Dear friends, this is Kaan speaking. Thank you for joining our second quarter earnings call. Now, before going deeper into the domestic outlook, I would like to briefly touch upon the global backdrop and its repercussions. Global economy is facing various challenges mainly characterized by elevated level of uncertainty pertaining to trade policy and their potential impact on growth and inflation. Besides, fiscal concerns in advanced economies, particularly in the U.S. and Japan, as well as geopolitical tensions have been major sources of volatility recently, amplifying the lingering difficulties. While financial markets are extremely sensitive to the news flow on tariffs and geopolitical tensions, recent positive developments on these fronts have supported global risk appetite and broad sentiment for emerging markets. Domestically, macroeconomic conditions in the second quarter were challenging for the banking sector.
Swift and strong monetary response against evolving political and global landscape had resulted in a sharp rise in the funding cost which is up to 49%. This postponed the previously anticipated margin expansion, leading us to revise our full year guidance. Monetary measures have successfully restored financial stability and the central bank restarted reserve accumulation in May. Now gross reserves have broadly reached pre-March levels while net reserves remain somewhat short of this level but steadily improving. Regarding macro trends, demand conditions and economic activity are moderating due to the tight financial conditions. We project a mild economic growth this year around 3% with downside risks associated with monetary tightness and external outlook. Exchange rate stability, mild course of commodity prices, and disinflationary support of demand conditions create a conducive environment for the continuance of the ongoing downtrend in inflation.
We anticipate the recently started rate cut cycle to resume in the rest of the year, while monetary conditions are likely to stay tighter than previously projected. Looking forward to next year, we expect the disinflation process to continue. While the pace of this improvement will depend on the macro policy design with a cautious and prudent approach, maintaining a tight monetary and fiscal policy mix is key for sustained disinflation. As Akbank, we acknowledge the short-term costs of disinflation, which we deem essential for a long-term and permanent improvement in the banking sector's operational environment and profitability. We will continue to closely monitor risks stemming from the global outlook, including rising protectionism and geopolitical tensions, as well as domestic developments. Based on our potential implications for the financial sector, we will adjust our positioning accordingly as we enter a pivotal phase in the cycle.
I want to highlight six core strength areas that position us to maximize the opportunity in a rate cut environment. Each one is a deliberate outcome of our strategy, and together they give us a structural edge as the macro landscape shifts. First, capital and liquidity. We have maintained a fortress balance sheet. Capital levels are strong. Liquidity is ample, giving us flexibility, optionality, and ammunition. Second, agile balance sheet aligned with regulation and market cycles. We have actively managed our asset-liability mix to stay ahead of the cycle while remaining fully compliant with evolving regulatory requirements. This agility ensures we can respond quickly to the market shift without compromising prudence. Third, our funding mix. We move fast to optimize our funding mix. We gain market share in widespread consumer deposits while high-cost deposits were actively reduced. This has already started to support margins.
Fourth, our securities book has been tactically structured. We have extended duration and locked in yield where it counts as rates fall. We expect meaningful margin tailwind from this positioning. Fifth, efficiency is our advantage. With fees covering 100% of our costs in the second quarter, we have achieved a superior fee to OpEx ratio in the sector, which underscores the scalability of our operating model and the strength of non-interest income streams. Also important to underline that cost containment remains disciplined even as we invest selectively for future growth. I am very happy to share that our achievement in future OpEx has already significantly exceeded our three-year objective, which I have shared on several occasions. Last but not least, risk is tightly controlled. Provisioning remains prudent. Coverage ratios are robust. We are focused on disciplined growth anchored in risk-adjusted value creation, protecting returns for long-term shareholders.
Everything we have built to the capital, the funding structure, the portfolio is aligned to convert this easing cycle into margin expansion and sustainable value creation. Execution remains strong, with the majority of our three-year strategic objectives well within reach or already delivered. Our only shortfall is in Turkish time deposit market share, which I already mentioned in the previous slide as an outcome of our funding optimization as well as regulation-driven low Turkish loan to deposit ratio. Our journey never stops. Customer growth driven by retail and digital channel is accelerating. Fee-based and customer-driven revenues backed by a well-structured rate-sensitive balance sheet. This forms a scalable, resilient earnings platform with strong momentum and long-term growth potential. I will now pass it over to Ebru to walk you through our second quarter results. Following that, Türker and I will be happy to answer any questions you have.
Thank you.
Thank you. Our first half net income was up by 3% year on year to TRY 24,852,000,000 , resulting in an ROE of 20.1% and ROA of 1.8% for the first half. During the same period, our revenues increased by 39% year on year to TRY 96,828,000,000 . As just noted, our robust 60% year on year growth in fee income remained a key revenue anchor, partly offsetting the delayed recovery in NII. Strategic investment over the years, especially in digitalization alongside deepening customer engagement and cross-sell efforts, continue to fuel steady growth in our recurring revenue stream. However, the unanticipated tightening in monetary policy triggered a downward revision in our net interest margin guidance since our margin evolution was directly linked to our rate cut expectations.
Therefore, despite the mitigating factors such as robust fee income, disciplined cost management, and well-controlled asset quality, the lower NIM trajectory has resulted in downward revision in our ROE guidance for the full year to above 25%. We achieved 13% year to date growth in TL loans, surpassing the TRY 1 trillion mark and remaining committed to our full year loan growth guidance of over 30% shared at the start of the year. Our loan composition breakdown remained unchanged year to date as we continue to pursue selective TL loan growth with a sharp focus on yield maximization and extended maturities. We leveraged our strong positioning in priority segments while remaining fully aligned with regulations. Risk discipline stayed intact. 85% of our GPLs were pre-approved and 35% were to our salary customers.
As you all know, we extended the maturity profile of our loan book last year and maintained its positioning year to date. This helps manage our duration gap effectively and positions us well as the rate cut cycle is reinitiated. We expect to start seeing NII uplift from third quarter onwards. Our risk-return focused loan strategy, supported by proactive asset-liability management, is designed to support margin expansion and drive long-term value. Our foreign currency loan book grew by 3.7%, building on the strong momentum from last year, which led us to reduce our full year growth guidance to mid-single digit. This year's slow performance reflects elevated redemptions and tighter regulatory growth caps. Our lean FX loan book, low risk exposure, and solid foreign currency liquidity provide headroom for future expansion.
We plan to leverage our strong presence in corporate and commercial banking to grow our share particularly in investment focused loans. Moving on to the securities slide, our securities portfolio grew by 15% year to date, now accounting for 24% of total assets. RTL securities were up by 14% year to date while our foreign currency securities increased by 9%. In dollar terms, we are well positioned with long duration high yielding TL fixed rate securities and TLREF bonds offering wide spreads. We have also strategically decreased our CPI linker exposure, which also has positive spread. Our proactive yield focused securities portfolio management has allowed us to swiftly adapt to shifting market conditions and remains a key driver of margin resilience going forward. On the funding side, we sustained our disciplined funding strategy with deposits continuing to serve as a primary source of funding.
Our deposit base remains robust and well diversified, representing 63% of total liabilities. Our low cost and sticky TL time deposits saw a year to date increase of 4 percentage points, carrying the share in total to 62% as of second quarter. Meanwhile, thanks to our strong franchise, we tactically increased our market share in small ticket widespread consumer only TL time deposits during the quarter. Please also note that TL demand deposit share in total TL deposits has increased by 240 basis points year to date to 15.5%. On top of our strong and widespread deposit base, our TL LDR remains low at 82%, offering substantial room for funding cost optimization in this inflationary phase.
Moving on to the P&L, on the margin front, a strategically optimized balance sheet and timely actions to extend duration of TL loan portfolio enables a solid start to the year supported by favorable spread development. However, in second quarter, margin pressure intensified due to the pause in the rate cut cycle as well as the unexpected monetary tightening. As a result, swap adjusted NIM contracted by 35 basis points quarterly to around 2%, reaching its trough in second quarter. The delay in the anticipated NIM improvement in second quarter can be attributed to three factors. First, the CBRT increased the wholesale funding rate from 42.5% levels to 49%, resulting in a 250 basis points effective increase in the quarterly weighted average funding cost. This indicated an even tighter stance than the beginning of the year in real terms.
Second, on the asset side, due to the loan growth caps, the upper adjustment in loan pricing had limited impact on back book yields, and third, elevated reserve requirements continue to put pressure on margin evolution. To put this in figures, on average reserve requirements make up around 10% of TL assets and 20% of our FX assets, and although we were eligible for the maximum remuneration on this front, the interest rate earned for TL reserve requirement remained at low 30% levels, significantly below the TL funding rate. As you all know, for the foreign currency reserves, we received zero remuneration. As Tom Bei mentioned previously, we expect the rate cut cycle to continue during the second half of the year, supporting recovery in quarter line starting from this quarter onwards with visible progress anticipated in the fourth quarter.
As a reminder, our robust balance sheet remains well positioned to drive margin enhancement underpinned by three strategic actions. First, we restructured our balance sheet by extended tail maturity mismatch last year, representing the highest tail maturity expansion among our peers as reflected in our year-end financials. Second, on the funding side, we pursued cost optimization strategies through tactical increase in widespread tail time deposit market share and maintained the low TLLD of 82%, both of which will enable margin support as this inflation unfolds. Third, on the security side, we focused on yield maximization and longer duration through targeted security portfolio management, which will also create substantial opportunity for NIM improvement in the coming period. Still, given the monetary conditions are likely to remain tighter than previously expected, we are revising our year-end swap adjusted NIM guidance to the range of 3% - 3.5% from around 5% level.
As a reference, our year-end policy rate expectation has also been revised up to 36% from the previous 30.5%, which we had taken into consideration. At the beginning of the year, our fee income increased by a robust 60% year on year, reflecting our strong commitment to expanding the fee generation customer base through innovative customer-centric initiatives and diversified product offerings. We have already achieved a significant milestone in diversifying our fee base, demonstrated by the solid contribution from all business lines, to name three of the key drivers starting with payment systems. The strong 60% year -on- year growth in payment systems was underpinned by more than just rate dynamics. It also reflects our effective customer engagement and extensive product capabilities. Second, bank assurance fees. They surged by 63% year on year as we maintained our number one position in total insurance commissions among private institutions.
Since 2023, digital bank insurance sales exceeded 70% of total sales, contributing further to growth. Third, money transfer fees rose by 58% year on year, reflecting higher transaction volumes and digital channel migration of the transactions. These achievements have led us to revise up our full year fee income growth guidance for this year. Accordingly, we now project our fee income growth to remain robust at 60% for the full year. I am delighted to share that we exceeded our 2025 strategic target to increase fee to OpEx ratio above 80% thanks to our strong customer acquisition and ongoing improvement in the fee chargeable customer base. With the fee income growth outpacing OpEx growth once again, our quarterly fee to OpEx ratio reached 100%, building on last year's record high fee income market share.
We gained an additional 80 bps from market share among private banks year to date as of May, bringing the share to 17.2%. This marks a 3.3 percentage point increase since 2022, underscoring the strength of our customer acquisition strategy as well as our well-diversified fee income stream. Moving on to OpEx, focus on disciplined cost management remains a key priority. Operating expense rose by 35% year on year in the first half. This realization is below our initial expectation, allowing for a positive adjustment to our full year guidance to around 40%. Our cost to assets ratio is at 3.8% as of first half.
Meanwhile, our long term ambition and cost to income ratio remains firmly in the mid to low 30 range in line with the historical averages, driven by commitment to sustainable growth, enhanced operational efficiency as well as the normalization of pricing behavior aligned with the ongoing disinflation trend. Moving on to the asset quality, retail led NPL inflows remain a persistent trend across the sector. During this time, our focus on optimizing loan portfolio through disciplined risk framework has enabled us to maintain sound asset quality, which was supported by excellent and advanced analytical capabilities across the retail segments, automated and AI-based credit decision models, diligent tracking and individual assessment of our corporate and commercial loan portfolio, as well as prudent provisioning. Our NPL ratio remains at 3.4%, which is within our full year guidance.
Meanwhile, the share of our stage 2 plus stage 3 loans representing potentially problematic exposures remained low at 8.7% of our gross portfolio. Please also note that the restructured loans represent only 2.7% of the total portfolio. In the first half, our total provisions reached almost TRY 58 billion thanks to our continuous provision reserve buildup. Meanwhile, our coverage ratio for stage 2 and 3 loans stands strong at 32.7%, and this reflects disciplined risk management practices excluding currency impact. Our net total cost of credit stood at 193 bps on a cumulative basis, which is consistent with the trends over the past three quarters and in line with our year projections. All in all, we expect our full year net cost of credit to remain within our guidance range of 150 to 200 bps.
Our total capital, Tier 1, and core equity Tier 1 ratios without forbearances remained robust at 17.4%, 13.8%, and 12.6% as of second quarter. As for the sensitivity, 10% depreciation in TL results in around 30 bps decrease in our capital ratios, while the impact diminishes for higher amounts of changes, and 100 bps increase in TL interest rates results in a 9 bps decline in our solvency ratios, again with diminishing impact. Strong capital reserves continue to safeguard against extraordinary market challenges and fluctuations, offering critical resources for long-term profitable growth. On this slide, you may find a summary of our first half performance as well as our revised guidance, which I shared in detail throughout the presentation. I'm not going to repeat. We can move on to the last slide.
Before moving on to the Q and A, I'd like to share a few highlights regarding our non-financial performance. As highlighted in our ESG video, we sustained strong momentum in second quarter, advancing our sustainable action plan with measurable results. We are on track with our long-term sustainability goals. Notably, we have reached 66% of our 2030 sustainable finance target as of second quarter. As Akbank, we are also pleased to be among the first institutions reporting under ISSB standards, with Turkey playing an active role in this transition. Actually, our first Turkish Sustainability Reporting Standards report aligned with ISSB has just been published recently today. The English version will follow in August. These efforts reflect our continued commitment to building a low carbon and inclusive economy in line with our long term objectives. This concludes our presentation. Now we'll be moving on to the Q & A session.
Please do raise your hand or type in the Q and A box if you have any questions. For those of you who are joining us by telephone, please send your questions by email at investor.relations@akbank.com. Hi David, I think the first question comes from you. Please go ahead and ask your question.
Good afternoon and thank you for taking my questions. I have three please. The first one is about the deposit rates. Do you expect deposit rates to decline broadly in line with the deposit rate, or are you assuming a more limited adjustment at the system level to mitigate the risk of dollarization here? I mean, how conservative are you on your assumptions here? The second one is about NIM. In your original operating plan, you were expecting NIM to peak around 6% levels in the fourth quarter with 30.5% of policy rates. Given the updated macro assumptions and the operating plan, where do you now see the peak net interest margin and when do you expect to get to that level? Is it in the first half of next year? Finally, could you share the approximate share of fixed rate Turkish instruments in your AFS securities book?
If possible, a quick sense of mark to market sensitivity please. For example, what would a 100 bps parallel move in yields imply in terms of mark to market gains or losses? Thank you.
Hi David, this is Türker. Thank you very much. With regards to deposit rates, actually what we've experienced so far is actually after this rate cuts we were able to reflect this rate cut to our marginal pricing. Maybe like to give you some figures. Currently we are pricing marginal deposits at around 42% - 43% levels, and with the existing rates we are able to maintain the ratio requirement of the Central Bank.
I understand your question surely like in the upcoming MPC meetings this expect rate cuts and the reflection to the whether we can pass it through to our deposit rate in our best case scenario we have actually assumed that we'll be able to mostly reflect it to our deposits cost and not to forget actually in the second quarter especially we have broadened our like small ticket deposit base which will also like give us some flexibility in the repricing of the deposit portfolio. With regard to net interest margin on that side like as you rightly mentioned.
We were expecting exit NIM like of we expect that the exit NIM into 2026 would be like 6% by the end of this year but probably under current like macro assumptions probably it will be like go up to 5% - 6%, maybe 5% - 5.5% levels in the fourth quarter. We can expect if this like macro trend continues into 2026 with like further disinflation and like further policy rate cuts in the in next year probably we can see the peak like somewhere in like maybe in the first quarter of next year maybe in the second or in the second quarter again maybe like around 6% levels. With regard to the securities part maybe everyone can contribute on that.
Yes. On the securities stock, actually 70% of the Turkish fixed bonds are in the portfolio, which equates to around 25% of the total TL securities. I can get back to regarding the overall impact, but what I can say is for the capital impacts, actually we just shared, David, that a 100 bps rate movement has around, let's say, 9 bps impact on the capital adequacy ratio.
Okay, thank you very much. Very clear.
You're welcome.
Okay, the next question comes from Gihan from HSBC.
Hello, thank you very much for the presentation. I have two questions. First one is with regards to your fee income. When do you expect central bank to start lowering the reference rate which feeds into the formula for the interchange fees? That's one. Second is does your net interest margin guidance include the recent cuts in the cap rate for credit card loans and overdraft loans? Third, a very small technical question. I see that your tax expense this quarter is very low. It's a very low effective tax rate and last quarter it was actually high effective tax rate. If you could give us some guidance about how we shall think about the effective tax rates for the full year. Thank you.
Hi Jian, this is Turkey. With regard to this adjustment of the interchange fee rate by central bank, actually I don't have any definite answer. As you may recall, last time in the first quarter when the policy came down from 50% to 42.5%, even at that time it was kept unchanged. Maybe in September in the upcoming MPC meeting, they may want to touch it for the first time. For the majority of this year, at least 3/4, it gives surely support to our fee income generation. This is also quite observable. When we look at the breakdown of the fee income composition, around 70% of fee income is coming from payment systems. Maybe starting from the fourth quarter onwards, we may see some adjustments, but its impact will be negligible because at the same time the volumes are increasing.
As with rates coming down, probably fee income components like brokerage fees, which was quite muted this year because of the high interest environments, may start to kick in. As of now, I don't know exactly when we may see some revision on that. With regard to your third question, effective tax rate, as you know, the corporate tax payment happens in the second quarter. After the finalization of our corporate tax income calculation for 2024, some of the accrual we had for 2024 corporate tax was excess, so there was some reversal on that front. On top of it, we use this indexing partially within inflation accounting, where we are indexing our fixed assets and prepaid expenses. What I can see is this relatively low effective tax rate was more unique for this quarter, probably, so third quarter will again come to first quarter levels at these levels.
Secondly, if I understand you, you meant the restructuring scheme. That's right. On the credit card side and its impact on the net interest margin.
Not just the restructuring scheme. The 300 basis points rate cut also led to a cut in the cap rates for the overdraft loans and the credit cards.
Actually, it was like it's embedded into our forecast because we are well aware that it's directly linked, that these interest rate caps are directly linked to the post rate environment. These go hand in hand. Therefore, actually, it is embedded into our revised NIM forecast. With regard to maybe, since topic is opened, with regard to restructuring, it's a quite new regulatory scheme and there are still some question marks in the banking sector, which we are trying to clarify with BRSA. Also, this restructuring scheme may also impact the limit usage of the credit card owners. We really have to see how this demand will look like and maybe once we have more clarity on that answer, we will see a more relative reasonable sample size. Maybe we can talk about it.
As of today, we don't expect in net terms negative in that because maybe on one end, maybe there is some interest income loss, but at the same time you have some issue on the NPL formation. Let's wait and see, actually, as I said, how the demand will look like and how these question marks are going to be clarified with the regulator.
Thank you very much.
You're welcome.
Thank you. Thank you, Gihan. There's a written question. In the meantime, if you have any further questions, please do raise your hand or you can type also in the Q and A box. Can you please guide us to what ROE would you deliver if cost of risk is near 150 bps and what it would be at 200 bps? We can share some sensitivity on that. Around 10 basis points. Cost of credit has around 35 basis points impact on ROE. You can calculate the differences. Basically that would happen with the 10 basis point move. Currently I don't see any further questions that are being raised. Maybe we can move to you Kaan Gür for the closing remarks. This concludes our presentation and I mean obviously we're always here to help and to answer questions.
If you want anything else, please reach out to our investigations team and convey. The floor is yours for the closing remarks.
Thank you, Ebru. Before we close, I want to reiterate that we remain in a position of strength. Our well-structured balance sheet, disciplined execution, and proactive positioning will enable us to capture early benefits of the evolving rate environment. At the same time, customer growth as well as deepening our relationships, particularly through digital and retail channels, is accelerating fee-based and customer-driven revenues. This combination gives us a scalable, resilient earnings platform with clear visibility for sustainable long-term value creation. I would like to take this opportunity to thank all our employees at Akbank for their dedication, hard work, and consistent focus on execution. To all those who have joined us today, thank you very much. Thanks for your trust and your continued support. Thank you.