Akbank TAS
IST:AKBNK.E
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Akbank TAS
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Dear friends, New front welcome to our first quarter 2021 financial results webcast and conference call. This is Ebru speaking, Head of IR and sustainability of Akbank. Thank you for joining us. I hope that you are all well in good health. Today, I have with me Håkan Binbasgil, our CEO; Türker Tunali, our CFO; and Ilknur Kocaer from our IR team. Before moving on to the financials in detail, I'd like to leave the floor to Håkan to share his thoughts. Håkan?
Thank you, Ebru. Hi, everybody. I'm very happy to be with you again. I hope that you, your families, your colleagues and your loved ones are all doing well. We obviously continue to go through extraordinary unprecedented times. Vaccinations have started to gain pace globally. But many of us are still facing certain challenges. The health and well-being of our people, customers and community remain our top priority. Over the last year, digitization has been tremendously fast forwarded in both transforming customer behavior and the way we operate. Our long-term approach in everything we do has given us significant competitive advantage.
Our years of investments in technology, advanced analytics and our people as well as our consistent focus on sustainability, help us successfully navigate these challenging waters. We are fully aware of the importance in building and maintaining a healthy and visionary company. Our robust capital, solid liquidity, low leverage, highest level of efficiency, low operating cost base, outstanding talent and technology are key enablers and differentiating factors in our ambition. And this long-term approach also helps us absorb the potential damages of difficult periods relatively well. Ebru will share with you our first quarter performance in detail in a few minutes, but I would also wanted to share my thoughts very briefly.
As you know, last year, with the support of favorable liquidity conditions, our sector witnessed significant loan growth. From third quarter onwards, with the tight monetary policy, loan growth started to normalize. Currently, the impact of this tightening is being felt both in loan growth as well as margin evolution. At the beginning of the year, when we shared our full year guidance, we were expecting loan growth and margins to start the year at low levels and gradually improve throughout. However, I should mention that so far, funding cost trends as well as inflation expectations have both evolved somewhat above our initial guidance.
We still believe that during the second half of this year, we will have a more favorable operating environment. In light of these latest trends, during the first quarter, our NIM has evolved at relatively low levels. Going forward, we expect to see a gradual improvement in NIM. On the fee income side, I'm happy to share that we had a very strong performance across the board. While our cost discipline continues, similar to the fourth quarter 2020, our net cost of credit has evolved favorably, helping to mitigate our performance on the net interest income side.
As I have shared with you in various occasions, our prudent provision build policy has started to pay off, and our cost of credit is moving towards normalized levels. To sum up, first quarter profitability is on path with our full year guidance. Before leaving the floor to Ebru, I'd like to express my sincere gratitude to all our people for rising to the unprecedented challenges and being a source of strength. And after the presentation, I'll be more than happy to answer your questions.
Thank you, Håkan. Let's start off with the big picture. Despite the negative impact of the ongoing pandemic, the economic activity in Turkey is still trending relatively well. This trend is driven both by domestic demand and the recovery in exports in line with the recovery in the global economy. With the help of the cumulative impact of the cumulative policies, most of the manufacturing sector activities are back to or even better than pre-COVID levels. However, activity in the service sector still remains to be weak and the trend in the tourism will be an important factor for this area.
As for the current account, the pickup in export is supported, yet the overall outlook will once again much be dependent on the trend in tourism revenues. And as for growth, we expect this year's GDP to be around 4.5%. The main challenge going forward is to reduce unemployment rate with sustainable growth trajectory. Inflation will arguably be the most closely watched macro parameter in the foreseeable future for Turkey. Both demand and supply-related factors continue to lead to upside risks, which may require the continuation of tight monetary policy. And although we expect a decline in time in annual inflation until year-end, it may still remain at elevated levels. And the pace of the deceleration will be important for the course of the monetary policy.
In light of all this, we expect policy rates to remain its current high level until a commencing g downward trend in inflation is observed. This implies that the TL deposit and loan rates would likely remain at relatively high levels. Although there was a decelerating trend in TL loan growth due to tight domestic financial conditions until mid-February, there has recently been some recovery due to improving domestic demand. The trend in FX loans, however, still remains to be weak. Overall, although the operating environment will be more favorable in the second half of the year, it will still likely remain challenging due to the tight financial conditions.
Let's move on to the bank. Our first quarter reported net income was up by 56% year-on-year to TRY 2.028 billion. When adjusted for the TRY 250 million fee provisions set aside last year in the first quarter, it was still up by an outstanding 31%. Our reported ROE stood at 12.9%. Please note that there has been a change in corporate tax rate from 20% to 25% for this year, which will be affecting our profitability on a cumulative basis, starting from second quarter. But including this negative impact, we still target mid-teens ROE for full year. We had shared at the beginning of this year that our swap-adjusted NIM would be at a sequential improving trend throughout the year. Due to funding cost rising above our expectations, NIM started the year at a lower level than what we initially anticipated. However, we continue to expect a gradual improving trend in NIM. As for fees, we started the year quite robust and on track for high teens guidance. On the growth side, our delivered loan book and investments in digital banking have further advanced our market share in retail, i.e., consumer and SME, which we believe will be supportive factors for our profit mix going forward.
We have been gaining market share in these high-margin segments since last year's third quarter. Our pre-provision income was up 10% year-on-year and 49% quarter-on-quarter, also reflecting the foreign currency gains from LYY risk hedge and foreign currency provision hedge. Both have no impact on net income as they are netted off at the provision line. This robust performance, which enables the bank to further build reserves is a clear demonstration of financial strength and the capacity to absorb as well as navigate challenging environments. Thanks to our proactive and prudent IFRS 9 implementation in previous quarters, the net cost of credit has been improving since it peak quarterly in second quarter of last year.
And as always, our fortress balance sheet built with robust total capital of 18.5% without forbearances, strong foreign currency liquidity and low leverage of around 8x underline the inherent benefits of our diversified business model. Please note that on this slide, we have shared a link to our cheat sheet, which provides the data used for the presentation.
Let's move on to the drivers in detail. First, with the balance sheet. Our total assets were up by 8.1% year-to-date to TRY 517 billion. Net loans increased by 7.3% in the same period to TRY 282 billion, led by both TL as well as FX loan growth. By the end of the first quarter, loans made up close to 55% of our total assets, almost no change versus year-end. TL business loans were around 39% of our total net loans, while consumer loans, including credit cards, accounted for 23%. The FX loans reached almost 38% of our total net loans, driven by limited new loan generation and also the 12% lira depreciation during the quarter. Our securities remain around 21% of our assets. Amid the heightened volatility of the quarter, the bank prioritized balanced and prudent asset allocation, which will be instrumental in creating sustainable long-term shareholder value, along with our low leverage and robust capital.
Our year-to-date TL loan growth was led by consumer loans and consumer credit cards, where we had a broad-based quarterly market share gain. With 50 bps in general purpose consumer loans, 40 bps in mortgages, 50 bps in auto and 15 bps in consumer credit cards. A notable support to GPLs during the quarter came from end-to-end improvements in analytical decision models. These initiatives reflect onto a healthy increase of our pre-approval rates. As a result, our pre-approval originations in total GPLs were up by 5 percentage points quarter-on-quarter, reaching 67%. We continue to enhance our analytical capabilities, which will further advance our market presence. Accelerated marketing efforts as well as digital initiatives were also key enablers for noteworthy performance.
Please see our appendix for the outstanding highlights of our digital banking achievements. As for TL business banking, after closing last year on a high note, we started the year rather flattish. We also witnessed some competitive pricing during the quarter, which curbed our lending appetite, especially in corporate and commercial segments. On the other hand, our net FX loans were up by 2% year-to-date, reaching $12.7 billion from our low base. Still muted demand for investment loans hinders us from establishing a more optimistic outlook for foreign currency loans.
To sum up, it is early days. But there may be some downside risk to our full year TL loan growth guidance of around 20%. However, we believe our efforts in the retail segment have resulted in better than guided performance so far, which will have positive repercussions for the profit mix. As for the securities, the total securities book is up by 4.8% year-to-date to TRY 107 billion. On the TL side, we continue to increase the share of CPI linkers and floating rate, which now make up 66%. And as a reminder, last year, first half, our CPI linkers and floating rate portfolio stood at 49%. In light of the rising inflation outlook, the main increase over the last 3 quarters took place in CPI linkers, which are now 57% of total TL securities up 14 percentage points since first half of last year.
This portfolio will work as hedge in higher inflation environment. We are currently using 11% for the October to October valuation. Please note that every 1% CPI has around TRY 260 million net income, 6 bps NIM and 40 bps ROE impact. As for the fixed rate side, around 35% of the portfolio will be maturing towards the end of first half. With current yields being significantly higher, the new purchases should be supportive for NIM. As for the foreign currency side, there was slight uplift in the overall use of the portfolio as we rolled low yield domestic issuance redemptions with higher-yielding sovereign Eurobonds. Our proactive positioning in both foreign currency and TL securities portfolio will be contributing positively to our net interest income this year.
Now on to the funding side. Our focus remains on well diversified and disciplined funding mix as deposits continue to be our main source of funding with 60% share. Our total deposits were up by 6% year-to-date to TRY 310 billion. Demand deposits were also up by 4% year-to-date, keeping a solid 31% share in total deposits. Sticky and low-cost deposits, such as retail, i.e., consumer and SME, have reached a total of 75% of total deposits -- TL deposits. This is 3 percentage points higher versus end of last year. We also improved our TL LDR by 6 percentage points. The [ devaluation ] observed towards the end of the quarter has also been a supportive factor. We have yet to observe whether this trend will continue as it will be dependent on the inflation and interest rate trajectory over the course of the year.
Our sound foreign currency liquidity with an FX LDR of 51% remains as one of our strong muscles. As a result, our total LDR ended the quarter at a low level of 95%, significantly below sector's 103%. For cost optimization purposes, we shifted some of our swaps to TL repo funding, which resulted in higher share of repos. Thanks to our significant unencumbered securities portfolio, we were able to opportunistically switch to this channel as a cheaper funding alternative. We have a well-established wholesale funding profile, which is less than 14% of our total liabilities. Our first quarter average foreign currency LCR is robust at 286%. And our foreign currency buffer is noteworthy at $12 billion versus our next 12-month rollover worth $2.7 billion. Also worth to share that, of the $2.7 billion due within the next 12 months, we have successfully renewed the $630 million syndicated loan in April with a rollover ratio of 107%. 35 banks participated, 8 being new. This was our first ESG-linked syndication, having performance criteria such as gender balance, non-lending decree for coal power projects, and electricity sourcing of our bank from renewables. The total share of ESG-linked funding in wholesale now stands around 21%, which we aim to increase to 30% by the end of the year.
The all-in cost was LIBOR plus 2.50% and euro plus -- Euribor plus 2.25%. We do not have any real bonds maturing this year. And due to the ample FX liquidity and low foreign currency loan demand, we will continue to be opportunistic in our borrowing strategies. And now on to the P&L. Our quarterly self-adjusted NIM was down 120 bps quarter-on-quarter to 2.4%. For the quarterly performance, key highlights were significantly higher funding costs with the CBRT funding and lower CPI linker contribution. As you very well know, we booked the higher full year CPI adjustment for last year during the fourth quarter, which the bank had an adjusted additional NII contribution of around TRY 785 million or 71 bps. Adjusted for this, or in other words, our CPI normalized NIM was down by around only 50 bps quarter-on-quarter.
I shared earlier, but to highlight once again, we are using 11% in our October to October CPI valuation and every 1% CPI has around 6% -- 6 bps NIM and TRY 260 million net income and 40 bps ROE impact. As I just shared, for funding cost optimization purposes, we reduced our swap utilization in nominal terms. Our average short-term and long-term swap utilization was around TRY 43 billion, down by around TRY 14 billion quarter-to-quarter, led by lower short-term swap utilization. Meanwhile, swap yields did increase, but our swap costs were still down by quarter-on-quarter to around TRY 1.4 billion.
Looking forward for NIM, we expect to see a gradual improvement starting this quarter. Currently, TL marginal deposit rates are slightly higher than our back book so probably we will see the peak in deposit costs in the coming weeks, whereas a positive spread gap between the TL loan back book and marginals remains to be significant, hence, also positive for asset repricing. 25% of our low-yielding commercial TL loans, excluding overnight, will be maturing in second quarter. Also, as I just shared, 35% of our TL fixed securities will be redeeming towards the end of the second quarter. Both asset classes being repriced at higher yields should be a blockbuster for NIM going forward. However, due to the funding environment being tighter than we initially expected as well as the worsening inflation outlook, there may be some downside risk to our full year NIM guidance, which should somewhat be mitigated with the CPI linkers working as hedge.
Now on to the fees. With an across the board, solid fee performance, our fees and commissions were up by 16% year-on-year, 36% quarter-on-quarter to TRY 1.462 billion. Last year, the effects of the pandemic on fee income tended to be felt mainly in the second quarter onwards. Therefore, first quarter of last year was relatively a higher base. As you can see on this slide, there were many businesses that positively contributed. To name some, our market share gains in noncash loans, higher interest rate and volume growth in payment systems as well as the positive contribution of our digital-first card that was issued, new project launch and increase of digital premiums and bank assurance, along with the online product innovation and digital client acquisition of Wealth Management. There was a one-off fee income from LYY loans. But even adjusted for this, our fee income was up by 25% quarter-on-quarter and 6% year-on-year. We are confident and fully on track to meet our high teens fee growth guidance and now on to the cost side.
Effective cost management is our strong muscle. We have a very low cost base, which gives the bank a lot of flexibility. Still, we continue to look line-by-line for expense control. Our reported OpEx was up by only 1.6% despite currency volatility. Last year in the first quarter, there was a one-off, i.e., the insurance penalty of TRY 71 million. If we were to adjust for this, the year-on-year increase would be around 5%. For this year, despite the higher inflation outlook, we remain confident in our mid-teens OpEx growth. The main contribution is expected to come from increasing marketing efforts and regulatory expenses, which are both in line with our growth strategy. We expect our low-cost base and solid revenue generation to be supportive of our best-in-class cost income ratio. We will continue with our disciplined cost management approach while investing in our future. And now on to asset quality. Our Stage 2 loans have remained around 9.5% of our gross loans, while Stage 3 loans declined slightly from 6.2% to 5.8%. We only had TRY 25 million write-off during the quarter, which had a negligible NPL impact. On a very positive note, second quarter in a row, our monthly average collection performance continues to be above pre-pandemic levels, leading to a net negative NPL inflow for the quarter.
As for the BRSA staging forbearances, of our 30 to 90-day files, only TRY 700 million are in Stage 1, while -- with a strong coverage, while 90 to 180-day files amount to around TRY 1.4 billion, and if all of these plus 90-day files would be booked as NPL, the impact would be around 40 bps. But looking at the past trends, we expect around 1/3 of these to become NPL. And also due to our prudent coverage policy, we expect limited channel impact. As a result, we remain confident in our less than 6% NPL guidance for the year, which excludes a possible 1% impact from NPL sales and write-offs. Our guidance takes into consideration that the forbearances on stagings will be ending in second quarter.
On this slide, we provide details regarding our loan deferred portfolio. Please recall that loan deferral schemes were extended until the end of the second quarter this year. Hence, we continue to support our customers in first quarter, while maintaining credit discipline and balance sheet strength. The total deferred risk principal amount to date reached TRY 32 billion, but the outstanding risk came down to TRY 20.8 billion by the end of first quarter. This is a substantial drop from also year-end of TRY 22.2 billion. Outstanding deferral loans account for 7% of our gross loans, while the total coverage almost reached 8%, up by 40 bps quarter-on-quarter.
It is also comforting that around 80% of the customers had matured installments and repayment performance continues to be very strong. Despite the BRSA staging forbearances, we did not deviate from IFRS 9. And as in the past, book necessary provisions for potentially problematic assets even before classifying them into Stage 2 or Stage 3. As a result of our prudent approach, our coverages for all 3 stages remain around the elevated year-end levels. Actually, as you can see on the right-hand side, despite our improving cost of credit churn over the last 3 quarters, our coverage ratios remained at similar elevated levels. This is a result of our solid reserve build with our total provisions having exceeded TRY 17 billion. Our net provision charges for the quarter were TRY 700 million resulting in total coverage of 6%, which actually excludes our TRY 1.1 billion or TRY 1.15 billion, free provisions as additional buffer. It's early days, but our first quarter net cost of credit, hence a better full year performance than we guided. As a reminder, we have guided for our net cost of credit including currency impact to remain below 200 basis points.
Every 10 bps change equates to around 40 bps ROE. Our LYY low-risk was hedged last year in third quarter. Therefore, the mark-to-market adjustment is offset at the trading line. And LYY is not included in our cost of credit calculations. Had we not hedged this loan due to the TL depreciation, there would have been an additional TRY 1.1 billion gross negative P&L impact. You may find all the provision charge and hedge details in our appendix. And now on to our bank's distinctive sign of strength, our capital position. Despite all the unprecedented challenges, our solvency ratios remain well above regulatory limits at 18.5% total capital and 15.5% Tier 1 and core equity Tier 1, excluding the forbearances.
In the first quarter, along with the TL depreciation and higher rates, we had also the impact of the dividend distribution and the yearly adjustment of the operational risk, which takes place every year in the first quarter. The latter 2 had negative 46 bps on our capital ratio. Meanwhile, solid internal capital generation uplifted our capital by 50 bps. All in all, we were able to maintain an outstanding TRY 25.4 billion excess total capital and TRY 27.6 billion excess core equity Tier 1 according to Basel III minimum requirements without any forbearances. If we include the forbearances, access total capital and core equity Tier 1 would reach TRY 29.7 billion and TRY 31.5 billion.
Our sound capital buffer serves as a shield against extreme volatility and also an ammunition for sustainable profitable growth. Before moving on to some of our first quarter financial performance, I'd like to mention some of the important areas we delivered value to our stakeholders this quarter. As you may remember, we announced our ESG strategy and targets at the beginning of the year. 4 key areas being sustainable finance, climate change, ecosystem management, people and community. In order to achieve the set targets, we have been working on numerous bank-wide long-term projects to further integrate sustainability to the way we do business and interact with our stakeholders.
It's a journey. And on this slide, we have some of the many actions taken during the quarter on the road to our long-term targets. As a bank, the principal way we affect the environment and community is through our financing activities. To that end, in line with responsible banking principles, we have updated our environmental and social credit policy this quarter to better manage climate-related risks of our credit activities. Akbank's nonfinancing activities have now expanded to include new coal thermal power plant projects as well as coal mining and coal transportation and power plant operating with coal for SMEs. We have reduced the threshold for environmental and social risk assessment for new commercial loans to $10 million. We were the first Turkish deposit bank to announce long-term targets of sustainable finance. In this respect, we launched our sustainable finance framework, which is an important step in our efforts to make sustainable financing more accessible to companies that contribute to a greener, more prosperous economy.
The framework looks clear: comprehensive rules, defining which financing products can be classified as sustainable by outlining social and green eligibility criteria. It is in line with international standards, such as International Capital Market Association Green Bond Principles, Social Bond Principles, Sustainability Bond Guidelines and Green Loan Principles. And was externally reviewed by facilities, which also gave a second-party opinion. We further supported companies and activities that follow sustainability principles through our subsidiary Akportföy, which launched 2 ESG-themed funds in January. Apart from paving the way to a more sustainable economy through our banking operations, we also took part in initiatives to empower our people and communities. As a result of our efforts to create a more diverse and inclusive workplace, we entered Bloomberg Gender Equality Index this year, scoring higher than global and sector averages. We became a top-rated EM bank in Official Monetary and Financial Institutions Forum Gender Balance Index. And we became the first Turkish company to join Valuable 500, a global initiative that aims to revolutionize disability inclusion.
We will continue decisively on our path with our vision to be the leading bank that drives Turkey into the future. To sum up, with the ongoing uncertainties regarding the pandemic as well as inflation, this year is set to be another challenging year. However, we remain confident in our financial strength and operational resilience. On this slide, you may find a summary of our first quarter performance versus this year's guidance. I have shared throughout the presentation details on each item. Still, there are a few I'd like to highlight once again. Starting with the TL loan growth, we may end the year slightly below. However, the composition being in favor of consumer and SME will be a supportive factor for the profit mix. Tighter funding conditions and higher-than-expected inflation outlook will be pressuring NIM beyond our initial expectations. However, CPI linkers, which now make up 57% of our TL securities, all work as hedge and somewhat mitigated downside risks. We are using 11% October to October inflation, and every 1% CPI has 6 bps full year NIM impact.
On a positive note, our cost of credit evolution has so far been better than our initial expectation, indicating we could end the year below our guidance or better than our guidance actually. Every 10 bps NIM equates to around 60 bps ROE, while every 10 bps cost of credit equates to around 40 bps ROE. One last note is regarding the change in the corporate tax rate from 20% to 25% for this year. Despite the challenges, we still target mid-teens ROE for the full year and believe our positioning will be able to enable us to leverage our strength, while carrying our priorities for improving profitability throughout the year.
And this ends our presentation. Let's move on to the Q&A. You may raise your hand or type in the Q&A box and for those of you who are joining us by mobile, please send your questions by e-mail to investor.relations@akbank.com.
Ilknur, would you like to start by maybe asking the questions from the online?
Yes, Ebru. We have a question regarding macro indicators. Could you please share your [ B1 ] major macro indicators, inflation rates and GDP, with [ BRSA's ] recent move creating rather challenging and more difficult environment.
Maybe I can answer this question. We had a slide for this, actually. At the beginning of the year, our inflation actual expectation was lower. So we were expecting something like 10%, 11% inflation at the beginning of the year. But -- and then of course, there were some changes, currency, et cetera, et cetera. So we believe that still, we believe that inflation will peak like April-May time frame.
And then despite this volatility in the exchange rates, still in the second half of the year, there will be a decline in the inflation rate. And the full year inflation, I think, will be -- we estimate that it will be around 14%. Regarding the growth, Turkey, it will still grow this year, somewhere like 4%, 4.5%. So this is our expectation for this year. And the level of interest rates in the country, of course, it will be linked to the level of inflation. So if inflation turns out to be around 14% at the end of the year, then we have to have to have, of course, a real interest rate. So therefore, interest rate should be somewhere like above 14%. So currently, actually, it is like 19%. So if our assumptions are correct, in the second half of the year, there will be some flexibility to have some rate cuts, gradual rate cuts in the country.
There was another question, I guess, regarding the currency, our expectations about the currency. What I can say, yes, there was some volatility, especially over the last month or so. But the good news is actually, when you look at the behavior of deposit holders in the country, that there are some positive developments since the beginning of the year. So when we look at the FX deposits, FX deposits are down by roughly 4%, roughly USD 11 billion. There is a decrease in the FX deposits. And there is an increase in the TL deposits, which is like almost 7% because now, yes, inflation is higher than our expectations. But when you look at the ongoing actually deposit rates in the country, it is anywhere between 18%, 19%. And in certain cases, it's even slightly higher than 19%. So that is actually changing the actual behavior of deposit holders in the country.
So this is actually a positive movement. And what we have been also observing, when there was a volatility in the exchange rates, exchange rates reaching like 8.4%, 8.3% over the last couple of weeks. We have been observing the households, the individuals actually saving some of the effects. So that was actually balancing some of the demand for the FX in the country. So these are like relatively positive developments. And on the corporate side, when we look at the open positions of corporates over the last couple of years, we are observing a decline.
So at the climax, it was as high as like $223 billion, the worth of open positions in the past. But now this is roughly down to $156 billion. So this is a positive development. And I think what is more important, the corporates in aggregates, they kind of hedge themselves in the short term. So when we look at the short-term open position of the corporates, actually, now it's a plus figure. So it is something like USD 25 billion, a plus figure. So that is also a positive development. So therefore, yes, that we have seen some volatility in the FX over the last month or so with recent developments. But as long as we have real interest rate on the currency, I think where we are more or less I would imagine we will continue. Of course, it depends on the demand. But as I said on the household side, it is relatively okay; corporates, that is also a relatively okay.
So the domestic part is relatively okay. Of course, tourism this year actually is important. We have seen some increasing the number of actually COVID cases in the country. But now we have some further actually actions. So for the next 2 weeks or so, there will be a complete shutdown in the country. So actually, that will be good in terms of fighting against COVID. So I think this is a good measurement to also to protect our actually tourism industry this year because last year, actually, it was not really very good. So as you know, tourism is important for Turkey. We usually create something like $30 billion, $35 billion worth of tourism revenues, which was very marginal last year. So hopefully, if we can fight against the COVID, probably, the tourism revenues, hopefully, will be higher than at least last year.
Thank you. Thank you, Håkan. No there's -- allowing Gabor. You can unmute your line -- from Gabor Kemeny from Autonomous.
A few quick questions from me. Actually, 1 is a follow-up on tourism. Can you help us understand the -- how sensitive is your business planning to tourism? And if the tourism activity wouldn't go back, it wouldn't actually improve much from the previous year's levels, how could that impact your business outlook? You showed 3% of the loan book related to tourism, but it would be useful to understand the risks in that book and the indirect impact from a lower tourism activity.
Second question is just to clarify the LYY impact on fees. Can you confirm what was the absolute impact? And yes, the final question on margins, you mentioned that you would expect some improvement in the second quarter. Would you be able to help us quantify the magnitude of the possible improvement?
Okay. So maybe with this, let me start with Türker, and then we can go to the other. Okay.
Gabor, this fee relates to the dividend income, the distribution of Turk Telekom, as you know, Turk Telekom have announced a strong dividend payout for this year in 3 installments. And we had an outstanding fee income from LYY, which we have because of this dividend decision. We have a good 1/3 of this dividend, as a fee income. In coming quarters, we will have further -- we are expecting further proceeds from LYY as a result of this dividend distribution. But this will be in the form of lower repayments. And the amount was roughly TRY 110 million.
And I guess with the question on the margin as well, right Gabor, maybe Türker can continue with that.
Yes. Gabor, as we have shared, so we have started at low interest margin of 2.4%. Actually, depending on loan generation, for sure, and with the redemption of lower yielding assets, as Ebru has mentioned in her presentation, we're expecting a gradual improvement in NIM to start from second quarter. But in this -- but do we expect a major uplift in the second quarter based on the current trend, I would rather say no. But starting from end of second quarter, starting from third quarter, we see a more positive trend.
And is it because you assume rate cuts from that?
Actually, depending on the inflation outlook for sure. We expect some rate cuts starting from third quarter. But the most important thing will be the repricing of the asset side. As Ebru has mentioned, actually 1/3 -- roughly 1/3 of our fixed rate securities are maturing towards the end of the second quarter. So we will either replace those or we will get the funding benefit.
And also, again, roughly 25% of our TL commercial loans, again, which trend to lower-yielding tickers, are going to mature as well in the second quarter. Again, the replacement of those along with the overall portfolio repricing will be helpful for the NIM improvement. And for sure, depending on the CPI expectations in the coming quarters, we may need to revisit our CPI linker assumption.
Understood.
And now maybe on the tourism side, there was a question on asset quality.
Yes. Regarding the tourism, Gabor. On Page 22, actually, we have a breakdown of our loan portfolio. So as you can see there, I mean, it's quite a diversified portfolio. So we are not really too much worried about our tourism exposure and it is relatively small. And the companies are actually good quality companies. And tourism, actually, we have seen that before. I mean, of course, pandemic is a different case. I mean, this is the first time we are actually experiencing anything as such. But like 2, 3 years ago, again, there was a big problem in tourism in Turkey because of some other issues. So the season was extremely bad, but interest structure was good and so on. And then about a year later, 2 years later, there was a full recovery.
So this year, of course, it will still be a very challenging year. But eventually, either next year or the year after, I'm sure that the sector will recover.
So I'm not really terribly worried about this because of our relatively low exposure and the quality of our portfolio.
And maybe, Håkan, if you can go to the next page, we also share here the coverage ratios for the sector. So you can see there that we have increased the coverage for tourism. Basically in second quarter -- sorry, in the first quarter of the year, as you can see, it's around 19% and so this is something that like, if you look at the breakdown of how much of those are in Stage 3 and how much of those are in Stage 2, you can see that they are actually, the overall exposure that we have, very limited amount. Actually, it's already a small amount, but the coverage ratios are also quite strong. So I wanted to also mention that.
Ilknur, maybe you'd like to continue with the call -- the questions from the Q&A.
Yes, Ebru. We have 2 questions from a participant. The questions are, can you give color on impressive Turkish lira deposit increase in the quarter? And second, do you see any rollover or payment risk on loans given out at very low rates last year around this time?
TL deposits increased in the quarter, yes. As I said, for the aggregate number for the whole country, that is around 7%. And actually, also, it is a healthy growth, in our case as well. So this is the TL part. And the -- actually, it is around 10% in our institution.
So I think this will continue as long as we are actually paying about the level of inflation in the country. And regarding the loans that we had given last year. So as you know, in the second quarter, that there was a regulation in the country, which is asset ratio. And all of a sudden, actually, banks had to grow substantially during that quarter. We had actually substantial growth as well. But we were actually extremely careful with that growth in 2 dimensions. First of all, we were very actually careful with the asset quality. So no matter what's actually the -- we refrained actually taking some unnecessary risks. So the loans that we had given during that period are 2, there were 2, that were blue-chip companies in the country. So we are not actually expecting any problems in those payments.
And we have already started seeing a maturity. And there's -- in the second quarter, we had started seeing those actually payments. So I'm not actually at all worried about this. So actually, I'm happy because we will be recovering on it. Yes. So that's what I can say. So that was putting a lot of pressure on our NIM. So we are happy that. We do not take too much mismatch risk, yes, that was the other dimension. So good asset quality and relatively short-term asset creation. So this was the strategy at that time. So I'm happy that, from the asset quality of point of view, there won't be any issues. And I'm also happy that in a rising interest rate environment, actually, a majority of those loans will be maturing, especially in the second quarter.
If you want to go to the next question?
Yes. We have an underwriting question. Why didn't HR cost grow year-on-year despite high inflation?
Maybe I can respond. Actually, last year in the first quarter, actually, we did not see the initial impact of the pandemic, but starting from second quarter there have been some savings, which have also impacted indirect HR expenses starting from second quarter. So this creates actually a high base for last year's first quarter. But when you look actually on a Q-on-Q basis, we have an increase in our HR costs because we are adjusting our salaries at the beginning of the year. So that's actually the main reason. During the course of the year, we may see some additional increase. We will see this year-on-year increase in the coming quarters.
Yes. But this is the benefits of digitization, actually. So all those investments and so on. Mobility, not on the consumer side, but on the people side as well, our own people. So what we did was actually we took our iPads and everything and went home. And still the number of transactions in the bank actually increased dramatically. So this was a lot of efficiency gain. And there was some HR related cost reduction, traveling costs and other costs as well. So this was an efficiency gain.
Thank you, Håkan. I think there's 1 question regarding again on [indiscernible]. Do you want to ask, Ilknur?
Yes, sure. One question. Can you give a breakdown on the first quarter other revenues, please?
I think you are meaning other income?
Yes.
These are coming from -- actually, these are coming from various areas which are not either fee income and also reversals of noncash loans and other -- provision reversals from noncash loans are also coming into the slide. This also impacted other income line.
Okay. Thank you. I think there are some other questions as well.
Yes. We have several. Okay. Let me first -- let me first get Mehmet on the line from JPMorgan.
I thought that was an excellent presentation. Can I please ask you on your views on loan growth. You already mentioned that there may be some downside risk to TL loan growth guidance of 20%. Do you have a view of what that level would be based on the current information and the trends you're seeing so far in the second quarter?
And on a similar note, can I please ask you for your views on the upcoming lockdown, which is a first, obviously, for Turkey in terms of being so strict. What kind of impact would that have on the business as well as activity and loan demand, et cetera, in your view?
Thanks very much. When we did this 20% Turkish lira loan growth assumption for this year, what we were really expecting, relatively slow start at the beginning of the year and then with the declining interest rate environment, especially in the second half, we were expecting TL loan growth to pick up in the second part of the year. So when you look at the first quarter, given the level of high interest rates and so on, I think the bank did very well. So this is roughly almost 4% growth. So if our assumptions are correct, if interest rates come down, then probably, the growth rate will be higher especially in the actually second half of the year.
But we have a challenge though, and the challenges because of this asset ratio, this -- the asset ratio last year, we had an exponential growth in the second quarter. So therefore, some of these loans, as I mentioned in the previous question, these are like to Blue Chip companies in the country. So some of these loans will be paid back. So therefore, we will have a challenge to grow our loan portfolio in the second quarter, but later on, later on though, I think if our assumptions are correct, I think the growth should kick in.
So still, we are sticking to that guidance around 20%. At least, I think it will be somewhere like high teens, somewhere close to 20%. I think this is still achievable, especially the retail part is actually going very well. So there's a lot of actually contribution coming from our digital channels. So we have invested heavily in our digital channels over the last several years and our bank is actually benefiting from this. And I think this is a great competitive advantage for our institution.
So when you look at the, for example, general purpose loans, almost 3/4 of the general purpose loans are sold through the mobile channels, the digital channels. Similarly, about 2/3 of our credit cards are sold through digital channels. So I mean, again, now we are -- we will be starting this complete lockdown but I'm sure that the level of activity in our institution will continue like almost before, at least on the retail side. So therefore, even if there's a lockdown, actually, I'm not again too much worried about this because 95% of our transactions are taking place outside our branches anyhow. So when you look at the traffic, the number of customers visiting our branches and so on, that was dramatically down anyhow. But when you look at the number of transactions in our institution, there was this exponential growth.
So we also have a page for our digital banking, mobile banking and so on. And if we visit that page, we will all see that these numbers are actually phenomenal, 41% increase in monthly loan gains. All these numbers are actually very dramatic in a positive manner. 106% increase in the financial transactions, 34% payments, 93% money transfer. So I mean complete shutdown. I wish this never happened, but this the digital part is one of the key strengths of our institution. So I think business will continue like before.
The next question comes from Klim Fedoff.
Hello, can you hear me?
Yes, yes, we can hear you. Hi. How are you?
Okay. I have a question on net interest margin. It's come down quite a bit, obviously. And 2-part question. One is on CPI impact. I would expect that to be a positive impact rather than it was negative this quarter on higher inflation. Can you just explain why there has been a negative 71 basis points impact?
And just to clarify, deposit costs are still outpacing loan yields. Is that on -- due to the incremental rate move that happened?
Okay. So Türker, would you like to answer that question, please?
Yes. Klim. Maybe we can shift to the slides, Ebru.
Sure.
Klim, we are trying to show here, actually last year, in the fourth quarter, we have adjusted our assumption to the actual inflation of last year. So therefore, actually, it has a positive impact to fourth quarter net interest margin. So in the first quarter, we again started to lower CPI assumption. So that brought us to 71 basis points, actually showing the inflation assumption difference we are using in the first quarter. This is the -- is coming from that.
On the deposit side, actually, during the course of the first quarter, we have seen continuous repricing of our deposit costs because of the tightening cost structure and post rate increase of the Central Bank. But when we look at the rates, actually rates, currently, our back book is up at 17% levels for TL books and also the margins are priced at roughly 17.5% levels. So there is actually, you can say, the reprice of TL deposit book has -- is almost completed. So maybe starting from in a few weeks' time, we may see the improvement in the cost TL core space.
Do you have any more questions?
No.
Okay. All right. The next question comes from [ Girish Patel ].
Many thanks for the presentation as well as for the detailed answers. It's definitely very helpful in getting a clear picture. My question is, it touches a little bit on both the FX, any potential weakness in FX as well as its impact on the capital ratios.
We know that historical FX rates can potentially be used, but then we would like to know what the bank's internal policy on use of those historical FX rates? And do you see any deviation in terms of the reported capital ratios using different rates -- market rates versus the historical?
Türker, can you take that?
Yes. Actually, [ Girish ], for regulatory reporting, we are using forbearances [ here at AK ], which we are actually also sharing in the first footnote. So the FX rate for RWA calculation is the average of last 12 months FX rates. But for investor reporting, also in order to be compliant with Basel, we are using actual FX rates without forbearances. So actually, also, we are managing ourselves also with us -- with the capital operation without forbearances. And even though the exchange rate was quite high at the end of the first quarter to TRY 8.3 per dollar, still we had a very strong capital adequacy ratio of 18.5% as we are sharing. And Tier 1 -- CET1 of 15.5%.
If you would use the BRSA forbearances, our capital ratio would be at 20% levels. But as I said, we are managing ourselves with means of confirmed capital cost ratio. And this 18.5% is actually very strong, as Ebru has mentioned leading to an excess capital of TRY 25 billion. And again, we are sharing here the depreciation solvency impact. Additional 10% TL depreciation has only had a negative impact of 70 basis points. And 1% NPL has roughly 25 basis points. So we are quite -- are very comfortable with our capital base..
Okay. And Ilknur, I think there are 1 or 2 more questions maybe you'd like to read from the Q&A?
Yes. We have another working question. Can you please comment on the drivers behind the 2.5% growth in FX corporate loans?
Maybe I can answer this question. I mean, yes, 2%. We had a growth 2% but however, over the last couple of years, 2, 3 years, maybe even more, there was a big deleveraging on the FX side. So actually, this 2%, given a very low base, it's not actually a major growth. So I cannot say that the demand has picked up yet in the country. So if that answers the question, this is not the case. So this is a slight growth in a relatively small portfolio. So I think this is how we should read it.
Thank you, Håkan. I guess there are many more questions, but we'll just take 1 there, and then we'll try to get back to you after the call on the remaining questions. If you can make 1 more question maybe, Ilknur?
Yes. Sure. And a question, this is regarding Tier 2s. You have mentioned on previous calls that you intend to call these bonds. So I wanted to check whether this is still the case. And also, what could potentially make you not call the bonds?
Okay. So I can answer this question as I've been answering this question every single call that we've had so far. As you all know, the market standards for these Tier 2s is basically to call on the call date. And in Turkey, obviously, the call exercise is subject to BRSA's approval. The call date for our issuance is in March next year. So there's still a lot of time. And according to the issuer's call definition, as per the drawdown prospectus, we may inform investors basically not less than 30 and not more than 60 days notice of the call decision. So that's the legal part. But as I mentioned, normal market practice is for the banks to call. As you know, and that will be subject to basically BRSA approval. So that's what I can say. And because it's March next year, there's a lot of time. So I just wanted to mention that. So I guess, as I said, we have many more calls, but we will get back to you. We are taking notes of your questions. Håkan, maybe a few last words from your side, and then we can end the call.
Yes. Thank you, Ebru. Just to wrap up, actually. I would like to underline that Akbank is undoubtedly one of the best positioned banks in the country. And I think we all know this. But of course, this unique pandemic experience continues to teach us crucial lessons. And even now, we are still working nonstop in our future banking models and harnessing state-of-the-art technology and talent to provide actually the best banking experience to our customers and further strengthen our position for years to come. So as we think progress daily, see things progress daily, we will continue to take necessary measures and update our stakeholders, clients and shareholders specifically, as best and as transparently as possible. But of course, there is still a lot of uncertainty, uncertainty, and we cannot deny this. However, having been through many cycles, I have full faith in our people's capacity and execution. And I would like to thank them all once again, for their exceptional efforts in helping our customers, supporting each other and also delivering results during these unprecedented times. And I also would like to thank all our stakeholders for their consistent trust and confidence in us. I hope we get to meet face-to-face again, hopefully, later this year.
And once again, thank you for joining us today, and have a great evening. Keep well and stay safe. So that's what I would like to say, Ebru.
Thank you. Thank you, Håkan. Thank you, Türker, and thank you, Ilknur. We look forward to being in touch with all of you, and everyone stay safe. Take care. Bye-bye.
Thank you very much. Bye-bye.