Ladies and gentlemen, welcome to the VakıfBank Audio Webcast T hird quarter 2025 Bank-O nly Earnings Results. We'll have a question and answer session following the presentation. If you would like to submit your questions, you can send them anytime by clicking the Q&A button at the bottom of your Zoom screen. If you want to ask an audio question, you can join the call by clicking the Raise Hand button. With that, I will leave the floor now to our hosts. First of all, Mr. Ali Tahan, the Head of International Banking and Investor Relations at VakıfBank, and Ms. Ece Seda Yasan Yılmaz, the Head of Investor Relations, also at VakıfBank. Speakers, the floor is yours.
Thank you, Rolf. Good afternoon, everybody, and welcome to VakıfBank third quarter 2025 earnings presentation call. As usual, I will be starting with the presentation, quickly and thereafter, to the extent possible, leave the floor, for the Q&A session. Starting with the first page, in this quarter, in the third quarter of 2025, as you can see on the right-hand side above chart, we delivered TRY 11.9 billion quarterly net income, which is, almost TRY 1 billion higher than the market consensus of TRY 10.9 billion. This number itself, comes with almost 20% increase on a QoQ basis from, TRY 10 billion to almost, TRY 12 billion .
With this quarterly performance, year-to-date, net income of VakıfBank increased to TRY 42 billion, which is up by 54% compared to same term of the previous year. And this, with this 54% net income, we are glad to see that we outperformed the sector net income growth of 45%. And on top of this, we are still keeping TRY 4 billion free provision as a buffer in our balance sheet as of third quarter end.
And on top of that, most importantly, as we will discuss more in detail, we will be delivering the best quarterly net income of 2025 within Q4 in the upcoming quarter, thanks to sizable potential interest income from our CPI linkers, as we are one of the most conservative bank so far in terms of using the very conservative CPI estimation. With TRY 42 billion net income in the first three quarters period of the year, we delivered an ROE, average ROE of 23% and quarterly is 19%. And this 23% year-to-date average ROE, thanks to strong Q4 of the year, we believe full year average ROE will be increasing to high 20s.
Remember, for the full year, we were guiding high 20s average ROE and with a very strong Q4, we believe it will be easily achievable and doable. Another point I would like to draw your attention to this slide is related to core banking revenues and pre-provisioning profit growth. On the core banking revenue side, similar to net income growth, we have another 56% year-over-year growth in our core banking revenue, reaching almost TRY 140 billion. And in terms of this core banking revenue composition, we have slight increase in the share of net fee and commission income, which was 37% a year ago versus 38% as of today. And the remaining 62% is mainly coming from net interest income.
And on the pre-provisioning profit side, the increase is much more visible with 147% increase compared to net income growth or core banking revenue growth, which take us to the conclusion that, as a conservative state lender, we set aside provisioning too much for the credit risk and other different risk factors. To continue with the presentation for the sake of the time, I will be jumping to net interest margin page, where you can see the details on slide five. Starting with the net interest margin.
Reported net interest margin in this quarter, as you can see with the yellow dot line, increased from 2.93% a quarter ago to 3.61% in this quarter, which corresponds to 68 basis points increase in just one quarter period of time. Similarly, swap-adjusted net interest margin increased from 2.59% to 3.07%, a very similar trend. And the good thing is, those numbers achieved via a very conservative and humble CPI estimate. As you can see on the left-hand side above chart. As of third quarter, we use 26.9% CPI estimation during Q3, which is the lowest level among the peer group banks.
The eye-catching reality is despite such a very conservative CPI estimation, still report net interest margin-wise as well as swap-adjusted net interest margin-wise, VakıfBank has delivered one of the strongest quarterly performance within third quarter. As you know, in the beginning of November last week, October-to-October inflation announced officially with 32.9% year-on-year, and all the correction will be reflected in Q4. As a result of such big correction, we are expecting to receive additional TRY 16.5 billion interest income from CPI linkers. As you can see, in the presentation as of third quarter, we enjoyed almost TRY 20 billion interest income from CPI linkers.
And on top of that, net-net, total net interest income from CPI linker portfolio will be reaching to TRY 35 billion, which will be the main driver of very strong quarterly performance within Q4. And another point I would like to take your attention is related to Turkish Lira core spreads. Yes, it is true that for Q4, we will have additional sizable contribution from CPI linkers. But on top of that, additional positive news will be coming from the Turkish Lira core spread development. As you can see on the below chart right-hand side. During Q3, we have additional expansion of Turkish Lira core spreads, and now it reached to 450 basis points, which was 420 basis points a quarter ago.
QoQ wise, Turkish Lira core spreads expanded by additional 30 basis points. And with the ongoing cycle, we believe within 2025, Turkish Lira core spreads will reach to the peak level within Q4. So therefore, for the very short period net interest margin outlook for Q4, there will be a sizable contribution, not only from CPI linker portfolio, but also from additional expansion of Turkish Lira core spreads. It's coming, it's on the way, and therefore we are quite optimistic for both Q4 net interest margin performance as well as overall profitability of the period actually. The next page is related to net fee and commission income.
On top of very, eye-catching, top-line performance on the net interest margin and on the net interest income, another strong performance is visible on the fee and commission income side. Similar to net income growth, we also have outperformance in terms of yearly and quarterly growth on the fee income side. Total fees increased by 61% year-over-year versus 50% for the sector. In terms of the quarterly evolution, we have another 19% quarterly fee income growth versus sector average of 14%. So therefore, core banking revenues, high quality revenue generation capacity of the bank remain intact and further, developed actually during the Q3.
In terms of the source of fee income, as you can see on the right-hand side, the bulk is coming mainly from the payment systems with more than 50% stake, followed by mainly lending related fees, both cash lending as well as non-cash lending. In terms of quarterly and annual growth, the most visible growth rates are coming from payment systems and cash loans. As a result of such strong performance on the fee income side, all fee related KPIs seems to be in a very good shape, like fee over OpEx or fee to over income, fee total income. So therefore, on top of a very strong net interest margin performance, we are very happy to see and reflect another good results, set of results on the fee income side.
The next page is related to OpEx, and OpEx growth is more or less in line with the fee income. Both of them are above the 60% year-over-year. In terms of the OpEx, rather than HR side, especially non-HR OpEx items like promotion expenses we are paying to payroll clients, this is the main driver of quarterly OpEx growth for Q3 as well as for the entire 2025. With page eight, we can move to asset side. On the asset side, as of third quarter, our total balance sheet reached to TRY 5 trillion level, which corresponds to $120 billion equivalent. Out of this asset growth, more than 50% is coming from the lending side as the main activity.
On the lending side, in this quarter, we have a quarterly total lending growth of 9.1%, which is slightly higher than the sector average of 8.6%. In this manner, on the total lending side, we continue to grow and we continue to gain market share. As of September end, our market share in total lending further increased to 12.5% share, which is the first ranking among the listed banks of Turkey. In terms of the currency breakdown, we have another 9.8% quarterly lending growth, which is specifically the same compared to sector average. On the hard currency side, we have additional 3.4% quarterly lending growth in dollar terms on the hard currency side.
When we look at the year-to-date numbers, year-to-date, Turkish Lira lending growth came at almost 29%, and hard currency lending growth in dollar terms came at 18%. These are the numbers actually we were sharing for the full year during the budget process. So on the lending side, as of September end, we are fully in line with the full year budget. In terms of the portfolio breakdown, during this quarter, most of the lending growth came from the SME side. So in this manner, third quarter was slightly different compared to first half of the year. Remember, during the first half of the year, quarterly lending growth was mainly coming from the corporate and commercial segment.
But this time, due to commitment for some IFI related projects, the main driver of lending growth was coming from the SME segment rather than corporate and commercial segment. And as a result of that, we have 16% Q-on-Q growth on the SME portfolio, which is followed by corporate and commercial segment with 7% quarterly growth. On the retail side, we will continue to be on the conservative side and on the shy side. And therefore, our market share continued to diminish on the retail side, which is relatively lower compared to total market share on the total lending or our market share on the non-retail segments. Retail market share came down to 9.2%.
However, on the corporate and commercial segment, we are almost reaching to 14% market share for both, SME as well as non-SME side, which is fully in line with the strategy and the priority of the senior management. For the sake of the time, I am moving to page 10, which is related to asset quality. On the asset quality, there are a couple of points I would like to share with you. Let me first start with the good part. The good part is related to collection performance. For the collection performance during this quarter, quarterly collection amount reached to almost TRY 6 billion, which is almost 2.5x higher than the last year average.
So in this manner, collection numbers and collection performance seems to be in a very good shape, thanks to strong collateralization, thanks to our collateralized lending policy. That's the one part of the asset quality. The other part is related to simply ratios. On the ratio side, we are calling this period as a normalization with the long-term average actually. At this stage, I would like to take your attention to NPL ratios. During this quarter, VakıfBank NPL ratio further increased to 2.77%, which was 2.5% a quarter ago, and which was almost 1.8% in the beginning of the year.
So if we just look at from NPL ratio point of view, NPL ratio increased by almost 100 basis points year to date, mainly because of the NPL inflow driven by retail. And indeed, in this quarter, in terms of NPL inflows, we are having around TRY 19 billion NPL inflow. Out of this NPL inflow, almost TRY 11 billion is coming from the retail and credit card business. And the remaining TRY 8.2 billion is coming from the corporate and commercial segments. Because of those NPL inflows, NPL ratios are increasing. But on the flip side, it is normalizing with the sector average.
Because if you look at the asset quality metrics from a long-term perspective, especially in this manner, as you can see in the middle of the page, we are indicating the NPL ratio of VakıfBank during the period of 2008 to 2019. 2008 refers to the period with the global banking financial crisis period, and 2019 simply refers to pre-pandemic period. During that period of time, our NPL ratio on average was hovering around 4.3%. So from this perspective, actually, we are approaching the long-term cycle averages, which is also in line with our budget. In terms of the budget and in terms of the expectations for the full year, we were guiding up to 3% NPL ratio and 150 basis points net cost of risk.
And indeed, as of today, we understand that those numbers and those guidance seems to be quite realistic, as NPL ratio is hovering around 2.8% and full year cumulative net cost of risk is hovering around 154 basis points. So in this manner, especially related to NPL ratio, it is simply normalizing as the denominator effect, to some extent is fading away. The last point I would like to take your attention is related to slight contraction in the share of stage two loans. As you can see on the right-hand side above chart, the share of stage two loans within total loan portfolio contracted from 9.1% to 8.8%. This is mainly simply a shift from stage two to NPL.
Within stage two, the share of restructured further increased from TRY 108 billion to almost TRY 125 billion. This is simply a reflection of the regulation change, which simply makes it easier for any kind of restructuring with the regulation introduced by the regulator as of July. With page 11, we can move to deposit and liability side, starting with the deposit side. As of this quarter, for the first time, the amount of total onshore customer deposits exhibits the TRY 3 trillion level. Year to date, our deposits increased by 23%. In terms of the quarterly evaluation, total deposit growth was up by 7.1% for Q3 specifically and 23.4% year to date.
Both numbers are slightly lower than the sector averages. In terms of the currency breakdown, our Turkish Lira deposits are up by 5.7% and 18.8%, respectively for quarterly and year to date. Those numbers are also slightly lower than sector trends because during 2025, we were mainly focusing in terms of making our deposit portfolio much more granular, much more retail-oriented, and much more supported by the demand deposit side. And indeed, that strategy seems to be worked efficiently. In terms of the demand versus term deposit breakdown, the share of demand deposits in total increased to 30% area, which was less than 25% a year ago. On top of that, the share of retail deposits also increased to 48%.
These are the retail deposits and the demand deposits. These are the main target areas for us in terms of deposit composition. And all the numbers so far simply shows that this strategy worked very well efficiently. Another page I would like to take your attention is related to page 13, where you can see the details of wholesale borrowing. As you know, during 2025, for Turkish banks, all wholesale borrowing channels are wide open, and all of them are working efficiently. As of September end, total wholesale borrowing of VakıfBank increased to $22.5 billion, which makes around 20% of total liabilities.
Thanks to additional transactions we achieved during the first week during October actually, that number further increased to almost $24 billion as of today with the new fresh DPR of $1 billion and with the recently issued additional tier one of $500 million. Especially one important aspect of this very recent AT1 transaction is simply related to the fact that among all Turkish banks, including state banks and private banks, this transaction itself has the lowest yield with 8.2% and has the lowest reset spread margin. Therefore, we are extremely happy with the outcome and with the strategy. And our focus on the wholesale funding still quite alive, especially with the further focus on long-dated IFI transactions and long-dated projects.
There will be much more transactions going forward. The last page I would like to take your attention is related to solvency ratios. As of September end, total reported CAR ratio materialized at 14.7%. Tier one ratio materialized at 12.34%. CET1 ratio materialized at 10.01% area. As you can see on the right-hand side, we are also transparently showing the solvency ratios without BRSA forbearance measures, both on bank basis and consolidated basis, including free provisioning.
Given especially SIFI buffer, systemically important financial institution buffer, taken into consideration on a consolidated level rather than the bank-only level, we believe BRSA without BRSA forbearance numbers makes a lot of sense when we look at on a consolidated basis rather than bank-only basis, which take us to 9.54%-9.56% as of September. Which is quite comfortable level compared to minimum requirements imposed by regulator, as well as compared to our internal risk buffer. The last point I would like to share with you is related to the impact of very recent AT1 with the amount of $500 million. This transaction itself has a potential positive impact of 75 basis points in our tier one ratio and tier two ratio as of today.
And that's the last point I would like to present to your attention. Thank you very much for your time, and thank you very much for listening to us. For the time being, we would like to conclude the presentation and leave the floor to Rolf actually again. Thank you.
Thank you, Mr. Ali Tahan. Thank you very much indeed. Yes, indeed, folks, we are now gonna start our question and answer session. If you would like to ask a written question, all you do is click the Q&A button, which you'll see there at the bottom of your Zoom screen, and then submit your question. You can do that right now. If you would like to ask an audio question, you can join the call by clicking the Raise Hand button, which you will also see there at the bottom of your Zoom screen. The floor is now open for those questions. Now is the time for you to do that. All right, Mr. Tahan, I see we have a written question. No audio questions so far. If you'd like to maybe have a look at that.
Just a reminder, folks, the question and answer session is now open. Written questions, click the Q&A button at the bottom of your Zoom screen and submit your question. And if you'd like to ask an audio question, you can join the call by clicking the Raise Hand button. I see we have a written question. Mr. Tahan, I hope you can hear me. Perhaps we can do that while we wait for an audio question. Thank you.
Sorry, Rolf. I was muted actually. I couldn't reach out to you. Now, I guess you are hearing to us. We have one written question from Valentina, from Barclays. She's asking different questions. Let me go over those questions. The first one is related to key guidance metrics and how VakıfBank performed compared to guidance. She is also asking about 2026 guidance. As of today, unfortunately, given the budget process not finalized, we don't have the official guidance for 2026. At least for 2025, we can try to summarize. In terms of the guidance on the lending side, for the Turkish Lira lending growth, we were guiding high 20s. As of now, we are already at 29%.
So Q4, with Q4, I think we will be overshooting our Turkish Lira loan growth. As of today, it is clear that Turkish Lira lending growth will be above the 30%. Compared with the inflation, we understand full year Turkish Lira lending growth will be in line with the inflation itself. Given the year-end inflation is 32%, we believe Turkish Lira lending growth for the full year will be also in line with the inflation growth, on the Turkish Lira lending side. On the hard currency lending side, we were guiding high teens, in dollar terms for the full year. As of September, it is already 18% and it is already achieved actually. For Q4, we don't expect too much room for hard currency lending.
More or less, it will be also the number for the full year. In terms of net cost of risk, it is also quite realistic. We were guiding 150 basis points net cost of risk, and as of September, on a cumulative basis, we are there actually. The specific number we are having is 154 basis points. On the swap-adjusted net interest margin, we were guiding, compared to previous year, 200 basis points improvement. It will be also overshooting. I mean, probably the expansion on the swap-adjusted net interest margin will be lower than what we were guiding. I think in this manner, all the banks are in the same category, compared to what we were expecting in the beginning of the year.
We understand as of today, net interest margin expectations in the beginning of the year was quite optimistic, and the numbers we are all delivering will be slightly lower than the guidance. Net-net maybe rather than 200 basis points swap-adjusted net interest margin improvement, we will end up with around 100 basis points and 125 basis points net interest margin expansion. On the net fee income and OpEx growth, all of them were referring to above the inflation and they are in line with each other. As you can see from September numbers, both on the fee income side as well as on the OpEx side, we have more than 60% growth on an annual basis for each, and this is also in line with the guidance.
All those numbers will take us to high 20s average ROE for the full year. That was our guidance. As of September, we are at 23% area, slightly lower than what we were guiding. Because of this strong net interest margin outlook and profitability outlook for Q4, because of both core spread expansion as well as because of the sizable additional interest income from CPI linkers, we believe for the full year, high 20s average ROE is quite doable and realistic. That was the brief summary of our guidance and what we achieved so far. For the second question is related to asset quality. Do you see asset quality pressure in the SME or commercial segment? For the micro SMEs, partially, yes.
However, for the mid-size SME and for the commercial and corporate sector, we don't see a general weakness, or we don't see a general trend actually. As you can see from the presentation so far, since the beginning of the year, in the first three quarters of 2025, vast majority of NPL inflow was coming from the retail side. We believe going forward, because of the restructuring easing, NPL inflow from the retail segment will be much more slower starting from Q4 onwards. The restructuring easing, which was introduced by BRSA in July, it was an important game changer, and it will work efficiently.
However, for the specific part of your question, for the asset quality pressure in the SME, for micro SMEs, partially, we can say yes, but for the mid-size SME and corporate and commercial segment, we don't see such general trend yet actually. The third question is related to hard currency liquidity as of third quarter. Maybe as of today and as of September, in terms of hard currency liquidity, all the banks are enjoying the most ample liquidity conditions in the hard currency. As of September end, for us, it is hovering around $9 billion actually. And this number is one of the highest compared to the beginning of the year or compared to previous years. The next question is related to consolidated CET1 ratio. Does it include the free provisioning? Yes.
That number assumes in case we are also releasing TRY 4 billion to the P&L actually. Without that number, it would be around 9.45% . 10 basic points lower than what we are suggesting. I think that these are the questions. The last question is related to RWA without forbearance on consolidated basis. We will come back on this via written email to you, Valentina, after the call. I don't have the specific numbers with me for the time being.
Another question is coming from Goldman Sachs, Mikhail Butkov. Mikhail is asking simply would like to double-check on CPI-linked income contribution in Q4. Would it be TRY 16.4 billion incremental increase on top of normal income contribution?
Yes, your understanding is correct, Mikhail. As of Q3, we are having around almost TRY 20 billion interest income from CPI portfolio. So with the actual numbers given it is announced, we will make the full year correction. Rather than TRY 20 billion , we will be enjoying around almost TRY 36 billion total interest income in Q4. I think that's the answer for your question. The last question, actually a couple of questions. We have another question from Furkan Vefadar. You were talking about TRY 35 billion total income from CPI linkers. Is this the total CPI linker income in Q4? Yes. The total income in Q4 from CPI linkers will be TRY 35 billion . Where do you see the exit net interest margin for this year?
Lastly, how do you see the net interest margin trajectory next year? I mean, for net interest margin side, of course, Q4 by far will be the strongest quarter of the year because of the peak levels within 2025 of Turkish Lira core spread evolution, as well as because of the additional sizable interest income from CPI portfolio. In terms of 2026, as we discussed, we will be discussing more in detail once the official budget is ready and approved by the board, which is not the case. In a bulk explanation, what we can tell to you, of course, we will be entering to the 2026 with a very good level of Turkish Lira core spread levels.
There will be more room for additional Turkish Lira core spreads in the first half of the year as Central Bank of Turkey, in our base case scenario, continue to cut rates. Of course, the level of cuts may not be as strong as 2025. Just to remind you, during 2025, Central Bank of Turkey starts cutting rates by 350 basis points, and thereafter decreases it to 250. In the last MPC meeting, they cut by an additional 100 basis points. In line with some of the research suggest, in our base case scenario, we expect 100 basis points rate cut at every MPC for next year. As of today, of course, Central Bank of Turkey didn't announce yet the calendar and the number of MPC meetings for 2026.
As long as inflation is standing at the current trend, there will be more room for Central Bank of the Republic of Turkey to cut rates. It will be much more beneficial from Turkish Lira core spread and expansion point of view. However, of course, at least in the first quarter compared to Q4, CPI linkers contribution will be quite weak in Q1, in the first quarter of 2026 compared to Q4 2025. To some extent, it will be compensated by additional expansion of Turkish Lira core spreads. These are the general trends for a very short period of time. As of today, unfortunately, we are not in a position to quantify those trends in numbers.
Of course, we will be happy to share our expectations once the budget is approved by our board of directors.
Another question is coming from the Mustafa Kemal Karaköse. Mustafa is asking, does ROE guidance include any provision reversal in the next quarter? What is break even NPL ratio in terms of required capital ratios? I mean, we don't have any sensitivity for the second question. But for the first part, we in our base case scenario, we don't touch to remaining TRY 4 billion free provisionings, and we are still keeping it in our balance sheet. For your information, among the listed banks, top tier one banks of Turkey, we are the only bank who still have free provisionings in the balance sheet.
In our base case scenario, when we are talking to high 20s full year average ROE, we don't take into consideration any free provisioning reversals. Rolf, actually, these are the written questions I am seeing on the screens. As far as I understand, there is no audio questions. If there is any, if I'm mistaken, please correct me. Otherwise, we will.
Yes, indeed.
Take a couple minutes for closing.
Thank you, Mr. Tahan. Yes, indeed. No audio questions are coming through. You're right, there don't seem to be any other written questions. Unless there are any other questions, I think yes you can move to the conclusion. Thank you, Mr. Tahan.
Thank you. Thank you, Rolf. Thank you very much for everybody for joining to the call. Together with Ece and all IR colleagues, in case of need, we are at your disposal and happy to answer any kind of follow-up questions. Thank you very much for your time and patience again, and looking forward to talking in the first possible occasion.
Thank you, Mr. Tahan. Thank you much for your presentation. That, ladies and gentlemen, concludes today's conference call. We thank you for your participation. You may now disconnect.