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Edited Transcript of YKBNK.IS earnings conference call or presentation 29-Jul-20 10:59am GMT

Q2 2020 Yapi ve Kredi Bankasi AS Earnings Call

Istanbul Aug 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Yapi ve Kredi Bankasi AS earnings conference call or presentation Wednesday, July 29, 2020 at 10:59:00am GMT

TEXT version of Transcript


Corporate Participants


* Gokhan Erun

Yapi ve Kredi Bankasi A.S. - CEO, GM & Executive Director

* Hilal Varol

Yapi ve Kredi Bankasi A.S. - Head of IR and Strategic Analysis

* Kürsad Keteci

Yapi ve Kredi Bankasi A.S. - EVP of Strategic Planning & IR


Conference Call Participants


* Mehmet Sevim

JPMorgan Chase & Co, Research Division - Associate




Operator [1]


Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome, and thank you for joining the Yapi Kredi conference call to present and discuss the first half 2020 financial results. Today's presenters are Mr. Gokhan Erun, CEO; Mr. Kürsad Keteci, Strategic Planning and IR EVP; and Ms. Hilal Varol, Head of Strategic Analysis and IR.

Now I hand over the presentation to Mr. Erun. Sir, please go ahead.


Gokhan Erun, Yapi ve Kredi Bankasi A.S. - CEO, GM & Executive Director [2]


Hello. Good afternoon, and thank you all for joining our first half 2020 earnings call. First of all, I hope yourself and your beloved ones are well and healthy.

The second quarter of the year was shared with uncertainties due to COVID-19 with the lockdown actions taken by the countries. Thanks to strong health system in Turkey, together with necessary and timely actions taken by Turkish government, Turkey started the gradual normalization process at the beginning of June. Turkey continues to maintain and increase the actions supporting liquidity in the markets, easing the lending conditions, increasing the level of support of impacted businesses and individuals and providing forbearance measures for banks.

Following the halts on the economy and everyday life for 3 months, we have already started to see the signs of recovery of Turkish economy. We are witnessing an improvement in the consumer and also real sector confidence from their deep levels in April, consumer 62.8 and real sector, 99.4. In IP, industrial production increased by 17% month-on-month on calendar adjusted basis in May, following a 30% contraction in April. PMI improved also 23% month-on-month in May and also 32% in June, which is already above 50% at 53.9%, which is growth environment.

Interest rates came down significantly, mainly with the introduction of the asset ratio, very famous asset ratio and timely rate cuts of the Central Bank, supporting the economic activity. I believe that Turkey will continue this recovery pace through the rest of the year for the second half.

Our banking system is one of the most important parts of the recovery. At Yapi Kredi, we are continuing to support to do our best to contribute this recovery. I'm sure that Turkey will again positively differentiate itself, thanks to the timely and effective actions taken. At Yapi Kredi, we will continue to act always responsibly against the market. And we have been as transparent as we can since the beginning of the process, and we will continue to do so. Before starting the presentation, as always, I'd like to thank the dedicated workforce of Yapi Kredi for their extensive effort during and for showing again their commitment to the country and to our esteemed bank.

I'm moving to Page 2. Our net profit at TRY 2.5 billion, corresponding to 12.1% ROE. Thanks to ongoing strength in PPP, pre-provision profit generation and conservative provisioning through solid fundamentals. Pre-provision profit generation is very strong, increasing 12 -- 22% year-on-year, a resulting 60 basis point improvement in the pre-provision profit per gross loans, reaching to 5.1% in half -- first half of 2020.

Core performance strength is the driver behind the better performance. We have improved net interest margin by 26 basis points on a year-to-date basis. We benefited around 110 basis points from loan-to-deposit spreads, improvement thanks to balanced loan yields and outstanding performance in both TL and FX demand deposit.

On a quarterly basis, TL and FX demand deposits increased 43% for TL; private banks, 34% quarter-on-quarter; and 31% for Yapi Kredi; and private banks, 21% quarter-on-quarter, respectively. And we gained a respective 123 basis points and 94 basis points market share year-to-date. So our market share now stands at 16.7% in Turkish lira and 14.4% in foreign currency among private banks.

During the period, we continued to support the Turkish economy by effectively utilizing newly introduced credit guarantee fund packages. Our total utilization reached more than TRY 7 billion with a market share of 19%. We are ranked at #1 in total check financing and OpEx lending among the all banks.

Fees came down on a quarterly basis due to both regulatory impacts as well as, as you very well know, COVID-19 with lack of transactions, unfortunately. That being said, we have already started to see some normalization with a positive trend in June and especially in July.

During the second quarter, we continued our prudent and very conservative approach in provisioning in first half. We have taken several actions and set aside TRY 1.5 billion additional provisions. We have increased the coverage of postponed loans to 3%, TRY 235 million additional provisions; conservatively increased Otas coverage to 29%, TRY 200 million additional provisions; and set aside TRY 1.1 billion COVID-19-related provisions due to basically macro.

Please note that our ordinary provisions include TRY 630 million provisions that we have provided, increasing the coverage to 90 -- of this 90 to, as you very well know this, 180 days dpd loans to 64% that are classified under Stage 2. So our cost of risk is at 252 basis points at first half. Ordinary cost of risk, 1.65%, including provisions related with 90 to 180 dpd and excluding our other provisions.

So when we look at our fundamentals, in terms of total LDR, we are at 100%, in the low end of our targeted 100% to 105% LDR. And TL LDR, I'm very happy to say that, is at 117%, showing a significant improvement versus 2019.

We have a solid liquidity with an LCR of 162%. Foreign currency LCR as high as 306%, very comfortable also about foreign currency LCR, including the negative impact arising from the syndication.

The Tier 1 ratio at 13% without, of course, forbearances. As you know, Yapi Kredi has been always been talking about both numbers, but always for the transparency purposes without forbearances. So with forbearances, it's 15% Tier 1. So this level represents 345 basis points buffer against the regulatory limit. So this is without forbearance. CET1 ratio at 11.8% with 375 basis points buffer against the regulatory limit. CAR, very comfortable at 15.7% with a buffer of 370 basis points.

I'd like to move to Page -- next page, Page 3. So as we have been sharing with you, our liquidity levels are very strong, and we have around of $14 billion of liquidity up to 1 month. This level of liquidity covers short-term external debt by 3.5x. And on top of this, as our total liquidity, which is this $14 billion, this liquidity represents the ability to pay all of our existing FX external debt (sic) [FC external debt], which stands as a total of $11.1 billion. So highly liquid as well, very comfortable in terms of liquidity as well.

In terms of asset ratio, I must say that we are very comfortable, one of the few banks that are very comfortable about this asset ratio since the initiation, not as of today, but since the initiation. And we were above the 100% requirement. And as of today, our ratio stands higher than 115% for the asset ratio. Very comfortable about the required level, also with the support of -- from the calculation change in June that helped us as well.

This comfort allowed us to act in line with our strategy, while also saving the market opportunity. And as Hilal will be matching the volumes and the balance sheet, you'll be seeing what we did during the last quarter.

So now I'm leaving the floor to Hilal.


Hilal Varol, Yapi ve Kredi Bankasi A.S. - Head of IR and Strategic Analysis [3]


Thank you very much, Gokhan Bey. On Page 4, looking at the volumes, both loans and deposit growth was Turkish lira-driven. We sustained our strategy of small ticket focus, reassuring sustainable spread generation.

TL cash loans increased 9% year-to-date versus 16% of private banks, and FX loans were down 2%. Thanks to our comfortable asset ratio levels, we continue to grow without hurting our margins. Turkish lira loan growth was supported by TRY 7 billion credit guarantee funding utilization, increase in GPLs as well as corporate and commercial loans. We expect the improvement in the demand, retail and commercial loans to continue supporting the volume growth in the rest of the year.

Turkish lira deposits, on the other hand, ramps up 16% year-to-date versus 7% increase in private banks, while foreign currency deposits declined 11%. We had a substantial increase in demand deposits, reacting the benefits of the strategy that we put in place at the beginning of 2018. TL, up by 52% year-to-date, and the share in total TL deposits increased as much as 6 percentage points year-to-date, reaching to 27%. Our market share went up to 16.7% or plus 161 basis points in a single quarter.

Foreign currency demand deposits, up by 47% year-to-date and 31% quarter-on-quarter, the share in FX deposits going up 16 percentage points to 40%, with a quarterly market share gain of 115 basis points. More importantly, the hefty part of the market share gain is 2 small tickets, retail deposits, and this trend sustained so far in July. All in all, demand deposit share in total is at 34% versus 23% in 2019.

Moving to Page 5. We have a very well-diversified loan mix, prudently staged and solidly covered. In the first half, we postponed around 470,000 customer loans corresponding to 4% of total. We increased the coverage of the postponed loans to 3%. Please note that in first Q '20, our Stage 1 coverage was 0.6%. We set aside additional TRY 235 million provision for this portfolio.

Loans with a dpd of 90 to 180 days stood at TRY 1.2 billion. With additional TRY 630 million provisions, we increased the coverage to 64%, aligned with IFRS 9 regulation.

Risky sectors. Energy, almost 50%, is under Stage 2. Risky file coverage is 32%. Real estate, less than 3% of loans, Stage 2 coverage, 15.4%. Tourism, less than 3% of loans. Transportations, 3% of loans, Stage 2 coverage at 14.3%. SME share is limited at 7% of loans, 65% of which is under credit guarantee funding scheme.

On Page 6, the details of our revenues. Revenue generation was up 20% year-over-year at TRY 11.2 billion, with 17% increase in core. Core revenue margin was stable year-to-date at 5%, although the fees were under pressure with the regulation change and COVID-19. Quarterly revenues, down a very limited 5%, thanks to the strength in NII where fees were down 18%.

Looking at the NIM evolution on Page 7. Swap-adjusted NIM widened 26 basis points year-to-date to 3.7% in first half, with as much as 109 basis points support from core to support from small ticket focus, demand deposits and the interest rate environment. Reserve requirements at 21 basis points negative impact; higher level of liquidity, minus 35 basis points; and fee accounting change, minus 11 basis points.

Quarterly NIM also widened 9 basis points with 29 basis point support from core and 7 bps to securities. In the quarter, we have opportunistically increased our securities that also supported the NIM.

Moving to Page 8. Loan-deposit spread declined a limited 35 basis points quarter-on-quarter. We had a significant 300 basis points improvement over 2019. Deposit costs further improved 31 basis points, supported by both Turkish lira and FX. Small ticket focus and increasing demand deposit share is helping us to keep the funding costs under control. Loans are repricing with lower rates, but we kept the decline at a limited 66 basis points.

We are on Page 9. Fees declined 18% quarter-on-quarter due to COVID and pressure arising from regulation. Cumulative increase, still positive at 7%. In April and May, our weekly fee generation went down with the lack of activity. With the start of the normalization in June, we witnessed the first signs of improvement. Please note that with second Q dip levels and ongoing regulation impact, we now foresee a single-digit contraction for full year 2020.

Transaction numbers are also supportive: money transfers, up 25% year-over-year. Also, we are seeing further improvement since June. Payment systems, down by 4%, but a significant 21 -- 29% increase in June. All these are signaling a positive transaction growth through the rest of the year.

Costs are on Page 10. Cost growth was 17% year-over-year, impacted by elevated regulatory costs, around 3% impact on growth; actions taken against COVID, around 2% impact with the intention to support our customers and prevent the health of our employees. Also, 20% of our costs are FX-denominated also having a negative impact due to the volatility in Turkish lira.

The COVID-related investments and spending will result in cost savings in the second half of the year. Hence, we comfortably maintain our mid-teen cost growth guidance for 2020.

Despite the COVID-19 impact, the share of running costs came down to 22% in first half '20. Also with our ongoing investments, business growth-related cost share is up to 25%. Share of digital in main products sold reached to 50% with a year-to-date increase of 14 percentage points, which will support the costs going forward.

76% of GPLs are sold via digital channels. Also, it is still at limited numbers, but digital onboarding is increasing significantly, 3.5x post-COVID and 110,000 mobile confirmations has been done so far in first half '20.

Transaction share in digital increased 19% year-to-date as well as the transactions through call centers. With the normalization in June, we witnessed some increase in transactions to branches and ATMs but still below 2019 averages. Please keep in mind that physical channels are still the main source of customer acquisition. With the change in customer behavior, we believe that transactions to a digital channel will continue to outpace the branches and ATMs.

Moving to Page 11, asset quality. As Gokhan Bey detailed at the start of the call, we continue to have a very conservative provision in second quarter as was the case in first Q. Even with the extensive provisioning, our cost of risk improved to 252 basis points, ordinary at 165. This includes TRY 630 million additional provisions for 90 to 100 days dpd.

Quarterly cost of risk also came down to 237 basis points. Please note that ordinary cost of risk is at 145 basis points. This includes 90 bps impact coming from 90 to 100 days dpd.

On Page 12. In second Q, our NPL ratio was stable at 7.1% is on a comparable basis, while the reported NPL ratio improved to 6.7%. Coverage, also up to 67% levels. With TRY 235 million additional provisions for the postponement and our more conservative modeling with COVID-19, Stage 1 coverage increased to 0.8%; Stage 2 loans, 14.4% of total with a 15% of coverage on a comparable basis. Please note that in the quarter, we set aside TRY 200 million provisions for Otas, increasing the coverage to 29%.

All in all, our provisions to gross loans went up to a significant level of 7.5%. Please note that these levels of provisions are for the times of uncertainty and likely to normalize going forward, with loan growth and stronger macro outlook.

We are on Page 13 (sic) [Page 14]. We had a very comfortable level of solvency, with 350 to 400 basis points above regulatory requirements, excluding the forbearances. CET1 at 11.8; Tier 1, 13%; and capital adequacy at 15.7%. Excluding the forbearance impact, these are 14.3%, 15% and 18.1%, respectively.

I'll now leave the floor to Gokhan Bey for 2020 guidance and closing remarks.


Gokhan Erun, Yapi ve Kredi Bankasi A.S. - CEO, GM & Executive Director [4]


So about the guidance. As of today, we have a clearer picture for sure compared to April and when we announced our first quarter results, if you recall. Accordingly, we have decided to revise our guidance, full year guidance and the -- according to a new operating environment.

So we foresee the normalization trend will continue throughout the rest of the year. In terms of fundamentals, we maintain our LDR target to below -- to be below 105%. CAR will continue to be around 16%, thanks to our internal capital generation efforts. In terms of TL loan growth, with the recent trends and improvement in the demand also, we maintain our high-teens growth targets.

In terms of revenue, fee part is mostly impacted due to both regulation change and also limited activity for the past 3 months. However, as mentioned in the presentation, we have already started to see some improvements, some strong improvements, I must say, in fee generation from its low levels in April and May. All incorporated, we are revising down our fee guidance to single-digit contraction for the full year, but we will maintain our number of transactions growth year-on-year.

In terms of net interest margin, rate environment was supportive so far incorporated with the ongoing loan repricing impact through the rest of the year. We expect our NIM to expand 30 basis points, 3-0, basis points year-on-year on a comparable basis with 2019, thanks to effective asset and liability ALM management. In terms of cost growth, mid-teens levels of growth is achievable. This is why we see what we see.

Lastly, the asset quality, as you all know, due to postponement of NPL recognition, we are not seeing any significant change in NPL ratio. We are very prudent provisioning strategy and high coverage levels as well and some deterioration in the asset quality due to pandemic. We are slightly increasing our cost of risk guidance, and we believe that we can be lower, south of 300 basis points, versus the previous target of 225. As a result of this, we are slightly revising down our ROE guidance to low teens from mid- to low teens.

As a closing remark, going forward, we will ensure the continuation of strong and sustainable revenue performance while maintaining our strong fundamentals and conservative risk appetite, driven by customer-centric approach, responsible growth and sustainable revenue generation through value-added services and increased transaction banking. With our strong brand, rich organizational culture, fully committed workforce and supported by our shareholders, we will seize the opportunities ahead of us and reach to greater achievements for sure, which will also contribute to our country's economy.

I'd like to take this occasion to extend my thanks to our stakeholders, who stand by us with trust and support; and to our dedicated employees, who contributed to the achievements of our bank. On behalf of the whole team, I'd like to thank you all for joining our call, and we can now take your questions.


Questions and Answers


Operator [1]


(Operator Instructions) The first question is from the line of Sevim, Mehmet with JPMorgan.


Mehmet Sevim, JPMorgan Chase & Co, Research Division - Associate [2]


My first question is on the cost of risk guidance, please. With the update to the guidance to 3%, it looks like you're now expecting an increase in the second half, given the first half figure is at around 2.5%. Could you please elaborate where the increase will come from?

And my second question will be on growth figures. Given the lending momentum is lower than at private bank peers in the first half, would you say this is related to the asset ratio implications also at peers? And how do you see the lending trends evolve in the second half, especially with the continuing competition also from the state banks?


Gokhan Erun, Yapi ve Kredi Bankasi A.S. - CEO, GM & Executive Director [3]




Kürsad Keteci, Yapi ve Kredi Bankasi A.S. - EVP of Strategic Planning & IR [4]


For your first question, I will be answering. For the cost of risk guidance, we are saying that it is going to be lower than 300 basis points. We would like to be a bit conservative, although we are seeing that our current level is adequate, and we have already front loaded a quite sizable amount of provisioning.

We believe that to be on the conservative side, just to be on the conservative side, we say it was 300 basis points. But of course, the ambition and the current situation shows that it is going to be, for sure, lower than 300 area.


Gokhan Erun, Yapi ve Kredi Bankasi A.S. - CEO, GM & Executive Director [5]


And to the second question, second part of the question about the growth that has been lower than the private banks' average, yes, this is very much related to the asset ratio. As I mentioned during the presentation, Mehmet, that since the initiation, we were -- we've been always above 100 threshold for the asset ratio. So therefore, as you see also from our net interest margin improvement, we were not forced or incentivized by the asset ratio to lend more with irrational competition rates, which are below already -- below the Central Bank's lending rate, cost of funding. So that's why we didn't want to get into the competition, which were not making apparently a profit for our balance sheet.

And furthermore, to your question about lending growth for the second half, where do I see it in general for the operating environment and versus the state banks. This was the question, I think. Lending demand, loan demand is continuing for the general purpose loans, and it is there. And I think it will stay there. That's why, of course, we have to be careful. We can grow there, but we have to be careful there, too.

But on the other front, on the -- especially commercial and corporate side, I think the competition from also the state banks are getting less at the moment. So most probably in the -- for the second half, I don't think that we'll be seeing a similar competition as we saw, at least for the -- as we did in the second quarter. So the competition will be slowing down. This is what we see.

And this is also some hints that we get also from the pricing side of the state banks that they are, from time to time, increasing this because of many reasons, obviously, but their interest rates. This shows that we are coming to a rational area, rational competition. At least for Yapi Kredi, we won't be in that competition because of the very comfortable levels of asset ratio at the moment. Just to remind you again, we are at more than 115% for the asset ratio.


Operator [6]


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


Hilal Varol, Yapi ve Kredi Bankasi A.S. - Head of IR and Strategic Analysis [7]


Thank you very much for your participation. If you have any further questions, you can always connect us. We are here waiting for your answers -- questions. Thank you very much.