Ladies and gentlemen, welcome to Albaraka Türk Fourth Quarter 2023 Financial Results Conference Meeting. We will have a Q&A session following the presentation. If you would like to submit your question, you can send any time by clicking the Q&A button at the bottom of your Zoom screen. Now, I will leave the floor to our host. Sir, the floor is yours.
Thank you, Merve. Good afternoon, and thank you all for joining our 2023 year-end earnings call today. This is Seyfullah, Head of Investor Relations and Sustainability at Albaraka Türk. Mr. Ömer Emeç is with me, our Assistant General Manager. Before going into details of our presentation, I am going to hand over to Ömer Emeç. He is going to share with us his review about the operating environment in Türkiye. Ömer , the floor is yours.
Thank you, Seyfullah. Hello, everyone. This is Ömer speaking. Welcome, and thank you for joining us. Today, we will be reviewing Albaraka Türk's year-end 2023 financial results. I am going to start my presentation, as you know, as usual, by outlining the macroeconomic framework in which we operate. Later, I will share the highlights of our 2023 financial performance before giving floor to Seyfullah. Let's start with macroeconomic conjecture in slide one. The year 2023 started with market predicting a mild recession in the global economy. Instead, 2023 showed us economic resilience, largely led by consumption, despite high interest rate globally. On the other hand, the world economic growth outlook remains weak for 2024, with the effects of tight monetary policy and a weaker-than-expected recovery in China.
The global PMI data showed growth in January for the third consecutive month, indicating that demand continues to be strong. While headline inflation has fallen, core inflation remains persistent due to the service sector and still relatively tight labor markets. With rates at a peak, we expect global central banks to begin gradual policy rate cuts in 2024. On the other hand, inflation indicators which remain above central bank targets pose an upside risk that inflation may continue to be more persistent than the expectations. This would require a longer period of higher interest rates. In Türkiye, we expect annual growth to be above 4% despite the loss of momentum in the second half of 2023. Coming in 2024, we anticipate a more moderate growth compared to 2023 due to the delayed effects of tightening measures. Monthly inflation indicators point to a certain degree of normalization in prices.
Although headline inflation remains high, expectations are becoming more predictable with the support of monetary policy. In latest inflation report, the CBRT maintained its 36% inflation forecast for 2024, as you know. We find it meaningful in terms of setting a target in the fight against inflation and drawing a monetary policy framework. On the other hand, considering the current demand, cost dynamics, and potential upside risks, we expect headline inflation to be slightly above 40% in 2020 year-end. It will most probably be peaking in May and enter a downward trend in the second half of the year. I am moving on slide two for discussing the banking sector overview. In 2023, Turkish banking sector showed a solid growth performance, while the total asset of the banking sector grew by 64% compared to year-end. Participation banks out-performed the sector with 73% growth.
The share of participation banks in the sector increased to 8.7%. The share continued to increase, Turkish lira share continued to increase as a result of liratization targets. Loan growth was 56% in the banking sector and 65% in participation banks in 2023. Continuing to improve asset quality, the banking sector reduced its NPL ratio from 2.1% at the end of 2022 to 1.6% in 2023. In the same period, participation banks managed to keep their NPL ratio below the banking sector by reducing it from 1.4% to 1%. In terms of net profit figures, the banking sector recorded a net profit of TRY 604 billion in 2023. It means increasing its net profit by 40% annually. Participation banks outperformed the sector in terms of profitability due to the lower funding cost and more supportive net share margin compared to the sector.
In 2023, participation banks increased their net profit by 80% to TRY 53 billion . Let's move to discussion of Albaraka Türk full year highlights on slide three. As Albaraka Türk, we had a successful year with our net income increased 2.5x , well above the sector average, and reached TRY 3.4 billion. Despite macroeconomic and regulatory challenges, we managed to significantly increase our net profit share income, and our revenues also supported by the increase in our net trading profit. On the other hand, we managed to keep our expenses at manageable levels despite rising market costs and the high inflationary environment. With our solid performance in revenue generation, we managed to increase our return on assets from 1.1%- 1.9% and return on equity from 21.2%- 33.4%. In 2023, we increased our profitability by keeping our asset quality in a very good position.
We have closed the year-end with an NPL ratio of 1.7%, which is down from 1.9% in 2022. As part of our prudent approach, we also continued to raise our provisioning ratios. At the end of 2023, we increased our Stage 3 provisioning ratio by 6.54 percentage points to 95.2%, which is well above the sector average. Apart from our ECL provision, we allocated TRY 3.4 billion free provision in 2023, which is a buffer against potential external or macro risks in the coming period. With that, we increased our free provision base to TRY 5.2 billion . This amount of free provisions may be perceived like profit reserves to support balance sheet and income statement in the coming periods. One last point that is worth noting is the level of performing credits and collect funds.
As you can see in graphs at the bottom right, our performing credits increased by 45% year-on-year. As the liratization continued in line with regulation, we increased Turkish lira share from 60%- 66% in our performing credits. We increased the Turkish lira share in funds collected from 50% from 46%. According to CBRT's exit targets from KKM to Turkish lira, our shares of FX protected deposits came down from 35% in Q3 2023 to 28% by end of 2023, which means 7% decrease in FX-protected deposits. We think this transition from FX-protected deposit, which is quite common, will continue towards 2024. I will turn it over to Seyfullah for details on year-end 2023 financial results. Thank you.
Thank you, Ömer. I am now moving on to the details of our financials. We are now on page four. As Ömer stated earlier, we ended last year with solid financial results, demonstrating very high increase in our profitability. Our net profit was up by 151% year-over-year. The quarterly net profit remained almost same in the last quarter compared to the third quarter of last year. It should be noted that the bank gained strong evaluation gains from its profit and loss sharing projects and some securitized assets. Similar to the conventional banks, high returns generated from the CPI-linked securities. However, the bank preferred to set aside a very large portion of these evaluation gains as free provisions. Therefore, the solid improvement in net profit reflects the sound financials and well-managed assets and liabilities, despite the challenging macroeconomic and regulatory environment.
The total operational income increased by almost 67% year-over-year, thanks to well-managed asset and liabilities. Our bank generated strong net profit share income, including TRY 2 billion evaluation gains from profit and loss sharing projects in the last quarter of last year. Net trading income was also strong last year with high evaluation gains from the securitized assets, mainly backed by real estates. The bank generated around TRY 3.5 billion income from the investment funds booked under the securities portfolio. The fee income also increased remarkably last year. Its share in the total operational income went up by 6.7 percentage points from 6.1% in 2002 to 12.8% at the end of last year. As a result of significant increase in the operational income, our profitability ratio demonstrated significant improvement in 2023.
The return on average equity improved by 12.3 percentage points and 1.3 percentage points year-over-year and quarter-over-quarter, respectively. The return on average equity stood at 33.2% at the end of last year. On the other hand, the return on average asset also continued to improve. It reached to 1.9% at the year-end of last year. The ratio increased by 80 basis points and 11 basis points year-over-year and quarter-over-quarter, respectively. Regarding the profitability ratio, I would like to say that these ratios would be much higher if the bank preferred not to set aside provisions which reached to TRY 5.2 billion as the year-end of 2023. TRY 3.4 billion provisions set aside in 2023 alone. I am now moving to page five. Asset growth continues to be driven mainly by increase in Turkish lira assets.
Annual growth in total assets went up by 59%. The growth was lower than the Turkish participation banking sector's averages because of the high foreign currency deleveraging in our balance sheet. Our Turkish lira assets increased by 86% year- over- year, while foreign currency assets decreased by 2% in USD terms year- over- year. Share of the cash and equivalence item in total assets went up by 4.2% year- over- year to 27.4% as end of last year. This is due to increasing regulatory reserve requirements in the last quarter. Total funded credits still have the highest share in our total assets. Share of the securities portfolio remained same in the total assets in comparison to the year-end of 2022. Since the cash and equivalence item in total assets increased considerably, the liquid assets to total assets ratio remains at high levels.
When we look at the spread between the profit-yielding assets and cost associated with the paying on profit-bearing liabilities, the spread continued to widen by 30 basis points at the last quarter of 2023, with positive impact of evaluation income received P&L projects. I am now moving on to page six. On the funded credit side, growth has been driven by Turkish lira-performing credits. Annual growth in total funded credits realized about 45% last year. This funded credits portfolio went up by 11.3% in the last quarter of 2023. The share of profit and growth projects were up by 90 basis points in total assets quarter- over- quarter due to the impact of increased assets values of P&L projects, mainly Metropol Istanbul shopping mall, written in the last quarter of last year.
The share of Stage 3 credits, in other words, NPL portfolio, slightly went down in total funded credits portfolio in the last quarter. The NPL ratio realized at 1.7% at the year-end of last year. It remains below 2% levels. Thanks to our foreign currency de-leveraging strategy, in total performing credits, the share of our foreign currency credit book shrank by 6%, from 40% at the end of 2022 to 34% at the end of 2023. The foreign currency performing credits decreased by 23% performing credits year- over- year in the US dollar terms.
On the other hand, Turkish lira performing credits increased by 62% almost year- over- year. The funded credit yields, both Turkish lira foreign currency credits, increased remarkably in the last quarter of 2023, with the impact of CBRT rate hikes as well as P&L projects returns written in the last quarter.
P&L projects adjusted blended yield for total funded credits portfolio were up by 150 basis points quarter- over- quarter. I am now on page seven. The asset quality remains to be very sound with additional PD provisions. Looking at the details of the developments in our NPL portfolio in 2023, new inflows into the NPL book was TRY 2.2 billion . On the other hand, TRY 1.8 billion non-performing credits were written off last year. Collections from the NPL book was around TRY 570 million . The coverage ratio remains at 95% level, standing at one of the highest among the Turkish banks. Our cost of risk came down by 8.6% year- over- year. Our total PD provisions, as stated earlier, reached to TRY 5 billion 200 million at the end of last year. We set aside TRY 3.4 billion PD provisions last year alone.
I am now moving to page eight. Our securities portfolio reached TRY 56 billion in 2023, increasing by 58.7% year-over-year. Our securities portfolio has gone up very significantly for the last couple of years because of the inflationary and regulatory operational environment. When we look at the currency composition of the securities portfolio, foreign currency securities comprised 61% of total portfolio. On the other hand, 39% of total securities portfolio was in Turkish lira at the year-end of last year. 19% of total securities was floating rate, CPI-linked sukuk, and the rest of the portfolio was fixed rate. Contribution of the securities portfolio income has been very supportive to the bottom line.
Although the securities yields went down quite considerably in the second and third quarters of last year, it picked up again in the last quarter of 2023 due to the positive impact of high-yielding sukuks both after the rate hikes of CBRT in the second half of last year. Profit share income generated from the securities portfolio went up by around 65% year-over-year and reached TRY 4.3 billion at the year-end of 2023. I am on page nine now. Solid funds collection remains to be main source of our funding base with increasing Turkish lira accounts. As we stated in our previous presentations, composition of total liabilities slightly changed by additional Tier 2 sukuk issuances, which was issued in May of last year. Therefore, share of total borrowings went up by 5.4% from 11.6% in 2002 to 17% as the year-end of last year.
Total participation funds, including current accounts and participation accounts, is still largest portion of our total liabilities. Participation funds constituted about 70% of our total liabilities as of the year-end of last year. Share of other liabilities remained almost same in comparison to the year-end of 2022. Share of equities in total liabilities went up by 30 basis points year-over-year since our profitability went up significantly. Total collected funds increased by 43.6% year-over-year, and share of Turkish lira collected funds in total funds collection went up by 77.7% as end of last year, including foreign currency-protected participation accounts. In fact, the foreign currency-protected participation account has helped us de-leveraging the foreign currency funding base. However, share of the foreign currency-protected fund participation account has been coming down in line with the new economic policies of CBRT.
It was about 35% of total collected funds in the third quarter of last year, but it came down by 7%- 28% of total funds collection as the year-end of 2023. The current account or total deposits ratio came up slightly from 46.3% at the end of 2022 to 46.7% as end of 2023. Share of participation accounts with over one year maturity in our total participation funds increased quite considerably from 8.5% at the year-end of 2022 to almost 17% as end of last year. I am now moving to page 10. Increase in Turkish lira funds collection was noteworthy in 2023. Both Turkish lira current and participation accounts increased very remarkably by almost 18.9% and 70.4% year-over-year respectively. Thanks to efforts for de-leveraging foreign currency funds, foreign currency funds collection decreased very sharply last year.
Foreign currency participation accounts came down by more than 40% in US dollar terms year- over- year. Cost of funds collection for total participation accounts increased by 300 basis points at the last quarter of 2023. This is due to the rate hikes of CBRT in the second half of last year. When we add current accounts in our calculation of cost of collected funds, it came down quite dramatically since share of current accounts in our total funds collection has been at very high levels. Cost of collected funds, including current accounts, realized at 7% at the year-end of last year. I am now on page 11. As mentioned earlier, our profitability has improved significantly over the last couple of years, thanks to strong fundamentals of the bank. Increased profit share income and fees and commission income enabled us further enhance income generation capacity in 2023.
Although profit share expense went up by over 100% year- over- year due to rising cost of funding, profit share income also increased remarkably by almost 82%, and net profit share income increased by almost 59% year- over- year. Growth in net fees and commission income was quite significant by more than 600% year- over- year. As stated in our previous presentations, this is mainly driven by cross-sales of banking services to credit customers. On the operational expense side, expenditures in all cost items went up considerably year- over- year terms due to the high inflation in Turkey. Total operational expenses increased by 111% year- over- year. I am now moving on page 12. Well-managed asset and liabilities and operational expenses led us to significant both yield and cost improvement.
Net profit share margin stand at very high level. Strong fee income and efficient cost management supported profitability to increase in year-over-year terms. Our operational income increased by almost 67%, while operational cost went up by only 54% year- over- year. The net profit share margin went up further with the positive impact of profit and loss sharing projects credits turn received in the last quarter of 2023. On page 13, we briefly explain the reasons for the changes in the income statement items. Starting with the net profit share income, although cost of funding increased, net profit share income continued to increase due to high credits and securities yields and additional support of profit and loss sharing projects gained at last quarter of last year, which was about TRY 2 billion .
Although net fees and commission income shrank by 10% at the last quarter of last year, it increased very significantly by almost 250% in year-over-year terms. Net trading income increased by 58% and 70% quarter- over- quarter and year- over- year respectively, thanks to strong investment funds evaluation gains received at the last quarter of 2023. On the other income sides, reversal of provisions due to collections from Stage 3 credits NPL portfolio and asset sales increased this item. Although provisions for expected credit loss reduced by around 10% year over year, Stage 3 coverage ratio increased to 95.2% at the end of last year. As stated earlier, total free provisions increased to TRY 5.2 billion and TRY 3.4 billion of it was set aside in the last year alone.
On the personal expenses, personal expenses increased by 116% year-over-year due to increasing salary expenses in line with inflation and the base effect of bonus premium payments made at the beginning of 2023. The last item, other costs. Operational expenses also increased over 100% due to the high inflationary environment in 2023. Moving on page 14, the details of capital adequacy ratio can be seen on this slide. The capital adequacy ratio stood at 17.3% as end of last year. In fact, it would be higher. It would be at 12.5% if free provisions wasn't set aside just in last year. As we stated, it was TRY 3.4 billion . The boosted internal capital generation further supports our capital adequacy ratios.
At the very back of our presentation, on page 15, you may find a comparison of some selected financial ratios with the Turkish banking sector and participation banking sector. On page 16 and 17, you may find our summary balance sheets and income statement actually. Before moving on to a Q&A session, I would like to inform you that we are going to hold an Investor Day at Feriye, Istanbul on the 28th of February. We welcome you all. We already sent you invitation. If you haven't received the invitation, please just contact us. Now I can say we can move on to Q&A session. Thank you all.
Thank you very much for your presentation. Now we will start our Q&A session. If you wish to ask a written question, please click the Q&A button at the bottom of your Zoom screen and submit your question. If you want to ask an audio question, you can join the call by clicking the raise hand button. Kindly reminder again, if you wish to ask a written question, please click the Q&A button at the bottom of your Zoom screen and submit your question. If you want to ask an audio question, you can join the call by clicking the raise hand button. We have a written question from Miraç Başçı.
Yes. Miraç Başçı, the question is about, "Thanks for the presentation and congratulations for the result. Can you share any details regarding 2024 expectations?" Actually, we will be sharing our expectation in the analyst meeting that will be held on the 28th of February. General manager will be sharing that. We will be very happy to host all of you if you actually want to participate that meeting. We are waiting for that meeting. We will be sharing our guidance for 2024 in the meeting.
We have another written question from Oğuzhan Vural .
It is about the margins. Yes, Oğuzhan , actually, as you know, the policy rate has been increased by Central Bank from 8.5%- 45%. Automatically, it has increased both on the commercial bank side, both deposit rate and credit side. Right now, for the participation bank sector as well, the credit yields is more than 50%, as you know. And the deposit side, we are mainly raising our deposit through our participation funds while looking at margins. Margins are somehow in line with year-end 2023 and slightly above the year-end 2023 fourth quarter.
And actually, in 2023, we have decreased our maturity in credit in a very short period due to we have already expected increase in the policy rate before the election. That is why our price adjustment has been already done for 2023. We expect these are somehow in line with 2023 or in line with market, which is roughly speaking 4% margin will be kept also in 2024.
Thank you very much. I do not see any written or audio question. If you wish to ask a written question, you can click the Q&A button, and if you want to ask an audio question, you can join the call by clicking the right-hand button. Dear speakers, I think we have any other question. I back to you for the conclusion.
Thank you so much for joining us for the year-end results for 2023. We hope for, again, a successful 2024 results. We actually want to remind you that, again, the analyst meeting which will be held on 28 of February, we will be discussing the developments and our guidance for 2024. Thank you again for joining us.
Thank you very much. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may disconnect now. Thank you very much.