Akbank TAS
IST:AKBNK.E
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Akbank TAS
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Dear friends, welcome to our second 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 in good health. Today, I have with me, as usual, Turker, our CFO; Ilknur from our IR team, but this time, we also have our CTO, Ilker, with us, to answer your questions with regards to our incident in July.
Before moving on to our bank's first half performance, I would like to share some insight of the macro environment we are operating in. Despite the negative impact of the ongoing pandemic, the economic activity in Turkey has been trending strong, and we expect it -- this to continue in the second half of the year.
Looking at the demand components, domestic demand has slightly decelerated, while external demand remains robust. Some macro potential measures have been implemented to secure a balanced demand composition in economic activity as well as current financial stability risks on both current account balance and inflation.
The ongoing recovery in economic activity as well as relatively high commodity prices, coupled with the low base of last year, have led to prevailing risks on inflation. However, with the impact of monetary tightening, as well as base effect, we expect inflation to slightly decline towards this year-end. The pace of the deceleration in inflation will be important for the course of monetary policy, which we believe will be kept tight until a significant fall takes place. As a result, we believe room for rate cuts will remain rather limited until year-end.
On a positive note, current account balance is in an improving trend. We expect full year current account deficit to decline towards $22 billion, below 3% of GDP. This will be achieved with potentially better trend in tourism revenues, robust export growth and lower gold imports. We expect overall export growth to outperform import growth for this year.
The impact of top line trade conditions is being felt both in loan growth as well as margin evolution. TL deposit and loan market trends, that being growth and interest rates, have somewhat stabilized. In light of the higher inflation expectations, we expect TL deposit and loan rates to likely be made at current levels. As far as FX loans, demand remains to be weak. So far, funding cost trends as well as inflation expectations have both evolved above our initial guidance. Although the operating environment is expected to be relatively more favorable in the second half of the year, it will still likely remain challenging due to the tight financial conditions.
In light of all this, let's move on to our bank's performance. First, I'd like to touch upon a few of the achievements. Our first half reported net income was up by a stellar 43% year-on-year to 4,134 million, a record high. I'd like to also provide some context on our quarterly profit before tax performance, which was up remarkably by 19% quarter-on-quarter, reaching all-time high, both on a quarterly and first half basis.
Due to the rise of the corporate tax rate to 25% for this year and with the first quarter's cumulative impact, our effective tax rate for second quarter increased to 31%. For the first 6 months, our effective tax rate was at 26%. And for the second half of the year, we will continue to apply 25%.
We had shared at the beginning of the year that our swap-adjusted NIM would be in a sequential improving trend. Due to funding cost rising above our expectations, NIM started the year at a lower level than we initially anticipated. However, with the increase of CPI linkers and floating rates in our TL securities mix as well as our loan growth being led by high-yielding consumer loans, core NIM started to improve in second quarter. Our proactive securities positioning and strategic loan mix will continue to be NIM-accretive for the second half of the year.
With our delevered loan book and investments of digital banking, we have been consecutively gaining market share in these high-margin segments since last year third quarter in a healthy and well-timed manner. This growth will continue to be supportive factor, not just for NIM, but for the overall profit mix.
Our robust peak performance in first half, which indicates a clear beat to our full year guidance, also underlines the success of our growth strategy and diversified business model. Thanks to our proactive and prudent IFRS 9 implementation in previous quarters, net cost of credit has been improving following the second quarter of last year. And as always, our robust capital and strong liquidity buffers underline the inherent benefits of our strategic priorities and the strength of our customer franchise.
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 more detail. First, with the balance sheet. Our total assets were up 12.4% year-to-date to almost TRY 538 billion. Net loans increased by 10.2% in the same period to TRY 289 billion, led by TL loan growth. By the end of first half, loans make up close to 54% of our total assets slightly lower versus year-end. TL business loans were around 39% of total loans, while consumer loans including credit cards, accounted for almost 24%, up 2 percentage points year-to-date, in line with our growth strategy, which I just shared.
FX loans were 37% of our total net loans year-to-date higher slightly, driven by TL weakness during the first half. Our security stood at 21% of our assets with strategic positioning, which I will discuss in further in a few minutes.
Our balanced and prudent asset allocation, along with our low leverage of 8x and robust capital adequacy ratio of 20%, will continue to drive sustainable long-term shareholder value. As highlighted, our year-to-date TL loan growth was driven and led by the high-margin consumer loans, where we continue to enjoy broad-based quarterly market share gains. And more importantly, this performance was not confined to this year. Our market share gains since third quarter last year added up to 115 basis in total consumer loans and 120 basis, specifically in GPLs. On this slide, we have shared the market share gains year-to-date.
Accelerating marketing efforts as well as digital initiatives have been key enablers for the noteworthy performance. I will touch base on the highlights of our digital banking performance in the upcoming slides.
We also continue to enhance our analytical capabilities, which will further advance our market presence. As for TL business banking, we had a heavy redemption schedule during the second quarter of this year, leading to a slight growth year-to-date in this segment. Please recall that in order to effectively manage margin evolution, our growth last year was mainly in short-term loans, which is why we had heavy redemptions.
To sum up, there is a slight downside risk to our full year guidance of 20% TL loan growth. But when looking into the loan mix, our efforts in retail segment had paid off with decent market share gains, which will be supportive for NII evolution.
On the other hand, our net FX loans remained almost unchanged at $12.3 billion versus end of last year. Still, muted demand for investment loans hinders us from establishing more optimistic outlook for FX loans, which is totally in line with our guidance.
Our total securities book is up 13% year-to-date at TRY 115 billion. On the TL side, share of CPI linkers and floating rate is now at 77% (sic) [76%] underlying a proactive strategic security strategy. In light of the rising inflation outlook, the main increase over the last 3 quarters took place in CPI linkers, which are now 63% of total TL securities, up by 20 percentage points since the first half of last year. This portfolio will work as natural hedge in higher inflation environment.
During the second quarter, we updated our October-to-October CPI assumption to 14% from 11% of first quarter. Please note that every 1% CPI has around 270 million net income, 6 bps NIM and 40 bps ROE impact.
As for the fixed rate side, a significant portion of the portfolio matured in second quarter and was replaced by higher-yielding securities. As a result of these strategic actions, TL securities yield increased visibly in second quarter. Hence, we expect considerable NIM contribution in upcoming quarters. Meanwhile, due to limited foreign currency loan demand, we have utilized our ample foreign currency liquidity and higher-yielding eurobond purchases, which will also be NIM-accretive. To sum up, our treasury's proactive positioning in both foreign currency and TL's securities portfolio will continue to contribute positively to NII this year.
Our focus remains on well-diversified and disciplined funding mix. As deposits continue to be our main source of funding with almost 61% share. Our total deposits were up by 12% year-to-date to TRY 327 billion. Demand deposits were also up by a solid 14% year-to-date, increasing its share to 32% in total deposits. Sticky and low-cost deposits, such as retail, i.e., consumer and SME, reached 76% of total TL deposits, 4 percentage points higher versus end of last year. TL LDR remained flattish quarter-on-quarter, but still 6 percentage points lower versus end of last year.
Our sound FX liquidity, with an FX LDR of 49%, remains as one of our strong muscles. As a result, our total LDR ended the quarter at a low level of 94%, still below sector's 100%.
We have a well-established wholesale funding profile, which is 12% of our total liabilities. Our second quarter average foreign currency LCR was robust at 276%. And our foreign currency liquidity buffer was noteworthy at $13.3 billion versus our next 12-month rollovers at $2.6 billion, of which around $1.5 billion are in syndicated loans.
Following our successful first ESG-linked syndication in April, we continued our efforts in sustainable finance with the first benchmark sustainable Tier 2 among Turkish deposit banks in June. As you know, we have a call due on our 2027 subject in March next year. Our capital position is already very robust. But as 47% of our assets are foreign currency, in order to keep the capital hedge against currency volatility, we decided to issue a sustainable Tier 2. The timing was very successful, as the book attracted around $1.4 billion from more than 150 investors, pricing at 6.8%. This yield is the same as our senior Eurobond issuance of last year, July.
The positive impact on CAR is 105 bps. As a result, the total share of ESG-linked funding in wholesale now stands at around 30%. Due to our ample FX liquidity and low FX loan demand, we will continue to be opportunistic in our bond strategies.
Let's move onto the P&L in detail. Our quarterly swap-adjusted NIM was up 34 bps quarter-on-quarter to 2.74%. For the quarterly performance, significantly higher swap costs was offset with higher CPI linker contribution. Therefore, the improvement in core NIM was led by asset repricing. To put it into numbers, our average short-term and long-term stock utilization was around TRY 49 billion, up by TRY 6.5 billion quarter-on-quarter led by higher short-term stock utilization. Swap rates also increased quarter-on-quarter. So both higher utilization and higher rates resulted in almost 2 billion swap costs leading to a 36 bps quarter-on-quarter negative impact on NIM.
Meanwhile, the revised October-to-October inflation assumption for CPI linkers to 14% led to a 40 bps quarter-on-quarter positive contribution, offsetting the negative impact of the increased swap costs. That said, looking at the recent realizations and upside risk for October-to-October inflation is evident. And every 1% CPI will have around 6 bps NIM impact.
Looking forward, we expect the gradual improvement in NIM to continue throughout second half. Currently, marginal TL deposit rates are at similar levels to our back book. So probably, we are at the peak in deposit costs. Whereas positive spread between TL loan back book and marginal still remains significant, hence, also positive for asset repricing. 25% of our mainly lower-yielding TL commercial loans, excluding overnight, matured in the second quarter. And in the second half, close to 30% will also be maturing. While 35% of our TL fixed securities redeemed towards the end of second quarter, and of the remaining TL fixed securities, close to 20% will be redeeming in the fourth quarter.
Therefore, during the second half, further repricing of both asset classes at higher yields as well as our CPI linkers should be a bolster for NIM. However, due to the funding environment being tighter than we initially expected as well as worsening inflation outlook, there is still downside risk to our full year NIM guidance.
Our fees and commissions were up 24% year-on-year at 2,810 million will end of our full year guidance. As you can see on this slide, there are many businesses that positively contribute to the revenue base. The increase in payment systems performance is eye-catching, up 48% year-on-year, predominantly related to the volume growth in both acquiring and issuing, and less so with the increase in interest rates, which support interchange and merchant fees.
Our credit card sales increased by 11% following our digital first card launch in September last year. This card enables end-to-end digital acquisition, approval and immediate usage to customers without waiting for the physical cards arrival. The share of digital first card in sales -- in total sales reached to 25% as of first half of this year. Digital cards have 4x better early activation rates and 20% higher average monthly spend than nondigital. During the first half of the year, we offered 50% more campaigns and promotional offers and the increased participation from customers led to higher volumes.
Bancassurance continues its strong performance, up 45% year-on-year as a result of new product launches and increase in digital premiums. There was a significant contribution from digital bancassurance sales, which were up 84% year-on-year as more products are migrated to the digital platform.
Money transfer fees were up by 32%, was due to the strong volume. Also, our wealth management business continues to grow and support our revenue base with the new ESG and tech-focused funds as well as new digital features that will offer throughout the year. To give an example, a new product group named Investments of the Future was added to digital channels which consist of ESG funds, high-tech stock fund and similar new-generation investment products. In only 6 months, the new digital service received good traction and boosted the client base, almost doubling the AUM of this product group, reaching over 10% of Akbank's total mutual fund AUM.
To sum up, looking at the first half performance, there is definitely upside potential in our mid-teens full year fee growth guidance.
We continue to leverage our digital capabilities with our 5.8 million active digital customers. As you may see on Slide 14, our numbers for interaction and financial engagement reflect the drastic improvement in our digital channels. Multi-mobile app logins increased by 24% since the beginning of 2020. And more importantly, our mobile Net Promoter Score has improved by 15 percentage points during the same period.
Our active mobile customers not only visited Akbank mobile almost every day, but also engage in financial transactions, which increased by 56% year-on-year. Value driven from each interaction and engagement also picked up remarkably. Share of digital channels in credit card sales and GPLs have reached 55% and 83%, respectively. On the bancassurance side, digital channels also had a solid 48% share.
Second quarter of the year, we also witnessed a ground-breaking change for the Turkish banking industry. Customer onboarding process has become digitized end-to-end as of May 1. On Slide 15, we summarized the main points that differentiates Akbank along with some initial performance results. While launching this new digital service, we, as always do -- we place the special emphasis on customer needs and experience design.
Extremely simple experience is on access to all banking products and services and strong value propositions are some of the key areas that sets us apart. We see digital onboarding as a potential major customer acquisition channel for Akbank. Though early days, initial results also confirm this with predominantly young digital savings that have good credit quality profile. For further information regarding the revolutionary change, please pay a visit to our IR website to watch our video interview with our EVP of Strategy, Digital Banking and Payment Systems, Burcu Civelek Yüce.
I'd like to take a moment also briefly to share some information about the interruption to our services that took place between 6th and 7th of July. First of all, as I showed at that time, there was not any sort of cyber attack and our customers' personal data remains fully secured and intact. On Thursday, July 8, 1.5x the normal amount of the transactions were processed and our systems operated at its usual high-performance level. Since then, all our systems have been serving our customers without any interruption.
Technology is at the core of the bank's strategies, in which we continue to make significant investments. Our core banking application runs on the IBM mainframe system, also used by many large banks around the world. And as mentioned in our footnotes, we expect the financial impact to be immaterial.
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 only 11% year-on-year despite currency volatility. For the full year, despite higher inflation outlook, we remain confident in our mid-teens OpEx growth. The main contribution will continue to be from increased marketing efforts as well as regulatory expenses, 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. Our cost-to-income ratio calculation excludes foreign currency gains from the loan foreign currency positions related to stage 1 and stage 2 provisions as well as our LYY hedged on the income side. 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 increased to 11% of our gross loans, mainly due to a well-collaterized corporate loan, which was restructured and, therefore, moved to stage 2, while our stage 3 loans declined from 6.2% to 5.5%. We had only 41 million write-off during the quarter, which had negligible NPL impact.
On a very positive note, third quarter in a row, our monthly average collection performance continues to be above pre-pandemic levels. As a result, we recorded net negative NPL inflow for the first half of the year.
As for the BRSA staging forbearances, our 30- to 90- day files, only around TRY 600 million are in stage 1 with strong coverage, while 90- to 180-day files amount to TRY 1.3 billion. If all of these would be going into 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, there will be limited P&L impact.
Currently, staging forbearances are scheduled to end by the end of third quarter. To sum up, we remain confident in our less than 6% NPL guidance for the year.
On this slide, we provide details regarding our deferred loan portfolio. Please recall that loan deferral schemes for customers were extended until end of September where -- for the consumer customers, whereas schemes for business banking loans had already ended. Hence, we continue to support our customers in the second quarter while maintaining credit discipline and balance sheet strength.
Total deferred risk principal amount to date has reached TRY 34 billion. But the outstanding risk has come down to TRY 21 billion by the end of first half. Outstanding deferred loans account for 7% of our gross loans, while total coverage was at 8%, up around 1% year-to-date. It is also comforting to see that 75% of the customers had matured -- that had matured installments had quite strong repayment performances.
Also, NPL migration of these loans have remained consistently low versus the total level, which also confirms the healthy asset quality of the specific portfolio.
Despite the BRSA staging forbearances, we did not deviate from IFRS 9. And as in the past, booked necessary provisions for potentially problematic assets even before classifying them to stage 2 or stage 3. As a result of our prudent approach, despite our improving cost of credit trend over the last 4 quarters, our coverage ratios remained at similar elevated levels.
Our net provision charges for the quarter were at 427 million, lowest quarterly since IFRS 9 implementation, which started at the beginning of 2018. Many factors fit into this performance, such as our delevered loan book, prudent reserve build with our total provisions reaching TRY 18 billion and material collection performance from both retail and corporate and commercial customer base.
As a result, our total coverage made at 6%, which excludes our 1.15 billion or 1,150 million free provisions as additional buffer. Our first half net cost of credit, including currency impact, is at 79 bps, suggesting a much better full year performance than we guided at the beginning of the year. As a reminder, we have guided for our net cost of credit including currency impact to remain below 200 basis points.
The lower level of net provision charges provide substantial offset to the net interest income headwind. Every time bps change in cost of credit, equates to around 40 bps ROE impact.
Our LYY loan 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 1.8 billion gross negative P&L impact in the first half of the year. You may find all the provision charges, trading income and hedge details in our appendix of the Investor and IR presentations.
And now on to our bank's distinctive sign of strength, our capital position. Despite the unprecedented challenges, our solvency remains -- our solvency ratios remain, will have our regulatory limits at 20% total capital, 16% Tier 1 and core equity Tier 1, excluding the forbearances. Our capital ratio was up by a solid 150 basis points quarter-on-quarter.
Let's go over the drivers. New sustainable Tier 2 issuance had a strong contribution of 105 bps; positive mark-to-market impact of securities portfolio, which is 35 bps, mostly compensated for the high credit risk, which is 39 bps, stemming from our loan growth. Our solid internal capital generation uplifted our capital by 51 bps in second quarter. All in all, we further advanced our excess total capital to TRY 32.4 billion and excess core equity Tier 1 billion to TRY 30.3 billion according to Basel III minimum requirements without any forbearances. If we were to include the forbearances, excess total capital and core equity Tier 1 would reach TRY 34.5 billion and TRY 32 billion. Our sound capital buffer serves as a shield against unprecedented challenges and volatility and also creates ammunition for sustainable profitable growth.
Speaking of sustainable profitable growth, I'd like to mention some of the steps that we have taken to help build a greener, more inclusive future for the next generations. In line with our commitment to ESG strategy, which we announced at the beginning of the year, we continue to offer new products to our customers to support the transition to a greener economy.
With our Green Trade Finance campaign, which is a first in Turkey, we offer competitive correspondent bank charges and commissions on letters of credit issuances for the imports of customers with clear environmental sustainability and protection policies. Additionally, pricing and maturity incentives will be provided in correspondent bank commissions for the conferred import letters of credits after the reviews of IFIs and correspondent banks.
We also launched our rooftop solar energy product to support the transition to a low-carbon economy. As you know, Akbank has committed to provide TRY 200 billion of sustainable loan financing until 2030. In line with this commitment, we provided around TRY 11 billion sustainable finance in the second quarter, reaching over TRY 17 billion in the first half of this year. While providing a more sustainable finance to our customers, as I mentioned earlier, we also increased the amount of wholesale funding from ESG-linked structures or sources this year to 30%.
In line with our commitment to become a carbon-neutral bank through eliminating our operational emissions by 2025, we took further measures to decrease our environment footprints. And the second quarter, 60% of our electricity used for our operations is sourced from renewables, which is up from 20% at the beginning of the year.
To further foster our governance and culture, we are prepared and announced 3 policy documents: diversity and inclusion policy, human rights policy, zero tolerance to violence policy. All 3 can be reached on our IR website.
Last but not least, we are proud to announce that Akbank is now a signatory of which is a partnership between and the global financial sector to mobilize private sector finance for sustainable development. Long-term commitments can only be achieved through consistent and coherent efforts. With the full evidence of this fact, we will continue to take new steps and initiatives on our journey to increase our positive impact on the environment and our communities while reducing our footprint in the quarters ahead.
To sum up, with the ongoing uncertainties regarding the pandemic as well as higher global inflation, this year has been 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 half performance versus full year guidance. Having reached midyear, we also wanted to share indication as to where we may be expecting some positive or negative surprises.
Starting with NIM, as said earlier, tighter funding conditions and higher inflation outlook pressured NIM beyond our initial expectations. To put in numbers, looking at the current trend, there could be around 50 bps negative deviation from our initial guidance.
On a positive note, however, our cost of credit evolution has been significantly better than our initial expectation of 200 bps, indicating that we could end the year somewhere between 100 to 150 basis, actually, more so closer to the lower end. Therefore, we expect the better than guided performance of cost of credit to fully offset the negative ROE impact of the NII miss. And also adding our robust performance in fees, we are confident in our mid-teens ROE guidance.
All in all, we believe our positioning will enable us to leverage our strength while carrying out our priorities for improving profitability this year. And this ends our presentation. Thank you for listening. Let's move on to the Q&A.
[Operator Instructions] And the first question comes from Waleed Mohsin.
I'll just ask a couple of questions. I just want to get a sense, I mean, look, we are almost at the end of July. And as you said, cost of risk has been tracking much better than expected. And you did allude that it's going to probably be at the lower end of the 100 to 150 bps that you think it could be. Maybe you could just talk about what you've seen in July so far? And how maybe some of the trends on that are tracking? And I was also curious -- I'd be also curious to hear why you haven't revised that particular guidance from cost of risk because it seems as there's good visibility on the credit loss number that it's going to be much better than expected. So that was the first question.
Then secondly, on the loan growth, you alluded to a slight downside risk. But just want to get a sense of in July or so far in the third quarter. Any particular trends that you're seeing both in terms of loan origination both TL/FX and if you're still seeing a further improvement on the loan spreads into July? So any comments on this would be very helpful.
And lastly, on asset quality. Obviously, I asked you about cost of risk. But any particular areas or stress would still remain, which are at the back of the -- of management's mind at this moment. Given that still the 100 to 150 bps range means that cost of risk will be higher than where it was at the end of first half.
Waleed, this is Turker. Thank you very much for your questions. Let me start with your first and second questions, actually. So now we actually -- we have not just -- we haven't finished -- we haven't seen the full picture of July yet. But so far, we haven't seen a change in the trends so far in terms of cost of credit. So therefore, maybe this 100 to 150 basis points range of expectation, maybe a bit conservative as well, so maybe we may end the year around 100 basis points. So that's quite good to see. But so far, we haven't seen a change in the trend. That's what I can say.
So why we did not change the guidance actually? Actually, as you know, as you can see from the slide, there are some positive and negative deviations from the initial guidance. But all in all, actually, we still think that we will be able to receive mid-teens of ROE by the end of the year. So therefore, actually, we kept the guidance unchanged. That's the reason actually why we unchanged the guidance.
With regards to loan growth in July, actually, when I look at the sector figures in July, so -- which have been published recently. Actually, we can only see the first half of July. And so far, when I look at the systems on TL loans -- on TL commercial loans, there has been some activity like 1% growth on the commercial loans and about roughly 0.5% on consumer loans. So no big change actually from the first half of the year. But I think with the opening of the economy, with the strong growth -- strong growth expectations, I think, in the second half of the year, we may see a more -- a bit more activity with regards to loan demand as well.
But still, I think that there may be some downside risks for full year because, as I said, in the first half of the year, our growth was roughly 7%, mainly by retail loans. I don't think that's -- I think -- so we will be able to reach this -- our guidance on the retail loan side, and maybe we may be exceeding -- we may exceed it as well because of our strong performance in the first half of the year. But maybe we may stay a little bit behind of our TL corporate commercial loan guidance of high teens because of the growth so far.
So that's what I can say with regard to loan growth. Surely since the front book or since the marginal price is above the back book, we are still -- we are seeing further improvement in our core space, maybe just to give you some color on that. When I look at margin rates on TL loans, these are priced as roughly depending on the type of customer matures, et cetera, is roughly at 20% levels, whereas back book is at roughly 17% level. So therefore, actually, there is a big area for improvement. That's on the loan growth side.
Asset quality, any particular areas of stress, I don't think -- we don't -- at least for the time being, we don't have such a signal coming from our portfolio. I think we have done our homework very carefully in the previous periods. That's why actually we are seeing this consecutive cost of credit improvements since the end of the second quarter of last year.
And maybe also just to keep in mind, as you may have seen from our presentation, there has been some increase in our stage 2 loans because we have classified one of our loans from stage 1 to stage 2. Some part of this customer was already restructured and was already classified in stage 2, whereas some portion of the loan of this customer was in stage 1. But we had already provided additional provisioning for that loan at that time. So we have just made the classification without any further provisioning for this customer. So these are my answers actually to your questions.
Any further questions?
Just one follow-up on this. So it's all very helpful comments. Just one follow-up will be on fee growth, right? So every -- on most line items, you've talked about downside or upside risk. With the kind of fee growth that you've had in the first half, I would expect that you to say that there would be some upside risk, especially given that first half was impacted by certain lockdowns. So would it not be fair to think that there's some upside risk to the fee growth guidance that you provided for the full year of high teens?
That's actually why we are -- we have said in the slides that we are expecting a better performance because, as you rightly mentioned, in the first half of the year, year-on-year growth was at 24%. So we are keeping a similar trend. So therefore, actually, there is a sizable upside potential.
Got it. Got it. Understood. Sorry, I missed that.
The next question comes from Gabor.
Can you hear me?
Yes, we can.
Firstly on your margin guidance. Did I get it right that you were mentioning a 50 basis points lower performance potentially for the full year than the initial guidance, which was minus 2030?
Yes.
Right. That's right. So you -- maybe you can't put this 50 basis points on top of it.
Got it. And I guess that would mean a significant recovery of at least 100 basis points in the second half. I guess some of it would come from inflation. Can you comment on how would you expect your core NIM to develop, like excluding the upside from the CPI linkers?
Gabor, first of all, on the funding side, I think we have seen the maximum because the main source of funding is through the deposits of the swaps and Repo funding. And because of the low maturity of the funding source, actually, we are already at the top of it being at the risk efficiency. As we have also shared for the system, deposits are pressed roughly closed to 18% in the system. So I don't think that there will be a further increase on the deposit side or other TR funding sources going forward.
Whereas the repricing on the TL loans side is going on, because as I mentioned, the back book is roughly at 17% levels, whereas the front book is roughly at 20% levels. And again, close to 30% of our TL commercial loans will be maturing in the second half of the year. On top of it, we are, again, roughly 20% in the second half of the year as well. So therefore, actually we expect material core spread improvement in the second half of the year.
And maybe -- maybe if we can see as we had -- as Ebru has explained at the beginning, we can see also an improvement in the inflation trends starting from fourth quarter onwards and which may also allow some rate cuts towards the end of the year. This will be helpful because of, again, the low maturity of customer deposits.
And maybe it's also important to mention. On the FX side, FX loan demand is weak in the system, which can also follow from the BRSA figures. But because of the strong FX liquidity we have, we are able to keep our FX deposit costs at very low levels. And actually, we have -- aybe not very big figures, but in the last roughly 1 month, we have further decreased our FX deposit pricing by roughly maybe 20 to 30 basis points. Currently, we are paying less than 1% for our dollar deposits. We are paying almost, I think, for euro deposits. So there is also some slight improvement from FX core spread side as well.
That's very clear. And just a broader question. What's your appetite to do TL commercial lending in an environment when obviously the inflation is running at a relatively high level? Would be interesting to hear your thoughts on that.
Actually, we are comfortable with our lending process. Actually, we would like to grow actually. That was actually what we have shared at the beginning of the year as well. And also during that time, actually, we had a similar interest rate environment. As we said, maybe also because of our relatively lower loan book, we felt we would like to grow our TL corporate commercial loans by high teens, and we still keep this intention.
And maybe we should really look at these rates at -- for TL corporate commercial loans, the rates are roughly at 19% levels in the system, margin rates. But when you compare it to the deposit rates and inflation, I don't think that these are very elevated rates. So if you would compare to the rates like 30% levels 2 years ago, I think these are okay.
The next question comes from
Can you hear me?
Yes. We can hear you.
Yes. My question is on the system glitch you had a few weeks ago. What was the cost of the total dilemma? And more importantly, going forward, have you seen any issues with clients and the potential cost of basically keeping those clients? If we can just hear what you have to say about it.
Okay. Ilker, would you like to start first? Regarding the customer base?
On the -- thank you. Thank you, Ebru. On the customer side, we see -- I mean on the NPS side, on the customer satisfaction side, after the incident, we see a little decrease in our NPS scores. However, we took necessary actions to quickly cover the impacted customers. Actually, we have solved almost all the customer complaints and compensated for our customers' unpleasant experiences during this period. And we have -- now we see back to the normal levels in our NPS levels. And now it is recovering to the pre-incident levels. On the customer acquisition side, maybe Turker, you can comment on that.
And also Turker, the financial impact.
Yes. Actually, surely on these 2 days because of the system interruption actually, when we look at -- dramatic decline in the number of financial transactions for these 2 days. But when we look at the trends, starting from 8th of July actually, especially the first day, the number of transactions was, as Ebru has mentioned, 1.5x of previous days -- of a previous normal day. And also then look at the trend after that time, a number of transactions from all channels of the bank, we don't see any negative trend compared to the days prior to the system interruption. That's something also we see on the number -- on our deposit book as well or new loan demand. So therefore, actually, as we have also in our disclosures, in our financial statements, we have also touched this area as well. So we expect the financial impacts very limited, very immaterial for the system interruption.
And really value talk to our colleagues actually, also they really -- also our customers actually are -- have been very supportive as well. And for the ones -- for the customers who had some complaints, our people have responded to them as soon as possible in the earliest time. Therefore, actually, all in all, we don't expect any material financial impact going forward.
The next question comes on Alan Webborn. Alan?
Great. Okay. Just 2 questions from me. When you point to there being some quite significant maturities of your fixed rate corporate lending in the second half, and clearly, those must be loans that were done at a much lower rate because you're saying that they're going to be positive. I mean, do you sense any issues at all in terms of asset quality? Are you expecting a lot of them to repay rather than sort of roll over? Please, that part of the reason why you're a little bit nervy about in your corporate loan guidance for the full year. So just some explanation of what you're expecting from that process across the second half would be helpful. So that was the first question.
And I guess the second would be -- you were -- within retail, are you seeing any signs of your retail customers struggling in terms of income? Are there any early signs of stress? Or do you not sense any of that? And do you think that there will be any shift in terms of where the demand in retail has been in the first half and where it's going to -- it's likely to be in the second half, given I guess, rates are going to be fairly stable if interest rate cuts don't come at all or maybe just before full year-end. So any feeling about the change of dynamics there would also be helpful.
Alan, it's again Turker. Actually, maybe we can go to Slide 8. Actually, as we have shared, our TL business banking loan growth was limited to roughly 2% for the first half of the year. And actually, one of the major business for us, as we have already shared -- as I shared in the previous earnings calls, we had sizable redemptions in the first half of this year as well. And many of these customers have actually paid back their loans so therefore, actually, we had to replace those loans. So therefore, actually, we had this limited loan growth.
So in the second half of the year, some of the loans, which we'll be redeeming, will be the ones we have generating rather towards the end of the year. So not like the ones we have generated in the first half of the year. So I think, again, some of these loans, customers would repay their funding. So therefore, actually, we are a bit more careful with regard to these high teens TL loan growth. Because of trends, we are seeing actually -- having these redemptions, replacing those loans make it difficult for us to reach this high teens guidance.
But in terms of asset quality, again, as you know, we have delevered our loan book in the previous year. So therefore, actually we are rather comfortable with our lending activity. And again, when you look at the risk, okay, these are like 19%, at 20% levels for commercial loans. But if you compare it with the inflation environment with deposit rating system, I think it's a very reasonable level of price. So it does not make us so concerned with regard to asset quality trends. And actually, we don't see such a trend -- we haven't seen such a trend so far because of strong repayment performance from our loan book.
Actually, the same is also true for, as Ebru has shared for the loans, for which we had granted payment holidays. When you look at the repayment performance of this deferred loss, as we are sharing on Page 18, really, the entire performance so far is quite strong. I think that's also other signal actually. So all in all, so far, we don't get such worrying signals. And we should also maybe not forget. So hopefully, with this -- with the vaccination activity, we wont have any further, hopefully, lockdowns like we had in the previous period so which will be supportive for economic activity overall.
And I'm not so sure whether I have understood your question correctly. So in terms of trend shift in retail loans...
I mean between the...
Were you asking about rather general purpose loans versus mortgage loans?
Yes.
Actually, when I look at -- actually, again, because of our low base, we are able to gain -- we have been able to gain market share in mortgage loans, but when then looking at the mortgage loan growth in the system so far, in the first half of the year, so in the 7 months so far, it is really limited to roughly 0.5%. So that -- so far, we haven't seen a high demand on the mortgage loan side. Maybe as long as these rates stay at these levels, I don't think that we would see a major increase in the mortgage loan appetite from our customers. That's actually what you see from the figures of system. But again, just to repeat, because of our low base in mortgage loans, we were able to gain some market share. And hopefully, we will continue with this trend in the coming months.
The next question comes from Simon Nellis.
My first question just would be on dividends. I think it's probably a bit too early, but have you had any discussions with the regulator? Do you think there'll be more dividends that you pay out a higher portion of your earnings this year as a dividend? That would be my first question. My second question would just be on -- is there any hope for kind of dedollarization? Your TL loan-to-deposit ratio has deteriorated quite a lot, it's a little higher than it was last year, beginning of the year. Any signs that that's going to improve going forward?
First of all, Simon, I think on -- just to mention, on the TL LDR side, actually, it has improved. So if you go to the slide, as you can see, our TL LDR versus year-end has improved by 6 percentage points, remaining flattish on a Q-on-Q basis. And our total LDR is as well, flattish, and our FX LDR obviously, slightly higher. So that has led to a slight maybe overall, as you can see here, increasing the total LDR. So maybe I can answer that there. And the remaining, I'll leave it to Turker.
Yes. Thank you, Ebru. Simon, maybe to start with the dedollarization trends. Actually, we have seen such a trend, as you may remember, towards the end of the first quarter. But after that time, actually, when you look at sector figures, at maybe a 4 week-to-week, it may change, but it was rather a flattish, maybe. Time to time, we have seen some dedollarization for -- by retail customers and dollar -- and the opposite direct in our corporate commercial customers. But all in all, such as -- we haven't -- we are not observed such a transshipped yet.
As you know, Central Bank has announced some incentives for TL deposits -- or let's say, for TL deposits converting from FX deposits.
Whether it would trigger any further dedollarization, we'll see. But what I can say is actually, because of our strong FX liquidity, we are paying at very low levels to our FX deposits. And I think it will be the choice of our customers actually. Based on maybe inflation expectations, they will make this decision. But so far, we don't see a clear trend.
With regard to dividends, as you rightly imagined, it's too early. As you know, BRSA makes its position clear towards the end of the year. But in every circumstance, we are expressing our view that we have a very strong capital base. So we would like to increase our dividend payout. Our official payout policy is up to 40% of net income. And in the past, as you may remember, we had paid up to 25% levels, like in 2017, in 2018, so we would like to pay our payout ratio, but it will depend on BRSA's stance.
Understood.
Yes. Just one correction from my side. The total LDR also remained flat. It's only the FX LDR that went from 47% to 49%, just to correct myself. I think I rephrased that incorrectly.
And the next question comes from Cihan Saraoglu. Cihan, would you like to ask your question? Okay. Maybe we can move to the questions from the web then. No, Cihan came in. Okay.
Okay. Can you hear me now?
Yes, we can.
Okay. I have a quick question about your stage 2 loans.
There's an echo, by the way, if you can...
Is it any better now?
Yes, better now. Thank you, Cihan.
I was checking your stage 2 loans and their share in total loans seem to have gone up by about 2 percentage points or so to 11%. I was wondering whether there is any specific reason behind that?
Cihan, as I explained previously, actually, we have a customer, some portion of its risk was already in stage 2 as a restructured loan, and some portion of its risk was under stage 1. So because the portion in stage 1, has been also included into the restructuring scheme of this customer. So therefore, we have also clarified this remaining portion into stage 2. But we had already provided additional provision for that customer while it was in stage 1 last year, actually. So therefore, actually we didn't have to provide additional provisioning for this customer. It was just a classification of the second portion of this customers' exposure together with its provision.
Okay. Maybe we can answer just maybe 1 or 2 questions from the web. Ilknur?
Okay. We have a question. What are your views on the impact from the latest decree from mid-July that allow banks to sell more NPLs on stage 2 loans to asset management companies? Where do you see opportunities for the sale of stage 2 loans where coverage is considered lower than 100%?
Okay. Let me answer this question. Actually, yes, this latest legislation change, I think it brings an additional flexibility to the banking system. But as you know, as a bank, actually, we have a very strong credit monitoring and collections team department -- so -- and our EVP in charge of this department, so she's a very seasoned lady as well. So she has a very long back experience in the asset management sector as well. So currently, we have no interest for selling our stage 2 loans.
As you know, for our NPS, again, we are always opportunistic. First of all, we try to reach the best collection performance from the NPL portfolio. And only after that, for the hedged ones, this NPL sales auction. So that's what I can say at the moment.
Okay. We have another question. This is the last question. In first quarter, you booked telecom dividend in your fees. Did you book any amount in second quarter? And what are your plans for the coming quarters?
Actually, no, in the second quarter, we didn't have any impact so -- income impact from LYY. But telecom is paying its dividends in 3 installments. So therefore actually, in the third quarter also -- at the beginning of third quarter as well as beginning of fourth quarter, we will have some repayments for our -- from our risk, roughly TRY 110 million for each quarter. So which will be positively impacting our mark-to-market line in the P&L.
Thank you. Thank you all for joining us today. I see that there are no further questions -- that no further hands are raised. Thank you for joining us today. If you have any further questions, please do reach out to us. You know how to reach us. And I hope, again, keeping my hopes up that we get to meet face-to-face again later in this year. Have a great evening and keep well.
Thank you very much. Good evening.
Bye-bye.