Hello, and thank you for joining us in Garanti BBVA's third quarter 2023 financial results webcast. Our CEO, Mr. Recep Baştuğ, our CFO, Mr. Aydın Güler, and our Investor Relations Director, Ms. Handan Saygın, will be presenting today. There will be a Q&A session following the presentation, and you will be able to ask your questions either via Raise Hand button or by typing them into the Q&A area. The presentation will now start, so I leave the floor to our presenters.
It's great to be with you at another results call, and, this time, honestly, it feels great and makes us proud, to be able to consistently announce new record results, be a significant player in the economy, especially in the year marking Turkish Republic's hundredth year anniversary. We celebrate full-heartedly our century-old republic and are supercharged as we start the second century. Before our results review, I will brief you on the macro backdrop we're operating in. After the election, at the end of the second quarter, the new economic administration's move to more orthodox policies and gradual deceleration in the domestic demand. However, inflationary pressures, both external and internal, still remain and pose upside risk to the expected inflation path. Overall, the current policies seem to be on the right track to rebalance the economy.
Recall that we had already witnessed an above 4% first half growth. Combined with the resilient global growth outlook, we expect the year-end GDP growth to be 4.5% this year. The recent tax hikes, high wage adjustments, the sharp currency depreciation's lag pass-through, unfortunately, worsen inflation expectations. We now expect year-end consumer inflation to be close to 70%. As for the current account deficit, given higher energy prices and the low growth in our trading partners, we expect $49 billion of deficit by this year-end, alluding to a level around 4.5% of GDP. Before getting in the numbers, the nine months recap of our financial performance is that core banking revenues continued to be the main components, the main driver of our profitability, suggesting the earnings high quality and sustainable nature.
We continue to outperform in the fundamental lines like core net interest income, net fees and commissions, pure trading, and asset quality. We call our core banking revenue generation capability our inherent strength. In the third quarter, we could grow our core banking revenues by 20% quarter-on-quarter and by 51% year-on-year. Thanks to increasing efficiencies and favorable asset quality trends, the net income growth was even higher in the quarter. Excluding the free provision reversals, quarterly earnings growth was a strong 27%, or 30% on a reported basis. The nine months results suggest a return on average equity of 41% and a return on average assets of 4.5%. A level much above what we anticipated and guided in the beginning of the year.
Now, before moving on with the components contributing to this result, I would like to walk you through how we fared in terms of core banking revenue generation. Recall that last quarter, we shared with you that there was additional funding costs, meaning additional remuneration related to foreign currency protective deposit scheme, the KKM, booked under the trading line. Adjusted with those funding costs, our core net interest income in the quarter improved by an amazing 93% or TRY 5.5 billion. Pure trading, on the other hand, dropped by TRY 5 billion upon normalization, given that lower currency volatility affecting net FX buy and sell activity, as well as normalized gains on security and derivative transactions. Net fees and commissions grew by further TRY 4.6 billion or 61% in the quarter.
These fundamental banking revenue generation lines combined led to a highly successful 20% growth in the quarter, validating the high quality as well as the sustainable nature of our earnings performance. Main reason for this high quality is owed to our strategy of growing assets via customer activity. Performing loan share in assets make up 54%, whereas securities share, including some limited regulatory-driven fixed rate security additions, remain at 15%. We started seeing the impact of the tightening measures of the new economic administration, and in the third quarter, there was noticeable slowdown in loan demand. Yet we could register a net TRY 75 billion or 13% growth in Turkish lira loans, bringing the year-to-date growth to 43% and sustain our number one position in Turkish lira lending. In this period, our foreign currency loan growth fared flattish.
On this page, you can see the lower growth pace in Turkish lira loans, especially in consumer and credit cards, whereas relatively higher growth was booked in short-term SME loans. Our performing loans reached TRY 674 billion as of September end. In the quarter, we booked market share gains in Turkish lira loans, Turkish lira business loans, and particularly in SME loans, where the consumer loan side, as we insisted on reasonable pricing, we lost market share in the last quarter. However, our leading position in consumer loans, as well as in credit card issuing and acquiring volumes among private banks, still remain. The current mix of the Turkish lira loan book is that 44% business loans, 31% credit cards, and the rest, 25%, consumer loans.
Looking on slide eight, the quality of the loan book of TRY 1.1 trillion, 86% is in stage one, TRY 138 billion or 12.2% is in Stage 2. Even though Stage 2 share got diluted, in a currency-adjusted manner, there was actually a couple billion liras of increase in the quarter, attributable to the SICR portion. The coverage for Stage 2 remains at a strong 20% level. Our highly prudent staging and provisioning remain. As for the NPLs on next page, net NPL inflow in the quarter remains very much muted, with only TRY 248 million, given the supportive growth environment and strong collections. NPL ratio further improved to under 2%, while our total provisions on balance sheet, including the write-down portion, is more than TRY 60 billion.
This is the highest provision level in the sector and represents a total cash coverage of 5.3%. We can see on the next slide, how this translates into risk costs or provisions. Net cost of risk as of nine months of the year ended to be 55 basis points. Isolating the earthquake-related portion in the prior quarters, quarterly provision increase was 54%, relating mainly to the increase in the SICR portion of Stage 2. Despite our continued high prudency in the provisioning, overall, our net cost of risk is faring better than our guidance that was, expected to be around 100 basis points. On the funding side, deposits dominate the funding sources, funding alone three-quarters of the assets. All the funding sources, as per our legacy, are closely and actively managed in delivering superior margins.
At Garanti BBVA, demand deposits alone fund more than 30% of the assets. This is a clear reflection that we're customers' choice as their main bank. Naturally, this strength contributes quite positively to free funds and interest-earning assets, which fares above 40%, a ratio that is well above the average in the industry, and key financial differentiation in terms of margin outperformance. Borrowing share in the funding, in funding assets, on the other hand, stand at 6.7%. Total external debt is now $4.1 billion, and you can see the breakdown of our foreign debt in the pie chart below. Securitizations make up nearly half. 21% of the external debt is in the form of syndications. Of the total foreign currency debt of $4.1 billion, $1.4 billion is due within a year.
Against that, we have a foreign currency quick liquidity buffer of $4.7 billion. In line with the regulations, lirization efforts continued. In Turkish lira deposits, even though quarterly growth seems low or nil, actually, due to the currency difference, accruals of the foreign currency-protected Turkish lira time deposits, adjusted with the accruals, there was actually 12% growth in Turkish lira time deposits. Turkish lira demand deposits in the period reached TRY 150 billion . Despite de-lirization efforts, foreign currency deposits remained flattish in the quarter due to customers seeing us as safe haven, especially with foreign currency demand deposits exceeding $17 billion. The rising interest rates, given the imposed rate caps, helped carry loan prices to more sensible levels and led to normalization in loan-to-deposit spreads.
Accordingly, Turkish lira core spread, meaning loans to time deposits adjusted with the foreign currency protected deposit scheme's additional remuneration, could improve in the quarter by about 400 basis points on average. Its reflection on the core margin was a + 135 basis points increase quarter-on-quarter to 2.4% from its all-time low level of 1.1% in the second quarter. CPI impact on margin was also up as we revised our CPI estimate in valuing the linkers to 55% in the quarter from 35% that we used in the first half. This growth, our nine months to date CPI estimate used in valuation to 48%, which is a level that is, at the moment, lower than the peers. However, we will adjust, we will all adjust to the same inflation reading level by year-end.
In the meantime, we continue to manage the balance sheet to the rising interest rate environment and aim to reduce the duration gap. On a cumulative basis in the nine months, the core margin drop was 204 basis points. For this line, our guidance was that we would expect to see around 185 basis points contraction by year-end. It looks we're faring in line with that guidance. The real look into core margin, meaning including the extra remuneration portion that is under trading, brought our cumulative core margin to 2.2% at end of nine months. Moving on to the performance in net fees and commissions, we could grow our net fees and commissions by 121% year-on-year.
Higher growth was seen in payment systems business, helped by the rising interest rates and our number one rank in both issuing and acquiring volumes, as well as us serving the highest number of credit card customers. Our nine months to date commission income alone neared TRY 27 billion. Other contributors to this robust fee performance are definitely the strength in relationship banking and digital empowerment, contributing to not only grow our active customer base, but also penetrate further the existing customers. Our digital banking customers are quickly rising near 15 million. 14.3 million, and this was active mobile banking customers at end of September. In here, recall that our growth guidance was around average inflation. Our performance so far suggests there's upside to that guidance.
As for the operating expense performance on slide 15, quarterly OpEx growth was 14%, and an annual growth was at 110%. Of this, 10% related to the currency without impact to the bottom line, due to the fact that portion gets hedged, and 4% related to the earthquake donations. Adjusted figure of 96% annual OpEx growth suggests that we fare in line with our OpEx growth guidance of 100% for the year. Our well-managed cost performance manifests itself in the best-in-class efficiency ratios, which can be listed as cost income ratio of 35%, fees coverage of operating expenses ratio of 69%, OpEx and average assets of 3.1%, as well as having the highest core banking revenues per branch and per employee figures.
As per capital, we could further strengthen in the quarter, we, with mainly our internal capital generation capability. Without the BRSA's forbearance, our consolidated capital ratio was 16.5%, and our core equity Tier 1 was 14.4%. The foreign currency sensitivity on our capital ratio is that for every 10% depreciation, it is 39 basis points negative. Wrapping up the financial part of the presentation and inform you as to where we stand relative to our beginning of the year guidance, is that in Turkish lira loan growth, we may end up lower than what we anticipated in the beginning of the year due to the regulatory growth caps. In other guided lines, we don't have any revisions.
It is just that the nine months ROE, return on equity, suggests clear upside due to robust fee growth, high trading gains, and better than expected asset quality. Now, moving on to our non-financial value creation. We take pride in being the first bank from Turkey to declare interim decarbonization objectives for the year 2030, with the ultimate aim of attaining net zero by 2050. We're proud to say that our efforts on ESG issues are recognized by various critical international agencies, as we're the only company from Turkey that has been in Dow Jones Sustainability Index for the eighth consecutive year, with a current score of 83, which is actually the fifth highest in the global banking sector.
Our success, which is evident in our leadership and brand power, can be attributed not only to the robust financial foundation, but also to our unwavering dedication to creating value in ESG matters, a commitment that forms the cornerstone of our broader social initiatives. One notable social initiative we champion is the Women Who Know Their Accounts project. The program aims to empower women by providing them with essential financial literacy skills, ultimately fostering economic independence and financial inclusion. In this program, we're collaborating with Financial Literacy and Inclusion Association, as well as the Foundation for the Support of Women's Work. These are two of the top nongovernmental organizations in their fields.
As part of our enduring commitment to community investments, lately commemorating the centennial of the Turkish Republic, the photographic exhibit, titled "One Hundred Years Ago, One Hundred Years Later: Mustafa Kemal Pasha's Path to the Republic in Photographs," is being showcased at our cultural platform, Salt. Investing in our community extends to our valued employees, whose happiness and well-being are of high importance. This commitment to our team's satisfaction was recently acknowledged through our receipt of the 2023 Youth Awards as the number one company in finance sector that young people would like to work for. This, and our strong performance in employee loyalty polls, are testaments to our ongoing dedication to creating a supportive and rewarding work environment. Now, this concludes our presentation, and we leave the floor to you for questions. Thank you for listening.
Hello again for the Q&A session. Due to a technical issue, we will only be able to accept audio questions. So please use Raise Your Hand button to ask your question. One minute for the first question. The first question comes from Waleed Mohsin. Hi, Waleed.
Three please, questions from my side. Number one, if you could share some insights on your early assessment of how we should think about 2024, especially in terms of your net interest margin expectations. If you cannot share 2024, perhaps some thoughts on how the fourth quarter is faring so far, especially in terms of net interest margin, that will be extremely helpful. Secondly, on asset quality, pretty robust display throughout the year. But I was wondering, given where rates are, you know, with the recent rate hikes, some of the pass-through takes time. Any particular sectors where you're seeing early signs of stress or perhaps the impact of rates flowing through? So your thoughts on, you know, where we could see some, let's say, stress or impact, would be extremely helpful.
And my third and final question is on the fee line. Again, a very solid fee growth from your side. When we look at the sector so far, the three banks that have reported, all three have shown very strong quarter-on-quarter and year-on-year growth. I was wondering if there is any risk of any regulation around fee, especially given, you know, rates are going up, so that's impacting customer repayment or can impact customer repayment ability. And then fee, obviously, is also adding to the customer burden. So, is there any risk around regulatory action on the fee line? Thank you.
Thank you, Waleed. Let me start with the first one. Net interest margin performance. In 2023, the banking sector operated with negative margins. We expect margins to become more positive towards the year end and continue to be in the positive territory in 2024. Thus, we expect to see net interest margin expansion in 2024. What differentiates us from the sector is our performance in net interest margin and mainly core net interest margin, the reflection of core banking strength and our management skill shows itself. Core banking revenue generation capability. So it is our strength coming from the penetrational penetration to the market. The second question, asset quality. As of now, in 2023, we don't have any problem.
As you see, the cost of risk are at very reasonable level. But with the rising interest rate environment, we expect some deterioration on the retail side in 2024. But this deterioration wouldn't hurt the banks, the balance sheets and NPL ratios, so it will be manageable. On the corporate side, for the past three years, they were able to book quite a lot of gains and build very strong capital. I would like to add that in my 34-35 years experience, I have never seen corporates to be this deleveraged. So due to this positive impact, we don't expect corporates to have any issues in 2024. Maybe in 2025, it's gonna happen, so we will have time to talk about it, related with asset quality.
In the fee regulation, no, I don't expect anything because what we have generated is the result of very strongly, highly regulated fee income levels. I think there is no room for new regulation, and I don't expect any regulation.
Got it. That's extremely helpful as always. Maybe one just follow-up. So in terms of, let's say, risks or factors that you are closely monitoring within the banking system, anything that we should be mindful of? Because you know, given the normalization in rates or the progress towards rate tightening, the banking sector seems to be navigating that quite comfortably. So you know, your thoughts on key risks at this moment will be extremely helpful.
What it's. My concern is the promotions. I underlined this issue in our earlier sessions. I think that in the market, this promotion, competition, it is not logical. This is not a big risk. Banks can manage it, but the P&L impact of this promotions, you are gonna see more deterioration in the OpEx in the sector. But this is in between for, for big banks, this is not related with the small banks. And the second issue is the margin management. Today, still, all the banking sector are in negative margin, environment. I think there will be improvement, but this improvement will not be so, sharp. That is the reason the second, this, this margin management is the second issue, but these are not two big concerns for us.
These are the main topics that we are gonna focus on in 2024. Answer to your question, but not too much risk. I want to underline it.
Got it. Thank you much, Recep. Thank you, as always, for your insights. Thank you.
Another minute for the second question. The next question comes from Can Demir. Hi, Can Demir!
Questions, and, thank you for the presentation as well. I wanted to ask about your NIM guidance. You mentioned you would expect the NIM to expand next year, if I understood you correctly. And in that context, I wanted to ask you, where you would see the inflation next year, because inflation obviously pushed up the margin a bit, I think this year, and sort of constitute a high base in 2023. So I was wondering what kind of inflation assumption goes into that preliminary guidance? So that's the first question. And the second question is: I was wondering if you could quantify the impact of increasing interchange on fees, or fee growth, rather, I should say, in the third quarter. Thank you very much.
So the first question, the CPI next year, the average CPI will likely be around 55%, and this year, it will end at 55%, and the average will be around 50%. The year-end number will be 69%-70%. The next year year-end number, as you know, the medium-term plan inflation target is 33%. Our expectation is one notch above that level. This is our expectation. So the year average will be around 65%-70% levels, but the year-end number is one notch above the medium-term plan. Your second question, we are just underlying our core need, and that is the reason, maybe this is our difference.
The fee growth and interchange rate, this interchange rate, I think this level is not satisfactory in terms of monetary tightening policy. So we expect more increases related with this interchange fees. In general, with the fee performance of the bank, I think you are going to see very similar performance as you see in the third quarter. Fourth quarter will be very similar to third quarter.
Okay. Thank you very much, Recep .
Our next question comes from Pınar Uğuroğlu. Hello, Pınar.
To regulations. As per last week's sort of regulation adjustment, it seems that there is not much venue left to buy out these bonds in terms of regulatory inflation. So I wonder, what do you think about your bond portfolio? Will there be a need to buy out more bonds in the remaining quarters? And in terms of the regulations, obviously, the regulator would like to see more Turkish lira time deposits to gain share within the overall bucket. Will you be in a position to pay off 8% commissions in terms of the rollovers? Or will it be a sort of easier process for you not to pay commissions, not to buy bonds, rather than rolling the DDM deposits? Thank you.
The total amount in the third quarter, TRY 16 billion fixed rate security we bought due to regulatory issues. And this quarter, as you know, with the regulation change last two weeks ago. So according to new regulation, with this structure got totally changed. So the commissions will be subject, and there won't be any security issue according to new regulations. So what we performed in September, just related with September, there will be some regulatory purchases, but it will be very, very negligible. Maybe 20% of total what we bought in the third quarter. So TRY 4 billion, maybe TRY 5 billion in September, we needed to buy. After September, due to regulation, there won't be any regulatory issue for securities.
Now, the name of the game is commissions, and the details of the commission calculation is not clear yet. We are going to get those formula in coming days. So that is it. What we have in the portfolio is around TRY 60 billion fixed rate security, and that is it. We don't need to buy any other security.
Thank you very much. And as a follow-up, do you find it easy to convert or to convince, depositors, especially the ones who convert from FX to FX-protected Turkish lira accounts to Turkish lira deposits? And do you think the latest policy rate hike would induce more deposit rate competition or would lead higher rates in deposit arena?
In the market, the deposit rates are in between 50%-40% levels. So these are very attractive rates for deposit holders. Under the circumstances, with this protected scheme, we are able to convert 5% of redeemed amount, and this is our track record with historically, during the last three months, we have been converting 5% of redeemed amount of protected scheme. So the reason behind this one is the high-yield deposit rates. It is up to, as I said, 40% levels, 40%, 45%, 50%, depending on maturity, depending on amount. With these rates, we are able to convert 5% monthly. So it was another threshold. If we pass, meet this target, then we don't need to pay any commission.
That is the reason we, as a bank, we always, we are always trying to be over 5%, and up until now, we are above that levels.
Thank you very much. Very helpful.
Seems like we don't have any more questions, so this concludes the Q&A session. I'll leave the floor to our presenters for closing remarks.
Thank you all for your participation. This quarter is marked by the gradual normalization steps taken by the new economic administration. These steps are in the right direction and important to restore the confidence. Naturally, there is a process, and we are just at the beginning of it. As a bank, we are actively managing our balance sheet parallel to this process. The fundamental factor that distinguishes us from our peers is in the financial results, is that a significant portion of our revenues come from customer, and for this reason, they are sustainable. Yesterday, we celebrated the 100th year of anniversary of our republic. We take pride in serving and contributing significantly to the Turkish economy over the last 77 years. As we start the new century of republic, our contribution will remain robust. This is our utmost priority and duty.
Looking forward to meet you all again with another set of stellar results. Thank you very much.