Good day, ladies and gentlemen. Welcome to the VakıfBank Audio Webcast first quarter 2025 bank-only earnings results. We will have a question-and-answer session following the presentation. Now, if you'd like to submit your questions, you can send them anytime, even now during the presentations, by clicking the Q&A button which you will see there at the bottom of your screen. If you would like to ask an audio question, you can join the call by clicking the Raise Hand button, and that will be after the presentations, and then we will come to you. With that, I will now hand you over to Mr. Ali Tahan. He's the head of International Banking and Investor Relations at VakıfBank. Good evening, sir. Over to you.
Thank you, Roland. Good afternoon, everybody, and welcome to VakıfBank first quarter 2025 earnings conference call. As usual, I am together with Ece, Head of Investor Relations, and all the investor relations colleague with me. As usual, we will spend some time on the presentation first, and especially we'll focus on some specific areas, and thereafter, we will leave the floor, if any to your questions. With this in mind, let me turn back to presentation. Starting with the first page, on the profitability, we are happy to announce TRY 20 billion net income in this quarter, which is up by 67% year-over-year on a bank-only basis, and which is up by another strong 52% Q-over-Q.
This is also almost 30% above than the market consensus of which is, slightly, above than TRY 15 billion. In terms of net income growth, we are happy to outperform the sector averages, both in annual as well as in quarterly growth numbers. This TRY 20 billion take us to almost TRY 35 billion, 35% average ROE during the quarter, which in recent periods is the best quarterly ROE number. Equally important, core banking revenues, which is consisting of net interest income and net fee and commission income, is also came as strong at almost TRY 36.5 billion, which is up by 28% compared to same term of the previous years.
Pre-provisioning profit also came at TRY 30 billion, which is almost up by 200% compared to first quarter of previous years. From every profitability point of view, it seems it's a quite strong quarter. As you can see on page four, this quarter, we had TRY 11 billion free provisioning, so that was also supporting our TRY 20 billion net income. This is something we already communicated and guided, especially in line with the CPI assumptions and CPI contribution to P&L. In order to minimize the earnings volatility between the quarters, we are releasing and putting additional free provisioning.
In this sense, for example, last quarter, Q4 of 2024, thanks to a very strong contribution from CPI-linked portfolio, deliberately, we put TRY 6.5 billion additional free provisioning. This time, in the beginning of this year, given we started the year with extremely conservative CPI assumption, which is less than 24% October - October inflation expectation, this time, in order to minimize the volatility, deliberately, we decided to release TRY 11 billion, and that amount also supported our bottom line. Despite this, we are still having TRY 4 billion free provisioning in our balance sheet. If needed in the upcoming quarters, it may also be utilized and reversed. For the time being, we would like to keep that number unchanged for a very short period of time.
Moving on the presentation, another page I would like to take your attention is related to page five, where you can see detailed numbers related to net interest margin, especially core spreads, and especially CPI assumptions. Starting with the headline net interest margin, as you can see on the right-hand side above chart, we had 2.4% swap-adjusted net interest margin, which was 2.3% a quarter ago. Swap-adjusted net interest margin improved by 10 basis points Q on Q.
Reported net interest margin came almost 10 basis points lower than swap-adjusted net interest margin, which is standing at 2.3%. Of course, one factor we would like to draw your attention to, especially compared to private peer banks who announced their first quarter results, is related to very humble CPI estimation we used. As you can see on the left-hand side above chart, for this quarter we had the number of 23.6% October - October CPI assumption. This number itself is clearly lower than the private peers, which are mainly using a number hovering between 28%-30% area.
Therefore, turning back to the right-hand side, we also put deliberately the number, net interest margin level we would be reaching in case we are using TRY 28.5% October - October CPI assumption rather than 23.6%. In this scenario, our swap-adjusted net interest margin will be at almost 3%, which is up by 60 basis points compared to reported numbers, which is also indicating a very strong number. Another point I would like to highlight here, even with 23.6%, very humble CPI estimation, our swap-adjusted net interest margin performance was relatively better than many of our private peers. Adjusted with a relatively fair CPI estimation, our outperformance at a swap-adjusted net interest margin level would be much more visible.
Another point I would like to take your attention to is related to Turkish lira core spreads. During this quarter, as guided, we further increased our Turkish lira core spreads in terms of the differential point between average Turkish lira loan yield versus average cost of Turkish lira deposits. This quarter, we had additional 105 basis points improvement on a quarter-over-quarter basis from 2.3% - 3.4%. That was guided, and that was also a strong evidence of our outperformance of many of our private peers in terms of overall headline net interest margin. That part was key.
Of course, as you know, because of the recent developments and because of the recent policy rate hike decision, for the very short run, we will see additional tightening on Turkish lira core spreads. Therefore, especially the first quarter, Turkish lira core spreads will be the highest in the first half of the year. That's very visible and that's very clear as of today. After net interest margin side, on the next page you can see the fee income, commission income. Our fee income performance was in line with the sector, especially this is very visible by making a comparison between annual fee income growth of sector versus VakıfBank. Our fee income growth on annual terms came at 45%, which is almost identical of the sector average of 47%.
Both these numbers, especially 45% annual fee income growth is clearly a very strong number compared to our initial guidance number of mid-20s. Clearly, there is a strong potential here to beat our initial fee income growth expectation for the full year. The last page on the P&L side I would like to mention is related to cost side. OpEx and all the cost KPIs can be seen on page seven. Especially, this quarter in terms of cost efficiency, we continue to perform relatively better and lower cost-to-income ratios. This quarter, our cost-to-income ratio came down to 32% area. Making a backward comparison, I think that level itself is one of the lowest, and that's also supporting our efficiency-related management strategy and understanding.
With page eight, we would like to continue with asset side and the lending side. The headline is a good summary of what happened in the first quarter by referring to the fact that slowly but surely ongoing market share increase across loan portfolio continued. Both in terms of market share in total lending, in Turkish lira lending, and in hard currency lending, we increased our market share by 20 basis points in every subcategory compared to 2024 year-end. On total lending, we increased our market share from 12.5% - 12.7%. On Turkish lira lending, the market share increased from 12.6% - 12.8%. On hard currency lending, our market share increased from 12.4% - 12.6%.
Especially on the Turkish lira lending side, retail and SME lending growth was very visible. Retail lending growth during the quarter came at 18%, and the bulk of this retail lending growth was mainly coming from credit card business as well as overdraft lending. That was the main driver of strong quarterly lending growth. To some extent it was also the case for SMEs. SME lending growth was also supported and driven by IFI-related lending projects with the sources we obtained from many different multinational IFIs, including, of course, World Bank Group, related loans. As a result of that, you can see that especially on the SME side, our market share reached to 13.3%, which is even above than our market share in total, blended lending market share, which is 12.5%.
The page I would like to take your attention is related to page 10, which is related to asset quality. In terms of asset quality, as expected and as guided, we see NPL ratio increase and stage two ratio increase. NPL ratio increase, as you can see on the left-hand side below chart, we had around 25 basis points increase in our NPL ratio from 1.8% area - 2.05% area. As you can see in the middle of the page, most of the NPL inflow out of total almost TRY 14 billion NPL inflow during the quarter. Around TRY 8.6 billion came from the retail lending, including credit card. The remaining 5.6% is coming from other part of the loan portfolio, especially from SME lending.
This is expected, this is guided. The same is also true for the Stage 2. The share of Stage 2 ratio also further increased from 7.9% - 8.3% on a Q-on-Q basis, and the total amount under stage loan category increased from almost TRY 160 billion - TRY 187 billion. Because of this NPL inflow, especially driven by retail segment, we ended up with relatively higher net cost of risk as guided. During the quarter, our net cost of risk ratio materialized at 134 basis points, which is clearly way higher compared to the average of 2024, which is only 33 basis points.
On top of that, we are still keeping TRY 4 billion free provisioning in our balance sheet. Going forward, as guided, we are expecting our NPL ratio will move north side towards 2.5% area. Similar to first quarter, in the upcoming quarters, we are still expecting more NPL inflow to be coming from retail segments as well as from SME segment. With page 11, I would like to move to liability side. With the main funding source of deposits, onshore customer deposits, we had humble deposit growth during the quarter. And unlike to the lending side, now on the deposit side, we had relatively lower deposit growth compared to sector average on a Q-on-Q basis. This is very visible both in Turkish lira deposit side as well as on hard currency deposit side.
Because of the liquidity conditions, we didn't prefer to engage in harsh deposit gathering. Selectively in some areas, we were becoming even bigger, and we were also increasing the share in total. Especially, our strategy and our mandate was much more in favor of retail deposits, which will be creating a much more granular and healthy deposit portfolio. For the first time, in terms of the breakdown of deposits, as you can see on the left-hand side, below chart, we ended up with 50% share of retail deposits in total deposit composition. Remember a couple of years ago, those numbers were hovering around 40%, but in line with the strategy every quarter, gradually the share of retail deposits further increased, and for the first time maybe we are reaching the 50% threshold.
That was on purpose, and that was a deliberate action. On page 13, sorry, you can also see the non-deposit funding source increase. Of course, the most eye-catching development on wholesale borrowing side was related to DPR transaction. In the middle of first quarter, we executed in total $700 million DPR with the institutional investors, with 10-year final maturity, four plus six years maturity profile with the weighted average life of seven years. That was a very remarkable transaction in the sense that after many years of break period, for the first time with that transaction, we see a very strong interest from international institutional investors to our DPR program. This $700 million totally allocated to those institutional international investors without any allocation to FIs or any other counterparties.
In this manner, the important story of this transaction was the maturity profile. It was way longer maturity compared to previous DPR transactions. Secondly, and maybe more importantly, the counterparties and the investors were institutional investors rather than FIs or any other type of investor profile. The last page I would like to take your attention is related to solvency ratios on the next slide at page 14. Our total CAR ratio materialized at 14.2%. Tier 1 ratio materialized at 11.8%. Our CET1 ratio materialized at 9.6%. These are reported solvency ratios. Compared to year-end numbers, we are having around 150 basis points decline in our solvency ratio, which is more or less in line with the overall sector trend, especially because of the seasonality.
As you know, at every first quarter, Turkish banks in line with the Basel implementation, we update our market risk calculation and operational risk calculation in every first quarter of the year. It doesn't change in the second, third or fourth quarters. Therefore, this seasonality is also creating a one-off impact pressure on solvency ratios. As you can see on the below table, we had almost 41 basis points negative impact of this operational risk calculation and another 12 basis points of market risk calculation impact. These are one-off, and all of them are materializing only in the first quarter. Apart from that, RWA growth and currency impact also created pressure. As a result of all those factors, our solvency ratios eroded by, like, 150 basis points on a reported basis.
Transparently, we are also showing what would be our solvency ratios without the current BRSA implementations. As you can see in this methodology, our CET1 ratio, Tier 1 ratio, and total CAR ratio will be hovering around at 9.1%, 11.2%, and 13.5% respectively. Given we are also having around TRY 4 billion pre-provisioning and assume that it is also released back, thereafter our ratios would be impacted like 420 basis points. Therefore, our CET1 ratio would be increasing to 9.3% area from 9.1% area. Both numbers are at a bank-only level. Today, we also announced simultaneously our consolidated numbers, and at a consolidated level we announced TRY 21.7 billion net income.
Adjusted with consolidated numbers, our consolidated CET1 ratio without BRSA forbearance measure, but with the assumption of releasing potential TRY 4 billion, then we would be reaching to around 9.7% CET1 ratio, which is up by almost 40 basis points compared to bank-only numbers. My point is, at a bigger scale, at a consolidated level, our solvency ratios are almost 40 basis points higher than our bank-only ratios, which are much more essential in terms of running our capital management. In the middle of the page, our colleagues also presented the sensitivity analysis related to change in interest rates as well as change in the currency move. These are also presented in the middle of the page.
Without too much delay, that was the remarks I wanted to share. Thank you very much for listening to me and to our presentation. At this stage, we would like to leave the floor to Roland again to answer any questions if there is available.
Thank you, Mr. Tahan. Lovely presentation. Ladies and gentlemen, as Mr. Tahan said, now is the time for you to ask those audio questions or written questions. Just a reminder, the written questions, just click the Q&A button at the bottom of your Zoom screen and submit that question. If you have an audio question, please feel free to click the Raise Hand button. You'll see that at the bottom of your Zoom screen, and we will come to you, and you can join the call. That is available right now. Mr. Tahan, we don't seem to have any audio questions coming through. I don't see any. Do you have any written questions that you have there?
Actually, no, Roland. Thank you very much. I mean, we will be staying in the office. Thank you very much for listening to us. If you have any follow-up questions, myself, Ece, and entire IR colleagues, we will be at your disposal. If there is any feedback or if there is any questions, please do not hesitate to contact us.
Sorry, Mr. Tahan, looks like we have a call. Murat, please, would you go ahead, please? Thank you.
Hello. Thank you. This is Murat Ünav actually from HSBC Asset Management. Just a short question about the evolution of net interest margin post the tightening up at the end of March. The other private banks are implying that quarter-on-quarter NIM evolution is under risk. I mean, it could be stable, or it could come down slightly. How would you guide given the current tighter funding conditions for the second quarter? Secondly, your new NPL inflows in the first quarter seem to be quite high. Given that we might not have yet seen the full impact of the economic slowdown, are you concerned about the second quarter and third quarter should the interest rates remain at elevated levels as foreseen in like three or four months ago?
Thank you very much.
Thank you, Murat Ünav. Let me first start with the first question, which is related to second quarter net interest margin outlook. There is one positive and one negative outlook in terms of the net interest margin components. In terms of the negative one, let me start with the negative one. The negative one will be related to Turkish lira core spreads. Because of the recent developments and because of the recent rate hike of Central Bank of Turkey, now for the time being, average cost of funding is higher compared to average of first quarter. Of course, all the banks are reflecting this cost increase to the lending activity. As you know, because of the duration mismatch, it will take some time. Therefore, in the very short run, for the second quarter specifically, Turkish lira core spreads will not further improve.
On the contrary, after seeing the peak level in the first quarter, we will have contraction in our Turkish lira core spreads. However, it will be to some extent, in our case, compensated by updating our CPI assumption, because unlike to many other private banks, we are in the first quarter using a very humble CPI, which is 23.6%. As you know, most of them are using a number, which is high 20s or even up to 30%. After seeing the central bank market survey report, which will be announced in upcoming days, we will also revise our CPI assumption, and we will also change the number, probably towards the same level the private peers are using.
It will be a correction move for the second quarter that covers the entire correction for first quarter and second quarter. My point is, in terms of second quarter net interest margin, the negative impact of additional recent cost of funding increase will be, to a large extent, covered by additional support from CPI-linked portfolio. As of today, it is not easy to tell how much it will be compensated. Clearly, as VakıfBank specific, we will have such specific upside, which is not the case for many of the private peers.
My point is net interest margin evolution, or if there will be a declining trend in the net interest margin of Turkish banking sector in the second quarter, it will be much more limited for VakıfBank specific compared to private peers average because of this additional potential contribution from CPI-linked portfolio.
Thank you very much. Just before you switch to NPL question, what is your expectation about the funding costs moving forward? Do you expect a rate cut from the central bank in June or do you expect a shift in the composition of funding to weekly repo from the overnight? Can you just give us a color of your expectations?
Sure, Murat Ünav. I mean, for the time being, as you know, there will be no meeting in May. After seeing the May inflation, the next MPC meeting will be held in the beginning of June. Depending on the inflation trend and depending on the currency side, they will decide according to macro developments. In our base case scenario, we are expecting at least even, either they will cut or even they will not cut, they will provide relatively lower cost of Turkish lira liquidity to the banking sector than what they are doing today. Let me clarify this point. As you know, at the moment, the policy rate itself is at 46%. However, average cost of central bank funding is close to 49%.
In our base case scenario, even if they will not lower the policy rate itself, even in a scenario where the policy rate will be still remaining at 46%, thereafter, we expect central bank funding average funding cost will be moving back to 46% area rather than 49% area. Therefore, it will also be a supportive move in terms of the balance sheet of the banking sector and in terms of the net interest margin evolution of the banking sector. Just to provide a brief answer to your question, we expect central bank either will start cutting either in June or July. But even they will pass in June, we expect they will lower the average cost of funding they are providing to the banking sector.
At every scenario, in both scenario, the developments will be supportive for net interest margin outlook for the second half of the year.
You think that the switch to weekly repo will be triggered after seeing the May inflation?
Exactly. That's our base case scenario in both scenarios.
Early June. Okay.
If this is clear, Murat Ünav, I would like to continue with the second question, which is related to asset quality.
Yes, please. Thank you.
On the asset quality side, I mean, just to remind our full year expectation, we were expecting our NPL ratio to reach to 2.5% by the end of 2025. We are starting to the year with 1.8% NPL ratio, and we were guiding 2.5% for the full year. The numbers, yes, compared to previous quarters, NPL inflows is relatively strong compared to previous periods. This is something we were already guiding, and this is something we were already sharing. As of today, we are still stick to 2.5% NPL ratio by the end of 2025. That was also in our guidance. This is not a surprise.
I mean, we were keeping saying that during 2025, most of the NPL inflow is expected to come from either retail and/or from SME segment. In this manner, we feel relatively safe in terms of the asset quality outlook of corporate and commercial segments. Of course, there will also be some companies, some cases that are also coming as NPL from corporate and commercial. In terms of the entire NPL inflow, the main source will be either retail and/or micro SMEs, which is understandable. This is already in our budget. This is already something we were expecting. As of today, there is no reason to change this guidance. Maybe, after seeing the second quarter, we should think about again and make the math accordingly.
As of today, we are still stick to 2.5% NPL ratio and above 100% net cost of risk expectation for the full year. In terms of net cost of risk, we are starting to deal with 135 basis points, which is in line with our also net cost of risk guidance. At this stage, for the asset quality, there is no need to change our guidance. However, I mean, in terms of the overall guidance, we will keep the guidance as we did in the beginning of the year. What we can tell to you as of today, we are still expecting mid-20s average ROE seems to be a realistic number.
Given we are starting to deal with 35%, despite some ongoing risk factors, especially related to net interest margin, still, we believe mid-20s is a doable number. Therefore, for the time being, we are not revising or changing any guidance numbers in terms of full-year expectation. Clearly, of course, very recent developments will lead to lower net interest margin performance than what we were guiding. I think it may be easily compensated by relatively better than initial expectation fee income performance as well as overall balance sheet management. I hope this is sufficient for your questions, Murat .Ünav
All right, Mr. Ali Tahan. We don't seem to have any other audio questions. Any written questions that you have there, sir?
We have one question actually, Roland. Ece will read the question, and thereafter, I will try to answer.
Thank you, Ali Tahan. The question come from Serhat Kaya. One non-core asset in your balance sheet is Roketsan's stake of 10%. Given recent market trends for defense industry, do you have any plan to revalue this asset in the balance sheet or to sell the shares at any point in the future?
Thank you, Serhat Kaya. Yes, indeed. I think that's a very fair point. Especially, defense industry seems to be outperforming every different sub-segment on stock exchange and every area. We also have 10% share, as you truly pointed out. In terms of revaluation, we are revaluing every subsidiary on an annual basis. Especially, this is happening during the Q4 of every year. We will double-check after the call, but as far as I remember, the last revaluation report of Roketsan already materialized in Q4 of 2024, and the upcoming one will be in the Q4 of 2025. We will double-check, and we will inform you if there is something we need to add. That's the situation for the revaluation part.
For the selling part, for the time being, there is no discussion, or there is no demand, or there is no offers coming from any third parties. Therefore, for the very short run, we don't have any digestion plan for the Roketsan shares. As we maybe communicated, that's also part of our capital management. For the year of 2025, we would like to list two of our subsidiaries. One of them is related to potential listing of Vakıf Faktoring subsidiary. CMB approval will be obtained in a very short period of time. In the second half of the year, we would like to also list Vakıf Securities, Vakıf Yatırım subsidiary.
In the very short run, for 2025, in terms of digestion of our subsidiaries, without losing the majority, without losing the management actually, we would like to make those two subsidiaries, who are also big players in their own business areas, to be listed, and that will be part of our capital management. For the Roketsan, so far there is no actual discussion or offer on the table yet. I hope this is also clear from your side. Actually, Roland, that was the only question.
Yes, sir.
We don't have any written question remained unanswered yet.
All right. Thank you, Mr. Tahan. No audio questions coming through, no written questions. So if you'd like to conclude, sir, that would be wonderful. Thank you. Over to you.
Thank you. Thank you very much. As we communicated, if you have any specific questions, we are at your disposal. Thank you very much for listening to us, and thank you very much for your interest. Looking forward to talking to you soon again.
Thank you, Mr. Tahan. Yes, thank you for that. Ladies and gentlemen, this now concludes today's conference call. Thank you for your participation, and you may now disconnect.