Ladies and gentlemen, welcome to Halkbank 1st quarter 2026 financial results. We'll have a question and answer session following the presentation. If you'd like to submit your questions, you can send them at any time by clicking the Q&A button which you will see at the bottom of your Zoom screen. If for some reason you don't see that button, just click the More button. That'll bring up a couple of options, including a Q&A button. If you'd like to ask an audio question, you'll be able to join the call by clicking the Raise Hand button. Again, you'll see that at the bottom of your Zoom screen. Our speakers for today are Mr. Miraç Taş, the Deputy General Manager of International Banking; Mr. Muharrem Baykara, Head of International Debt Capital Markets and Investor Relations; and Mr. Kamer Olcay Aşık, Investor Relations Manager.
Now I will hand you over to your hosts. Gentlemen, the floor is yours.
Good evening. Hello, everyone, and thank you for joining our 1st quarter earnings call. I'm Miraç Taş, Deputy General Manager of International Banking Department. It's rewarding to open 2026 on such a strong quarter. Joining me today are our Head of International Debt Capital Markets and Investor Relations, Mr. Muharrem Baykara, and our Investor Relations Manager, Mr. Kamer Aşık, who will cover the current macroeconomic trends and our financial performance respectively. The momentum we see today is a direct result of our strategic positioning from the past years. By maintaining a sharp focus on core banking operations, we have successfully reinforced Halkbank's long-term profitability. A key highlight of the quarter was the increased rate on the loan growth while securities growth stayed intact. Since we grew significantly on securities last year, we saw some normalization as of the 1st quarter.
The securities share still kept its weight as 27% our total assets. Asset growth was mostly dependent on loan growth, which can be seen all customer segments in the Turkish lira loan book. Before we look at the numbers, I want to talk about a progress in the first quarter of 2026. Our core banking operations serve as our institutional strength, driving robust revenue growth and the sustainability profitability of Halkbank. We realized healthy growth in interest income despite declines from the CPI linkers. Our strong fee generation capability for further supported in revenues. The significant positive impact from other income also benefits from our bottom line. Our commitment to efficiency is clearly reflect our disciplined cost management figures. The significant contribution from our subsidiaries remain a vital catalyst for our overall success.
We maintain resilient asset quality by staying focused on proactive risk monitoring. This well-diversified portfolio ensures the continued resilience of our asset base. Despite the volatility increase in the market condition, we continue our effort to diversify funding source. We have roll over bilateral loans and continue to execute new AT1 issuance. In the 1st quarter, we finalized $210 million among the new AT1 issuance with 8.3% coupon rate and supported our capital buffers. We already started establish GMTN and DPR programs in order to increase our flexibility, manage market condition, and bridge the external funding gap with our peers. We are planning to execute senior unsecured Eurobond issuance in the frame of our GMTN program in coming quarters. We are also planning to obtain syndicated loan for the first time in the 10 years.
Strictly growing the FX wholesale funding is expected to decrease our dependency on deposit funding and help to optimize our funding structure. This potential structural shift will help us to manage required reserve ratio cost more effectively, which will in return bolster our profitability in the new era. Besides, a decent performance in demand deposits significantly optimize the efficiency of our funding base. Looking at our expanding footprint in international capital markets will lead us to seize further FX wholesale funding opportunities. We are executing our current strategy by transforming to the future throughout the clear long-term vision. I would like to extend sincere thanks to our team for dedication and the hard work. They are true engines of our success. Finally, thanks to our shareholders for their continued trust and support to Halkbank. I look forward to seeing you all again in the coming quarters.
Now I will turn the floor over to Mr. Muharrem Bey for the macroeconomic perspective.
Thank you, Miraç Bey. We are navigating through uncharted territories on the geopolitical front. Volatility on the energy prices have been shaping the financial markets, and prices are very susceptible to news flows. In this conjuncture, uncertainties regarding the global monetary policies have increased noticeably. Money markets have been back and forth between tighter and more tighter policy rates or forward guidance. Recent inflation data prints in United States and Europe look manageable for the time being. If a permanent ceasefire reached among the sides of the conflict, this would change the direction of the policy rate expectations. This abrupt war in the Iran created an exogenous shock on the state of the Turkish economy, just like other economies were exposed to. Volatility in the energy prices, the anchored inflation expectations to some extent, bond yields have risen, and markets start to price in tighter financial conditions.
Despite the choppy energy prices, the disinflation trajectory continues to hold its course with some countercyclical resistance. First round effects of the energy prices has been kept by the help of the fuel price mitigation system of the Ministry of Treasury and Finance. Year-over-year headline inflation hovers above 32% as of April. The economy management thinks this pause in the disinflation trajectory is temporary. Against this backdrop, the CBRT have done an implicit rate hike proactively and maintained its hawkish stance with a decisive forward guidance. The CBRT continues to fund the market with overnight lending rate at 40%, which is 300 basis points higher than the policy rate. On the other hand, elevated geopolitical tensions pose downside risk to the economic activity, which may help to curb the demand and to tame the inflation.
All in all, operating environment deteriorated to some extent, financial conditions tightened, cost of funding increased, and the expected earnings growth momentum has lost steam temporarily. We are expecting the Middle East tension will be de-escalated, disinflation narrative will continue to unfold, the CBRT will turn back to rate cut cycle at some point, and finally, profitability prospect will play in again. I want to pitch the new pages on our earning presentation before leaving the room for the financial performance. Kamer Bey, can you just show the first page of the macro site? First page. Macro page. First macro page is related to the state of the Turkish economy, inflation outlook, and the depicted coordination of the monetary policy and the fiscal policy. Just like mentioned in the last MPC meeting statement, economic activity has been decelerating due to ramifications of the geopolitical tensions.
We expect that the subdued growth could help the CBRT to contain inflation. As you can see on the relevant plot, real GDP growth is below its long-run average. Moreover, both headline budget deficit and the primary budget balance shows the fiscal consolidation is evolving in the right direction. Turning to the second macro slides. On this slide, you are seeing that the waning credit contribution to the GDP growth and low indebtedness in Türkiye across the board. Moreover, the country risk premium has a negative slope since the middle of the 2022, and it is very close to the lowest level since 2018. Further decline in the risk premium can reduce the cost of the external funding, which can fund the Turkish economy by reducing the potential inflationary pressures that will be derived from potential demand.
On the new last slide, you can check out key balance sheet figures showing Halkbank's position among sectors. You can also see Halkbank's business model and its role in funding SMEs and the cooperatives. Thank you for your patience. I am leaving the room for the quarterly financials. Kamer Bey, over to you.
Thank you, Muharrem Bey. Let's dive into the first quarter of financial performance. Starting with the fourth page, total assets increased by 3.3% quarter-over-quarter, reflecting a yearly growth of 38.1%. Accordingly, total assets exceeded 4.4 trillion TL as of the first quarter. Loan portfolio was the main driver of the quarterly asset growth. The share of loans bounced back to 47.5% from 44.9% due to our accelerated loan growth. On the other hand, the securities portfolio stayed intact during the quarter. Despite first quarter specific mild contraction in the securities portfolio, total securities share as of our assets maintained its high levels with 27%. Meanwhile, as Halkbank, we have abundant FX liquidity, and our liquidity coverage ratio satisfies regulatory requirements. Now, moving into our securities portfolio.
Total securities decreased by 0.3% quarter-on-quarter, reaching an almost 30, 34% year-over-year growth. Our treasury management bids only to fulfill our PD obligations. In other words, we are not too much aggressive to grow our assets through security investments. On the other hand, we have operationally enough security assets as collateral for our money market funding operations. We continue to benefit our CPI-linked revenue with another TRY 25 billion interest income in the first quarter. Relying on 78.3% CPI valuation for 2026. We expect supportive revenue from the portfolio throughout 2026. If the risk on the inflation outlook will continue to materialize, our hefty CPI linkers portfolio would hedge our balance sheet and support the profitability metrics of Halkbank. As for securities composition, fair value through P&L securities share declined to 8.6% from 9.5%.
During the quarter, amortized cost securities slightly increased to 67.3%, while fair value OCI securities inched up to 74.2%. Our conservative securities portfolio structure prevented us from the market volatility in terms of trading income and also equity. We already witnessed a trading loss to some extent and some equity reduction due to mark-to-market valuations. We think the turmoil in the market is temporary. Once the bond yields start to come down, we are going to witness impact of mark-to-market valuations will replenish equity growth again. Let's walk through the loan growth dynamics on page 6. Total loans increased by 8.6% quarterly, while TL loans grew by a strong 9.8%. FX loans in USD terms increased by 2.5%, slightly above the sector.
Total loans continue to ensure our healthy loan book with a sustainable risk-return approach. Accordingly, the total loan growth was supported by all customer segments. SME loans were the largest driver of the total loan growth. Those growth heavily belong to the standard SME loans, excluding cooperative loans. Business loans were the second-largest driver of the total growth. It's also worth mentioning that retail loans picked up and contributed loan growth too. Relative to retail loans, both consumer loans and credit cards have seen significant growth during the quarter. Turning to next page, more details on loan portfolio. TL loan growth was well distributed across all segments. SME segment had the highest contribution to TL loan book, in which growing standard SME loans, CGF loan utilization, and woman entrepreneur loans were the main supporters.
FX loans was mainly supported by the business loans. We had a limited appetite on FX loans during the quarter. FX loans was muted, and it lost momentum on every segment relative to previous quarter, in line with the sector trends. On the back of increasing loan granting appetite, our TL loan market share incrementally bounced back to 8.8%. Turning the next page. Structurally, our balance sheet is more TL dominated. Tight TL financial conditions make TL loans more profitable. Therefore, granting TL-denominated loans in this conjecture replenish TL back book loan yields. In a nutshell, in the short run, our TL loan share could continue to increase. TL loans make up nearly 70% of total loans, while FX loans make up 30%. SME loans with a 48% share are the largest segment within our loan portfolio.
Additionally, we benefited from our high-yielded retail book. Accordingly, the credit card share within retail loans increased to 42% from 38% sequentially. Similar to credit cards, our consumer loan share increased to 75% within the retail loan book, which was 74.9% in the previous quarter. Asset quality details are on the next page. We had an almost 10 billion TL NPL inflows during the quarter, which is mainly initiated by SME segment. Recent ongoing volatility in the market and the CBRT's proactive policy tightening have led to additional stage 3 inflows compared to the previous quarter. Accordingly, NPL ratio slightly deteriorated to 3.5% from 3.3% in the previous quarter.
Please note that there was no NPL sales during the quarter. We saw some normalization on our Stage 2 ratio, decreasing to 8.6% from 9.1%. Turning to page 10, we saw some deterioration, especially on SME segment. Corporate commercial loans NPL ratio was actually stabilized. Consumer loans NPL ratio continued to normalize, which is positively impacted by restructuring. The BRSA's restructuring measures also reversed the deterioration in the credit card segment's NPL ratio, which helped us position below sector levels. Moving to asset quality details on page 11, we again acted prudently and set aside significantly higher Stage 3 provisions compared to the first quarter of the last year. Taking into account all provision expenses cumulatively, our total loan coverage remains above 3% level.
We had, again, NPL collections and released some of our performing loans. Those two factors supported our total reversal income during the first quarter. Gross total cost of risk stayed at 189 basis points. Taking into account total reversals, our net total cost of risk realized at 70.9% at 79 basis points. Looking back to previous year, net cost of risk was lower the same quarter of the last year. Moving on our liabilities on the next page. Loan-to-deposit ratio increased to 62%. Considering its low level versus that of sector average, there is much potential available for the loan growth in the upcoming quarters. Our deposit base remains strong, making up 76% of our total liabilities, signaling quarter-over-quarter decline, mostly due to managing high deposit costs on the back of our wide security collateral base.
On the other hand, our DCM team have been exploring further opportunities to increase the wholesale funding. Our dedication to wholesale funding continued on expanding and deepening. It's also worth mentioning that we rolled over bilateral loans. We also obtained another $1 billion AT1 issuance limits, and we utilized $210 million amount of AT1 issuance limits in first quarter. By executing this AT1 transaction, we supported our capital adequacy ratio and Tier 1 ratio by approximately 40 basis points. As a result of our efforts, wholesale funding share within the liabilities stood at 6%. It's well above the sector average, which is 19%. Our balance sheet have further room in terms of additional wholesale funding. 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 down by 3.3% quarterly. TL deposits decreased by 5.3% quarterly. On the other hand, FX deposits in USD terms decreased by 3.4% quarter-on-quarter. We highly focused on increasing our share of state deposits. As a result of strategic focus, we maintained its share to 10% within the TL deposits, which was 4% a year ago. In summary, our strategy changed to manage costs with short-term money market funds caused contraction in deposit funding. Following page 14, the share of demand deposits reached to 77% quarterly from 75.5% previously. It can be seen as 6.5% growth quarterly, mainly due to visible increase in gold deposit demand and demand deposit boosting new products. On page 15, cost yield and spread details.
During the quarter, both TL core spread and blended spread kept their strength, mostly driven by lower funding costs, except March. Our TL core spread recorded an increase of 41 basis points. We saw a modest 30 basis points decline on FX side, and our blended core spread increased by 8%, 8 basis points. Following page 16, NII more than doubled on a yearly basis. Similarly, it has seen an almost 72.6% quarterly growth. NIM recovered above 4%, mostly on the back of increasing TL spreads. In the coming quarters, our increasing FX wholesale funding activity could support our NIM prospects. Net fees and commissions declined by low single-digit levels quarterly in line with the sector.
Moving into page 17, total operating revenue increased by 8.5% quarterly and 69% on a yearly basis. Moreover, our net income surged by 35% on a yearly basis, hosting the bottom line at 9.5 billion TL. Accordingly, our ROE recovered to high teens levels in the first quarter. Further details on page 18. We continued our disciplined cost management, which is reflected in cost to income ratio. Our cost to income ratio has a negative slope and incremental declining over the last quarters from 70s to mid-60s. Moving into page 19, our consolidated CAR came in at 12.98%, while CET1 ratio realized at 8.13%. As of first quarter, after the removal of BRSA forbearance, these number are still above the regulatory limits. These are my final remarks. Over to you, Rob.
Thank you very much, sir. Ladies and gentlemen, this is your opportunity to ask a question because we are now in the question and answer session. If you would like to ask a written question, please do so by clicking the Q&A button at the bottom of your Zoom screen. You can pop that through right now and submit your question. Our hosts will be more than happy to answer that. If you'd like to ask an audio question, you can join the call by clicking the Raise Hand button. I believe we have a gentleman by the name of [Evranos] on the line. Please go ahead.
Thank you very much for the presentation. I wonder if you have any plan for a rights issue, and if so, what's the timeframe for it? Thank you.
I can answer this question. We don't have any clear decision yet, but we are exploring every opportunities to increase our common equity. In the new era, we need equity. We acknowledge this. It is not certain yet, but we're exploring every single opportunity to increase or support or replenish our capital, not only the standard capital ratio, but also the common Tier 1 equity ratio. I can answer this question in this form.
Thank you very much, Muharrem Baykara.
You're welcome.
Right, gentlemen, we don't have any audio questions right now. I see some written questions have come through. If you would like to answer those, that would be tremendous. Thank you.
We are not seeing any written form questions as of now.
Oh, we've got a gentleman by the name of [David Toronto]. Go ahead, David.
Good afternoon. Thank you for the presentation. Your 2026 guidance you communicated earlier this year assumed a low 20% year-end policy rate. The outlook is now easily different. Should we expect any revisions to guidance? How is your current thinking about this year's P&L outlook? Thank you.
We didn't change our guidance for now because as you witnessed, the energy prices are very choppy, and the elevated energy prices or the significant in the increase in the energy prices have been affecting the central bank's, central bank's attitude towards the monetary policy. It is not only affecting the CBRT, but also affecting the Fed and the BoE or the ECB. For now, we are standing by, but we can change our budget in coming quarters. As we just, as I can reminiscent our expectations regarding the inflation and the policy rate. We were expecting 23% CPI when we are starting the year. And we also have been expecting a bit 26% or 25% policy rates.
The inflation outlook changed, and the CBRT, as you see, have done an implicit interest rate hike. The CBRT have been funding the market, 300 basis point higher than the policy rate, which is 40% the overnight lending rate they are funding the banks. The outlook changed. We've seen an exogenous shock happened. For now, we are standing by, as I told you. This will impact our profitability too because we are expecting the rate cuts. As Kamer mentioned in the financials presentation, we have a hefty CPI linkers portfolio. These CPI linkers will hedge our profitability in the short run.
Sides in the conflict will probably reach a ceasefire. The ceasefire probably help the energy prices will get lower. If the energy prices will be stabilized, this will impact the CBRT's efforts to contain the inflation in the right direction. At some point, maybe it can be happen in the last quarter of the year, we're going to see the CBRT will turn back to rate cut cycle, this will impact our profitability in the fourth quarter. On the other hand, as I told you, the hefty CPI linkers portfolio will hedge our profitability in the short run. I hope it works, David.
Yes, maybe a follow-up on the previous question really. Your CET1 buffer on the consolidated side looks relatively tight. Do you see internal capital generation improving materially over the coming quarters? In absence of a capital injection, would you consider moderating your growth to support capital?
Yeah. Maybe I can answer this question with the Evrenos Bey's question. Because he asked if our bank have been considering a rights issue. As I told you on that question, we are just considering every option to replenish our capitals in across the board. Not only the subordinated debts issuances, not only the internal capital generations, but also we are exploring this kind of decisive options. On the other hand, maybe I can give you a statistics. TRY 1 billion increase our profitability corresponds 4.2 basis points increase in our CET1 ratio, and TRY 1 billion decrease, 1 billion TL decrease in our in our risk-weighted assets corresponds 0.3% increase in CET1 level.
Okay. Thank you very much.
You're welcome.
Thank you very much, Mr. [Erhanto]. Okay. Folks, if you'd like to ask those written questions, just a reminder, click the Q&A button at the bottom of your Zoom screen and submit your question. Audio questions, you can join the call by clicking the Raise Hand button.
Rob.
Yeah, go ahead.
Rob, I think we have some written questions from [Orkun Bey]. Let me ask them to Muharrem Bey. Thank you for the presentation. We appreciate the renewed momentum in your investor relations. Congratulations on the strong financials. Regarding the monetary cycle, what is your revised timeline for the first rate cut?
I think there are 2 tiers of this question. The first tier is when the CBRT will turn back to the policy rate. The CBRT have been funding the market with the overnight lending rate, which is 300 basis point higher than the policy rate, which is 37%. This, the answer of this question, the first tier of this question, the CBRT may turn back to the policy rate right after a ceasefire reached by the sides of the conflict, I mean, the U.S. and Iran.
If we see the escalation in the geopolitical front, and this corresponds to decline in the oil prices, this may change the attitude of the CBRT, and this will get the CBRT back to the policy rate. This timing would be the last of the third quarters. I mean, the August maybe or September. On the other hand, the rate cut should be started in the last quarter of this year. We've seen the timing of the rate cuts have been pushing back due to geopolitical or the geopolitical shock or the exogenous shock. We should see a resolution or a ceasefire on this geopolitical tension. It is very related to the geopolitical front or the situation on the Middle East.
Muharrem Bey, another question from Orkun Bey. How do you assess the balance of risk for your 2026 guidance?
I think, on the profitability side, there are a lot of things that can change our profitability trajectory. As Evrenos Bey asked or as the way I answered the David Bey's question on the equity side. We are very close to an end to the case in the United States. Our case will be dismissed through the middle of the year. If our case will be dismissed through the middle of the year, then we are going to reshuffle our strategies on the every inch of our balance sheet. Not only our balance sheet's liability side will change, but also the composition of our assets will change.
What I'm trying to tell you, now our balance sheet is very dependent on the deposits, but once we just see the case will be dismissed, then we are going to increase our external funding, FX wholesale funding, and this will help us to cut the cost of funding on the FX side. We will substitute our FX deposits higher cost of FX deposits, this will help to improve our FX NIM. Now, our NIM have been supported by the TL NIM broadly. FX NIMs are very slack, if the case will be dismissed, as I told you, we are going to see this year will be a transition year.
We're not going to abruptly increase the FX wholesale funding, but this year we're going to start to tap the international capital market and to diversify our funding. Maybe I can update you our strategies in this term. Now we're not expecting the close of the case. We've already engaged our coordinator banks to establish a GMTN program. Probably we're going to see the GMTN program established in the middle of the third quarter, and we are going to be ready for making our debut on the international capital markets. Probably we're going to explore the opportunities. If we see any opportunity window on the market, we can start our debut with issuing a senior unsecured Eurobond.
On the other hand, we're not only establishing the GMTN program, we're also started to talk to the third parties to establish a DPR program, which the peer banks have been heavily fund their balance sheet and diversify their liabilities. This prospect will support our profitability. Now, Orkun Bey, maybe in a short version I can answer your questions. The risk to our profitability is not balanced. Maybe there is some downside risks, but there are a lot of opportunities in terms of the Halkbank's new era strategies. We are going to reshuffle our balance sheet, and this will impact our profitability in the new era. I hope it answered your question.
One last question from Orkun Bey.
Could you provide some color on the trends observed during April and May, and especially for the second quarter?
I can give you some color. As I told you, we have a hefty CPI linkers portfolio, and our CPI linkers valuation methodology is different than the sector. We can see a support from our CPI linkers due to deteriorating inflation outlook. Okay. These are all, we finalized our written questions right now.
Thank you, gentlemen. Yes. We don't appear to have any audio questions either. If there are no more written questions, I believe we can conclude.
Okay. Thank you for your interest, and thank you for your dense questions, specifically in this earning presentation. If you have any follow-up questions, you can just reach us and ask your questions by email or by phone. We are at your full disposal. Have a good evening. We see you in the next meetings.
Thank you very much, gentlemen, for your presentations. I'm sure those are greatly valued. Ladies and gentlemen, this now concludes today's conference call. You may now disconnect. Thank you very much.