Welcome to Işbank's Q3 2022 Financial Results Audio Webcast. Our presentation will be hosted by Ms. Gamze Altın, CFO, and Ms. Nilgün Yosef Osman, Head of IR and Sustainability. If you wish to ask any questions, please type them into the Q&A area or raise your hand at the end of the presentation. Now I leave the floor to our presenters.
Hello all. This is Gamze Altın speaking. I hope everyone is safe and healthy. Thank you all for joining our Q3 earnings presentation. We are pleased to present another strong set of results in this challenging environment. Needless to say, this performance is based on our strength in human capital, technological infrastructure, digital capabilities, as well as our sustainable business model. Without further ado, I, as always, would like to share the period's highlights for Işbank. In the face of the uncertainties, both globally and locally, we maintained our prudent stance, and we further increased our more than sufficient loan loss provisions in addition to our robust free provision base. We continued our selective and balanced lending approach in the context of recent regulatory and macro outlook. Loan growth is still on the Turkish lira side. As expected, FX loans continued to decline.
In the period, we observed further improvements in FX-protected deposits and conversion rates. Both for retail and non-retail, we exceeded the 20% threshold. In the Q3, we also increased our non-deposit FX financing through securitization program and bilateral transaction, both having high tier maturities. We preserved our spread, and we kept our swap-adjusted net interest margin above our guidance. Based on our concentration on net fees and commissions, we once again achieved a robust performance with more than 100% increase on a yearly basis. Furthermore, as in the previous quarters, subsidiaries continued to support our bottom line. Indeed, the performance of this portfolio is proving the fact that through our well-diversified asset base, Işbank has a strong capacity to generate income. All in all, return on tangible equity exceeded 52%.
Please note that when CPI linker income is adjusted for actual CPI levels, return on tangible equity increased to 66.2%, whereas return on tangible assets reached 6.1%. Cost-to-income ratio further declined thanks to 118% positive jaws we created in the quarter. Solvency ratios stood at solid levels, well above the minimum required levels. High profitability and optimization of risk-weighted assets served to further strengthen our capital. In line with the improved performance, bottom line was nearly 4.5 times higher compared to the same period of last year. Now I will leave the floor to Nilgün Yosef Osman for the details of the bank's performance.
Thank you, Gamze. Welcome all, and thank you for joining the webcast. Page 4 shows the main balance sheet items. We continued with our selective and well-balanced growth policy in the Q3 as well and booked a TL loan growth of 12%. On a year-to-date basis, TL lending increase reached 49%. We have seen a further 5.2% decline in FX loans on a quarterly basis. Year-to-date contraction in FX lending came to 8.8% in line with our budget. Looking at the funding side, TL deposits continued to post a remarkable increase. There was around 33% additional quarterly growth in TL deposits, carrying the year-to-date increase to 94%. Naturally, most of the expansion came from new deposit schemes, as we are among the top performing banks in this area.
Needless to say, in terms of demand deposits and savings deposit base, we continue to be the number one among private banks. As of the end of period, 45% of our deposit base is comprised of demand deposits, providing an impressive support to cost of funding. As for the external liabilities, as of the end of September, our total external dues were $8.2 billion, of which $3.7 billion is due within a year. Against that, our FX liquid assets was nearly three times of short-term repayments amount. FX LCR was again remarkable at 479% by the end of the period. On the next page, we have the net interest margin and spread evolution. On a quarterly basis, swap-adjusted NIM was flattish at 7.1% despite pressures in the operating environment.
For the 1st nine months, swap-adjusted net interest margins stood at 6.6%, posting a 31 basis points increase compared to 1st half. As you know, we have a more conservative approach compared to our peers regarding the valuation of CPI-linked portfolio, where we look into the eight, 12 months ahead inflation expectation instead of actual figures. However, for your convenience, we provide comparable figures as well. In this regard, if we use the headline CPI figures in valuation, our core net interest margin would increase by 176 basis points and stood at 8.9%, while cumulative net interest margin would reach 8.3%. All in all, we expect to remain above guidance of more than 5%. On page six, I'm sorry. We provide information about the securities portfolio and CPI link contribution in detail.
As of the end of September, share of securities in total assets increased to 18.1%. Obviously, we have seen a surge in the share of fixed income securities to 27% owing to recent regulatory framework. At the same time, we continued to purchase floating rate notes and CPI-linked securities for the sake of diversification and providing a natural hedge to our portfolio. In Q3, yield of the CPI-linked portfolio stood at 53%. Once again, if we have valued our portfolio using the actual CPI figures, we would have added around TL 11.3 billion to our net income in the nine months. Moving on with net fees and commissions. We achieved a solid net fees and commissions growth in the quarter, which brought the year-on-year growth to an impressive 104%.
Net fees and commissions in the quarter was backed by strong performance in payment systems, lending business and money transfers. Going forward, with this concentration, we will further enhance our performance in fee business and most probably we will be at a level above our guidance at the year-end. Next page shows the NPL and provisioning trends. In the Q3, our NPL ratio stood at 3.2%. The slight increase in NPL inflows was the result of two one-off commercial files. Other than that, we do not observe a general downward trend in the asset quality metrics. In line with our prudent stance, our coverage ratio substantially increased to 74.5%, constituting the highest level among peers. Our cost of risk evolution underlines our proactive provisioning. Total net cost of risk, including currency impact, stood at 141 basis points.
We wouldn't expect a significant change in this trend for the rest of the year as well. Next page shows the capitalization levels. Capital adequacy ratio without the BRSA forbearance increased to 19.3% from 16.5% in the beginning of the year. We further reinforced our capital. Net income generation alone added 160 basis points to our solvency ratio in this quarter. Mark-to-market valuations of securities portfolio also contributed to capitalization. Once again, please note that the sensitivity of our capital adequacy ratio to 10% depreciation in Turkish lira is limited to around 50 basis points. This concludes our presentation. Now we can have your questions.
I don't see any written questions at this time. Please raise your hand if you have a question. Cihan Saraoglu from HSBC have a question. Cihan, please unmute yourself.
Hello? Sorry, can you hear me now?
Could you please try once more, please?
Hello?
Cihan, please. Could you try once more? Can you hear me, Cihan? Okay, let's try to continue with Simon Nellis from Citi.
Hi. Can you hear me?
Excellent. Yeah. A quick thanks for the opportunity. Just a quick question. I was wondering if you could quantify how much the impact of all these new regulatory measures that have been imposed on the banking sector, how they are affecting your behavior and your returns and how are you kind of responding to them going forward? I guess will you slow your loan growth is the key question.
Hello, Simon. Thank you for the question. 1st of all, want to focus on the NIM evolution, maybe looking directly at our core NIM evolution. Of course, definitely, when we look at the loan side with respect to the current environment, and this is not only the regulation, it's also the macro outlook, as you know. We are committed to selective lending and mainly focused on targeted areas which are protected. However, on a system-wide basis, obviously yields are under pressure.
As Işbank, thanks to our well-diversified asset base and flexibility in terms of our balance sheet structure in that sense, the lower funding rates as well as our low cost of funding base, which reflects our rational pricing policy, et cetera, we believe that will help us to maintain a core NIM excluding the CPI linker portfolio impact, that a core NIM above 4%. Definitely the new regulations introduced might weigh on the P&L of the banking system. We believe that as Işbank, we can still provide NIM guidance above our guidance levels. We believe that our balance sheet fundamentals are strong enough to absorb any necessities regarding the new regulations framework.
I believe in terms of the securities, the majority of the question is related with the securities portfolio. I must say that since we already had a relatively balanced mix of securities, both in terms of fixed and floating rate notes, this gives us the flexibility in terms of our managing our liquidity and balance sheet requirements. Continuing with our normal purchase agenda with respect to treasury options, as you know, Işbank is a market maker and a primary dealer. We will suffice with respect to this new requirement. As you know, the regulation will be effective in the coming periods and it might be subject to changes. For Q4, we don't see any necessity for extra purchases. However, in line with the market dynamics, we might consider front-loading purchases.
Definitely, in terms of the regulation, we understand the context of the framework and we support the lira-ization strategy for the macro output. We will do our best, however, being respectful to our customers' preferences as well as continuing keeping up with our rational pricing policies. Is that an answer to your question, Simon?
Yeah. Yeah, I guess so. I just wondering how, you know, what would your returns look like if you hadn't been burdened by all this regulation?
To be clear in that sense, as you know, we have revised our guidance for this year and back in the 1st half of August. Despite the continuing regulatory frameworks introduced into the system, we don't see the necessity to make changes with our guidance for the full year.
Can you maybe just highlight where you think you're going to be? I think you mentioned on the fee income side that you probably will beat your guidance. Are there other areas where you feel confident that you're going to exceed?
Fee income definitely is the main business that we see that upside potential. Please also keep in mind that in terms of our conservative stance, we front-loaded the provisions maybe more than needed as we already discussed. Definitely we can say that we can overperform the guidance of fee income, which has this upside potential about 80% considering our current on a yearly basis more than 100% growth in the fee income business.
Maybe just one last one from me, concerning your Şişecam stake. Are you happy to continue holding that or would you ever consider selling it at some point?
Yes, of course. There is no change in the strategy of keeping the subsidiaries portfolio.
Okay. Thanks. Thanks very much.
Thank you. Thank you, Simon.
Thank you, Simon.
While we think, we can look into some written questions, I guess. Valentina Soykova from Barclays asks the FX liquidity as of Q3, and how much of it is with the correspondent banks. She's asking the potential use of call option for our n ext year.
Okay. In terms of the FX liquidity, I must say that the current FX liquidity is around $11 billion. This figure includes the sub-debt repayment of the bank back on October 24th. In terms of the decomposition, I must say, it's like around $6 billion is in the form of FX swaps. The remaining parts, liquid assets like including money market placements, unencumbered cash and banknotes, is around $2.7 billion. Unencumbered securities around $1.5-$1.6 billion. This sums up around $11 billion, I must say. The question is limited with the FX liquidity. I have seen another question, I guess, a written question regarding the stages.
We will come to that.
Okay. Okay.
The second question, we will answer that. Valentina was asking about the call option as well.
Sorry, is the question regarding the call option? Okay, call optionality. Okay. The call dates for our $500 million and $750 million subordinated notes are for June 2023. Next year in June, we will have the call dates for the 1st one like $500 million, and for the 2nd one it's $750 million. Of course, as we always share with yourselves, for sure, we will take into consideration the market dynamics as well as investor expectations. Please also keep in mind that BRSA's approval is also required within the use of the call optionality. We hear you. We understand you. We will try to be in line with the market's expectations.
But as the process requires the involvement of BRSA's permission, so we cannot talk on behalf of them before discussing this issue with the authority. The main aim of the bank is of course to consider the investors' expectations because this is an area where we would like to further enhance our bonding with the investor community.
A number of the participants are asking about where we are with respect to the 50/50 currency composition.
Okay. We must say that, obviously, in terms of our rational pricing policies in line with our low cost of funding base to benefit SMEs, et cetera, and in terms of being respectful to the customers' preferences, definitely we will do our best. Definitely we support the liberalization strategy for the macro outlook. We will do our best, but we will be sticking to our rational pricing policy as always. Early year-end levels will be important in that sense. The regulation, you know, will be effective in the coming days, months, we must say. We are not there yet, but definitely we support the liberalization strategy, and we'll be doing our best in that sense.
Let's comment while we look at the year-end levels. The effective date of this regulation, as you know, is towards March end.
I guess Cihan has just typed down his question. He's asking about the commercial loan rates, and asking about the potential downward repricing possibility.
As you know, the cap on currency-protected products which is 13.5%, constitutes a general benchmark for Turkish lira deposit costs. In our case, average cost of Turkish lira term deposits hover around mid-teen levels. On a blended basis, Turkish lira deposit costs come down to 12% levels. Looking at the loan side, we can say that newly offered loans are priced around low twenties levels on average for the time being. Following recent regulations, we may see, of course, further decline in the non-retail side. As you know, the recent regulations also target to limit the maximum interest rates for Turkish lira commercial loans, in that sense. Our appetite is mainly on SME financing.
As I reiterate myself, with respect to the new regulations regarding the terms breakdown of deposits, an increase in Turkish lira deposits composition has surfaced. As I say, we will stick to our rational pricing approach in terms of pricing our deposit products.
I guess these are all the questions we have so far, so I believe I can leave the floor to our presenters for closing remarks. Gamze Altın, floor is yours.
Okay. Thank you very much for your participation. We believe today we have disclosed another strong set of results indicating our expertise in weathering challenging operating environments. Regarding the details, we are ready to be in touch for your further questions. Looking forward to see you all in person soon. Until then, stay safe and healthy.