Turkey
Highlights
- Growth in lending and customer funds
- The downward trend in NPL ratio continues
- Favorable evolution of recurring income in the second quarter
- Lower quarterly impact from hyperinflation
BUSINESS ACTIVITY (1)
(VARIATION AT CONSTANT EXCHANGE RATE COMPARED TO 31-12-23)
(1) Excluding repos.
NET INTEREST INCOME / AVERAGE TOTAL ASSETS
(PERCENTAGE AT CONSTANT EXCHANGE RATE)
OPERATING INCOME
(MILLIONS OF EUROS AT CURRENT EXCHANGE RATE)
NET ATTRIBUTABLE PROFIT (LOSS)
(MILLIONS OF EUROS AT CURRENT EXCHANGE RATE)
| FINANCIAL STATEMENTS AND RELEVANT BUSINESS INDICATORS (MILLIONS OF EUROS AND PERCENTAGE) | ||||
|---|---|---|---|---|
| Income statement | 1H24 | ∆ % | ∆ % (2) | 1H23 (1) |
| Net interest income | 605 | (38.3) | (22.3) | 980 |
| Net fees and commissions | 905 | 217.2 | 294.7 | 285 |
| Net trading income | 601 | 52.5 | 88.5 | 394 |
| Other operating income and expenses | (219) | 21.6 | (22.6) | (180) |
| Gross income | 1,892 | 27.9 | 81.3 | 1,480 |
| Operating expenses | (909) | 53.5 | 90.9 | (592) |
| Personnel expenses | (526) | 62.1 | 103.8 | (324) |
| Other administrative expenses | (284) | 37.5 | 72.2 | (207) |
| Depreciation | (99) | 62.1 | 86.6 | (61) |
| Operating income | 983 | 10.8 | 73.3 | 888 |
| Impairment on financial assets not measured at fair value through profit or loss | (152) | 178.0 | 216.6 | (55) |
| Provisions or reversal of provisions and other results | 82 | n.s. | n.s. | (47) |
| Profit (loss) before tax | 914 | 16.2 | 89.6 | 786 |
| Income tax | (498) | 192.7 | n.s. | (170) |
| Profit (loss) for the period | 416 | (32.5) | 8.0 | 616 |
| Non-controlling interests | (64) | (29.7) | 10.9 | (92) |
| Net attributable profit (loss) | 351 | (33.0) | 7.5 | 524 |
Balance sheets | 30-06-24 | ∆ % | ∆ % (2) | 31-12-23 |
| Cash, cash balances at central banks and other demand deposits | 8,957 | (7.7) | (0.5) | 9,700 |
| Financial assets designated at fair value | 4,106 | 11.2 | 19.9 | 3,692 |
| Of which: Loans and advances | 2 | 0.7 | 8.5 | 2 |
| Financial assets at amortized cost | 58,294 | 13.1 | 21.9 | 51,543 |
| Of which: Loans and advances to customers | 42,174 | 12.7 | 21.5 | 37,416 |
| Tangible assets | 1,827 | 22.1 | 28.6 | 1,496 |
| Other assets | 2,271 | 19.6 | 28.5 | 1,899 |
| Total assets/liabilities and equity | 75,456 | 10.4 | 18.9 | 68,329 |
| Financial liabilities held for trading and designated at fair value through profit or loss | 1,957 | 4.2 | 12.2 | 1,878 |
| Deposits from central banks and credit institutions | 3,564 | 54.6 | 66.6 | 2,306 |
| Deposits from customers | 54,950 | 8.5 | 16.9 | 50,651 |
| Debt certificates | 3,143 | 14.8 | 23.7 | 2,737 |
| Other liabilities | 4,243 | (1.8) | 5.0 | 4,319 |
| Regulatory capital allocated | 7,599 | 18.0 | 27.1 | 6,438 |
Relevant business indicators | 30-06-24 | ∆ % | ∆ % (2) | 31-12-23 |
| Performing loans and advances to customers under management (3) | 42,063 | 12.7 | 21.4 | 37,339 |
| Non-performing loans | 1,956 | (0.5) | 7.3 | 1,965 |
| Customer deposits under management (3) | 52,397 | 6.2 | 14.5 | 49,321 |
| Off-balance sheet funds (4) | 12,180 | 56.8 | 69.0 | 7,768 |
| Risk-weighted assets | 62,037 | 13.8 | 22.5 | 54,506 |
| Efficiency ratio (%) | 48.0 | 47.0 | ||
| NPL ratio (%) | 3.3 | 3.8 | ||
| NPL coverage ratio (%) | 94 | 97 | ||
| Cost of risk (%) | 0.84 | 0.25 | ||
(1) Revised balances. For more information, please refer to the “Business Areas” section.
(2) At constant exchange rate.
(3) Excluding repos.
(4) Includes mutual funds and pension funds.
Macro and industry trends
Since the general elections held in May 2023, there are increasing signs of normalization in economic policy, in general, and monetary policy in particular, which point to a gradual reversal of the current macroeconomic distortions. Thus, benchmark interest rates have increased from 8.5% at the beginning of 2023 to 50% in March 2024, and other countercyclical measures have been announced, leading to a relatively stable exchange rate and an incipient moderation in annual inflation, which reached 71.6% in June compared to 75.5% reached in May. Economic growth would moderate from 4.5% in 2023 to 3.5% in 2024 (unchanged from the previous forecasts), despite the resilience of demand which, to some extent, continues to be supported by a expansive fiscal policy. Despite the still high uncertainty, it is most likely that the expected moderation of growth and the more restrictive tone of economic policies will favor a further reduction in inflation, to around 43% by the end of 2024.
As for the Turkish banking system, the effect of inflation remains strong. Total lending in the system increased 45.6% on a year-on-year basis as of May 2024, at similar levels to the previous months. The credit stock continues to be driven by the increase of consumer finance and credit cards (+51.3% year-on-year) while credit to businesses grew slightly less (+46.7% year-on-year). Total deposits maintain their strength from the previous months and increased at the end of May by 54.6% on a year-on-year basis. The growth of Turkish lira deposits remains strong in the same month (+61.0%), while U.S. dollar deposits grew more slowly (+45.0%), The dollarization decreased to 37.5% in May 2024 versus 40.0% a year before. The system's NPL ratio has continued falling in the last months and as of May 2024 it was of 1.6% (24 basis points lower than in the same month of 2023). Capital indicators remained at more than comfortable levels on the same date.
Unless expressly stated otherwise, all comments below on rates of changes for both activity and results, will be presented at constant exchange rates. These rates, together with changes at current exchange rates, can be observed in the attached tables of the financial statements and relevant business indicators. For the conversion of these figures, the end of period exchange rate as of June 30, 2024 is used, reflecting the considerable depreciation by the Turkish lira in the last twelve months. Likewise, the Balance sheet, the Risk-Weighted Asset (RWA) and the equity are affected.
Activity16
The most relevant aspects related to the area’s activity in the first half of 2024 were:
- Lending activity (performing loans under management) increased by 21.4% between January and June 2024, mainly driven by the growth in Turkish lira loans (+24.7%). This growth was mainly supported by the performance of credit cards and consumer loans. Foreign currency loans (in U.S. dollars) increased by 6.5%, boosted by the increase in activity with customers focused on foreign trade (with natural hedging of exchange rate risk).
- Customer deposits (72.8% of the area's total liabilities as of June 30, 2024) remained the main source of funding for the balance sheet and increased by 14.5% favored by evolution the positive performance of Turkish lira time deposits (+22.0%), which represent a 82.0% of total customer deposits in local currency. Balances deposited in foreign currency (in U.S. dollars) continued their downward path and decreased by 6.5%, with transfers from foreign currency time deposits to Turkish lira time deposits observed under a foreign exchange protection scheme. Thus, as of June 30, 2024, Turkish lira deposits accounted for 65.8% of total customer deposits in the area. For its part, off-balance sheet funds grew by 69.0%.
The most relevant aspects related to the area’s activity in the second quarter of 2024 were:
- Lending activity (performing loans under management) increased by 7.1%, mainly driven by the growth in Turkish lira loans (+7.9%, below the quarterly inflation rate) and, to a lesser extent, by the growth of foreign currency loans (+4.5%). Within loans in Turkish liras, the evolution of credit cards (+8.7%) and of consumer loans (+11.0% including auto loans) stand out.
- In terms of asset quality, the NPL ratio decreased 9 basis points from that at the end of March 2024 to 3.3%, and 45 basis points compared to the figure as of the end of December 2023, mainly as a result of the growth in activity, the sale of a retail portfolio and the positive dynamics in the wholesale portfolio in recoveries and repayments, which offset higher net entries in the retail portfolio. The NPL coverage ratio recorded a decrease of 158 basis points in the quarter to 94% as of June 30, 2024.
- Customer deposits increased by 4.7%, with a clear trend towards dedollarization thanks to the growth in Turkish lira deposits (+18.0%), which amply offset the drop in deposits in USD (-11.9%). Additionally, off-balance sheet funds had a remarkable evolution (+22.8%).
Results
Turkey generated a net attributable profit of €351m during the first half of 2024, with an improvement in the contribution to the Group's results in the second quarter of the year.
As mentioned above, the year-on-year comparison of the accumulated income statement at the end of June 2024 at current exchange rate is affected by the strong depreciation of the Turkish lira in the last year (-19.5%). Excluding this effect, the highlights of the results for the year at constant exchange rate are summarized below:
- Net interest income recorded a year-on-year fall, mainly by the decline in the Turkish lira spread and greater wholesale funding costs, partially offset by the growth in lending activity and, the remuneration of certain reserves in Turkish lira from the central bank since February 2024.
- Net fees and commissions increased significantly, favored by the performance in payment systems fees, brokerage activity, guarantees and asset management.
- NTI showed an excellent evolution thanks to higher results from derivatives and in foreign exchange operations.
- The other operating income and expenses line showed a balance of €-219m, which compares favorably with the previous year. This line includes, among others, the loss in the value of the net monetary position due to the country's inflation rate, together with its partial offset by the income derived from inflation-linked bonds (CPI linkers). The net impact of both effects was less negative than in the first half of 2023. It is also worth highlighting the improved performance of the results of Garanti BBVA´s subsidiaries, also included in this line.
- Operating expenses increased, mainly due to the growth in personnel expenses, linked to the growth in the workforce in 2023 and salary review in the context of high inflation. On the other hand, general expenses also increase, highlighting the higher technology expenditure.
- Regarding the impairment on financial assets, it increased due to both higher requirements in retail portfolios and to lower recoveries in the wholesale segment, which, despite continuing to be relevant in terms of credit quality and repayments improvement, have not been as high as in the first half of 2023. Thus, the cumulative cost of risk as of June 30, 2024 increased to 0.84%, a more standard level after an abnormally low level in 2023.
- The provisions and other results line closed June 2024 with a release of €82m, linked to remarkable recoveries in wholesale clients, as well as the revaluations on real estate assets.
In the second quarter of 2024, the net attributable profit of Turkey stood at €212m, which represents an increase of 44.1% at current exchange rates, with respect to the previous quarter as a result of the favorable performance of net interest income, favored by the remuneration of reserves in the central bank and the better performance of the spread in Turkish lira, as well as the evolution of fees, a less negative net impact due to hyperinflation and the aforementioned effect from the revaluation of real estate assets.
16 The variation rates of loans in Turkish lira and loans in foreign currency (U.S. dollars) only refer to Garanti Bank. Thus they exclude the subsidiaries of Garanti BBVA, mainly in Romania and Netherlands.