new asset ratio. So would this have any impact operationally going forward?

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [15]

--------------------------------------------------------------------------------

It's a very good question. Thank you very much for asking this question. And it's a very important regulation change. But having said this, still, there are some gray areas. So if you ask me as of today, is there a gap for Akbank, I'm not unfortunately in a situation to give you the exact answer because we had some question marks regarding some of these gray areas. And we are looking forward to have some announcements nowadays.

But what are the main functions of banks? I mean we are like intermediaries, and we are collecting deposits and we do lending. So this is our focus. So this actually asset ratio forces banks to use the liquidity, the funding that they have. So this is the idea. And this is also what we would like to do as a bank. So if you look at our -- actually, our guidance for 2020, I mean, we were quite aggressive in our estimations in our targets and so on. But what I can say though, sustainability is very critical. So therefore, I mean, I can assure you that we will -- once there is clarity on the calculations. We will, of course, look at our assets and liabilities, optimize our balance sheet. But what I can assure you though, we will do that in a sustainable manner, which is something that which our bank has been doing for many, many years anyhow. So that is all I can say at this stage. But I don't think that Akbank is too different, that the ratio is really too different from the rest of the private banking sector.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

The next question comes from the line of Gasimli Deniz with Goldman Sachs.

--------------------------------------------------------------------------------

Deniz Gasimli, Goldman Sachs Group Inc., Research Division - Associate [17]

--------------------------------------------------------------------------------

. I just had 2 questions from my side. One is the follow-up on the previous question on the asset ratio. I understand that it's still, I guess, work in progress, trying to determine what all means and how the conclusion works. But just wanted your thoughts, I guess, thoughts on the way the ratio is constructed in the denominated deposits, foreign currency deposits. And basically, when you gather those deposits, you have to meet this ratio probably have to lend the moderate securities or use swaps and then blend the deposits out. Do you think that this will (inaudible) Akbank for other banks -- do you think this would result in banks utilizing nondeposit funding? Do you foresee this resulting in banks increasing their debt rollover, increasing their wholesale funding relies and perhaps paying off for nondeposit funding? That will be my first question.

The second question is related to perhaps somewhat. Obviously, central banks continue to cut rates. And right now, the marginal deposit rate in the system is above the benchmark rate. So do you see downside for deposit rates? Do you see that deposit rates can come down given that the cutting cycles are still going on? Or do you think that given the situation in our -- we're in maybe a more cautious approach as well as CGF-driven lending in the system? Do you see that there might be pressure for deposits to remain at current levels or maybe even to increase possibly?

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [18]

--------------------------------------------------------------------------------

Yes, Deniz, thank you very much for the question. So it's a bit difficult to answer your first question. So you asked about the denominator. So first of all, I think that the banks have to actually see the gaps. But I don't think that there will be major, major shifts, to be frank with you, from what we have as of today. So as you know, we all have certain structures in our actually financial statements. So therefore, I don't think that there will be big, big shifts in either direction. So I think this will be something manageable for a majority of us. But to answer this question completely, I think we have to know the details.

Regarding the deposit rates, one thing this asset ratio contributed significantly to the banking system is -- it started almost on day 1 on the cost of funding side. So since FX -- actually, deposit taking became so expensive, all of a sudden, FX deposit rates, interest rates in the country, came down from almost 2.5 -- almost 2.5 percentage points down to below 1% nowadays. So from the margin expansion point of view, I think this is a very positive trend. So that happened immediately on the FX side. TL side, the movement is relatively slow because, as you know, when you look at the loan-to-deposit ratio in the system, there is a difference between local currency and FX. So therefore, there is a declining actually interest rate environment also on the local currency. But what we have been experiencing on the FX was actually deeper, steeper compared to TL, but TL is also coming down. So that is also good news for the country and for the banking system.

--------------------------------------------------------------------------------

Kamile Necat Ebru GÜVENIR, Akbank T.A.S. - SVP of IR & Sustainability [19]

--------------------------------------------------------------------------------

Okay. I guess there are no further questions, but we have some questions online. So maybe we can continue with those. One of them is, are you seeing any changes in your business model post-COVID situation? Hakan Bey?

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [20]

--------------------------------------------------------------------------------

Thank you very much for asking this question. I like this question very much. As you know, the strongest part of our management is actually -- is only transformation upfront. And I think I have a great team doing this in the bank. So as I was trying to tell in my part, Akbank adapted to this new very unusual period very quickly because what we have been actually trying to do over the last years was almost like preparing the bank with something like this. So that was the vision of the management.

So when I see my people actually, now, as I said, we have like 12,000 people in the bank, and more than 9,000 people are working from home. And what I can assure you, they are all productive because they have all the technological tools. They have all the analytical capabilities. They are all supported by our machine learning algorithms and so on. So I think it was a great test for us. So looking forward, now, we are spending lot of time actually -- me, personally, I'm spending almost 1/3 of my time how we can accelerate our vision, our digitization efforts. Because what this corona '19 has proved us was the actually -- the effectiveness of our model. So that actually encourages us even further. So therefore, if we can work from home, in certain cases, more productively, so why don't we continue with this? I cannot tell this for the whole bank. But for a certain portion of the bank, yes, it can be done. So these are some of the things that actually, we are evaluating in the institution. So there are lots of initiatives currently. So I just touched upon the numbers and so on. But what I can assure you that there is a bunch of people, my colleagues, myself, concentrating on our future. So I think -- and it is very sad, actually, to be frank with you, what we have been experiencing on the health front, on the humanity front. I'm really very sorry for all the people, patients. But on the other side, it's created some, actually, test environment for future models. And yes, I mean, in short, the answer is yes. I don't think that we will go back to 100% normal. I'm sure that there will be some permanent impact of this virus on business models, not only in our bank, but globally. And I'm also very happy to say that our clients, be it corporate, commercial, SME, consumer, whatever, adapted to the new way of banking very easily. We already had around 90%, 95% of our transactions taking place outside the branch environment anyhow. So on top of this, there was a further migration. So I'm personally very happy to see that.

--------------------------------------------------------------------------------

Kamile Necat Ebru GÜVENIR, Akbank T.A.S. - SVP of IR & Sustainability [21]

--------------------------------------------------------------------------------

Thank you, Hakam. Gail, I think there are a few more questions coming online. So I give it back to you.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

The next question is from Nellis Simon with Citibank.

--------------------------------------------------------------------------------

Simon Nellis, Citigroup Inc, Research Division - MD [23]

--------------------------------------------------------------------------------

My question would just be back on the payment holidays. I was just wondering if you will see an NPV hit from the holidays. Or are you capitalizing interest? I assume you're accruing interest, but I'm wondering if you capitalize interest?

And then my second question would just be if you could comment on the risk that a lot of the restructured loans in the Stage 2 classification might -- what's the risk that they migrate to Stage 3, where do you see the vulnerabilities there? Because I guess the -- we were all expecting that this year would be a decent year for growth. Those exposures would probably just stay in Stage 2 or even migrate back to Stage 1 at some point. But I guess the risk is now that they've been moved to Stage 3.

--------------------------------------------------------------------------------

Türker Tunali, Akbank T.A.S. - CFO [24]

--------------------------------------------------------------------------------

Simon, this is Türker. Actually, since we are calculating interest income with the existing rates on the amounts, which have been postponed actually from an NPV perspective, there won't be any gap, with regard to your first question.

As with regard to your second question, actually, this year -- at the beginning of this year, we were expecting an improvement -- an evening in Stage 2 to Stage 3 migration. This was our initial guidance at the beginning of the year. And -- but the current situation may change this picture, which is unfortunately, it's too early to comment on it. So all the companies will be impacted. But it's also important that our -- the balance of our restructured loans has stabilized since the third quarter of last year. So it is at similar levels. And the 108 days rules may also postpone the Stage 2, Stage 3 migration, not only for the restructured loans, but for all of the Stage 2 loans. But what we want to do -- but we want to stay prudent, and so we will increase our provisioning levels for overdue loans more than 90 days going forward. But there wasn't any impact in the first quarter. But in the second quarter, we'll see how it will evolve.

--------------------------------------------------------------------------------

Simon Nellis, Citigroup Inc, Research Division - MD [25]

--------------------------------------------------------------------------------

Okay. And just maybe a follow-up question on the -- I think you mentioned that you moved your probabilities of your macro scenarios to towards the higher weighting on the negative scenario, but you haven't changed your macro models. What was the actual impact from just moving the probabilities in the first quarter?

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [26]

--------------------------------------------------------------------------------

We had also mentioned during the presentation, it was roughly 15 to 20 basis points. The initial response to COVID-19, so we have to see how things will settle, how the macro outlook will be towards the end of the second quarter. And at that time, we will again reassess our models and we'll make necessary adjustments.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

The next question is from the line of Soroka Oleksiy with ING Bank.

--------------------------------------------------------------------------------

Soroka Oleksiy, [28]

--------------------------------------------------------------------------------

This is Oleksiy Soroka from ING Bank in London. Some of our questions have been answered, but a couple of housekeeping ones, if I may. First of all, do you see any impact from this asset ratio that is presumably coming into effect from the beginning of May? Are you affected in any way? Or are you already in compliance?

And just to clarify, in terms of the full year guidance, if I understood you correctly, you're not touching it for the moment, and you will update it as things go -- at some point maybe after Q2?

And thirdly, just refreshing, from what you can see right now because, you just mentioned 15, 20 basis points. I didn't catch whether it was relating to? Any quantifiable impact from the current environment from COVID? If you could refresh it. Apologies if I missed it.

--------------------------------------------------------------------------------

Türker Tunali, Akbank T.A.S. - CFO [29]

--------------------------------------------------------------------------------

This is Türker. Actually, Hakan Bey gave comments on the asset ratio. For the time being, actually, there are some question marks on the details of the calculation, which the banks are waiting on. Once these are clarified by the regulator, we'll see where we are standing. And as always, as in the past, we will take necessary actions both on asset side as well on the funding side. But first of all, we have to see how the calculation in detail looks like because there are many question marks by the banks. So we are waiting for clarification. So we'll see -- we will have a more clear picture after that. And with regard to our full year guidance, in the -- because of the uncertainties, actually, we really don't know how the second -- especially second half of the year will look like in terms of growth, in terms of asset quality evolution. We may consider revising our guidance by the end of the second quarter. But for the time being, as we have shared in our presentation, there are some downside risks on the profitable side as well on the growth side. But we have to wait for a little while to have more clarity.

With regard to your cost of capital -- cost of credit question, actually, end of first quarter, it was really too early to assess the full impact of COVID. So as a first response, we have played around with our -- with the probabilities of our macro assumptions. So the impact on the cost of credit was roughly 15 to 20 basis points. But as I had mentioned previously, towards the end of second quarter, once things settle down and we are more -- we have a more clear picture on the macro outlook, we will consider revising the assumptions in the models as well. But what we can say is, for the time being, as you can see also globally, there is an upside risk to our initial guidance of cost of credit of 200 basis points and NPL ratio of 6%. That's what I can say for the time being.

--------------------------------------------------------------------------------

Soroka Oleksiy, [30]

--------------------------------------------------------------------------------

Okay. And what's your latest full year GDP expectation if you changed it?

--------------------------------------------------------------------------------

Kamile Necat Ebru GÜVENIR, Akbank T.A.S. - SVP of IR & Sustainability [31]

--------------------------------------------------------------------------------

Actually, as we discussed earlier, it's too early to make an assumption for the full year. Our CEO mentioned, just to repeat, basically, we have to do it during second quarter. This is why we are not able to also revise our cost of credit guidance and other guidances as well because GDP is the main, I would say, input in terms of the cost of credit modeling.

If there are no more core, I'll just ask a few questions from the web, basically. There is a question asking, will you be looking to funding the Eurobond market this year, basically not at these spreads, but it's -- obviously, if the spreads come down, maybe but not at the current levels.

Are you planning to buy back bonds? There are no current decisions made on this issue right now.

What is the current total outstanding loan volume under CGF?

Türker, maybe you'd like to comment on the CGF?

--------------------------------------------------------------------------------

Türker Tunali, Akbank T.A.S. - CFO [32]

--------------------------------------------------------------------------------

Yes. By the end of the third quarter, it was roughly at TRY 7 billion, with a market share less than 6% and with the duration of -- remaining duration of 7 months.

Do you expect to call your Q2 bonds in 2020?

We have no changes in our plans as of yet, so there's no change on the plans. It's still (inaudible). And as you know, the final approval has to go through the BRSA.

There are many other questions on the web. We will, as IR get back to you one by one. And we thank you for your participation. And for closing remarks. I would like to hand the floor to our CEO, Hakan Binbasgil.

--------------------------------------------------------------------------------

Sabri Hakan Binbasgil, Akbank T.A.S. - CEO, Director & Member of International Advisory Board [33]

--------------------------------------------------------------------------------

Thank you, everyone. Just to wrap up, I would like to underline that no matter how challenging and unprecedented this period might be, we will get through with strength and together with all our stakeholders. Akbank is no doubt one of the best-positioned banks in this environment. And our years of investments in technology, advanced analytics and our people will help us successfully navigate these challenging waters. And as things get back to a new normal, I think we will have a significant competitive advantage. And this unique experience has taught us actually crucial lessons. Digitization has been tremendously fast forwarded in both transforming customer behavior and the way we operate. And as I answered in one of those questions, even now during this very unusual period, we are still working nonstop in our future banking models. So at least on that front, it is business as usual for Akbank. So I'm happy to say that, day by day, as we see things progress, we will continue to take necessary measures, update our people, clients and shareholders as transparently as possible. But as we have been discussing throughout the whole session, there is still a lot of uncertainty. But however, having been through many cycles, I have full faith in our people's capacity, and I would like to actually thank them all for their executional efforts in helping our customers and supporting each other during these very difficult unprecedented times. And I hope we get to meet face-to-face again in the coming months.

Thank you for joining us today. Have a great evening. Keep well and stay safe. Bye-bye now.