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Ladies and gentlemen, thank you for standing by. I'm Popi, your Chorus 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 2024 Financial Results Conference Call and Live Webcast. This time, I would like to turn the conference over to Mr. Kursad Keteci CFO 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 Q '24 earnings call. Before going into our performance, I would like to share some information about the operating environment. Türkiye continues its normalization process through actions both in monetary and fiscal sides. Tightening in financial conditions significantly increased and policy rates reached 50%. As you all know, CBRT funding has estimate 53%. Central Bank also signals tight monetary stance to continue until they observe significant and sustained decline in monthly underlying inflation. Alongside with the monetary policy, the tightening sustains with some macro prudential measures. It's targeted to shift the expenditure driven growth to a value-added production-driven growth. It's also expected to get support from tightening efforts from the fiscal side.
As a result of these actions, there is an improvement on current account deficit. And as of February end, 12 months rolling current account deficit to GDP improved to 2.9% and expected to be around $25 billion for the full year. The budget deficit is at 5.6% of GDP as of March and expected to be lower than 5%. Inflation on the other hand remains elevated as expected. And after seeing the positive impacts of tightening and the base impacts, we expect the inflation to decrease in the second half of the year. All these measures are causing an increase in the TL cost of funding and a weak loan growth momentum delays the recovery. As a result, there is a pressure on Turkish lira loan deposit spread and net interest margins.
Now I move to the second page of our presentation. We posted TL 10.3 billion net profit in the first quarter corresponding to 18% year-on-year decline. Our return on tangible liquidity realized at 23%, return on asset at 2.1% in a very challenging operating environment. And by the way, I would like to state that our quarterly performance was in line with our own expectations. Some important drivers of our performance are as follows: During the quarter, with the ongoing rate hikes and tightening measures, TL cost of funding continued to increase. That said, thanks to our successful Asset Liability Management and strong demand deposit increase, we had a controlled 134 bps contraction in the quarter PL loan deposit spreads and our Turkish lira loan deposit spreads continued to be above our peers. Net fee income went up by another 20% quarterly growth and 190% year-on-year growth. This performance is achieved through all subgroups. Number of transactions and active number of customer increases are supporting both payment system, investment activities, insurance and money transfer fees.
Operating costs increased in the quarter continued at 4% and NPL collection in the quarter was again very strong at TL 3.2 billion. We had front-loaded provisioning for this quarter and as a result, our cost of risk stood at 82 bps as of first quarter. In this quarter again, we have continued to maintain a solid set of fundamentals, which enables us to be well equipped for the normalization to be followed by a growth cycle. In terms of liquidity levels, our FX LCR is about 570%, and total LCR is around 150% as we speak now. And additionally, our loan deposit ratio is still significantly below 100% and realized at 86%.
On capital front, we continue to have comfortable solvency with strong buffers. Tier 1 ratio at 12.8% when adjusted for $500 million AT1 issued in April, and we have 322 bps buffer versus regulatory limits.
We actively managed capital position despite dividends and a new onetime flat operational risk impact. Total loan loss coverage stands at 4%, and we maintained the highest level among peers. NPL coverage is 155%. The slight decrease in total loan coverage is mainly due to our strong PL driven loan growth and a fully covered NPL sale of TL 1 billion and collections for both Stage 2 and Stage 3. Focused income's small-ticket strategy and increased number of transactions enabled the bank to be very well positioned for the upcoming normalization period. As it is shown on Page 3, we have the highest demand deposit share in total deposit at 44%. We have the lowest cost of Turkish lira deposit at 31.3%. These comparisons are between the peers as far as they announced the year's results. And we have the highest fee over OpEx at 97%. Again, our strong customer franchise and thanks to our #1 position in acquiring volumes. And we have the lowest NPL flows versus our peers announced so far, where we put some front-loaded provisions in this quarter and we expect to have lower cost of risk for the upcoming periods. And again, we have the highest total loan coverage, as I stated previously. And from the operating cost perspective, our efficiency sustained, we have the lowest cost to average assets at 3.5% versus our peers. Lastly I would like to mention that in the past 8 months, we have secured around $5 billion of funding from abroad, of which $2 billion was from the market transactions and $1 billion around DPR and the remaining are syndications MTN trade notes. Now I'm leaving the floor to Hilal, and she will be providing the details behind our numbers.
Thank you very much, Kursad, and thank you all for joining our call today. I'm starting with Page 4. In first quarter, our lucrative learning strategy sustained and we had 17% increase in Turkish lira loans on a quarterly basis and annual growth stood at 67%. In the quarter, we gained 29 basis points market share among private banks, I can say, driven by all loan subsegments except for housing loans. On top, we start to solve our demand for the foreign currency side and increased our loans by 9% quarter-on-quarter.
Again, this growth was on the lucrative way with strong set. All incorporated retail loan share as part of our small-ticket strategy, retail loan share in total now stands at 55% of our total loan. This is on a reported basis, so we haven't adjusted the currency impact on that.
On the funding side, we are on Page 5. We had another quarter of eye-catching demand deposit growth mainly through individual demand deposits, and this is once again thanks to our intact customer base and ongoing customer acquisitions. Turkish lira deposits increased 8% quarter-on-quarter while Turkish lira demand deposit increased, it was also at 8%. Annual Turkish lira deposits increase stood at 40% and Turkey lira demand deposit increased at 39%. The share of Turkish lira demand deposit, which are definitely supporting our Turkish lira cost of funding in total stood at 22%. And as a proof of the sustainable nature of our strength thanks to individual Turkish lira demand deposit in which we increased our market share by an additional 76 basis points in a single quarter. Our forecast customer deposits and customer demand deposits in U.S. dollars also both increased 8% quarter-on-quarter and the share increased 1% with demand deposit share in total increased 1 percentage points reaching to 71% and all incorporated, our total demand deposits to total deposit share went up by 1.7 percentage points to 44%, and this is the highest level among our peers that announced so far. Moving to Page 6. In the quarter, our revenues increased 23% year-over-year to TL 31.4 billion. This is supported by core revenues that stood at TL 25 billion and treasury activities, thanks to proactive management, our trading income and other income increasing TL 6.5 billion. As a result, our core revenue margin stood at 5.4% as of first quarter '24. Due to higher interest rate environment, which is pressuring Turkish lira cost of funding and lower support from the linkers, net interest margin came down to 1.3% and including strong fee income from credit cards, net interest margin, including credit cards so that credit card fees stood at 5.5%. In the quarter, supported by strength in demand deposits, Turkish lira cost increase was at 391 basis points and Turkish lira lending yields were up by 256 bps. And our spreads, our Turkish lira loan deposit spreads come down and controlled 135 basis points remained above our peer group. Adjusted for the non-revolving part of the credit card portfolio, our blended Turkish lira loan deposed spreads were at positive territory and also above our peers. In the quarter, foreign currency loan deposit spread stood at 9%, which was also supportive and likely continue to support our total spread. On the next page, we have consistent and impressive fee performance across the board and as always, net fees increased an additional 20% quarter-on-quarter and annual growth stood at 190%. Our fees to average interest-earning assets also imported 3.7% in the first quarter, this was 3.5% in 4Q. Payment system fees that make up 65% of our net fee base surged to 18% quarter-on-quarter and 4x year-over-year. And we are back #1 position in acquiring volumes and we gained -- and we are continuously gaining market share which is supporting our fee. The increasing turn in number of transactions consistently supporting our money transfer fees, resulting in 18% quarterly and 79% year-over-year increase.
Bancassurance fees doubled year-over-year with a 54% quarter results. Once again, the ongoing customer acquisition along with the increasing penetration, supported and will continue to support our fee generation as we already have a proven track record.
Moving to OpEx. We are on Page 8. In the quarter, we have maintained top notch efficiency and our quarterly cost increase was limited at 4% and annual increase contained at 87% level. So the limited cost increase is true effective running cost management, which came down 20% quarter-on-quarter, an increase of 43% year-over-year when business growth and human capital investments sustained, which are utmost importance for us as we are always mentioning. Our efficiency KPIs are best-in-class and better than our peers that announced so far. Fees to OpEx further improved as high as 97%, and cost to average assets at 3.5%.
Looking at asset quality on Page 9. In the quarter, NPL inflows were limited and below our peers at TL 5.1 billion when collections continues to be very strong at TL 3.7 billion, and this is mainly through a wide range of recovery from corporate and commercial portfolio. Our net NPL inflows on the other hand stood at TL 1.9 billion. Quarterly increase in net NPL inflows were mainly driven by unsecured retail lending and net NPL inflows from consumer and credit cards were 2x of the limited 2023 quarterly average. SME net inflows, however, still limited at TL 105 million. We foresee further normalization in unsecured consumer loan inflows through the year, given the tight liquidity conditions and expected slowdown on the market side, and we always started to observe it. Accordingly, we have front loaded some provisions in a conservative manner. So our cost of risk stood at 82 basis points when the support from specific collections were strong at 102 basis points. Also, our recovery from Stage 2 also continues. Looking at the stages. We are on Page 10. We maintained a high 0.7% coverage level for Stage 1 loans, which are making up 87% of our total loans. Stage 2 loan coverage slightly up to 15% when the NPLs of Stage 2 coverage increased slightly, although we sold TL 1 billion worth of NPLs, which were fully covered. All included, our total coverage ratio stood at 4% and we maintain the highest level of coverage among peers. And just looking at the Stage 2 coverage breakdown, just 6% of the portfolio is past due, 46% of the portfolio is restructured in which, as I mentioned, this is the part we are slow in recovery and 48% is significant increase in credit risk.
Moving to Page 11, our very comfortable solvency levels. Our CET1 ratio stood at 11.7% and buffer versus regulatory thresholds so that 364. In a quarter that we had the dividend and the one-off annual operating risk impact, which are totaling 150 bps negative impact on the ratio. And including the 108 basis points positive impact from our very successful USD 500 million AT1 issuance in April. Tier 1 ratio stood at 12.8% with a 322 basis points buffer. On top of the seasonal impact that I mentioned on CET1 in the first quarter, please note that we have redeemed our $650 million AT1 in January 2024 that had 152 basis points negative impact on our Tier 1 capital ratio. On the other hand, our capital adequacy ratio stood at 15.7% with a more than 470 bps buffer. And once again, as always mentioned, these ratios all exclude regulatory forbearances. In terms of sensitive activities, the impacts are limited. First 10% depreciation at 32 basis points impact on CET1 and 25 basis points on Tier 1 and very limited 9 basis points on the capital adequacy ratio. These all impacts are including our recent AT1 issuances. The impact of the first 100 basis points interest rates in the Turkish lira is also limited at 20 basis points. And as always, I will mention that these figures are not linear. Now handing the floor to Kursad for closing remarks, and then we will be taking your questions.
Thank you, Hilal. And 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 comes from the line of Butkov, Mikhail with Goldman Sachs.
Yes, can you hear me?
Yes, we can hear you.
Yes, we can hear you.
Yes. I have a couple of questions. Firstly, in the light of the change in the policy rate, a little hike of 500 basis points and also some new regulatory caps on particular loan categories growth. How do you see this will shape your net interest margin performance in the next quarters? And also the loan growth when connected to your full-year guidance, which as far as I understand, you have reiterated. So that's the first question.
The second question is on cost of risk and on how you actually phrased the first quarter results that you front loaded some of the provisions, which -- and as a result, cost of risk came at 80 basis points. That correct me, but it gives a little bit of an impression that the normalized cost of risk then can be lower than this 80 basis points? And does it mean that this can be an area of potential positive surprise when again it comes to your guidance for the 100 basis points for the full year? And finally, on the capital, we can see some 180 basis points compression related to the business growth. Is that all related to your lending growth? Or there is something else baked into this number? So thank you very much.
And thank you, Mikhail.This is Kursad speaking again. For your first question, the policy rate increase and kept, yes, the policy rate increase and as well as CBRT's funding at 53% was not in our budget at this high. We were keeping our budget around 45% for the policy rate. And this added pressure on the net interest margins. And on the cap side, it is something tightening needed for the country. We believe we will be having room to grow in the second half of the year.
But for these 2, it's making real operating environment a bit tough. How do we see the current situation? As I said, this quarter, we started slow in terms of net interest margin and this slow performance was offset by other P&L items, as you see, and we had the quarterly net profit, which is in line with our internal quarterly expectations and performance. And NIM slowdown is mainly due to higher-than-expected policy rate as we explained. And this higher-than-expected funding has some impacts on our strong Turkish lira loan growth because we increased our TL lending stronger than our peers with very lucrative rates, but the expectation for the post rate had some negative impacts on that.
But as I said, we found -- we use our other strength, and we were able to keep our quarterly net profit. And therefore, for the upcoming periods, net interest margin pressure will be there. For sure for the second quarter, and third and fourth quarter, we will be seeing positive recoveries. And I believe with our strength on asset liability management and cost of funding management, which is much better than our peers, we will be achieving our ambition to reach the bottom line target as we guided.
And for the cost of risk, the front loaded, what we tried to meet, in this quarter, we had a very strong recovery. Again, it helped 102 bps for our cost of risk and we also sold part of our NPL portfolio. Although there is not as expected, we were expecting more NPL flows, which is not happening as you see also on the sector figures, but we kept our prudent and front-loaded provisioning criteria. For the normalized levels, I cannot say for the full year yet for the 50 bps, but there is a room for improvement for this 100 bps guidance. And for the capital part, yes, it's mainly coming from our business growth on the TL loan side.
And just one small. What's your nominal -- what's your guidance for the nominal return on tangible equity if you may disclose. I think if you disclose on inflation account...
Our guidance is in inflation accounting adjusted ROE improvement versus previous year.
The next question comes from the line of Saraoglu, Cihan with HSBC Global Banking and Markets.
My question though is about the first quarter net interest margin and NII evolution. If you could just elaborate on the drivers of that decline in net interest margin in the first quarter? And also, if you could share with us the size of your swap book and how that changed? Because it seems to have negative impact on your NII in the first quarter.
And in light of the first quarter, are you still maintaining your above 4.5% net interest margin guidance for the full year? Apart from that, one other question, in terms of Common Equity Tier 1, I noticed that you are now below 12%. But obviously, in the first quarter, you had the change in operational risk plus the dividend. Where do you expect to finish the year in terms of Common Equity Tier 1 in the absence of those?
Thank you, Cihan. For the net interest margin, and we had this strong TL loan growth with liquidity rates and for the funding profit, the main reason behind the more-than-expected policy rate from CBRT. It was the main reason, which was not so in line with our planning. But other than that, the other components are quite in line and we were also able to get remuneration on the reserve requirement, which has some positive impacts on our NIM. But for the main reason for the NIM not from the lending part, from the cost of funding part, which was higher than our expectations.
And therefore the upcoming periods, I will link it to your guidance question from this first quarter, it is not easy to make a revision. And therefore, we decided to have you see the second quarter and as well as when we announce our second quarter results in July, we will be seeing the July figures. And accordingly, we will think about any revision if needed.
But as I said, we are keeping our ambition to reach our bottom line guidance. And for the swap book, yes, we are having higher than our peers' swap book, and it's mainly due to our wholesale funding book. Our wholesale funding FX funding is close to $5 billion to $6 billion more than our peers. And as you know, during the first quarter, Turkish lira funding through swaps versus still beneficiary for the bank rather than getting Turkish lira direct deposits. Therefore, as asset liability management strategy, we kept our swap book, and that's why you see the swap cost is a bit higher. But instead of swap cost, it would have been Turkish lira deposit cost. It is the management of the balance sheet, and it is still positive in terms of profitability, funding -- raising TL through swaps.
And for the CET1, as you well mentioned, 11.7% includes flat operational risk impact of 90 bps in this quarter. But just not -- it is still 364 bps higher than our regulatory limits. And you know we have a management buffer of 200 bps and we will be keeping our buffers around this level, and it's obviously, it's going to be above 12% for the end of the year.
The next question comes from the line of Sevim, Mehmet with JPMorgan.
I'll have a couple of follow-up questions, please, to what my colleagues already asked. Maybe in terms of the NIM management and the balance sheet overall. You mentioned TL loan growth was obviously relatively strong in the first quarter, and then there was the additional CBRT tightening, which was not budgeted in. But if you look just top down your balance sheet, your loan-to-deposit ratio in TL has also increased quite substantially now to 114% and there was this 8-percentage-point jump in this quarter. Your peers which have reported so far are below 90%, which I would assume also is partly the reason behind the increase in swap costs.
So could you please explain the strategic thinking behind this? And why you're growing so fast still when your loan-to-deposit ratio in TL is arguably less comfortable than what peers are? And where do you see this going forward? And maybe related to this, if I may ask, FX loan growth was also quite strong this quarter, 9%. Obviously, maybe the balance is not that big, but can I ask where these big ticket files? Or is there any other color you can share on this strong growth in this quarter?
Thank you, Mehmet. Good afternoon to you also. For the NIM management and also the TL loan deposit ratio you mentioned. And it is totally a composition of the balance sheet. As I said, we have more than $6 billion wholesale funding than our peers. And the liquidity -- and while keeping the $6 billion trying to increase the deposit book is quite not profitable for the balance sheet. That's why we chose to swap those excess FX lending to TL which is still a lower cost than the deposits. And that's why you see the TL LDR higher than our peers. But in the total LDR, we are at around the same levels and it seems it is better to have a look at on the total LDR also because we have different asset balance sheet mix between our peers.
And for your question about the FX loan growth, yes, we have been deleveraging FX loan book for the last 5 to 6 years. Now also we have guided that we are planning to increase the FX from book -- around 5% levels. This is what's happening. And the lending activity is not a big ticket one. It is really widespread and mainly to exporters. And tourism sector-related lending, but there is no big tickets because we still keep our strategy of small-ticket loan and deposit growth. I hope it helps. But if you need any further clarification, happy to answer.
That's super. If I may ask just as a clarification to the previous question. Did you confirm that you're sticking to the real TL loan growth guidance for this year, with the expected improvement in the second half? Or would you re-visit this with the next quarter's results?
Next quarter, we will be revisiting it, I would say.
Okay.
Also Mehmet it's totally related to inflation. And we have more color for the year-end inflation at the middle of the year, then we will have more clues to revise or not the guidance.
At this time, there are no further audio questions. I will hand over the floor to management for any written questions.
We have a couple of written questions. One is for from [indiscernible]. Loan repricing was a bit slow in first Q at around 230 basis points, what we expect in the remaining quarters?
Thank you [indiscernible]. Loan pricing will continue to upward in the upcoming quarters. For this quarter, what you see as reported. There is an impact -- a direct impact coming from credit cards. As you know, credit cards just the revolving part subject to interest rate and also there is a cap on that interest rate. Also our TL loan growth also coming from the credit cards. That's why on the reported basis, you see a net higher repricing. When we adjust the credit card increase in our MIS figures, we see a quite good repricing on the loan.
And the second question from [indiscernible]. Can you reiterate rationale for the higher cost of risk in first Q '24. Can you discuss NPL inflows and sources of these inflows? I will ask one...
Okay. And for the rationale behind the cost of risk, as you know, in a full year, we have our quarterly planning. And in our quarter planning, these levels of cost of risk was the initial plan, but collection happened more than we expect. And that's why we stick on our normal quarterly plan. And instead of revising it down, we kept -- we put additional provisioning on the cost of risk, but -- this is the rationale. But as I said, we are going to rediscuss for this for the upcoming quarters. And for the NPL inflows and source of these inflows when we look at through the segments, we see less NPL inflows from the company than commercial and more on the retail part, but these are all in line with our expectations.
And second part of the question also, can you comment on 90 basis points impact on capital equity ratio from operational risk? What were the specific drivers?
And the operational risk calculation is a rule set by BRSA. It is a calculation of last 3 years' gross revenue multiplied by a co-efficient. And it immediately started and impacts the capital ratio at the beginning of the year. It takes last 3 years' average gross revenue and multiplied by if I'm not wrong, 12.5 and that's why you see a flat impact at the beginning. It's a standard method of calculation. Although we have an internal modeling for the operational risk, it is not being used but we still use standard methods driven by the BRSA rule set.
Thanks. So one question just for you. I may have missed it earlier or specific to your full year NIM guidance?
Yes, we answered that for the -- after the second quarter, we will have a look at it and decide accordingly.
And one more question. I will take this. Could you please disclose what was the income from CPI linkers in the quarter. And CPI rates we used to calculate is around TL 17 billion and we used 45% CPI for the valuation. TL 17 billion without the gross revenue generation. And please note that we are looking at -- the cost of funding is also increasing on CPI linkers. And given that, there is an impact on the net interest margin.
Also, you cannot just look at the revenue generation. Please also note that we are funding CPI linkers also in the portfolio. So we don't have any further questions. So we thank you all for joining our call. If you have any further questions, you can always reach us and the team. Thank you.
Thank you.