Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to Garanti Bank's First Quarter 2018 Financial Results Webcast and Conference Call.

Our presenters at this session will be Fuat Erbil, our President and CEO; Aydin Güler, our CFO; and Handan Saygin, Head of Investor Relations. [Operator Instructions] The presentation will now start. I leave the floor to our presenters.

[Handan Saygin, executive]

Hello, everyone. Welcome. We had a great start to the year, and we are very happy to exceed in quarterly earnings the TRY 2 billion mark for the first time. This is a new record. With an annual increase of 31% and quarterly increase of 18%, we recorded an ROAA, return on average assets, of 2.2%; and an return on average equity of 18.3% despite an even lower leverage of 7.4x book.

Now these strong earnings definitely further reinforced the solvency even more than offsetting the highest ever dividends we paid that coincided in the first quarter. The Capital Equity Ratio by end of the quarter reached 16.2% and Core Equity Tier 1 was 14.1%. If you recall, in the -- as of the 2017 end, we had the highest Core Equity Tier 1 ratio in the sector among the peers.

What lies beneath the performance is the outstanding NIM management, strong fee generation, contained OpEx growth and prudent provisioning. To open these up, let's look at first the core NIM -- I mean, the NIM. In the first quarter, the core NIM expanded. When you look at the overall NIM, it's slightly misleading because if you recall, in the last quarter 2017, we typically do the CPI adjustment, which brought the rate that we used in the last quarter to 20%. Whereas in the first quarter, we chose to start the year with 8% CPI estimate, which is aligned with the Central Bank's estimate, and this resulted in more than TRY 600 million lower, TRY 649 million -- TRY 645 million lower revenue, driven purely from the CPI linker valuation.

Now isolating the CPI linker impact, looking at the core NIM, we were able to increase the core NIM by 7 basis points. And the main contributors to this mainly is the loan yields, the repricing impact more than offsets the higher deposit costs and the swap cost. So the core NIM reached 3.9%.

Now on top of this, just as sensitivity -- just for sensitivity purposes, I would also like to share the CPI's -- any 1% higher CPI impact on the NIM and the net income. On the NIM it's 7 basis points, on the net income, annually, it's TRY 175 million. So there's a post-tax TRY 175 million a year and 1% higher CPI.

Moving on to the growth, looking at the balance sheet components. In terms of the performing loans, we ended up again with a balance breakdown among the Turkish lira business banking, consumer lending and foreign currency loans. We -- the growth was mainly driven by Turkish lira lending. We recorded total Turkish lira lending of -- TL lending growth of 4% in the quarter and foreign currency lending in dollar terms of 1%.

The -- in Turkish lira, the growth was across the board. And consumer lending, excluding credit cards in the quarter, kept its pace and we -- this recorded 3% growth in the quarter. The frontrunner was the general purpose lending. We had 5% growth in the quarter while preserving our rational pricing stance.

On the business banking side, we did record a slightly better growth and -- versus the fourth quarter run rate of 4%. Because in the first quarter, we had 1% additional impact to the growth coming from the Credit Guarantee Fund.

In the first quarter, the Credit Guarantee Fund additional TRY 50 billion limit started to get allocated. And in the first quarter, the limit assigned to Garanti was TRY 2.7 billion, of which in the first quarter already, we did originate TRY 2.4 billion. But the redemption from the prior limit that hit the first quarter was TRY 1.5 billion, so the net impact to the growth just from the Credit Guarantee Fund was TRY 900 million, basically causing an increment 1% to the Turkish lira business banking lending in the quarter.

This was funded -- this growth was funded with deposits growth mostly. We had actually slightly better deposit growth versus the lending growth. Our Turkish lira deposits grew by 4%. Foreign currency deposits growth was 2% in dollar terms. So we did see slight improvement, about 106 basis points improvement in loan-to-deposit ratio in total, bringing the ratio to 112%.

In terms of the deposits, we did keep our strength in demand deposits. The demand deposits share in total deposits remained to be 27%, which we like a lot as they are free funds for us basically and contribute hefty to our margin's performance. And also, the other detail around the deposit is that in Turkish lira deposits, the share of SME and retail deposits went up to 78%, which is again another component that contributes hefty to our margin performance as they are mostly, even though they are a low ticket, they're -- in a mass markets and sticky deposits, low interest rates, low cost.

In the quarter, we utilized again swaps heavily along -- while reducing the repo funding. So this basically -- this utilization is the result of our dual currency balance sheet. And looking at the margin performance, again, that ended up to be a successful performance in the quarter. In the quarter, the other funding that we did at fresh was a small TRY 125 million MTN issuance we did that was for 1 year -- that was -- that had 1-year maturity.

Moving on to the net fees and commission. We had a stellar performance there at 34% year-on-year. Now we're happy with this performance, but we are very aware that it is well above our guidance of low teens net fees and commission growth. Now this only suggests that there is an upside to our net fees and commissions growth guidance. We do expect some normalization by year-end. Now what happens -- what was the driver of this 34% is mainly -- the payment systems is a big contributor. As you know, they make up almost half of the net fees and commissions. There was significant growth there because the -- not only the issuing and acquiring volumes each, the growth there was more than 20%. Given the increase in the inflation and the interest rates, the interchange fees and merchant fees were strong, especially off of the lower base in the first quarter in that category.

In money transfer fees, we kept our leadership. We have strong market share in interbank money transfer, 14%; and in SWIFT transactions, 17%, both of which are more than our fair market share. And again, in insurance, we -- the focus, especially on digital-only products paid off in terms of the growth. And we do remain as the leader in a number of pension participants. Overall, in the first quarter, there was strong economic activity and growth. And this definitely supported especially our brokerage fee, cash and noncash lending fees. So we're happy with the start to the year, which we expect to normalize in the ensuing quarters.

Now the other contributor, of course, to this outstanding net fees and commissions growth is basically the further digitalized processes. Our active mobile customer increase is an incredible 36% year-on-year. Our total mobile customers active users, mobile customers reached 5.5 million, and we are definitely leading in digital banking.

One out of each 4 transactions that are done through the Internet and mobile banking go through Garanti systems. And we are happy to announce that digital channels share in non-credit linked fees has been going up. Now it's 43%.

Looking at the operating expenses, here's another great result. We only recorded 7% -- a mere 7% in operating expense growth. This is a clear reflection to our commitment to improve efficiency and operational excellence. In operating expenses, even though the amortization of our prior investment was hit, we could manage to a 7% growth as the hiring -- we have a hiring freeze and so it was just limited to HR growth and about the same levels of CPI. Non-HR related expenses were managed. So overall, given the double-digit and significant growth in revenues versus the only single-digit operating expense growth, we were able to further improve our cost/income ratio. In the quarter, we did additional 270 basis points improvement just in the cost/income ratio, bringing it further down to 40.9%. So our jaws are wide open.

Now moving on to Page 11. And now that we're in an IFRS 9 world, let me try to explain in more detail the approach. You see here the breakdown of our loan book, pre- and post-IFRS 9. In IFRS 9, the loan book saving is assessed for both qualitative and quantitative parameter. In the qualitative assessment portion, you simply consider those loans over 30 days past due, the ones under watch list and the ones that are restructured. Our past approach in classifying Group 2s have been validated as compliance to the IFRS 9 qualitative assessment. The little difference seen between the year-end versus the year beginning arose solely from the classification of leasing and factoring receivables that now are required to be booked under loan.

What's different mainly is the quantitative assessment on top of the qualitative one. The quantitative assessment reflects purely the model outcome based on probability of default changes on each and every file. Now in here, all the banks are allowed to set their own criteria, limiting the comparability. As you may expect from us, we kept our prudent approach in staging criteria. Even though our Stage 2 loans seem to have increased by TRY 19.1 billion, this is totally explained by the IFRS 9 transition impact and all are below 30 days past due with performing payments. Actually, 85% of these are not even delinquent at all. The increase in the Stage 2 from the beginning of the year till the quarter-end is largely attributable to one big file I suspect you're all aware of.

Now looking at the NPL levels, we actually see the strong performance of 2017 continuing. NPL ratios stayed put at 2.8% on a consolidated basis. Our bank-only NPL ratio of 2.5% remain to be well below the sector average of 3%. Now moving on to the coverages in this table at the bottom of the page. You can see the coverage in each stage. In the nonperforming group, Stage 3, even though the risk did not increase much between the beginning and end of the quarter, you will see here that only TRY 300 million from TRY 6.9 billion to TRY 7.2 billion, the coverage increase is mainly attributable to model parameter updates during the quarter. So basically, going up from 65.5% to 67.88%. Regarding the coverage of Stage 2, even though you see here 9.5%, the individually assessed portion has a much higher coverage versus the remaining file. For instance, our Otas exposure is kept with 30% provisioning ratio.

Now on Slide 12, you can see the details of the provisioning for each stage and the net cost of risk. Again, here, I would like to clarify the changes IFRS 9 accounting brought. Notice that the expected credit loss of Stage 1 and Stage 2 in the prior world general provision are high, and so are the provision reversals for Stage 1 and 2. In the past, general provisions, which were set aside for the performing portfolio, Group 1 and 2 basically, were accounted for on a net basis, meaning that the related provision reversals were netted from the provision line. Whereas now the provision reversals of Stage 1 and Stage 2 portfolio are accounted for under other income. Therefore, it only is -- it is only sensible to look at the net cost of risk rather than growth going forward -- now and going forward.

Here on the left-hand table, we have clearly stated the calculation. And all the underlying detail of which you can find in our financial statements and footnotes that is aligned with IFRS 7 reporting requirements. Walking you through the net cost of risk, the business-as-usual provisioning continued to fare low. There is one incremental impact amounting to 29 basis points due to the update of macro parameters used in IFRS 9 models.

[Ali Erbil, executive]

Within the quarter.

[Handan Saygin, executive]

Within the quarter, yes, and it was annualized. As you may recall, the model turnaround began in the fourth quarter with a certain set of macro parameters projected back then. Those are revisited and the updates affected the provisioning level in the quarter, bringing the net cost of risk in the quarter to 109 basis points.

Another impact you see on this page comes from the currency depreciation, which does not have a bottom line impact as it is 100% hedged. The FX gains associated with that hits the trading line. All in all, the trend suggests that we are well on track with our operating plan guidance of 100 bps for net cost of risk.

In summary, we will see on Slide 13 the main contributors to our return on average assets and return on average equity performance. Significant contribution comes from the top line, mirroring our outstanding asset and liability management and exceptional fee generation capability. Coupled with the ongoing efficiency gains and prudent provisioning, demonstrates our high-quality earnings.

Thank you for listening. We can now take your questions.

[Operator]

We are taking the first question from Gabor Kemeny from Autonomous.

[Gabor Kemeny, analyst]

Gabor from Autonomous. I have a few questions on credit quality, please. The first one is you mentioned that you updated the macro parameters in your model under IFRS 9, and this has a negative -- this had a negative impact on provisioning. What drove this increase? Or what drove the revision of the macro parameters, if you could speak a bit about that? The second question is what early indicators did you look at in terms of credit quality and how do you see this developing? And finally, would you be able to tell us whether you have conducted any stress tests on currency devaluation? And how would you expect your loan portfolio quality to behave on the [ early appreciation ]?

[Ali Erbil, executive]

Hi, Gabor, this is Fuat. And hi, everyone. Thanks for listening to us. Handan, thank you so much for your great presentation. So Gabor, related to your questions, macro parameters, as Handan stated during her speech, we did -- working on this IFRS modeling for the last 1 year, actually, through a lot of the whole year of 2017. And the final 4 months were the finalizing months for our models. And the assumptions that we have used in the models, in the engines, especially in terms of macro parameters, has changed during the first quarter. So we needed to update the engine parameters as such with the new macro parameters. I can give you an example. This is very detailed. Number one, inflation. Inflation, we took during the first modeling lower. It was much lower than expected. So we increased the inflation for the -- going for 2018. GDP growth was higher, so we just decreased the GDP growth as an example. In line with that, unemployment ratio, slightly effective in terms of negativity, so that's also included in the engine.

So overall, this type of macro parameters took the extra provisioning need, as we have stated on Page 12 in our presentation, which makes additional 29 bps on top of our business as usual provision. So these are the developments related with this. So if there is a need going forward, of course, these macro parameters will be updated. And we might expect this is the new life of IFRS 9, we will update positively or negatively with the parameters, but we just make sure that the existing parameters is reflecting today's reality in our model. So the other part, of course, the early indicators -- I mean, the approach that we have been using has not changed at all actually in terms of early indicators relate with the individual asset files. So the -- we are going over our portfolio of our business loans very, very frequently. So -- I mean, there's no need to go into the details of the early indicators. Of course, the leverage levels of the company is [ DD ] growth and the -- a lot of different detailed financial analysis has been done our teams on a regular basis. So the other part, which is the more quantitative part, is not changing. The rules are very straightforward, but conservative, I should say, in the New World. Even as Handan stated, the 2-day or 5-day delinquent personal loan, if there is a delinquency, even single days, it is classified as under Stage II. So this is very straightforward early indicators, but how conservative we are? Actually, you can tell even for 3 days, 4 days the delinquency. As an example, we've been calculating of the companies, of the portfolios, of the segments and of the products, the probability of defaults, and as [ GD ] is lost, given defaults. So that has been calculated very regularly. If there's a significant change, in the PD, as an example, of the special product category in the retail consumer or SMEs, or the LGD's changes, it is recorded as Stage 2 very proactively. So these are the methods and the early indicators that we have started to use. So I need to mention once more, I think, Handan did very good explanation for you to know. I mean, there's a New World. When comparing the books with the old world is misleading. I mean, I'll be very direct. I mean, the previous watch list will be equal to Stage 2 once we have very good, nice assumption. So as you -- as Handan stated, there's a big differences between IFRS 9 [indiscernible] old world. So as a result, this is the approach. And in terms of net cost of risk, the business, as usual, is the core, which is 80 bps. We add up 29 bps more, but this is, we think, one time for the year. But if it's needed, it is revised up again. We'll see. But even in our cost of risk figures, we annualized this 29 bps in the calculation, as you can see on Page 12 on the left-hand side. So even with our net cost of risk calculation, we are making very conservative approach. And that 31 bps is the currencies coming from our foreign currency loan book. If currency depreciates, the provisioning in increasing Turkish lira, as you know, even the quality does not change and it is fully hedged at Garanti. Whatever provision in foreign currency, in our books, it is hedged. So even when you're making your calculation, it might be included negatively in cost of risk, but that 31 bps fully offset it by our treasure operations, hedging operation in our trading portfolio. And finally, stress test, of course, we've been doing this stress test for many years. I mean, this is not the only time you've been asking -- we've been asked what are the FX exposed, [ corpus ] and so on, and so forth, so we've been doing it. And the results has been in numbers in the last 2 years, 3 years. Those were the reasons, actually, we've been increasing the watch list. Remember, 2 years ago, you've been asking -- wondering why Garanti's watch list is high and so on and so forth. So those are the results of these studies. Of course, we're doing the stress test and this is not the one time, and we'll be going on to do that. But overall, asset quality related issues, I mean, even the -- in regards from your questions, Gabor, there might be some structuring companies in the system, but we don't see this structuring incidents as a systemic risk. It's not. It's not a systemic risk. Those companies are grouped very peculiar, very specific reasons why they've been asked for restructuring. And are we expecting the long list of companies looking for this restructuring? The answer is very simply no. So yes, as always, we are very cautious and prudent bank, but we can simply say we are on top and we are not expecting big changes in terms of asset quality trends, specifically, for the big loans.

[Operator]

[Operator Instructions] We are taking the second question from [ Constantine Gozanste ] from JP Morgan.

[Unknown Analyst]

Just had 2 questions to confirm, really. The first one is on, again, on the net cost [ implication ] of loans into this Stage 2 category and what changed specifically in terms of how the classification of those are changed compared to your prior reporting. So you mentioned in the presentation, and yes, you commented previously that there is this IFRS 9 type impact. Could you please specify what exactly changed in the classification methodology which made you recognize this additional Stage 2 loans? And my second question is about the foreign funds. I mean, it's more general for the Turkish banks overall. And I wanted to confirm. So I'm seeing the public databases, that there is about $190 billion in the foreign funding for the Turkish banking sector in general. And I'm also seeing that about 50% to 60% of that is in the bucket of maturities with about 1 year. Could you please specify, maybe you have some more detailed data, maybe you have some more information based on Garanti example. How much in this funding total is of the maturities of say, 3 and 6 months? Yes, these are 2 questions for me.

[Handan Saygin, executive]

[indiscernible]

[Ali Erbil, executive]

Regarding Stage 2, I mean, we have very detailed information pack in the...

[Handan Saygin, executive]

Financial reporting.

[Ali Erbil, executive]

In the financial reporting. But the basic approach difference, in the old days, the watch list is just the qualitative approach that we have been using. The reasons for registering those files as watch list, as an example, if we restructure it. If they do more than, delinquency is about 30 days. So this type of -- if we see a big risk related with the group in terms of leverage ratios and so on and so forth, we proactively register those companies under watch list. That's still the case under IFRS 9. We are doing the same thing. And in terms of the number of the -- amount wise, it doesn't change before and after much. Only one addition is the restructuring, which has been almost finished is that file, specifically that file. Other than that, there's no change. And the other part is the second part, which is the quantitative part, which did not exist in the past, is the qualitative part, which -- quantitative part, sorry, which has very detailed approach. I mean, as an example, I gave the example to Gabor, too, if there is delinquency below 30 days. But if there's a delinquency, it's a deposit. If there's a PD change -- there's a big -- these are PD calculations internally. If that PD or LGD change, so we just classify as such. So as a result, they can stop here, but you can have the very detailed information set in our reporting. Footnotes, it is Article 3.8.3. Footnote Article 3.8.3. So that's the thing. And for our specific upcoming loans, how much? Handan?

[Handan Saygin, executive]

46% of the private bank's external debt actually matures within 1 year, and these are -- these can be well met by the existing foreign currency reserve under the ROC mechanism. The money market placement short-term slot, the unencumbered foreign currency securities and the foreign currency collateral deposits. So these assets basically more than offset, more than meets the short-term external debt of the financial or private banks.

[Ali Erbil, executive]

So to repeat, in our privately-owned bank group, we do have the total debt figure end of year, November, it is $170 billion. 170. 46% of it, less than 1 year. But please know that we, as Turkish banks, keeping extra reserves in terms of foreign currency reserves throughout ROC mechanisms just to offset our requirement in Turkish lira. The amount is around $35 billion to $40 billion. This is excess amount that Turkish banks are holding at the Central Bank just to enjoy better profitability just instead of putting Turkish lira. That's #1. Mark-to-market placement, it's another -- pardon?

[Handan Saygin, executive]

Money market.

[Ali Erbil, executive]

Money market placement, sorry for that, another [ 11 billion ] that we place as Turkish banks. Short-term swaps. As you know, we are doing a lot of swaps because we're collecting foreign currency deposits and we are swapping to Turkish lira. For that purpose, we are deploying our foreign currency resource, which is around 50 billion. So when you add up, it's goes to more than enough to roll over the upcoming 46% of the short-term debt of the Turkish banking system. And remind that even those short-term debts like syndication loans, even the worst days like 2008, 2009, we had the opportunity to roll over with 80%, 90%. In the worst scenario, 60%, 70%. So there is an ongoing rollover mechanism itself. And the markets are still, I mean, there is one [indiscernible] transaction today as an example, very successful one. And the book was quite high, and there's also liquidity upcoming from the international markets as well.

[Unknown Analyst]

Understood. This was very detailed. If I could just confirm. The 46% that you referenced is it by remaining maturity or is it by the original maturity? And secondly, if you could still maybe provide some estimates for maturities within, say, 6 months? Not within 1 year, but shorter, within 6 months as of today. How much in foreign debt matures within that period for the banking sector for Garanti?

[Ali Erbil, executive]

That's the remaining maturities. First part of your question, the answer is remaining maturity. And I don't have the...

[Handan Saygin, executive]

6 months...

[Ali Erbil, executive]

The 6-month breakdown. But we'll be -- we don't have that information, no?

[Handan Saygin, executive]

It's a central -- this is driven by the Central Bank.

[Ali Erbil, executive]

We're getting this information from Central Bank. Maybe we can explore if we have the 6-minus months.

[Operator]

We're taking the next question from Deniz Gasimli, Goldman Sachs.

[Deniz Gasimli, analyst]

I have 2 questions from my side. One was on asset quality, one on margins. Regarding asset quality, I mean, apologies if I'm being repetitive. But I just wanted to understand and maybe kind of reiterate what you're saying on your Group 2 or Stage 2 watch list loans share increase. There was an 18 billion inflow. So the ratio, as far as I understand, went from 7.8 to 16.8. And you were saying this IFRS -- in the presentation, saying IFRS 9 transition-related impact. So just trying to maybe understand, if you can give more details on what constitutes this increase? Is it maybe sector-wise or big-ticket items-wise? Just wanted to understand, given the news that we're seeing on [indiscernible] holding, if this is part of the -- if you're able to comment, of course, if it's part of this increase? And -- or if there's some other line items. And then as follow-up on Otas, which is classified as Group 2 at the end of last quarter. Do you expect any kind of changes? Was there kind of restructuring talks ongoing maybe in terms of a change in management of Otas? Or maybe banks will be able to seize the -- take control of the collateral to sell it? Any updates on that would be appreciated. And that would be on -- as it coincides on the margin side. Obviously, very, very strong quarter, with strong asset repricing supporting margins. So I just want to understand your outlook for future quarters. Do you expect further asset repricing to support margins? And do you see maybe the yesterday's rate hike of 75 basis points driving deposits cost higher in second or third quarter, which might, short-term, impact your margins? Any clarity on that would be appreciated.

[Ali Erbil, executive]

In terms of asset quality, actually, we have very detailed introduction by Handan and myself related to the Stage 2. I mean, yes, in terms of the percentage, it might increase in the total performing loans from 7%, 8% to 17%. So the reason being, as we have stated on Page 11 in our presentation, the original, the old method watch list amount has not changed. So very briefly, it takes around 7% as in the old days. So what makes the other -- makes the total 17%? It's because of the qualitative approach of IFRS 9. So that's the result -- that's the reason why we have increased the total Stage 2 ratio of -- to performing loans to 17%. So we will go if you like one-on-one. I don't want to take too much time to repeat everything again and again. But if you're interested, we can get contact with you to make the detailed information. So that's the pure reasons, as we have previously explained, the new IFRS approach, IFRS 9 approach. In terms of NIM, in terms of the -- again, on Page 11, you can tell basically, as of first day of the year, our Stage 2 loan was around TRY 38 billion. Now it is TRY 41 billion. So the sole reason for the NIM that you have mentioned, that is also recorded or classified as Stage 2. So the reason is hedge increase, basically. Of course, not fully, but mainly it's because of that TRY 38 billion to TRY 41 billion increase is because of that specific loan, which has been provisioned as 8% in our coverage. So that's further information for you to know. For other restructuring, there is no in the queue that we are working, other than publicly known names, so we don't have in the pipeline, in our agenda any other restructuring file. So that's another information that I would like to share with you. For the Otas, the process still going on. We do have the options, potential buyers, and as well as we are talking some structures with the banks. Since we are in the preparation of the process, I cannot disclose further information related with that. But there is no negative development that I can share with you on that front. In terms of NIM, thank you so much. I mean, I think we did a good job. Last year was a good year in terms of NIM management. Q1, not an easy quarter, but we did perform. So far, so good. And yes, 75 bps could put some pressure on the deposit pricing, but that's not happening for the first time. We've been seeing this for the last 2 years. So bank has been reacting very proactively to these changes. And I don't think we'll be seeing dramatic short-term effects of the NIM. So we are still keeping our, excluding CPI NIM, flat throughout the year. And we do have this 7 bps buffer already, so maybe a few bps might be affected in the next quarter, maybe the other quarters. But frankly speaking, it's going to be negligible for your calculations and for our performance.

[Deniz Gasimli, analyst]

Just to clarify, you said the Stage 2 increased from TRY 38 billion to TRY 41 billion, or just -- or if I heard it correctly?

[Handan Saygin, executive]

Yes. From the beginning of the year until quarter end, it increased from TRY 38 billion to TRY 41 billion, and the major contributor to this increase was that specific loan...

[Ali Erbil, executive]

I mean, that TRY 38 billion is coming from, on Page 11, the first of January, the Stage 2, TRY 19.1 billion plus TRY 18.2 billion, which makes TRY 37.3. I just rounded it to TRY 38 billion, so.

[Handan Saygin, executive]

Actually, Dennis, I would like to reiterate, just to make sure that it's understood well. Because now, the TRY 18.2 billion is very much aligned with what we used to have at Group 2 in the past under watch list. So this basically validated our approach in the past under the qualitative assessment. The one -- the portion that has added that cost growth from -- of Stage 2 from, what, 7.8 to 16.8, is mainly the IFRS transition impact, which is purely the result of the model. And as I said, all of these, this portion, 19.1 billion portion, they are loans that are past due less than 30 days and their performing payments. Even the one that is like 1 day, 2-day past due is in here. And 85% of this are not even delinquent at all. So it's just a model outcome. So this basically gives us higher buffer because we provide more for the Stage 2. And in total, actually, the coverage didn't change much. Just we did remain conservative and prudent in this.

[Ali Erbil, executive]

No more asset quality questions. Joking. Joking. But anyone -- anyone is ready to come this way for our performance -- for the great performance for Q1.

[Operator]

We are taking the next question from Alan Webborn, Societe Generale.

[Alan Webborn, analyst]

I will avoid any questions on asset quality. Could you talk a little bit more about what's been going on in fee income? I mean, I heard Handan's discussion earlier, but is there something that's being particularly front-loaded this year that wasn't in the past? And what's the reason behind you thinking it will gradually sort of come back towards your guidance? I mean, I think I heard you say there's some upside risk to that, but is there any change in terms of how things are billed or just to give us an idea of what the dynamics on a quarterly basis will be there? That would be helpful.

[Ali Erbil, executive]

Alan, thank you for your question. No, no, you're all free to ask any asset quality-related questions. I was just joking. Related to this net fees and commission, I think, overall, very well-diversified performance, I should say. The base was lower, I agree, for the last quarter, Q1 '17. So there's a slight base effect, but I think the business activity is much higher in the Q1 versus last year. Remember last year was very slow year in terms of activity, so that has affected many things like payment systems, the major contributors to our fees and commissions. There was much more activity than last year. So -- and on top, we've been pricing or the price increases on the fees and commissions very frequently. So that's one explanation. There is not one-offs, but there is a little concentration on cash loans fees for the Q1. Maybe we cannot continue with the same growth throughout the year, just because of the high ticket loans commissions. I mean, just specifically, concentrated on Q1. But other than that, for the money transfers, for insurance, for brokerage, for asset management, for the payment systems and all fee areas, we are expecting, going forward, good performance. I mean, don't expect 34% throughout the year, but as Handan stated, our low teens become too conservative. So we don't increase our -- the official guidance, but there's a big potential in terms of upside in terms of fees and commissions.

[Alan Webborn, analyst]

Okay. I guess the other question was, clearly inflation is somewhat higher than your accruing. I mean, how do you feel from that perspective at the end of sort of Q1 looking into where the lira is now? Do you see sort of -- do you think you're likely to adjust in the second quarter? Or do you think you'll wait?

[Ali Erbil, executive]

I think since we have not decided yet, I cannot disclose. We will or we won't. But we all agree that, that 8% looks too low, too conservative. So we might come up with a decision within the year, but maybe we don't. I think we're expecting the [ CDD ] Central Bank's inflation report at the end of the month, and then, the related [ com ] estimates and if decides, we might increase. But that decision has not been taken yet, Alan. So still, we're keeping 8%, but 1% increase makes, annually, TRY 175 million net bottom-line effect. So that makes your calculations much easier.

[Operator]

We are taking the next question from [indiscernible] from Bank of America Merrill Lynch.

[Unknown Analyst]

I have 3 questions. The first one will be on asset quality. I mean, there have been a lot of questions about your Stage 2 loans that increased. But my question will be quite broad. I mean, I just want to know how you feel about your guidance, about the NPL guidance of 3% by year-end. Are you still comfortable with it? And also, regarding your exposure to the energy sector, especially the electricity distribution and generation sector, can you give us a little bit of color there? Do you see it as a potential risk for this year? So that will be on asset quality. Then, my second question is about the Credit Guarantee Fund. There was some discussion back in September last year that potentially the redemptions will be allowed to be tapped again for the Credit Guarantee Fund, but we haven't seen any update on this. Do you think that the regulator may allow the bank to tap the redemption on the Credit Guarantee Fund? And the third question is just about your issuance plans for this year. Can you remind us what you are planning in senior and maybe in sub format, in your bond market?

[Ali Erbil, executive]

Related with asset quality questions, NPL guidance, 3%. We're not planning to change it. It goes in line with our -- much better, actually, than our guidance. So there's no plan to update it, that 3% in terms of NPL guidance. Bold answer to your bold question. Energy sector, that's been the case for the last 2, 3 years, I should say. Nothing's new related to it, the agenda or pipeline in terms of restructuring of the energy companies. We don't see any issues related to distribution at all. There has been some restructuring done already for some generation, especially the gas generation and some coal, but that's already been done -- restructured. There might be some small files 1, 2, maybe 3, but that would be limited maximum with those numbers. So we're not expecting any further systemic worsening in the energy loans. For the KGF, I mean, there is no freedom for us to tap the -- our available limits. That is fully coordinated with the agency itself. In our presentation, we have said our limits has been assigned for the available limits, new loans, limits assigned already in the first quarter as TRY 2.7 billion with conditions. I mean, some portion for the exporter, some portion for those companies making investments, some portion for the entrepreneurs. So unlike that year, there was some conditions for granting of those assigned limits. But the agency stopped for some time. In the last weeks, we have not got any new limits from the agency. So overall, for Garanti and the systems, total -- the KGF program, the total limits or usage has been decreasing although they had given some slight increases in terms of limits. So total book has been decreasing already. And in terms of issuances, we don't have a very clear agenda. Maybe we could tap one senior transaction throughout the year. I cannot specifically give the period or timing, but rest of the year, we can try, we can tap the senior issuance. So that's the only plan. We are not planning any Tier 2 or related -- capital-related issuance that's not budgeted.

[Operator]

We are taking the next question from Mehmet Sevim from JPMorgan.

[Mehmet Sevim, analyst]

I have one last question on asset quality, please. Your gross cost of risk has seen a significant increase this quarter, and I understand some of it is due to a one-off update in the macro parameters, while some of it is also due to currency depreciation. Now this currency depreciation part, is this, for example, due to currency impact in nonperforming FX loans like, for example, to Otas exposure differences? And I understand that the same amount, so 31 basis points, is offset in the trading line as an income because of hedging. Is this true? And finally, your provision reversals, this is also very big line this quarter. Is it the same as collections as previously? And are you just seeing a better collections performance? Or is this just because under IFRS 9, the Stage 2 loans have become much larger?

[Ali Erbil, executive]

First of all, Mehmet, from now on, we need to, with the IFRS 9, the jargon we have to use is the net cost of risk. That shows the reality because the gross is not affecting the truth. Why? Handan?

[Handan Saygin, executive]

There's significant provision reversals that used to be netted in the past, but now they're booked under other income. So if you look on page -- Slide 12, we state it. So basically, it takes the net of Stage 1 and Stage 2 expected credit loss, minus the...

[Ali Erbil, executive]

Reversals.

[Handan Saygin, executive]

Provision reversal under other income for Stage 1 and 2. So going forward, we need to look at the net cost of risk. Gross cost of risk will be very much misleading, and it won't be -- I mean, it's not comparable already, but in the past, this used to be the growth cost of risk when you were calculating. It was netted out -- the reversals were netted out, so you were already seeing the net portion. But going forward, that's not going to be the case, so we need to look at it net.

[Ali Erbil, executive]

Exactly. So for the second part of the question, foreign currency. Even performing loans, let's say, it is provisioned 1%. If you have a $100 million loan, that $1 million has been provisioned for, let's us say [ it's an assumption ], in our provisioning. $1 million might be last year's TRY 3 million. That's the provision that we set aside. And at the end of the year, let's suppose the Turkish lira went up to TRY 4 lira per dollar. So our provision increases from TRY 3 million to TRY 4 million. You will see even the loan amount has not changed because of depreciation, you'll see the cost of risk or the provision amount has increased by [ $1 million ]. So what we do, even for the performing loan, even for the restructuring loan, we are hedging fully 100% whatever we provision set aside because of the foreign currency. That's $1 million is hedged in the original date. And as a result, you will see that $1 million increasing the provision at the end of the quarter period or year is fully offset-ed in our traded income until the single penny fully hedged. And that also applies, as an example, for the big files, like Otas loans. As you know, that is disclosed already. We have very roughly $1 million exposure.

[Handan Saygin, executive]

[ Billion ].

[Ali Erbil, executive]

Billion dollar. I said billion. $1 million exposure. 30%, which is $300 million. So if there is a depreciation 10% in the current [indiscernible], which has increased our provision 10% in Turkish lira, but that negativity hedged in positive terms offset-ed by our trading income in our trading line. So that's why you might think that Garanti's net cost of risk is 140 bps. No, it should be offset-ed, adjusted by 31 bps. The reality, including the macro parameters update, it is only 109%, and the ongoing lines, business, as usual, it's only 80 bps.

[Operator]

There are no questions on the line. The questions via web that have not been answered yet are going to be as follows. I will direct it to our presenters.

One question from Batuhan Ozsahin from Ata Invest. Could you please elaborate on the TRY 19 billion increase in Stage 2 loans under IFRS 9? Breakdown according to loan segments and such.

[Handan Saygin, executive]

[indiscernible]

[Ali Erbil, executive]

So the ballpark figure, 60% is coming from business banking, that includes SME, commercial and corporate, all segments. 40% increase coming from consumer, including cards, GPL and the other mortgages, the other products. I think very clear.

[Handan Saygin, executive]

Very clear. Yes.

[Operator]

The last one is coming from [ Tomas Natza ] from Bloomberg. What's your asset lira maturity mismatch, lira-only? And how will your NIM be impacted by recent 75 bps rates increase? How far yields can go up, so there's still demand for loans?

[Ali Erbil, executive]

The maturity mismatch in our Turkish lira balance sheet is around 5 months, roughly speaking, around 140 day, 150 days, towards 150 days. In foreign currency, negligible amount, negative. Not even for positive GAAP we carry in our foreign currency. Sometimes it is 10 days, sometimes 50 days, 30 days. So it really depends on the week. But very roughly speaking, negligible in negative terms. For loan, I think, we started the year in line with our guidance. As you know, if the system, and the sector, and us has performed in line with our guidance. Let us repeat 15% of the guidance figure in the Turkish lira loan growth. And as we have stated, we are not expecting big growth in foreign currency. Regard it as flattish for the whole year.

[Operator]

This concludes our Q&A session. I leave the floor now to our presenters for closing remarks.

[Ali Erbil, executive]

Once again, we are very thankful for all of you for your time, for your contribution for our performance. I think we've been performing every single quarter in the recent years very -- in a robust manner. I think Q1 was one of the best one, I should say, in terms of many KPIs, many parameters that we are -- chase our performance, not only financial but also nonfinancial as well. I mean, in terms of financial, we are in line with the growth, NIMs. And nobody asked the OpEx. I think OpEx performance and the efficiency. We've been doing good job in the recent quarters, and this is another very strong quarter, and we are very confident we will be going on with the same performance.

I mean, 7%. Imagine with an inflation environment around 11%. So we did a good job, and we are going to keep the same pace. Other than OpEx, fees, as you can see here, very strong. In terms of capital, the dividend payouts, bottom line, asset quality, and all financial parameters, KPIs, we've been doing great. But more importantly, we are still keeping our #1 position in the customers, in the eyes of the customers, in terms of satisfaction.

We are very successful with rolling out our project, Garanti Plus Project, that has been changing the operating model of currency in a dramatic way, in a very positive way. That's ongoing. We're successful as of today. 426 branches has already been converted to the new system. And before the end of May, we will be finalizing 4 -- 500 branches. So the pace is very fast and the effect is very positive in all fronts, customer satisfaction, sales and efficiency.

So digitalization is another big topic. We have been transforming for many years the bank, and we are still keeping our leadership position in that front and it helps a lot. It helps a lot in the past, and we are very sure it will help a lot going forward as well. So the team is great, the strategy is very clear, our objectives are very neat, and we are very confident and happy to deliver every quarter the very good performance and we don't come up with any surprises.

So I would like to thank all colleagues of mine contributing to this performance every single one of them, and for those who are helping us tonight to make this presentation, special thanks for them. And we are very confident, and the economy is doing good, sector is doing good, and Garanti mission is performing with the good or the same pace.

Thank you all. Enjoy the evening. Bye-bye.

[Operator]

Thank you all for participating in Garanti Bank's First Quarter 2018 Financial Results Webcast and Conference Call. You may disconnect now.