Akbank TAS
IST:AKBNK.E
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Akbank TAS
Earnings Call Analysis
Q2-2024 Analysis
Akbank TAS
The company's management highlighted the challenging economic environment in Turkey, emphasizing significant inflation rates and tight financial conditions. Consequently, the economic slowdown is anticipated to be more pronounced towards the year's end, with expected GDP growth moderating to 3.5% for 2024 . Despite these challenges, Turkey's foreign trade balance has improved significantly, with the cumulative deficit falling sharply from $45 billion in December to $25.2 billion in May .
A highlight from the earnings call was the impressive growth in fee income, which almost tripled year-on-year. This has been driven by the company's robust organic growth strategy, customer acquisition, and diversification of product offerings. Consequently, the fee income growth guidance for the year has been raised to above 100% . The company’s fee to OpEx ratio has improved significantly, standing at 81% as of mid-year, and is expected to exceed the strategic target of 80% by 2025 .
The company has shown strong performance in balancing its loan growth strategy, with a 21% increase in TL loans in the first half of the year . The asset quality has been maintained through stringent credit risk management frameworks powered by machine learning-based models. The non-performing loans (NPL) ratio remains low at 2.2%, and the slow migration to stage 2 and 3 loans indicates solid portfolio quality .
The company's market share in consumer loans among private banks increased by 110 basis points in the first half of the year, following a substantial 200 basis points gain last year . In the FX loan segment, the company achieved a 16% growth year-to-date, leading to an upward revision of the 2024 guidance to above 20% growth . The successful growth in market share for housing loans is particularly noteworthy, achieving a 390 basis points gain year-to-date .
Margins continued to be under pressure due to high funding costs and loan growth caps, with the net interest margin (NIM) guidance revised down to around 3% from 4% . The swap costs also affected the margins significantly, but a gradual recovery is expected towards the end of the year as the back book spreads evolve positively .
The company emphasized its commitment to sustainability, providing TRY 81 billion in sustainable finance during the second quarter alone, and achieving a cumulative total of TRY 207 billion since 2021 . The management also highlighted various ESG initiatives, including investment in startups and earthquake-affected schools, supporting long-term sustainable growth strategies .
The company revised its return on equity (ROE) guidance to the mid- to high-20s for this year, down from above 30%, reflecting external challenges but affirming confidence in core business strength . Additionally, they are on track to achieve their 2025 targets, with a focus on digital capabilities and customer acquisition as key growth drivers .
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Dear friends, this is Cenk Gur speaking, CEO at bank. I hope you are all well. Thank you for joining our second quarter earnings call. Before moving on to our bank, I would like to share my thoughts on the operating environment.
First of all, I would like to walk through with you about Turkish economy overview. First of all, economic activity remained strong in the first quarter of the year, growing by 5.7% year-on-year and 2.4% quarter-on-quarter. GDP is projected to be almost flat on a quarter-on-quarter basis in the second quarter.
The slowdown is expected to become more pronounced towards the end of the year due to tight financial conditions and prospective fiscal tightening. We maintain our growth forecast for 2024, and at 3.5% as the weak global backdrop and the lag effects of the monetary tightening ways on economic activity. There are good news from external balance.
For example, Turkey's foreign trade balance improved considerably since last year. External balance and financing needs seem to be less of a concern in the short term. As of May, the 12-month cumulative deficit narrowed to $25.2 billion from $45 billion in December. The slowdown in loan growth and domestic demand are likely to contribute to external rebalancing going forward.
We estimate current account deficit to be around $22 billion which is below 2% of GDP by the end of this year. Regarding inflation, I would like to say that consistent with our previous communication in April, consumer inflation peaked at 75.4% in May, marking the turning point of a prolonged inflationary cycle.
The worst has been left, we can say behind us as a down trend in annual inflation started in June. Near-term inflation outlook will be mainly shaped by administrative price and tax adjustments, which might be critical for expectations and pricing behavior. We still expect year-end inflation around 43%.
The prospective improvement in underlying inflation may provide room for Monteresing towards the end of this year. Regarding financial conditions, I can tell that while the CBRT capital policy rate unchanged since March, it continued to take additional measures to curb excess loan growth to sterilize excess liquidity, thereby to support mentor transmission mechanism.
Regarding banking sector, I would like to emphasize the key indicators. The first one is tight monetary stance and quantitative restraints continue to keep borrowing rates high. The impact of tightening in financial conditions has been more pronounced on commercial loans while retail loan growth has also lost momentum.
Turkish lira loan growth slowed down significantly, while the growth cap introduced in May has also limited FX loans. Looking forward, total credit impulse implies a gradual, but not a sharp softening in economic activity, which will alleviate demand pool inflationary pressures. Regarding capital flows and reserves, the current policy stance has strengthened foreign capital inflows and reinforce domestic residents de-dollarization.
After the election, depreciation pressures on the lira have eased and the CBRT has become net buyer in FX market. Portfolio inflows and the de-dollarization have enabled to CBRT to improve its net FX position remarkably. Net foreign assets, excluding swaps, turned positive for the first time since the pandemic and reached $25.3 billion as of July 2024.
Thus, the cumulative improvement since early April has reached approximately $90 billion. Country's premium continued to improve. And the FICDs declined to around 260 basis points, which was an early sign of the recent double notch rating upgrade. Again, regarding banking sector, I would like to emphasize the importance of the banks, we are in a transition period in which the monitor transmission mechanism has been largely restored with a few financial regulations remaining in place.
The current inflation outlook leaves no room for complacency, and the policy rate is likely to remain high for an extended period of time. And hence, policy predictability and largely simplified regulatory environment have supported well functioning of the system, while the rebalancing process brings some challenges in the short term.
The slowdown in loan growth and the decline in LDR on the core operating profitability of the sector. However, going forward, the regulation induced historical low LDR provide buffers for improvement in the net interest margin when the economy normalizes to lower inflation environment. We haven't seen a broad-based rise in the [indiscernible] rates up until now as economic activity and labor markets still remain resilient. The ongoing economic adjustment takes place gradually and we do not envisage a sharp contraction or a prolonged stagnation in the economy that would put asset quality at material risk.
The sector is well prepared against a combination of large adverse shocks, thanks to enhanced fee income generating capacity, cautious provisioning and adequate buffers. Now I would like to share a few highlights of our bank's sound performance before leaving the floor to Avro for details.
First of all, I would like to tell that the dedication and the experience of our people continue to drive our success. Our capital position remains solid and resilient at 13.9% Tier 1, allowing us to address the interest of all stakeholders. The strength of our flexible balance sheet management, combined with our agility and regulatory methods, and persistent fee performance excellence played key roles in our profitability.
However, in light of the current monitor and regulatory environment, we have made the necessary decision to revise our guidance for the upcoming periods. Ebru will share all the details, but as a result of the required change are above 30% return on equity guidance has been revised to mid- to high 20s for this year. While this adjustment reflects the external challenge we are facing, I want to assure that our core business remains strong, and we are taking proactive steps to navigate this change effectively.
As a testament, I am happy to share that bank's strong momentum in expanding the customer footprint persists. We keep our customers at the core of all our initiatives. The exceptional increase in our active customer base has resulted in our fee to OpEx ratio to excel by 23 percentage points in just 6 quarters. Ongoing organic customer growth strategy, strengthen our recurring revenues, ensuring the bank's long-term success in dynamic markets.
Our digital capabilities are advanced and our key enablers. Still, our focus remains on investing in our business and our people for future growth and sustained profitability. Dear friends, I am also pleased to inform you that we are continuously on track to achieve our 2025 targets. A focus area that is intentionally scaled back to manage our long-term goals is the Turkish lira wide spread consumer only deposit market share.
This is a result of our low TL LDR at 84% and are a reflection of our current decision-making in light of the regulatory environment. Where to underline that our low Turkish lira LDR will give us a significant room for margin improvement going forward. As pointed out in earlier slide, our enhanced fee to OpEx ratio is a major success area achieved through our continuous customer acquisition efforts.
It's surged impressively and already reached 85%, even exceeding our 2025 ambition of 80%. Second quarter alone, it was at 85%. And I would like to take this moment to express my sincere appreciation to all of our staff. Their commitment, passion and resilience are the driving forces behind our success. Now Ebru will provide insights regarding our second quarter performance. Following her presentation, I will be more than happy to answer your questions together with Turker and Ebru. Thank you.
Thank you, Cenk. As you have just highlighted, regardless of the sector-wide challenges, especially in margin evolution, our strong commitment to enhance our recurs revenues and to generate sustainable high profitability continue to be the driving forces behind our success. We are operating a transition period in which the monetary policy transmission mechanism has been largely distorted, but the high funding costs, along with the loan growth caps continue to pressure our margins.
However, our superior fee income generation continue to support core revenue generation, more than offsetting the decline in NII, thanks to our outstanding organic growth strategy. Our fee income almost tripled year-on-year, and as a result of our intensified commitment to enlarge our customer base while deepening the relationships.
It is important to highlight that thanks to timely actions taken by our treasury, the trading side also continued to be supportive. Our revenues were up by 11% year-on-year to EUR 69.582 billion for the first half. Robust noninterest income growth has been instrumental in counteracting the effect of the cost pressure on net income. Our net income decreased by 22% year-on-year to $24.104 billion, resulting in an ROE of 22.4% and ROA of 2.3% for the first half.
Moving on to the key drivers of our healthy performance in more detail. Let's start with the balance sheet. In the first half, our TL loans were up by 21%, led by our ambition to grow in higher-yielding small tickets. While we have continuously been reshaping our loan portfolio, we are successfully and proactively extending the maturities considering the outlook for a disinflationary environment.
This is despite the loan growth cap that constrained asset repricing. Also, on top of a phenomenal 200 bps market share gain in consumer loans among private banks last year, we successfully increased our market share by an additional 110 bps during the first half of this year. Our market share gain in housing loans has been eye-catching at 390 bps year-to-date.
This is -- this not only helps extend the maturity of the loan book, but also has very high cross-sell. And also, delinquencies in this area are especially very low, as you know. Our organic growth strategy also features a prudent balance risk between risk and return with timely adjustments to lending criteria as required. Advanced analytics and technology are central to our growth strategy, driving our robust asset quality.
Our 100% automated loan decision processes with an excellence in AI-based consumer credit models enables us to take quick and timely actions. Please also note that in terms of volume, around 90% of our GPLs are preapproved, and around 30% are to salary customers. In SME loans, we increased our market share by 76 bps year-to-date through a cautious and selective growth strategy, carefully managing maturity extensions according to product pricing.
For the FX loan side, we successfully grew our foreign currency loan book by a solid 16% year-to-date with strong foothold within high-profile blue-chip corporates. Our bank-only growth was even stronger at 32%, excluding the impact of big [indiscernible] during first quarter in our fully owned subsidiary, Akbank AG. This robust growth led us to gain 170 basis points market share among private banks year-to-date.
The bank's prop expansion of its already deleveraged foreign currency loan book was a deliberate strategy to navigate the growth caps set by the regulator. Foreign currency part of the balance sheet has strong spreads, therefore, growth on this side is margin support. We remain committed to expand the foreign currency loan portfolio as demonstrated in our first half results, leading us to revise our 2024 guidance upwards to above 20% year-on-year accordingly.
Moving on to the security side. We have also dynamically adjusted composition of our security portfolio by incorporating higher-yielding securities in light of the disinflation environment. We have been increasing our position in TL floating notes since the beginning of the year.
Accordingly, FR runs with a decent 61% average yield in second quarter, have strong 21% share in our TL securities, up from 11% at the end of 2022. Note that majority of these notes are TLREF index bonds and have robust above market spreads. Our strategic approach also involves decreasing the share of CPI linkers and TL securities. This strategy resulted in a cumulative reduction of 20 percentage points since the end of 2022.
Meanwhile, our treasures proactive positioning in positive building CPI linkers continues to be a differentiating factor considering the targeting spread between the policy rate and inflation. Our CPI linker portfolio now stands at TRY 166 billion, which equates to 75% of equity and continues to help to mitigate the impact of inflation while creating a solid ROE support. Please note that every 1% change in CPI has around TRY 1 billion TL net income or 45% ROE impact.
Our TL fixed rate securities were acquired at favorable rates. We may also leverage our expertise in treasury management to capitalize on trading opportunities. Meanwhile, we continue to lead the sector with our strong positioning in TL corporate bonds. Our high-yielding corporate bond portfolio with end-of-quarter 56% yield stands at TRY 32 billion or 9% of our TL securities.
On the funding side, it is important to highlight that in line with our strategic ambition, our market share in below 1 million TL deposits and 0 cost TL demand deposit has increased considerably by 260 bps last year, thanks to our solid customer franchise. Our enhanced TL white consumer-only deposit market share provides ample opportunity for tactical adjustments in market positioning and has given us notable edge and cost optimization this year.
As a result, we have preserved our well-diversified and disciplined funding mix, whereby deposits have continued to be main source of funding. Our deposits now stand at 64% of total liabilities. It is also important to note that 65% of our TL time deposits are sticky and low cost, which is actually even up by 4 percentage points quarter-on-quarter. In addition, TL LDR, which now stands at the low 84%, has been essential in supporting our margins and provides us an abundant capacity for growth and enhancing margins going forward.
On the wholesale funding side, we continue to pioneer the market have successful transactions. In second quarter, as you know, our inaugural Basel III-compliant additional Tier 1 issuance was in March. Please recall that our AT1 issuance was the first out of Turkey fully purchased by international investors with a peak demand of around $3.7 billion.
In second quarter, we renewed our sustainable syndicated loan, which was once again first in Turkey in allocating according to the sustainable finance framework and received record demand. During the quarter, we have also successfully completed our issuance of $500 million sustainability senior unsecured Eurobond with a very strong like 3x demand from international investors.
As a result, we have succeeded to increase the share of sustainable transactions in our wholesale funding book to 64%. I am happy to share that we are well on track with our '23 sustainable wholesale funding target of 100%.
Moving on to the P&L. Without any doubt, spread and margin evolution were the major challenges in the sector this year. the tight monetary policy targeting disinflation, along with the competitive pressures and growth casein asset pricing have delayed the expected margin recovery in second quarter. Consequently, we have revised our full year so adjusted net interest margin guidance down to around 3%.
Our sub-adjusted NIM stood at 2.4% in the first half of the year, and our strategic restructure and robust balance sheet will be crucial for margin improvement in the second half. To outline 3 core factors that will drive margin enhancement in the second half of the year and beyond. First, on the growth side, we prioritize high-yielding small ticket loans while carefully extending maturities as well as diversifying product mix to lock and spread.
Second, on the funding side, we leverage our expertise and agility to optimize cost while our extensive TL deposit base and low tail LDR help minimize margin pressure. Last but not least, our sound floating and high-yielding security portfolio is well positioned for this inflation environment.
As highlighted earlier, consistent with our organic growth strategy, we have continuously grown our customer base and the customer-driven recurring revenues. Our active customer base reached $13.9 million, up 64% since the end of year 2021, with an eye catching 5.4 million net active customer growth.
The key to our growth strategy success lies in our adaptability, dedication to customer satisfaction and continuing innovations all core to our strategic vision. Similar to last year, 2/3 of our new-to-bank customers were acquired to be digital onboarding, underlying the strength of our digital capabilities.
Our active product portfolio a function of active customer base and average cross-sell per customer has excelled further by 14% year-on-year, reaching new all-time high. At the same time, our growing young customer base strengthens our sustainability of the recurring revenues generated from our customers centric strategies for the future. The success of our digital strategies is consistently demonstrated by the growth in our customer base and the advancement in our sustainable fee income.
Number of our digital customers reached 12 million with a robust 81% growth since 2021 year-end. Digital penetration continues to increase, extending to 87%, while migration of transactions to digital channels have already reached 96%. Please note that digital channels have secured a visibly striking share in credit card sales with 68%, GPLs was 93% and time deposit account openings with 83%.
We continue to leverage our digital excellence, innovative solutions to revamp our value proposition and to maximize number of customer touch points. Our one platform for all at Bank Mobile , with simple and social everyday banking vision attracts more than once a day log-in, thanks to its more than 350 functions.
We successfully translate our outstanding digital experience into our customized applications as well. Just to name a few on the slide, for example, Dizon, our back end notice digital planes platform, bank divest, a groundbreaking e-sale, e-payment and invoice application for merchants. As bancassurance, a comprehensive investment insights, which is tilted for traders and investors. All of these are more will continue to support our sustainable fee income going forward.
On the state and commission income side, our well-diversified fee income base has driven 132% year-on-year growth in the first half significantly exceeding our full year guidance of above 80% growth. This achievement leads us to raise our full year fee income growth guidance for this year. We now project our fee income growth to surpass 100% year-on-year.
The excellence in our fee performance can be attributed to our dedicated investments through the cycles, strong momentum in customer acquisition and the diversified product offerings. I am delighted to actually repeat what Kambi had mentioned that we have already reached our 2025 strategic target to increase our fee to OpEx above 80%. Our fee to OpEx ratio improved by outstanding 23 percentage points since 2022 to 81% with even higher quarterly figure of 85% in second quarter, thanks to all-time high fee chargeable customer base and the strong cross-sells.
Our progress in fee income has also enabled us to sustain our 16% solid fee income market share year-to-date based on the latest BRSA data. As a reminder, extraordinary growth in our active customer base last year resulted in 210 bps surge in our fee market share gain among private banks since the end of 2022.
Despite ongoing challenges in OpEx, the quarterly increase has moderated to 5%, a significant drop from 20% average over the last 12 months. Our revised guidance of around 70% for this year for OpEx reflects our expectation that OpEx will ease for the remaining for the year. Despite crop profitability challenges in the sector, our mid- to long-term target of mid- to low 30s cost-to-income ratio is still firmly in place.
Moving on to asset quality. Resilient credit risk management framework powered by machine learning based credit decision models have been enabling us to maintain solid asset quality while growing. Despite the retailed increased migration trend in the sector, our advanced energy capabilities across retail segments play a crucial role in managing the quality of the portfolio.
While robust and broad-based collection performance across all customer segments supported NPL evolution, which remained at 2.2%. Share of Stage 2 and 3 in our growth loans, which would be deemed more potentially problematic loans, continue to be limited in our loan portfolio at 8.1%, while coverage also remains strong at around 27%.
Although, we diversified loan book, sophisticated digital capabilities, along with our proactive provisioning are clearly reflected in the evolution of our cost of credit. We ended the first half of the year at 47 bps net cost of credit, excluding currency impact. This robust cost of credit performance has led us to improve our full year guidance from below 150 bps around 100 bps.
I would like to emphasize that our loan growth -- loan loss provision build has approached TRY 35 billion as of second quarter, excluding a TRY 1.4 billion free provision. While our coverages remain solid, even with the substantial recoveries from our NPL portfolio and a TRY 1.5 billion NPL sales during the quarter. Our total capital, Tier 1 and core coated Tier 1 ratios without forbearances remained robust at 16.4%, 13.9% and 12.7%. This is particularly notable given the adverse effects of sector-wide profitability challenges as well as our proactive and strategic foreign currency credit growth we achieved during the quarter.
Also, please note that adjusted for the temporary risk weight increase applied by BRSA, our capital will be even 190 bps higher at an outstanding 18.3%. Strong capital reserves continue to provide protection against extraordinary market challenges and fluctuations as well as offering critical resources for long-term and profitable growth.
In positive sensitivity, the first 10% depreciation impact on our solvency is at 20 bps with a 100 bps change of interest rate impact of 80 bps on capital adequacy ratios. Note that sensitivities shared have a diminishing impact. Now before moving on to the Q&A, I'd like to always -- as we always do, share a few highlights regarding our ESG journey. As highlighted in our ESG video at the start of the presentation, we remain committed to embed sustainability into our core of our operations. Our efforts received full endorsement from our senior management, including our Board.
In second quarter, we provided TRY 81 billion sustainable finance, bringing our cumulative total to TRY 207 billion since end of -- since 2021 actually. And this accounts to around 38% of our new 2030 target. In addition to our ESG themes and ESG rating funds we launched have a website to encourage investors to invest in companies that contribute positively to the environment and society.
As for ecosystem management, we have successfully completed the second term of Turkey's first full-time spin-off program. So far, $1.4 million was invested in total to start-ups founded by the bank entrepreneurs. As for people on community pillar under Akbank Academy, we supported use in developing competency in sustainability and sustainable finance trainings.
With our transformation holds a future project, over 4,000 pieces of furniture from Akbank renovation project have been donated to 318 schools affected by the earthquake. Last but not least, our 2050 net bank commitment remains the center of our climate change pillar. Following the disclosure of our 2030 emission reduction targets for the power, cement, iron and steel and commercial real estate sectors, we are now developing our sectoral net-zero strategies, which will be announced very soon. I've shared with you throughout the presentation our revised guidance. So this concludes our presentation. Now we are moving on to the Q&A session.
[Operator Instructions] And the first question comes from Nida.
I have a few questions -- sorry, one second. Can you hear me better now?
Yes, we can. Thank you, Nida.
Okay. Great. So Firstly, on the margin outlook, if you were able to comment on the margin outlook for the second half in 2025, in particular, I'm interested in the downgrade to guidance for margins. To what extent is the downgrade driven by the 500 bps rate hike in March versus perhaps weaker underlying margin trends than previously expected? And you mentioned competitive pricing as well. If you can comment on that, how is that different in corporate versus consumer loans? And just on the same topic, what does your guidance assume for policy in Turkey? Do you assume a rate cut in 2024?
This is Turker. With regard to the margin outlook and like the impact of the first half developed on our NIM revision, maybe just to -- maybe I can start with the reasoning for net interest margin revision from 4% to 3%.
Actually, yes, there are there were various factors. Surely, one of them was the last 5% rate hike made in the first quarter. As in our initial guidance, like we had reached 45% FTE peak. So that's one of the reasons. And not to forget the ongoing increases on the reserve requirement side has also significantly impacted the net interest income evolution.
Just to recall, like currently, like we are holding close to 15% of our TR balance sheet at the Central Bank in the form of reserve recommit. Yes, we are getting partial remuneration, but it does not fully offset our [indiscernible] actually, it's just offset some part of our funding cost for that part. And on the FX side, actually, the reserve requirements on the effect that makes roughly 1/4 of our FX balance sheet.
This is also another factor. Actually, maybe not to forget, especially on the commercial lending side, the pricing evolution in the markets, like it was a bit competitive, like this competition was more to be observed on the commercial side rather than on the consumer side. So that's the overall view for the first half of the year. With regard to the NIM evolution and new trajectory for the second half of the year, when we look at like front book evolution, maybe just to also give it with figures.
Like currently, new deposit pricing is at low 40s levels, which used to be like close to 50% levels. Breast marginal lending is created at high 40s up to 50%. They also new business in net terms is created with a positive margin of like 4%, 5% to 6% level. But the issue is actually here is the growth cap. So therefore, actually because of the 2% growth gap, it takes a bit time to reflect this positive margin spread on to the back book.
So it will take some time. But like in the last 3, 4 weeks in the third quarter, like we are observing that back book spread is evolving positively. That will be one of the major contributors to our net interest margin -- revised net interest margin guidance. So therefore, actually, we are expecting to see a gradual improvement in the net interest margin like especially towards the end of the third quarter and on the -- in the fourth quarter.
Therefore, actually, the main cost impact will be coming from the marginal pricing like we have -- we are expecting a gradual -- that some rate cuts may begin towards the end of the year, but it's -- since it will be happening towards the end of the year, its positive contribution will be rather marginal. But what I can say is actually like with the macro expectations we have, probably, so the entry into the next year will be much more positive...
Post assumption for the credit...
Margin rate cut towards the end.
Net does that answer your question?
Yes, it's very helpful.
Now the next question comes from Jihan from HSBC Jihan.
I have a very specific question about the market share in SME, which if I calculated correctly, increased almost 100 basis points in just one quarter. So I'm a little curious about the drivers of that market share gain and whether that's going to continue in coming quarters because your 2025 -- by 2025, your -- according to your targets, aiming for a significant market share gain, you were somewhat behind, but it seems to be accelerating. So any color on that on your resite to grow would be good.
Thanks a lot for the question, Jihan. Actually, this trend started the last quarter of last year, actually. So our focus, especially on the SME business, especially growing on the Turkish lira loan side is one of the major success factor because our existing capacity on the especially digital and end-to-end credit underwriting the system supporting us a lot.
So in the same time, although there are loan growth caps especially regarding Turkish lira loans. But at the same time, there are specific areas that we can grow on. First of all, earthquake cities agriculture. There are lots of areas that we can build up a new SME portfolio. So regarding our existing collateral rating breakdown we are comfortable that there are niche potential for us in order to grow there.
So thanks to our specific focus on that, especially on the Turkish lira loan side, we are gaining the market share in a healthy way. And so of course, there are some sweeteners on the spreads and the higher yield on the SME line of businesses. And of course, SMEs are the one of the most important segments that we can increase our cross-sell, our demand deposit base. So it is a kind of win situation for the bank.
Okay. The next question comes from Mikhail.
Yes. Good day. I have 2 questions. One is on the underlying asset quality trends and how do you see its development so far in different categories, including the like credit cards and SMEs? And then also on the issuances. How do you look at this into this next year? Do you see what could be the reason to issue more or less or not to issue more securities?
Mikhail, thanks a lot for the question. I would like to try to answer the first one and then Cenk Gur, you're going to jump into the second one. I can tell you that up until now, asset quality remains strong. We haven't seen a broad-based rising delinquency rates yet, but of course, we may expect some increase there, especially credit cards have been the most significantly affected group as we expect.
We are very closely monitoring the portfolio. Migration trends have increased, but there is no increase on the NPL side so far. Our NPL ratio remains stable as placement growth continued and our strong collection performances. And it is, let's say, the positive way that we can manage our existing the portfolio. Migration rates to Stage 3, again, we have seen some increase on the retail side.
But we don't expect any -- the rates seen in 2018 or 2019 within this year. So the other important issue here. Since we have mission learning-based 100% automated credit decision models. So we have we can easily differentiate ourselves in terms of sophistication of those models. So those models in the same time enable us to take quick and timely actions. So this is a kind of strength of our existing risk management, the practices.
So the other thing I would like to emphasize that on the corporate side, commercial side, including SME business, we are really dealing with the sectors that have positive outlook such as tourism logistics, transportation, e-commerce informatics, telecommunication, food. Actually, this is the policy that we really would like to deepen our relationship within those, let's say, healthy sectors.
Yes. Michael, with regard to FX issuance, as you know, and also as Ebru has already touched upon, this year in the first quarter and in the second quarter, we've made very successful issuances first as AT1 and then in the second quarter, again, a very successful senior unsecured eurobond issuance. Should going forward, we will we are always opportunistic. We are looking at market developments.
But surely, the user capacity of this FX liquidity will be quite important. As you know, recently, the imposed 2% growth gap on the FX loan side. We don't know how long it will stay with us. We'll put some limits on the growth side. But based on the developments on that side as well as like our capacity to grow our FX balance sheet we will always continue to be active, but also I can say is currently, there isn't any something specific in pipeline as of today.
The next question comes from David Toronto.
And I have 3 questions, if I may. The first 2 questions are about the swaps. Your swap costs were a bit higher in the second quarter. However, when I look at the Central Bank data, I assume your onshore swap utilization should be substantially lower nowadays. And could you talk a bit on how your funding has changed now versus the second quarter?
And have you started to use the reverse swap facilities with the Central Bank? And if so, how should we think about the allocation of the received FX? I mean, what I'm trying to get is the incremental impact on the NIM dynamics in the second half apart from the core spread dynamics. And finally, in the presentation, you have highlighted that the second quarter NIM was the bottom. Our recovery was expected to kick off in the third quarter and continue for some time? If possible, may I please ask the difference between the exit NIM from second quarter versus the average figure that we see on the presentation. In other words, have you started to see the recovery trend towards the end of the quarter? Or is it yet to come?
David, this is Turker. Yes, as you are rightly mentioning the second quarter swap cost is relatively similar to the first quarter. Yes, lately, as you can see from CBRT data, CBRT has gradually reduced its swap usage. And very recently, they have also announced like road swap transaction, but there hasn't been any like auction yet by the sentiment therefore it's actually -- some parts. So actually, there is no realized transaction yet.
But with regard to the swap cost, maybe we should recall that the policy rate increase was gradually in the first quarter. So the act are average. Cost of funding has increased in the second quarter. And the shift of Central Bank swaps has also gradually happened from Central Bank to offshore swaps, there price it's like a mathematic calculation.
So in the second quarter, like average CBRT slapshots still there? Maybe yes, currently like close to 0. And the cost of funding has like the latest rate hike in this -- in March has reflected itself into the second quarter cost of funding. So that's the major reason, actually. With regard to NIM evolution, yes, second quarter NIM was 2%, 2.1%. Like exit NIM was slightly below, but currently, we are above this trend. That's what I can say. So on a weekly basis, we are observing the improvements. But just to recall, the low LDR and the growth cap is limiting this -- the pace of the recovery.
Okay. And perhaps one more question. Can you fill in the existing growth caps on the TL side? Or do you see demand rather muted nowadays?
Yes, actually, we can utilize the growth cap, yes.
And the next question comes from Mehmet Sevim,.
And I had just a couple of follow-ups. Actually, one just on my colleague's question there on the growth caps. Can I ask if there were no growth caps right now how much the book would be growing in your view on a quarterly basis? And secondly, maybe related to that, also taking into account your view of a small rate cuts towards the end of the year, do you have any early thoughts on when the growth caps could be adjusted?
And secondly, on the KKM deposits, if you could just remind us of the remaining volumes on those. And specifically, I'm asking because clearly, there's a big positive remuneration impact on NIM right now given the very encouraging conversion trends there. But I was wondering how long we should expect that to continue.
Mat, thanks for the questions. Regarding your first question and related to especially growth caps First of all, actually, we anticipate that I think the market is in the same in the same page. The Central Bank, I think they are going to lift the growth caps right after the policy rate cuts. So it was the adverse thinking when we were talking about 2 months ago or 3 months ago now, it's evaluated that way.
Then I think we're going to see first rate cut and then the drought cats are going to lift it by the central bank. If we assume that there is no growth cap, okay? I think the level of interest rates on both consumer and the commercial lending, it is high. and it's curbing the demand. So the thing is here, with some specific -- the customers, they are trying to convert their demand from Turkish lira to foreign currency loans because they are generating a fixed -- the revenues.
And especially for the mid- and long-term investments, the main demand is coming from, especially foreign currency financing. So this is a kind of dilemma that we have to accept because the limitation for the drop, of course, the unique and essential for the slowdown of the economic activities. But at the same time, there are some investment opportunities that we have to take into consideration for upcoming months and years. So I think we are going to see some normalization starting from the first quarter of 2025 regarding the especially policy rate cuts and of course, following the lifting the draft caps.
Maybe with regard to your second question, like FX project deposit scheme is currently making up like around like 12% of our deposit portfolio. And share is like continuously coming down, which you can see from the CBR and BRSA data as well. KKM stock is down to USD 57 billion as of last week yet. And we have to like some rollover and conversion ratio. And currently, we are able to meet the vessels, especially the conversion ratio is like evolving quite positively. So therefore, probably like in the click months, we are going to talk about a very like material share of KKR total deposit bases already at a very low level.
And the next question comes from Nida.
I just have a follow-up on the fee commission income growth. so, of course, fee and commission income process is quite impressive. You raised guidance as well. I just wanted to get a better understanding of how this is expected to evolve a more normalized rate environment, but lower policy rates as we look out to 2025. Do what extent do you think the strength in fees that we've seen a sustainable growth? And what elements could be addressed?
Okay. Just -- I'm going to repeat your question either. I guess you're asking about the strength in the fees, how sustainable is it going forward? And what -- and going forward, basically, what could be sustained basically in terms of fee generation? I guess that's your question, right? The underlying dynamics. Yes. I think that's the question.
Okay. Nide, the line was not so good. So we couldn't understand it in the first instance. With regard to fee income growth, yes, this year, like -- in the first 6 months of the year, again, year-on-year growth was quite high 172%. But with -- because of the base effect of the second half of last year, probably this growth will come -- will be coming down, but still it's -- we are expecting it to be above 100% levels.
Going forward, surely, like in a normalized world, where the -- also the interest rates come down, which is a significant component of the payment systems related fee generation. But anyway, as Akbank, we are going to aim significant real growth in the -- in fee income generation. Maybe it's difficult to put it into figures, but we will be aiming to further improve our P2 OpEx ratio, which we have done already quite -- like successfully so far, we are already above our '25 year -- '25 guidance.
So it will be like one of our like the benchmark we are going to meet and be so further improve our fee to OpEx ratio like what will be the main contributors for that. As you know, in the last roughly 2 years that we have significantly increased our customer base while maintaining our cross-sell and while increasing our products we are selling.
So -- and it's certainly -- and the composition is quite balanced. So the fee income is driven from payment systems, from bank insurance, from lending activity from wealth management. There's a healthy end like reasonable distribution. So therefore actually, maybe it's also like also minimizing the sensitivity of interest rate related fee generation, this composition will be helpful going forward to Akbank.
As you know, last year, we have significantly increased our market share. Currently, we are protecting this market share at a similar level. But going forward, in an environment where the interest rates are declining, we are expecting to further improve our fee income market share.
Thank you, Nida, for your question. I guess your intent is very bad. So thank you very much. If you have any further questions, please just send us directly. Cenk Gur, there are no further questions right now. I would like to thank everyone for attending our call today, and I wish you all a very happy summer if we don't meet before September. And if you have any further questions, we're always here as IR to help you out, but I'm leaving the floor to Cenk Gur for closing remarks.
Thank you, Ebru. Dear friends, as we conclude today's webcast, I want to extend my deepest gratitude to all of you for joining us today. We are proud of our achievements and remain focused on driving sustainable growth and delivering value to our stakeholders. Thank you for your continued support and confidence in our vision. We look forward to meeting you and updating you on our progress in the future. Have a great evening. Thank you.