Ladies and gentlemen, welcome to İşbank third quarter 2026 financial results audio webcast. Today, our presenters will be Ms. Ebru Özşuca, Senior Deputy Chief Executive, Mr. Mehmet Türk, CFO, Ms. Nilgün Osman, Head of IR and Sustainability. The presentation will be followed by a Q&A session. If you wish to ask a question, please raise your hand or type in the Q&A area. Now, I hand over to our presenters.
Good afternoon, everyone, and welcome to our third quarter earnings presentation. This is Ebru speaking, and thank you all for joining us today. Before we turn to our financial results, I would like to start with a brief overview of the macroeconomic environment. We will then walk you through our financial performance in detail, followed by a Q&A session. The global economy has proved resilient in recent years, supported by technology investments, fiscal stimulus, accommodative financial conditions, and rising defense spending. However, persistent geopolitical tensions are adding to inflationary pressures, prompting central banks to tighten policy and creating a more challenging environment for growth. Against this backdrop, the Turkish economy has continued to demonstrate strength. Growth has held up throughout the disinflation process and remains resilient despite the additional pressure from global headwinds.
Domestic demand has nevertheless softened in recent months, supporting further disinflation, although the pace remains slower than initially expected. Annual CPI inflation fell below 30% in September for the first time since November 2021 and remained below that level in October. With inflation declining and demand conditions weakening, the CBRT cut its policy rate by 100 basis points in October, as widely expected. While sustained policy credibility has continued to support the risk perception towards Türkiye, dollarization tendency remained subdued in the third quarter, as the share of Turkish lira deposits in total remained about 60%. In this macro environment, as upside risks to inflation persist due to elevated levels of energy prices, we believe that the current policy stance, maintaining a strong focus on disinflation, will continue to guide policy decisions in the period ahead.
We assess that the CPI inflation could settle around 30% by the year-end and the policy rate remain at its current levels. Besides, we maintain our GDP growth forecast at around 3%. Let me now take you throughout the highlights of the third quarter. Following the central bank's resumption of one-week repo auctions at the end of August, funding costs declined through the remainder of the third quarter. In September alone, we saw a reduction of around 200 basis points in deposit costs, and this downward trend has continued into the fourth quarter. CBRT's 100 basis points policy rate cut in October is reinforcing this trend, with the benefits becoming more visible as our deposit base is repricing at lower rates. This should provide further support for Turkish lira loan-to-deposit spreads and contribute to the recovery in our net interest margin in the final quarter of the year.
Fee income delivered a remarkable performance, growing by 33% year-on-year and continuing to outpace inflation. On asset quality, we maintained our prudent provisioning approach. Our coverage ratios remain robust. Total coverage ratio rose to 4.4%, indicating the highest level among our peers. Collection performance continued to be outstanding at a rate of 21%. Last but not least, we have completed our transition to the internal ratings-based approach. We began implementing it in July, and from this quarter onwards, our capital ratios are reported in line with IRB approach. This further strengthened our capital position, and we will go through the details about this on the relevant slide. Turning to the major P&L items. The third quarter marked the start of the margin recovery, reinforced by declining deposit costs toward the end of the quarter. Swap-adjusted net interest income rose by 20.4% quarter-on-quarter and 107% year-on-year.
Net fees and commissions continued to make a strong contribution to our revenue base. On the cost side, OpEx growth slowed to 57% year-on-year in the first nine months. Much of the increase reflects our first half spending on business development and customer acquisition. We view this as an investment in the bank's future earnings capacity, and the bulk of the planned investment has already been completed. Going forward, we expect a more controlled pace of expense growth. All in all, mainly enhanced by the expanding margin trajectory, we will see an improving trend in our profitability and efficiency indicators going forward. Now, I will hand over to Nilgün to provide further details on our financial performance.
Thank you, Ebru. Welcome all, and thank you for joining our webcast. In this slide, you can see the composition of our balance sheet. Total assets reached TRY 5.3 trillion at the end of September, up by 15% year-to-date. In dollar terms, the asset base stands at around $110 billion, indicating the highest level among peers. Loans account for 51% of total assets and securities for 16%. Consistent with our lending strategies, TL loans account for 64% of the book against 36% in FX. Within securities, TL shares stands at 70% and FX at 30%. Moving on to the next page. TL loans grew by 3.4% quarter-on-quarter and 18.1% year-to-date. We maintained our selective approach to lending during the quarter, prioritizing pricing and margins over volume as funding costs remained elevated in July and August. Our TL loan book remains well-balanced across segments.
This diversification across customer segments and products allows us to balance growth and profitability throughout any cycle. Furthermore, it is a reflection of our strategy of being the main bank of our customers. FX lending was largely flat in the quarter. On the securities side, in the third quarter, floating rate notes, particularly those linked to TLREF, remained our primary preference. While the income contribution from CPI linkers was TRY 12.1 billion in the third quarter, relatively flat compared with the previous quarter. The TL securities portfolio's fixed to floating rate composition has been actively managed in order to optimize its contribution to the P&L items. Deposits accounted for 67% of our total liabilities and 73% of our funding base. As for the funding mix, wholesale funding made up 18.4%, while repos and money market funding accounted for 8.4%. Total deposits reached TRY 3.5 trillion.
This further strengthens our position as the largest private bank by total deposits. Our loan-to-deposit ratios stood at 76.7% overall, 87.5% for TL, and 62.8% for FX. These levels leave us ample room to support future loan growth. Let's take a closer look at our deposit base. TL deposits grew by 2.8% quarter-on-quarter, bringing the year-to-date TL deposit growth to 14.5%. On the FX side, deposits remained relatively flat in the quarter. Looking at the demand deposits, their share in total deposits increased in this quarter to 43.3%. Within TL deposits, demand deposit share increased to 62.2%, and within FX deposits to 78%. Further improving its shares through a period of high interest rates reflects the strength of our business model. We also remain the leading private bank in demand deposits, which continues to give us a low-cost and stable source of funding.
On the next page, we look at the evolution of our spread and net interest margin. Our margins improved in the third quarter as funding costs declined and we maintained loan yields. Central Bank's resumption of one-week repo auctions in late August resulted in lower market funding rates. On top of this, our deposit costs also came down, falling by around 200 basis points in September alone. Throughout the quarter, we maintained our firm stance on new lending pricing, supporting loan yield as deposit costs fell. This widened our TL loan deposit spread and supported growth in swap-adjusted net interest income of 20.4% quarter-on-quarter and 107% year-on-year. Our swap-adjusted NIM increased by 30 basis points quarter-on-quarter to 2.4%.
We observe that this improvement is continuing into the fourth quarter, with additional uplift from CBRT's 100 basis points rate cut in October to our deposit pricing strategy, which have already been proactively managed with a cost-sensitive approach. At the end of the day, this is carrying our September NIM, which was around 3.2%, to higher levels, close to 4%. Consequently, we expect the exit NIM for the year to be around 4.5%, supporting the achievement of our full-year NIM guidance. Beyond year-end, continued disinflation path should support further margin recovery through 2027. Moving on with net fees and commissions. On a year-on-year basis, net fees and commissions were up by 33.1%. All items contributed to this growth, payment systems posting a 35% increase, while asset management fees grew by 55%.
Moderating loan growth as a result of our selective lending policies resulted in somewhat softer expansion in lending-related and bancassurance fees. Payment systems continue to have the largest share in total fees at 69%, followed by lending-related fees, asset management, and money transfers. We carry on our investments in the drivers of sustainable fee generation. Digitalization is at the center of this effort. Fees obtained from digital channels now account for a substantial portion of commissions revenue. At the same time, we keep expanding our payments ecosystem. Additionally, customer acquisition continue to be a key driver of our fee growth. New customers, particularly salary payment and merchant clients, deepen our primary bank relationships and broaden our cross-selling opportunities. Across all segments, we also draw on customer data and analytics to offer the right product at the right time, which supports both product penetration and customer satisfaction.
We are already starting to see returns on the business development investments we made earlier this year, and we expect their contribution to build further in the coming quarters. Annual growth of OpEx stood at 57% in the first nine months of the year. Main driver of this growth was our investment in business development, which contributed 22.8 percentage points to total growth, and now accounts for around one-third of our cost base. These are investments in customer acquisition and business growth, and they are already starting to pay off in our customer base and fee generation. Looking at our efficiency ratios, net fees and commissions covered more than 80% of operating expenses and 213% of HR expenses. Cost discipline remains a clear priority for us.
While we continue to invest in areas that will drive future revenue, we keep running costs under close control through ongoing digitalization, process automation, and optimization. As the benefits of our business development investments build over time, we expect them to translate into stronger operating leverage. Turning to asset quality, net NPL formation rates stood at 318 basis points over the quarter. Collection performance continued to be strong, with a collection rate of 21%, highest among peers. Our NPL ratio was 4.2% in this quarter, largely in line with our projections. Coverage ratio for stage 3 loans increased to 62%. In addition, our total coverage ratio rose to 4.4% from 4.1% in the previous quarter, the highest level among our peers. We continue to take a prudent and forward-looking approach to provisioning.
This approach has served us well through past cycles, and it allows us to navigate the current conditions as well. Nine-month cost of risk stood at 233 basis points, in line with the guided level. Next page shows the capitalization levels. Our capital positions strengthened further in the third quarter, supported by the completion of our transition to IRB. We began implementing IRB as of July, and accordingly, our September financials reflect the related results, which have a positive effect in the range of 140-230 basis points on our capital ratios. At the end of September, our capital adequacy ratio increased to 17.2%, and Tier 1 rose to 14.2%. Sensitivity of our capital adequacy ratio to a 10% depreciation in TL is around 25 basis points, while sensitivity to 100 basis points increase in TL interest rates is around 5 basis points.
Before moving on to the Q&A session, let's take a look at our summary of previously shared expectations. Although our revised NIM guidance looks largely achievable at the moment, the fact that there are downside risks with respect to OpEx and net fees and commissions may affect our ability to fully deliver our 20% ROE guidance. Nevertheless, we believe an ROE above the mid-teen level remains achievable. This concludes our presentation. We are now ready to take your questions.
The floor is open for questions. At the moment, I do not see any audio questions. Although there are some written questions. Let me start with those. The first question: How should we interpret your nine-month fee growth in the light of your full-year fee target? Do you think 40% increase is achievable? Could you provide some color on how you see this item evolving beyond this year?
Okay, let me start to answer that question. We set, by the start of the year, an ambitious fee income growth target of around 40%. We delivered around 39%, 39.4% growth in the first half. Over the first nine months, fee income has increased by 33.1%, which is still a strong performance in an environment where annual inflation is below 30%. The slight slowdown in fee growth is mainly driven by the third quarter lending growth, which is also reflecting our selective approach and continued emphasis on asset quality. This is translated into a lower contribution from lending-related commissions. In the last quarter of the year, we expect a pickup in lending activity towards the year-end, which will also support eventually a recovery in these fees. All in all, there might be some downside risk to our full-year guidance.
Beyond this year, our main ambition is to keep the fee growth above inflation going into 2027. Thank you.
Another question. Actually, these are two questions linked to each other. Could you provide some details with respect to your lending approach? How do you assess the lending environment? Are there any areas you particularly focus? What are your main concerns? In relation to that, what are the asset quality trends you observe at the moment, and what are your expectations for the period ahead?
Currently, the existing loan growth limits make the allocation of our growth capacity particularly important, and we do not foresee a removal of this currently. Going forward into 2027, a broad removal of the limits can be on the table. We think a degree of relaxation is more probable. Looking at the trends, the lending margins have now reached levels we are targeting. SMEs are still our main focus, while we do not envisage an aggressive expansion in retail lending. Taking into consideration the cost of risk, we think it is timely to shift from the retail portfolio to SMEs and commercials, which provide a significant uplift in the margins. We think it is more consistent with our strategy to move into commercials and SMEs going forward.
For the NPLs and vulnerabilities, I can suggest that the NPL inflows come mainly from the retail side in the current environment. While the pressure here persists, the new inflows remain with the levels anticipated in our budget. Looking ahead into 2027, our budget is still prepared, and our assessments are preliminary at this stage. We see the NPL ratio could increase modestly, though we do not foresee an NPL sale going forward. The sectors under stress are mostly coming from the energy and labor-intensive sectors, and also the trade-dependent businesses with limited liquidity buffers, such as textile and construction. Thank you.
Okay, another question comes from Goldman Sachs. Could you please share Sorry, JP Morgan. Could you please share your preliminary macro expectations for financial year 2027? How do you currently think about net interest margin and cost of risk development in 2027? If you could please share your views on OpEx dynamic in 4Q in relation to your full-year guidance.
Thank you for the question. Of course, we have just started to shape our budgeting processes. Therefore, just from a macro outlook level, I can say that we are expecting the disinflation process to continue in year 2027. Therefore, if the exit CPI for this year is around 30%, 29%-30%, there might be, you know, by the end of 2027, our preliminary expectation at the moment is a CPI level of 25%. In parallel to this, we are expecting to see a decline in the policy rate, but still continuing to have a real return on the Turkish lira. As I said, for the other dynamics, still we have just started to work around the numbers, and we will be sharing more detailed expectations within our year-end results.
But for the net interest margin evolution, I can say that we are expecting the spread widening in the spreads gradually throughout 2027, net interest margin to continue expand, to widen gradually in year 2027. As we said that, as we are expecting an exit net interest margin of 4.45% for this year, you know, as a preliminary guidance or expectation, I can say that in each and every quarter next year, you know, there will be a widening in this level.
For cost of risk, as we are standing around 233 basis points, our guidance, to remind, is that below 250 basis points. In the fourth quarter, we will still stay below 250 basis points overall as our year target, so we are quite comfortable to catch our target. For the next year, to give you a heads-up, I think it is too early, but we can suggest that next year will be around these levels, most probably as well. On the OpEx side, as OpEx increased by 57%, the 44% growth comes from HR, 67% comes from the non-HR expenses. In third quarter alone, the expenses declined by 1% compared to second quarter, but much of the increase overall in nine months reflects our first half spending on business development and customer acquisition, as you can see from our slides.
We view this as an investment in the bank's earnings capacity going forward, the bulk of the planned investment has already been completed. Going forward, we expect a more controlled pace of expense growth. For 2027, I can suggest that we will be staying below inflation on the overall expense item. Thank you.
We have a question from Ashwath P T, Goldman Sachs. Ashwath, please unmute yourself and ask your question. Thank you.
Thank you very much for the presentation. I just have a couple of questions. I think some of them may have already been discussed, so forgive me for that. I think it was mentioned you expect the exit NIM from this year to be around 4.5%. What is the exit NIM out of the third quarter? Is my first question. Basically, how much expansion are you expecting within Q4 implicitly? The second question is around the NPL ratios. We have seen that it is around 4.2%, slightly higher. How are you seeing overall NPL inflows across retail, SMEs, corporate, and the trajectory for this in terms of also recoveries?
I am just trying to understand if, for example, NPL ratios are likely to accelerate even further despite some of the rate cuts, or are we pretty much near the peak in terms of NPL ratios, or are they going to plateau at these levels for a while longer? I think those are my two questions. Thank you.
Thank you for the questions. Maybe I can start from the net interest margin trajectory. As you know, since within the third quarter, we have started to see the expansion in our net interest margin, and with the CBRT's 100 basis point rate cut in October, has provided further support to our ongoing efforts to lower the deposits cost. Our net interest margin for the September, which we can say that the exit net interest margin for the third quarter was around 3.2%, and it is now approaching to nearly to 4% levels. Therefore, we are expecting, our projections show us an exit NIM for the year-end at around 4.5% level.
I think we have covered the NPL side, but let me try to repeat some of those. We are currently, as you suggested, around 4.2%, and the main reason of the increase to 4.2% is the muted growth in the third quarter. So, we are expecting an increase in the pace of our lending in the fourth quarter, which will comfortably put us in around our target levels. We are not planning any sales, so we will see the result, but we will be close to our target is what I can suggest overall. There is also a possibility of further retail loans restructuring scheme, which could also offer borrowers some additional flexibility in managing their repayments and so on and so forth. We do not know the extent and timing of any benefit that could be provided by that.
I think overall, we are not still close, we are not still at the peak of NPLs. I think in 2027, we will see an increase in that sense, but the cost of risk will be around these levels in 2027. Thank you.
Thank you. Just a quick follow-up question on that. In terms of when you're saying you're not at the peak, what do you think is the main driver of the incremental NPL inflows? Is it retail? Is it SMEs? Do you have any color in terms of the segment that's likely to drive that inflow?
Actually, it's both two segments, but mostly from the retail side. Retail and SME both, but retail is higher than SME side. We are seeing restructuring schemes and some of the flows are muted in SMEs, but retail side is in a rapid pace. We forecasted that in the start of the year that there will be a peak in the retail segment, but it's still continuing. There are the sales in the mean period, so 4.2% is close to our budget, and I think we will be staying close to that by the year-end as well.
Thank you very much. Very clear.
No more audio questions as far as I can see. We can take one more written question from Barclays. How are you thinking about your funding strategy over the next 12 months? Which segments or products on the wholesale funding side look most opportunistic right now, and how do you weigh their cost and diversification benefits against keeping access to public bond markets?
Thank you for the question. As you know that the choice between the instruments is driven by balance sheet requirements and relative funding economics. We continue to maintain close engagement with the investor and financial institution communities, where we can, in order to act when suitable opportunities arise. Of course, within our funding strategies, as a general framework, I can say that Eurobond issuances, future flow transactions, bilateral facilities, trade loans, and syndicated term loans are existing. Looking to our balance sheet needs or matured profile and the available liquidity, we would prefer to use them dynamically as the time comes. With our current fixed LCR levels, there is not an imminent need for structuring a specific type of funding. But throughout the year 2027, we will closely monitor the markets and we will consider the all kind of alternative structures. Thank you.
I think we can close the conference call now. I am handing over to our presenters for closing remarks.
Thank you very much for your participation. Regarding the details, please stay in touch. We look forward to speaking with you again at our year-end results. Thank you.