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Ladies and gentlemen, welcome to Halkbank First Quarter 2019 Financial Results. Today's speakers would be Mr. Erkan Kilimci, Deputy CEO of Treasury Management and International Banking; and Mr. Umut Kovanci, IR Manager.
I will now hand over to your hosts, sirs, please go ahead.
Dear all. Good afternoon. This is Erkan Kilimci. Welcome to our first quarter financial results conference call. It's my pleasure to be with you, once again, with this set of financial results. We had projected a slow start to the year due to the challenges in the operating environment to be followed by consecutive improvement in the remainder of the year. We are happy to successfully navigate risks that are associated with the economy and the banking system. Hope our operating environment and our strategies will continue to bring out positive and stronger set of results going forward.
Let me switch to our presentation that hopefully you'll find informative and useful.
On Page 1, you see our assets growing by 7.6% quarter-on-quarter and 27.1% year-on-year, reaching TRY 407 billion, nominally. Loans continue to have the highest share in total assets, with 67% share and followed by the securities that accounts for 20.6% of the total. Liquid assets that heavily consists of FX assets, as you can see, in down right, make up 9% of the total and it reveals how strong we are in terms of FX liquidity, as also shown by our liquidity coverage ratio, which has been hovering around 176% by far above the required level of 80%.
Page 2 reveals the details of our securities portfolio. As pictured on top left, securities share in total has inched up to 20.6% and Turkish lira portion still makes 83% of it. CPI linkers amount to TRY [ 16.7 ] billion and generated TRY 740 million interest income, which was dramatically down compared to the previous quarters, while we booked more than TRY 1.8 billion on high CPI print [ off ] the base period. As previously guided, we have changed our linker valuation methodology and start to use 16% CPI expectation. The methodology changes aimed to provide us and the market participants, who follow us, with a more predictable and stable income generation. Securities measured at amortized cost has the lion's share with 72.6% in total securities, whereas securities at fair value through P&L is at 17.3%. Please bear in mind that the latter includes almost TRY 15 billion of securities borrowed.
On the Page 3, which displays strong loan growth, which was led by SME and corporate loans. Loan book grew 8.6% quarter-on-quarter, while SME spearheading the growth with 13.5% increase. CGF impact has been rather limited due to the amortizations in the portfolio and the living loan amount could only increase by TRY 1 billion. Corporate lending showed 7.9% growth quarter-on-quarter and helped overall market share to rise from 10.3% to 10.6%.
Further details of loan book, we have on the next page. Turkish lira have a loan book, which is [ self-apparent ] with 67% share in total loan portfolio. As for FX loans, they are mostly constituted by corporate segments, in which we feel ourselves quite safe, owing to the strong collaterals and treasury guarantees. On the next item, we see SMEs have a lion's share with 41% share, and our market share in SME loans exceeded 17%. When we look at the sectoral breakdown of loans, we can see that our exposure to construction and energy loans is not excessive with only 8% and 5% shares, consecutively. When it comes to retail book, which makes up 17% of total portfolio -- of loan portfolio is, again, quite secured on account of housing loans, which constitutes more than half of it and consumer loans, of which almost 70% granted to either pensioners or payroll customers.
To elaborate more on asset quality, let's flip to the next page. As you may follow, NPL increase on a notional basis has slowed down and our 3.1% NPL ratio has remarkable differentiation vis-Ă -vis sector and our year-end expectations. NPL coverage is strong enough to absorb an unexpected deterioration, thanks to our prudent approach. Furthermore, stage 2 loans grew in volume from TRY 16.7 billion to TRY 18.6 billion and in the share of total loans from 6.4% to 6.6%, but its share in total is still one of the best in the sector.
Page 6, manifests that NPL ratios of both consumer loans and SME loans are remarkably lower than the sector average, for which we have always emphasized our conservative structures.
On the next page, Page #7, we can see the quarterly decrease in growth and specific cost of risk that indicates no significant distortion in our asset quality metrics. Moreover, thanks to our collection performance without any write-off provision reversals assist us to push down the net cost of risk. In net terms, as one provision is made to quarterly difference due to the high-volume growth and added 56 basis points to our quarterly cost of risk performance.
Switching to the next page, we lay emphasis on our low reliance on FX wholesale funding and our FX liquidity, as it has been mentioned earlier, is more than enough to compensate FX wholesale debt maturing in 12 months. It is important to note that USD 5.7 billion dollars also includes $3.5 billion bank deposits, which have been in our balance sheet for a very long time, with enormously high rollover ratios. Intensified lending activities in Turkish lira led our Turkish lira loan-to-deposit ratio to increase up to 147%, but we expect it to come back to where it was used to be in the following quarters. The landed loan-to-deposit ratio is kept flat at 103%.
Page 9 shows that our deposits grew 8.4% quarter-on-quarter and were driven by growing FX deposits broadly on real growth and Turkish lira depreciation, which inflates Turkish lira equivalent value of FX book. The good thing is that we continue to gain market share in state deposits, which make up 11% of our Turkish lira deposits as end of first quarter. We have a following page addressing the details of our deposit base in terms of interest paid. Cost of Turkish lira deposits dramatically dropped from 7.9% to 16.3%. Just a short notice on that, it has continued to decline in 1.5 months, we lagged behind in the second quarter, but we expect it to bottom out and start increasing, especially after recent rate hike [ onto extra ] deposits. But we will continue to do our best to stick with the optimization of funding costs. Another positive takeaway of the first quarter was increasing the share of demand deposits. We saw a jump from 14.7% to 16.5%.
Flipping to the next page, where there are detailed explanations on spread dynamics. Cost of deposits in blended terms dropped significantly and paved the way for an enhancement in core spread. On the other hand, securities yield was widely down and partly swapped the positive impact of spread enhancement on the net interest margin.
Page 12 is about how profitability looks like in the first quarter. Operating revenues and net income came in at TRY 2.3 billion and TRY 305 million, respectively, which translates into an ROE of 4.3%. We are in the expectation of a pickup in the coming quarters.
On Page 13, you are given a detailed look at our top line revenue sources. Interest income from CPI linkers declined TRY 1.1 billion on a quarterly basis, which brought net interest income down almost 11.5% quarter-on-quarter and accordingly net interest margin was squeezed by 30 basis points. On the other hand, fees did very well by delivering 9.4% quarter-on-quarter and 50.6% (sic) [ 51.6% ] year-on-year increases. We are happy with the quarter-on-quarter improvement. [ And we ] will continue to do our best to manage improvement in the following quarters. Though the base effect will normalize starting from the second quarter and according with the pace of yearly growth is also expected to lose momentum.
Switching to Page 14. OpEx declined by 5.1% quarter-on-quarter, and its share to average assets still hovers at around very efficient levels, showing how disciplined our operating expenses base has been managed. Yearly growth [ has ] to be assumed high due to the low base of the last year's first quarter, but it will also converge towards CPI levels starting from the second quarter.
Page 15 sheds a light on capital adequacy evolution. Capital adequacy ratio dropped to 13%, which was reflective of strong growth from the first quarter. As shown by the [ remark ] down right, we have had EUR 900 million fresh capital, which added around 185 basis points into our capital adequacy ratios. Given the structure of the transaction, our additional Tier 1 ratio was also boosted by 188 basis points. State support in the most [ reasonable ] manner has been very positively looking at recent comments from marketing participants and international rating agencies.
On the last page, we have headcount and branch network details as usual. Our headcount has been subject to a small decline in the first 3 months, while number of the branches could increase by 4 showing we have been operating at almost full scale. Looking at the breakdown of banking transactions on top right, we are happy to see mobile banking and Internet bank accounts for almost half of the transactions. And again, happy to see digitalization efforts are paying off. This concludes our presentation and now we can switch to the Q&A session.
[Operator Instructions] Our first question comes from Deniz Gasimli from Goldman Sachs.
I have 3 questions from my side. One would be on the top line, on your net interest margin trend. So you mentioned that deposit costs have started -- have improved in the first quarter. But do you expect that to bottom out and deposit costs start to increase given the sector change and also the recent 150 basis point increase in the funding costs? And in relation to that, given that your yield on loan has -- on loans has declined by 60 basis points in the first quarter. I just wanted to understand what's the driver behind the decline on loan yields? And how do you see that panning out in future quarters given the expected increase in TL deposit costs, whether you -- I mean, do you expect NIM and spread pressure given that deposit costs are going to increase and loan yields have been declining in first quarter? Just in connection to that, I see that there was -- if I understand correctly, there was some swap utilization -- [ right away ] swap utilization in the first quarter. So I want to understand if there were any swap costs associated with that during the first quarter? What was the amount? And if you anticipate that to continue going forward given the foreign currency liquidity that you have right now? That was my first question.
Second question would be on -- could be just on the tax. There was around TRY 190 million positive tax gain in this quarter. I think similar to the previous quarter, this is on the back of a repatriation of funds from Bahrain, if I understand it correctly. I just wanted to ask how -- if this will continue in future quarters as well or is it probably done? And lastly, on capital. Your bank-only CET1 is at 10%. I think your consolidated CET1 is at 9.6% as of end of quarter. And given that lira has depreciated since the end of first quarter by around 9% and -- which can have an impact on your capital second quarter. Are you comfortable with the CET1 ratio? I mean given there is the EUR 100 million capital raise additional Tier 1, which will increase your Tier 1 and total capital, but probably won't affect your CET1 level. So I want to understand how comfortable are you with CET1 levels of 9.6% given the lira situation.
Deniz, this is Umut speaking. Many thanks for your good questions. And let me start with the NIM to understand our swap utilization, maybe during the first quarter. I think it is the shortest question that you raised. Yes, we have decided to increase our swap utilization, and accordingly, the amount has increased substantially and, again, accordingly the respective costs that are reflected under trading income has become more significant. And in terms of numbers, the average volume would hold at around -- would have hovered at around TRY 15 [ billion ] and the costs that we reflected into the trading line was at around TRY 753 million. And so far, in the second quarter, we continue to actively use the swap facilities as well. We have, as you know, some facilities with CBRT plus some OTC facilities with international banks. And it is just an ongoing process for the time being. And we will continue to do that as long as we have idle FX liquidity to, let me say, [ create the ] Turkish lira and hedge our positions. Of course, these are 2 key motivations to enter into a swap transaction.
And as for the net interest margin trends, as you correctly said, we have seen some 30 bps negative on a quarterly basis, which was mainly driven by the lack of revenues from CPI linkers. Last quarter, they have contributed a lot because of the adjustments and because of the high provisions. But in the first quarter, we have had almost TRY 1.1 billion less income. So this was the key driver of net interest margin squeeze in the first quarter, while our core spread has been performing better, especially better than our initial expectations on the back of a dramatic decline in, especially on Turkish lira deposit pricing.
And the other question was related with this issue, I guess, you have asked why the loan yields, especially on TL side has been down dramatically. You said 60 basis points. I mean there are 2 reasons for that: one is related with the regular business that we'll be running. I mean during the first quarter, we have actively used CGF loans plus some [ corporative ] -- we have seen some contribution from our corporative lending activities, which is generating a relatively low yield, it is not a secret, which was bringing down the average TL spread. But beginning this quarter, we have made significant upward adjustments there, both corporative lending and CGF or any other facility have been subject to significant very material pricing increases. So starting from the second quarter, we expect to see our TL loan spread, which is entering into a path of significant and fast recovery. And you have seen -- as you all know, we have seen the deposit pricings have stabilized after almost 300 basis points increase beginning the second quarter, and accordingly, we saw some de-dollarization trend, albeit, slightly, it was only limited with USD 3 [ billion ] , but it was a good message for the banking system, showing that the customers started to favor more Turkish lira and have done with the -- with targeting some specific currency levels. But last Monday, we have seen a decision, which is -- which led to the rerun of the Istanbul election and according with connected data, both in [ our hands ] and in the sector, the -- some of the de-dollarization actually looks to be reversed -- looks to have reversed. But that was the reason why we have introduced some products, which are either linked or protected against CPI, as you know.
In the first quarter, we have seen 2 key phenomenon. The first one, as I said, was the dollarization and accordingly, the deposit holders preferred their -- changed their preferences in favor of FX to defend some purchasing power in an environment where inflation was peaking. The second key phenomenon that we have seen, not only in the first quarter, but also for a while, in the last few quarters, let me say, the shortening of the maturity in TL deposits. I mean in the past, we were discussing some 40, 45 days on average, but it has, to some extent, shortened to 30 days, very roughly. So these kind of products are aiming at actually both. There is a spread to be applied on actualized CPI, which is making it attractive for the customers, who have hesitations about the inflation, plus some withholding tax exemptions will be applied on deposits having a maturity of more than 1 year, which is, again, supporting the attractiveness of these products. And on the other hand, we will be able to improve the maturity profile of Turkish lira deposit base. I mean, it is beneficial for both parties. That's what I'm trying to say. And with these kind of products, we expect a rather swift, let me say, movement in the deposit market and with expectations with some CPI [ pad ] improving in the second half and some expectations for a better environment -- better operating environment. We expect to stand out as the banks, who is the best position for, let me say, easing cycle on Turkish lira side.
So probably, NIM will start recovering, especially this will become more visible in the second half. So far, on a quarter-to-date basis, what we saw, looking at the actualized numbers in front of us in the first half of the second quarter, well, Turkish lira side is doing well, but as I said, we have seen some pricing hikes. A few weeks ago, and accordingly, and ultimately, our Turkish lira deposit costs will be impacted. At this point, the impact looks to be rather smaller, but towards the quarter end, we expect to see a bigger translation of this recent hike into our back book. But on the other hand, we have been very proactively repricing our Turkish lira assets, I'm not sure whether it will be enough to fully offset the increase in funding costs, but we will do our best.
[ My ] second quarter might be taken as a transition period. And on the FX side, we were able to increase some volume, especially with some corporate customers. And as you know, the rates turned out to be very attractive that we are -- we saw some 8% to 9% pricing for a U.S. dollar loan versus slightly around 3% deposit costs, which is offering a very good chance to build up a higher spread and margin, and it looks to be very supportive for the time being for both of our core spread and net interest margin so far. So FX part turned out to be a very good surprise to offset the expected impact on Turkish lira side.
The other question was related to tax reversal, as you said, we have the chance to reverse some taxes, tax provisions due to our actions, due to our activities, which are conducted through our Bahrain branch. There is a repatriation act, which will last until the end of April, and accordingly, in the first month of the second quarter, we have benefited out of it. But it will -- it has already disappeared, let me put it that way, and we start to see some normalization in the effective tax rate.
The other question, if I'm not mistaken, and please jump in if I miss anything. The other question was related to the common equity Tier 1, whether we are comfortable or not. Well, looking at the level that we are subject from a regulatory point of view, we are happy with the existing 10% level. Yes, as you correctly said, we have seen some depreciation in Turkish lira, which has lowered our capital adequacy ratios. Not -- this is not limited with common equity Tier 1, but also include total capital adequacy ratio and additional Tier 1. But from the common equity Tier 1 point of view, we are not that much hesitated. We have always been acting at an efficient level. And obviously, we have something in mind. We have some specific levels that we feel ourselves comfortable on. We will do our best to preserve it. And as for the other additional Tier 1, on the call, as Erkan Kilimci said during his presentation, we have benefited and we have seen a positive impact of more than 180 basis points, both on our total capital adequacy ratio and additional Tier 1. So we have reached at a point where we feel ourselves comfortable at a level, which can be deemed as efficient. Yes, it might be low -- relatively lower compared to [ that ] of sectoral averages, but there has always been a gap between our number and the sectoral averages that we deem our levels as efficient.
Our next question comes from Sam Goodacre from JP Morgan.
Just following up on that question on tax reversals. So could you clarify that it is solely related to the repatriation of our Bahrain branch. And therefore, other than the month of April, there is no reason to believe you'll have tax reversals going forward? That's the first question. Second question is if just -- obviously, I haven't looked into the numbers in detail, because they're only just published, but there does seem to be a significantly lower consolidated income [ than solo ] this quarter at the net profit level. So could you help us understand the difference there? And the last 2 questions are operational. The first one on fees, as you say, there's eye-catching performance from fees and commissions. And it does seem that the key drivers there are your payment systems and noncash loan fee income sources. Could you let us know a bit about your strategy there? And how you are able to deliver very good trends in those 2 areas in particular? And the last one is related to your distribution platform. I think you alluded to the fact that we ought to expect less branch expansion going forward. You obviously have increased the number of branches each quarter sequentially for the last 4 -- 4, 5 quarters. That now comes to an end of it.
Thank you for the questions, Sam. Let me start with tax reversal. Some part of is attributable to the Bahrain operations and some part of it was mainly because of the, let me say, the low level of the profit before tax. I mean there are some expenses that you cannot deduct from taxable income. And accordingly, it is increasing or decreasing in the other way. So yes, we have seen some impact coming from operations conducted through the Bahrain branch and repatriation. But there are other items that we have not -- we cannot fully disclose at this point, which has led some further tax deductions, let me put it that way.
And the other question was related with fee performance. It was good to record a quarterly improvement there. And accordingly, we exceeded some certain level, which is TRY 600 million. And yearly growth looks to be pretty much better compared to that of quarter 1, mainly reflecting the base effect. As you know, the first quarter of last year was not that much strong -- was not in line with our quarterly run rates. And accordingly, we saw a strong performance there. But obviously, this will be normalizing going forward once the relatively higher base of second quarter phasing in. We had some -- we had recorded some good performances in the second and third quarter of last year. And accordingly, we will see some sort of normalization going forward. As you know, there are some loan-related fees and commissions, which are increasing once you generate -- give out more loans. And in the first quarter, we have achieved almost 9% loan growth, which has been helpful. But there is a good portion out of it, which is generated through non-credit linked operations, including noncash transactions, money transfers, I mean, transactions with corporate, some restructuring fees, as we have seen in the past. So it is more across-the-board, let me put it that way, if we are discussing the remaining part, which are not directly linked to the loan growth, let me put it that way. And obviously, we have seen some adjustments in the pricing scheme of fees and commissions. In the beginning of the year, we have passed the inflation impact into the pricing rate. And we still have some further room to go as we lag behind peers in terms of introducing new fees and commissions or, let me say, applying relatively lower fees. So we expect this strong trend to be carried on to the remainder of the year.
But because of the base effect, it will -- the yearly growth run rate will normalize.
The other question was about the distribution platform. I mean, as you said, we are very close to a point of situation, where we feel ourselves comfortable in terms of the covering all the customer base and each and every corner of the country. We are very happy with the overall distribution. 2/3 of the branches are located in the rural part, where we see less competition. And accordingly, this strategy has been paying off when it comes to increasing deposit at [ attractable ] rates and provide loans. So we are happy with the existing scheme, and we are happy with the digitalized platforms started to pay off better. So these 2 will be combined, will continue to be harmonized and managed hand-in-hand going forward. But whether we will continue to increase the branch network as fast as it is used to be, I believe not. In the second quarter, we have seen some small adjustments that we have seen some mergers between our branches to increase their efficiency. And accordingly, this will probably lead into a lower level -- a lower number of total branches.
Your other question was related to the consolidated income, if I'm not mistaken. Please give us some time to take a look on it and to follow-up on that at the end of the presentation, if you don't mind.
That's fine.
[Operator Instructions] Our next question comes from Ovunc Gursoy for BNP Paribas.
I have a quick question about your provisioning policy? And how comfortable are you with your current asset quality considering that the commercial side posing the most risk in your total cost of risk? And about free provisioning [ that ] you reversed any free provisions this quarter and what is the total amount -- current total amount?
Thank you, Ovunc. Let me start with your last question referring to the free provisions. Yes, we reversed some TRY [ 79.5 ] million in the first quarter, and accordingly, the stock volume decreased to TRY 385 million. It was just a small adjustment. As for provisioning, I mean, and current situation in the asset quality, I mean, we are happy with that. We have seen lower inflow from our performing books in the first quarter. I mean the highest inflow that we have seen in our portfolio was in December, which was inflated by a big ticket loan. But if we adjust for that, the trends have -- the trends are still smooth enough to keep our initial NPL expectations. Internally, we have a guidance of, which is below 4% level, and we still stick with that.
And looking at the NPL formation, it is more across-the-board among commercial customers. And as for our retailers, I mean, it is paying off. It's all about our strategy aiming at the customers that we know and being more active with housing loans. As you can easily track on our presentation, almost 60% of the retail loans are associated with housing loans, where we have a brilliant asset quality, which is not [ peculiar ] to Halkbank. And credit card has a quite small share in total. We have never been -- we have never followed aggressive strategies there and just concentrated on our own customers, not to support the asset quality. And as for the consumer lending, again, almost 70% to 75% of loans are granted to either -- either to pensioners or payroll customers, where we have a chance to track the customers, money inflows and outflows and overall financial performance before granting the loan, et cetera. And accordingly, this strategy has yielded into a successful result in the retail segment.
We have seen some pressure from SME segment, which is expected. Having considered the SMEs, I mean, they obviously have the highest share in the total loans, it should be around 41%. And accordingly, it shouldn't be a surprise to see higher NPL inflows from SME segment from that perspective. And accordingly, you can see relatively higher cost of risk for this specific sector. But we have other measures that -- such as corporative lending, which is making almost 1/3 of total SME loans. And we have obviously support from CGF loans in terms of asset quality, the NPL ratios are still low there. And we have another 1/3 of the portfolio, which was granted on the CGF facility. And the remaining portion is similar -- quite similar to usual SME loans. That sector has been operating at around 7% NPL. But to limit our risks there we -- for example, we have been using our funds that we raised from international financial institutions with more affordable pricing, grace periods and other advantages to be passed on to the customers, which is helpful to sustain the good asset quality there. So it shouldn't be a surprise to see a divergence between our NPL ratio and that of sector. And as for provisioning, we are happy with the initial -- with the existing coverage ratios. We have been following a prudent strategy for stage 3 loans. This is just for the purpose of prudency. It is not indicating a lack of collateral or any other problem there. That's the preference of the bank. And we are happy with the stage 1 one and stage 2 provisioning coverages of the bank as well.
Our next question comes from Alan Webborn from Societe Generale.
If I heard you correctly, you said that you had TRY 753 million of swap costs in Q1. And I assume that is within the negative trading income, which is sort of TRY 431 million in Q1. So you've made a reasonable trading profit outside of the swap costs, if I if I'm correct. And could you just tell us what -- where that came from? I mean, is there an element of hedging in there? Just give us an idea of what that's from? That was my first question. The second question was, there's a reasonably big associate profit of TRY 377 million, if I can see that. Could you just tell me what the nature of that was in Q1? That would also be helpful. And then I think you said a couple of times that you're more optimistic in terms of the bottom line progress that you expect to see in the subsequent quarters of this year and clearly, at a time when Turkish lira deposit costs are rising and arguably sort of tensions in the market are more difficult now than they were in the first quarter. And could you just point us to where you see the improvement coming over the next couple of quarters to give us some sort of feeling of where do you think the higher returns are going to come from over the next 2 or 3 quarters?
Thank you, Alan. As you correctly said, we recorded TRY 753 million of swap loss as a result of increased usage of swap facilities, but it turned out to be the trading item, generated a relatively lower loss due to other transactions to support the trading income, which includes FX trading gains. I cannot give you the exact number, but there is a good positive there, and a small contribution came from regular bond buying and selling transactions, bond trading, I would say. But the biggest contribution came from FX trading part. And as for your second question, which is referring to the subsidiaries income. I mean, we usually book our subsidiaries, dividend distribution in the second quarter and in the third quarter. It used to be higher in the second quarter, mainly because of the fact that the general assembly meetings of our [ local ] subsidiaries are completed faster than that of our subsidiaries' meetings, which are located outside of Turkey. As you know, we have 2 operational banks. In the Balkan region, in Macedonia and Serbia, as you know. And their FX -- their dividends are booked in FX. And accordingly, the -- once we see Turkish lira depreciating, it is, let me say, generating more income as they have recorded and as they record and distribute profit in euros. So what we have seen in the first quarter is a shift of general assembly meetings of our local subsidiaries from the second quarter to the first quarter. So we have not waited that long to organize to hold the general assembly meetings. And accordingly booked TRY 377 million, which is quite similar to that of the revenue that we booked last year in the second quarter. And we also expect to see some contribution to come in, in the second quarter. But obviously, it will not be as high as it was in the first quarter.
And as for this -- the other question, which was related with how the earnings will perform better, if I'm not mistaken. So as I said, we are the best positioned bank, having the highest share of Turkey lira liabilities that are interest bearing in total liabilities. And this obviously added further pressure on our split and margin performance in the past, but looking at the expectations, which is suggesting a relatively lower CPI and there are still some expectations from CBRT to cut -- to start cutting interest rates somewhere in the second half, which was shifted from the first half to the second half because of the volatilities, because of the recent developments we have seen in the operational environment. But we are still optimistic about the outlook. And accordingly, we'll continue with our existing positioning there -- and obviously, we are in the expectation to be paid back once the inflation reenters into a path of improvement.
Okay. So if I missed anything, please feel free to raise your questions again.
Okay. I just sort of -- obviously, the -- am I right that the dividends have sort of moved from the dividend line to the associate line? I mean, is there any relevance in that or is that simply the presentation that you've made in -- on your slide? Because I think, normally, we'd have seen dividends under dividend payments and now they seem to be under associates. Is that right?
But, it is just a change in name, if I'm not mistaken. So the dynamic is still there. There was no change in the methodology. But the only changing part was related with the name. So it is the same as the previous quarters.
[Operator Instructions] Our next question comes from Magnus Scherman from Reorg Research.
I wanted to touch on the operating expenses. Could you explain how you managed to bring those down in the quarter? And then my other question was with regards to the NPL and stage 2 loans? What's your strategy when it comes to dealing with them? Will there be sales of NPLs? Or will you sort of negotiate them with the counter-party on a one-by-one basis.
Thank you for the questions. OpEx, I mean, it tends to be higher in the last quarters of the year because of some [ limits to be consumed ] by the respective departments. And there has always been that kind of seasonalities that we see in the OpEx space, and accordingly, it was not a big surprise to see a quarterly improvement there. And it looks to be a bit higher if you look at it on a yearly basis, mainly because of, again, the basis effect, the first quarter of last year was substantially low, which drove the yearly increase into a level, which is higher than actualized CPI. But it will disappear. It will fade away and more normalized going forward as we continue with the good performance when it comes to managing OpEx in a disciplined manner.
As for the NPLs and stage 2 loans. I mean all of the banks say they have done their best with restructurings, with everything that they can provide in favor of customers and try to keep the loans as [ alive ] as possible. And this is a phenomenon that we have been seeing, not in the few quarters, about almost since 2015 and '16. I mean in those days, we were helping customers by converting their FX exposures into Turkish lira to the extent our capacity allows us. I mean, we have always been acting in accordance and in favor of our customers. So this should be the same for all of the banks. It should not be peculiar to our bank, I guess.
We have no other audio questions. So please speakers we can now switch to written Q&A.
I guess, this was the last one in the audio call. And maybe we can switch to the questions that we have been received through webcast.
We have a question from Valentina asking unconsolidated common equity Tier 1 and consolidated common equity Tier 1 levels, unconsolidated 10% consolidated 9.6%, as we discussed, somewhere in the middle of the Q&A session.
Conditions of additional Tier 1 loan, well, it is a loan, not a bond, as you correctly said. And it is issued. It has been signed off on a perpetual basis with Non-Core 5 structure. The amount was EUR 900 million, which will be filed under sub debt item, not under shareholders equity or capital -- sorry shareholders equity, but it will be taken into account in the calculation of the additional Tier 1 and capital adequacy ratios. And the interest rate, which will be made public in the auditor's report of the second quarter's financial results, but we have been discussing this with interested counter-parties and the cost should be at around 4.6%, excluding some fees that are paid into the lender. I guess this is all about the questions on capital adequacy.
And as for the NPL inflows and collections. I mean, as I said, it was more across-the-board, among commercial loans, SMEs make up slightly a higher portion, mainly because of, let me say, because of the fact that they have the highest share in the total loan book. I mean we are talking about 41% share in total, which is -- we have an SME-dominant portfolio and wouldn't be surprised to see SMEs generating higher NPLs in nominal terms. So it's not a surprise.
And as for the collection performance of the bank, it tends to be higher in the first quarters. Because of the fact that all the NPLs, which you make collections on, are booked -- are sent into NPL in the previous quarters, in the previous financial terms, and each and every NPL collection accordingly is reflected into the other operating income. So it is supportive for this item. But it is smoothening out going forward as the bank starts making collections on the fresh, nonperforming loans. So it tends to be higher in the first quarter. So let me put it that way. And there was no big ticket reversal that it was all, let me say, basing on -- based on flows, let me put it that way.
And the other question, again, from Valentina regarding stage 2 loans, how much of it's model-driven? And how much is delinquent? I mean the majority of it is in not any kind of overdue. If I'm not mistaken, the rate should be at around 53%. So I think this answers the question on it and the mitigation rate from stage 2 to the NPL portfolio turns out to be 17% once we, let me say, include the one-offs into our calculations as well. But if we adjust for that, probably the run rate would be lower at 15%, but you can take a range in between 15% to 20%, if you're asking for your own calculations, Valentina.
And another question again from Valentina, I think, this is the fourth quarter FX wholesale debt is at around USD 5.7 billion, but this also includes interbank deposits, which have been showing some, let me say, stickiness in our portfolio. There has never been a case to roll them over. If we adjust this portion, the real wholesale funding amount would be -- would come down to USD 2.2 billion. And looking at the liquidity position of the bank, we have more than USD 700 million placed in liquid assets, plus USD 5.2 billion placed with CBRT. This includes mandatory or required reserves in FX as well. But we have been using reserve option mechanism to the almost full extent, and accordingly, have a higher flexibility there. [ Plus ] , we had swaps slightly amounting to USD 3 billion. These are short-term right-way swaps. And if we decide not to roll them over, accordingly, this should create more FX to, let me say, meet any FX outflow.
And other question comes from Tolu Alamutu. I think we have answered your question on FX liquidity position. But whether the banks will be looking for -- to repay its euro -- its USD-denominated bonds or any chance to roll them over? I mean looking at the FX liquidity position, both in terms of actual and available FX in our portfolio and liquidity coverage ratios, there is an abundance of FX liquidity for the time being, which is putting us in a comfortable position not to rush out to tap any market with any issues. On the other hand, we have been very active with our relations with international counter-parties when it comes to bilateral trading opportunities, bilateral funding opportunities. So issuing a bond is not the only way to raise FX funds from international markets, obviously. And looking at the liquidity position, we have more than the capacity to repay any bond, which is maturing. So that's why we will not be rushing out for tapping the market or rolling over the maturing Eurobond. I think you are referring to that one, which will mature in June, next month.
And what -- where are the places that we expect some sort of recovery in the coming quarters? As I said, we've been very active with hiking the rates on the lending side. Accordingly, the interest income will be supported. For example, maybe we can take corporative lending. As you know, this portion, this portfolio was generating only 12% in the past. But after recent adjustment of 600 basis points, the actual return on that portfolio was recently increased to 18%. And please bear in mind that this portfolio generates almost no NPL and please also bear in mind that SMEs, sector-wise, have an NPL ratio of 7%. So in terms of risk-adjusted return, corporative lending might be supporting our interest income plus, I mean it is applicable to any of the other loan categories. We have made some significant adjustments, obviously, higher than that of which was made for Turkish lira deposits. And accordingly, we've been operating with a widened spread in marginal terms, but it will take some time to see the full impact in the back book.
And you have asked an update on U.S. case. Unfortunately, Tolu, there is no update on that. It has stayed where it was left off in the previous quarters. And it would have been very boring for both of -- both us and for you to start, let me say, repeating the same statements of the previous quarters.
And the other question is coming from Klim. He has 2 questions. What is the FX sensitivity on capital adequacy ratio? I mean, 10% depreciation in Turkey lira versus the currency basket would have an impact of 50 basis points on our CAR. And as for the question, which is referring to the Eurobond maturity and overall strategy that we have for the Eurobond's part, maybe, Erkan Kilimci step in at that point to make some further remarks.
Thank you, Umut. Umut already has mentioned how strong we are in FX liquidity, which makes us patient to tap international markets once again. But we're already in touch with a couple of different investment banks discussing the opportunity in the market. But from our perspective, given the guidance of our economists on the ongoing developments in Turkey, we expect the inflation to slow down in the coming period. And then the risk premium that we are going to pay will be also sorted out. So our spread to our peers is also higher, which we cannot justify, an issuance, which will be priced according to where our floating bonds are trading. So we are patient, and we are already having a very strong liquidity position, thanks to our network in Turkey. But hopefully, we expect the market to be available for such an issuance in the second half of the year.
Well, thank you, Erkan Kilimci. And we have another question coming from [ Anjali. ] She asked for the share of group 2 loans in total? It is around 6.6%. And what is the share of restructured loans? Restructured loans roughly constitutes 40% of total stage 2 loans, as you can correctly see on the respective page in the auditor's report. I think these are all the questions as raised from her.
And as for the questions coming from Bulent Sengonul, yes, your calculations are correct. The reversal on the other operating income, which should be equal to almost TRY 400 million and the part, which is related with the reversal of loan loss provisions, is making almost TRY 163 million. As for the remainder, we have had a provisioning reversal from these 2 loans as a result of the, let me say, findings of the outcome of the fine-tunings in the IFRS 9 model. It is coming out of IFRS 9 model. So it was not, let me say, tweaked or let me say, because of changing -- changes in the assumptions. But as you know, we have not been involving into the IFRS 9 model except for some macro parameters that are subject to revision, at least once a year, and it tends to take place usually in the first quarters of the year, but it was not directly related with that. The amount should be TRY 183 million, which was reversed from stage 2 loans and transferred into the stage 1 loans. You can easily see our stage 1 provisions has increased at a similar amount. So [ it ] is some sort of a conversion from stage 1 to stage -- stage 2 to stage 1 as a result of, let me say, model outcome.
I think these are all, and we would like to thank all of you for participating to our conference call and for your patience during the conference call. Hope to see you in the next presentations with stronger set of results. Erkan?
Thank you all for listening and joining us today. Have a nice evening.
Thank you. This concludes today's conference call and webcast. Thank you for your participation. You may now disconnect.