Turkiye Garanti Bankasi A.S.

Hello and thank you for joining us in Guaranty BBVA's third quarter 23 financial results webcast. Our CEO Mr. Recep Baştuğ, our CFO Mr. Aydın Güler and our Investor Relations Director Ms. Handan Saygın will be presenting today. There will be a Q&A session following the presentation and you will be able to ask your questions either via raise hand button or by typing them into the Q&A area. The presentation will now start, so I'll leave the floor to our presenters.

It's great to be with you at another results call, and this time, honestly, it feels great and makes us proud to be able to consistently announce new record results, be a significant player in the economy, especially in the year marking Turkish Republic's 100th year anniversary. We celebrate full-heartedly our century-old republic and are supercharged as we start the second century. Before our results review, I will brief you on the macro backdrop we're operating in. After the election, at the end of the second quarter, the new economic administrations moved to more orthodox policies and gradually deceleration in the domestic demand. However, inflationary pressures, both external and internal, still remain and pose upside risk to the expected inflation path. Overall, the current policies seem to be on the right track to rebalance the economy. Recall that we had already witnessed an above 4% first-half growth Combined with the resilient global growth outlook, we expect the year-end GDP growth to be 4.5% this year. The recent tax hikes, high wage adjustments, the sharp currency depreciations lag passed through, unfortunately worsened inflation expectations. We now expect year-end consumer inflation to be close to 70%. As for the current account deficit, given higher energy prices and the low growth in our trading partners, we expect $49 billion of deficit by this year end, alluding to a level around 4.5% of GDP. Before getting into numbers, the nine months recap of our financial performance is that core banking revenues continue to be the main components, the main driver of our profitability. suggesting the earnings high quality and sustainable nature. We continue to outperform in the fundamental lines like core net interest income, net fees and commissions, pure trading, and asset quality. We call our core banking revenue generation capability our inherent strength. In the third quarter, we could grow our core banking revenues by 20% quarter-on-quarter and by 51% year-on-year. Thanks to increasing efficiencies and favorable asset quality trends, the net income growth was even higher in the quarter. Excluding the free provision reversals, quarterly earnings growth was a strong 27% or 30% on a reported basis. The nine months results suggest a return on average equity of 41% and a return on average assets of 4.5%, a level much above what we anticipated and guided in the beginning of the year. Now, before moving on with the components contributing to this result, I would like to walk you through how we fared in terms of core banking revenue generation. Recall that last quarter we shared with you that there was additional funding costs, meaning additional remuneration related to foreign currency protected deposit scheme, the KKM, booked under the trading line. Adjusted with those funding costs, our core net interest income in the quarter improved by an amazing 93%, or 5.5 billion liras. Pure trading, on the other hand, dropped by 5 billion liras upon normalization, given that lower currency volatility affecting net FX buy and sell activity, as well as normalized gains on security and derivative transactions. Net fees and commissions grew by further 4.6 billion liras, or 61% in the quarter. These fundamental banking revenue generation lines combined led to a highly successful 20% growth in the quarter, validating the high quality as well as the sustainable nature of our earnings performance. Main reason for this high quality is owed to our strategy of growing assets via customer activity. Performing loans share in assets make up 54%, whereas securities share, including some limited regulatory-driven fixed-rate security additions, remain at 15%. We started seeing the impact of the tightening measures of the new economic administration, and in the third quarter, there was noticeable slowdown in loan demand. Yet we could register a net 75 billion Liras or 13% growth in Turkish Lira loans, bringing the year-to-date growth to 43% and sustain our number one position in Turkish Lira lending. In this period, our foreign currency loan growth fared flattish. On this page, you can see the lower growth pace in Turkish Lira loans, especially in consumer and credit cards, whereas relatively higher growth was booked in short-term SME loans. Our performing loans reached 674 billion liras as of September end. In the quarter, we booked market share gains in Turkish Lira loans, Turkish Lira business loans, and particularly in SME loans, where the consumer loan side, as we insisted on reasonable pricing, we lost market share in the last quarter. However, our leading position in consumer loans, as well as in credit card issuing and acquiring volumes among private banks, still remains. The current mix of the Turkish Lira loan book is that 44% business loans, 31% credit cards and the rest 25% consumer loans. Looking on slide eight, the quality of the loan book of 1.1 trillion Liras, 86% is in stage one. 138 billion Liras or 12.2% is in stage two. Even though stage two share got diluted in a currency adjusted manner, there was actually a couple billion Liras of increase in the quarter attributable to the SICR portion. The coverage for stage two remains at a strong 20% level. Our highly prudent staging and provisioning remain. As for the MPLs on the next page, net MPL inflow in the quarter remains very much muted with only 248 million liras given the supportive growth environment and strong collections. MPI ratio further improved to under 2%, while our total provisions on balance sheet, including the write-down portion, is more than 60 billion liras. This is the highest provision level in the sector and represents a total cash coverage of 5.3%. We can see on the next slide how this translates into risk costs or provisions. Net cost of risk as of 9 months of the year ended to be 55 basis points. Isolating the earthquake-related portion in the prior quarters, quarterly provision increase was 54%, relating mainly to the increase in the SICR portion of stage 2. Despite our continued high prudency in the provisioning, overall, our net cost of risk is very better than our guidance that was expected to be around 100 basis points. On the funding side, deposits dominate the funding sources. Funding alone, three quarters of the assets. All the funding sources, as per our legacy, are closely and actively managed and delivering superior margins. At Garanti BBVA, demand deposits alone fund more than 30% of the assets. This is a clear reflection that we're a customer's choice as their main bank. Naturally, this strength contributes quite positively to free funds and interest earning assets, which fares above 40%. a ratio that is well above the average in the industry, and key financial differentiation in terms of margin outperformance. Borrowings share in funding assets, on the other hand, stand at 6.7%. Total external debt is now $4.1 billion. And you can see the breakdown of our foreign debt in the pie chart below. Securitizations make up nearly half. 21% of the external debt is in the form of syndications. Of the total foreign currency debt of $4.1 billion, $1.4 billion is due within a year. Against that, we have a foreign currency quick liquidity buffer of $4.7 billion. In line with the regulations, theorization efforts continued. In Turkish Neural Deposits, even though quarterly growth seems low, or nil actually, due to the currency difference accruals of the foreign currency-protected Turkish Lira time deposits. Adjusted with the accruals, there was actually 12% growth in Turkish Lira time deposits. Turkish Lira demand deposits in the period reached 150 billion Liras. Despite delirization efforts, foreign currency deposits remained flattish in the quarter due to customers seeing us as safe haven, especially with foreign currency demand deposits exceeding $17 billion. The rising interest rates, given the imposed rate caps, helped carry loan prices to more statusable levels and led to normalization in loan-to-deposit spreads. Accordingly, Turkish lira core spread, meaning loans to time deposits adjusted with the Foreign Currency Protected Deposit Scheme's additional remuneration, could improve in the quarter by about 400 basis points on average. Its reflection on the core margin was a positive 135 basis points, increased quarter-on-quarter to 2.4% from its all-time low level of 1.1% in the second quarter. CPI impact on margin was also up as we revised our CPI estimate in valuing the linkers to 55% in the quarter from 35% that we used in the first half. This growth our nine months to date CPI estimate used in valuation to 48%, which is a level that is at the moment lower than the peers. However, we will all adjust to the same inflation reading level by year end. In the meantime, we continue to manage the balance sheet to the rising interest rate environment and aim to reduce the duration gap. On a cumulative basis in the nine months, the core margin drop was 204 basis points. For this line, our guidance was that we would expect to see around 185 basis points contraction by year end. It looks we're faring in line with that guidance. The real look into core margin, meaning including the extra remuneration portion that is under trading, brought our cumulative core margin to 2.2% at end of 9 months. Moving on to the performance in net fees and commissions, we could grow our net fees and commissions by 121% year-on-year. Higher growth was seen in payment systems business helped by the rising interest rates and our number one rank in both issuing and acquiring volumes, as well as us serving the highest number of credit card customers. Our nine months to date commission income alone neared 27 billion liras. Other contributors to this robust fee performance are definitely the strength in relationship banking and digital empowerment contributing to not only grow our active customer base, but also penetrate further the existing customers. Our digital banking customers are quickly rising near 15 million. 14.3 million in this was active mobile banking customers at end of September. In here, recall that our growth guidance was around average inflation. Our performance so far suggests there's upside to that guidance. As for the operating expenses performance on slide 15, quarterly OPEX growth was 14%, and an annual growth was at 110%. Of this, 10% related to the currency without impact to the bottom line due to the fact that the portion gets hedged, and 4% related to the earthquake donations. Adjusted figure of 96% annual OPEX growth suggests that we fare in line with our OPEX growth guidance of 100% for the year. Our well-managed cost performance manifests itself in the best-in-class efficiency ratios, which can be listed as cost-income ratio of 35%, fees coverage of operating expenses ratio of 69%, OPEX and average assets of 3.1%, as well as having the highest core banking revenues per branch and per employee figures. As per capital, we could further strengthen in the quarters with mainly our internal capital generation capability. Without the BRSA's forbearance, our consolidated capletics ratio was 16.5% and our core equity tier 1 was 14.4%. The foreign currency sensitivity on our capletics ratio is that for every 10% depreciation, it is 39 basis points negative. Repping up the financial part of the presentation and inform you as to where we stand relative to our beginning of the year guidance is that in Turkish Neural Loan growth, we may end up lower than what we anticipated in the beginning of the year due to the regulatory growth caps. In other guided lines, we don't have any revisions. It is just that the 9 months ROE suggests clear upside due to robust fee growth, high trading gains, and better-than-expected asset quality. Now, moving on to our non-financial value creation, we take pride in being the first bank from Turkey to declare interium decarbonization objectives for the year 2030, with the ultimate aim of attaining net zero by 2050. We're proud to say that our efforts on ESG issues are recognized by various credible international agencies, as we're the only company from Turkey that has been in Dow Jones Sustainability Index for the eighth consecutive year, with a current score of 83, which is actually the fifth highest in the global banking sector. Our success, which is evident in our leadership and brand power, can be attributed not only to the robust financial foundation, but also to our unwavering dedication to creating value in ESG matters, a commitment that forms the cornerstone of our broader social initiatives. One notable social initiative we champion is the Women Who Know Their Accounts project. The program aims to empower women by providing them with essential financial literacy skills, ultimately fostering economic independence and financial inclusion. In this program, we're collaborating with Financial Literacy and Inclusion Association, as well as the Foundation for the Support of Women's Work. These are two of the top non-governmental organizations in their fields. As part of our enduring commitment to community investments, lately commemorating the centennial of the Turkish Republic, the photographic exhibit titled, 100 Years Ago, 100 Years Later, Mustafa Kemal Paşa's Path to the Republic in Photographs, is being showcased at our cultural platform, SAAT. Investing in our community extends to our valued employees, whose happiness and well-being are of high importance. This commitment to our team's satisfaction was recently acknowledged through our receipt of the 2023 Youth Awards as the number one company in finance sector that young people would like to work for. This and our strong performance and employee loyalty polls are testaments to our ongoing dedication to creating a supportive and rewarding work environment. Now, this concludes our presentation and we leave the floor to you for questions. Thank you for listening.

Hello again for the Q&A session. Due to a technical issue, we will only be able to accept audio questions. So please raise your hand button to ask your question. One minute for the first question. The first question comes from Vadit Muhsin. Hi, Vadit.