© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Fourth Quarter 2022 Financial Results Audio Webcast. Our presentation will be hosted by Ms. Gamze Yalcin, CFO; and Ms. Nese Sozdinler, Head of IR and Sustainability. [Operator Instructions] Now I leave the floor to our presenters.
Hello, all. This is Gamze speaking. I hope everyone is safe and healthy. Thank you all for joining our third quarter earnings presentation. We are pleased to present another strong set of results in this challenging environment. Needless to say, this performance is based on our strength in human capital, technological infrastructure, digital capabilities as well as our sustainable business model.
Without further ado, as always, I would like to share the period's highlights for Isbank. In the face of the uncertainties, both globally and locally, we maintained our prudent stance, and we further increased our more than sufficient loan loss provisions in addition to our robust 3 provision base. We continued our selective and balanced lending approach in the context of recent regulatory and macro outlook. Loan growth is still on the Turkish lira side. As expected, FX loans continued to decline.
In the period, we observed further improvements in FX-protected deposits and conversion rates. Both for retail and non-retail, we exceeded the 20% threshold. In the third quarter, we also increased our non-deposit FX financing through securitization program and bilateral transaction, both having 5-year maturities. We preserved our spreads, and we kept our swap-adjusted net interest margin above our guidance. Based on our concentration on net fees and commissions, we once again achieved a robust performance with more than 100% increase on a yearly basis. Furthermore, as in the previous quarters, subsidiaries continued to support our bottom line. Indeed, the performance of this portfolio is proving the fact that, through our well-diversified asset base, Isbank has a strong capacity to generate income.
All in all, return on tangible equity exceeded 52%, but please note that when CPI linker income is adjusted for actual CPI levels, return on tangible equity increased to 66.2%, whereas return on tangible assets reached 6.1%. Cost to income ratio further declined, thanks to 118% positive jobs we created in the quarter. Solvency ratio stood at solid levels, well above the minimum required levels, high profitability and optimization of risk-weighted assets surge further strengthen our capital. So in line with the improved performance, bottom line was nearly 4.5% higher compared to the same period of last year.
Now I will leave the floor to Nese for the details of the bank's performance.
Thank you, Gonzalo. Welcome, all, and thank you for joining the webcast. Page 4 shows the main balance sheet items. We continued with our selected and well-balanced growth policy in the third quarter as well and booked a TL loan growth of 12%. On a year-to-date basis, TL lending increase reached 49%. We have seen a further 5.2% decline in FX loans on a quarterly basis. Year-to-date contraction in FX lending came to 8.8%, in line with our budgets.
Looking at the funding side, TL deposits continued to post a remarkable increase. That was around 33% additional parts of the growth in TL deposits, carrying the year-to-date increase to 94%. Naturally, most of the expansion came from new deposits as we are among the top-performing banks in this area.
Needless to say, in terms of demand deposits and saving deposit base, we continue to be the #1 among private banks. As of the end of period, 45% of our deposit base is comprised of demand deposits, providing an impressive support to cost of funding. As for the external liabilities, as of the end of September, our total external dues were USD 8.2 billion, of which USD 3.7 billion is due within a year. Against that, our FX liquid assets was nearly 3x of short-term repayment amount.
FX LCR was again remarkable at 479% by the end of the period. On the next page, we have the net interest margin and spread evolution. On a quarterly basis, swap adjusted NIM was flattish at 7.1% despite pressures in the operating environment. For the first 9 months, swap adjusted net interest margin stood at 6.6%, posting a 31 basis point increase compared to first half. As you know, we have a more conservative approach compared to our peers regarding the valuation of CPI linker portfolio, where we look into the 12 months ahead inflation expectation instead of actual figures.
However, for your convenience, we provide comparable figures as well. With this regard, if we use the headline CPI figures in valuation, our quarterly net interest margin would increase by 176 basis points and stood at 8.9% while cumulative net interest margin would reach 8.3%. All in all, we expect to remain above guidance of more than 5%.
On Page 7 -- on Page 6, I'm sorry, we provide information about the securities portfolio and CPI linker contribution in detail. As of the end of September, share of securities in total FX increased to 18.1%. Obviously, we have seen a surge in the share of fixed income securities to 27%, owing to recent regulatory framework. At the same time, we continue to purchase floating rate notes and CPI-linked securities for the sake of diversification and providing a natural hedge to our portfolio.
In Q3, yield on the CPI linker portfolio stood at 53%. Once again, if we have valued our portfolio using the actual CPI figures, we would have added around TRY 11.3 billion to our net income in the 9 months.
Moving on with net fees and commissions. We achieved solid net fees and commissions broad in the quarter, which brought the year-on-year growth to an impressive 104%. Net fees and commissions in the quarter was backed by strong performance in payment systems, lending business and money transfers. Going forward, with this concentration, we will further enhance our performance in key business, and most probably, we will be at a level above our guidance at the year-end.
Next page shows the NPL and provisioning trends. In the third quarter, our NPL ratio stood at 3.2%. The slight increase in NPL inflows was the result of 2 one-off commercial files. Other than that, we do not observe a general downward trend in the asset quality metrics. In line with our prudent stance, our coverage ratio substantially increased to 74.5%, constituting the highest level among peers. Our cost of this evolution underlines our proactive provisioning. Total net cost of risk, including currency impact, stood at 141 basis points. We wouldn't expect a significant change in the strength for the rest of the year as well.
Next page shows the capitalization levels. Capital adequacy ratio without the BRSA for revenues increased to 19.3% from 16.5% in the beginning of the year. We further reinforced our capital. Net income generation alone added 160 basis points to our solvency ratio in this quarter.
Mark-to-market valuations of securities portfolio also contributed to capitalization. Once again, please note that the sensitivity of our capital adequacy ratio to 10% depreciation in Turkish lira is limited to around 50 basis points.
This concludes our presentation. Now we can have your questions.
I don't see any written questions at this time. [Operator Instructions] [ Johan ] [indiscernible] from HSBC has a question.
Sorry can you hear me now?
[Operator Instructions] Let's try to continue with Simon Nellis from Citi.
Can you hear me?
Yes.
Excellent. Yes. Thanks for the opportunity. Just a quick question. I was wondering if you could quantify how much the impact of all these new regulatory measures that have been imposed on the banking sector, how they are affecting your behavior and your returns. And how are you kind of responding to them going forward? I guess will you slow your loan growth is the key question.
Simon, thank you for the question. First of all, I want to focus on the NIM evolution, maybe looking directly on our core NIM evolution. Of course, definitely, when we look at the loan side, with respect to currency environment, and this is not only the regulation, it's also the macro outlook, as you know, we are committed to selective lending and mainly focused on targeted areas, which are productive.
But however, on a system-wide basis, obviously, yields are under pressure. But as much as Isbank, thanks to our well-diversified asset base and flexibility in terms of our balance sheet structure in that sense, the lower funding rates as well as our low cost of funding base, which reflects our rational pricing policy, et cetera, we believe that will help us to maintain a core NIM excluding the CPI linker portfolio impact that a core NIM above 4%.
So definitely, the regulations, the new regulations introduced might have a -- might weigh on the P&L of the banking system. But we believe that, as Isbank, we can still provide NIM guidance about our guidance levels. And we believe that our balance sheet fundamentals are strong enough to absorb any necessities regarding the NIM regulation framework.
I believe in terms of the securities, the majority of the question is related to the securities portfolio. I must say that since we already had a relatively balanced mix of securities, both in terms of fixed and floating rate notes, this gives us the flexibility in terms of our managing our liquidity and balance sheet requirements, continuing with our normal purchase agenda with respect to treasury auctions.
As you know, Isbank is a market maker and a primary dealer. We will suffice with respect to this NIM's requirements. And as you know, the regulation will be effective in the coming periods, and it might be subject to changes. For Q4, we don't see any necessity for extra purchases. However, in line with the market dynamics, we might consider front-loading purchases.
Definitely, in terms of the regulation, we understand the context of the framework, and we support the realization strategy for the macro outlook. We will do our best, however, being respectful to our customers' preferences as well as continuing keeping up with our rational pricing policies. Is that an answer to your question, Simon?
Yes. I guess so. I'm just wondering how -- what will your returns looked like if you hadn't been burdened by all these regulations.
To be clear, in that sense, as you know, we have revised our guidance for this year and back in the first half of August. So despite the continuing regulatory frameworks introduced into the system, we are not -- we don't see the necessity to make changes with our guidance for the full year.
And can you maybe just highlight where you think you're going to be? I think you mentioned on the fee income side, you probably will beat your guidance. Are there other areas where you feel confident that you're going to exceed?
Fee income definitely is the main business that we see that upside potential. And please also keep in mind that in terms of our conservative stance, we front-loaded provisions may be more than needed as we already discussed. So definitely, we can say that we can overperform the guidance of fee income, which has this upside potential above 80%, considering our current on a year -- on a yearly basis, more than 100% growth in the fee income business.
Okay. And maybe just one last one from me. Concerning your [indiscernible] stake, would you -- are you happy to continue holding that? Or would you ever consider selling it at some point?
Yes, of course, there is no change in the strategy of keeping the subsidiaries portfolio.
We can look into some written questions, I guess. [indiscernible] from Barclays asks the FX liquidity as of Q3 and how much of users with the corresponding bank. She is asking the potential use of call option for our swap [ billable] next year.
Okay. In terms of the FX liquidity, I must say that the current FX liquidity is around $11 billion. This figure includes the sub debt repayment of the bank back on 24th of October. In terms of the composition, I must say, yes, like around USD 6 billion is in the form of FX swaps. The remaining parts, liquid assets like including money market placements, unencumbered cash and bank notes is around USD 2.7 billion. Unencumbered securities, around USD 1.5 billion, USD 1.6 billion. So this sums up around USD 11 billion, I must say. The question is limited with the FX liquidity. I have seen another question, I guess, a written question regarding the stages.
We will come to that in person. We will answer that. [indiscernible] is asking about the call option as well.
Sorry, is the question regarding the...
Call option.
Okay, call optionality. Okay. The call dates for our USD 500 million and USD 750 million subordinated notes are for June 2023. So next year in June, we will have the call date for the first one like $500 million. And for the second one, it's $750 million. Of course, as we always share with you ourselves, for sure, we will take into the consideration of the market dynamics as well as investor expectations, but please also keep in mind that BRSA's approval is also required within the call -- using off the call optionality.
So we hear you, we understand you. We will try to be in line with the market expectations. But as the process requires the involvement of BRSA permission. So we cannot talk on behalf of them before discussing this issue with the authority. But the main aim of the bank is, of course, to consider the investors' expectations because this is an area where we would like to further enhance our bonding with the investor community.
So a number of the participants are asking about where we are with respect to the 50-50 currency composition.
Okay. We must say that, obviously, in terms of our rational pricing policies in line with our low cost of funding base to benefit from it, et cetera. And in terms of being respectful to the customers' preferences, definitely, we will do our best. Definitely, we support the realization strategy for the macro outlook. We will do our best, but we will be sticking to our rational pricing policy as always.
Early year-end levels will be important in that sense. So you know the regulation will be effective in the coming days, months, we must say. So we are not there yet. But definitely, we support the realization strategy and we'll be doing our best in that sense. So let's comment while we look at the year-end level. So the effective date of this regulation, as you know, is towards March end.
So I guess [ Johan ] has just typed down his question. He is asking about the commercial loan rates. And asking about the potential downward repricing possibility.
As you know, the cap on currency protected products, which is 13.5% constitute a general benchmark for Turkish lira deposit cost. In our case, average cost of Turkish lira term deposits over around mid-teen levels. On a blended basis, Turkish lira deposit costs come down to 12% levels.
Looking at the loan side, we can say that newly offered loans are priced around low 20s levels on average for the time being. Following recent regulations, we may see, of course, further decline in the non-retail side. As you know, the recent regulations also target to limit the maximum interest rates for Turkish lira commercial loans in that sense. Our appetite is mainly on SME financing.
And as reiterating myself with respect to the new regulations regarding the currency breakdown of deposits, an increase in Turkish lira deposit composition surface. But as I say, we will stick to our rational pricing approach in terms of pricing or deposit products.
I guess these are all the questions we have so far. So I believe I can leave the floor to our presenters for closing remarks to Gamze.
Okay. Thank you very much for your participation. We believe today, we have disclosed another strong set of results indicating our expertise in weathering challenging operating environments. Regarding the details, we are ready to be in touch for your further questions. Looking forward to see you all in person soon. Until then, stay safe and healthy.