Ladies and gentlemen, thank you for standing by. I'm Konstantino, your gorgeous call operator. Welcome and thank you for joining the Yapı Kredi Conference Call and Live Webcast that presents and discusses the Yapı Kredi nine Months 2024 Financial Results Conference Call and Live Webcast. All participants will be listening on remote, and the conference is being recorded. The presentation will be followed by a question-and-answer session. Should anyone need assistance during the conference call, you may circle in an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Mr. M. Kürşad Keteci, CSO, and Ms. Hilal Varol, Head of Investor Relations and Strategic Analysis. Mr. Keteci, you may now proceed.
Good afternoon, and thank you all for joining our Nine Months 2024 Earnings Call. Before going into details of our performance, I would like to share some information about the operating environment. Türkiye's gradual normalization process continues, and the preliminary positive results are being observed. On the other hand, the tight monetary policy stance remains in place due to uncertainty regarding the pace of dis inflation process. Although inflation readings indicate a decline in the headline, the slower moderation in the service-driven inflation, alongside with deterioration in pricing behavior and expectations, has delayed the disinflation process. We observed a target slowdown in domestic demand in the Q3, but yet to reach disinflationary target levels by the Central Bank.
This slowdown in domestic demand has supported the improvement in current account deficit to be more visible, which is expected to be around even less than 1% of the GDP for the full year. The budget deficit is improving from its peak in January, and it is now at 4.8% of GDP as of September, but lagging behind the monetary actions. All in all, while the central bank remains decisive in its tight monetary stance, the uncertainty in this inflation process postponed the possibility of an easing in 2024. Looking at the developments, there is a gradual improvement in Turkish loan deposit spread and net interest margin, although not at desired levels, due to ongoing tight monetary levels and the implementation of additional macroprudential measures. The delay in the easing process is not allowing the pickup in the loan as we had planned before.
But for Yapı Kredi, we are improving both our net interest margin and Turkish loan deposit spread, and we are the only bank in this quarter achieving this. As we have been expressing since the beginning of the year, 2024 is a transitionary year, and the process is underway. Also, 2025 will be impacted by this gradual normalization of the economy. Now I'm moving to the second page of our presentation. Our top line started to improve with a 32% quarterly increase in pre-provision profit. Our core revenue margin has widened by 73 basis points quarterly, with support from both net interest margin and fees part. While improving the top line, we have prudently set aside provisions, and our gross provisions increased a hefty 47% quarterly, bringing our total coverage to 3.7% levels.
Total coverage would be even higher at around 4% if we include the NPL sales in 2024. All in all, we posted a TRY 5 billion net profit in this quarter, corresponding to a 30% quarterly decline, when the cumulative net profit stood at TRY 22.4 billion. Our return on tangible equity is at 16.4% in this challenging operating environment, and return on asset is at 1.4%. Some important drivers of our performance I would like to comment on. As we previously mentioned, the worst was over for Yapı Kredi at the end of the second quarter. Since then, margins are gradually improving. Prolonged high-rate environment and pressures from macroprudential measures are waiting on this improvement to reach our desired levels for the margins. Nevertheless, through active loan repricing and controlled cost of Turkish lira deposits, we successfully widened the loan deposit spread by 236 basis points quarterly.
We had the highest contribution to our net interest margin from loan deposit spread among our peers announced so far. Overall, our cumulative net interest margin is at 31 basis points as of nine months. Net fee income went up by 5% quarterly and substantial 132% year on year. Operating cost increase in this quarter is at 13%, primarily driven by increase in HR cost due to salary increases. Thanks to our ongoing customer acquisition and strong penetration, our fees coverage over OpEx realized as high as 98%. Again, this is the highest level among our peers announced so far. This robust top line performance enabled us to set aside further provisions in a prudent manner, bringing our total coverage to 3.7%. Also, I would like to comment that in terms of net NPL flow, our net NPL flow is the lowest versus our peers again announced so far.
Moving to the third page, we have continued to maintain a solid set of fundamentals along with a well-positioned balance sheet, which enables us to be well equipped for the upcoming period. First of all, our strong customer base will further support our financial results. We have a base of 16.5 million customers, and more than 60% of those are efficient in terms of penetrated products. This showed itself in number of customer transactions, which realized five times higher in 2024 compared to 2020. Share of demand deposit reached to 44%, again the highest level among our peers, and this is mainly driven by sticky individual deposits showing further potential. We have a well-positioned balance sheet, which will differentiate us from the competition in the upcoming rate cut period. Almost 30% of our liabilities are at short-term non-deposit funding, which will reprice earlier than average deposit maturities.
Furthermore, thanks to excellence in our service model and strong customer base, our new Turkish lira loan pricing was around 400 basis points above the sector average, and also Turkish lira deposit rates were around 130 basis points lower throughout September. This is just for the new lending and new deposits. On the foreign currency side, we are seizing the opportunity to expand our portfolio in a controlled way. We have widespread small ticket lending to eligible companies. This will also continue to support our overall spread performance going forward with a healthy asset quality outlook. On capital front, we are comfortably above buffers, regulatory buffers, which stands around 272 basis points for Tier 1 as of nine months. This buffer further widened recently and now stands at around 300 basis points.
In terms of liquidity levels, our total loan deposit ratio is still significantly below 100% at 89%, and additionally, foreign currency LCR is about 330% levels and total is around 130% levels. Also, FX liquidity is around $9 billion, 2.2 times of our upcoming foreign currency payment in one year. To strengthen and diversify our funding base for the growth cycle, we have secured around $7 billion worth of external funding within the last 12 months. Last but definitely not least is our sound asset quality. Since 2018, after we set our new strategy, we have set aside around 100 billion, [TRY 10 billion provisions], bringing the total coverage to 3.7% levels. Thus, we have a very well-covered portfolio, providing us room for potential deterioration as well as provision reversals following the normalization with collections.
In a year in which we see normalization, mainly on unsecured consumer lending, we further increased our coverages in this portfolio, and Hilal will give some details about those. One of the main reasons that we are comfortable about our asset quality is the support from our salary customers. As of first nine months 2024, more than 60% of our general purpose lending to salary customers, and those salary customers' lifetime PDs are below 1% levels. Since the establishment of the bank, payment services, payment business is one of our strengths. Our well-diversified and managed credit card portfolio is visible in terms of MPL generation also, and our credit card MPL ratio is 30 basis points lower than the sector MPL, which has been the case for more than a decade. All in all, we are ready to seize all the upcoming opportunities and get ready for the future.
Now I'm leaving the floor to Hilal, and she will provide the details behind our numbers.
Thank you very much, Kürşad. Thank you all for joining our call today. I will start with page four. In Q3, we had a continued loan growth, and we are very selective in terms of lending, as you know, it's our strategy with ongoing repricing actions leading to the best quarterly Turkish lira loan yield evolution among peers. Our quarterly Turkish lira loans were flat, while the year-to-date increase stood at 28%. We also continued to seize the lucrative growth availability on the foreign currency side with sustained demand. Accordingly, our foreign currency loans increased 10% in dollar terms in the Q3, leading to a 30% year-to-date increase.
Altogether, although we see some downside risk to our full-year Turkish lira loan growth guidance, with the healthy growth in the foreign currency side, we maintain our total loan growth target at inflation, and we do not see any risk on that. As I have stated, we had a very active loan repricing throughout Q3, seeing the positive impact on the yield. Our new Turkish lira loan pricing was more than 400 basis points above the sector throughout September, as Kürşad mentioned, leading a significantly better loan yield evolution in the quarter versus our peers. We will continue our selective and lucrative lending strategy, which will continue to support our spreads further in the upcoming periods. On the funding side, our widespread customer base reaching to the edge of 16.5 million continues to support our deposit base and Turkish lira cost of funding.
Turkish lira deposits increased 2% quarterly and 28% year-to-date, reaching to TRY 790 billion. Our Turkish lira demand deposits base increased further 8% in the quarter, reaching to a very strong 54% year-to-date jump. More importantly, this performance is once again driven by individuals, and our Turkish lira demand deposits in nominal terms reached to TRY 204 billion, and we maintain the highest level among our peers, even in nominal terms. Going further up 2 percentage points above 2023 end, demand deposit share in total reached to 44% of total. Once again, this is the highest level among peers. Turkish lira side and eye-catching performance up by 4.4 percentage points to 26%, again the highest level. Foreign currency deposits, on the other hand, increased 9% quarter on quarter and 5% year-to-date, when the share of foreign currency demand deposits in total stood at a significant 70%.
All incorporated, thanks to widespread customer base, we continue to price the deposits below the sector. In September, Turkish lira time deposit rates were 130 basis points below the sector, and we will continue. We still continue to price below the sector average and will continue to support our Turkish lira cost of funding. Now looking at page six, in the quarter, thanks to the strong support from the core revenues and ongoing support from trading, total revenues increased 18%, reaching to TRY 29 billion, showing that the worst seems to be over for us in the second quarter, as we have mentioned, and we have already started to see the increase on our top line. Core revenue margin increased 70 basis points to 4.6% in the quarter.
Thanks to the highest 236 basis points quarterly widening in the Turkish lira loan deposit spread, net interest margin improved 81 basis points over second quarter. As I have stated, our active loan repricing and controlled deposits costs supported this performance. Also, from the visible contribution from our core business, meaning loan and deposits, our net interest margin contribution is by far the highest among peers. The support is as high as 1.8% in Q3 and 1.6% as of nine months. This will be a key to our performance in 2025 and beyond. In the last quarter of the year, we are seeing the continuation of this performance. That being said, as also Kürşad mentioned, the expected strong net interest margin improvement has been postponed with ongoing pressure from macroprudential measures and prolonged tightening of post-pandemic.
As a result, we now foresee a downside risk to our around 2% net interest margin guidance, thus revenue margin guidance of around 6% for the full year. On the next page, fees. Thanks to increasing customer penetration in terms of products to our customer base, reaching to 16.5 million, our fees increased 132% year-over-year and 5% quarter-on-quarter amidst the contained loan activity in the quarter. The top support was to our payment system business, which net fee income went up four times, making up 69% of our net fee base. That said, a strong support sustained on money transfer fees up by 84%. Bancassurance, investment products, and all is thanks to the increasing number of transactions and definitely coming from the support from our strong customer base. Our fees to average interest earning assets also improved to 3.8% as of 9/24.
This was 2.3% as of 9/24 last year. Once again, the ongoing customer penetration will continue to support our fee generation. With this performance, we're comfortable about our above 100% fee increase guidance for the full year. Moving to OpEx, now we are on page eight. In quarter, we have maintained our top-notch efficiency, best in class, as a proven track record. Our quarterly costs increased 14%, mainly through variable compensation, meaning HR costs. Annual increase contained at 77%, thanks to ongoing cost elimination efforts and perfectly in line with our full-year guidance. More important, we maintained our best-in-class efficiency KPIs. Fee coverage of OpEx at 98%, almost covering fully, and this is highest among peers. Cost-to-average assets also by far the lowest at 3.5%.
Asset quality in the quarter, as expected, MPL inflows were driven by unsecured consumer side, while collections from MPLs and recoveries from stage two continued, mainly through company side. Our MPL inflows stood at TRY 9.7 billion in the quarter, the lowest inflow we saw so far among the peers that announced. Net MPL inflows stood at TRY 7.9 billion in the quarter and TRY 15 billion as of 9/2, once again the lowest level among peers. Yes, collections decelerated a bit this quarter, but still very strong, bringing down the MPL inflows, as I mentioned. Looking at the segments, quarterly average MPL inflows from consumer and credit cards increased to TRY 4.2 billion versus TRY 1.2 billion in 2023.
Quarterly net MPL inflows from general purpose loans and credit cards were 2.6 times and 5.5 times higher than the average of last year, but it was very low last year, I have to mention it respectively. We are seeing the normalization. Still, our MPL ratio is more than 30 basis points better than the system in credit cards. Looking at the cost of risk level, 9/24 cost of risk is at 23 basis points with a strong 98 basis points support from specific collections, so collections from MPLs, and 163 basis points support from stage two recoveries. Despite the limited inflows in Q3 , we have prudently increased our provisioning, which I will go into the details of in the next page. With this performance, we are comfortable about our 75 basis points or lower cost of risk guidance for the full year.
So looking at the stages, as I mentioned, we are on page 10. Our total coverage further increased to 3.7% and adjusted for the MPL sales at 4%. And note that in the first nine months, we sold four billion Turkish lira MPLs with a price around 35. The increase in the coverage is also driven by our unsecured consumer loans and credit cards, where we have further increased our coverage level for the sake of conservatism. Regarding the increase in stage two portfolio, I know you will be asking about it. We wanted to share it with you. 80 basis points is through changing contract conditions, which are not past due. And adjusted for that, our portfolio share is even coming down, and this is thanks to recoveries, and we still were conservatively clustering our portfolios. I also wanted to note that.
These all providing us comfort for the normalization cycle. Moving to page 11, looking at our solvency, our very comfortable buffers widened further thanks to easing regulation on the retail side. Just to note, the higher risk rate on the company side is still there. Our CET1 ratio stood at 11.2%, and buffer versus the regulatory threshold stood at 318 basis points, and the most recent is 330. We started to see support from profits, and this will continue to come in further. This level is very comfortable and is significantly higher than our guided threshold of 200 basis points. Capital Adequacy Ratio is at 14.8% with 280 basis points buffer, and today we are even 300 basis points. I want to note once again, these all are without regulatory forbearance.
Looking at the sensitivities, the impact seems limited, and we are not seeing any risk on our capital. First 10% depreciation has 33 basis points impact on CT1 and a limited 10 basis points on capital equity ratio, and the break-even US to Turkish lira rate is 80, and please note that all the calculations are ceteris paribus. The impact of the first 100 basis points parallel shift in the Turkish lira yield curve is also limited at 15 basis points. Looking at the break-even level for the MPL ratio is as high as 7.5%. Just to note, we are at 3.1%, and this is signaling a significant margin for us, so all incorporated, we are very comfortable, so on page 12 is a summary of our guidance that I went through the presentation.
In a nutshell, we foresee a potential downside return on tangible equity for the year end 2024. As I have mentioned, this is mainly due to the prolonged tight monetary stance and further pressure from regulations on the net interest margin. Now I'm leaving the floor to Kürşad for closing remarks, and we will be having your questions afterwards. Thank you, Kürşad.
Thank you, Hilal. I would like to take this occasion to extend our thanks to our stakeholders who stand by us with trust and support, and to our dedicated employees who contributed to the achievement of our bank. On behalf of the whole team, we would like to thank you all for joining our call, and now we can take your questions. Ladies and gentlemen, at this time, we will begin the question and answer session.
Anyone who wishes to ask a question may press star followed by one on the telephone. If you wish to remove yourself from the question queue, then you may press star and two. Please use your handset when asking your question for better quality. Anyone who has a question may press star and one at this time. One moment for the first question, please. As a reminder, if you would like to ask a question, please press star and one on your telephone. There are no audio questions at this time. I will now pass the floor to management for any webcast questions. Thank you.
Okay, I will start with the written questions. So we have a question from Valentina Barclays. Can you please elaborate a bit more on your strategy this quarter that leads to loan deposit spread expansion, and how do you expect NIM to develop going into Q4 and 2025? What is the key difference of your strategy versus peers?
Thank you, Valentina. For net interest margin, our strategy is we would like to do as much as we can that we are able to control the margins, which is mainly loan deposits, and the other part of it is subject to rate cut cycle, and based on the rate cut cycle, everyone will benefit it, and for those rate cut cycles, again, our non-deposit funding proposition, we will be having some benefit before our peers due to earlier maturities.
But for the loan deposit spread, since this is the only area that we can control and make some actions, we tried to first lower our cost of deposits. And as I said throughout the presentation, our NIM deposit collection rate is around 130, which is lower than the sector. And this is one of the most important things for our margins. And second, with our franchise, we are able to increase our demand deposits, which today is 44% of our total deposit base. This is helping us, and we are doing a bit different than our peers. And also on the loan part, not only with the new lending, but also with the existing loans, we are able to reprice our loan book, and we have a much higher increase than our peers in terms of our loan book. This is the overall strategy.
What is going to happen in Q4, and especially in Q25? It is all now linked to rate cut cycle and macro developments. And with the rate cut cycle, we will be benefiting more. But for Q4, we are not expecting it to happen because rate cuts are not expected in this year, as you know. And also in 2025, macroprudential measures will stay for a while. Therefore, at least the first part of 2025, again, will be challenging. But as you see in our figures, we will be aiming to improve our margins in this space, and we will be increasing it, I believe, better than the market.
We have one audio question. Can we have it?
The first audio question comes from Mikhail Butkov with Goldman Sachs. Please go ahead.
Yes, good day. Thank you very much for the presentation. Just maybe to the tune of the previous question, I think you mentioned in the presentation that new loan pricing was over 400 basis points above the sector throughout September. So I'm just curious, how do you balance it against maybe the volumes growth, and then how do you see the competition, why it is possible? What helps you to price it significantly above the sector, like over 400 basis points in September? Thank you.
Thank you, Mikhail. For the loan new loans, as you know, the lending is capped by the regulatory limits. And on top of this cap, when you look at our Q3 financials, our Turkish lira loan growth is lower than previous quarters. And therefore, whatever we are lending is around 400, which is higher than the overall market new loan rate.
And as a result of it, this was we have been doing it for this quarter. And the aim behind is to optimize the net interest margin. And as a result of this higher lending rate, our loan growth is lower, which is something that we deliberately did.
Okay, okay. And do you expect this strategy to continue for a while, like to price yields higher at lower volumes or like for how long?
Yes, until the rate cut cycle starts and the compound cost of deposit rate gets lower. Yes, we will be targeting to price lending part a bit higher.
Okay, okay. That is very clear. Yeah, thank you very much. Thank you .
Once again, to register for a question, please press star and one on your telephone.
I will take a couple of written questions also. So one question from Muharrem Gürsever. Based on your current projections, when do you foresee ROTE to exit CPI,
And Muharrem, maybe to a little bit reply in another way, the ROE to exit the cost of equity, let me say, and for the cost of equity in a normalized level, we believe that next year, especially the second half of next year, it will be doable.
One question from Marina. I thank you for the call. A question on the NII. If we take the reported NII deduct swap cost and deduct the CPI link NII, ex-linkers still decline quarter on quarter in Turkey. How do we reconcile that with the positive trends in loan deposit spreads and loan repricing you mentioned earlier in the presentation?
Marina, the other asset classes, such as central bank reserve requirements, there is a very minimal remuneration on that, is impacting this decline. As well as the other funding sources, such as external borrowing, money market borrowing, etc. Loan deposit spread is just one part of the NIM. And even if you exclude CPI linkers, there are some other asset classes and other funding sources.
Oh, another question from Vinod. NPL inflow drivers, 2025 cost of risk and NPL estimates. I will continue.
Okay. NPL inflow drivers is mainly retail individuals. Also, as Hilal mentioned, we are seeing an increase in the NPL inflows for the retail part on secured lending and credit cards, but manageable for us in terms of cost of risk. And for 2025, as you know, we are just now preparing our budget. When it is available, when it is going to be public, we will be sharing our guidance about 2025.
Any stress expected in your foreign currency book, especially on export loans?
No, we are quite making a prudent underwriting on that, and also the ticket sizes are so small, and also the sectors and their FX revenue forecast, we are looking at it. Therefore, we don't expect any stress.
I will merge two questions. How do you see market conditions right now for potential issues of euro bonds? Do you have any appetite for opportunistic issues of seniors and/or capital instruments in the near term?
For the euro bond market, we have no more redemption in 2025. Therefore, there is nothing that is pushing us to make any issuance, but again, we will be opportunistic if we see any opportunity. Yes, we would like to do it, but we don't have any redemption this year.
I don't see any other questions.
There's one more. Okay. Ladies and gentlemen,
there are more. Okay, there's one more. Sorry, there's one more. Just came from Kemal Osman. Hi, thanks for the presentation. Your previous guidance regarding the exit margin will be over 4.5%, and strongest quarter will be for Q24, and main improvement will be in first half 2025 in terms of margin and EPS improvement next year. How do you see the path now? This is the first question.
And Kemal, the reason behind that rate cut, again, our rate cut expectations did not happen, and that's why when the rate cut cycle starts, you can think that the next quarter of the rate cut cycle, we will be having this NIM improvement, but also it's important that how the macroprudential measures will be eased in what kind of paths, but again, throughout the first half of the next year, it will be challenging. It will stay challenging.
We can discuss some better figures, much higher figures or peak in terms of margins in the second part of the year, maybe.
The second question is regarding the inflation accounting. Do you expect any change regarding the decision to apply in 2025?
We still don't have an official answer or response from the government bodies. Yes, in terms of regulation, it's going to start next year. But we believe we are hearing that it is under discussion again between the minister and the BRSA, Central Bank. And as far as we learn, I think you will be learning at the same time.
I'm not seeing any further. And also from the line as well. So I thank you all for joining. And so if you have any questions, myself and the whole IR team are always here to help. Thank you very much all for listening. Thank you. Bye-bye.
Thank you. Bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling. Have a pleasant evening.