Ladies and gentlemen, welcome to the VakıfBank audio webcast, first quarter 2026, bank-only earnings results. We'll have a question-and-answer session following the presentation. If you would like to submit your questions, written questions, you can send them anytime. You just click the Q&A button, which you will see at the bottom of your Zoom screen. If you don't see a Q&A button, just click the More button. Click on that. That'll bring up a couple of options, including a Q&A button. Just click that and send your question anytime. If you'd like to ask an audio question, you'll be able to do so. You just click the Raise Hand button at the bottom of your Zoom screen. It's as simple as that.
Right, our speakers for today are Mr. Ali Tahan, he's the Head of International Banking and Investor Relations, and Ms. Ece Seda Yasan Yilmaz, Head of Investor Relations. I will now leave the floor to our host, Mr. Ali Tahan. Over to you, sir.
Thank you all. Good afternoon, everybody, and welcome to VakıfBank first quarter 2026 earnings presentation conference call. As usual, together with myself, we have Ece, Head of IR, and all the IR colleagues with me. As usual, after the call, in case you have any follow-up question, we will be more than happy to answer your questions. Without losing further time, let me jump to the presentation. Starting with the first page. In this quarter, we are announcing TRY 15 billion first quarter net income, which is slightly higher than the market consensus of TRY 14.3 billion, and figures bank-only numbers. Today, we are also announcing the first quarter consolidated financials, consolidated numbers are even stronger at TRY 17 billion net income for the same period.
Compared to a year ago, reported twice last year in the first quarter, we delivered TRY 20 billion net income. Just to remind you, during this quarter of the last year, we were enjoying around TRY 11 billion free provisioning reversal. Therefore, likewise's TRY 9 billion a year ago versus TRY 15 billion in this quarter corresponds to 66% annual net income growth. One of the important eye-catching developments of the quarter, similar to last quarter of 2025, we are still having and keeping TRY 8 billion free provisioning in our balance sheet. We didn't touch to this free provisioning amount. As you know, amongst the top Tier 1 banks of Türkiye, we are the only bank still having free provisioning.
As we also outlined in the headline, this TRY 8 billion free provisioning is also putting additional potential net income base to offset uncertainty. Another important part of the quarter is related to CPI estimation and CPI valuation. As you can see on the right-hand side below chart, we are starting to the year conservatively, at less than 21% October-to-October CPI numbers. Compared to other peer group banks, this is the lowest number. Given the recent inflationary trends, we understand for the rest of the year, there will be also relatively a good number of potential interest income we will enjoy from CPI-linked portfolio. Therefore, there will be additional upside from both outstanding free provisioning amount as well as from the currently conservative CPI valuation.
In the quarter, reported ROE came at 18.4%. However, if they adjusted with a potential release of TRY 8 billion free provisioning, thereafter, our comparable average ROE would be jumping to 28% area, which is in line with our full-year guidance. The last point related to this page is related to total revenues. Total revenues came at TRY 85.6 billion in the quarter, which is up by 13% year-over-year basis. It is mainly coming from the core banking revenues, 63% net interest income plus 23% net fee and commission income, which is simply showing a sustainable revenue generation capacity for the upcoming quarters as well. The next slide is related to net interest margin.
Net interest margin in the quarter evolves in line with our guidance despite very conservative CPI estimate. As we discussed, 20.9% CPI number, October-to-October CPI, is lowest. Despite that, reported twice in the quarter, we have 4.6% quarterly net interest margin, and swap-adjusted twice, 4.1% swap-adjusted net interest margin. In case we are using 25% CPI estimate, which was the consensus in the beginning of the quarter, as of today, this number is even higher. Even if we take 25% as the base case, thereafter, our group adjusted net interest margin would be jumping to 4.4% area instead of current reported 4.1% area.
Just to remind you, this is exactly the net interest margin level, swap-adjusted net interest margin level we were guiding for the full year of 2026. In terms of the components of net interest margin, TRY cost of debt during the quarter continued to expand compared to average of 2025. During the entire year of 2025, TRY cost of debts were hovering around 4.8%. During this quarter, it further evolved to 5% area despite cost of funding decline in the quarter. TRY loan also declined, but because of the pace difference, TRY cost of debts widened by 20 BPS in the quarter compared to average of 2025. Another page is related to fee income.
Fee income in the quarter came at flat-ish, hovering around TRY 19.3 billion. Year-over-year basis corresponds to 26% increase. Thanks to fee growth, we outperformed core banking revenue generation compared to sector average. On annual basis, our core banking revenues actually doubled, reaching to TRY 73.2 billion, which was TRY 36.4 billion a year ago. Considering the increase in sector of up 73% this quarter, we are glad that on the core banking revenue generation side, which is consisting of net interest income and net fee and commission income. I am repeating myself too much, please also keep in mind that number came despite, again, a very conservative CPI estimate.
Therefore, we are outperforming in terms of core banking revenue generation despite a conservative CPI estimate. In terms of the fee and commission income, cash loans increased by almost 50% year-over-year basis. Non-cash lending was also at a similar pace at 46%. Payment systems, despite to the fact they have almost 50% of share in total fee income, year-over-year basis, payment systems increased only by 15%. That was the breakdown of the fee income generation. Next slide is related to OpEx. OpEx came at TRY 39 billion in the quarter, which was TRY 24.4 billion a year ago. Q- on- Q wise, OpEx is up by 12%. Year-over-year basis, it is up by 60%.
The main driver of OpEx growth in the quarter was related to promotional expenses. Promotional expenses share in OpEx last year was hovering around 25%, this quarter, it further increased to 32%. Despite the denominator's increase, the share of promotional expenses in total OpEx further increased, that was the main driver of OpEx growth. This is first quarter specific. For the upcoming quarters, we expect OpEx growth will normalize and will be more or less in line with the initial expectation and budget. In terms of the OpEx, between HR cost and non-HR cost, more or less it doesn't change too much dramatically year-over-year basis. Around 35% is coming from HR cost versus remaining 65% coming from the administrative cost and non-HR cost.
With page six, we can shift to asset side, starting with the lending, which is the main component of asset composition with more than 55% stake. Our selective loan growth strategy is going on with well-managed risk, return focus. In the quarter, there was a balanced lending growth between Turkish lira and hard currency. Both of them were up by 4%. We will continue to gain market share on the Turkish lira lending side. Sorry, we will continue to gain market share on the hard currency lending side. We were slightly losing market share on the retail side, on the Turkish lira side. In terms of market share, among the listed banks, we are still keeping our first ranking position.
Yet, in terms of retail versus non-retail side, in line with our strategy and in line with our selective lending target, we are becoming bigger player on the non-retail side, including SME, corporate, and commercial lending. Our market share on those segments in total cumulatively further increased from 13.6% a year ago to 13.9%, meaning we are gaining additional 30 BPS market share on the non-retail segment just in one year period of time. At the same time, deliberately, because of the strong appetite of private peers, we are losing some market share on the retail side, and retail market share came inside 9% area above first quarter 2026.
In terms of the portfolio breakdown, the portfolio composition still coming from 50% corporate and commercial lending, 30% coming from the SME lending, and the remaining 20%, which is mainly driven by credit card and overdraft, coming from the total retail lending. Total loan portfolio for the first time is also exceeding in terms of nominal numbers, TRY 3 threshold. On page seven, you can see the detailed numbers and composition related to well-balanced loan portfolio in terms of currency breakdown, in terms of loan-to-deposit ratio, as well as in terms of sectoral breakdown. The next two pages are related to asset quality, starting with NPL ratio and Stage two ratios on page eight. As expected and as guided, we are witnessing limited NPL ratios every quarter.
Just to remind you, we were closing the year of 2025 with 2.9% NPL ratio. This quarter, we were having balanced NPL inflow from both retail and non-retail segments. As you can see on the left-hand side below chart, around 47% of the new NPL is coming from the retail portfolio, and the remaining 53% is coming from the commercial SME and corporate portfolio. In total, we have almost TRY 90 million new NPL versus a good number of collection holding around TRY 6.6 billion. Those numbers brought our NPL ratio to 3.1% area.
Just to remind you, our year-end NPL ratio expectation is hovering around 3.5%, the current situation on the asset quality and on the NPL ratio is fully expected and fully in line with our guidance compared to beginning of the year. On the Stage two side, Stage two in terms of share in total loan portfolio is also increasing by more than 1%. By the end of 2025, it was hovering around 9% as a percentage of loan portfolio, versus now it is above 10%, 10.2%. Most of the Stage two loans increase is coming from the restructured portfolio because of the easing of restructuring on the especially retail portfolio following the BRSA regulatory watchdog communicate change.
Then we have demand on restructuring, all the restructuring loans are classified under Stage two category. Therefore, the share of restructured further increased to 64% versus 57% a quarter ago. The next slide is related to cost of risk and coverage. Cost of risk also came in line with the guidance at 164 basis points. This is purely related to a coverage policy, which is quite conservative and prudent. Total coverage during the quarter compared to year-end increased to 3.6%, which was 3.4% a quarter ago. Because of the aging impact, NPL cash coverage ratio increased to more than 63%, which was hovering around 61.7% a quarter ago.
On the provisioning and on the cost of risk side, prudent provisioning policy reflected via increased levels of coverage ratios. Last point, still we are having additional TRY 8 billion pre-provisioned within our provisioned breakdown. With the next page, we can move on to liability side, starting with the deposits, which is the main funding channel. Deposits this quarter was limited. On the Turkish lira side, we were having around 4% contraction. On the hard currency side, we have a limited 2% increase in our hard currency loan portfolio.
During the quarter, cost efficiency, cost management, net interest margin management, as well as ratio regulations enforced by Central Bank of the Republic of Turkey, we acted in accordance with those targets and KPIs. Because of the access to money market, which is relatively much more attractive from cost of funding point, especially during the month of March, we gave exit to some costly Turkish lira deposit accounts, and therefore, on the Turkish lira side, we had slight contraction. More importantly, deposit composition became much more granular, both in terms of demand deposit shares as well as in terms of retail deposit shares. Demand deposits in total deposits further increased to 33%. One-third of total deposits now coming from the demand deposits, which was 27% a year ago.
Yes, we are aware of the fact that compared to peer group, we are still catching up. On the positive side, on the flip side, those numbers clearly shows we are in the right track and we are in the right direction. Hopefully, there will be further convergence in terms of share of demand deposits via private peers and other state banks. On the retail side, retail share slight also further increase to 47%, which was 45% a year ago. This strategy creating a much more granular deposit portfolio is paying off, and we are glad in terms of deposit composition, we are approaching more to private peers. The next page is related to international funding, especially this quarter. It was an active quarter.
Despite lack of Eurobond issuances, still, we managed to obtain almost $3 billion fresh funding. The lion's share of this funding is coming under the partial guarantee structure of IBRD World Bank Group. In the month of March, we obtained a fresh funding of EUR 1.5 billion with 10 years final maturity. After this transaction on the commercial banking side, we are glad we became the biggest financial institution counterparty of entire World Bank Group in Turkey. Of course, this funding project with the ESG angle, especially use of proceeds will be ESG angle especially. It will be used for gender inequality. Use of proceeds will be used to support women and young laborers, as well as to support women and young entrepreneurship in the country.
Therefore, it will be a very supportive project for the sake of entire Turkish economy actually. We are glad we became one of the biggest counterparty in this critical project. In terms of the sustainable funding, total sustainable funding amount increased to $10 million with this transaction. Going forward, especially, we will be focusing much more on long-dated, cost-effective funding channels like DPR issuances, like more and first ever cooperations with multinational IFI institutions. That strategy will be much more alive for the rest of the year from our side. The last page I would like to pay attention is related to capital. As you know, with the first quarter of 2026, all the forbearance measures lifted in the Turkish banking space.
In order to show you a like-on-like basis solvency ratios, Q4 2025 solvency ratios are depicted without forbearance measures level. During the quarter, because of the market turmoil and because of the mark-to-market losses, as well as because of the one-off regulatory impact in terms of the measurement of operational risk. As you know, in Turkey, at every first quarter, we have additional one-off impact coming from the operational risk measurement side, and it had negative 38 basis points impact in our total CAR ratio calculation. Our CET1 ratio in the quarter came at 9.4%, which was down by 57 basis points compared to a quarter ago. Tier 1 ratio came at 11.9%, and total CAR came at 14.1%.
These are all the numbers without forbearance measures under the current new regulation, which is totally different compared to what we were reporting to up until the end of the previous year. All those numbers are bank-only numbers. Because of the relatively better and higher P&L on the consolidated levels, consolidated capital ratios are also higher compared to bank-only numbers. We are having around 35 basis points higher capital ratios at consolidated level compared to unconsolidated levels.
That's also another point I would like to share with you. For the sake of time, this is the point I would like to stop, and the rest of the presentation is related to annex pages, especially related to sustainability, composition of assets and liabilities, security portfolio, detailed information related to retail loan portfolio, and all the key financial ratios and the details of balance sheet and P&L. Thank you very much for your attention and listening. Let me leave the floor again to Rob.
Thank you, Mr. Ali Tahan. Yes, indeed, it is time for our question and answer session. Ladies and gentlemen, now, like I said earlier, if you would like to ask a written question, I see a couple are coming through. Please pop along to the bottom of your Zoom screen. You'll see a Q&A button. If you don't see that, just look for the More button. Click that. A couple of options will come up, and one of them will be a Q&A button. Just pop your written question through, and Mr. Tahan will be more than happy to answer that. If you would like to ask an audio question, not a problem. You can join the call by clicking the Raise Hand button. You'll also see that at the bottom of your Zoom screen. I don't see any audio questions right now.
Mr. Tahan, do you have any written questions? Just a reminder, folks, we are doing the Q&A session. Written questions, you can click the Q&A button at the bottom of your Zoom screen. Audio questions, just click the Raise Hand button, which you will see at the bottom of your Zoom screen. At this time, no audio questions. Mr. Tahan, do you have any written questions? Yeah.
Actually, we have. Sorry, I was muted. I was speaking to myself, but because of the muted button, you couldn't hear me. Sorry for this technical issue. We have written questions from Valentina, from Barclays. Her first question is related to level of hard currency liquidity as of first quarter compared to $7.4 billion short-term debt actually. At the moment, we are quite comfortable from hard currency liquidity point of view, as especially Turkish side is much more tight in terms of liquidity conditions, which is a deliberate action following the tightening measures introduced by Central Bank management as a response to what we were seeing on the geopolitical side during the month of March.
Hard currency liquidity conditions are quite comfortable and ample. The dollarization trend among locals, which can be considered as a potential risk factor, doesn't take place because of the relatively good level of Turkish returns. In terms of the level of hard currency liquidity, we have 1.5 times coverage compared to upcoming one-year redemptions. In this manner, we are quite comfortable, especially the 10-year IBRD partial guarantee funding, which is very fresh funding actually. It was also helping in terms of hard currency liquidity. On top of that, in the upcoming weeks, there will be also new announcements in terms of long-dated and sizable funding transactions.
That's the reason actually why we didn't show up on the Eurobond market side also, because as I mentioned, to the extent possible, we would like to focus on either multinational IFI-related projects which, with ESG angle and with ESG value and contribution, as well as to the extent possible because of the cost advantage and because of the duration and maturity advantage. We would like to also benefit from our secured funding programs like DPR and more announcements on those areas will be shared shortly. The second question from Valentina is related to Stage two. What was driving lower Stage two coverage ratio in the quarter? Can you also elaborate on whether you see asset quality pressure on SMEs and corporates, which sectors are affected? That was our guidance actually, Valentina.
Just to remind you, last year we were expecting, and indeed we tested and experienced much more retail-driven NPL formation and NPL inflow. This time, we were expecting much more balanced in the first half between retail versus non-retail. In the second half especially, much more SME-heavy NPL inflow rather than retail and rather than corporate and commercial. For the time being, corporate and commercial segments, because of the additional buffers they created from the previous cycles, as well as because of the competitive powers they have, let's say, they are in good shape, but small scale micro SMEs, they can be the potential flow of NPL for the rest of the year, especially in the second half of the year.
The first part of your question, which is related to a decline in the coverage of Stage two, this is related to migration because of the NPL inflow this quarter, which was TRY 18 billion in the quarter. All of them were switching from Stage two to NPL at the end of the day. Because of this shift from Stage two to Stage three, and because of the additional specific provisioning we were putting for those migrated Stage two loans once they became NPL. Automatically, actually, that's a quite the result of the formula. We see slight decline. When we see less and slow NPL inflow from Stage two thereafter, automatically the coverage for Stage two ratios are increasing.
One key KPI or one key ratio we are also looking is related to total coverage ratio. Total coverage ratio, meaning the coverage we put, general provisioning we put for Stage one and Stage two, as well as specific provisioning for NPL divided by total loan portfolio. As we also showed in the presentation, is 3.6%. Compared to peer group average and compared sector average, this 3.6% is slightly higher actually, which also shows how conservative VakıfBank is in terms of coverage and in terms of provisioning policy. Another question from Valentina is related to, can you please walk us through your net interest margin and core loan deposit dynamics in Q1, and how do you see these being shaping up in second quarter and for the rest of the year?
Can you remind us your full year guidance and do you see downside risk to it? What macro assumptions you use in the forecast? In line with the other banks who announced their first quarter numbers, yes, we see also downside risk to our full year net interest margin guidance. Just to remind you, last year average slope- adjusted net interest margin we had was 3.4%. This time for the year of 2026, we were guiding almost 110 b ps in-increase, which is corresponding to 4.5% full year slope adjusted net interest margin. In the first quarter, core spreads compared to average of 2025 further increased, as we discussed. Yet we started with the most conservative CPI estimation.
For the rest of the year, we have clearly a good potential upside from CPI portfolio. However, on the flip side, because of the policies implemented by Central Bank management, just to make sure Turkish lira is still attractive and Turkish lira liquidity conditions tight, we also witnessed relatively higher cost of funding pressure since the beginning of March. That pressure peaked during the middle of April. From March onwards to till mid-April, we see elevated level of cost of Turkish lira funding. To navigate this pressure, we gave exit to costly Turkish lira deposit accounts and replaced them with much more relatively attractive cost of funding, money market funding availabilities.
The good thing is, since the second half of April, the highest peak level Turkish lira cost of funding seems to be coming down slightly. Of course, we are still keep a close monitor to recent developments. Because of the correlation between the inflation and the Turkish lira deposit markets, the recent inflation came above than the market consensus, inflation-wise, CPI numbers. Therefore, there may be some additional cost of funding pressure on the deposit side. Because of that, of course, all the cost of funding increase will be reflected on lending side. On the other hand, because of this short-dated Turkish lira cost of funding increase, there will be a downside risk to our full year swap-adjusted net interest margin.
We will be updating our full year scope adjusted net interest margin expectation when we are announcing the second quarter financials. Not now, for the time being, because of those recent developments, we see downside risk to full year net interest margin. There is one more question from Mustafa Kemal Karaköse. Do you see an upside or downside risk to guidance? I mean, for the time being, we have downside risk to only net interest margin. For the time being, we would like to keep the guidance unchanged, and we would like to see and monitor the developments within the second quarter. After having some meaningful insights into the second quarter, we prefer to change the guidance accordingly. For the time being, we would like to keep it unchanged.
Yet, we have additional focus on net interest margin side. Similar to other banks, we also see downside risk to full-year net interest margin expectation. The last question I see on the screen is from Hakan Aygün from AK Investment. Hakan is asking, could you please provide us the current outlook on your expectations for ROE NIM cost of risk, fee and OpEx growth for 2022, 2026? Do you see some significant downside risk on your guidance for such metrics? Hakan, our answer is same. For the time being, we remain strict to our full-year guidance, but especially on the net interest margin side, there is clearly a downside risk. We will change our guidance after second quarter financials, not now. These are all the written questions actually we are seeing on the screens.
If there is any audio question, we can continue. Rob, please let us know if there is any.
Yes. Hello, Mr. Tahan. We don't appear to have any audio questions. Folks, just a couple more seconds. If you would like to ask an audio question, just click the Raise Hand button. A few more moments for you to do that. Otherwise, if we don't have any more audio questions, I'm going to hand the floor back to Mr. Tahan for a conclusion.
Guidance has been taken as norm. Rob, thank you very much for everybody, for their time and for their participation, and looking forward to talking to you in the earliest possible way. In case you have any follow-up question, Ece and all the team and myself, we are available as always. But for the time being, thank you very much for your time, and thank you very much for your participation again.
Thank you, Mr. Tahan. Thank you for the presentation. Ladies and gentlemen, thank you for your participation. With that, we conclude today's conference call, and you may now disconnect. Thank you.