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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, I will now hand you over to Ms. Senar Akkus, CFO; Ms. Gamze Yalcin, Deputy Chief Executive; Mr. Süleyman Özcan, Head of Investor Relations. Dear speakers, the floor is yours.
Good evening, ladies and gentlemen. Welcome to our conference call for the third quarter results for Isbank.
Gamze Yalcin, our Deputy Chief Executive, and Süleyman Özcan from our Investor Relations function are with me. We will go into the details of our performance, but before that, I would like to give a very brief outlook for the economy and period highlights for Isbank. In the first 9 months of 2019, continued trade war concerns between U.S. and China, Brexit process and geopolitical developments were influential on global markets. While rising global uncertainties caused fluctuations in financial and commodity markets, it also paved the way for a slowdown in the global economic growth. As weakening in the global economic activity became more evident, major central banks started to implement more expansionary monetary policies supporting the demand for emerging market assets.
In Turkey, moderate recovery in economic activity continued. During this period, CBRT continued its policy rate cuts as inflation outlook continued to improve. Domestic demand conditions, relatively stable cost of Turkish Lira and strong base effects were behind the disinflation process.
In the third quarter, geopolitical development continued to be the main driver of these domestic markets. In the coming period, considering the current relative stability in the domestic financial markets despite the rise in geopolitical risks, CBRT's year-end inflation projection seems to be achievable. In fact, we expect the economic activities to continue to recover gradually with the help of CBRT's monetary policy easing and disinflation process. Low base effect will also support this recovery.
After this brief outlook, let's move on to Page 3, where we have the main highlights for the period. As you see, TL core spreads improved in the third quarter as a result of lower deposit costs. Swap adjusted NIM increased by 55 basis points quarterly in line with our expectations, strong performance in fee income generation continued. Year-on-year OpEx growth remained below year-end guidance, loan growth started to recover on the Turkish lira side, NPL formation was in line with our expectations; however, NPL guidance was revised, mainly due to the lower-than-expected loan growth. There was a relatively strong growth in Turkish lira deposits contrast to previous quarter. Share of demand deposits in total deposits reached a remarkable level of 28%. Our strong liquidity profile was maintained with an FX LCR of 343%, FX LDR of 72%, and NSFR of 130%. Our capital adequacy ratios stood at around 18%, indicating a comfortable level for future growth.
So now Gamze Hanim will give you the details of the bank's performance. I'm leaving the floor to her.
Thank you, Senar Hanim. Welcome all. On Page 4, we have the major P&L items as well as profitability and efficiency indicators. During the third quarter, in addition to the pickup in Turkish lira loans and a decline in Turkish lira deposit costs, we have seen a decrease in the volume and cost of swap transaction. As a result, q-on-q swap adjusted net interest income was up by 17%.
Fees & commissions income continues to grow on a quarterly basis, bringing the year-on-year increase to 28.5%, still well above our guidance for the year-end. Income from participations supported the revenue base again with around TRY 2 billion contribution to our operating income in the first 9 months.
In the third quarter, we continue to contain our OpEx. On a q-on-q basis, OpEx was flat while the year-on-year increase was below our year-end guidance. Taking into account the dynamics of the operating environment for the first 9 months as well as our expectations for the rest of the year, our revised year-end guidance for return on average asset is a range between 1.2% to 1.4% and return on average tangible equity is 11% to 12%.
Page 5 shows the main balance sheet items. In Q3, we started to observe a recovery in Turkish lira loan demand. Main drivers of the 1.7% quarterly growth in Turkish lira loans were Turkish lira corporate, commercial and general-purpose loans. FX loans continued to shrink as expected. Investments in Turkish lira securities continued as Turkish treasury maintained a high level of rollover ratio and Turkish lira loan demand remains weak.
In the third quarter, we registered a strong double-digit growth in Turkish lira deposits compared to the previous quarter. On the other hand, we have seen a decline in FX deposits. Turkish Lira and FX money market transaction were also decreasing in line with our flexible and cost-oriented approach, while swap transactions maintained their significant role in short-term Turkish lira funding.
Shareholders' equity increased 4% quarterly, mainly as a result of net income generation along with deposited mark-to-market differences from securities. Reaching 28% of our deposit base, demand deposits continued to further support our low cost of funding.
On the next page, we have the net interest margin and spread evolution. In the third quarter, quarterly average Turkish lira deposit costs declined by 66 basis points and stood at 14.5%. As the downward trend continues, we can expect that the average blended interest rate on outstanding Turkish lira deposit accounts as of the year-end to fall to single-digit levels. In the third quarter, average volume of FX swaps was around USD 6.7 million and their cost was TRY 1.7 billion.
On the other hand, quarterly, CPI linker yields declined to 15.4% and income from CPI-linked securities stood at TRY 1.1 billion. Despite the decrease in CPI linker contribution, thanks to the improvements in Turkish lira cost spreads, swap-adjusted net interest margin increased to 3.6% bringing the 9 months swap-adjusted net interest margin to 3.3% in line with our budget.
On the next slide, I'll be touching on fee income performance in the third quarter. We have registered another strong performance in Q3. Quarterly decrease in payment system fees were compensated by credits-related and mutual fund fees. The year-on-year increase in net fees and commissions income were 28.5%, still well above our full year fee income growth guidance of about 20%.
We have the asset quality indicators on Page 8. In the third quarter, in line with the recent developments in the banking system, there was an increase in the NPL formation. By the end of the quarter, NPL ratio stood at 6.7%. We expect this ratio to be around 7% to 7.5% by the end of the year. Decline in NPL coverage ratio was mainly due to the NPL sale in the period as well as the new additions to the NPL during the quarter. In line with the aging impact, this ratio can be expected to increase in the coming quarters. Net cost of risk for the first 9 months stood at 197 basis points. For the rest of the year, we expect it to remain flattish and stood around 200 bps at the end of the year.
Next page shows the capitalization level. As of the end of the first 9 months, capital adequacy ratio increased by more than 1 percentage point and reached 17.8% indicating a comfortable level for future growth. Net income generation, mark-to-market gains and securities as well as the decrease in FX loans continues to make positive contributions to the ratio.
This concludes our presentation now. Thank you for attending to the conference. And now we can take your questions.
[Operator Instructions] Your first question comes from Alan Webborn from Societe Generale.
I think you may have touched on the call, but I did hear you properly. Could you just go through how you see Turkish lira loan yields and deposit costs from where the stock is now to where you think the stock will be when we close the year, so we feel that we're up-to-date with how you see the trends there? That would be useful. And do you think you could, with regards to your existing guidance for 2019, tell us how you feel that you are performing, just go through it briefly for us, so we can understand where you are? That would be the second question.
And I think also could you talk a little bit about where you're seeing an improvement coming through in terms of the loan demand? Is it particularly retail, you're starting to see better demand in corporate? And just to give us an idea about how you feel, the dynamics of the market are changing, now we're in a rather lower interest rate environment than we were back in July?
Thank you very much for the questions. Let me start with the first one. I'll give some information about our output and our yields in order to give an idea about the trends. We see that both the deposit costs and lower yields continue to decrease. And according to our calculations, in the fourth quarter, average deposit cost of Isbank can go down by around 3.5 percentage points. This is quarter's share of deposits. And for the loan yields, I can say that in the last quarter, you can expect a decrease in the average loan yield by around 1.5 to 2 percentage points. That means, our net interest margin will continue to improve in the fourth quarter, and we calculate that it will be about 4% in the fourth quarter, leading us to a net interest margin of 3.5% for the whole year as the guidance.
And for the volume growth, I can say that there is an improvement in the Turkish lira loan demand and our balances are also improving in this sense. We see demand for general purpose loans as well as equal installment commercial loans. And with our expectations for the fourth quarter, we believe that we can reach our guidance of 7% to 8% growth in Turkish lira loans. Although, of course, the rate cuts will have a positive effect on the loan demand. We believe in that. In the third quarter, although the Central Bank started its rate cuts in July, the loan demand well performed due to the expectations for further rate cuts. But at the point we have come, if we take into account that, there is relatively little space for further rate cuts. This can cause a recovery in Turkish lira loan demand, we believe. In this sense, although the 9 months figures are at lower levels, we calculate that at the end of the year, we will be around 7% to 8% growth rate for Turkish lira loans.
On the foreign currency loan side, the decrease in our FX loans are higher than we expected. Therefore, we will see a lower balance in FX loans at Isbank at the end of the year as we see from here.
And what was the third question? That's all? Okay. Thank you. I think this concludes my answers.
[Operator Instructions] The next question comes from Sam Goodacre from JPMorgan.
I had a question on your cost of risk which in the third quarter was materially lower than I believe consensus had expected. So could you let us know what the core reason of that was? I believe you said there was an NPL sale, and so I wonder if that impact is felt in the provisioning line this quarter. But also it does seem, generally speaking, that you had effectively 0 Stage I provisioning and write-backs at the Stage II level? And then the second question related to asset quality is on the NPL reclassification that the BRSA mandated. And if you could share any data around the burden that Isbank felt?
Okay. Thank you. Actually, under IFRS 9 framework, we have contracted different macroeconomic models for each loan [indiscernible] of retail loans and commercial loans. That means when macroeconomic parameters change, our provisioning levels are also changing. The NPL sale affects the coverage ratio for the Stage III loans, but it doesn't have any effect on net cost of risk. In this sense, the decrease in the net provisioning in the third quarter is mainly a function of our model. That means in the fourth quarter, if there occurs any changes in the expectation for these macroeconomic parameters or if there occurs any change in the credit risk of some firms, we can see this provisioning level to be higher again. If you look at the second quarter, although the additions to NPL are lower than the third quarter. You'll see that the net provisioning levels are quite as high as the provisioning levels in the third quarter. This is to summarize that, we are provisioning depending on our macroeconomic model and also, of course, for some loans, the individual assessments that are done for some project finance loss. This is a -- this can be an indication of the risk perception of Isbank in pure terms. I can easily say that.
This project can cause fluctuations on a quarterly basis as we experienced in the first 9 months. Therefore, we left some room for such changes. This is why we revised our next cost of risk and NPL ratio levels. Most probably, in our best case scenario, we expect our NPL ratio to be around 7% because of the denominator effect. Actually, in NPL balances and in second stage balances, we do not have any divergence from our guidance. However, because of the low levels of loan demand, the denominator didn't grow in the first 9 months of the year. Therefore, automatically, these balances lead us to higher ratios. This is why we are now revising our expectations for the year-end in terms of net cost of risk and NPL.
Also as you know, we have a BRSA list. By the end of September, an important portion of the files on our site are transferred to NPL. There are some workings on the restructurings and for some loans, we have no overdues in the bank, and also we have a strong collection potential due to outstanding collaterals. And this is also another point that we should take into account for the fourth quarter. But, as I said, in our best case scenario, we do not expect the NPL ratio to divert from our guidance if we do not take into account the denominator effect.
The next question comes from Ovunc Gursoy from BNP.
Could you give us some preliminary guidance for 2020, especially the first half of 2020 as far as NIM and spreads are concerned and also the asset quality?
Actually, we are still working on it. We -- for the first half of the year and for the full year, of course, it is -- it will not be surprising to see a GDP growth, which is a [ close-lease ] potential with the effect of rate cuts by the CBRT. In this sense, we are expecting a recovery of -- in the volumes for loans at Isbank. And in the first half of the year, we believe that we can keep the same net interest margin levels that we have in the fourth quarter. But as the duration gap is around 7 to 8 months for Isbank, in the second half of the year, we can see a contraction in the net interest margin again. But our aim, of course, will be to keep it at high levels like in the fourth quarter of 2019 and first half of the 2020.
Asset quality trends also will depend on the developments in the fourth quarter. We are optimistic in the sense, with the recovery in the economy, we believe that the financial structures, financial capabilities of the firms will also improve. And we don't expect a major flow to NPL and personal stage loans as we experienced in the year 2019. Therefore, we are optimistic about the NPL and Stage 2 additions for the year 2020. But we are still working on it. We are doing some fine-tunings, both for the macroeconomic explanations -- expectations, both for the figures of the bank. We will share them with you at our Analyst Day at the beginning of 2020.
[Operator Instructions] The next question comes from [ John Yuton ] from [indiscernible] Investment.
All of my questions have been answered, so thanks for the feedback. Thanks.
The next question comes from Thomas [ Little ] from Bloomberg.
Could you please just clarify one more time on your asset quality front, especially about NPL ratio guidance and cost of risk guidance, where you have not included the mandated BRSA NPL formation into those targets, right? So you can probably -- there can be some recognition in the fourth quarter.
Okay. Okay. We are revising our NPL guidance from 6% to 7.5%, including BRSA effect, of course. And in terms of net cost of risk, our guidance was lower than 150 basis points at the beginning of this year. Now we are revising it to around 200 basis points in terms of net cost of risk.
[Operator Instructions] There are no further questions. Dear speaker, back to you for the conclusion.
Okay. Thank you very much for your participation. We're looking forward to seeing you at our year-end teleconference and also at our Analyst Day. Thank you very much for your attention.
Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation. You may now disconnect.