U.S. Markets closed

Edited Transcript of VAKBN.IS earnings conference call or presentation 9-Aug-19 3:30pm GMT

Q2 2019 Turkiye Vakiflar Bankasi TAO Earnings Call

Istanbul Sep 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Turkiye Vakiflar Bankasi TAO earnings conference call or presentation Friday, August 9, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Ali Tahan

Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Manager of International Banking & IR

* Mustafa Turan

Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR

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

Conference Call Participants

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

* Alan Ramsey Webborn

Societe Generale Cross Asset Research - Equity Analyst

* Ali Dhaloomal

BofA Merrill Lynch, Research Division - Emerging Markets Corporate Credit Analyst

* Ovunc Gursoy

BNP Paribas, Research Division - Research Analyst

* Yulia Di Mambro

Federated Investors, Inc. - Senior Investment Analyst

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

Presentation

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

Operator [1]

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

Ladies and gentlemen, welcome to VakifBank Audio Webcast Second Quarter 2019 Earnings Call and Webcast.

I'll now hand over to -- the call to Mr. Mustafa Turan, Senior Vice President, Head of International Banking and Investor Relations. Sir, please go ahead.

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [2]

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

Good afternoon, ladies and gentlemen. Welcome to VakifBank 2019 First Half Earnings Investment Conference Call. I have Ali Tahan, Head of Investor Relations and Investor Relations team, with me as usual. We will be starting with the highlights of the quarter. Ali will continue with the details and, of course, we will be welcoming your questions later as always.

VakifBank has TRY 367.6 million net earnings for unconsolidated numbers for the second quarter, bringing us first half net earnings of TRY 1.0188 billion (sic) [TRY 1,018.8 million]. Today, we are also announcing consolidated numbers. Going forward, that's the plan to start announcing both consolidated and unconsolidated figures together. Quarterly earnings are 46% higher for the consolidated numbers at TRY 535 million, and the first half consolidated earnings are 31% higher than bank-only figures with TRY 1.331 billion. As you see, subsidiaries are supporting substantially better going forward versus previous years, in line with the strategy.

We have [TRY 2.3 billion] preprovisioning operating profit for the first half of 2019 despite challenging environment, especially half of the first 2 quarters because of election cycle, et cetera. However, VakifBank didn't touch TRY 917 million free provisioning coming from 2018, which will be used for future quarters to smooth out earnings.

Another important part of the first half figures is we have pretty healthy asset quality numbers and strong coverage ratios maintained. Total NPL coverage ratio came above 100% -- with 101.1% and Stage III coverage ratio remained rock solid at 75%, which is more than 10% higher than the sector averages of 67.6% NPL coverage.

When we look at the balance sheet, we have a muted quarterly lending growth. Turkish loans are flattish, just up by 0.2%. Hard currency loans are up by a modest 1.7% Q-on-Q in dollar terms, almost entirely resulting from scheduled disbursements under project loans secured couple of years ago.

We have slightly a higher retail loan growth with 1.8% quarterly. And entire business loan segments: SME, corporate, commercial grew only 1.4%. These very modest growth numbers are in line with our budgets and expectations towards June.

On the other end -- on the other hand, the bank kept gaining grant in its already solid deposit franchise. We have sizable growth numbers in deposits in almost every segment. Total deposits are up by 8.2%. Turkish deposits are up by 7.4%. I want to take your attention on this number because, as you know, there is a sizable dollarization towards July end. And despite dollarization, VakifBank managed to grow its Turkish deposits substantially higher than the sector averages.

Retail deposits are up by 7.9%, and we are happy to say that CPI linkers embedded deposits, which is a new product, reached TRY 10 billion threshold. It shows the distribution capacity of the bank. In such a short time, we have meaningful numbers.

VakifBank chart increasing its already really high liquidity ratios, liquidity loans. Total LCR of the bank increased to 142% from 118% end of March. Hard currency side is extremely liquid. As of now, hard currency LCR ratio is 562%. I'm doing this for over 11 years. This is, by far, the highest LCR in hard currency, I remember.

Total loan-to-deposit ratio of the bank decreased substantially in just the quarter from 124% to 116.7%. And Turkish lira side improvement is even bigger, 10 percentage points from 146% to 136%, showing the deposit franchise of the bank.

As I mentioned, despite challenging environment in the second quarter, we had elections and other reasons for Istanbul and some volatility during the second quarter, but asset quality came slightly better than our budget and guidance. NPL ratio materialized at 4.74%, just a small inch up from 4.65% level of December '18. We are substantially better than year-end guidance of 6% in NPL ratio, and happy to announce that our base case now gives us a meaningfully below 6% NPL ratio for year-end 2019.

Net cost of risk is at 151 basis points, significantly lower than our guidance as well, and we remained our strong coverage at 75% threshold.

Before leaving the floor to Ali for the details of the quarter, I'm extremely happy and proud to announce that the fee generation came 3x better than our aggressive guidance. We have 92% annual fee growth, and fee revenues are all-time high at 32%. This occurred despite muted lending growth of the quarter. This is a clear exhibition that VakifBank is reaping the fruits of its local weighted transition towards a better fee-generating bank, and I'm personally extremely happy to announce those strong fee figures.

And now I want to leave the floor to Ali for the details of the quarter.

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

Ali Tahan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Manager of International Banking & IR [3]

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

Thank you, Mustafa Bey. Good afternoon, everybody.

I would like to keep the presentation part even shorter than usual, given the fact that this is Friday afternoon, and we are at the eve of [Eid break].

And as always, I will start with Page 5 on the presentation starting with the revenue side.

Revenue generation capacity of VakifBank continue to be strong with almost 18% year-on-year increase, and total revenues reached to almost TRY 8.3 billion. And more importantly, within the breakdown of total revenues, high-quality core banking revenues which are coming from the sum of net interest income and net fee and commission income increased further 19% year-on-year and reaching to almost TRY 7 billion, which makes almost 84% of total revenue base.

On Page 6, you can see the details of net interest margin, spreads and swap usage. Starting with the reported net interest margin -- quarterly net interest margin came at 3.55%, which is up by 33 basis points compared to first quarter net interest margin level of 3.22%. And net interest margin expansion mainly came from better core spreads. TL core spreads further improved 32 basis points Q-on-Q, and at the same year improvement was also visible on the FX part of the balance sheet. But looking at in line with swap cost and swap usage because this is one of the main characteristics of this quarter, as you can see in the presentation, at the right hand side, we had in average almost TRY 17.9 billion average swap usage, which resulted in a more than TRY 1 billion of swap cost. And adjusted with second quarter swap adjustment, interest margin came at 2.16%, which growth first half swap adjusted net interest margin to 2.45%. But going forward, when you look at recent pricing dynamics, both at the deposit market as well as on the swap market, we understand that second half net interest margin level will be higher compared to first half, and we expect swap adjustment interest margin and the gross net interest margin in the second half to be more than 3% and 4%, respectively, which is significantly higher compared to first half.

On Page 7, you can see the details of the fee income. As Mustafa Bey mentioned, despite muted lending growth quarterly, here we had good number of fee income growth on a cumulative basis. First half -- the first half on year-on-year basis, we have 92% fee income growth, which is very higher compared to our initial guidance of (inaudible), and thanks to this strong and eye-catching performance, we delivered all-time best fee ratios like fee to total revenue and fee to operating expense. Fee to total revenues came at more than 22%, and fee to OpEx came at almost 58%. Both numbers are all-time high.

On Page 8, you can see the information related to OpEx. OpEx growth came at 21.4% on a cumulative basis year-on-year, and quarterly OpEx growth came at 5% compared to first quarter. In terms of HR and non-HR cost, especially on the quarterly basis, OpEx growth came from non-HR side, the head contraction on the HR side Q-on-Q, but going forward, we expect there will also be some recovery in our OpEx growth especially in the second half due to both cost discipline as well as high base effect of second half of the year. We are expecting 2019 full year OpEx growth will be low teens versus more than 21% numbers we delivered as of first half.

Starting with Page 9, we may go through the details of the balance sheet. On Page 9, you can see the details of the lending portfolio and lending growth. As Mustafa Bey mentioned, in line with the sectoral trend this quarter, lending growth was muted, which is also in line with the sector trend. Total lending growth on a quarterly basis came at 1.5%. TL lending was flattish, and we have limited FX value in dollar terms with 1.7%. And other detailed information can be seen at the same page.

You may also see detailed information related to lending portfolio on Page 10 in terms of sectoral breakdown. And you may also see detailed information related to construction and energy loans, which are considered more problematic compared to others. As well as, you may also see detailed information related to breakdown of project finance, which are not too much different than the numbers we announced a couple of quarters ago.

Page 11 and Page 12 is related to asset quality. Starting with Page 11. NPL inflows and NPL formation came lower than initial expectation and guidance. NPL ratio increased really limited and came to 4.74%, which is up by only 14 basis points Q-on-Q and very lower compared to full year guidance of 6%. Now we understand that our '19 year-end NPL ratio will be definitely lower than 6% initial guidance. However, on the other hand, Stage II ratio may be slightly higher than initial expectations. We were guiding 11% to 12% Stage II within total lending. It may be slightly higher than initial expectations. You may also see different and detailed information related to sectoral breakdown of both NPL and Stage II at the same page.

This asset quality picture resulted lower net cost of risk also in the first half of the year compared to our initial expectations. Just to remind you, we were guiding like 200 basis points net cost of risk for the full year. However, especially second quarter, net cost of risk came with a significant turnover at 65 basis points net cost of risk, which growth first half net cost of risk ratio to 151 basis points. On top of that, we continued to have good number of coverage both in terms of total as well as specific coverage. Total coverage ratio remained more than 100% threshold, which is one of the highest among peer group banks. And NPL specific coverage ratio came at almost 75%, which is 12% higher compared to sector average of 67.6%.

Page 13 is related to deposits growth. We have good number of quarterly deposits growth in second quarter both in TL and hard currency. TL deposit growth came at 7.4%, which is way above than the sector average, and we also have good number of FX deposit growth. And therefore, total deposit growth on a quarterly basis came at 8.2%. And in terms of TL versus FX deposit, we continue to have Turkish lira heavy deposit structure with 54% of total deposits are coming from TL versus remaining 46% coming from the hard currency deposits.

And looking at the sector, sector has specific low project numbers in terms of TL versus FX and, therefore, compared to sectors especially, it is our privilege to have more towards the heavy deposit portfolio. And CPI linkers deposit, which is a fresh new product we started to offer to our deposit accounts since the month of May, already increased to TRY 10 billion outstanding amount as of today. And it is also encouraging cost in terms of collecting more TL deposits.

In terms of the deposit portfolio, you may also see detailed information related to retail, state and SME and corporate deposit at same page.

Related to non-deposit funding structures, we continue to do timely and cost-efficient wholesale funding transactions. Just to remind you, EUR 700 million Basel III compatible additional Tier 1 issuance was the most important transaction of second quarter with Perpetual Non-Call 5 structure and very cheap cost of 5.076% coupon rate. And on top of that, we also had $1.1 billion syndication loan obtained in April from different 38 correspondent banks and with 100% roll-over ratio. And as of June, we continue to have like $15 billion total wholesale borrowing, which makes 22% of total liabilities. And most of our external debt is long-term maturity with $9.3 billion amount, which makes likely almost 70% of total external debt.

Page 15 is related to solvency ratios. We have total improvement in our solvency ratios, thanks to especially additional Tier 1 issuance in the month of April. Our Tier 2 ratio total cost further increased to more than 17%, and Tier 1 ratio came to 14%. And this EUR 700 million additional Tier 1 issuance had 167 basis points positively impacting our solvency ratios.

Remaining pages are regular pages, while you may see different and detailed information related to other banking areas.

For the sake of the time, I will stop here and leave the floor to operator again to finish Q&A.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) Our first question comes from Alan Webborn from Societe Generale.

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

Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [2]

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

Could you humor us and just sort of go through again your existing guidance and where you think you can change that after what you've seen in H1, just so that we've got the complete picture? And then could you also possibly put a bit more color on what was clearly an extremely good performance in terms of risk cost in the second quarter, which I suspect will have surprised most of us a little bit? And does seem to be, to some extent, contrary to the trends that we've seen from some others elsewhere. So if you could give us a little bit of color as to what you're seeing and why you seem to be doing rather better, that would be really helpful.

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [3]

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

Let's start with the last one, not to forget the question. I mean our initial guidance was not an aggressive guidance so beating dead is not at all totally a big surprise in terms of NPL ratio. And please don't forget that the first half loan growth is above 12%. That's faster than our full year loan growth target. Therefore, there is also a denominator effect of the NPL ratio.

And I think the big part of your -- the big part of the answer of the question (inaudible) Stage II. If you look our Stage II numbers, there is 1% increase of total Stage II. Nominal increase is TRY 2.7 billion, which is not a small number. But at the same time, the bank managed to decrease the past due 30 days loans under Stage II. This is super important. That is the main reason of less NPL mitigation -- less NPL migration from Stage II to Stage III. So as you know, no loan goes to NPL before it's past due 30 days. Therefore, therefore, that's the main reason we have good collections out of previously restructured loans. That's the main reason of slightly better asset quality performance compared to our budget guidance, and we are happily beating the Street expectations in NPL. But as Ali mentioned, less NPL migration from Stage II is also going to create a little bit over surging in Stage II ratios. Therefore, we may slightly increase our Stage II guidance from 11%, 12% towards 13%, 14% thresholds. But at the same time, NPL ratio seems to be comfortably below 6% guidance.

Speaking about the first 2 questions, I mean there is substantial change in the markets in terms of the mood, in terms of the big Central Banks attitude as well as local rates and the currency. I mean needless to say, Central Banks started rate-cut cycle with a big move for 25%. And each and every day, we are enjoying this initial big step in terms of lower cost of deposits. And maybe more importantly, the swap market, which verticals I will use now with around $300 billion worth of short-term swaps, they is even more correction in the swap market as much as 7% to 8%. Therefore, as of today, almost mid-August, we're seeing sizable corrections in the month that's open and how Ali mentioned about swap adjusted net interest margin to be above 3% versus 2.4% now as well as reported net interest margin to be above 4%, which is traditionally the threshold that is normal. So second half of the year, starting with the third quarter also, we will start enjoying good margins to improve earnings significantly. So we got very firm numbers because we're in the first phase of assessing the outcome of rate cuts. We are not 100% sure how much improvement will be attained towards end of September. We are foreseeing full year ROE to be at least at 10% where it is only 7% in the first half. So we may expect ROE to be almost double in the second half of the year versus the first half.

Don't forget that VakifBank is a Turkish lira bank and because of the funding structure, because of relatively higher customer deposits in Turkish lira and especially in Turkish lira deposits, we got a sizable Turkish lira repricing provision mismatch. Therefore, it's pretty easy to assess to -- and say that we will be one of the best beneficiaries of the rate cycle that we believe we are in the early stages.

So earnings will improve significantly starting with third quarter. And don't forget that the TRY 917 million free provisions are here because of excessive CPI linkers profits of 2018. And now CPI linkers performance will drop significantly, and it is going down because of inflation decrease. So obviously, we will not hesitate to use that free provision towards next 1 year for smoothening of our earnings.

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

Operator [4]

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

Our next question comes from Ali Dhaloomal Bank of America.

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

Ali Dhaloomal, BofA Merrill Lynch, Research Division - Emerging Markets Corporate Credit Analyst [5]

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

I have 2 questions. I mean first one on cost. Can you elaborate on your swap usage, what has driven that much activity in second quarter, especially that your Turkish lira lending had been quite muted, and you have been quite aggressive in collecting Turkish lira deposits? And also, can you -- on cost as well, can you just give us a little bit of color about your non-HR cost that increased in the second quarter? What was behind this?

Then the second question is about asset quality. Just -- I just wanted to understand what would be driving your Stage II at 13% or 14% level? Will it be more restructured loans or watch list, will it be big tickets that you expect to book in the coming quarters into Stage II? And also, which kind of sector do you expect the Stage II to come from? And last question just on your Eurobond issuance plan, I mean can you update us on your budget for the rest of the year in regard of issuance?

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [6]

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

Let me start with the latest question. In terms of the Eurobond issuance for the rest of the year, actually, in the beginning of the year we had one public transaction, and it was already done in the month of April with an amount of $600 million. So in terms of budget, we are done for this year.

However, as you know, we have the -- we have up already GMTN program, which allows us to do both private placement and public Eurobond issuances in a ratio of (inaudible). And therefore, we are closely monitoring all the market developments closely. And if needed, in spite of having opportunity, we may look for additional Eurobond issuances. But for the time being at the table, we don't have such solid plan.

In terms of the second quarter in terms of Stage II, yes it is true that we are expecting a little bit more Stage II increase in the second half of the year compared to first half, and it is much more related with overall economic activity -- the weakness in the economic activity, which we are witnessing a couple of quarters will automatically result in more Stage II increase. There is no specific or there is no one-off thing that we are expecting to be much creating boredom in our Stage II. And in terms of the lending portfolio, we are expecting more Stage II to come from nonretail segments compared to retail because -- especially because of payroll business, we are much more confident for the asset quality of the retail portfolio even though the NPL ratio is going up. So for the rest of the year, we may expect more nonretail lending Stage II increase compared to retail portfolio.

(inaudible) sort of trade off, I mean, because of the limited NPL inflow in the first half of the year, you may see slightly higher Stage II. But on the other hand, NPL ratio will be slightly lower than our initial guidance. But net-net, we don't change our net cost of risk guidance compared to our initial guidance of 200 basis points in the beginning of the year even though we delivered 151 basis points in the first half of the year.

In terms of the first question in terms of cost and OpEx, actually, it's a new management and with the new top management last year, we started to implement some saving arrears and to give much more focus on the cost discipline. This will couple with the base effect of second half of 2018. That's the reason actually why we are guiding low teens OpEx growth for the entire year of 2019 versus '18 even though in the first half of '19, annual OpEx growth came like 21.4% on a year-on-year basis. Still for the first, second half, we see a significant decline in terms of cumulative and new OpEx growth due to both -- 2 reasons. And hopefully, first full year OpEx growth will be low teens as of '19 versus '18. And in terms of 1H cost increase, actually, it is coming from mainly this effect. There is no specific area that is fulfilling non-HR cost increase on a Q-on-Q basis, it is coming from arrear.

And for the last part of swap usage, because of the first quarter Turkish lira loan-to-deposit ratio adjusted in 1Q, as of first quarter, our Turkish lira loan-to-deposit ratio increased to all-time high levels at 145%. And because of the lack of debt (inaudible) plan, even though we are collecting Turkish lira deposits mainly coming from retail and state deposit accounts still opportunistically, we also used swap usage during the 2 quarters.

I think that these are the questions, and I didn't miss any part of your questions.

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

Operator [7]

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

And our next question comes from Ovunc Gursoy, TEB.

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

Ovunc Gursoy, BNP Paribas, Research Division - Research Analyst [8]

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

Just a quick question about fees. What is the main driver of strong fee growth in the first half? Assuming -- I mean, I'm looking at your numbers and seeing that the loan growth, cash loan growth was not that high, so could you give some color on that?

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [9]

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

Actually, we may say 2 main reasons for such strong performance, one is related to overall interest rates because of the grant in the interest rate levels, we had more contribution from same systems. That's one of the reasons actually for such a strong fee income.

And secondly , it may also be attributed to the lack in growth in the first quarter, especially during the first quarter, we did not have enough Turkish lira lending. That was some sort of trade-off between interest income and fee income, in other words maybe we charge a little bit lower than we should do in terms of overall interest rate levels. But on the other hand, this gap was fulfilled by higher fee income. So in this half, there was some sort of trade-off between interest income and fee income. Of course, the fee income was accrued in line with the overall maturity of the loan if you note, due to the regulation in Turkey. And therefore, even though in second quarter we didn't have additional lending TL lending growth, still this strong momentum in the first quarter resulted in higher fee income even on a Q-on-Q basis.

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

Operator [10]

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

Our next question comes from Yulia Di Mambro, Federated Investors.

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

Yulia Di Mambro, Federated Investors, Inc. - Senior Investment Analyst [11]

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

I have a couple of follow-up questions, please. My first question is on your trading loss in the quarter. Can you please confirm if all this is just the cost of the swaps? Or was there something else in there?

And then my second question is on your securities portfolio. It looks to me like it increased quite substantially in Q2, particularly your dollar securities, and your liquidity portfolio declined slightly. Can you confirm that you spent some of your dollar equity on your FX portfolio? And what is your strategy going forward, in terms of the mix in your TL securities between CPI linkers and fixed income? I guess there's a bit more of an incentive now to hold fixed income securities. If I get some focus on that, that would be great.

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [12]

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

Yes. We have TRY 1.083 billion is swap cost for the quarter. As I mentioned, we have a very big short-term swap. And I mean this is interesting, today, swap rates are substantially lower than the average of the second quarter so that's the reason of trading elevated swap cost for the second quarter. There is no other reason for high swap cost, and you will see swap costs are going down because of lower swap rates.

Speaking about the hard currency securities, yes, you're right. We had sizable accumulation of hard currency securities in the second half -- quarter, which is still on the table until now in the third quarter. And I'm very happy to say this all of those hard currency government securities are now in the money if you mark-to-market them. Some of them are booked under after maturity, but we can comfortably tell you that all of them are in the money, so the treasury function was pretty successful since beginning of April. Going forward, Vakif will keep being investor if existing Turkish (inaudible) in dollars remain because we see a lot of value there. For the Turkish side, as a sizable market maker, primary dealer of the country, Vakif will remain net investor in Turkish lira side. But on the other hand, we will, of course, use some trading opportunity, especially for some credit profitable portfolios we accumulated so we may see -- you may see more balanced Turkish lira security growth down the line towards the year-end.

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

Operator [13]

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

(Operator Instructions)

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [14]

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

Operator, if there is no audio questions, we have some webcast questions. Ali will be asking the question on behalf of investors, and I will try to answer them.

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

Ali Tahan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Manager of International Banking & IR [15]

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

The first question is coming from Valentina from Barclays. Valentina has 2 different questions. The first one is related to our year-end profitability. She's asking, ROE is not particularly low this quarter and effective first half numbers, what is your expectation for the full year profitability? And can you also cover your key guidance measures and share with us value expect changes.

And her second question is related to management change. She's asking, given the recent change in management, what change in your strategy we can expect going forward?

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [16]

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

Let's start with the second question. The new CEO is a VakifBank veteran. He's with us in the last 28 years. He served in many different departments and different roles. Before his CEO appointment, he was immediately responsible for IT and that's, I believe, a rare commodity given, as far as I know, he's the first state bank CEO, who has spent some part of his career in IT as a technical person, which is, I believe, an asset because we have ambitious digitalization targets, and that is also one of strong part of the strategy that we will keep investing in digitalization and data analytics and other parts of issues regarding data. So we believe, it will give us a competitive edge, especially in retail front.

Apart from that, I don't see significant strategic change in the existing overall strategy in terms of lending, in terms of positioning of the bank. But as I mentioned, it's pretty understandable that the new CEO will prioritize more digitalization going forward.

For your first question, I think, it's mostly answered in the first question by Alan Webborn, but just to remind, we may see at least 10% full year ROE, thanks to significant improvement in the margins in the second half of the year starting with third quarter and daily figures are supporting this improvement in the margins. And we do expect our -- in our base case scenario that Central Bank will not hesitate to use the next 2 meetings to cut the rates. And in our base case scenario, the markets will react more or less similar to the initial start of the rate cut cycle. So we believe, the duration gap in the Turkish lira balance sheet of the bank will start creating more profits in the second half. And Ali also mentioned that good news from OpEx, the bank is pretty diligent about expenses, and you will see year-on-year growth improvements in third quarter in terms of OpEx. And we are -- we can be relatively bullish about at least next 2 quarters in earnings for Vakif. Yes, and we are not changing our growth budgets and happy to reconfirm that second quarter was relatively muted loan growth quarter. Third quarter onwards, we will normalize the growth and probably close the year at just about 20% year-on-year Turkish-denominated overall loan growth.

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

Ali Tahan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Manager of International Banking & IR [17]

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

Thank you, Mustafa Bey. Let's continue with the questions of ladies first and then we may continue with the questions of gentlemen.

Tolu Alamutu from Tellimer has a couple of questions. She's asking, first, where do you expect NPL ratio to be by the year-end?

Secondly, she's asking your performance from subsidiary was strong. Do you expect this to be maintained through the rest of the year?

Her third question is given that the bank has boosted capital via additional Tier 1 in the recent figures, will VakifBank consider calling EUR 500 million Tier 2 in February 2020 which is the classical question of October-ending quarter?

And her final question is related to after the 5-year Eurobond issuance, are there any other plan to return to the Eurobond market in the near term?

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [18]

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

For a change, we will try my best. First of all, if we quote direct from guidance, we could but -- for NPL ratio, but it's not possible at this stage. So we can only tell you that it seems that in base case scenario, we will beat our 6% NPL ratio target. But how much, by how far, it's too early to comment about it. But I mean, first half, June numbers, 4.74%. As of today, below 5% NPL ratio is encouraging for a meaningful decrease -- meaningfully lower figure, that's 6%.

Your second question, subsidiary performance, yes, you're totally right, and maybe it's time to start analyzing the bank with consolidated figures because the accounting division is also announcing both set of results at same day. The significant improvement in insurance-related subsidiaries, both life and nonlife elementary side, remains on the table. There are 2 reasons for this. One is the same reason of our significant fee growth. The bank is substantially better in terms of cross-selling with the insurance subsidiaries. Secondly, the elementary insurance subsidiary, Günes, after its rights issue, they started to deliver. We don't expect any more negative surprises. No hard dreams from Günes, like the year-end 2018. They don't have any unprovisioned buffers. So it's like a fresh start for the Günes. And life insurance subsidiary, Vakif Pension Funds, remains very strong. And again, the bank growing in retail. The bank bettering -- cross-sell gives them better grant. So we are pretty hopeful about Vakif Pension Funds, Vakif Pension Business. Apart from those 2 insurance subsidiaries, the other subsidiaries aggregate numbers are not super strong, but hopefully, they will not take below the strong performance of insurance. And we are -- our base case scenario, subsidiaries will contribute more in the second half.

For the third question, additional Tier 1, our government-sponsored additional Tier 1 issuance of EUR 700 million, is that related with the call of the [25s]. I mean I don't want to be speaking same language 50 times, but VakifBank will not create some distortion in the markets as well as create an inequilibrium between different investors in terms of the decision of that call. And as of today, it's all -- early August. I think it's too far to comment about this given how big the volatility is. I mean 3 months ago or 6 months ago, nobody could sign this dovishness of the central banks. And I don't personally find the liberty that this will not change significantly in next 3 to 6 months. So it's too early to give a guidance, but our -- as mentioned many times, we will not make the market to trade some information about this, and everybody will learn at the same time about our decision for our 25s .

And the last question after our March bond issue, I suppose, are there any plans to return to the bond markets? We don't have to. We -- the budget is done with $600 million 5-year senior, but we are pretty positive about April -- sorry, September and November about Turkish (inaudible) in hard currency as well, if it works as we expected, we don't have to close the year without approaching the markets, but I'm glad to say this, the bank has the luxury not to rush a deal if we are not happy with the market. So let's see what will happen after summer break and onwards. We don't have to be done for the year, but again, there is no necessity in terms of funding, existing liquidity above $5.5 billion is a solid balance sheet.

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

Ali Tahan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Manager of International Banking & IR [19]

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

Thank you, Mustafa Bey. Klim Fedoff, the next question. It's coming from Klim from Lord, Abbett. Klim is asking how were you able to get market share in deposit further especially on the Turkish lira effect?

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [20]

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

Thank you, Klim. This is also more or less similar story with this standard fee growth. I mean as you know, year-on-year basis, our loan growth, despite very slow second quarter, but year-on-year or year-to-date loan growth, both of them are significantly above system average. Excluding state banks, our loan growth differential is a massive number. Therefore, in such situation, this gives you cross-sell hedge. That's one of the main reasons of fee growth substantially higher than the budget, which is also more or less similar for the deposits growth, both Turkish lira and dollars, because if you are supportive of your client in any segments with your very valued balance sheet, you will have the right to be more demanding with deposit, if any exists. And I'm glad to say that this worked, plus, needless to say, because of super high Central Bank funding costs as well as super high swap costs in the second quarter, we pushed the entire distribution branch and regional offices with amended KPIs extremely heavily in favor of retail and Turkish deposits. So this is a good news that it worked. It proves that management is very effective in terms of adapting change in the market. So those are the main reasons rather than paying the highest rate income as you may sit for a more cost numbers. We are not paying the highest rate income. So the balance sheet support to the system and efficient management with KPI amendment are the main reasons of strong deposit growth.

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

Ali Tahan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Manager of International Banking & IR [21]

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

Thank you, Mustafa Bey. And the last question from the online is coming from Batuhan Bey from Ata Invest. Batuhan Bey is asking what is the reason behind high swap usage in second quarter?

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [22]

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

Thank you, Batuhan Bey. Actually, this is not a rocket science decision in second quarter in line with the private peers because of our excess hard currency liquidity and on the other hand, very high cost of Central Bank funding at 24% for entire second quarter. Overall, Turkish lira cost after short-term swaps and the dollar cost was substantially better than the short-term funding -- Central Bank related funding or repo. Therefore, that's the reason like almost all the banks in Turkey.

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

Ali Tahan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Manager of International Banking & IR [23]

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

Thank you, Mustafa Bey. That's the final question from the audience.

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [24]

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

Ladies and gentlemen, we have 1 more questions from...

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

Ali Tahan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Manager of International Banking & IR [25]

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

Valentina is also asking a last-minute question. She is asking what is your capital sensitivity to interest rate move through to mark-to-market expression of your security portfolio?

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [26]

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

We have a different sensitivity that you may see in our presentation on Page 15. That's 1 percentage point, interest rate increase or decrease on par is 6% -- 6 basis points. That's not 100% the same sensitivity that what you're asking, but I think that works. 6 basis points sensitivity for 1 percentage point change in Turkish lira interest rates.

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

Ali Tahan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Manager of International Banking & IR [27]

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

Thank you, Mustafa Bey. We don't have...

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

Mustafa Turan, Türkiye Vakiflar Bankasi Türk Anonim Ortakligi - Senior VP and Head of International Banking & IR [28]

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

Ladies and gentlemen, thank you for your patience in such late afternoon just before [Eid] holiday in Turkey as well as summer break in all the globe. And I wish Vakif will keep delivering strong set of results and very good earnings in the second half of the year. And hopefully, we'll beat our guidance revision now. Existing market backdrop is very conducive and we will be hopefully meeting each others not so soon. Thank you very much.

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

Operator [29]

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

Thank you. Ladies and gentlemen, this concludes today's webcast. Thank you all for your participation. You may now disconnect.