Earnings Call: Q2 2025

Aug 9, 2025

Ladies and gentlemen, welcome to the Halkbank's second quarter 2025 financial results. We will have a question and answer session following the presentation. If you would like to submit your questions, you can do them anytime. You can do that anytime, even now, by clicking the Q&A button at the bottom of your Zoom screen. That's written questions. If you would like to ask an audio question, you can join the call by clicking the Raise Hand button, and that will be available later. Now, I will leave you to our hosts, and they are, in this order, Mr. Miraç Taş, the Group Head of International Banking; Mr. Muharrem Baykara, Head of Investor Relations; and Mr. Kamer Olkay Asik, the Investor Relations Manager, all from Halkbank. Gentlemen, over to you. Thank you, Rob. Dear friends, good evening, and welcome to our second quarter earnings call. This is Miraç Taş, Group Head of International Banking. Today, we have Muharrem Baykara, Head of the Investor Relations, and our Investor Relations Manager, Mr. Kamer Asik, presenting. Before moving on the financials, I would like to go through the forest fires that were seen in the countryside and open areas in cities. They can quickly get out of the control, spread rapidly, change the direction, and are extremely dangerous. We are deeply saddened by the loss of the lives and extensive damage, including our natural heritage. We express our solidarity with the communities affected, as well as those engaged in the first aid and civil protection activities. I hope the earliest possible recovery from this disaster. Moving on the second quarter financial results. Our core banking revenue saw a significant increase even in a period of high interest rates and ongoing regulatory measures. Although the operational conditions were challenging for the banking sector, we were well-positioned and successfully manage our balance sheet. We achieved remarkable progress in extending our corporate segment, especially in products where we can prevent from NPL inflow. We were opportunistic so that we mainly grow on corporate segment in order to maintain our assets' quality with the higher loan yields. We continue to increase demand deposit share within total deposits, which help ease the funding cost pressures. We continue to optimize our funding mix. Despite so many years without any Eurobond issue from our side, we increased our appetite for FX wholesale funding. We successfully executed $700 million amount of additional AT1 bond during the second quarter. We plan to be more active in external funding for the coming quarters, including further offshore bond issuance of and bilateral loans. Our activeness in the international capital markets will continue to keep its momentum to raise additional wholesale funding in coming quarters. We were focused on discipline, balance sheet management, protecting return for long-term shareholders. We managed to improve our diversified funding structure. Our well-diversified loan portfolio was also structured to benefit the easing cycle, which will lead to margin expansion, resultant earning, and long-term growth potentially. Kamer Bey now will provide insight regarding our second quarter performance. Following his speech, Muharrem Bey will offer some perspective on the macro and banking sector. Thank you very much for your participation. Have a nice evening to all. Thank you. Thank you, Mirac Bey. Turning back to our second quarter financial performance, we start with the first page. Total assets increased by 39.8% year-over-year, reflecting quarterly growth of 13.7%. Accordingly, total assets reached 3.7 trillion TRY as of second quarter. Similar to the previous quarter, the main driver was the solid growth of securities portfolio. Total securities maintained its growth pace, and its share stayed above 27% within the total assets. On the other hand, the share of loans kept declining and decreased to 44.6% due to our prudent loan underwriting strategy. Moving into our securities portfolio. Total securities increased by 13% quarter-on-quarter, in which TRY securities grew by 9.5% and FX securities by 17.1% in USD terms. The composition between fixed and floating rate notes are largely similar to the previous quarter. Another point that we would like to highlight that CPI linkers valuation methodology has changed in the second quarter. While the valuation rate of CPI linkers revised down to 30%, the interest income on CPI linkers increased to TRY 51.7 billion in the second quarter due to our new methodology. Front-loaded income effect of this new methodology will offset in coming quarters. As for securities composition, fair value through P&L securities share decreased to 8.1% from 9%. During the quarter, amortized cost securities slightly increased to 71.2%, while fair value OCI securities increased to 70.6%. Let's walk through the loan growth dynamics on page three. Total loans gained some momentum quarterly. FX loans fueled total loan growth, while TL loan growth still realized below the sector, despite gaining some momentum during the quarter. As such, FX loans in USD terms increased by 7.5% in line with the sector, while TL loans grew by below sector 5.9%. Business segment growth was mainly supported by strong FX loan growth. Similar to the sector, we had a strong appetite on granting FX loans during the quarter due to strong FX demand and increased FX liquidity. SME segment was driven by strong TL loan growth, especially by micro SME segment. Extending our micro SME segment helps us maintain our asset quality and benefit from the higher loan yields. Our below sector total loan growth reflects our capital protecting strategy and selective loan approach. It's also worth mentioning that retail loans started picking up and contributed total loan book. With respect to retail loans, both credit cards and overdraft loans have seen significant growth during the quarter. Turning the next page, more details on loan portfolio. Structurally, our balance sheet is more TL dominated compared to our peer banks. TL loans make up nearly 70% of total loans, while FX loans make up 30%. Surging FX loan demand and increasing FX liquidity continue to change the composition in favor of FX loans. SME loans with a 47% share are the largest segment within our loan portfolio. The continued momentum on credit cards reflect itself that its share within retail loans increased to 32% from 30%. Asset quality details are on the page 5. We had an almost TRY 10 billion NPL inflows this quarter, which can be seen as a deterioration compared to TRY 7 billion during the first quarter. NPL inflows were mainly initiated by SME segment. Temporary volatility in the market and the CBRT's proactive policy tightening have led to additional Stage 3 inflows compared to the previous quarter. NPL inflows were broadly granular. As a result, NPL ratio deteriorated to 2.8% from 2.4% in the previous quarter. Our NPL ratio is decoupling from the sector, which stems from two main reasons. The first one, we are neither selling nor writing off. The second one, the denominator impact draw our NPL ratio above the sector average. However, we still had a 53% NPL coverage, which is comfortable, and anchoring around the sector average. We maintain our prudent approach. On the other hand, we saw some deterioration on our Stage 2 ratio, increasing to 8.8% level from 8.2%. Our Stage 2 coverage is well preserved at 11%. We saw some deterioration, especially on SME segment, while corporate commercial loans ratio was stable. Although consumer loans NPL increased to some extent, they realized slightly above the sector. In addition, we saw an increase on credit card NPL ratios, but their share within total loan book was almost 4%. Moving to asset quality details on page 7. We again acted prudently and set aside significantly higher Stage 3 provisions compared to the first 2 quarters of the last year. Taking into account all provision expenses cumulatively, our total loan coverage ratio remains at a healthy 2.8% level. We had notable NPL collections and released some of our performing loan provisions. Those two factors supported our total reversal income during the second quarter. Gross total cost of risk reached at 162 basis points cumulatively. Taking into account total reversals, our net total cost of risk realized at a comfortable 74 basis points, whose number is a simple reflection of our prudence. Looking back to the history, net cost of risk was in a negative territory for the same quarter of the last year. Moving on our liabilities on the next page. Loan-to-deposit ratio decreased to 55.1% from 57.7%. Considering its lower level versus that of sector average, there is much potential available for long growth over next quarters, as, of course, depending on bank's strategy. Our deposit base remains strong, making up 81% of our total liabilities. On the other hand, we continue to optimize our funding structure. After almost a decade, we successfully executed $700 million amount of AT1 at 9.3% coupon rate. Our DCM team have been exploring further opportunities to increase the wholesale funding. Following the recent AT1 issuance, completed some bilateral loans, and increasing collateral-based funding. Our wholesale funding share within the liabilities increased from 3% to 4.4%. Despite some increase of this ratio, it's well below the sector average, which is 19.1%. Our balance sheet have a lot of space in terms of additional wholesale funding. As Mirac Bey highlighted in his speech, we will be more active in external funding for upcoming quarters, including further offshore bond issuances and bilateral loans. Details of deposits are on the following page. On the deposit side, we maintained our concentration on widespread granular core deposit base. Total deposits were up by 13.5% quarterly, and almost 39.2% on a yearly basis. TL deposits increased by 14.4% quarterly. In terms of FX deposits in USD terms, which surged by 6.6% quarter-on-quarter due to ongoing FX demand of deposit holders. Following to page 10. The share of demand deposits reached to 73% with an 11% quarterly growth. Therefore, the increase in demand deposits softened the margin pressure that derived from temporary market volatility. Halkbank will be the main beneficiary from the rate cut cycle thanks to TL-driven deposit structure. TL deposits are responsible for 62% of our total deposits, therefore the decline in the cost of funding will feed into margins. Shifting to the page 11. Just alike in the sector, we witnessed some deterioration on the spreads. Following the CBRT's policy pivot, it's well expected that spread will recover in coming quarters. All in all, we can say that this is a temporary pause. Following page 12. NII got the main boost from the income on securities, as we mentioned on page 2. Net fees and commissions managed to grow low double-digit levels quarterly, in line with the sector. Accordingly, our headline NIM recovered from 2.9% to 3.6%. Moving into page 13. Total operating revenues increased by 21% quarterly, stamping our bottom line at an almost TRY 5 billion. In summary, ROE sticks to mid-teens due to sudden increase in cost of funding. Further details on page 14. OpEx grew by 22.5% quarterly. OpEx growth stemmed from mainly non-HR expense. Now on solvency ratios. We saw the positive impact of the recent AT1 issuances on solvency ratio. Our CAR and Tier-1 ratios were boosted by 150 basis points from AT1 issuance. As a result, CAR and Tier-1 recovered to 15.3% and 12.5% respectively as consolidated basis. These are my final remarks. I will hand over to Muharrem Bey, and he will speech on his own. Good evening, good evening everyone. This is Muharrem Baykara, head of investor relations. Before we proceed the Q&A session, I would like to address a few important issues. Let me start with a broader perspective on the operating environment. Despite the front-loaded rate hikes and the CBRT's higher-for-longer approach, the Turkish economy has managed to engineer a soft landing. Meanwhile, global central banks have begun to ease their monetary policies. Fed is approaching a policy pivot following a slew of weak United States economic data, while the ECB's policy rate reached 2%. Additional search and permanent write-off the Euro-USD parity, about 120 handle, may force the ECB to cut further. European Union, the biggest trading partner of the Türkiye, disclosed a colossal defense package. All in all, easing global monetary and fiscal policies will fade away for a robust external demand, which is good for Türkiye's real GDP growth. Tight Turkish lira financial conditions are being offset by easing FX financial conditions. Banks have high FX liquidity, which is derived from increasing FX deposits and favorable external funding conditions. The downward trend in the global interest rates and Türkiye's declining risk premium have contributed to increasing external funding volumes. Therefore, banks prefer to grant more FX loans, presumably in the form of selective loans. In addition to FX loans, Turkish corporates have actively tapped international capital markets to raise funding. In summary, decline in risk premium and ease in global financial conditions have shielded the economic activity despite high local interest rate conjuncture. The underlying inflation showed steady improvement over the 14 consecutive months, with the CPI recently approached to low 30s. Why didn't real interest rates and significant international FX reserve recovery allow the CBRT to start cutting rates? First of all, the CBRT simplified the monetary policy framework by stopping to fund at 49%, which is the upper bound of the corridor. In its July meeting, the CBRT cut the policy rate by 300 basis points from 46% to 43%. There is no MPC meeting in August. Therefore, net that the funding rate was reduced by 600 basis points after the policy pivot over the last couple of months. We will watch the inflation report soon to get more information regarding the CBRT's easing trajectory. Next MPC meeting will be held on the 11th September. The spread between the policy rate and the CPI is currently close to 10%, suggesting that all the upcoming meetings will be the live meetings. In other words, in the base case scenario, it is forecasted that the CBRT will continue to cut the rates in each meeting as long as the real rates may remain relatively higher than its historical norms. On the other hand, geopolitics created a temporary volatility in the energy market, but supply side will be supportive due to OPEC's positive attitude towards production increases. A potential decline in oil prices is very important for the inflation and current account balance dynamics. Market expectations for the CPI, for the year-end CPI stand at 30%, while the CBRT's median forecast is 24%. The upper band of the confidence interval of the CBRT's median CPI forecast is 29%. Our year-end CPI expectations hovers around that level. The CBRT attaches more importance to deposit trends, inflation outlook and inflation expectations. The CBRT has maintained its cautious forward guidance, telling the market rate cut steps will be reviewed prudently on a meeting-by-meeting basis with a focus on inflation outlook despite high real interest rates. The CBRT's decisive prudence and relatively tight financial conditions will support the CBRT to contain inflation. The CBRT's monthly loan growth limits have temporarily softened the competitiveness among peers, we anticipate this environment to shift once the lending caps are eased. The timing of this potential policy change remains uncertain. Our objective is to be well prepared for potential return to full-fledged orthodox market dynamics. We have already taken proactive steps to strengthen our capital base. Recent AT1 issuance is an important element of our efforts. We are actively exploring further opportunities to replenish our capital buffers. Internal capital generation will also support our capital base, thanks to potential consistent decline in the cost of funding. Moreover, our increasing appetite for the wholesale funding may lead some increase in the share of the wholesale funding as of our liabilities. To conclude, despite the challenging macroeconomic and regulatory environments, we have reinforced the resilience of our bank. Turkish lira-driven asset structure, easing cycle, prudent risk management, and strategic capital initiatives position us well to navigate the remainder of the year. We remain committed to delivering value and resilience through every market cycle. Finally, when it comes to new methodology change for our CPI-linkers portfolio, a significant portion of our CPI-linkers portfolio consists of privately issued special bonds. Turkish equivalence of this term is Özel Tertip DİBS. Those were provided as capital by our main shareholder in previous years. Those securities are the ones long-term, non-coupon payment, and bulk principal redemption at maturity. The low internal rate of return of those bonds stemming from their structure used to reduce the total return of the CPI linkers portfolio and led to volatility in the interest income. After consulting the new methodology with our current independent audit firm, we adopted as of the second quarter a maturity-based valuation model for our CPI linker securities. Our initial intention was to apply this methodology solely to CPI linkers that is privately placed bonds, which is Özel Tertip DİBS due to their unique structure. The independent audit firm recommended us applying this method across the entire CPI linkers portfolio for consistency. As a result, under this methodology, which discounts the total projected cash flows of the CPI linkers using expected inflation and IRR, our CPI linkers interest income for the second quarter increased to 51.7 billion TRY, as Kamer mentioned in his presentation. We anticipate this front-loaded interest income impact to normalize over the coming quarters. Based on our preliminary guesstimates for the second half of the year, CPI linkers income is expected to be around 40 billion TRY, roughly corresponding to 20 billion TRY per quarter for the third and the fourth quarters. You can also refer to the audit report for this new methodology change. These are my key points I wanted to cover. Thank you. Over to you, Rob. Thank you. Thank you. Thank you very much. A big thank you to our speakers. Right, ladies and gentlemen, we will now start our question and answer session. If you wish to ask a written question, please would you click the Q&A button, which you will find there at the bottom of your Zoom screen, and then just submit your question that way. If, however, you would like to ask an audio question from one of our speakers, you can join the call by clicking the Raise Hand button, which is also there at the bottom of the screen. You'll see it there. Now, when you do that, I will introduce you with your initials and your first name. For example, if your name was John Smith, I will say, "We have a question from J.S. John, please go ahead." That's how that will work. Right. The floor is now open to both audio and written questions. Thank you very much, ladies and gentlemen. Just a reminder, ladies and gentlemen, questions, you can submit a written question via the button at the bottom of your Zoom screen, the Q&A screen. You'll see up there a little button with a question mark, Q&A. That's where you submit your written questions. If you would like to ask a question to one of the speakers via an audio question, just click the Raise Hand button, which you will see at the bottom of your screen. The question and answer session is open right now. Thank you. Thank you very much your interest and attentions. If you have any follow-up questions, please feel free to contact us. Have a nice evening. Bye-bye. Thank you very much, speakers, and thank you ladies and gentlemen for your participation. That concludes today's conference call. You may now disconnect.