Ladies and gentlemen, thank you for standing by. I am Mina, 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 first half, 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 Mrs. 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 first half results. Before going on, the performance of the bank, I'll share with you some information about the operating environment. Now, the election is behind us, and the gradual normalization in the macro environment started with the appointments of the new FinMin, Mehmet Şimşek, and the governor. In the past 2 monetary policy meetings that were held after the election, the central bank hiked the rates by 900 basis points to 17.5%. On top, we are witnessing a gradual and small release in terms of macro and also microprudential measures. From a budget deficit perspective, we foresee some actions to increase revenue through tax and also some lease hikes.
The global backdrop also started to support, as Fed likely to stop the rate hike cycle in the upcoming months, even next month. Inflation, on the other hand, is likely to remain high through the rest of the year. Also, there is a currency impact, tax increases, and also deterioration in, unfortunately, pricing behavior. With all the developments and actions taken so far, the pressure on Turkish lira spreads started to ease, and we are witnessing an impressive improvement from the bottom for in June going on, and we foresee this trend to continue in the rest of the year. Now, I'm paging page two on the presentation. Page two, we posted TRY 24.1 billion net profit, first off, corresponding to 26% year-on-year increase.
Normalized, with the linked income, our net profit increased 4% quarter-on-quarter. PPP, pre-provision profit, increased 12% quarter-on-quarter. Our ROTE is at, or close to, 37%, 36.8%, to be exact. Our ROA, return on asset, at 3.6%. I would also like to add our inflation accounting adjusted ROE is in line with our full year guidance at mid to low teens. Some important drivers of the performance. During the quarter, we witnessed an intensified competition in Turkish lira deposits, alongside with ongoing regulatory pressure on lending rates, caps on the lending rates or limitations. Thanks to our successful ALM management, we managed to have just 66 basis point contraction in Turkish lira loan deposit spread quarterly.
Moreover, supported by the foreign currency balance sheet, FX balance sheet, total loan to deposit spread improved to 5.4%, further supporting the bottom line. Our NIM is at 4.3% when the CPI reading for our linker portfolio is at 40%. Net fees and commissions more than doubled year-on-year and increased a hefty 28% quarter-on-quarter, thanks to strength in lending related and also money transfers fees, as well as strong contribution from all our subgroups. On top of a robust core revenue performance, our trading income was very supportive in the quarter, thanks to timely actions taken by our treasury team.
Ongoing strength in NPL collections continued with an additional TRY 1.4 billion recovery in the quarter, supporting cost of risk by 253 basis points in the first half. Our cumulative cost of risk, COR, stands at 33 basis points. I'm moving page 3. In the second quarter, our main focus here was further strengthening of the fundamentals via profitable Turkish lira lending and solidifying our sticky deposit base. In terms of liquidity level, our foreign currency LCR around 540% and total above 200% as we speak. Additionally, our LDR improved 5 percentage points in a single quarter at 76%, and TL LDR at 87%. This is 4 percentage point improvement also quarter-on-quarter.
Capital front, very solid as well. Tier 1 capital further improved in the quarter, thanks to consistently strong internal capital generation profit. Tier 1 ratio now stands at 15%. We have more than 540 basis points buffer versus regulatory limit for Tier 1. Liquidity, capital, and now asset quality. Total loan loss coverage stands at 5.4%. The slight decrease in total loan coverage is mainly due to fully covered 1.8 billion TL worth of NPL sales in the quarter. That's why the sale proceeds were around 30%, which also shows how much well-provisioned or prudent, prudentially, we are covering our NPL portfolio. Now I'm leaving the floor to Hilal. She will give you further details.
Thank you very much, Gökhan Erün Good afternoon, I thank you all for joining our call today. On page four, in the first half of the year, we had a profitable focus Turkish growing growth with ongoing deleveraging in foreign currency. Turkish lira loans increased 6% on a quarter-on-quarter basis, reaching to 16% year-to-date increase. Our Turkish lira loan yield, which was top of the range in the first quarter, widened further in the second quarter as a result of our lucrative growth, which will continue in the rest of the year. Foreign currency loan deleveraging continues in the quarter, coming down by 6% on a quarter-on-quarter basis and 7% year-to-date. Our bank-only foreign currency loans now stands at a limited $8 billion.
In line with our small ticket focus, retail loans share in total further increase in the quarter, reaching to 64%, and this is on an FX-adjusted term. On the funding side, we are on page 5. Our persistent focus on small tickets continues supporting our sticky deposit base. Showing another 13% quarterly increase, Turkish deposits went up by a 42% on a year-to-date basis, increasing 3 percentage points in a single quarter and 5 percentage points year-to-date. Retail deposit share in total reached to 73% in total. Our Turkish lira deposit share in total has been consistently above 60% since mid-February this year.
The ease in the regulation, alongside with our high levels, with the agile ALM management, these all will continue to provide us further room to manage cost of funding better than sector in the rest of the year. The share of demand deposits in total increased 63 basis points year-to-date, reaching to 42% in first half. Turkish lira demand deposits went up 13% year-to-date, and it's now at TRY 105 billion. Our foreign currency customer deposits in dollar terms came down by 8% year-to-date, while demand deposits were up by 8%. As a result, the share of demand deposits as foreign currency demand deposits in total increased to 71% in first half.
On Turkish individual deposits, we gained 96 basis points market share among private banks year-to-date, and equally important, individual demand deposits market share gain was 47. Moving to page 6. Thanks to our successful and agile asset and liability management, Turkish lira loan deposit spread came down a limited 6 basis points quarter-on-quarter, despite the intensified competition on deposits and pressure on lending rates due to the regulation. We managed to keep the Turkish lira spread post at 1.1%, and equally important, with support from foreign currency, total loan deposit spread widened 55 basis points on a quarterly basis to 5.4%. Accordingly, normalized for the linker income, our revenues increased 14% and reached to TRY 27.9 billion in second Q. Revenues to interest earning assets increased to 9%.
Cumulative revenues jumped 49% year-over-year to TRY 52 billion, and the strong performance, both in first half and second quarter, was driven by thanks to the core revenues, but also trading line, and this is thanks to success of our treasury department. Please note that we have revised down our CPI estimates for the valuation of the linkers to 40% from 45 in first quarter. In the quarter, normalized for the linker income, our net interest margin came down 152 basis points to 3.65% and 476 basis points over 2022 to 4.34%. In the quarter, core net interest margin support was 22 basis points, when the regulatory impacts, rates was a negative 25 basis points on the NIM.
As Gökhan Erün stressed out, our balance sheet is the best position for the normalization. Accordingly, we foresee our net interest margin to improve in the rest of the year, and we will meet our guidance of above or equal to 5% by the end of the year. Moving to the next page. We had a stellar fee performance, and it's once again across the board. Net fees more than doubled year-over-year, with an additional 28% quarterly increase. Fees to average interest earning assets improved further to 2.2% from 1.7% as of 2022. Money transfer fees up by 136%, with ongoing surge in number of transactions. Fee income to investment products, again, double. Bank insurance up 82% year-over-year.
Payment fees up 90%, along with lending related fees, increasing as much as 128%, so all across the board. Our best-in-class digital full service model and new customer acquisitions are also supporting our fee performance. Thanks to our strong fee performance so far, which we will continue through the year, we are revising up our fee increase guidance to above 90% from above 60%. Moving to OpEx, we are on page 8. Our year-over-year cost increase stood at 150% in first half 2023, mainly due to the inflation pass-through impact, earthquake-related costs, and our ongoing business growth and human capital investments. Main driver of increase is again business growth related costs, increasing 317% year-over-year.
Our HR cost increase was at 102%, when the running costs were up a controlled 76% year-over-year. Looking at the quarter, quarterly average increase versus 2022, OpEx went up by 7%. Our efficiency KPIs are best in class. Fees to OpEx further improved at 66%, and cost to average assets stable at 3%. We are revising our cost increase guidance to below 120% from below 100%, given the inflation pass-through impact and earthquake-related costs. Looking at our asset quality, we are on page nine. Our strong collection performance continues to support our cost of risk. Collections in the first half were as high as TRY 2.79 billion, and the positive support to the cost of risk is as much as 253 basis points.
In the quarter, we classified a big ticket file as NPL, which we had previously provisioned and budgeted. On consumer and credit cards, there is a limited increase in the inflows, but still very controlled and low at 1.5 billion Turkish lira as of first half 2023. SME net inflows continues to be negligible at 54 million Turkish lira. All incorporated, quarterly cost of risk stood at 30 basis points and on a cumulative basis at 33. The declining cost of risk from last year is mainly due to our provision book in general and precautionary provisions that we set aside in the previous years. In the quarter, we sold 1.8 billion Turkish lira worth of NPL, which was fully covered with a price around 30%, showing our conservative provisioning approach.
Adjusted for the NPL sale, we maintained our total loan coverage level at 5.7% in the quarter. With a very conservative approach, we are maintaining our full year cost of risk guidance at around 100 basis points levels, although we do not foresee any material increase in net inflows. Moving to page 9, this is showing our very comfortable and solvent solvency. Looking at the capital levels, we have 500 basis and above buffers versus the regulatory thresholds at all ratios. Both our Tier 1 and capital adequacy ratio improved quarter and quarter. The macro environment has 116 basis points negative impact on capital adequacy ratio, when the support from profit is as high as 311 basis points, which is significantly above the business growth impact of 124 basis points.
In terms of sensitivities, the impact, it is limited, as you can see. Every 10% depreciation has 37 basis impact on Tier 1 and 32 basis points impact on capital request ratio, and these all are set as TFRS calculations. The impact of 100 basis points parallelized in the Turkish lira yield curve is also limited at 11 basis points. Please note that both figures are not linear. On page 11, you can see a summary of our guidance division, which I tried to mention to the presentation. With a balance sheet very well equipped, we are now revising our return on tangible equity guidance to above 30% from high 20s, while maintaining inflation accounting ROTE guidance at mid to low teens level. I'm leaving the floor to Gökhan Bey for closing remarks, and then we will be taking your questions.
Gökhan Erün?
Thank you, Hilal. I'd like to take this occasion to extend my thanks as always to our stakeholders who stand by us with trust and support, and also to our dedicated employees who contributed to the achievements of our bank. On behalf of the team, I would 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.
2 quick questions from my side, please. First, on the NIM, would be helpful if you could talk about when you expect normalization on an overall level. I'm thinking here, when do you expect NIM to drop? Whether you think you have already, you know, somewhere in July, August, or, you know, would you expect some more pressure? If you could talk about the drivers a little bit, how you see the trends into the third quarter so far. I would imagine that the CN loan to deposit spread still continues to contract, whereas you've got a good momentum on the FX side. You know, your comments on that front will be very helpful on the NIM trajectory.
Secondly, I mean, on the cost of risk side, as you alluded to, you have significant buffers on the NPL side. Your credit losses have been well contained. Your guidance remains unchanged, which seems, you know, mainly reflecting prudence. However, if you kind of think about cost of risk or credit losses into the next 6-12 months, how do you see that, you know, trending? You know, are you seeing any early signs of the, you know, rebound in rates, the inflation trajectory starting to hurt asset quality at this moment? You know, these comments will be very helpful.
Okay. Hi, Walid. First about the net interest margin. I think we have seen the worst in July in terms of net interest margin, it bottomed up. There are good signs that normalization efforts is helping the balance sheet. One side is the risk premium of Turkey is dropping, and because of this, also normalization efforts on the central bank, they are increasing the rates. There is a convergence of the central bank reference rate and the deposit rate, as we expect normally. In the past, we have seen because of the regulatory pressure, as the central bank rate was standing at 8.5.
Because of the regulatory pressure, basically, the regulations, we were heavily affected, and there has been, as we said, and fierce competition in the Turkish lira deposit side to match the ratios, Turkish lira deposit ratios. That we did not buy those low interest rates long term securities, Turkish lira securities or less amount compared to our competitors. In that sense, I think normalization, although baby steps, but is continuing, which means that in terms of Turkish lira cost of deposit, it's going down. I might I must say, this is the good thing.
On the other hand, as the central bank is hiking the rates, which means that the caps on the Turkish lira loans are also increasing, which gives us an upside to balance our loan to deposit spreads. Of course, this will take some time, but it's going on the right direction. This is the first thing. On the foreign currency net interest margin side, at least for the foreign currency balance sheet, we do not see any sign of the cost of deposit going up. We have enough liquidity in Turkey, even as we speak, and that's why the time deposit that we have in terms of amount, is very much limited.
The demand deposit or the FX demand deposit is highly appreciated, definitely, and helping our balance sheet in terms of net interest margin in general. This is the good news for you. Second is the asset quality, the NPL inflow, the cost of risk. Yes, we are, as we also mentioned during the presentation, cost of risk. In terms of cost of risk, we are trying to be very conservative, very prudent. Also, the recent sale of the NPL portfolio showed us that how much we've been prudent as we got 30% out of this fully provisioned portfolio. This is a good sign.
In terms of future, whether we are seeing any NPL inflow, even in the last one or two weeks, there is no something that alerts us or keeps us awake during the night. There will be a slowdown, just to keep in mind, and this is also I think this view is also reflected in our guidance of 100 basis points, less than or around 100 basis points, asset quality cost of risk. There will be a slowdown in the economy. This is what we are seeing. Coupled with that, there might be an increase, net NPL inflow. We do not expect any huge inflows, no big ticket items coming in.
Actually, on the opposite, we might be seeing some of the recoveries, as the asset prices go up. That's why, especially the ones that are well collateralized, we might be seeing some reversals from our provisions. This is how we are seeing. To be on the safe side, we are still keeping on the asset quality, total cost of risk around 100 basis point.
Thank you much for your answers. Very helpful on both points. Thank you.
Thank you.
The next question comes from the line of Rojan Cheb Constantine with JP Morgan. Please go ahead.
Yes, hello. Thanks a lot for taking my questions and for the presentation. I had two questions that I wanted to ask. The first one, you mentioned earlier in the call that you observed that Turkish treasury deposit rates are now falling. Could you please comment why is this happening? Do you observe that there has been some easing in this regulation, and so competition for lira deposits is not as acute as it has been, so why do we see this trend? At a high level, could you please maybe share the view, so what Turkish lira deposit rates do you observe with the markets at the moment for FX-protected accounts and for the term lira deposits outside of the scheme?
Where do you see this trending in the coming periods? That's the first question. The second question, from the date and from some qualitative comments in the past, I understand that there has been some evidence of FX cash leaving the banking system before the elections, but this trend has reversed. Conversely, after elections, banks have been seeing some inflows of FX cash from retail. Have you observed the same trends on your side, even moderate? Could you please rationalize why has this been happening before and after elections? Thanks a lot.
Thank you, Constantine. First, actually, you asked two questions, one A, one B. I think, first, the TL deposit cost of funding evening. Yes, it is evening. In terms of regulation, there has been some improvement in favor of the banks. For example, the 60% ratio in terms of the central bank was pushing us towards this 60% Turkish lira deposit balance sheet, on the balance sheet, and 40% dollar deposits, and even more pushing it up to 70% levels. That is changed, as I mentioned, small steps, but down to from 60% to 57%. This helps the TL deposit competition to ease a little bit. Those are the regulations that are helping us.
Lots of technical details, but, you know, conversion ratios, et cetera, in the past, that was pushing the Turkish lira deposits, even touching close to 50% in during the second quarter. Although we did not quote those levels, but in terms of markets, we have seen that, we heard those quotations. Now it is evening. This is the first A answer for you. Second, I think one B is where we are at the moment, pricing the Turkish lira deposit below 30%. Below 30%, which means this is the maximum that we are quoting. Which is, you know, at the maximum, at the marginal level, from 40%+ levels, now below 30% at the moment....
This is happening, and this is helping definitely in terms of net interest margin. This has to be, actually, if you ask us, this is the normal way. If you buy something at 10 TRY, and we should be able to sell it at least, 13, 14 TRY, rather than buying it 10 TRY and selling it at 7 TRY. Banking should not be a loss-making business anyhow. This is the first question, answer to your first question. Second question was the FX cash reversal, cash outflow from the system. We have seen that before the election, Constantine, for some for a few weeks. We might say it accelerated in the last 1 or 2 weeks, but it is totally reversed.
Every day, as we were talking actually a few minutes ago, I was looking also the daily reports from the bank. Still it continues. The reversal, the cash inflow is continuing to come in, to put in the system. There are several reasons. One is definitely the tourism sector. At the moment, we are seeing it, and we are feeling a strong tourism sector income. This also includes the cash portion from the tourists as well. This was the first thing, most probably the second thing from the local retail customers after the election, as the risks are over, we have more clarity, and more rational system is continuing.
I think this is also helping to those cash, FX cash coming to the system. I think it's a sign of the strength or it shows that how much the locals are believing in the strong Turkish banking system in general.
Okay, thanks a lot for these questions. For the answers, that's extremely useful and what I needed to know. Just a quick clarification on the second question. Before the elections, you mentioned you used to observe some outflows of FX cash. What contributed to that? What factors contributed to those moderate outflows before elections?
Let me tell me, I think I answered that already. A few weeks we have seen that, after the election, it reversed.
Okay. Okay, thank you.
Thank you. Thank you.
The next question comes from the line of Mehmet Sevim with JP Morgan. Please go ahead.
Good evening. Thanks very much for the presentation. I have just two follow-up questions, please. One, on the trading income, which was very strong this quarter. I understand FX volatility played a visible role in that, but were there any parts that are more sustainable? Please, could you give us your thoughts on how much of the trading income would be sustainable, at least for the next few quarters, and where you'd see this lying? My second question is on capital, more specifically on RWA density, which seems to have come down quite significantly this quarter. You do mention in the presentation some optimization measures, but could you please walk us through the drivers of that again, and guide us on how to think about RWA growth going forward? Thank you.
Thank you for two good questions, I think, Mehmet. One is the trading income. I think, those levels, I'm not sure whether we'll be seeing it because the most important part was coming, as you well mentioned, is the coming from the volatility, FX volatility. With the customer flow, we enjoyed this strong FX income, trading income. The volatility came down nowadays, so that's why we should not be expecting high FX income as much as this FX trading income in the coming years. Of course, the flow is there.
In terms of customer numbers, if you look at the last 4, 5 years, what we have achieved, we almost by the end of the year, hopefully, will be almost doubling our number of customers in the last 4, 5 years. Which means that the inflow is there already, and we are enjoying it. But the higher margins out of this FX volatility, I do not expect to see further. But on the other hand, definitely it's not only limited to FX inflow, but also some trading activity on the securities as well.
So, as the market will be more balanced and rational, with the words of the Finance Minister, Mehmet Şimşek , more if the markets get more rational, which means that there will be more opportunity for our treasury teams, so that they will be making more money, so the liquidity will be coming back. If you look at the liquidity on the Turkish lira securities at the moment, that market, which is very limited, that will be increasing. Hopefully, we will be seeing better appetite from the foreign investors into Turkish lira fixed income. If this is the case, definitely, I'm sure that we'll be making more money out of the Turkish lira fixed income side as well.
This is the first part. We have high hopes for that. That the macro-prudential measures will be smoothened or evened evening on the macro-prudential measures back to rational days. This is the first thing. Second thing, the capital. Yes, especially through the end of the second quarter, you know, as I mentioned, you know, borrowing or, you know, cost of time deposit was for the marginal months above 40%. Borrowing at 40% or more, and lending because of the regulations less than 14%, 15%, having a marginal of 25%-30%, did not make any sense to us. Even with the flow, whatever you do with the cross-sell, et cetera, you cannot compensate it.
That's why our decision was not to lose definitely the our franchise, the customer franchise, but to be very careful what we were doing or in terms of lending. That's why the RWA, as my team mentioned during the presentation, we've been very careful and it has been a deleveraging process for Yapı Kredi during the second quarter, especially May and June. This has been the case. Now we have more clarity, more visibility, and although small steps, but we are seeing that at least on the lending side, we have better rates. In terms of deposit funding, we have better rates. At least we do not make any losses, and we have hopes that with the cross sell, et cetera, we can make money out of that.
Here, we can leverage again our franchise, our fields, our customer base, and we can grow. This was the answer for the RWA deleveraging process for the second quarter.
Great. Thanks very much, Gökhan Erün. 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 written questions.
Hello, we have a couple of written questions. One is from Thomas: Net interest margin, what will be the drivers of the net interest margin in the second half with full year guidance maintained?
Hi, Thomas. Let me combine 2 of your question. First, how we managed to keep net interest margin high in second quarter. We were able to achieve the regulatory limits earlier in the first quarter, which helped us to start the quarter with the confidence. Together with that, especially at the end of the quarter, we were able to manage our cost of deposits. Meanwhile, we were selectively lending, and it was helping us to have the highest Turkish lira lending rate in the market. As you may also see in the first quarter, we were the highest in terms of TL loan yield. I believe in the second quarter we will be so.
Although we decreased the CPI linkers assumption to 40%, we were able to keep the NIM high. Even we had kept the CPI linkers at 45, our NIM would be something around 4.9%. We will be managing carefully also during second half for the NIM. At this period, also the market will be supporting us. We are seeing a decrease in the cost of deposits, and also we are able to gradually lend with the higher rate than before. On the top of it, if there is going to be some positive things coming from CPI linkers, we believe we will be managing our net interest margin and achieving our guidance.
I see also another question from you for this big ticket lending to NPL flow. We have in total close to TRY 9 billion in the quarter, of which TRY 5 billion is from company loans, and one of them is a big ticket. Big ticket is not TRY 9 billion, it is within the 5 billion TL, a company NPL flow. This one is from a construction sector, which we had already provided the provision, and there is no PNL, but a minor impact.
Also we have one. Can you comment on your ALM strategy?
I answered.
Sorry. From Furkan Zengin, we have a couple of questions. What are your expectations regarding the next half of the year about the economic conditions, mainly for GDP and credit development?
... And you can maybe.
Sure. There will be a slowdown in the economy, but still will be close to 4% growth. We'll be seeing that. I think, also keeping in mind that we have a local election in next year, March. But in terms of loan growth, I think, also looking at the macro-prudential measures and what the regulator will be asking, there will be loan growth, yes, but also limited. It should not be seeing in the, in the, in the good old days that we were, Turkey was growing much better numbers. Which means that there will be a limited growth also in terms of lending. Also, regulators are, I think, in favor of this. A normalization period, which is very much understandable.
What else is the question?
Do you consider a major shift in your investment portfolio?
No, we don't have any expectation of a shift in our investment portfolio. For your third question, Furkan, the CPI assumption, possible revision, let's follow the inflation reading in coming months, and if we have any, we will be announcing it for sure.
We have, one from Erhan Karaca: Would it be wise to assume the deposit rate in FX protected deposit accounts to go down after reserve requirement change in FX protected deposit accounts from 15 from almost 0?
Yeah, the answer is yes. I think this is one of the motivation to from the regulators to us. just to decrease also the amount of the FX-protected deposits and converting to Turkish lira long term, higher than 3 months, long term deposits. This is the motivation behind. How much will be affected? Let's see.
What is the ratio of regulatory bonds?
It is somewhere around, close to 4%, between 3.5%-4% levels.
We have one from Ole. Do you expect to come to the Eurobond market this year or next year?
For Eurobond markets, as Yapı Kredi, we always would like to have a market pricing for our bonds. Currently, the terms in the market are not favorable for us, and we are not in a rush because our FX LCR is somewhere close to 600%, and we are able to pay two times our upcoming maturing bonds. Therefore, in these conditions, no, but if we see any availability window, yes, we would like to.
Could you please provide capital sensitivity to dollar more? What is the lira dollar rate as this excess capital would be wiped out? I tried to tell it in the presentation, every 10% depreciation has 37 basis points impact on Tier 1, and 32 basis points on capital with ratio, and the break-even level is 75. It's around 75. It's significant-
Dollar tier.
Yes, dollar tier. It's very strong. There's one question: Is it possible to record the presentation and publish it in your website? After the call, during the night, we are sharing the recording in our website, so you can find it's there. If you have any questions, you can ask us, and we can also share the link with you. Thank you. I thank everyone to joining the call. If you have any further questions, we will be very happy to answer. Thank you.
Thank you.