Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, thank you for joining the Yapı Kredi conference call and live webcast to present and discuss the Yapı Kredi first quarter 2023 financial results and live webcast. At this time, I would like to turn the conference over to Mr. Gökhan Erün, CEO, Mr. Kürşat Keteci, CS-CFO, and Ms. Hilal Varol, Head of Investor Relations and Strategic Analysis. Mr. Gökhan Erün, you may now proceed.
Thank you. Good afternoon, and thank you all for joining our first quarter earnings call. At the beginning of February, our country faced one of the worst natural disasters in its history. Earthquake hit southeast part of country and impacted 11 cities. Unfortunately, there has been above 50,000 casualties and more than also 100,000 injured people. We at Yapi Kredi lost, unfortunately, 10 colleagues. We are deeply saddened by this tragic loss of life and devastating injuries. I believe that our country is strong enough to get over this. During this period, we have been carrying out our work in the field uninterruptedly to heal our wounds. I also would like to add that after securing our employees, we started to serve our customers in these 11 cities with our alternative distribution channels in an uninterrupted manner.
Let me give couple of information about the operating environment as well. In terms of economic activity, we have seen a slowdown due to earthquake. Apart from this, we see limited activity on the ground compared to last year. Central Bank is continuing to use macroprudential measures to sustain the tightening. TL-driven economic model is putting pressure on Turkish lira rates, especially in terms of funding costs. The situation puts pressure on our spreads, unfortunately. Lastly, public spending is increasing due to earthquake-related costs and as well as costs incurred from early pension law. Election is an important event ahead of us. After the election, these imbalances are expected to be minimized in order to keep the market dynamics. Now I'm moving to page 2 of our presentation. We posted TRY 12.6 billion net profits corresponding 74% year-on-year increase.
Our ROE is at 39.7%, close to 40%, and we kept our leadership among our peers enough so far in a challenging operating environment. Our ROA is at 4.2% in the quarter. I would also like to add our inflation accounting adjusted ROE is at mid-to-low teens, in line with our full year guidance. Some important drivers of the performance are despite the intensified competition in Turkish lira deposits and regulatory pressures on lending rates, we maintained our TL loan to deposits spread at positive territory. We also controlled 197 base point increase in TL cost of deposit and 115 base point limited decline in the lending yields on a quarterly basis. Our TL loan to deposit spread stood at 177 base point, thanks to our ongoing agile and strong ALM strategies.
Alongside with lower contribution from CPI-linked securities, our NIM stands at 5.6%, in line with our full year guidance, which is above 5%. Net fees and commissions more than doubled year-over-year and increased 13% quarter-over-quarter, thanks to strength in lending related and also money transfer fees, as well as strong contribution from our payment systems business. Our NPL collection increased an additional 31% in the quarter to TRY 1.5 billion, with limited NPL inflows and our net NPL inflow were negative at TRY 144 million. With a conservative approach always, our cost of risk was at 38 basis points. Our operating expenses increased 168 year-over-year, mainly due to inflation pass-through impact. First quarter, we had around TRY 150 million earthquake-related costs.
Excluding the earthquake costs, year-on-year growth would be still above 149%. From another point of view, compared to 2020-2022 quarterly average, the cost increase was limited to 57%. This year, we kept our focus on increasing TL funding through small tickets. Benefiting from strong customer acquisition, we continued to gain market share for TL individual deposits. That which is there, of course, sticky deposit base. Looking at our fundamentals, we are very well equipped to navigate through any uncertainty that may arise in the future, in the near future. In terms of liquidity, our foreign currency LCR is around 650%. Total LCR around 190% as we speak. Additionally, our loan-to-deposit rate further improved down to 81%.
Equally important, TL LDR improved 13 percentage points to 91%. Our FX LCR liquidity is around 2.5 times of our foreign currency dues over 1 year period. Very strong liquidity balance sheet management. On capital front, our Tier 1 capital remains very strong at 14.8% post dividend distribution and flat impact of operational risk. Thanks to consistently strong internal capital generation as well. We have 525 base points buffer versus regulatory limits for Tier 1 ratio. Above 500 base point or 5%. In terms of asset quality perspective, in the quarter we have further increased our NPL coverage to 177%. The slight decrease in total loan coverage is mainly due to the increase of Stage 1 lending. Lending was strong in the first quarter.
Yet still a very strong level of 5.7%, the highest among peers so far. Our over provisioned portfolio is affirmed by the recent sale of the NPL, which took place very recently at 31% for individual portfolio and 21% for our SMEs. Which means that there will be a profit return out of this NPL sale. Now I'm leaving the floor to Hilal Varol. She'll give details behind our strong numbers.
Thank you very much, Gökhan Erün. Good afternoon and thank you all for joining our call this Friday afternoon. Once again, we are deeply saddened by the earthquake and our hearts are still at the region. I will start with page 3. Our small ticket concentrated Turkish lira lending continues to support the profitable growth. Our Turkish lira loan increase was 9% quarter-on-quarter. Looking at the drivers against small tickets, consumer loans went up by 14% and this was driven by General Purpose Loans. Also I have to mention that auto loans continued to increase a strong 23% in the quarter. Foreign currency loan deleveraging continued, as we mentioned at the year-end, coming down by 1% quarterly and at 25% year-over-year. Our bank loans now stand at a limited $8.7 billion.
All in all, retail loans share in total, once again, I have to mention this includes SMEs or small tickets, reached to 60% as of 1Q. This is on an FX-adjusted term. Which is now, which was 49% as of 2021. There is a huge increase there. On the funding side, I'm now on page 4. Our strong customer franchise further strengthened and continues to support the core funding source deposits. Showing another significant 26% quarterly increase, Turkish lira deposits went up by a 163% year-over-year. Increasing 2 percentage points in a single quarter, retail deposit share in total reached to 70%.
Turkish lira demand deposits increased a solid 11% in the quarter to TRY 103 billion. The share in total Turkish lira is 22%. Our FX customer deposits in dollar terms came down by 7% quarter-on-quarter, showing the Turkish lira conversion, while demand deposits were up by 9%. As a result, the share of demand deposits in total increased to a record high level of 71% in 1st quarter. All incorporated share of demand deposits in total now stands at 41%. Looking at the market share that we gained on small tickets. On Turkish lira individual deposits, we gained a significant market share among private banks in a single quarter, 165 basis points. Now our market share reached to 16.5%.
Equally important, Turkish lira demand deposit market share gain was 81 basis points, and this is again in a single quarter, bringing up our market share to 20.7%. On Turkish individual-term deposits, our market share is 15.7 with 186 basis points increase in a quarter. I also want to mention that Turkish lira deposit share in total on both individuals and companies is comfortably above 60% since mid-February. Now, moving to page five. We managed to have, as Gökhan also mentioned, a positive Turkish lira loan deposit spread in the quarter. It is 1.8 percentage points despite the intensified competition over Turkish lira deposits and pressure on Turkish lira lending rates.
Turkish lira deposit costs increased by 197 basis points on a quarterly basis, and this is coming from a very low base of 4Q. When Turkish lira loan yields came down, it controlled 115 basis points. This decline is the lowest level we have seen so far among our private peers announced. Accordingly, our revenues reached to TRY 25.6 billion in 1Q, with revenues to interest earning assets reaching to 9.2%. This level was 7.3% in 1Q last year. The strong performance was driven by core revenues and I have to mention timely actions of our treasury department supporting the trading line.
In the quarter, normalized for the link or income, our net interest margin came down 402 basis points quarter-on-quarter and 347 basis points over 2022. It now stands at 5.63%, which is in line with our full year guidance of above 5% net interest margin. Now we are seeing, as we mentioned in our last presentation, a normalization. With tighter loan deposit spreads, core NIM had 232 basis points negative impact. We valued our CPI link was at 45% with inflation expectation in the quarter. Recall that this was 85.5% in 2022. This has lowered the contribution of securities by 192 basis points.
Since last year, non-deposit funding costs are coming down. Accordingly, it had a positive impact of 48 basis points on our net interest margin evolution. Moving to next page. We had stellar fee performance, and it is driven by across the board. I cannot mention a single item again. Net fees more than doubled year-over-year with a 13% quarterly increase. Fees to average interest earning assets improved further to 2.1%. Money transfer fees more than doubled. This is a number of transactions that are going up for us. Fee income to investment products doubled. Bank insurance up 79%. Payment system fees, 98%, almost doubled, we can say. Along with lending related fees, also more than doubling.
We are always investing to digital solutions, with the intention of providing and sustaining our best-in-class service model. New customer acquisition is also supporting our fee performance, and I believe it's visible. Looking at the OpEx, our annual cost increased to that 168% in the quarter. As Gökhan Erün mentioned, this is mainly due to the inflation pass-through impact and includes earthquake related costs which reached to TRY 650 million in the quarter. I believe that also it is more fair to compare the first quarter's figure with 2022 quarterly average, and which is showing an increase of 57%. We are comfortable that our annual increase will come close to our guidance of below 100% throughout the year.
Main driver of the increase is again, business growth related costs, increasing 359% year-over-year. Our HR cost increase was at 98%. I want to note that the salary adjustment impact will be seen in the second quarter as we are adjusting salaries twice a year and the first one is finalized in April. Our efficiency KPIs. We are proud to say we are best in class compared with our peers announced so far. Cost income at 29%, the lowest. Fees to OpEx at 63%, it is the highest. Cost to average assets at 3%, this is the lowest level. Moving to asset quality, we are on page 8. We had record high collections in the quarter at TRY 1.5 billion.
NPL inflows, however, continues to be very limited at TRY 1.4 billion. According to net NPL inflows were negative at TRY 144 million. As a result, our NPL ratio came down to 3.2%. On consumer and credit cards, quarterly additions were lower than the quarterly averages that we had last year at TRY 679 million. SME net inflows continues to be negligible. Net inflows on corporate and commercial loans were negative at TRY 830 million thanks to strong recoveries. Quarterly cost of risk stood at 38 basis points and 20 basis points of which is related with precaution for reasons for earthquake. The declining cost of this is mainly due to our overprovision book in general and our precautionary provisions that we set aside in the previous years.
Our cost office level was close to 150 basis points last year. Looking at the components, support from collections were as high as 337 basis points. This is as a note and is not included in our next cost office calculation. The currency impact is 27 basis points, and it is fully hedged. We want to mention our conservative provisioning levels. We are on page 9. Our total coverage came down marginally to 5.7%. However, the decrease is purely due to the change in composition internal stages. Stage 1 balance, the share increased in total, and since it is relatively low provisioned portfolio in nature, the total coverage dilutes.
However, we have maintained a high level of coverage at all stages, and we still have the highest total coverage among our peers and ourselves. Stage 1 loans share increased to 84%, still with a very strong 0.9% coverage. The share of Stage 2 loans came down to 12.8%, while the coverage maintained at 19.2%. Also, I want to mention that we have further increased the coverage levels at all stages for SME segments. Please also recall that as Gökhan Erün mentioned, I want to state that again, we have announced very recently our NPL sale and the level of income generated from NPL sale also affirms our conservative approach in provisioning. Moving to page 10. Looking at all capital levels, we have 450% above buffers versus regulatory thresholds at all ratios.
We have some declines as a result of 15% dividend payouts we had in the quarter, 8 basis points impact. One such operational risk impact, 111 basis points. That being said, the contribution from internal capital generation continues. We had 159 basis points support from profits, while business growth impact was at 99 basis points. In terms of sensitivities, the impact is very limited for us. Every 10% depreciation has 34 basis points impact on Tier 1 and 29 basis points on capital ratio.
The impact of 100 basis points parallel shift in the Turkish lira yield curve is limited at 6 basis points on capital levels. I also want to mention that these figures, both figures, are not linear. On page 11, we showed our 2020 guidance. At the moment, we are maintaining our full year guidance. We mentioned them through the presentation. Now I'm leaving the floor to Gökhan Erün, for closing remarks. We will be taking your questions. Gökhan Erün
Thank you, Gökhan Erün, I'd like to take this occasion to extend my thanks to our stakeholders who stand by us with trust and support as always, 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. Now we can take your questions.
The first question is from the line of Waleed Mohsin with Goldman Sachs. Please go ahead.
Thank you much. Good evening. Thank you for the presentation and your detailed comments. Three quick questions from my side. Number one, on your excellent performance on credit quality, if you could provide a little bit more detail on which sectors are driving recoveries. It's quite significant. If we remove the impact of the earthquake, your net credit loss was only 18 basis points. I mean, the recoveries are at record levels, so any commentary around that will be extremely helpful. That's my first question. Second, I wanted to get your thoughts on a little bit more on how you will be managing the balance sheet going forward. Obviously, post-election period could be a little bit more volatile in terms of FX and interest rates.
I wanted to get a better sense of how you would manage your securities portfolio, in particular going forward. My third and final question, I mean, you've kindly provided, your sensitivity to rates and FX, which seems to be quite limited compared to your peer group. Any other numbers that you can share, perha Mps in terms of any stress tests that you've done with regards to different macro scenarios would be very helpful. These are my three questions. Thank you very much.
Thank you, Waleed Mohsin , for the question. I'll take the second question, balance sheet, post-election, and then I'll leave the floor to Kusnat and Hilal to answer the other questions. For the post-election side, I think, as you mentioned, also from the sensitivity side and stress test that we ran through, We prepared the balance sheets very well, as much as possible, for the post-election. Obviously, there will be if this trend cannot continue as it is, so macroprudential measures, et cetera, that has to change at a point. For example, let me tell you that for example, on the deposit side, cost of TL deposit is increasing.
Which means that we are already, which is not dependent on the Central Bank funding, which we saw in the past. Which means that we are seeing the impact of the what you call post-election developments. Already we are seeing that on our balance sheet, which means that at TL interest rate hike on the funding side is happening already. This is something that we were expecting a little bit later on our balance sheet, but which is happening at the moment. Which means that on the balance sheet we are seeing that impact already, most of the part.
The second is on the lending side, we've been very careful on the lending side with very much short durations, so that the duration gap remains around 3 months or even lower for the TL side or also similar to the foreign currency side. The duration gap is very limited. That's why we have a good potential to lend in the upcoming period for the lucrative TL lending side. The balance sheet is very much prepared for that. If you look at the liquidity, as I mentioned, liquidity is very strong, so we can grow whenever we would like to. But what we did, we got prepared ourselves for the post-election.
We did not grow the balance sheet too much, so we have enough capital to grow. We have enough provisions or even very prudently, more than enough provisions on the balance sheet, so that we are well prepared for the post-election period of time. Securities and liquidity I mentioned. You also asked about the securities. Yes, there has been periods and it is still we are going through that period that if we are here to lend to our customers, and we are doing that this way or another, we cannot let the franchise go away. We still acquiring new customers and we are growing. This is the value of the bank, and this is not a one-time thing. We'll be growing further.
That's why, we are lending. Because of the macroprudential measures of the Central Bank, we are also buying the securities with relatively lower interest rates. What we did so far, I think till now, we were the first bank to reach the 60% conversion. That's why, the security amount that we bought is limited to around TRY 30 billion or so on the balance sheet. That we managed that to keep it low compared to our peers, I think.
Of course, this had an impact on the net interest margin, obviously, because the impact we are seeing, instead of spreading it out for 5 years or 10 years with low interest rate securities, this we bought less securities with low interest rate. Also, we got the hit on our P&L on our NIM with the higher TL cost of funding. This is more or less the first quarter story in a nutshell. Securities-wise, also the good thing that the treasury did very well there, I must tell you that during February and March, the treasury did very well not to buy securities with 10% levels or so.
Instead, either we bought some securities in advance with higher interest rates. This was the, of course, agile balance sheet management of Yapı Kredi, and we are very much proud of managing it. This is the answer for the second question, but also in general, how we see post-election side as well. I leave the floor to Kürşat Keteci and Hilal to answer the other questions.
Thank you, Gökhan Bey. Waleed Mohsin thanks for your questions. Regarding the recoveries on non-performing loans, we could say it is a diversified collection performance. If we go in deep, what we are seeing in terms of sectors, we are seeing recoveries from tourism and as well as energy sector. They are not big tickets, they are just totaling around 10%-15% of total recoveries, specific to these sectors. I would like to mention here more in terms of recoveries, and it is coming exactly due to the lending policies and procedures. The lending policies are so strong that, and we are prudently classifying our customers to Stage 2 and 3. If we have the collections, we are recovering more than the others.
Another affirmation of it, we just sale, sell the NPLs for our retail and SME portfolio. For the individual portfolio, we sold them at 31% and the SMEs at 21% levels, which is also justifying our prudent lending policies. Regarding the stress test scenarios, yes, we are having some stress test scenarios, and let me try to give some details. First of all, from the Turkish lira duration gap, our average duration of Turkish lira loans is just five months. When we look at the total Turkish lira duration to something around three months levels. Therefore, in case of a rate hike risk, we will be first benefiting from our lending book, because, there are some caps for the lending where the deposit rates are already high.
It will be beneficiary. For the capital, what we have the sensitivity in 100 basis points parallel shifts, as Hilal mentioned, the 6 basis points. 10% of the currency devaluation is something around 35 basis points levels. For the liquidity, we already have strong liquidity in FX LCR close to 700% and total LDR is 180%. We don't see any big important change on these ratios in case of sensitivities or a stress test. For the asset quality, maybe it is better to mention, if we look at the NPL ratio, which may trigger the capital ratios, it is something close to 15% of NPL ratio with the current coverage levels. Therefore, our balance sheets are quite strong against some possible shock scenarios.
Thank you much, Gokhan
. Thank you much, Gokhane Lou. Very helpful. Thank you.
Thank you.
The next question is from the line of Mehmet Sevim with J.P. Morgan. Please go ahead.
Good evening. Thanks very much for the presentation. Maybe as a way of follow-up, could you please talk about the individual drivers of your relatively strong spread performance compared to your peers in particular? I understand both loan yields and funding costs seem to evolve relatively better in this environment where you really can't do much given the high amount of regulation. What is it that you do that is leading to this relatively better performance in this environment? Secondly, clearly we're in an environment of many uncertainties, and there are multiple scenarios that we're looking at. But given the very strong performance in the first quarter of almost 40% ROCE, I'm wondering if your high 20s ROCE guide still applies, or is that a now more conservative guidance? If so, what would lead to that ROCE from here?
What would need to happen that we go down to the 28% levels from here? Thanks very much.
Thank you, Mehmet. The first question I think is we grow with the retail side. Recall that there was no cap or limitation during that period of the Central Bank. Whenever we see that opportunity, we lend on the retail side and with better margins than our peers. That is for sure. We know the market rates. Without having a cost of risk, thanks to our risk management efforts, we are lending with better rates, especially on the GPL side. We've been very strong at that level. Once we had some limitations thresholds from the Central Bank, we slowed down.
We said, "If we lend, then we lend with higher rates or we slow down." Instead of getting into a market share competition, we try to avoid the buying the purchase of the TL securities. That's why the margins are better. For the guidance side, whether the 40% for having 40% ROE in the first quarter and whether the guidance will be a little bit conservative for the year end. There are lots of uncertainties in front of us. Some of them it is happening already at the moment. Once we see, for example, April margins, while it's not going in the right direction, the TL cost of funding is going up.
The competition is obviously, is moving, and this was the last day of the competition for this is 60%, also 5% conversion of the Turkish lira deposit. I think the pressure that we have seen on that front. That's why, especially for the second quarter and third quarter, we have some doubts for the performance. Later on, it might also recover. Any comment? Kürşad?
Yes, Gökhan Bey. I would like to add one thing on top. Mehmet, as you know besides the nominal ROATE, we are publishing, our guidance is also saying in terms of inflation accounting basis, we are targeting to meet the low teens. And as of first quarter results, we are at exactly this level. And that's why we are also keeping our current guidance levels, and we try to reach our guidance throughout the year.
That's very helpful and very clear. Thank you so much.
Thank you.
Ladies and gentlemen, there are no further audio questions at this time. I will now turn the conference over to management for any webcast written questions. Thank you.
Hello, we have a couple of questions from the west, from Valentina Goryunova. Good afternoon. Can you please share the FX liquidity amounts as of 1Q, short-term FX debt and total? Our liquidity is around TRY 8.5 billion. Short term, that is $3.5 billion, sorry, not Turkish lira, obviously. Short term, that's $3.5 billion and $1.3 billion of which is syndication. Total FX external debt is lower than our liquidity, $7.5 billion. One question from Isaac Zane. I missed the CPI linker estimate. Is it 35? No, it's 45. We use 45 for the quarter. We have a couple of questions from Pinar . Would you think that Turkish deposit spread will continue to shrink in the second quarter?
Pinar Cinar, actually, we are doing our best to maintain it. Hopefully, we will continue with this level of positive spreads, at least on total, as we are very selective in lending. As you know, with our small tickets contribution, we are controlling our deposits rate. What is the amount of regulation imposed loans on our, your balance sheet? It is around 3% of our total assets, I can say. Any concerns on FX liquidity given current trends? As I mentioned, we have the FX liquidity covering more than our FX debt. Accordingly, we don't have any problems about liquidity. As Gökhan Bey also mentioned during the call, liquidity coverage ratio is higher than 600%. Very, very high level. No concern about FX liquidity.
From Valentina, how do you see your NIM trajectory from here? Kürşat, would you like to take this or, would you like me to answer?
Sure, Valentina. Regarding the NIM trajectory, it totally depends on how the macro scenario will evolve. If we see rates to increase, especially for the normalization on the loan parts, we will be benefiting where the deposit rates are still high. If this is going to be the base scenario, we would like to perform in line with our NIM trajectory of this quarter. As you know, we already targeted the guidance above 5% of net interest margin, and we will be keeping our net interest margin in line with the guidance. This is our target.
We don't have any question on the west left. I, as the whole team, we thank you all for participating in our call. If you have any further questions, you can reach our IR team and myself during the night also. Thank you very much for spending the Friday afternoon with us.