Ladies and gentlemen, thank you for standing by. I'm Kristian Dieners, your Coverage 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 2025 Financial Results conference call and live webcast. At this time, I would like to turn the conference over to Kürşad Keteçi, Chief Strategy Officer, 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 First Half 2025 earnings call. Starting with the operating environment, the Central Bank of the Republic of Turkey has adopted a tight policy throughout the second quarter in response to the volatility started in mid-March. Accordingly, the funding rate reached the high end of the corridor and stood at 49% up until mid-June. Following the gradual stabilization, the Central Bank of the Republic of Turkey moved back to a weekly funding at a policy rate of 46% during June. As you also followed, the Central Bank of the Republic of Turkey restarted the rate cut cycle last week by decreasing the policy rate to 43%. When we look at the macro developments throughout the quarter, headline inflation improved to 35% in June, with 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 and reach below 30%. Equally important, the Central Bank of the Republic of Turkey rebuilt its reserves by more than $30 billion during the quarter. Macro developments disrupted the ongoing improvements in net interest margin. That being said, with agile asset-liability management and deposit pricing strategies, as Yapı ve Kredi Bankası A.Ş., we had a limited shrinkage in net interest margin. The improvement trend in our net interest margin is back on track also, when we look at today's figures. Now, looking at our strong first quarter, I would like to move to the second page of our presentation to give details about our second quarter performance.
In the second quarter of the year, we posted TRY 11 billion net profit, same as the first quarter, and showed resilience against disruption in the rate cut cycle. Accordingly, our first- half net profit reached TRY23 billion, going up by 31% year-on-year. Our Return On Tangible Equity and Return On Assets stood at 22.4% and 1.6% respectively. Thanks to the strong performance, we confirmed our mid-20s ROE guidance for the full year. The main driver of the performance was the ongoing strength in our top line. The core revenue margin was almost stable quarterly and improved by 161 basis points year-on-year. This resulted in an 8% quarterly and strong 83% annual improvement in core revenues. Net interest margin improvement was 116 basis points over 2024 last year. Strong fee performance continued also.
Thanks to our enhanced penetration to the strong customer base and support from payment systems, fees went up by 16% quarterly and 45% year-on-year. Equally important, NPL inflows throughout unsecured consumer loans started to improve in the quarter. Our performance positively deviated from the market trends when we continued to maintain our prudency in coverage. Some of the other important drivers of our performance are our Turkish lira loan- deposit spreads adjusted to credit cards had a limited tightening of 130 bps quarterly. Despite the significant hike in the market rates, our effective deposit cost management sustained thanks to our best-in-class service model and strong customer franchise. Year-to-date improvements on Turkish lira loan deposit spreads were very strong at 540 bps, and again with the active loan and deposit pricing. In the quarter, we continued to price our Turkish lira deposits 100 bps below the market price.
I also want to emphasize that we do not just have the highest demand deposit share among the peer group, but also the highest amount in nominal terms. This performance once again proves the quality of our customer-oriented strategies and the strength of our service model and our branches and all the channels. Operating expenses increased by 6% quarterly, 52% year-on-year, mainly due to the inflation pass-through impact, ongoing customer acquisition costs, and as well as investment to our human capital. All in all, our fee covered 96% of the costs as of first half 2025. In terms of asset quality, in the second quarter of the year, we continued to perform better than the market and our peers. Improvement in our net NPL inflows from unsecured consumer loans were the main driver of this performance. NPL inflows in the quarter increased a limited 14%, whereas collections improved by 39%.
Accordingly, our net NPL inflows were by far lower than our peers and also lower than the first quarter. We continued to have a robust total coverage at 3.7%. If we adjust with our recent NPL sales, it's 4%. Our cost of risk improved to 152 bps in the second quarter, and year-to-date, it's at 1.62%. Now, I am leaving the floor to Hilal, and she will provide the details behind our strong numbers. Hilal?
Thank you very much, Kürşad. Thank you all for joining our call today. I will start with page three, the volumes. In the second quarter of the year, we continued our selective lending, and we have started to gain market share in lucrative products. Our Turkish lira loans went up by 13% in the second quarter, while the year-to-date increased to 17%. We also continued to seize 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 year-to-date increase to 17%. We have started to gain market share mainly in the retail side, given the improvement in profitability. Our general purpose loans increased 18% quarter- on- quarter, and we gained 72 basis points market share among private banks. One other product, credit cards, we gained 43 basis points market share through a 15% quarterly increase.
Business loan growth, Turkish lira cards, on the other hand, stood at 5% in the quarter, and this is in line with the loan growth caps. In the quarter, we also maintained above- sector and peer pricing on the lending side. As a result, adjusted for the credit cards, our loan yield further went up 84 basis points quarter- on- quarter versus a drop in our peer average. This brings the annual improvement year- to- date to 297 basis points, and this is 100 basis points better than the peer average. We are, and we will continue our selective and lucrative lending strategy in a very agile way, which will continue to support our spreads in the rest of the year and for the future also. Now, moving to the funding side, we are on page four.
Our strong and widespread active customer franchise, which already surpassed 17 million, and agile pricing strategy supported the funding base as well as the cost of funding in the quarter. Turkish lira deposits increased 9% quarter- on- quarter and 17% over year-end. Reaching back to the highest nominal level among our peers by far, our Turkish lira demand deposit base increased another impressive 26% quarterly and 36% year- to- date and reached TRY 295 billion. Turkish lira demand deposit share improved further 464 basis points to 32%. This is the highest level again among our peer group, meaning our small ticket focus strategy is paying off. Please note that almost 90% of our Turkish lira demand deposit base is through sticky small tickets.
Foreign currency deposits, on the other hand, increased 2% quarterly and 14% year-to-date, when the share of foreign currency demand deposit in total stood at a significant 65%. All incorporated, our demand deposit share in total is at 47%, showing an impressive 244 basis points improvement on a year-to-date basis. This strong deposit performance and our agile pricing strategies limited Turkish lira deposit cost increase at 217 basis points, and this is despite a significant jump in market rates and definite competition. Please note that given our agile balance sheet management, this happened throughout the quarter. Looking at the daily average MIS data, Turkish lira deposit cost increase was very limited at 110 basis points. On a year-to-date basis, we had 241 basis points improvement in Turkish lira deposit costs.
This is showing our agility in balance sheet management once again. This time, following the Central Bank of the Republic of Turkey's decision to lower the funding rate, first started from 49% to 46%, and then they recently had another cut, we have gradually lowered the share of more costly big ticket deposits while gradually increasing non-deposit funding mainly repo. So far, in July, as Kürşad already mentioned, we are already seeing the positive support from lower deposit costs coupled with lower non-deposit funding, and our net interest margin is going up. Now, moving to the details of our profit, starting from top line performance, we are now on page. As I have detailed previously, thanks to our agile cost of funding management, in the quarter, we had a confined contraction in quarterly net interest margin supported by the ongoing strength in fees.
Core revenue margin remained almost stable, just a mere four- basis- points declined quarterly, while the increase was 146 basis points year-to-date. Supported also by the trading line, core revenues increased 1%, almost stable, when the annual increase was very strong at 17.70%. Our effective pricing strategy definitely was the main driver of this performance. Our net interest margin came down just 37 basis points quarter-on-quarter and improved 116 basis points year to date. Looking at the peer group, the improvement year-to-date, the improvement is the best among our peer group also. Our loan deposit spread contribution to the net interest margin stood at a hefty 3.9%, and this is again, I want to emphasize it, significantly above the peer group, and this is showing the room for the improvement going forward in our net interest margin.
Our strong net interest margin improvement trend was shattered by the quarterly disruption in the rate- cut cycle in the second quarter, even though we had the hike in the funding rates. Today, we are now back to the improving stage and foresee quarterly increase in each quarter for the rest of the year. Obviously, this quarterly disruption was not incorporated in our budget we released at the beginning of the year. Thus, we reduced our net interest margin improvement target to 200- 225 basis points range from around 300 basis points. Also, we foresee the improvement to sustain in the first quarter of next year as well. Moving to the next page, we are looking at again very strong fee performance. We have increased our fee base by an additional 16% quarter on quarter and 45% year over year.
We are continuously leveraging on customer franchise as well as sustaining diversification efforts. This is a very strong performance from our branches as well. Our payment system business further supports our fees and better than our guidance. Number and amount of transactions are very strong. They are improving each and every quarter, each and every month. Looking at the numbers, more than five times what we have compared to back in 2020. Support was very strong. 60% year over year increase was through our transactional banking for money transfers. Bancassurance up 62% annually. Investment products 35%. Of course, payment systems providing a significant support, but it is from all of the parts. Once again, the ongoing customer penetration will continue to support our already high level of fee generation, which is already evolving above budget.
Thus, we revised up our fee increase guidance to above equal to 40% from 25%- 30% growth. This is expected to offset a substantial portion of the new revision. Moving to OpEx, we are on page seven. Operating costs increased 6% quarter-on-quarter and 52% year- over- year. Our fees come close to a full coverage of OpEx, providing us room for investing in operational efficiency for the future. Cost growth is still in line with the guidance. Making up 37% of our total loans, HR-related costs increased 48% year- over- year. As I mentioned, we are investing for the future for the operational efficiency. Thus, running cost increase was 57% this time. Also, there is some impact from exchange rate, inflation, but the main part is coming from future investments. In the quarter, we have maintained our top-notch efficiencies.
In the second quarter, our fees fully covered OpEx 100%, and in the first half, the coverage is at 96%. Cost- to- average assets at 3.9%. Moving to another very hot topic, asset quality. As we have stated during our first quarter 2025 call and also Kürşad, as Kürşad mentioned, we have started to see some improvement in net NPL inflows, mainly through unsecured consumer side. On the other hand, NPL formation through SMEs are increasing, but as you all know, coming from a very low base. All incorporated, our performance diverged from the system in a positive way, and we had lower NPL inflows versus the sector and peer average. That being said, we continued our uncompromised potency in provisioning. In the quarter, NPL inflows were at TRY 15.7 billion, bank collections improved to TRY 7.5 billion.
As a result, net NPL inflows came down slightly to TRY 3.8 billion, TRY 5.8 billion of which was through consumer loans and credit cards. Net NPL inflows from general- purpose loans came down 34% quarter-on-quarter to TRY 2.2 billion, and this is when we look at the peer average, it's TRY 3.3 billion. Please note that more than 65% of our GPLs are through our payroll customers with a significantly lower lifetime PD. This is supporting us. Credit card net NPL inflows down by 14% to TRY 3.5 billion. The peer average was TRY 5.7 billion, and this is thanks to our strong know-how on credit cards and time actions taken. Moving to page nine, since second quarter 2024, so showing how we are losing market share on the NPLs, meaning we are performing better than the sector since second quarter last year.
Still, our coverage level of 3.7% is reflecting our prudency and adjusted for the recent NPL sales even higher at 4%. All in all, our cost of risk stood at 162 basis points as of first half 2025 and 152 basis points in second quarter. This is within the full year guidance range. Equally important, we have a very well-diversified loan mix in terms of sectors. The highest share is lower than 7%. Also, SME share in performing loans is limited at 8.5%. Moving to page 10, solvency, our CET1 ratio stood at 9.9%. Our buffer is at 189 basis points, and this is mainly due to the market volatility and ongoing business growth. Capital adequacy ratio stood at 13.1%, and looking at the impact, operational impact was 51 basis points and macro 15. We have already started to see an improvement in the solvency.
There are two reasons, thanks to lower interest rates supporting the capital level through AFS reserves. Second, internal capital generation is back. It's back on track. In terms of sensitivities, the impacts are still limited. First, 7% depreciation, 32 basis points impact on CET1, and 90 basis points on capital adequacy ratio. The break-even U.S. to Turkish lira rate is around 80, and all calculations are set as paribus. The impact of the first 100 basis points parallel shift in the Turkish lira yield curve is at 15. Break-even NPL ratio is around 7.5, even a bit higher definitely today. All incorporated, we are comfortable with our capital levels today. Internal capital generation, as you know, was disrupted for a quarter, but already started to kick in again, which will help us to build buffers through the year and before growth opportunities kickstart further.
Now, moving to page 11, a summary of our guidance. I will try to go through, give a summary each and every section, but in a nutshell, long-haul guidance is on track. We realized that our net interest margin guidance to 200-225 basis points improvement, given a quarter of disruption in rate cut cycle, does increase in funding costs, which will be largely offset by our better performance on fees. We revised up our fee growth guidance to above and/or equal to 40%. On top, although we haven't provided the guidance here, our trading performance through treasury operations are performing better than our forecast. Cost increases on track, we maintain below 50% increase guidance, and for asset quality, we also keep the guidance at 150 to 175 basis points. All incorporated, we do maintain our ROE guidance at mid-20s.
Now, I'm leaving the floor to Kürşad for closing remarks, and then we will be taking your questions. Kürşad.
Thank you, Hilal. We 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 the bank. On behalf of the whole team, I would like to thank you all for joining our call. Now, we can take your questions.
The first question from Mariana Villalba with William Blair. Please go ahead.
Hi, can you hear me?
Yes, we can hear you. Please go ahead.
Thank you for the presentation, you both. I have two questions. One is related to solvency. Hilal, you mentioned that the solvency already started to improve from the level you reported in the second quarter. Is there a level of CET1 roughly that the bank has in mind that they would be comfortable ending the year in order to continue to grow in 2026? My second question is on stage two loans. There was quite a big increase. I was just wondering if this is related to the deterioration in retail and to a lesser extent SMEs that you mentioned, or if this was a big file, and if you can comment on any, if there are any particular sectors or segments that have driven that increase in stage two. Thank you.
Thank you, Mariana, for your question. I will reply to the first one, solvency ratio. Our adequate levels is 200 basis points buffer against regulatory limit for Common Equity Tier 1 (CET1). As of the second quarter end, we are close to that. It is slightly below that threshold, and due to a low level of profitability with the rate hike session throughout the quarter, and with the profitability increase in the third and fourth quarter, surely we will go back to the levels that we always would like to be. Secondly, maybe there are a couple of written questions about that, and I hope, I think that there will be some other questions. As you know, we are the only IRB bank in Turkey in terms of capital calculation. Being an IRB bank, there is the model update sessions.
For some couple of times, we have not been updating our model. We were waiting for this economic turmoil to end. There are some basis points buffers that when we make the update, there is going to be some increases in our capital calculations, which we believe we will start also doing those throughout the second half. That's why it is the most important thing that we rely on, and that's why we are comfortable as of today also going below 200 basis points buffers, because we know that there are some quite important buffers that will come with our IRB model updates.
About your second question about stage two loans, our stage two loans increased 24% quarter-on-quarter. Mainly, one reason is the exchange rate, because almost 40% of the stage two loans are in foreign currency. The increase 70% is due to SICR, meaning significant increase in credit risk. We are always mentioning this is because of our prudency. Also, the rest is true. The restructured portfolio, we have been effectively restructuring our retail portfolio, mainly general purpose loans and credit cards, and also, you know, the BRSA regulation is allowing us to restructure. This is helping us on the asset quality front also, and looking at the payment performance of these restructured credit cards and general purpose loans, it is performing quite well, and we are seeing a quite good return from that.
Thank you.
Is it clear, or do you need any further clarifications?
No, that was clear. Thank you.
Thank you.
The next question comes David Taranto with Bank of America Merrill Lynch. Please go ahead.
Good afternoon, and thanks for the opportunity. I have three questions, please. First, we've seen fairly muted local- currency lending growth in the previous quarters, but there is a clear acceleration in this quarter. Is this the start of a more sustained trend or more of a tactical move? What I'm really trying to understand is how your lending appetite stands as of today. I realize the growth-c aps are in place, that those are a constraint, but would appreciate your broader thoughts here. Second, on NIM, based on the chart on page five, the cumulative NIM improvement year-to-date is around 115 bps, and the lower end of your guidance implies 200 bps improvement for the full year. That suggests you expect second- half NIM to average around 3.5%, essentially double what you reported in the second quarter.
I know it's only July, but how is the third quarter shaping so far, and how should we think about the NIM split between the third and the fourth quarter? Also, would you be able to comment on the level and timing of the peak NIM? Should we expect that late this year or sometime in 2026? Finally, could you please also walk us through the policy rate assumptions that underpin your guidance? Thank you.
David, thank you for these questions. For the local currency lending increase, when we see clarity in terms of interest rate and in terms of macro situation, you know, we always would like to make a business banking with our customers. Therefore, we are a bank trying to make all the revenue and profitability through customers, and it always depends on the macro. It is a reason that you see an increase. We start seeing the clarity in terms of interest rate environment for the upcoming periods, and that's why we are trying to increase on the lucrative products. That's going to help us to improve our net interest margin. This is the strategy behind, and as a result of it, what you see, we are trying to lend more on the individual part and also some unrisky fee trust on the corporate commercial part.
For your second question, net interest margin trajectory, your calculation assumptions are quite right, I would say, and we believe that for the third quarter, net interest margin will be above our first quarter levels. As you remember, it was around 2.1. First quarter NIM is going to be above the first quarter levels, and the fourth quarter as an exit NIM, it's going to be close to 4%. This is our assumptions. The peak in terms of net interest margin is going to be on the second quarters, close to between the first and second quarter of 2026, because we still have our conservative approach in terms of guidance. As you also know from the past, we keep that conservative approach, and we believe after seeing everything settled and lifting these macroprudential measures, the peak in terms of NIM will come through the second quarter next year.
Lastly, for the policy rate, again, being on the conservative part, inflation, we believe it's going to be lower than 30%. For the policy rate, we still are trying to figure out the exact landing point, but I can give you a kind of levels between 36 to 38 for the policy rate year-end, depending on how the economic situation and the inflation will result. There is going to be the rate cycle for sure, but the magnitudes, let's see some couple of months inflation as well as the budget part. Budget, I mean the government budget.
Thank you very much. Very clear. Thanks.
Okay.
Thank you.
Thank you, sir.
The next question comes from the line of Simon Nellis with Citigroup. Please go ahead.
Hi, hello, Kürşad. Thank you for the opportunity. My question would be on the tax rate. I know it's quite difficult, but can you give us any guidance on the tax rate in the second half of this year and what should we pencil into our models next year? Also, I'd be interested if there are any new regulatory initiatives that we should be wary of. Thank you.
Simon, for the tax rate, I would try to be specific. The effective tax rate for the second half is going to be somewhere around 20% levels. Without going into details why this is happening, there are too many details behind it, but you may make your models with 20% effective tax rate for the rest of the year. For the new regulatory changes, I will say in our base case scenario, we do not expect a lifting of current macroprudential measures. This doesn't mean that there is not going to be anything further on it. It all depends on the evolution of the inflation and the budget deficit evolution. There may be, again, some macroprudential measures specifically in order to keep inflation to lower it below 30%, but what I can say, we don't expect any release of these macroprudential measures.
Okay, thank you. Thank you very much.
The next question comes from Mikhail Butkov with Goldman Sachs. Please go ahead.
Good day. Just wanted to ask on the outlook on asset quality for SMEs. Do you see any changes there following the higher policy rate regime than was originally expected, or the asset quality trends are stable? I think that's the question.
Hello, Mikhail. For the SME asset quality deterioration, yes, there is a deterioration, but it is not even close to historical averages, the high or the peak in terms of asset quality deterioration on the SMEs. Also, as you well mentioned, depending on the policy rate evolution, if policy rate keeps high or another move of a rate hike, which we don't expect, the worsening on the SMEs could deepen, but this is not our base case scenario. It's going to increase on a quarterly basis. You are going to see that NPL inflows in third quarter and fourth quarter also will be higher than previous ones, but it is not even close to the highest levels that we saw in the past. It is under control, I would say.
Okay. If you could share any also early views into 2026, cost of risk, how do you expect, how would you expect it to develop?
It is a bit early, Mikhail. Therefore, I don't want to share any figures for 2026. We will be making our guidance details at the end of the year.
All right. Thank you. Thank you very much.
Ladies and gentlemen, we're going to offer the audio questions at this time. I will now pass the floor over to Ms. Hilal Varol to accommodate any webcast questions. Thank you.
We have a couple of questions from Valentina. What's your FX liquidity and wholesale funding short term as well? Our FX liquidity is around the buffer is TRY 9 billion. One year, upcoming payments are TRY 7.6 billion. The full year, the overall, including everything, is TRY 14 billion. Please note that around TRY 2 billion of all is syndications. We are easily rolling them. The second one, can you please give us an update on your issuance plans until the end of the year, both in seniors and sub-debts ones? We will continue to be very opportunistic because it will be very important for us to see the markets. We are always quite active, and we will seize all the opportunities. There are no upcoming maturities for us, but definitely, if there is an opportunity, we will be there. Last, can you elaborate about the updates of the IRB model?
It's a very complicated one, but just we updated some of our models, and it is related with the calculation of the LGD loss given default. There are some parameter changes, so there's a change on the multiplier, and there will be some positive impact. I don't want to share a precise impact with you at the moment. Let's wait and see, but we are seeing a figure I can say. I think one other question, how sustainable do you think is the fee generation that covers completely your OpEx going into second half and 2026? These figures are very high. I can say we cannot continue with the full coverage, but it will gradually come down. I believe we will see the normalized level we can share is around 80-85% levels. I do not see any further questions written or on the phone. Okay. Thank you all for joining.
If you have any further questions, we are always here. You can either reach me, Zardil, or the investor relations team always. Thank you for joining. Bye-bye.