Turkiye Is Bankasi AS
IST:ISCTR.E
Earnings Call Analysis
Q3-2023 Analysis
Turkiye Is Bankasi AS
In a climate of economic fluctuations and regulatory transformation, IsBank has emerged resilient, leveraging a close to a century of history to sustain its competitive edge. The bank's third-quarter earnings presentation, hosted by CFO Gamze Yalcin and Head of IR Nilgun Yosef Osman, was not only an occasion to report financial victories but also to commemorate Turkey's centennial of republicanism. IsBank, with a year less to its own centenary, stands proud of its foundational role in bolstering Turkish society and the national economy. In this spirit of tenacity and remembrance, they continue their journey, striving for financial excellence and stability.
The bank has navigated the recent normalization steps in economic policy, maintaining margins and showing adaptability. A remarkable outcome of the period was the bank's leadership in fee generation, which saw an impressive 60% quarterly and 138% annual growth in fee income due to a strategic pivot towards payment systems. Their subsidiary portfolio also contributed robustly. Asset quality management exhibited prowess, with strong collection performance and coverage ratios, as well as a lower non-performing loan (NPL) ratio. The bank also boasts of solid capitalization, positioning itself to absorb possible economic shocks and support further growth. With a cushion of free provisions amounting to TRY 6.5 billion, one of the highest among its peers, IsBank's balance sheet stands robust. This quarter also saw the bank's ongoing digitalization efforts internationally acknowledged, with their mobile app IsCep winning the 'World's Best Mobile Banking App' awarded by Global Finance.
IsBank's performance for the quarter is underlined by a 16.7% increase in net interest income plus trading income, along with a significant support of TRY 8.3 billion from income participations. The bank achieved a striking return on equity (ROE) of 38.2% for the third quarter, lifting the year-to-date ROE to 34%, with a fee provision adjustment raising it further to 36%. These figures stand tall against operational expenses, which have grown 118 %, in alignment with the banking system's trends. Such profitability indicators speak volumes about IsBank's efficient handling of assets and revenue-generating strategies.
A pivotal element in analyzing IsBank's future is its ability to sustain net interest margins (NIM) amid regulatory changes and economic pressures. The bank aims to preserve NIM levels through a holistic and dynamic management approach, compensating for funding cost increases with non-retail loan growth. On fee income, IsBank plans to continue diversifying fee base sources and enhance payment systems, diminishing dependency on lending growth rates. While maintaining conservative asset quality management, IsBank remains watchful for future regulatory changes, expecting positive moves towards stability and predictability. The composition of deposits has also shifted in alignment with Turkey's economic programs, with 80% FX protected versus 20% Turkish lira protected.
CFO Gamze Yalcin elaborated on IsBank's proactive approach to diverse regulations, highlighting efforts to manage Turkish lira deposit costs, commissions, and other financial metrics to maintain net interest margin. Despite the frequent regulatory changes, IsBank's strategy includes dynamic management of the pressures, ensuring sustained profitability. Moreover, the bank's approach to funding is equally strategic, eyeing diversified wholesale funding sources such as syndication and securitization, while being open to market opportunities for Eurobond issuances. IsBank operates with a forward-looking perspective, ready to leverage various forms of capital market instruments to bolster its financial standing.
In conclusion of the earnings call, Gamze Yalcin attributed the solid quarterly performance to the bank's strengths in human capital, technological infrastructure, digital capabilities, and a sustainable business model. Underpinning this success is their commitment to creating value for stakeholders and readiness to handle inquiries regarding their performance further. As IsBank looks to the future and plans to meet stakeholders in person, they signal confidence in their trajectory towards enduring success and innovation.
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Ladies and gentlemen, welcome to Isbank's Third Quarter 2023 Financial Results Audio Webcast. The presentation will be hosted by Ms. Gamze Yalcin, CFO; Ms. Nilgun Yosef Osman, Head of IR and Sustainability. [Operator Instructions]. Gamze, the floor is yours.
Thank you, Ozge. Hello, everyone, and welcome to our earnings presentation for the third quarter. Thank you all for joining. Before going over our financial results, we want to say that we are proud to celebrate the 100th anniversary of the Republic of Turkey. As an institution, 1 year younger than the Republic, we are particularly happy in our contributions to fostering the development of the Turkish economy and society over the last 99 years, and we will continue to do so in the many countries ahead with our solid fundamentals. And today, we are delighted to present once again another strong set of results. Before going into the details, I would like to touch upon the highlights of the period. As you all know, in the third quarter, the normalization steps may initiate the environment. We definitely welcome this process as it helps stability and predictability. In this period, we have remained resilient and adaptive as reflected on our strong set of financials. In this environment, we are largely sustaining our margins.
One of the highlights of the period was our remarkable performance in fee generation. In the quarter, we maintained our leadership position among our peers, both in fee base and fee growth levels as an outcome of our ongoing concentration in line with our payment system strategy. As part of this strategy, we made collaborations in payment systems in line with Isbank's vision to become the bank of the future.
On top of our robust core revenue performance, we again received a very solid income from our subsidiary portfolio as a result of our well-diversified revenue base. In the third quarter, once again, we demonstrated expertise in managing asset quality, displaying the highest collection performance and strongest coverage ratios among peers with a lower NPL ratio.
Over the period, we maintained our solid capitalization levels. These levels are definitely strong enough to absorb any potential adversities in the economy and to support future growth. This is valid for the liquidity levels as well.
On top of this, we keep our strong cushion of free provisions at TRY 6.5 billion on our balance sheet indicating the highest level among private peers. Before moving on with the details, I would like to take a moment here to proudly say that our efforts in digitalization are recognized internationally as our mobile app, IsCep, have received the world's best mobile banking app award by Global Finance.
On the next page, we have the major P&L items as well as the profitability and efficiency indicators. Net interest income plus trading income posted an increase of 16.7%. Thanks to our continuous efforts, our outstanding net fee income generation continues posting an impressive quarterly increase of 60% carrying the annual growth further up to 138%. On top of that, we sustained the largest fee base, as I mentioned earlier. Income from participations was also notable at TRY 8.3 billion providing a significant support to our net income. Annual increase in OpEx is around 118% in line with the banking system. All in all, our return on equity in the third quarter increased to 38.2% carrying the ROE for the first 9 months to 34%. When adjusted for fee provisions, cumulative ROE reaches 36% level.
Now I will leave the floor to Nilgun for the details of the bank's performance.
Thank you, Gamze. Welcome, all, and thank you for joining the webcast. First and foremost, I would also like to celebrate the century of the Republic of Turkey and the centuries to come. Moving on with the financial performance. You can see the main balance sheet items in this slide.
Because of the tightening measures in the third quarter as part of normalization process, there was a slowdown in loan demand. However, we registered a TL lending growth of 9.4%, mainly stemming from the retail side. In line with our budget, FX lending continued to decline in the third quarter with 6.3%.
On the funding side, we maintained our concentration on widespread renewal of core deposit base. There was around 31.2% additional quarterly growth in TL deposits, carrying the year-to-date increase to 85.1%. FX deposits, on the other hand, declined by 1.9% in this quarter. As you know, Isbank has the largest demand deposit base among peers. In Q3, where deposit rates stayed at high levels, share of demand deposits stood at 42%, providing substantial support to our funding cost base. Moreover, core deposits that are still key in nature make up around 74% of total deposits.
As for the non-deposit funding, we continue to support our strong FX liquidity base with a diversified set of funding sources. As an example, very recently, we have finalized the financing through our diversified payment rights program with an amount of around USD 250 million. We are closely monitoring the market and continue working on alternative funding sources to further enhance the wholesale funding. Definitely, wholesale funding transactions support our FX liquidity base as well as extending the maturity profile. Please note that our FX liquid assets are more than enough to cover overall repayment amount, which is $6.9 billion in total. FX LCR was again at comfortable levels at 360%. ESG remained as a priority in FX wholesale funding. Since 2021, FX funds that we have raised have been entirely ESG linked. Furthermore, share of sustainable funding is around 31%.
On the next page, we have the NIM and spread evolution. In the third quarter, swap adjusted net interest margin slightly declined, which is an inevitable outcome given the current market conditions. We observed an upward pressure on the funding costs. Please note that due to our conservative methodology for the valuation of CPI linkers which take into account 12 months ahead inflation expectation of market participants, in the third quarter, income contribution of linkers was relatively moderate compared to peers.
Consequently, on a quarterly basis, swap adjusted NIM was down to 3.2%. For the first 9 months, swap adjusted net interest margin stood at 4.4%. Of course, pressure on swap adjusted NIM will be proactively managed in the remainder of the year with an aim of keeping it above current levels.
As of the end of September, share of securities in total assets was 20%. On the TL side, share of fixed income securities declined as a result of normalization steps towards security maintenance obligation. However, we maintain the diversified structure of the book. At the end of Q3, floating rate notes, which provide a natural hedge to our portfolio comprise more than 60% of TL securities.
As of the end of third quarter, our CPI linker portfolio make up 40% of TL securities contributing to our income base by TRY 12.8 billion. On our next slide, I will summarize the fee income performance. As you already know, in recent years, we have been focusing more strongly on the fee-generating businesses as a way of boosting income base without consuming capital. In line with the strategy, fee income generation was again remarkable in this quarter. We have maintained our leadership position as having the largest fee base among peers as of the first 9 months with more than 138% annual increase.
Drivers of the strong growth were again across the board, with payment systems growing by an impressive 191%. Thanks to our efforts in diversifying fee base, we achieved this high performance in an environment where loan growth was limited due to the regulatory restrictions.
Ongoing efforts to enrich the type and scope of fee-based services on digital channels will be supporting the fee growth going forward. On the next page, we see the NPL and provisioning trends. In the third quarter, we have seen further improvement in our asset quality metrics. Our NPL ratio declined to 1.9%. Thanks to our outstanding collection performance and limited inflows, quarterly net NPL formation was in the negative territory in Q3. Our total net cost of risk, including currency impact, stood at 86 basis points for the first half. Furthermore, as part of our prudent approach, we increased our NPL coverage ratio to 81%, highest among peers. Please note that on top of more than sufficient loan loss provisions, we have a pre-provision buffer of TRY 6.5 billion, as we mentioned.
Next page shows the capitalization levels. Our capital ratios remained solid in this quarter despite macro outlook. Capital adequacy ratio without the BRSA's forbearance measures stood at 18%. Additionally, Common Equity Tier 1 was at 14.6%. We are confident that our capital levels are strong enough to weather any economic challenges that may arise. As we always share sensitivity of our capital adequacy ratio to 10% depreciation in TL is limited to around 45 basis points, while sensitivity to 100 basis points increase in TL interest rates is around 10 basis points.
This concludes our earnings presentation. You can see more details both on our financial and nonfinancial performance in the Annex. Thank you for your attention. And I would now like to open the floor for your questions.
We have a question from Waleed Mohsin, Goldman Sachs.
Thank you for the presentation and congrats on the set of results. A couple of questions, please. I wanted to spend some time on the guidance that you've provided for 2023. And I wanted to get your thoughts. I mean you briefly touched upon it. But specifically, I wanted to get your thoughts on net interest margin, where you mentioned that by proactively managing the asset liability management side, you will manage the margin during the third quarter. So I wanted to get a sense of -- is 5%, which you laid out as your guidance still achievable given what you've seen in the fourth quarter so far? Or are there risks to the downside on that front?
Secondly, if I look at your fee income growth that's well above your 2023 guidance, which is 100%, you're clocking 138% and third quarter was very strong. So clearly seeing some upside risk on that front. And similarly, on the net cost of risk side as well, you're way below what you guide for 2023? I mean, almost half of what you've guided for 2023 at 86 basis points. So just trying to measure the upside, downside risks on these metrics?
And my final question will be on the outlook. If you could talk a little bit about what you've seen on fourth quarter in terms of funding cost trend so far or kind of core spread trend so far? And what do you think are the key risks at this moment, which management is focused on.
Thank you very much, Waleed, for the questions. To start with, the 2024 expectations, I should say that, we haven't finalized our operating budgets and guidance for next year, still working on it. As soon as we finalize it, as always, we'll be sharing it with yourselves.
But I will try to give you a color starting from your first question on NIM. As you know, realization is one of the primary targets of the new economic program. In this regard, recent regulations are being shaped towards to encourage shifts to Turkish lira from FX and more specifically, to Turkish lira standard conventional accounts from currency hedge products. In this environment, naturally, there is a pressure in the funding cost. We believe that the best way to navigate this pressure is to take a holistic approach and manage net interest margin on this basis. And we think that by having such a holistic approach management on NIM, we were able to sustain our net interest margin. And of course, we aim to sustain those levels in the fourth quarter as well as going forward.
Of course, I mentioned about pressures like the increase in funding costs, but a positive element of this environment is definitely a potential pickup in the non-retail loans. Of course, a certain time is needed considering the maturity mismatches in order for the full impact to kick in. But surely, non-retail lending will be supporting the net interest margin in the coming period.
When assessing our net interest margins, please also consider the fact that for our CPI Linkers portfolio, we do implement very different rates than many other peers in the system. As we always share, we are taking into account the 12 months ahead CPI expectations level from the market participants. So all in all, we can say that the net interest margin will be sustained at these levels.
But please also keep in mind that we are indeed converging to the historically normalized levels of the net interest margin in the system. In the previous year's quarters, it was an outcome of the low monthly pulse rate implementation. But now as the economic program includes normalization, this definitely is reflected on the net interest margin of the system. So we can say that we will continue to sustain these net interest margin levels.
The second question was related with the fee income. Of course, I can say that our efforts in the recent years focused on diversifying our fee base as much as possible and including the contribution of different items. As a result, the dependency of fee income generation to lending growth rates was largely eliminated.
Leadership in payment system is one of our strategic priorities. And in this regard, we are continuously gaining market share, both on the customers side in terms of we see the volume increases in the number of customers as well as in merchant business, both in the issuing and acquiring side. And we believe that we still have a room to go in this areas. I believe this ensures the sustainability of our fee income in the coming period.
The third question was about the cost of risk levels. We keep our conservative guidance, which is around 150 bps levels. There was a one-off big ticket collection in the third quarter amounting to TRY 1.3 billion. Excluding this amount, we are in line with the guidance level. So I can say that we are conservative in terms of our asset quality management.
I believe there were 3 questions or is there any other that I missed, Waleed?
No, you covered everything. Just one thing. Maybe the risks that you're monitoring?
Sorry?
Any particular risks which management team is [indiscernible].
Particular risk. Indeed, of course, we believe that as the Turkish Banking System and as Isbank, we believe that we are dynamically and successfully responding to address that face with. Thanks to the experience in the system. We believe that the balance sheet is ready to absorb any risk. I believe, especially in the last couple of years, maybe since 2018, of course, we further strengthened our balance sheet structures in terms of FX deleveraging, et cetera.
But we believe that the worst is behind. So we see no specific risk in that respect. So what I am trying to say, Waleed, is that the Turkish Banking System and as Isbank, we can manage the risks that we face with. So no particular concerns on that respect.
Mehmet Savin from JPMorgan has a question.
Congratulations. Firstly, I'd be keen to hear your views on loan growth going forward. Your momentum was so much slower than peers so far this year, and you mentioned during the presentation, that was because of the regulation, but now regulations have eased. At the same time, the monetary policy is quite tight. So how should we think about it going forward, both for the fourth quarter and into the new year. So where do you think you will be placing yourselves relative to competition? And where do you see long growth overall in this tight monetary environment?
And secondly, just wanted to hear about your views on the implications of recent changes and regulations in terms of the commission payments and the conversion of the FX protected deposits into standard deposits. So what kind of impact do you expect to see, particularly with regards to your own strategy? Do you think you're in a good position to basically avoid the commission payments? Or again, how should we think about it in general?
Thank you, Mehmet. To start with the loan environment, loan demand and supply issues, of course, from now on, seeking and finding the healthy and productive demand so to speak. Cherry picking abilities of the banks will be the defining factors for the coming periods. Optimizing risk and return will be a very key factor here, and we believe that this is one of our traditional strength.
In terms of the segmentation, of course, in order to control the inflation, we believe that tightening process, including the retail lending activities will continue. But there is definitely easing on the non-retail lending side. So the growth will be mainly on the Turkish lira -- again, Turkish lira side with the commercial lending side.
For the FX side, similar to the previous periods, we do not observe a very significant demand coming from the environment. And FX portfolio continues to shrink with the exception that our appetite on export lending business definitely continues. So for the next year, we expect to see the non-retail side and the Turkish lira will be active and in line with the management of the economy program. Of course, with the stabilization and predictability in the operating environment, more strong demand for FX loans will be in the picture.
The second question was related with the commissions and how we are impacted from the recent regulation. Of course, the realization strategy is continuing and the regulations are very much shaped around this realization strategy. And what we try to do within this environment, to manage all these regulations with a holistic approach and manage the Turkish lira deposit costs, commissions regarding [indiscernible] conversion, rollover targets, reserve requirements.
These are all managed with this holistic perspective. And with this perspective, we believe that we can sustain our current NIM levels. You know that the regulations are, yes, on the easing side, but frequently continue to change. For example, in commissions, there is a 2-week reporting period, and we try to manage this process on a dynamic manner. So what I can say on a solid pace to ourselves is that, the important part is we will try to sustain our net interest margin levels through dynamic and holistic management.
We have a written question from Valentina Stoykova, Barclays. Given upcoming Eurobond maturities, Tier 2 and seniors, do you plan any opportunistic issuances near term? Would you prefer labeled over conventional loan issuances, seniors or subs?
Thank you, Valentina. On the eurobond front, we have a redemption for our TRY 400 million subordinated note in December of this year. However, thanks to our high FX liquidity levels and expectations towards the continuation of lower FX loan demand, the need for rolling over our foreign currency debt instruments is not imminent. However, having said that as part of our proactive approach of managing the liability mix and our wholesale funding, as we have mentioned in our presentation, we are always closely monitoring the market for new issuances, opportunities both in public and private format.
And also, as you know, we have a sustainable financing framework. So we can do issuances out of our framework as well. So we will be looking at all of the options for Tier 2 seniors. It can be label transactions as well. We are open to all of the opportunities in the capital markets.
Thank you, Nilgun. Maybe one addition to this explanation. Of course, we diversify our wholesale funding base as well. So it's not only the issuances, but also we continue with our syndication, securitization, post financing, bilateral agreements. So definitely on a very diversified base, we continue to reach out the new sources of funding in this respect. And definitely, the maturity profile of the wholesale funding base of the bank is increasing with the support of alternative instruments as well.
We have a question from [indiscernible].
My question is regarding the future outlook of the regulations. Since bulk of the regulations has been lifted or shaped, what direction do you expect regulation to take place in the future with regards to deposits or loans? Do you expect any sort of pending discussions that will affect your P&L or NIM progression going forward. And one thing, you have managed to grow this FX protected deposit account [indiscernible]. What portion is FX to FX protected versus Tier 2 FX protected?
Thank you [indiscernible] for the questions. The first question is about expectations on regulations. So we can say that in line with the normalization and rationalization of the economic program, definitely, we expect to see some further steps but on the positive side. So when I say on the positive side, definitely, I mean that which will bring further predictability and stability to the banking system. So definitely, we will observe some more regulations in the picture.
If you remember in the medium-term plan, some messages were on the controlling inflation, some messages on the transformation of the economy, et cetera. Of course, in terms of easing the commercial lending, will continue. On top of that, we might see some support coming for the green transformation type of lending as well as exports and investment lending activities.
So from now on, the type of regulations that will be seen will definitely on the positive side. It doesn't matter if it's pressures the net interest margins because they will definitely bring some more predictability and stability in the system. That's why we welcome them. And that's how indeed as the Turkish Banking System converging to our historical normalized levels of net interest margins.
Coming to the second question is that -- like 20% is the Turkish lira [indiscernible] and 80% is FX [indiscernible].
So we have only one written question at this moment. [indiscernible] thoughts on transition into inflation accounting methodology next year, especially in regard to the recent comments by the government.
Of course, this is one of issues that we also would like to see to be clarified. But as Isbank in line with the IFRS regulation, in every 6 months' time by the end of June and by the end of December, we present our inflation accounting financials and present them on our website. According to the year-end inflation accounting results, I must say that we definitely present its very strong return on equity figures, both on a solo and on a consolidated basis. This is very much dependent on our balance sheet to be ready to absorb the adverse impacts of inflation.
And as you know, we are very much conservative in terms of our evaluation to our CPI Linkers portfolio. On top of that, the fair values of other assets within the balance sheet, definitely, these help us to present such strong set of results under inflation accounting.
For the June end results, the process is still going on. We will be presenting them soon. There is another inflation accounting regulation, a draft one for the tax purposes, as you know. But it's just a draft yet. So we are also in need for clarification of this issue, but no matter what -- if it becomes a regulation or not, we have already been presenting these inflation adjusted financials for your reviews on our website for many years.
At this point, we don't have any remaining questions. I'm handing over to our presenters for closing remarks. Thank you very much.
So thank you very much for your participation. We believe that we have presented another solid performance this quarter. And as always, we share this is due to our strength in human capital, technological infrastructure, digital capabilities as well as our sustainable business model, which is based on value creation for our stakeholders.
Of course, regarding the details as Isbank team -- IR team, we will be ready to answer your questions and looking forward to see you all in person soon. Thank you very much for joining this teleconference.