Hello, and thank you for joining us in the Garanti BBVA's First Quarter 2025 Financial Results Webcast. Our CEO, Mr. Mahmut Akten; our CFO, Mr. Aydın Güler ; and our Head of Investor Relations, Ms. Ceyda Akın , 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 Raise Hand button or by typing them into the Q&A area. I now leave the floor to management for the presentation.
Hello everyone. I'm pleased to present Garanti BBVA's First Quarter earnings results. Before moving on to financials, I would like to go through the macro environment and our macro forecast. Turkish economy in 1Q remains solid, supported by robust domestic demand. Given the strong momentum in the first quarter and the expansionary fiscal stance, we expect GDP growth to be 3.5% this year. Inflation is set to decline, supported by tighter financial conditions, moderating private consumption, and lower commodity prices. Following the latest internal and external market volatility, we revised up our year-end inflation estimate from 29%- 31%, while acknowledging upside risks from uncertainty in food prices. As you're all familiar with, following the turmoil, CBRT took all necessary market-friendly actions to address economic imbalances, gave a strong message to rebuild confidence, and anchor foreign currency expectations.
Once the effects of recent internal and external shocks begin to fade, CBRT can again start easing June onwards. Yet, given the potentially higher risk premium levels going forward, we think that CBRT might keep a slightly higher ex-post real rate of at least 4 percentage points by year-end. Moving on to the current account deficit, we expect current account deficit to GDP to slightly worsen to 1.5% in 2025 due to deterioration in core trade deficit and increasing net gold imports. Fiscal policies stayed expansionary in early months of the year. Therefore, fiscal consolidation may be more clearly seen in the second half of the year. Accordingly, we maintain our forecast of budget GDP at 3.5%, yet cash deficit to GDP ratio might remain above 4% due to potential risks on near-term growth outlook. Now, moving into first quarter financial results. We kicked off 2025 with a solid performance.
Net income reached TL 25.4 billion. This marks a 13% year-over-year growth, with robust ROE at 30.5%, despite relatively low leverage of 9.3 times. Our internal capital generation continued to support our capital ratios. Key driver of this earnings strength is core banking income, as you can see on Page 7. Core banking continues to be our pillar of strength, delivering unmatched revenue growth and highlighting the sustainable nature of the bank's profitability. Core NII surged by 68% Q on Q on the back of declining funding costs and resilient loan yields, which I will touch upon in detail in the coming slides. Clean trading gains contribution was relatively modest in this quarter due to derivative transactions MTMs, which can be considered as non-recurring. Net fees also held up well, growing 4% Q on Q on the back of strong activity.
As a consequence, our core banking revenues to assets reached 7.9% in 1Q, which suggests the highest level and improvement. A big part of this success stems from our asset mix, as you can see in Slide 8. Our lending-driven asset composition remains as a key differentiator. Performing loans now make up 55% of assets, suggesting a slight decline compared to Q on Q, and this has to do with robust deposit growth related to increasing reserve requirements. Yet, we continue to differentiate with our high share of loans in the mix. Lending growth was across the board. I will explain the key drivers of TL loans in the next slide, but on the foreign currency side, I would like to highlight that half of the growth was coming from the increasing Euro/Dollar parity impact.
In securities, we had CPI redemptions during the quarter, and we invested in long-term fixed-rate securities in the beginning of the year. In foreign currency securities, we had opportunistic purchases during the year. Moving into slide 9 for further insights on our loan portfolio. In 1Q, our TL loans grew by 7%, reaching TL 1.2 trillion. Credit card growth slowed down compared to 1Q, yet we maintained strong growth momentum in consumer and SME loans. We gained market share in general purpose loans, mortgages, micro and small enterprises, and solidified our leading position in these loan segments. While growing, we always act with prudency. Now, let's look at the evolution of our asset quality. Increase in Stage 2 loans was limited in 1Q, backed by strong economic activity. Now, Stage 2 loans make up 10.5% of our gross loans, with 11% coverage.
More importantly, if we look at TL foreign currency breakdown, our foreign currency Stage 2 loans coverage remained healthy at 26%. Now, let's walk through the evolution of our NPLs. Our asset quality is normalizing, as expected. The NPL ratio rose slightly to 2.6%. In line with the expectation, the majority of net flows was from retail and credit cards. We are witnessing the natural consequence of robust consumer and credit card growth sector registered in the last couple of years. Our total coverage levels remain healthy at 3.6% compared to an NPL ratio of 2.6%. Now, moving into provisioning. This year, we guided for higher cost of risk due to increasing NPL inflows from unsecured loans and normalizing large ticket collections. As of 1Q, we have started to see this trend.
On a reported basis, net provisions excluding currency surged notably, yet last quarter base was exceptionally low due to large ticket collections and reclassification-related provision release of a large ticket item. Our first quarter net cost of risk realized at 1.4%, better than our year-end guidance of 2%-2.5% level, which is supported by better GDP growth-related macro adjustment. Despite better-than-expected performance, we maintain our year-end guidance for cost of risk. In an increasing interest rate environment, our cost of risk level will converge to our guidance towards the end of the year. Now, moving into the other side of the balance sheet, how we are funding this growth. Not only in assets, but also in funding, we rely on customer-driven sources, which is the backbone of our success. With the outstanding growth we registered in 1Q, deposits share in assets increased by 2% and reached 74%.
Following the internal developments in mid-March, we witnessed accelerated growth in deposits, both in TL and foreign currency. On TL side, due to increasing deposit rates and conversion from money market funds, we registered 18% growth. Here, I should also admit that 75% of TL deposit growth was coming from retail, which was relatively lower cost and sticky. Growing demand deposit base, in line with our expanding customer base, also supported this growth. In TL deposits, we gained 1.1% market share among private banks, and our market share reached 22%. On foreign currency side, due to increased dollarization tendency, especially among corporates, we witnessed a surge in foreign currency deposits. Hence, 70% of foreign currency deposit growth was from corporates, and the pace of increase has slowed down compared to initial reaction in mid-March.
While growing, we always keep a close eye on spread management, as it is visible in our net interest income on the next page. In first quarter, we continued to deliver best-in-class amid market shifts. Our core NII increased by 68%, which alludes to 145 basis points increase in core margin. This quarter, CPI contribution reduced by almost half, as we used a 28% rate in the valuation of CPI linkers. Accordingly, net interest margin, including swap cost, increased by 45 basis points in the first quarter. Looking at the core spread more detail, up until mid-March, in a declining interest rate environment, we were able to reflect the expected rate cut into our TL deposit pricings. Hence, our TL time deposit cost declined by 3%, whereas drop in TL loan yields was limited with 1%.
This is the result of effective duration gap management and also strong presence in relatively less interest rate sensitive loan products, namely consumer loans. In this current macro background, given CBRT's tightening measures, we are observing an increase in funding costs, which also leads to an adjustment in lending yields. That said, current volatility looks more like a postponement in margin recovery rather than a disruption of the overall story. The overall impact on NIM will depend on how macroeconomic variables, particularly interest rates and currency levels, evolve in the coming period. Now, moving on to the next slide to break down the components of margin strength. Margin reliance is rooted in our assets and funding strategy. In our TL assets, the share of TL loans is 58% versus securities share is only 15%.
In a period where loan yields are about two times higher than securities, this presents a significant and sustainable revenue advantage. On liabilities, TL time deposit share in TL liabilities is 86%, and here we continue to preserve our funding cost benefit versus repo in an increasing interest rate environment. Now, moving on our fees on Page 16. Our fee base remains robust, up by 55% year- over- year. On an annual basis, payment system fees continue to lead the growth, yet its share has started to decelerate in line with expectation. On a quarterly basis, strong cash and non-cash loan growth, which supported lending-related and insurance fees, followed by increasing money transfer fees. Digital penetration continues to rise. Number of digital customers reached 17 million. Our strength in digital banking reinforces fee base by driving growth in customer acquisition and customer penetration. Now, moving on to our operating expenses.
We are keeping our costs under control, growing in line with the budget. Operating expenses grew 4% quarter on quarter. Quarterly HR cost growth reflects annual salary adjustment and rollover impact of previous adjustments. In terms of efficiency, we continue to have the best ratios among private peers, as you can see on the comparative chart on the right-hand side. As per our capital strength, our capital-generated growth strategy continued to support the solvency, and we maintained sector-leading capital ratios even after 20% dividend payout and annual operational risk adjustment. These two had 1.7% impact on capital adequacy ratio. Our consolidated Common Equity Tier 1 ratio stands at 13% without forbearance. Foreign currency sensitivity on our capital adequacy ratio is low, 15.5 basis points for every 10% depreciation. We have a strong TRY 105 billion excess capital, which will continue to support us to absorb any volatility.
Before we conclude, I would like to go through our guidance. In TL loans, we expect slightly positive real growth versus year-end inflation forecast. In foreign currency loans, we are faring in line with the guidance. We continue to abide by regulatory caps on foreign currency, and increasing Euro/Dollar parity could drive foreign currency loan growth to the low teens . In terms of net cost of risk, despite better-than-expected first quarter performance, we think in an increasing interest rate environment, it will converge to the guided range towards the year-end. In terms of NIM, CBRT's current tight stance may postpone some margin recovery, but we think we still need time to see the evolution of macroeconomic variables in the coming periods. Fees and OpEx growth also on track with the guidance, and as a consequence, we maintain our low-thirties ROE guidance.
While acknowledging the postponement of NIM recovery, we believe we can end the year within the guided range. This concludes my presentation. Thank you for listening. Now we can 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. One minute for the first question. The first question is from Mehmet Sevim. Hi Mehmet, please unmute yourself and ask your question.
Presentation. I just wanted to ask and follow up on your NIM guidance for the full year. Specifically, you have mentioned there is some downside risk, but understandably, you want to wait and see where the monetary policy goes.
Are you able to give us any color at this stage in terms of where the exit NIMs would reach based on what we know today and also how maybe the new quarter started off? Anything maybe quantitatively on that side would be really helpful considering, obviously, you started the year much better than your peers and also your exit NIM guidance for the full year previously was much higher than for your peers as well. That is one. Secondly, you mentioned during the presentation that you gained some market share in deposits , which I think is quite interesting given, obviously, the volatility that we saw in the market. Maybe qualitatively, what are the reasons behind this? Is there anything you can share about what led to this market share gain in those more volatile times, especially from retail? Thank you.
Let me start with the first one. In terms of NIM, as we indicated, as Ceyda indicated, the expansion we expect 3% throughout the year. We did not want to change it really because we want to see the next few months, especially whether there will be a significant cut in June, later in June. There is quite a bit of time till then. That is number one. In the fourth quarter, in the meeting we had, if you remember, we mentioned that we have a relatively good duration. We increased our duration late last year. We are expecting NIM expansion, further expansion until the third quarter. In the third quarter, we would have expected the highest NIM. These changes in the cost of funding actually defer this NIM expansion to the fourth quarter.
It's like really everything is a bit deferred by three months as it looks right now. That's the main reason. We still expect a similar trend, but now in the second quarter, there will be a slight reduction in customer loan minus customer funding. There is a KKM impact as well. We had a higher hit from KKM, close to 55 basis points in the first quarter results. Second quarter, very likely NIM will be higher than the first quarter overall. With the June potential cut, we expect NIM to expand further. Given that situation, we didn't want to change it right now. This was one item. There is a potential downside risk, but very limited, not significant in terms of material impact.
Also, Ceyda mentioned that we are keeping our cost of risk flat with the earlier guidance, but there we see also potential upside as well, even though we expect some normalization, but there is an immaterial upside there as well. We stick with our numbers in the NIM as well. In this next quarter, we might have a better projection for you. In terms of TL time deposit and demand deposit as well, our strategy, as in the previous quarters I mentioned as well, is expand our customer base and be close to the customers. We are doing many things to do that. Regardless of this market, we wanted to rely on customer deposit as we do in the asset side customer loans to have a healthier balance sheet. It has not been related to volatility, although volatility helped.
In these times, when there is a volatility, we further expand our customer base. The majority of those market share gains is attributable to January and February, not March really. It worked very well in the interest-increasing environment. It costs close to 300-400 basis points lower to have a deposit on the marginal level than the repo funding. It has been, regardless of whether interest rate is going down or up, we always focus on expanding our customer base. We have gained substantial market share also in credit cards as well, which is also helpful in terms of increasing our sticky customer. I hope it answers your question.
It does. Thanks very much, Mahmut. Thank you. It's very helpful.
One moment for the next question.
Just a quick reminder, you can ask your questions on the Q&A area or by raising your hand button.
Thank you. We have a written question from Valentina. How do you see TRY deposit costs evolving in coming quarters given recent rate hikes? What trajectory of NIM do you expect by the end of year? What are your assumptions that back up your exit NIM guidance?
Hi Valentina. I tried to partially answer the similar question by Mehmet Bey as well. Basically, the way it's going to be evolving at the moment, in the second quarter in terms of customer spread and cost of funding, cost of funding will go up as we see given the margin cost of funding in the repo market and central bank went up significantly.
As you know, policy rate only went up by 350 basis points, but the margin cost went up almost 650 basis points. We expect in the coming days, these marginal overnight rates will be coming down to policy rate first and further in June, so evolve further down, which will help our spread and NIM to expand. As I said earlier, we expect a NIM expansion at the end of the year given this cost of funding correcting itself over time. It appears like the projections we have done in November when we were preparing our budgets for the full year, the whole projection has been deferred by three months or so in terms of cost of funding and margins. Instead of the margins picking up in the third quarter, it's picking up in the fourth quarter.
By year-end, we expect our policy rate to come down to 35%, leading 400-500 basis points in terms of above ex-ante inflation. Given that, we expect our cost of funding also decreasing below the policy rate, somewhere between 32% or so at the marginal level. Typically, because our margin cost of funding is 300-400 basis points below the policy rate. There was another question from Valentina. Lastly, can you update us on your Eurobond issuance plans for the rest of the year? We have been in the market last year, as you have pointed out, and then we might be in the market again opportunistically as the market corrects itself, as we see more liquidity. Given that our continuous focus on growth, there might be good opportunities to leverage the market, especially on sub-debt Tier 2 .
Thank you.
Hope these answers those two questions.
Seems like we don't have any more questions. This concludes the Q&A session. I now leave the floor for closing remarks.
Thank you all for attending this meeting. As we complete the first quarter of this year, we are again proud to deliver very strong and resilient results. Regardless of the volatility, regardless of our CPI linker or any other factor, we still continue to provide good results. This is mainly driven by our customer-centric approach, as we just discussed about the deposit cost and deposit customer base, how we expand, also strong capital base, and our continuous focus on innovation, which in these meetings, in these calls, it's hard to talk about those details, but we are doing a lot of innovation in especially the digital space with subsidiaries as well as our mobile app.
This further helps us to further strengthen our leadership, which also helps in terms of further expansion of our customer base. We see also this with market share gains. We achieved a cross-lending, deposit, digital platform, payment system, and this reflects the success of our continuous strategy and execution. Looking forward, we remain confident that our agility and financial strength will help us to navigate any uncertainty in global or local markets, as demonstrated by our consistent track record in the past as well. Again, thank you very much for your participation and have a nice evening to all. Thank you.