Ladies and gentlemen, welcome to the VakıfBank second quarter 2023 conference call and webcast. There's gonna be a Q&A session after the presentation. Let me just tell you, if you would like to ask a question, please press star five on your telephone keypad. If you'd like to participate in the written Q&A after that, you can type your question into the ask a question text area and then click the Submit button. Look forward to those questions, but right now it is my privilege to hand you over to your host. That is Mr. Ali Tahan. He's the head of international banking and investor relations for VakıfBank. Sir, the floor is your.
Thank you, Rob. Thank you very much. Good afternoon, everybody, and welcome to VakıfBank second quarter 2023 earnings presentation call. As always, we will start with the presentation. After a quick presentation, we will be more than happy to answer your questions. Starting with the first page in the presentation. This quarter, in terms of earnings and net income, it was a weak quarter, but that was not something unexpected. More or less, our net income of around TRY 1 billion in the second quarter was in line with the market consensus. We believe that was the bottom out in terms of profitability, and especially in the second half of the year, we are much more optimistic in terms of efficiency, profitability and ROE.
With such TRY 1 billion second quarter net income, first half numbers came cumulatively at TRY 5.5 billion. When we look at to the pre-provisioning profit, we compare to same term of the previous year, first half 2022 versus first half 2023, we have slightly up 5.4% increase year-over-year from TRY 23.7 billion to almost TRY 25 billion. Of course, the gap between pre-provisioning profit and net income can be partially explained by additional coverage ratios compared to a year ago. In terms of NPL cash coverage ratio, we had almost three percentage points increase from 79% to above than 82%.
This is also the case for Stage 2 coverage ratio from 18.3% a year ago to 22.4% as of first half of 2023. As a combination of those two, total NPL coverage ratio went up significantly from 160% to almost 218%, which is indicating almost a 58% increase. After such relatively weak quarter because we believe in this quarter, especially the regulatory negativities reflected in our P&L and in our financials. With the new environment in Turkey after the elections, with the new investor friendly and relatively more market friendly environment, especially taking into consideration some easing on the banking regulation front, things will change pretty quickly for us. Therefore, because of two dynamics, one of them is related to CPI.
Because in the first half of the year, we had TRY 20 billion interest income from our CPI-linked Turkish lira security portfolio. Given Central Bank of Turkey recently revised year-end inflation target to 58%, we also updated our models and our estimations. In line with this understanding with the revised central bank expectation for year-end, now we expect additional TRY 39 billion total interest income in the second half of the year, which is a huge increase compared to TRY 20 billion in the first half. That will be one of the main drivers of optimism for net earnings in the second half of the year. On top of that, especially for VakıfBank, we are also witnessing a very speedy recovery in our Turkish lira core spread.
As of today, during July and so far in August, indeed, we are witnessing a very strong recovery in our Turkish lira net interest margin compared to second quarter numbers. On the one hand, we are enjoying relatively lower cost of Turkish lira deposits. On the other hand, we are also having relatively higher loan yield as a result of increase in the policy rate. Therefore, Turkish lira net interest margins in the core spread business seems to be improving in a very speedy way. Because of both CPI impact and because of this net interest margin recovery on Turkish lira core spreads, we believe second half of the year will be way stronger than our relatively humble performance in the first half of the year.
Next page refers to important highlights of the quarter. Of course, especially on the PNL, two items seems to be very important. One of them is related to fee income because of the relatively low level of Turkish core spreads. In line with the other Turkish peer group banks and in line with the overall Turkish banking sector, we also enjoyed eye-catching fee income growth. Quarterly basis, we had 25% increase, and on annual basis we had 125% increase in our fee income performance. As a result of that fee to OpEx ratio came at 52%, which is one of the highest. Apart from this fee income, of course, trading income was especially very supportive for the overall revenue generation capacity.
We had strong trading income, especially in the second quarter of the year, driven by both e-FX exchange transactions as well as timely trading of securities. In this quarter, we enjoyed TRY 9.3 billion trading income, which is up by almost 300% QoQ. FX exchange gains are up by 365%. Trading security gains are up by 245% QoQ. Fee income and trading income, these are the main drivers of revenue generation. On the balance sheet side, our selective loan strategy, which is also in line with the macroeconomic policies of the new government, on track. Total loans in this quarter are up by 17%. All of them are driven by Turkish loans.
In Turkish loans, we had 11.5% increase QoQ, mainly driven by selective segments in key areas, mainly coming from commercial segment rather than retail. On the FX side, actually, our shrinkage in dollar terms, in real terms, also continued during the second quarter. Our FX loan book shrink additional 3.6% in this quarter. Apart from lending growth, especially, strategic positioning on interest earnings assets was also important. Deliberately, just to make sure, we will be well-positioned for a rate hike cycle in terms of policy rate. We deliberately converted a vast majority of our loan portfolio and asset portfolio to the floating. As you can see, as of first half, 80% of our Turkish loans are floating.
With the increase level of policy rate, it means we will also enjoy relatively higher interest income. The same also true for Turkish securities. Two-thirds of our Turkish securities are also floating. Those ratios, especially the share of floating loans within Turkish loans with 80% in our case, may be one of the highest in the peer group, which is creating additional upside for us for the second half of the year. Apart from that, liquidity levels during the second quarter continued to be strong. Hard currency LCR ratio was hovering around 400%. Total LCR ratio came at 176%. As of second quarter, on top of those very strong LCR ratios, as of June, we have still around TRY 7.5 billion free liquidity.
Net Stable Funding Ratio, which is a Basel III ratio actually recently introduced by Turkish regulators, came also strong at 113%, comfortably above the minimum threshold of 100%. LCR ratios were also comfortable. Total loan-to-deposit ratio further came down to 90% area, which was two or three percentage points higher as of year end. More importantly, Turkish lira loan-to-deposit ratio came down to 106%, which was 120% a year ago. On the next page, the important thing is related to free provisioning. This quarter, we released additional TRY 250 million free provisioning. But still in our balance sheet, there are remaining, we have remaining TRY 6.7 billion free provisioning.
Compared to peer group, this is one of the highest numbers in Turkish banking space. I don't expect there will be no need to release any of these free provisioning in the second half of the year. Because of the reasons we discussed, CPI linkers and very speedy recovery on Turkish lira net interest margin business side, profitability will be very strong in the second half of the year. Therefore, there will be no additional free provisioning relief in the second half of the year. On the contrary, if needed, for some reasons, we may put additional, but we will decide by the end of the year. The thing is, there will be no free provisioning relief for the second half of the year. Next page is related to net interest margin.
Swap adjusted net interest margin in the first half of the year came around 1%. Remember, we were guiding around 3.5% net interest margin for the full year of 2023. Compared to our initial guidance, first half performance relatively weak. This is mainly driven by regulatory environment actually, as we mentioned. This effect is fading away. Thanks to additional CPI contribution and thanks to exceptional, speedy recovery in the Turkish net interest margin, still, we expect, our initial net interest margin guidance—swap adjusted net interest margin guidance of 3.5% for the full year still, can be doable. During this quarter, because of the redemptions, compared to a quarter ago, we had small shrinkage in our CPI portfolio.
CPI linked security portfolio came down to TRY 142 billion as of June, which was TRY 147 billion a quarter ago. During the month of July, especially, we continued to accumulate CPI linkers. If, after such accumulation, Central Bank of Turkey also revised year-end expectation to 58% area. In this sense, our additional CPI linker accumulation, especially during the month of July, seems to be also very timely and very supportive for the PNL. There will be additional upside on top of TRY 39 billion, conservative assumption for the second half of the year interest income from CPI portfolio.
When we adjust our CPI numbers only in third quarter, our net interest margin in third quarter will be up by 316 basis points. Similarly, our annual net interest margin would increase up by 168 basis points. These are just taking into consideration CPI impact on a relatively conservative basis. I'm saying conservative because on the one hand, overall CPI amount is still going up. On the other hand, there may be additional upside to October to October CPI data. As a result of that, we believe even with the conservative assumptions of today, we have minimum TRY 39 billion. This TRY 39 billion CPI contribution creates such positive impacts in our net interest margin in the third quarter.
There will be more, of course. Therefore, the bottom line is, even though the first half swap adjusted net interest margin is way below than our full year guidance, still thanks to those points, we believe three point five percent area swap adjusted net interest margin for the full year can still be doable and achievable. Next page is related to fee income. Fee income was one of the positive side of the PNL. Up by 124% year-over-year on a cumulative basis. And this is above than sector average slightly. Sector fee income growth in the same period came at 118%. In our case, it was slightly up compared to sector numbers. Almost half of the fees are coming from lending-related, cash lending-related activities.
Payment system has 28% share in total fee income base. Insurance has 9%. LG and LC related non-cash lending activities has 13% share in our total fee base. Quarterly-wise, this quarter we enjoyed additional contribution from payment systems, as you can see on the left-hand side flow chart. In terms of annual growth, of course, cash lending related fees were the main driver, relatively strong performance. We believe in the second half, in line with the recovery on Turkish lira net interest margin side, this very strong momentum may not be continued. Still, we believe full year net fee and commission income growth will be triple-digit, a minimum 100% for the full year.
Second half, we may see some decrease, but still, we believe for the full year, fee income growth will be above 100%. On next page, on page eight, you can see the numbers related to OpEx and cost. Our OpEx growth also more or less in line with sector, up by 157% year-over-year on a cumulative basis. This is the number with the exclusion of TRY 12 billion donation to earthquake area actually. In the first half of the year, because of the relatively low revenue generation capacity, cost income ratio materialize relatively higher compared to our recent performance in the last couple of years and came at 37%. However, the optimism also valid for cost income ratio.
With the both strong revenue generation capacity as well as with the high quality revenue generation capacity, we still expect full year cost income ratio came down to 30% area for the full year of 2023. Starting with page nine, we may switch to balance sheet side. This quarter, as we highlighted in the second page of the presentation, selective Turkish lira growth in key segments was the important development of the quarter. Almost all of the quarterly Turkish lira lending growth came from commercial lending, especially on corporate and commercial lending side. We had around 25% growth. On the SME side, we had around 11% growth. Some of them are also linked to earthquake support package, which is also covered by CGF facility of the Turkish government.
When the issue comes to retail lending, in line with the policies of the economy administration, that was relatively weak. It was 4% up only quarter-on-quarter wise. In terms of the total lending growth this quarter, we were slightly lower than the sector net-net. Sector quarterly total loan growth came at 17.5%. Our number was slightly lower than that, 16.8%. We were selective, and we were mainly focusing on real economy and real sector. We are still keeping our strong position in terms of market share. We are still keeping the second ranking in terms of market share in total loan portfolio, as well as hard currency loan portfolio.
Similarly, we are also keeping our third ranking in Turkish lira loan portfolio with above than 13% market share. As of this quarter, another important highlight is the fact that for the first time in this quarter, our non-retail lending volume exceeded TRY 1 trillion threshold and this is also important for this quarter. Next page 10, is related to breakdown of loan portfolio. It is not changing too much compared to previous terms, both in terms of currency and in terms of the interest rate structure. 70% in local currency out of total loan portfolio and 30% in hard currency loans. The share of hard currency loans are also coming down slightly despite real shrinkage because of the depreciation. Still it is changing very limited.
In terms of interest rate structure, for the loan portfolio, as we discussed, 8% floating, only 20%, at fixed rate, mainly retail loans. For the hard currency lending, 69% almost, coming from floating rate loans and the remaining 31% coming from fixed rate. Next page is related to asset quality. NPL ratio in this quarter continued to came down because of the mainly denominator effect and, currency depreciation. NPL ratio came down to 1.64% as of June, which was 1.80%, a quarter ago. At the same time, in Stage 2 ratios, within the share of total loan portfolio, slightly also came down. It was 7.2% a quarter ago, and as of June, it is slightly lower than 7%.
Net cost of risk during the quarter came at 117 basis points area. As a result, first half net cost of risk cumulatively came at 94 basis points. Remember our initial guidance for the full year in terms of net cost of risk was 100 basis points. I believe this is realistic, and this should also be the case for the full year. Next page is related to deposits. Balance deposit portfolio maintained. During this quarter, similar to total loan portfolio, our deposit growth also came slightly lower than the sector. We are having around 12% QoQ deposit growth. Especially Turkish lira deposits were flattish. Hard currency deposits, they were also slightly down there in dollar terms.
Because of depreciation, net-net, we are having still around 12% QoQ total deposit growth. As you know, as of today and as of June, in terms of the CBRT regulations, our ratios in terms of TL deposits over total deposits, for retail and commercial segments are above than Central Bank of Turkey threshold level of 57%. Retail ratio, retail deposits over total deposits are at 60% and commercial deposits over total deposits at 61%. In both areas, we are above than this threshold, and we are in line with Central Bank regulations.
In terms of the liquidity, as we discussed, especially Turkish loan-to-deposit ratio still continues to come down and came at 106%. On the next page, you can also see the breakdown of wholesale funding. We are still keeping around $12 billion total international fundings. Out of $4.5 billion will mature in 1-year period, including syndications and principal payments from DPR and IFI transactions and some Eurobond redemptions as well. The remaining $6.3 billion dollars coming from long-term perspective. Very recently, after closing the quarter, in line with the improvement in the overall environment and market conditions, we also obtained $500 million secured funding from one international counterparty.
With the 5 years maturity, it was a typical market size Eurobond issuance, deal. I think it is important, especially in terms of the improvement in the investor sentiment and in the market conditions. This very recently happened, and we are also witnessing more interest on international funding side. Seems to be possible, especially with the involvement of new names coming from the different parts of the world, which is also promising for that area. The next page I would like to take your attention is related to solvency ratios. This quarter, because of the mainly depreciation effect, solvency ratios came down. Total CAR came at 14.85%, which was 15.84% a quarter ago.
Tier 1 ratio came at 13.36%, and CET1 ratio came at 11.33%. All of them are well comfortably above our internal risk appetite levels as well as regulatory levels. Especially in this quarter, both as a combination effect of currency depreciation as well as relatively weak quarter in terms of profitability, we see some decline in our solvency ratios. Given most of the depreciation seems to be already taken place, and on top of that, a very strong profitability in the second half of the year, we believe our year-end solvency ratios will be higher than what we reported as of June end.
The next pages are related to detailed information related to especially sustainable banking, which is becoming even bigger and bigger in our daily activities. Therefore, our investor relations colleagues had three different page related to sustainable banking activities and sustainable banking approach. Other pages are mainly coming from the regular stuff. At this stage, I don't want to take too much of your time. Thank you very much for your listening. At this stage, I would like to leave the floor to Rob again, and we are more than happy to answer your questions.
Thank you, Mr. Tahan. Thank you for that, incredible presentation. Much appreciated. Right, ladies and gentlemen, it is time now for our question and answer session. As you heard Mr. Tahan say earlier, where he welcomes any questions you might have. If you wish to ask a question, please go ahead now and press star five on your telephone keypad. Just a reminder, to participate in the written question and answers, type your question into the ask a question text area and then click the Submit button. First, we give you a moment for the audio questions. Star five on your telephone keypad. The floor is open, and we will take a question first of all from Mehmet Sevim from JP Morgan. If you just wanna go ahead there, Mr. Sevim.
Good evening, Ali Bey. Thanks very much for the presentation. I have a couple follow-up questions. Firstly, maybe on loan growth. You talked about the deceleration that you saw in the second quarter, particularly worse as the sector, which is, not a big difference. I was just wondering how you see the loan growth dynamics going into the second half of the year, particularly in the context of the government's new policies but also the overall tightening that we are observing in the environment. Where do you see loan growth in the second half? Maybe also in the context of the improvement in the solvency ratios that you are expecting by the end of this year. Secondly, just a very quick follow-up on the CPI linker valuation, just so that I understand it correctly.
You're currently valuing them at 51%. Is that correct? Or, is that the expectation for the third quarter? If you could just clarify. Thank you.
Thank you, Mehmet Bey. Starting with the first question, in terms of the lending quote, you are right, especially very recently, we are witnessing a lot of tightening conditions from the regulators. In line with this development, actually we are not changing our full year guidance. Just to remember, we will keep saying that for Turkish loans, our lending growth will be in line with the sectors. On Turkish side, we don't want to share market share, and we don't want to gain additional market share. We would like to simply preserve our very strong market share on Turkish lending side. On Turkish side, we are selective.
We are especially supporting companies operating in key segments like manufacturing, like, export-oriented companies, like, companies supporting the employment, et cetera. We have key segments, key sectors to support, especially in the second half of the year. Net-net, we believe our Turkish loan growth will be in line with the overall banking sector. For the hard currency side, we are still keeping our initial guidance for the full year, and indeed it is happening. Just to remind you, in the beginning of the year, we will keep saying single-digit contraction in hard currency loan portfolio in dollar terms.
In this environment, I think it will continue to be the case for the second half of the year, and it will also support us in terms of capital management. Because the different depreciation, especially thanks to hard currency interest income effects, are creating too much pressure on performance ratio. Especially for the second half of the year, in line with the full year guidance, we believe we will see single digit contraction in our hard currency loan portfolio year-over-year basis. For the performance ratio, I mean, it is not easy to give a specific number, but we believe our performance ratios also bottom out in the second quarter of the year because most of the depreciation already happened in the second quarter.
On top of that, profitability-wise, second quarter is by far the weakest quarter of the year. In the second half of the year, the level of depreciation will be relatively limited compared to what we witnessed in the second quarter. More importantly, profitability-wise, overall profitability will be very strong. Both profitability ratios, efficiency ratios will improve. At the same time, it will be driven by high quality revenue generation capacity, and especially in the second quarter, apart from fees, NII relatively was weak, and mainly revenue generation capacity was coming from other income and trading activities and FX exchange gains. In the second half of the year, we believe there will be also normalization in terms of revenue composition, and it will be driven by mainly high quality revenue items.
Net-net, because of relatively limited depreciation in the second half, as well as because of the additional, very strong profitability outlook, we believe the second quarter performance ratios are the weakest quarterly ratios, and it will increase each and every quarter going forward. For the CPI numbers, in the second quarter, our estimation for October to October CPI was 34%. Recently, given Central Bank of Turkey revised year-end inflation expectation to 58%, this 58% year-end inflation number take us to 50.8% October to October inflation data. This 50.8% is coming with the assumption that year-end inflation numbers will be 58%, which is in line with Central Bank Turkey guidance.
With that adjustment, 50.8% CPI estimation for the third quarter, we expect TRY 23.5 billion interest income because with 50.8% October to October CPI estimation, we will also make correction for the first two quarters of the year. Most of the CPI contribution will be reflected in third quarter. However, most of the Turkish net interest margin recovery will be seen in Q4 rather than Q3. Both third quarter net interest margin outlook as well as Q4 net interest margin outlook seems to be very supportive. I hope these are sufficient for your questions.
Very clear. Thanks very much, Ali Bey.
Thank you, Mehmet.
Thank you, Mr. Sevim. Thank you very much for that. All right, we've got a question here from, I believe it's, Haluk Musun from Goldman Sachs. Please go ahead, sir.
Thank you much, Ali Bey, for the presentation. A couple of questions here from my side. You talked a lot about, you know, some of the changes or the focus areas for the bank, which will further solidify the performance in the second half. Ali Bey, I was wondering what do you think are the key risks at this moment? Deposit costs have come down and I wanted to get your sense on do you see any risks that, you know, the deposit costs can again start going up sharply, as we saw in the second quarter? What prevents such an outcome from happening?
Maybe together with that, you can also talk about, you did touch upon the NIM trajectory, which should be better in the second half, and you spoke at length about the CPI linker contribution. Maybe on the underlying NIM excluding CPI linker, I mean, what protects them from increasing cost of funding? My first question basically on what are the key risks that you're monitoring, which could impact second half performance? Third and final question, asset quality maybe, if you can touch upon it. You've talked about how you built up buffers. Any sectors, any areas which are seeing stress given the volatility that we've seen in the FX side and also on the rate side? Thank you.
Thank you, Haluk Kucukertan. It is very nice to hear from you. Actually, in terms of risk factors, I mean, you are also covering Turkish banks for many years. And you are also closely monitoring the market very closely actually. I mean, for a long period of time, Turkish banking sector had a lot of risk factors on table. And we were trying to make business in the middle of those risk factor environment. Of course, these are not related to banking sector itself. It was mainly driven by other external factors. The good thing is Turkish banking sector still was performing for many years in the middle of those external risk factors coming from COVID, coming from different volatilities, coming from the currency market, coming from different factors, et cetera. We are all aware of those risk factors.
The good thing is with the new environment, especially after the elections, most of these risk factors seems to be fading away. Maybe this is the first time after such volatilities we will be making business in the environment where any potential risk factor apart from banking sector will not create additional too much pressure over profitability, over liquidity, over balance sheet management, et cetera. Of course, cost of funding increase may be possible. Very frankly speaking, as of today, maybe we are at the bottom up in terms of cost of Turkish Lira funding pricing, especially on the deposit side. Going forward, we may see some additional increase in Turkish Lira cost of deposit.
The important thing, especially for us, is rather than the cost of funding side, the important thing is the pricing of our Turkish lira loan portfolio, especially from Turkish lira net interest margin point of view. That will be the main parameter. That will be the main factor actually. This policy rate cycle is helping us. The more we see policy rate hike, the more we enjoy better asset yield and better loan yield, which will be much more important compared to potential rate increase in the cost of funding. My point is, especially from risk factors, yes, this potential Turkish lira cost of deposit funding increase may be a risk factor, but I think we can easily manage it. More important point here is the pricing of the loan portfolio.
Because, unlike private peers, we are not generating too much very high yield retail loans because of our position in the market and because of our strategy to support key real sector areas. Like the ones I mentioned a couple of minutes ago. We are providing more commercial loans. Commercial loans, most of them, are at the floating rate, and they are linked to policy rate. Therefore, in terms of P&L outlook and in terms of net interest margin outlook, because of this loan profile and because of this selective loan strategy, I believe the policy rate itself will be very critical. The more we see higher increase in the policy rate, the more we will enjoy better net interest margin and better efficiency.
In this environment, I think additional cost of funding increase from net interest margin point of view can be manageable. In terms of risk factors, the many risk factors seems to be fading away. Very frankly speaking, we don't see a real potential risk factor apart from this limited cost of funding increase on the deposit side. Maybe who knows, when we are talking to especially fixed income investors or when we talk to credit colleagues or our FI business, we are also talking a lot in terms of rating and outlook of Turkey and Turkish banking sector. Who knows, maybe going forward with the normalization and rationalization of macro policies with the transparency of the new economy administration team.
Maybe, with the more investor friendly, market friendly medium-term program of the current administration, we may also enjoy maybe outlook upgrade or rating upgrade in coming quarters, which may be also positively affect overall banking environment. My point is, in terms of risk factors, all the potential risk factors, which in the previous terms I discussed as a concern, seems to be fading away and overall environment seems to be very supportive. Only risk factor can be related to potential increase on the cost of funding side. But I think, we are sophisticated enough to manage this cost increase in our net interest margin business. In terms of the asset quality, I mean, this inflationary environment, relatively high inflationary environment, is creating additional burden for asset quality because of the all-time LTV ratios.
As you know, in the last couple of years, especially real estate assessment values increased dramatically in Turkey and in Istanbul especially big cities. As a result of that, all Turkish banking sector enjoy all time low LTV ratio. Let me give you some numbers. In our case, for example, as VakıfBank, normally under the last decade maybe, in average, we have around 50% LTV ratio. Currently, because of the increase, recent increase and recent dramatic increase in property values, as of today this LTV ratio is holding around only 20%. This 20% may be all time low. Therefore, this is motivating people to make payment to the banking sector.
The willingness to pay, especially on the Turkish side, seems to be very high because nobody would like to lose their property, their home, their office, their land for a small amount of debt compared to the real value of their property. Therefore, especially for the Turkish side, asset quality especially NPL collection performance because of this factor seems to be very strong. The risk factors we may see, we don't know yet, on the asset quality can be related to potential NPL inflows that may come from earthquake region. As you know, in February, we had a very massive earthquake affecting 11 cities of our country.
Our, as a support to the region, all the banks, all the big banks of Turkey, and to my knowledge, all The Banks Association of Turkey members already provided six-month break for all retail and commercial companies operating in this earthquake region. It is coming to an end. It will come to an end by September. We don't know whether we will provide additional break or not, postponement or not. But the thing is, there may be some NPL inflow out of this earthquake region after this postponement period is over. It may be only visible in Q4 earliest in case there is no additional postponement. So as a conservative bank for this risk factor, we already provided additional net cost of risk for earthquake related cities, earthquake related exposures.
For your information, we have around 10% of our total exposure to those earthquake region. For the earthquake region, most of our exposure are coming from the Adana and Antakya region. The rest, the others are safe. As of today, of course there will be some companies fail, some people are lost and some of the exposure may be NPL. At earliest it can be understood as of Q4, but not before. I think Nihan put your presentation budget. Please let me know if I missed any part.
No, thank you, Ali. That's very detailed. You covered everything. Thank you so much as always.
Thank you.
Thank you.
Thank you, Mr. Lucan. We do apologize for the call quality coming through there. Mr. Tahan, I don't appear to have any more audio questions. If you'd like to move on to the written questions, over to you.
Yeah. Thank you. Thank you, Rob. Nihan, if there is any written questions, we can continue with that.
Yes, Haluk. Thank you. We have a couple of questions on the list, written. The first one is coming from Pınar Uğuroğlu Delice from TEB Yatırım. At VakıfBank, are you able to charge 37.9% or 1.8 x cap on Turkish lira business loans along with the other pricing peers?
Thank you, Pınar hanım. Yes. This is the current cap, actually, 1.8x. Up until recently, we also had 1.4x option, but this option no longer available. The only cap is 1.8x. For some rate, especially for some relatively higher risky areas for the. Of course, it is an outcome of our scoring methodology. For a SME or for a corporate company, if the scores come with some relatively low rating, let's say, we can charge 37.9% maximum interest rate. But if the internal scores of the company is relatively higher, it is coming down. So it is up to the company. It is up to the collateral. So there is no only one determinant.
There is a lot of points we need to take into consideration before deciding on the pricing. Especially for relatively low-rated companies, especially with the low collateral companies, we can charge this maximum 38% interest rate cap.
The next question came from Furkan Zeytin from Ziraat Portföy. I have two straight questions. What are the costs of deposits and yields on loans, interest rates, as of the latest data? What are your expectations on deposit rates for the next half of the year? Secondly, may I ask how loan growth affects the capital adequacy ratio negatively?
Sorry, can you repeat the last question, Nihan?
How loan growth affects the capital adequacy ratio CAR negatively?
Thank you.
Loan growth effect.
Okay. Thank you. Thank you, Nihan. Thank you very much, Furkan Bey. Especially, as of today, we are seeing that from marginal point of view, our additional Turkish lira lending creates a positive net interest margin, which was not the case, especially during the second quarter. This is the main driver of weak performance in the second quarter. Marginal lending activity as of today compared to marginal cost of funding no longer produce negative net interest margin. On the contrary, it is positive already, and it will be very positive in a very short period of time because most of our commercial loan composition, loan portfolio is coming from floating rates, and they are mainly linked to policy rate itself or TLREF actually. Their maturities are very short-dated.
In a very quick period of time, in a quarter period of time, this repricing effect, we believe, will be fully completed. Even in the third quarter, Turkish lira net interest margin side, we will see a very strong recovery compared to second quarter, but even better recovery with the current conditions, of course, will be even better Turkish lira net interest margin recovery will be visible in Q4. For the second half Turkish lira and overall net interest margin, especially in third quarter, because of the correction of CPI estimation cumulatively, there will be more upside for overall net interest margin from CPI portfolio. For Q4, the real upside will be coming from this Turkish lira cost of funds business side. Q3 will be mainly driven by CPI.
Q4 will be mainly driven by Turkish lira cost spread improvement. This is actually why we are still optimistic that our initial full year swap adjusted net interest margin recovery of 3.5% can be achievable and doable, despite to the fact that it was only 1% in the first half of the year. For the second question, I am trying to dial in from a remote place. Therefore from time to time, the quality of the data may not be strong enough. As far as I understand the question, it was related to loan effect of how currency depreciation effect on solvency ratios.
As we depicted in our presentation on page 14, every 10 cent depreciation of the currency has 20 basis points impact in our solvency ratios. As I mentioned, especially for second half of the year, on the solvency ratio side, on the one hand, additional depreciation will be relatively limited compared to what we had in the second quarter. On top of that, profitability wise, profitability will be very stronger. Therefore, we believe, solvency ratios also bottom out as of June, and it will be strong both in third quarter as well in Q4. Year-end solvency ratios will be comfortably higher than the levels we saw as of June end.
I hope this is the right answers for the questions you asked. Thank you.
Yes, Ali. Thank you, Ali. The next question came from Valentina Barclay. "What was the FX liquidity in third quarter 2023 in $ billion? Also, you have been pretty active in sourcing FX liquidity from alternative sources. How you think about current market conditions in the context of your bond issuance plans for the rest of the year?
Thank you, Valentina. Actually, I don't have the data related to first quarter, but I am sure after the call, Nihan and investor relations colleague may provide to you via email. I think it was also a comfortable number, and it was not too much different than the numbers we presented for June. In terms of the overall environment, you are right. I mean, during the presentation, we also discuss about the very recent fresh secured funding we obtained from an international counterparty with the five-year maturity and with the size of $500 million. For this year, we don't have any redemption for the rest of the year. As you know, the last time we came to DCM market was September 2021, almost two years ago.
With the current market conditions, in case overall, pricing will be at acceptable level from our treasury management point of view, we would like to also look for a fresh Eurobond issuance again. Unlike to some banks who came in the beginning of the year, we would like to look for five years rather than three years, because for 2026, we already have sizable amount of redemptions, and we don't want to put additional redemption for this year. It may be very painful. Therefore, rather than three years, we would like to look for a five-year fresh Eurobond issuance, even though we don't have any redemption for the rest of the year. We also have a syndication in November.
With the improvement in the investor perception, especially after May, we also see a lot of different banks, a lot of different FIs coming from different parts of the world, seems to have interest for this syndication. I don't expect there will be no issue in terms of rolling over the second half syndication loans for overall Turkish banking sector. On top of that, with the relatively good environment, we may see more Eurobond issuances for the rest of the year. Definitely we would like to be one of those in case this relatively good environment continue and in case overall pricing seems to be in line with the expectation of our treasury colleagues.
On top of that, we may also have some additional cooperation with different IFIs related to sustainability, ESG and earthquake support, related projects. We will continue to be active on those areas, IFI related, funding transactions. To the extent possible, we would like to enjoy out of the current relatively investor-friendly, market-friendly environment. In line with that understanding, we will continue to diversify our external funding base.
Ali, the last question we have from Osman at Crédit Agricole. "What is the level of fixed and low-rate mandatory Turkish lira bond portfolio central bank pledge fund?
Can you repeat the question again, Nihan? I apologize.
He's asking the level of fixed and floating rate Turkish lira bonds that we received, I mean, accumulated because of the regulation.
Oh, thank you. Thank you very much for this question. Actually, as of June, the overall portfolio with almost six years maturity all the Turkish lira securities we obtained because of these regulatory requirements was hovering around TRY 45 billion. Of course, it is changing every day. We are also trying to sell in the secondary. TRY 45 billion long-dated fixed rate Turkish lira security portfolio compared to asset size of TRY 2.2 trillion, I think it is not a risk factor. Overall impact on the PNL and on net interest margin can be manageable. That's our understanding. The most important thing from net interest margin point of view is related to real business on Turkish lira lending and on Turkish lira deposit management.
This impact, because of the relatively limited size and because of the relatively limited share in total interest earning assets and in total assets, I think it is manageable. On the one hand, on the other hand, our treasury colleagues also trading and to the extent possible trying to digest this kind of portfolio. Maybe as of third quarter, we may even have a lower such loan security portfolio compared to June numbers, which is TRY 45 billion as open.
No more any additional questions, Ali.
Thank you.
Thank you very much. Mr. Tahan, as was said, there doesn't appear to be any more questions. If you would like to conclude, that would be wonderful. Thank you.
Thank you, Rob. Thank you very much for everybody. I mean, it took already more than one hour, but we are at your disposal if you have any follow-up questions to me or to Nihan or to our investor relations colleague. We are at your disposal. Thank you very much for your time and looking forward to seeing all of you again in the first possible occasion.
Great. Thank you, Mr. Tahan. Always a pleasure. There we go, ladies and gentlemen. That concludes today's webcast call. I wanna thank you for your participation. You may now disconnect.