Hello, and thank you for joining us in Garanti BBVA's First of 2024 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. As always, there will be a Q&A session following the presentation, and you will be able to ask your questions either via a raise hand button or by typing them into the Q&A area. The presentation will now start, so I'll leave the floor to our presenters.
Good afternoon, everyone. We're very pleased to be with you all on another earnings call presenting our stellar results. Despite the market complexities and challenges of the first half, we continue to deliver improvement in banking performance. Before getting into our financial performance details, let's, as usual, go over the broader macroeconomic environment we're in. We now forecast annual 4% GDP growth in the second quarter. Accordingly, we expect almost no change quarter-on-quarter. This will likely take the annual GDP growth in first half 2024 closer to 5%. Taking into account the strong performance of first half, there seems to be upside for our 2024 GDP forecast of 3.5%. In terms of the interest rates, we expect the central bank to stay on hold till late 2024, along with the macroprudential tools support affecting liquidity management and credit policies.
Depending on how close they get near the year-end inflation target, the CBRT would remain restrictive longer than we expect in our baseline. Inflation trend, on the other hand, started to ease in June. We now forecast consumer inflation to decline below 50% by September on strong favorable base effects and finish the year at 43%. On the next slide, the rebalancing that has already started in the economy will result in much lower external financing pressure. Current account deficit in the first half already reached $26 billion. We now expect the current account deficit to diminish to $20 billion, or 1.6% of GDP by year-end 2024, down from last year's $45 billion. This will be achieved with improving net trade deficit, strong tourism revenues, and lower net gold imports on top of de-dollarization. On the fiscal side, we expect fiscal prudence to continue to help the targeted disinflation path.
We expect the year-end budget deficit, excluding the earthquake spending, to remain within the Maastricht criteria of 3%. Now, time for the financial results. Contrary to the expectations, Garanti could continue its earnings growth and booked TRY 44.6 billion in the first half of 2024. This represents a 32% year-on-year growth, or even 40% when adjusted with last year's free provision reversal. On a quarterly basis, even though the sequentially rising earnings trend was maintained in our bank-only figures, there seems to be slightly lower net income in the consolidated figures. This has nothing to do with the subsidiary's performance, but with the recognition of the real estate valuation gains under equity at consolidated level versus net income at bank-only. So, even in the most likely the weakest quarter of the year, we booked TRY 22.1 billion of net income.
This suggests a year-to-date return on average assets of 3.7% and a return on average equity of 34.2%. Our core banking, namely customer-focused approach, continued to result in sustained sequential banking revenue growth, which was another 7% in the quarter and 63% year-on-year. Accordingly, our core banking revenue generation remains to be the highest in sectors and our inherent strength. Contributors to core banking revenues are core NII, core net interest income, where we could grow by another 18% in the quarter; pure trading, where we could largely sustain last quarter's outstanding gains with supporting FX transaction gains in the absence of derivative mark-to-market gains; and net fees and commissions, where we could grow by further 13% in the last quarter. Getting to these results, of course, required a high share of customer-driven asset mix.
As you can see in the pie chart on slide 7, the performing loans make up the majority of the assets, almost 56%. We booked 9% Turkish lira lending growth in the quarter while sticking to the imposed loan growth caps and continued to register higher growth in the preferred areas such as investment, export, credit cards, and earthquake-affected area loans. Accordingly, our first half Turkish lira loan growth ended to be a robust 27%. In foreign currency lending, we booked a growth of 4% year-to-date that is totally in line with our guidance and growth projections. On the securities front, as many of you know, we're never aggressive, but rather opportunistic. In the quarter, we did replace our redeeming securities and even accumulated a bit more 10-year fixed-rate securities and CPI-linked ones that are 3.5% real rate attached. Nevertheless, the securities share in assets remains low at around 15%.
Looking in depth into the loan portfolio on this next page, you can see our Turkish lira loan mix on the left-hand side and the growth in each area on the right. You may have already noticed the sector's lower Turkish lira loan growth figures in line with the intended slowdown in Turkish lira lending imposed by the central bank in its efforts to fight against inflation. Our selective and profitable loan growth strategy is naturally preserved while abiding fully to the regulatory loan growth caps. Our Turkish lira performing loans reached TRY 952 billion upon the 27% Turkish lira loan growth in the first six months of the year.
Notice that the quarterly growth was relatively lower versus the first quarter in credit cards and business loans, whereas the consumer loan growth of 11% was sustained, and we could register market share gains, especially in the high-yielding consumer GPLs, including overdraft. Our market share in general-purpose loans among private banks neared 19%, and in credit cards to 22%. Also, in business banking, we have more than 20% market share. Even though there seems to be a slight quarterly drop in the second quarter, we have booked 68 basis points of market share increase year-to-date and actually have succeeded in growing our market share on average by 75 basis points per year over the last five years. In total, we maintain our leadership in Turkish lira lending. Moving on to the quality of the total loan book of TRY 1.5 trillion, 88% is in stage one.
10%, or TRY 156 billion, is in Stage 2. Isolating the currency impact, which has affected largely the restructured portion of Stage 2, Stage 2 increase of a significant TRY 18.5 billion was largely due to the increase in the SICR portion, namely those expected small-ticket size retail and credit card loans. Since the coverage of the SICR is relatively low, this high inflow diluted the Stage 2 coverage to 19% from 21%. Notice actually that the strong foreign currency loans coverage of 43% in Stage 2 and the 8% coverage for Turkish lira loans remained. For the NPLs, you can see on the next page, the net NPL inflows in the quarter suggest deterioration yet normalization after last year's exceptional low base. 86% of the new NPLs relate to retail and credit cards portfolio, as expected, upon the end of the cheap funding period.
Credit card portfolio NPL increase versus last year was 5.5-fold, and retail was 2.5-fold for six months into the year. The ratio post-NPL sale and write-downs remained at 1.9%, though with the continuing strong collections on the wholesale business and successful execution of timely NPL sales. We sold a total of TRY 4.2 billion of NPL for TRY 1.9 billion, suggesting $0.45 on the dollar NPL in the first half. We will continue with our NPL sales in this inflationary environment as long as there is positive spread between the NPL sale price and the legal process time cost. With these, we could secure attractive recovery via being first mover in NPL sales in the first half of the year. Our total provisions on balance sheet, including the written-down portion, now accumulate to TRY 70.4 billion.
This is the highest provision level among the private banks and represents a 4.6% total cash coverage. On the next slide, we'll see the translation of this into cost of risk. Even though net provisions, excluding currency and the earthquake-related provisions of last year, spiked 4.5-fold year-on-year, the continuing strong commercial business recoveries supported the year-to-date net cost of risk. 66 basis points of net cost of risk in the first half fares lower than our guidance of 125 basis points for the year. However, we stick to our guidance for the whole year, parallel to the expected rise in NPLs and no ease in our prudent provisioning. On the funding side, deposits dominate our funding with 71%. Despite the high interest rates, the high weight of demand deposits remains to be the key financial differentiation in terms of our margin outperformance.
Borrowing share in funding assets remains low at under 6.5%. Total external debt as of the first half was $4.3 billion, of which 44% relates to securitizations, 29% to sub-debt, and 20% to syndications. $1.2 billion of the external debt is due within a year, and against that, we have a five-fold $5.9 billion buffer in foreign currency liquidity. Overall, our leverage remained to be the lowest among peers at 8.3x the equity. In the second quarter, post the local elections, we exhibited an accelerated conversion from the foreign currency protected deposit scheme to standard Turkish lira deposits. Turkish lira deposits increased by 17%, whereas foreign currency deposits decreased by 9% in dollar terms in the second quarter. Accordingly, we ended the first half with the historic low share of foreign currency deposits in total.
Even though we manage probably the most sizable Turkish lira deposit portfolio in high-interest rate environments, Garanti continues to lead in customer demand deposits share in total with 39% versus the average of private peers of 34% for bank-only figures. Comparatively, this grants a significant funding advantage and continues to support our superior margin performance. Our margins were resilient quarter-on-quarter and could even book a five basis points improvement in the core margin. Our core net interest income, including the swap costs, further increased to TRY 10.6 billion from TRY 9 billion, suggesting by far the highest level among peers and validating one more time our legacy of highest core net interest income generation capability. Our improving core net interest income performance is owed to timely loan growth, repricing, and duration gap management, effective management of funding costs, and full utilization of CBRT's remuneration potential.
With the ongoing increase in loan yields, stabilized deposit rates, and currency, we expect to see a more visible core margin expansion in the second half of the year. Therefore, we keep our flat margin guidance for the whole year that suggests on a cumulative basis, our total margin of 3.6% in the first half will end the year around the last year's total margin of 5.1%. As for net fees and commissions on slide 15, there has been a threefold growth year-on-year driven by the payment systems business. Accordingly, of the near TRY 42 billion of net fees and commissions booked, two-thirds related to our strength in the payment systems. Recall that we rank number one in issuing volume, acquiring volume, and the number of credit card customers.
Even though we're also number one ranked in Turkish lira cash loans and non-cash loans, as well as money transfer fees, the extraordinarily high growth in the payment systems diluted their contribution to the net fees and commissions. Key reasons behind our robust fee performance are the strength in relationship banking and digital empowerment contributing to not only growth in our active customer base, but also penetrate further the existing customers. Our digital active customers now reached almost 16 million, and digital sales in total is 90%. As for the operating expenses performance, quarterly growth was a mere 7%, and the annual growth pointed to 71% post-currency adjustment. The lower growth in non-HR-related costs suggests increased efficiencies, feasible customer acquisition, and tight cost management. On the HR side, cost growth is actually slightly higher than inflation. Higher figure is due to the timing of wage increases.
Year-end growth for operating expense will remain above inflation as guided. Efficiency indicators are that the cost income was 42%, fees coverage of OPEX was a strong 93%, and operating expenses and average assets were 3.7% in the first half. As per capital, the quarter-end consolidated Capital Adequacy Ratio without the BRSA's forbearance was 15.2%, and Core Equity Tier 1 was 12.8%. Both remained well above the regulatory and ICAAP requirements. When we look at the year-to-date trend of capital, it seems that our capital generation, even though we booked the largest net income, could not compensate the negative effect of market and credit risk. This actually relates to the regulation that imposes higher risk ratings for loans. Under the condition of normalized risk ratings, our Capital Adequacy Ratio would be around 150 basis points higher than recorded and be 16.7%.
The foreign currency sensitivity on our capital adequacy ratio remains low at 18.3 basis points negative for every 10% depreciation, thanks to our $500 million Tier 2 issuance in the first quarter. In summary, we earned the Olympic gold medal in the financial pentathlon. In the first half 2024, we recorded the highest net income via sustained increase in core banking revenues. The year-on-year growth in the core banking revenues was 63%, reaching TRY 81 billion in only six months. On the fee side, our diversified fee-generating businesses, along with the extraordinarily high payment systems fees, tripled year-on-year and brought the fees coverage of OPEX to 93%. On the asset quality front, we started to see more normalized retail and credit card NPL inflows as expected and guided. However, first half net cost of risk remained low due to the continuing strong collections from the wholesale business.
Our total provisions on balance sheet with above TRY 55 billion is the highest among private banks. On the capital front, we remained solid. We had TRY 65 billion of excess capital as of the half-year end when calculating without the BRSA's forbearance. Our progress in business growth continues. Today, every one out of two bank customers has an account with Garanti BBVA, and our digital active customers with almost 16 million is the highest in the sector. In conclusion, our agility and financial resilience once again validated our unmatched leadership. Thank you for listening. It's now time to take your questions.
Hello again for the Q&A session. You can ask your questions by typing into the Q&A area or by using the raise your hand button. Once your name is announced, please unmute yourself and ask your question. Just one minute for the first question. The first question is coming from Mehmet Sevim. Hello, Mehmet.
Good evening. Thanks very much. Can you hear me?
Yes, we can hear you. Thank you.
Great. Thanks very much for the presentation and taking my questions. I have just a few of them. So first of all, you're clearly tracking ahead of your peers when it comes to margins. And as we can see that also in the delivery so far. Can I just ask here what the contribution of the remuneration is to the NIM that you receive from the conversion efforts of KKM deposits? And as we go into the second half, how would you expect this to evolve? And also maybe based on that, if you could also give us your thoughts about your overall guidance going into the second quarter, second half, that would be very helpful.
And another question I had is just on the growth trends. Clearly, growth is limited, but some of your peers have accelerated their efforts in FX lending. And as far as I see, you're tracking a bit behind there with the volumes up much smaller than your peers. If I could ask why that's the case, and specifically, do you have any different views on what's going on currently in the FX lending in the market, or what is really driving that? Thanks very much.
Thank you, Mehmet. The first question, we've fulfilled all mitigation from CBRT. That is the reason 100% without any loss. We have got full remuneration from Central Bank, and its total amount is around TRY 11 billion in the first half. So it is added to net interest margin.
The second one, net interest margin guidance, we don't see any risk on our flatish net interest margin guidance. In the second half of the year, especially in the fourth quarter, we are expecting to see a more visible improvement in margin, and as repricing on the asset side will continue and more or less stabilized or maybe even lower deposit costs. So with the recovery of the second half, we are going to be around the guidance. So we don't need to change our guidance as well. In the foreign currency credit side, we did this grow in 2023. When market was stable, we increased our loan portfolio, and we got 220 bps market share in 2023. Market followed us with a lag. That is the reason what you have seen in this year was done last year by us.
That is the reason this is not related with risk appetite. This is just related with pricing issues because last year's pricing were 2%, 3% above of this year. So in line with your first or second question, this is another contributor to net interest margin. So we are just managing our portfolio in a profitable way. That is the reason.
The next question is coming from Cihan Saraoğlu. Hello, Cihan. Hi, Cihan. Hi, we can hear you right now. Please go ahead.
Okay, thank you very much. And congratulations on the very strong results. My question is rather a broader one. So we see a significant divergence between your profitability performance versus peers. Part of it comes from net interest margin, but part of it comes from elsewhere. So if you could just elaborate on what strategic decisions that you took in the last few quarters that created this divergence, that would be useful. Beyond that, I have a couple of specific questions as well. One is your swap cost seems to have increased a lot Q-O-Q. Is that related with utilization or just with pricing? And in general, are you making any changes to your guidance? You said that net interest margin, you're keeping the guidance, but what about fees or overall profitability? Thank you.
Okay, thank you, Cihan. The first question, I think this is mainly related with the balance sheet structure. We have the highest share of interest earning assets. This is one of the main indicators. The second one, we have the highest share of non-interest bearing liabilities, which is the result of having the largest demand deposit based on free equity.
And also, as Handan mentioned, our balance sheet is able to create impact for a larger customer base. So our priority is always being customer-driven asset growth rather than betting on securities income. Because, as you know, last year, securities were the main differentiators, but this year, securities is a little income-consuming issue. So we didn't invest too much to securities. Always, always, we are on assets. Our assets are customer-driven, and funds are customer-driven as well. And equally important, we are the best in class in this management with our right pricing in lending and funding. As you see, the spreads are over the market averages. These are the main differentiators. The second part of your question, this is the swap cost, is related with the volume amount of the swap. So in terms of interest rate, we are in line with market.
So there is not any exceptional issues. The last question, I think in the guidance side, we are not going to make any change with our guidance. All our guidance is valid. We don't need to make any changes.
All right. Thank you very much.
The next question is coming from David Taranto. Hi, David.
As my colleagues have mentioned, your margin performance has been impressive in a rather challenging quarter. I know it's quite early, and there are many moving parts here, but would you kindly give us some color on how you see the outlook in 2025, which should be a year of easing policy rates? Would it be fair to expect an expansion on top of the second half margins, which, as you highlight, should be higher versus the first half margins? Second question is on asset quality.
It has been more resilient than initial expectations so far this year. Considering the lagged effect of the macro slowdown and the aging impact on accounting, would it be fair to push out higher cost of risk expectations into next year? And finally, on NPL sales, I remember back in 2018, 2019, the proceeds on NPL sales were like 0.05 on a dollar. And back in 2015, 2016, they were around 10%-15% on a dollar. Now we are talking about 40%-45% levels. I appreciate that the inflation has been supporting the collection performance here, but are there any other reasons behind the strong pricing levels for these NPL sales? Thank you.
I think the year-end net interest margin within the last quarter margin will be the right signal for 2025. As we mentioned, there will be a correction because our net interest margin is 3.6 in the first half. Our guidance is around 5%. I think it's going to be around 5% and positively above 5%. This is expectation, but it's going to be shaped in line with the inflation plus with the policy rate, which will be another result of the inflation. What is our expectation? The year-end inflation will be around 43%. In line with that inflation rate, there will be some rate cuts. Those rate cuts will help banks to reach better net interest margin level under the circumstances, decreasing the cost of deposits. And also in line with that, decreasing the credit yields always will create banks to reach better net interest margin.
So as a mood or as a specific level, I think that it will be over 5%, but how much? I may tell you a reasonable answer in the last quarter, fourth quarter, not now, but as of now, it will be over 5%. The asset quality, as you know, our 2024 guidance is 1 25 basis points. This is mainly created by retail portfolio, credit cards, and retail portfolio. Wholesale is on the positive side. Wholesale in total, there are very strong collections from wholesale. That is the reason it is balancing. So we are going to end up the year around under than 25 basis points. But there are very strong signals we have been getting from the market. There will be deterioration in wholesale portfolio. This deterioration doesn't mean that it will be a problem.
It is normalization because in Turkey's circumstances, cost of risk 1 25% cost of risk is the reasonable one. What we have witnessed during the last three years, 6 - 7 basis points, that is the reason there is an accumulated amount of NPL that will be subject to the banking sector in 2025. This is normalization. This is normalization, but with the impact of this delayed normalization, we are going to see cost of risk levels above 200 basis points in 2025. Then the NPL side, yes, we are opportunistic here. As we see reasonable rates, we did it, and we will continue to do it in that manner as well. So we are on the positive side. We will continue in the first half. We made TRY 4.2 billion NPL sales.
I think in the second half, there will be another 2-3 tranches, which will be around these TRY 4 billion levels.
Seems like we don't have any more questions. So this concludes the Q&A session. I now leave the floor to our presenters for closing remarks.
Thank you all for your participation. I am extremely pleased with our outstanding financial performance, which I believe will once again positively differentiate in the sector, not just in terms of level, but also in terms of quality. Our assets and funding our customer-driven and equally important, we are the best in class in this management with our right pricing in loans and deposits. Therefore, we end up with the highest core NII in the sector. We are the only bank generating fees that can fully cover its OPEX.
We refrained from irrational competition in customer acquisition, which has material costs on banks' balance sheet in short term and medium term. We are the most prudent bank in terms of provision allocation as we operate with comfortable buffers. We have positioned the balance sheet for sustained growth and profitability. We are confident in our team's ability to deliver continued value to shareholders, customers, and employees. Thank you again for your time. Hope to meet you soon.