Turkiye Garanti Bankasi A.S.

Good afternoon and thank you for joining Garanti BBVA's first half 2026 financial results webcast. Today, representing Garanti BBVA, we are joined by our CEO, Mr. Mahmut Akten, our CFO, Mr. Atil Özus, and our Head of Investor Relations, Ms. Ceyda Akinç. Following management's presentation, we will open the floor for questions. You can either use the raise hand function or submit your questions through the Q&A box. Without further ado, I will now hand over to management.

Hello everyone. We are pleased to be with you again following another solid set of results. First, let me begin with macroeconomic environments we are in. GDP growth was 2.5% in the first quarter and we now cast a similar level as of June. Activity is expected to recover modestly in the second half of the year, thus we maintain our 3% growth forecast for the full year. On the right-hand side, you can find our inflation and interest rate forecasts. Higher food and energy prices slowed down the improvement in headline inflation. Nevertheless, preserved tight financial conditions and fiscal discipline have supported our 30% year-end CPI forecast. Authorities continue to pursue a carefully balanced policy mix combining gradual monetary normalization with tight macroprudential measures. Therefore, we expect the funding rate to gradually converge toward the policy rate by September. The timing of the first easing step remains data dependent and may be affected by oil price volatility. If conditions allow, limited rate cuts might resume in the fourth quarter. Moving into current account deficit, weak foreign demand and high commodity prices lead to a worsening in external balance, yet resilient tourism revenues and moderation in economic activity could prevent further deterioration. We now expect current account deficit to GDP to be around 3.5% versus around 2% estimate in the beginning of the year. Evolution of energy prices will determine the external outlook. Fiscal discipline on the right-hand side continues to support macroeconomic stabilization. Expenditure discipline remains broadly intact, while income taxes continue to support revenue performance. We expect fiscal deficit to be close to the medium-term plan target of 3.5% in 2026. Now moving into our financials, I will start with the net income. In the first six months of the year, we generated 64 billion TL in net income, up by 20% year-on-year, while recording 28% return on equity. Well-defended NIR, robust fee generation and stronger contribution from financial subsidies reinforced solid earnings delivery. On a quarterly basis, we had a single-digit decline in net income, mainly due to Lower trading income and increased provision that I will elaborate more on the following slides. I would like to highlight that we used 27% CPI rate in the valuation of CPI linkers income. If we had used 30% rate, our net income would have been close to 2 billion TL higher. Our diversified revenue sources once again enabled earnings resilience, now moving into slide 7. Against the challenging macro backdrop, we managed to defend our sector-leading core banking revenues. Strong fee generation and the growing contribution from our financial subsidiaries helped cushion cyclical pressure on net interest income and trading. I will discuss net interest income and fees in more detail on the following slides. Here I would like to briefly touch on trading income. In the first quarter, the upward shift in swap curves resulted in mark-to-market gains on our swap portfolio. As swap curves normalized in the second quarter and these short-term positions matured, this positive contribution faded. Lower client foreign currency activity also weighed on the trading income. Therefore, we had lower trading income in the second quarter. That said, trading income represents less than 5% of our gross income. and more sensitive to market volatility, our earnings profile continues to be driven by sustainable core banking revenues, namely interest income and fee generation. As a result, we delivered 43% year-on-year growth in core banking revenues. If we look at our asset mix, our total assets reached 5.2 trillion TL and loans make up 55% of the assets, supporting sustainable and recurring revenue generation. We maintained our growth pace both in TL and foreign currency loans. In foreign currency securities, you may notice a sharp decline in the second quarter. This mainly reflects the maturity of our $3 billion short-term placement made in high-quality liquid assets at the end of the first quarter. Excluding this temporary impact, our foreign currency securities increased modestly QonQon. In TL Securities, we continued to selectively increase our floating grade notes. Moving into slide 9 for further insights on TL Loan Portfolio, we maintained our disciplined growth strategy, further strengthening our presence in micro and small enterprises, while reinforcing our leading position in general purpose loans and credit cards. Now let's look at the evolution of our asset quality. As our loan mix continues to evolve towards consumer lending and credit cards, we continue to proactively identify and classify these exposures. Accordingly, the stage 2 share in total loans increased modestly to 12%, mainly reflecting higher SICR classifications as you can see on the right-hand side. Importantly, 84% of the SICR portfolio is non-delinquent at all, highlighting our prudent and forward-looking risk management approach. The higher share of early-stage SICR exposures also lowered our stage 2 coverage ratio. Consumer loans and credit cards now account for around 75% of the SICR portfolio, consistent with the evolving loan mix. Here, I would like to also mention that around 55% of new general purpose loans are originated to salary customers, while credit card revolving rates have remained broadly stable at around 35%. In terms of restructured loans, as you can see on the chart, declined during the quarter following the migration of previously restructured loans into stage 3 with the end of the related regulation. If we move on to NPL inflow, the trend observed in stage 2 was also evident in NPL inflows. Around 70% of new NPL inflows was coming from consumer loans and credit cards. And the end of restructuring regulation resulted in a temporary increase in NPL inflows during the second quarter and effect may also continue in the third quarter. We expect it to normalize in the fourth quarter. In terms of cost of risk, as we discussed on the previous two slides, cost of risk increased during the quarter reflecting three main factors. First, we updated our provisioning models to incorporate the latest macroeconomic assumptions. Second, we continue to see MPI inflows from consumer loans and credit cards as our loan mix shifted towards these segments, largely due to regulatory caps. Third, the end of the restructuring regulation led to the migration of previously restructured bonds into stage 3. While the first two reflect our portfolio strategy and operating environment, the regulatory migration effect expected to normalize in the fourth quarter. As a result, we continue to expect full-year consolidated cost of risk to finish within the guided range, though towards the upper end due to combined impact of these quarter-specific factors and higher for longer interest rate environment. If we look at annual comparison on the right hand side, first off 25 cost of risk benefited from exceptionally large provision reversals. As provision reversals normalized in 26, the year on year comparison naturally resulted in higher blended cost of risk. Moving on to funding, similar to our asset strategy, we continue to rely on customer-driven funding sources. Total customer deposits reached 3.5 trillion TL, constitute 66% of total assets and remain TL-heavy. Importantly, our share of free funds continues to be the highest among private banks, providing a key structural advantage for margin resilience. On foreign currency side, half of the decline was due to gold price related parity impact while the remaining decrease reflected customer shift from foreign currency into TL assets. On external funding, we maintained our diversified funding mix. Total external debt currently stands at $9.8 billion, of which $4.5 billion is short-term. Against this, we maintain a comfortable foreign currency liquidity buffer of $6.1 billion. We further diversified our funding mix in the second quarter. We successfully completed our first thematic syndicated loan. In addition, we completed three thematic bond issuances in line with orange bond principles and climate change adaptation. And more recently, in July, we completed 4 billion TL asset-backed securities issuance, further optimizing our capital structure. Moving on to net interest income, our first half margin performance continued to stand out. The funding cost headwinds that emerged in March became more pronounced in the second quarter, putting pressure on margins and TL loan deposit spreads. Even so, we limited the quarterly decline in net interest income to just 5%. This quarter, as I mentioned in the beginning, we also revised up our CPI estimate to 27% from 23%. Yet current inflation expectations still point to further upside. Assuming a 30% CPI assumption, net interest income would have been around 3 billion TL higher and year-to-date net interest margin expansion would have been 20 bps higher. Let's move on to the P&L item. Fees. Our first-offee performance remained one of the strongest in the sector. Our fee base was up by 42% year-over-year, 39% year-over-year, and 12% Q&Q. Strength in payment systems continued to be the main driver of the growth. Money transfer fees, insurance fees, as well as asset management fees further gained momentum. and over the past year, we welcomed 2.4 million new customers, bringing our total customer base toward 1 million. We also maintained our leadership in customer satisfaction, ranking first in net promoter score across retail mass, SME and mobile banking. Now moving into operating expenses, we are keeping our costs under control, growing in line with the budget and was up by 45%. We continue to have the lowest cost-income ratio among our peers. As always, we remained focused on capital generative growth, which is clearly reflected in our sector-leading capital ratios. Supported by strong earnings generation, we maintained our common equity tier 1 ratio at around 12%. There was a limited decline in capital adequacy ratio due to sub-debt amortization impact. The foreign currency sensitivity on capital adequacy ratio remains limited and we have a strong 149 billion TL excess capital providing ample capacity to absorb market volatility while supporting future growth. With that, let me walk you through 26 operating plan guidance. I will begin with the macro assumptions on the left as these form the foundations of our planning framework. Our January baseline macro scenario, while assuming 32% policy rate with 25% inflation, since then ongoing geopolitical developments, as you all aware, and heightened uncertainty have led us to revise our macro assumptions twice. Our current base case assumes that funding costs will gradually converge towards policy rate by September. And now we expect year-round inflation to be around 30%. Against this macro backdrop, we maintain our loan growth guidance for both TIA and foreign currency loans. As discussed earlier, we also remain on track to deliver our full-year consolidated cost-office guidance, although quality-specific factors and higher for longer interest rate environments are likely to keep us towards the upper end of the guidance range. Turning into margins, we have consistently communicated since April that funding costs will normalize only gradually. While we continue to expect margin expansion this year, the pace of improvement is likely to be modest than initially anticipated. Going forward, evolution of funding costs and macroprudential measures will continue to be the key swing factors for margins. In terms of fees and OPEX, we are also on track with our expectations. Finally, regarding profitability, the upward revision to our inflation assumption naturally creates downside risk for our real RE outlook. In nominal terms, however, our guidance looks achievable depending on rate evolution. This concludes my presentation. Now we can take your questions.

Welcome to the Q&A session. As a reminder, you may ask questions by raising your hand or by using the Q&A box. When your name is called, please unmute yourself and proceed with your question. One moment for the first question. Let's begin with our first question from Mehmet Sevim, JP Morgan. Mehmet, please go ahead.