Ladies and gentlemen, thank you for standing by. I am Gayle, your Chorus Call operator. Welcome, and thank you for joining the Yapı Kredi Conference Call and Live Webcast to Present and Discuss The Yapı Kredi Nine Months 2023 Financial Results and Live Webcast. At this time, I would like to turn the conference over to Mr. Gökhan Erün, CEO, Mr. Kürşad Keteci, CFO, and Ms. Hilal Varol, Head of investor relations and strategic analysis. Mr. Erün, you may now proceed..
Thank you. Good afternoon, and thank you all for joining our Q3 Earnings Call. This weekend, it will be a century since the great founder of our nation, Mustafa Kemal Atatürk, declared the establishment of the Republic of Turkey. I'd like to take this occasion to celebrate one of the most significant milestones in our nation's history. In this deeply important year for Turkey, I'm proud to announce our new initiative, Snowball for the Future. At Yapı Kredi, we aim to support next generation through creating an awareness on the importance of physical education. This will be another gift by our franchise, with the motto of: Stronger future comes with stronger generations. Hilal will provide further details during the presentation. Before going into our performance, I'll share with you some information about the operating environment.
Turkey is in the gradual normalization process through actions both in fiscal and monetary side. In the past 4 monetary policy meetings, committees, the Central Bank hiked the rates by 21.5 percentage points to 30%. A central bank also signaled we believe that further rates, rate hikes might follow. The rate is targeted to reach ex-ante positive real interest rate. Alongside with the monetary policy, the tightening sustains with some macro and also microprudential measures in order to shift the expenditure-driven growth to a value-added, production-driven growth. Looking at the budget deficit perspective, it is expected to have a budget deficit above 6% of GDP by the end of the year. Inflation, on the other hand, remains elevated and likely to continue to be high for a while. It will be crucial to maintain the tightening measures of the route.
Most importantly, there are also measures to reduce the FX-protected deposit scheme as needed. With all these gradual normalization steps, we are observing high rate and high inflation period, which is positively impacting the margins. On the contrary, measures related to exiting the FX protected deposit scheme has negative impact on the cost of funding, but also spreads. Accordingly, it will take some time to have stability in terms of margins. Therefore, asset and liability management is the key to manage the volatility. In this aspect, as we have proved so many times, it is the most important muscle for Yapı Kredi. Our first quarter result is again a proof of this strength. Now I'm moving to page two of our presentation. We posted TRY 48.7 billion net profit as of September 2023, corresponding to a 38% year-on-year improvement.
Our quarterly net profit stood at TRY 24.6 billion. When normalized for the CPI assumption change for the valuation of our linker portfolio, the quarterly increase is 19%. This bottom line increase once again proves our timely execution of ALM strategies. Our ROE is at 46% and ROA is at a strong 4.5%. Some important drivers of the performance are as follows: During the quarter, thanks to our successful ALM capabilities and stronger customer franchise, we managed to widen our TL loan to deposit spread by an extensive 208 basis points. We managed to keep the increase in cost of TL deposits at a limited 121 basis points, despite tough competition and policy rate hikes.
During this quarter, we managed to keep cost of new TL time deposits low, 200 basis points lower than the system, the sector. On top, the increase in TL demand deposits supported our cost of funding. TL loan yields, on the other hand, improved 329 basis points in a single quarter. Our mean for the first nine months is at 5.8%, above our full year guidance of equal or above 5%. Net income went up by a hefty 49% quarter- on- quarter, and more than doubled year-on-year. Thanks to our strength in lending related and also money transfer fees, as well as strong contribution from all our subsidiary groups. On top of the robust core revenue performance, our trading income continued to support our bottom line in this quarter, thanks to timely actions taken by our treasury.
All incorporated, our revenues increased 55% year-on-year in third quarter, with a 15% increase, and normalized with the linker income. NPL collections in this quarter were record high at TRY 2.7 billion. Net, the net NPL inflows were at negative territory once again. Recovery supported our cost of risk by 79 basis points in the first nine months. As a result, our cumulative cost of risk stands at only 331 basis points. Now, I'm moving to page 3. In this quarter, we have retained our strong fundamentals, which also indicates our potential for the future. In terms of liquidity levels, our FC LCR is around 430. Total also around 200% as we speak. Additionally, our total LDR is significantly below 100% at 78%.
On capital front, our Tier 1 capital further improved in this quarter, thanks to consistently strong internal capital generation despite the macro backdrop. Tier 1 ratio now stands at 15.8%, and we have 638-point buffer versus regulatory limit for Tier 1. In terms of asset quality perspective, total loan loss coverage stands at 5.2% and the NPL coverage at 152%. The slight decrease in total loan coverage is mainly due to our Stage 2 loan growth. Since we maintained our increased coverage at all stages in the quarter. Now I'm leaving the floor to Hilal. She'll provide more details to you.
Thank you very much, Gökhan, and thank you all for joining our, our call today. First and foremost, I would also like to celebrate the century of Turkish Republic and the centuries to come. Moving to the details of our 9M finances, we are now on page 4. Our lucrative lending strategies sustained in the quarter and supported our loan yields further in the third quarter. Following our limited Turkish lira loan growth in the second quarter, we will negative marginal spread. Our Turkish lira loan growth accelerated to 12% in third quarter, alongside with positive marginal spread generation. Our Turkish lira loan growth is at 30% year to date, and we continue our selective lending strategy. As a result, our topping class, Turkish lira loan yield further improved in the third quarter of the year.
Foreign currency loan deleveraging continues in the quarter, coming down 4% quarter on quarter and 10% year to date. Our bank-only foreign currency loans now stands at a limited $7.7 billion. In line with our small ticket-focused strategy, retail loans, including SME, share in total reached to 65% as of 9M 2023 on an effective adjusted term. On the funding side, we are now on page five. We had high checking demand deposit growth in the quarter, thanks to our intact customer base, also supporting our spreads. Turkish lira deposits increased 5% quarter on quarter, while Turkish lira demand deposits increase was at 17%, and this is in a single quarter, driven by individual Turkish lira demand deposits, where we increased our market share by 134 basis points in a single quarter.
Our year-to-date increase in Turkish lira deposits reached 47%, still above our Turkish lira loan growth. As we have mentioned during our second quarter call, our strong deposit growth in the first half 2023 allowed us to get rid of some high-cost Turkish lira company term deposits in the third quarter. The share of demand deposits in total increased to 43% in September 2023. The share of Turkish lira demand deposits in Turkish lira deposits increased 238 basis points quarterly, and stood at 22%. Our FX customer deposits in dollar terms came down by 9% year-to-date, while demand deposits were up by 8%. As a result, the share of foreign currency demand deposits in total increased to 72% in 9M 2023. Now moving to page nine.
Thanks to our agile, timely, pioneer ALM strategies, revenues increased 55% year-over-year to TRY 99 billion. On a quarterly basis, the increase is at 15% normalized for linker income, and this is supported by the strength in sustainable core revenue generation. Please note that we have revised up our CPI estimates for the valuation of increase to 60% in 2023, from 40% in first half. Core revenue margin widened 98 basis points quarter-on- quarter, in the third quarter, with a 44 basis points support from core revenues, showing the sustainable revenue generating capability of Yapı Kredi. The support from treasury activities continued, thanks to proactive management. Now moving to page seven. We had a remarkable spread expansion in the quarter as we guided during our first half earnings call. Again, I have to mention our pioneer ALM strategies.
Our Turkish lira deposit pricing was 200 basis points below the sector average during third quarter. As a result, the increase in Turkish lira cost of funding was limited at 173 basis points, during intensified competition alongside with higher interest rate era. Turkish lira lending yields, on the other hand, improved 329 basis points, and our Turkish lira loan deposit spread widened 208 basis points to 3.2%. With the normalization, as you know, last quarter concurrent spreads were very wide, it normalized. Despite that, the expansion on the blended loan deposit spread was also very strong at 110 basis points, reaching to 6.5%. All incorporated, our net interest margin improved to 5.6%, 33 basis points expansion in the third Q.
Of course, again, normalized with the linker, bringing the cumulative net interest margin to 5.8%, creating an upside potential for our full year guidance of above or equal to 5% net interest margin. On next page, we have stellar fee performance across the board, as always. Net fees more than doubled year-over-year, with an additional 49% quarterly increase. Our fees to average interest earning assets improved further to 2.5% as of nine months, from 1.7% as of 2022. Money transfer fees up by 139%, with ongoing surge in number of transactions. Fee income to investment products up by 135%. Bancas surance up 90%. Payment system fees surged 114% year-over-year, alongside with lending-related fees increasing 146%.
Thanks to our ongoing strong performance, we see an upside potential to our full year fee growth guidance of above or equal to 90%. I am also very happy to share, according to the 2022 Nilson Report that announced recently, we are 17th in Europe and 24th in the world, based on number of transactions on the acquiring side, top ranking among Turkish banks. Moving to the OpEx, we are now on page 9. Our year-over-year cost increased to that a 131% , as of 9M. This is mainly due to the inflation pass-through impact, earthquake-related costs, and our ongoing business growth and human capital investments. The quarterly increase was on the other hand, limited at 11%, even though the salary adjustments.
Main driver of the increase is again, business growth-related costs, increasing 244.8% year-over-year, and our HR cost increase is close to 100%, while the running costs were up a contained 67% year-over-year. Our efficiency KPIs are best in class. Fees to OpEx further improved at 75% and cost to average assets stayed at 3%. With this performance, we maintain our full-year cost growth guidance of below 120% level. Now moving to asset quality, we are on page 10. Our sound collection performance continues to support our cost of risk. Quarterly collections stood at a record high, TRY 2.7 billion, while the inflows were slightly below the collections, resulting in negative net NPL inflows in the quarter.
Specific collections in the first nine months reached TRY 5.6 billion. As we have previously mentioned, on consumer and credit card NPL inflows, we are seeing some normalization, but it's still very limited and at a very comfortable level. However, SME net NPL inflows continues to be negligible. All incorporated, our cost of risk stood at 31 basis points as of 9M, while the cost of risk, excluding the collection, stood at 110 basis points, showing our prudency in provisioning. Given the ongoing strength in collections, thanks to extraordinary efforts of our collection team and the network, we now see a downside potential for around 100 basis points cost of risk guidance for the full year 2023. Moving to page 11, are very comfortable and further strengthen solvency ratios.
All our ratios improved on a quarterly basis, thanks to the support from our sustained internal capital generation. Our Tier 1 and CET1 improved around 90 basis points quarter on quarter, while the quarterly increase on the capital ratio is at 82 basis points. Now, our buffer versus, the regulatory threshold, set at, stands at 580 basis points and above. The macro environment has 141 basis points negative impact on the capital ratio, when the support from the profits as high as 511 basis points, and this is significantly above the business growth impact of 233 basis points. In terms of sensitivities, once again, the impact is limited. Every 10% depreciation has 35 basis points impact on Q1 and 30 basis points impact on capital ratio.
The impact of 100 basis points parallel in the Turkish yield curve is also limited at 20 basis points. As we always mention, these figures are not linear. Now, moving on page twelve. To celebrate the 100th year of our republic and honor its future, as Yapı Kredi, we are starting an educational campaign called Snowball for the Future, for the development of our children under the age of 6 in our country. There are 9 million children under the age of 6 in Turkey. With this project, which we designed with the guidance of Professor Selçuk Şirin, New York University, and his team of academics, we will support our children, especially those living in socio-economically disadvantaged areas, to develop their social, emotional, and physical skills. We would like to project in the earthquake zone first, in 17 cities that are affected.
Our first goal is to support our children in the region to overcome the trauma of the earthquake. Afterwards, we are aiming to spread the project with the cooperation of non-governmental organizations to the whole country. The preschool education starts with parents. Accordingly, we will provide parental education, create awareness, and provide expert support to them to raise the people of Turkey, our children. On top, we are providing an educational set and volunteer support for the children. We aim and focus to have good people, well, good citizens. Support social development of our children, provide education on emotional development, support their physical development. Last but not the least, support their cognitive development. We tell you. You can read the details from our website that we provided the link.
If you want to learn our menu, I'm sure you watched at the beginning of our presentation by clicking the link also. On page 13, we are providing a summary of our guidance for 2023. I went through the potential upside and downside potentials throughout the presentation. But in a nutshell, with a potential upside to our top line guidance, net interest margin, and fees, and downside potential to cost of risk, we foresee an upside potential to our above 30% return on tangible equity guidance while maintaining our inflation economy ROTE of mid- to low teens. Now, I'm leaving the floor to Gökhan Bey for closing remarks, then we will be taking your questions. Gökhan Bey?
Thank you, Hilal. I'd like to take this occasion to extend my gratitude to our stakeholders who stand by us with trust and support, and to our dedicated employees who contributed to the achievements of our bank. On behalf of whole team, I'd like to thank you all for joining our call. Now we can take your questions.
The first question is from the line of Waleed Mohsin with Goldman Sachs. Please go ahead.
Hi, good, good afternoon. Thank you much for the presentation, and congratulations on a very strong set of results. Two questions, please, from my side. First, I mean, you've had, you know, very strong, net interest margin trends. If you could perhaps provide a mark to market on what you've seen in this particular quarter, if there's anything that you can highlight. I know, Hilal, you mentioned some of this during your presentation, but maybe you can provide a more detailed mark to market in terms of what, what trends you're seeing in terms of, you know, competition or, you know, deposit costs, during the fourth quarter. That would be very helpful.
And then secondly, I know it's early, but perhaps a look through into your early thoughts into 2024, what could we expect on some of the key line items, whether it's asset quality, or margins? That would be extremely helpful. Thank you.
Hi, Waleed. This is Kürşad . For your first question, what's happening for the competition in the fourth quarter? Specifically, as you are also following the flow, lending rate as well as deposit cost, we still see on the lending rate there is an increase. The increase in the lending rates in the sector, it is not as much as in the third quarter, but the trend is still on the upside. For the deposit cost, there is a huge variance, I would say, in terms of competition. We are seeing even more than 50% levels for Turkish lira deposit rates. But when we look at the flow for the market, it is increasing, and the speed of increase is still the same as third quarter.
Whereas as Yapı Kredi, as you also remember, since the second quarter, we are applying a different strategy, and we are able to manage our deposit costs, which we are not part of this competition. And our average flow is something around 30% levels for the TL deposits. And, for this competition, I would say, those, what we will need, as Gökhan Bey mentioned at the beginning, we will need more time, for stability on the margin. That's why asset liability management is crucial. And for your second question, if I understood correctly, about the trend on the asset quality. For the asset quality, what we are still seeing and also forecasting in the retail part, the asset quality worsening, may happen, for the coming periods.
As you also know, the lending rate increases are mainly impacting the retail part, individuals, mostly. Although we haven't seen too many increase in the flow, yet there is an increase in the NPL inflow for the retail, and it may be deepen in 2024. Since it's a widespread risk, it is manageable for all the banks in Turkey.
Thank you very much, Kürşad. Just one follow-up or maybe some early thoughts on 2024 on net interest margin as well.
Can you please repeat again? I couldn't understand.
Sorry, on net interest margin, some early thoughts on your, you know, what could we expect in terms of, you know, next year, early next year. I know you haven't provided 2024 guidance as yet, but, you know, given what you're seeing in the market, how do you expect net interest margin to trend in 2024?
Well, it unfortunately doesn't have any information that we can share with you net. As soon as we start preparing the budget, we will give you some information, but unfortunately, we don't have it yet.
Perfect. Thank you so much for your answers. Thank you.
Thanks.
The next question is from the line of Mehmet Sevim with JP Morgan. Please go ahead.
Good afternoon. Thanks very much, and congratulations on the strong results. I just had two follow-up questions, please. Firstly, just on loan growth, if you could give us maybe some more color on your expectations, from here and, 4Q , maybe the early months of 2024 on the back of high rates, that would be very helpful. And, do you expect a shift in basically demand or in your appetite to lend to corporates from here, as obviously, lending yields have improved quite significantly? And, secondly, in terms of cost of risk, which is still tracking very, very low, I'm just wondering if you expect any one-off model adjustments whatsoever in the fourth quarter, given, it seems like you're still keeping your guidance of 1% for the full year. Thanks very much.
Hi, Mehmet. For loan growth, as you very well know, second quarter was the for Yapı Kredi, that is we did not grow in terms of loans because of the obvious reasons that the margins were negative for us. That's why we didn't want to go with low- yielding loans. But this time, now, we have more rational interest rates at the moment for loan yields. Although we are capped with some limits, we would like to grow. In terms of capital and also in terms of customer franchise, we are ready. And of course, we are carefully growing in terms of touching the caps, monthly caps that is provided by our central bank.
But we'll be growing, for sure, in the fourth quarter as well. It will be a quarter of growth in terms of loans. This is t he appetite is definitely higher with the existing interest rates. Second question was about the cost of risk. Well, cost of risk is low also because of the one-off collections that we had. There was one file that was fully provisioned, and thanks to efforts of our teams, it was collected fully. So this is the result of the cost of risk is so low. We do not expect any model adjustments for the year. And although the NPL inflow, as Kürşad mentioned, is slightly increasing. But on the other hand, also, because of the asset prices went up, especially for the collateralized loans, the collection effort is still strong, for us.
Great. Thanks very much, Gökhan Bey . Very helpful.
Thank you. Thank you.
The next question is from the line of Cihan Saraçoğlu with HSBC. Please go ahead.
Hello. Thank you very much for the presentation. I have a question about your fee income. It seems to have grown 50% in just one quarter, which is unusually high. Could you please elaborate what is the driver behind that very strong growth? Have you changed your fee catalog or increased pricing? Another question is on trading income. In this quarter, your trading income was again very high, although it came a little bit down from last quarter. Do you think this revenue are sustainable going forward? Thank you.
On the fee income side, there are actually, if you look at the chart that we provided, it is so diversified that we are growing in all aspects. So it's all almost about 100% or so the growth. Although, you know, second quarter was less also but third quarter for sure. It was, of course, related with the lending activities that we achieved, but not limited to. So also the subsidiaries are going very well. In terms of payment systems, payment systems is also helping us a lot. Money transfers for sure, you name it.
Because, I'd like, I'd like to link it to also, the growth of, number of customers and strong growth, of number of customers as well, reaching to, 14 million, active customers end of all, already. This is helping, in all aspects, to the net fees and compos- net fees and commissions. So that's why that we are waiting for the coming, months or quarters that this should be continuing. Maybe less of, extent, for the, lending-related activities. But as the volumes will be also increasing, this will be helping, supporting our net fees and commissions. But, payment systems and the others, for sure, the activity continues, with a stronger pace. In terms of trading income, I think the second question was about the trading income.
Yes, I think the trading income was also very supportive for the bottom line for the third quarter. But we are seeing a slowdown in terms of FX demand against Turkish lira from our customers. Which means that the activity for the FX-related inflow is diminishing. This is what we are seeing as Turkish lira stabilizing in that way. We are seeing less demand thanks to also the strong monetary policy that we are seeing. But on the other hand, it is providing us with other opportunities, as we are seeing at the moment, more rational interest rates on securities.
So in the past, it was the results were less affected by the security income, trading income that we did. But now, we are seeing that the market is functioning, having the long-term interest rates at 30% or so, even two years above 30%, 33%. So I think the market is coming back, and this will be helping the liquidity to come back. And also the trading activity on the, especially on the TL securities, will be coming back again for our trading income.
Thank you very much.
The next question is from the line of Alan Webborn with Société Générale. Please go ahead.
Hi, thanks for the call today. I know that you're keeping your guidance on operating cost growth the same as it was previously. I guess, you know, presumably it's a question of a base effect with the fourth quarter of last year, where, you know, costs started to sort of go up quite a lot. Do you see any sort of start of any form of improvement, for example, in sort of non-operating cost growth? Or is it just really maybe tracking inflation and that's likely how you'll have to manage it? I mean, clearly you're doing a lot better than inflation in fee income.
You know, is there any change you feel, you know, some stabilization of the lira at lower levels and so on? Or should we just expect that, you know, you have to manage a high inflationary cost structure with no trajectory until the policy of the central bank starts to work a little bit better. That was the first question. And I guess, on the fee income again, will you start to get benefits from the higher policy rate environment in terms of that feeding through to fee income over the next couple of quarters as well? Thank you.
I'll be answering the second question. Yes, we'll be definitely benefiting from the lending activities on the fees and commissions. That is for sure. But as you very well know, we have some caps on the lending side or the fees that we can charge to our customers. But as the volumes and as the number of loans will go up, I think also this will be helping our fees and commissions. This is the first second question. First question about costs.
I may reply. Hi, Alan. For the cost, as you mentioned in the fourth quarter, we are going to be on a year-on-year basis. Our cost growth will be lower than 1 20 as our guidance. And the inflation pass-through, when you also look at the historically, after two, three years of high inflation periods, the pass-through is especially for the next year, it is much higher than any inflation, and this is what we are having. That's why, rather than looking at year-on-year growth, we try to look at cost on our average assets, which is still at 3% levels, and which is also the lowest. We still keep our efficiency in terms of cost part. As you also, we didn't change any strategy about the cost.
As you remember, we always keen to make expenditure on business growth, acquiring customers, making relevant IT investment and investing on digital. We will keep doing it. Meanwhile, running costs, we are trying to keep it the growth below inflation, and this strategy remains the same. For this inflation pass-through impact, I kindly ask you also look at the cost to asset ratio. This is how we are tracking it.
Yeah. Okay, super. Thank you.
Thank you.
Ladies and gentlemen, there are no further audio questions at this time. I will now pass the floor over to management for any webcast questions. Thank you.
Okay, we have some written questions. One is from Valentina, and she's thanking, congratulations, on the result. Thank you, V. She's asking about our AT1, the call option, what we think about it, economics or other factors that will draw the decision. What is the minimum capital buffer you target? If you decide to call the bond, how long it will usually take to receive the BRSA approval?
And, Valentina, as you know, the process is as follows: First, we will have our management decision about the call, which we have been sharing for a while. Our management decision is more close to call it. Then, we will go with the regulator. We will approach to the regulator, and we will get. We need to get their approval. And for your questions, within what would BRSA be asking for, we will see when we apply to them. But when we look at our capital ratios, it is more than 600 basis points buffer against regulatory limits. We are quite comfortable on those. Our minimum buffer, as you remember, we have always been sharing 200 basis points above regulatory limits.
This is still our minimum buffer against regulatory limits, and we will be keeping it. And for the BRSA, when we get any information about the process, as you know, before the maturity, call maturity, we will be making announcements.
One other question from Valentina. FX liquidity in dollar billion for two, short term and total. Our FX liquidity is about $10 billion as of 9 M. Short-term upcoming payments is $4 billion. This includes, as always, as you are managing the syndications also. The full is $8.9 billion. Our liquidity can cover 1.2 x of our all FX external debts. One last question, I think Gökhan Bey also very clearly answered, but what drove quarter-on-quarter fee growth is from John Finch. Beyond volume growth this quarter, there is all cost support on a quarter basis also. Definitely the growth, earnings growth is the lending growth is helping us, but I cannot distinguish one, just lending.
So it's payment systems, banc assurance, investment products, everything is supporting our fees, and it is very well diversified. I think we don't have any further questions. So, as the team, we are thanking you all for joining the call, and as always, if you have any questions, we are always here to answer your questions. Thank you. Thank you for joining.