Ladies and gentlemen, welcome to the VakıfBank Audio Webcast, our second quarter 2025 bank only earnings results. We will 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, which you will see there at the bottom of your Zoom screen. If you want to ask an audio question, you'll be able to join the call by clicking the raise hand button again at the bottom of the Zoom screen. Now, with that, I'm going to leave the floor to our hosts, and they are Mr. Ali Tahan, Head of International Banking and Investor Relations, and Ms. Ece Seda Yasan Yılmaz, Head of Investor Relations. Sir, madam, the floor is yours.
Thank you, Roel. Good afternoon, everybody, and welcome to first half 2025 VakıfBank earnings conference call. Starting with the presentation, I would like to start with the first page, which is related to profitability. As you can see on the right-hand side above chart, this quarter, second quarter only, we delivered TRY 10 billion quarterly net income, which is slightly above the market consensus of TRY 9.3 billion. With TRY 10 billion quarterly net income, first- half net income materialized at TRY 30 billion, which is up by 57% compared to same term of the previous year. This TRY 30 billion net income in the first half resulted in almost 26% average ROE and quarterly second quarter average ROE came at 17% ROA.
In terms of quarterly net income, as you can also see, at the right-hand side, last quarter, we had additional one-off TRY 11 billion provision. Excluding that, on a comparable basis, actually our comparable net income increased from TRY 9 billion- TRY 10 billion . I think this is also another positive aspect of the quarter for us, especially considering the fact that during this quarter, sector net income contracted by five percentage point. And especially in terms of the P&L, core banking revenues were strong, especially it was stronger on a quarterly basis. As you can see, in the middle of the page on the below chart, quarterly our core banking revenues increased by 25% from more than TRY 36 billion to more than TRY 45 billion .
Especially that part was the main driver of quarterly P&L delivery actually. Following this page, one of the important page I would like to take your attention is related to net interest margin, where you can see the detailed progress actually. Especially compared to peer group banks who announced their second quarter financials, we are glad to announce one of the best-in-class quarterly net interest margin. Especially this is visible both on a reported net interest margin wise as well as swap-adjusted net interest margin wise. On the right-hand side, in terms of quarterly evolution, our reported net interest margin increased by 61 basis points Q-on-Q and materialized at 2.9% ROA.
Swap-adjusted net interest margin also improved by 18 basis points from 2.4% ROA- 2.6% ROA. Of course, one of the main driver of relatively our performance on the net interest margin side can be attributable to CPI-linked portfolio. As one of the banks who are using the most conservative CPI estimation in the beginning of the year, just to remind you, in the first quarter, we were using less than 24% October to October CPI estimation. This quarter, for the first half, we corrected that number to 26%. This correction actually was the main driver of quarterly net interest margin increase.
Still, the good thing is, compared to private peers and compared to market consensus for year-end inflation, and more importantly, of course, October to October inflation, we still have upside for the second half of the year in terms of additional interest income support for CPI-linked portfolio. The 26% October to October CPI numbers still relatively a shiny number compared to what the private peers are using so far. During this quarter, another eye-catching development on the net interest margin side is materializing on the Turkish lira core spread business. As you can see on the right-hand side below chart, during this quarter, our Turkish lira core spreads further increased from 3.4% - 4.2%.
This is quite eye-catching, especially considering the fact that at the end of the first quarter, Central Bank of Turkey hiked the policy rate from 43% - 46%. Even in such quarter, we delivered additional Turkish lira core spread expansion, and this expansion came from both sides. As you can see, both we had additional positive contribution from Turkish lira loan yield perspective, as well as, and maybe more importantly, during the same term, we also achieved to deliver lower Turkish lira cost of deposit from 36% - 35%. As a combination of those two factors, our Turkish lira core spreads improved by 84 basis points QOQ, and this is also one of the best performance in the peer group comparison.
On the left-hand side below chart, another important development can be related to money market and swap usage. During this quarter, compared to first quarter, swap usage declined from TRY 44 billion - TRY 39 billion due to mainly increased cost of swap transactions. To counterbalance this balance actually, we have additional increase on money market funding. Money market funding increased from TRY 170 billion - TRY 220 billion, which means we have additional TRY 50 billion increase in our money market funding and effective cost of Turkish lira deposits, as well as further focus on demand deposit on Turkish lira side, was the main driver of this relatively good performance on Turkish lira core spread evolution. The next page is related to fee side.
Fee side was also stronger. Stronger compared to what we guided in the beginning of the year. Just to remind you, in the beginning of the year, for the full- year, we were guiding like mid-twenties annual fee income growth. However, in the first half, our total annual fee income growth came at 55%, much stronger than our conservative mid-twenties initial guidance. We also had 13% Q-on-Q fee income growth. This 13% is also a stronger number compared to total asset growth and compared to total lending growth. This can be attributable to the fact that most of our fee income came from payment side, payment-related, payment system-related fees, as well as other type of different fee diversification, which is not strictly correlated to cash lending growth and non-cash lending growth.
Therefore, that was also another positive performance of the quarter on top of net interest margin. Net interest margin performance and this fee income performance resulted a very strong core revenue banking generation capacity during the second quarter and during the first half of the year. OpEx growth on the expense side was also in line with the guidance. However, the good thing is, all cost income, all cost-related ratios in terms of KPI, like cost income ratio or cost over average assets, further improved. We are also outperforming compared to banking sector numbers during first half in terms of cost income. Our first half cost income ratio materialized at 38% versus sector average of 41%. Cost over asset ratio came at 2.5% versus 3.2% for the sector.
Our take is despite higher-than-average inflation OpEx growth, thanks to strong income generation capacity, we also manage efficiently to have lower cost ratios compared to sector. With page eight, we may move to asset growth and starting with the lending side. This quarter, our lending growth numbers, especially on Turkish lira lending side, as well as on the total lending side, was slightly lower than the sector Q-on-Q-wise. On total lending side, we had less than 9% versus sector growth of 11%. This is also the case for Turkish lira lending side. During this quarter, we had 8% Turkish lira lending growth versus 10% for the sector.
For the first half, since the beginning of the year, cumulative numbers seems to be in line between VakıfBank and the sectors. Both of us had more than 21% growth in the first half of the year for the total lending, and especially selectively in line with the guidance. In some areas, we further increased our market share. In some areas deliberately, we lost market share. Net-net, in the first half of the year, we maintained our strong market share positioning in terms of the competition. In terms of the portfolio, in line with our strategy, we had much more visible lending growth on the non-retail side compared to retail side. On the non-retail side, of course, relatively much more secured lending coming from corporate and commercial segments was much more visible, like 11% QOQ growth.
On the SME side, we had 7% QOQ growth. On the retail side, total retail lending growth came at 7% Q-on-Q and 25% year- to- date. In line with the sector trend, most of our retail growth came from credit card business as well as from overdraft. Excluding those two sub- products, excluding credit cards and excluding overdraft, our quarterly retail lending growth will be only limited at 2%, and in the first half, it would be only 10%. This kind of a very visible breakdown between non-retail versus retail is simply in line with our strategy and in line with what we were guiding in the beginning of the year. Another page I would like to draw your attention to is page 10, which is related to asset quality.
In the first half, our cost of risk, which is the main headline of the slide actually, came relatively higher than our initial guidance. In the first half, our net cost of risk came at almost 150 basis points versus initial guidance of 100 basis points. This is simply a true reflection of our conservative provisioning policy on the asset quality. In terms of ratios, in terms of both NPL ratio and in terms of Stage 2 ratio, the normalization process is also taking place. Our NPL ratio further increased to 2.5% from 2.05% a quarter ago. Our Stage 2 ratio further increased to above than 9% versus 8.3% a quarter ago.
Especially in front of the NPL inflow, in line with what we were guiding, most of our NPL inflow during the first half and especially during the second quarter came from the retail side compared to non-retail segments. For example, for this quarter, out of TRY 20 billion NPL inflows, more than TRY 10 billion came from the retail side, and the remaining almost another TRY 10 billion came from the SME, corporate and commercial segments. That was something we were expecting and that was something we were guiding. For the second half of the year, of course, NPL inflows and NPL ratio increase will continue. The speed of NPL formation and the speed of increase in NPL ratio will be dramatically lower compared to what we were experiencing in the first half of the year.
With page eleven, we may shift to liability side. Starting with the deposits, the headline seems to be quite critical. For the first time in this quarter, we have more than TRY 3 trillion of Turkish lira deposits. This is the quarter where we exceeded this threshold actually. In terms of the quarterly deposit growth, we had more than 11% total deposit growth. That number is significantly higher compared to sector average of 8.4%. In terms of the currency breakdown, we had almost equal split between Turkish deposit growth and hard currency deposit growth. We had almost 10% Turkish quarterly deposit growth, and we had another 10% hard currency deposit growth in dollar terms.
As a result of that, we had more than TRY 3 trillion deposits. Compared to lending growth in terms of quarterly growth, quarterly deposit growth was stronger than lending growth, so therefore, loan-to-deposit ratios further declined. There are two points I would like to also highlight related to deposits. One of them is related to the share of demand deposits, which is also a key strategic area for our senior management. We see further improvement in terms of the share of demand deposits in total deposits. This quarter, the share of demand deposits further increased to 30%, which was 27% a quarter ago. Of course, this is still a lower number compared to our private peers.
In terms of the evolution over the quarters, this clearly shows we are in the good track, and we will further see further improvement on that area. Another point related to deposit is related to share of retail deposits. Again, as part of our strategy, we are putting further focus on retail deposits, and the share of retail deposits further increased to 48%, which was 45% a year ago. In terms of market share and in terms of ranking, similar to lending side, we are also keeping our strong presence and our strong market share, especially among listed banks. At every front, almost, we are still staying at the first rankings. On page 13, actually, you may also see the developments on the wholesale borrowing side.
For the first half year to date, international fresh funding growth came at $8.5 billion, including DPR, including syndication, including private placements, and very recently, including the senior unsecured Eurobond issuance. In the beginning of July, a month ago almost, we also had the first Eurobond issuance of the year, again, sustainable, five years maturity, $750 million, with yield of 7.38%. IPTs were hovering around almost 8%. Thanks to strong appetite from international investors, we had good progress during the day and landed at 7.38% area. That was the first Eurobond issuance of the year. During the period, actually, we were quite successful in terms of diversification and in terms of using effectively different funding sources.
As of second quarter end, total wholesale funding, including repo transactions, almost reached $22 billion, which makes around 18% of total liabilities. The last point I would like to take your attention is related to capital ratios. Capital ratios in all levels actually, both reported as well as without forbearance measures in terms of total CAR, in terms of Tier 1 ratio, in terms of CET 1 ratios. Q-on-Q-wise, we see improvement in every aspect. Of course, you are seeing at the left-hand side above chart, the reported numbers. On the next to that, on the table, we are also showing our solvency ratios without forbearance measures actually. During this quarter, we had almost 9.2% CET 1 ratio without forbearance measures.
Including also potential release of TRY 4 billion pre-provisioning, our CET 1 ratio would be 9.3%. This is on a bank-only basis. Today, we also announced our consolidated financials. In the first half of the year, consolidated net income even came stronger at TRY 34.5 billion, almost TRY 5 billion higher compared to bank-only basis. Thanks to efficiency and profitability of our subsidiaries, our total CET 1 ratio on a consolidated basis, including all those factors actually, would be almost 9.7% area, way higher than bank-only levels. As usual, on the left-hand side below chart, you are also seeing the quarterly evolution of total CAR.
Compared to a quarter ago and compared to previous periods actually, this time, the impact of BRSA forbearance measures materialized at 100 and almost 20 basis points. Just to remind you, up until a quarter ago, the impact of such forbearances were hovering around 100 basis points instead of current 120 basis points. This additional forbearance impact can be explained by the fact that because of the further depreciation of Turkish lira against euro, I mean, during the second quarter, we had additional five Turkish lira depreciation against euro. Given in terms of the FX balance sheet breakdown, we have more than 50% euro-denominated lending compared to dollar and other currencies.
The impact of forbearance measures further increased, and this is the reason actually why we had relatively higher amount of impact coming from the forbearance measures. I mean, without taking too much of your time, I would like to stop here. Before leaving the floor to Roel again, I would like to also spend a couple of minutes related to our revised guidance for the full- year. Starting with the lending side and growth side, I would like to first start with the Turkish lira lending side. Just to remind you, initially, we were guiding mid-teens Turkish lira lending growth for the full- year. After first half numbers, now we are revising our Turkish lira loan growth for the full- year to high twenties, which is in line with the year-end inflation.
As you know, as of today, the market consensus for the year-end inflation is slightly lower than 30%. In line with this reality, now we are also revising our Turkish lira lending growth to high 20s, sorry. High 20s area. Inflation-adjusted, actually, we don't have a real Turkish lira lending growth. On the hard currency side, we were starting the year with relatively humble guidance, which was high single digit in dollar terms. In the first half, we already had more than this in terms of hard currency lending growth, which came at 14% in the first half of the year. This is mainly related to two factors.
One of them was simply related to too much high quality demand for hard currency lending because of the interest rate differential between hard currency versus Turkish lira lending rates. Second, and maybe more importantly, because of some specific exclusions from the hard currency lending restrictions, we had additional capacity to grow. Therefore, in the first half of the year, our hard currency lending growth already materialized more than what we were guiding in the beginning of the year. As of today, realistically, we are revising our hard currency lending to high teens in dollar terms again, versus high- single digits in the beginning of the year. That's also another revision on the volume side, on the lending side. When we switch to revenue side, we are not changing our guidance for the swap-adjusted net interest margin.
Just to remind you, in the beginning of the year, we were guiding like 200 basis points improvement in our swap-adjusted net interest margin for the full- year from 2.5% area - 4.5% area. At the end of March, because of volatility we had in the markets, central bank hiked. It created some additional net interest margin pressure, of course. But despite this, we are still stick to our initial swap-adjusted net interest margin expectation. Especially for the second half, we are quite optimistic, and therefore we still believe this 4.5% full -year swap-adjusted net interest margin is doable and realistic. Another positive revision after seeing the first- half results can be seen on the fee income side.
Just to remind you, we were guiding mid-20s in the beginning of the year. Realistically, now, we see a strong potential to deliver more than 40% fee income growth for the full- year. In a nutshell, from mid-20s initial guidance, now we are changing to above than 40%, 40% fee growth. Therefore, this is also another positive P&L support for the full- year. We don't change our OpEx expectation, which is above than high inflation. However, we are also revising our net cost of risk. In the beginning of the year, we were guiding 100 basis points, but in the first half, we already delivered 150.
Now we are realistically thinking that for the full- year, a 150 basis points net cost of risk is much more doable and much more sensible. Therefore, on the net cost of risk side, we are revising our expectation to from 100 basis points area - 150 basis points area. All those revisions, especially, volume side, positive, revision, no change on swap-adjusted net interest margin side, and additional support from fee side. All those numbers will take us to high twenties average ROE from previous mid-twenties average ROE. Therefore, as a combination of those, all those factors, we are revising positively our full- year profitability expectation from initial mid-twenties to high twenties area. Of course, this high twenties will also include TRY 11 billion pre-provisioning we announced in the first quarter.
Having said that, on top of this TRY 11 billion, we don't envisage any additional free provision reversal in the second half of the year. Without any further support from free provisioning side, we are revising positively our full- year average ROE through high twenties area. These are the points I also would like to share. I guess now, Roel, this is time to leave the floor to you again. Thank you very much.
Thank you, Mr. Tahan. Yes, indeed, ladies and gentlemen, we will now start our question and answer session. It's your chance to ask the questions you would like. If you would like to ask a written question, please would you click the Q&A button, which you will see there at the bottom of your Zoom screen, and then just submit that. If you'd like to ask an audio question, if you want to join the call. Just join the call by clicking the raise hand button, which you will also see there at the bottom of the screen, and we will connect you. As simple as that. All right. With that, the floor is now open for those audio and written questions. Right, Mr. David Taranto, if you would go ahead with your question, please. Thank you.
Hi. Thank s for taking my question. I have a question on deposits, please. Second quarter was a period of rising interest rates. What was the key driver of quarterly decline in your Turkish lira deposit costs in this period, please? Is it because of higher percentage of retail deposits or state deposits, or are there any other reasons for this? Thank you.
Thank you, David. Thank you very much for this question. Actually, there are two reasons for that. One of them is related to effective management of structural cost of funding. To the extent possible, we try to give exit to most expensive ones and to the extent possible, try to replace with much more relatively less expensive ones. But rather than the retail, the main support came from the demand deposit side. On Turkish lira side this quarter, in terms of demand versus term, Turkish lira deposit growth, we had significant growth on the demand side rather than the term side. Q-on-Q-wise, we had more than 30% quarterly growth on Turkish lira demand deposit side versus single-digit on Turkish lira term deposit side.
As a result of that, the combination and the composition of Turkish lira deposits further changed in favor of demand versus term. These are the two main drivers of actually having relatively lower Turkish lira cost of deposits in second quarter compared to first quarter. That was the main driver of Turkish lira cost spread expansion, actually. Hope clear.
Yes. It's very clear. Thank you very much.
Thank you, David.
Thank you, Mr. Taranto. All right, ladies and gentlemen, we have started the question and answer session. Just a reminder, if you would like to ask an audio question like Mr. Taranto just did, you can join the call by clicking the raise hand button. You can do that right now. If you would like to ask a written question, please would you click the Q&A button at the bottom of your Zoom screen and submit your question. You can do that right now. Thank you.
Actually, Roel, we have one written question. For the sake of the time, maybe we should switch to that question. In the meantime, if there is any other question, of course, we are more than happy to answer. Valentina from Barclays. Actually, she is asking two questions. One of them is related to capital and CET 1 ratios. Where do you see your CET 1 ratios at the end of the year? And at what buffers over minimum would you feel comfortable given capital sensitivities? That's her first question. For this question, actually, I think we already had the most challenging time in the first half of the year.
Without any further one-off impact, thanks to a very strong profitability outlook in the second half of the year, our CET 1 ratios should improve both on a bank only basis as well as consolidated basis. On top of that, of course, there will be some potential additional one-off impacts related to potential listing of our two subsidiaries. They are still on the table. The good thing is, without any one-off impact, thanks to profitability increase, thanks to efficiency increase, in line with our guidance and in line with our expectation, each and every quarter, our CET 1 ratios should improve. By the end of the year, without forbearance measures, it should be hovering around a double-digit area. Just to remind you, as of June, as of first half, it is 9.14%.
Even without any further support from one-off subsidiary listing impacts, still we may end up with above 10% CET 1 ratio without forbearance level. I think that's the answer for the first question. The second one is related to hard currency liquidity as of second quarter. As of second quarter, actually, hard currency liquidity ratios because of the also dollar deposit availability, as well as because of the all wholesale funding channels availability. We were extremely at a comfortable level, and this is also something visible from hard currency LCR ratio point of view.
For your question, specifically at the end of second quarter, our free hard currency liquidity is hovering around almost $6 billion level, which is quite comfortable. For your information, Valentina, especially for example on the syndication side, on the syndication facility we closed in the second quarter of the year. We had a very strong demand from all correspondent banks. For the first time, maybe, we had almost 20 banks participating at the MLA level. However, overall demand for that syndication, which we were looking for only one year without making any two year or three years optionality, because from cost of funding side, that was the decision given by our treasury management.
We had almost $1.5 billion demand from the banks participating from all over the world, but we simply wanted to take around $1 billion, but not more. Good level of, very good level of hard currency liquidity levels simply created such availability for your question. Mustafa Kemal Karaköse, he is also asking another written question, and he's asking: What was the main driver for consolidated net income to exceed the solo figure by such a large margin? Actually, Mustafa Bey, this is not something specific to second quarter. That was also the numbers. That was also the delta, actually, in terms of net income differential between bank only versus consolidated. That was also more or less the difference as of first quarter.
At a consolidated level, especially visible support came from the listed subsidiary of REIT, Vakıf REIT, actually, Vakıf Gayrimenkul Yatırım Ortaklığı. Because of the additional some one-off positive support from some of the projects our REIT subsidiary is running. In the first quarter, we had some such strong support from our REIT subsidiary, and it was much more on the first quarter. As of second quarter, actually, this kind of difference between bank only versus consolidated, simply flattish. The last written question is also from Valentina. She is asking any update on your Eurobond issuance plans by the end of the year? Actually, in our original budget, Valentina, we only had one senior unsecured Eurobond issuance, and we successfully executed in July, in the beginning of July.
The good thing is, for the rest of the year, we don't have any redemption on the Eurobond side. For next year, we have two redemptions, one in the beginning of the year and one in the beginning of Q4. Therefore, if market conditions are supportive, opportunistically, we may be looking for fresh Eurobond issuance for pre-funding purposes. However, as of today, our management haven't decided yet whether we should be looking for a capital deal or we should be looking for a senior deal. It will be decided by looking at the market pricing levels, actually. From budget point of view, we only had one public Eurobond issuance plan, and we successfully executed it in the month of July. Another written question we just received from Furkan Bey. Furkan Vefatilioğlu.
He's asking: Could you please give further details on your net interest margin evolution? At which level and when we will see the peak on net interest margin? I mean, of course, especially for the second half of the year, in line with the cut of central bank from the policy rate, actually, there will be too much room for cost of structural deposits to decline. Therefore, for the rest of the year, at every MPC meeting, we are expecting a further rate cut from central bank management. We are expecting, given year-end inflation will be slightly lower than 30% area.
Year-end policy rate levels may be hovering around 35% area, so that there will be more than minimum 5% real return between the inflation versus central bank policy rate. Therefore, the more they cut, of course, the more we will enjoy from the interest margin. In terms of quarterly net interest margin, of course, within 2025, Q4 2025 will be the highest quarterly net interest margin. However, in terms of quarterly sequence, further improvement will also be visible in the beginning of 2026. As of today, it is not actually known at what quarter we will see quarterly peak level of net interest margin.
As of today, it is very visible that, within 2025, Q3 will be way stronger than first half, and Q4 will be way stronger than Q3. Each and every quarter, it will continue to increase. Of course, because of the duration mismatch and because of the repricing effect, this improvement will continue in the first quarters of 2026. Given next year budget is not finalized yet, as of today, we are not in a position to provide quarterly evolution for next year, actually. At least the trend-wise, as of today, it is very visible that first quarter 2026 net interest margin will also be stronger than Q4 2025 net interest margin. These are the written questions, and these are the answers from our side, Roel.
If there's any other participants who would like to ask questions on audio, we can switch, or otherwise, we can come to the conclusion.
Yes, Ali Tahan. I don't see any more audio questions. No one seems to be. Everyone seems to be happy, and I don't see any more written questions. Yes, if you can proceed to conclude, that'd be great. Thank you.
Thank you. Thank you, Roel, and thank you, everybody, for your participation and interest. As usual, together with Ece and together with our investor relations colleagues, we are at your disposal. If you have any follow-up questions, please do not hesitate to contact with us. Looking forward to making way stronger earnings presentation calls going forward for the rest of the year. With this occasion, we would like to have a good evening and looking forward to talking to you soon again.
Thank you, Ali Tahan. Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.