Ladies and gentlemen, welcome to The VakıfBank Third Quarter 2023 Conference Call and Webcast. There will be a question and answer session after the presentation. If you wish to ask an audio question, please press star five on your telephone keypad. To participate in the written question and answer session, type your question into the ask a question text area and then click the submit button. Right now, it is my privilege to hand you over to your host. He is Mr. Ali Tahan, the Head of International Banking and Investor Relations for VakıfBank. Sir, the floor is yours.
Thank you, Rob. Good afternoon, everybody, and welcome to VakıfBank Third Quarter 2023 Earnings Presentation. In this evening, we will try to minimize the duration for the presentation part. If there are any questions related to third quarter financials and for upcoming quarters, it will be our pleasure to answer them. Starting with the presentation, in this quarter, we are having a net profit of TRY 9.5 billion. Considering the consensus was hovering around TRY 8.3 billion, we are announcing, roughly speaking, 10% higher compared to market expectation. Of course, compared to second quarter, we have a very dramatic increase in our net income as expected.
The result of relatively strong third quarter financials on a cumulative basis in the first nine months of the year, our total net income came at TRY 15 billion. On top of that, we didn't touch to our pre-provisioning, and still we have around TRY 6.7 billion pre-provisioning in our balance sheet. In terms of the details, core banking revenues, especially this quarter, as well as net interest income and trading income was very visible. NII and trading income cumulatively in this quarter materialized at TRY 21.4 billion, which is almost double, compared to a previous quarter.
After such a strong core banking revenue generation capacity, because of having relatively good level of coverage ratios, our pre-provisioning profit also came strong at TRY 18.6 billion. In terms of the other pages of the presentation, just to briefly mention, I would like to take your attention to page 5, which is related to net interest margin, CPI and cost to spreads. In this quarter, our quarterly reported net interest margin came at 3.2%. Swap-adjusted wise, swap-adjusted net interest margin came at TRY 2.7 billion. Compared to previous quarters, we see a limited improvement in our Turkish lira cost spread evolution, especially because of the relatively higher cost of deposit funding, especially in the second half of the quarter.
Total improvement in our Turkish lira cost spread business, constrained and it became limited. However, in terms of the Turkish lira cost spread point of view, especially in the current environment, incremental lending and incremental loan generation seems to be producing a very strong net interest margin as a combination of both better loan yield, which is also a reflection of increase in the policy rate and increase in the TLREF, as well as relatively compared to third quarter average, of course, or compared to late third quarter. As of now, we have relatively lower marginal cost of deposit. Therefore, the limited improvement in third quarter on Turkish lira net interest margin hopefully will be much more visible in Q4. On top of that, I would like to also highlight the important highlights related to our CPI portfolio.
Just to remind you, in the second quarter, as October to October CPI expectation, we used 34%. In this quarter, we revised it to almost 51%. This 51% compared to private peers, of course, a relative number because most of the private peers used 60% as of third quarter for this CPI. As of today, October to October data is certain, and it will be adjusted in accordance with the number of 61.4%. Based on this 61.4% October to October realized data, in the fourth quarter of the year, we will enjoy around TRY 32 billion interest income in just one quarter out of our CPI portfolio. It will have more than 120 basis points positive impact in our quarterly net interest margin.
To bottom up, in terms of net interest margin, in third quarter, we had significant contribution from CPI linkers, but we had a very limited improvement in our Turkish lira core business. In Q4, we will enjoy both even a strong CPI contribution, as well as we will also enjoy a very visible, a very significant contribution from our Turkish lira core spread point of view. Therefore, clearly, Q4 net interest margin will be the strongest quarterly net interest margin of the year. The last point I would like to take your attention is related to total money market funding, especially in terms of the average swap usage. In Q3, our average swap usage seems to be almost doubled compared to a quarter ago.
It was around TRY 51 billion in the second quarter, but this quarter, it was hovering around TRY 100 billion. As of today in Q4, that number still going up. This average, this swap usage mainly conducted with Central Bank of Turkey, is also helping us in terms of lowering cost of deposit funding. Because via swap usage, we have enjoying to access relatively lower cost of Turkish lira funding. On the next page, you can see the numbers related to fee income. Similar to strong NII and trading income increase, as we discussed in the first page. We also see a very eye-catching and strong growth on the fee side, both Q-on-Q-wise as well as on a year-over-year basis.
Q-on-Q-wise, our fee income reached to TRY 7 billion, which was slightly above than TRY 5 billion a quarter ago. On a cumulative basis in the first nine months of the year, our total fee income reached to 16.3 billion Turkish lira, which corresponds to above than 125% increase on annual basis. All the fee income sources, of course, contributed to such strong performance. Amongst them, especially the contribution from payment systems, both quarterly as well as annually, seems to be very significant. On quarterly terms, we had almost 90% growth on the fees receiving from payment side. On annual basis, it is almost 165% increase. Next page is related to OpEx.
I mean, OpEx growth, excluding the donation to the earthquake region, seems to be in line with the sector adjusted for inflation. Rather than the OpEx growth, thanks to strong revenue generation capacity, especially in third quarter, we also witness improvement in all KPIs related to cost side, like cost income and other ratios. We expect especially the normalization on the cost income ratio side will be even much more visible in Q4. As of third quarter, our cumulative cost income ratio came down to 35%. By the year end, in very strong revenue generation capacity environment, we expect this ratio to further come down to 30% area for the full year of 2023. On page eight, you can see the numbers related to lending.
This quarter, our total lending growth was almost 9%. This time we see growth is coming from both Turkish lira side as well as from the FX lending side also. This is something not the case we were seeing in the first half of the year. Remember in the first half, entire lending growth was growing and coming from the Turkish lira side. For this quarter, we also have positive contribution from FX lending also in dollar terms. Net-net, quarterly lending growth in both Turkish lira as well as in FX lending was above than the sector averages. Therefore, we continued to grow market share or in all lending areas. We are still keeping our strong second ranking in terms of the market share.
In terms of the breakdown of the lending in this quarter, the biggest contribution seems to be coming from the non-retail segment, including corporate and commercial, as well as SME lending. On the retail side, it was relatively muted. It was limited to 5%, and it was mainly driven by credit card business. Excluding the credit card business, we almost had a very limited growth on the retail and especially on the mortgage side, we had Q-on-Q contraction. After the lending numbers and quarterly lending dynamics, I just want to take your attention to page 10 related to asset quality. In line with the sector and as a result of the denominator effect and the currency depreciation effect, of course, NPL ratios continue to come down.
As of this quarter, it came down to 1.5% area. The most important development in the asset quality in this quarter was related to net cost of risk. In this quarter specifically, our net cost of risk ratio came at 235 basis points area. This is mainly for the Stage 1 category rather than Stage 2 and Stage 3. Therefore, in terms of coverage ratios, Stage 3 coverage ratio and Stage 2 coverage ratio didn't change too much on Q-on-Q basis. However, the real change came from the coverage on the Stage 1 category. As a result of this strong increase in the quarterly net cost of risk, cumulative nine months total net cost of risk came at almost 150 basis points.
For the full year, remember, just to remind you, we were guiding 100 basis points net cost of risk, and this is almost 50 basis points higher than our initial guidance. The gap between the actual versus guidance can be attributable to the provisioning related to our exposure in the earthquake region. For the earthquake region, we in cumulative basis set aside around 60 basis points net cost of risk, and therefore total net cost of risk came at 150. Excluding this earthquake impact, actually we are in line with our net cost of risk guidance. On the liability side in this quarter, I would like to take your attention to page 12 related to wholesale borrowings.
Following the elections, following the perception in the investor appetite, and following the improvement in the CDS level of the country, as a regular issuer, we reopened the Eurobond market for Turkish banking sector in the beginning of September. With the strong participation from international fixed income investors coming from all over the world with the granular base of 180 different investor accounts, we achieved to print $750 million sustainable Eurobond issuance with the yield of 9.125%. We are glad to mention that among the Turkish banks who came for Eurobond market in the year of 2023, we had the honor of having the highest maturity, the biggest amount and the lowest yield Eurobond achievement as VakıfBank.
Of course, it was not the only wholesale borrowing transaction of the quarter. Apart from that, we also secured $500 million fresh funding under a secured program with one single counterparty, international counterparty with the final maturity of five years. So especially in terms of fresh transactions, this very successful Eurobond issuance and this very fresh $500 million five-year funding seems to be very eye-catching. We are at the final stage of rolling over our November syndication. We are, as of today, happy to say that we are in a position to make it above 100% overall ratio easily. Which is also the case for the other Turkish banks who completed their syndication rollover so far. The last page is related to capital ratios.
We have the total CAR of 14.7% on a reported basis. Without forbearance measures, our total CAR is slightly above than 13.1%. On the below chart, we also put in detail the evolution of our solvency ratios from second quarter to our third quarter. That was the last page. I just wanted to take your attention. Thank you very much for your interest. If doable, we would like to continue with the Q&A session. Thank you.
Thank you, Mr. Tahan, for the presentation. Right, ladies and gentlemen, it is time for our question and answer session. If you wish to ask an audio question, please go ahead and press star five on your telephone keypad now and we will come to you. If you'd prefer to participate in the written question and answer session, just type your question into the ask a question text area and then click the Submit button. First, we'll give you an opportunity to ask an audio question. Star five on your telephone keypad and the floor is open. All right, Mr. Tahan, we don't seem to be getting any audio questions. If you'd like to begin with the written questions, that would be great. Thank you so much.
We have an audio question. It's Gihan from HSBC. Let's just pop him on. Please go ahead, sir.
Thank you very much. Thank you very much for the presentation. I have a quick question about the provision expenses. What's the reason behind increasing the coverage ratio for Stage 1? That's the first question. The second question is, could you remind us of your full year 2023 budget and what sort of changes there would be after the nine months results? Thank you.
Thank you, Gihan. Especially for the first question, for the dramatic increase for Stage 1 coverage ratio. This is just a conservative approach we made in our scoring modeling because of the potential GDP contraction going forward and because of the potential slowdown in the economy in some areas conservatively and in a front-loaded manner. We just wanted to increase our provisioning ratio. We reflected this conservative approach to our scoring models. Based on those assumptions, the new model suggested to provide additional coverage ratios for some risky sectors, and this is mainly related to this understanding.
In terms of the full year guidance, just to remind you, we were saying in terms of the volume side, on the lending side, we were simply saying on the Turkish side, we will be growing in line with the sector. In the first three quarters of the year, we are slightly having a growth above than the sector, so this is overshooting. On the FX lending side, we were guiding single digit contraction. I think it is still doable and we shouldn't change this guidance. On the revenue side, on the fee side, we were guiding around 100%, and in the first three quarters it is 126%.
On the swap adjustment net interest margin side, we were guiding slope adjusted net interest margin for the full year, like 3.5%. In the first nine months of the year it is hovering around 2%. For Q4 that will be upside to have a better net interest margin for sure because of both better CPI contribution as well as because of better Turkish core spread business. Given we are hovering around 2% and given the full year was 3.5%, I think the number will be hovering around 3% realistically rather than 3.5% for the full year. In terms of the net cost of risk, we were guiding around 100 basis points.
For the first three quarters it is 150 basis points. 50 basis points higher than the guidance. The main divergence is related to earthquake-related risk. For earthquake-related risk, we set aside 60 basis points, and this is the main driver between the actual number and the guidance number. Net-net, for the overall average ROE, we were guiding mid-teens full year ROE. In the first three quarters it is slightly above 15%. Q4 will be strong probably for the full year. Our full year average ROE will be close to 20%. There is upside to our full year ROE guidance compared to our guidance numbers.
Even though net cost of risk will be higher than guidance and even though net interest margin side will be lower than slightly our guidance, thanks to relatively bigger and higher volume growth, as well as thanks to better contribution from fee income and trading income, I think rather than initial guidance of mid-teens ROE, we will be finalizing the full year with close to 20% average ROE. I hope those covers your questions, Gihan.
Thank you very much. Thank you very much.
Thank you, Gihan. All right. Just a reminder, a few more moments for the audio questions. Just star five on your telephone keypad. Of course, for the written question and answer session, which we will get to shortly, you can submit those on the webcast platform. Now is the time.
Actually, Rob, in the meantime, we have a written question from Mehmet Sevim, J.P. Morgan. If you don't mind, we would like to continue with this question. Mehmet is asking a couple of questions. Some of them already answered because these are exactly the same questions Gihan was asking. The only remaining question is related to CPI-linked portfolio. Mehmet is asking, it seems your CPI-linked portfolio grew significantly in third quarter. Is this an accrual impact, or are you strategically increasing the size of your portfolio, and if so, why? Actually, this is a very good point, Mehmet. Thank you very much for this question. Rather than the first option, rather than the accrual impact, it is indeed related to a deliberate further accumulation of CPI portfolio.
During the auctions of third quarter, we were deliberately continue to accumulate more CPI-linked portfolio. As a result of this, average CPI yield declined. Actually, if you go back to presentation on page five at the chart, right-hand left-hand side above chart, this is also something we are putting. A quarter ago, average real rate was hovering around 2%, and now it came down to flat area. However, on the other hand, CPI amount increased from TRY 140 billion to TRY 194 billion. Especially during the auctions of July and August, we deliberately continued to accumulate from the new auctions at the expense of giving up from the real yield.
Our treasury management believes this is a good strategy, and this is a good hedge in the environment of relatively high inflation environment. As a result of this strategy, especially in Q4, we will continue to enjoy more interest income from our CPI portfolio. Apart from-
All right. Thank you. Go ahead.
Sorry, Rob. Apart from this, we don't have any written question on the back.
All right. We don't seem to have any audio questions coming through either. If you have no more written questions. Oh, hang on, we've got one. We've got an audio question. Valentina Stoykova from Barclays. Here we go. Please go ahead.
Yes, hi Ali. Thanks a lot for the presentation. Very detailed presentation and good set of results, so congratulations on that. My question is related to the recent regulatory changes, and how do you see them impacting your financials going forward? Also, what are your plans until the end of the year and next year?
Thank you, Valentina. Thank you very much for your good remarks related to earnings. In terms of the regulations, of course, especially with the new economic administration and with the new central bank administration, regulation-wise, it is a relatively easy environment for us. Each and every day, we are seeing more investor-friendly, market-friendly policies to be implemented by especially new central bank administration. The more we see, less regulation and deregulation from central banks, it becomes much more comfortable in terms of PNL management and balance sheet management for all the banking sector. The most important recent regulation change seems to be the easing on the KKM FX-indexed deposit. When we look at the numbers, indeed, in line with the sector, we also see contraction in our KKM portfolio, FX-indexed deposit portfolio.
Especially, on the one hand, the numbers are going down. On the other hand, the regulation that asks the Turkish banking sector to hold more fixed rate, long-dated security requirement, this is also fading away. However, of course, fine, penalty, punishment in case the KPIs related to KKM not maintained still on track. This is still a regulation which is effective as of today. This is the only remaining part. KKM portfolio is going down, and this is the most visible impact of the recent regulatory changes. This is also very visible in our portfolio. By looking from June to September, of course, we are seeing contraction in our KKM.
Apart from this contraction from second quarter to third quarter, we see even an accelerated level of contraction from September to today within Q4. KKM portfolio in total seems to be coming down with an accelerated pace. This is the biggest impact. However, in terms of regulation, of course, Central Bank is providing Turkish liquidity to build up reserves with swap mechanism. Via such swap mechanism, Turkish banks are enjoying to access relatively lower cost of funding, which is helping us in terms of especially in terms of lowering the cost of Turkish deposits. This is the biggest upside for us. On top of that, all the regulations related to interest rate cap on commercial loan portfolio, this is also no longer the case.
There is no cap for any commercial loan products anymore. Of course, in the current environment, given the interest rates are relatively higher compared to previous terms, we don't witness too much demand for fresh lending. Therefore, on top of swap usage via Central Bank of Turkey, this kind of lack of demand driven by relatively high interest rate environment enable banks to lower cost of deposit funding, which is a very good indicator, especially for the Turkish net interest margin outlook for upcoming quarters.
Anything else, Ms. Stoykova? All right.
Thanks.
Oh, go ahead, sorry.
No, no, thanks a lot. I just wanted to say thank you.
All right. Thank you so much. Right, Mr. Tahan, we have no more audio questions, so if you have anything else or any written questions. If not, if you could conclude, that would be great.
Thank you. Thank you, Rob. Thank you very much. I mean, our investor relations colleagues are at your disposal as always. If you have any follow-up question, please let us know. With this occasion, we would like to wish a good weekend ahead of Friday and looking forward to talking to you again in the first possible occasion.
Thank you, Mr. Tahan. Thank you so much. Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation. You may now disconnect.