Turkiye Vakiflar Bankasi TAO

IST:VAKBN.E

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, welcome to the VakifBank Second Quarter 2023 Conference Call and Webcast. There will be a question-and-answer after the presentation. [Operator Instructions]

But right now, it is my privilege to hand you over to your host, that is Mr. Ali Tahan. He's the Head of International Banking and Investor Relations for VakifBank. Sir, the floor is yours.

[Ali Tahan, executive]

Thank you, Rob. Thank you very much. Good afternoon, everybody, and welcome to VakifBank Second Quarter 2023 Earnings Presentation Call. As always, we will start with the presentation. After the quick presentation, we will be more than happy to answer your questions.

Starting with the first page in the presentation. This quarter, in terms of earnings and net income, it was a weak quarter, but it was not something unexpected. More or less, our net income of around TRY 1 billion in the second quarter was in line with the market consensus. We believe that was the bottom out in terms of profitability.

And especially in the second half of the year, we are much more optimistic in terms of efficiency, profitability and ROE. And with such TRY 1 billion second quarter net income, first half numbers came cumulatively at TRY 5.5 billion.

But when we look at -- to the pre-provisioning profit compared to same term of the previous year, first half 2022 versus first half 2023, we have slightly up 5.4% increase year-over-year from TRY 23.7 billion to almost TRY 25 billion. Of course, the gap in pre-provisioning profit and net income can be partially explained by additional coverage ratios compared to a year ago.

In terms of NPL cash coverage ratio, we had almost 3 percentage point increase from 79% to a more than 82%. This is also the case for Stage II coverage ratio from 18.3% a year ago to 22.1% as of first half of 2023. And as a combination of those 2, total NPL coverage ratio went up significantly from 160% to 218% almost, which is indicating almost a 58% increase.

After such relatively weak quarter, because we believe in this quarter, especially the regulatory, all negativities reflected in our P&L and in our financials. With the new environment in Turkey after the elections, with the new investor-friendly and relatively more market-friendly environment, especially taking into consideration some [ easening ] on the banking regulation front, things will change pretty quickly for us.

And therefore, because of the dynamics, one of them is related to CPI, because in the first half of the year, we had TRY 20 billion interest income from our CPI linker Turkish lira security portfolio. But given Central Bank of Turkey recently revised year-end inflation target to 58%, we also updated our models and our estimations.

And in line with this understanding with the revised Central Bank expectation for lira, now we expect additional TRY 39 billion total interest income in the second half of the year, which is a huge increase compared to TRY 20 billion in the first half. That will be one of the main drivers of optimism for net earnings in the second half of the year.

And on top of that, especially for VakifBank, we are also witnessing a very strategic recovery in our Turkish lira core spreads. As of today, during July and so far in August, indeed, we are witnessing a very strong recovery in our Turkish lira net interest margin compared to second quarter numbers. On the one hand, we are enjoying relatively lower cost of Turkish lira deposits. And on the other hand, we are also having relatively higher loan yield as a result of increasing the core spreads.

Therefore, Turkish lira's interest margins in the core spreads business seems to be improving in a very speedy way. And because of both CPI impact and because of this net interest margin recovery on Turkish lira core spreads, we believe second half of the year will be way stronger than our relatively humble performance in the first half of the year.

Next page refers to the important highlights of the quarter. Of course, especially on the P&L, 2 items seems to be very important. One of them is related to fee income. Because of the relatively low level of Turkish lira core spreads, in line with the other Turkish peer group banks and in line with the overall Turkish banking sector, we also enjoyed eye-catching fee income growth.

Quarterly base, we had 25% increase. And on annual base, we had 125% increase in our fee income performance. And as a result of that, fee-to-OpEx ratio came at 52%, which is one of the highest.

And apart from this fee income, of course, trading income was especially very supportive for the overall revenue generation capacity. We had a strong trading income, especially in the second quarter of the year, driven by both FX exchange transactions as well as timely trading of securities.

In this quarter, we enjoyed a TRY 9.3 billion trading income, which is up by almost more than 300 percentage points Q-on-Q. FX exchange gains are up by 365% and trading security gains are up by 245% Q-on-Q. So fee income and trading income, they were the main drivers of revenue generation.

On the balance sheet side, our selective loan strategy, which is also in line with macroeconomic policy of the new government, on track. Total loans in this quarter are up by 17%. All of some are driven by Turkish lira.

In Turkish lira loans, we had 11.5% increase in Q-on-Q, mainly driven by selective segments in key areas, mainly coming from commercial segment rather than retail. And on the FX side, actually, our shrinkage in dollar terms, in real terms, also continued during the second quarter. And our FX loan book shrinked additional 3.6% in this quarter.

Apart from lending growth, especially strategic positioning on interest-earning assets was also important. Deliberately, just to make sure we will be well positioned for a rate hike cycle in terms of policy rate, we deliberately converted a vast majority of our loan portfolio and asset portfolio to the floating. As you can see, as of first half, 80% our Turkish lira loans are floating. And with the increased level of policy rate, it means we will also enjoy relatively higher interest income.

The same also true for Turkish lira securities. 2/3 of our Turkish lira securities are also floating and those ratios, especially the share of floating loans within Turkish lira loans, with 80% in our case, may be one of the highest in the peer group, which is creating additional upside for us for the second half of the year. Apart from that, liquidity levels during the second quarter continued to rise. [ Factoring the ] LCR ratio, that's hovering around 400%, total LCR ratio came at 176%.

As of second quarter, on top of those very strong LCR ratios, as of June end, we have still around TRY 7.5 billion free liquidity and net stable funding ratio, which is available pre ratio, actually, differently introduced by Turkish regulators, came also strong at 113%, comfortably above than the minimum threshold of 100%.

LtD ratios were also comfortable. Total loan-to-deposit ratio further came down to 90% area, which was 2 or 3 percentage points higher as of year-end. And more importantly, Turkish lira loan-to-deposit ratio came down to 106%, which was 120% a year ago.

On the next page, the important thing is related to free provisioning. This quarter, we released additional TRY 250 million free provision. But still in over the last year, we are remaining -- we have remained TRY 6.7 billion free provisioning.

And compared to peer group, this is one of the highest numbers in Turkish banking space. I don't expect there will be no need to release end of this free provision in the second half of the year because of the reasons we discussed, CPI linkers and very speedy recovery on Turkish lira net interest margin business side.

Profitability will be very strong in the second half of the year. So therefore, there will be no additional free provision credit in the second half of the year. And on the contrary, if needed, for some reasons, we may put additional, but we will decide by the end of the year. But the thing is there will be no free provisioning relief for the second half of the year.

Next page is related to net interest margin. Swap-adjusted net interest margin in the first half of the year came around 1%. Remember, we were guiding around 3.5% net interest margin for the full year of 2023. So compared to our initial guidance, first half performance, relatively weak, and this is mainly driven by regulatory environment, actually, as we mentioned.

But this effect is fading away. And thanks to additional CPI contribution and thanks to additional -- speedy recovery in the Turkish lira net interest margin, still, we expect our initial net interest margin guidance, not adjusted net interest margin guidance, of 3.5% for the full year, still can be doable.

During this quarter, because of the redemptions compared to a quarter ago, we had small shrinkage in our CPI portfolio. CPI linker secured portfolio came down to TRY 142 billion as of June, which was TRY 147 billion a quarter ago. But during the month of July, especially, we continue to accumulate CPI linkers.

And after such accumulation, Central Bank of Turkey also revised lira expectation to the 58% area. So in the past, our additional CPI linker accumulation, especially during the month of July, it seems to be also very timely and very supportive for the P&L. So there will be additional upside on top of TRY 39 billion, a conservative assumption for the second half of the year interest income from CPI portfolio.

And when we adjust our CPI numbers only in third quarter, our net interest margin in third quarter will be up by 316 basis points. And similarly, our annual net interest margin would increase up by 168 basis points. But these are just taking into consideration CPI impact on a relatively conservative basis.

I think also, because on the one hand, although CPI amount is still going up, and on the other hand, there may be additional upside to October-to-October CPI data. So as a result of that, we believe, even with the conservative assumptions of today, we have minimum TRY 39 billion.

And this TRY 39 billion CPI contribution creates such positive impact in our net interest margin in the first quarters and there will be more, of course. Therefore, the bottom line is, even though the first half swap adjusted net interest margin is well below than our full year guidance. Still, thanks to those points, we believe a 3.5% area swap adjusted net interest margin for the full year can still be doable and achievable.

The next page is related to fee income. Fee income was one of the positive side of the P&L, up by 124% year-over-year on a cumulative basis. And this is a more than sector average slightly. Sector fee income growth in the same period came at 118%, and our [indiscernible], slightly up compared to sector numbers. And almost half of the fees are coming from lending-related, cash lending-related activities.

Payment System has 28% share in total fee income base. Insurance had 9% and [ LG ] and [ LC ] related noncash-lending activities has 13% share in our total fee base. Quarterly-wise, this quarter, we enjoyed additional contribution from Payment Systems, as you can see on the left-hand side below chart. But in terms of annual growth, of course, cash lending-related fees were the main driver, relatively, of higher performance.

We believe in the second half, in line with the recovery on Turkish lira net interest margin [ site ]. With this strong momentum and may not be continued, but still, we believe full year net fee and commission income growth will be triple digits, a minimum 100% for the full year. So second half, we may see some decrease. But still, we believe, for the full year, fee income growth will be above 100%.

And on next page, on Page 8, you can see the numbers related to OpEx and costs. Our OpEx growth also, more or less, in line with sector, up by 157% year-over-year on a cumulative basis. And this is the number, with the exclusion of TRY 12 billion donation to earthquake area actually. In the first half of the year, because of relatively low revenue generation capacity, cost/income ratio materialized relatively higher compared to our recent performance in the last couple of years and came in to 37%. However, the optimism also valid for cost-to-income ratio. And with both strong revenue generation capacity as well with the high-quality revenue generation capacity, we still expect full year cost-to-income ratio came down to 30% area for the full year of 2023.

And starting with Page 9, we may switch to a balance sheet side. This quarter, as we highlighted in the second page of the presentation, selective Turkish lira growth in key segments was the important development of the quarter. Almost all of the quarterly Turkish lira lending growth came from commercial lending, especially on corporate and commercial lending side, we had around 25% growth.

On the SME side, we had around 11% growth. Some of them are also linked to earthquake support package, which is also covered by [ CGF ] facility of the Turkish government. But when the issue comes to retail lending, in line with the policy of the current administration, that was relatively -- it was 4% up only Q-on-Q.

And in terms of the total lending growth this quarter, we were slightly lower than sector net-net. Sector total loan growth came at 17.5%. Our number was slightly lower than that, 16.8%, but we were selective and we were mainly focusing on real economy and real sector. And we are still keeping our strong position in terms of market share. We are still keeping the second ranking in terms of market share in total loan portfolio as well as hard currency portfolio.

And similarly, we are also keeping our third ranking in Turkish lira loan portfolio, with a more than 13% market share. And as of this quarter, another important highlight is the fact that, for the first time in this quarter, our nonretail lending volume exceeded TRY 1 trillion threshold, and this is also important for this quarter.

Next page, Page 10, is related to breakdown of loan portfolio. It is not changing too much compared to previous terms, both in terms of currency and in terms of the interest rate structure. 70% in local currency out of total loan portfolio and 30% in hard currency loans. The share of hard currency loans are also coming down slightly despite real shrinkage because of depreciation, it came in -- changing very limited.

And in terms of interest rate structure, for the loan portfolio, as we discussed, 80% floating, only 20% at fixed rate, mainly retail loans. And for the hard currency lending, 69% almost coming from floating rate loans and the remaining 31% coming from fixed rate.

Next page is related to asset quality. NPL ratio in this quarter continue to come down because of the mainly denominator effect and cost depreciation. NPL ratio came down to 1.64% as of June, which was 1.80% a quarter ago. At the same time, in Stage II ratios, within the share of total loan portfolio, slightly also came down by 7.2% a quarter ago. And as of June, it is slightly lower than 7%.

And net cost of risk during the quarter came at 117 basis points earlier and, as a result, first half net cost profit cumulatively came at 94 basis points. And to remember, our initial guidance for the full year in terms of net cost of risk was 100 bps, and I believe this is realistic and this should also be the case for the full year.

Next page is related to deposits. A well-balanced deposit portfolio maintained during this quarter. Similar to total loan portfolio, our deposit growth also came slightly lower than the sector. We have demand around 12% Q-on-Q deposit growth, and especially Turkish lira deposits were flattish. Hard currency deposits, they were also a slightly down, let's say, in other terms. But because of depreciation, net-net, we are having still around 12% Q-on-Q total deposit growth.

As you know, as of today and as of June, in terms of the CBRT regulations, our ratios in terms of TL deposits over total deposits for retail and commercial segments are above than Central Bank of Turkey. Threshold level of 57%, retail ratio -- retail deposits over total deposits are at 60% and commercial deposits over total deposits at 61%. In both areas, we are above on this ratio, and we are in line with Central Bank regulations. And in terms of the liquidity, as we discussed, especially Turkish lira loan-to-deposit ratio still continue to come down and came at 106%.

On the next page, you can also see the breakdown of wholesale funding. We are still keeping around $12 billion total international funding. Out of $4.5 billion will mature in 1 year period, including syndications and principal payments from DPR and IFI transactions and from Eurobond redemption paper, and the remaining $6.3 billion coming from long-term perspective.

Very recently, after closing the quarter, in line with the improvement in the overall environment and market conditions, we also obtained a $500 million secured funding from an international country party, with 5 years maturity. It was a typical market-sized global issuance deal. But I think it is important, especially in terms of the improvement in the investor sentiment and in the market conditions.

So this very recently happened. And we are also witnessing more interest on international funding side. It seems to be possible, especially with the involvement of new names coming from the different parts of the world, which is also promising for that area.

The next page I would like to take your attention is related to solvency ratios. This quarter, because of the mainly depreciation effect, solvency ratios came down, total CAR came at 14.85%, which was 15.84% a quarter ago. And Tier 1 ratio came at 13.36%, and CET1 ratio came at 11.33%. All of them were comfortably above our internal risk appetite levels as well as regulatory levels. But especially in this quarter, both as a combination effect of currency depreciation as well as relatively weak quarter in terms of profitability, we see some decline in our solvency ratios. But given most of the depreciation seems to be already taken place, and on top of that, a very strong profitability in the second half of the year. We believe our year-end solvency ratios will be higher than what we reported as of June end.

And the next page is related to a detailed information related to especially sustainable banking, which is becoming even bigger and bigger in our daily activities. Therefore, our Investor Relations colleague had 3 different pages related to sustainable banking activities and sustainable banking approach, and other pages are mainly coming from the regular stuff.

At this stage, I don't want to take too much of your time. Thank you very much for your listening. And at this stage, I would like to leave the floor to Rob again, and we are more than happy to answer your questions.

[Operator]

Thank you, Mr. Tahan. Thank you for that incredible presentation. Much appreciated. All right, ladies and gentlemen, it is time now for our question-and-answer session. And as you heard Mr. Tahan say earlier, where he welcomes any questions you might have.

[Operator]

[Operator Instructions] And we will take a question, first of all, from Mehmet Sevim from JPMorgan.

[Mehmet Sevim, analyst]

I have a couple of follow-up questions. Firstly, maybe on loan growth. You talked about the deceleration that you saw in the second quarter, particularly versus the sector, which is not a big difference, but I was just wondering how you see the loan growth dynamics going into the second half of the year, particularly in the context of the government's new policies, but also the overall tightening that we're observing in the environment. So what -- where do you see loan growth in the second half? And maybe also in the context of the improvement in the solvency ratios that you are expecting by the end of this year?

And secondly, just a very quick follow-up on the CPI linker valuation. Just so that I understand it correctly, so you're currently valuing them at 51%. Is that correct? Or is that the expectation for the third quarter? If you could just clarify.

[Ali Tahan, executive]

Thank you, Mehmet Bey. Starting with the first question, in terms of the lending growth, you are right, especially very recently, we are witnessing a lot of tightening conditions from the regulators. And in line with this development, actually, we are not changing our full year guidance. Just to remember, we will keep saying that for Turkish lira loans, our lending growth will be in line with the sector. So on Turkish lira side, we don't want to share market share, and we don't want to gain additional market share. We would like to simply preserve our very strong market share on Turkish lira lending side.

But on Turkish lira side, we are selective. We are especially supporting companies operating in key segments like manufacturing, like export-oriented companies, like companies supporting the employment sector. So we have key segments, key factors to support, especially in the second half of the year. But net-net, we believe our Turkish lira loan growth will be in line with the overall banking sector.

For the hard currency side, we are still keeping our initial guidance for the full year and, indeed, it is happening. Just to remind you, in the beginning of the year, we were using single-digit contraction in hard currency loan portfolio in dollar terms. And in this environment, I think it will continue to be the case for the second half of the year, and it will also support us in terms of capital management. Because the recent appreciation, especially thanks to hard currency interest-earning assets, are creating too much pressure on solvency ratio.

So especially for the second half of the year, in line with the full year guidance, we believe we will see single-digit contraction in our hard currency loan portfolio year-over-year basis. And for the solvency ratio, I mean, it is not easy to give a specific number. But we believe our solvency ratios also bottom out in the second quarter of the year because most of the depreciation already happened in the second quarter. And on top of that, profitability-wise, second quarter, by far, is the weakest quarter of the year.

So in the second half of the year, the level of depreciation will be relatively limited compared to what we witnessed in the second quarter. But more importantly, the profitability-wise or more profitability will be very strong. Both profitability ratios, efficiency ratios will improve. At the same time, it will be driven by high-quality revenue-generation capacity.

And especially in the second quarter, a platform piece, NII, relatively was weak and mainly revenue-generation capacity was coming from other income and trading activities and FX exchange gains. But in the second half of the year, we believe there will be also a normalization in terms of revenue composition, and it will be driven by mainly high-quality revenue items.

So net-net, because of relatively limited depreciation in the second half as well as because of the additional very strong profitability outlook, we believe the second quarter performance ratios are the weakest quarterly ratios, and it will bottom -- it will increase each and every quarter going forward.

For the CPI numbers, in the second quarter, our estimation for October-to-October CPI was 34%. But recently, given Central Bank of Turkey revised year-end inflation expectation to 58%, this 58% year-end inflation numbers take us to 50.8% October-to-October inflation data. So this 50.8% is coming with the assumption that year-end inflation numbers will be 58%, which is in line with Central Bank Turkey guidance. And with that adjustment, 50.8% CPI estimation for the third quarter, we expect TRY 23.5 billion interest income because with 50.8% October-to-October CPI estimation, we will also make collection projects first 2 quarters of the year. So therefore, most of the CPI contribution will be reflected in third quarter.

However, most of the Turkish lira net interest margin recovery will be seen in Q4 rather than Q3. So therefore, both third quarter net interest margin outlook as well as Q4 net interest margin outlook seems to be very supportive. I hope these are sufficient for your questions.

[Operator]

So we've got a question here from, I believe, it's Waleed Mohsin from Goldman Sachs.

[Waleed Mohsin, analyst]

A couple of questions here from my side. You talked a lot about some of the changes or the focus areas for the bank, which will further solidify the performance in the second half. Ali Bey, I was wondering what do you think are the key risks at this moment? Deposit costs have come down, and I wanted to get your sense on do you see any risks that the deposit costs can again start going up sharply as we saw in the second quarter and what prevents such an outcome from happening? And maybe together with that, you can also talk about you did touch upon the NIM trajectory, which will be better in the second half and you spoke at length about the CPI linker contribution. But maybe on the underlying NIM, excluding CPI linker, I mean, what protects them from increasing cost of funding?

And then the first -- my first question, basically, on the -- what are the key risks that you're monitoring, which could impact second half performance? And third and final question, asset quality, maybe if you can touch upon that. You've talked about how you built up buffers. Any sectors, any areas which are seeing stress given the volatility that we've seen in the FX side and also on the rate side?

[Ali Tahan, executive]

Thank you, Waleed. It is very nice to hear from you. Actually, in terms of the risk factors, I mean, you are also covering Turkish banks for many years, and you are also closely monitoring the market very closely actually. I mean for a long period of time, Turkish banking sector had a lot of risk factors on table. And we were trying to make business in the middle of those risk factor environment. Of course, these are not related to banking sectors, in fact, it was mainly driven by other external factors. But the good thing is Turkish banking sector still was performing for many years in the middle of those external risk factors coming from COVID, coming from different volatilities, coming from the currency market, coming from different factors, et cetera. We are [ all available for ] these factors.

But the good thing is with the new environment, especially after the elections, most of these risk factors seems to be fading away, and maybe this is the first time after such volatility, we will be making business in the environment where any potential risk factor apart from banking sector will not create additional too much pressure over profitability, over liquidity, over balance sheet management, et cetera. So of course, cost of funding increase may be possible. And very fact speaking as of today, maybe we are at the bottom up in terms of cost of Turkish lira funding pricing, especially on the deposit side.

Going forward, we may see some additional increase in Turkish lira cost of deposit. But the important thing, especially for us is rather than the cost of funding side, the important thing is the pricing of our Turkish lira loan portfolio, especially from Turkish lira net interest margin point of view, that will be the main parameter, that will be the main factor actually. And this policy rate cycle is helping us. The more we see policy rate hike, the more we enjoy a better asset yield and better loan yield, which will be much more important compared to potential rate increase in the cost of funding.

So my point is, especially from risk factor, yes, this potential Turkish lira cost of deposit funding increase may be a risk factor, but I think we can even manage it and more important point here is the pricing of the loan portfolio. Because unlike to private peers, we are not generating too much relatively high-yield retail loss because of the -- our position in the market and because of our strategy to support key real sector areas like the bank I mentioned a couple of minutes ago. We are providing more commercial loans. And commercial loans, most of them are at the floating rate and they are linked to policy rate. And therefore, in terms of P&L outlook and in terms of net interest margin outlook, because of this loan profile and because of this selective loan strategy, I believe the policy rate in fact will be very critical.

And the more we see a higher increase in the policy rate, the more we will enjoy better net interest margin and better efficiency. In this environment, I think additional cost of funding increase from net interest margin point of view can be manageable. And in terms of risk factors, these many risk factors seem to be fading away. Very frankly speaking, we don't see a real potential risk factor apart from this limited cost of funding increase on the deposit side. And maybe who knows, while we are talking to especially fixed income investors or when we talk to credit colleagues or our FI business, we are also talking a lot in terms of rating and outlook of Turkey and Turkish banking sector. Who knows, maybe going forward with the normalization and rationalization of macro policies with the transparency of the new economic administration team, maybe with more investor-friendly, market-friendly, medium-term program of the current administration, we may also enjoy maybe outlook upgrade or rating upgrade in coming quarters, which may be also positively affect all banking environment. So my point is in terms of risk factors, all the potential risk factors, which in the previous terms discussed as a concern, seems to be fading away and overall environment seems to be very supportive. Only risk factor can be related to potential increase on the cost of funding side. But I think we are sophisticated enough to manage this cost increase in our net interest margin business.

In terms of the asset quality, I mean, this inflationary environment, relatively high inflationary environment is creating additional burden for asset quality because of the all-time LTV ratios. Because as you know, in the last couple of years, especially real estate assessment values increased dramatically in Turkey and [ stabilized, especially big steel ]. And as a result of that, all Turkish banking sector enjoyed all-time low LTV ratio.

Let me give you some numbers. In our case, for example, VakifBank, normally, under the last decade maybe, in average, we have around 50%, 5-0% LTV ratio. But currently, because of the increase -- recent increase and recent dramatic increase in profile to values, as of today, this LTV ratio is holding around only 20% and this 20% may be all-time low. And therefore, this is motivating people to make payment to the banking sector. The willingness to pay, especially on the Turkish website, seems to be very high because nobody would like to lose their property, their home, their office, they allot for a small amount of debt compared to the real value of their property.

So therefore, especially for the Turkish lira fact, asset quality, especially in collection performance because of this factor seems to be very strong. The risk factors we may see, we don't know yet. On asset quality can be related to NPL inflow that may come from earthquake region. As you know, in February, we had a very massive earthquake affecting 11 cities of our country.

And as a support to the region, all the banks, all the big banks of Turkey and to my knowledge, all Turkish banking association members already provided 6-month break for all retail and commercial companies operating in this earthquake region. And it is coming to an end, it will come to an end by September. We don't know whether we will provide additional break or not, postponement or not. But the thing is there may be some NPL inflow out of this earthquake region after this pro forma period is over. And it may be only visible in Q4 earlier in case there is no additional postponement.

So as a conservative bank for this risk factor, we already provided additional net gross profit for earthquake-related cities, earthquake-related exposure. For the information, we have around 10% of our total exposure to those earthquake region. [indiscernible] compared to other cities. For the earthquake region, most of our exposure are [indiscernible] some companies, we have some people are lost and some of the [indiscernible]. understood as of Q4 but not before. I think we put your vision with it [indiscernible] if I missed anything.

[Operator]

. We do apologize for the poor quality coming through that. So Mr. Tahan, I don't appear to have any more audio questions. So if you'd like to move on to the written questions. Over to you.

[Ali Tahan, executive]

Yes. Thank you, Rob. Nihan, if there's any written questions, we can continue with that.

[Zeynep Nihan DINCEL, executive]

Yes, Ali Bey. Thank you. We have a couple of questions on the web. There is one. The first one is coming from [indiscernible]. As was the plan, are you able to charge 37.9% or 1.8x cash on Turkish lira business loans, along with the other price peers?

[Ali Tahan, executive]

Thank you. Yes, this is the current CapEx, 1.8x. Up until recently, we also had a 1.4x option, but this option no longer available. The only CapEx is 1.8x. For some risk, especially for some relatively higher risk areas for the -- of course, it is an outcome of the -- our scoring methodology is for SME or for a corporate company. If of course coming from relatively low rating, let's say, we can charge 37.9% maximum interest rate. But if the internal scores of the company is relatively higher, it is coming down. So it is up to the company, it is up to the collateral. So there is not only one determinant, there are a lot of points we need to take into consideration before deciding on the pricing. But especially for relatively low-rated companies, especially with the low collateral companies, we can charge this maximum 38% interest rate cap.

[Zeynep Nihan DINCEL, executive]

The next question came from [indiscernible]. I have two first questions. What are the cost of deposits and yield from loan installed as rates as of the last data? And what are your expectations on the policy rate for the next half of the year? And secondly, may I ask how loan growth affect the capital adequacy ratio negatively.

[Ali Tahan, executive]

Sorry. Can you repeat the last question, Nihan?

[Zeynep Nihan DINCEL, executive]

How loan growth affect the capital adequacy ratio, CAR, negatively, loan growth effect.

[Ali Tahan, executive]

Okay. Thank you. Thank you, Nihan. Thank you very much. Especially as of today, we are seeing that from a marginal point of view, our additional structural lending creates positive net interest margin, which was not the case, especially during the second quarter. And this is the main driver reach performance in the second quarter. So marginal lending update as of today compared to margin cost of funding, no longer produce negative net interest margin.

On the contrary, it is a positive already. And it will be very positive in a very short period of time because most of our commercial loan composition, loan portfolio is coming from floating rates, and they are mainly linked to policy rates itself or the outlook actually, and their maturities are very short dated. So therefore, in a very quick period of time, in a quarter period of time, this pricing effect, we believe, will be fully completed.

Therefore, even in the third quarter, Turkish lira interest margin side, we will see a very strong recovery compared to second quarter but even better recovery with the current conditions, of course. We will be even a better Turkish lira, net interest margin recovery will be available in Q4. So for the second half, Turkish lira and overall net interest margin, especially in third quarter because of the collection of CPI estimation cumulatively, there will be more upside for overall net interest margin from CPI portfolio.

And for Q4, the real upside will be coming from this structural cost effectiveness side. So therefore, Q3 will be mainly driven by CPI. Q4 will be mainly driven by Turkish lira cost effect improvement. This is actually why we are still optimistic that our initial full year swap adjusted net interest margin recovery of 3.5% can be achievable and doable despite to the fact that it was only 1% in the first half of the year.

For the second question, I am trying to dial in from a removed place. Therefore, from time to time, quite often, data may not be strong enough. But as far as I understand the question, it was related to a loan effect of how to see depreciation effect on solvency ratios. And as we depicted in our presentation on Page 14, every tranche depreciation of the currency or every constant depreciation of currency has 20 bps impact in our solvency ratios. But as I mentioned, especially for the second half of the year, on the solvency ratio side, on the one hand, depreciation -- additional depreciation will be very limited compared to what we had in the second quarter.

And on top of that, profitability-wise, profitability will be way stronger. Therefore, we believe solvency ratios also bottom up as of June and it will be strong both in third quarter as well in Q4. So year-end performance ratios will be comfortably higher than the levels you saw as of [ July ]. I hope I give the right answers for the questions you asked. Thank you.

[Zeynep Nihan DINCEL, executive]

Yes, Ali Bey. And the next question came from Valentina, Barclays. What was the FX liquidity in first half '23 in dollar billion? Also, you have in fact after insourcing FX liquidity from alternative sources, how do you think about current market conditions in the context of your bond issuance plan for the rest of the year?

[Ali Tahan, executive]

Thank you, Valentina. Actually, I don't have the data related to first quarter, but I am sure after the call, Nihan and Investor Relations colleague may provide to you via e-mail. But I think it was also a comfortable number, and it was not too much different than the numbers we presented for June. In terms of the overall environment, you are right. I mean during the presentation, we also discussed about the very different, fresh secured funding we obtained from an international counterparty with the 5-year maturity and with the $500 million.

For this year, we don't have any reduction for the rest of the year. But as you know, the last time we came to DCM market was September 2021, almost 2 years ago. And with the current market conditions in case overall pricing will be at acceptable level from our treasury management point of view, we would like to also look for a fresh Eurobond issuance again, but I would like to some banks who came in the beginning of the year. We would like to look for 5 years rather than 3 years because for 2026, we already have sizable amount of redemption, and we don't want to put additional redemption for this year. It may be very painful.

So therefore, rather than 3 years, we would like to look for a 5-year fresh Eurobond issuance even though we don't have any redemption for rest of the year. And we also have a syndication in November with the improvement in the investor's perception, especially after May. We also see a lot of different banks, a lot of different FIs coming from different parts of the world seems to have interest for this syndication. I don't expect there will be no issue in terms of rolling over the second half syndication loans for overall Turkish banking sector. And on top of that, with the relatively good environment, we may see more Eurobond issuances for the rest of the year.

Definitely, we would like to be one of those in case this relatively good environment continue and in case overall pricing seems to be in line with the expectation of our treasury colleagues. And on top of that, we may also have some additional cooperation with different IFIs related to sustainability, ESG and earthquake support-related projects. So we will continue to be active on those areas, IFI-related funding transactions.

So to the extent possible, we would like to enjoy out of the current relatively investor-friendly market trend environment. And in line with that understanding, we will continue to diversify our external funding base.

[Zeynep Nihan DINCEL, executive]

Ali Bey, the last question we have from Ovunc, Yapi Kredi Yatirim. What is the level of fixed and low-rate mandatory Turkish lira bond portfolio, [indiscernible].

[Ali Tahan, executive]

Can you repeat the question again, Nihan? I apologize.

[Zeynep Nihan DINCEL, executive]

He is asking for the level of fixed and low-rate Turkish lira bonds that we received, I mean, accumulated because of the regulation.

[Ali Tahan, executive]

Thank you. Thank you very much for this question. Actually as of June, the overall portfolio with almost 6 years maturity, all the Turkish lira facilities we obtained because of these regulatory requirements but falling around TRY 45 billion and of course, it is changing every day. We are also trying to file in the secondary, but TRY 45 billion long-dated fixed rate Turkish lira security portfolio compared to an asset size of TRY 2.2 trillion, I think it is not a risk factor and overall impact on the P&L and on net interest margin can be manageable. That's our understanding.

The important thing from net interest margin point of view is related to real business on Turkish lira lending and on Turkish lira deposit management give an impact because of the relatively limited size and because of the relatively limited share in total interest on assets and in total assets. I think it is manageable.

And on the one hand, on the other hand, our treasury colleagues also trading and to the extent possible, trying to digest this kind of portfolio. So maybe as of third quarter, we may even have a lower such loan secured portfolio compared to June numbers, which is TRY 45 billion adoption.

[Zeynep Nihan DINCEL, executive]

No more additional questions, Ali Bey.

[Ali Tahan, executive]

Thank you.

[Operator]

Thank you very much. Mr. Tahan, as was said, there seems to be no more questions. So if you would like to conclude, that would be wonderful. Thank you.

[Ali Tahan, executive]

Thank you, Rob. Thank you very much for everybody. I mean it took a little more than one hour. But we are at your disposal if you have any follow-up questions to me or to Nihan or to our Investor Relations colleagues. We are at your disposal. Thank you very much for your time, and looking forward to seeing all of you again in the first possible occasion.

[Operator]

Thank you, Mr. Tahan. Always a pleasure. There we go, ladies and gentlemen. That concludes today's webcast call. I want to thank you for your participation. You may now disconnect.