Ladies and gentlemen, thank you for standing by. I am Mina, your call operator. Welcome and thank you for joining the Yapi Kredi conference call and live webcast to present and discuss the Yapi Kredi first quarter 2025 announcement results conference call and live webcast. At this time, I would like to turn the conference over to Mr. Kürşad Keteci, CSO, and Mrs. Hilal Varol, Head of Investor Relations and Strategic Analysis. Mr. Keteci, you may now proceed.
Good afternoon and thank you all for joining our first quarter 2025 earnings call. Starting with the operating environment, first quarter evolution was in line with expectations until mid-March. Rates were coming down, inflation was improving as planned. Volatility in the market started after mid-March. Since then, we are observing pressure on inflation and accordingly interest rates. As a response to this volatility, the central bank changed its monetary stance. After three consecutive cuts by 250 basis points since the beginning of the year, the central bank first increased rates to the high end of the corridor. Recently, in the April meeting, the central bank also hiked the overnight rate to 46% and the high end of the corridor to 49%, and currently funding the market at 49%.
Latest inflation print as of March is 38%, and in April and May, monthly inflation reading is going to be higher given the recent volatility in currency, a hike in energy prices, and harsh frost impacting agricultural production. That being said, with the ongoing tight monetary policy and slowdown in economic activity, we expect the improvement in headline inflation trajectory to sustain through the rest of the year. All incorporated, we foresee the tight monetary stance to sustain at least until July. Depending on the monthly inflation reading in May and onwards, the central bank might have room to restart the disrupted rate cut cycle. In this perspective, macro developments in the first quarter of the year were very supportive in terms of TL loan deposit spreads and evolution of net interest margin, especially for us, Yapi Kredi.
Now, looking at our strong first quarter performance, I am moving to the second page of our presentation. In the first quarter of the year, we posted TRY 11.4 billion net profit and went up a strong 73% quarter on quarter. Our return on tangible equity and return on asset reached 23.4% and 1.7% respectively. Our performance in the quarter was stronger than our expectations and thus the given guidance. The main driver of the performance was the strong top line. Net interest margin widened 136 basis points year to date to 2.1%, and NII increased 31% quarterly. From its already high base, fees went up by an additional 12% in the first year. In the quarter, trading income through treasury operations was also supportive. All incorporated, improving every quarter since the second quarter of 2024, revenues went up by an additional 31% quarterly in the first quarter.
In this quarter, we continued to set aside precautionary provisions in prudent manner. Our gross provisions increased by another 44% quarterly, bringing our total coverage to 3.9%. Adjusted for the quarterly NPL sales, coverage reached 4%. Equally important, we continued our strong collection performance in the first quarter also. Some important drivers for our performance are as follows: through active loan and effective deposit pricing, we successfully widened Turkish lira loan deposit spreads by 515 basis points year to date to 4.6%. Strength in fee generation maintained with 12% quarterly and 44% yearly increase, and this performance is driven by an already built and growing customer base and a successful increase in product penetrations. Operating expense increase was 10% quarterly, 53% yearly, mainly due to inflation pass-through impact and also ongoing customer acquisition costs as well as investments to our human capital.
All in all, our fee coverage of OPEX still stands at a strong 91% as of the first quarter. On the asset quality side, during the quarter, as I previously stated, we continued to provision the loan base in a prudent manner. We have further increased the NPL sale adjusted coverage to the level of 4%, and this already creates an additional buffer for the upcoming quarters. In the first quarter, non-performing loan inflows from unsecured consumer loans sustained as expected, albeit below sector. NPL collection, on the other hand, continued to improve. NPL inflows increased 19% quarterly, whereas recoveries further surged 44%. This resulted in a limited 7% rise in the net NPL inflows, and as I stated, these levels are lower than the market averages.
Our cost of risk stood at 1.78% in the first quarter, which is likely to be the highest level we will see in 2025 based on this operating environment, and as we already started to witness a stabilization in the retail inflows. Now I am leaving the floor to Hilal. She will provide the details behind our strong numbers. Hilal.
Thank you very much, Kürşad, and I thank you all for joining our call today. I will start with page three. In the first quarter of the year, we sustained our selective lending through strategic pricing, supporting our Turkish lira loan yields further amidst the declining interest rates. Our quarterly Turkish lira loans went up by 4%, while the annual increased to 17%. We also continued to see the lucrative growth availability on the foreign currency side. Our foreign currency loans increased 8% quarter on quarter. This is in dollar terms, bringing the annual growth to 31%. On the Turkish lira loans, our growth was very well diversified and aligned with the monthly growth caps. General purpose loans increased 5%, mortgages up by 7%, credit cards up 4%, business loans 3%, and these all providing us room for active and efficient pricing. Accordingly, in the quarter, we maintained above-sector pricing.
Our consumer and commercial loan rates were 300 basis points and 500 basis points above the sector, respectively. Please note that these rates are in simple terms. As a result, adjusted for the credit cards, our loan yields went up 278 basis points year to date to 48.3%. We are and we will be continuing our selective and lucrative lending strategy, which will continue to support our spreads in the rest of the year, and we will act in an agile manner. Moving to the funding side, we are on page four. We are optimizing the cost of funding via robust demand deposit performance and agile time deposit pricing. This is definitely thanks to our widespread customer base. Turkish lira deposits increased 7% quarter on quarter and 26% year over year.
Our Turkish lira demand deposit base, on the other hand, increased further by 8% in the quarter, reaching a very strong 63% jump annually. The share of Turkish lira demand deposits in total improved further, now stands at 28%, and total stood at 44%. I think that you will agree this is now a proven track record. This is again driven by small ticket deposits, which makes up 78% of our deposit base and for sure supporting our cost of funding. Foreign currency deposits, on the other hand, increased 12% quarter on quarter, up 6% year over year, when the share of foreign currency demand deposits in total stood at 65%. All incorporated, thanks to a widespread customer base, we continue to price the deposits below the sector.
In the first quarter, our Turkish lira time deposit rate remained 100 basis points below the sector, and once again, this is also in simple terms. As a result of all, our Turkish lira deposit costs improved an eye-catching 294 basis points quarter on quarter and 338 basis points year to date. Equally important, showing our agility in balance sheet management, following the rate hike, we have started to lower the share of repo funding, which has already come down 31% quarter on quarter in the first quarter, and this happened mainly in the last month, and we still are managing the funding mix in a very agile manner. These all supported liquidity. Our LDR loan-to-deposit ratio improved to 89%, and Turkish lira loan-to-deposit ratio is at 101%. Turkish lira liquidity coverage ratio is above 150%, and foreign currency LCR as high as 500% as we speak.
Now, moving to the details of our strong profits, starting with the top line performance, we are on page five. We had an eye-catching performance in top line as our robust spread expansion drived the margin improvement. Thanks to the strong support from the core revenues and definitely the treasury activities, total revenues increased 31% quarter on quarter, reaching TRY 247 billion. Core revenue margin went up by 76 basis points quarterly and 151 basis points year to date to 6.6%. Quarterly improvement in Turkish lira loan deposit spread, as Kürşad already mentioned, is as high as 315 basis points, and this includes credit cards, and year to date expansion reached 515 basis points. As a result, in the quarter, our net interest margin widened 136 basis points year to date and 57 basis points quarter on quarter to 2.1%.
Please note that we are just normalizing the CPI linked to income in 2024's quarters for the CPI reading of the year-end 48.5%, while our first quarter CPI assumption is at 30%. Meaning our very strong performance in the spreads more than compensated for the lower net interest income contribution of linkers in the first quarter of the year. Looking at the details, support to net interest margin through core was 295 basis points when securities had 186 basis points negative impact. This is mainly through linkers, as you can assume. Repo and borrowing impact was 64 basis points minus. This core-named performance is showing our future and further improved capability in the upcoming quarters and years. On the next page, we are looking at our fee performance. We have increased our fee base by 12% quarterly and 44% year over year from this already high base.
We are continuously leveraging on customer franchise as well as sustaining diversification efforts. Our payment system business continues to support our fees. Net fee income from card business increased an additional 7% quarter on quarter and 53% year over year. Money transfers with ongoing increase on number of transactions and important proof of our customer penetration up by 21% quarterly and 55% year over year. Bank assurance fees up by 76% in the quarter despite limited loan growth. Investment products up 19% in the quarter. Once again, the ongoing customer penetration will continue to support our already high level of fee generation. Now, moving to OPEX, we are on page seven. Inflation pass-through impact is weighing on our cost increase, and this is as expected. OPEX increased 10% quarter on quarter and 53% year over year, making up 39% of our total costs.
HR-related costs increased 17% in the quarter and 40% year over year. Running costs came down 18% in the quarter but went up 53%. This is mainly due to the exchange rate impact as well as definitely the pass-through impact of the inflation. In the quarter, we have maintained our very strong efficiencies. Fee coverage of OPEX very strong at 91%, cost to average assets at 4% levels. Now, moving to a hot topic, asset quality. In the quarter, as expected and as we were telling, NPL inflows through unsecured consumer loans sustained albeit lower than the sector. We are doing better than the sector thanks to our strong customer base and definitely looking at the share of our salary customers. It is supporting our asset quality. Equally important, collections further improved.
We continued our uncompromised prudency despite this in provisioning and built further precautionary buffers for the rest of the year. In the quarter, NPL inflows were at TRY 13.8 billion when collections improved further to TRY 5.3 billion. As a result, net NPL inflows increased slightly to TRY 8.5 billion, TRY 7.5 billion of which was through consumer loans and credit cards. In the first quarter, our NPL ratio stood at 3.4%. Looking at the cost of risk level, further increasing the total coverage to 3.9%, and even if we adjust TRY 1.7 billion fully provisioned NPL sale in the quarter, 4%, our cost of risk stood at 178 basis points. Please also note that the share of SMEs in our loan portfolio is limited at 8%. Equally important, we have a very well-diversified loan mix in terms of sectors.
High sector share is lower than 7%, which is infrastructure and construction, most of which is state-guaranteed projects. Now, moving to page nine and solvency. Internal capital generation, which we kickstarted in the last quarter of 2024, is sustaining. Our CT1 ratio stood at 10.7%. Our buffer is at 262 basis points and above our promised 200 basis points buffer despite the immediate impact of the volatility mainly that came in the last three days of the quarter. The second thing is the annual operational risk impact. Capital adequacy ratio, on the other hand, stood at 14.4%. Operational risk impact was 51 basis points when the macro impact was 15. In terms of sensitivities, the impacts are still limited. First, 10% depreciation has 32 basis points impact on CT1 and a limited 9 basis points on capital adequacy ratio.
The break-even US to Turkish lira rate is in the range of 80. And these all are ceteris paribus calculations, as you can imagine. The impact of the first 100 basis points parallel shift in the Turkish lira yield curve is also limited at 15 basis points. Break-even NPL ratio is around 7.5% versus our recent level of 3.4%. All incorporated, we are very comfortable with our capital levels for today as we will continue to build further buffers through the year before the growth opportunities kickstart in 2026. Now, I am leaving the floor to Kürşad for closing remarks, and then we will be taking your questions. 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 achievements of our bank.
On behalf of the whole team, I would like to thank you all for joining our call, and now we can take your questions.
The first question is from the line of Shamim Ahmed with J.P. Morgan. Please go ahead.
Good evening, Kürşad Bey. Good evening, Hilal. Thanks very much for the presentation. May I please ask if you could comment on the NIM trends since mid-March? Clearly, core spreads have shown a very strong performance, but NIM recovery was so-so, I think overall. It's still at the very beginning of this recovery trajectory. Would you just comment on what you've seen since the volatility in mid-March? Obviously, you're keeping your full-year ROE guidance, but at the same time, how do you see the individual lines evolving from here within that? Thanks very much.
Thank you, Mehmet. First of all, let me first set the ground.
We have guided a bit more conservative operating environment for the year compared to our peers. Let me also be clear that we were not expecting that rate hike. We were expecting mostly not an aggressive rate cut, but our base case scenario was not also including the rate hikes, which is happening now. Since the beginning of the year, net interest margin has been improving every month. Starting with the mid of March, as you stated, we started seeing an increase in the cost of funding. Still, March overall was higher than February in terms of margin. Thanks to our good deposit pricing as well as lending rates, we are able to keep it the same, close to the same, to the March levels as of April. For sure, May and June will be under pressure, and it will be challenging.
It seems that keeping net interest margin in the second quarter as same as the first quarter will be challenging. If we can do it, it will be a very good success. For the remainder of the year, in our base case scenario as of now, we are a bit sure that starting with July, we may resume these rate cuts, and third quarter will be better than second quarter. How much these are going to impact our guidance, it's all linked to when this high rate, 49, even the high end of the corridor, will stop.
If it stops in May, we may still keep our guidance, but if it is going to be longer than May, if we are going to stay with this 49 till July and then June, July, it will be challenging also for the guidance. Therefore, we are not able to say anything about the guidance, but when we see the operating environment settlement, we will be happy to give that guidance change, if any. In overall, for our guidance, yes, net interest margin under pressure, but we are able to improve our fee part. Commission income is helping to compensate this net interest margin loss. Therefore, the revenue margin increase could still be there in the second quarter. If we can do it also, it is going to help us for achieving the rest of the year guidance.
In terms of ROE, we have guided mid-20% levels. We are not changing it now due to the reasons I stated. We are a bit sure about below inflation level loan growth. We are keeping that. On the FX lending book in the first quarter, we were aggressive up until the cap rates decrease and cap decreases. It seems we are going to achieve that FX loan book growth, let me say. On the asset quality part, this line is also one of our strengths, I would say. We will be able to keep it around 175 basis points levels thanks to our collection capabilities. Also for the cost part, below 50% is still relevant. I hope this answers your question, but if you have any further to ask, please.
No, that's very helpful. Thanks very much, Kürşad Bey. Thank you.
Thank you, Mehmet.
The next question is from the line of Rozantsev Konstantin with J.P. Morgan. Please go ahead.
Yes, hello. Thank you very much for taking my question. I have two questions. The first one, could you comment on what trend.
Konstantin, can you please speak a bit louder? We cannot hear you properly.
Yes, can you hear me better now? Yes, thank you. Yes, thank you very much for the presentation and for taking my questions. Could you please comment on what trends do you observe with respect to retail and corporate dollarization in the past few days or one week? What is the most recent on this as regards to deposit dollarization by both retail and corporate? What is your expectation for the very near term if you see any risks around this?
The second question is about the, we see in the data that reserves at the central bank level keep dropping. Could you please maybe comment what flows do you see at the bank? How can you explain this kind of developments of the recent days as regards reserves? Thank you.
Thank you, Konstantin. For your first question about the dollarization in terms of deposits, since mid of March, we've seen a demand both for the corporate, especially more on the corporate, as well as some individual. Up until mid of March, in total, FX term deposits or the investment funds, etc., were positive in terms of flow. Since mid of March, we have seen that it's reversed back, and the amount of dollar demand already surpassed the first part of the quarter.
Therefore, on a net basis, in terms of dollarization, both in deposits and as well as the funds, it is slightly higher than $2 billion in total for the sector. I am trying to say up until mid of March, there was a de-dollarization. Starting with mid of March, dollarization started. Now it is at break-even for the sector. Since as one of the big players in the sector, we are also observing the same. What I would add additionally, the corporate demand in terms of dollar is higher than retail demand. For the upcoming periods, what is our expectation? Since the Turkish lira rate is 49, it is quite high. We believe this dollarization demand is going to be minimized throughout every week, which has also partially been seen in the latest weeks.
With 49% Turkish lira rates, it seems that the central bank is aiming to stop this dollarization, and we will be following closely. For the reserves, the second question of yours, for the reserves, there have been some consumption on the reserves, as you are also following up to $50 billion levels. After all those, still the gross reserves is more than $130 billion, and also net reserves is still positive. The central bank is trying to keep this tightening, and they are using these reserves accordingly. Maybe the pace of reserve usage will be lower, but at least these reserves are quite adequate to deal with those volatilities.
Understood. Thank you very much. Very recent data over the past few days and one week on retail and corporate dollarization, is it kind of broadly in line with the prior records since mid-March?
Is there anything that kind of suggests that the trends are becoming more alarming, or it is still stable relatively?
The trend is getting stable. First of the first week after mid of March, it was an aggressive demand, but now it is stabilizing, and therefore we see that it is going to be minimized.
Thank you very much.
Thank you. Thank you. Thank you.
The next question is from the line of Simon Nellis with Citibank. Please go ahead.
Oh, hi. Thanks for the opportunity. Just a quick one on fees. The growth that you posted in the first quarter would have to decelerate to kind of hit your full-year target. Can you just walk me through why you expect kind of a deceleration in fee growth, or is there upside risk to the fees? It sounds like you were suggesting that there could be.
Thank you, Simon.
The deceleration for the fees growth is depending on the inflation because we were expecting that inflation is going to be below 30%. Now there is a risk on that, inflation, year-end inflation. Therefore, as it guided, this deceleration may not happen. Therefore, there is a positive upside risk for the fee growth.
Okay. Which quarter were you thinking was going to be the weakest? I guess the later quarters given lower inflation.
The later quarters, it should be considering that inflation trend will be in decreasing levels since the last quarter, quarter three and quarter four. Overall, with this volatility happened, there is an upside risk for our fee growth guidance.
My other question would just be on the tax rate, which was quite low in the quarter. What's the outlook for the effective tax rate for the full year?
I think the effective tax rate in the solo accounts was less than 14%.
Yes, Simon, the solo accounts do not show the real picture. I would recommend you to look at the consolidated account. Why is it so? On the solo account, net profit of the subsidiaries is already included in before-tax lines. Therefore, you do not see the tax impact of these subsidiaries. Therefore, it is better for you to look at the consolidated one, which is something close to 20%-22% effective tax rate on consolidated. It is going to stay like that in consolidated.
Even next year? Because the next year is already right.
I do not know the tax rate, what it is going to be. Therefore, I cannot say any guidance on that. At least for this year, in our base case scenario, 20%-25% effective tax rate.
Okay. Thank you very much. Thank you.
Ladies and gentlemen, there are no further audio questions. I will now give the floor to management for written questions. Apologies, an audio question just came in. It is from the line of Taranto David with BofA. Please go ahead.
Hello, good afternoon. Thanks for taking my questions. What has been the key driver of your trading income in the period? Is it from the volatility around the FX during the quarter, or have you sold some securities in the period? The reason I'm asking is, A, your mark-to-market losses remained relatively limited in this quarter, and B, I haven't seen a material change on your securities breakdown, but the backbook rates for Turkish lira securities yields, excluding CPI linkers, have come down a bit according to my siNPLe calculations.
Thank you.
Thank you, David, for the trading one.
I would say it's both related to securities trading as well as swap-related transactions. Also, when you look at the yield of the security portfolio, there is an impact of the redemption. Maybe that could be the reason for you not to be able to see it. In overall volatility, yes, it's an impact, but our success in treasury activities has always happened. It is balanced trading income, I would say. There is no specific one-off item.
Okay. Thank you.
You're welcome.
Ladies and gentlemen, we will now proceed with the written questions from our webcast participants. Okay, let's go through the written questions. We have some. Some of them were answered, but I will just read them also.
From Danny Johnson Jones, 0.72, were there any one-offs in securities interest income? No, there are not any one-offs in the securities interest income.
Just a note, we lowered the CPI reading for assumption to 30%. Maybe you are seeing that. Also on the CPI part, as Kürşad previously mentioned, we had some redemptions. How do you expect Turkish lira deposit beta to develop over the remaining quarters?
Danny, for the TL deposit beta, it is increasing. The TL deposit rate is increasing. What we are trying to do with our strength in demand deposits, we are trying to minimize the impact. This quarter, going the second quarter versus first quarter, you will see a hike in overall cost of deposits. The third quarter and the fourth quarter should be better than the second quarter levels, depending on the rate cut cycle.
What is gross cost of risk guidance in upcoming quarters?
As we mentioned, we are looking at the net cost of risk. First of all, it's better if you follow that. Also, we are adjusting the ECL heights because we have some FX risk on that. This quarter, it was 178. As Kürşad mentioned, it's likely that it will be around that levels in the second quarter. We will emerge towards our full-year guidance to 175 basis points. It will be in that range. You can assume that. We answered Kemal Özer's question.
Yes, we see an upside risk potential to our fee growth guidance.
Yamilia, thank you for your presentation. Could you please comment on potential impact, if any, of tariffs on your loan portfolio, asset quality, and profitability?
Yamilia, the tariffs specific to Turkey, as you know, it's not as big as the other countries.
For our companies or our customers that have some exporting activities to our site, when we look at it, there is an insignificant impact in terms of their revenue generation, even if everything goes well internally in terms of our own volatility, if it gets solved. There is a positive upside for our customers, specifically companies who are exporters. Therefore, there is no negative impact in terms of loan book, both in asset quality and profitability. It could be positive if everything's settled internally, locally, let me say.
From Valentina, thank you for the presentation. Can you please share the FX liquidity in dollar billion versus short-term FX wholesale funding and total FX funding in dollars?
We have around $9 billion worth of liquidity immediate. One-year upcoming maturities are around $5.9 billion, around $2 billion of which is syndications.
Our total wholesale funding is around TRY 11.9 billion.
From Miraj Başçı, can you give any color related to NIM expectations? I think we answered that question. Can you comment on NPL inflow in SME segment?
Miraj, it is very limited, both due to our underwriting policies and as well as our low composition in terms of SME lending in the total loan book. We are following the sector data in terms of delinquent, in terms of concordato or bankruptcy application. We have the lowest market share for those customers in SME segment also. I would say, as of now, we are comfortable.
Can you share government bonds' impact on capital equity ratio?
Our AFS reserves came around TRY 2.8 billion, increased TRY 2.8 billion. The impact on the quarterly impact is around 15.15 basis points. You can calculate the overall impact from that.
The other question is, how much do you assess the impact of the new action taken regarding the interest paid on required reserves? How much can it reduce deposit costs? From Mustafa Kemal Özke.
Mustafa Kemal, thank you for the question. It is very limited. It is insignificant, I would say. Yes, it is a bit positive in terms of interest income, but it is limited in terms of the deposit cost.
From Valentina, about cost of risk, do you see an upside risk to your guidance? What trends do you see for retail and corporate book? Is there any particular sector that could potentially surprise negatively?
Valentina, for the cost of risk, we would like to keep our guidance, as we stated, depending on the rate environment. If there is going to be a need for further rate hike, then it could damage the asset quality, for sure.
As of now, we are assuming our base case scenario, this volatility will stop, and we will go back to we will resume the rate cuts at least in the third quarter. If it is going to be extended, this high rate environment, then there could be some asset quality issues for the corporate and commercial sector. As of now, it is not our base case scenario.
From Hakan Aygün, does higher inflation trajectory affect your guidance on operating costs as well as it affects your guidance on fee growth?
Hakan, the impact on fees is much higher than impact could happen for the cost. Therefore, we believe the just ratio, the cost to fee coverage over the cost will stay high in a nutshell.
From Constantine, should we expect the bank to call its tier two bond, which is callable in January 2026?
Constantine, an early decision-making, I would say, if we comment anything on that. As you know, we know how these instruments work in the market, and we are an investor-friendly company, investor-friendly bank, and nothing could happen for our investors negatively, I would say.
One last question from Irfan Kemal Özer, Phillip Capital. Your equity growth seems to diverge from peers. What is the reason for this divergence?
Irfan, I believe you are asking in terms of positive divergence. The reason behind there are some valuation changes in every year we do for the fixed asset, etc., it could be the reason, I would say. It is not something that we specifically follow. It is the business, ordinary business.
We do not have any further questions. Thank you all for joining our call.
If you have any further questions, you can always connect directly to us and our investor relations team. Thank you. Bye-bye. Thank you.