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Edited Transcript of ISCTR.IS earnings conference call or presentation 8-Aug-19 3:45pm GMT

Q2 2019 Turkiye Is Bankasi AS Earnings Call

Levent/Istanbul Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Turkiye Is Bankasi AS earnings conference call or presentation Thursday, August 8, 2019 at 3:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gamze Yalcin

Türkiye Is Bankasi A.S. - Deputy CEO & Member of Executive Board

* Senar Akkus

Türkiye Is Bankasi A.S. - Deputy CEO & Member of Executive Board

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Conference Call Participants

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* Ovunc Gursoy

BNP Paribas, Research Division - Research Analyst

* Samuel Magnum Goodacre

JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Isbank First Half 2019 Financial Results Conference Call and Webcast.

I will now hand you over to Ms. Senar Akkus, CFO. Ma'am, please go ahead.

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Senar Akkus, Türkiye Is Bankasi A.S. - Deputy CEO & Member of Executive Board [2]

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Good evening, ladies and gentlemen, this is Senar Akkus speaking. Welcome to our conference call. Gamze Hanim, Deputy CEO, in charge of Investor Relations; and Süleyman Bey, the Head of Investor Relations are with me tonight. I'll start with recent developments and also period highlights for Isbank, and then I will leave the floor to Gamze for the details of bank's performance.

In the overall global economy look, further momentum in the second quarter of 2019, ongoing opportunities regarding the protectionist trade measures and Brexit dominated the agenda. The negative impact of these uncertainties on risk perception was offset by the low shift in leading central banks' monetary policy. In Turkey, the fall in domestic demand continues, albeit at a slower pace, while fiscal policy remains supportive of growth. During this period, annual CPI inflation decelerated as CBRT maintained its cautious monetary policy and exchange rates followed a relatively stable path. Indeed, risk sentiment towards Turkey started to improve in June as relation with the U.S. presented a relatively more harmonious picture. In the coming periods, we expect a moderate recovery in the economic activities, net exports and other foreign currency-generating sectors as there is low base effect arising from second half of 2018, and the expected positive impact of central bank rate cut on domestic demand will drive this recovery.

After this brief outlook, if we move on to Page 3, we have the main highlights for the period. In Isbank, we maintained our strong fee income performance in quarter 2. Market conditions and temporary additional tightenings in the second quarter led to a pressure on adjusted NIM, however, there is no change in our year-end expectations. The level of NPL formation is in line with our expectations. OpEx growth in the first half on a year-on-year basis is below the CPI inflation. We have seen a pickup in TL deposits at the end of the quarter versus a flat level of FX deposits. Isbank has the highest market share in zero-cost demand deposits, which make up 27% of total deposits. Meanwhile, strong FX liquidity and contraction in FX loans provided flexibility in the management of FX borrowings. And the capital adequacy ratio of the bank increased to 17% by the end of the second quarter.

As you know, we are expecting a better operating environment in the second half of the year thanks to a gradual recovery in economic activities, declining inflation and lower interest rates. We have already started to see indicators of this improvement.

At this point, I'll leave the floor to Gamze for the details of the bank's performance.

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Gamze Yalcin, Türkiye Is Bankasi A.S. - Deputy CEO & Member of Executive Board [3]

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Thank you, Senar. Welcome, all. Page 4 shows the major P&L items as well as profitability and efficiency indicators. Increase in Turkey's risk premium during the second quarter due to rising geopolitical tensions and deepening concerns about macroeconomic outlook paved the way to more tightened funding conditions as a temporary reaction. During this period, while we continued with our Turkish lira lending activities to real sector companies, we strongly focused on optimization of our funding composition with a cost-sensitive perspective. As a result of increasing volume of FX swap transactions and shifting funding costs, we incurred higher swap costs compared to the first quarter, which led to a Q-on-Q decline in swap adjusted net interest income.

On the other hand, we sustained our stellar performance in fee business. There was a quarterly increase of 8.5%, and the year-on-year growth was about 30%. We continue to outperform our annual fee growth guidance. Please note that we released TRY 375 million of free provisions under other operating income, and reversed free provisions that we set aside last quarter, which were amounting to TRY 130 million. As a result, our free provision amount stands at TRY 825 million by the end of the second quarter.

Similar to the previous quarter, we maintained a below CPI year-on-year OpEx increase. Contribution from equity participations was higher than the first quarter, amounting to TRY 682 million. As for the profitability and efficiency ratios, we were expecting that the first half of the year would be worse than the second half, and we retained our year-end target for those metrics, which we shared with you in the beginning of this year.

On Page 5, we have the main balance sheet items. In Q2, we observed a slight increase in TL loans. We expect loan growth to accelerate in the coming part of the year as the operating environment improves and the interest rates go down. Securities portfolio was another item that contributed to the interest-earning assets growth in the period, and the increase mainly came from the FRNs and CPI increase. The quarterly income from CPI increase was TRY 1,178 million versus TRY 1,098 million in the previous quarter.

On the liabilities side, FX deposits were flat, but there was a slight pickup in TL deposits. Thanks to our robust FX liquidity, we declined our FX loan deposits funding during the quarter, in line with our opportunistic and cost-sensitive approach. Share of demand deposits reached 27.3% by the end of the quarter. They continue to further support our low cost of funding with this remarkable level.

On the next page, we have the NIM and spread evolution. Due to tightened market conditions with increasing volume of FX swap transactions, we observed an increase in our swap costs that created the pressure in our swap adjusted NIM. At Isbank, since we have already started to see the benefits of interest rate cost expectations through declining cost of local currency deposits and swap rates in line with downward trend in inflation, we believe that we will close the year with a NIM level in line with our guidance. On the other hand, we achieved a higher core spread, both in Turkish lira and FX in the second quarter as cost of deposits declined. And we expect this trend to continue in the rest of the year, supported by the lower interest rates and a better operating environment.

On the next page, we have the fee income performance. We have achieved a strong growth performance in the second quarter as well. The year-on-year increase in net fees and commissions income was higher than 30% in the period. Payment systems and noncash loans were the items that made the highest contributions to the year-on-year fee income generation. For the first half, we are highly above about our full year fee income growth guidance of about 20%.

We have the asset quality indicators on Page 9. NPL formation trends were in line with our expectations, and our NPL ratio stood at 5.8%, whereas share of Stage II was 14.3%. Net cost of risk stood at 224 bps for the first half of the year. However, we expect this figure to improve and approach our guidance of 150 bps in the second half, in line with the recovery in the economic activity.

Next page shows the capitalization levels. By the end of the first half (inaudible) our capital adequacy ratio reached 16.9%, indicating a robust and comfortable level. Although the negative impact of the currency continued, profit generation, weak loan demand, mark-to-market gains in securities and sub-debt issuance made explicit contribution to the ratio.

This concludes our presentation. Thank you for attending to the conference. And now we can take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Sam Goodacre, JPMorgan.

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Samuel Magnum Goodacre, JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [2]

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I wanted to follow up on the last point that you made related to the asset quality trends. And in particular, the fact that you are in the first half above your guidance for the full year, but you have said you would expect it to improve towards the 150 basis points guidance in the second half. Does that, indeed, mean that -- or do you mean to say that, on an annualized annual basis, we will indeed have a risk cost higher than what you were guiding, but it should trend down towards that level by year-end? That was the first question.

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Senar Akkus, Türkiye Is Bankasi A.S. - Deputy CEO & Member of Executive Board [3]

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At the beginning of the year, we had shared that the net cost of risk guidance of the bank was 150 basis points. In the first half of the year, [we had realized at] 224 in average. In the -- for the second half of the year, we have a more optimistic expectations about the net cost of risk. Behind that, there are some, of course, assumptions about the economy and about the credit portfolio of the bank. In the second half of the year, as you know, we are expecting a recovery, a mild recovery. And with the effect of the downward trend in interest rates, we can see a recovery in loan demand as well. And of course, it will affect the denominator of the FX quality ratio.

Meanwhile, the flows to Stage III loans will continue in line with our expectations for the year. However, we do not expect a provisioning burden, which is similar to the first half of the year, since the potential loans are already flowing in at high levels into Stage II. And we don't expect big-ticket loans to be transferred to second stage and there can be some big tickets again for Stage III loans.

Also, as you know, we made a high level of restructuring with 1 and 2 years' grace periods. And now we are at a point to take the repayment on these loans. And we have good signs coming from these areas, and therefore, we can also experience some transitions from Stage II into Stage I in 1 or 2 big-ticket loans. Under these assumptions and expectations, we expect the second half net cost of risk particularly lower than the first half. And in average, we keep our expectation of 150 basis points average for the year 2019. Of course, that can be from outside risk. I mean the average net cost of this can be higher than 150 bps. But in order to realize it, we want to wait 1 or 2 months. And if we need any revision, we are planning to do in September, after seeing the effects of the downward trend in interest rates and also the repayments on restructured loans. If we see it necessary, we will do it in September without waiting for announcing the September results.

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Samuel Magnum Goodacre, JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [4]

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Okay. The second question I had was related to your franchise in demand deposits, and specifically related to the initiatives you are implementing, which is allowing you to both increase the share of demand deposits in your own mix, but also take market share in demand deposits. So you have higher year-to-date growth in demand deposits relative to your total deposit base and you are taking share. So can you talk to us about some of the ways you are capturing that higher share of demand deposits?

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Senar Akkus, Türkiye Is Bankasi A.S. - Deputy CEO & Member of Executive Board [5]

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For the non-deposits, we are always benefiting from our large branch network and customer base. And in times of uncertainties and in times of challenging developments, there is always flight to quality and we experience an inflow to the bank under these conditions. And therefore, of course, we always prefer to increase the share of demand deposits, but under these challenging conditions, it is a natural flow of the bank, what we observe.

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Operator [6]

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(Operator Instructions) Our next question comes from Ovunc Gursoy, TEB Investment.

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Ovunc Gursoy, BNP Paribas, Research Division - Research Analyst [7]

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I have a couple of questions. The first one is about the -- I see a tax reversal. Could you give some color on that? And how do you see the interest rate environment going forward in terms of spread and margin evolution?

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Senar Akkus, Türkiye Is Bankasi A.S. - Deputy CEO & Member of Executive Board [8]

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For tax provisions, what I can say is that it is related with the composition of the income. If you look at the income before tax, it is at TRY 843 million. And we have income from subsidiary at a level of TRY 689 million. And also we had a reversal of TRY 505 million free provisions compared to first quarter. And that is -- the 2 items do not have any tax effect. I mean they don't constitute any tax pay. In other words, for tax purposes, we can say that we are not producing income and we are at a negative level for tax purposes. [Some of this] income is exempt from tax provisions. And also, as I said, the reversal of TRY 505 million does not constitute any tax burden. That is why is we are -- we had a negative tax provision in the second quarter.

As to interest rate environment, what I can share is that, of course, we will share -- we will experience a decrease in deposit costs as well as in loan yields. I think [if we -- it's been halfway] for some time into the assumption of the loan demand. The deposit costs are also determined mostly depending on the loan demand. If you remember that in the first quarter of the year, the most competitive deposit prices for Turkish lira deposits were lower than money market rates, and we had used more Turkish lira deposits in the funding of the balance sheet. But it was a period of low loan demand. If you see a recovery in the loan demand starting from August or September, we have to see where the deposit costs will be balanced.

Therefore, for Isbank, I can say that we expect an expansion in the third quarter with the effect of decrease in interest rates. The extent can differ with different funding composition, therefore, I do not want to mention the third quarter or fourth quarter on a quarterly basis. Under different scenarios, what we can calculate is that in the second half of the year, our net interest margins can reach to 3.5% at least, and it will bring us to the rate that we had shared at the beginning of the year with you, which is 3.3% to 3.5%. That can be counted as additions between the quarters. That is why I don't want to mention the third quarter or fourth quarter separately. It will depend on the funding composition. It will depend on the loan demand level. And also, of course, it will depend on the magnitude of the central bank rate cut.

At the beginning of the year, again, we have shared that we were expecting a downward trend in interest rate, especially in the second half of the year. We're saying that we were expecting CBRT rates to go back to June-ish level in 2018. But now an important thing has come to the market. This is related with the [low-level investment]. Again, while saying this, while assuming this, we were expecting the Fed to continue its rate hikes at a slow pace in the second half of the year. But at this point, as you know, Fed decreased the rate as this will support the flows to emerging markets and Turkey. Therefore, central bank can find more room to capital raise, and we can see a lower level than 17% level, maybe reaching to the surplus levels of 2018. But as I said, we keep our expectation that the year-end levels will be around June 2018 levels.

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Ovunc Gursoy, BNP Paribas, Research Division - Research Analyst [9]

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Just one follow-up question about the provisioning. What is the amount of free provisions at the moment? As you reverse TRY 375 million this quarter, what is left?

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Senar Akkus, Türkiye Is Bankasi A.S. - Deputy CEO & Member of Executive Board [10]

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It is TRY 825 million. Again, as you might remember, this was the level we had at the September 2017, before TFRS 9 provisions. As of year-end 2017, we had released some provisions from loan side, and [it stands] to free provisions and we had reached to TRY 1.55 billion levels. Now depending on the development in the asset quality and depending on the results of our TFRS 9 model, [you see] -- sometimes add 2 or 3 provisions again. But [sitting], we are above the level which we had at -- in the September 2017. The remaining balance is TRY 825 million, as I said.

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Operator [11]

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(Operator Instructions) We have no further questions. Dear speakers, back to you for the conclusion.

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Senar Akkus, Türkiye Is Bankasi A.S. - Deputy CEO & Member of Executive Board [12]

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Okay. Thank you very much for your participation and contribution to our presentation. We are looking forward to seeing you in our September results conference call. Thank you very much for your interest. Thank you.

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Operator [13]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.