Hello, and thank you for joining us in Garanti BBVA's 2023 financial results and 2024 operating plan guidance webcast. Our CEO, Mr. Recep Baştuğ, our CFO, Mr. Aydın Güler, and our Investor Relations Director, Ms. Handan Saygın, will be presenting today. As always, there will be a Q&A session following the presentation, and you will be able to ask your questions either by a 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.
Good afternoon, everyone. Welcome to our 2023 year-end earnings call. This past year, characterized by extraordinary challenges, has truly tested our strength and resilience. Yet our solidarity and unwavering commitment to excellence led us to achieve, once again, outstanding results. Before delving into the specifics of our performance, I will begin, as usual, with a brief macro overview of the broader macroeconomic environment. As a recap, monetary tightening continues in order to rebalance the economy. Given the gradual steps so far, domestic demand is slowly cooling down. In the very short term, fiscal policy will be key to determine the pace of adjustment. We have also started to see the positive signs of foreign capital inflow, which will contribute positively to the growth outlook. We expect 2024 GDP growth to be 3.5%, with domestic demand decelerating further and net exports contributing much higher.
We forecast consumer inflation to slow down to 40%-45% range by end of 2024, given the recent improvement in inflation trend and enhanced likelihood of keeping a stable currency. In 2023, excluding earthquake spending, budget deficit was 1.7% of GDP, far below the Maastricht Criteria of 3%. We expect fiscal prudence to continue to help the targeted disinflation path. We also foresee the current account deficit shrinking down to 30%-35%, $35 billion, for year 2024, expecting ongoing favorable conditions for its financing. Before getting in the numbers, the summary is basically our core banking revenue-driven net income generation capability. Our distinction, contrary to what market expected, as Garanti BBVA, we could sustain the quarterly growth in earnings also in the fourth quarter.
With 23% quarterly earnings growth, fourth quarter earnings reached a new record level, TRY 29.3 billion. With this, our 2023 earnings totaled TRY 86.9 billion, suggesting a 49% EPS growth for year 2023. These figures include the free provision reversals we have done throughout the year. However, even when adjusted, it does not distort the main story of consistent growth in quarterly earnings. Return on average equity for the year ended to be 45% versus our operating plan expectation of above 28%. Thankfully, we could outperform our budget in a significant way. Even if we had not reversed our free provisions in the year, our return on average equity would have been a still significant 41%. More importantly, the bulk of the earnings is what we call are of high quality.
High-quality revenue generation capability, meaning core banking revenue generation, remains to be our inherent strength. Even in a year of rising interest rates and heavy regulations that led to significant increase in funding costs, we could offset such a downside with higher growth in fee trading and net fees and commissions. Our core banking revenues, even in the year of shrinking core net interest income, could surge by 47% year-on-year. Trading income boost was driven largely by the high FX buy and sell activity, especially in the first half of the year. While the net fees and commissions boost was from the extraordinarily high rise of the payment systems business, as well as the high banking transaction activity in the year. High-quality earnings is the natural outcome of our strategy of growing assets via customers.
Performing loan share in assets make up the majority, 54%, whereas securities share, including some limited regulatory-driven fixed rate security additions and CPI-linked repos, remain at 15%. Tightening measures of the new economic administration hit the second half of the year with a pace cut in Turkish lira loan growth. In the fourth quarter, given higher interest rates, quarterly Turkish lira loan growth was a limited 11%, bringing the year-to-date growth to 59%, a level that is slightly above the average inflation guidance. With this, we likely sustained our number one position in Turkish lira lending. In 2023, contrary to the sector trend, we took the opportunity to grow our foreign currency loans and met the growing demand in this stabilized currency environment.
You can see on this page that the lower growth pace in Turkish lira loans, especially in business and credit cards, whereas relatively higher growth was booked in consumer lending, namely [audio distortion] general purpose loans. Our Turkish lira performing loans reached TRY 751 billion as of the year-end. During the year, we could further strengthen our leadership in Turkish lira loans, particularly with market share gains in SME and commercial lending. On the consumer side, as we insisted on reasonable pricing, we had, at times, intentional market share loss to defend margins. Similarly, in credit card business, even though the year-on-year growth seems is an astonishing 117%, the credit card business growth in the sector was even higher, 136%. Ours was actually a natural demand-driven growth, given our leadership in credit cards.
Yet we were not too concerned with our market share loss in the year from the comparatively lower yielding business. You may recall that the credit card rates were exceptionally low for most of the year, and only in the last quarter it got to a reasonable level. Moving on to the quality of the total loan book of TRY 1.3 trillion, 88% is Stage One, TRY 130 billion, or 10.3% is Stage Two. The noticeable drop in Stage Two, even in a currency-adjusted manner, relates to one big file that used to be in prudent, under prudence, under Stage Two, justifying its upgrade in staging. Yet, the coverage for Stage Two has been further solidified at above 21% levels. As for the NPLs, they make up 2% of the total.
You can see on next page that the net NPL inflow in the quarter suggested some normalizing trend. More than half of the new NPLs in the last quarter relates to retail and credit cards portfolio, as expected, upon the end of the cheap funding period. The rest related to the wholesale portfolio, with one big file in construction sector. Thankfully, this file at Garanti needed only minor provisioning, as it was already highly covered while in Stage Two. Our total provisions on balance sheet, including the written down portion, is TRY 69 billion, or TRY 68.8 billion, to be exact. This is the highest provision level in the sector and represents a total cash coverage of 5.4%. On the next slide, you can see how this translates into cost of risk.
Net cost of risk as of the year-end tended to be exceptionally low. It's been far better than our operating expectations, operating plan expectation of around 100 basis points, with only 61 basis points. And this figure is even after including the provisions relating to the earthquake. This is far better net cost of risk. It's not only due to the low NPL inflows during the year, but also is owed to the exceptionally strong collections performance in the year, given the highly liquid, low interest rate environment of the first half. Fourth quarter, though, started giving signals of normalization, especially in the absence of such high collections performance. On the funding side, as it has been our historic legacy, we actively manage our funding structure to deliver superior margins. Deposits alone fund three-quarters of the assets, and 40% of this is demand.
Despite the high interest rates, the high weight of demand deposits remains to be the key financial differentiation in terms of margin outperformance. Borrowings share in funding assets, on the other hand, stands at a low 6.5%. Total external debt is now $4.1 billion, and you can see the breakdown of our foreign debt in the pie chart on the right-hand side. Securitizations make up nearly half, and 21% of the external debt is in the form of syndications. 100% of the new issuances since 2021 has been ESG-linked, and now ESG-linked funding makes up 28% of total wholesale funding. Of the total foreign currency debt of $4.1 billion, $1.4 billion is due within a year.
Against that, we had a quick, foreign currency, quick liquidity buffer of $6.3 billion as of the year-end. In line with the regulation, lirasation efforts continued throughout the year. There was 17% growth in Turkish lira time deposits, bringing the year-on-year growth to 134%.... In this period, foreign currency deposits shrinkage at Garanti, though, was a limited 4%. Regarding demand deposits, Garanti continues to lead in customer demand deposits share in total, with 41% versus the average of private peers of 38%. This presents comparatively high funding advantage and manifests itself in our superior margin performance. The rising interest rates and edit regulations took funding costs to even higher levels, while loan yields, even though they were at relatively more sensible levels, were heavily regulated. This caused further pressure on spreads and of course, on margins.
Accordingly, the core margin, adjusted with the foreign currency protected deposit scheme's additional remuneration, was down by 94 basis points in the quarter and by 334 basis points on a cumulative basis year-on-year. CPI impact on margin was positive in the last quarter, as we did the adjustment for the actual CPI reading that came in 62%. This meant significant adjustments versus the 48% cumulative CPI estimate that we had used in the prior valuation. Moving on to the performance in net fees and commissions, we could grow our net fees and commissions by 37% in the quarter and 140% year-on-year. Payment systems business contributed the highest to the well above the projection performance, with a growth that was almost twice the pace of other fee businesses.
This exceptional performance in payment systems is owed to the rising interest rates and also was a natural outcome of our number one rank in both issuing and acquiring volumes, as well as us serving the highest number of credit card customers. Other contributors to this robust fee performance are definitely the strength in relationship banking and digital empowerment, contributing to not only to grow our active customer base, but also penetrate further the existing customers. Our mobile active customers are now near 15 million, and digital sales in total reached 90%. Our leadership in Turkish lira, cash and non-cash loans manifested itself with 83% increase in lending-related fees. Brokerage and asset management fee growth was also an amazing 113%. Owing to customers using us as their main bank, our money transfer fee growth was also well above expectations at 98%.
Our well-diversified fee businesses signal the sustainability of Garanti's superior fee generation capability. As for the operating expenses performance on Slide 16, quarterly operating expense growth was 21%, and annual growth was at 103%, suggesting that we ended the year in line with our guidance, even with the impact of the earthquake and currency. 3% of this annual growth was due to the earthquake-related donations and 11% related to the currency without impact to the bottom line, as, the FX portion of operating expenses gets fully hedged with Garanti. Thus, the adjusted figure is actually 89%, suggesting our cost-conscious and real outperformance in cost management. Looking at, looking at our best-in-class efficiency ratios, cost income was 35%, fees coverage of OpEx was 78%, and operating expenses and average assets was 3.2%.
As per capital, it remains strong as net income compensated for the negative impacts of FX and market risks. Without the BRSA's forbearance, our consolidated capital ratio was 16.5%, and Core Equity Tier 1 was 14.5%. The foreign currency sensitivity on our capital ratio is that for every 10% depreciation, it is 37 basis points negative. In summary, wrapping up the year, we were able to outperform our 2023 guidance by delivering and return on average equity of 45% versus our above 28% operating plan expectation. The significant pressure on margins due to increase in funding costs and heavy regulations was more than offset with exceptionally low net cost of risk, super performance in fees and trading income support.
We are thrilled to see the reflection of this outperformance on our share price performance, which increased by 33% in dollar terms, outperforming the banking index by a significant 21%. With that, we finish the year as the most valuable bank in Turkey. These outperformances are very meaningful for us, especially in the year marking the 100th anniversary of our republic.... We are more motivated than ever to continue creating value for all our stakeholders. Now, time to give you our 2024 operating plan expectations. For year 2024, we expect a Turkish lira lending growth around CPI, which suggests a slight slowdown compared to 2023, parallel to the ongoing monetary tightening and expected economic slowdown.
More color around growth expectations is that we expect a pickup in pace in the second half, and project the growth to be a balanced one across business and retail within the framework of regulation. We project a low single-digit growth in foreign currency loans this year, as we expect demand to pick up. On the cost of risk side, as I have mentioned, we had an exceptionally low cost of risk year behind, and fourth quarter 2023 inflows suggested some normalizing trends. Accordingly, we expect a normalization, normalizing net cost of risk at around 125 basis points by 2024 end. On the margin side, we will aim to manage the total margin flat year-on-year. There will most likely be a decrease in CPI contribution, given the lower CPI expectation for the year.
We project the core margin side, though, to largely compensate for this drop. On the fee and OpEx growth, our guidance is that the growth in both of these items would be above CPI, due to the rollover effects-- actually above average CPI, due to the rollover effects for operating expense and normalizing fee growth. These all should suggest a return on average equity for the year that is in the mid-thirties. Please keep in mind that these expectations are built on the assumption that the current regulations will remain intact and no new regulations will be introduced. Any change in these may lead to an either an upside or a downside on the guidance. In conclusion, these are the messages we wanted to share with you. It is now time to take your questions. Thank you for listening.
Hello again for the Q&A session. You can ask your questions by typing in the Q&A area or by using Raise Your Hand button. Once your name is announced, please, unmute yourself and ask your question. One minute for the first question. Our first question comes from Waleed Mohsin. Hi, Waleed.
Just a few questions, please. First, on your margin for 2024, Handan, you mentioned, you're looking at flat NIMs, including swap costs and the impact of CPI linkers. Perhaps you could walk us through the trajectory that you expect on the core spreads, which will help offset the CPI linker income pressure. That would be extremely helpful if you could kind of explain how that would balance the impact from CPI linkers, and what kind of impact are you expecting from CPI linkers, which will be offset by the core spread expansion. That's the first question. Second, you mentioned, and we saw during 2023 as well, selectively growing the FX loan book, and you've guided for low single digit growth.
If you could talk about the sectors where you're seeing opportunities, what's giving comfort, you know, maybe some thoughts around pricing as well on that book, that would be extremely helpful. Third and final question on asset quality, seems quite robust, and your guidance of 125 basis points for 2024 seems to be more a normalization from a very low cost of risk in 2023. Any particular sectors that you're seeing stress? You talked about, you know, one particular file within the construction space. It largely seems to be a one-off, but have you seen any impact of higher rates so far on, you know, any sectors other than retail? Thank you.
Thank you, Waleed. The cost of risk is the first question. As you remember, in our last call, we announced that net interest margin would improve, but it deteriorated because of the regulation, and that deterioration will continue in the first half as well. So but then, starting with the second quarter, third quarter will be better than second, and fourth quarter will be better than third quarter. So consecutively, there will be a recovery improvement in the related with the net interest margin. So, we think that it will help us to recover what we are gonna lose from CPI linkers. So we will offset it with our spread management, with our net interest margin improvement. The second question, FX loan, yes.
Even though we announced you that we didn't want to grow in FX loans in 2023, unfortunately, the regulation killed our margins in TL side, but there were very strong margins in foreign currency loans. As we granted those loans to two companies who has had foreign currency revenues, we were comfortable. That is the reason we grew reasonably. And in 2024, we think that there will be opportunity in the market in terms of foreign currency loans. It will not be a huge increase, but again, we think there will be opportunities for us to grow. But as I underlined, our focus area, focus sector, are mainly exporters and companies who has foreign currency revenues. The third one, asset quality.
This year, 61 basis points cost of risk is extremely low. A normal cost of risk in, according to our calculation, should be between 100 and 125 basis points. So 2024 will be the year with 100 and 125 basis points level. There will be a correction. That correction will come from retail and payments, retail and unsecured retail loans and credit cards. Wholesale, I think will be similar to this year, maybe a little higher than this year, but the real increase we are expecting from retail and payment. So all in all, 125 basis points, the sectoral approach will be a normal year for Turkey. It will not disturb our capital adequacy ratio. It will not change the picture in a negative side.
So we are comfortable with that level, with this normalization.
Thank you very much, Recep. That's very clear. Thank you.
Our next audio question comes from Konstantin Rozantsev. Hi, Konstantin.
Thank you very much for the presentation and for taking my questions. I had three questions that I wanted to ask. The first question is on the lending growth. So, could you please comment how effective are the monthly loan growth limitations, which are introduced across various types of loan products for the banks? So it seems to me that recently, private banks as a segment and what shows from Garanti's year guidance, seems like loan growth in Turkey is expected to be in excess of these limitations, which are introduced on a monthly, but so I'm extrapolating for the whole year. So could you please comment, are these limitations not effective? And how are banks managing themselves kind of relative to these thresholds?
The second question is about the trends in the rates on the conventional Turkish lira deposits, term deposits. Where do you see the rates on these deposits stabilizing in the coming periods? And the last question is about the FX protected deposit scheme. So what trends have you been observing with this scheme in the past eight months or so? And, with respect to the FX portion of that scheme, how quickly is that portion being unwound, and what is the trends? Thank you.
Thank you, Konstantin. With the lending growth, subject to regulation, we are gonna be in line with the regulation. There are some areas which is out of this regulation. This is export loans and the, some specific sector. There are those loans are out of limitation, but we are gonna be in line, maybe a little higher, but in general, we are gonna be in line with the limitation. All our, all our budget and the, expectation is on, on, on this, perspective. The, the protected scheme, as you, as you, as you remember, the total amount of the protected scheme in 2023 reached $240 billion levels. Now it has come down to $85 billion levels.
As the foreign currency is stable, the conversion rate of the protected scheme to TL deposit has accelerated. So the average conversion rate is around 15% in the banking sector. So, if this trend continues on this way, I think that in the middle of the year, all sector and central bank will be in a comfortable zone in terms of this protected scheme turnover. So it is very correlated with protected scheme and TL deposit stabilization. Yes, it is true, market has reached to a reasonable levels, which is in line between 52%-54% levels in the TL cost of deposit. So it is very correlated with protected scheme. As these rates are attractive, protected scheme is gonna be converted around 15% levels.
With this trend, I think without having any problem, we are gonna handle this issue in the middle of the year.
Understood. Thank you very much. And do you have some high-level guidance, how much time would it take for the scheme to be fully unwound at these levels of conversion? You may, you may mention, but, could you please repeat this, expectation?
I think fully to clear it to the end of the year at least. Because now we have some deposits in our portfolio up to one year. So as the time pass, the numbers are getting smaller, but to clean up everything, at least one year. But as I said, every month, 15% conversion, so it makes very reasonable amount. So within six months later, the problem will be very, very negligible to me, if we continue to convert existing amounts around 15%.
Understood. Thank you very much for the details. Thank you.
Our next question comes from Mehmet Sevim. Hello, Mehmet.
Thanks for taking my question. Just one question on, as a follow-up to Waleed's question, on core spreads. Do you think that the worst is now behind us, or where would you see the trough in TL core spreads as we go into 2024? Also, could you kindly tell us what kind of CPI-linked evaluation you're using in this guidance right now? I would assume it's maybe 40%-45% levels. If you could confirm, that would be great. And, finally, just as a follow-up to the FX deposit protected scheme question and your answer, what makes you comfortable with the 15% conversion rate and that it continues at this level? Would you see risks to it, given the remaining FX deposits, the deposits were mostly originated from FX accounts?
you know, would you be ready to offer higher rates to those depositors? Are you feeling any resistance from them? Maybe any kind of color on this would be very helpful. Thanks very much.
Thank you. The first one, the TL deposit, as I said, TL deposit is around 42%-44% levels. The lending rate is around 48%, so that is 6% positive difference. So, in terms of, NIM management, now we have been recovering what we lost in the last quarter. This quarter will be also under pressure, but it will be ... It will be in a better position in the second quarter. Day by day, we are improving. We are better than, we are, we are not better than, we are worse than the last quarter of 2023, but it will not be negative. It will be on positive side, but second quarter, third quarter, fourth quarter, consecutively, it will go up, it will be improving.
So the core NIM, maybe this always we have been, proud of saying that in terms of core NIM management, under these circumstances, we are in the positive era. Improvement is going on. The second one, our CPI linkers, valuation. I think when you are asking the question, you gave the answer. 40% is an existing, valuation percentage. The third one, up until now, up until now, with this 15% conversion rate, we didn't have too many difficulties. As we are offering reasonable rates to the deposit owner, they are ready to convert it. We don't offer them crazy rates in order to convince them to convert their money.
Because, as the country gets stable, as the economic condition gets stable, foreign currency doesn't fluctuate a lot, they get comfortable, they are volunteer to convert their money with this rate. So I don't see any problem under these circumstances. We don't need to push, we don't need to convince them with crazy rates. So you can see it, our cost of deposit rates in the coming quarter. Thank you.
Okay, thanks very much, Recep. That's very helpful.
One minute for the next question.
It will be too late to wait for my colleagues to give me the question. I am asking the question, I am going to answer the question: What is our macro assumption? This is the question. Our GDP growth expectation is around 3.5%. Interest rates, policy rate, it is around inflation. Then year-ending inflation, according to our expectation, will be in between 40%-45% levels. And the last one, the currency. Our expectation is in line with a medium-term plan. So 43% devaluation to the year-end is doable and reasonable targets for us.
I leave the floor for our closing remarks. Thank you.
Thank you all for your participation. In 2023, macroprudential measures and regulations shaped banking sector's balance sheet, with the currency protected scheme at the main focus. In the post-election period, the simplification of policy, the predictability of exchange rate and interest rate enhanced the confidence and perception of foreign investors. The absence of election in the country for four years after March, supports our expectation that policies to combat inflation will continue to be implemented. In a challenging year as 2023, we are proud of announcing another set of great results. As we look ahead to 2024, we will demonstrate Garanti BBVA's remarkable distinction yet again. We will be happy to meet you again at our next earnings call. Have a great day. Thank you.