Morning to you. Welcome, and thank you for joining Albaraka Türk first half 2026 financial results call. I am Seyfullah Demirlek, Head of Investor Relations and Sustainability. Joining me today is our Chief Financial Officer, Mr. Yasin Kaynar. Yasin, you will begin with an overview of the macroeconomic environment and the banking sector. I will then take over to walk you through our financial results for the first half of 2026, followed by a brief assessment of our performance against our full-year guidance. After the presentation, we will have a Q&A session, and we hope to take your questions. With that, now I would like to hand over to Yasin Bey. Yasin Bey, the floor is yours.
Thank you, Seyfullah. Good morning, everyone, and thank you for joining us. Before diving into the details, let me briefly share our assessment on the broader current market backdrop and how it has shaped up during the first half. As shown on slide three, global markets have recently been shaped by geopolitical developments and commodity market fluctuations. While temporarily, fires provide brief relief to oil prices, the subsequent breakdown of truces renewed volatility in energy markets, adding upward momentum to global inflationary pressures.
Consequently, inflation outputs have deteriorated across both advanced and emerging economies. Core targets now appear achievable primarily over the medium term, forcing central banks to reassess their disinflation timelines alongside economic growth prospects. If you look at the first chart and policy rates across major central banks, including the Fed, ECB, Bank of England, and emerging market peers, you will notice the global policy rates remain elevated. Market expectations for rate cuts have largely receded, and participants are now weighing the possibility of further rate hikes to counter persistent inflation risks.
Turning to the domestic front, the Turkish economy is attempting to maintain its tight monetary policy stance amid a challenging global environment. Although the macroprudential measures support the disinflation process, global energy costs, pressures in the services sector, and wage adjustments are creating headwinds. While the government's partial subsidization of energy prices mitigates the pressures on consumers, it imposes an additional burden on public finances. In this period of higher geopolitical risks and uncertainty, Turkey's prudent monetary policy and strong foreign exchange reserves have helped improve market confidence and support the country's risk perception. At the same time, the weighted global geopolitical risks continue to make the long term outlook more uncertain.
Looking ahead to 2026, tighter global financial conditions, higher energy costs, and weaker internal demand are expected to put upward pressure on inflation and the current account deficit in 2026, while also leading to expectations of more moderate economic growth. Next, I will highlight key developments in the Turkish banking sector on slide four. Turning to the banking sector, we observed a sustained performance in the first half of 2026 despite the challenges posed by a tight monetary policy environment. In the first half of 2026, the Turkish banking sector's asset growth reached 12% compared to year-end 2025. Participation banks continued to outperform the sector, recording a 14% expansion over the same period and increasing their share in the total sector assets to 9.3%.
On the credit side, total cash credits in the banking sector expanded by 16% in the first half, while participation banks posted a higher growth of 20%. The current regulations are encouraging banks to prioritize targeted segments while limiting broad-based credit expansion. As a result, overall credit growth has moderated. Asset quality has continued to reflect the lagged effects of monetary tightening. The sector's NPL has moved up by 0.28 percentage points to 2.63%, whereas participation banks recorded a 3.46 percentage point increase to 2.30%. The upward pressure is expected to persist in the near term alongside tight financial conditions. Nevertheless, NPL metrics remain historically sound and well within the management interval. In terms of profitability, the sector delivered a moderate performance in the first half of 2026, with net income increasing by 25% year-on-year amid persistent margin compression.
Participation banks reported a 26% increase over the same period. Turning now to margins. In the second half, recent geopolitical developments and rising market volatility have led to an increase in funding costs across the sector. This upward shift in liability pricing has put renewed pressure on margins and consequently on overall profitability for the period. The sector's return on assets slightly decreased to 2.2%, while return on equity experienced a minor decline to 25.9%. I will now move to slide six to share the highlights of Albaraka Türk's financial performance in the first half of 2026. In the first half, our net income increased by 47% year-on-year to TRY 3.1 billion, excluding the one-off impact of last year's TRY 7 billion pre-provision reversal, by 141% quarter-over-quarter to TRY 2.2 billion.
Looking at our profitability ratios, our return on assets increased to 1.6%, while our return on equity increased by 4.2% to 79.9%, outperforming the Turkish banking sector in terms of capital efficiency. On the revenue side, excluding the pre-provision reversal in first quarter 2025, our total operating income grew by 55% year-on-year to TRY 15.7 billion, surpassing inflation. On the cost side, operating expenses grew by 47% year-on-year, mainly driven by personal expenses, while growth in expense items related to the building continued. Despite a more challenging market environment, considering the deviation in expectations for depreciation and interest rate cuts, our net operational income increased by 279% year-on-year to TRY 6 billion in the first half, excluding the pre-provision reversal.
Looking forward, profit margins are expected to remain flat due to higher funding costs, slower adjustments in asset pricing, and intense competition. Our potential interest rate cuts in the later half of 2026 are likely to gradually ease pressures, setting the stage for a progressive normalization in margins. At this point, I will hand back to Seyfullah to walk you through the details of our performance. Seyfullah, over to you.
Thank you, Yasin Bey. Let me now walk you through our financial performance, starting with our assets composition and growth. During the first half of the year, our assets increased by 14.6% year-to-date, reaching almost TRY 535 billion , representing 37.5% year-on-year growth. The most notable development on the asset side was the increase in the share of funded credits from 49.5% at year-end to 51.8%, while the shares of cash and cash equivalents and securities declined in line with our asset allocation strategy. As shown in the waterfall chart, funded credits continued to be the main driver of asset growth, contributing TRY 72 billion during the first half. On the currency side, Turkish lira assets recorded 22.2% year-to-date growth, while foreign currency assets remained broadly stable at $5.2 billion.
Turning to margins, our swap-adjusted net profit share margin remained at 3.4%, in line with the levels reported at the end of 2025. Including income from investment funds, our margin reached 4.3%. Let's now turn to page eight, where we present our funded credit portfolio. Our funded credit portfolio increased by 20% year-to-date to TRY 284.3 billion, representing almost 48% year-on-year growth. Asset quality remains resilient, with stage one funded credits accounting for 91.1% of the portfolio, while stage two and stage three represent 7% and 1.9%, respectively. Looking at the currency breakdown, Turkish lira funded credits increased by 27.2% year-to-date and reached almost TRY 162 billion. Foreign currency funded credits remained broadly stable at $2.5 billion.
Selective funded credits continued to increase during the period, with Turkish lira selective funded credits rising from TRY 27.9 billion to TRY 40 billion. While foreign currency selective funded credits increased from $300 million to $600 million. Turning to credit yields. Total credit yields increased to 34% in the second quarter of this year. Turkish credit yields remained stable at 53.4%, while foreign currency credit yields also remained stable at 10.4%. Finally, looking at the segment breakdown of our funded credits, we maintained a balanced portfolio structure. The Corporate segment accounted for 62% of the portfolio. SMEs represent 39%, while the Retail segment remained stable at 9%.
Let's now turn to page nine and look at our asset quality. During the first half of the year, our NPL portfolio increased to TRY 5.5 billion. New NPL inflows amounted to TRY 2.2 billion, while collections reached TRY 700 million. Write-offs remained at minimal levels. As a result, our NPL ratio increased to 1.93%. Despite the challenging operating environment, our asset quality indicators remain among the strongest in the sector. In addition, our NPL ratio remains below our full-year guidance of 2.5%. Looking at the cost of risk, it remained well under control at 1.8% as of the end of the first half. Finally, our provisioning ratios continued to normalize during the period.
Our stage three provisioning ratios stood at 74.3%, remaining close to our full-year guidance of 75%. Stage two provisioning also continued to normalize, while our overall coverage levels remained among the strongest in the sector. Let's now turn to page 10 and look at our securities portfolio. Our securities portfolio increased to TRY 95.3 billion by the end of the first half. During the period, we further increased the share of Turkish lira-denominated securities to 69% of the portfolio, in line with our portfolio allocation strategy and market conditions. Within our Turkish lira securities portfolio, CPI-linked Sukuk accounted for around 11% of the portfolio.
In addition, approximately TRY 22 billion securities portfolio consists of rebalanced home securitized assets. Turning to portfolio yields, total securities yields increased to 17.9%, mainly driven by the improvement in Turkish lira securities yields, while foreign currency securities yields remained broadly stable. As a result, profit share income generated from our securities portfolio reached TRY 7.1 billion during the first half, representing a 72% increase compared to the same period of last year. Moving to page 11, where we present our funding structure. We maintained a well-diversified funding mix during the first half. In the second quarter, participation accounts was our largest funding source, accounting for almost 33% of total liabilities, followed by current accounts at 28.8% and borrowings at 33.4%.
Looking at the liability growth reach, Wakalah-based participation accounts made the largest contribution to liability growth, adding almost TRY 30 billion during the period. Borrowings contributed around TR Y22 billion while current accounts added TRY 7.3 billion. Foreign exchange movements also supported the increase in total liabilities. Turning to our borrowings, the portfolio reached around TRY 145 billion by the end of the first half this year. We maintained a diversified funding base across alternative funding sources. Turkish lira Sukuk issuances, and subordinated Sukuk, supporting both funding flexibility and cost optimization. Looking at the maturity composition of our funds collected, current accounts represent 46.7% of our total funds collected, while the remaining portfolio remains well distributed across different maturities, supporting a balanced funding portfolio.
Moving on to page 12, where we present our deposit structure. Starting with current accounts, Turkish lira current accounts declined by 13.7% during the first half, mainly reflecting movements in precious metal accounts such as gold and silver. While foreign currency current accounts remained broadly stable at $2.8 billion. Looking at participation accounts, Turkish lira participation accounts increased by almost 61% during the first half, reaching almost TRY 150 billion , while foreign currency participation accounts remained broadly stable at around $600 million. Turning to funding costs, the cost of participation accounts declined during the second quarter, with the total cost decreasing to 31.1%, mainly driven by the decline in Turkish lira participation account costs to 38%.
Including current accounts, our total cost of funds projected declined to 60.6%, reflecting the benefit of our strong current account base and efficient funding structure. Moving on to page 13, where we present the main drivers of our profit share income and fee generation. Profit share income increased by 61.6% compared to the first half of last year, reaching TRY 43.7 billion . The increase was mainly driven by higher financing income, supported by stronger securities income and income from required reserves. Within financing income, selective financing contributed TRY 3.2 billion . In addition to that, profit and valuation gains on processed and gross project credits contributed a further TRY 1.7 billion during the first half of this year.
Profit share expenses increased by 37.5% compared to the first half of last year, reaching almost TRY 35 billion . The increase mainly reflected higher profit share expense on especially Wakalah-based participation accounts and borrowings in line with our funding mix during the period. Turning to fees and commissions. Fees and commission income increased by around 12% compared with the same quarter last year, reaching TRY 1.4 billion , supported by continued growth in our fee-generating banking activities. Moving on to page 14, where we summarize our P&L performance for the first half of the year. Net profit sharing income remains the main driver of our revenue growth, increasing by 425% compared to the first half of last year, and by 74% compared to the previous quarter.
Profitability performance was also supported by TRY 1.7 billion of valuation gains on processed gross project credits. Net fees and commission income continued to grow, supported by high business volumes and commission rates, with quality performance also remaining positive. Net trading income remains under pressure, primarily reflecting elevated swap funding costs during the quarter. Other income declined from the exceptionally strong base of the previous year, primarily due to the TRY 7 billion pre-provision reversal recorded in the first half of 2025. On a quarterly basis, the decrease mainly reflects the absence of the bonus provision reversal recognized in the previous quarter.
Nevertheless, other income in the second quarter included approximately TRY 500 million of pre-provision reversal, bringing in total pre-provision reversal in the first half of this year to around TRY 700 million . Provisioning remains broadly stable compared to the previous quarter, reflecting our prudent provisioning approach. Personnel expenses increased broadly in line with inflation on a yearly basis, while declining by 31% compared to the previous quarter due to the base effect of bonus payments recorded in the previous quarter. Non-personnel expenses increased by 45% compared to the first half of last year, while declining by 6% compared to the previous quarter, reflecting our continued focus on cost discipline.
Moving on to page 15, where we present our capital adequacy position. Our capital adequacy ratios moderated during the first half of the year. Core CAR declined to 8.4%, principal CAR to 11.6%, and total CAR to 15.6%, including our TRY 1 billion of pre-provisions. These ratios would have been 8.8%, 12%, and 15.9% respectively. As we discussed in the previous quarter, around 310 basis points of the decline mainly reflected the expiration of the temporary regulatory treatment introduced by BRSA for FX rates. Looking at our capital structure, the composition of our regulatory capital remains broadly unchanged, with a balanced contribution from four capitals, the additional tier one and tier two capital.
Finally, the movement in our capital adequacy ratio mainly reflects the combined impact of higher market, credit, and operational risk-weighted assets during the period, partially offset by the contribution from tier one and tier two capital. Moving on to our final slides before the Q&A session, where we provide our half-year assessment of our 2026 guidance. As you can see, our performance during the first half of the year remains broadly in line with our full-year expectations. Credit growth reached 20%. Our NPL ratio remains below 2%. Our stage three provisioning ratio stood at 74.3%, and our swap-adjusted net profit share margin reached 3.4%, or 4.3%, including income from investment funds.
Our return on equity reached 29.9%, already close to the upper end of our full-year guidance range. Based on first half performance, our current expectations for the remainder of the year, we are maintaining our full-year guidance without any changes. At this stage, we do not see any need to revise our guidance and continue to believe it reflects our prudent outlook under the current macroeconomic environment. This concludes the presentation section now. We will now move on to the Q&A session. If you have any questions, please feel free to type your questions into the chat box. If you prefer to ask your questions in person, please use the raise hand function, and we will be happy to give you the floor.
If you have any questions, just type them into the chat box or just raise your hand, please. We have one question. We observed that the 425% increase in net dividends income was supported by project valuation gains of approximately TRY 1.7 billion and the contribution of TRY 3.2 billion from selective lending. Is the growth in core dividend income sustainable when we exclude this one-off effect?
The question came from Mehmet. Actually, these are not dividend income. This is a special credit type, profit-and-loss sharing projects. We have some balance on our asset side as profit-and-loss sharing projects. We gain some profits from those projects. We received some profit share income from those projects in the first part of this year. I just want to clarify this point, and I am going to give the floor to Yasin Bey for the original question, actually. Is the growth in core dividend income, or we can say the core profit share income sustainable when we exclude these one-off effects?
In fact, I can also answer this question. We can say the growth is sustainable even we exclude these one-off effects. Also, I would like to clarify one point as well. Selective lending is not exceptional, a one-off. What we mean by selective lending, there are some caps, growth caps for credit deals, and there are some exemption areas. We call those exemption areas as selective credit areas. We are going to continue to gain income from those selective lending in the coming periods. Also, we are going to receive some profit-and-loss sharing project valuation gains in the last part of this year, actually.
Thank you, Mehmet Bey. If there is any further question, we are happy to answer your questions. If there is no further question. Sorry. Sadettin Bey. The floor is yours.
Seyfullah, thank you very much for the presentation. I do have a question on the asset quality side. We have been talking to banks, and we have been also observing from the sector data. There is some deterioration in the asset quality. Regarding your client portfolio, how do you see the asset quality outlook going forward? I saw your guidance, and I saw also your numbers, 1.93% NPL ratio is very good, actually. Do you foresee any, let's say, further slowdown in the economic activity that may cause asset quality deterioration? Thank you.
Thank you, Sadettin Bey. Yasin, would you like to answer this question?
Thank you so much for your question, Sadettin Bey. As of the second quarter of 2026, our NPL ratio stands at 1.93%, which is well below the sector average. Although we observed new NPL inflows in line with challenging macroeconomic conditions. Our credit portfolio structure, characterized by low exposure to the retail, provides a significant positive divergence in our profile. Thanks to this resilient portfolio structure, we anticipate closing the year with an NPL ratio at or below our year-end target of 2.5%.
Thank you, Yasin.
If there are any further questions, we are happy to answer your questions.