Welcome to VakıfBank Audio Webcast, our Fourth Quarter 2025 Bank Only Earnings Results. We'll have a question and answer session following the presentation. Now, if you'd like to submit your questions, you can send them anytime at all, by clicking the Q&A button, which you will see there at the bottom of your Zoom screen. All right? If you would like to ask an audio question, though, you can join the call by clicking the raise hand button. Again, you will see that at the bottom of your Zoom screen. With that, I'd like to introduce our speakers for today. First of all, Ms. Ece Seda Yasan Yılmaz, the Head of Investor Relations. But first, Head of International Banking and Investor Relations at VakıfBank. I hand you over now to Mr. Ali Tahan. Sir, over to you.
Thank you. Thank you, Rob, and good afternoon, everybody, and welcome to 2025 Q4 Earnings Presentation Conference Call. Without ado, I would like to start with the presentation as usual. In this quarter, as you can see in the first page, we are glad to announce a very strong Q4 PNL as guided and expected. This quarter, we reportedly announced a TRY 28.1 billion quarterly income, which brought full year net income number to TRY 70.1 billion, which is up by 73% itself compared to previous year cumulative net income number of TRY 40.4 billion. During this quarter, we also set aside further TRY 4 billion pre-provision profit.
Without such pre-provisioning action, our quarterly net income will be even stronger and materialized at TRY 32.1 billion, which is up by 170% on a quarterly basis. Those quarterly earnings are one of the strongest in the peer group in Turkey, and we are very glad to announce such strong numbers. With such PNL numbers, our reported quarterly average ROE came at above than 38%, and it would be even close to 44% in case we wouldn't set aside such TRY 4 billion pre-provisioning. Those quarterly numbers also resulted full year 2025 year-end average ROE number at almost 26%. Again, we are very also glad to perform average ROE number, which is in line with our full year guidance number of high 20%.
One last point I would like to take your attention is related to pre-provision profit, which is even up by 90%, which is even stronger than net income annual growth number. Pre-provision PNL came at TRY 133 billion, which is up by 90%, which is indicating another strong performance during the entire year of 2025. The next page I would like to take your attention is page five, which is one of the best part of the quarter, which is related to net interest margin.
As you can see on the right-hand side above chart, quarterly reported net interest margin came very strong at 6% and swap-adjusted quarterly net interest margin came at 5.4%, which is up by 2.4 percentage point compared to a quarter ago. During this quarter, we had a 2.4 percentage point expansion, further expansion in our quarterly net interest margin. This 5.4% itself, swap-adjusted net interest margin, is also one of the highest, again, in the peer group in Turkey. In terms of the driver of such increase in our quarterly numbers, as you can see in the middle of the page, there are two main reasons. One of them is obviously related to additional interest income from our CPI portfolio.
With the full-year correction based on almost 33% October to October CPI numbers, now, we enjoyed in total, TRY 36.5 billion, which is up by TRY 16.6 billion compared to a year ago, and this is for the full year correction. Therefore, this additional TRY 16.6 billion additional interest income is resulted 150 basis points quarterly net interest margin expansion. The remaining, part of 90 basis points expansion can be attributable to, additional core spread expansion on the TL side. As you can see on the left-hand side below chart, our quarterly Turkish lira core spreads continued to expand and materialized at 5.8%, which was 4.5%.
It means that during the quarter, we had additional 1.3 percentage point quarterly expansion in our core spreads on the Turkish lira balance sheet side, which is also outperforming the sector average, considering the sector quarterly Turkish lira core expansion of 1.1 percentage point. Such quarterly swap-adjusted net interest margin performance brought full year swap-adjusted net interest margin also to a very strong number. As of September, third quarter end, cumulative swap-adjusted net interest margin was in the area of 2.7%.
Thanks to such the strongest quarter of the year in Q4, full year average swap-adjusted net interest margin further increased to 3.4%, which is up by 110 basis points compared to average of 2024, which materialized at 2.3%. In this manner, one of the most eye-catching performance of VakıfBank financials can be seen on the net interest margin side. We were very happy, and we were very glad to see such a strong net interest margin performance and such strong increase in our full year swap-adjusted net interest margin. We are closing the year at the top so that it means also that we are also starting to the year of 2026 with a very good base effect actually.
The next page six, is related to fee income. During the quarter, we delivered TRY 19.4 billion fee income, which brought full year net income numbers to almost TRY 73 billion. That number itself is up by 56% on a cumulative basis compared to full year of 2024. This 56% is slightly above than the sector number of 50%. In this manner, apart from the very strong net interest margin performance, we are also glad to perform another very strong indicator on the fee income side, which are considered as the core revenue generation capacity. In this manner, net fee and commission income was also strong and came at 56% quarter-on-quarter.
On the right-hand side, you can also see quarterly and annually, lending growth areas ranging from payment systems to cash lending, as well as from non-cash lending to insurance. Among the fee contribution, of course, payment systems with more than 50% at almost 52%, they were the main contributors to our fee base, which is also in line with the sector average. On the next slide, you can see some numbers related to cost and OpEx side. OpEx, full year OpEx came at TRY 118 billion, which is up by 61% compared to full year of 2024. OpEx growth came slightly above than the sector average. Sector average was hovering around 53%, and our OpEx growth was slightly above than that at 61%.
However, we maintained to have good level of cost-to-income ratios similar to last year. This year also, our full year cost-to-income ratio materialized slightly lower than the sector average. Sector average was hovering around 41% versus VakıfBank cost-to-income ratio of 40%. In this manner, despite slightly higher than the sector average OpEx growth, still, we managed to deliver a relatively good level of, and stable level of 40% area cost-to-income ratio. At the next page eight, we can move on to asset side, starting with the lending side. This quarter, quarterly lending growth was much more visible on the SME segment, which is up by 15% and, which brought full year growth number to 62%.
Apart from SME side, this quarter, we also had good level of lending growth both on the SME side, on the retail side, as well as on the corporate and commercial side. Retail lending was up by 8% Q on Q, which brought full year retail lending growth to 44%. Our retail lending growth was slightly lower than the sector average of 50%. Deliberately, we were much more active on the retail side and non-retail side, and we were gaining on the non-retail segments. As you can see on the right-hand side below, during the full year of 2025, we further increased our market share on the non-retail segments from 13.7% a year ago to above than 14%, 14.1%.
During the entire year of 2025, our market share on the non-retail lending side, including SME, including corporate, including commercial, and of course, including project finance, increased further by 40 basis points. Equally, we further moved some momentum on the retail market share, and our retail market share materialized at 8.9%. In terms of the currency breakdown, our total lending during the quarter came at almost 10.7% on the Turkish lira front, which is slightly above than the market average of 10.3%. On the hard currency side, we were still growing. Our hard currency lending was up by another 5.7% in dollar terms during Q4, which brought full year FX lending growth at around 25%, above than the sector average of 19.4%.
In terms of the loan-to-asset ratio, the share of loans and the share of lending in total assets, during 2025 further increased to 54.3%, which was 50% a year ago. On the next page, you can also see detailed information related to breakdown of loan portfolio in terms of Turkish lira, hard currency, as well as in terms of loan-to-deposit ratios. This is a regular page actually. The next page is essential and important, which is related to asset quality. On asset quality side, the headline is NPL ratio increase moderated. As you can see on the left-hand side below chart, we started the year with 1.8% in terms of NPL ratio, and finalized the year at 2.9%.
Most of the NPL formation and most of the NPL ratio increase was much more visible in the first half, especially in Q4. NPL ratio increase and momentum started to slow down thanks to both strong collections as well as relatively slow NPL inflow. As you can see, each and every quarter in the year of 2025, our NPL collections increased as well. We started the year at TRY 3.5 billion NPL collection, and NPL collections peaked in Q4 with TRY 6.5 billion. In terms of the NPL formation, NPL formation was relatively at the peak level during Q2 and Q3. Especially after the restructuring ease related to retail portfolio, we started to witness some sort of NPL inflow slowdown, and in Q4, NPL inflow materialized at TRY 17.8 billion.
Most of the NPL inflow still came from the retail side. It was even the case for the Q4. As you can see, out of this TRY 17.8 billion NPL formation, around 68% came from the retail side, while the remaining 32% came from the non-retail side, including SME, corporate, and commercial segment. Stage 2 ratios also increased. We finalized the year at 9% in terms of share of Stage 2 in total lending, which was 7.9% in the beginning of the year. The last point I would like to draw your attention is related to cost of risk. During the full year of 2025, our full year net cost of risk materialized at 128 basis points.
Plus, on top of that, during the year, we continued to have in total TRY 8 billion free provision, which can be released and which can be used at any time in the upcoming quarters. This is still standing in our balance sheet. When we move to liability side, of course, deposits were up by 36% year-over-year, reaching to almost TRY 3.5 billion. One important thing related to deposit side is related to demand deposits. Demand deposits coming from both Turkish lira demand deposits as well as hard currency demand deposits for the first time exceeded TRY 1 trillion level and materialized at TRY 1.1 trillion .
As a result of that, the share of demand deposit in total came 1/3 of total deposit portfolio. In terms of the Turkish lira and hard currency deposits, we are still having Turkish lira deposit portfolio with more than 70% of total deposits are coming from the local currency. In terms of the growth numbers, I mean, during this quarter, we had 10% quarterly Turkish lira deposit growth, again, outperforming the sector average of 9%. In terms of the hard currency deposits, our hard currency deposits were up by 6.5% in dollar terms, which is also another strong quarter. The next page is related to wholesale borrowing, where the details can be seen on page 13.
Total amount of international funding obtained in the year of 2025 exceeded $12.8 billion. In this manner, it was a very successful year, and it was well-diversified. It was coming from different funding sources. Of course, especially Q4 was also remarkable via two different transactions. One of them was related to fresh DPR. In October, we had additional DPR amount of $1 billion. It was the second DPR transaction of the year, and it was a DPR year actually. In total, we issued and obtained $1.7 billion fresh fundings under our DPR program. As the biggest DPR bank of the country, we continued to be active DPR issuer bank actually.
Another one is related to fresh AT1 issuance, public issuance with the amounting of $500 million with the yield of 8.2%. This transaction itself was also remarkable, not only for VakıfBank, but also for the entire banking sector because of the yield perspective. In terms of yield, it was the lowest reset spread margin issuance among all Turkish banking sector. On top of those important transactions, we recently announced another two important upcoming transactions. One of them is related to World Bank Group IBRD transaction. IBRD board approved EUR 1.5 billion amount project with the partial guarantee, and it will be materializing and executing soon. Another one was the first ever cooperation with another important international development bank, Asian Infrastructure Investment Bank.
In December, we also announced fresh $300 million transaction with 10-year final maturity with AIIB. Those two transactions will also be executed in a very short period of time. In this manner, indeed, entire year of 2025 was very efficient and was very a good year in terms of diversity as well as in terms of the different nature of the transactions. The last page I would like to draw your attention is related to capital. Capital ratios, because of both strong profitability as well as because of the mark-to-market gains under revaluation of our subsidiaries and real estate portfolio further increased. Reported CET1 ratio came at 11.4%, which was 10% a quarter ago.
Reported Tier 1 ratio came at 14.4%, which was 12.3% again a quarter ago. Reported total CAR ratio came at 16.7%, which was 14.7% a quarter ago. In all, reported solvency ratios, there was a good recovery, and there was good increase. As you can see in the below chart, we've had a detailed breakdown how in a quarter period of time our capital ratios increased by. Of course, there are two important factors. One of them is related to overall profitability. P&L increase resulted in 88 basis points positive impact in our total CAR ratio.
More importantly, we also enjoyed additional 100 basis points positive impact, thanks to mark-to-market gains obtained from our non-listed subsidiaries as well as from the valuation impact of our real estate portfolio. Those two are the main reasons. The third reason is related to fresh AT1 issuance we executed with the amount of $500 million in October. This transaction itself also created 68 basis points positive impact in our total capital adequacy ratio. Of course, these are the reported numbers. As you know, starting from the first of January, all of those numbers will be reported without forbearance measures. Without forbearance side, our CET1 ratio as of 2025 year-end was hovering around 10% on a bank-only basis.
That number, that 10% RWA CET1 ratio, just to remind you, a quarter ago, it was hovering around 9% of RWA. In this manner, even without forbearance measures level, our CET1 ratio increased by 100 basis points just in a quarter period of time. Of course, on top of that, we also have additional free provision of TRY 8 billion. As you know, we are the only big Turkish bank having such free provision in our balance sheet. It is also creating additional 20 basis points positive impact in our solvency ratios. All of those numbers, of course, are bank only.
Our consolidated numbers, which will be published also next week, in terms of, capital ratios, our consolidated ratios are also stronger than our bank-only ratios. You can simply add around 30 basis points for consolidated capital adequacy ratios compared to bank-only numbers, and all the details hopefully will be seen in a week period of time. These are the slides I would like to take your attention. Before leaving the floor to your question, in a nutshell, we would like to also share our expectations and guidance related to full year of 2026. In this manner, starting with the lending side. On the lending side, Turkish lira lending growth is expected to be at around mid-20%. Hard currency lending growth are expected to be in single-digit territory in dollar terms.
These are the guidance numbers related to lending side. Mid-20% TRY lending and single-digit accuracy lending in dollar term. In terms of net interest margin, we believe that will be the best part of 2026, we are further expecting recovery and increase in our swap-adjusted net interest margin. Just to remind you, full-year swap-adjusted net interest margin in the year of 2025 came at 3.4% area. On top of that, we are expecting full-year 2026 swap-adjusted net interest margin on average to be hovering around 4.5% area. Which means we are expecting around 110 basis points additional increase in our swap-adjusted net interest margin.
This swap-adjusted net interest margin level of 4.5% will be the best annual swap-adjusted net interest margin compared to last 10-15 years period of time. In this manner, indeed, it will be a very strong year for the overall top-line P&L side. Apart from that, on the fee income side, we are expecting our fee income growth to be above than 40%. On the OpEx side, we are expecting our OpEx growth to be above than the inflation. Above than 40% fee income versus above than inflation OpEx growth. On the net cost of risk, our budget suggests full year 2026 net cost of risk to be hovering around 150 basis points net cost of risk.
All those numbers will take us to high twenties average ROE for the full year of 2026. This is the summary related to expectations for 2026. At this stage, let me stop and let me leave the floor to Rob again to switch to Q&A session. Thank you.
Thank you very much, Mr. Tahan. Right, ladies and gentlemen, it is now time for the question and answer session. This is your opportunity to ask whatever questions you would like of Mr. Tahan and the panel. If you would like to ask a written question, like we said, please click the Q&A button, which you will see there at the bottom of your Zoom screen, and then submit the question. If you would like to ask an audio question, you can join the call with pleasure by clicking the Raise Hand button, which you will see at the bottom of your Zoom screen. I see we have a question from Mr. David Taranto. Please go ahead.
Good afternoon. Thank you for taking my questions. First, could you walk us through your key macro assumptions, particularly inflation and the year-end policy rate assumptions, please? On volumes, your Turkish lira loan growth guidance is meaningfully below your private peers. Are you being conservative, or do you deliberately plan to give away market share here to focus more on the margins, perhaps? Lastly, could you talk about your key drivers of your NIM expectation for this year? Where do you see the deposit interest rates? When do you expect the margins to peak? Thank you.
Thank you, David. Starting with the first question. I mean, in terms of macro assumptions, we are mainly taking into consideration OVP numbers used by the economy administration actually. The only exception to this equation is related to inflation. On the inflation side, we are taking into consideration central bank market participants' expectation. That number is hovering around mid-20% for the time being. That's the only different macro KPI we are using compared to OVP numbers. Apart from the inflation, all the other parameters are simply derived from the OVP financials.
With this in mind, in terms of the policy rate, we are expecting 800 basis points rate cut from the central bank during the full year of 2026, so that the policy rate will be coming to 30% area by the end of the year. Of course, most of this rate cut is expected to be in the first half rather than the second half. For the time being, January inflation came slightly higher than the market consensus. In this manner, February numbers will be critical to see the action plan for the upcoming MPC meeting, which is scheduled for the month of March, as they will skip the February MPC meeting.
With 800 basis points rate cut and with the assumption that all the rate cuts will be also passing through the deposit rates, that's the level of adjusted net interest margin we are ending up with. In terms of quarterly evolution of net interest margin, we are expecting either second quarter or third quarter. We are expecting to see the quarterly highest level of net interest margin. Starting from Q4 onwards, there may be some decline from the peak level. From quarterly evolution, we are expecting to see the peak levels in terms of quarterly evolution, either in the second quarter or in the third quarter. One critical point we would like to emphasize is related to the fact that all the policy rate cut are fully reflected on the deposit rates.
That's also critical, we believe. I hope those are the answers to your questions. Please let me know if we are missing anything.
I'm thinking in terms of volume growth, how conservative are you with your mid-20% Turkish loan growth assumption, please?
On the lending side, we are aware that our private peers are also guiding relatively higher lending growth. This is in this manner very similar to last year. We are also starting to the year with relatively conservative numbers. Depending on the competition conditions and depending on the appetite of other banks, we are reviewing. Conservatively, we are starting with a mid-20% structural lending growth. Similar to 2025, we don't want to lose any market share on the non-retail segments especially. If needed, if competition take us to there, overall lending growth, especially on the non-retail segments, may be higher than what we are guiding for the time being. Clearly, we don't want to lose any market share on the non-retail side.
On the retail side, I mean, especially so far and last year and the year even before, private banks were quite aggressive. There, that's the reason why we lost some market share on the retail. In this manner, we don't want to also, lose market share on the retail segment also. Of course, the level of the competition will be harsh as well as the level, of the regulatory caps are also important. At least for the non-retail side, for sure, we don't want to lose any market share.
Thank you. Thanks.
Thank you, Mr. Taranto. All right, let's see. We don't have any more audio questions. Folks, if you'd like to ask an audio question, you can join the call anytime. Just click the Raise the Hand button. For now, Mr. Tahan, I think if we could move to some of those written questions, please.
Actually, there are some written questions, as you pointed out. Ece will read the questions, and I will try to answer.
Actually, we have four written questions, and three of them come from Valentina. Thank you, Valentina. She's asking, the first question is related to in which retail segments you let market share go, and what prompted this? Can you share some color where you would like to grow loans this year? Also, the second question is related to key guidance metrics, especially NII, NIM trajectory and asset quality as well as ROE. What's your target level and buffer for CET1 this year? And second question is regarding your issuing plans for this year. Last question, what's your FX security compared with $8 billion short-term FX funding and $23.6 billion total FX wholesale funding.
Thank you, Valentina. Let us start with the last one. In terms of hard currency liquidity, similar to sector actually, all the big banks in Turkey are enjoying the availability of hard currency liquidity quite ample. As of today, we have a good coverage in terms of upcoming redemptions on the hard currency liquidity side. Hard currency free liquidity coverage ratio in terms of redemptions are hovering almost 2x actually for the time being. It is quite in good shape. This is also understandable by looking at hard currency LCR ratios. To the extent possible in terms of wholesale funding and liquidity management, we would like to go for relatively longer duration transactions.
Therefore, IFI corporations like some Asian names, like World Bank Group or hopefully some European names, it will be quite important because of both ESG angle as well as because of the maturity and duration angle. All the funding channels are wide open for Turkish banks, and to the extent possible, selectively, we would like to be much more active and concentrated on those two areas. One of them is related to IFI and the other one is related to DPR transactions with real money investors, which are also providing long-term maturity perspective. DPR and IFIs will be the main topic in terms of wholesale. On the Eurobond side, we had two redemptions this year. One of them already materialized in the month of January.
We had a redemption of $750 million, senior unsecured actually. On top of that, there will be one more in October with the amount of $500 million. Because of the additional focus on IFI and DPR, in our budget we have only one public Eurobond issuance plan. Either in the second quarter or in the second half, we will be looking for the right window. More focus will be on the long-dated DPR as well as on the long-dated IFI transactions with both of them with above 10-year final maturities.
Some of those IFIs actually go even beyond 20-year final maturity, which is quite attractive from treasury management point of view. For the first question, let me summarize again in a nutshell our full year guidance numbers. On the lending side, Turkish lira lending mid-20%, hard currency lending single digit. Net interest margin, swap-adjusted net interest margin, to be hovering around 4.5%, which was 3.4% in the year of 2025. Which means, we are expecting additional 110 basis points improvement in our full year swap-adjusted net interest margin. On the fee side, our fee income growth expectation is above than 40%. On the cost side, OpEx, our official expression is above than the inflation. For the net cost of risk, 150 basis points full year net cost of risk.
All those numbers will take us to high twenties average ROE number on the profitability side. Those are the numbers we are sharing. Ece, we can move on to other questions.
Thank you, Ali. We have two more questions which come from Mustafa Faruk Köse, and he's asking for the OpEx growth for 2026 and for any free provision for 2026 plans.
Thank you, Ece. Thank you, Mustafa. On the free provision side, we didn't touch the free provision actually during the budget process to our free provision. In our base case scenario, you can consider that, this current outstanding amount of TRY 8 billion will remain unchanged during the entire year of 2026. No add up or no release from the free provision in our base case scenario for 2026. For the first question, I mean, conservatively, we would like to be on the above than inflation side. Of course, given, the inflation number we are taking is the market survey expectation of mid-20%. You can also understand it's above than 30% because our international branch expansion is still going on.
As you know, apart from our current branches in New York and Qatar, we are also opening branches in London, Dubai and Hungary. Those branch expansion, especially international branch expansion, is going on. On top of that, there will be some IT additional investments. On top of that, structurally, even without such form of items, banks OpEx always grow above than the inflation and above than the CPI. Therefore, official expression for OpEx is above an inflation. Of course it will be even above than 12% because of those additional items for 2026. I believe these are the final questions actually we are seeing on the written format. If there is no audio question, we may conclude actually, Rob.
Indeed. Thank you, Mr. Tahan. No, there's no more audio questions coming through. If you don't have any more written questions, then we can conclude. Over to you, sir.
Thank you very much, everybody. Together with Ece and the team, we will be at your disposal for any kind of follow-up questions. For the time being, thank you and thank you very much again for your interest and time.
Thank you so much, Mr. Tahan. Thank you, speakers, and thank you, ladies and gentlemen, for your participation. This concludes today's conference call. You may now disconnect.