© 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.
Ladies and gentlemen, I will now hand you over to Ms. Senar Akkus, CFO; Ms. Gamze Yalcin, Deputy Chief Executive; and Mr. Süleyman Özcan, Head of Investor Relations. Dear speakers, the floor is yours.
Good evening to all. And welcome to our conference call. This is Senar Akkus speaking. We are very sorry for the delay due to some technical difficulties. Gamze Hanim and Süleyman will -- from our IR function are with me. Gamze will go into the details of our performance, but before that, I would like to give the period highlights for the fourth quarter in which we delivered solid performance. Actually, we had shared an overall picture for the year-end based on the provisional figures at our Analyst Day. Now we see that we are in line with this picture. We have the main highlights for the period on Page 2. Now I will touch upon them. In the fourth quarter, we observed a reasonable recovery in Turkish lira loans, mostly driven by general purpose loans and SME loans. NPL formation declined in the last quarter and NPL ratio stood at 6.5%. The strong growth in Turkish lira deposits continued in Q4. And share of demand deposits in total deposits stayed at a remarkable level of almost 28% (sic) [ over 28% ]. We see that Q-on-Q adjusted NIM improved significantly. The cumulative figure of 3.71% is well above our year-end guidance. Meanwhile, our annual net fees and commissions growth reached 26.4% which is also above the guidance. Profitability ratios improved compared to the third quarter, thanks to strong quarterly revenue growth and decline in OpEx. And as a result, capital adequacy ratio continued to stand at around 18%, indicating a solid capital base for Isbank. Now I'm leaving the floor to Gamze for the details of the bank's performance.
Thank you, Senar Hanim. Welcome all. On Page 3, we have the major P&L items as well as profitability and efficiency indicators. In the last quarter, as a result of the sharp decline in TL deposits and swap costs, leading to a strong expansion in swap-adjusted net interest margin as well as the momentum in Turkish lira loan growth. Q-on-Q, swap-adjusted net interest income has registered a strong increase at around 41%. Fees and commissions income continues to grow on a quarterly basis, bringing the year-on-year increase to 26.4%, and we closed another year outperforming our fee income guidance. Income from participations was flattish on a year-on-year basis, in line with the budget and continue to support the revenue base with around TRY 2.8 billion in 2019. OpEx evolution was also parallel to our budget expectations. However, when adjusted for pension fund provisions, year-on-year OpEx increase stood only at 17.6%. Please note that we have set aside TRY 300 million free provisions in the fourth quarter, and by the year-end 2019, our total free provisions have amounted to TRY 1.125 billion.
In the last quarter of 2019, as we expected, we achieved an improvement in our profitability and efficiency ratios. Our return on average assets and equity stood at 1.4% and 12.1%, respectively, whereas cost-to-income ratio was 38.8%, indicating a better level compared to the guidance range of 40% to 41%. Page 4 shows the main balance sheet items. In Q4, we observed a strong recovery in Turkish lira loan demand. GPLs and Turkish lira SME loans were the main drivers of the quarterly growth. In USD terms, FX loans were flattish compared to Q3. In the last quarter, we registered another strong double-digit growth in Turkish lira deposits compared to the previous quarter. FX deposits also increased, although at a slower pace. By the year-end, share of deposits in our total liabilities reached 63.2%, half of which are retail. Demand deposits continued to further support our low cost of funding with a share of 28.4% in total deposits. Shareholders' equity increased 8% quarterly, mainly as a result of net income generation along with deposited mark-to-market differences from securities. Lastly, we maintained our liquidity ratios at comfortable levels by the year-end total and FX LCR stood at around 195% and 361%, respectively. On the next page, we have the net interest margin and spread evolution. We closed 2019 with a swap-adjusted net interest margin of 3.71%, indicating a level above our guidance range of 3.3% to 3.5% for the full year. Quarterly swap-adjusted net interest margin recorded a remarkable increase and reached 4.86%. Sharp decline in TL deposit costs amounting to around 500 bps was the main driver of the net interest margin improvement. Declining swap costs supported this trend as well. In Q4, average volume of FX swaps was around USD 6.4 billion and their cost was TRY 1.1 billion. On the other hand, quarterly, CPI linker yield declined to 13% and income from CPI-linked securities stood at TRY 962 million. Looking into 2020, we expect the first quarter to be a strong one in terms of margin evolution given the current trends in the operating environment. And as we disclosed in our Analyst and Investor Day, we expect swap-adjusted net interest margin to be in the range of 3.8% to 4% for the full year 2020. On our next slide, I'll be touching on fee income performance in the last quarter. 2019 was another year in which we outperformed our fee income guidance, as we mentioned. We achieved a year-on-year increase of 26.4% in our net fees and commissions income, all items supported the growth in 2019. In Q4, we achieved a Q-on-Q increase once again and all major items except for payment systems contributed to the quarterly performance. In the coming year as well, despite the negative regulatory impact, our diversified fee base, ongoing efforts to enrich the type and scope of fee-based services on digital channels as well as the relatively higher loan growth will contribute to the growth of our fee base. On Page 7, we have the asset quality indicators. Last quarter of 2019 was relatively resilient in terms of net NPL flow. Our quarterly net NPL formation rate declined to 118 bps, driven by both low NPL flow and higher collection rate in Q4. Our NPL ratio declined as well to 6.5% by the end of the year. Please also note that we haven't made any NPL sales in the last quarter.
Net cost of risk for the full year stood at 217 bps. For asset quality, we expect a better outlook in 2020. We believe that the volatilities and weaknesses that are impacting the asset quality metrics negatively are now behind us. By the end of the year, we expect net cost of risk to be below 150 bps, while NPL ratio to be below 7%. Next page shows the capitalization levels. In the last quarter of 2019, capital adequacy ratio increased slightly compared to Q3 and reached 17.9% indicating a comfortable level for future growth. Our Tier 1 stood at 15% by the end of the same period. Net income generation and mark-to-market gains in securities were the main drivers of the increase in Q4.
So this concludes our presentation. Thank you for attending to the conference. And now we can take your questions.
[Operator Instructions] The first question comes from the line of Alan Webborn from Societe Generale.
Could you -- I mean, I know we've already covered most of this when we saw you a few weeks ago. But could you talk a little bit about where the growth has come from, between sort of TL retail and commercial in Q4? Is there any particular sort of trend that you felt is important to highlight? And also, are there areas where the competition is perhaps more aggressive or less aggressive? And how do you feel the competitive environment is as there seems to be a little bit of a race to the bottom in terms of loan yields? That would be the first question. And also a little bit about how your -- after what we've seen from deposits growth in Q4, and how do -- do you see any sort of sense of de-dollarization? When do you think the trigger for that is going to come through? That would be interesting.
Okay. Thank you very much for the questions. In the fourth quarter, our loan growth was driven by general purpose loans to a great extent and also SME loans. General purpose loans registered an increase of 28% on a quarter-on-quarter basis, while the SME loans have shown an increase of 10% in the last quarter of the year. I think this is a normal trend when we take into account the Central Bank rate cuts. I think it's normal to see the first effect of the rate cuts on consumption and, of course, general purpose loans. We know that there was a pent-up demand. After the Central Bank starts to cut the rate there occurred an expectation in the market that these rates -- these rate cuts will continue throughout the year. But when we come to the fourth quarter, the room was narrowed. I mean, the Central Bank rate cuts are closed to be coming to an end, there is a limited room for further rate cut. Therefore, we see a demand for general purpose loans. This was one of the main drivers of our loan growth. And also on the SME loan side, there was a comparatively high demand when we take into account the weak demand throughout the first 9 months of the year. What we see now is that the demand for GPLs still continue as a factor-base than commercial side. And we see the demand for SME and corporate loans going lower than the retail side. And as I said at the beginning of my conversation, it is a normal trend. I mean, we will see the effect on the consumption side. This can trigger the need for capital and need for working capital in the later stages of the year. In the start we evaluated this trend as a normal consequence of the Central Bank rate cuts. And for the deposit side, we do not see a circumstance there. This is still prevailing in the markets. We cannot talk about de-dollarization in the prevailing condition. But there is an increase in such deposits coming from other TL instruments, we can say that. For the year 2020, again we do not expect a very sharp rate of de-dollarization. We are expecting the share of such deposits to increase at the end of 2020, but our expectation is that the share of foreign currency deposits will stay higher than Turkish deposits as of the end of 2020. The competition in the deposit side is mainly a function of, of course, loan demand. If we see a rise in loan demand in the second half of the year, this can bring about the competition in Turkish deposits market. But for the time being, we are not experiencing a high competition for such deposits in deposits market, and we are using such deposits with money market transactions in a complementary and cost reduction purposes.
Okay. That's very helpful. Could I just ask again about your -- the cost line in Q4? It seems to be a very constrained level of cost growth there. Anything particular that you wanted to highlight there? But they may now seem to be quite well controlled at year-end anyway.
Actually, there was a one-off item in the third quarter. It was constituting a high base effect. In the areas that we can manage, there was not a significant change in our OpEx.
The next question comes from the line of Deniz Gasimli from Goldman Sachs.
Just few questions from my side on asset quality. On your NPL ratio, you ended the year at 6.5%. You're guiding for below 7% for 2020. Could you maybe give a view of what's the expected amount of recoveries or write-offs and NPL sales that you plan to do for 2020 so as to see, I mean, what will be the impact of write-offs and NPL sales on the NPL ratio by year-end? And also, whether your cost of risk guidance entails changing your -- or increasing your coverage ratios for Stage 2 and Stage 3 loans? And perhaps if you could kind of give an expectation on quarterly cost of risk progression, I mean, you're guiding for cost of risk to be below 150 basis points for the year. Do you -- how do you see the start of 2020? And how do you see the cost of risk trending throughout the year to get to 150 basis points guidance?
Let me start with 2020. As we check at our analyst meeting, we expect an improvement in both collections and additions sites in 2020 and the improvement will be around 30% in each category, I mean, in both additions and collections. About the collections, I can say that almost 1/3 of the collections will come from the corporate side. And it's mainly due to a big ticket loan, I can say that. And this will bring up to an NPL level which is still below 7% at the end of 2020. And for the collections, again, I can say that we expect, for example, 13% to come from the commercial side and around 40% to come from SME side, I can give you this details about the collections side.
And for the additions, again, the SME will take a part of 40% in the additions to NPL throughout 2020. Commercial side and corporate side has a total share of 40% in our target. Also retail side we will have a share of 20% in our base scenario in addition to NPL in 2020. And that was the main driver and in the improvement in collections and additions will be the main driver behind the decrease in net cost of risk for 2020. We closed 2019 with a net cost of risk at around 200 basis points. But for 2020, our net cost of risk is calculated to be lower than 150 basis points in our base case scenario. Of course, we will evaluate the opportunities in the markets for NPL sales. We don't have a certain plan yet. But our NPL expectation covers all NPL possible or -- possible NPL sales or any write-offs which can be done in 2020.
And for the last quarter, as I said, there is an increase in the coverage ratio for both second stage and third stage loans. This can be summarized as the effect of the additions to these stages. And also, for the third stage loans, I mean, Stage 3 loans, there is an aging effect as well as there is a readjustment of some limited number of loans both in Stage 2 and Stage 3 which caused an increase in the coverage ratio in the fourth quarter. I mean 3 main factors: aging, readjustments of some particular loans and also the effect of the new additions to Stage 2 and Stage 3.
Understood. And just a quick follow-up. Could you repeat the swap utilization number for the fourth quarter was around, you said, $6.4 billion, I believe?
Yes, in average.
The next question comes from the line of Simon Nellis from Citibank.
I'm just a little curious about your NPL formation. I mean a lot of other banks seem to have used the quarter to recognize a lot more NPLs than you have and your provision coverage is a bit lower than some of your peers. So -- and your risk costs outlook for this year is lower than your peers. So can you again just help us, I mean, why is that the case? And why are you more optimistic? Why didn't you create more provisions and recognize more NPLs in the quarter? And is there a risk that you missed your risk cost guidance again this year?
Actually, as you know, we are analyzing each loan on a stand-alone basis. I mean the composition of our portfolios are different -- is different and also our model and credit risk analysis are different from our peers. We should be like that. I mean -- and at the end -- in the end, we see that for the peer group, the NPL rate is somewhat similar to each other. There can be some volatility in the additions or recoveries because as you know, there is difference between the current environment and the premium funds is that there is a flow from the corporate side. These are very big amount loans. Therefore, it can have, I mean, the addition or recovery from such a loan can cause some volatility on the provision as well as the ratio of Stage 2 and Stage 3 loans. This is what we are trying to manage for the time being. I mean 2 or 3 years ago, when there occurred a flow towards increasing NPL, it was mainly coming from SME side and it was ensuring a stable trend that we can make healthy estimations. But when corporate side comes to the picture -- comes into the picture, it is really very difficult to get the quality and -- quality of the asset and as well as the effect of the loan on the provisions and the NPL of Stage 2 ratio side. Therefore, there can be some differences among banks at certain period of time. But in the end, they can approach to each other. I mean both NPL ratios and the coverage ratios can come to similar level at some period of time, but it is not easy to get it.
There are no further questions registered at the moment. [Operator Instructions]
There is a question on the webcast about the CPI rates we are using in quarter 1.
As you know, we are using the expectations which are taking place in the Central Bank survey for one year inflation. And for the time being, we are using 9.54% with the latest survey. But as -- with changes in the survey, we are revising it accordingly. But now we are using 9.54%. And for the current adjustment NIM, I can say that we keep the levels which were -- which we had in the fourth quarter, it is still about 4.5%. And for the rest of the quarter, we do not expect a major decrease in this level.
We have a follow-up question from the line of Simon Nellis from Citibank.
A quick question on free provisions. I think you made a TRY 300 million free provision in the last quarter. Is that right? And where does that bring your total free provisions now?
At the end of 2018, it was TRY 1.2 million. At the end of 2019, it is TRY 1,125 million.
TRY 1,125 million, yes?
TRY 1,125 million, yes. As you might remember, in the first half of the year, we had released TRY 375 million, in the fourth quarter we added TRY 300 million. In net, we released TRY 75 million in 2019. This brought us to TRY 1,125 million.
Right. Okay. And then just on your cost guidance of 17% or roundabouts there this year. Part of that is being driven by your collective bargaining, correct? When will we get -- when will that be finalized? And when will we know the agreements with the unions for the next several years?
It is expected to be finalized in the end of the first quarter. And what was the remaining part of the question?
I mean is that a major driver of why you're guiding for such high-cost growth versus some of your peers?
Yes. The [ cost of risk ] guidance was one of the main factors. Also, we are still seeing the largest effects of dollar-TL rate increase as well as inflation. And also, we see a high competition in the business development side, especially in the promotions for employee and retired people's salaries. There is a high increase in this area. Also, our IT expenditures continue in parallel with the digitalization process. This is the summary of the main factors which leads us to 16% of our current OpEx growth in 2020.
We have a follow-up question from Alan Webborn from Societe Generale.
Can you tell me what the FX impact on -- in terms of provisioning was, I guess, we'd see in the trading line on -- in Q4, presumably, that was a positive? And were there other gains in that line as well? I mean that sort of positive TRY 351 million that was excluding swap costs in Q4, that would be helpful. And also, I sort of feel, maybe it's the level of utilization that, I think, your swap costs have come down maybe quite a lot more than some of your peers, at least. And I'd just be interested to see how you sort of manage that? And why you manage that as quickly as you did, so that would be interesting too?
FX impact on provisioning can be calculated as the dollar-TL rate change applied for -- applied on the balance of USD 500 million. I mean for the time being, this is the number, it can change. But the FX impact on provisioning is equal to the increase in dollar-TL rate x USD 500 million on a general basis. And excluding swaps, there is a TRY 350 million positive effect, let me check it, please. It is mainly due to the effect of again long FX position.
So it's mark-to-market gains maybe then, is it?
Yes. Yes. It is mainly due to the mark-to-market gains on FX position and also there is a gain in capital market operations on a quarterly basis. Also, we have an ILS portfolio and the change in interest rates are again having an effect on our trading income. And the contribution of these instruments in the fourth quarter is around TRY 100 million.
[Operator Instructions]
There is another question on the webcast. It is about the main impact or implications of the CBRT gaining fee-setting authority. Actually, yes, I think, it's fair pricings in all areas including the fee side. We are one of the banks which take minimum customer complaints about this area. Therefore, for the time being, we do not expect a major effect -- a major negative effect which will come through the CBRT gaining fee-setting authority.
This concludes today's webcast. Thank you all for your participation. Thank you.
Okay. Thank you very much for your contribution and participation in our teleconference. And we are looking forward to seeing you at our first quarter results teleconference. Thank you.