Akbank TAS
IST:AKBNK.E
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Akbank TAS
Earnings Call Analysis
Q4-2023 Analysis
Akbank TAS
The company showcased a solid performance in 2023 with robust revenue generation, especially in fee income, resulting in a full year Return on Equity (ROE) that surpassed expectations. Despite operational expense (OpEx) challenges, the bank's focus on sustainable practices is paying off. A notable accomplishment is the elevation of their MSCI ESG rating to 'A', signaling a significant improvement in sustainability and social governance over two years. Looking ahead, they have positioned themselves to carry this strong momentum into 2024.
For 2024, the bank is committed to capitalizing on their strong capital position, aiming to grow Turkish lira loans by around 40%, driven by consumer and SME segments. They remain focused on customer acquisition and relationship deepening, bolstered by a holistic organizational structure and digital solutions. However, they anticipate challenges in the sector's margin evolution due to low loan demand and the regulatory environment, expecting to maintain a solid swap-adjusted net interest margin around 4%. Fee income is projected to grow significantly, aiding their goal to keep the cost-to-income ratio in the mid-30s.
The company has not only met but quadrupled its Sustainable Finance target for 2030, reaching TRY 800 billion. Their dedication to low-carbon and inclusive economy transition is evident through various initiatives, such as the strong performance of ESG themed funds and the UN Financial Health and Inclusion Commitment. They've introduced Akbank+, Turkey's first full-time entrepreneurship program, and their Akbank Academy continues to advance education and financial literacy. As part of their 2050 Net Zero Bank target, they have set ambitious emission reduction goals for their operational and portfolio emissions.
During the Q&A, analysts inquired about the strategies to achieve the 40% loan growth target, particularly in terms of sector focus. The bank's executive highlighted their selective approach with emphasis on consumer loans and SMEs, suggesting exporters will be key to their strategy. As for the net interest margin (NIM), it was elaborated that despite volatility and lower contribution from CPI linkers, the NIM on a swap-adjusted basis is expected to average at 4% for the year, taking into account the stabilized deposit and loan back book costs.
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Dear friends, this is Kaan Gur speaking, CEO of Akbank. I wish you and all your loved ones a happy and prosperous new year. Thank you for joining our fourth quarter earnings call, during which we also be sharing our 2024 guidance.
Before moving on to our bank, I would like to share my thoughts on the operating environment. Let's move to Turkish economy overview. Domestic economic growth has been solid. While the risks for the period ahead are tilted to downside, economic growth in 2023 is likely to be around 4.4%, in line with the medium-term program target of the government.
Looking forward, recently increasing borrowing costs, led by the ongoing policy rate hikes as well as the regulations forcing banks to push deposit rates higher, are expected to curb excess demand and cool down the economy. We as Akbank expect 2024 growth to be around 3% as the weakening in global backdrop and the prospective tight monetary policy will weigh on economic activity.
Cost push factors such as strong demand and [indiscernible] effects will drive annual inflation higher in first half of the year, before declining around low 40s at year-end.
We entered the year with a high external deficit, as you know. While the prospective slowdown in domestic demand will contribute to external rebalancing, restructuring efforts in the earthquake region may somewhat limit this. We project an improvement in current account deficits from TRY 47 billion in 2023 to TRY 23 billion in 2024.
Macro stabilization, particularly bringing inflation down to single digits, will not only require a tight measure [indiscernible] and extending period, but also continuation of the enhanced policy coordination. We expect a gradual easing in the ongoing financial regulations, particularly those regarding the FX market, sustaining the ongoing progress in restoring predictability and confidence in policymaking is key to steer the economy towards a more balanced path.
Let's move to key indicators of the banking sector. Despite the regulatory environment, banking sector profitability remain robust. Recent pivots in monetary policymaking and normalization of market interest rates have created a more conducive environment for core banking activities by supporting positive margins, with challenges posed by the current macro backdrop are expected to ease towards the end of the year once [ this inflation ] trend is maintained on a sustained basis.
Loan growth is moderating towards the levels consistent with the macro financial stabilization objectives of policy authorities. Banking sector remains well-capitalized and resilient. The prospective [ Mile ] and gradual deterioration in asset quality is manageable, thanks to prudent provisioning.
Let's move on to our bank. Dear friends, I am delighted to share that Akbank has consistently demonstrated exceptional financial performance, solidifying its position as a leader in the banking industry. Our customer-centric strategies and agile balance sheet management have created a solid foundation for strong, sustainable profitability.
As a result, we, despite the challenging regulatory environments, we ended the year well ahead of our guidance with 37.9% ROE and 4.4% in ROA, while our leverage remained low at 9%. Our robust performance was driven by organic growth, while every business line contributed significantly.
I am pleased to share that our efforts in retail banking have resulted in an impressive and sustained momentum with 2.3 million net active customer growth, reflecting our commitment to excellence. This is on top of another 2.3 million net customer growth in 2022.
As a direct outcome of our focused efforts, there has been a remarkable 55% increase in our net active customer base over the last 2 years. Along with the increased cross-sell, this has led to a substantial 230 basis points market share gain in fee income among private banks. In line with our strategic ambition, during the year we gained 300 basis market share in consumer loans and 150 basis points in broad-based Turkish lira deposits.
Thanks to our achievements so far, our journey continues with accelerated momentum, while we remain committed to investing, innovating and growing. Retail banking prevails as a strategic focus area for us. While growing, we remain as one of the best-positioned banks with our superior capital buffers, sound liquidity and solid efficiency.
Dear friends, I'm very happy to inform you that we are fully on track with our 2025 targets. I have already mentioned some of them in previous slides. On top of this, it is worth to mention that we acted strategically in SME loans, we are -- where we have gained 160 basis points market share during fourth quarter, with better pricing environment.
Perhaps most notably, our revenues derived from customers has been significantly strengthened. Our fee to OpEx ratio advanced by a remarkable 14 percentage points from 58% to 72% in just 1 year.
Our bank strength is derived from our agility, our proactive and prudent approach in balance sheet, and risk management, coupled with our years of investments in our people. I'd like to take this opportunity to express my deepest gratitude to all of our people. Their commitment, passion and resilience is the driving force behind our success.
Now Ebru will provide insights regarding our 2023 performance. Following her presentation, I will outline our 2024 guidance. And we'll be available to address any questions, together with Turker and Ebru. Thank you very much.
Ebru, I'm handing over to you.
Thank you, Kaan-bey. As you have just mentioned, we ended the year on a very strong note despite all the macroeconomic challenges and tight regulatory environment. Our agility and balance sheet management, as well as outstanding customer acquisition, resulted in our fee income to almost triple year-on-year, and our net income to increase by 11% year-on-year to a robust TRY 66.496 billion last year.
Accordingly, as you just mentioned, we ended the year with a substantial 37.9% ROE and a 4.4% ROA, which is well ahead of our full year guidance. On a quarterly basis, we maintained a sound profitability with TRY 15 billion net income, resulting in solid quarterly 30% ROE and 3.3% ROA.
Now let's move on to the key drivers of the solid performance in more detail. Starting with the balance sheet. Our TL loans were up by 62% year-on-year, exceeding our full year guidance. Bank's motivation, as Kaan-bey just mentioned, in high-yielding small ticket continues at full pace. This motivation has resulted in a significant 82% year-on-year increase in consumer loans, with broad-based 300 basis points market share gain in the same period among private banks.
We grew an eye-catching 195% year-on-year in consumer credit cards, thanks to strong customer acquisition as well as advanced analytics and technology being at the heart of our targeted marketing campaigns. Market share gain in consumer credit cards was also noteworthy with 200 bps during the year, again, among private banks. As a side note, thanks to our 100% automated loan decision process with an excellence in AI-based consumer credit card models, we are prudently managing the quality of the portfolio while growing. Also, please note that 85% of the general purpose consumer loans are preapproved and 25% are to salaried customers.
During last quarter of last year, we strategically increased the maturities of the loan portfolio, and we selectively grew in business banking loans where we refrained to go in the first half of last year due to regulatory pricing caps, which were actually creating unfavorable pricing environment. As the pricing environment improved, we increased our market share in SME and [indiscernible] business banking loans significantly by 160 basis and 225 basis points, respectively, during last quarter of last year alone.
As for 2024, our growth ambition remains intact, and we target to increase our market share further in small tickets, while extending maturities and diversifying our product mix. Our strategy is geared towards supporting and strengthening the margins.
On the FX loan side, demand remained muted last year. Our net FX loans were down by 7% year-on-year to $10 billion. Considering our already deleveraged FX loan book, we expect to grow in 2024. Foreign currency part of the balance sheet has more favorable spreads. Therefore, any growth on this side would be margin supportive.
Moving on to the securities side, interest rate risk management remained in focus for our tickets positioning as well. Since the beginning of last year, we have been increasing our positioning in TL floating notes. Accordingly, share [ of FRNs ] in total TL securities increased considerably by 9 percentage points to 20% in the same period. Our TL floating securities, majority of which are TLREF indexed bonds, have a decent above-market spreads and are NIM supportive. Having met the regulations proactively, we were able to build our fixed rate TL securities book at favorable rate.
Fixed rate bonds for CBRT pledge remain low. Please also keep in mind that we are proactively utilizing some of these bonds to grow selectively in order to enhance overall asset yields.
Similar to first 9 months of last year, we continue to lead the sector in TL corporate bond purchases from primary issuances. Our high-yielding corporate bond portfolio, which has an average of 44% yield, stands at TRY 31 billion or around 10% of our TL securities.
Our treasury's proactive positioning in positive yielding CPI linkers will also be a differentiating factor this year considering the tightening spread between the policy rates and inflation. Our CPI linker portfolio now stands at TRY 153 billion, which equates to 73% of our equity and continues to help to mitigate negative impact of inflation while creating a solid ROE support. Please note that every 1% change in CPI has around TRY 1.1 billion net income or 50 bps ROE impact.
As shared in several occasions, our foreign currency securities, which make up around 1/3 of the total, were timely hedged against Fed rate hikes.
Moving on to the funding side. We continue to prioritize widespread and small-ticket customer deposits to fund our growth. Our total TL deposits, where we gained 180 basis point market share among private banks, were up by 79% year-on-year. Thanks to our sound customer franchise and our success in gaining further 2.3 million customers in 1 year alone, our market share in below 1 million TL deposits has also increased considerably by 260 basis points year-on-year.
Our market share in zero cost TL demand deposits was also up by an outstanding 260 basis points in the same period. Our success in gaining significant market share in broad-based TL deposits last year will be especially important for NIM evolution this year. Please also keep in mind that regulation induced low level of TL LDR, down substantially by 24 percentage points to 83% last year, creates significant room for margin improvement going forward.
On the wholesale funding side, managing the maturity profile efficiently with differentiating funding solutions is a priority for the bank. We have a very solid FX equity buffer of $9.7 billion, whereby $2.7 billion is short term, indicating a liquidity buffer of above 3.5%.
In addition to our sound FX liquidity, we have succeeded to increase the share of sustainable transaction in our wholesale funding book to 59%. And this includes the first gender-themed Tier 2 globally. Hence, I'm happy to share that we are well on track with our 2030 sustainable wholesale funding target of 100%.
Despite the regulatory environment, which put significant pressure on margins last year, we ended the year with 4.7% swap adjusted NIM, close to the upper band of our guidance. There is no doubt that our agile ALM, with prudent and proactive [indiscernible] to mismatched management, as well as our solid customer deposit franchise, have been the key enablers of this success. Please keep in mind that our swap adjusted NIM for 2023 would be even 100 bps higher adjusted for the impact of reserve requirement rules.
Note that 10% of our TL assets and 20% of our FX assets are held at Central Bank as reserve requirements and earned 0 interest. In terms of quarterly margin evolution, the impact of reserve requirement regulation is even more remarkable with around 250 basis points for fourth quarter swap adjusted NIM alone. This increase implemented in reserve requirements goes hand-in-hand with the authorities aimed in unwinding the FX deposit scheme.
As for this year 2024, our strategically designed and sound balance sheet will continue to support further NIM evolution. We have been proactively extending the loan maturities since third quarter of last year with a well-diversified product mix, prioritizing high-yielding and/or installment loans to lock in spread. Our strategically built 3-month swap book prior to each rate card continues to be beneficial for funding costs as well.
Please note that our proactive compliance with the regulations helped us further enhance our broad-based small ticket TL deposits, while creating room to benefit from low reserve requirement ratios via extending maturities. Last but not least, our strong floating and high-yielding securities positioning will help minimize margin pressure.
We mentioned earlier our momentum in customer acquisition continues at full pace. Our active customer base reached 13.1 million, up around 55% year-on-year, with an impressive 2.3 million net active customer increase. This is on top of the noteworthy 2.3 million net customer growth in 2022.
Similar to first 9 months, 60% of the new-to-bank customers were acquired via digital onboarding, emphasizing the robustness of our digital capabilities. We continuously leverage digital onboarding and revamp our value proposition in a comprehensive manner for young customers as well.
Our active project portfolio, a function of our active customer base and average cost sell per customer, has excelled close to 24% year-on-year, thanks to accelerated customer activation and acquisition as well as persistent improvement in cross-sell. Our expanding young customer base solidifies the sustainability of our revenue generation from our customer-centric strategies in the years ahead.
Our numbers consistently demonstrate the impact of our digital strategy crafted around our customers' journey. We exceeded 11 million digital customers, achieving 68% increase in 2 years. The digital penetration is up by 7 percentage points since the end of 2021 to 85%, while migration of transactions to digital channels have already reached 96%.
Digital customers enter our mobile application 35 times a month, so more than once a day, playing a significant role both in our sustainable fee income generation as well as our asset quality evolution.
While the digital channels have secured a visibly striking share in credit card sales with 70%, GPLs or general purpose consumer loans with 90%, and time deposit account opens with 83%.
Moving on to the fee side. We have actually exceeded our full year guidance and achieved a remarkable 188% year-on-year growth. All business lines, as Kaan-bey mentioned earlier, have contributed significantly with some phenomenal achievements during the year.
Examples include: We were the fastest-growing private banking consumer credit cards in terms of number of credit cards issued, while also achieving the highest market share in consumer purchase volume. Moreover, the success actually extends beyond the consumer credit cards as we were also the fastest-growing private bank in terms of number of commercial credit cards issued. And among the top 2 fastest-growing banks in market share of acquiring volume.
On the bancassurance side, we not only maintained our top position in total insurance commissions, but also attained the highest market share gain in credit linked life insurance among private banks. Additionally, our subsidiary AK Asset Management secured the position of market leader in wealth management among private institutions with a total AUM of TRY 407 billion.
You can see on this slide that our dedicated investment through cycles as well as strong momentum in customer acquisition have resulted in a remarkable, as Kaan-bey, mentioned earlier, 230 bps market share gain in fee income among private banks in just 1 year, resulting in a cumulative fee to OpEx ratio to boost by 14 percentage points to 72% in just 1 year.
As shared earlier, we are well on track with our strategic target to increase fee to OpEx ratio above 80% by 2025. A proof of this is that our quarterly fee to OpEx ratio already reached above 80% levels in the third and fourth quarter of last year. This year, we target to further improve our fee to OpEx ratio thanks to all-time high fee chargeable customer base and strong cross-sell.
Our OpEx was up 20% quarter-on-quarter, carrying cumulative [ year-on-year ] increase to 133% last year. However, thanks to our enhanced customer base revenues and sustained cost discipline, our cost-to-income ratio closed the year at a commandable 32.7%, meeting our full year guidance. Leveraging our relatively low OpEx space, we attain notable competitive edge and enhance adaptability, particularly in times of inflation. Meanwhile, our cost of assets remains intact at 3.1%.
Moving on to the active quality. Our loan portfolio continues to perform well with robust and broad-based collection performance, while leading indicators for asset quality remain strong thanks to our prudent risk management and healthy loan portfolio composition. Please note that our net NPL influence to Stage 3 is limited when we exclude for a sector-wide one-off big ticket file that migrated into Stage 2. The related company operates in construction sector and had its own company-specific issues and isn't an indicator for overall asset quality trends.
We completed the year with a low 2.2% NPL ratio, in line with our full year guidance of below 3%. Moreover, the share of Stage 2 and Stage 3 in our gross loans, which would be deemed, let's say, more -- potentially more problematic, continue to be limited at 8.6% with strong coverage.
Our proactive approach in provisioning and the robustness of our loan portfolio are clearly reflected in the evolution of our cost of credit. We ended the year at 107 bps net cost of credit excluding currency impact, consistent with the provided guidance. Please note that 11 bps is related with IFRS model update that happened during the last quarter of the year for the mass segment and 8 bps is for the proactive earthquake provisioning.
Despite our solid loan growth, our coverage ratios remained strong with an additional loan loss provision build of TRY 11 billion, carrying the total provisioning book to TRY 32.5 billion which excludes our TRY 1.4 billion free provisions. Looking forward, we are confident that our robust provision build and solid collateral values, as well as the proficiency in digital capabilities, will minimize the need for additional provisions.
Moving on to our capital position. Our Tier 1 and core equity Tier 1 ratios without forbearances remain robust at 18.5% and 15.6%, respectively. Our sound profitability was reflected onto our capital position as our [ internal ] capital generation added a solid 115 bps to our total capital quarter-on-quarter, reaching a cumulative 510 bps for the year. Worth to note that, adjusting for the temporary risk weight increase supplied by BRSA, our capital would be even higher by 220 bps at an outstanding 20.7%.
To share some sensitivity, the first 10% depreciation in TL results in around 40 bps decrease in our capital ratios, while the impact diminishes for higher amount of changes. And 100 bps increase in TL interest rates results in a 7 bps decline in our solvency ratios, again, with diminishing impact. Strong capital buffers present as shield against unprecedented challenges and market fluctuations, offering significant resource for sustainable profitable growth.
On this slide, you may find the summary of our solid 2023 performance. Though there were challenges on the OpEx side, the revenue generation capabilities of the bank, including the outstanding performance in fee generation, led to a robust full year ROE that exceeded our guidance. As for the nonfinancial performance, I am very delighted to share that the result of our sustainability activities and transparency practices had been reflected to our ESG rating scores in various ESG ratings and indices.
One of the highlights on this slide is our MSCI ESG rating, which increased to A, with the devoted bank-wide efforts we have carried out since 2021. This marks a 3-level increase in just 2 years. We will continue to play a leading role in our country's transition to low-carbon economy to achieve net zero targets while investing in talent management and keeping our financial performance impact.
Kaan-bey, the floor is now yours for our 2024 guidance.
Ebru, thank you very much. Actually Ebru very well summarized what we had achieved in 2023. Actually, it was a very strong note, and we will be capitalizing our achievements for the next chapter in our success story.
We remain dedicated to leverage our strong capital buffers as well as our skill talent [indiscernible]. Our focus remains on superior customer acquisition, coupled with a commitment to deepening our existing relationships.
We target to expand further our footprint in retail segment on top of significant market share gains achieved in high-yielding small ticket loans as well as broad-based Turkish lira deposits. Our 360-degree customer-oriented holistic organizational structure, agility in service, with advanced digital solutions, as well as a wide range of product offerings will continue to be supportive factors.
For this year, we expect to grow around 40% in Turkish lira loans, which will once again be driven by healthy market share gains in consumer and SME segments. In 2024, given our already deleveraged fixed loan book, we may observe some increase.
Without any doubt, major challenge will be in the margin evolution of the sector, considering low loan demand, which limits asset repricing as well as regulatory environment. We expect our swap-adjusted net interest margin to remain solid at around 4% in 2024, despite potentially low contribution from CPI linkers.
Our all-time high fee chargeable customer base and increasing cross-sell will continue to be supportive for the fee income growth. We, therefore, target about 80% growth in our fee income for this year on top of 188% achieved in 2023. More importantly, in 2024, we expect our fee income growth to exceed OpEx growth, again, yielding further improvement in fee/OpEx ratio. With our solid revenue generation, we guide for our cost-to-income to remain best-in-class at mid-30s.
For 2024, given our prudent risk approach and excellence in AI-based loan decision models, we believe there won't be a material increase in NPL inflows. Therefore, we expect our NPL ratio to remain around 2%.
Accordingly, our robust provision build and solid cultural values will limit the need for additional provisions. We expect our net cost of credit, excluding currency impact, to remain below 150 basis points. As a result, we are aiming to achieve a sound above 30% ROE for the fiscal year, limiting the differential with expected inflation.
Dear friends, now Ebru will share a few highlights regarding our successful ESG journey, after which we will be more than happy to answer your questions. Ebru, floor is yours.
Thank you, Kaan-bey. Starting with the Sustainable Finance. Our commitment continues in providing further resources to facilitate the transition to a low-carbon and inclusive economy. I am pleased to inform you that we have already exceeded our 2030 target in Sustainable Finance by end of last year and have now quadrupled our 2030 Sustainable Finance target to TRY 800 billion.
In addition, during the year, our ESG themed funds received good interest from our customers, where we achieved 165% year-on-year increase in the number of investors in these funds.
As for ecosystem management, I am proud to share that we became among the 28 banks globally as founding signature of UN Financial Health and Inclusion Commitment. For this commitment, we disclosed our financial inclusion measurable target, which is to achieve a growth rate of 10% per annum in the number of women-led business customers until. This goes hand-in-hand with our efforts to increase financial resilience and support sustainable business growth.
In addition, we've fostered sustainable entrepreneurship ecosystem by actually implementing Akbank+, an entrepreneurship program for our people. This is Turkey's first full-time spin-off program, which actually allows Akbankers to work on their entrepreneur ideas on a full-time basis.
As for our people and community pillar, Akbank Academy continues to support young people with its leading education and financial literacy programs, reaching 61,000 young people in 2023, totaling 135,000 since the program was initiated in 2020.
Last year was a milestone year for us in terms of our 2050 Net Zero Bank target, where we worked in detail on our decarbonization roadmap of our portfolio and operational emissions. For our decarbonization roadmap of our operational emissions, we have set an interim emission reduction target in line with the 1.5-degree scenario, which is to reduce absolute Scope 1 and Scope 2 GHG emissions by 90% until 2030. This is taking 2019 as the base year.
For our portfolio emissions, we have calculated our financial emissions in line with [ PCAP ] methodology for various business segments and have set interim emission reduction targets for [indiscernible] carbon-intensive sectors. And we will be announcing our detailed plans soon.
This year, we will continue to actively work on our roadmap with our focus remaining on ESG data, reporting and the impact that we create.
This concludes our presentation, and now we are moving on to the Q&A session. Please raise your hand or type your question in the Q&A box. For those of you who are joining us by telephone, please send your questions by e-mail to investor.relations@akbank.com.
And the first question comes from Waleed from Goldman Sachs.
Good evening, Kaan-bey, Ebru. A couple of questions, please, from my side. First, on your loan growth guidance for this year, 40% in TL terms. If you could please talk about sectors which you would look to grow in. And the reason why I ask this question is because, Kaan-bey, you mentioned that in certain sectors or, at this moment, given where rates are, et cetera, it may be challenging from a pricing perspective. So just curious to hear which sectors do you find most attractive to be able to deliver 40% TL load growth. That's the first question.
Second, it would be very helpful if you could please provide some line of sight on the trajectory for net interest margin. And the reason why I ask this is that, obviously, given the CPL linker income, and you've adjusted this in the presentation and showed like-for-like comparison, there has been some volatility. And as such, I'm trying to understand how does the year start in terms of NIM on a swap adjusted basis. And how does it end for us to get to a 4% NIM that you've guided for the year? So these are my 2 questions, please.
Nice seeing you again. I think everyone is okay from your side. First of all, regarding your question in order to how are we going to achieve 40% loan growth. Actually, it is very obvious that, as we improved our performance in 2023, as you know, our aggressive and very successful customer acquisition allows us to grow, especially on the consumer loans. And of course, continuing with the SME businesses.
Actually, though we are very selective in terms of growing on the Turkish lira loan side, but at the same time, our focus, of course, will be on the, again, very, very selective. So we are not aiming to make an assumption in terms of the sectors, but we know that, especially exporters, those are going to be another important factor for Akbank's loan growth strategy.
So we have a very successful lending structure in retail business. So it's going to strengthen our aiming above 40% lending growth. So this is as from my side. But regarding your second question, I think Turker is going to answer that question. Thank you.
This is Turker. I hope you can hear me. Maybe, as you rightly mentioned actually, the contribution from the CPL linker portfolio will be probably lower this year compared to '23 and '22. And surely, currently, because of the -- like as Ebru has also mentioned in her presentation, the deposit pressure as well as the moderate loan demand are delaying the core spread improvements in the banking sector.
But having said that, actually, when we look at like yield and cost evolution, maybe just to put into figures, right, maybe. Like on the deposit side, like the back book has currently stabilized at low 40s and the margins are also at similar levels. Whereas on the lending side like GPS, where the back book is at high 30s whereas the front book is at high 40s [indiscernible] on the commercial lending side, like back book is at 40% levels there, front book is at high 40s, these are actually our -- giving us room to grow, to improve our core spread going forward.
So therefore, actually assuming so there is a stable like funding environment also in terms of deposit rate for the majority of the year, and maybe some -- with some marginal rate cuts towards the end of the year. In such a scenario, we are expecting a gradual NIM improvement for the full year.
So actually, surely, we will be starting from a lower base in the first quarter, like we are expecting a gradual improvement with repricing of the loan book. And also like if also these assumptions are also realized, like achieving some growth on the FX side, so FX balance sheet is actually more profitable, so it will also positively contribute to our net interest margin going forward.
So these are actually the main assumptions then the trajectory of the bank with regard to the net interest margin evolution and throughout the year. And also maybe also one last sentence. As Ebru has also mentioned currently, we are operating -- the bank is operating [indiscernible] of low 80s, which is a historical low level, which is also like giving us a potential to improve our core spread on the TL balance sheet side.
Maybe I can add something, Waleed, regarding your question. It's a kind of emphasizing our digital capital, is because our capital -- capabilities play a significant role. So we -- as we are given our AI-based long decision process and the sophistication level makes us able to decide quality of loan while growing. So GPLs, 100% automated loan decision process. Those models use a number of scorecards for risk-based pricing, et cetera.
So actually, this is going to be the major asset growth area that we're going to focus on. Thank you.
Thank you, Waleed, for your question. The next question comes from JPMorgan, from Konstantin.
I had 3 questions that I wanted to ask. The first one is with respect to the pace of lending growth. So there is a regulation which introduces the monthly limitations on lending growth in different loan in segments. You mentioned that you, selectively, you're growing in excess of these limitations by utilizing some of the fixed rate government bonds that you have released from the prior regulations. So I just wanted to ask, in these segments affected by those limitations, how are you growing? To what extent in excess of these limitations are you growing in these segments affected by these limitations?
And a related question, are you just utilizing your existing stock of fixed rate bonds to grow above these limits? Or are you also purchasing new fixed rate bonds to allow for higher growth rate?
The second question is about the loan quality trends into 2025. So you mentioned that in 2024, the picture is rather benign. You don't expect any major changes. But in 2025 across retail and corporate segments, and specifically corporate segment, do you expect any significant weakening?
And the third question is about the deposit scheme. How -- at what point from now do you expect the substantial part of the scheme to be released and convert it into conventional deposits? And what [indiscernible] what conversion rates are you observing now? And how do you see them changing in the near to medium term?
Maybe I can start with the first question [indiscernible] with regard to the lending growth. Yes, you're right, there are these monthly cap of 2.5% for general purpose tons. So actually, what we are -- how we are actually looking at this, actually, currently are these fixed-rate bonds under this reserve requirement scheme is less than 3% of the loan book, and some of which is still -- actually is available for growth.
So on a monthly basis, actually, we manage it in a very agile manner, actually, depending on the rates in the market, time to time like we are preferring to exit it on the general purpose loan side or on the commercial lending side. But all in all, when we compound this 2.5% actually and on top of which the growth in the exempt loans actually from this loan growth cap, actually, you are already ending up with this 40% growth actually.
All in all, the answer is actually we are managing in an agile manner. And if we say, yes, we want to exceed it and it [indiscernible] to buy some additional bonds, so we also look at the rates in the market. Like in the last 1 month, actually, a bit normalization effect in the economy, also the long-term fixed-rate bonds are also providing actually favorable yields in long term like [indiscernible] positive carry and longer maturities. This is actually -- we are actually assessing it in a dynamic manner, in an agile manner, and make our business based on that.
With regard to the asset quality in '25, actually, assuming like this -- the normalization the economy continues, like with a gradual slowdown in the economy and a rebound afterwards, maybe going into '25, we don't expect that there will be a material change in the asset quality evolution both in corporate, commercial as well on the retail side. Under the assumption actually we feel comfortable to [indiscernible] stick to our normalized cost of risk of 1% to 1.5% in the medium term.
With regard to the latest question, actually, the share of the -- this FX protected deposits have come down from 50%, it was to 30% levels already. And we actually are observing a gradual transition, maybe not very fast, into [indiscernible] TL deposits. But as long as the stability in the economy continues and also the customers still also more like comfortable to switch into TL, so we think this transition will continue. And probably towards the end of the year, and maybe like maybe third quarter onwards, fourth quarter onwards, we are expecting this deposit scheme will have a much lower share within total TL deposits.
Thank you, Konstantin. The next question comes from Mehmet Sevim from JPMorgan.
I just had one question on asset quality and specifically the dynamics between cost of risk and the NPL ratio. In 2024, you do expect cost of risk to go up quite visibly. But at the same time, NPL ratio has seen stable, and despite, obviously, a bit more subtle growth expectation for loans this year. So could you help me understand the dynamics a bit better.
And I also see that the coverage ratio has decreased in the fourth quarter quite visibly. And I do assume this is related to that 1 big ticket size -- file, but is that essentially will that be an attempt to increase coverage again in 2024? Or how do you see the outcome on that?
Actually, with regard to cost of risk and NPL relationship actually, actually, it's not that much different from this year actually. Also this year, like we ended -- started the year with NPL ratio below 3%, and we ended the year by, again, at 2%. [indiscernible] [ 1.07 ]. And again, for next year, we expect cost of risk like, again, to evolve below 1.5%, again, and an NPL ratio of 2%.
Just also to consider also at the same time the bank is also is growing, and surely, we will also consider any potential NPL sales during [indiscernible]. Actually, we don't expect a major change or a change in the dynamic strength in Stage 2 and Stage 3 formation.
As you have rightly mentioned, like this one-off commercial file, which we have also transferred into Stage 3, has had some impact in the coverage ratio. But also on top of it, we had this API sale as well. So it has also like partially reduced coverage of Stage 3. But going forward, are -- actually stands. So we will continue to provision whenever needed, like for the mass portfolio based on our model, and for corporate and commercial files [indiscernible] certain ticket size, we are doing periodic individual assessments and make necessary adjustments whenever needed.
Okay. Thanks very much, Turker-bey. A second question, and that will be on the -- just the margin impact. And specifically, you mentioned that there was a 100 basis point impact on NIM last year resulting from the required reserve regulations. What was this figure for the fourth quarter? I think you mentioned it, but I didn't catch it.
It was 2.5%.
2.5%, thank you. And I think there's been further changes to regulations just recently. Would you expect that to have an impact going forward for the next couple of quarters?
Yes, actually, but like a marginal impact, yes. There will be a slight increase in the reserve requirement, but it will be like relatively marginal. Which can be also offset with the gradual transition from the KKM into [indiscernible] which will also help us to bring down our reserve requirement.
Okay. Just a follow-up. On this -- on your NIM guidance for 2024, I assume there's an expectation for widening obviously, going into the second half of the year. You probably do not assume any relaxation in those regulations, right? Or is that basically just based on...
Actually based on the existing regulations.
Thank you, Mehmet. And the next question comes from [ David Toronto ] from Bank of America.
The book value growth in the quarter was substantially higher versus net income level. Could you please elaborate on the key drivers of these mark-to-market or revaluation gains in this period?
And you have shared your year-end inflation assumptions. But if possible, could you also share your average inflation assumption for this year as well?
And finally, where do you see the leverage ratio by the end of 2024? Would it be fair to see the leverage increasing in this year and in subsequent years from current 9x levels?
Actually, as book value has been positively impacted, David, by the mark-to-market evolution, but also on top of it, we had some revaluation of our fixed assets by the end of the year, which has positively contributed roughly 30 basis points to our capital adequacy ratio. So maybe afterwards we can also like give the details of the numeric figure set in nominal terms.
With regard to the leverage, actually, surely, we want to grow. We have the capacity. But based on the like more moderate loan growth assumptions, probably leverage will again be around these levels, maybe approaching maybe 10x.
With regard to average inflation [indiscernible] first half of the year, will trade at like mid-60% level. So the gradual decline towards the end of year, maybe there actually we can say average inflation will be above 50%. For the CPI linker portfolio in this guidance, we have assumed 40%.
If you have further questions, please your hand. In the meantime, take some of the written questions that we have.
From [indiscernible] [ Adamson ]. Do you plan to come to the Eurobond market this year? Turker, would like to answer?
We are always opportunistic in this perspective. We are surely always looking at the opportunity in the market. And the improved -- significantly improved CDS levels are also giving the room for us to make Eurobond issuances or come into the market with different products.
But surely, the potential to place this FX liquidity will be important in terms of FX lending. Therefore, actually, we will take that into cost duration as well. So there isn't any definite decision right now, but we are always monitoring the market evolution.
And the next question, written question, is from Mehmet Gerz of [indiscernible]. Can you share your evaluation of deposit rate landscape as FX deposit scheme is phased out?
Actually, I have already answered this in the NIM evolution. Maybe just to repeat it, like this phaseout will take some time. It won't be happening very rapidly. But currently, what we're observing is actually like the back book levels in the deposit cost has -- is at similar levels to the front book. And also the latest changes of the central bank with regard to the improvement of the TL deposit share to total -- TL deposit to total deposit share, like with the easing on that side, it's also like helping us to manage our deposit cost.
Assuming -- but overall, assuming this stability continues the normalization in the country continues and also the confidence into TL deposits like in the past further improves, I think this -- like this transition, this conversion may accelerate. So that's the current picture, actually.
Thank you, Turker. I see that there are no more written or no more hands up for questions. So thank you all for joining our call. And for closing remarks, I'd like to hand the floor to Kaan-bey.
But before that, I'm wishing also everyone a very happy new year and look forward to meeting you all soon. And if you have any further questions, please feel free to reach out to Investor Relations team.
And Kaan-bey, the floor is yours.
Thank you, Ebru. Dear friends, build up on your trust, Akbank stands as a symbol of competence. With our experience in many cycles, I'm fully confident in our people's capacity and execution to build our 2024 guidance I shared earlier.
Once again, I would like to express my ample gratitude to all our people for their outstanding efforts. I would like -- also like to thank all our stakeholders for consistently placing their trust and confidence in us. Keep well, and look forward to meeting you all soon. Thank you.