Yapi ve Kredi Bankasi A.S. (YKBNK) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. I'm Paulina, your Chorus Call operator. Welcome, and thank you for joining the Yapi Kredi Conference Call and Live Webcast to present and discuss the Yapi Kredi's first half 2026 financial results conference call and live webcast. At this time, I would like to turn the conference over to Mr. Kursad Keteci, CSO; and Ms. Hilal Varol, Head of Investor Relations and Strategic Analysis. Mr. Keteci, you may now proceed.

Thank you. Good afternoon, and thank you all for joining our first half '26 earnings call. I would like to start with our recent strategic initiative announcements regarding our asset management activities. We have signed a partnership agreement with Azimut Holdings, Italy. This transaction is expected to create first of its kind strategic partnership in Turkey's asset management sector. Our partnership includes sale of shares in Yapi Kredi Asset Management and most importantly, 15 years exclusive distribution agreements. Azimut is an independent global asset management group that operates in more than 20 countries worldwide with again more than [ EUR ] 150 billion AUM in Europe. This partnership underscores Yapi Kredi's ambition to pioneer the asset management sector on top of the organic growth potential. We, as Yapi Kredi, will continue to serve asset management products to our valuable customers with robust widespread and digitally capable distribution network. Azimut will put its international investment expertise product development capabilities and entrepreneurial asset management platform. As a result, we will be offering our customers a broader, deeper and more sophisticated range of investment solutions while continuing to deliver the high-quality service they expect from Yapi Kredi. Our customers will continue to benefit from existing products of Yapi Kredi asset management and gain access to an innovative range of asset management solutions developed with Azimut's global investment capability. This is the reason why we are saying this transaction is first of its kind strategic partnership in Turkey for the asset management sector. As you also follow, total estimated value of the transaction is around [ $425 ] million assuming that the transaction will be closed at year-end and which means an adjusted P/E multiple of 11x based on 2025 results. And transaction will strengthen our capital base close to 70 bps for our capital calculations. And lastly and most importantly, I would like to add that this initiative is not a onetime transaction we did. It is part of a bigger strategic plan we are working on. This strategic plan targets to achieve undisputable leadership in the market and write another landmark story for Yapi Kredi as we did before. Within this plan, there are other important actions and including all, we will be guiding to market during the second half of the year. Just keep an eye on us and watch us closely. Now let's look at first half performance. I'm moving to the second page of our presentation. We posted TRY 31 billion net profit in the first half '26, increasing 36% year-on-year. Our return on tangible equity stood at 23.4%, still in line with our guidance despite the slip in second quarter net profit due to global volatility. Main driver of the performance was the strong top line. Thanks to 49 bps year-to-date improvement in Turkish lira loan deposit spreads. Net interest margin widened 68 basis points year-to-date to 2.9%. Our net interest margin widening is better than our peers that announced their results, showing our agility and strength in both cost of funding and loan [indiscernible]. Equally important, our strong deposit base, best-in-class demand deposits supported this performance again. On the fee side, our customer-centric service model is supporting our fees and which resulted 26% year-on-year increase. All incorporated, pre-provision profit went up by 62% year-on-year. On the top of our revenue performance, I would like to add that we are committed to efficiency improvement in 2026 and beyond, as we have mentioned also in the first Q, despite higher than initially expected inflation outlook. Regarding the asset quality, deterioration sustains on tight macro and slowdown on the growth through unsecured consumer loans mainly and also [indiscernible]. Accordingly, we have further increased our coverage for those segments, pulling up our total coverage to 4.1%. And if adjusted for the TRY 5.5 billion NPL sales, our coverage will be as high as 4.3%. All incorporated, our cost of risk stood at 201 basis points as of first half '26. Should the tight macro sustain, given the slower than projected recoveries, we might have slightly higher than projected cost of risk for full year. As a summary, we believe that the worst is over quarterly in this year, and our performance in the upcoming quarters will further support our already strong profitability as we maintain our this year ROE guidance [indiscernible]. Now I'm handing the floor to Hila. She is going to provide the details behind our performance. Hilla?

Thank you very much, Kursad, and I thank you all for joining our call today. As usual, I will start with Page 3. Our lucrative lending growth strategy supported our loan yields in second Q also. Turkish lira loans increased 9% quarterly and 15% year-to-date, while foreign currency loans were stable in the quarter, going up by 5% on a year-to-date basis. Our well-diversified loan mix sustains and is providing us further agility and with 12% quarter-on-quarter and 24% year-to-date increase, the share of individual loans is now at [indiscernible]. On the company side, our FX-adjusted loan growth stood at 3% Q-on-Q and 9% year-to-date, making up 6% of the loan portfolio. Our credit card portfolio was up controlled 8% quarterly. But equally important, we are gaining market share in liquidity products. As always, our market share in general purpose loans increased 50 basis points in second quarter, and this is mainly through our credit customers and pensioners, as we all know, with lower P/D levels of [indiscernible] default. On another one, housing loans, our market share increased 150 basis points in the second quarter, and this is supporting our penetration levels further and supporting our returns overall. All incorporated, our Turkish lira loan yields improved [indiscernible] basis points quarter-on-quarter. And if you adjust the nonrevolving part of the credit cards, we had a very limited [indiscernible] bps contraction. So good news, in July, we have further improved our loan yields. So it started to be visible more. On the -- now I'm moving to the funding side. Our impressive and disciplined deposit cost management sustained also supported by a well-structured funding base, making up 55% of the portfolio, Turkish lira customer deposits increased 10% quarter-on-quarter. And as a proven track record, I believe we are the leader in Turkish lira demand deposits in with nominal terms with a further 10% quarterly increase. So about 46% of our deposits are at the moment [indiscernible] deposits, so we are not paying any interest on them and 29% of the Turkish lira. And these levels sustain to be the highest level among the peer group. On the foreign currency deposits, on the other hand, they came down 3% quarter-on-quarter and 2% year-to-date, and this is due to -- mainly due to the bulk deposits, the currency impact. Adjusted for that, our portfolio was stable. Also supporting our cost of deposits, small ticket Turkish lira deposit base continues to increase, going up an additional 118 basis points quarter-on-quarter. Low-cost small ticket deposits share reached to [indiscernible] and around 70% is individual and 8% is SME. So we are very strong on the individual loans. Thanks to this strong performance on the deposits and our disciplined pricing strategy, Turkish lira deposits went up by a limited 62 basis points quarter-on-quarter. This is best-in-class and still improving. We are seeing an improving trend at the moment and the year-to-date improvement is 290 basis points. In July, now we already see some improving trend on Turkish lira deposit cost, which we believe might support our third quarter performance. I'm moving to the details of our strong quarter. I'm starting with our top line. We are on Page 5. Despite all the macro backdrop, all the volatility, our core revenues came down a limited 2% quarter-on-quarter, corresponding a strong 47% year-over-year increase. Net interest margin tightened a limited 50 basis points quarter-on-quarter over our very strong first quarter. And thus, year-to-date improvement is still, I can say, very strong at 58, I'm sorry, basis points. Our Turkish lira loan deposit spread was down just 1 basis point quarter-on-quarter. So the year-to-date improvement is around 50 basis points. So as I tried to mention, the recent levels already signaling an improving trend. So we will see further improvement on the year-to-date performance. Our trading income in the second quarter stood at TRY 4.5 billion, thanks to increasing customer transactions. First off, very strong at TRY 15.3 billion. With this performance, we are still ambitious to achieve our full year net interest margin guidance of at least 100 basis points improvement in 2026 full year. Now I'm moving to the next page. We are looking at the fees. Our fees are backed by customer-facing service model, increasing 26% year-over-year. The diversified fee generation is supporting this performance, deepening customer engagement is the key. This is despite a 13% year-over-year increase in payment system fees, robust increase in transaction fees, up by 45% year-over-year, a solid 68% support from bancassurance and 81% increase in fees from investment products, and these are all more than compensated for this lower contribution on the payment systems. Once again, our strong customer franchise will continue to support our already high level of fee generation. Thus, we maintain our around inflation fee increase guidance for the full year. Now I'm moving to OpEx. We are on Page 7. Despite the higher than projected inflation reading, our cost growth stood at 34% year-over-year and aligned with our full year guidance. Even with ongoing increase in IT spending, I want to note that our IT-related costs increased 52% year-over-year, so we are not compromising on IT spending. Our fee covered OpEx stood at a strong 90% of the average [indiscernible] 3.9%. All incorporated, we are committed to achieve our lower than 35% OpEx increase guidance for the full year, and we are at set levels at the moment. Now moving to the asset quality. Given tight macro and legal restructuring scheme on the individual front, we are witnessing some increase on the NPL inflows to consumer loans and SMEs. While bigger ticket corporate commercial, they are intact. We are not seeing any problem on that front. First half '26 quarterly average NPL inflows, we are looking at quarterly average because there might be some differences on a quarter-on-quarter basis. So we believe that, that is the best way to understand the development. So NPL inflows stood at TRY 18.6 billion. This level was TRY 15 billion back in 2025 on quarterly average again. So this level is still the lowest inflow amount among peer group. Also from a very high base because last year, we had a very strong recovery performance, if you recall, we are seeing some slowdown in recoveries. Quarterly average recoveries collections stood at TRY 5.8 billion versus TRY 6.5 billion that we had in 2025. All incorporated, average net NPL inflows were TRY 12.8 billion. We are seeing 36% increase versus 2025 averages. The increase is a 52% increase in credit card increase inflows, 41% from general purpose loans and 54% increase from SMEs. [indiscernible] that we have been actively restructuring the unsecured consumer loans since the last quarter of 2024. The recovery is very strong at 65%, which is limiting the inflows. But as we can say that we are recovering and classifying a part of Stage 1, but a part is now mitigating for the NPL. Now I will dig into the details in the next page, but we have prudently covering the portfolio. All incorporates our cost of risk increased 201 basis points in first half '26 and should the high level of real interest rate environment sustain, slowdown sustains or macro tightening sustain, our 2026 cost of risk might be slightly higher than our guided level of 175 basis points range. And this might be mainly through slower than projected recovery. So moving to Page 9, looking at our conservative staging and following provisioning approach, our total loan coverage further increased to 4.1% and adjusted for TRY 5.5 billion NPL sales in the year, it was at 4.3%, even very strong. The increase is through prudent provision increase in unsecured consumer loans and SMEs. Our NPL ratio stood at 4.3% and despite the NPL sale, coverage is still at 51.4%. Stage 2 loan share stable at 12% with a strong 9% coverage and 59% of Stage 2 loans are restructured. Once again, I want to emphasize that around 40% of the portfolio is from [indiscernible] that we restructured back in 2018, '19, and there is a healthy coverage of 20% despite a very strong performance there and 35% of the restructured portfolio is [ formed on secured ] customer loans. We had some increase in [indiscernible] part, is at 39% of Stage 2 portfolio. This is a significant increase in credit risk in which we have a very conservative classification. So now more than 90% of the portfolio is without any passive, and just a limited 3% of the portfolio is the passive classification in which we might see some mitigation as we always mentioned. Now we are on Page 10, our solvency. Given the macro, we had a halt in internal capital generation in second quarter, but still the support of internal capital generation is at 76 basis points in first half. Starting from third Q, we foresee the internal capital generation to [indiscernible]. Also, as Kursad stated, as a brief teaser of our strategic milestones to come, we have signed a partnership agreement with Azimut Holdings. And accordingly, this transaction will further support our capital levels by around 70 basis points. Looking at the [indiscernible] still very limited, first 100 bps [indiscernible] 13 basis on the yield curve, 13 basis points impact, 10% depreciation, CET1 impact is 28 basis points, no impact on [indiscernible]. And we have a huge room for the NPL breakeven level. We are comfortable. Now looking at a summary of what we guided, what we had. So we are comfortable with our guidance. We are adjusting, as we mentioned, [indiscernible]. And also, we believe that the worst is over, and we will see improving earnings each quarter. Accordingly, we comfortably maintain our mid-20s ROE guidance. Now we would be very happy if you have any questions. Let's start with the written one. Or if you have any audio, we can jump into it.

Ladies and gentlemen, there are no further audio questions at this time. I will now pass the floor to Ms. Varol to accommodate any written questions from the webcast participants.

Okay. So I will start with the written questions. If you have any audio, we can always go back. So thank you from [indiscernible]. The first question is about [indiscernible] Managements sale. What should we expect about the bank-only impact on fees? Should we expect a decline or increase? Can you please quantify?

Thank you. Regarding the transaction, the distribution agreement is [indiscernible] fee sharing is exactly the same as we have today with our subsidiary [indiscernible] asset management. But on the top of what we are earning as bank only, there are potential upside as earnout in the distribution agreement that we will be earning more. And also, as I tried to state at the beginning, this partnership will create a further growth on the top of what we are planning as all bank. Therefore, this further growth on AUM is going to help us to pay much [indiscernible] fund management fees in bank only financials. We have more than upside and it's going to be more than what we have today. I would say, therefore, to your stated question, there should be an increase.

Also, on other provisions during the quarter, you had TRY 1.1 billion. Can you give the details?

Let me continue, this TRY 1.1 billion possible risk that may arise [indiscernible] risk coverage.

Third question is about asset quality trends. Looking forward, when should we expect the deterioration trend to reverse? Can you please share your view? Is there any reason for 2027 to be better than 2026?

And it is mainly with the macro conditions and growth and as well as the tightening policies. And we believe -- and based on our forecast that we are confirming our guidance, we believe in the [indiscernible] we will reach our guided level in the fourth Q. Therefore, with the continuation of the rate cuts, there is going to be a better cost of risk level in 2027. But I mean I shouldn't say expectation for much higher improvement in cost of risk, but [indiscernible] this will be still there.

So I will merge a couple of questions because we are having some about the rationale of selling the upgraded portfolio. And the question is why now and one saying, could you elaborate more on your strategy going forward? What is driving the sale?

And first of all, maybe for [indiscernible] our strategy is more bigger than this transaction, as I say. And we, as Yapi Kredi, made a transformative improvement, as you know, when we became 4x in a row ROE leader in the market. And this plan is also aiming to achieve this again to sustain our leadership and also the market is changing and including the ecosystem as well as efficiency and productivity areas with AI and technology. On the top of this kind transition, you will be hearing more improvement in the processes, efficiency and productivity and as well as some action plans in new ecosystem from us. Therefore, this strategy is trying to reach much better market capital for the bank, and we are sustaining our leadership and undisputable leadership in the markets. And continuing to [indiscernible] question, the strategic rationale [indiscernible]. And the reason behind is again the same. We would like to be a pioneer in this sector as it like in 2007 bancassurance business. And there was the first sale of the bancassurance part of a bank to a foreign insurance company. It was the first and then all the other rest follows. And this is going to be something like that, we believe because we, as a bank, would like to focus on our selling activities, and we would like to depend on our customer base and rather than focusing on the product factory and management of it. Therefore, this partnership is going to increase our market share in asset management more than our possible organic growth. The rationale behind is not just capital raising activities. It is more on the business side. We would like to improve our market share in asset management since we have the capability of our network with more than 18 million customers. And we would like to have one of the biggest asset management companies in the world as a product factory, and we will use their expertise, and we will continue to sell more and more on this business [indiscernible]. Actually, it is not something like [indiscernible] business. Actually, it is quite reverse of it, we would like to have much more market share in this asset management business by making good partners, And the other question that you have to meet internal CET1 buffer. We have been telling that we are going to reach [indiscernible] basis point target soon closely. Therefore, we feel comfortable now where we are.