Turkiye Garanti Bankasi A.S.

Hello and thank you for joining us in Guaranteed BBVA's 2024 Financial Results and 2025 Operating Plan Guidance Webcast. Our CEO, Mr. Mahmoud Aktan, our CFO, Mr. Aydin 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. I now leave the floor for presentation.

Good afternoon, everyone. It's an honor to be with you on our earnings call, presenting another set of unmatched results. Despite the ongoing market complexities and tight regulations, we delivered further improvement in our net income. But before getting into the results, let's, as usual, quickly go over the macro backdrop we're in. Rebalancing in the Turkish economy continues with a gradual moderation in domestic demands. Economic growth in the first three quarters were 3.2%, and we also expect the 2024 growth to be 3.2%. With the continuing restrictive monetary policies and expected fiscal consolidation, we expect GDP growth to come down to 2.5% in 2025. Monthly inflation trend is further in December to below 2.5%. We expect, well, actually in the year 2024, we finished the year with a CPI of 44.4%, and we forecast 25.5% CPI for year-end 2025. As for the policy rate, it was 47.5% at year-end. In January, there was a further 250 basis points cut, bringing the policy rate to 45%. We expect the easing cycle to continue with 250 BITS cuts in March and April and smaller cuts thereafter, ending the year with 31%. As for the current account deficit on slide 4, We expect the deficit to be only 0.7% of GDP in year 2024, driven by moderating domestic demands, normalization in gold imports, strong tourism revenues, and improving core trade deficits. We forecast the current account deficit to be 1.5% in year 2025, taking into account some of the risks on external demand. On the budget deficit, the latest medium-term program suggests a clearer fiscal consolidation in 2025 with savings and capital expenditures and transfers suggesting further improvement in budget deficit to GDP. We expect the ratio to decline from 4.8% in 2024 to 3.5% in 2025, including the earthquake expanding. Excluding the earthquake spending, budget deficit to GDP will remain within the Maastricht criteria. Now, the financials for year 2024. Guaranteed BBVA ended the year 2024 with a clearly unmatched earnings performance. With the addition of 25.2 billion euros of net income in the fourth quarter, annual net income reached 92.2 billion euros, representing a clean 17% year-on-year earnings growth, when adjusted with the last year's provision reversal. The level of earnings suggests we succeeded in delivering what we guided in the beginning of the year, as well as delivering a significant outperformance. Return on average equity of 33% and return on average assets of 3.5% are the highest among peers, underscoring our dynamic balance sheet management, sustainable revenue streams, mainly our strong core banking revenues that you see on slide 7. The core banking revenue growth registered even in a year of increasing interest rates and regulatory pressures was an outstanding 62%. Our core banking revenue generation as a percentage of assets not only shows the highest level and the highest improvement, but compares very favorably to that of the peer average. Largest differentiation lies in the core net interest income performance backed by our high weight of customer-driven asset mix, closely managed pricing, and duration. As you can see in the asset breakdown on the next page, performing loans share in assets is a high 58%, whereas securities share in assets is at its two-year low and lowest among peers with 14%. Our fourth quarter Turkish Lira lending growth of 11% brought 2024 Turkish Lira loan growth to 52%, a level pointing to a high single-digit real loan growth for the year. This growth is achieved while sticking to the imposed loan growth caps and looking higher growth in the preferred areas such as investment, export, credit cards, and earthquake-affected area loans. In foreign currency lending, our annual growth ended to be 13% in dollar terms after no growth due to redemptions in the last quarter, similar to sector trends. On the securities front, we're typically opportunistic and grow for either hedging purpose or regulatory driven. In the fourth quarter, we did replace our redeeming Turkish Lira securities and added to our long-term fixed rate portfolio. Accordingly, our annual growth in Turkish Lira securities reached 42%. In the last quarter of the year, we sustained our market share gains in Turkish Lira lending and thus solidified our leadership in Turkish Lira loans with near 22% market share among private banks. Last quarter's gains were across the board with continued focus on extending maturities. We finished the year with a 1.1 trillion lira-sized Turkish lira loan portfolio, driven by a 74% growth in credit cards, 55% growth in consumer loans, and 35% growth in business loans. Our market share in consumer general purpose loans among private banks is near 20%. In consumer mortgages, we gained in just one quarter 130 basis points market share, and now our market share is near 28%. In credit cards, our market share gain in the quarter was 160 basis points, bringing our credit card market share to more than 24%. And in business banking, our market share exceeded 20% as of the year end. As for the quality of the total loan book that you can see on slide 10, of 1.8 trillion liras of the total loan book, 11.4% is in stage 2 and 2.1% is in stage 3. The anticipated increase in Stage 2 relates predominantly to the increase in the SICR portion, namely small tickets, size, retail, and credit card loans. Isolating the currency impact, the quarterly increase in Stage 2 was 34 billion liras. Since the coverage for the SICR is relatively low, it did not pressure the Stage 2 provisions much, while the recovery of a few highly provisioned wholesale files in Stage 2 diluted the foreign currency coverage portion of Stage 2 from 38% to 30%. And we had a similar impact on the Turkish lira side that lead to coverage dilution to 6% from 8%. And regarding the NPL formation in the quarter, we can see on the next slide. The net NPL inflow in the quarter was less than half of the prior quarters with 3.2 billion liras, owing to strong collections, NPL sales, and write-down. Excluding the NPL sales and write-down, the net NPL inflow was 8.8. showing the deterioration we all expected after last year's robust retail growth. 85% of the new MPLs related to the retail book, half alone was from the credit cards portfolio, and MPL inflow from commercial sides was quite muted. The ratio post-MPL sale and write-downs stayed at 2.1%. If we had not done any MPL sale or write-down since 2019, our MPI ratio would have been 3.1%. During the year, we sold about 10 billion euros of MPLs for 3.3 billion euros, as they presented a good opportunity in this inflationary period, with positive spread versus the legal process time cost. Our total provisions on balance sheet, including the written-down portion, is at 78.6 billion liras. This is the highest provision level among the private banks and represents a 4.3% total cash coverage. On the next slide, let's see how this translates into cost of risk. Net provisions... excluding currency and the earthquake-related provisions of last year, spiked almost three-fold year-on-year. It actually could have been much higher if we had not had the big-ticket wholesale collections as well as the reclassification-related provision release of a loan hitting the last quarter of the year. The reclassified portion of this specific loan alone had a 15-bibs positive impact on net cost of risk. Also during the year, the two sovereign rating upgrades received added to the positive impact versus budget. Accordingly, the cumulative net cost of risk at year-end recorded was 78 basis points, which is a level lower than our annual guidance of 125 basis points. On the funding side, customer deposits funds more than 70% of the assets, 71.8% to be exact. 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. Borrowing's share in funding assets, despite our new Tier 2 and some MTN issuances in the last quarter, remains low at 7.3%. Total external debt as of the year end was $5.5 billion. Of this, one-third relates to sub-debt, Another one-third relates to securitizations, 15% to syndications, and 13% to MTN programs. $1.8 billion of the external debt is due within a year, and against that, we have $3.5 billion buffer in foreign currency liquidity. The quarterly drop in foreign currency liquidity is due to higher reserve requirements and continuing de-dollarization. Overall, our leverage remained low at 8.1 times the equity. Conversion to standard TL deposits continued in line with the regulation targets given. We recorded another 6% growth in Turkish Lira deposits, bringing the annual Turkish Lira deposit growth to 36%. Turkish Lira deposits now make up 57% of total deposits. On the foreign currency deposit side, de-dollarization continued in the last quarter at an increased pace. Even though there seems to be an annual 4% growth in dollar terms, it relates to non-retail foreign currency deposit volume growth at our foreign subsidiaries, namely Garanti Bank International and Garanti Bank Romania. Even though we manage the most sizable Turkish dollar deposit portfolio in high interest rate environment, we continue to lead in customer demand deposits share in total. On a bank-only comparative basis, demand deposits share in total is 40% at guarantee versus the average of private peers of 33%. Also, within the time deposits, we continue to have the highest share of foreign currency protected deposits and TL time deposits with relatively lower funding costs. The significant funding advantage provided by these factors support our superior margin performance. Accordingly, On slide 15, our margins remain the most resilient throughout the year, despite the continuing tight stance in monetary policy and additional macroprudential measures. And we could book not only the highest core net interest income, but also the highest improvement in core net interest income of 41% year-on-year. As for the margins, the last quarter of the year, in the last quarter of the year, we started seeing the reversal of the margin suppression. As you can see on the top right-hand side, the Turkish Lira loan to Turkish Lira time deposit spreads are on extension trend, with deposits repricing faster than loans. As a result, we could register 67 basis points quarter-on-quarter improvement in our core margin in the last quarter. Combined with the CPI adjustment impact, quarterly expansion was 71 basis points. On a cumulative basis, our margin ended to be 4.1%, suggesting a level 92 basis points lower year-on-year versus our flat margin guidance in the beginning of the year. The difference can be explained with the rules of the game changing midway in the year. The increased reserve requirements net of remuneration alone had 80 basis points of negative impact. So the level of our core net interest income and margin remains to be our legacy and will remain intact owing to our customer-driven asset mix. Notice on slide 16, what ensures the sustainability of our strong banking revenue generation can be explained with our leadership in Turkish lira loans and Turkish lira deposits. In our Turkish lira assets, the share of Turkish lira loans is 62% versus the securities share is only 16%. In a period where loan yields are increasing, were about one and a half times higher than securities, and there are low growth caps, this presents a significant and sustainable revenue advantage. And our assets, as I said before, are funded largely with customer deposits. Turkish Lira time deposit share in Turkish Lira liabilities is 66.6% and presents a funding cost benefit versus repos. In the meantime, we are, as always, actively managing not only our pricing but also the duration gap. Nowadays, our Turkish Lira balance sheet duration gap is around 4 to 5 months and increasing at a time of declining interest rates. As for net fees and commissions on slide 17, there is 11% quarter-on-quarter and a robust 2.2-fold year-on-year growth led largely by the payment systems business. Of the 97 billion euros of net fees and commissions booked in year 2024, two-thirds still 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, Turkish Lira non-cash loans, as well as money transfer fees, non-life and life insurance were all supported in our net fees and commissions growth. Key reasons behind our robust fee performance are the strength in relationship banking leading to significant cross-sell and increased customer penetration, and digital empowerment. Our digital active customers now reached 16.7 million, and digital sales share in total is 89%. Moving to our operating expenses performance, as expected, we had an inevitable operating expense growth due to the accumulated high inflation impact. Quarterly growth was 23%, and annual operating expense growth was 84% when adjusted with the currency. This above-inflation growth can be explained with operating expenses relating to higher current and potential revenue generation. In the end, our efficiencies remain best in class, such that our cost-income ratio, with 44%, suggests the highest efficiency among peers in this period. Fees coverage of OPEX also suggests a very strong 91%. As for capital, consolidated capital exchange ratio without the BRSA's forbearance went up to 18.2% and core equity tier 1 to 14.7%. Our capital generative growth strategy continued to support the solvency in the quarters as well as for the year. The foreign currency sensitivity on our capital X ratio is a low 20.5% negative for every 10% depreciation, owing to our total of $1.25 billion of tier 2 issuances in the year. In summary, what I can say with these outstanding and rather unmatched results is that we added to our strong track record of delivering what we promise, what we guide. Since I went over each line throughout my presentation as how we fared versus budget guidance, I don't want to do a repetition and rather jump into what our guidance is for year 2025. So let's jump to slide 22. And start first with the assumed macro backdrop. In 2025, we project a lower GDP growth of 2.5%, year-round inflation to come down to 26.5%, policy rate to ease down to 31%, and unemployment to rise to 10.5%. We expect a Turkish lira lending growth that is above average CPI and that is about more or less even across the board in terms of consumer credit card and business lending. And about even pace throughout the year, we can say. A foreign currency low growth that is in the low teens, we expect. Net cost of risk to rise up to 2% to 2.5% levels in the absence of the heavy wholesale collections we had seen in 2024. Offsetting this, we expect a margin expansion of total 3% by year-end. A fee growth that can be sustained above average CPI, however, with a much normalized payment system fee growth, of course. and accordingly a fee coverage of OPEX ratio normalizing to 80 to 85 percent levels. These all should suggest a return on average equity for the year that is in the low 30s. Please keep in mind that these expectations are built on the assumption that the current regulations will remain intact and no new regulations will be introduced. Any change in these may lead to either an upside or a downside on the guidance. In conclusion, these are the messages we wanted to share with you. It's now time to take your questions. Thank you for listening.

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. And once your name is announced, please unmute yourself and ask your question. Our first question is coming from David Taranto. Hello, David. Please go ahead.