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

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 and Live Webcast to Present and Discuss the Yapi Kredi First Half 2025 Financial Results. 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.

Good afternoon, and thank you all for joining our first half 2025 earnings call. Starting with the operating environment. Central Bank has adopted a tight policy throughout the second quarter in response to the volatility started in mid-March. Accordingly, the funding rate reached the high end of the corridor and stood at 49% up until mid-June. Following the gradual stabilization, Central Bank moved back to a weekly funding policy rate of 46% during June. As you also follow, Central Bank restarted the rate cut cycle last week by decreasing the policy rate to 43%. When we look at the macro developments throughout the quarter, headline inflation improved to 35% in June. With ongoing tight monetary policy and slowdown in economic activity, we expect the improvement in headline inflation trajectory to sustain through the rest of the year and reach below 30%. Equally important, Central Bank rebuilt its reserves by more than $30 billion during the quarter. Macro developments disrupted the ongoing improvements in net interest margin. That being said, with agile asset liability management and deposit pricing strategies at Yapi Kredi, we had a limited shrinkage in net interest margin. Improving trend in our net interest margin is back on track also when we look at today's figures. Now looking at our strong first quarter, I would like to move to the second page of our presentation to give details about our second quarter performance. In the second quarter of the year, we posted TRY 11 billion net profit, same as first quarter and showed resilience against the disruption in the rate cut cycle. Accordingly, our first half net profit reached TRY 23 billion, going up by 31% year-on-year. Our return on tangible equity and return on assets stood at 22.4% and 1.6%, respectively. Thanks to the strong performance, we confirm our mid-20s ROE guidance for the full year. Main driver of the performance was the ongoing strength in our top line. Core revenue margin was almost stable quarterly and improved by 161 bps year-on-year. This resulted in an 8% quarterly and a strong 83% annual improvement in core revenues. Net interest margin improvement was 116 bps over 2024 last year. Strong fee performance continued also. Thanks to our enhanced penetration to the strong customer base and support from payment systems, fees went up by 16% quarterly and 45% year-on-year. Equally important, NPL inflows throughout unsecured consumer loans started to improve in the quarter. Our performance positively deviated from the market trends and we continue to maintain our prudence in coverage. Some of other important drivers of our performance are our Turkish lira loan-to-deposit spread adjusted credit cards had a limited tightening of [ 130 bps ] quarterly. Despite the significant hike in the market rates, our effective deposit cost management sustained, thanks to our best-in-class service model and strong customer franchise. Year-to-date improvement on Turkish lira loan-to-deposit spread was very strong at 540 bps and again, with the active loan and deposit pricing. In the quarter, we continued to price our Turkish lira deposits 100 bps below the market price. I also want to emphasize that we do not just have the highest demand deposit share among the peer group, but also the highest amount in nominal terms. This performance once again proves the quality of our customer-oriented strategies and strength of our service model and our branches and all the channels. Operating expenses increased by 6% quarterly, 52% year-on-year, mainly due to the inflation pass-through impact, ongoing customer acquisition costs and as well as investment to our human capital. All in all, our fee covered 96% of the cost as of first half '25. In terms of asset quality, in the second quarter of the year, we continue to perform better than the market and our peers. Improvement in our net NPL inflows from unsecured consumer loans were the main driver of this performance. NPL inflows in the quarter increased a limited 14%, whereas collections improved by 39%. Accordingly, our net NPL inflows was by far lower than our peers and also lower than the first quarter. We continue to have a robust total coverage at 3.7%. If we adjust with our recent NPL sales, it's 4%. Our cost of risk improved to 152 bps in second quarter and year-to-date, it's at 162. Now I'm leaving the floor to Hilal, and she will provide the details behind our strong numbers. Hilal?

Thank you very much, Kursad. Thank you all for joining our call today. I will start with Page 3, the volumes. In the second quarter of the year, we continued our selective lending, and we have started to gain market share in lucrative products. Our Turkish lira loans went up by 13% in the second quarter, while the year-to-date increase stood at 17%. We also continue to see the lucrative growth availability on the foreign currency side. Our foreign currency loans increased 8% quarter-on-quarter, this is in dollar terms, bringing the year-to-date increase to 17%. We have started to gain market share, mainly in retail side, given the improvement in profitability. Our general purpose loans increased 18% quarter-on-quarter, and we gained 72 basis points market share among private banks. One other product, credit cards, we gained 43 basis points market share through a 15% quarterly increase. Business loan growth, Turkish lira part, on the other hand, stood at 5% in the quarter, and this is in line with the loan growth caps. In the quarter, we also maintained both sector and peer pricing on the lending side. As a result, adjusted for the credit card, our loan yield further went up 84 basis points quarter-on-quarter versus a drop in our peer average. This brings the annual improvement year-to-date to 297 basis points, and this is 100 basis points better than the peer average. We are and we will continue our selective and lucrative lending strategy in a very agile way and which will continue to support our spreads in the rest of the year and for the future also. Now moving to the funding side. We are on Page 4. Our strong and widespread active customer franchise, which already surpassed TRY 17 million, and agile pricing strategy supported the funding base as well as the cost of funding in the quarter. Turkish lira deposits increased 9% quarter-on-quarter and 17% over year-end. Reaching back to the highest nominal level among our peers by far, our Turkish lira demand deposit base increased another impressive 26% quarterly and 36% year-to-date and reached TRY 295 billion. Turkish lira demand deposit share improved further 464 basis points to 32%. This is the highest level again among our peer group, meaning our small ticket focused strategy is paying off. Please note that almost 90% of our Turkish lira demand deposit base is through sticky small tickets. Foreign currency deposits, on the other hand, increased 2% quarterly and 14% year-to-date, while the share of foreign currency demand deposits in total stood at a significant 65%. All incorporated, our demand deposit share in total is at 47%, showing an impressive 244 basis points improvement on a year-to-date basis. This strong deposit performance and our agile pricing strategy limited Turkish lira deposit cost increase at 217 basis points, and this is despite a significant drop in market rates and intense competition. And please note that given our agile balance sheet management, this happened throughout the quarter. Looking at the daily average MIS data, Turkish lira deposit cost increase was very limited at 110 basis points. On a year-to-date basis, we had 241 basis points improvement in Turkish lira deposit costs. This is showing our agility in balance sheet management once again. And this time, following Central Bank's decision to lower the funding rate first started from 49% to 46% and then they recently had another cut, we have gradually lowered the share of most cost big ticket deposits while gradually increasing non-deposit funding, mainly repo. So far in July, as Kursad already mentioned, we are already seeing the positive support from lower deposit costs, coupled with lower non-deposit funding and our net interest margin is going up. Now moving to the details of our profit, starting from top line performance. We are now on Page 5. As I have detailed previously, thanks to our cost of funding management in the quarter, we had a confined contraction in quarterly net interest margin, supported by the ongoing strength in fees. Core revenue margin remained almost stable, just a mere 4 basis points decline quarterly, while the increase was 146 basis points year-to-date. Supported also by the trading line, core revenues increased 1%, almost stable, while the annual increase was very strong at 70%, 7-0. Our effective pricing strategy definitely was the main driver of this performance. Our net interest margin came down just 37 basis points quarter-on-quarter and improved 116 basis points year-to-date. And looking at the peer group, the improvement year-to-date improvement is the best among our peer group also. Our loan-to-deposit spread contribution to the net interest margin stood at a healthy 3.9%. And this, again, I want to emphasize, is significantly above the peer group, and this is showing the room for the improvement going forward in our net interest margin. Our strong net interest margin improvement trend was shadowed by the quarterly disruption in the rate cut cycle in the second quarter, even we had the hike in the funding rates. So today, we are now back to the improving stage and foresee quarterly increase in each quarter for the rest of the year. So obviously, this quarter, the disruption was not incorporated in our budget we released at the beginning of the year. Thus, we reduced our net interest margin improvement target to 200 to 225 basis points range from around 300 basis points. Also, we foresee the improvement to sustain in the first quarter of next year as well. Moving to the next page, we are looking at, again, very strong fee performance. We have increased our fee base by an additional 16% quarter-on-quarter and 45% year-over-year. We are continuously leveraging on customer franchise as well as sustaining diversification efforts. This is a very strong performance from our branches as well. Our payment system business further supports our fees and better than our guidance. Number and amount of transactions, very strong. They are improving each and every quarter, each and every month. And looking at the numbers, more than 5x what we have compared to back in 2020. So support was very strong, 60% year-over-year increase was through our transactional banking money transfers. Bancassurance up 62% annually. Investment products, 35%, of course, payment systems providing a significant support, but it is from all of the parts. Once again, the ongoing customer penetration will continue to support our already high level of fee generation, which is already evolving above budget. Thus, we revised up our fee increase guidance to above equal to 40% from 25% to 30% growth. This is expected to offset a substantial portion of the NIM revision. Moving to OpEx. We are on Page 7. Operating costs increased 6% quarter-on-quarter and 52% year-over-year. Our fees come close to a full coverage of OpEx, providing us room for investing in operational efficiency for the future. Cost growth is still in line with the guidance. Making up 37% of our total loans, HR-related costs increased 48% year-over-year. As I mentioned, we are investing for the future for the operational efficiency. Thus, cost increase was 57% this time. Also, there is some impact from exchange rate, inflation, but the main part is coming from future investments. In the quarter, we have maintained our top-notch efficiencies. In second quarter, our fees fully covered OpEx 100%. And in the first half, the coverage is at 96%. Cost-to-average assets at 3.9%. Moving to another very hot topic, asset quality. As we have stated during our first quarter '25 call, and also as Kursad mentioned, we have started to see some improvement in net NPL inflows, mainly through unsecured consumer side. On the other hand, NPL formation through SMEs are increasing, but as you all note, coming from a very low base. All incorporated, our performance diverged from the system in a positive way, and we had lower NPL inflows versus the sector and peer average. That being said, we continued our uncompromised prudence in provisioning. In the quarter, NPL inflows were at TRY 15.7 billion, and collections improved to TRY 7.5 billion. As a result, net NPL inflows came down slightly to TRY 3.8 billion (sic) [ TRY 13.8 billion ], TRY 5.8 billion of which was through consumer loans and credit cards. Net NPL inflows from general purpose loans came down 34% quarter-on-quarter to TRY 2.2 billion. And when we look at the peer average, it is TRY 3.3 billion. And please note that more than 65% of our GPLs are through our payroll customers with a significantly lower lifetime PV. This is supporting us. Credit card net NPL inflows down by 14% to TRY 3.5 billion. The peer average was TRY 5.7 billion. And this is thanks to our strong know-how on credit cards and planned actions taken. Moving to Page 9. Since second quarter '24, so showing how we are losing market share on the NPLs, meaning we are performing better than sector since second quarter last year. Still, our coverage level of 3.7% is reflecting our prudence and adjusted for the recent NPL sales, even higher at 4%. All in all, our cost of risk stood at 162 basis points as of first half '25 and 152 basis points in second quarter. This is within the full year guidance range. Equally important, we have a very well-diversified loan mix in terms of sectors. The highest share is lower than 7%. Also, SME share in performing loans is limited at 8.5%. Moving to Page 10, solvency. Our CET1 ratio stood at 9.9%. Our buffer is at 189 basis points, and this is mainly due to the market volatility and ongoing business growth. Capital adequacy ratio stood at 13.1%. And looking at the impact, operational impact was 51 basis points and macro, 15 (sic) [ 11 ]. We have already started to see an improvement in the solvency. There are 2 reasons, thanks to lower interest rates supporting the capital level through AFS reserves. Second, internal capital generation is back. So it's back on track. In terms of sensitivities, the impacts are still limited, first 10% depreciation, 32 basis points (sic) [ 31 basis points ] impact on CET1 and 90 basis points (sic) [ 10 basis points ] on capital adequacy ratio. The breakeven U.S. to Turkish lira rate is around 80 (sic) [ 70 ], and all calculations are set at [indiscernible]. The impact of the first 100 basis points per last year in the Turkish lira yield curve is at 15. Breakeven NPL ratio is around 7.5% (sic) [ 6.0% ], even a bit higher definitely today. All incorporated, we are comfortable with our capital levels today. Internal capital generation, as you know, dropped at fourth quarter, but already it started to kick in again, which will help us to build buffers through the year and before growth opportunities kickstart further. Now moving to Page 11, a summary of our guidance. I will try to go through and give a summary at each and every section. But in a nutshell, loan growth guidance is on track. We revised on our net interest margin guidance to 200, 225 basis points improvement given a quarter of disruption in rate cut cycle, thus increasing funding costs, which will be largely offset by our better performance on fees. So we revised up our fee growth guidance above or equal to 40%. On top, although we haven't provided the guidance here, our trading performance through treasury operations are performing better than our forecast. Cost increase is on track. We maintain below 50% increase guidance. And for asset quality, we also keep the guidance at 150 to 175 basis points. And all incorporated, we do maintain our ROE (sic) [ RoTE ] guidance at mid-20s. Now I'm leaving the floor to Kursad for closing remarks, and then we will be taking your questions.

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

The first question comes from the line of Vialba Mariana with William Blair.

Can you hear me?

Yes, we can hear you, please go ahead.

Sorry, just checking. I have 2 questions. One is related to solvency. Hilal, you mentioned that the solvency already started to improve from the level you reported in second quarter. Is there a level of CET1 roughly that the bank has in mind that they would be comfortable ending the year in order to continue to grow in 2026? And my second question is on Stage 2 loans. There was quite a big increase. I was just wondering if this is related to the deterioration in retail and, to a lesser extent, SMEs that you mentioned or if this was a big file. And if you can comment on if there is any particular sectors or segments that have driven that increase in Stage 2.

Thank you, Mariana, for your question. I will reply to the first one, solvency ratio. And our adequate levels is 200 bps buffer against regulatory limit for CET1. As of the second quarter end, we are close to that. It is slightly below that threshold due to a low level of profitability with the rate hike session throughout the quarter. And with the profitability increase in the third and fourth quarter, surely, we will go back to the levels that we always would like to be. And secondly, maybe there are a couple of written questions about that, and I think that there will be some other on the others' questions. And as you know, we are the only IRB bank in Turkey in terms of capital calculation. And being an IRB bank, there is the model update sessions. For some couple of time, we have not been updating our model. We were waiting for this economic turmoil to end. And there are some BC buffers that when we make the update, there is going to be some increases in our capital calculations, which we believe we will start also doing those throughout the second half. That's why it is the most important thing that we rely on, and that's why we are comfortable as of today also going below 200 bps buffer because we know that there are some quite important buffers that will come with our IRB model updates.

So about your second question about Stage 2 loans, our Stage 2 loans increased 24% quarter-on-quarter. And mainly one reason is the exchange rate because almost 40% of Stage 2 loans are in foreign currency. And the increased 70% is due to [ SCRS ], meaning significant increase in credit risk. So we are always mentioning this is because of our prudence. And also, the rest is true, the restructured portfolio. We have been effectively restructuring our retail portfolio, mainly general purpose loans and credit cards, and also the BRSA regulation is allowing us to restructure. This is helping us on the asset quality front also. And looking at the payment performance of the restructured credit card and general purpose, it is performing quite well. And we are seeing a quite good return from that. Is it clear? Or do you need any further clarification?

No, that is clear.

The next question comes from the line of Taranto, David with Bank of America Merrill Lynch.