Ladies and gentlemen, welcome to Türkiye İş Bankası A.Ş.'s first half 2022 financial results audio webcast. The presentation will be given by Ms. Gamze Yalçın, CFO, and Ms. Neşe Gülden Sözdinler, Head of IR and Sustainability. There will be a Q&A session at the end of the presentation. If you wish to ask a question, please raise your hand or type your question into the Q&A area. Now I leave the floor to Gamze.
Hello, all. I hope everyone is safe and healthy. Thank you all for joining our second quarter earnings presentation. Despite challenges both locally and globally, we are happy to present another strong set of results. We believe, once again, we proved our sustainable performance, of course, thanks to our well-diversified balance sheet structured with a long-term perspective.
Without further ado, I would like to share the period's highlights for Türkiye İş Bankası A.Ş. All the major performance indicators posted healthy and strong results, leading to a revision in our year-end guidance. Each asset class, indeed each and every business we are operating in, contributed strongly to our robust performance.
Among all, please note that fee income generation was eye-catching due to our ongoing concentration. In the first half, we achieved the largest fee base among our peers with nearly three digits annual increase.
Not abandoning our conservative stance within this challenging environment to weather the rainy days, we have further added TRY 2.2 billion to our free provision base, carrying the total amount to TRY 6.5 billion. Return on tangible equity exceeded 51%, pointing out a new record high level.
Thanks to the 97% positive jaws that was achieved in the period, cost-to-income ratio declined to 25.9%. Free provisions increased by around 60% versus 24% year-to-date asset growth. Please note that, again, free provision buffer expanded on top of our prudent loan loss provisionings. As a result of strong support of profitability and optimization of risk-weighted assets, significant increases were achieved in our solvency ratios.
All in all, in line with the improved performance, our free provision income increased more than three-folds on a year-on-year basis, whereas bottom line was nearly five times higher compared to the same period of last year. Now I will leave the floor to Neşe for the details of the bank's performance within the period.
Thank you, Gamze Hanım . Welcome all, and thank you for joining our webcast. Page 5 shows the main balance sheet items. In the second quarter, we observed a pickup in TL loan growth compared to the previous quarter. Largest driver of this increase was SME loans, which is one of our focus areas.
As the year-to-date growth reached 34%, we have revised our TL lending increase expectation to around 45%. In line with our budget, there was 3% decline in foreign currency lending. Looking at the funding side, there was around 10% additional quarterly growth in TL deposits, carrying the year-to-date increase to 46%.
Naturally, bulk of the expansion came from new deposit schemes, as we are among top-performing banks in this area. Needless to say, in terms of demand deposit base, we continue to be the number one among private banks.
As of the end of period, nearly half of our deposit base is comprised of demand deposits, providing an impressive support to cost of funding. As for the external liabilities, our total external dues were $8 billion, of which $3.8 billion is due within a year.
Against that, our FX liquid assets was 3 times of short-term repayment amount. FX LCR was again remarkable at 454%. In Q2, we have secured another ESG-linked syndication deal with a decent rollover rate.
On the next page, we have the net interest margin and spread evolution. At the end of first half, our swap-adjusted net interest margins stood at 6.3%. As a result of our agile balance sheet management approach, we have received remarkable outcomes in defending our spreads.
Indeed, we expect to maintain existing spreads in the second half as well. Accordingly, we revised our swap-adjusted net interest margin guidance as above 5% with a conservative stance. Please note that there is still upside potential. On page 7, we provide information about the securities portfolio and CPI linker contribution in detail.
As of the end of June, share of securities in total assets stood at 16.8%. Looking at the composition of TL securities, we see that CPI-linked bonds have a share of 60%, while share of other floating rate notes and fixed securities is around 20% each, giving us an advantageous position in the current operating environment. In Q2, yield of the CPI linker portfolio stood at 58%.
On our next slide, I will summarize the fee income performance. Fee income generation was remarkable this quarter. We have reached the largest fee base as of the first half with almost 100% increase. We are proud to acknowledge that our continuous efforts to enhance fee business is definitely paying off.
Largest drivers of the strong growth were again payment systems, lending related fees and money transfers. Going forward with this concentration, we will further enhance our performance in fee business. Accordingly, we revise our guidance as above 80% from 30% level.
Next page shows the NPL and provisioning trends. In the first half, we have not seen a deterioration in our asset quality metrics. Our NPL ratio stood at 3%. With declining inflows as well as outstanding collection performance as always, quarterly net NPL formation was negative in Q2.
Coverages across all stages pointed out prudent levels once again among the peer group. NPL coverage increased further by another 2 points. Major driver of the decline in share of Stage 2 was the reverse migration. Our total net cost of risk, including currency impact, stood at 83 basis points in the first half.
We wouldn't expect a significant change in this trend for the rest of the year other than a slight normalization. Therefore, we revise our year-end cost of risk guidance as below 125 basis points. Next page shows the capitalization levels. In Q2, despite the currency increase, capitalization ratios remained stable thanks to the net profit generation in the period.
Once again, please note that the sensitivity of our capital adequacy ratio to 10% depreciation in TL is limited to around 50 basis points. Next page provides a summary of revised guidance items for your convenience. This concludes our presentation. Now we can have your questions.
Friendly reminder, if you wish to ask a question, please raise your hand or type your question into the Q&A area. We have a question from Constantine Rozantsev. Constantine, you can unmute yourself now. I guess there's a technical issue with Constantine. I'm moving on to the written questions.
Oh, sorry. Can you hear me now? Apologies.
Yes. Go ahead.
Sorry. Can you hear me now? I was muted, I think.
Yes, yes, Constantine, please go ahead. Thank you.
Yeah, thanks a lot for the presentation. I just wanted to clarify one point. I understand that some of the corporate deposits that are invested into this protected deposit scheme, they've already started to come to you since late July.
I just wanted to confirm what's the evidence that you've been observing at İşbank? What fraction of these corporate deposits invested into this protected scheme? What fraction of these deposits is being rolled generally within this scheme, and what fraction leaves this scheme and kind of invested elsewhere? Thank you.
Okay. Thank you, Constantine, for the question. We have been observing a considerable amount has been accumulated under this type of product, I mean, the currency-hedged protected schemes. Currently, new deposit schemes constitute like more than half of our Turkish lira term deposits.
We have achieved decent conversion rates both for the retail and non-retail segments, which provide us a great deal of flexibility, as well as cost and liquidity advantages in shaping our asset and funding mixes, in the current environment. Rollovers of these accounts also display a favorable trajectory.
On the other hand, it might be a little early at this stage to provide an average figure. As you know, a large chunk of non-retail portion will be maturing in the coming days. And most probably we will be seeing a more clear picture of the trend after observing the behavior of this segment. I must say that for İş Bank, for the retail segment, we observed about 10% levels, whereas for non-retail, about 20% levels.
Understood. Thank you very much. Just to confirm. In terms of your expectations for August, is the management kind of comfortable with the fact that rollovers should do fine by corporates in the scheme, or it's not as clear, and we need to see the actual data? How comfortable is the management of the bank that there wouldn't be any issues here?
For OpEx, we tend to keep our existing guidance level, which is in line with CPI. Coming to the current levels, as we discussed in our first quarter results teleconference, despite the collective bargaining process, we kept our wages and salaries components below inflation levels at around 60% level, I can say.
However, as you know, CPI still remains at high levels. Therefore, we increased provisions in this item as well. Please note that in line with the profitability increase, provisioning base also increases.
On the other hand, in line with our cost control focus, non-HR expenses increased by only 71% when adjusted for provisions for our pension funds. That's why we keep our OpEx guidance remaining at the same levels which we disclosed in the beginning of the year.
Yeah, thanks a lot. That's very useful. Just to confirm, sorry, I think I was not very clear in my last question, but I just wanted to clarify how comfortable is the management that the majority of corporates invested into this FX-Protected Deposit Scheme, which rolls within the scheme. How comfortable is the management that there wouldn't be any, you know, significant drop in, you know, rollovers of corporate investors into the scheme in August?
Yeah. Indeed, this is not the only liquidity funding item that we are relying on. Of course, we benefit from the favorable capped interest rates in terms of cost of funding. Definitely, we effectively utilize alternative sources of funding as well.
When you look at the current levels for the non-retail segment, which is about 20% levels, we don't see a problematic issue in that sense. As I said, definitely, we effectively positioned ourselves in our funding items. We don't see that much of a stressful issue regarding the rollover ratios rates for the non-retail segment.
Okay. Thanks a lot. Thank you.
Thank you. There's a written question: What are the expected impacts of TL lending limitation on the loan portfolio?
What I can say is that, in the recently passed regulation, targets to incentivize conversion to Turkish lira, as you know. On the other hand, companies that have open FX positions have been held exempt from this regulation.
Accordingly, we do not anticipate any related pressure on our borrowers or our asset quality metrics. Recently, BRSA announced that there are around 300 companies that are likely to be impacted from this regulation. Obviously, related to their approach regarding conversion to Turkish lira, their Turkish lira loan demand might be impacted.
On the other hand, we would not expect a considerable effect on our TL loan growth trajectory due to this, in line with this regulation, because we do have a well-diversified portfolio. As you know, the SMEs, et cetera, type of segment is in more targeted areas within the operating environment.
We have a question from Ozan Rull , Yapı Kredi Securities. Ozan Bey, the floor is yours.
Hi. Hello. Do you hear me?
Yes. Yes.
Yeah, thank you for the presentation. Do you provide any color for the potential impact of inflation accounting? I just wondered that. Thank you.
Thank you, Ozan Bey. As you know, IAS 29 standard suggests the restatement of non-monetary assets and liabilities through the application of CPI indices. There are so many elements that need to be clarified in terms of making this adjustment right now. As of today, no framework has been announced yet.
Clarification of these details will have a critical impact on the results. However, even with a high-level look, it's evident that İşbank is relatively well-positioned among the peer group. First of all, our subsidiaries and participations portfolio includes real sector and real estate investments that will be positively contributing to inflation adjustments.
Secondly, as we always emphasize, in our CPI linker valuations, we use the 12-month ahead expectation rates, in the sense that we do not adjust with the actual October to October CPI at the year-end.
Since inflation expectation is hovering at significantly lower levels compared with the actual rates when adjusted for headline inflation, this will surely provide another positive contribution. Another factor is the acquisition or balance sheet dates of non-monetary assets, which we believe might be favorable for us in general.
In line with these points, at least, we believe that we will be in a relatively favorable position as a result of these mitigating factors. Before the clarification of the details on the standards, we do not want to mislead yourselves with any rough figures in that sense. I believe the points that I just shared with yourselves provide a color on how İşbank is positioned with its balance sheet against inflation adjustments.
As you know, although the guidelines for implementation of IAS 29 standard is not clear yet, as of June-end figures, we will be implementing the standards in our IFRS compliant financials in the coming periods. I hope this provides a color for your question.
Well, thank you very much.
I guess we have no further open questions, so I am handing over to our presenters for concluding remarks.
We would like to thank you all for participating in today's teleconference. We believe disclosing another strong set of results indicate the robust strong fundamentals of the bank as well as the expertise in weathering the challenging operating environment. Regarding the details, let's be in touch as always. We all look forward to seeing you in person soon. Until then, stay safe and healthy. Thank you all.