Akbank T/A/S S/Adr

Hello everyone, and thank you for joining our second quarter earnings call. This is Kaan speaking. I hope you're all well. Let me start with what has changed since our last earnings call. First of all, the operating environment has proven more challenging than we had anticipated, with continued geopolitical tensions adding uncertainty to the global domestic outlook. At home, The disinflation process is processing more gradually, the expected easing cycle has been pushed back, and macroprudential measures have been tightened further. At the same time, the continued rebuilding of the central bank's reserves remains an important source of confidence and reinforces the credibility of the broader policy framework. For the banking sector, the implications are clear. Higher funding costs are likely to persist for longer, delaying the pace of margin recovery, while asset quality remains a key area of focus in restrictive operating environments. Taken all together, these developments have also pushed out the timing of sustainable real return on equity generation for the sector. The direction of travel remains intact, but the path is proving longer and more demanding than previously expected. Against this backdrop, we have revised our return equity guidance for this year to 23 to 25% from high 20s. Of course, Ebru will share all the details. Going forward, disciplined balance sheet management, strong capital, prudent provisioning, and resilient customer franchise have become even more important. Our focus is therefore not only on managing the current environment, but also on ensuring that we are well positioned to capture the opportunities that will emerge as conditions eventually normalize. One of Akbank's key strengths has always been our ability to adapt. Our adaptability comes from disciplined strategic decision-making rather than reacting to short-term market developments. As the operating environment evolved, we made deliberate choices to further strengthen our balance sheet and the resilience of our franchise. We continue to reshape our asset mix toward higher yielding assets while maintaining selective and disciplined loan growth and gradually reducing the share of securities in our balance sheet. While optimizing our asset mix, we maintained resilient provision buffers and remained prudent in asset quality. Our risk management is reflected in a 380 basis points reduction in our share of private banks MPLs since the beginning of last year. This includes a further 130 basis points improvement year-to-date. On the funding side, we continue to capitalize on the strength of our customer franchise. This enabled us to increase our zero-cost demand deposit market share among private banks on a quarterly basis by 120 basis points through disciplined liability management. The strength of our customer franchise continues to drive resilient fee generation, with quarterly fee income covering all of our quarterly operating expenses and supporting strong operating leverage. Most importantly, our robust capital position of total capital, 16.4%, entire one of 13.3%, provides the strategic flexibility to turn today's disciplined decisions into tomorrow's growth opportunities. And on that note, before moving to the financials, Let me briefly touch on how we are positioning Akbank for the near future. Our strategy is built around transforming how we serve our customers through a stronger advisory model, next generation digital capabilities, and a scalable bank-wide approach to AI. We are redesigning our service model by expanding relationship-led coverage where advice creates the most value. At the same time, we are making digital the primary service channel for our mass consumer and SME customers. This allows us to serve more customers while enhancing customer experience and productivity. Digital and AI go hand in hand. We are evolving our mobile application into an AI-powered financial companion and building integrated digital platforms that simplify banking for businesses. Our AI strategy is built to scale, integrated across the bank, and supported by a robust governance framework. Rather than deploying AI and isolated use cases, we are building a common infrastructure that allows us to embed AI across the bank from customer interactions and relationship management to back office operations and software development. This enterprise-wide approach gives us confidence that AI will become a meaningful driver of both productivity and future growth. Finally, we are continuing to strengthen our subsidiaries and ecosystem partnerships, creating additional growth opportunities beyond our core banking franchise. Taken together, these initiatives reinforce our ability to deliver sustainable growth, strong returns, and long-term shareholder value. I will now pass it over to Ebru to walk you through our results in more detail. Following that, we will be happy to answer any questions you may have. Ebru, over to you. Thank you.

Thank you, Kambe. As you have just mentioned, while the long-term direction remains intact, higher funding costs are delaying both margin recovery and the sector's real ROE generation. In the first half of this year, our net income was up by 38% year-on-year to 34,333,000,000 and resulting in an ROE of 22.2% and an ROE of 1.9%. During the same period, our revenues increased by 45% year-on-year to $140,320,000. Net interest income expanded by 95% year-on-year, driven by our agile balance sheet management and relatively lower funding cost environment compared to the same period of last year. Our strong customer franchise continued to drive resilient fee generation, delivering 35% year-on-year fee income growth and fully covering quarterly OPEX. However, as the higher for longer rate environment proved more persistent than anticipated, we revised our NIM guidance to reflect a slower margin recovery. While resilient fee income, disciplined cost management, and strong asset quality continue to support earnings, the slower margin recovery has translated into a downward revision in our full-year ROE guidance from high 20s to 23% to 25%, as you just mentioned. Now let's dive into the quarter's financial performance and key drivers, starting with the balance sheet. As Kambi highlighted, we remained disciplined in our lending strategy, prioritizing risk-adjusted growth while optimizing maturity and enhancing yields in our target segments. We continue to restructure our asset mix, increasing higher-yielding assets while gradually reducing the weight of TL securities in our balance sheet, a strategic shift that has been underway for the past few years. This strategy has translated into a meaningful shift in our asset mix, with the share of TL loans in total TL assets rising by 7 percentage points to 59% since 2024, while the share of TL securities, excluding corporate bonds, has declined by 3 percentage points in the same period. Most importantly, we have achieved this without compromising our prudent approach to asset quality while preserving strong coverage ratios. Our selective TL loan growth focus has contributed to the 8% year-to-date growth in TL loans and noteworthy market share gains in business loans among private banks. As a result, we remain committed to our full-year TL loan growth guidance of over 30% shared at the start of the year. Turning to our loan mix, we maintained a well-balanced and strategically diversified loan book across segments. Portfolio resilience is underpinned by the strong diversification, with no single sector accounting for more than 8% of our business loans. We continued to proactively monitor sector-specific risks and take early actions where needed, actively managing portfolio concentrations to preserve strong asset quality. Meanwhile, we continued to grow our FX loan book, delivering 3% year-to-date growth in US dollar terms despite a more restrictive operating environment. While tighter regulatory caps led us to modestly revise our full-year foreign currency long-growth guidance to high single-digit, execution remained strong. We delivered a 30 basis points quarterly market share gain and continued to progress towards our 2028 strategic ambitions. Moving on to securities. We remain dedicated to actively repositioning our securities portfolio, aligning with the evolving macroeconomic environment while enhancing the yields. On the TL side, we increased the share of TL REF index bonds by 6 percentage points since the end of 2024, while reducing fixed-rate securities by 7 percentage points to improve carry in a higher-for-longer interest rate environment. During the same period, we increased the share of foreign currency securities in total securities by 8 percentage points to 35%, primarily through timely build-up of NIM accretive Eurobond investments. As a side note, we maintained our leading position in blue-chip corporate bonds, representing around 8% of our TL securities. So overall, our timely, yield-focused portfolio actions have continued to support margins while positioning us for resilient performance going forward. On the funding side, our strong customer franchise has continued to support deposit cost optimization while providing flexibility in meeting central bank's ratio requirements. We achieved 130 basis points year-to-date increase in TL demand deposit market share among private banks while maintaining a healthy 55% share in sticky, low-cost TL time deposits, reinforcing the strength and the stability of our funding base. Looking ahead, our well-structured balance sheet and sound deposit mix are expected to support gradual and sustainable NIM improvement. Let's move on to the wholesale funding side. Our transactions since the beginning of the year reaffirmed international investors' confidence in our franchise despite heightened geopolitical volatility. During the quarter, we successfully completed a 500 million Tier 2 issuance at an 8.25% yield with an order book exceeding $1.2 billion, demonstrating continued strong investor demand. We also exercise the call of the outstanding tier two, maintaining our consistent track record. Our diversified funding strategy continues to provide us with reliable access to international funding markets across different market environments. Moving on to the profitability. Let's start with the net interest margin. Heightened geopolitical uncertainty and tighter funding conditions continue to weigh on margins during the quarter. However, our proactive and disciplined balance sheet management helped contain the pressure to some extent. As a result, swap-adjusted NIM declined by a moderate 25 basis points to 3%, primarily reflecting higher TL funding costs. Looking ahead, we expect a more gradual margin recovery as monetary conditions are likely to remain tighter for longer. We believe our disciplined balance sheet management and strong deposit franchise position us well to navigate this environment. But still, taking all into consideration, we have revised our year-end swap-adjusted NIM guidance to 3.2% to 3.5% range from around 4% levels. As a side note, during the quarter, we valued our CPI linkers at 30% and every 1% change in CPI has 6 pips NIP and 40 basis point ROE impact on a full year basis. Our fee income increased by a robust 35% year-on-year in first half, keeping us well on track with our full year guidance of above 30%. Our diversified fee income base, supported by broad product offerings, continues to strengthen earnings resilience and visibility. We remain focused on expanding recurring fee streams through customer-centric innovations and deeper client engagement. Looking ahead, we will continue to leverage our digital capabilities and AI-driven hyper-personalization to further expand our fee income base. Strong fee generation and disciplined cost management have drove our fee-to-OPEX ratio back above 100%, with cumulative ratio reaching 94% for the first half of the year. OPEX growth was at 37% year-on-year in the first half and expected to moderate toward the full year guidance of low 30s thanks to our continued focus on cost control and operational efficiency. Accordingly, we remain confident in achieving our full-year fee-to-OPEC ambition of around 100%. However, net interest income dynamics continue to be key determinant for our cost-to-income ratio, which remained around 52%, leading us to revise our full-year cost-to-income ratio guidance to high 40s from low 40s. Looking ahead, we remain focused on disciplined cost management while leveraging AI to further improve scalability and efficiency. Moving on to asset quality. As expected, early signs of asset quality deterioration have become more visible across the sector, reflecting the broader macro environment. Against this backdrop, we further strengthened our relative positioning, reducing our NPL market share among private banks by 130 basis points year to date, building on the significant improvement we achieved last year. Our loan book is a reflection of our disciplined underwriting standards and well-diversified portfolio with Stage 2 plus Stage 3 loans contained at 11.5% of gross loans and restructured loans remaining limited at 4%. At the same time, we continue to strengthen our reserve buffers with total provisions reaching nearly 85 billion TL. Accordingly, our coverage ratios remain solid with growth coverage at 3.8% and stage 2 plus stage 3 coverage at 28.1%, reinforcing balance sheet resilience. Excluding currency impact, net cost of credit stood at 220 basis points during the first half of the year, broadly in line with our full-year guidance, while NPL ratio remained stable at around 3.5%. We continue to enhance our collection capabilities through AI-powered voice agents, which was just launched during second quarter. Early signals indicate improving customer engagement and increased our promise to pay rates significantly. This supports a more proactive, scalable, and data-driven collection model, reinforcing our disciplined approach to asset quality management. Looking ahead, we remain confident in our ability to navigate the evolving macro environment with cost of credit and NPL dynamics remaining well manageable within our full-year guidance. Moving on to capital. Our strong capital base remains a key strategic advantage, providing the flexibility to navigate cycles while continuing to pursue disciplined growth. Our total capital, Tier 1 and core equity Tier 1 ratios have improved to 16.4%, 13.3%, and 11.3% in second quarter, respectively. These were supported by risk-return-focused loan growth, continued RWA optimization, and the gradual easing of the quarter-specific adverse effects in the first quarter, including operational risk adjustment and dividend payment. In addition, improved market sentiment and better bond pricing enabled a partial reversal of mark-to-market losses in the second quarter. As for sensitivities, a 10% depreciation in TL results to around 25 basis point decline in our capital ratios, while the impact diminishes for larger foreign currency movements. Similarly, 100 basis point increase in TL interest rates has around 5 basis point impact, highlighting the limited sensitivity and strength of our capital. Overall, our solid capital buffers provide competitive advantage and a strong foundation to deliver sustainable, profitable growth going forward. On this slide, you may find the summary of our first half performance as well as our revised guidance, which I did share with you in detail throughout the presentation. As previously highlighted, headwinds related with geopolitical developments which resulted in the rate cycle to pause has shifted NIM expansion to second half of the year with a more gradual pace than initially expected. While resilient fee income, disciplined cost management, and strong asset quality continue to support earnings, the slower margin recovery has translated into a downward revision in our ROE guidance. As reflected in our first talk performance, we continue to make solid progress towards our 2028 strategic targets, which we shared at the beginning of this year. And last but not least, before moving on to Q&A, I'd like to share that we are extremely proud to have surpassed our $800 billion sustainable financing target for 2030 ahead of schedule, reaching $841 billion by the end of the second quarter. Looking ahead, we will continue to raise our ambition and set new targets in sustainable finance later this year. This concludes our presentation. Now moving on to Q&A session. Please raise your hand or type your question in the Q&A box. And for those of you who are joining us by telephone, please send your questions by email to investor.relations at akbank.com. The first question comes from Ashwath. Ashwath, please go ahead. We have unmuted you. Hi, can you hear me? Yes, we can hear you loud and clear.

Thank you very much for the presentation. I just have three questions. The first is on the NIMS. So I guess the exit rate is around slightly lower than your full year revised guidance on your NIMS. So when do you first expect some of the rate cuts or potentially normalization in the policy rate to begin? That would be my first question. The second question is around the cost side. Are there any initiatives in place beyond the ones you mentioned in terms of AI, etc., in order to rein in some of that cost growth or OPEX growth, especially if, for example, the top line growth does not pan out to be as positive as anticipated with the rate cuts into the back end of this year? And the last question is on asset quality. So currently, I understand it's slightly ahead or above your full year guidance of around 200 basis points. How confident is the bank in being able to maintain that 200 basis points net cost of risk excluding currency, especially if, for example, rate cuts or the normalization and policy rate does not happen sometime this year? Thank you.