Turkiye Is Bankasi AS

IST:ISCTR.E

Q3-2025 Earnings Call

[Operator]

Ladies and gentlemen, welcome to Isbank's Third Quarter 2025 Financial Results Audio Webcast. Today, our presenters will be Ms. Ebru Ozsuca, Deputy Chief Executive; Mr. Mehmet Türk, CFO; Ms. Nilgun Osman, Head of IR and Sustainability. The presentation will be followed by a Q&A session. [Operator Instructions] Now I hand over to our presenters.

[Ebru Ozsuca, executive]

Good evening. Welcome to our earnings presentation for the third quarter. This is Ebru speaking. Thank you all for joining. Before moving on to our financial results, I want to go over the macroeconomic environment we are operating in. In a positive real interest rate environment, production activities lost momentum in the third quarter. While the manufacturing PMI has remained below the threshold since April 2024, the weakening was more evident, particularly in labor-intensive sectors. Nonetheless, demand conditions remained relatively resilient, supporting the economic activity.

Having performed the higher-than-expected growth in the first half of the year, we estimated 2025 real GDP growth to be around 3.5%. The improving trend in CPI inflation slowed down in September due to the increases mainly in food prices caused by drought and frost as well as inertia in the service sector prices.

Following September's inflation data, year-end inflation expectations exceeded 30%, having cut the post rate by 550 basis points in total in its July and September meetings, Central Bank maintaining the cautious stance, cut the post rate by 100 basis points in October. We read this as a justification of CBRT's commitment to the disinflationary process in the medium term. The current account surplus, which was USD 1.7 billion in July, recorded a historic high monthly reading of USD 5.5 billion in August. Thus, the current account deficit for the first 8 months of the year amounted to USD 15.9 billion, indicating that the medium-term program targets are achievable.

In line with the improvement observed in the risk perception towards Türkiye, CDS fell below 250 basis points in the third quarter of 2025. During this period, the Turkish lira continued to appreciate in real terms due to the tight monetary policy stance, while the improvement in the CBRT's reserves also continued. CBRT's gross reserves reached a total of USD 186 billion and net reserves to USD 68 billion as of October 24.

Let me share the highlights of our performance in the third quarter. This quarter, we delivered another strong set of results, supported by an outstanding achievement in our swap adjusted net interest margin, which is a reflection of not only our effective balance sheet management, but also our strategic positioning even in a period of changing market dynamics. Our focus remains on sustaining growth that is both sound and value adding rather than pursuing volumes. Given our broad and well-established customer base, we aim to capture opportunities selectively while preserving asset quality and prudent risk metrics.

Needless to say, robust net fee income generation continues to support our bottom line. Our diversified fee base built on stronger customer relationships and expanding digital channels continues to provide resilience to our overall revenue stream. On the cost side, our unmatched discipline once again stood out as a key differentiator while ensuring we invest in key growth enablers such as digital channels, data analytics, SME and commercial banking capacity. In the third quarter, asset quality indicators remained at solid levels across retail, SME and corporate segments.

Finally, our capital and liquidity metrics further improved, providing us with ample flexibility to support future growth opportunities while continuing to meet all regulatory requirements quite comfortably. When we look at our major profit and loss items, third quarter highlight the net interest income contribution. As we have been emphasizing recently, thanks to our well-positioned balance sheet structure, we were able to further improve our net interest margin in this quarter and deliver another solid performance across the board.

First and foremost, we widened our core spreads and achieved a notable 116% increase in swap adjusted net interest income on a quarterly basis. Please note that on a year-on-year basis, swap adjusted net interest income increased around 4x. Moreover, net fee income generation remained strong in this quarter, registering a quarterly increase of 10%, carrying the annual growth to 47%. We are particularly seeing the positive impact of our earlier investments in credit card business, which constitutes 68% of our fee base, indicating the highest portion as of third quarter.

The consistent improvement in our rankings and market share clearly demonstrates the success of our long-term approach. Quarterly increase in OpEx was around 11% due to the salary adjustments in July. On the other hand, annual increase was limited to 24%. Disciplined cost management, combined with strong fee growth, helped us to achieve a fee coverage of OpEx above 90%. On the cost side, our unmatched discipline once again stood out as a key differentiator, while ensuring we invest in key growth enablers. Overall, while attaining year-over-year net profit increase by 78%, our return on tangible equity at the end of the period stood at 20% and return on average tangible assets at 1.6%.

Now I will leave the floor to Nilgun for the details of the bank's performance.

[Nilgun Osman, executive]

Thank you, Ebru. Welcome all, and thank you for joining our webcast. In this slide, you can see the main balance sheet items. In the third quarter, we managed our loan growth in line with our strategic priorities, keeping in mind the monthly lending caps. While maintaining our prudent and selective approach, TL loans grew by 8.4% quarter-on-quarter, bringing year-to-date growth to 28.2%, which is aligned with our full year guidance of around 35%.

On the FX side, loans were up 14.5% in dollar terms year-to-date, while remaining flat in the third quarter. Please keep in mind that when adjusted for parity impact, year-to-date increase on FX loans comes down to high single-digit levels, in line with our expectations. On the commercial side, in terms of our lending activity, we prioritize productive sectors that contribute to economic growth, current account and employment, which has always been a cornerstone of our strategy.

In that respect, SME banking remains one of our key focus areas. Within this segment, we particularly emphasize agriculture, tourism, export-oriented businesses and women entrepreneurs, areas where we have consistently strengthened our presence and gained notable market share in recent years. In export financing, we are clearly the market leader among private deposit banks with a market share of 26%.

On the retail side, we have been pursuing a disciplined and consistent strategy over the past several years. Our approach has always been to grow in a sustainable manner while focusing on customer value creation and portfolio quality. On the funding side, we kept our focus on a diversified and granular core deposit base, which remains a key element of our balance sheet strategy. In this quarter, TL deposits grew by 9%, while FX deposits were up by 3%, mainly due to gold price movement.

In fact, on a parity adjusted basis, FX deposits were stable compared to year-end and around 2% below compared to June figures. As for the external liabilities, our total external dues are $9.4 billion, of which $5.2 billion is due in the next 12-month period. Half of our short-term liabilities are syndications, which are regularly rolled over and our FX liquid assets are more than enough to cover our external liabilities.

FX LCR was again at comfortable levels with around 300%. ESG remains a key priority in FX wholesale funding, contributing to diversification and accounting for around 55% of total funding. Following our deb AT1 issuance in the first quarter, we successfully completed a Tier 2 transaction amounting to $500 million. As always, we will continue to evaluate FX wholesale funding structures and potential transactions in line with the needs of our balance sheet based on market conditions.

As Ebru mentioned earlier, our balance sheet has been well positioned for the ongoing rate cut cycle. This positioning has allowed our core spreads to widen, which resulted in significant improvement on our swap adjusted net interest income with an increase of 116% during the quarter. Following the temporary margin pressure we experienced in the second quarter, our quarterly swap adjusted net interest margin continued to improve, rising by 118 basis points, highest among peers to reach 2.34%.

This performance is fully in line with the NIM trajectory we shared during our previous earnings call. Looking at the first 9 months of the year, our net interest margin improved by over 260 basis points year-on-year. As we move into the final quarter of the year, we expect this positive momentum in net interest margin to continue without losing pace, carrying our exit NIM to around 5%.

Having said that, not only the magnitude of the rate cuts, but also its transmission to pricing dynamics will be the main determinant on the pace and extent of the NIM improvements going forward. As of the end of September, share of securities in total assets was 18% while continuing to maintain the diversified structure of the book with floating rate notes, we increased the share of fixed income securities to 48%. Our CPI linker portfolio makes up of 27% of TL securities, contributing to our income base by TRY 11.2 billion in the third quarter.

Moving on with net fees and commissions. We continue to see strong and sustainable momentum in fee and commission income generation, reflecting both the strategic investments we have made over the past several years and the structural diversification of our revenue base. The groundwork laid earlier, particularly in digital banking, product innovation and process transformation is now consistently translating into resilient and recurring fee streams, which are less sensitive to interest rate cycles.

We are prioritizing value extraction and relationship debt in addition to expansion, leveraging our established customer franchise efficiently. Needless to say, lending activities are one of our strong muscles that supports solid fee income base. Roughly 1/3 of lending-related commissions is generated from noncash portfolio with the highest efficiency among our peers. In the retail segment, insurance-related commissions have been displaying a strong upward trend, reflecting both higher product penetration and improved cross-sell dynamics. Likewise, asset management fees remain an important and growing contributor, benefiting from our long-standing experience, broad product range and solid market presence in investment and wealth management services.

All in all, in the first 9 months, fee income increased around 47% on a year-on-year basis, reaching TRY 96 billion, which represents one of the strongest fee base in the sector. In recent years, efficiency and cost management have become increasingly important amid a relatively high inflation environment. As you know, we have been taking solid steps to transform our business model in line with our digitalization strategy, which continues to deliver meaningful efficiency gains.

As a result, our OpEx growth once again remained significantly below our peers during the first 9 months of 2025. Accordingly, fee coverage of OpEx rose to 93%, while fee coverage of HR expenses reached 230%. In addition, our cost to average asset ratio declined to 3.6% and our cost-to-income ratio improved by 10 percentage points compared to year-end, reflecting tangible progress on operational efficiency. Please note that in the last quarter of the year, we expect a slight normalization in OpEx due to increasing business development costs. Therefore, we are keeping our guidance levels at around average CPR.

Looking ahead, we will continue to focus on enhancing efficiency by leveraging our strengths in adopting new technologies, upskilling our talent base, pioneering digital banking services and centralizing process management across the organization.

Next page shows the NPL and provisioning trends. During the quarter, we delivered healthy loan growth accompanied by resilient asset quality metrics. In the third quarter, NPL ratio stood at 2.7%, which is largely in line with our projections. Flows to NPL increased slightly but at quite manageable levels and collections remained strong at 26%. Our total net cost of risk, including currency impact, stood at 218 basis points. Furthermore, as part of our cautious approach, our NPL coverage ratio stood at 65%, highest among peers.

Our capital ratios remained at solid levels at the end of the third quarter. Capital adequacy ratio without the BRSA's forbearance measures stood at 15.4%, while common equity Tier 1 was at 12.5%. We believe that our capital ratios are strong enough 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.

Before moving on to the Q&A session, let's take a look at our summary of previously shared expectations. Thus far, we have largely been performing in line with our guidance items for 2025. For the net interest margin, we will be focusing on defending our core margin. This concludes my presentation. Now we can have your questions. Thank you.

[Operator]

[Operator Instructions] We have a question from Simon Nellis, Citi.

[Simon Nellis, analyst]

Yes, I guess my question would really be on asset quality. If you could elaborate a little bit why you had to take such a large charge in the quarter? And how you see the outlook for risk costs going into the fourth quarter and next year, that would be quite helpful.

[Mehmet Türk, executive]

Hi, Simon, this is Mehmet. Actually, in this quarter, we have seen some companies under the high interest environment and relatively stronger Turkish lira and somewhat softer domestic demand conditions, which are faced with the challenging backdrop. Particularly, these are the firms operating with tighter margins or who have limited pricing power. That said, the impacts we are observing have been supplier and firm specifics rather than widespread or structural, and we are not seeing any deterioration beyond what we had already anticipated or prepared for.

But during this quarter, in order to elaborate more, the increase seen is in Stage 2 loans that was driven largely by credit card restructuring under the newly introduced retail restructuring framework. When we look at the numbers, the details of the flows into Stage 2 in Q3, 61% of the flows was due to the restructuring of these and which -- of which was -- 76% was from the retail and 80% of this was from credit cards and 20% from the GPLs versus the 24% restructuring from the commercials.

So it's important to underscore that this was fully anticipated and reflects the mechanics of the program rather than an incremental stress. And we implemented this scheme in a carefully calibrated and customer-specific manner, offering repayment structures aligned with actual disposable income and demonstrated repayment capacity. And the early numbers, performance indicators suggest that these customers are adapting well to the new schedules and overall behavior is tracking in line with or slightly better than our internal expectations.

On the SME side, the past few quarters have effectively acted as a stress test for the portfolio. We are now seeing signs of stabilization in NPL formation with levels broadly constant with recent trends, while certain pockets, particularly smaller or more leveraged SMEs continue to warrant close monitoring. Overall, portfolio quality has remained resilient, and we are still below the sector's average.

Looking ahead, potential policy rate adjustments next year could provide additional support to credit dynamics, and we believe that will be helping to contain further deterioration risks in this segment. In the retail segment, there -- I think I lost voice. Let me continue from here. On the retail side, there are some still potential for mild credit normalization in the near term. However, these are from the consumer segments more sensitive to real income dynamics. And we expect minimum wage adjustments and salary revisions early in the year to support repayment behavior.

In that sense, the outlook remains manageable and well within the boundaries of our provisioning strategy. So putting all this together, we expect to close the year broadly in line with our initial guidance with NPL around 3% and cost of risk around 200 basis points. However, there is upside pressure on the cost of risk going forward. But we believe we will remain flat to current levels going into the year-end. Does that answer your question?

[Simon Nellis, analyst]

Yes, I guess so. But you're saying that there's still risk that risk cost remains elevated going forward?

[Mehmet Türk, executive]

At around current levels, which are 218 basis points.

[Operator]

Our next question is coming from David Taranto, Bank of America.

[David Taranto, analyst]

I have 3, please. The first one is on the guidance. Your 25% return on equity guidance for this year looks rather challenging now. How much of a downside do you see to this year's bottom line guidance, return on equity guidance basically? And inflation and rate expectations have changed since you shared the NIM guidance in the previous quarter. Could you confirm that you still see the exit NIM around 5% levels for this year?

And if so, what are the policy rate and deposit rate assumptions for this guidance, please? And this is another quarter where the book value growth has been materially above the quarterly net income. What has been driving that in this quarter, please?

[Ebru Ozsuca, executive]

Thank you, David, for the questions. I think that first, I can start from the net interest margin side as improvement in our core banking income trajectory will be one of the main determinants of the return on equity trajectory. You would remember that in August, we have revisited our NIM guidance level based on a revised baseline scenario where we anticipated CBRT to go for consecutive 3 rate cuts in the remaining meetings, although we said that at time, the levels might differ depending on the market developments.

And by now, after the October MPC meeting, we see the rate cut in the 2 meetings summed up to 350 basis points. And this, as we already mentioned also signals that there will be a divergence from our previous expectations. At the moment, we are assuming that the cost rate will be somewhere around 38%. In our previous projections, it was around 35% to 36%. But more importantly, what is important is that how the TL deposit cost side will evolve as we are also seeing the easing in Turkish lira deposit cost is lower than our initial expectations due to the increased target levels in the Turkish lira deposit ratio measures.

However, we still achieved the third quarter NIM expansion in line with our expectations and see the October improvement, again in line with our previous expectations and calculations. The fact that we have been able to preserve our loan yields in the third quarter was not only important for managing the cost pressure during the period, but also will make sense to further contribution to the spread widening going forward. Therefore -- and thinking of our balance sheet mismatch on the Turkish lira side of around 6 months, we still see a gradual improvement, and we believe it will continue to improve in the -- throughout 2025 and 2026.

And in the light of these expectations, we still continue to assume that we will be able to increase our quarterly net interest margin by around 150 basis points in the last quarter. Therefore, it will again take us to somewhere around 5% as an exit net interest margin level. And from here, if I do -- and our inflation expectation for the year-end, I think you also said that, I said that our expectation for post rate is around 38%. The inflation will be around 31% levels -- 31% to 32% levels, I can say, for the year-end.

And when we look to our return on equity, of course, not only the core -- how the core banking income trajectory and the evolution of our net interest margin will go. Apart from that, the performance will be supported by strong fee generation and contained OpEx growth. And therefore, we believe our return on equity will pick up in the last quarter, bringing us to about 20% level for the full year.

At this point, maybe it is crucial also for me to mention that the momentum with respect to interest income generation has become more than visible as of this quarter, as I have already mentioned, indicating that we have the potential to deliver better and superior results in this area in the coming period. And I think this will be the main catalyst for us going forward. And for the 2026, I think you have been asked -- you have asked our growth assumptions...

[Mehmet Türk, executive]

Let me try to cover that question. Well, we are still in the early stage of budgeting. But looking ahead to 2026, we expect book value growth to normalize closer to or lower than earnings growth, let's say, assuming a stable macro backdrop and gradual moderation in inflation and continued internal capital generation. So it may be reasonable to think that as of next year, we'll be able to deliver real equity growth to our stakeholders exiting the cost of capital.

[Operator]

Next question is from [indiscernible].

[Unknown Analyst]

Regarding the fee to OpEx ratio in the past couple of years, we have been observing a significant improvement, not only for Isbank, but for the sector as well. How do you see the outlook maybe for 2026 and onwards? What is the correlation between the Central Bank reference rates versus the receipts or receivables on credit card commissions from -- or merchant commissions? And how do you see the operating expense outlook? Because as far as I noticed, you are roughly probably deleveraging your operating expenses through hiring younger people. So how do you see the outlook for your own as well?

[Mehmet Türk, executive]

Thank you for the question. There are 2 components to this question actually. For the fee side, we continue to see strong and sustainable momentum in fee and commission income generation, which reflects the strategic investments, as Ebru mentioned previously during the presentation that we have made over the past several years and bring structural diversification to our revenue base. And that's due to the digital banking product innovation, process transformation, which are providing us consistently translating into resilient and recurring fee streams, and they are less sensitive to the interest rate cycles.

And going forward, as we expect the moderation of the interest rates and with the interest rates, so they will provide less sensitivity, lower the sensitivity during this cycle. And as you already know, over the recent years, payment systems have been increasingly important driver of our fee growth. And the combination of higher transaction volumes, continued innovation in card products and the expansion of merchant relationships are important, and they all have contributed to a material uplift in the payments-related commissions.

But not only this, our leadership in digital banking, which is a key differentiator in fee generation, the expansion of and deepening of the digital ecosystems are also important. They have also direct and measurable impact on commission income. In the first 9 months, for instance, fee income generated through digital channels, which have namely increased by 60% on a year-over-year basis. They underscore -- this underscores the scalability of our platform and the efficiency gains that come with digital penetration.

And also in the retail segment, we have insurance-related commissions, which have displayed a strong upward trend as you look at the details of those numbers. They reflect both higher product penetration and improved cross-sell dynamics. So also another strong muscle is asset management fees, for instance, they remain an important and growing contributor to our commissions. So needless to say, for instance, the lending activities are also contributing to our solid fee income base. So this is a diversified fee income generation. And we don't see any headwinds for the fee generation.

This is because we have also some other rooms growth areas, which we see as an opportunity, for instance, the payment systems, money transfers, et cetera. So we are also confident that we can gain market share in these areas and narrow the gap and especially in the several high potential segments. On the OpEx side, as you can see from the numbers, we have outperformed our peers. The OpEx growth has been 24% year-over-year, proving our disciplined approach.

For the year -- full year, as everyone mentioned, we believe that OpEx increase might stand around 30%. This is -- we didn't change our average CPI guidance. So the average CPI expectation has moved to 35% we are keeping an expectation of 30%, though we have not revised them, we are -- we have been cautious about this. But while ensuring we invest in key growth enablers such as digital channels, data analytics, SME commercial banking capacity, our priority is to keep the OpEx discipline.

So we still expect further cost benefits from full implementation of process automation, from ongoing branch network rationalization moving into 2026. And our aim is on the fee OpEx side to improve further going into next year. And we expect at least 100% growth going into 2026. I hope that answers your question.

[Unknown Analyst]

100%, you mean fee to OpEx ratio to be 100%?

[Mehmet Türk, executive]

For the fee OpEx ratio.

[Unknown Analyst]

Fee to OpEx ratio. Okay. One more question, if I may. This is on the exit NIM for the third quarter. What's the exit NIM for the third quarter?

[Ebru Ozsuca, executive]

Over 3%.

[Unknown Analyst]

Over 3%? Okay.

[Ebru Ozsuca, executive]

Yes, slightly over 3%.

[Unknown Analyst]

Okay. Got it. And you say that it will be around 5%, so roughly 150 basis points increase on average.

[Ebru Ozsuca, executive]

Yes, on an average quarterly net interest margin, I can say. Of course, beating the post rate cuts, timing and so on. So it just differs sometimes on average and the exiting side, but we are just seeing this trend in line with our expectations.

[Operator]

Next question comes from Valentina Stoykova of Barclays.

[Valentina Stoykova, analyst]

Most of my questions have been answered, but I have 2 more, I guess. First one is if you can give us a little bit more color on the decision to increase the fixed rate TL security portfolio, that will be great. And then my second question is on your FX liquidity in the absolute amount, if you can provide it for us as well.

[Ebru Ozsuca, executive]

On the security side, I think that as being one of the primary dealer banks in Turkiye, actually, we have always been active in all kinds of the securities. And therefore, when you look to the past, also, you will see that we always have a diversified security base. But seeing the current yield curve on the fixed asset side and with our expectations during the last -- I think that during the last 1 year, we are mostly also giving away on the fixed rate securities.

Of course, we are in all the tenures, but I can say that up to 2 years is one of the areas that we are most active. Therefore, we are still maintaining our diversified structure of the book with the floating rate notes, but we have increased the share of the fixed income securities to 48%. And on the FX liquidity side, I can say that we have the FX liquidity more than our short-term liabilities. I can say that it is somewhere about -- hovering around USD 7 billion. And also, you know that we have a high FX reserve requirement by the Central Bank, which is apart from that, the liquidity -- imminent liquidity that we have in our bank.

[Valentina Stoykova, analyst]

And fixed rate securities, these were mostly sovereign bonds. What were they?

[Ebru Ozsuca, executive]

Mainly sovereign. We have the corporate notes, I just have a quite small portion in our balance sheet, I can say.

[Operator]

I believe those were all the questions. So I now hand over to our presenters for closing remarks.

[Ebru Ozsuca, executive]

Thank you all for your participation. We believe we have delivered another solid performance this quarter, supported by our strong human capital, robust technological infrastructure, advanced digital capabilities and our sustainable business model built on long-term value creation for all stakeholders.

For any further details, please feel free to reach out to us. We truly appreciate your continued interest and support, and we look forward to seeing you in person very soon. I wish you have a very good weekend. Stay safe and healthy until next time. Thank you for participation.