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Welcome to Yapi Kredi's 2017 results and outlook conference call on the 6th of February 2018. [Operator Instructions] Today's speakers during this conference call are: Mr. Gökhan Erün, Chief Executive Officer; Mr. Niccolò Ubertalli, Deputy Chief Executive Officer; Mr. Massimo Francese, Chief Financial Officer; Mr. Kürsad Keteci, Head of Corporate Strategy and Investor Relations; and Ms. Hilal Varol, IR Manager. I will now like to hand the conference over to Mr. Gökhan Erün. Sir, please go ahead.
Thank you very much. First of all, I'd like to thank you all for joining in our 2017 earnings call. I feel extremely happy and honored to join privilege to your credit family who is one of our Turkey's most reputable and also respected organization and continues to have phenomenal accomplishments in this sector. I am excited to be a part of such a large family who has been serving for the last 74 years with a strong vision of dedication to deliver. In terms of 2017 performance, as you may see from the figures, we continued to increase our profitability again driven by successful execution of our long-term strategy. Yapi ve Kredi managed to improve its profitability levels with first, optimized balanced growth in terms of scale and delivered quarter-on-quarter improvement to NIM and loan-to-deposit spreads; second, well-managed cost structure; and third, improvement in asset quality. Going forward, we'll ensure the contribution -- the continuation of this performance while maintaining our strong fundamentals. So before starting to the presentation, I'd like to thank to all my team, and also Mr. Faik Açikalin to deliver these strong results, which will be milestone for achieving our future targets. So now I'll be moving through the presentation Page 2. So as you see, strong results talking about first-- about income. Net income, TRY 3.6 billion, 33% increase year-on-year and then 13.6% ROATE, 170 basis points increase also year-on-year. So going on the second pillar, which is the cost side, cost income 41%, an improvement of 150 basis points, thanks to well below inflation cost growth. And also as a third pillar, asset quality, the cost of risk was 170 basis points, 30 basis points improvement there. So despite higher coverage after NPL sales. So looking at the CET1 ratio, another 32 basis points improvement year-over-year going up to 10.9% internal capital generation continues. Looking -- going on Page 3. Talking about details a little bit on my side. First page on the left-hand side, profitability acceleration better than the guidance 33%. And then, ongoing improvement in ROATE since 2015 going up to 13.6%, 170 basis points. And then balanced scale management, loan market share and loan price banks and reduction a decrease of 40 basis points at 16%. Thus, we have the conservative approach stemming mainly from the change here and deposit market share in line with the loan growth. On the right-hand side, you see the strong operational performance, efficiency gave 150 basis points, cost income down to 41%. The cost is nearly 7 basis points -- 7 percentage increase compared to 12% CPI increase. And looking at the cost of risk, better than the guidance, now to 170 basis points. Also solid fundamentals on capital ratios, better than the guidance. The CAR standing at 14.5 and CET1 at 10.9. And then LDR, as we promised and as we delivered in the last 5 years, always between 110% and 115% so this time 112. We had only 2 percentage increase compared to sectors up 4%. So this is, in a nutshell, what I can comment on. And now I'm giving the floor to Nicco.
Thank you very much, Gökhan. Good afternoon, or good morning, to everybody in the call. I'm on Page 4, going to look at the balance sheet. On the lending side, we have been growing 14% slightly below the private banks that were growing at 15%. This is mainly driven by SME loans, where we have been very strict in the application of the credit range incentives and therefore, growth on credit incentives SME loan is slightly lower than the private banks. In terms of foreign currency loans, we have been decreasing by 2%. As we have stated since the beginning of the year, we are being deleveraging the FC loan. And in particular, short-term loans and long-term loans have been decreasing on FX by 11% by 19%. But only product finance loan increased by 6%. So we have been strong in deleveraging that part of our balance sheet. In terms of deposits, our deposits have grown to 10% below market where private banks have been growing by 13%. This is due to management -- effective management on our liability side. In particular, we let go some large corporate deposits, very expensive. And we're substituting with the borrowings, borrowings instead have grown 31% versus the market 18%. In particular, we have concluded very successfully a $1.1 billion and $0.5 Eurobond. One was in dollars, one was in TL. And 0.5 billion TL covered bonds. Those have allowed us to reduce our cost of funding that is another area that we are focusing on. As we always told you, we are looking to rebalance the bank in this. And in fact, the results our individual deposits over total deposits have increased from 27% to 34% and will continue in that direction. As demand deposits over total deposits have increased from 17% to 18%. We are focusing on continuing this and are managing it in a way to reduce the cost of funding of our bank. On Page 5, let me talk to you about overall result. Net income of the bank year-over-year plus 33%. This is among the best in the sector, driven by 11% revenue growth, itself driven by 17% core revenue growth. In particular, in the revenue side, we have -- we will discuss it on the next page, the details. In terms of cost of -- we can't say, we grew only 7%, way below inflation, as we promised at the beginning of the year. Provisions, down 6% and also on this we'll discuss it in the further pages. Let's go now to Page 6 and look at the revenue side. On Page 6, revenues grew 11% to TRY 13.8 billion, with an 18% growth in net interest income and a 12% growth in fees. In terms of NIM over stock adjusted, we had a slight decrease over the year from 3.3% to 3.1%. This was mostly driven to our strategy to not allow the loan-to-deposit ratio go above certain limits. In fact, it was during the full year contained. And I would add that yes, despite the decrease, the exit of the year in the fourth quarter was strong at 3.3% stock adjusted NIM. In terms of fee growth, better than guidance at 12% year-over-year growth. Compared to sector we're much better if we compare in fees to average assets, 1.14% versus 0.86%. And they are strong because they are commercially driven fees. So we are happy with the result. In terms of other income as I told you, we have some specifics here. We have collections increasing. In particular, we have been -- this shows on your part that we have been the bank with the largest NPL sale this year. Then we have swap costs that have increased substantially during 2017, both on volumes and on price. But this is always due to proactive management of our costs. So it's always a trade-off between the cost of the deposit and the cost in TL or the cost of swapping and we are actively managing on a day-to-day basis. So if you see the cost increasing, that was the cheapest way for us to find in that moment of time. On Page 7, let's look at the loan yields a little bit more in detail. We have been repricing our loans successfully, blended at 9.9%. Our deposit costs after being high on third quarter -- second quarter and third quarter of 2017, also to maintain the loan to debt ratio. Our fourth quarter, it's down at 5.9%, so the actions we are taking, as I told you, letting go some large corporate deposits, substituting them with borrowing, we are very proactive on that. The effects are reduction in our deposit cost at 5.9%. This implies a long term deposit spread going at -- exiting at 4% after a dip of 3.4%, then 3.3%, then 3.4%, then 4%. So a nice enter into 2018. On Page 8, let's discuss a little bit the cost together. So cost, we are at TRY 5.7 billion, growing 7% with a CPI at 12%. HR cost up 12% and non-HR cost at only 3%. That say, we have still -- we are still investing heavily on IT. That was happening in '17 and will continue. The investments are paying off and the reduction of the cost to growth is the execution of those investments. We have done very structural changes on our IT platform the infrastructures that day-over-day are allowing us to be faster on the market and cheaper on the market when we execute our strategies. And it is clearly visible. Cost income down from 42.8% from -- to 41.3%. Cost over assets from 2.1% to 2% and fees over OpEx 56% to 58%. So we are pleased with this. We will not stop investing on IT, as the investments we do are targeted to cost elimination. And we are delivering now as -- during the whole year we have been delivering and we will continue delivering next year. Page 9. Another effect of our investments is that we have been increasing our digital customer market share at 12.6% versus 8.6% of physical network. You can see here, as I've told you several times that serving a customer in digital for us is 56 times cheaper than via the physical network. And you could see that 38% increase in transactions through digital this year versus 10% decrease in physical transactions, you can see why we are confident on the cost elimination program. Other key indicators, 4.4 million digital customers with 51% digital customer penetration and 3.7 million mobile customers. For the digital one, it's another 1.1 million customers added in 1 year. Very proud and I will spend some time with this to say that we have been awarded by Global Finance in October 2017 as the world's Most Innovative Digital Bank. In September '17, as the Best Digital Consumer Bank in Turkey. We have been awarded by -- we had got a Gold Stevie Winner on Apps Financial Services Banking and on Apps Experimental and Innovation. And we got another award, these are among the main, Most Effective Mobile-First Service. So the investments we are doing not only are very appreciated by the customer and we can see the customer increase are very appreciated and we got several recognitions on this on top of effecting clearly our P&L in terms of our cost line. We will continue on the digitization on this direction. Page 10, asset quality. NPL ratio has gone down from 4.8% to 4.4%. Watch and restructured, if you consider watch restructured down from 3.2% to 2.6%. We are conservative in our approach and sustainable. So this is a trend that will not have surprises. It will continue to decrease. We're extremely conservative in the way we allocate the loans. And in fact, our long term structured portfolio is very contained. NPL influence is going down. Collection has been going up dramatically this year. We have been investing, as I told you at the beginning in the year, in revamping world collection strategy and more has to be done. So we don't expect this trend to stop. NPL inflow is going down and we are very pleased with that. We know we do have a gap versus main competition. We are closing this gap. Page 11, cost of risk. Our NPL coverage stands at 77%, despite we'll be the largest seller of portfolios. So we are being -- maintaining this. Obviously, it has a P&L cost, but it doesn't matter, we do want to have predictability and sustainability of our results. So we have kept toward this. In terms of cost of risk, down from 1.37% to 1.07% total cost of risk. And if you consider the seller portfolio, then it would've been 0.88%. For specific, from 1.10% to 0.92%, we would have been 0.73%, if we would have sold the portfolio. If you still believe that selling the portfolio is the correct strategy, we are continuing to doing it and we will continue doing that also in 2018. Page 12, capital. In terms of capital ratio, the bank is at now 14.5% versus 14.2% at the beginning of the year. CET1 is at 10.9% versus a limit of 6.5%. And in a consolidated basis, at 10% versus a limit of 8% that will become 9%. As I told you in the last 2 years, our strategy would have not required a capital increase and it did not require a capital increase and we did not do a capital increase. In fact, the internal capital generation is at 75 basis points. As I told you, we'll keep managing capital by internal capital generation leveraging on our investment. On this, we are -- as we are very aware that we are less capitalized than other banks in the sector. We do not need this year a capital increase for regulatory purposes. So our strategy does not require a capital increase because of regulatory issues. We're also very aware that on the newspaper there were allegations that our shareholders would be supported in case we wouldn't necessitate of a capital increase and this makes us just very happy. On this note, I will leave the floor to Gökhan Erün.
Thank you, Niccoló. Very good summary. Very, very pleased how we did against the guided performance in 2017. We did well, especially on cost sides, compared to -- we were guiding -- actually guided 2, 3 percentage below the CPI and we ended up with 5 percentage below CPI. And also looking at the asset quality ratios, we said flattish at -- but we end up with 39 basis points improvement. And cost of risk has been stable, 18 basis points as well. So better than the guidance that we've achieved thanks to the team. And then I am moving now to Page 14. This is the guidance for 2018. For volumes, for both loans and deposits sides, we are guiding at 12% to 14% levels, and mainly driven by the TL commercial loans as well as also individual loans for us is extending due to -- actually the demand is also very low in that sector. So mild increase in FX lending, I might say. On the revenue side, flattish except CPI impact and fees growth of low teens. Costs, as we stated earlier, this year again, below CPI, cost to income around 40%. Asset quality, NPL ratio, an improvement of standings points and also for cost of risk slightly down. And for the fundamentals, LDR, we are being doing that for 5 years and this year, again, 110% and 115%. We know how we can manage it and will be managing within the scope between 110% and 115% and CAR above 13%. So finalizing the presentation, coming to the closing remarks. As we have clearly seen our improving profitability performance with 170 basis points year-on-year growth in our ROATE is continuing. This incremental increase in ROATE was driven by sustaining revenues by a successful core business performance with balanced growth, much lower cost growth, due to completion of investment structure and also contained asset quality. In the new periods, in line with our all shareholders expectations the goal and the strategy of the bank are very clear, to accelerate the strong performance on profitability. I really believe that we have huge potential that can support to achieve our goals. With our strong brands, rich organizational culture and support of our shareholders, both [indiscernible], we will seize the opportunities ahead of us and reach to greater achievements, which will also contribute to our country's economy of Turkey. We are going to add more enablers to achieve the improvement in profitability as I said, by having existing concrete strategic pillars, mainly: first, ensuring sustainability of revenue improvements to optimize volume growth. We made investments in our all strategic areas to widen our revenue base. Also feeding the potential with an increase in client acquisition for sure; also, second, cost elimination and discipline, this will continue. The investments that we made are also allowing us to eliminate cost, essentially via digital integration in both forms. And of course, back office processes, we will be seeing that more and more; and, third, the life of our strategy is the asset quality that we mentioned, me and Niccoló mentioned earlier, on this front, the investments and enhancements are being done through 3 main enablers, which is first, underwriting investment; second, of course, the collection improvement and third, NPL stock management. The trend is also already in place. We are seeing a clear trend, with the first positive signs visible during the first quarter of last year, 2017. NPL ratio is controlled and cost of risk decreasing. So I'd like to take this occasion to extend my thanks to our stakeholders who stand by us with trust and support. And also to our dedicated employees who contributed to the achievements of our bank. So on behalf of the whole team here, I would like to thank you for joining our call. And we can now take your questions.
[Operator Instructions] Our first question comes from Sam Goodacre from Morgan Stanley.
I wanted to talk just a little bit more about capital. So on Slide 12, you talk about quite a comfortable buffer over the minimum. Though, of course, you did elude to being less capitalized than peers. When you think not the regulatory minimum but what your comfort level is, what level would you be looking at maintaining over the coming year? And if we put the internal capital generation aside for the second, what do you think could be some of the uses or the absorbers of capital this year. It's not just the 57 bps negative impact from the macro environment we saw last year. Just trying to get a sense for what ultimately you are comfortable with and what you think could be the evolution aside from the internal capital generation?
Thank you for the question. What I can say today is that at this stage we are comfortable. Based on our budget, we are comfortable. And I would stop it here. If anything during the year would happen, we would make the necessary announcement. There's no announcement to be made.
Okay, my second question was on digital. You allude to some of -- or having been a change in the way you calculate and present your digital data. So I'm fully aware that there are differences on how banks present digital, but particularly given you're saying you're the most innovative digital bank, could you let us know how some of the statistics compared to your peers? Like, for example, the transactions you're doing through digital, the share of digital products sold. And particularly, in the near term, how could these things evolve? Are there any other products that you are trying to sell digitally, for example, other than those that you do list on your Slide 9?
It's very difficult to make a comparison homogeneous basis on this topics. For sure, we can compare our market share in terms of digital customer, that is 12.5%, this is an official data. And on this, I believe that you can make the comparison homogeneous basis. When we moved today a number of transaction, I believe that every bank is at own space to measure the performance. I can reassume what is visible on Page 9, but it's really difficult on the other items to make a comparison homogeneous basis. I can say something in terms of fees. We can say that during the '17, we have seen an increase in number of our digital customers. We acquired 1 million new customers. And we don't see, so far, any pressure in terms of fees. That means that through this channel, we were able to deliver a more convenient product to our customer base. And the same time, we were able to reduce our cost to serve. So far, we have something around 25% to our transaction fees generated from the digital channels.
Okay. And then my final question is on the improvement you foresee in the NPL ratio. Is that organic, so to speak, or is it reliant on further NPL sales? And what level of sales would you foresee for the coming year, is there any transaction in the pipeline?
In '17, we sold TRY 1.6 billion NPL. At the same time, we improved our performance. And this strategy will go on also in -- will do in 2018.
Our next question comes from Ovunc Gursoy from BNP.
I have a couple of questions. The first one is about the IFRS 9 transition. You have TRY 1.8 billion of general provision buffer. What -- could you give some color on what will be when you align your books according to IFRS 9. And also related to what is your exposure to [indiscernible], what should we expect in terms of provisioning, for example, could you give some color on that because your -- some of your peers already told us that like around 25% to 30% provisioning will be set aside for [indiscernible] after IFRS 9 transition. The second question is about your CPI expectation for next year and net interest margin including CPI, what should we expect?
So starting from the first question about IFRS 9. Of course, the TRY 1.8 billion general provision will be useful in the transition. Overall, we don't expect any significant impact in terms of capital ratio. We are still waiting some final guidelines from the regulator in terms of capital impact. But again, we don't see any major impact in terms of capital ratio. Regarding [indiscernible], you know that our exposure is definitely lower than other banks. We have something around $200 million partially equal to [indiscernible]. In the last quarter, we classified this in group 2, with a coverage of 2%. In the 2018, we are going to increase this coverage aligned with the sector. In terms of CPI, our assumption is 9.83% -- 9.3%, sorry, October, this was October. And we keep this impact stable month-by-month.
For the whole year 9%.
Net interest margin please?
The impact of the CPI on the NIM will be something around 20 bps less. Our assumption is, as I've said, the 9.3% in the previous year, CPI ratio was 11.9%. And this will generate this impact on our NIM.
Our next question comes from Alan Webborn from Société Générale.
In formulating your targeted volume growth for 2018, what did you take into account in terms of the impact of this sort of stage 2 credit guarantee fund availability? And how well do you think that sort of Yapi is structured in terms of taking advantage of this potential helpfulness in terms of loan growth for 2018? That would be interesting. Is it at all possible to give us an idea of what your FX forecasts are for 2018? And therefore, what your TL growth in that forecast actually is just to give us an idea. You were saying a mild increase in FX lending, presumably that's in FX terms. If you can give us a little bit of color on that, that would also be interesting. And I suppose, certainly, how do you feel in terms of the competitive environment in the economy. We have some of your competitors sort of launching cashless branches very quickly. Others sort of being a little bit more cautious in terms of believing that Turkey is still very much a cash economy. Where do you think Yapi fits in? And do you see the competition within the sort of grabbing the digital client as intensifying? Is it stabilizing? Do you feel that there is any shift in the trend that you're seeing over the last sort of 6 months or so? That would also be interesting.
Starting from the credit guarantee fund. When we elaborated our budget, the assumption was to have TRY 50 billion for 2018. Now perhaps, this amount is underestimated. We are waiting for some guidelines in terms of reviews such of the portion that we left re-up during the year. But in our budget, the assumption is TRY 50 billion. In terms of TL depreciation, we expect something in line with the inflation. While I leave the floor to Gökhan for the third question.
For the competition side, I think we are all going after the -- all the banks including ourselves for the efficiency gain. This is why we are after. I think we are going on the right track. And looking at the branch norms or new startup branch, everybody's working on that, including ourselves. Although we have not disclosed it yet, we are also working on it heavily. So you'll be seeing that new trends also on our side. So the nuance at first you'll be seeing from this credit.
Our next question comes from Gabor Kemeny from Autonomous Research.
Firstly on your deposit cost, your newer deposit cost declined quite significantly in the fourth quarter. Can you give us a sense, how do you expect the earlier deposit spread levels from here? Do you have more room for divesting some of the expensive deposits you have? And secondly on capital, you mentioned that you want to be above 13% total capital ratio and you are already there. Can you give us a sense of how you think about the share of CET1 capital? So would you seek to increase all the time, your share of the CET1 within total capital?
Let me start with your second question. For Tier 1 -- composition of Tier 1 in our total capital equities ratio, we've increased based on our internal capital generation through our profit generation. And for your first question, we have seen a decline in deposit cost in the fourth quarter. What we're assuming in our budget assumption is to have the same trend at the beginning of the year 2018. And some of is it on the second half of 2018. We still have rooms, especially, to increase our domestic deposits composition in the total deposits and also individual deposit parts. Therefore, we still have a room to decrease our cost of funding.
Our next question comes from Paul Formanko from JPMorgan.
Sorry if I missed it, what was the CET1 consolidated capital ratio for the year-end?
CET1 consolidated ratio is 10.0%. On Page 12, you may see it on the graph on the left-hand side on the top.
So 10.0%? Okay. And I'm aware that you have been in a process of IRB transaction, the recalibration. Could you just confirm, when would you expect that to be visible in your capital? Is it something over the next 1 or 2 quarters?
Note we made an application and last year and now we are in the assessment phase with the regulator. The first phase was very positive. Now we're going through the details and discuss to them to give us this positive impact on our capital ratio. Our first estimation was to have a benefit something around 100 basis points, and we are very proud to be the first bank applying for this.
Okay. But you will not know the approval results until perhaps the end of the year or even next year? What's the timing of the approval, do you think?
Difficult to say. It's up to the regulator. And in this moment, I don't have any clue on that.
Okay, my final question is asset repricing. You have done a very good job in lowering your deposit costs into Q4. And I guess, you'll have a little bit more scope to continue that process as these are still above the industry average. But on the asset side, we haven't seen really that much progress on the asset repricing we have seen with some of the other banks. Why is that? What would you -- how would you see these trends over the next few quarters?
I believe that the positive impact coming from the repricing action was already visible in Q3 and even more in Q4. This action will go on also in '18. It takes time. You know that we have a mismatch between asset liabilities. But I'm confident that this process will go on and you will see the results also in upcoming quarters.
Well, if you look at Page 7, in the loan yields, in a blue dotted line, the loan yields been flat for -- since Q4 '16. If you look at some of your peer group, these have been actually rising. So this is -- I'm just wondering whether are you going to see similar trends as the peer group? Or is there something specific about your loan book that you are unable to reprice these credit spreads?
I believe that it's important to consider also the change based on the daily average in the bottom left of the slide, where it's visible that the repricing action was 25 basis points on the TL and 30 on the FX. And also, the different mix more favorable in terms of loan yields will give us an upside during the next year -- during '18.
[Operator Instructions] Our next question comes from Simon Nellis from Citi.
I just have one quick question. Just wondering if you have any free provisions created? And how much is the stock on your balance sheet?
We have TRY 150 million free provision.
So no change quarter-on-quarter?
No change.
[Operator Instructions] There appear to be no further questions. Dear speakers, are there any further points which you will like to raise?
No. Thank you very much for joining us to your end. Have a nice year, actually, although it's already February, have a nice year in front of us, and good night.
This concludes Yapi Kredi 2017 results and outlook conference call on the 6th of February 2018. Thank you for participating.