Turkiye Garanti Bk

Good afternoon and welcome to Guarantee BBA's third quarter 2025 financial results webcast. Thank you for joining us today. Our CFO, Mr. Aydin Güler, and our Head of Investor Relations, Mr. Eda Akınç, will be presenting today. Following the presentation, there will be a Q&A session. You may ask your questions either by using the raise hand function or by typing them into the Q&A box. With that, I would now like to hand over to management for their presentation.

Hello, everyone, and thank you for joining us. We are excited to be with you on another Earnings Call. Before getting into our financial performance principles, let's, as usual, go over the board. We are in. Turkish economy grew by 1.6% QoQ in the second quarter, and for the third quarter we now catch 0.5-1% QoQ growth. This implies a slowdown on a quarterly basis, yet it could still generate 4-4.5% annual growth. Therefore, we view risks to our full-year GDP growth forecast as balanced and keep our forecast at 3.7% for 2025 and 4% for 2026. In terms of inflation and monetary policy, following September inflation reading, we revised up our year-end inflation expectation to nearly 33% and policy rate assumption to 38%. Face-off rate cuts will depend on this and that gains, and we evaluate the ex-post 6-7 percentage point real rate can be required due to sticky service inflation and uncertainty on full inflation. We expect CBRT to maintain gradual rate cuts with ongoing reliance on macro-predential measures for longer. In terms of current account deficit, we assume private consumption staying much lower than its long-term trend, thus keeping current account deficit moderate in short term. We forecast current account deficit to be 1.2% of GDP in 2025 and 1.5% of GDP in 2026, which can be easily financed. Led by moderating non-interest funding below inflation trend and still strong tax revenues, cash primary deficit to GDP came down to 0.6% of GDP in September. We observe an increasing effort on fiscal consolidation since April, resulting in a negative fiscal impulse. Accordingly, in our current macro baseline, we assume 3.6% of budget deficit to GDP in 2025 and 3.7% in 2026. Now moving into our financials, I will start with the headline figures. At Guaranty BBVA, we could sustain the quarterly growth in earnings also in the third quarter. With a 9% quarterly growth, third quarter net income reached a new record level of 30.9 billion TL. This brought our 9-month net earnings to 84.5 billion TL, which translates into 31% RE with relatively low leverage. During the quarter, strong NII improvement and stellar fee generation more than offset the increase in net provisions. Earnings outperformance once again enabled by core banking revenues moving on to page 7. We delivered consistent growth for 7 consecutive quarters in core banking revenue. As we will discuss in the following slides, recovery in core margin was better than expected on the back of opportunistic liquidity management and well-managed spreads. Trading income increased, supported by securities trading, and the absence of derivative transactions marked market losses that weighed on second quarter base. Net fees also held up well, growing 11% on the back of payment systems and strong lending activity. As a consequence, our core banking revenues to assets reached 7.8% in 9 months, which suggests the highest level among peers. A big part of this success stems from our asset mix now moving on slide 8. Our asset growth continued to be fueled by customer-driven sources, namely loans. Performing loans sharing assets remained strong at 57% and lending growth was across the board. In securities, we had opportunistic foreign currency security additions and realized some gain from TR fixed rate security portfolio. Moving into slide 9 for further insights on loan portfolio, In the third quarter, we recorded 10% growth in TR loans. Credit cards and consumer loans were the frontrunners with 15% and 12% growth respectively. Our market share in TR loans increased further to 22% with outperformance in consumer GPA and mortgage loans. Our SME focus remains intact and we preserve our market position in micro and small enterprises with around 24% market share among private banks. We continue growing in profitable way, focusing segments where we see more value. Now let's look at the evolution of our asset quality. In the third quarter, there was retail restructuring-related increase in Stage 2 loans. As you may know, in line with our prudent provision strategy, once loan is restructured, we classify this loan under Stage 2. Due to the respective regulation, restructuring in consumer loans gained pace notably in the third quarter, and thus our restructuring loans under Stage 2 increased. However, please also note that as of October, this regulation has been terminated. Our Stage 2 coverage ratio declined due to improved repayment performance of some individually assessed firms. While our Stage 2 coverage is now 9%, if we look at TL and foreign currency breakdown, our foreign currency Stage 2 loans coverage remains healthy at 18%. Now let's walk through the evolution of NPLs. Our NPR ratio rose modestly to 2.8% in line with the expectations. We are witnessing the national consequence of robust consumer and credit card growth that sector registered in the last couple years. Retail and credit card portfolios still accounted for around 70% of net NPR flops. If we move on to the net cost of risk on page 12, In the third quarter, net provisions increased queue-on-queue, mainly due to the exceptionally low base of second quarter, which had benefited from large-ticket provision reversals. Yet, on a cumulative basis, net provisions continued to perform better than expected. As a result of this trend, we also revised down our net cost of risk expectation for this year-end, which I will explain in more detail in final slide. Now, moving to the other side of the balance sheet, how we are funding our balance sheet growth. Not only in assets, but also in funding, we rely on customer-derived sources. Total deposits make up 69% of total assets and remain TL heavy. This quarter, in TL time deposits, our growth was flattish due to cost optimization to support spreads. On an average basis, TL deposit growth was strong and we continue to meet the required regulation in TL deposit weight. Growing demand deposit base in line with our expanding customer base supported TL deposit growth. On foreign currency side, deposits increased by 14% due to gold price increase and flow from maturing KKM deposits. Excluding subsidiaries impact, foreign currency deposit growth was 10% and 40% of quarterly increase was purely coming from surging gold prices. Our active funding management is also visible in net interest income on page 14. In the third quarter, our core margin recovered better than expected by 44 basis points with the support of opportunistic liquidity management. Let me elaborate on this. In the third quarter, we created excess TL liquidity with utilizing more repo and swap funding and then placed this TL liquidity to depot facility at better yields. On spreads, as you can see on the right-hand side of the slide, our TL loan-to-time deposit spreads remained flat in the third quarter. We managed to fully reflect 300 basis points July rate cut to our funding costs, However, in September, pace of decline in TL time deposits was more gradual than expected, mainly due to the impact of TL deposit regulations. In the fourth quarter, on average, we expect spreads to progressively improve. We are expecting another 100 pips cut in December. which may bring down fourth quarter average TL time deposit costs to below third quarter average. Another component of NIM was swaps. You may notice the increase in swap costs as we utilize more swaps in the third quarter due to its funding cost advantage relative to TL time deposit costs. Lastly, in terms of CPI increase income, CPI rate used in the valuation increased to 30% from 28% following September inflation data. Yet, CPI increased income contribution to NIM remained flat due to redemptions from the portfolio. Here, I would like to mention that October CPI reading will be announced in the coming days. and we are expecting October CPI rate to be around 33%. If it realizes at this level, we will once again adjust our CPI linker income valuation and reflect the full year adjustment into the fourth quarter. Putting all these together with the help of landing growth, we were able to register 20% growth in NAI base. As you can see on the left hand side, with 5.3% net interest margin and 46.5 billion TL NIA including swap, we have the highest net interest margin and NIA level among tier one private peers. And our balance sheet positioning lie at the heart of this unmatched performance. We would like to present this slide every quarter in order to underline that our margin reliance is rooted in high share of TL loans and TL deposits. First, TL loans make up 62% of TL assets. In a current environment where loan yields are about two times higher than securities, this presents a sustainable revenue advantage. Please also note that while our securities share in assets is the lowest among peers, when we look at the components, it's mainly because of low share of CPI linkers. we are not lagging behind peers in terms of fixed rate securities. CPI linker share is only 38%, and in a disinflationary environment, yield gap may widen further. And 58% of TL securities are fixed rate securities at attractive rates, which will again serve as a hedge in a declining interest rate environment. On liabilities, TL time deposits represent 69% of TL liabilities. And here, we continue to preserve our funding cost benefits versus repo in the 9 months. Here, I would like to underline that, as you know, there are three main funding sources for us. Customer deposits, repo funding, and swap funding. On a daily basis, we manage our funding sources by taking into consideration margin and risk metrics. As our track record shows, we have operational agility and we are well positioned to respond. Now, let's move on to the other P&L items, fees. Our fee base remains robust up by 54% year-over-year. On an annual basis, payment system fees continue to lead to growth. On a quarterly basis, strong cash and non-cash loan growth, which supports lending-related and insurance fees, followed by increasing health management fees. Digital engagement continues to rise and number of digital active customers reached 17.6 billion. Moving to our operating expenses, our OPEC space is growing in line with expectations. OPEC space increased by 70% in the nine months due to planned investments to fuel sustainable revenue generation streams. As we have been communicating, we have been investing in customer acquisition through salary promotions, and to enhance customer experience and to increase customer penetration, we have been leveraging the power of artificial intelligence and digitalization. which in return supports our revenue generation capability. Hence 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, in the third quarter our solvency ratios improved with strong support from profitability and tier 2 issuance we had in July. As you know, in October, to support our capital base for future growth, we successfully issued $700 million tier 2 in October, which will provide 92 basis points uplift to our capital decrease ratio and reduce currency sensitivity by 5 basis points. Let's now summarize our performance before closing. We sustained our unmatched leadership in earnings generation capability. Backed by our customer-driven balance sheet growth, we defended our NII well. Remarkable fee performance enabled us to cover 84% of operating expenses. Better than expected net cost-office strength sustained with exceptionally high provision reversals. As a result, we ended the first nine months with 30.9%, i.e., while maintaining sound capital ratios. Now let's look briefly at what's ahead. In terms of guidance, our message remains fully aligned with what we communicated in the second quarter call. In this quarter, to enhance transparency, we quantified the underlying impacts and formally revised our guidance for select PL items. Yet, our RE guidance remains unchanged. Let's take a closer look at what we revised. We lowered our year-end net cost of risk expectation to below 2%, given exceptionally high provision reversals recorded during the year. Due to the change in policy rate expectation and the impact of TR deposit regulations, we revised our NIM expansion guidance down to 1.5 to 2%. Please note that in the beginning of the year, our policy rate assumption for this year end was 31%, which we now revise upward to 38.5%. On a year-to-date basis, we were able to increase our margin by 1% on a consolidated basis and by 1.3% on a bank-only basis. In the fourth quarter, we expect TL spreads to improve QoQ, while the contribution from CPL increase is also increased. Taken together, this gives us confidence that we will achieve NIM expansion within the revised range. Lastly, we revised up our fee growth guidance, and now we expect fee coverage of OPEX to be 90-95% on a per year basis. Better-than-expected trend in net provisions and fees would mitigate headwinds on net interest margin. As a result, ROE is likely to settle near the lower bound of the guided range. This concludes my presentation. Thank you for listening. Now we can take your questions.

Welcome back to the Q&A session.

You may submit your questions via the Q&A box or raise your hand to speak directly. Once your name is announced, please unmute yourself and go ahead with your question.

One minute for the first question. We have our first question coming from Murat İnebekçili, HSBC. Hello Murat, please go ahead. Hi, you may unmute yourself and ask your question Murat.

Seems like there's a problem with the lines, so now as we have no further questions, this concludes our Q&A session. I would now like to hand the floor back to our management for their closing remarks.

I think Jada probably explained everything very clearly, so we don't have any recent even question, right? So let me conclude the meeting by saying thank you all for joining us today. We are pleased to close another strong quarter that reflects our solid fundamentals and discipline execution in a dynamic environment. So numbers speaks for themselves. That's what we are saying. During the first quarter, we manage our margin effectively, strengthen our leadership in Turkish Lira loans and continue to expand our deposit base as well. Clear indicators that we remain our customers' primary bank. We also continue to advance our digital transformation and sustainability efforts, consistently creating long-term value through innovation and operational excellence. With our sole capital position and focus on balance, theory and growth, we are confident in our ability to continue delivering sustainable value for all our stakeholders. Thank you once again for your participation. Have a nice day. Thank you