Ladies and gentlemen, thank you for standing by. I'm Poppy, your conference call operator. Welcome, and thank you for joining the Yapı Kredi conference call and live webcast to present and discuss the Yapı Kredi 2023 financial results and 2024 guidance live webcast. At this time, I would like to turn the conference over to Mr. Gökhan Erün, CEO, Mr. Kürşat Keteci, CFO, and Ms. Hilal Varol, Head of Investor Relations and Strategic Analysis. Mr. Erün, you may now proceed.
Good afternoon, and thank you all for joining our 2023 earnings and 2024 guidance call. Before going into our strong performance, I'd like to share some information about our operating environment. Turkey is in the gradual normalization process through action, both in monetary and also on the fiscal side. Last week, Central Bank hiked the rates by an additional 250 basis points to 45%, reaching to an ex-ante positive real rate, signaling to remain on hold until the improvement in the inflation. Alongside with the monetary policy, the tightening sustains with some macro and also macro-prudential measures in order to shift the expenditure-driven growth to a value-added, production-driven growth. Tightening is helping to reduce current account balance and also the budget deficit.
2023 full year budget deficit stood at 5.4% of the GDP and excluding the earthquake, 1.7%. Inflation, on the other hand, remains elevated and likely to continue to stay around these levels. After seeing the tightening and base impacts, it is expected to decrease through the second half of the year. Now, I'm moving to page two of our presentation. We posted TRY 68 billion net profits last year. We kept our leadership in terms of ROE versus tiers for the fourth consecutive year. ROE is at 45% and ROA at 4.5%. I'd like also to add that our inflation accounting adjusted ROE is at 14.5%, which is slightly better than our mid-low teens guidance.
Some important drivers of the performance are as follows: In the last quarter of the year, when Turkish lira marginal spreads went back to positive, we started to gain market share at all TL loan sub-segments. Alongside with the lending growth, thanks to our successful ALM capabilities and strong customer franchise, we managed to widen our TL loan to time deposit spread by 55 basis points. Our 2023 net interest margin is at 5.4%, beating our full year guidance of equal to 5% or above. Highest level among our peers so far. Net fee income went up by another 26% quarter-over-quarter, and up by a hefty 142% year-on-year, above our guidance of 90% increase. This is thanks to our strength in payment systems, lending-related activities, and money transfer fees.
So operating costs increase last year also contained at 106%, below our guidance of 120% increase. Running costs increase is limited to seventy-four percent, thanks to our increasing number of customers and transaction of fees coverage of OpEx realized at 78%. NPL collections in the quarter continued to be very strong at 2.2 billion TL, thanks to our ongoing efforts. Total recoveries in the year reached 7.8 billion TL, supporting our cost of risk by 71 basis points. As a result, our cumulative cost of risk stands at 14 basis points as of last year, significantly better than our 100 basis point guidance for the year. I'm moving page 3. In the third quarter, we continued our solid fundamentals and to well-kept normalization.
In terms of our liquidity levels, foreign currency LCR 554 and total 160. Additional, our LDR is significantly below 100 percent at 82 percent. Capital fronts, Tier 1 capital is supported by consistent, strong internal capital generation despite the macro backdrop. Tier 1 ratio now stands at 15.3 percent, and we have buffers of 575 basis points against the regulatory limit. In terms of asset quality improvement, total loan loss coverage stands at 4.4 percent, and we maintained highest level amongst our peers and NPL coverage at 148 percent. Slight decrease in total loan coverage is mainly due to our TL driven loan growth, fully covered NPL sale of TRY 1.4 billion, and also collections both on stage two and stage three.
Lastly, I'd like to mention our leverage. Increasing inflation levels and diminishing loan to deposit spreads led us to lower our leverage during 2022 and also last year. Our leverage used to be close to 12%, before 2022, and we ended the leverage at 10.4x. Thanks to our capital buffers as well as our more than 15 million customers, we'd like to increase again our leverage in line with the macro normalization. Now I'm leaving the floor to Hilal. She'll provide further details about our strong numbers.
Thank you very much, Gökhan Bey, and I thank you all for joining our call today. We are on page four. As Gökhan Bey mentioned, we have the best-in-class profitability while maintaining top-notch fundamentals. Yapı Kredi, our demand deposit share in total is the highest among peers at 42.1%. We have the highest level of foreign currency LCR, which is above 500%. Regarding prudence in asset quality, our total loan coverage is also above the peer group at a conservative 4.4%. Our superior ALM strategies, timely actions, ongoing focus on lucrative small takers, supported the net interest margin, and we have ended the year with the highest level among peers at 5.4%. Fee coverage of OpEx continues to be at the top, at 78.2%.
All in all, for the fourth consecutive year, we marked the highest tangible ROE among peers at 45.1%. Now diving to the details to our strong performance. We are on page five. In 2023, our controlled and lucrative lending strategy sustained throughout the year and continues to support our loan yields. In the last quarter of the year, we had 19% increase in Turkish lira loans and annual growth stood at 57%. This is above our guidance, but below the inflation. As a result, we have maintained our top-in-class Turkish lira loan yield in the last quarter of the year. Thus, on a cumulative basis for the full year 2023, we also have the highest level of Turkish lira loan yield among our peers that announced so far.
Foreign currency loans were more or less stable in the quarter, but declining 9% year-over-year. On a bank-only basis, we believe that we are close to the bottom level, with bank only touching to $7.6 billion, and we have started to witness some pickup in the demand from eligible companies. In line with our lucrative small ticket-focused strategy, retail loans share in total reached to 68% as of 2023 on an FX-adjusted term. On the funding side, we are on page six. We had another quarter of eye-catching demand deposit growth, thanks to our intact customer base, reaching above 50 million and counting. This is also supporting our Turkish lira spreads. Turkish lira deposits increased 10% quarter-on-quarter, while demand deposits increase on the Turkish lira side was at 7%.
Annual Turkish lira deposit increase reached to 64%. Turkish lira demand deposits increased to that 42. Our Turkish lira demand deposit market share in the quarter among five banks increased 69 basis points. Very importantly, once again, driven by individual Turkish lira demand deposits, where we increased our market share by an additional 54 basis points quarter-on-quarter, reaching to 112 basis points year-over-year market share gain to 2023, and this is once again marking our strength. As a result, the share of demand deposits in total stood at 42% in 2023, highest level among peers announced so far. The share of Turkish lira demand deposits in Turkish lira deposits stood at 21%.
Our foreign currency customer deposits in dollar terms came down by 8% year-over-year, while demand deposits were up by 6%. As a result, the share of foreign currency demand deposits in total increased 10 percentage points to 70% in 2023. Now moving to page 7. Once again, marking our agile and timely pioneer ALM strategies, revenues increased 33% year-over-year to TRY 135 billion. Our revenues have been supported by sustainable core revenue generation that went up by 20% year-over-year, reaching to TRY 112 billion. As a result, our core revenue margin stood at 8.2% as of year-end. This is the highest level among peers announced so far again, and this is once again showing our strength in sustainable core revenue generation.
On top, treasury activities continue to support the revenues, thanks to proactive management. In the quarter, our lending Turkish lira spread widens, and this is thanks to controlled increasing cost of deposits, ongoing repricing in Turkish lira loans, as well as the support from demand deposits. In the quarter, wider foreign currency spread also support our net interest margin generation. All in all, in 2023, our net interest margin materialized at 5.4% above our guidance at 5% or above level. And adding the credit card fees on top, the ratio would be at a strong 6.9%. On the next page, we had a superior fee performance once again and always all across the board.
Net fees increased an additional 26% quarter-over-quarter, bringing the annual growth to 142%, which is significantly better than our above 90% increase guidance for the year. Our fees to average asset, average interest earning assets improved further to 2.8% from 1.7% as of 2022. Money transfer fees up by 132%, with ongoing surge in number of transactions. Fee income through investment products more than doubled, banc assurance up 89%. Payment system fees surged 174% year-over-year, alongside with lending-related fees increasing as much as 129%. Once again, the ongoing customer acquisition, along with the increase in the penetration, supported and will continue to support our fee generation. Moving to the OpEx, we are page nine.
Our year-over-year cost increase contains at 106%, which is better than our full year guidance below 120%. The increase in the year was mainly due to the inflation factoring impact, earthquake-related costs, and our ongoing business growth and human capital investments. Main driver of the increase is again, business growth-related costs, increasing 161% year-over-year, when the running costs were contained at 74% year-over-year. Our efficiency KPIs are best in class. Fees to OpEx further improved at 78% and cost to average assets at 3.2%. Looking at the asset quality, we are on page 10. Our robust collection performance continues to support our cost of risk.
Quarterly collections stood at a very high level of TRY 2.2 billion, when the inflows were at TRY 3.3 billion, and the net NPL inflows were just at TRY 1.1 billion. Total collections in the year reached to TRY 7.8 billion, going up 81% year-over-year and supporting the cost of risk by 70 basis points. Consumer and credit card NPL inflows, we are seeing some normalization there, but still very limited at TRY 4.5 billion as of 2023. SME net inflow, this is continued to be negligible, as you can see, very limited at TRY 256 million.
As a result, our NPL ratio further improved to 3%, and once again thanks to limited inflows, strong collections, and some fully covered NPL sales. Despite TRY 1.4 billion fully covered NPL sales in the quarter, we have slightly increased the NPL coverage to 70.5%. Note that the sale proceeds were at a very strong 39% for the sale, also showing our conservative provisioning approach. All in incorporated, our cost of risk stood at a limited 14 basis points as of 2023, significantly better than our around 100 basis points guidance for the year. Once again, this is thanks to the strength in the collection performance. Cost of risk excluding the collection stood at 84 basis points, also showing our ongoing prudence in provisioning.
Looking at the total coverage ratio of 4.4%, we have maintained the highest level among peers announced so far. Now moving to page 11, our very comfortable solvency. Our CET1 ratio stood at 13.8%, a hefty 573 basis points buffer versus the regulatory threshold. Tier 1 ratio stood at 15.3% with a 575 basis points buffer. Please note that we have already redeemed our $650 million worth of AT1 on January 16, 2024, and this was the first call date. The impact on Tier 1 ratio is around 100 basis points, and even adjusted for this redemption, our buffer is at a healthy 425 basis points.
On the other hand, our capital adequacy ratio stood at 16.9% with a more than 490 basis points buffer. The negative impact arising from the redemption of AT1 on capital adequacy ratio will be fully offset by the recent and very successful Tier 2 issuance worth $650 million at a cost of 9.25%, and the demand on the deal was above 3.7 times. The macro environment had 220 basis points negative impact on capital adequacy ratio, when the support from the profit period is as high as 667 basis points, significantly above the business growth impact of 381 basis points. In terms of sensitivity, the impact is limited.
First, 10% depreciation has 42 basis points impact on CET1, and 25 basis points impact on capital adequacy ratio. The impact of the first 100 basis points parallel in the Turkish yield curve is also limited at 20 basis points. And I once again want to mention that these figures are not linear. On page 12 you can see the summary of our strong 2023 results versus the guidance, which I have mentioned through the presentation. But in a nutshell, Turkish lira loan growth was above the guidance, but it remains below inflation. Net interest margin above our guidance. Fee growth, significantly better than the guidance. Cost increase below the guidance and cost of risk, significantly better, thanks to robust collection performance. All in all, operators, our 14.1% ROTE is better than our guidance.
Very importantly, inflation accounting ROE is slightly better than our guidance at 14.5%. Now I'm leaving the floor to Gökhan Bey for 2024 guidance and closing three months. Gökhan Bey?
Thank you, Hilal. So 2024, this year will be a transition year. We expect to have more growth and stability during the second half of the year. As a result of this recovery, next year, 2025, will be full year of normalized levels, hopefully. The 2024 guidance for consolidated financials are: in terms of volumes, we target to a real Turkish lira lending growth following year of slowdown. Foreign currency loans, on the other hand, are already at minimum levels, so we started already to grow there too, for the FX loan, with the FX loan demand. So we target low single digits increase for this year. In terms of core revenues, we expect NIM to be above 4.5%. And well, the margins will be under pressure for the first half, but second half, it will recover.
In the past two years, our performance in the fees had been very strong. Diversification efforts, as Hilal mentioned earlier, number of transactions, small tickets, payment systems, definitely supported the performance. And this year, we target to have an 80% growth in terms of fees, with the executional strategies. In terms of costs, we'd like to keep investing on business growth for sure, without any sacrifice on the talent side. And also, on the other hand, we'll continue to keep the running costs under control and sustain cost eliminations in this area. We already started to work on that. On asset quality side, we foresee the cost of risk to be around 100 basis points higher than last year, with some normalization in unsecured retail lending NPL inflows.
So overall, as a result of this performance, inflation accounting adjusted ROE is targeted to have some improvement for this year. I'd like to take this occasion to extend my thanks 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 the whole team, I'd like to thank you all for joining our call, and now we can take your questions.
The first question comes from the line of Mehmet Sevim with JP Morgan. Please go ahead.
Good afternoon. Thanks very much for the presentation. Gökhan Bey, I have one question on your loan growth guidance, given this differs slightly from what we've heard from your peers so far. Seems like you're increasing your appetite to lend this year, and also you mentioned you want to increase your leverage now. Can I ask why you've chosen to do this now, at this point in the cycle, given the monetary policy is still very tight and things are still readjusting? Any color on your thought process here, I would really appreciate.
And secondly also, where do you expect this growth to come from? Which sectors do you see a strong pipeline? How is demand evolving? Color on this would be helpful as well. And maybe lastly, while your leverage increases, how do you see the trajectory of your capital ratio in accordance with that? Thank you.
Thank you for the questions, Mehmet. So loan growth, as I mentioned, during the presentation, last year was not the year to grow, definitely, especially the second and third quarter, because with the negative interest margins, it was better to slow down, also to decrease the leverage and to get as much as possible lowest hit from the negative interest rate margins. So but what we are seeing is this year it will be a normalization year, and already we are seeing, starting from the fourth quarter, last quarter, that at least on the lending side, the rates are favorable compared to the cost of deposit side. In that sense, we are growing.
We already started to grow on each segments, on all, all the segments. So loan growth, well, for the Turkish lira loan growth, still the demand is not too high. It is limited. Yes, we know. And also, there are some thresholds that the central bank is imposing by, by you know, 2%, 2.5%, and 3% for the auto loans, for the commercial loans, et cetera. But still, we would like to hit those levels and also even beat those levels. Of course, it comes with a penalty of buying some securities. But looking at the levels of the securities, what we are seeing in the rate, so this might be also favorable for the bank.
So we very much believe in Turkey and what the Minister Mehmet Şimşek started with the new policies. We are very much behind his policies. That's why we'd like to grow in that sense. So this is the Turkish lira loan growth. And coupled with that, the foreign currency loan growth, you know, we are coming from the levels of $22 billion of foreign currency loans. It was back to 2018, and we have been deleveraging those FX loan portfolio since then. But I think it is the right time today, especially with the to support the exporters or the companies, the clients that have FX income. So we can lend them.
And as the CDS levels of Turkey is also going down, I think it makes sense to lend them with favorable rates. So in terms of when we are talking about during the presentation, the FX LCR is also very much compared to our peers, also high on our bank. So we are very well positioned in terms of liquidity, capital, and also on the client base to grow. That's why what I mean is this year is the year for Yapı Kredi to grow again, hopefully better than the sector. So this is in general and through all the segments, not only the commercial ones, corporate ones, but throughout the segments, including the retail and payment side as well.
And the last question was, I think, about the capital buffers. I think, as we did, when we were in London, actually, the first week of January, it was, right, I think on the eighth or ninth of January, when we were there, we saw the appetite. When we attended the conference, we saw the appetite there, and we decided to take the opportunity to issue the Tier 2. I think it went very well. We are extremely happy with the results. And also to pay back the AT1, we got the Tier 2. So in terms of capital adequacy ratio, we have important buffers still to go.
And in that sense, I do not have any doubts about the capital buffers. And on top of this, the internal capital generation will definitely continue. So with this positive loan-to-deposit margins.
Gürkan Bey, if I may, add something for the third question, Mehmet. Also just keep in mind that we are the only bank in Turkey applying IRB in terms of RWA. With the help of the normalization in macro, there will be a much more free space, than before for comparing the normalization. There's also something beneficial for us.
That's great. Thank you very much, Gökhan Bey. Thank you, Kürşad.
Thank you.
The next question comes from the line of David Taranto with Bank of America Merrill Lynch. Please go ahead.
Hi, good afternoon. Thanks for taking my questions. Could you elaborate a bit on your macro assumptions behind the guidance? We would be particularly interested on GDP growth, inflation, and policy rate expectations on your side. And the second question is on the book value. The book value growth in the period was a tad lower than the quarterly net income. Is it because of unrealized mark-to-market loss on securities, or was there any other drivers behind this? And finally, as for the CPI income outlook, what CPI assumptions are you using in valuations, and do you provide NII or ROE as to changes in the CPI? Thank you.
Hi, David, this is Kürşat. For your question, macro expectations for 2024, and we have an inflation assumption around 40% for the full year, and within GDP of 3%-3.5% growth. For the policy rate, our assumption is this on second half, together with the positive signals of decreasing inflation, we can start seeing decrease on the policy rate, and we are not expecting too much rate cut, by the way. It will be still, in terms of example, it will be positive real rates. Therefore, let's say five percentage levels, 5%-7.5% percentage levels decrease. And for your second question, book value decrease, as you very well guessed, it is due to other comprehensive income booked under equity.
That's the reason that you don't see the same growth from the equity compared to PNL. CPI assumption is 40%. We are applying for the full year, and sensitivity is every 1% is impacting 10 basis points in terms of net interest margin. I would say in terms of growth, gross revenue, it is something around TRY 900 million.
It increased to 1.5.
1.5 billion TRY. Sorry, my fault.
Used to be in the past $900 million, but now it's $1.5 billion.
Thank you.
The next question comes from the line of Konstantin Rozants ev with JP Morgan. Please go ahead.
Yes, thank you very much for this presentation and for taking my questions. Apologies, I may have missed some details, so apologies if some of that has been answered. But so I had three questions that I wanted to ask. The first one is on the lending growth. So as I'm aware, there are these monthly caps on lending growth in different segments of TRY lending. So I just wanted to understand how the bank manages growth in these segments, which are affected by these caps relative to these limits.
My sense is that there has been some market practice that, you know, banks have, they've got some released securities from prior regulations, and they are allocating the securities to grow a bit in excess of these limits. So I just wanted to ask, in addition, do you buy additional securities, additional, you know, fixed rate government bonds to allow for higher growth, as well? The second question is about the protected deposit scheme. So my sense is that there has been some recent, you know, market practice where, where banks have been extending tenors of these FX-protected deposits, to allegedly to reduce their reserve requirements. So could I please ask, has this activity been prominent across the, you know, dominant parts of the, this protected deposit base?
Does this introduce risks with respect to how quickly the scheme is being unwound? Because the maturities in the scheme could be more sparse, and it could take longer for the stock to mature. The third question is about, do you have some cost of risk or cost of credit expectations for 2025? For 2024, the guidance is quite benign. And for 2025, I'm curious as well. Thank you.
Hi, Constantine. Thank you for the questions. I think the first question was answered, but very shortly. Lending growth, yes, there are caps. Penalty, if you exceed that, there is a penalty of buying securities. In terms of lending growth, we'd like to grow also from time to time, meeting those caps. And we are not hesitant to buy Turkish lira securities with the market levels at least. Especially, we very much believe, also believing in the new economy team headed by Mehmet Şimşek. For the longer maturities, I think we- there's a value to buy those securities from time to time, even without the penalty. So in that sense, we are very comfortable about lending growth.
For the protected deposit scheme, in the beginning last quarter and also beginning of this year, there has been a wind down definitely on the protected deposit scheme to Turkish lira more going to Turkish lira. But I think there are limits to that, too. So I think those winding down will be slowing down as well. So from now on we'll be seeing either the customers will be going to Turkish lira deposits with the existing levels of interest rates or staying with the FX protected deposit scheme.
We believe that seeing the FX levels at the moment and the slowdown of the devaluation, I don't think the customers will be converting their Turkish liras or their FX supported schemes to foreign currency. The last question was for the 2025 cost of risk. It's too early to mention, or let's see the 2024. As I mentioned to you, it will be a transition year. So let's see what goes on, especially the second half of the year. Then we can have a conversation for 2025, but earliest in the second half of the year of this year.
Understood. Thank you very much. Just a quick clarification on this protected deposit scheme. So have you seen a prominent activity of the type where, you know, where banks were extending tenors in this FX protected deposits? So to reduce-
Yes.
And so does it introduce risk with the pace at which this deposit scheme is being unwound? Because maturities weren't happening too quickly, too often, and they're gonna be distributed, you know, further on in time. And does it reduce risk in terms of how quickly the scheme can be unwound?
Yeah, Constantine. So we are seeing that the maturities are extending, so from three months to six months. This is that I can say from our portfolio. Almost half of the FX protected scheme is now moving to six months. So it shows also first that they also the customers are very much believing in the product. And also there's an angle that we it is beneficial also for us with less reserve requirements for the bank. And the extra commission that we are paying on top of the FX protected scheme is higher for the six months compared to three months.
Okay. Thank you, thank you so much. Thank you for the color. Thank you.
Ladies and gentlemen, at this time, there are no further audio questions, and I would like to pass the floor over to Ms. Hilal Varol to proceed with any written questions.
Thank you. So I will read a couple of questions. Some are answered, so looking at the net interest margin evolution, how it will stay for full year, five quarters, first half, second half? And the second one, are you expecting a possible decline in the NIM on a year-over-year basis, year coming?
So for the NIM, the year started very, very difficult, very hard, I must tell. First quarter, it will be the lowest, I think, in terms of net interest margin. But then we'll be seeing a recovery, especially on the third quarter, with the cost of deposits coming down, and also a rebalancing of our balance sheet as well. So looking at our Turkish lira duration gap, around 90 days. So which means that in three months' time, we should be able to recover it. With, of course, the condition that the rate hikes are over at the moment, and we have seen the rise, 45% rate from the central bank.
In that sense, most of the third quarter and more favorable fourth quarter will be the best for this year. But first quarter will be the most difficult one. That I feel for sure. Any question?
We have some other written questions that they will answer.
One is: What is the nominal ROE guidance for 2024, and what will be the most important hurdle in attaining this target?
Thank you, Panos, for the question. Our nominal ROE guidance, since it is not a guidance, I can only say, what it means 14.5% inflation, more than 14.5% inflation accounting ROE. It means nominally something around in thirties. The most important hurdle, we would say, is the inflation. We should see a decreasing inflation in the second half of the year. It will be crucial. It is the most important hurdle, internally, locally, also from the international markets. If there is something happening, it may impact negatively also our macro.
One last question we have from Ulay. Do you plan to come back to the Eurobond market this year with a senior issue?
... Yeah, I think we have two more reductions this year. One in June, and the other one is in October, I think. So we'll be opportunistic, definitely. With the existing CDS levels, I think we have to see better levels of the CDS, and now around 300-330. So the global should be helping us. So in that sense, if and when we see Fed cutting interest rates, I think it will be favorable for us to be on the market again. Because in terms of liquidity, I think we did our job.
So with the trade loans, with the syndications, $800 million last year and $650 million this year, I think we did our job, and we'll be opportunistic for the remaining of the year.
We don't have any other questions. This one, Waleed: Do you expect any major differences in effective tax rates for 2024 versus the marginal tax rates?
Well, the effective tax rates, especially in 2023, there have been lots of changes, also with partial implication of inflation accounting. And currently, no to your question, but if there is any regulatory changes happening, then that, that could be. But as of now, we don't have an expectation to have a lower effective tax rate.
I think we have a follow-up from David Toronto. Can we connect David?
Hi, can you hear me?
Yes.
Yeah. Hi. Sorry, I have one follow-up question. I know it's a bit early to ask this right now, but given the quarterly progression of NIM and earnings, it seems that the exit ROE from 2024 will be quite substantially higher than the full year figure. So all else being equal, with the visibility you have so far, would it be fair to expect a better ROE in 2025?
Yes, definitely. Definitely. I think, for the investors in general or for the analyst, I think 2025 is the year, that, the banking will be much, much, much, better profits, than 2024 and definitely also 2023. That's why 2024 is a little bit mixed. So that's why transitory. So it, it will be a transition year.
Okay. Thank you.
Thank you.
So, thank you all. We don't have any further questions. If you, if you have any further questions, you can always, contact with our investor relations, team and myself. Thank you all for joining the call.
Thank you.
Thank you.