Turkiye Garanti Bankasi AS

IST:GARAN.E

Earnings Call Transcript 2021-Q4

[Operator]

Hello, and thank you for joining us today in Garanti BBVA's 2021 Financial Results and 2022 Operating Plan Guidance webcast. Our CEO, Mr. Recep Bastug; our CFO, Mr. Aydin Guler; and our Investor Relations Director, Ms. Handan Saygin will be presenting today. [Operator Instructions]. I now leave the floor to our presenters.

[Handan Saygin, executive]

Welcome, everyone. Thank you all for taking the time to attend our call on 2021 year-end results and year 2022 operating plan guidance. We're very pleased to have the year 2021 behind with strong results far exceeding our beginning of the year expectation guidance.

Before moving on to the results presentation for 2021, let us remind you briefly the macro backdrop. 2021, unlike what we anticipated in the beginning of the year given the pandemic-driven global uncertainties, ended up to be a double-digit GDP growth year for Turkey. GDP growth realized in the first 9 months registered an annual 11.7%. And for the whole year, it seems the GDP growth will end around 11%. Major contributor to the 2021 GDP growth was high domestic consumption, which naturally brought with it significant inflationary pressures on top of the already high cost push factors and currency pass-through. Year-end CPI ended up to be 36.1%. October CPI reading was 19.9%, which was quite above what we anticipated in our operating plan for the year.

Continuing with further macro indicators on this page, we expect external demand to remain supportive and tourism revenues recovering back to pre-pandemic levels. Imports, on the other hand, still remain robust especially led by the increasing energy bill. Most recent reading in current account deficit in November was a further reduced level of 1.8%. Regarding the budget deficit to GDP, year-end figure was a deficit of only 2.8%, which was due to the strong tax revenues and largely controlled expenditures, they remain supportive and likely will continue to differentiate Turkey positively even though there might be some upward pressure in the near term due to recent government-backed subsidies.

Now let's move on to the announcement of our 2021 results. To summarize, the challenging macro backdrop gave us the opportunity to produce and prove once again our solid revenue streams and sustain delivering superior returns, which actually is the natural outcome of our unrivaled net interest income and fee generation capability, proactively shaped and well-provided assets and increased efficiency.

In year 2021, we significantly outperformed in earnings versus the operating plan. Operating plan expectation of mid- to high teens was surpassed with a reported return on equity of 19% and free provision-adjusted ROE of 22.6%. Last quarter only income of TRY 4 billion led to 2021 earnings to double that of 2020 at TRY 13.1 billion.

These strong results are even after further free provisioning. We booked TRY 900 million of free provisions in the last quarter, and this brought the total free provisions for the year to TRY 2.85 billion, a level that was higher than the prior year's TRY 2.15 billion. Accordingly, free provisions total on-balance sheet reached TRY 7.5 billion. Adjusted for the free provisions, asset return of 2.5% and equity return of 23% for the year 2021 suggests not only significant outperformance to our operating plan but also superior performance among the sector players.

Let's now look in more detail to the contributors of these results, starting with the assets on Slide 7. Asset breakdown being heavier on customer-driven sources, largely loans, points to the sustainable nature of our revenues. Asset total was TRY 849 billion as of the year-end. Even though the growth in assets predominantly came from higher-yielding Turkish lira portion, for both loans and securities, this is -- there was also some currency impact that took us to this level. Turkish lira lending growth booked in 2021 was 27% versus 7% shrinkage in foreign currency lending. And currency depreciation though carried the recorded total growth to a significant 42%.

Similarly in securities, Turkish lira securities' growth was 30% versus 20% shrinkage in foreign currency portion and 34% growth in total securities. Nevertheless, securities portion in assets is limited and was under 12% as of the year-end. Overall, the outperformance in this sector is also owed to Garanti's higher share of interest-earning assets. As of the September announced figures, Garanti has the highest share of interest-earning assets among its private peers. Also, the lending growth of 27% suggests a significant outperformance, thus market share gains in the year, where commercial bank's loan growth was 21%.

Continuing in more depth with Turkish lira loans on Slide 8. The growth we booked in Turkish lira year-to-date meant significant market share gains across the board, and more importantly, at rational and dynamically managed pricing levels. In the pie chart on the left-hand side, you can see the well balanced breakdown of Turkish lira loan book in business and consumer. This year, we moved up the rank to #1 in Turkish lira lending among our peer -- private peers as of September. Our year-end market share of 10.2% in TL lending represents 60 basis points of market share gains since the start of the year.

In consumer lending, namely, general purpose loans, mortgages and auto, our year-to-date growth of 31% led to a market share increase of a remarkable 150 basis points to 11.7%. In credit cards, the volume increase for both issuing and acquiring were highest among our private peers. The growth especially translated into a meaningful 50 basis points market share gain in acquiring volume to 17.4%. In business banking, a net growth of 18% in a year of significant redemptions in the first half limited the market share gains though to low single digits as competition heated up also in the last quarter. That also contributed to this 18% relatively lower growth.

Now moving on to how we fund the assets. Notice on this slide the funding mix on the left-hand side. Deposits, both time and demand deposits and deposits like Turkish lira bonds issued and merchant payables, fund more than 70% of the assets. Also, notice the share of demand deposits that as of 2021 end was more than the portion of time deposits level, funding alone more than 1/3 of the assets, certainly contributing to our significant outperformance in free funds to interest earning assets. This is absolutely major in our profitability outperformance in the sector as free funds to interest earning assets ratio at private peers stands at much lower 20% versus our 35% plus levels.

Notice, the borrowing's share year-to-date has come down to below 12%. External debt has come down to $6.9 billion, of which $2.9 billion is short term. Foreign currency quick liquidity, on the other hand, has further increased to $13.1 billion, a level which is a level that is more than quadruple the short-term needs. Funding contributors show that we are highly liquid, and our active management of funding sources remain to be the main differentiating factor.

Now a detailed look into the deposits on Slide 10. Year-to-date Turkish lira deposit growth was 26%, and foreign currency deposit growth was 5%. Most surprising for both currency deposits was the faster growth seen in demand. Actually, this is a true reflection of customers' banking preference. Garanti actually ranked #1 for both Turkish lira demand and time deposits among private peers. Garanti demand deposit share in TL deposits ended the year at 29% versus sector average of 25%, and demand share in foreign currency deposits ended the year at a significant 60% versus sector average of 45%.

The other quality indicator in deposit performance is the share of retail and SME deposits in total customer deposits, which remains to form the bulk of the deposits, suggesting also the strength of our franchise as well as our effective customer penetration. This well differentiated deposit base contributes noticeably to our margin performance that you will see on next page.

In terms of margin performance, as expected, fourth quarter NIM expansion was very visible and largely core NIM driven, core margin driven, given the drop in funding costs as well as the continued healthy loan pricing. On a cumulative basis, we can proudly say that we have perfectly met our margin guidance for 2021. On a consolidated basis, margin drop for the year was 85 basis points, taking cumulative margin to 4.5%, a level that remains to be the best in class. Core margin, meaning the sustainable and customer-driven portion, in total remains to be the biggest component.

I would also like to mention on this slide the net interest income evolution, core versus the total. Significant portion of the quarterly growth comes from the core business, lending and funding mix management, thanks to our dynamic balance sheet management and core competitive strength that I mentioned earlier.

Moving on to the topic of asset quality on Slide 12. As we have already given heads up, we did IFRS 9 model recalibration in the last quarter of 2021. This -- but more so the currency impact inflated the portion of Stage 2 in total loans to 17% from 16% in the beginning of the year. Actually, when constant currency is used, the increase in Stage 2 has remained very limited, going up from TRY 59.3 billion to TRY 63 billion, up by only 5% to 6% versus the reported year-end figure of TRY 85.3 billion.

Within Stage 2, SICR portion at year-end was 33%, the restructured portion was 51% and the watch list portion was 14%. Past due portion remained low at 2%. In 2021, despite this much limited net increase in Stage 2, we stepped up the coverage from 14.4% in the beginning of the year to 16.8% mainly because of the currency volatility to remain extra prudent. The 90 to 180 days past due files balance that was -- that used to be classified under Stage 2 got moved to NPL as of the end of fourth quarter.

And you can see on next page that net new NPL inflow, adjusted with currency, NPL sales and write-downs seems higher in the last quarter, that TRY 774 million figure. TRY 1.3 billion of the TRY 2.3 billion of new NPL inflow in the last quarter was because of the lift of the forbearance on 90 to 180 days past due files. Accordingly, notice also that there was better-than-usual collection performance.

In the quarter, we moved off balance sheet an additional TRY 2.3 billion of NPLs that are 100% covered. Plus, we had a small NPL sale. All in, NPL ratio at year-end was 3.6% with 66% coverage ratio. If we were to pronounce NPLs without the write-downs, our NPL would have been 5.6% with a very significant near 80% coverage. Even though we continued all throughout the year with our very cautious, prudent provisioning, our cumulative net cost of risk in 2021 ended near 100 basis points, a level lower than our near 150 basis points net cost of risk guidance for the year.

Now moving on to the topic of net fees and commissions. We could once again demonstrate our unrivaled fee generation capability. Fee growth registered was a record 40% on top of the highest base in the sector. Our new annual fee base exceeded TRY 9 billion, TRY 9.2 billion to be more precise. The outperformance in fees is broadly attributable to further organic customer penetration with the support of increased digitalization and relationship banking as well as a net new customer increase of minimum 1.5 million each year.

High fee growth was seen in cash lending-related fees, money transfer fees and payment systems. Cash loan fee growth of 60% was the natural outcome of our outperformance in lending, which also brought with it new customer base. Recall that we moved up in the year to #1 rank among private peers in Turkish lira lending.

Similarly, money transfer fees registered a striking growth of 59% on the back of digital empowerment and best-in-class customer experience. There was a significant 66% year-on-year increase in number of digital transactions. We also exhibited the positive impact of 7/24 FAST system for local money transfers. We ranked top in FAST transactions as well. Payment systems' 54% annual growth was also substantially supportive in 2021 given the higher interest rates and post-pandemic recovery in credit card volumes.

Moving on to the operating expenses. In operating expense, we chose to make a small adjustment to show the OpEx growth performance relative to operating plan. An inflated adjustment -- I mean, the employee benefit provisions we had for years that actually was to be settled in 2022, we made an inflation adjustment related to that, an additional of TRY 650 million. So we deducted that from the 2021 base.

Accordingly, our operating expense growth was 23%. And this level includes a currency impact of around 6% that is fully hedged, meaning no negative impact to bottom line. So for these reasons, operating expense growth for the year ended slightly above the average inflation. All in, our efficiency metrics suggest sustainable and improved levels such that our cost/income ratio ended the year with a level below 34% and banking revenue per branch as well as per employee remain far above the private peers' average.

Let's finish up the financials with capital. We continue to operate with strong capital buffers well above the minimum regulatory limits. Our capital adequacy ratio without the BRSA's currency forbearance stands at a robust 14%. On top of this, if we are to consider the free provisions we have so far accumulated, the ratio would have been 15.1%. Please keep in mind that unlike the common practice in the sector, our ratio also assigns 100% risk weight to our swap transactions with the CBRT, which has 38 basis points negative impact on our figure. Our excess capital on a consolidated basis is TRY 12.5 billion as of the year-end. As secondary buffer, we have TRY 7.5 billion of free provisions. But more importantly, we remain committed to grow in a capital generative manner.

Before moving on to nonfinancials, allow me to present in summary what we guided for year 2021 and what we delivered on Slide 17. In Turkish lira lending, we said we would deliver above 20%. We ended with 27% TL lending growth. This was supported by the increase in domestic demand. In foreign currency lending, we guided shrinkage. We ended up with 7% shrinkage. This was mainly because of the redemptions and lack of demand, as expected.

In NPL ratio, we said it would be lower than 4.5%. We ended the year with 3.6% as there were limited net new NPL inflows and strong collections continued. Net cost of risk, we said it would be under 150 basis points. We outperformed there. It was 107 basis points. So there was the need for further loan provisioning further came down with no -- and this was with no ease in prudency for sure. You saw the coverage levels we have.

Margin, including swap costs, we guided for 100 basis points contraction. On a consolidated basis, the contraction was 85 basis points. And this is definitely backed by dynamic spread management, timely lending growth and of course, there is some contribution coming from CPI linkers' income. In fees, we said we would grow them by 30%. We ended the year with 40%. This outperformance is owed to higher activity, and there's also some currency impact there.

Operating expense growth, we said we would manage it to around inflation. We ended slightly above inflation, and that has to do with inflation adjustment related with additional provision that inflated 2021 base. So all in, we were guiding for an ROE of mid- to high teens. This machine, this bank, could produce an ROE of near 23%, suggesting a significant outperformance, as I said.

Now allow me to share with you very briefly some of our nonfinancial strength as well. As Garanti, we continue to lead the way in digitalization in the sectors. Our continuous investments in digital since the late '90s, efforts to enrich customer experience and meet the growing digital trends undeniably carry us to the forefront. Over the past 2 years alone, we were able to gain more than 2.5 million new customers, both in digital and mobile banking. Now with more than 11 million digital customers and 10.6 million mobile banking customers, we have the highest base among peers.

Customer monthly logins in this period have increased by a remarkable 130%, and our market share in mobile financial transactions has been at almost twice our fair market share at 19%. More detailed view of customers' transactions, seen on the bottom left-hand side, that we have seen an increase of 137% in digital transactions, whereas branch transactions decreased by 14% since the beginning of the pandemic. This has consequently brought down the share of branch in customer transactions to below 3% levels from 6%. Digital onboarding end-to-end process introduced in May contributed to this shift as well.

With the aim to position mobile as the main service channel and enable first contact resolution within the app, we work on enhancing human touch within the app such that we have expanded live chat with agents and enhanced video call capabilities. In this period, we also could support 36% of our interacted digital customers with financial health tools in mobile.

Continuing with also an update on the sustainability side. As you know, our parent group, BBVA, has committed to provide EUR 200 billion in financing to combat climate change and support sustainable development by year 2025. And we, as Garanti BBVA, are also aiming to support the sustainable development and fight against climate change in parallel to BBVA's pledge and in line with our strategy.

While we continue our operations as carbon neutral since 2020, this year, we also became the first bank in Turkey to announce that we will not be financing coal and coal-related activities, and we will zero our coal risk by year 2040 at the latest. On top of this, we also became the first and only Turkish signatory on the UN Net-Zero Banking Alliance. We closed the year 2021 with a sustainable finance mobilization of TRY 8.8 million, and TRY 6 million of this was for green financing.

As Garanti BBVA, we offer innovative sustainable alternatives for all our main products. This year, we launched Turkey's first corporate green vehicle package; 3 ESG-related funds; and the BBVA Climate Index, first of its kind in Turkey. We also signed 2 ESG-linked syndication loan deals and launched the world's first Green IPO on top of offering the first green debiting system in Turkey.

We're also managing our impact by focusing on internal education and making valuable changes in our operations to combat climate change. This year, we saved more than 172 tons of oil by the cooling system revisions we made in our data centers. Garanti BBVA is proud to announce that the total financing provided to sustainable development on the basis of impact investments have reached TRY 60 billion as of 2021 year-end with more than 50 products. We will continue our investments in sustainability by making changes in our own operations and continue to encourage our society and our customers to make a transition to a greener future.

Now comes the turn for the most awaited part, our 2022 operating plan guidance. In summary, based on the current macro backdrop and outlook, what we expect this year is our strong and sustainable revenue generation capability to continue carry us to the forefront and also a relatively moderated lending growth environment. In 2022, we also expect a normalizing cost of risk as well as a cost growth that is around average inflation.

If we are to go through more detail on next page, Turkish lira lending -- in terms of Turkish lira lending, we expect to grow above 25%. We expect further shrinkage in foreign currency loans. We expect the net cost of risk in 2022 to remain under 150 basis points. We project in the scenario, the budget [ base ] scenario, a margin expansion of 50 to 75 bps largely driven by CPI. Whereas we expect core margin including the -- excluding the CPI but including swaps to be flattish.

We expect a fee growth above 25% because here, we think there may be some downside because of the relatively lower interest rate environment in 2022 that may affect payment systems fees, so we would like to conservatively guide above 25%. Operating expense growth, we will aim to manage to around -- to average inflation. So overall, this guidance actually alludes to an ROE that is at minimum in the low 20s.

As you're all familiar by now, we always shy away from guiding levels that may be at risk with circumstances out of our control and tend to guide conservatively. For that reason, we ended up giving you a relatively flexible and a big range of 20-plus, greater than 20% ROE guidance. During the year as we see our progress, where needed, we may revisit the guidance and revise that.

Now this ends our presentation, and we leave the floor to you for questions. Thank you for listening.

[Operator]

[Operator Instructions] Our first question comes from Gabor Kemeny.

[Gabor Kemeny, analyst]

I have a few questions. The first one is on the NIM guidance, which I understand is flattish, excluding the CPI linkers. Can you talk a bit more about this? It sounds relatively cautious given that your NIM -- your core NIM was already 70 basis points above the full year in the fourth quarter, and your customer spreads seem to be widening. So a bit more color on that would be useful.

And the other question is on capital. I mean, you are at -- a bit above the 11% CET1 ratio. What kind of buffer would you like to maintain above the regulatory minimum? And just given that growth still seems to be trending well, maybe you could give us a sense under what conditions would you consider raising capital?

And just a final question is if you could provide us an update on the BBVA tender, please.

[Recep Bastug, executive]

Thank you, Gabor. With the first question, NIM, yes, it is flattish, the core NIM. Why? Because in order to be at the safe side, we put to our operation plan one policy rate increase throughout the year, even though the CBRT strongly committed they don't change the rate. In order to get to the safe side, we put one increase. That is the reason. You see that is a flattish core NIM. Only this is an assumption in order to be at the safe side.

The second one, let me -- the third one, the BBVA transaction. As BBVA, the shareholder announced, this process would end within -- in the first quarter of this year. So I think the procedures within ECB and with the local authorities, regulators in Turkey has been going on. I think -- I hope as it was scheduled, it will be ending, I think, this quarter. When? I don't know because there are very strong procedures.

This is -- what was the second one, sorry, guys? We are very confident about our capital adequacy ratio because I'm sure that you recognized that with our free provisions, our -- today, our level is about the consolidated one, about 15%. So we don't have any problem related to our capital adequacy ratio. And also, according to our stress test results, we don't see any problem.

[Gabor Kemeny, analyst]

Okay. And I might have missed, but can you just remind us about your macro assumptions for '22, like inflation, interest rates and FX, if that's possible?

[Recep Bastug, executive]

Okay. '21 GDP growth might have materialized at 11% level. For 2022, our growth expectation is 3.5%. Inflation, it is a little complicated. But we are going to follow the CBRT's program, and I will give our estimations. Related with that approach, CBRT's 2022 year-end inflation expectation range between 19% to 28% levels. We expect the year-end inflation to converge to the upper bound of CBRT's expectation, around 30% level. This is in line with CBRT's inflation expectation also such as that inflation may also reach 50% levels and then come down with the base effect. The recent -- this is inflation estimation.

The recent FX-protected TL deposit has resulted in some currency stabilization, as it encourage reasonable amount of customer to switch from FX to TL and may potentially increase TL deposit. So I think it has stabilized the foreign currency volatility in the market. As of now, I think the -- I hope the amount of this FX-protected deposits has reached around TRY 300 billion levels. I think tomorrow, it will be announced. This is just estimation, but 90%, it will be around this number. So it has stopped the volatility in foreign currency.

Then we think that 50%, high 50% and more inflation we are going to see in the middle of the year, second and third quarter, maybe at the end of the third quarter. But it will be transitory. So for a specific time of period, we are going to see it. To the year-end, we see reasonable, around 30% level inflations. So these are general assumptions related to macro.

[Gabor Kemeny, analyst]

Got it. And the CBRT rate -- reference rate, you expect like 15% or...

[Recep Bastug, executive]

I'm going to read their sentences to you. They are really committed -- they are committed about this rate. So as they say, they will not change it. They will not increase it. I have to accept and make my program -- make the bank's program in line with that standing.

[Operator]

Our next question comes from Alan Webborn.

[Alan Webborn, analyst]

On the basis of your full year CPI estimate, I mean, are you telling us, therefore, that sort of the operating costs are going to be up about 50% if they're going to move with average inflation? Is that the sort of the ballpark figure that we should be looking at? That was my first question.

Secondly, what are you -- are you using year-end inflation? Or what are you using for CPI estimates for the -- your guidance? That would also be helpful.

Could you talk a little bit about what the drivers of the risk costs in Q4 were in terms of the new NPLs? I hear what you said in terms of the changes in regulation. But outside of that, what was going on there? That was the third question.

And I guess could you talk a little bit about the -- how you see the dynamics of loan repricing and deposit costs? I mean, presumably, if you're forecasting one rate rise in your modeling, you're suggesting that the deposit costs aren't going to go down. So what do you think is going to happen to lending? I mean, do you have an opportunity to reprice more of the back book? Is that not much of an opportunity? Could you just give us a little bit of an idea of the dynamics there? That would be great.

[Recep Bastug, executive]

Here, the first one, yes, we put there as the OpEx growth will be around average CPI. The average year-end CPI will be below 50%, we think, first of all. If it doesn't happen, it will be below of that range because we don't expect around 50% increase in our OpEx. It is under control. So it will be in line with average CPI and below -- most probably below that average CPI.

Drivers in net cost of risk model, in our risk model, cost of risk, 80% of cost of risk is coming from with the cost of NPL, 20% macro calibration. So according to this formula, let's say, cost of risk will be less than 150 bps level. We don't expect more than that.

So with loan repricing, first, I'd like to try to explain the deposit cost. I don't expect any increase in cost of deposits. Why? Because as you know, the protected TL deposits prices kept with 17%, 14% policy rate plus 300 bps premium. As of today, I think 15% of that is additional 15% deposits -- final deposits added to the stock deposit amount. So that is a natural CapEx, 17%. My expectation, there will be more shifts to protected one. So this is a natural cap for time deposit. If policy rate stays at the same level, I don't expect any increase in the cost of deposits. It will trigger the lower pricing as well. But that is a picture in front of us. That is not demand for long-term loan.

As of now, most part of the demand is coming for short-term working capital loan needs. So the average maturity is up to 180 days in general demand in wholesale side. With that portfolio, we don't see any repricing problem. And also, the average maturities of the loan portfolio in our book is coming down sharply. So repricing issue for the short term is another opportunity for the bank. I don't see any problem in doing that. But in retail side, the loan demand drag in total came down 30% and more. So that is not strong demand with this environment. As you know, the maturities in general out of the mortgage product capped with 24 months. So under normal circumstances, I don't see any repricing problem or new danger in terms of getting costly deposit, cheap credit. No, I don't see any problem.

[Alan Webborn, analyst]

Okay. I did ask about what you felt the drivers of NPL formation outside of the change in regulation in Q4 were, just to see how in the sort of -- as the currencies come down, I know you're hedged, but what were the drivers in Q4?

[Recep Bastug, executive]

In terms of NPL, our NPL will be below 4.5% level. It is not in the guidance plan, but it will be less than 4.5%. We don't expect more deterioration because as you see, for 2021, our cost of risk is more than 1%. Most part of it's due to additional provision in the last quarter. 80% of our FX-sensitive portfolio is highly provisioned, some part of them in Stage 2, some part of them in Stage 3. So we don't expect any big file that will be moved from Stage 2 to Stage 3. Everything is very well provisioned. Due to this devaluation issue, we don't expect newcomers from the Stage 2 to Stage 3. All usual suspect files, I think, are in Stage 3.

So NPL ratio, as I said, will not be more than 5.4%, and we don't see any problem with this devaluation amount because we have set aside very reasonable amount of provision. As of now, if I am not wrong, our Stage 2 and Stage 3 foreign currency portfolio is provisioned around 45% to 50% levels, which is very strong provision.

[Operator]

Our next question comes from Sam Goodacre.

[Samuel Goodacre, analyst]

I just wanted to understand a little bit more the OpEx growth guidance. I think in answer to Alan's question, you said OpEx should be up in line with average inflation, but you expect average inflation to be below 50%. So if you could just confirm that.

But then secondly, I think one of the challenging things in my mind is the fact that certain prices in Turkey are going up way above the government's reported inflation numbers, like electricity up 80%, for example. And also, in the fourth quarter last year, you put through a relatively large increase in staff costs, I believe, a quasi-backward adjustment to compensate staff for the high inflationary environment they had been living in. But it now means that the quarterly run rate in your HR costs going into '22 is TRY 2 billion a quarter. And presumably, that will grow in line with inflation this year, too. So staff costs could be growing anywhere between 50% and 100%. Certain costs which are out of your control like electricity is 80%. So how do we come out -- up with a total OpEx that is in line with average inflation below 50%?

[Recep Bastug, executive]

Starting with HR cost, our HR cost has always been historically above inflation. In 2022, HR cost increase was above average inflation due to inflation adjustment on salaries done in December. On top of this raise, in 2022, HR cost increase will be at manageable level. Non-HR cost growth was below in inflation with the help of our hybrid working model. You are right, there are too many increases in the price of electricity and other type of things. But on the other side, last year, we jumped to a hybrid working model. So most of our operational cost in terms of quantity is coming down. So under these circumstances, we are committed that we are able to complete the year below average inflation level.

[Samuel Goodacre, analyst]

Okay. And I think there was an earlier question on the October-to-October CPI linker valuation you're baking into your NIM guidance. And I just didn't get that level. So within your NIM guidance, what CPI linker valuation are you expecting?

[Recep Bastug, executive]

Inflation estimates, we took up end of the CBRT's expectation for the month, which alluded to 40% level. So we are trying to be in line with CBRT's expectation, 40%.

[Operator]

We have quite a few questions from the text side. So I would like to start reading them one by one. The first couple of questions comes from [ Thomas Marcel ]. He asks, "Could you please comment about interest for FX-linked deposits among Garanti customers?"

[Recep Bastug, executive]

As of yesterday, the total volume is about TRY 25 billion. So the share of this product has reached to 20% of our total TL time deposit. Their interest is very strong. The retail part has started much, I think, 1 month ago. So it is in a natural outflow. It is going very well. But the corporate side with tax incentive, it has started last week. The flow is very strong. Up until now, just Garanti BBVA has converted $800 million to TL. If you think that we represent the 10% of total deposit volume amount in the market, both in Garanti BBVA's lines and in terms of sector perspective, that is very strong demand to this new product. So I think this is the answer. 20% of our total time deposits is from this protected deposit.

[Operator]

So the next question is, could you please comment about interest for FX-linked -- sorry. So could you share with us data on your Central Bank funding?

[Recep Bastug, executive]

Our Central Bank funding, I think we are mainly using the swap funding. It is around $7 million levels. This is the only funding side that we have been using from Central Bank. Our peers are using much more than that. We don't. The main reason behind that, we have very strong KPI. This is loan-to-deposit ratio. Our main source is our customers' deposit. That is the reason whatever the cost, whatever the commission is, CBRT funds always will be at the second base for us. We will be investing, we will be dealing with, with our clients' portfolio, clients' deposit. That is the reason there is a very strong opportunity. We have been using with unlimited perspective.

So this is it. We will be -- I think we will be spending there with just swap funding, CBRT's sources. But as I mentioned, if this liraization goes down those level, we come down sharply because we switched the foreign currency to TL deposits. It will decrease the CBRT usage.

[Operator]

How much upright potential do you see to your ROE? Should cost of risk remain flat in 2022 and inflation was higher than your assumption?

[Recep Bastug, executive]

If net cost of risk remains flat at 1.1% level in 2022, ROE will be, I think, 1.5% higher.

[Operator]

And the next 3 questions comes from Valentina Stoykova. She is asking, "You are targeting full year 2022 ROE about 20%. Can you give us more details behind the strategy which will help you achieve it? Some of your competitors shared much bigger ROE targets."

[Recep Bastug, executive]

I think we have been using the same formula, but the numbers that we are cooking in that formula are different. If we use the same number, you would see much more ROE levels with our results. But we try to be on the safe side. That is the main difference.

[Operator]

Can you please explain what are driving the increase quarterly in NPL inflows in fourth quarter? And can you also provide a bit more color on the write-down you did on Q4?

[Recep Bastug, executive]

That is -- as you remember, there was forbearance of BRSA. The NPL period was extended from 90 days to 180 days. The total portfolio was about TRY 1.7 million, and its impact to NPL was 40 bps. It was calculated. It was very strongly provisioned. So year-end, bulk amount was transferred to NPL. It -- with a plan. That is the reason you see the last quarter a deterioration. But during the -- our presentation in 2021, we were giving this message to everyone that there is a bulk amount, and it's, in fact, 40 bps in total NPL. We did that transaction at the end of the year. So you see there is a jump, but that was 100% a planned one.

[Handan Saygin, executive]

And guided.

[Recep Bastug, executive]

Yes.

[Operator]

And we have a question from Ovunc Gursoy.

[Ovunc Gursoy, analyst]

I have a question about spreads. You say cost of deposits will stay the same. Or do you expect them to stay flat during the year? But how about loan yields, also bonds yields, what are your expectations? I am asking this because your core NIM guidance is flattish. So what is behind as far as spreads are concerned?

[Recep Bastug, executive]

Yes. That is true. Under these circumstances, 17% cap ROE. But those 17% is a expensive cost for us because when this -- before this product was announced, our cost of deposit was below than this level. So that is negatively change in the cost of deposits because regardless of the size of deposits, everyone is asking, 17% with this product, TRY 10,000 or TRY 10 million, that is no difference. So the -- unfortunately, deposits and the deposit price, cost of deposits become commodity. Everyone is asking and getting the same price. This is the first one.

The second one, as I said, we try to be -- or market is asking short-term loans. As short-term loans is in line with this cost of deposits, it is not easy to increase the rates as you wish. This is the first one.

The second one, as I said in our plan, in order to be at the safe side, we put rate increase in our model. That is the reason the negative impact that rate increase is putting a cap to our core NIM. If, as they commit, they don't change this 14% level, you will see positive NIM there. This is the second difference from the market, from the peers.

[Operator]

We have a question from the text area. What are your plans on calling and refinancing the Tier 2s callable this year? What is your capital adequacy ratio that you target for full year '22?

[Recep Bastug, executive]

We have not decided yet. We have -- we know our options. So its maturity with -- Tier 2s maturity will come by May. According to our possible option, we will be working on our strategy and let you know what's going to happen.

In terms of our capital adequacy ratio, as I said, we don't see any problem with this Tier 2 after we decide what's going to happen. But under normal circumstances, it will be over 15% level. And we are very confident about our capital adequacy ratio.

[Operator]

It seems like we don't have any questions left, so I leave the floor for closing remarks. Thank you.

[Recep Bastug, executive]

Okay. Thank you all for listening to our 2021 earnings and '22 operating plan guidance call this evening. In 2021, we once again proved the sustainable nature of our revenues and significant path from the guidance. 2020 will be a good year for us in which we hope to deliver an above 20% ROE and continue to support our stakeholders.

I hope that 2022 will be bringing health and happiness to everyone. I hope we will be seeing each other in person in coming months. Thank you. Have a good evening.