Turkiye Garanti Bankasi A.S.

Hello and thank you for joining us in Garanti BBVA's first half 2024 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. As always, 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.

Good afternoon, everyone. We're very pleased to be with you all on another earnings call presenting our stellar results. Despite the market complexities and challenges of the first half, we continue to deliver improvement in banking performance. Before getting into our financial performance details, let's as usual go over the broader macroeconomic environment we're in. We now cast annual 4% GDP growth in the second quarter. Accordingly, we expect almost no change quarter on quarter. This will likely take the annual GDP growth in first half 24 closer to 5%. Taking into account the strong performance of first half, there seems to be upside for our 2024 GDP forecast of 3.5%. In terms of the interest rates, we expect the central bank to stay on hold till late 2024, along with the macroprudential tools support affecting liquidity management and credit policies. Depending on how close they get near the year-end inflation target, the CBRT would remain restrictive longer than we expect in our baseline. Inflation trend, on the other hand, started to ease in June. We now forecast consumer inflation to decline below 50% by September on strong favorable base effects and finish the year at 43%. On the next slide, the rebalancing that has already started in the economy will result in much lower external financing pressure. Current account deficits in the first half already reached $26 billion. We now expect the current account deficit to diminish to 20 billion or 1.6% of GDP by year-end 2024, down from last year's $45 billion. This will be achieved with improving net trade deficits, strong tourism revenues, and lower net gold imports on top of de-dollarization. On fiscal side, we expect fiscal prudence to continue to help the targeted disinflation path. We expect the year-end budget deficit, excluding the earthquake spending, to remain within the Maastricht criteria of 3%. Now, time for the financial results. Contrary to the expectations, Garanti could continue its earnings growth and booked 44.6 billion Liras in the first half of 2024. This represents a 32% year-on-year growth or even 40% when adjusted with last year's free provision reversal. On a quarterly basis, even though the sequentially rising earnings trend was maintained in our bank-only figures, there seems to be slightly lower net income in the consolidated figures. This has nothing to do with the subsidiary's performance, but with the recognition of the real estate valuation gains under equity at consolidated level versus net income at bank-only. So even in the, most likely the weakest quarter of the year, we booked 22.1 billion liras of net income. This suggests a year-to-date return on average assets of 3.7% and a return on average equity of 34.2%. Our core banking, namely customer-focused approach, continued to result in sustained sequential banking revenue growth, which was another 7% in the quarter and 63% year-on-year. Accordingly, our core banking revenue generation remains to be the highest in sectors and our inherent strength. Contributors to core banking revenues are core NII, core net interest income, where we could grow by another 18% in the quarter. Pure trading, where we could largely sustain last quarter's outstanding gains with supporting FX transaction gains in the absence of derivative mark-to-market gains. And net fees and commissions, where we could grow by further 13% in the last quarter. Getting to these results, of course, require high share of customer-driven asset mix. As you can see in the pie chart on the slide seven, that the performing loans make up the majority of the assets, almost 56%. We booked 9% Turkish Lira lending growth in the quarter while sticking to the imposed loan growth caps and continued to register higher growth in the preferred areas such as investment, export, credit cards, and earthquake-affected area loans. Accordingly, our first half Turkish Lira loan growth ended to be a robust 27%. In foreign currency lending, we booked a growth of 4% year to date. That is totally in line with our guidance and growth projections. On the securities front, as many of you know, We're never aggressive, but rather opportunistic. In the quarters, we did replace our redeeming securities and even accumulated a bit more 10-year fixed rate securities and CPI-linked ones that are 3.5% real rate attached. Nevertheless, the securities share in assets remains low at around 15%. Looking in depth into the loan portfolio on this next page, you can see our Turkish Lira loan mix on the left-hand side and the growth in each area on the right. You may have already noticed the sector's lower Turkish Lira loan growth figures in line with the intended slowdown in Turkish Lira lending imposed by the central bank in its efforts to fight against the inflation. Our selective and profitable loan growth strategy is naturally preserved while abiding fully to the regulatory loan growth caps. Our Turkish Lira performing loans reached 952 billion Liras upon the 27% Turkish Lira loan growth in the first six months of the year. Notice that the quarterly growth was relatively lower versus the first quarter in credit cards and business loans, whereas the consumer loan growth of 11% was sustained and we could register market share gains, especially in the high-yielding consumer GPLs, including overdraft. Our market share in general purpose loans among private banks neared 19% and in credit cards to 22%. Also in business banking, we have more than 20% market share. Even though there seems to be a slight quarterly drop in the second quarter, we have booked 68 basis points of market share increase year to date and actually have succeeded in growing our market share on average by 75 basis points per year over the last five years. In total, we maintain our leadership in Turkish Lira lending. Moving on to the quality of the total loan book of one and a half trillion liras, 88% is in stage one. 10% or 156 billion liras is in stage two. Isolating the currency impact, which has affected largely the restructured portion of Stage 2, Stage 2 increase of a significant 18.5 billion liras was largely due to the increase in the SICR portion, namely those expected small ticket size, retail, and credit card loans. Since the coverage of the SICR is relatively low, this high inflow diluted the Stage 2 coverage to 19% from 21%. Notice actually that the strong foreign currency loans coverage of 43% in Stage 2 and the 8% coverage for Turkish lira loans remains. For the MPLs, you can see on next page, The net MPL inflows in the quarter suggest deterioration, yet normalization after last year's exceptional low base. 86% of the new MPLs relate to retail and credit cards portfolio, as expected, upon the end of the cheap funding period. Credit card portfolio NPL increase versus last year was 5.5 gold, and retail was 2.5 gold for six months into the year. The ratio post-NPL sale and write-downs remained at 1.9%, though with the continuing strong collections of the wholesale business and successful execution of timely NPL sales. We sold a total of 4.2 billion Liras of MPL for 1.9 billion Liras, suggesting 45 cents on a dollar MPL in the first half. We will continue with our MPL sales in this inflationary environment as long as there is positive spread between the MPL sale price and the legal process time cost. With these, we could secure attractive recovery via being first mover in MPL sales in the first half of the year. Our total provisions on balance sheet, including the written down portion, now accumulate to 70.4 billion Liras. This is the highest provision level among the private banks and represents a 4.6% total cash coverage. On the next slide, we'll see the translation of this into cost of risk. Even though net provisions excluding currency and the earthquake related provisions of last year spiked four and a half fold year on year, the continuing strong commercial business recoveries supported the year to date net cost of risk. 66 basis points of net cost of risk in the first half fares lower than our guidance of 125 basis points for the year. However, we stick to our guidance for the whole year parallel to the expected rise in MPLs and no ease in our prudent provisioning. On the funding side, deposits dominate our funding with 71%. Despite the high interest rates, the high weight of demand deposits remain to be the key financial differentiation in terms of our margin outperformance. Borrowings share in funding assets remains low at under 6.5%. Total external debt as of the first half was $4.3 billion, of which 44% relates to securitizations, 29% to sub-debt, and 20% to syndications. $1.2 billion of the external debt is due within a year, and against that, we have a five-fold $5.9 billion buffer in foreign currency liquidity. Overall, our leverage remained to be the lowest among peers at 8.3 times the equity. In the second quarter, post the local elections, we exhibited an accelerated conversion from the foreign currency protected deposit scheme to standard Turkish Lira deposits. Time deposits. Turkish dollar deposits increased by 17%, whereas foreign currency deposits decreased by 9% in dollar terms in the second quarter. Accordingly, we ended the first half with the historic low share of foreign currency deposits in total. Even though we manage probably the most sizable Turkish Lira deposit portfolio in high interest rate environments, Galanti continues to lead in customer demand deposits share in total with 39% versus the average of private peers of 34% for bank only figures. Comparatively, this grants a significant funding advantage and continue to support our superior margin performance. Our margins were resilient quarter on quarter and could even book a five basis points improvement in the core margin. Our core net interest income, including the swap costs, further increased to 10.6 billion Liras from 9 billion, suggesting by far the highest level among peers and validating One more time, our legacy of highest core net interest income generation capability. Our improving core net interest income performance is owed to timely loan growth, repricing and duration gap management, effective management of funding costs, and full utilization of CBRT's remuneration potential. With the ongoing increase in loan yields, stabilized deposit rates, and currency, we expect to see a more visible core margin expansion in the second half of the year. Therefore, we keep our flat margin guidance for the whole year that suggests on a cumulative basis, our total margin of 3.6% in the first half will end the year around the last year's total margin of 5.1%. As for net fees and commissions on slide 15, there has been a threefold growth year on year driven by the payment systems business. Accordingly, of the near 42 billion euros of net fees and commissions booked, two thirds related to our strength in the payment systems. Recall that we ranked number one in issuing volume volume and the number of credit card customers. Even though we're also number one ranked in Turkish lira cash loans and non-cash loans as well as money transfer fees, the extraordinarily high growth and the payment systems diluted their contribution to the net fees and commissions. Key reasons behind our robust fee performance are the strength in relationship banking and digital empowerment contributing to not only growth in our active customer base, but also penetrate further the existing customers. Our digital active customers now reached almost 16 million and digital sales in total is 90%. As for the operating expenses performance, quarterly growth was a mere 7% and the annual growth pointed to 71% post the currency adjustment. The lower growth in non-HR related costs suggest increased efficiencies, feasible customer acquisition, and tight cost management. On the HR side, cost growth is actually slightly higher than inflation, Higher figure is due to the timing of wage increases. Year-end growth for operating expense will remain above inflation as guided. Efficiency indicators are that the cost income was 42%, fees coverage of OPEX was a strong 93%, and operating expenses and average assets were 3.7% in the first half. As per capital, the quarter and consolidated capital ratio without the BRSA's forbearance was 15.2% and core equity tier one was 12.8%. Both remained well above the regulatory and ICAP requirements. When we look at the year-to-date trend of capital, it seems that our capital generation, even though we booked the largest net income, could not compensate the negative effect of market and credit risk. This actually relates to the regulation that imposes higher risk weightings for loans. Under the condition of normalized risk weightings, our cap-to-dux ratio would be around 150 basis points higher than recorded and be 16.7%. The foreign currency sensitivity on our capital X ratio remains low at 18.3 basis points, negative for every 10% depreciation, thanks to our $500 million tier two issuance in the first quarter. In summary, we earned the Olympic gold medal in the financial pentathlon. In the first half of 2024, we recorded the highest net income via sustained increase in core banking revenues. The year-on-year growth in the core banking revenues was 63%, reaching 81 billion Liras in only six months. On the fee side, our diversified fee generating businesses, along with the extraordinarily high payment systems fees, tripled year-on-year. and brought the fees coverage of OPEX to 93%. On the asset quality front, we started to see more normalized retail and credit card MPL inflows as expected and guided. However, first half net cost of risk remained low due to the continuing strong collections from the wholesale business. Our total provisions on balance sheet with about 55 billion liras is the highest among private banks. On the capital front, we remain solid. We had 65 billion Liras of excess capital as of the half year end when calculating without the BRSA's forbearance. Our progress in business growth continues. Today, every one out of two bank customers has an account with Garanti BBVA, and our digital active customers with almost 16 million is the highest in the sector. In conclusion, our agility and financial resilience once again validated our unmatched leadership. Thank you for listening. It's now time to take your questions.

Hello again for the Q&A session. You can ask your questions by typing into the Q&A area or by using raise your hand button. Once your name is announced, please unmute yourself and ask your question. Just one minute for the first question. The first question is coming from Mehmet Sevim. Hello Mehmet.