Turkiye Garanti Bk

Hello, and thank you for joining us, Guarantee BBVA's Second Quarter 2025 Financial Result Webcast. Our CEO, Mr. Mahmut Akten, our CFO, Mr. Aydin Güler, and our Head of Investor Relations, Ms. Ceyda Akınç, will be presenting today. As always, there will be a Q&A session following the presentation, and you will be able to ask your question either via raise hand button or by typing them into the Q&A area. I now hand over to our management for the presentation.

Hello everyone and thank you for joining us. Today we are excited to walk you through our first talk earnings results. First, I would like to begin with macro environment that shaped the banking sector's performance. First, in terms of GDP. Let me move first to the GDP part. Yes, in terms of GDP, following 1% growth in the first Q, we now cast a quarterly growth rate of around 0.5% in 2Q, which will bring the first half GDP growth to above 3%. Thus, for the full year, considering potentially supportive fiscal stance and no dramatic impact from weaker external demand, we maintain our GDP growth forecast of 3.5%, yet evaluate the balance of risk tilted to the downside. Rate cut evolution, developments in trade wars, and the accent of fiscal discipline will ultimately shape the growth outlook. Inflation is set to decline, supported by tighter financial conditions, moderating private consumption and lower commodity prices. Thus, we slightly revised down our inflation forecast to 30% from 31% for the year-end, following positive surprises over the last three months on inflation data. CBRT's commitment to orthodoxy and the tighter monetary stance have contributed to the drop in inflation, the accumulation of reserves, and reduction in market volatility. Hence, we believe, conditions are settled to allow a carefully calibrated rate-cutting cycle. Depending on the improvement in inflation dynamics, we do not rule out a similar 300 basis point cut in September MPC meeting, we still expect 36% policy rate by year-end, with reduced cuts to 200 basis in October and December. On next page, in terms of current account deficits, we expect current account deficit to GDP to slightly worsen to 1.3%, Tourism revenues are expected to be supported, yet due to deterioration in core trade deficit and increasing net gold imports, current account deficit is expected to reach $20 billion. Fiscal policies stayed expansionary in the first quarter and the efforts for consolidation later were limited. Therefore, considering the sensitivity on growth and employment, fiscal stance can remain supportive to some extent. That means we may potentially see a policy mix where monetary stands staying relatively tighter, meaning 5-6 percentage point exposed real rates, and fiscal policy not being able to be tightened as targeted, which suggests cash deficit to GDP of at least 4% in 2025. Moving into our financials, I will start with headline figures. In the second quarter, we preserved our distinguished earnings strength and delivered 28.2 billion TL net income. This marks 11% quarterly EPS growth. Resilient NAI, robust fee income, and provision reversals from a few large-ticket items reinforced its solid earnings. Accordingly, in the first half, we were able to generate 53.6 billion yen net earnings, alluding to 30.7% RE and 3.1% ROE. Now in the next slide, I would like to elaborate the drivers behind this earnings trend, starting with core banking revenues. Core banking continues to be our main pillar of strength. We were able to increase our core banking revenue both on a quarterly and annual basis on the back of well-defended NAI and growing fee base. We experienced spread contraction this quarter due to longer than anticipated tight policies, yet strong long growth supported the NAI base, which I will touch upon in this detail in the coming slides. Net fees delivered a robust 15% quarterly growth with increasing contribution from payment systems. Clean trading gains contribution was relatively modest due to market losses on derivative transactions on a quarterly basis. our subsidiary's contribution has been increasingly supportive for our P&L. As a consequence, this strong performance lifted our core revenues to assets ratio to 7.7%, the highest among peers, underscoring the sustainable nature of our profitability. And a big part of this success stems from asset mix now moving to slide 8. Our lending-driven asset mix remains as a key differentiator. In the second quarter, performing loans share increased further to 57%, well above the sector average of 50%. Lending growth was across the board, and I will explain the key drivers of TL loans in the next slide, but on foreign currency loans, with the growing support of international subsidiaries, we were able to register 12% quarterly growth. Here, I also would like to note that half of the growth was coming from the increasing EURUSD parity impact. In securities, we had CPI redemptions during the quarter and we have been investing in long-term fixed-rate securities since the beginning of the year. In foreign currency securities, we had opportunistic purchases during the year. Moving into slide 9 for further insights on non-portfolio, In the second quarter, TL loan growth accelerated compared to first Q and grew by 10%, reaching 1.4 trillion TL. Particularly, consumer loans and credit cards gained pace compared to first Q, and we had notable market share gains in these products. Our SME focus remains intact and we further solidified our market position in micro and small enterprises with 24% market share among private banks. While growing, we always act with prudence as you know. Now let's look at the evolution of asset quality. In the second quarter, Increase in Stage 2 loans was limited as we witnessed some outflows from Stage 2 SICR and Washington portfolios due to their improved repayment performance. This also led a decline in Stage 2 coverage ratios, yet I would like to underline that there is no change in prudent provisioning and staging policies. While our stage 2 loans coverage is now 10%, if we look at TL and foreign currency breakdown, our foreign currency stage 2 loans coverage remains healthy at 21%. Please also note that 86% of SICR portfolio remains non-delinquent. Now let's walk through the evolution of NPLs. Our NPR ratio rose modestly to 2.6% in line with expectation, following the robust growth in unsecured retail segments, and now retail and credit card portfolios accounted for around 70% of net NPR flows. Importantly, provisioning remained robust, total coverage ratio remained strong at 3.2%. If you look at the P&L of the provisioning on next page, as you know, this year we guided for higher cost of risk compared to last year due to increasing NPL inflows from unsecured tons and normalizing trade large ticket collections. And as of first year, we have started to see this trend. However, in this second quarter, Provision release of a few large-ticket items that were not unforeseen in the operational plan guidance led to a quarterly decline in net provisions. As a result, our first-half cost of fees came in at 1.24%, way below our guidance range of 2% to 2.5%. In the absence of large-ticket collections, we will see a normalization in net cost of fees in the second half, Yet due to better than expected first half, net cost of risk may end the year towards the lower end of the projected range. Now moving to the other side of the balance sheet, how we are funding our growth. Not only in assets, but also in funding, we rely on customer-driven sources and total deposits. make up around 70% of total assets, and remain TL heavy. In the first half, TL deposits grew by 22%, mainly supported by sticky and lower-cost deposits. As such, retail and SME deposits share in TL stand at 68%. On a quarterly basis, TL deposit growth was limited mainly due to flow to money market funds and our spread focus pricing strategy. In foreign currency time deposits, we witnessed a significant decline due to reduced market volatility and attractive TL deposit rate. We also maintained strong 4.9 billion foreign currency liquidity buffer, providing ample caution over long-term obligations. While growing, we always keep a close eye on spread management as it is visible in our net interest income. In the second quarter, our core margin contracted by toward the one basis point due to declining core spreads and higher net swap costs. As you can see on the right hand of the slide, TL deposit costs increased by 100% on average due to longer than anticipated CBRT's tight stance and increased market competition, coupled with recent regulatory changes. However, since July, TL long-time deposit spread has been widening and is projected to accelerate further in 4Q with the assumption of gradual easing cycle to continue. Net swap funding costs increased few on Q due to lower utilization of swap depot transactions compared to first Q. I would like to elaborate more on this. In first Q, given our excess liquidity supported by significant deposit growth, we utilized swap depot, which reduced net swap funding cost. In second quarter, swap depot utilization declined and swap funding cost increased. Therefore, there was increase in swap cost Q over Q, yet remained below previous quarter's average. We continued to use 28% in evaluation of CPI linkers, and putting all these together with the help of landing growth, we were able to register growth in an AI base. Our balance sheet positioning and active management lie at the heart of our unmatched margin performance, which we will build on it in the next slide. We would like to present this slide every quarter in order to underline that our margin resilience is rooted in high share of TL loans and TL deposits. In our TL assets, TL loans make up 60.5% of our TL assets, while securities account only for 13%. In this current environment, where loan yields are about two times higher than securities, this presents a sustainable revenue advantage. Please also note that within TL securities, CPI-linked share is only 38%, and in a disinflationary environment, yield gap may widen further. On liabilities, TL time deposits represent 69% of TR liabilities, and here we continue to preserve our funding cost benefit versus repo funding in an increasing interest rate environment. We acknowledge that in a declining rate environment, this advantage may narrow, but we are well positioned to respond. With an average deposit duration of just one month, we have the agility to actively manage our portfolio and protect our margins. Now, in terms of fees, our fee growth remains remarkable, reflecting continued strength in payment systems, lending activities, and money transfers. In the first half, net fees rose by 57% year-over-year, Payment system fees continue to lead the growth with the support of accelerated credit card volumes. On top of that, growing cash and non-cash loans also contributed to the lending-related fees, including insurance fees. Digital engagement continues to deepen. We have more than 17 million digitally active customers and today 99% of all transactions are carried through non-brand channels and 86% of product sales originate digitally. Moving on to operating expenses. Our OPEC space is growing in line with budget. Operating expenses base increased by 69% year-over-year in the first half due to planned investments to fill sustainable revenue generation streams. We have been investing in customer acquisition through salary promotions, And to enhance customer experience and increase customer penetration, we have been leveraging the power of artificial intelligence and digitalization, which in return supports our revenue generation capability. As you can see, our OPEC space is largely covered by fees, and we continue to have the lowest level of cost-income ratio among peers. As per our capital strength, Our capital ratios remained strong. Common equity year 1 stood at 12.6%, while capital adequacy ratio reached 15.6% without BRSA forbearance. To support our capital base, as you know, for future growth, we successfully issued $500 million Tier 2 in July, which will provide around 70 basis point uplift to our capital-educancy ratio and will reduce currency sensitivity by 4 basis points. Now, let's summarize the first half. We sustained our unmatched leadership in earnings generation capability Backed by our customer-driven balance sheet growth, we defended our NII well. Remarkable P performance enabled us to cover 86% of operating expenses. Large-ticket provision reversals tied to recovery performance led a quarterly decline in net provisions, and as a result, we ended the first half with 30.7% RE while maintaining sound capital ratios. Now let's look at briefly what's ahead. In terms of TL loans, we are on track with our guidance, expecting slightly positive real growth compared to average inflation. Foreign currency loan growth is faring better than guidance, largely driven by parity impact. As we discussed earlier, unbudgeted provision reversals in the first half brought our net cost of risk down to 1.24%. In the absence of similar large-ticket recoveries in the second half, we expect normalization in net cost of risk. That said, given the better-than-expected first half realization, year-end cost of risk may land at the lower end of the projected range. On the other hand, this upside potential in net cost of risk could be offset by margin headwinds. Longer than anticipated tight conditions may result in two quarters of postponement in margin expansion. Having said that, I want to highlight that our new evolution remains highly sensitive to market developments, particularly interest rates and funding behaviors. Fee growth, on the other hand, continues to outperform expectations led by payment systems. This also creates upside potential in our fee-to-OPEX guidance as well. All in all, net interest margin headwinds is likely to be mitigated by large-ticket provision releases and robust fee growth. As a result, RE is likely to settle near the lower bound of the guided range. So this concludes my presentation. Thank you for listening. We now take your questions.

Hello again for the Q&A session. You can ask your questions by typing into Q&A area or by using raise your hand button. Once your name is announced, you are welcome to ask your question. The first question is from Mehmet Sevim. Mehmet Sevim, you can unmute yourself.

Hi, good evening. Thanks very much for the presentation. I have just a couple questions, please. Firstly, on the trajectory of NIMS, and I appreciate this is the same question every quarter, but obviously you're now highlighting some downsides to your NIMS guidance, but it doesn't look like that we're too far from the previous trajectory. So, As you talk about the two quarters of a delay in the improvement of NIM from here relative to previous expectations, can I just ask where you would see the year-end NIM now and then the peak in the beginning of 2026? So would it be reasonable to expect NIM to reach maybe about 7% or so by year-end now and then increase a bit further in 2026. That's my first question. And then my second question is just about the unexpected or unbudgeted large ticket provision reversals that you highlighted. I was just wondering if you can share a bit more on these. What's the nature of those? And if we can expect any further surprises like that in the second half. Thanks very much.

Thank you very much for the questions, Mehmet. First of all, trajectory about NIM, as you point out, we are not that much off the trajectory, but the compression on the NIM due to the volatility in March and further tightening of the interest and repo market. forced us to see, to observe this compression in NIMH in the second quarter. We saw the lowest point in mid-June. Since then, there has been an improvement. But overall, in that three months timeframe, majority of the time of that three months, we have been in a tightening phase. Therefore, the third quarter will be slightly higher than second quarter, potentially marginally better than the first quarter. So the number, if I recall, was 5.1 first quarter. So it might be slightly over 5.1%. And then toward the year end, it will be closer to 7%. So we'll see further improvement in the fourth quarter, especially. But if you look at the third quarter versus second quarter, we'll see slight improvement over the first quarter and second quarter. That's the trajectory. But when we give the guidance, we look at the cumulative year versus the prior year. We're hoping that we will get an average of 3% improvement. That will be more of a two. But the exit will be 3% from the beginning of the year. So that's the good news. and then for the next year uh we expect neem to be around this to be around the exit one slightly coming to the seven percent and it will be stabilized around that uh because of the also partially the CPI, lower CPI as well, which will offset some of the gains there. But overall, that six-month delay is related to the first quarter volatility and second quarter tightening. But the trajectory is the same. And we'll see the peak. Pretty much we looked at the scenarios, but I wouldn't say peak throughout the year. It will be relatively flat across the year. The second one, questions related to on-budget MPLs, MPL and then the collection performance. There were a few items we were expecting because of the collection performance. We will have the stage two to stage one provision release. But beyond that, In the second quarter as well, we have good collection performance in two energy projects, one real estate project, and one of them was not expected because it was really written down and there wasn't much of an expectation on that, but it was a sale of an asset in the energy space. In the third and fourth quarter, there might be some surprises similarly, but not as much as the first and second quarter. But we'll continue to perform on that front. I think the overall performance of the country and projections and decreasing interest rate environment encourage, especially in the energy space, real estate space, further improvement and therefore some interest in some of the markets. forgotten assets we have on our book. So that's also a plus sign, but we are coming to the end of those as well. But there might be a few more surprises going forward. That's very helpful.

Okay, thank you. Yes, it does. Thanks very much, Ramudwe. Thank you. Sure.

We had similar questions from Valentina from Barclays. So if my prior answer is sufficient, then I'll pass the device. Valentina, please write us.

So we have one written question. Your updated ROE guidance seems to imply almost a stable ROE outlook for the second half of the year. Would you agree that this might be a little bit conservative, especially given the ongoing consensus view that the second half will be the much better period for the banks earning across the sector?

Yeah, I think it's a good note. When you look at the total picture in the second quarter, one might think we might have further improvement in ROE. We expect still in low 30s, but it's very difficult to estimate that because especially in the first and second quarter, there was very good collection performance, which half the numbers sufficiently. We might in the base case scenario will not have as strong as the first two quarters in terms of collection performance, but the NIM expansion will help. Our cost of risk will go up close to 2% by year end from versus where it stands. So that's the reason we have some offset of these two items. But if there is any upside downside risk, I would say, you know, it might be upside from what we put, but this is the base scenario. It's really difficult to forecast some of the activity in the collection, whether through M&A or other activities.

We have one more written question. Can you also give us an update your issuance plan still at the end of the year, seniors and subsidiaries?

Valentina, we have been opportunistic in that market, relatively going with the lower tickets as we needed basis. We might have actually further, especially in the tier two space, potentially and senior funding as well toward the end of the year based on the market opportunistically.

And also, Valentina asked another question. Lastly, you talk about the reversal in some corporate loans. How is the retail segment holding with regards to asset quality?

Just, Valentina, any other questions which I think... Sorry, Mikhail first. There were similar questions to both Valentina's and Mehmet's questions about the clarification on NIMH. Yes, from the beginning of 2006 to to the end of the 26th, we expect relatively flat NIM because of the CPI versus NIM expansion. Therefore, to the point-to-point, we expect a flat performance, but year over year, we expect an improvement, close to 100 pips, average NIM increase of 2026 versus 2025, which positively will impact our results in 2026.

Also, we have another question from Simon Nellis. Simon, you can unmute yourself and you can ask your question. Simon, we can't hear you.

Hello.

Hello.

Hi. Yeah, my question is, maybe it's a bit early, but could you provide us some color on how you see margin fee growth, you know, into next year and risk costs? Because I think it's pretty clear the trajectory in the second half.

Yeah. Simon, yeah, thank you for the question. In terms of margin growth, we'll continue to see that 1% improvement year over year, as I explained. But in terms of fee growth, we will continue to grow beyond inflation on the fee, for sure. That's our objective. And in terms of cost of risk, yeah. We'll continue to see some reversal in provisioning corporate loans this year. There will be less of that. But I think normally if you normalize for these collections, we would have expected closer to 2.5% cost of risk by year end this year. So base case scenario, we expect next year a deterioration. of 50 bps toward the end of the year. We expect this year to finish by 2%, next year 2.5%. Having said that, this is the base scenario. We see that some improvement in retail portfolio, but it's early to call in terms of MPLs. But given the many years of past history, I think somewhere between 2% to 2.5% next year is also something expected.

Maybe since you're elaborating on these items, how about OPEX? Do you think you'll find it challenging to control costs? Do you expect them to grow faster than inflation next year?

Yeah, no, not really, Simon. The OPEX number we have shown had two parts, right? One HR, one non-HR. HR side, we are investing quite a bit in non-HR. It shows up in AI. and data and digitalization of our operations in headquarters and branches as well. So those investments will pay off and will be paying off in HR costs as well. But there is a part, just from a accounting perspective, we show in non-HR, which is related to customer acquisition beyond digitalization, beyond advertising and so forth. That customer acquisition cost is related to, in Turkey, the custom of paying promotions for retirees, for payroll acquisitions and in general and retiree promotions. If you exude those, there are non-HR costs also, despite AI expenditures, is below the HR inflation as well. So I'm not much of a concern about the OPEX growth next year.

Thank you. Very helpful.

I think Mehmet Sevim has another question. If you have another question, Mehmet, you can unmute yourself.

Thanks very much. If I may squeeze in just one more, and that is on the deposit growth this quarter, which looks quite muted. It seems like you've lost some market share there. And also we've seen, obviously, some higher swap costs. And I was just wondering if there is any specific reason behind this, or is this just a normalization after the strong first quarter result? And is that related to the increase in the swap costs, given you also explained it by better liquidity in the first quarter? Thank you.

Swap cost increase is related to that we didn't use swap depot facility with central bank given the liquidity and given the tight situation already anyway. But in terms of, it's really good questions about our deposit strategy. We continue to expand our sticky customer base. There are three parts to it, first quarter or second quarter in terms of results. Number one, the demand deposit, I think it will show up in the total sector number as well. The first quarter end was right before the religious holiday, which we did have a significant demand deposit increase. Otherwise, in terms of market share and focus, there is no change in demand deposit in Turkish lira. In FX, we continue to grow in FX. In time deposit, is related to tightening markets uh we we don't compete as much in a very high cost uh high ticket size uh so i said it optimization we have a very strong first quarter uh in a tight market we continue to focus on that but if you look at it our repo rate we are our focus has been always have low repo uh portion but high sticky uh customer base in deposit uh The main objective there, regardless of the interest rate decreasing environment, we can reflect lower cost of funding even through deposit. It's not like repo market. It's not one day, but in third days or so, we can reflect the lower interest rate or policy on our cost of funding very quickly. Just as an example, for instance, I'll be very specific, versus our deposit rate or cost of... marginal deposit versus, I would say, cost of deposit flow this week right now, for instance, today versus a week ago before the policy rate decision, we already reflected 80% of that decrease on our deposit funding. So our strategy will not change. You'll see very strong interest from our bank in expanding customer base as well as our deposit in both Turkish Lira and FX.

That's super. Thanks very much.

Sure. We have one more written question. Can you please confirm that you only expect 100 BIPs increase in average NIM between fiscal year 2025 and 2026?

Yeah, I think it's not a formal guidance at the moment for us, but given the trajectory, We see that there will be improvements year over year. That's the main reason. It's very hard to forecast from now. It really depends on the pace of policy rate decisions, how quickly it will come down. That will be, as I mentioned, mostly reflected on the NIM margin. But I think we will be in a better situation to give a better guidance, actually a formal guidance, in the next quarter or the end of the year.

We are taking another written question. And lastly, Valentina asked that. And lastly, you talk about reversal in some corporate loans. How is the retail segment holding with regards to asset quality?

A perfect question. It's a very interesting observation from us as well over the last year and two. We have been seeing significant improvement in retail roll rates. Our overall credit card, number of credit customers, number of credit receivables, credit card receivables and GPL receivables is going up. Despite that, quarter over quarter, if you look at our retail MPL flow, in sum, it hasn't changed. So there was no deterioration. There is a slight deterioration in SME and wholesale, but they were very low, especially in commercial and corporate. And there was some small increase in NPL flow. And then if you remember the page we have shown you, the full increase from $13 billion to $13.8 billion was related to SME and wholesale. From a very low base, from that perspective, I think we have seen the verse, because as you remember, retail is credit card and GPL in overall 70% of our NPL flow. If you see the stabilization, but more importantly, significant improvement in roll rate. I think overall, we have seen the worst and we are hopeful that it's going to come down. And then also, I need to add one more thing. As you might know, very recently, BDDK regulators had a very important law, that regulation that allow us to restructure delinquency customers in GPL and credit card. We have quickly adapted. Today, we are able to do these restructuring in digital as well. It will have some temporary relief as well. It's not going to materially change our numbers, given the size of the portfolio we have. But not only in the branches, we are able to do in call center, but in digital, in mobile as well. We were able to do it as similar restructuring for the 90 plus day customers as well. But now with the help of the regulator, we are able to release the tension further and improve our retail portfolio further. And that's also a big plus.

I hope also that answers the question.

It seems like we don't have any more questions, so this concludes the Q&A session. I leave the floor to our presenter for closing remarks.

Thank you all for your participation. Again, this was another quarter which we had sustainable and resilient profitability. Our net profit market share within the sector has improved significantly over this quarter. um today we have more than 28 million customers and we remain committed to growing this customer base but through long-term value generation so we have seen the numbers today more financial numbers but behind this very significant investment in digitization but more important artificial intelligence and other long-term technology investment for sustainable and radical customer experience. We believe in that for long-term sustainability of our numbers. We still try to be cautious on numbers, given that we are in a cycle of decreasing interest rate environment, it looks like. So it's really hard to predict how the data will emerge in inflation and interest rate. But we are committed to our long-term strategy of having larger customer related loan book and funding book and I will only note one thing versus the first quarter when we look at our customer high share of loans is two percent higher versus a quarter ago sector is also improved by one percent so we have been expanding our customer loan book in our overall assets. I think this is a very important indication of our commitment to customer-focused growth, and we'll continue to do so to support this number. Again, thank you very much for this late conference call, and I appreciated all the interesting questions. Thank you again. Have a nice evening. See you in the next quarter.