Dear friends, thank you for joining our third quarter earnings call and for your continued interest in Akbank. This is Kaan speaking. I hope you are all well. Dear friends, as we are all aware, the global operating environment remains challenging, shaped by heightened geopolitical uncertainty, high energy prices, and persistent inflationary pressures. While global growth has remained relatively resilient, the outlook for monetary policy has become more complex, with central banks pivoting to a more hawkish stance and long-term interest rates remaining elevated due to various cyclical and structural driving forces. Despite these external headwinds, the Turkish economy has demonstrated resilience, supported by prudent macro policies, external balances, and solid reserve buffers. Meanwhile, economic activity is moderating, and the underlying inflation trend is showing signs of improvement despite the large cost-push pressures. Going forward, we expect monetary policy to remain tight enough to ensure a sustained disinflation process.
For the Turkish banking sector, this environment presents both opportunities and challenges. On one hand, declining funding costs should support a gradual recovery in net interest margin, although at slower pace than previously anticipated. On the other hand, weakening domestic demand and prolonged high interest rates continue to weigh on asset quality and profitability, making disciplined risk management and risk-adjusted returns increasingly important. Against this backdrop, we remain firmly focused on the fundamentals that matter most: maintaining a strong balance sheet, preserving asset quality, and deepening customer relationships. These priorities are central to strengthening our competitive position and laying the foundation for stronger, more sustainable returns as the operating environment normalizes. Combined with disciplined execution and continued investments in innovation and efficiency, we believe these strengths will enable Akbank not only to navigate the current challenge, but to emerge even stronger.
Let me now highlight some of our key performance indicators that demonstrate the underlying strength and resilience of our franchise. Agility and resilience have always been among Akbank's defining strengths, enabling us to adapt swiftly to changing conditions while staying focused on our long-term priorities. This is clearly reflected in how we managed our balance sheet throughout the current cycle. First and foremost, we have preserved our strong capital position with a total capital of 16.7% and a Tier 1 ratio of 13.3%. This provides us with the financial resilience and strategic flexibility to navigate uncertainty and capitalize on opportunities as they emerge. Building on this financial strength, we have also been taking proactive steps to enhance the profitability potential of our balance sheet. Dear friends, we continue to reshape our asset mix, optimizing our securities portfolio while gradually shifting towards loans.
This deliberate repositioning will allow us to better capture opportunities as the operating environment normalizes. Of course, enhancing returns goes hand in hand with maintaining our prudent approach to risk. We remain firmly focused on risk-adjusted returns, carefully balancing maturity, yield, and asset quality to enhance profitability without compromising our risk standards. This discipline is equally evident in how we manage asset quality. We have maintained solid provisioning buffers, providing an important safeguard against potential credit pressures. At the same time, the 210 basis points year-to-date decline in our NPL market share reflects the effectiveness of our underwriting standards, proactive risk management, and strong collection capabilities. Beyond the balance sheet, we are equally focused on strengthening the efficiency and earnings capacity of our franchise.
Through disciplined cost management, digitalization, and productivity improvements, we continue to enhance operational efficiency. Our nine-month fee-to-OpEx coverage of 95% further supports the sustainability of our earnings. Ultimately, all these initiatives serve a common objective, protecting our strong fundamentals today while positioning Akbank for greater competitiveness and stronger, more sustainable profitability as conditions normalize. I will now pass it over to Ebru to walk through our results in more details. Following that, we will be happy to answer any questions you may have. Thank you again. Ebru, over to you.
Thank you, Kaan Bey. As you have just mentioned, while the long-term direction remains intact, high funding cost environment continue to weigh on profitability of the third quarter. For the first nine months of the year, our net income reached TRY 45, 933 billion, resulting in an ROE of 19.4%. Excluding the TRY 1.7 billion provision related to the Competition Board penalty, our adjusted ROE stood at 20.1%. Net interest income remained under pressure, reflecting elevated funding costs. Nevertheless, third quarter marked a trough in our NIM, setting the stage for a gradual recovery. In fact, margin improvement is already underway in the fourth quarter, supported by continued funding cost optimization, leveraging our deposit franchise, and also disciplined asset pricing. Meanwhile, fee income continues to support core revenues, although growth is moderating due to slowing domestic demand.
Our broad-based fee generation capacity, particularly bancassurance, wealth management, and money transfers, continues to demonstrate strong momentum. Looking ahead, we expect the gradual improvement in margins to feed through to earnings, supporting a progressive recovery in profitability. Now, let's take a closer look at our financial performance and the key drivers, starting with the balance sheet. We continue to strategically reposition our asset mix, focusing on enhancing risk-adjusted returns. A key part of this transformation is the ongoing rebalancing from securities towards lending, improving the overall yield potential of our assets. As a result, the share of TL loans in our total TL assets has increased by 8 percentage points since 2024, reaching 60% as of third quarter.
Alongside the increase in our loans to asset ratio, we have continued to strategically rebalance our loan portfolio towards business lending in line with our three-year strategic plan outlined at the beginning of this year. Reflecting this shift, the share of total business loans in our total loan portfolio increased by 3 percentage points year-to-date to 64%. On the security side, we have been actively managing our fixed rate and TLREF index positions to maximize portfolio returns as market conditions evolve. Looking ahead, next year, upcoming redemptions, including certain negative carry TL securities, will gradually create additional opportunities to reinvest in higher yielding assets. Overall, this strategic rebalancing is expected to enhance our asset yields and strengthen our earnings potential going forward. Taking a closer look at our business loans, diversification remains one of our key strengths, providing a solid foundation for sustainable and profitable growth.
Our portfolio is well-diversified across sectors with no single industry accounting for more than 7% of total business loans or 4% of gross loans, which obviously limits the concentration risk. This is particularly important in the current environment, where cost of credit is becoming an increasingly critical factor in determining risk-adjusted returns. Our well-established portfolio diversification puts us in a strong position to navigate potential asset quality pressures. Turning to our loan growth dynamics, we have maintained a selective and disciplined approach to TL and to FX lending, carefully balancing yield optimization and asset quality considerations. We remain selective in our lending decisions, prioritizing risk-adjusted profitability over market share gains. Against this backdrop, TL loans grew by 21% year-to-date, mainly driven by business loans. Meanwhile, our FX loans increased by 8% with 60 basis point market share gain among private banks, reflecting opportunities captured through disciplined lending.
We have also been actively managing loan maturities with a more balanced approach to preserve repricing flexibility and capture reinvestment opportunities as market conditions evolve. Turning to our securities portfolio, we have been carefully managing the composition of our TL securities portfolio, balancing fixed rate and TLREF index instruments to capture opportunities as market conditions evolve. As a result, the share of TL fixed rate securities in total TL securities declined by 4 percentage points year-to-date. Looking ahead, next year, upcoming redemptions, including negative carry TL securities, will gradually create opportunities to reinvest in a more attractive yields, supporting interest earning assets. On the funding side, our strong customer franchise remains a key competitive advantage, supporting effective deposit cost management while preserving flexibility to meet regulatory requirements.
We maintained a healthy 58% share of sticky low-cost TL time deposits, reinforcing the stability and the cost efficiency of our funding base. Importantly, we successfully passed through the CBRT's effective 300 basis points policy rate normalization to our deposit pricing. The Central Bank's additional 100 basis points cut on October 22nd is expected to further support the gradual decline in TL funding cost. Together with our sound deposit base, we expect this to translate into NIM improvement in the coming quarters. On that note, let's move on to profitability and start off with the net interest margin. Our cumulative year-to-date nine-month NIM improved by 30 basis points. The recovery has been more gradual than initially anticipated, and this is primarily due to the funding cost volatility and the slower-than-expected pace of monetary easing. On a positive note, third quarter marked a trough in our NIM.
The lagged impact of funding cost pressure and the high base of second quarter CPI-linked income weighed on the quarterly NIM evolution. As you all may recall, we had revised our CPI-linked inflation assumption upwards from 25% to 30% in the second quarter. However, during third quarter, we revised our October-to-October CPI estimation downwards to 29.5%, which put additional pressure on our quarterly NIM. Accordingly, quarterly CPI normalized NIM decline was more limited at 42 basis points. To give some insight for fourth quarter, the weekly NIM has shown a strong rebound since end of September, benefiting from the easing TL funding pressures. We expect this positive momentum to translate into an improvement in our cumulative NIM during fourth quarter, paving the way for a more sustained, albeit gradual, margin recovery into next year.
Despite the slowdown in economic activity, our nine-month fee income grew by 23% year-on-year, maintaining a solid contribution to our revenue base. As expected, softer economic activity has started to weigh on fee generation, particularly with regards to lending-related and payment system fees, resulting in a moderation in overall fee growth. Nevertheless, our diversified fee-based streams helped mitigate these pressures, with bancassurance, wealth management, and money transfer maintaining strong growth momentum. To put into figures, wealth management fees increased by 60% year-on-year, benefiting from strong performance of our asset management subsidiary, Ak Portföy, whose market share reached 12% among private institutions. Bancassurance fees also delivered 35% growth year-on-year during the same period, with around 80% of insurance sales being generated through digital channels. Meanwhile, money transfer fees also rose by 44% year-on-year, driven by higher transaction volumes and effective pricing.
Strong fee generation and effective cost management enabled us to maintain a quarterly fee-to-OpEx ratio of 97%, bringing the nine-month cumulative figure to 95%. Operating expenses increased by 35% year-on-year during the nine months, with growth moderating compared to the first half of the year, reflecting our cost discipline. We continue to leverage AI, automation, and process optimization to enhance productivity, improve scalability, and maintain a lean cost structure. Looking ahead, we remain committed to our strategic ambition of fee-to-OpEx ratio of around 100%. Let's move on to asset quality. The prolonged high interest rates environment continues to put pressure on credit performance across the banking sector, particularly in retail lending. Against this backdrop, our disciplined underwriting standards and selective lending approach have enabled us to maintain a solid asset quality profile.
Looking at our portfolio, pressure remains concentrated in retail lending, while business loan NPL ratios remain at relatively low levels. Importantly, our NPL market share remains below our respective loan market share across all segments. Also, our NPL market share among private banks has further declined by 210 basis points year-to-date, carrying cumulative declines since beginning of last year to 470 basis points. This consistent outperformance underscores the strength of our disciplined lending approach, particularly as cost of credit plays an increasingly critical role in risk-adjusted profitability. Taking a closer look at our asset quality metrics, our combined Stage 2 plus Stage 3 loans remained limited at 11.9% of total gross loans, while restructured loans remain contained at 3.9%. Our coverage ratio also is quite solid, with gross coverage at 3.7% and Stage 2 plus Stage 3 coverage of 26.7%, and all of these are reinforcing the balance sheet's resilience.
These strong coverage buffers provide additional protection against potential credit deterioration, reinforcing the ability to manage the evolving asset quality risks. Meanwhile, our cost of credit stood at 189 basis points in the nine months, reflecting our proactive risk management and provisioning approach. Please note that the model update in third quarter had a positive impact of 20 basis points on our cumulative cost of credit. But even after adjusting for this, both our cumulative and our quarterly net cost of credit remain in line with our 200 basis points guidance for the year. Looking ahead, we remain committed to maintaining a sound asset quality through a proactive portfolio monitoring and disciplined provisioning. Moving on to the capital. Our strong capital base remains a key strategic advantage, providing flexibility to navigate market cycles and selectively capture growth opportunities.
As of third quarter, our total capital adequacy ratio, Tier 1, and common equity Tier 1 ratios stood at 16.7%, 13.3%, and 11.2% respectively, maintaining comfortable buffers above regulatory requirements. Our capital position continues to benefit from risk-adjusted loan growth and active RWA optimization alongside prudent balance sheet management. In terms of sensitivities, as we share with you every quarter, a 10% depreciation in TL results in approximately 25 basis points decline in our capital ratios with the impact diminishing for larger FX moves. Similarly, 100 basis points increase in TL interest rates have an impact of around 5 basis points, highlighting our limited sensitivity to market fluctuations. This slide summarizes our nine-month financial performance. As highlighted throughout the presentation, geopolitical developments and subsequent pause in monetary easing have delayed the expected NIM expansion, resulting in a slower recovery than initially anticipated.
Meanwhile, softer domestic economic activity has begun to moderate fee income growth, placing additional pressure on revenues. Nevertheless, disciplined cost management and sound asset quality continue to underpin our earnings performance. However, the slower-than-expected margin recovery, together with the moderating fee income, has weighed on our ROE performance. On a positive note, with NIM having troughed in third quarter and early signs of improvement already visible in fourth quarter, going forward, we expect profitability to recover progressively as funding cost pressure eases. Before moving on to Q and A, let me briefly walk you through our key highlights of our ESG performance. As you have seen in the ESG video at the beginning of the presentation, we continue to support the low carbon and more inclusive economy, and this remains a key priority within our sustainability strategy and long-term ambitions.
In sustainable finance, we already surpassed our TRY 800 billion target for 2030 during the second quarter, and we have reached TRY 905 billion by the end of the third quarter. Building on this momentum, we will be announcing a new target very soon to further strengthen our ambitions. Also, I'm sure you're all aware, we have COP 31 this year taking place in Antalya from the 9th of November to the 20th of November, and we will actively be contributing to sustainability agenda through new initiatives and strategic partnerships across sustainable finance, electrification, clean energy efficiency, green industrialization, and also the circular economy.
Finally, we would be very glad to welcome you at the Akbank stand at the Climate Finance Hub in the green zone, where we can explore opportunities for collaboration and contribute to the global sustainability agenda together. This concludes our presentation. Now we can move on to the Q and A. Please raise your hand or type your question in the Q and A box. For those of you who are joining us by telephone, please send your questions by email to investor.relations@akbank.com. Okay, the first question comes from David Taranto. David, please unmute yourself and ask your question.
Good afternoon. Thanks for the presentation. I have two questions, please. You talked about balancing asset growth and duration. Where do you see the best risk-adjusted opportunity to add duration today, and what would need to change for you to become more aggressive on Turkish lira lending? You were a bit more selective in the third quarter. Second question is about the fund market disruption. Are you seeing meaningful flows back into deposits or any spill-over into asset quality? Does the exemption from loan growth caps for corporate bond refinancing create a lending opportunity for you? Thank you.
Hi, David. This is Türker. With regard to how we manage the duration, honestly speaking, when we look at the macro development in the last one year and looking ahead, probably, yes, this disinflation process will continue into 2027. But as of today, also considering the global uncertainties, probably the pace of this disinflation will be relatively lower than we had forecast in the past. Therefore, it will also probably limit the rate cuts into 2027. Still there are some uncertainties on the table, especially on the global side, which may again create a pause in this trajectory. Therefore, especially in the third quarter, we have followed a more balanced growth approach, so not extending the maturity profile, so growing as long as the pricing makes sense, both on short term as well as on longer durations.
With regard to extending the maturity mismatch, especially on the TL side, we should really have more clarity so that the pace of this disinflation and rate cuts may increase, but it's as of today, not so clear, to be honest with you. This is with regard to your first question. With regard to money market, to the fund issue in the system, when look at our own portfolio asset management company, we are observing that the funds under managed AUM, under asset under management is mostly stable. Yes, but overall, we've seen some inflows into our deposit base, but I can't say that it's really huge, which you can also follow from sector data. But we are closely tracking because still this liquidation process is ongoing, as you know.
With regard to indirect asset quality, we've made a really thorough check in our asset, in our loan book, and as of today, potential impact made, it will be immaterial as of today, as I'm saying. Our customers who have invest into these funds and who have loans in our balance sheet, it's quite immaterial, the volume. But again, we are tracking because it's also a fact that we may have customers, borrowers in our loan book and which, who may have invested in other channels in other banks. But as of today, we haven't really seen major signals.
Maybe lastly, I would like to add that regarding David's question. Actually, we do not expect any spillover impact stemming from money market funds issue so far. Regarding, again, we can consider selectively to, of course, to lend some new business regarding exemptions. The redemption is going to be, of course, a kind of opportunity for the system in order to re-lend, but at the same time, actually, we are always selective, our prudent approach in all terms. That's all I would like to share. Thank you.
Thank you, David.
Thank you.
Thank you for your question. Now, the next question comes from Ashwath from Goldman Sachs. Please go ahead, ask your question.
Thank you very much, and congrats on the results, and thank you very much for your presentation. I have a few questions. The first one is around the macro assumptions for the remainder of the year, and potentially your first thoughts into next year. The second is around exit NIMs for the third quarter. I can still see that the revised or the guidance is still maintained between 3.2%- 3.5% with nine month around 2.8%.
I wanted to just understand the exit and whether the trajectory is headed towards that range. The last question is basically, is the overall idea that the NIM expansion with the rate cuts or the expected rate cuts towards the end of the year, which is what will drive the ROE expansion into the guidance range, or is it also partly due to further volume growth as well? That's also a bit higher than the nine month run rate so far. Those are my questions. Thank you.
Hi, Ashwath. Let me start with your first question. We have actually only two months left. Probably year-end inflation will be at a similar level, like plus minus 30%. Depending also on global developments, in the last MPC meeting in December, the second week of December, we may have another rate cut or not. Maybe that's as of today, maybe 50/50. We'll see. Going into 2027, as I mentioned in response to David's question, we expect disinflation process to continue, but probably as of today, our basic assumption is at maybe about 25%, maybe 25%-27% levels. We expect that Central Bank will stick to its tight monetary policy, meaning probably 2027 year-end policy rate may be at around maybe ± 30%. So still maintaining this real rate.
Also as a part of this macro assumption set, we may have some changes in the macroprudential measures, but with regard to loan growth caps, we don't expect a big change. There may be some selective changes by the Central Bank, which is always the case. That's on the macro side. With regard to NIM, definitely as Ebru has indicated in her speech, third quarter was challenging. But towards the end of the third quarter, especially after the end of July when Central Bank again decreased the policy rates effectively back to 37%, we were able to reflect this rate cut into our deposit pricing, and starting from end of July, we were able to improve our loan-to-deposit core spreads by roughly 3%. After that, in the first three weeks of October, excluding the last rate cut, actually, because we are only two days since last Thursday.
We are already operating in terms of fourth quarter NIM, by the way, not cumulative NIM, in the range of our revised guidance, i.e., above 3.2%, definitely. After last Thursday's rate cut, again, we have reflected this rate cut into our marginal pricing on the deposit side. Currently, our blended marginal deposit is close to 36%, and for big tickets, we are paying maximum 37%, around like that. We have to see actually how it will, again, reflect into our net interest margin. But definitely, we are expecting a further improvement in our quarterly NIM. We'll see actually how this improvement in quarterly NIM will bring us to our full-year guidance. But we may end the year slightly below full-year guidance, but definitely in terms of fourth quarter NIM. Even if there is no additional rate cuts in December, we're expecting exiting into 2027 above 3.5%.
If there's another rate cut in December, it may give further improvement, but since we will have only three weeks left till the end of the year, it will be not so big in this sense. But looking into 2027, again in terms of NIM trajectory, considering this rate cycle will continue at a slow pace, but still it will help us to gradually improve our net interest margin, definitely. Also with some redemptions from the back book, especially on the security side. This may also give some additional support starting from second half of 2027, I would say. So that's on the net NIM trajectory. With regard to bottom line 2026, we will actually do our best in the fourth quarter to come close to this guidance of 23%-25%, but definitely it will be challenging.
Because on one hand, we are trying to improve our core spreads by preserving our loan yields and bringing down our deposit costs. Definitely, loan growth caps is another topic we have to stick to. Just to maybe also remember, this year, the picture for loan growth will be taken again by the end of the year, so just to keep in mind. So that's it actually with regard to fourth quarter as of today.
Thank you.
Thank you.
Ashwath, for your question.
Okay.
All right. Currently there is one written question, actually. There are no more hands. I cannot see any more hands. If you have any questions, please do raise your hand. There is a question on the capital, because we already answered one of the macro questions. Valentina is asking from Barclays, do you feel comfortable at common equity Tier 1, which looks low compared to history? What initiatives have you taken for common equity Tier 1 ratio via RWA optimization, for example? Can you give us some color on the progress with these initiatives?
Thank you, Ebru. Actually, it is an ongoing process. We are always revisiting our calculations, the loan book, and all other areas which are feeding into our RWA. With regard to, for instance, corporate lending, corporate with ratings and without ratings, we are again revisiting that part. Again, collateralization in all segments. This is, as I said, the renewal of appraisals for our collateral. This is what we are doing throughout the year. Definitely, in terms of internal capital generation, profitability will be important in 2027. This is what we will be aiming anyway. Supporting our growth with internal capital generation.
Apart from that, just maybe recall, which we have also shared in the past, in the previous earning calls, we are currently in the final stages of our IRB approval process by BRSA. Probably we will be ending this process in 2027, probably in the first half of 2027. This is what we are expecting as of today. As of today, the uplift we are going to get from switch to IRB from standard approach will be around 2%, like 2% into all capital ratios.
Okay. As far as I can see, there are no further questions. Thank you all for joining us today. Before I leave the floor to Kaan Bey for closing remarks, please, if you have any further questions, do reach out to the investor relations team. We are always here to help, and we look forward to being in touch. Kaan Bey, the floor is yours.
Thank you, Ebru. Dear friends, to conclude, we remain firmly committed to our strategic priorities, as I mentioned at the beginning of the webcast. Maintaining a strong balance sheet, preserving asset quality, and deepening our customer relationships. I am confident that the steps we are taking today will further strengthen our competitive position and support sustainable value creation over the long term. I would like to thank our dedicated teams for their continued commitment and hard work, and our shareholders for their ongoing trust and support. Thank you all for joining us today. We look forward to keeping in touch. Have a great day. Thank you very much.
Goodbye.