Ladies and gentlemen, welcome to İş Bank's First Quarter 2025 Financial Results Audio Webcast. Today, our presenters will be Ms. İzlem Erdem, Chief Economist and Deputy CEO responsible for IR and Sustainability; Mr. Mehmet Türk, CFO; and Ms. Nilgün Osman, Head of IR and Sustainability. As always, the presentation will be followed by a Q&A session. If you wish to ask a question, please raise your hand or type your question into the Q&A area. I hand over to our presenters.
Welcome to our earnings presentation for the first quarter. This is İzlem speaking. Thank you all for joining. In the first quarter of 2025, the annual inflation continued to decline in line with market expectations and CBRT's projected path in general. In this period, tight monetary policy stance is preserved with gradual and cautious rate cuts. However, on March 20, at an interim meeting, CBRT decided to raise the overnight lending rate, I mean, the upper bound of the interest rate corridor, to 46%, acting proactively against recent turmoil in domestic markets. CBRT started to fund the market through the upper bound of the interest rate corridor, giving a pause to using weekly repo auctions. In its planned monetary policy committee meeting on April 17, CBRT increased the policy rate from 42.5% to 46%, the overnight lending rate from 46% to 49%, and restarted its one-week repo auction.
Starting from mid-March, due to the unexpected volatility in the market, there was a net tightening in monetary policy stance, still keeping the weighted average cost of funding close to the upper bound of the interest rate corridor. These actions prove the commitment of CBRT to price stability. The divergence of production and demand indicators remained in place in the first quarter of 2025. Latest figures from February indicated that industrial production, which increased on a QoQ basis in the last quarter of 2024, contracted in the first two months of 2025 compared to the same period of the previous year, while retail sales kept its momentum. The current account deficit, which decreased significantly in 2024 to 0.8% of GDP, started to widen in the first two months of 2025. As of the end of February, [inaudible] cumulative current account deficit increased to $12.8 billion.
However, in the coming months, relatively low level of oil prices driven by the weak global growth expectation is anticipated to support current account outlook. The budget deficit reached 36.8% of year-end target in the first quarter. Fiscal policy support to the disinflation process will be closely monitored in the rest of the year. On the next slide, we have the major P&L items as well as the profitability and efficiency indicators. In the first quarter of 2025, with the help of significant expansion in our margins, our tax-adjusted net interest income increased substantially both on quarters and annual basis, registering the highest improvement in the peer group. On top of our good performance in net interest income generation, our stellar performance in containing OpEx growth supported our bottom line.
In line with our concentration in cost control, OpEx posted a 5% quarterly decline, and annual increase was limited to around 24%, well below the annual inflation levels. Please note that we have outperformed all our peers with this performance. This impressive display in OpEx, along with the increase in annual fee growth, brought fee coverage of OpEx close to 90% levels in line with our guidance. Furthermore, cost-to-average assets ratio declined to 3.6%, and our cost-to-income ratio improved by 10 percentage points. Fee income generation was somewhat muted at the beginning of the year as a result of the high base year effect as well as seasonality impact. Significantly gaining momentum through the end of the quarter posted an annual increase of 39% in the first quarter of the year. All in all, our return on tangible equity in the first quarter stood at above 18%.
I will leave the floor to Nilgün for the details of the bank's performance.
Thank you, İzlem. Welcome all, and thank you for joining the webcast. In this slide, you can see the main balance sheet items. In the first quarter, we strategically managed our selective loan growth, taking into account monetary limitations. It is important to mention that our main focus is to preserve our healthy loan portfolio with a sustainable risk-return approach. Largest driver of the increase in the first quarter was particularly SME loans, which is one of our focus areas. Our quarterly TRY loan increase was 7.4%, while growth on SME loans, according to the BSA definition, was close to 14%. Please note that we are strategically growing in SME loans while maintaining our prudent stance, and that translates into our best-in-class asset quality metrics, which we will touch upon in the relevant slide.
As we have been sharing with yourselves, SME lending is an area where we have a unique strength and expertise. We have been increasing our market share steadily in this segment. As of the end of first quarter, our market shares, in line with BSA definition, both for cash and non-cash SME loans among private banks stood at 22%. FX lending increased 5% in the first quarter. On the FX side, our growth mostly stemmed from the exports. We have been emphasizing our concentration on export business. In total export lending, we solidified our leadership position among private banks with an outstanding market share of around 30%. As of the end of first quarter, nearly 40% of our FX lending consists of export loans, a strong indication of low-risk structure of our FX loan portfolio.
At the same time, tourism continues to be a key area for us, contributing to the current account balance. On the funding side, we maintained our concentration on widespread granular core deposit base. There was around 13% quarterly growth in TL deposits, while FX deposits increased by 9%. Needless to say, we maintained the largest demand deposit base among private banks. As of the end of first quarter, 42% of our deposit base is comprised of demand deposits, providing substantial support to our funding cost base. Moreover, core deposits that are sticky in nature make up around 72% of total deposits. Regarding the external liabilities, our total external dues are $7.7 billion, of which $4.5 billion is due in the next 12-month period. Against that, our FX liquid assets are more than enough to cover our whole external liabilities. FX LCR was again at comfortable levels with 256%.
ESG remains as a priority in FX wholesale funding. On top of being able to obtain a more diversified base of ESG-related funding instruments, its share in total funding have been increasing. By the end of first quarter, share of sustainable funding stood at 62%. Recently, we have signed a deal amounting to EUR 100 million with our long-standing partner, Proparco, to support our climate and SME financing activities. This will be one of our funding sources that will help us further develop our climate portfolio and achieve our ambitious environmental goals. As you already know, we used our call option for January 2030 Tier 2 notes, and we redeemed in January. Additionally, we were the first comer among Turkish FIs to international bond market in 2025 for our debut additional Tier 1 bond.
The spread of the $500 million issuance was an all-time low among the AT1 issuances by Turkish banks to date. The transaction was more than three times oversubscribed, attracting strong interest from various investor groups across a wide geography. Going forward, we will continue to evaluate potential transactions for FX wholesale funding based on market conditions as well as the needs of our balance sheet management. On the next page, we have the NIM and spread evolution. In the first quarter of the year, margin recovery gained significant pace. Quarterly swap-adjusted NIM increased to 1.6% with a 140 basis points expansion compared to previous quarter, in line with our projections. While the quarterly NIM was 1.6%, please note that at the end of the quarter, NIM exceeded 2%.
As we have shared with yourself at the year-end earnings call, our TL core spread was already in a widening trend at the start of 2025. In Q1, in line with our expectations, deposit costs declined significantly throughout the quarter while we maintained a sluggish course in our loan yields. Thus, our core spread increased to 12%. Demand deposits, which increased 18% on a quarterly basis, helped significantly to contain costs on the funding side. However, with CBRT's recent tightened stance, we have been observing a pickup in funding costs. As a result, we are also adjusting our loan yields. Therefore, we think that recent change in the monetary stance will slightly postpone the gradual improvement in NIM rather than distorting the overall recovery. Going forward, the course of CBRT's monetary stance will be effective in the performance of the banking sector.
As we have started the year with a continuously widening loan deposit spread, we can say that net interest margin still stays at manageable levels compared to previous tightening cycles, in which loan deposit spread was very tight. That's why we feel more confident with regard to maintaining a stable quarterly NIM in the second quarter. Also, our assumption is that CBRT will be back to its cutting cycle in the second half of the year, as we deem recent hikes as temporary. As of the end of March, share of securities in total assets was 19%. Composition between fixed and floating rate notes was largely stable. Despite the downward trend in inflation, we continued to benefit from CPI-linked revenues with another TRY 13.1 billion interest income in the first quarter.
Our valuation methodology, which takes into account 12 months ahead CPI expectations, provides us a stable and consistent revenue stream from this portfolio. Moving on with net fees and commission. In the first quarter, fee income increased around 40% on a year-on-year basis. Drivers of the growth were again across the board. We continued to be the market leader in terms of lending and asset management-related fee income generation. Annual increase in fee income is expected to gain momentum going forward; we are expecting to be in line with our guidance by the year-end. In the recent years, efficiency and cost management have gained more importance in relatively high inflation environments. As you know, we have been taking solid steps in terms of transforming our business models in line with our digitalization strategy, which enables efficiency gains as well.
Consequently, our OpEx growth has been once again significantly lower than our peers in the first quarter of 2025. Accordingly, fee coverage of OpEx rose to 87%, while fee coverage of HR expenses reached nearly 230%. Cost-to-average asset ratio declined to 3.6%, and our cost-to-income ratio improved by 10 percentage points. We will continue to focus on efficiency by leveraging our strengths in adapting new technologies, upskilling our talent force, pioneering digital banking services, and centralizing process management. Next page shows the NPL and provisioning track. In the first quarter, NPL ratios stood at 2.4%, which is largely in line with our projections. Flows to NPL increased slightly, but at quite manageable levels, collections remained strong at 22%. Our NPL formation rates, both on net and gross basis, stood at the lowest levels among peers, indicating our prudent stance in underwriting as well as robust collection capabilities.
Our NPL ratios in every major segment, such as SME and retail loans, was lower than private banks' average. It is important to highlight our success in NPL ratios in general, but mainly in SME segment. This is an area in which we do not only have a strong market presence, but resilient asset quality metrics thanks to our cherry-picking and collection capabilities as well as extensive customer data. Despite the slowdown in economic activity, significantly lower NPL ratio in SME segments compared to the sector reveals our careful and selective strategy in SME lending. On the other hand, we maintained our conservative approach and kept our stage three coverage ratio at around 71%, highest among peers. Our net cost of risk was 209 basis points for the first quarter, including currency impacts. Next page shows the capitalization levels.
Our capital ratios remained at solid levels at the end of first quarter. Capital adequacy ratio without the BRSA states forbearance measures stood at 15.1%, while Common Equity Tier 1 was at 12.6%. We believe that our capital ratios are strong enough to absorb any potential adversities in the economy as well as to sustain the growth whenever it is deemed favorable. Sensitivity of our capital adequacy ratio to 10% depreciation in Turkish Lira is around 40 basis points, while sensitivity to 100 basis points increase in Turkish Lira interest rates is around eight basis points. On this page, we have a summary of our first quarter performance. As of the end of first quarter, we were largely on track with our budget estimates. Current market dynamics surely pose pressure on net interest margin.
As we previously communicated with yourself, our base case scenario did not include an additional rate hike. On the other hand, there are compensating elements such as already high level of core spreads. Also, we assume that there will be a room for CBRT to turn back to rate cut cycle in the second half of the year. Therefore, we need to observe further development in order to be convinced of a guidance revision. But please note that a prolonged tight monetary policy might create downside risks on the net interest income. So in case of any change in our guidance assumptions, we will revisit our guidance and disclose accordingly. This concludes our presentation. Now we can have your questions.
Reminder, if you wish to ask a question, please raise your hand or type it in the Q&A area. At the moment, we have some written questions from Valentina Turkova , Barclays. I will read them to you. Thank you for the presentation. Can you please share your thoughts on how you expect the most recent regulatory changes over the weekend to affect your NII and NIM going forward and how you see the NIM trajectory developing in the next few quarters? Are there any changes to your financial year 2025 guidance that you can share with us and macro indicators assumptions you used in your net interest margin ROE guidance for the full year?
Her other question is regarding FX liquidity in dollar terms and how it compares to your short-term and total FX wholesale funding. We have covered this one, but just to reiterate, she also asked about our sensitivity of our CET1 ratio and capital equity ratio to depreciation and interest rate moves.
Okay, thank you for the question. In fact, I think we answered some of those questions during Nilgün's explanations related to the first quarter. I can comment on the impact of the most recent macro-prudential measures of central bank that was released at the end of the previous weekend. CBRT recently increased the remuneration on Turkish lira reserve requirements while introducing a new increase in the foreign currency reserve requirements. The estimated overall impact of these recent changes could be summed up as five basis points impact on potential net interest margin. On the upward side, on the positive side, I mean. Some part of the question is related with our guidance revision, whether we will have a guidance revision or not. I have to again mention that as of the end of the first quarter, we are largely on track with our budget estimates.
Our balance sheet growth is hovering in line with our budget. Other than that, we haven't experienced any considerable deviation with respect to our budget projections in the first quarter. Realizations are largely parallel to our expectations and actually, some items such as OpEx are trending better than our expectations. Going forward, the course of monetary policy will be an important determinant of the margin evolution. We will be closely monitoring the policy actions with respect to their impacts, and we will consider whether making revisions to our guidance or not if we deem necessary. Currently, we are maintaining the guidance that we disclosed at the beginning of the year. We believe that it is early to comment. We need to accumulate some more data, both in terms of financial and in terms of macroeconomic side. I think we already mentioned about the sensitivity.
There is a question related to the FX liquidity. We have enough FX liquidity to cover not only the short-term foreign currency liabilities but the long-term liabilities as well. We are very comfortable with our prevailing foreign currency liquidity. I think I covered nearly all the questions coming from Valentina. Thank you for the questions.
We have a few more written questions. Let me summarize them. There are questions about the most recent deposit trends and if you see any dollarization tendency in the market, and also the current prices for the loan and deposit books. Also, another question is regarding the expected trajectory for OpEx. Is the current performance sustainable?
Let me try to cover those questions. Thank you for the questions. First of all, due to both local and global market volatility, there has been a growth tendency in FX deposits. However, since Turkish interest rates are high enough to support deposit base, we haven't observed a significant dollarization on our side. Moreover, FX demand in the market was more on the corporate clients, which is due to liquidity management needs rather than concern on market dynamics. We do not expect a significant change in the behavior of market participants in the long run. Another important point I think is keep in mind is the euro-dollar exchange rate and precious metals price increase impact.
If we adjust the 9% quarterly increase in FX deposits for the change in these price changes. The growth comes down to 3.5%, so overall it's around $1 billion, which constitutes the actual portion derived from the customer demand until this point. For the OpEx, I can say that if you compare the figures to the last year's figures, in the last year's earnings call, earnings presentation, we were almost similar with our peers on the HR side, while we beat it on the non-HR. Our figure was around 51%, and the peers' was around 78%. In this quarter, we beat the peer average on both HR and non-HR side. Being aware of the fact that there will be pressure inevitably on the HR cost in a high inflation environment, as İş Bankası, we prefer to have higher concentration on the non-HR cost discipline.
Using digitalization, centralization, AI, and robotic process automation techniques, we are constantly gaining progress with regard to shrinking costs and increasing our efficiency. Thanks to the implementation of this control initiatives, we achieved significant awareness within the bank that transformed into concrete results. Please note that this performance will not be a one-off achievement for the banks, but it will have long-term and sustainable impact on the budget discipline as well. As for the HR side, which you see in this quarter as 24% increase compared to our peers' 39% in the last two years. As some of our workforce has preferred to retire using their options provided by early retirement scheme of the government, we optimized our headcounts by not replacing the retired employees on a one-to-one basis. This enabled us to increase the efficiency as well.
During this period, our staff numbers declined by around 3,000 people on a net basis. Going forward, though current employee number can be stable for İş Bankası, we do not anticipate a sharp decline on this figure. Thank you.
There was another question about the current loan and deposit rate.
On the current loan deposit rate, our Turkish lira loans front book is close to around 55%, and marginal term deposit is between post rate and weighted average cost of funding, depending on the ticket size. We are still keeping in April our Turkish lira loan deposit spread. I think it's important to see the coming months and quarters to have a constant figure if we can achieve the net interest margin going forward.
As far as I can see, we have no more remaining questions. I'm handing over to our presenters for concluding remarks. Thank you.
Thank you very much for your participation. We believe that we have presented another solid performance this quarter. Behind the strong performance, there lies our strengths in human capital, technological infrastructure, digital capabilities, as well as our sustainable business model, which is based on value creation for all our stakeholders. Regarding the details, you may always reach us. Looking forward to see you all in person soon. Thank you very much.