Dear friends, this is Kaan Gür speaking, CEO of Akbank. I hope you are all well. Thank you for joining our third quarter earnings call. I'm speaking to you from Washington, where I am attending the IMF and World Bank annual meetings. While I am here, I wanted to take a moment to connect with you all, to share my thoughts on the operating environment and how we are navigating and how are we positioning ourselves for the future. After my remarks, I will leave the floor to Türker , and Ebru , and our investor relations team, who will go through the detailed financial results and handle the Q&A session. I would like to apologize. I'm not able to stay for entire call, but as always, I look forward to keeping in touch with you in near future and continuing our discussions.
Before we get into the numbers, I want to touch on the broader macroeconomic backdrop, especially in Turkey. The policymakers' efforts toward fiscal discipline and structural reforms provide cautious optimism for a more stable economic environment moving forward. That being said, we forecast economic growth to be around 3% this year, as the weak global backdrop and the lagged effects of monetary tightening weigh on economic activity. The pledge of the Medium Term Plan to a considerably tightened fiscal stance in 2025 is expected to restrain economic growth next year as well. On a positive note, external balance continues to improve and seems to be less of a concern. It is encouraging to see that despite real appreciation of Turkish L ira, tight credit policies are preventing the worsening in current account balance.
Underlying trend in inflation still remains high, and sticky services inflation underlines the need for a tight monetary policy stance for an extended period of time, narrowing the room for rate cuts this year. We expect inflation to end the year around 44%, and we are in budgeting process, but our initial expectation for inflation next year is around 25%. Let's move on to key indicators of the banking sector. Tight monetary stance and quantitative restraints continue to keep borrowing rates high. As a result, Turkish loan growth slowed down significantly, while the growth cap introduced to FX loans in May has also limited growth on that side. Looking forward, total credit impulse implies a gradual but not a sharp softening in economic activity, which will reduce the demand pool inflationary pressures. The rebalancing process brings some challenges in the short term.
The slowdown in loan growth and the decline in LDR put additional pressure on the core operating profitability of the sector. Going forward, the regulation-induced low LDRs provide a large room for improvement in net interest margin once the economy heads towards a lower inflation environment. Now, it is time to moving on to our bank. In this very dynamic environment, our team has remained resilient, agile, and focused on what we do best. Firstly, executing our customer-centric strategy for recurring revenues. Secondly, identifying areas for sustainable growth, as usual. And the last one, while maintaining prudence in risk management and cost control. The dedication and experience of our people continue to drive our success. With a solid total capital of 17.2%, and Tier 1 of 14.6%, we are well equipped to serve the interests of all stakeholders.
Key factors behind our profitability include effective balance sheet management, agility in regulatory matters, and continuous momentum in fee performance. Our active customer base exceeded fourteen million, resulting in our fee-to-OpEx ratio to excel by twenty-six percentage points in just seven quarters. Ongoing organic customer growth strategy strengths are recurring revenues, ensuring the bank's long-term success in very dynamic markets. We remain committed to investing in our businesses and people to drive future growth and maintain long-term profitability. Slide five, I think this is another important slide for the presentation. Once again, I'm really pleased to share with you that we are consistently moving forward to achieve our two thousand and twenty-five targets. Similar to second quarter, we intentionally scaled back in Turkish Lira widespread consumer-only deposit market share, in order to optimize our funding costs and manage net interest margin.
Again, similar to previous quarters, our TL LDR remains low at 82%, which is the reason behind our decision, given the regulatory environment. As stated earlier, our low Turkish Lira LDR offers considerable potential for enhancing margin moving forward. Another important point I'd like to leave you with, this is the improvement in our fee-to-OpEx ratio. It increased substantially and is already at 84%. In third quarter alone, it was 91%. This reflects a major accomplishment, largely due to our persistent efforts in acquiring new customers. To wrap up, despite the challenging environments, we believe we have reached a trough in earnings, and we are well positioned for a gradual recovery. Our net interest margin, in the same time, is showing early signals of an upward trend.
We have strategically structured our balance sheet to prosper in a disinflationary environment, enabling us to manage risk effectively while maintaining flexibility in response to macroprudential measures and regulatory developments. Our customer-related recurring revenues continue to grow, providing us with a resilient revenue base that will support our long-term performance. We are committed to managing risk prudently, and we believe our approach allows us to navigate this environment while unlocking growth opportunities. I would like to leave you with these key messages: We are recovering, managing risk proactively, and positioned for gradual but sustained growth. I'm proud of our team's hard work and dedication. I sincerely would like to take this opportunity to thank all of our people. And dear friends, thank you all for your ongoing trust, and as we continue to build toward a stronger future, I look forward to meeting you all soon. Bye for now.
Türker and Ebru, I'm now handing the webcast over to you. Is that okay?
Thank you so much, Kaan Gür. Really, hearing your insights once more in our webcast was very invaluable, and good luck in Washington.
Thank you. Thank you.
Thank you. Let's just continue. As Kaan Gür just highlighted, we are navigating a transitional period where the monetary policy transmission mechanism has largely been restored, but elevated funding costs, along with restrictions on loan growth, continue to strain our margins. Despite the sector-wide challenges in net interest income, the strength of our fee income continues to support our core revenue generation. Our core revenues increased by 17% year-on-year in the first nine months of the year, thanks to advancing fee income generation, more than offsetting NII decline. Without any doubt, our strong commitment to enhance our recurring revenues and nonstop enhancement in fee- chargeable customer base, and also obviously our strong cross-sell ratio, continue to be the driving force behind our success.
Please also note, in the third quarter, we maintained our prudent approach in building provision buffers, which added pressure to the quarterly net income evolution. Meanwhile, this quarter, we reversed our free provision of TRY 1.4 billion. Adding all up, our net income decreased by 36% year- on- year to TRY 33.135 billion, resulting in an ROE of 20.2% and an ROA of 2% for nine months. Going forward, our balance sheet is well positioned to expand margin and net interest income in this inflation environment, thanks to our small ticket-led growth strategy, while proactively extending maturities of the loan book and substantial market share gains in FX loans, and relative advantage in asset repricing, considering the low TL LDR of 82%, as well as the dynamic rebalancing of the security portfolio towards higher yielding assets.
Let's now take a closer look at the main factors contributing to our solid performance in a challenging environment, starting with the balance sheet. In the first nine months of the year, our TL loans were up by 30%, led mainly by small tickets in line with our strategic target to enhance our retail footprint. Considering the disinflation outlook, we have strategically and proactively shifted our loan portfolio by prioritizing the growth in segments where we can effectively extend maturities. As a testament of our growth strategy, on top of a phenomenal 300 basis points market share gain in consumer loans among private banks last year, we successfully further increased our market share by 110 basis points year to date. Our market share gain in mortgages has also been eye-catching at more than 300 basis points year to date.
Please note that in addition to maturity extensions, mortgages offer significant cost advantages, with delinquencies being nearly non-existent for this product. On the business banking front, our robust positioning in installment loans with a solid 18.8% market share among private banks enables us to capitalize on opportunities for extending maturities. Following an eye-catching 230 basis points market share gain last year in this product, we added 100 basis points market share in just third quarter alone. In SME loans, through a prudent and selective growth strategy, we expanded our market share by 172 basis points year to date. Please also keep in mind, while benefiting from our comparatively low market share in SME loans, we have been managing maturity extensions based on pricing. Our organic growth strategy also features a prudent balance between risk and return, with timely adjustments in lending criteria as required....
Advanced analytics and excellence in technology are central to our growth strategy, driving our robust asset quality, enabling us to take quick and timely actions. Please also note that in terms of volume, around 85% of GPLs, or general purpose consumer loans, are pre-approved and around 30% are to salary customers. As for the FX loan side, we successfully grew the loan book by a solid 25% year to date, already reaching our full year guidance of above 20%. Our bank-only growth was even stronger at 43%, excluding the impact of the big ticket redemption during the first quarter in our fully owned subsidiary, Akbank AG. This robust growth led us to gain 170 basis points market share among private banks year to date, with strong foothold within high-profile blue-chip corporates.
Thanks to our already deleveraged foreign currency loan book, we have significantly mitigated our risk and remain committed to expand the portfolio, which will also be margin supportive. Moving on to the securities side. In light of the disinflation environment, we have also actively adjusted composition of our TL security portfolio by incorporating higher yielding assets. We adopted strategic and balanced approach in FRNs and fixed rate bonds. We have been increasing our positioning in TL floating notes since the beginning of last year. Its share in our securities is up by 11 percentage points over the last seven quarters. Accordingly, FRNs, majority of which are TL BIST index bonds, have a decent 60% average yield and a solid 22% share in our TL securities.
In TL fixed rate securities, while we are positioned strategically at favorable rates, we continue to lead the sector with our strong positioning in TL corporate bonds. Our high-yielding corporate bond portfolio, with at the end of quarter, 56% yield, stands at TRY 35 billion, or around 9% of our TL securities. Our strategic approach also incorporates to decrease the share of CPI linkers in our TL securities. The strategy already resulted in a cumulative reduction of 19 percentage points since the end of 2022. Meanwhile, our treasury's proactive positioning in CPI linkers with a positive yield rate continues to be a differentiating factor, considering the tightening spread between policy rate and inflation. On the funding side, we maintain our disciplined funding mix, whereby deposits have continued to be the main source of funding.
We have a well-diversified deposit base, making up 66% of our total liabilities. While our TL time deposits remain resilient, with 60% of total consisting of low cost and sticky TL time deposits. On top of our strong and widespread deposit base, our TL LDR remains low, as Kaan earlier mentioned, at 82%. This low LDR has enabled us to cost-effective funding strategies and tactical shift in market positioning, providing edge in cost optimization this year. Please note that this TL LDR will also be crucial, as stated earlier, in supporting our margins going forward, offering significant capacity for future growth, asset repricing, and margin enhancement. Moving on to the P&L. Without any doubt, pressure on spread and margin evolution were the major challenges faced by the sector this year.
The tight monetary policies targeting disinflation, along with competitive pressures and growth gaps, which have limited asset repricing, continued to put pressure on NIM evolution in the third quarter. To put into figures, higher reserve requirement ratios, effective as of May 23rd, put additional thirty basis points pressure in NIM in third quarter. Please note that even though the bank is eligible for maximum remuneration from its reserve requirements, the interest earned remains significantly below the funding rate. To put into figures, on average, our reserve requirements make up 10% of our TL assets and 25% of our FX assets. Last but not least, change in the composition of short-term TL funding towards higher cost repos, following the Central Bank' s decision to terminate swap transactions with the banks, has put significant pressure on quarterly NIM evolution.
Our cumulative nine months of adjusted NIM now stands at 2.2%, which creates downward risk to our full year NIM guidance, especially when considering high underlying inflation trend, which requires tightness of monetary and macroprudential stance. On the other hand, our balance sheet is ready to expand margin and NII in the upcoming disinflationary phase, thanks to our agile and proactive asset liability management. On the asset side, we have strategically increased our TL loans by focusing on maturity extensions and have also significant growth in FX loans while adjusting our lending criteria to manage risk. Additionally, our balanced approach to securities portfolio will create substantial opportunities for NIM enhancement in the coming period. On the funding side, our robust TL deposit base and low TL LDR will provide additional opportunities for margin improvement going forward.
As highlighted earlier, we are committed to grow our customer base and enhance our customer-driven recurring revenues. In line with our strategic targets, our active customer base reached 14.2 million, up 69% since the end of 2021, with an eye-catching 5.8 million net active customer growth. Without any doubt, the success of our organic growth strategy lies in our customer-centric initiatives, with a focus on customer satisfaction and continual innovations. Our active product portfolio, a function of active customer base and average cross-sell per customer, has enhanced further by 10% year-on-year, reaching a new all-time high. Meanwhile, our growing young customer base, which increased further by 18% year-on-year, strengthens our robust and recurring revenue base. Our digital strategies have proven successful through the expansion of our customer base and advancement in our sustainable fee income.
Similar to last year, two-thirds of our new-to-bank customers were acquired via digital onboarding. Number of digital customers reached 12.3 million, with a robust 85% growth since the end of 2021, well exceeding the net active customer growth in the same period. Accordingly, digital penetration continues to excel, up by 8 percentage points to 86% since the end of 2021, while migration of transactions to digital channels already reached 96%. We continue to leverage our digital excellence innovative solutions to revamp our value proposition and to maximize the number of customer touchpoints. Please note that our digital channels have achieved an impressive share, accounting for around 70% of our credit card sales, over 90% of general-purpose consumer loans, and more than 80% of time deposit account openings.
On the fee and commission income side, we achieved 136 year-on-year growth in the first nine months of the year, significantly outpacing the OpEx growth and well on track with our full year guidance of around 100% growth. This outstanding fee performance is, without question, driven by our dedicated investments, strong customer acquisition track record, broad product portfolio, and diverse fee income base. I am delighted to share that we have already reached our 2025 strategic target to increase our fee to OpEx ratio above 80%. Our fee income more than doubled year-on-year. This resulted in our fee to OpEx ratio to improve by an outstanding 26 percentage points in 7 quarters to 84%, with an even higher quarterly figure of 91%, thanks to all-time high fee chargeable customer base and strong cross-sales.
It is important to underline that we have an impressive around three percentage point market share gain since end of 2021 to this year. And our fee income market share among private banks remained unchanged actually year to date, at 16.1% on top of the three-percentage point growth, as a result of our intensified commitment to enlarge our customer base while deepening the relationships. So the message is clear: the bank is now operating at a higher plateau in fees in terms of market share. On the cost side, our OpEx was up by 83% year-on-year in the first nine months of the year, while quarterly increase in limited at single digit, second quarter in a row. Accordingly, despite the ongoing challenges in OpEx, cost growth has been easing towards our full year guidance of around 70% levels.
Meanwhile, tough monetary and macroprudential policies put pressure on revenues, resulting in a temporary high cost-to-income ratio. However, I must underline that our mid to long-term ambition of mid to low thirties remains firmly in place, and this is in line with our historical averages, thanks to our dedicated investments for sustainable growth and profitability, as well as our disciplined cost management. Moving on to asset quality. Our focus on risk return, supported by proactive provisioning, excellence and advanced analytical capabilities across retail segments, machine learning-based credit decision models, have enabled us to maintain strong asset quality. For GPLs, we have 100% automated credit decision models, where we differentiate ourselves in terms of sophistication with substantial number of scorecards in in decision processes. For credit cards, on top of machine learning-based decision models, advanced mathematical optimization in limit decisions enables us to secure quality.
For SME loans, this year, we have also applied our proven analytical capabilities to already digitized micro segment, not enabling only the substantial market share growth, but also to manage the quality while growing. Please note that the uptick in new NPL inflow is driven mainly by our proactive approach in staging of a big ticket file, which was already provisioned adequately and has limited net income impact. While the robust and broad-based collection performance across all customer segments supported the NPL ratio to remain at 2.5%. Share of Stage 2 and Stage 3 in our gross loans, which would be considered, let's say, more problematic potentially, remained limited at 8.3%, while coverage remained strong.
During the quarter, our continuous provision buffer build-up has carried our total provisions to around TRY 39 billion , while our Stage 3 coverage remains solid, even with a negative 100 basis points impact, due to the TRY 1.7 billion NPL sale during the quarter. Adjusting for this NPL sale, our Stage 3 coverage would be at 58%, and our Stage 2 and Stage 3 coverage would be at 28%. Also, please note that the coverage of Stage 2 came slightly down due to the previously mentioned big tickets file migration to Stage 3. Otherwise, our Stage 2 coverage would have remained flattish. All in all, we ended the first nine months of the year at 87 basis points net cost of credit, excluding currency impact.
Despite the deteriorating asset quality environment, net cost of credit is well managed within our guidance of around 100 basis points, thanks to our well-diversified loan book, sophisticated digital capabilities, along with our proactive provisioning. Looking ahead, we anticipate that any potential uptick in cost of credit will be offset by the strengthening of the net interest income during the disinflationary phase. Despite the sector-wide profitability challenges, which limit internal capital generation capabilities, our total capital Tier 1 and Core Equity Tier 1 ratios without forbearances remained outstanding at 17.2%, 14.6%, and 13.4% as of nine months. As you know, we saw lifted temporary risk weights for high-risk weights for the newly generated consumer credit cards and GPLs in third quarter, and this had 122 basis points positive impact on our total capital.
On top of this, when adjusted for the temporary risk weight for commercial loans, which remained actually unchanged, as you all know, our CAR would be even 50 basis points higher at 17.9%. Strong capital reserves continue to provide protection against extraordinary market challenges and fluctuations, offering critical resource for long-term and profitable growth. Before moving on to Q&A, as usual, I'd like to share a few highlights regarding our ESG journey. As you have all watched in our ESG video at the start of our presentation, we continue to embed sustainability into the core operations, and we are proud to be honored with the Integrated Report at ESG Awards, underlining our commitment to sustainability, responsible banking, with a strong dedication to transparency and accountability.
During the third quarter, we have provided TRY 126 billion sustainable finance, bringing the cumulative to TRY 352 billion since 2021, and this accounts for 44% of our 2030 targets. In addition, 62% of our wholesale funding is sustainable. In ecosystem management, our commitment to financial inclusion is evident in our efforts to provide more accessible services. We have successfully completed our first Mentor Check-up event in Istanbul, with 30+ startups to fulfill the needs of our entrepreneur customers. To encourage eco-friendly transportation for our customers, we offered monthly refunds on charging transactions and advantageous vehicle loan pricing with a special campaign package. As for people and community pillar, we continue to take important steps in diversity and inclusion, youth and education projects.
In alignment with our zero tolerance policy towards violence, we have joined the Business Against Domestic Violence network, and we'll work on concrete steps for the victims of violence. Our commitment to becoming Net Zero bank by 2050 remains central to our climate change pillar. We are pleased to be the first deposit bank in Türkiye to reveal our Net Zero strategy, baseline emissions, and sectoral approaches. In addition, we have announced our commitment to phasing out of coal by 2040, considering the principles of just transition. As a final note, while our fee generation has been robust, due to the ongoing sector-wide challenges, it is evident that there is downside risk to our NIM and therefore our ROE guidance.
However, to repeat, as Kaan Gür mentioned at the start of the call, based on the latest trends, we believe that third quarter was a bottom in earnings, and we are well positioned for better profitability ahead. This concludes our presentation. Now, moving on to the Q&A session. Please do raise your hand or type in your question in the Q&A box, and for those of you who are joining us by telephone, please send your questions by email to investor.relations@akbank.com, and Nida, because you raised your hands first, I would like to allow you to talk first. Please go ahead, Nida. You can ask your question.
Hi, Ebru. Thank you very much for the call. I have a few questions. Firstly, just starting off on the margin side of things, with rate cut expectations now being pushed out to next year, you know, what are your expectations in terms of exit rates for 4Q? And secondly, in terms of the margin inflection into 2025, just want to get a better understanding of how important easing of the macroprudential measures is, i.e., even if you see rate cuts, is there a scenario where macroprudential measures remain tight and therefore we see perhaps slower than expected margin expansion? My second question is on if you can comment on asset quality and the outlook for cost of risk, into 2025, please. Thank you.
Thank you. I'll leave the floor to Türker, our CFO.
Hi, Nida. Actually, yes. Based on latest developments, like, we expect probably the first rate cuts, like, will be happening in the new year. So therefore, actually, there won't be, like, any impact into fourth quarter, like, NIM evolution. But having said that, you know, like, we have already, like, talked slightly about it. Actually, we have seen the, like, bottom, on the net interest margin side in the third quarter. In the fourth quarter, maybe not very significant, but we are, like, observing initial signs of net interest margin recovery, mainly coming from the slightly improved reserve requirements, interest payments, as well as some easing on the deposit cost side, as well as on the TL wholesale funding side.
So these are showing first signals of the net interest and NIM recovery, but as I said, not very material. But what I can say is actually, like Ebru has already touched upon, it seems like that we won't be able to meet our like revised guidance. So like, observing that, third quarter net interest margin was like 2%, probably exit NIM will be somewhere between 2%-3% levels. But surely the like next month like November and December will be important in terms of like yield trends, deposit cost trends.
With regard to, like, 2025, surely the, again, Central Bank's, like, decisions on the macroprudential side will be important on top of the, rate cut, scenario, because as you know, currently we are subject to 2%, monthly growth gap. On top of it, we have to, meet some, conversion as well as rollover ratios on the, FX- protected deposit scheme. So Central Bank's , like, potential decisions on these area, in these areas will be again important, like with regard to the NIM recovery, next year. But like, like just as maybe like assumption, assuming, that these, macroprudential measures, like, limitations, stay the same, but, surely there will be a rate cut, trends.
Maybe we don't know the timing yet, because there are some like critical events, critical dates this quarter, which will be impacting the rate cut cycle. But we can say that we can expect a gradual recovery in the net interest margin for twenty-five. Surely the pace of this recovery will depend on the rate cut trends, as well as the potential changes in these macroprudential measures. Surely, the pricing dynamics in the market will be important as well, so we have to wait and see then.
Maybe one final remark, as I said, so in the coming months, November and December, as I said, there are some critical dates, like, as you know, elections in the U.S., next MPC meetings, October and November inflation data for Turkey, as well as in December, the minimum wage increase, at what level it's going to like finalize. So these will be also impacting, probably impacting the rate cut decisions of Central Bank . With regard to asset quality, as we had expected, actually, like, as we have also shared in the second quarter earnings call, our cost of risk is normalizing towards 1% for full year. In the third quarter only, cost of risk was at 1.5%, cumulative cost of risk at 87%.
So probably, it's very likely that we will be ending the year in terms of cost of risk in line with our full year guidance, like 1%. For next year, still we are in the budgeting process and probably also, like, the regulators, or I mean, like to be safe, like potential movements in this area may impact the cost of risk evolution, but probably for as of today, we can expect like 1.5%-2% cost of risk as a proxy for next year. In terms of inflows, like, we are observing the most of the inflows coming from the retail side, except for, let's say, in our bank case, for one big ticket in the third quarter, which was already provisioned in Stage 2.
But apart from this case, like, mainly the inflows are coming from retail side. I think it will, like, evolve like that in the next year. As you may remember, end of September, BRSA has, like, announced a restructuring scheme for overdue credit card receivables as well as general purpose loans, which was a, like a one-off action, but it may be repeated going forward, like next year. So probably it may also impact the pace of NPL formation. But all in all, I think we can take cost of risk of like 1.5%-2%, like, as an initial procedure for next year.
Maybe just to add a few comments on the NIM side, Nida. I already mentioned in the call, and we actually have shown also in our NIM slide as well. But just to repeat, as you know, you know, normally speaking, swaps are less costly than repos, you know, for the banks. And when you look at the overall swaps, basically, that were terminated, as of, as you know, as of July, there were no more swaps actually out for the banks with the Central Bank . The swaps options were usually around, let's say, 45% or so. But the repos, as you know, goes between 47%-53%.
Actually, especially in August, there was a lot of volatility in the market that led for the repos to touch the upper band, which actually also was another reason for the overall NIM pressure in the third quarter. We have also shared that in our presentation as well. So now, nowadays, we're seeing in the last few weeks that the repos are actually below 50%, maybe around the 48% level. So that is also helping the overall NIM actually evolution this quarter. And on top of that, the remuneration that we are actually getting as well versus the previous quarter is also giving us support. So all of these will be additional to what Türker has mentioned, supportive for the NIM evolution.
Thank you very much, very helpful. Can I just ask one small follow-up question? I just want to confirm if the banks are going to start reporting under hyperinflation accounting from January twenty twenty-five, and if my understanding is correct, that tax will still be based on nominal earnings? Thank you.
Yes, Nida. Like, as you may recall, BRSA had postponed IAS 29 implementation by banks for one year, so if no change, we will be subject to IAS 29, starting from January first, but again, you're right, on the tax filing side, in 2025, we'll be using the nominals like PNL, i.e., unadjusted figures, for tax filing, if there is no change, but I don't expect any change in this area.
Thank you very much.
You're welcome.
Thank you. The next question comes from Cihan. Cihan, please go ahead. You may ask your question.
Hello. Thank you very much for the presentation. I have couple of quick questions. One is about the market share gain in SME. I mean, during the time of economic slowdown, what makes you think that increasing the SME market share is not going to have any ramifications on asset quality? That's one. And second is: could you comment what the NPL flow would be if you strip out the large ticket NPL that you had in the quarter? And the third question, I mean, I saw that you reduced your market share in time deposits, but if you think about the funding available, probably time deposit costs are the lowest if you compare it with the swaps and the repos.
So why are you positioning the balance sheet in a way that the contribution of time deposits in funding mixes less? Thank you.
Cihan, hi, this is Türker. Maybe let's start with your second question. Like, close to 40% of inflows in the third quarter belongs to big ticket files in the third quarter. Like, we can say, like, maybe like eight billion would it look like without these big tickets files. On top of it, SME market share gain on the SME side, as you know, like, we are coming from a lower base, and on the, especially on the micro side, again, like, we are using AI machine learning and AI-based models. So, these goals are created via analyzing the data. Surely, but on top of it, we know it's a difficult environment.
Surely, we are always also like taking paying attention to our collateralization. As long as we have the like healthy collateralization levels, you can always recover like of like potential NPLs in the future. But as I said, like, we are currently maybe benefiting from coming from a relatively lower base, so that makes us relatively like more comfortable. But having said that, we surely like. We are surely well aware of the like potential asset quality deterioration trends in the upcoming quarter. With regard to time deposits, actually, when we compare like marginal time deposit costs like to like gaining from the market time to time, you may have to pay like up to 50%.
Whereas on the offshore side, like, wholesale funding is slightly, like, lower than that, like maybe 2%-3% lower than that. And maybe really not to forget, like, the banking system is trying to, like, meet these, like, ratio requirements, improvement of TRY deposit, total deposits ratio. Like, therefore, actually, like, gaining additional deposits, may be costlier than the back book. Therefore, actually, we are making this, the calculation of this, mathematics.
Also, the area that we are optimizing, Cihan, is more the costly,
Yes
... side of the deposit base, basically, and trying to, let's say, you know, mix, let's say substitute that with the offshore, you know, where possible.
All right. Thank you very much.
You're welcome.
And maybe one last thing on the SME side is, yes, we are gaining market share and growing, but if you look at we have shared also in our investor presentation, I mean, in our earnings presentation, it is still actually below or around. It is still below 9% of our gross loan book. So yes, we are gaining market share and growing, but it's still, you know, a single digit of our overall loan book.
Thank you very much.
Thank you. Let's move on to now Mikhail. Please go ahead and ask your question, Mikhail.
Yes. Can you hear me?
Yes, we can.
Yeah, yeah. Good day. Thank you very much for the presentation. I have two questions. One is on asset quality. So looking at the third quarter, do you already see the effect of reducing support from the recoveries in corporate sector, which I think was a narrative for a couple of the previous quarters?
Which essentially pushes up cost of risk upwards or are there other effects? That's the first question. And the second is on net interest margin yeah dynamic. Yeah you outlined a couple of reasons for the for its incremental pressure in the third quarter. But if we split this into two sides compared to the outlook which you shared in the second quarter what was more unexpected and had a more negative effect? Were that the additional macro-prudential measures which were unexpected or it was or the borrowing costs developed in a more unexpected way maybe than you expected?
And looking into the fourth quarter, also, where do you see maybe more risks, more risks in the area of prudential measures or the development of borrowing costs? Thank you very much.
Maybe just to start with the recoveries, I can say that actually we continue to see collection performance this quarter as well, coming in from big ticket items. Because as you know, these are long-term, let's say, legacy books that we have, some of them. So this quarter, we will also see a strong recovery. At least, so far, we have seen some strong recoveries coming in on that side. So we haven't seen a slowing down in that trend, and maybe I'll leave the new message to Türker.
Mikhail, on the net interest margin side, like, what went, like, unexpected in the third quarter, one of them was the TL wholesale funding side. As Ebru has already mentioned, in the volatility in July, August area has, like, negatively impacted our TL wholesale funding costs, especially from offshore, like, the rates went up. And on top of it, actually, by the end of second quarter, actually, we were expecting that we would be able to see some easing on the deposit cost side, TL deposit side, cost side, in the third quarter. But it not that, it did not realize, and also during that time, Central Bank has also made some changes in the reserve requirements. So, this has somehow, like, kept the deposit cost at similar levels.
But for the fourth quarter, as I already mentioned, we are seeing some easing on both sides. So therefore, actually, probably like, it's very likely that our fourth quarter exiting will be, like, better than the third quarter net interest margin. With regard to next year, first quarter, what may be the, like, the risk, if I understood you correctly, like, maybe, like, potentials and there may be, like, further delay in the rate cuts, like, may be the case or like, the recovery or the improvement of the core spreads, if the loan demand stays, like, muted. For instance, third, fourth quarter so far, TL loan growth in the system is, like, close to zero.
In such circumstances, actually, the marginal yields on the lending side may be like below our expectations. As we have also observed, especially in the first quarter of this year, actually. For instance, when we started the year, we were expecting like higher yields, but it did not realize, and it has also impacted the NIM evolution this year. Like, this loan demand for next year like will be also important for NIM evolution.
Thank you very much for this, yeah, comprehensive, very comprehensive answers. May I just follow up on the corporate recoveries? For how long maybe do you see the pipeline of this recoveries continuing? Is that a question of quarters or maybe years?
Yeah, actually, no, it depends, like, from file to file, because, like, there are some files which take like many years for the liquidation process. But, like, there were some files in our legacy book, like, where we have really, have seen strong recoveries this year, in the second quarter, third quarter, and-
And now as well.
... and also we will see some in the fourth quarter, but probably it's too early, like, to give some, like, insight for next year. So it really depends, like, from file to file.
Okay, okay. Thank you. Thank you very much.
You're welcome.
Very helpful.
Thank you, Mikhail. The next question comes from Murat İğnebekçili. Murat, please go ahead and ask your question.
Hello. Thank you for the opportunity. You answered actually a couple of them, but I just want to make sure. Let's roll back to the end of second quarter when you shared the guidance. So, I would assume you were not expecting any rate cut before the middle of fourth quarter. So what made you confident back then that the NIM would increase? I mean, reduction of the onshore swap? I mean, I'm speaking in hindsight, obviously, but might have been expected as the Central Bank buying dollars and flushing the market with Turkish Lira . Maybe you thought that it will, the financial conditions would be loose, right? So, was it the main reason why this did not turn out to be the case?
This is a question not only for you, but for all the members of the banking sector, obviously. Could you elaborate more on that, please? I have a second question, too.
Okay, Murat, say hi. Actually, if I'm not, like, remember wrong, wrongly, actually, also, during that time, actually, we had said that this revised guidance of 3% was taking into consideration a rate cut, because during that time also, we were expecting the rate cut to happen towards the end of the year. So like, the positive impact of this potential rate cut assumption at that time was quite immaterial. But actually, in our scenario at that time, actually, we were expecting an improvement in the core spreads, like, coming from both lending side as well as from deposit side, which did not, like, realize so far, as we were expecting.
And on top of it, actually, the, like, the third quarter's worsening on the TL wholesale funding side, like mainly also stemming from the risk-off mode globally, was not taken, like, was not considered at that time because it was not there. But unfortunately, this risk-off mode has also negatively impacted the wholesale funding side. And also lately, like also there was some final adjustments in the reserve requirement side, which have also negatively impacted the NIM evolution. But just to recall, so, our revised guidance at that time was not factoring in an early rate cut.
I see. And the second question is about the... I mean, I'm, we're following the weekly Central Bank data, and loan yields have been easing, and I assume banks are competing to lock the loan books at higher rates before the, before the rates decrease. So and there is a 2% monthly cap. So does this create a competitive environment to secure these loans? I mean, does it bring down the loan yields further? Do you see a pressure over there? And-
Actually, yeah, maybe like as I was trying to, like, answer Mikhail's question, actually, this, like, relatively moderate or muted loan demand, so also like we are trying to like fill this 2% monthly growth gap. Yes, that's on one hand creating a, like, pricing competition in the market. So that is maybe like one reason for the easing of this Central Bank data trend. But also on top of it, like the banks, also Akbank, we are trying, like, to grow in longer maturities in installment type of loans, as Ebru has shared, like where we have gained market share, in order to lock the spreads going forward, so to benefit from positive carry in longer term. This is also another reason, like, why there is some easing.
So I can say it's a combination of all these factors, actually.
I see. Thank you very much.
You're welcome.
Do you expect a change in this monthly cap, or if they change it?
Uh, like-
What will be the effect?
Probably, like, in the near future, I don't think that, like, it's likely, but maybe like, like my, like, personal opinion, maybe, over time, they may, reconsider the, like, loan types or segments which are exempt from, growth cap. Maybe, that may be the case, like, before they touch the, 2% growth cap.
So all in all, to summarize, I think you're pretty much giving a similar guidance that this is the bottom. But I think you... There are no more aggressive assumptions or assumptions for the funding side, too. So you think that this is, you're at a more visible position compared to second quarter? Is your confidence higher compared to second quarter about the guidance you provide now?
Actually, maybe, like, I am talking based on the latest trends, actually. Like, when I look at, like, back book versus, like, front book, our, like, deposit cost in the back book is at like, 46%-47% levels, whereas the margins are rather like, low 40s to mid-40s. And, as you know, over time, the portion of the KKM is coming down, which is like subject to, conversion requirements, where we have to pay higher rates in the first, account opening. Like, based on the latest trends, there is some easing, but... This is what I can say is actually, I don't want to be very, very aggressive, like in terms of the net interest margin improvements.
So like, we have to see like how coming weeks evolve.
Okay, that's, that's very clear. Thank you very much.
You're welcome.
Okay. We go another, Mehmet Sevim, please go ahead and ask your question.
Hi. Good evening. Thanks very much for the presentation. Türker, if I may ask just one clarification to your NIM comment also. You've now positioned the balance sheet for lower rates, and we're waiting for this trigger to happen. But do I understand it correctly from your comments that you're expecting a more gradual improvement in NIM now throughout next year, rather than a sharper, more visible increase, as it would have been towards the end of this year if everything had gone according to plan previously? How you know, assuming rates come down according to market expectations, what kind of a trajectory do you have in mind at this stage? And just also, my second question is on the implementation of the inflation accounting.
Just wanted to see if you had any color on the direction of travel in the authority's minds right now, given if nothing happens, then we will get that. But I'm trying to understand the motivation from their side, and you know, how your feelings are about this, given obviously we're in this inflationary phase now, but this will be a lot of added operational burden. I just wanted to understand if you have any additional thoughts or color there. Thank you.
Let me start from the second question. Yes, it's an operational burden for sure, for our colleagues. But as of today, actually, like we haven't like any like signal from the BRSA, like which would indicate that there will be another postponement, actually. Like, as of today, we are preparing ourselves for January 1st. And probably, yes, we are in this inflationary environment, but having said that, as you know, like one of the rules for inflation accounting is three-year cumulative inflation of 100%. It's not the only rule, but one of the critical criteria. So probably, like, we will have this three-year cumulative 100% inflation, for at least two or three years. So therefore, actually.
So similar to non-financial, like probably we will also be like subject starting from January the 1st. That's what I can say, actually. So it will not disappear immediately. That's what I mean. On the net interest margin side, like as I said, previously, there are some, like critical dates, key events, like we have to wait and see, which will also, like, impact our, like, forecasts for, assumptions for, next year. Like, October, November inflation, like Central Bank's , MPC meeting, outcomes, in the, next two months. They will also share their own Inflation Report for next year in the, coming weeks. That, and finally, the, minimum wage, adjustments, to be decided by the end of year, this year.
But like as of today, I don't like. I don't expect that this rate cut will be front loaded. Probably, as of today, like, as I said, there are some uncertainties as of now, but we can say maybe probably this rate cut will happen gradually throughout the year, like coming down to maybe mid-twenties by the end of next year. So therefore, actually, we can expect the NIM recovery to happen gradually. Maybe also, maybe one additional comment, maybe as a response to one of the previous questions with regard to the yields development and maybe like potential threat.
As you may recall in the past, like the early redemption option for companies, like the penalty for early redemption was quite limited, like 1% or 2%, depending on the maturity of the loan, but it has been changed by the end of June. Now it is linked to the duration as well as the interest rate level of the loan. So therefore, actually, early redemption commission to be paid by the corporates and commercials is going up to like high, mid- to high single digits. So therefore, actually, one may ask, so this early redemption option may be a like a threat to the yield improvement. So after this latest development regulation change, this risk, maybe, has not disappeared but is relatively lower now.
Okay, thanks very much, Türker.
You're welcome.
Thank you, Mehmet. And now the last question that we see. Simon, would you like to go ahead?
Yeah. Hi, thanks. Just quick ones from me. On the cost of risk for next year, you said between 1.5% and 2%. But you also mentioned that you know that assumes no other regulatory intervention. So just wondering what regulatory intervention you might be worried about on the risk cost side? And then my other question would just be on fees. Do you think... I know you're preparing the budget for next year, but do you think you can-... maintain well above inflation growth in fees? Just any guidance there would be helpful.
On the cost of risk, that maybe not worries, but like, maybe like quite the opposite. Sure, there are always risks, like, downside risks, but what I meant was, like, the regulators, like, may, like, implement, like, some standard restructuring schemes, like based on, asset quality developments going forward. Now, which may, in this way, actually, like, smoother to NPL formation trend or help on the, asset quality formation. That was what I was trying to mean. David, could you maybe again repeat your second question?
It's just on fee growth, whether you think-
On the fee growth-
Whether you can maintain such fee growth?
We are in the initial, like, phase of our, like, budget process, but surely we will be, like, aiming, like trying to aim a real growth on the fee income side. Surely, like, the growth outlook in the economy or like how these macroprudential measures, like, will evolve throughout the year, like whether they will be rather restrictive on the lending side will be also important as well. Maybe a little bit more like patient, so we will share our guidance like in the beginning of the next year. But like in the coming months, again, like we are always in touch, like we can also share maybe more color.
Okay. Thank you.
You're welcome.
Okay. So I guess there are no further questions. Thank you all for joining our call today. If you do have any further questions, please do feel free to reach out to our investor relations team. We are always happy to help, and we look forward to meeting and updating you on our progress in the future. I'd like to thank all of you for joining us and Kaan, especially for joining us from Washington. And have a great day. Bye-bye.