Turkiye Is Bankasi AS
IST:ISCTR.E
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Turkiye Is Bankasi AS
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Ladies and gentlemen, welcome to Isbank's first quarter 2018 financial results conference call and webcast. The event will be hosted by Ms. Senar Akkus, CFO; Ms. Gamze Yalcin, Deputy Chief Executive. Madam, please go ahead.
Thank you very much. Ladies and gentlemen, welcome to the presentation of Isbank for the first quarter 2018 results. This is Senar Akkus speaking. I am Deputy Chief Executive in charge of financial management and strategy of the bank. Ms. Gamze Yalcin, Deputy CEO, in charge of FI and Investor Relations; and our colleagues from Investor Relations department who will be with us during this presentation.
I will start with the recent developments in the economy and period highlights for Isbank and then leave the ground to Ms. Yalcin for the rest of the presentation.
On Page 2, we are giving a summary of recent developments in the economy. Global economic activity has kept its strength in the first quarter led by developed countries. In this period, the meetings of major central banks and protectionist trade policies came to the forefront. Fed raised the policy rate in March as widely expected, thanks to the favorable outlook in the U.S. economy and upward trend in inflation. Other major central banks continued their expansion and in monetary policy implementation. On the other hand, the rise of protectionist foreign trade policies, among major global economic actors constitutes a threat on a global scale.
In Turkish economy, leading indicators such as growth in industrial production and higher [ loan ] capacity utilization ratios suggest that a strong economic activity in the first quarter of the year. Plus marked cumulative current account deficit reached USD 53 billion in February 2018.
A higher energy bill due to higher oil prices and strong gold imports were behind this development.
Excluding net energy and gold imports, the deficit got as low as USD 6.3 billion. Tourism revenues have continued to recover, surging by more than 30% year-on-year in the first 2 months of the year, thanks to improved relations with Russia and diminished security concerns.
Portfolio investments and other investments recorded a net inflow of USD 4.6 billion and USD 10.5 billion, respectively. In fact, Turkish institutions did not face any difficulty in accessing international funds. Long-term debt rollover ratios of banking sector and nonbank sectors were 104% and 122%, respectively.
The recent depreciation in Turkish lira was partly driven by the deterioration in global risk perception stemming from rising international trade sanctions and from acceleration in geopolitical tension in Syria. While most of the emerging countries were hit by these, Turkish lira turned out to be, now the worst affected currencies.
In an environment where capital inflow of the emerging markets have been volatile and geopolitical risks have increased, we believe the current depreciation of Turkish lira does not fully reflect Turkish macroeconomic fundamentals.
Owing to a couple of factors including the higher food and oil prices as well as the weakness in Turkish lira, annual CPI inflation rounding the double-digit range. The Central Bank declared that it puts price stability first and remains ready to act if deemed necessary. In this, CBRT increased liquidity window lending rate from 12.75% to 13.5% in April.
On the other hand, early presidential and parliamentary elections to be held on 24th June are expected to ease political uncertainties and prevent further deterioration in macroeconomic indicators.
Under these conditions, at Isbank, we are performing in line with our budget. We recorded strong increases in core delivery items in 2018 first quarter on a year-on-year basis. Our net interest income increased by 16%, while net fees and commissions grew by 15%. Our swap adjusted NIM reached 4%, thanks to ongoing asset repricing, as well as stable costs on the deposit side. Asset quality remains benign. We continue to have the lowest NPL ratio among peers in the first quarter of the year. Net cost of risk stood at 68 basis points, remaining better than the expectation. We maintained our strong capital raise. Our capital adequacy ratio was at 60.5% by the end of Q1.
Lastly, by the first quarter of 2018, we implemented equity method, the impacts of which in our figures will be seen in the coming slides, as well as notes to the financial statements.
Now Gamze Yalcin will continue with the details of our performance. Thank you.
Thank you, Senar Akkus. Hello, everyone.
Moving on to Slide 4 with the major P&L items, as well as the profitability indicators. We posted strong year-on-year performance in terms of net interest income as well as season commissions income in the first quarter of the year. OpEx declined by 2% compared to the previous quarters. Year-on-year growth was somehow -- somewhat higher than our guidance but in line with our projections for the first quarter, mainly because of the very low rates of the first quarter of 2017 and thus, seasonality impact.
We believe that in the coming part of the year, these impacts will be normalizing and will be in line with our guidance for full year 2018, which corresponds to CPI plus 3% to 4%.
Looking at our profitability indicators. Our return on average tangible assets stands at 1.99%, while our return on average tangible equity was 17.5%. Please note that previous period figures have been restated according to the equity method. On the next stage we will be looking at the growth performance of the main balance sheet items. In the first quarter of the year, Turkish lira loan growth was relatively moderate. Though we started to extend CGF loans from our newly allocated limits amounting to TRY 2.5 billion by the end of March, pace of utilization in this area is not as fast as previous year, as you know. Our outstanding balance stands at TRY 16.7 billion as the end of quarter 1 versus TRY 17.3 billion by the year-end as repayments [ matters ] also.
On the securities side, securities portfolio increased by 5.4%, while Turkish lira securities grew by 6.3%. In the first quarter, we reclassified some of our securities as they're under AFS portfolio in 2017, so financial assets measure that amortized cost item. This also had an impact on securities growth in the period.
2% -- 2.4% of increase in Turkish lira securities was the result of this shift. We provide the composition of securities on Page 17 where you can see the details.
If you move to the liabilities side, we continue to grow our deposits with a cost-oriented approach. The quarterly growth on the Turkish lira side stood at 1.5%, while there was a decline in the FX deposits on a U.S. fee basis. As you know, demand deposits is a major contributor to our low-cost deposit base. By the end of Q1, share of demand deposits was 25.3% in Turkish lira and 26% in FX deposits. We continue to be the market leader in this area among private banks. We are also dynamically monitoring the market conditions and actively benefiting from non-deposit fund items, in terms of our proactive and flexible funding management approach.
On Page 6, we have the net interest margin performance for the first quarter of the year. In Q1, upward repricing in the loan book continued on both Turkish lira and FX side. Turkish lira loan yields increased by 61 bps in the period. Similarly, FX loan yield improved by [ 9 ] bps, including the effect of the increase in LIBOR rates.
On the deposit side, due to our proactive funding management strategy, we managed to decrease our Turkish lira deposit costs by 4 bps, whereas the FX deposit costs came out at only 6 bps. As a result, we managed to increase our core spreads on both Turkish lira and FX side. On the other hand, the [ flood ] cost in Q1 remained at TRY 512 million, being almost flat compared to the previous quarter.
All in all, the net interest margin increased by 21 bps and reached 4 points or 3% on a swap adjusted basis, which is higher than our full year guidance of 3.7% to 3.9%. We made a strong start to the year in terms of NIM, and we will continue to manage our margins very carefully during the year in order to deliver the levels we guided for this year.
On the next slide I will be elaborating on the fee income performance in the first quarter. As you know, growing the fee income is a part of our selective growth strategy that focuses on profitability with a risk-return approach. In this sense, we continue to achieve robust results in net season commissions generation in the first quarter of this year. On a year-on-year basis, net season commissions grew by 15%. As you will recall, we have been guiding about 15% fee income growth in the last several years, and we have been doing even better than this. In the last 3 years, our average fee income growth was around 19%. First quarter of 2017 was a very strong base in terms of fee income. Nevertheless, the increase in Q1 was in line with our guidance. We believe that we will see even higher figures in the coming part of the year, April and May figures support our expectations. Also in Q1, OpEx coverage of commission income increased to 46.4% from 45.6% as of 2017.
Looking at the cost-to-income evolution of the next page. In Q1, cost-to-income ratio improved significantly with the implementation of equity matters. We believe now our cost income figures, alongside other indicators, will be much more comparable with our peers. Please also note that we deducted the provision reversal, resulting from IFRS 9 implementation from our income base. Despite this adjustment, our adjusted cost-to-income ratio is now below 40%.
On the next page, I'd like to talk about the asset quality trends. Our NPL ratio stood at 2.3% by the end of Q1. We continue to have the lowest NPL ratio among our private peers when adjusted for the NPL portfolio sales in the sector doing the quarter.
Besides the total NPL ratio, our NPL in every loan category continues to be better than the sector averages. Net NPL formation rates, which came down significantly due to increased economic activity in 2017, started to normalize in the first quarter and stood at 57 bps. The coverage ratio stood at 72% by March 2018. If general provisions were also included, the ratio increases to 131%.
As you may recall, we also have fee provisions set aside for potential risks and by the end of the period, they amount to TRY 1.55 billion.
Lastly, the collection rate stood at 20.3% for the first quarter.
Next page provides information about classification of the loans and provisioning after IFRS 9. As you see in this slide, the share of Stage 2 loans stood at 8.5% in Q1 versus 5.1% as of year-end, indicating a lower level compared to our main peers. Approximately 90% of the increase in Stage 2 loans resulted from commercial side. Some big tickets and energy sector loans were the main drivers of the increase in Stage 2 loans in the first quarter. After the implementation of IFRS 9 all our coverage ratio came across 0.7%, 8.8% and 72% in Stages 1, 2 and 3 respectively, which we all deem as resilience level.
Looking at the cost of risk, due to the impact of IFRS 9 in the provisioning and provision reversals, we believe net cost of risk is a better indicator to threats. By the end of Q1, our net cost of risk stands at 68 bps at a level more benign than our expectations. Specific Gross Cost of Risk is also intact at 88 bps by Q1.
On the following page, we have the capital position of the bank. By the end of Q1, our capital adequacy ratio stood at 16.51% with a slight decline compared to the year-end, mostly due to Turkish lira depreciation and dividend distribution during the quarter. Tier 1 ratio was 13.78% at the end of the period.
The major elements which impacted the capital adequacy ratio during the quarter can be seen on the slide, we believe that the current level of capital adequacy ratio indicates a very comfortable base in terms of supporting our future growth.
In the [ last ] slide of our presentation, we have a quick update talking about digitalization process. By the end of Q1, share of digital channels in total comparable transactions was 85%, share of mobile reached the remarkable level of 47%. The number of our digital customers, which is continuously increasing, exceeded 6.2 million, indicating a very impressive level. Our market share in mobile transactions are also remarkable. By the end of Q1, around 1/3 of investment transactions in the market were made through our mobile banking app.
Likewise, 1 in every 5 credit card transactions was made through IsCep. We also observed that the digital channels are becoming more and more important for the sale activities. For example, as of the first quarter of 2017, share of general-purpose consumer loans, which are expanded, we have the digital channels, was around 40% and almost 66% of time deposit accounts, all [ found ] in Q1, were originated through our digital channels.
The contribution of digitalization is materializing in our results as well. By the end of Q1, 23% of fee revenue originated from digital channels. On the other hand, we believe that the positive impacts in the cost side will be visible in a relatively gradual fashion. On the other hand, we don't expect to see any dramatic change in the branch network, however, branches are transforming continuously, and employees are being transferred to sales roles from nonsales roles. Up to now, 1,400 employees were reallocated in this context. As you already know, we have a strong focus on this area, and its progress is closely monitored by our management.
We will continue to be very active in this area in the future. This concludes our presentation. We'll be pleased to answer your questions now. Thank you.
[Operator Instructions] Our first question comes from Deniz Gasimli, Goldman Sachs.
I have two questions from my side. One would be on the revenue line. Just to confirm the accounting change that you've -- the equity method change. And just wanted to kind of confirm, my understanding is that the dividend, previously it was reporting on the income from the subsidiaries on a dividend income, now it's under equity method. So that is, that's where you will classify your subsidiary income from now on, and that is the key driver of the account, the key kind of change with this accounting methodology this quarter. Just want to confirm. And also on your presentation, there's another thing, for other income line, it says a TRY 504 million is due to IFRS 9 impact on other income. So I'm just trying to -- looking to understand what's, what is this impact? Is this because of -- previously this would be part of credit cost line? Is it, it may be some Stage 1, Stage 2 provisioning, which is now part of other income? Or is there some other driver for this? Just getting -- trying to get more color on the TRY 504 million on -- in other income? And my second question, on asset quality. I mean, you talked about the Stage 2 ratio increase to around 8.5 this quarter. I mean, just trying to understand, does this include any of the big-ticket loans that would be, getting used for this year? Are they part of this increase that we saw, or are you still undergoing restructuring talks or in that case, they're still in Stage 1?
Thank you for the question. Let me start with the first one. Yes, you are right. In the new method, I mean, in -- under equity methods, we will not be reporting dividend income from our subsidiaries. Instead, you will be seeing an income coming from equity methods in our income statement. For the first quarter of the year, this income is TRY 510 million. And you will see a stable income there, which is differing from the past. I mean if, as you know, the dividend income was causing a seasonality effect in our income statement. Now you will see a more stable income coming from our subsidiaries in our income statement. And therefore, in the calculation of our return on equity and return on assets, we quit using trading data for the last 4 quarters. Instead we are using the first quarter data and annualize it, in order to give an indication about ROE and ROA.
And about your second question, TRY 504 million in other income items is due to the reversals in general provisions within the process of IFRS transition. Therefore, in order to give a better idea about the real income, we excluded it in some of our calculations. About the second stage loans, as Gamze would had mentioned, there is an increase about TRY 9 billion in the first quarter of the year. And this was mainly due to some big-ticket loans as well as energy sector loans. And I think this answers your question. The -- some big-ticket loans are also included in the second stage loans in the first quarter of the year, as you may have heard from the news in the sector.
And just as a follow-up, the general provision reversal of TRY 540 million this quarter, is this a, kind of an one-off thing or should that recur going forward?
It can be considered as one-off in the transitional stage.
Our next question comes from Alan Webborn, Societe Generale.
Could you just, I mean, on this TRY 504 million reversal, is what you're doing is, is putting the reversals. You're not netting Stage 1 and Stage 2 off. Is that what's happening? So within the TRY 504 million reversal, you've got Stage 1, Stage 2 and Stage 3 reversals. Is that what you're doing now? Because some of your peers are doing that. Others don't seem to be doing that. So within that TRY 504 million, are you splitting out what the Stage 3 reversals are? That was sort of one question. And then perhaps it's in the notes anyway, but could you just sort of be clear on that? And my second question was, when I look at your TL lending in Q1, it looks slightly, it looks rather below the sector level, and I wondered whether you could sort of give us a view of what the dynamics within that have been and whether it was yourselves being particularly cautious? Or just give us an explanation of why that was?
Actually with the transition to IFRS 9, we -- as we said, there was TRY 504 million from general provisions to second stage loans and third stage loans. And you will see the reflection of it in our loan provisions item. Do you want to learn the growth amounts?
I was just -- I think it's okay.
Maybe I can summarize like this. We had reversed TRY 504 million from Stage 1 and add TRY 596 million to Stage 2 loans. And the addition to Stage 3 loans was, in broad terms, about TRY 532 million, as you are seeing the net of it on Slide 10.
Okay.
Is it clear, or...
I think in a way what I'm looking at is, is looking at the P&L other income line, which clearly is where you put the asterisks and you've done TRY 797 million in Q1, in other operating income, and you say, of that TRY 504 million is IFRS impact. But then, is that simply -- did you say that, that was just Stage 1 and Stage 2. So between the TRY 504 million and the TRY 797 million is the Stage 3 reversals? Or does the TRY 504 million include Stage 1, Stage 2 and Stage 3. I'm just trying to understand what that TRY 504 million actually means?
Mr. Webborn, this is Mahmut Magemizoglu. Let me put the issue in this way. As you'll recall in the last year, we have been provisioning more than it was required in [ 2007 ]. So we have built up a provision base. And if you'll recall also, last year what we have done is, we have transformed half of those provisions to [ 3 provisions ] in 2017 year-end. In 2018, when we transferred to IFRS 9, there was 2 issues. One of them is a reversal in the provisions, and the other one is reclassification of the reversals, a reclassification of the provisions. So if you look, our coverage ratio was slightly above 80% last year. And today it is about 72%. So that means that our specific provision requirements has declined. So we released some provisions from this specific provisions, and some of them are reclassified as general provisions because as you know, there has been an increase in the Stage 2 provision requirements. And we have some provisions for Stage 1 also. So having all of them together with the impact of the reclassification also, the remaining part, which goes to the other income, is the sum. It is the difference between these 2 items. So that is the reason why this is -- this can be considered as a one-off because of the reclassification. So today, if you look to the presentation, you will see the Stage 1 provisions has declined even to 0.7%, because we were provisioning slightly above 1% last year. You will see that the provision requirements of Stage 2 has increased to about 8.5% -- 8.8%. And that requires an additional provision to be reclassified in Stage 2. So all in all, when you see the impact, you see the result of those that goes to other income.
Our next question comes from Simon Nellis, Citibank.
I just want to make sure I understood the same issue, actually. But from collections, so the total collections, if I calculate it right, was TRY 714 million, is that correct, and that's all in other income.
If you exclude the TRY 504 million, the collection is around TRY 200 million.
Yes, so the total is TRY 714 million.
Yes.
Okay. And just on the IFRS 9 impact, what was the impact to equity, the net positive impact on equity?
In terms of provisions, the effect was negligible, But with IFRS 9, as we mentioned in the past slides, we also reclassified some of our securities, such securities under past maturity item. Therefore, its contribution to our capital adequacy ratio is around 32 basis points impact of changes in provisioning due to IFRS 9 implementation, was around 5 basis points in capital adequacy ratio.
Okay. And then I have 2 other questions. You've given guidance for your expected total gross specific -- sorry, total gross cost of risk, I think 115 to 120 basis points. Can you provide guidance on a net basis?
Actually, since the IFRS transition increases the gross amounts of our provisions, I think it is better to track in terms of net cost of risk, is it's calculated as 68 basis points for the first quarter and our guidance for net cost of risk was 84 basis points.
So you still expect 84 basis points on a net basis?
Yes, yes. We're still better than our targets.
Okay.
Our main cost of risk target was 84 basis points.
And that hasn't changed, okay. And then my last question would just be about the margin outlook. I mean, what are you seeing and how do you think your margins would react if you -- we had a substantially higher -- if we had further rate hikes from here?
Yes. What we were expecting for the first quarter was an improvement in our net interest margin. And today we are seeing that it has been realized. The repricing on our per share of loan book continue. There is a 9 month raising gap in our Turkish lira balance sheet, as you might know. But since the interest rates are continuing to increase, this is a continuous process and it covers our per share of loan book, it is to be repriced. And for our FX loans, what I can say is that more than half of our FX loans have a total-rate structure, and this also has a positive impact on our net interest margin since the LIBOR is increasing also. Therefore, it increases the yield on our FX loan book. On the liability side, we see a stable deposit base. As you know, last year there was a great failure on deposits cost due to CGF loans. But since the loan growth, especially Turkish lira loan growth, is moderate compared to last year, we do not see a pressure on our Turkish lira deposits cost. And it -- this makes us believe that there will not be a deterioration in our net interest margins in the short term. Most probably, in the second quarter, we will be keeping the same net interest margin levels as in first quarter. Also, the floating rate part of our Turkish lira securities book is higher than the fixed-rate part. It has also continued to be repriced to the inflation rate increases, and also benchmark rate increases. This also contributes positively to our net interest margin and that is what we expect for the second quarter of the year as well.
For the full year, as you know, our target was 3.7% to 3.9%. And now we are at the upper side of this spend, and we have still room for the rest of the year to achieve the targeted levels of net interest margin.
Our following question comes from [indiscernible], Bank of America.
I was wondering if you could provide us a little bit more color about your asset quality. I mean, you said that a lot of the Stage 2 loans are in -- from the energy sector. But are these more in the generation -- power generation sector, or are these more distribution companies? And also, I mean, are you looking -- what's your outlook in terms of the rest of the year? Do you see more Stage 2 loans from this sector for the rest of the year? And do you see some of these being shifted to NPLs as we progress in the year?
Thank you. Our portfolio is mainly composed of energy generation project financials and approximately half of it is allocated to renewable energy investment that are entitled to benefit from feed-in tariffs in USD terms. The feed-in tariff levels are set according to resource types, and currency risk for such investments is mostly manageable, thanks to USD index for [ transparency ]. But on the other hand, thermal energy investments, which are not eligible for feed-in tariff, have been financed exclusively by fixed loans and are exposed to currency risk in the short term. Since the [ GI ] base [ indiscernible ] prices in the markets are dragged by the increase in exchange rates, with a time lag over the tenure of the loans. In this area, however, sponsor support and the cost structures embedded in the financing are considered the main collaterals in the short term against poor FX and performance risks associated with those projects.
And recently, as you know, against the serious price fluctuations, the latest public authorities have introduced several incentives and precautions to overcome the short-term difficulties in sector. Especially for power plants using fossil-based domestic fuel, capacity payment currencies and fixed process price mechanisms have been introduced. Taking into consideration all these methods, financings in the energy generation sector are still relatively sound and sustainable in the context of ongoing sponsors guarantees that simple introduce governmental measurements and maturing markets with the expectation of increasing energy prices. Therefore, at this point, taking into account that we don't have an outstanding restructuring request from big players in the market, we are not in the opinion that there will be further deteriorations in energy portfolios. And for the other sectors also, we see the effects of depreciation in Turkish lira as well as the sale and operational pressures coming from the pressure on economic activity. And of course we are all part of the same system. Therefore, banks are trying to solve the problems of these firms in a cooperative way. But as I mentioned, for the time being, we don't see any restructuring requests from big firms in the sector. And we believe that there is now enough reasons to be pessimistic about the future development in our NPL and second stage loans. That's what we expect for the short-term period. We are, of course, individually assisting the big loans, especially in project finance side. Under IFRS 9, we are working with more quantitative data supporting our qualitative assessment. Therefore, on a monthly basis, we are assessing the big-ticket loans with detailed quantitative and qualitative criteria. And if we see a financial difficulty in one of the firms, or if we see a delay in the payments -- a possible delay in the payments of the firms, we will be ready to classify these loans under Stage 2. We have enough reserves for it as Gamze and Mahmut, they had mentioned. We have a high level of coverage ratios. And this will not cause -- a barely negative effect on our profitability throughout the year, we believe.
Our following question comes from Alan Webborn, Societe Generale.
Could you just put a little bit more color on your TL loan growth in the first quarter? I mean, clearly it's running a bit below what your target is for the full year. And clearly, there are some areas where you look as if it's been -- you've been quite cautious. But could you sort of -- you look as if you're a little bit below what the other private banks were doing in Q1. So could you just put a bit of color on what was going on, in terms of the lending dynamics in TL in Q1?
As you know, the main driver in Turkish loan growth in 2017 was CGF loans. And for this year, we cannot talk about the same kind of pace in Turkish lira loans, depending on the limits given by the authorities. We are keeping our target for the year. As you know, we have given guidance for Turkish lira loans to grow between 13% to 14%. For the first quarter of the year, we can say that we are a little bit lower level than this guidance. But for the whole year, we keep our guidance. Actually, we are limited by our profitability and capital adequacy ratio. I mean, if you do a simple calculation, in order to grow in loans by 15% or 14% without disturbing your capital adequacy ratio, you have to achieve a return on equity of 15%. This is very simple. Therefore, as long as we achieve higher levels of return on equity, we will be extending more loans to the sector. That is our efforts to this. But also on the demand side, we do not see a strong demand for Turkish lira loans, depending on the uncertainties in the market before elections. We believe that after elections, the demand for loans can also increase, as we will be achieving our targets core [ learning ], approaching to the year-end.
We have a question from Deniz Gasimli, Goldman Sachs.
Just a quick follow-up. About your OpEx growth, during the [indiscernible] Analyst Day you provided guidance for the full year of 13% to 14% growth. I think today you talked about how you plan on achieving your guidance of CPI plus 3% to 4%. So I mean, is that your expectation of inflation is around 10% for the year, hence the 13%, 14% growth guidance in line with CPI plus 3% to 4%, or is that giving some upside issue to inflation due to weakness in lira? And can we expect costs to be higher in line with CPI plus 3% to 4%, or should be in the 13% to 14% range?
Actually in the first quarter, our FX, OpEx growth was high. But this is in line with our expectations for the first quarter, because there was a low phase year effect coming from the first quarter of 2017. And towards the year-end, this OpEx growth will normalize and approach to our targets for the whole year. Of course, there can be some upward risk, depending on the CPI levels. As you mentioned, our year -- our target for -- at the year -- at the beginning of the year was 13% to 14%, which is corresponding to CPI plus 3% to 4%. If we see some risk there, we will evaluate our calculation for OpEx and we will take the measure in second half of the year, in order to achieve, again, 13% to 14% levels at the year-end. But we do not see a major risk in achieving this target for the time being.
[Operator Instructions]We have a question from Ovunc Gursoy, BNP.
I have 2 questions. The first one is about your swap volume. What was it in the first quarter? And when I look at costs, for example, year-on-year basis, there's a huge increase in your swap cost. How do you see further developments on the swap side? And second question, I might miss it, what is the real collection income, apart from this TRY 504 million? Could you tell the numbers?
Our swap volume is flat compared to the last quarter of 2017. But it is high compared to the first quarter of last year. In terms of average balance and cost, as you see from our appendix, we are very flat compared to the fourth quarter of 2017. However, swap book is around USD 6 billion. And most probably, we'll be keeping this average balance in the second quarter and third quarter of the year. We are giving special emphasis on being liquid in FX. Therefore, our daily liquidity is always kept at a level which will meet the obligations of the bank in this worst-case scenario. For example, for this year, we have a repayment of USD 6.7 billion in FX borrowings and FX issuances. We are believing that we will be rolling over this debt with a rollover ratio higher than above 100%. But being cautious and taking into account the worst-case scenarios, we're always maintaining our FX liquidity with a similar amount to our short-term FX obligations, which is, as I said, USD 6.7 billion for 2018. As long as we keep this FX liquidity, we will be doing swaps in order to create Turkish lira under very tight Turkish lira conditions, with the effect of [ CG ] active strategies. Therefore, we do not see a major change in our swaps book volume in the following quarter and for the whole year. And our real collection income for the first quarter is approximately TRY 200 million, for your second question, I can say.
Our next question comes from [indiscernible]
I just need a clearance on this equity method accounting. You say that going forward it would be a smooth item, rather than quarterly volatility. So in this case, I mean, the major -- one of the major subsidiaries that you have is [indiscernible], and in past, I mean generally [indiscernible] distributes 1/3 of its profit, then you book those dividends in your books. But now, going forward, should we assume roughly more than TRY 600 million extra profits coming from this accounting change on your books? And also, is it in your guidance that you had shared with the community at the beginning of the year? Or is this a new issue that you should revise your budget upwards? Because if you start booking [indiscernible] profits, not the dividends, there will be an extra roughly TRY 600 million.
Yes, you are right. As I mentioned before, the first quarter income, coming from our subsidiaries was TRY 510 million. I can say that half of it is coming from [indiscernible]. You can easily calculate it. What I can say is, for the rest of the year is that, in the first quarter of the year, there was not major one-offs in the performance of our participations included in this method. Therefore, for the rest of the year, under normal conditions, we may see a similar income from our [ product stations ] in the following quarter. As you said, our dividend income for this year was lower than that amount. Again, as you calculate for our bank, this year's dividend income was expected to be around TRY 800 million, around approximately. But the net income, which will be coming from this equity method will be higher than this at a significant amount. Therefore, you can see our return on equity and return on average [ FX ] ratios to be higher than our guidance, depending on this equity method, which we started to implement.
Let me add one point, and that is, from now on, you will not see dividends in the income statement, because we will be continuing to implement the equity method. And apart from that, if you look, most of our subsidiaries, which are included in the equity method are usually publicly traded companies. So you will see these profits there. In terms of dividend policy, each and every company which is publicly traded, will seek and continue to follow the dividend payment policies. So why we have done that is, because, as you know, at the end of the day, this has become a sector standard, and secondly, it is a way of reflecting the profitability of the whole group through the P&L rather than the equity of the bank itself.
So in this sense, last year you booked roughly TRY 720 million dividends, and you are sharing roughly TRY 800 million for 2018. So this means this TRY 800 million will move to -- I mean will disappear, but that would be a cash flow item going forward, but --
That's right.
With the profits of [ ICSTR ] in total coming from your associates, related with your rates, you -- we will see a huge amount as a profit from associates. So in this sense, for instance, if you continue to have around TRY 500 million, this means roughly TRY 2 billion. So -- and you were expecting TRY 800 million. So the difference will be TRY 1.2 billion. And this equity method income is after-tax, so there would be double -- there will not be double taxation. So this also take your effective tax rate down as well, so...
That's right.
So in the sense, the additional ROE that you are expecting on top of your guidance, is it possible to share a new guidance on this? Because in -- if this is a smooth item going forward, that means roughly, this will potentially mean roughly 20% earnings, extra.
That's right. If you look to our consolidated income, net profit last year, it will be a solo, standalone profit, getting closer and closer to the consolidated profitability. So in that sense, we will see an additional contribution coming each quarter, which is very in line with the first quarter as Ms. Akkus has stated. And our year-end profit will be accordingly increased. As you know, we have not shared an ROE -- we have shared an ROE and -- we have shared only a return on tangible equity in our analyst presentation. I think that this was around 17%. So at the end of the day, you will see our standalone ROE is getting closer to the tangible equity ROE. That is between 16% to 17%.
Also we have restated our year-end balance sheets and income statements with the new method. You can see it in our notes to the financial statements. You will see that the net income for the year 2017 has increased from TRY 5.3 billion to TRY 6.2 billion under equity method. You can find an approximation there.
Yes, so that means those are approximations, right. Okay.
Yes.
We have a question from David Taranto, Merrill Lynch.
My questions have been answered.
Our next question comes from[ Nicolai ] [indiscernible] of Morgan Stanley.
Two quick questions. Can you provide some color regarding your capital sensitivity to the devaluation of the Turkish lira? So that's going to be the first question. And the second one is going to be, can you give us some information regarding your Eurobond issuance plans, both senior and subordinated for the rest of the year?
In terms of capital adequacy ratio, a 10% increase in dollar TL rate has an effect of around 55 basis points. That is what I can say for the capital side. And...
Okay, I apologize. A 10% increase in the TL is 55 basis points?
For the TL rate, yes. The dollar TL rate has an effect of around 55 basis points in our capital adequacy ratio, through risk weighted assets.
And for the plans regarding Eurobond issuances, as I mentioned before, we have redemptions in 2018. We have a redemption of USD 750 million in October. Our plan is to make some issuances before that and we are planning to do it in senior unsecured issuances. However, if market conditions allow us to make an opportunistic trade, we can also be in the market for Tier 2 issuances. But our main plan is to be in the market for senior unsecured issuances if we see a strong inflow in Turkish assets.
We have no other questions. Dear speakers, back to you for the conclusion.
So we thank you very much for your participation and contribution to the presentation. We wish for you the best for the rest of the year. Thank you very much.
This concludes today's conference call. Thank you all for your participation. You may now disconnect.