Turkiye Garanti Bankasi A.S.

Hello, and thank you for joining us, Guarantee BBVA's Second Quarter 2025 Financial Result Webcast. Our CEO, Mr. Mahmut Akten, our CFO, Mr. Aydin Güler, and our Head of Investor Relations, Ms. Ceyda Akınç, will be presenting today. As always, there will be a Q&A session following the presentation, and you will be able to ask your question either via raise hand button or by typing them into the Q&A area. I now hand over to our management for the presentation.

Hello everyone and thank you for joining us. Today we are excited to walk you through our first talk 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 accent 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 three 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 point cut in September MPC 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 deficits, we expect current account deficit to GDP to slightly worsen to 1.3%, Tourism revenues are expected to be supported, 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 stands staying relatively tighter, meaning 5-6 percentage point exposed real rates, and fiscal policy not being able to be tightened as targeted, which suggests cash deficit to GDP of at least 4% in 2025. Moving into our financials, I will start with headline figures. In the second quarter, we preserved our distinguished earnings strength and delivered 28.2 billion TL net income. This marks 11% quarterly EPS growth. Resilient NAI, robust fee income, and provision reversals from a few large-ticket items reinforced its solid earnings. Accordingly, in the first half, we were able to generate 53.6 billion yen net earnings, alluding to 30.7% RE and 3.1% ROE. 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-defended NAI and growing fee base. We experienced spread contraction this quarter due to longer than anticipated tight policies, yet strong long growth supported the NAI base, which I will touch upon in 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 market losses on derivative transactions on a quarterly basis. our subsidiary's contribution has been increasingly supportive 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 a 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 EURUSD 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 non-portfolio, In the second quarter, TL loan growth accelerated compared to first Q and grew by 10%, reaching 1.4 trillion TL. 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 prudence 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 Washington 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 non-delinquent. Now let's walk through the evolution of NPLs. Our NPR 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 NPR flows. Importantly, provisioning remained robust, total coverage ratio remained strong at 3.2%. If you look at the P&L of the provisioning on next page, as you know, this year we guided for higher cost of risk compared to last year due to increasing NPL inflows from unsecured tons and normalizing trade large ticket collections. And as of first year, we have started to see this trend. However, in this second quarter, Provision release of a few large-ticket items that were not unforeseen in the operational plan guidance led to a quarterly decline in net provisions. As a result, our first-half cost of fees came in at 1.24%, way below our guidance range of 2% to 2.5%. In the absence of large-ticket collections, we will see a normalization in net cost of fees 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 and 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 stand at 68%. On a quarterly basis, TL deposit growth was limited mainly due to flow to money market funds and our spread focus pricing strategy. In foreign currency time deposits, we witnessed a significant decline due to reduced market volatility and attractive TL deposit rate. We also maintained strong 4.9 billion foreign currency liquidity buffer, providing ample caution 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 toward the one basis point 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's tight stance and increased market competition, coupled with recent regulatory changes. However, since July, TL long-time 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 few 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 cost increased. Therefore, there was increase in swap cost Q over Q, yet remained below previous quarter's average. We continued to use 28% in evaluation of CPI linkers, and putting all these together with the help of landing growth, we were able to register growth in an AI 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 two times higher than securities, this presents a sustainable revenue advantage. Please also note that within TL securities, CPI-linked share is only 38%, and in a disinflationary environment, yield gap may widen further. On liabilities, TL time deposits represent 69% of TR 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 one 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 non-cash 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 OPEC space is growing in line with budget. Operating expenses base increased by 69% year-over-year in the first half due to planned investments to fill 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 OPEC space 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 year 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-educancy 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 P 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% RE 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 two quarters of postponement in margin expansion. Having said that, I want to highlight that our new evolution remains highly sensitive to market developments, particularly interest rates and funding behaviors. 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, RE 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.

Hello again for the Q&A session. You can ask your questions by typing into Q&A area or by using raise your hand button. Once your name is announced, you are welcome to ask your question. The first question is from Mehmet Sevim. Mehmet Sevim, you can unmute yourself.