Turkiye Garanti Bankasi A.S.

Hello, everyone, and thank you for joining us. Today, we are excited to walk you through our first half earnings results.

First, I would like to begin with macro environment that shaped the banking sector's performance. First, in terms of GDP, let me move first to the GDP part.

Yes. In terms of GDP, following 1% growth in the first Q, we now cast a quarterly growth rate of around 0.5% in 2Q, which will bring the first half GDP growth to above 3%.

Thus, for the full year, considering potentially supportive fiscal stance and no dramatic impact from weaker external demand, we maintain our GDP growth forecast of 3.5%, yet evaluate the balance of risk tilted to the downside. Rate cut evolution, developments in trade wars and the extent of fiscal discipline will ultimately shape the growth outlook.

Inflation is set to decline, supported by tighter financial conditions, moderating private consumption and lower commodity prices. Thus, we slightly revised down our inflation forecast to 30% from 31% for the year-end, following positive surprises over the last 3 months on inflation data.

CBRT's commitment to orthodoxy and the tighter monetary stance have contributed to the drop in inflation, the accumulation of reserves and reduction in market volatility. Hence, we believe conditions are settled to allow a carefully calibrated rate-cutting cycle.

Depending on the improvement in inflation dynamics, we do not rule out a similar 300 basis points cut in September NPC meeting. We still expect 36% policy rate by year-end with reduced cuts to 200 basis in October and December.

On next page, in terms of current account deficit, we expect current account deficit to GDP to slightly worsen to 1.3%. Tourism revenues are expected to be supportive, yet due to deterioration in core trade deficit and increasing net gold imports, current account deficit is expected to reach $20 billion.

Fiscal policies stayed expansionary in the first quarter and the efforts for consolidation later were limited. Therefore, considering the sensitivity on growth and employment, fiscal stance can remain supportive to some extent.

That means we may potentially see a policy mix where monetary stance is staying relatively tighter, meaning 5, 6 percentage point ex-post real rates and fiscal policy not being able to be tightened as targeted, we suggest cash deficit to GDP of at least 4% in '25. Moving into our financials.

I will start with headline figures. In the second quarter, we preserved our distinguished earnings strength and delivered TRY 28.2 billion net income.

This marks 11% quarterly EPS growth. Resilient NII, robust fee income and provision reversals from a few large-ticket items reinforce the solid earnings.

Accordingly, in the first half, we were able to generate TRY 53.6 billion net earnings, alluding to 30.7% ROE and 3.1% ROA. Now in the next slide, I would like to elaborate the drivers behind this earnings trend, starting with core banking revenues.

Core banking continues to be our main pillar of strength. We were able to increase our core banking revenue, both on a quarterly and annual basis on the back of well-defunded NII and growing fee base.

We experienced slight contraction this quarter due to longer-than-anticipated tariff policies, yet strong loan growth supported the NII base, which I will touch upon this detail in the coming slides. Net fees delivered a robust 15% quarterly growth with increasing contribution from payment systems.

Clean trading gains contribution was relatively modest due to mark-to-market losses on derivative transaction on a quarterly basis. Our subsidiaries contribution has been increasingly supported for our P&L.

As a consequence, this strong performance lifted our core revenues to assets ratio to 7.7%, the highest among peers, underscoring the sustainable nature of our profitability. And the big part of this success stems from asset mix.

Now moving to Slide 8. Our lending-driven asset mix remains as a key differentiator.

In the second quarter, performing loans share increased further to 57%, well above the sector average of 50%. Lending growth was across the board, and I will explain the key drivers of TL loans in the next slide.

But on foreign currency loans, with the growing support of international subsidiaries, we were able to register 12% quarterly growth. Here, I also would like to note that half of the growth was coming from the increasing euro-dollar parity impact.

In securities, we had CPI redemptions during the quarter, and we have been investing in long-term fixed rate securities since the beginning of the year. In foreign currency securities, we had opportunistic purchases during the year.

Moving into Slide 9 for further insights on loan portfolio. In the second quarter, TL loan growth accelerated compared to first Q and grew by 10%, reached TRY 1.4 trillion.

Particularly consumer loans and credit cards gained pace compared to first Q, and we had notable market share gains in these products. Our SME focus remains intact, and we further solidified our market position in micro and small enterprises with 24% market share among private banks.

While growing, we always act with prudency, as you know. Now let's look at the evolution of asset quality.

In the second quarter, increase in Stage 2 loans was limited as we witnessed some outflows from Stage 2 SICR and washed [indiscernible] portfolios due to their improved repayment performance. This also led a decline in Stage 2 coverage ratios, yet I would like to underline that there is no change in prudent provisioning and staging policies.

While our Stage 2 loans coverage is now 10%, if we look at TL and foreign currency breakdown, our foreign currency Stage 2 loans coverage remains healthy at 21%. Please also note that 86% of SICR portfolio remains nondelinquent.

Now let's walk through the evolution of NPLs. Our NPL ratio rose modestly to 2.6%, in line with expectation following the robust growth in unsecured retail segments.

And now retail and credit card portfolios accounted for around 70% of net NPL flows. Importantly, provisioning remains robust.

Total coverage ratio remains strong at 3.2%. If we look at the P&L of the provisioning on next page, as you know, we -- this year, we guided for higher cost of risk compared to last year due to increasing NPL inflows from unsecured loans and normalizing trade large-ticket collections.

And as of first Q, we have started to see this trend. However, in the second quarter, provision release of a few large-ticket items that were not unforeseen in the operational plan guidance led a quarterly decline in net provisions.

As a result, our first half cost of risk came in at 1.1% to 4%, way below our guided range of 2% to 2.5%. In the absence of large ticket collections, we will see a normalization in net cost of risk in the second half, yet due to better-than-expected first half, net cost of risk may end the year towards the lower end of the projected range.

Now moving to the other side of the balance sheet, how we are funding our growth. Not only in assets, but also in funding, we rely on customer-driven sources.

Total deposits make up around 70% of total assets and remain TL heavy. In the first half, TL deposits grew by 22%, mainly supported by sticky and lower cost deposits.

As such, retail and SME deposits share in TL stands at 68%. On a quarterly basis, TL deposit growth was limited, mainly due to flow to money market funds and our spread-focused pricing strategy.

In foreign currency time deposits, we witnessed a significant decline due to reduced market volatility and attractive TL deposits rate. We also maintained strong TRY 4.9 billion foreign currency liquidity buffer, providing ample cushion over long-term obligations.

While growing, we always keep a close eye on spread management as it is visible in our net interest income. In the second quarter, our core margin contracted by 21 basis points due to declining core spreads and higher net swap costs.

As you can see on the right hand of the slide, TL deposit costs increased by 100% on average due to longer-than-anticipated CBRT tight stance and increased market competition, coupled with recent regulatory changes. However, since July, TL long-term deposit spread has been widening and is projected to accelerate further in 4Q with the assumption of gradual easing cycle to continue.

Net swap funding costs increased Q-on-Q due to lower utilization of swap depot transactions compared to first Q. I would like to elaborate more on this.

In first Q, given our excess liquidity supported by significant deposit growth, we utilized swap depot, which reduced net swap funding cost. In second quarter, swap depot utilization declined and swap funding costs increased.

Therefore, there was increase in swap cost Q-over-Q, yet remained below previous quarter's average. We continue to use 28% in the valuation of CPI linkers and putting all this together with the help of lending growth, we were able to register growth in NII base.

Our balance sheet positioning and active management lie at the heart of our unmatched margin performance, which we will build on it in the next slide. We would like to present this slide every quarter in order to underline that our margin resilience is rooted in high share of TL loans and TL deposits.

In our TL assets, TL loans make up 60.5% of our TL assets, while securities account only for 13%. In this current environment, where loan yields are about 2x higher than securities, this presents a sustainable revenue advantage.

Please also note that within TL securities, CPI linker's share is only 38% and in a disinflationary environment, yield gap may widen further. On liabilities, TL time deposits represent 69% of TL liabilities.

And here, we continue to preserve our funding cost benefit versus repo funding in an increasing interest rate environment. We acknowledge that in a declining rate environment, this advantage may narrow, but we are well positioned to respond.

With an average deposit duration of just 1 month, we have the agility to actively manage our portfolio and protect our margins. Now in terms of fees, our fee growth remains remarkable, reflecting continued strength in payment systems, lending activities and money transfers.

In the first half, net fees rose by 57% year-over-year. Payment system fees continue to lead the growth with the support of accelerated credit card volumes.

On top of that, growing cash and noncash loans also contributed to the lending-related fees, including insurance fees. Digital engagement continues to deepen.

We have more than 17 million digitally active customers. And today, 99% of all transactions are carried through non-brand channels and 86% of product sales originate digitally.

Moving on to operating expenses. Our OpEx base growing in line with budget.

Operating expenses base increased by 69% year-over-year in the first half due to planned investments to build sustainable revenue generation streams. We have been investing in customer acquisition through salary promotions and to enhance customer experience and increase customer penetration, we have been leveraging the power of artificial intelligence and digitalization, which in return supports our revenue generation capability.

As you can see, our OpEx base is largely covered by fees, and we continue to have the lowest level of cost/income ratio among peers. As per our capital strength, our capital ratios remained strong.

Common equity Tier 1 stood at 12.6%, while capital adequacy ratio reached 15.6% without BRSA forbearance. To support our capital base, as you know, for future growth, we successfully issued $500 million Tier 2 in July, which will provide around 70 basis point uplift to our capital adequacy ratio and will reduce currency sensitivity by 4 basis points.

Now let's summarize the first half. We sustained our unmatched leadership in earnings generation capability backed by our customer-driven balance sheet growth.

We defended our NII well. Remarkable fee performance enabled us to cover 86% of operating expenses.

Large ticket provision reversals tied to recovery performance led a quarterly decline in net provisions. And as a result, we ended the first half with 30.7% ROE while maintaining sound capital ratios.

Now let's look at briefly what's ahead. In terms of TL loans, we are on track with our guidance, expecting slightly positive real growth compared to average inflation.

Foreign currency loan growth is faring better than guidance, largely driven by parity impact. As we discussed earlier, unbudgeted provision reversals in the first half brought our net cost of risk down to 1.24%.

In the absence of similar large ticket recoveries in the second half, we expect normalization in net cost of risk. That said, given the better-than-expected first half realization, year-end cost of risk may land at the lower end of the projected range.

On the other hand, this upside potential in net cost of risk could be offset by margin headwinds. Longer-than-anticipated tight conditions may result in 2 quarters of postponement in margin expansion.

Having said that, I want to highlight that our NIM evolution remains highly sensitive to market developments, particularly interest rates and funding behavior. Fee growth, on the other hand, continues to outperform expectations, led by payment systems.

This also creates upside potential in our fee to OpEx guidance as well. All in all, net interest margin headwinds is likely to be mitigated by large ticket provision releases and robust fee growth.

As a result, ROE is likely to settle near the lower bound of the guided range. So this concludes my presentation.

Thank you for listening. We now take your questions.

I have just a couple of questions, please. Firstly, on the trajectory of NIMs, and I appreciate this is the same question every quarter.

But obviously, you're now highlighting some downside risk to your NIM guidance, but it doesn't look like that we're too far off from the previous trajectory. So as you talk about the 2 quarters of a delay in the improvement of NIM from here relative to previous expectations, can I just ask where you would see the year-end NIM now and then the peak in the beginning of 2026?

So would it be reasonable to expect NIM to reach maybe about 7% or so by year-end now and then increase a bit further in 2026? That's my first question.

And then my second question is just about the unexpected or unbudgeted large-ticket provision reversals that you highlighted. I was just wondering if you can share a bit more on these?

What's the nature of those? And if we can expect any further surprises like that in the second half?

Thank you very much for the questions, Mehmet. First of all, trajectory about NIM, as you point out, we are not that much off the trajectory, but the compression on the NIM due to the volatility in March and further tightening of the interest and repo market forced us to see -- to observe this compression in NIM in the second quarter.

We saw the lowest point in mid-June. Since then, there has been an improvement.

But overall, in that 3 months time frame, majority of the time of that 3 months, we have been in a tightening phase. Therefore, the third quarter will be slightly higher than second quarter, potentially marginally better than the first quarter.

So the number, if I recall, was 5.1% first quarter. So it might be slightly over 5.1% and then towards the year-end, it will be closer to 7%.

So we'll see further improvement in the fourth quarter, especially. But if you look at the third quarter versus second quarter, we'll see a slight improvement over the first quarter and second quarter.

That's the trajectory. But when we give the guidance, we look at the cumulative year versus the prior year, we are hoping that we will get an average of 3% improvement.

That will be more of a true, but the exit NIM will be 3% from the beginning of the year. So that's a good news.

And then for the next year, we expect NIM to be around this, to be around the exit one slightly coming to the 7%, and it will be stabilized around that because of the -- also partially the CPI -- lower CPI as well, which will offset some of the gains there. But overall, that 6 months delay is related to the first quarter volatility and second quarter tightening, but the trajectory is the same.

So -- and we'll see the peak pretty much -- we looked at the scenarios, but I wouldn't say peak throughout the year, it will be relatively flat across the year. The second one question is related to unbudgeted NPL and the collection performance.

There were a few items we were expecting because of the collection performance, we will have the Stage 2 to Stage 1 provision release. But beyond that, in the second quarter as well, we have good collection performance in 2 energy projects, 1 real estate project.

And one of them was not expected because it was really written down and it wasn't really -- there wasn't much of an expectation on that, but it was a sale of an asset in the energy space. In the third and fourth quarter, there might be some surprises similarly, but not as much as the first and second quarter, but we'll continue to perform on that front.

I think the overall performance of the country and projections and decreasing interest rate environment encourage, especially in the energy space, real estate space further improvement and therefore, some interest in some of the forgotten assets we have on our book. So that's also a plus sign, but we are coming to the end of those as well, but there might be a few more surprises going forward.

I hope it answers. We had similar questions from Valentina from Barclays.

So if my prior answer is sufficient, then I'll pass the device Valentina. Please write us.

Yes. I think it's a good note.

When you look at the total picture in the second quarter, one might think we might have further improvements in ROE. We expect still in low 30s, but it's very difficult to estimate because especially in the first and second quarter, there was very good collection performance, which helped the numbers sufficiently.

We might -- in the base case scenario, we will not have as strong as the first 2 quarters in terms of collection performance, but the NIM expansion will help. Our cost of risk will go up close to 2% by year-end versus where it stands.

So that's the reason we have some offset of these 2 items. But if there is any upside, downside risk, I would say, it might be upside from what we put, but this is the base scenario.

It's really difficult to forecast some of the activity in the collection, whether through M&A or other activities.

Valentina, we have been opportunistic in that market, relatively going with the lower tickets as we needed basis. We might have actually further, especially in the Tier 2 space potentially and senior funding as well towards the end of the year based on the market opportunistically.

Just Valentina has another question, which I think -- Valentina, sorry, [indiscernible] first. There were similar questions about Valentina's and Mehmet's questions about the clarification on NIM.

Yes, from the beginning of 2026 to the end of '26, we expect relatively flat NIM because of the CPI versus NIM expansion. Therefore, to the point-to-point, we expect a flat performance.

But year-over-year, we expect an improvement, close to 100 bps average NIM increase 2026 versus 2025, which positively will impact our results in 2026.

Yes. My question is, maybe it's a bit early, but could you provide us some color on how you see margin fee growth into next year and risk costs?

Because I think it's pretty clear the trajectory in the second half.

Simon, yes, thank you for the question. In terms of margin growth, we'll continue to see that 1% improvement year-over-year, as I explained.

But in terms of fee growth, we will continue to grow beyond inflation on the fee for sure. That's our objective.

And in terms of cost of risk, we'll continue to see some reversal in provision in corporate loans this year. There will be less of that.

But I think normally, if you normalize for these collections, we would have expected closer to 2.5% cost of risk by year-end this year. So base case scenario, we expect next year a deterioration of 50 bps towards the end of the year, we expect this year to finish by 2%, next year, 2.5%.

Having said that, this is the base scenario. If we see that some improvement in retail portfolio, but it's early to call in terms of NPLs.

But given the many years of past history, I think somewhere between 2% to 2.5% next year is also something expected for '26.

And maybe since you're elaborating on these items, how about OpEx? I mean, do you think you'll find it challenging to control costs?

Do you expect them to grow faster than inflation next year?

Yes. No, not really, Simon.

The OpEx number we have shown had 2 parts, right? One, HR, and one non-HR.

HR side, we are investing quite a bit. In non-HR, it shows up in AI and data and digitalization of our operations in headquarter and branches as well.

So those investments are paying off and will be paying off in HR costs as well. But there is a part just from a accounting perspective, we show in non-HR, which is related to customer acquisition beyond digitalization, beyond advertising and so forth.

That customer acquisition cost is related to in Turkey, the custom of paying promotions for retirees, payroll acquisitions and in general, retiree promotions. If you exclude those, our non-HR cost also despite AI expenditures is below the HR inflation as well.

So I'm not much of a concern about the OpEx growth next year.

If I may squeeze in just one more, and that is on the deposit growth this quarter, which looks quite muted. It seems like you've lost some market share there.

And also, we've seen obviously some higher swap costs. And I was just wondering if there is any specific reason behind this?

Or is this just a normalization after the strong first quarter results? And is that related to the increase in the swap cost given you also explained it by better liquidity in the first quarter?

Swap cost increase is related to that. We didn't use swap depo facility with Central Bank given the liquidity and given the tight situation already anyway.

But in terms of -- it's really, really good questions about our deposit strategy. We continue to expand our sticky customer base.

There are 3 parts to it, first quarter or second quarter in terms of results. Number one, the demand deposit, I think it will show up in the total sector number as well.

The first quarter end was right before the religious holiday, which we did have a significant demand deposit increase. Otherwise, in terms of market share and focus, there's no change in demand deposit in Turkish lira.

In FX, we continue to grow in FX. In time deposits, it's related to tightening market.

We don't compete as much in a very high cost, high ticket size. So it's a bit optimization.

We have a very strong first quarter in a tight market, we continue to focus on that. But if you look at it, our repo rate, our focus has been always have low repo portion, but high sticky customer base in deposit.

The main objective there, regardless of the interest rate decreasing environment, we can reflect lower cost of funding even through deposits. It's not like repo market.

Yes, it's not 1 day. But in 30 days or so, we can reflect lower interest rate or policy on our cost of funding very quickly.

Just as an example, for instance, I'll be very specific versus our deposit rate or cost of marginal deposit versus, I would say, cost of deposit flow is weak right now, for instance, today versus a week ago before the policy rate decision. We already reflected 80% of that decrease on our deposit funding.

So our strategy will not change. You'll see with strong interest from our bank in expanding customer base as well as our deposits in both Turkish lira and FX.

Yes. I think it's not a formal guidance at the moment for us.

But given the trajectory, we see that there will be improvement year-over-year. That's the main reason.

It's really hard to forecast from now. It really depends on the pace of policy rate decisions, how quickly it will come down.

That will be, as I mentioned, mostly reflected on the NIM margin. But I think we will be in a better situation to give a better guidance, actually a formal guidance in the next quarter or the end of the year.

A perfect question. It's a very interesting observation from us as well over the last year and two.

We have been seeing significant improvement in retail growth rates. Our overall credit card -- number of credit customers, number of credit receivables, credit card receivables and GPL receivables is going up.

Despite that, quarter-over-quarter, if you look at our retail NPL flow, in sum, it hasn't changed. So there was no deterioration.

There is a slight deterioration in SME and wholesale, but they were very low, especially in commercial and corporate. And there was some small increase in NPL flow.

And then if you remember the page we have shown you, the full increase from TRY 13 billion to TRY 13.8 billion was related to SME and wholesale from a very low base. From that perspective, I think we have seen the worse because as you remember, retail is credit card and GPL in overall 70% of our NPL flow.

If you see the stabilization, but more importantly, significant improvement in roll rate, I think overall, we have seen the worst, and we are hopeful that's going to come down. And then also, I need to add one more thing.

As you might know, we recently, [indiscernible] our regulators had a very important law that -- regulation that allow us to restructure delinquency customers in GPL and credit card. We have quickly adopted.

Today, we are able to do the restructuring in digital as well. It will have some temporary relief as well.

It's not going to materially change our numbers given the size of the portfolio we have. But not only in the branches, we are able to do in call center, but in digital, in mobile as well.

We were able to do it a similar restructuring for the 90-plus day customers as well. But now with the help of the regulators, we are able to release the tension further and improve our retail portfolio further, and that's also a big plus.

I hope also that answers the question.

Thank you all for your participation. Again, this was another quarter which we had sustainable and resilient profitability.

Our net profit market share within the sector has improved significantly over this quarter. Today, we have more than 28 million customers, and we remain committed to growing this customer base, but through long-term value generation.

So you have seen the numbers today, more financial numbers. But behind this, there is significant investment in digitalization, but more important, artificial intelligence and other long-term technology investment for sustainable and radical customer experience.

We believe in that, for long-term sustainability of our numbers. We still try to be cautious on numbers given that there is -- we are in a cycle of decreasing interest rate environment, it looks like.

So it's really hard to predict how the data will emerge in inflation and interest rate, but we are committed to our long-term strategy of having larger customer-related loan book and funding book. And I will only note one thing versus the first quarter, when we look at our customer, share of loans is 2% higher versus a quarter ago.

Sector is also improved by 1%. So we have been expanding our loan book -- customer loan book in our overall assets.

I think this is a very important indication of our commitment to customer-focused growth, and we'll continue to do so to support this number. Again, thank you very much for this late conference call and appreciate all the interesting questions.

Thank you again. Have a nice evening.

See you in the next quarter.