Good afternoon, and thank you for joining Garanti BBVA's Q1 2026 financial results webcast. Today, we are joined by our CEO, Mr. Mahmut Akten, our CFO, Mr. Atıl Özus, and our Head of Investor Relations, Mr. Ceyda Akınç. Following management's presentation, we will open the floor for questions. You can either use the Raise Hand function or submit your questions through the Q&A box. Without further ado, I will now hand over to management.
Hello, everyone. We are pleased to be with you again following another quarter of strong financial performance. Before getting into our financial performance details, let's, as usual, go over the macroeconomic environment we are in. Following 3.6% annual growth in 2025, we now forecast a moderate GDP growth of 2.5%-3% in Q1 . Although ceasefire remains a possibility, the physical destruction in the region suggests that the recovery on the supply side will take time. Therefore, we evaluate downside risk to our 4% GDP growth forecast for 2026. We have revised up our year-end policy rate assumptions from 32% to 35% alongside a higher inflation outlook.
In line with our above 30% inflation expectation until September, we expect CBRT to keep the funding rate at 40% until June, and if conditions allow, limited rate cuts might resume in July. Moving into current account balance, increased energy prices and weaker export performance due to subdued external demand put the pressure on the current account deficit. We now expect current account deficit to GDP to be around 3.2% versus around 2% estimate in the beginning of the year. Despite availability in fiscal room, depending on the increasing external financing needs, the fiscal support on growth would be kept mild. Moving into our financials, I will start with the headline figures. We had a solid start to the year.
In the Q1 , we delivered a net income of TRY 34 billion, corresponding to 32% annual increase and 25% quarterly increase. Our return on equity was 30% and once again supported by core banking revenues. As you can see on the right-hand side, core NII went up by 4% Q-on-Q with the support of expanding spreads. Strong increase in trading income was mainly backed by higher foreign currency buy and sell activity. Net fees and commissions income maintained its growth pace in the Q1 with the increasing contribution from money transfer, insurance, and asset management fees. As always, we remained focused on capital generative growth, which is clearly reflected in our sector-leading CET1 ratio of 12%. A big part of this success comes from our asset mix.
On slide seven, our total assets reached TRY 4.8 trillion, and loans make up 56% of total assets, which supports our recurring revenue generation. In this quarter, I would like to acknowledge that due to the ongoing sale process of our Romania subsidiary, related balance sheet and P&L items have been reclassified under assets held for sale and discontinued operations. Therefore, in our earnings presentation, we have shown Romania impacts separately in previous quarters' figures for fair comparison. Quarterly and yearly growth figures also excludes Romania for fair comparison. In foreign currency securities at the quarter end, $3 billion short-term placement to high-quality liquid assets led a temporary increase in foreign currency securities balance. In TL securities composition, I would like to highlight that we increased floating rate notes. Moving into slide nine for further insight on the loan portfolio.
In the Q1 , we maintained growth pace in credit cards and business banking loans. We preserved our disciplined pricing stance in loans and delivered healthy growth in all loan categories. If we move on to the asset quality, in the Q1 , consumer and credit card-related flow to Stage 2 and Stage 3 continued. Share of Stage 2 in total loans modestly increased to 11% due to flow to SICR and restructuring. Increasing SICR portion reflects our prudency since 84% of SICR portion is non-delinquent at all. Due to the respective regulation, restructuring in consumer loans gained pace notably. Our Stage 2 coverage ratio declined slightly to 7.5%, mainly due to mix effects and improved repayment performance in certain individually assessed loans. I should highlight that there is no change in our prudent provisioning and staging policies.
Higher-risk segments are supported by strong collateral structures and coverage buffers, particularly in SME and wholesale portfolios. If we move on to the net cost of risk on page 11, net provisions declined slightly in the Q1 from the high base of Q4 . On an annual basis, provisions increased due to the retailing flows and normalizing collections from the wholesale book. As a result, consolidated cost of risk realized at around 2%, pairing in line with our expectations. Moving into the other side of the balance sheet. Not only in assets but also in funding, we rely on customer-driven sources. Total customer deposits exceeded TRY 3 trillion, constitutes 66% of total assets and remain TRY heavy. Share of free funds is by far the best among peers, which mirrors our net interest margin strength.
In TL demand deposits, due to point-in-time data, there seems to be a slight decline. On an average basis, we continue to expand our TL demand deposit base. On foreign currency side, deposits increased by 3%. One third of that growth was due to gold price increase related parity impact compared to the same brand. Moving on to external funding, we maintained our diversified funding mix. Our total external debt currently stands at $9.5 billion, of which $3.7 billion is short term. Against this, we maintain a comfortable and strong foreign currency liquidity buffer of $9.4 billion. Let's move on to the net interest margin on page 15.
In the Q1 , we were able to expand our net interest margin by 25 basis points with the support of increasing loan-to-deposit spread, as you can see on the right-hand side. As you may recall, in our previous earnings webcast, we had expected a decline in the Q1 margin. However, until March, TL deposit costs stayed below our expectations. Coupled with timely loan growth and duration gap management, we were able to expand our core spreads notably. In this net interest income base for prudence, we used 23% assumption in our Q1 CPI valuation, while current expectations point to a potential realization closer to 28% by October. As a result, our net interest margin reached 6.1%.
We continue to have by far the highest net interest margin and net interest income level among major peers. Our aim is to preserve this leading position. If we move on to the other P&L items fee, our fee base remains robust, up by 42% year-over-year and 4% Q-on-Q. Payment system fees continue to be the main driver of the growth. In this quarter, contribution from money transfer, insurance, as well as asset management fees gains momentum. We are number 1 in money transfer fees and in life and non-life insurance fees. This leading stance is a result of our expanding customer base and increased digital engagement. 1 in every 2 banking customers in Turkey is Garanti BBVA customer. With over 2.4 million new customer acquisitions, our total number of customers has reached 30.6 million.
With 18 million active mobile customers, one in every 5 mobile banking transactions in Turkey is conducted through Garanti BBVA Mobile. If we move on to the operating expenses, we are keeping costs under control, growing in line with the budget and was up by 57% year-over-year. Quarterly HR cost growth reflects a new salary adjustment. As we have been communicating, our strategic investments to enhance customer experience and increase customer penetration support our revenue generation capability. As a result, significant portion of our operating expense base is covered by fee income, and we have the lowest cost-income ratio. Our capital generative growth strategy continue to support solvency. Consolidated CET1 realized at 12%, while capital adequacy ratio reached 16.2%. We maintain sector-leading capital ratios even after 20% dividend payout and annual operational risk adjustment.
These two had 1.4% impact on CAR in the Q1 . The foreign currency sensitivity on our capital adequacy ratio remains limited with 12 basis point negative for every 10% depreciation. We have a strong TRY 149 billion excess capital, which will support us to absorb any volatility. With that, let me walk you through our 2026 operating plan guidance and our current outlook. First, start with macro assumptions on the left as they form the foundations of our planning framework. Back in January, our baseline scenario assumed 32% policy rate and 25% inflation.
Given the ongoing conflict in the Middle East, we have revised our year-end policy rate assumption upwards to 35% alongside a higher inflation outlook. As I mentioned earlier, in line with our expectation of inflation remaining above 30% until September, we expect CBRT to maintain funding rate at around 40% until June, with the possibility of limited rate cuts resuming in July. Under this updated macro framework, while we continue to track in line with our balance sheet growth targets and our P&L performance remains broadly aligned with our expectations on fees, costs, and provisionings, we do see some downside risk on our net interest margin guidance due to higher funding costs. Let me elaborate on this. In the Q2 , we expect average funding costs to increase compared to Q1 , contrary to our initial projections.
While we had anticipated a gradual improvement in fourth spreads, rising funding costs since March have weighed on this trend. We have already incorporated this increase into our loan pricing. Due to duration gap, the positive impact on yields will come with a lag. Higher than expected CPI is another buffer to offset this impact. In Q1 , for prudence, as I mentioned, we used 23% in the valuation of CPI increase. We continue to expect margin expansion for the full year, even under a more conservative funding cost assumption. Loan repricing catches up, we expect margins to recover relatively quickly in the second half. A faster than expected normalization in funding costs would further support this recovery. In terms of return on equity, at the beginning of the year, under 25% inflation assumption, we guided for mid-single digits real return.
With the revised inflation outlook and the pressure on margins, there is some downside risk to our real return. However, in nominal terms, we may still be able to deliver our targets. Please note that expected contribution from the sale of our Romanian subsidiary may provide additional support towards the year-end. This concludes my presentation. We are now happy to take your questions.
Welcome to the Q&A session. As a reminder, you may ask questions by raising your hands or by using the Q&A box. When your name is called, please unmute yourself and proceed with your question. One moment for the first question. We have a written question. Should we expect a NIM compression in Q2 ?
Yes, we already see the impact in the month of March. As expected, with the cost of funding increase by central bank, it reflects on the deposit pricing as well. At the same time, and we did the projections for NIM for the full year, as 6.1% from last year's average of 5.3%. We already achieved that NIM in the Q1 beyond our expectation. The slight increase in the funding cost, and compression in the Q2 as the funding costs increased by more than 250 basis points. Also, as Ceyda mentioned, we incorporated the cost of funding into the loan pricing already.
Therefore, we'll get a slight NIM compression in the Q2 , but third and Q4 , we will correct it again, and we might be likely getting very close to the NIM guidance we had last year. Overall, that's the reason Ceyda mentioned in nominal terms, we are not expecting much of a change from our expectation in terms of ROE, in terms of profitability guidance. The timing of the expected NIM between the quarters will be different than as we planned. That's what we can say.
We can add the CPI linker assumption will be better than the original guidance, which was 25%. CPI will be higher, so this will also support of NIM.
Yeah.
To help us reach original guidance.
Yeah, it's a good point. I forgot to mention that, we incorporate in our Q1 is only 23% actually.
Exactly.
We have been as usual, very conservative about these type of assumptions going forward. Very likely this will be significantly higher in the Q2 as we see more data on inflation.
Yes.
October to October.
Mm-hmm.
Inflation will be higher than our projections. There isn't much of a difference from the our original baseline. It's just the timing of the NIM margins in terms of realization might be different than what we initially thought. Thank you.
Thank you. One moment for the next question. We have audio question from Furkan Vefa. Please unmute yourself and ask question. Furkan, you hear us?
If my voice was heard.
Yes, we can hear you right now.
My-
Please go ahead.
Okay, thanks. My first question is, with higher inflation, do you see any upside on fee generation? My second question is, what are the rates for loans and deposits right now that you see?
Let me start off, and then Atıl add it up. On higher inflation upside in fee generation. Yeah, it might have a positive impact in terms of payment fees as the interest rate comes down. Fee generation assumptions in original base has been assuming that there is further decrease in inflation going forward, and at some point might have an impact on fee generation especially in payments. Typically, most of the commissions we have is in especially money transfers, typically updates once a year. Any inflation this year might have a positive impact in next year. Having said that, higher interest and inflation will have other impact on, for instance, asset management or brokerage.
Because inflation is reflected in returns, especially given that we are number one in terms of asset management volume for instance. The returns will be higher with inflation, this will convert to higher commission. If you look at it, there are certain items we will benefit from higher inflation next year, but there are certain items we'll benefit this year and like this type of insurance and asset management and brokerage fees. Then there are items where we were expecting lower fee generation towards the end of the year, which might not happen, so overall positive. If I move to the second question.
In terms of deposit rates and loan rates, I'm relatively confident on the numbers, but we have an increase that's right on deposit funding initially up to 250 basis or so.
Yes. In fact, I mean, the new deposit-taking rates increased by around 200 basis points and new lending rates increased by more than 300 basis points.
Yeah. Furkan, we did something, we are relatively conservative in terms of long-term view. We actually not knowing this will happen, but we have hedged our deposit to an extent by increasing the deposit duration. We benefited overall in our scope of deposits funding from a longer duration, both on commercial and retail, but more on commercial. That also benefits us in this time. I can tell that. You know, we shouldn't forget about the swap rates back to a bit more normalized right now. Offshore funding cost is not as low as February, but it's coming back to normal.
In terms of credit sides, this 300 basis increase is also related to decreasing duration as well, which will benefit us in the coming months. Overall, it is an immediate impact in NIM compression, but it's not substantial given that we have hedged ourselves ahead of the game to an extent on the funding side, and then reflected both on mortgages and other items. Position ourselves on the lower duration and higher versus sector. There is weekly data on these items. We see clearly that we are pricing it correctly versus the sector. Does that answer your question?
Yes. Thank you.
Sure. Thank you.
Our next question comes from David Ferrante. David, please go ahead.
Good afternoon. Thank you for the presentation. I have a quick question. Could you quantify the expected impact of the Romanian subsidiary sale on the P&L and also on the capital, given the RWA impact? In addition, would the proceeds be treated as a part of the regular payout or would any gain be considered separately in your payout calculation at the year-end? Thank you.
First of all, yes, we are expecting over EUR 100 million worth of positive profitability from the Romanian sales. Atıl, what was the capital impact?
Yeah, it's close to 80 basis points or so. 80 basis positive.
Yeah. That gives us extra buffer, which is good. Your second question was?
Regular payout in the.
Yeah. Could you repeat?
Would this one-off sales gain proceeds be treated as a part of the regular payout at the end, or would that gain be considered separately when you decide on the dividend payment?
No. We do our regular dividend payments once a year with the regulatory approvals. At this point, that's going to be kept in capital and not a part of distribution.
Okay. Thank you.
Mm-hmm. Sure.
One moment for the next question.
It looks like we don't have further questions. Thank you for all joining today. I just wanna add the last question because it reflects our perspective on growth. We have sold the Romanian operations, but we have been always focused on the business plan. Business plan meaning sustainable profitability, we did have a plan for Romania as well. Even though it looks very good priced, it was part of our business. You know, in a few years we were going to be there. This is valid for the remaining of our business as well. This is reflected on a very solid start of the year.
We have been mostly conservative in our assumptions, including CPIs, including provisions, including how we look at the business and the hedges I mentioned, for instance, even last year. On top, our main focus is customer and preserving our sector leading capital positions on top to be able to grow sustainably. In this period, there have been a lot of uncertainties, both globally and locally. As we have seen, in Turkey, there has been very fast stabilization after the war start overall. It has been a bit of hiccup, in March in terms of the funding costs going up, that, you know, not expected and that was not the part of the plan.
January, February, when you look at the numbers, I think when you look at the sector numbers as well, it has been really significantly positive. As I mentioned, we achieved our NIM even with very conservative assumptions, our average year numbers in the Q1 . Therefore, with a strong balance sheet and effective risk management, we should be able to manage to hit the baseline projections. Going forward, as I said, what's important is the long-term view, we will continue to build on our product portfolio subsidies and then, once again, provide you a very strong Q2 and Q3 going forward.
If there's no other questions, I would like to, again, thank you for everybody and hope to see you in the next earning call, sharing, and look forward to sharing another strong set of results. Thank you, and have a nice evening.