Turkiye Vakiflar Bankasi TAO

IST:VAKBN.E

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to VakifBank Audio Webcast First Quarter 2022 Earnings Results Conference Call and Webcast. Thank you very much for standing by. There will be a Q&A session following the presentation by the speakers. [Operator Instructions] With that, I will now hand you over to your host, Mr. Ali Tahan. He's the Head of International Banking and Investor Relations at VakifBank. Mr. Tahan, the floor is yours.

[Ali Tahan, executive]

Thank you. Thank you very much for this kind introduction, Rob. Good afternoon, everybody, and welcome to our first quarter's conference call announcement.

As you can see in our cover page, we just inserted the picture of our new head office building, which we are planning to move in a very short period of time, which is located within new Istanbul Finance downtown area. And this location, we would like to host you opening the first possible location. Every single of this esteemed group of participants in our new area. And after the cover page, let me start with the usual format, starting with the earnings and profitability.

In this quarter, VakifBank delivered slightly above than TRY 3 billion net income, which is up by 300 percentage points compared to the same term of the previous year. And apart from this TRY 3 billion net income during this quarter, we also had additional TRY 228 million free provision, and total free provision cannot reach TRY 2 billion within our balance sheet. The inclusion of this TRY 228 million.

Our net income growth is also in line with sector. As you know, sector data in the first quarter, also short. Turkish banking sector in general has 300 percentage increase on a year-over-year basis. And it is also the case for our specific case, and on top of that, we have additional free provisions.

When we look at further details, core banking revenues are also strong. Our core bankings revenues, consisting of net interest income and net fee and commission income, is also up by above about 200% year-over-year and reaching almost TRY 11 billion. And more importantly, if you look at pre-provisions profit, there is even a more severe and dramatic increase on annual basis. Our pre-provision profit number is up by almost 700% year-over-year and reaching to almost TRY 9 billion.

During this quarter, conservatively, we continue to put additional provisions, especially for Stage 2. As you know, Vakif did 76%, 77% NPL cash coverage ratio. We are the highest -- we are having the highest NPL cash coverage ratio in the peer group.

On top of this quarter, deliberately, we also put additional provisioning for Stage 2, and our Stage 2 coverage ratio already exceeded 18%, which was less than 15% a quarter ago. And the amount of this total NPL coverage ratio for the first time also exceeded 150% area and materialized at 154% in specific terms.

On the next page, you can see the important highlights of the quarter. Starting with the lira side, similar to last year, this quarter again lending growth primarily driven by commercial lending, both on TI as well as on the FX (sic) [FC] lending side. Total loans are up by 12% Q-on-Q, which is in line with the sector numbers, and up by almost 43% year-over-year. In terms of the currency breakdown, again, at this quarter, it was much more Turkish lira heavy quarterly lending growth. Turkish lira loans are up by 10.8% Q-on-Q. And in terms of hard currency side, we have a growth on Q-on-Q, but in line with the guidance year-over-year, there is some slight contraction in FX terms until construction will be much more visible during the rest of the year.

Another point related to quarter is related to net interest margin side. As expected and as guided, we have effective new management in place. Our reported net interest margin expanded by almost 140 basis points from 2.8% in the entire year of 2021 to almost 4.2%. And equally important, swap adjustment interest margin expanded even at a larger space with above 190 basis points from 176% in the average of 2021 to 3.7%.

Another important highlight of the quarter came from the cost side. Disciplined cost management was in place. Our OpEx growth in annual terms came below the inflation substantially. It was 2% year-over-year increase. And this, coupled with strong revenue generation capacity on the income side, and as a combination of those 2 factors, our cost-to-income ratio came all-time low to 20% for the first time, which was almost 33% a year ago.

On the coverage side, as we discussed, we have additional coverage ratio increase both for Stage 2 and for total NPL coverage ratio, and our total free provisioning already reached TRY 2 billion.

One of the most eye-catching development of the quarter was coming from the provisioning side. As the pioneer and active bank on ESG and sustainability side, we are glad to be the first Turkish bank who incorporated our sustainability approach and understanding to our provisioning policy in line with the EU Fit for 55 understanding for some carbon-intensive industry for the launch, the expanded for both relatively high carbon-intensive industries like cement, electricity, fertilizers, iron, steel as well as aluminum. We decided to increase our provisions by 100%.

And at the same time, for some environmental front, the loans, like renewable energy loans, we decided to put less provisioning, like 50% less provisioning than we had in place. Therefore, net-net, it requires us to put more provisionings. But the most important thing is we became the first Turkish bank who updated the provisioning policy in accordance with such ESG understanding.

Another important remark of the quarter came from the capital side. As you all know, during the first quarter, Turkish state injected TRY 13.4 billion CET1. And as a result of that, our paid-in capital amount increased to TRY 7.1 billion which was TRY 3.9 billion previously. And we enjoyed around 250 basis points positive impact out of this capital injection.

And another important point is related to hard currency liquidity. We still enjoy a good level of comfortable hard currency liquidity levels for both short-term liquidity as well as medium to longer -- and medium to long-term liquidity. Our FC LCR ratio materialized at above than 530% versus Basel III requirement of 80%. And more importantly, our net stable funding ratio came at 120% versus, again, the Basel III requirement of 100%.

On Page 4, you can see a different format in terms of the P&L items both Q-on-Q and year-over-year inflation -- evolution. And we also put in detail the evolution of free provision amount over the years, and we see additional TRY 228 million additional pre-provisioning in this quarter. Total pre-provision amount reached to TRY 2 billion within our balance sheet.

And another important development of the quarter came from the effective tax rate. As you know, in Turkey, for this year, we are asked to put 25% effective tax rate. However, in the first quarter, it was above than 40% in our case. It was a little bit front-loaded in a different way, which may be a positive upside point for the rest of the year, especially compared to other banks.

On Page 5, you can see the details of net interest margin, both reported twice as well as swap adjusted twice. And at the left-hand side below chart, you can also see detailed information related to CPI linkers, which is a real game changer not only for this quarter but also for the entire year of [ the rent -- the rent, too ].

As of first quarter, we enjoy around TRY 85 billion CPI linkers compared to asset size compared to equity. We are one of the most CPI-linker exposed bank. As you can see in the middle of the page, our CPI linker portfolio exceeding our shareholder equity, CPI or equity ratio is hovering around 112%. And in this manner, we are one of the top rank level banks in Turkey.

During the first quarter, our October to October CPI estimate number was slightly shorter than 40%, which is a result of CBRT market expectation results. And with the most updated CPI survey in the second quarter, we will be revising our October-to-October CPI expectation to above than 58%, which signals additional potential interest income out of CPI linker portfolio.

On the right-hand side below chart, you can also see the money market funding. Average swap usage during this quarter decreased significantly from above than TRY 41 billion to TRY 42 billion simply because of the conversion from fixed deposits to Turkish lira deposits within concepts of new deposit products sponsored by Turkish Treasury as well as Central Bank of Turkey.

On next page, you can see the detailed information related to fee income. Our fee income is up by almost 100% year-over-year and 23% Q-on-Q, which are all above than our relatively conservative expectations in the beginning of the year. And in terms of the composition, within the items, we have around 44% fees coming from cash lending activity, another 20% coming from non-cash lending activity, and we have payment systems contributing 24% of our total fee base, and the others in which ensures that mainly money transfer.

And in terms of the quarterly and annual growth, as you can see, especially this quarter, cash flow, our main driver of strong fee income. Q-on-Q wise, we see 37% increase in our cash lending-related fees, which makes also 168% annual growth year-over-year. And therefore, in this strong performance on the fee side, relatively speaking, this cash fee-related fees were the main drivers. And fee-to-OpEx ratio also further improved to 47% as of first quarter, which was slightly above than 40% a year ago.

On next page, you can see OpEx and cost-to-income ratio. As we discussed, we enjoy all-time low cost-to-income ratio, both as a result of disciplined cost management as well as the denominator effect coming from a strong revenue generation capacity. And our OpEx growth, both HR and non-HR cost growth, came below the inflation year-over-year basis.

Starting with Page 8, we can move on to asset side. This quarter, in line with the guidance, especially on Turkish lira lending side, we were not growing above than the sectors, and our total loan growth came in line with the sector. Total lending growth came at 12% versus sector revenue to 12.3%. We had contraction year-over-year on the FX lending side, and we have almost 11% Turkish lira loan growth in quarterly terms. And Turkish lira mainly came from corporate and commercial lending activity, as you can see on the corporate and commercial lending, which makes around 50% of our total loan portfolio. We had 17% quarterly lending growth.

On the SME side, we had around 7%. On the retail side, we had around 5% quarterly growth. And as of first quarter, 11.7% market share on the total lending side. We preserve our second strong position in the large lending market.

Next page, you can also see a detailed information related to loan portfolio. There is nothing new or material change compared to previous terms. The only eye-catching development, which is expected by the way, seems to be coming from the CGF side, both COVID-related and pre-COVID CGF loans amount are coming down substantially as strong collection performance as expected, which is also a good sign for asset quality for the upcoming quarters.

And for this page, we also put the detailed breakdown of a fixed loan within export loan, project finance and working capital loans. Both detailed information can be seen at this page.

Next page, Page 10, is related to profit quality or NPL ratio, starting with the NPL. Mainly because of the denominator effect and depreciation, came down to 2.9%, which was 3.1% a quarter ago. And apart from NPL and asset quality, the share of Stage 2 loans also slightly came down to 10%, which was 10.8% a quarter ago. And during this quarter, our cost of risk -- net cost of risk came at 225 basis points, which is even higher than our conservative 150 net cost of risk guidance in the beginning of the year. This strong and relatively high net cost of risk is totally a reflection of our conservative policy for additional coverage increase.

And speaking of the provision, on next page, on Page 11, and you can also see the details of our recently updated provision policy in line with the proactive -- in line with the Carbon Border Adjustment Mechanism and Fit for 55 principles which were bought off than -- sponsored by EU regulators. And in this past, we already adjusted our provisioning policy in line by both with the trendy and recent developments.

On Page 12, you can see also detailed information related to deposit. This quarter, in line with the sector trend, we see significant quarterly growth on Turkish lira side and significant contraction in FX deposits, which is totally a natural outcome of the new deposit products sponsored by state institutions. Our FX deposits were down by 8.1% Q-on-Q in dollar terms, and total Turkish lira deposits are up by almost 26%. And total deposit growth came at almost 16%, which is slightly higher than sector EBIT of 13%.

And as a result of that, our market share in total deposits, which is 11.5%, came even much more closer to our market share in the total lending, which is 11.7%. And for the information, as of first quarter, our deposit amount portfolio related to this FX index deposits already exceeded slightly TRY 100 billion threshold.

On next page, you can see important information related to external funding. Just 2 days ago, we successfully announced a more than 100% rollover ratio for our $1 billion syndication loan with the participation of 27 banks from different 16 countries. In the middle of relatively such global macroeconomic challenging environment, we had above the 100% ratio.

And maybe more importantly, year-to-date, as VakifBank, we raised above than $500 million fresh external fundings, mainly coming from post financing and value to the loans. And this amount itself is almost equal to a public Eurobond issuance size as compared to pricing considerations. Unfortunately, the bond pricing at the moment not seems to be attractive from our side, but the good thing is and important thing is we were capable of diversifying our external funding base via different funding sources in this environment.

On next page, you can also see our solvency ratio in the form of CET1 Tier 1 and Tier 2. We are showing trust currently both reported solvency ratios as well as our solvency ratios without forbearance measures and with a more recent capital injection of TRY 13.4 billion. Now, we are even much more comfortable and created enough buffer for additional risk factors, and our total CAR reported price further increased to 17.5%. And this capital injection had around 250 bps positive impact in our solvency ratio.

I mean, for the sake of time, I will stop here and leave the floor to Rob Egan to move Q&A session. Thank you. Thank you very much.

[Operator]

[Operator Instructions]

And we do have a question here. I apologize, it's a gentleman or someone from OYAK, here we go. Ovunc Gursoy.

[Ovunc Gursoy, analyst]

No problem. This is Ovunc from OYAK. Thanks for the presentation, and congratulations for good results. I have a couple of questions.

The first one, how you see the pricing dynamics at the moment in terms of loans and deposits? And what will be your strategy in the rest of the year also as far as loan growth is concerned? And we know that a new housing financing scheme already introduced. What will be the consequences of this new scheme to your loan growth, especially on the housing side?

And also, I wonder about your net interest margin trajectory going forward, we know that CPI linkers will contribute huge to your NIM. But apart from that, again, how you see the spread side for this year? And also if you can comment about next year? Because we think inflation -- I think inflation will be high next year as well. What should think about it? I would really appreciate.

[Ali Tahan, executive]

Thank you, Ovunc. Let me first start with the first question.

I mean,

[Audio Gap] we just also heard in the morning a new holdings campaign sponsored by the government, but the [ duties ] are not clear yet. We are trying to figure out how this new product will be working going forward.

In terms of the plan for landing and deposits for the rest of the year, and first of all, we will be probably updating and revising our full year guidance after seeing the second quarter financials, which will be announced in the beginning of August under normal conditions.

But for the time being, our strategy remain unchanged. Starting with the lending side, we still have appetite to be growing in line with the sector, especially for Turkish lira lending site. And this year, you may also notice, this year is a little bit different than last year in the fact that last year, mainly, state banks were growing on the commercial side, but private banks were growing more on the retail side. But this time, all the banks, including state banks and private banks, they all compete mainly for commercial lending.

And in such -- which is good, by the way. And in such environment, our aim is to keep our strong market share, which is, as of first quarter, we are the second biggest lenders of Turkey. We would like to keep this strong position unchanged. Therefore, without losing or gaining any market share, we would like to keep our current positioning for the Turkish lira effect.

For the hard currency side, because of -- especially lack of demand for mainly long-term investment lending transactions and because of the regular redemption profile, we understand year-over-year contraction in FX funding will be much more visible for the rest of the year. But after seeing the second quarter financials, we may also change our overall guidance. But for the time being, we still stick to our guidance we announced in the beginning of the year.

In terms of the second question, for the net interest margin side. Indeed, I mean, we understand that there will be additional upside we all enjoy out of CPI linker portfolio. Therefore, for the time being, our initial guidance of 75 to 100 basis points increase in our swap-adjusted net interest margin, which was the initial guidance we were sharing during February. As of today, it sounds a little bit conservative, maybe we should revise it in the positive way. But again, we would like to see also second quarter financials and revise that accordingly.

But for the time being, we understand that there is huge potential for the overall net interest margin guidance, which is fully supported by additional CPI linker site. Ex-CPI linkers, cost fo debt, especially on the hard currency side because of the additional increase in cost of funding on the hard currency deposit side, core fee base may be lower compared to what we are announcing. But still, net-net, potential contraction on the cost of debt side can easily be compensated by additional upside we will enjoy from CPI linker portfolio. I think those are helpful for the operation.

[Ovunc Gursoy, analyst]

And a final question, if I may, about the recent -- the impact of recent regulations. There's kind of a confusion on the potential impact of these regulations on banks. But as far as VakifBank is concerned, how do you evaluate the impact? I mean, here, the tax -- higher tax rate, also lack of remuneration for TL reserves and commission penalty as you know. Could you give some color on that? I would really appreciate it.

[Ali Tahan, executive]

Thank you, Ovunc. Of course, especially the most relevant regulatory point seems to be related to FX index deposit. Because on the one hand, if you don't meet the required levels, which introduced by Central Bank of Turkey, you have to put additional provisioning requirement -- there's [ no ] requirement provisioning, sorry. But on the other hand, if you also meet those targets in terms of the conversion within total FX deposit portfolio, then you have to give up from hard currency liquidity. So this is some sort of trade-off between Basel requirement versus hard currency liquidity.

As VakifBank, we believe we are in the optimum level as of now, which is slightly above the 10% for the time being. We believe that slightly above than 10% level seems to be much more sustainable and optimal from our side. We don't have, for the time being, and we don't have demand by the way, we don't have such a target to make it 20% as of today. And I think this is most relevant and most important regulation point for us.

Apart from that, I mean, corporate tax rate had already increased from previous 20% to 25% but as a consolidative bank in the first quarter, we, to some extent, already front-loaded the tax burden in our cost side so there will be less pressure for the rest of the year coming from the FX side.

And I think for your question, both points also, hopefully, will also be useful.

[Operator]

So next, we've got a question here from Nik Dimitrov from Morgan Stanley.

[Nikolai Dimitrov, analyst]

Ali and Zeynep, I have one question.

You have a bunch of maturities that are coming. Later this month, there is $500 million of senior debt maturing. And then in November, you have roughly $900 million that is split between old style and a new style callable bond. So I was wondering about your plans, how you're going to deal with these maturities?

And specifically about the callable bond. So we had a precedent in Turkey where, guaranteed, didn't call their subordinated bonds last month despite the fact that it had a record quarter in terms of earnings. And on that same day, the parent, BBVA extended an offer to acquire full control of the bank. And I was wondering, in the past, you've been very disciplined. And you've always hold your bonds on the first call date. Now that we have a precedent, has that changed your way of thinking about the callable subordinated debt? And what are your plans specifically about this bond? It's not a large amount, $227 million, but I was just kind of wondering how you think about your determination to whether call or not call the bond?

[Ali Tahan, executive]

Thank you, Nik. Indeed, I mean, as we truly pointed out, we have a redemption both in year and the year 2 for the rest of the year. And on top of that, there will be additional senior redemptions in the beginning of 2023. And with the current market dynamics, Eurobond market that wasn't found attractive from issuer side, even though under normal conditions, we have a strong appetite to be a regular issuer from disciplined cost management point of view with the current outlook, the market conditions doesn't support us.

However, as you know, VakifBank always active and capable of diversifying its excellent funding portfolio. Year-to-date, we also showed a good example of that. And since the beginning of the year, we already raised above the $500 million fresh funding through gross financing, through bilateral loss, through repo transactions with our correspondent banks. And for the rest of the year, to keep our hard currency liquidity at comfortable position, we will be looking for more collateralized funding transactions to the extent possible and indeed, especially for the -- call it like funding transactions, we also received a lot of questions and interest from potential investor banks like DPR securitization or like, call it like depot transactions. So to the extent possible, we will be using both potential areas more effectively.

In terms of the Tier 2, you know our edge. Since day 1, we were always pushing to be acting investor-friendly and market friendly just to -- not have some sort of reputation risk and perception risk. Of course, for guarantee specific, I cannot comment on that. This is totally up to their decision. But from our side, of course, Turkish regulations doesn't allow us to make any color about our call or no-call decision. But I think our previous approach and our previous staff gives a clue about our understanding, our approach.

To the extent possible, we will keep our positioning unchanged.

[Nikolai Dimitrov, analyst]

Got it. Okay. That's very valuable.

And maybe a quick update on your FX-linked deposits in terms of the take-up rate? In other words, the popularity, do you continue to see a conversion to this type of product? And where is it coming from? Is it from regular Turkish lira deposits that are maturing and are rolling over into the FX-linked deposit scheme? Or you actually are seeing some transition from dollar deposits into the FX-linked deposit product?

[Ali Tahan, executive]

Thank you, Nik. Actually, we have 2 products in place, one of them sponsored by Central Bank of Turkey, which aims FX deposit holders to switch their hard currency to Turkish lira. And on top of that, we also have another product, which is sponsored by Turkish government to keep it in Turkish lira especially for the FX index deposit.

As of no, we have an outstanding amount of around TRY 100 million. Out of this, around 1/3 is coming from the retail bank and 2/3 is coming from the corporate bank. Especially for the corporate tax incentive was a real game changer. After introducing such tax incentives, we also witnessed huge demand from corporates for such product.

And for the corporates, due date not approached yet. We don't have any color about their behavior in terms of keeping in Turkish lira or converting back to hard currency. But for the retail part, we have some data because the initial maturity now started to become due.

We didn't detail deposit side. More than 50% of the deposit holders in retail side still prefer to keep their bank in Turkish lira. However, some parts of them decided to switch back to again hard currency. But in terms of the breakdown, I can tell you on the retail side, more than 50% of the total amount start -- decided to keep their money in Turkish lira.

[Operator]

And now we've got a question from Valentina Stoykova from Barclays.

All right. We seem to be that -- all right. If you have a question, I think Mr. Tahan, we don't seem to have any more audio questions. If you would like to move on to the written Q&A, that would be great.

[Ali Tahan, executive]

Thank you, Rob. On the written questions, Nihan will read the question. And to the extent possible, I will try to answer.

[Zeynep Nihan DINCEL, executive]

Thank you, Ali. The first question came from Alan Webborn from Societe Generale. Could you please explain why you decided to increase provisions on high carbon lending and provision less on renewable energy? Why not adjust for risk ratings instead? Why should carbon incentives in [ total ] loans have lower asset cost versus renewables?

[Ali Tahan, executive]

Thank you, Alan. Actually, this is a new trend, this is a new phenomenon. Why we decided to put additional provisioning for some high carbon intense industries is simply related to they're required to do a list to become a carbon -- less carbon intensive industry. Because according to the feedback and assessment done by third parties, EU regulation push those companies to convert their business model to be more environmental friendly and more green.

Otherwise, those companies will be subject to additional carbon tax. And in case, those companies or those borrowers operating in those industries, just as a possibility. In case if those companies are not capable of converting their business model to less carbon economy, then they may lose some market shares, then they may lose from capacity to sell the product to the EU market.

Therefore, as a consolidative bank, just as a reaction to this possibility, we decided to increase provisioning for those readily high carbon industries. On the other hand, for the renewable energy loss, Turkish government and Turkish regulations are also put additional, how can I say, initiatives as support for those companies who are making renewable energy. And therefore, they will be in a much more advantageous position compared to non-renewable ones. Therefore, internally, we decided to upgrade their internal scoring system by one notch. And as a result of that, our internal model resulted in provisioning related for those companies.

But net-net, for those 2 combined effects, which is one positive, one negative, net-net, we put additional provisioning. We haven't released net-net provisioning. On the other hand, we put additional provisioning out of those total 2 new provisioning policies.

[Zeynep Nihan DINCEL, executive]

And Alan has another question. Could you please explain the strong trading result in 1Q 2020, excluding the swap costs?

[Ali Tahan, executive]

Actually, all the sub items were supporting the tradings line -- trading activities, both on the fixed income and equity side from customers, as well as a huge amount of ethics transactions conducted by our customers, both on the retail as well as corporate side. And on top of that, we also enjoyed some additional profit out of security portfolio sale in -- especially in the beginning of the quarter.

So even despite swap losses, thanks to all supportive sub items coming from trading activities, coming from FX exchange gains, we had a positive and strong trading income in the first quarter of the year.

[Zeynep Nihan DINCEL, executive]

The next question came from Mariana from William Blair Company. Could you please comment further on the new provisioning policy adopted to the Carbon Border Adjustment Mechanism? Is the bank increasing existing provisions for the high emitting sectors for 100%? Or are you increasing the level of provisioning to 100%?

Also on NIM, could you please explain why the provisions may decline Q-on-Q? This trend diverts from what we have seen in price expense results.

[Ali Tahan, executive]

Correct me if I am wrong, according to our data, we don't -- let me double check actually.

Q-on-Q, right. From 3.9% to 3.7%, it is actually related to some spread -- core spread construction, especially on Turkish lira side. This is the driver of relatively small contraction in swap-adjusted net interest margin side on Q-on-Q. However, this contraction on [ TI course break ] compensated by additional fee income growth. So at this stage, there was some sort of trade-off between cost of debt and net fee and commission income growth. Remember in the beginning of the year, we were guiding a much more moderate fee income growth. But as of first quarter, we delivered almost double our fee income.

So at this stage, there was some sort of trade-off between interest income and fee income. But still, overall headline quarterly swap adjusted net interest margin levels are way above than what we did last year and way above than what we were thinking in the beginning of the year for this year.

In terms of new provisioning policy, I mean, for the -- both industries, especially on the high carbon industry, for most of them are at Stage 1 and Stage 2. Of course, according to our internal scoring system, we were already putting some provisions for those companies, which is in line with our overall Stage 1 and Stage 2 provisioning. But we did is simply the -- 100% increase our provisioning level for those companies.

In terms of base effects, it is not a big game-changer, but it just reflects our understanding. And I'm not asking why we just increased the provisioning or why we didn't increase the RWA. I mean, it will -- maybe at a later stage, it may also be possible. These issues have to be implemented gradually rather than making all of them happen at the same time. We just doing a step on that front and maybe at a later stage, we may further develop this area. At time of the day, it is not a regulatory mark. It is just our internal motivation and internal deal. We believe such provisionings policy change, this will be suitable with our ESG understanding and ESG implementations, and we believe it will also be a good example for the rest of the Turkish banking sector.

[Zeynep Nihan DINCEL, executive]

Another question from Mariana. Are you revising the cost of credit guidance as a result of new provisioning methodology?

[Ali Tahan, executive]

For cost of credit, I mean, I think you are referring to net cost of risk. Just to be at the same page in the beginning of the year, we were guiding 150 bps net cost of risk. But in the first quarter, we had 225 bps.

The gap is not the result of this new provision policy related to this carbon -- high carbon economy. Rather, it is much more linked to additional provisioning increase for Stage 2 and total NPL coverage. After seeing also second quarter financials in line with the potential revision in the other guidance numbers, we may also change our net cost of risk guidance for the rest of the year.

[Zeynep Nihan DINCEL, executive]

The next question came from [ Sablay Kumarja, Valentos Management ]. Congratulations on good numbers and thanks for the presentation today. Would you please provide some information with us on bank situation change for both loans and deposits?

[Ali Tahan, executive]

Thank you, [ Sablay ]. I mean, I think you are referring to maturities in terms of lending and deposits, especially on the commercial lending side. Now, because of the relatively high inflation environment, we prefer our commercial lending activity to be more short-dated rather than previous medium-term duration and maturity. So at this stage, the real difference in terms of the duration at maturity can be seen on the commercial lending side.

From a retail side, the duration and the maturities didn't change materially compared to last year. However, a real change, a real shortening of the duration was seen on the commercial lending side. And to the extent possible, we were providing relatively short-dated commercial landings with more floating rate, which is creating a natural hedge in terms of net interest margin evolution, especially in case there is different lay of evolution on the policy rate.

For the deposit side, I mean, there is nothing new. We have some conversion from hard currency to Turkish lira within the concept of this FX net deposit product. And we already shared the numbers related to portfolio size. This is also in line with our market share on the deposit side. But in terms of the maturity of deposits, whether it is hard currency or FX index, we don't see too much difference compared to past.

[Zeynep Nihan DINCEL, executive]

And the last question on the left from [ Mar Uro, KBS ], can you please a rough idea on percentage of loans fall off for the -- we are saying command of business loans, budgets, exports, agriculture, investments, et cetera?

[Ali Tahan, executive]

Actually, [ Uro ], this is a question I am not fully aware of the results. Let me study this, and we will come back to you via email. I think that was the end of the also written question. Rob, if there is no any other questions, please, let us move.

[Operator]

Yes, no more questions, Mr. Tahan. If you'd like to conclude, that would be wonderful.

[Ali Tahan, executive]

Thank you, Rob. Thank you very much for all participants. As always, we are at your disposal. If you have any follow-up questions, you can reach out to me, Nihan ,[ A.J. ] and all other Investor Relations colleagues. We will be trying to as helpful as we can.

Thank you, and have a lovely evening to all of you. Thank you.

[Operator]

Thank you, Mr. Tahan.

And ladies and gentlemen, that concludes today's webcast call. Thank you for your participation. You may now disconnect.