Turkiye Is Bankasi AS

IST:ISCTR.E

Q1-2025 Earnings Call

[Operator]

Ladies and gentlemen, welcome to Isbank's First Quarter 2025 Financial Results Audio Webcast. Today, our presenters will be Ms. Izlem Erdem, Chief Economist and Deputy CEO responsible for IR and Sustainability; Mr. Mehmet Türk, CFO; and Ms. Nilgun Osman, Head of IR and Sustainability. As always, the presentation will be followed by a Q&A session. [Operator Instructions] Now I hand over to our presenters.

[Izlem Erdem, executive]

Welcome to our earnings presentation for the first quarter. This is Izlem speaking. Thank you all for joining. In the first quarter of 2025, the annual inflation continued to decline in line with market expectations and CBRT's projected path in general. In this period, tight monetary policy stance is preserved with gradual and cautious rate cuts. However, on March 20, at an interim meeting, CBRT decided to raise the overnight lending rate, I mean, the upper bound of the interest rate corridor to 46%, acting proactively against recent turmoil in domestic markets. And CBRT started to fund the market through the upper bound of the interest rate corridor, giving a pause to using weekly repo auctions.

In its planned Monetary Policy Committee meeting on April 17, CBRT increased the policy rate from 42.5% to 46%. The overnight lending rate from 46% to 49% and restarted its 1 week repo auction. So starting from mid-March, due to the unexpected volatility in the market, there was a net tightening in monetary policy stance, keeping -- still keeping the weighted average cost of funding close to the upper bound of the interest rate corridor. These actions prove the commitment of CBRT to price stability.

The divergence of production and demand indicators remained in place in the first quarter of 2025. Largest -- latest figures from February indicated that industrial production, which increased on a Q-on-Q basis in the last quarter of 2024, contracted in the first 2 months of 2025 compared to the same period of the previous year, while retail sales kept its momentum. The current account deficit, which decreased significantly in 2024 to 0.8% of GDP started to widen in the first 2 months of 2025.

As of the end of February, 12-month cumulative current account deficit increased to $12.8 billion. However, in the coming months, relatively low level of oil prices driven by the weak global growth expectations is anticipated to support current account outlook. The budget deficit reached 36.8% of year-end target in the first quarter. Fiscal policy support to the disinflation process will be closely monitored in the rest of the year.

On the next slide, we have the major P&L items as well as the profitability and efficiency indicators. In the first quarter of 2025, with the help of significant expansion in our margins, our swap adjusted net interest income increased substantially both on quarterly and annual basis, registering the highest improvement in the peer group. On top of our good performance in net interest income generation, our stellar performance in containing OpEx growth supported our bottom line.

In line with our concentration in cost control, OpEx posted a 5% quarterly decline and annual increase was limited to around 24%, well below the annual inflation levels. Please note that we have outperformed all our peers with this performance. This impressive display in OpEx, along with the increase in annual fee growth brought fee coverage to OpEx close to 90% levels, in line with our guidance. Furthermore, cost to average assets ratio declined to 3.6% and our cost-to-income ratio improved by 10 percentage points. Fee income generation was somewhat muted at the beginning of the year as a result of the high base year effect as well as seasonality impact, but significantly gaining momentum through the end of the quarter, post an annual increase of 39% in the first quarter of the year. All in all, our return on tangible equity in the first quarter stood at about 18%. Now I will leave the floor to Nilgun for the details of the bank's performance.

[Nilgun Osman, executive]

Thank you, Izlem. Welcome all, and thank you for joining the webcast. In this slide, you can see the main balance sheet items. In the first quarter, we strategically managed our selective loan growth, taking into account monthly limitations. It is important to mention that our main focus is to preserve our healthy loan portfolio with a sustainable risk return approach. Largest driver of the increase in the first quarter was particularly SME loans which is one of our focus areas. Our quarterly TL loan increase was 7.4%, while growth in SME loans according to the BRSA definition was close to 14%. Please note that we are strategically growing in SME loans while maintaining our prudent stance and that translates into our best-in-class asset quality metrics, which we will touch upon in the relevant slides.

As we have been sharing with yourselves, SME lending is an area where we have a unique strength and expertise. We have been increasing our market share steadily in this segment. As of the end of first quarter, our market shares in line with BRSA definition, both for cash and noncash SME loans among private banks stood at 22%. FX lending increased 5% in the first quarter. On the FX side, our growth mostly stems from the exports. We have been emphasizing our concentration on export business. In total export lending, we solidified our leadership position among private banks with an outstanding market share of around 30%. As of the end of first quarter, nearly 40% of our FX lending consists of export loans, a strong indication of low-risk structure of our FX loan portfolio. At the same time, tourism continues to be a key area for us. contributing to the current account balance.

On the funding side, we maintained our concentration on widespread granular core deposit base. There was around 13% quarterly growth in TL deposits, while FX deposits increased by 9%. Needless to say, we maintained the largest demand deposit base among private banks. As of the end of first quarter, 42% of our deposit base is comprised of demand deposits, providing substantial support to our funding cost base. Moreover, core deposits that are sticky in nature make up around 72% of total deposits. Regarding the external liabilities, our total external views are $7.7 billion, of which $4.5 billion is due in the next 12-month period. Against that, our FX liquid assets are more than enough to cover our whole external liabilities. FX LCR was again at comfortable levels with 256%.

ESG remains as a priority in FX wholesale funding. On top of being able to obtain a more diversified base of ESG-related funding instruments, its share in total funding have been increasing. By the end of first quarter, share of sustainable funding stood at 62%. Recently, we have signed a deal amounting to EUR 100 million with our long-standing partner, Proparco, to support our climate and SME financing activities. This will be one of our funding sources that will help us further develop our climate portfolio and achieve our ambitious environmental goals.

As you already know, we used our call option for January 2030 Tier 2 notes, and we redeemed in January.

Additionally, we were the first comer among Turkish FIs to international bond market in 2025 for our debut additional Tier 1 bonds. The spread of the $500 million issuance was an all-time low amongst the 81 issuances by Turkish banks to date. The transaction was more than 3x oversubscribed, attracting strong interest from various investor groups across a wide geography. Going forward, we will continue to evaluate potential transactions for FX wholesale funding based on market conditions as well as the needs of our balance sheet management.

On the next page, we have the NIM and spread evolution. In the first quarter of the year, margin recovery gained significant pace. Quarterly swap adjusted NIM increased to 1.6% with 140 basis points expansion compared to previous quarter, in line with our projections. While the quarterly NIM was 1.6%, please note that at the end of the quarter, NIM exceeded 2%. As we have shared with yourselves at the year-end earnings call, our TL core spread was already in a widening trend at the start of 2025. In Q1, in line with our expectations, deposit costs declined significantly throughout the quarter, while we maintained a flattish cost in our loan yields. Thus, our core spread increased to 12%.

Demand deposits, which increased 18% on a quarterly basis, helped significantly to contain costs on the funding side. However, with CBRT's recent tightened stance, we have been observing a pickup in funding costs. As a result, we are also adjusting our loan yields. Therefore, we think that recent change in the monetary stance will slightly postpone the gradual improvement in NIM rather than distorting the overall recovery. Going forward, the course of CBRT's monetary stance will be affected in the performance of the banking sector. As we have started the year with a continuously widening loan deposit spread, we can say that net interest margin still stays at manageable levels compared to previous tightening cycle in which loan deposit spread was very tight.

That's why we feel more confident with regards to maintaining a stable quarterly NIM in the second quarter. Also, our assumption is that CBRT will be back to its cutting cycle in the second half of the year as we deem recent hikes as temporary. As of the end of March, share of securities in total assets was 19%. Composition between fixed and floating rate notes was largely stable. Despite the downward trend in inflation, we continue to benefit from CPI linker revenues with another TL 13.1 billion interest income in the first quarter. Our valuation methodology, which takes into account 12 months ahead CPI expectations, provides us a stable and consistent revenue stream from this portfolio.

Moving on with net fees and commissions. In the first quarter, fee income increased around 40% on a year-on-year basis. Drivers of the growth were again across the board. We continue to be the market leader in terms of lending and asset management-related fee income generation. Annual increase in fee income is expected to gain momentum going forward, and we are expecting to be in line with our guidance by the year-end. In the recent years, efficiency and cost management have gained more importance in relatively high inflation environment.

As you know, we have been taking solid steps in terms of transforming our business models in line with our digitalization strategy, which enables efficiency gains as well. Consequently, our OpEx growth has been once again significantly lower than our peers in the first quarter of 2025. Accordingly, fee coverage of OpEx rose to 87%, while fee coverage of HR expenses reached nearly 230%. Cost to average asset ratio declined to 3.6% and our cost-to-income ratio improved by 10 percentage points. We will continue to focus on efficiency by leveraging our strength in adapting new technologies, upskilling our talent force, pioneering digital banking services and centralizing process management.

Next page shows the NPL and provisioning chart. In the first quarter, NPL ratio stood at 2.4%, which is largely in line with our projections. Close to NPL increased slightly but at quite manageable levels and collections remained strong at 22%. Our NPL formation rates, both on net and gross basis stood at the lowest levels among peers, indicating our prudent stance in underwriting as well as robust collection capabilities. Our NPL ratios in every major segment, such as SME and retail loans was lower than private bank's average.

It is important to highlight our success in NPL ratios in general, but mainly in SME segment. This is an area in which we do not only have a strong market presence, but resilient asset quality metrics, thanks to our cherrypicking and collection capabilities as well as extensive customer data. Despite the slowdown in economic activity, significantly lower NPL ratio in SME segment compared to the sector, we built our careful and selective strategy in SME lending. On the other hand, we maintained our conservative approach and kept our Stage 3 coverage ratio at around 71%, highest among peers. Our net cost of risk was 209 basis points for the first quarter, including currency impact.

Next page shows the capitalization levels. Our capital ratios remained at solid levels at the end of first quarter. Capital adequacy ratio without the real estate forbearance measures stood at 15.1%, while common equity Tier 1 was at 12.6%. We believe that our capital ratios are strong enough to absorb any potential adversities in the economy as well as to sustain the growth whenever it is deemed favorable. Sensitivity of our capital adequacy ratio to 10% depreciation in TL is around 40 basis points, while sensitivity to 100 basis points increase in TL interest rates is around 8 basis points.

On this page, we have a summary of our first quarter performance. As of the end of first quarter, we were largely on track with our budget estimates. Current market dynamics surely put pressure on net interest margin. As we previously communicated with yourselves, our base case scenario did not include an additional rate hike. On the other hand, there are compensating elements such as already high level of core spread. Also, we assume that there will be a room for CBRT to turn back to rate cut cycle in the second half of the year.

Therefore, we need to observe further development in order to be convinced of a guidance revision. But please note that a prolonged tight monetary policy might create downside risks on the net interest income. So in case of any change in our guidance assumptions, we will revisit our guidance and disclose accordingly. This concludes our presentation. Now we can have your questions.

[Operator]

[Operator Instructions] At the moment, we have some written questions from Valentina Stoykova from Barclays. I will present for you. Thank you for the presentation. Can you please share your thoughts on how you expect the most recent regulatory changes over the weekend to affect your NII and NIM going forward? And how you see the NIM trajectory developing in the next few quarters? Are there any changes to your financial year '25 guidance that you can share with us and macro indicators assumptions you use in your net interest margin, ROE guidance for the full year.

Her other question is regarding FX liquidity in dollar terms and how it compares to your short-term and total FX wholesale funding. We have covered this one, but just to reiterate, she also asked about our sensitivity of our CET1 ratio and capital adequacy ratio to depreciation and interest rate moves.

[Izlem Erdem, executive]

Okay. Thank you for the question. In fact, I think we answered some of those questions during Nilgun's explanations related to the first quarter. But I can comment on the impact of the most recent macro prudential measures of Central Bank that was released at the end of the previous weekend. CBRT recently increased the remuneration on Turkish lira reserve requirements while introducing a new increase in the foreign currency reserve requirements. The estimated overall impact of these recent changes could be summed up as 5 basis points impact on potential net interest margin on the upward side, on the positive side, I mean.

Some part of the question is related with our guidance revision, whether we will have a guidance revision or not. I have to again mention that as of the end of the first quarter, we are largely on track with our budget estimates. Our balance sheet growth is hovering in line with our budget. And other than that, we haven't experienced any considerable deviation with respect to our budget projections in the first quarter. And realizations are largely parallel to our expectations. And actually, some items such as OpEx are trending better than our expectations.

Going forward, the course of monetary policy will be an important determinant of the margin evolution. We will be closely monitoring the policy actions with respect to their impact, and we will consider whether making revisions to our guidance or not if we deem necessary. Currently, we are maintaining the guidance that we disclosed at the beginning of the year. We believe that it is early to comment. We need to accumulate some more data, both in terms of financials and in terms of macroeconomic side.

I think we already mentioned about the sensitivity. There is a question related to the FX liquidity. We have enough FX liquidity to cover not only the short-term foreign currency liabilities, but the long-term liabilities as well. So we are very comfortable with our prevailing foreign currency liquidity. I think I covered nearly all the questions coming from Valentina. Thank you for the questions.

[Operator]

We have a few more recent questions. Let me summarize them. There are questions about the most recent deposit trends. And if we see any dollarization tendency in the market and also the current prices for the loan and deposit, both. And also another question is regarding the expected trajectory for OpEx. Is the current pipeline sustainable?

[Mehmet Türk, executive]

Let me try to cover those questions. Thank you for the questions first of all. Due to both local and global market volatility, there has been a growth tendency in FX deposits. However, since Turkish interest rates are high enough to support deposit base, we haven't observed a significant dollarization on our side. Moreover, FX demand in the market was more on the corporate clients, which is due to the liquidity management needs rather than concern on market dynamics. Therefore, we do not expect a significant change in the behavior of market participants in the long run.

Another important point, I think, is to keep in mind is the euro-dollar exchange rate and precious metals price increase impact. So if we adjust the 9% quarterly increase in FX deposits for the change in these price changes, the growth comes down to 3.5%. So overall, it's around $1 billion, which constitutes the actual portion derived from the customer demand until this point.

And for the OpEx, I can say that if you compare the figures to the last year figures in the last year's earnings call -- earnings presentation, we were almost similar with our peers on the HR side, while we beat it on the non-HR, our figure was around 51% and the peers was around 78%. And in this quarter, we beat the peer comparison on peer average on both HR and non-HR side. And being aware of the fact that there will be pressure inevitably on the HR cost in a high inflation environment, at Isbank, we prefer to have higher concentration on the non-HR cost discipline using digitalization, centralization, AI and robotic process automation techniques.

We are constantly gaining progress with regards to shrinking costs and increasing our efficiency. Thanks to the implementation of the control initiatives, we achieved significant awareness within the bank that transformed into concrete results. Please note that this performance will not be a one-off achievement for the bank, but it will have a long-term and sustainable impact on the budget as well. As for the HR side, which you see in this quarter as 24% increase compared to our peers, 39% in the last 2 years, as some of our workforce has preferred to retire using their options provided by early retirement scheme of the government, we optimized our headcount by not replacing the retired employees on a one-to-one basis. This enabled us to increase the efficiency as well. During this period, our staff number declined by around 3,000 people on a net basis. Going forward, though, current employee number can be deemed stable for Isbank. So we do not anticipate a sharp decline on this figure. Thank you.

[Operator]

There was another question about the current loan and deposit rates.

[Mehmet Türk, executive]

On the current loan deposit rates, our Turkish lira loans front book is close to around 55% and marginal term deposit is between policy rate and weighted average cost of funding depending on the ticket size. So we are still keeping in April our loan deposit -- Turkish lira loan deposit spread. And I think it's important to see the coming months and quarters to have a constant figure if we can achieve the net interest margin going forward.

[Operator]

As far as I can see, we have no remaining questions. So I'm handing over to our presenters for concluding remarks. Thank you.

[Izlem Erdem, executive]

Thank you very much for your participation. We believe that we have presented another solid performance this quarter. Behind the strong performance, their lies our strength in human capital, technological infrastructure, digital capabilities as well as our sustainable business model, which is based on value creation for all our stakeholders. Regarding the details, you may always reach us. Looking forward to see you all in person soon. Thank you very much.