Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome and thank you for joining the Yapı Kredi conference call and live webcast to present and discuss the Yapı Kredi nine months 2026 financial results conference call and live webcast. All participants will be listen-only mode and the conference is being recorded. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Mr. 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 2026 earnings call. Looking at the macro environment as usual, on the global side, the first nine months of 2026 unfolded against a backdrop of elevated geopolitical uncertainty, persistent inflationary pressures, and increasingly complex global economic landscape. Accordingly, developed countries' central banks turned to a more hawkish tone. As a sign of the resilience of Turkish economy and success of this inflation program, inflation came down to below 30% in September and also remained below in October as today's early print. Accordingly, in late August, the Central Bank restarted the weekly repo auctions and found the market at 37%, implying an implicit 300 basis points rate cut. On top, with the slowdown in growth and tight Turkish lira liquidity conditions, Central Bank cut deposit rate 100 basis points to 36% on 22nd of October.
All incorporated, the lower interest rate environment started to support Turkish lira loan deposit spread evolution and net interest margin. During the declining interest rate era, we as Yapı Kredi are seizing this opportunity to set our balance sheet for the future. Equally important, we also had a very strong start for the last quarter of this year. Now, let's look at our performance in the first nine months of the year, and I'm moving to second page of our presentation. We posted TRY 42 billion net profit for the first nine months of this year, increasing 10% year-on-year. Our return on tangible equity stood at 20.6%.
In the previous call, we have stated that second quarter was the worst in terms of net interest margin loan deposit spread for us, and we were able to improve our margins and loan deposit spread, albeit the high rate environment. We want to emphasize that during this period, mainly as the rate cut cycle restarted, we seized the opportunity to position our balance sheet for the future. What we have done as follows. First, we have strategically focused on increasing the share of Turkish lira deposits in total funding base without compromising our pricing levels. Mainly through sticky small tickets, our Turkish lira deposits increased 20% quarterly. This effort also show our strength in franchise that in a single quarter, we gained 136 basis points market share without, again, compromising from our deposit cost strategy.
Our cost of Turkish lira deposit is still the lowest versus peers by around 300 basis points together with the demand deposit. Our selective lending strategy is further supporting our loan yields, and our Turkish lira loan yields improved 44 basis points quarterly in MIS view, even in a declining interest rate environment. As a start of this balance sheet positioning, our top line performance quarterly improved as a sign of further improvement in the next quarter, fourth quarter. Turkish lira loan deposit spreads widened 33 basis points quarterly and 71 basis points year-to-date. Our net interest margin also widened at 23 basis points quarterly and 58 basis points year-to-date. Exit of third quarter is promising for our fourth quarter margins, and it gives us a confidence that we will end the year close to our full year guidance.
Our marginal net interest margin as we speak is already close to 3.3% levels, 45-50 basis points above the third quarter mean. On the fee side, our customer-centric service model is supporting our fees and adjusted for the one-off PV lucrative payments network scheme transition cost, the increase stood at 26% year-on-year. I would like to add that we are committed to efficiency improvement in 2026 and beyond, despite higher than initially expected inflation outlook. Regarding the asset quality, deterioration stays on tight macro and slowdown on the growth through unsecured consumer loans and SMEs. Accordingly, we have further increased our coverage for those segments. We still have the lowest gross NPL inflow, and we have lots of room to improve our NPL ratio through NPL sales and write-offs in fourth quarter.
All incorporated, year-to-date, our cost of risk at 214 basis points, and it is likely that our full-year cost of risk will be slightly higher than 200 basis points for this year. As we stated in our second quarter call, worst was over for this year, and our performance in the upcoming quarters will further support our already strong profitability. All in all, we maintain our ROE guidance and believe a strong fourth Q, as well as even stronger year, is ahead of us. Now I am handing the floor to Hilal, who will provide the details behind our performance.
Thank you very much, Kürşad, and I thank you all for joining our call today. I will start with page three. Our lucrative and prudent lending growth strategy translates into further improvement in Turkish lira loan yields, even during the decline in interest rates. Turkish lira loans increased 6% quarter-on-quarter and 23% year-to-date, and this is in line with our full-year guidance. Also, please note that excluding the credit cards, our growth is at 29%. Foreign currency loans, on the other hand, were stable in the quarter and up by 5% year-to-date, also aligned with our guidance. We continue to gain market share in individuals through general-purpose loans via salary customers and pensioners, mortgages that supports our penetration levels further, and auto loans. On the company side, we continue to be selective.
Our focus is RAROC, meaning return on risk-adjusted capital returns, and it has to be positive, and we are selective because of that in overall lending. All incorporated, our Turkish lira loan yields improved 18 basis points quarter-on-quarter, adjusted for the non-revolving part of the credit cards. Good news, our loan yields are still at those levels stable, even slightly higher than that, which we foresee to continue in the fourth quarter, which will further support our net interest margin. Now moving to the funding side. As Kürşad stated, we are seizing opportunities in Turkish lira deposits as cost of funding is on the ease. Our Turkish lira deposits increased as much as 20% in a single quarter, while maintaining our Turkish lira deposit costs 300 basis points below our peers, both on a quarterly and year-to-date basis.
This is a proof of our impressive and disciplined cost management, deposit cost management. Improving 19 basis points quarter-on-quarter, our Turkish lira deposit costs improved 294 basis points on a year-to-date basis. Further to come, we have already reflected the rate cuts to our Turkish lira time deposit rates, which is now even below the policy rate. Also, we continue to gain market share, thanks to the strong active customer franchise, which is now above 18 million, even 18.1. Equally important, our strong small ticket deposit base is supporting our deposit costs. As a proven track record, we are leader in Turkish lira demand deposits in nominal terms, with a further 10% quarter-on-quarter increase. Thus, 43% of our deposits are sight deposits and 26% of Turkish lira. This is obviously the highest level among the peer group.
Foreign currency deposits, on the other hand, were almost stable Q-on-Q and year-to-date. Once again, our strong deposit performance and our disciplined pricing strategies will continue to support our net interest margin further in the quarters to come. Now I am moving to page five, looking at our top line. As we have stated during our second quarter call, as you can see, versus over, our net interest margin widened 23 basis points quarter-on-quarter in third quarter. Turkish lira loan deposit spread improved 33 basis points and 91 basis points on a year-to-date basis. Once again, more to come with a stronger momentum, as we are already witnessing, which gives us the confidence on our full-year net interest margin guidance and for the quarters ahead. As also Kürşad stated, we are already 45 to 50 basis points higher than our third quarter NIM levels.
Accordingly, increasing another 11% Q-on-Q and 37% year-over-year, our revenues reached to TRY 207 billion. This is mainly thanks to 38% increase in core revenues, as our net interest margin widened 58 basis points year-to-date and 73 basis points year-on-year. Our trading income in third quarter stood at TRY 5.5 billion and at TRY 21 billion as of 9M, and this is thanks to increasing customer transactions and treasury operations mainly in first quarter. On top of the increase in customer transactions, should the market allow, definitely the interest rate environment will be important, we will see further support from our trading line. Now moving to the next page, our fees. Our fees are already backed by a customer-centric service model. This year, we are going through a PV lucrative payments network scheme transition, which has a one-off impact on our fee expenses.
Adjusted for that, our fee growth stands at 26% year-over-year, while the reported increase is at 19%. Please note that the negative impact is one-off and is during the migration year, thus this year, 2026. Looking at the details, we had a robust increase in transaction fees, up by 43% year-over-year, a solid 65% support from bancassurance, and 65% increase in fees from investment products, which are more than compensating this impact. Once again, our strong customer franchise will continue to support our already high level of fee generation. On a reported basis, now we see some downside risk to our full-year guidance, but that said, adjusted for the one-off impact, our fee guidance is intact. Also, this is also providing some support for next year's fee growth. Definitely, when this one-off impact vanishes, we will see a stronger growth on the net fee income generation.
Now moving to the OPEX, we are on page seven. Despite the higher-than-projected inflation reading, our cost growth stood at 34% year-over-year and aligned with our full-year guidance, even with an ongoing increase in IT spending. Note that our IT-related costs increased 57% year-over-year without any compromise. All the IT investments are supporting and will further support our revenue generation and efficiency. Our fee coverage of OPEX stood at a strong 85%, and cost-to-average asset at 3.9%. All incorporated, we are committed to achieve our lower-than-35% OPEX increase guidance for the full year. Even we are likely to end the year better than our guidance. Now moving to the asset quality. Given longer and higher-than-projected interest rate environment, tighter-than-expected macro, lack of legal restructuring scheme, we are witnessing an increase in NPL inflows through unsecured consumer loans and SMEs, while bigger tickets, corporate and commercial, are quite intact.
Also, as always, we continue to be conservative in classification with a very prudent coverage. Accordingly, quarter average gross NPL inflows stood at TRY 21 billion versus TRY 16 billion in 2025. Also, from a very high base, we are seeing some slight slowdown in recoveries. Quarterly average stood at TRY 6.3 billion versus TRY 6.5 billion in 2025. All incorporated, quarterly average net NPL inflows increased 5% versus 2025 average. These increases mainly through a 25% increase in credit card inflows, 66% higher on GPLs, and 50% increase is on the SMEs. I will dig into the details in the next page, but definitely we continue to be very, very prudently covered. All incorporated, our cost of risk increased to 214 basis points as of 9M 2026.
Thus, as also Kürşad stated, we might end the year with a slightly higher than 200 basis points cost of risk, given prolonged high inflation and high interest rate environment. Looking at our conservative staging and provisioning, we are on page 9. Our total loan coverage further increased to 4.1%. Adjusted for TRY 12.6 billion NPL sales and write-offs in the year, our coverage increased to 4.7% level. The increase is through prudent provisioning in unsecured consumer loans and SMEs. We are increasing the coverage levels on these two sub-segments. Our NPL ratios stood at 4.6% with 60% coverage, and adjusted for the NPL sales and write-offs, 64.4%. Stage 2 loan shares stood at 12.4% with a strong 8% coverage. Note that 57% of Stage 2 loans are restructured.
40% of this portfolio is from our legacy files that we have restructured in 2018, 2019, and the coverage is very strong on that front, around 20%. 35% of the portfolio restructured is from unsecured consumer loans, and we have around 70% recovery rate. We had further increase in our SICR part with a conservative approach. As always, share is at 41% in Stage 2 portfolio, and these are significant increase in credit risk in which we have a very conservative classification. Now more than 90% of the portfolio is without any past due. Just a limited 3% of the portfolio is day past due classification in which we are seeing and we will see some migration, as we always mention. Now moving to the solvency, we are on page 10.
Due to negative impact arising from macro and limited internal capital generation in the past two quarters, our Tier 1 ratio is now at 11.7% with 211 basis points buffer. Also, as a part of our conservative provisioning and lending approach, model update impacts, we had 35 basis points negative impact arising from that. We recognize that our buffers have narrowed versus what we had in the previous years, but definitely with a very strong head start to the fourth quarter, internal capital generation restarted in 4Q and will accelerate in the coming quarters. Lower interest rates will also provide support through securities valuations. Note that as of 9M 2026, our mark-to-market losses on the equity is at TRY 17.3 billion. The negative impact on the capital ratio is 60 basis points.
In addition, our strategic partnership with Azimut on our portfolio management will contribute approximately 50 basis points to our capital adequacy ratio, depending on the closing date. These also we have some further incentives that we will be sharing you hopefully in January. Looking at the sensitivities, first 10 basis points move on the interest rates support our capital by 13 basis points, and 10% depreciation impact on CET1 is at 28 basis points. No impact, even some slight positive impact on capital adequacy ratio. We have huge room for the NPLs break-even when it is set as per. Our 2020 guidance continues to get ROT in the range of our high to mid-20s level. Excluding the one-off gains, it will be closer to the low end of the guidance and including closer to the high end.
As we stated, we foresee an upside potential to our guidance on OPEX. This will be supportive to the ROE, while cost of it is likely to end the year slightly higher than 200 basis points. Now, we would be very happy to 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 their 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. The first question comes from the line of David Taranto with Bank of America. Please go ahead.
Good afternoon. Thanks for taking my questions. I have two. On fees, could you quantify the one-off transition costs in the third quarter? If not, when should we expect the drag to disappear? Secondly, you grew your Turkish lira deposits by 20%, materially ahead of the lending. Was this a deliberate decision to build liquidity ahead of unexpected acceleration in loan growth, or how do you intend to deploy this additional liquidity from here? Thank you.
David, thank you for your questions. For the fees part, it is not a single quarter one-off. It is throughout the whole year this year. Beginning of the year, we have changed our payment system scheme from one of the biggest one to another, namely from Visa to Mastercard. These kind of changes are happening in a couple of years, and the first year of the change is mainly a negative and increasing cost on the one that we are leaving, the payment scheme we are leaving. The benefit of the new payment scheme company is getting on the upcoming quarters years. Therefore, throughout the year, we had the cost, and then starting from the next year-on-year growth, you will see a much more higher growth than the previous quarters. This is something like that. Think about a long-term investment.
In the first year, you had the minus, but the remaining four year, you have a quite good high positive return. NPV of this all is still positive, but it's just the timing of the cost and benefit we are having. On the Turkish lira deposit part, it is not specifically for the liquidity. It is mostly due to the cost advantage that we believe on the Turkish lira deposit side will bring. Therefore, we hugely invested on Turkish lira deposits, and also we are doing the same on the last quarter, this quarter. We would like to enter to next year with much higher deposit base, where we will have more room to also change or downside the cost of deposit. This is the strategy behind.
Because when you also see while we are doing it, we are also getting rid of some of the wholesale funding or money market borrowing, that kind of things. That's kind of a composition change, let me say. Not an additional liquidity. It's a composition change to favor more on the decreasing rate environment.
Thank you.
Thank you.
As a reminder, if you would like to ask a question, please press star and 1 on your telephone. Ladies and gentlemen, there are no further audio questions at this time. I will now pass the floor over to Ms. Varol to accommodate any written questions from the webcast participants. Thank you.
We have a couple of written questions. Can you give any guidance on the time of Yapı Kredi Portföy sale? Why has the benefit reduced from 70 basis points last quarter?
Alexander, thank you for the question. The timing is we are on the closing process. We are waiting for regulatory approvals. We got two of them from Competition Board. We have one remaining from Capital Markets Board. When we receive it, our expectation is within this month, hopefully, we are going to close it. The benefit was the first one we announced, 70 basis points based on first quarter RWA of the balance sheet. Now we updated it with the last quarter RWA. That is the reason why it is decreasing due to higher RWA.
The second question is from Shabir. What drove Yapı Kredi's above market deposit growth? I think we answered that question. How your view on rate cuts change in light of the inflation print for October? How has CPI linker valuation changed in third quarter? Do you think the potential reduction in rates would help for controlling NPL formation in retail?
Thank you, Shabir. For the rate cuts, we haven't changed our rate cut assumption. We have one more, there could be another rate cut that we will see, but we haven't changed anything for our Based on the inflation October print, we haven't changed anything on our assumptions. CPI linker, it doesn't have any significant impact because we were valuing at 30%. Now the October inflation is 29.8. Just 20 basis points is very minor for the total balance sheet to change. Do you think the potential rate cut to help NPL? For sure, it is going to help, especially for the financing of the cash management SMEs as well as the individuals. Therefore, we see a benefit of a rate cut in terms of NPL formation.
So one question from Valentina. My main question is on capital adequacy, particularly on CET1. The CET1 buffer is currently low by historical standards and at around half of your internal target of 200 basis points above the minimum requirement. What capital enhancement initiatives are you working on? What impact do you expect this to have, and when do you expect the buffer to move back towards the 200 basis points targets? Are you considering an equity raise, and how willing would your key shareholder be to participate in such a transaction?
Thank you, Valentina. CET1 buffer buildup will mainly come from three separate pillars. The first one, the strategic initiatives, as you also mentioned. The second one, the most important one, internal capital generation. In fourth quarter, you are going to see a huge internal capital generation as it was in the first quarter. Therefore, this internal capital generation is the main driver of the capital growth. The third one, Hilal mentioned when she went through the slide, and we have some model changes negative impact. When we have a better picture in the macro environment, then this model changes buffers will also be released. Therefore, these three, we believe that next year, around the beginning of the second half, we will have this buffer again, 200 basis points buffer again.
One question from Mustafa Kemal Karaköse. There is an 80% increase in Turkish lira reserves at Central Bank quarter on quarter. Is there any reason for this?
Not specifically. For our Central Bank reserves, we obliged to put an average. Therefore, maybe the end of the quarter was the last week of that average. It could be the reason, but there is no specific reason behind it.
Our Turkish lira deposits increased also.
Yes. Fundamentally, yes.
Valentina is asking, where do you see cost of risk ending this year and how this compares with through the cycle cost of risk. We will be ending the year slightly higher than 200 basis points, as we said, and then it will start to improve. Fourth quarter will definitely seem to be lower than what we had in the third quarter or around that levels. Starting from first quarter of next year, we will see some improving trend on the cost of risk levels. From Hakan Aygün, "Can you briefly update us on your macro projections for 2027. How do you see the evolution of cost of risk NIM for next couple of quarters. Are we going to see the peak cost of risk in 4Q 2026.
Hakan Bey, thank you. We are not able to give any projection for 2027, because we are in the budgeting process and we will be giving that at the beginning of next year. In terms of cost of risk and NIM evolution, let me start with the NIM. Fourth quarter NIM, we will see quite a good jump on the fourth quarter and exit of the fourth quarter. What I mean, the very last days, weeks of this quarter, we will be around 4%, 4.5% levels. Then it will continue on the next two quarters, beginning of 2027, and we will peak there and normalize around 4.2 levels in a normalized environment. In terms of cost of risk, also the same.
The fourth quarter, there could be in line or slightly better than the third quarter, because when we look at the, as of today, the collection potential and collection capabilities are increasing. Therefore, it is in line or slightly better than third quarter. Next year, we don't expect a dramatic improvement, but again, the cost of risk could stay something around 150, 175 for the next year.
I'm just checking first. So from Valentina, "Could you give us more color on the restructured stage 2 portfolio? You mentioned that around 40% relates to legacy loans. Which sector are these exposures mainly concentrated in? How much do you expect to migrate to stage 3? Separately, could you provide more detail on restructured stage 2 consumer portfolio and your expectations for migration to stage 3?" Looking at the stage 2, as you recall, if you recall, back in 2018, we restructured half the mainly on the energy loans, which we are seeing strong recovery since then. We do not expect, to be honest with you, any migration from that portfolio towards NPLs. On the 35% of is unsecured consumer loans, the recovery is around 70% for that. A part will definitely, we are seeing is flowing towards the NPLs. It continues.
30% is going towards the NPLs. That's, I think, yes. One last question we have. "Are there any other deals in your pipeline beyond Azimut one?
Anna, thank you. The first two questions of yours already answered, the macro scenario and the NIM. As you may also understand, when it happens, we are making the public announcement.
I think we do not have any further questions. So I thank you all for joining our call today. If you have any further questions, we are always happy to answer. Please directly reach us. 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, and have a pleasant evening.