Turkiye Garanti Bankasi A.S.

Hello and thank you for joining us in Guaranty BBVA's Third Quarter 2024 Financial Results Webcast. Our CEO, Mr. Mahmut Akden, our CFO, Mr. Aydin Güler, and our Investor Relations Director, Misandan 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. I now leave the floor to our CEO for his initial remarks and to management for the presentation.

Hello, everyone. Welcome to our third quarter earnings results and call. It's a pleasure for me to be able to meet with you today, especially as we present again another stellar results. I've been part of this organization for 12 and a half years and from moving from the front line of retail banking to corporate and investment banking and as a part of executive leadership. And these 12 and a half years actually deeply shaped my understanding of our institution's strengths and potential. I'm excited to lead us today into a new chapter. While there may be changes in leadership, as you will notice from our results, our successful strategic direction remains unchanged, as you will see from our most recent figures. Now I hand over the presentation to Handan to present our third quarter results.

Thank you, Mahmut. Good afternoon, everyone. We're thrilled to be with you on another earnings call, presenting our outstanding performance. Despite the continuing market complexities and even further regulatory pressures, we sustained improvement in our core banking revenues. Before getting into the details, let's quickly go over the macro backdrop we're in. Rebalancing in the Turkish economy continues with a mild slowdown so far. Restrictive monetary policy and expected fiscal consolidation 2025 onwards might keep GDP growth at closer to 3% in the short term. We expect monthly inflation trends to decline to slightly below 2% by end of 2024, resulting in an annualized level of nearly 25% in 2025, with risks tilted to the upside. Depending on the improvement in inflation trends, we maintain our call of a modest first rate cut in December, but define risks as staying high for longer. Uncertainties about the wage and tax adjustments at the start of the year will require the central bank to remain cautious. Driven by weak domestic demand and lower energy prices, current account outlook further improves to below 1% of GDP. Medium-term program shows efforts to keep budget deficit to GDP below 5% in 2024 and close to 3% in 2025. Negative fiscal impulse will support the disinflation process and excluding earthquake spending, budget deficit to GDP will remain below 3%, which would be in line with the Maastricht criteria. Now, time for the financials results. In the third quarter of 2024 as well, Guaranty sustained its best-in-class performance with a 22.4 billion Liras of net income, bringing the nine months net income to 67 billion Liras. This represents a clean 27% year-on-year earnings growth when adjusted with last year's provision reversal. So even with the rules of the game changing midway through the quarter, causing further pressure on funding costs, we sustained our outstanding performance and ended with a year-to-date return on average assets of 3.5% and a return on average equity of 33%. This best-in-class performance is owed to our highest internal capital generation capability on the back of customer-driven asset mix, high asset quality, closely managed funding costs, and operating expenses. We registered an even higher performance in growing our core banking revenues. The quarterly growth of 12% in core banking revenues carried the cumulative year-on-year growth to 58%. Biggest component this year is net fees and commissions, as expected, with an 18% quarterly and 2.5-fold cumulative annual growth. Second biggest component remained to be growth in poor net interest income, despite stabilizing loan yields in the quarter and further tightened macro prudential measures, such as much higher reserve requirements, the deposit conversion rules, and minimum interest rate calculation changes in credit cards. Still, when we look at our core banking revenues to assets ratio, we have been consistently improving it and its level compares quite favorably to that of the average peers. For instance, our core banking revenues to assets ratio of 6.7% was 2.9 on average at peers in the first half. In other words, our core banking revenue generation capability remains to be the highest in sectors and our inherent strength. This achievement requires high share of customer-driven asset mix and relatively lower share of securities. Our performing loans and assets make up the majority with 56%. Securities share, on the other hand, is at its two-year low with 14% share, and it is the lowest among peers. We booked another 8% Turkish Lira lending growth in the quarter, bringing the year-to-date Turkish Lira loan growth to 38%. This growth is achieved while sticking to the imposed loan growth caps and booking higher growth in the preferred areas such as investments, export, credit cards, and earthquake-affected area loans. In foreign currency lending, we booked a strong 8% growth and a quarter, taking the year-to-date to a double-digit growth, suggesting an upside in our foreign currency loan growth projection. On the securities front, we're typically opportunistic and grow for either hedging purpose or regulatory-driven. In the quarter, we did replace our redeeming Turkish Lira securities and added a bit more to our fixed rate portfolio. Combined with the securities purchased in the first half, year-to-date growth registered in Turkish Lira securities reached 32%. Drivers of our Turkish Lira loan growth were mainly consumer loans, such as mortgages and general purpose loans with preferably longer maturity, and credit cards. We gained market share in Turkish Lira across the board, except for a slight market share loss in business loans, due to low demand and current short-term preference of companies waiting for the rate cuts. Our Turkish Lira loan portfolio at the end of third quarter surpassed 1 trillion Lira's mark on the back of a year-to-date growth of 49% in credit cards, 40% in consumer loans, and 28% in business loans. Our market share in consumer general purpose loans among private banks neared 20%. In mortgages, it exceeded 26% and in credit cards, it's almost 23%. Also in business banking, we still have 20% market share. In total, we have the largest Turkish Lira loan book among private banks. Moving on to the quality of the total loan book of 1.7 trillion liras, 88% is in stage one. 10.4% or 176 billion lira is in stage two. Now, isolating the currency impact, which has affected largely the restructured portion of Stage 2, Stage 2 increase was predominantly 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, it did not pressure the Stage 2 provisions much, while the recovery of a highly provisioned wholesale book in Stage 2 diluted the foreign currency coverage portion of Stage 2. About one third of our stage two is foreign currency loans related, and their coverage even after this recovery remains at a strong 38%, while the Turkish Neural Loans coverage is at 8%. For the NPL evolution, let's see on next slide. The net NPL inflows in the quarters suggest deterioration, we all expected, after last year's exceptional low base and robust retail growth. New NPLs doubled quarter-on-quarter, and 90% of them related to the retail book. Half alone was from the credit cards portfolio, MPL, while MPL inflow from commercial side was almost nil. The ratio post MPL sale and write downs went up to 2.1% from 1.9 in the first half. It was also supported by the still strong fairing collection performance on the wholesale side. We sold a total of 5.9 billion Liras of MPLs for 2.3 billion Liras as they were feasible with positive spread in MPL sale price and the legal process time cost in this inflationary period. Our total provisions on balance sheet, including the written down portion went up by another 6 billion Liras and reached 76 and a half billion Liras. This is the highest provision level among the private banks and represents a 4.5% 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 earthquake-related provisions of last year spiked almost fivefold year on year, and double quarter and quarter, collections from the wholesale book continue to support the year-to-date net cost of risk. Cumulative net cost of risk went up to 90 basis points from 66 basis points in the first half. This increase is very much parallel to our anticipated deterioration in the year. For that reason, we stick to our whole year guidance of 125 basis points of net cost of risk by year end. On the funding side, customer deposits dominate the funding of assets. The high share of demand deposits funding assets, in spite of the high interest rate environment, remains to be the key financial differentiation supporting margin outperformance. Borrowings share in funding assets remains low at under 6.5%. Total external debt as of the nine months was $4.6 billion, with some increase in the MPN program in the quarter. Of this, 41% relates to securitizations, 27% to sub-debt, and 19% to syndications. $1.5 billion of the external debt is due within a year, and against that, we have $5.1 billion buffer in foreign currency liquidity. The quarterly drop in foreign currency liquidity buffer is due to the significant increase in the total required reserve amount and decrease in bank depot placement. Overall, our leverage remained to be the lowest among peers at 8.5 times the equity. Conversion to standard Turkish lira deposits continued in line with the regulation targets given. As of the third quarter end, we grew another 6% in Turkish lira deposits, bringing the year-to-date Turkish lira deposit growth to 29%. Turkish dollar deposits now make up 56% of the total. On the foreign currency deposit side, even though there seems to be higher growth in dollar terms, 11% in the quarter versus 6% growth year to date, this growth though largely relates to gold deposits that went up in value and the parity move during the quarter rather than dollarization. Actually, half of the increase in foreign currency deposits in our bank-only foreign currency deposit growth relates to the appreciation in the gold value. A quarter of the impact comes from the change in euro-dollar parity in the quarter. On a consolidated basis, the reason behind the increase that looks much bigger is because of the non-retail foreign currency deposit volume growth at our foreign subsidiaries. Even though we manage the most sizable Turkishner deposit portfolio in high interest rate environment, we continue to lead in customer demand deposits share in total. That is 40% at guarantee versus the average of private peers of 34%. Also, within the time deposits, even though the conversion to standard Turkish Lira deposit has picked up significant pace, we still have the highest share of foreign currency protected deposits in Turkish Lira time deposits with relatively lower funding costs. So clearly, these provide significant funding advantage and continue to support our superior margin performance. Accordingly, our margins remained resilient despite the continuing tight stance in monetary policy and additional macroprudential measures. Quarterly margin improvement of 50 basis points largely stemmed from the CPI book, and our CPI estimate increased to 45% from 40 that we have used in the first half. On the other hand, the regulatory changes introduced midway through the quarter exerted additional pressure on our core net interest margin and limited the expected quarterly expansion. In the quarter, our core margin went up by a mere eight basis points to 2%. Nominally speaking, our net interest income, including swap costs in the quarter, ended 25 billion liras, Stripping out the CPI income of 13 billion liras in the quarter meant another 1.6 billion liras increase of core net interest income to 12.2 billion liras. Even though the core net interest income growth is lower than our projections in the beginning of the year, the level of core net interest income and the margin are by far the highest among peers. This strength proved to be our legacy. Please note that if we had not had the rules of the game change midway through the year, our cumulative net interest margin would have been 60 basis points higher and quarterly net interest margin expansion would have been 70 basis points rather than 51 basis points. And with that, we would have been perfectly on track to meet our flat margin guidance for the year. taking into account the further spreads and thus margin improvement we expect in the last quarter. As for Net Fees and Commissions, there is 18% Q-on-Q and 2.5% BOLT year-on-year growth driven largely by the payment systems business. Accordingly, of the 68 billion Liras of net fees and commissions booked in the first nine months, two-thirds relate to the payment systems business, owing to our number one rank in that business. Also, our number one rank in Turkish Lira cash loans, non-cash loans, as well as money transfer fees, non-life and life insurance were all supportive in our net fees and commissions growth. Key reasons behind our robust fee performance are the strength in relationship banking and the digital empowerment contributing to not only growth in our active customer base, but also penetrate further the existing customers. Our digital active customers now reach 16.3 million and digital sales in total is 89%. As for the operating expenses performance, quarterly growth was 18% and the annual growth pointed to 71% post the currency adjustment. Even though the salary adjustment hit the quarterly operating expense base, our efficiencies remained best in class. such that our cost-income ratio with 43% suggests the highest deficiency among peers in this period. Peace coverage of operating expenses remained at a strong 93%, and operating expenses in average assets were 3.8%. As per capital, consolidated capital X ratio without the BRSA's forbearance went up to 15.8% and core equity tier 1 to 13.4%. Net income generation in the quarter continued to support the solvency and became more visible, especially upon the normalization of risk weights assigned to consumer loans in the quarter for the regulator. If further normalization of risk weights on commercial loans gets realized, it will take the capital equity ratio level 95 basis points higher than the current one. The foreign currency sensitivity on our capital equity ratio is a low 21.6 basis points negative for every 10 percentage points depreciation. owing to our 500 million tier two issuance in the first quarter this year. Now, in summary, we hold the Olympic gold medal in the financial pentathlon. In the nine months into 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 58%, reaching 128 billion liras in the nine-month period. On the fee side, our diversified fee-generating businesses, along with the extraordinarily high payment systems fees, almost tripled year-on-year and brought the fees coverage of OPEX to 93%. On the asset quality front, we remain committed to robust provisioning. Total provisions on balance sheets reach 61 billion Liras, including the written down portion, it is actually 77 billion Liras, suggesting a total coverage of 4.5%, a level that is highest among the peers. With the rise in credit cards and retail NPL inflows, and normalizing collections from the wholesale business, our net cost of risk is well on track to be within the guided level by year end. On the capital front, we remain solid. We had 81 billion euros of excess capital as of the nine months 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 Guaranty BBVA, and our digital active customers with 16.3 million is the highest in the sector. In conclusion, our agility and financial resilience once again validated our unmatched leadership. Looking forward, we maintain our full-year profitability guidance. Even though there is now a visible downside risk to our margin guidance due to the additional regulation changes in the second half, we are well on track to compensate that downside with better growth and fees and commissions and trading income. Therefore, we stick to our mid-30s return on average equity guidance for full-year 2024. Now with this, I end my presentation and we can now start to take your questions. Thank you for listening.