Akbank T.A.S. (AKBNK) Earnings Call Transcript & Summary

Dear friends, this is Kaan Gur speaking, CEO of Akbank. I hope you are all well. Thank you for joining our third quarter earnings call. I'm speaking to you from Washington, where I am attending the IMF and World Bank Annual Meetings. While I'm here, I wanted to take a moment to connect with you all to share my thoughts on the operating environment and how we are navigating and how are we positioning ourselves for the future. After my remarks, I will leave the floor to Turker and Ebru and our Investor Relations team, who will go through the detailed financial results and handle the Q&A session. I would like to apologize. I'm not able to stay for entire call, but as always, I look forward to keeping in touch with you in near future and continuing our discussions. Before we get into the numbers, I want to touch on the broader macroeconomic backdrop, especially in 2 tier. The policymakers' efforts toward fiscal discipline and structural reforms provide cautious optimism for a more stable economic environment moving forward. That being said, we forecast economic growth to be around 3% this year as the weak global backdrop and the lag effects of monetary tightening weigh on economic activity. The pledge of the medium-term plan to considerably tighten fiscal stance in 2025 is expected to restrain economic growth next year as well. On a positive note, external balance continues to improve and seems to be less of a concern. It is encouraging to see that despite real appreciation of Turkish lira, tight credit policies are preventing the worsening in currency account balance. Underlying trend in inflation still remains high, and sticky services inflation underlines the need for a tight monetary policy stance for an extended period of time, narrowing the room for rate cuts this year. We expect inflation to end the year around 44%, and we are in budgeting process. But our initial expectation for inflation next year is around 25%. Let's move on to key indicators of the banking sector. Tight monetary stance and quantitative restraints continue to keep borrowing rates high. As a result, Turkish loan growth slowed down significantly, while the growth cap introduced to FX loans in May has also limited growth on that side. Looking forward, total credit impulse implies a gradual but not a sharp softening in economic activity, which will reduce the demand pool inflationary pressures. The rebalancing process brings some challenges in the short term. The slowdown in loan growth and the decline in LDR put additional pressure on the core operating profitability of the sector. Going forward, the regulation-induced low LDRs provide a large room for improvement in net interest margin once the economy heads towards a lower inflation environment. Now it is time to moving on to our bank. In this very dynamic environment, our team has remained resilient, agile and focused on what we do best: firstly, executing our customer-centric strategy for recurring revenues; secondly, identifying areas for sustainable growth as usual; and the last one, while maintaining prudence in risk management and cost control. The dedication and experience of our people continue to drive our success. With a solid total capital of 17.2% and Tier 1 of 14.6%, we are all equipped to serve the interest of all stakeholders. Key factors behind our profitability include effective balance sheet management, agility and regulatory matters, and continuous momentum in fee performance. Our active customer base exceeded 14 million, resulting in our fee-to-OpEx ratio to excel by 26 percentage points in just 7 quarters. Ongoing organic customer growth strategy strengthened our recurring revenues, ensuring the bank's long-term success in very dynamic markets. We remain committed to investing in our businesses and people to drive future growth and maintain long-term profitability. Slide 5, I think this is another important slide for the presentation. Once again, I'm really pleased to share with you that we are consistently moving forward to achieve our 2025 targets. Similar to second quarter, we intentionally scaled back in Turkish lira [ widespread ] consumer-only deposit market share in order to optimize our funding costs and manage net interest margin. Again, similar to previous quarter, our TL LDR remains low at 82%, which is the reason behind our decision given the regulatory environment. As stated earlier, our low Turkish lira LDR offers considerable potential for enhancing margin moving forward. Another important point I would like to leave you with, this is the improvement in our fee-to-OpEx ratio. It increased substantially and is already at 84%. In third quarter alone, it was 91%. This reflects a major accomplishment, largely due to our persistent efforts in acquiring new customers. To wrap up, despite the challenging environment, we believe we have reached a true in earnings, and we are well positioned for a gradual recovery. Our net interest margin in the same time is showing early signals of an upward trend. We have strategically structured our balance sheet to prosper in this inflationary environment. Enabling us to manage risk effectively while maintaining flexibility in response to macro prudential measures and regulatory developments. Our customer-related recurring revenues continue to grow, providing us with a resilient revenue base that will support our long-term performance. We are committed to managing risk prudently and we believe our approach allows us to navigate this environment while unlocking growth opportunities. I would like to leave you with these key messages. We are recovering, managing risk proactively and positioned for gradual but sustained growth. I'm proud of our team's hard work and dedication. I sincerely would like to take this opportunity, thank all of our people and their friends. Thank you all for your ongoing trust. And as we continue to build toward a stronger future, I look forward to meeting you all soon. Bye for now. Turker and Ebru, I'm now handing the webcast over to you. Is that okay?

Thank you so much, Kaan Bey. Really, hearing your insights once more in our webcast was very invaluable and good luck in Washington.

Thank you. Thank you.

Thank you. So let's just continue. As Kaan Bey just highlighted, we are navigating a transitional period where the monetary policy transmission mechanism has largely been restored but elevated funding costs along with restrictions on loan growth continue to strain our margins. Despite the sector-wide challenges in net interest income, the strength of our fee income continues to support our core revenue generation. Our core revenues increased by 17% year-on-year in the first 9 months of the year, thanks to advancing fee income generation more than offsetting NII decline. Without any doubt, our strong commitment to enhance our recurring revenues and nonstop enhancement in fee chargeable customer base and also obviously our strong cross-sell ratio continue to be the driving force behind our success. Please also note, in the third quarter, we maintained our prudent approach in building provision buffers, which added pressure to the quarterly net income evolution. Meanwhile, this quarter reversed our free provision of TRY 1.4 billion. Adding all up, our net income decreased by 36% year-on-year to TRY 33.135 billion, resulting in an ROE of 20.2% and an ROA of 2% for 9 months. Going forward, our balance sheet is well positioned to expand margin and net interest income in this inflationary environment, thanks to our small ticket-led growth strategy while proactively extending maturities of the loan book and substantial market share gains and FX loans and relative advantage in asset repricing, considering the low TL LDR of 82% as well as the dynamic rebalancing of the security portfolio towards higher-yielding assets. Let's now take a closer look at the main factors contributing to our solid performance in a challenging environment. Starting with the balance sheet. In the first 9 months of the year, our TL loans were up by 30%, led mainly by small tickets in line with our strategic target to enhance our retail footprint. Considering the disinflation outlook, we'll strategically and proactively shift our loan portfolio by prioritizing the growth in segments where we can effectively extend maturities. As a testament of our growth strategy on top of a phenomenal 300 bps market share gain in consumer loans among private banks last year, we successfully further increased our market share by 110 bps year-to-date. Our market share gain in mortgages has also been eye-catching at more than 300 bps year-to-date. Please note that in addition to maturity extensions, mortgages offer significant cross-sell opportunities with delinquencies being nearly nonexistent for this product. On the business banking front, our robust positioning in installment loans with a solid 18.8% market share among private banks enables us to capitalize on opportunities for extending maturities. Following an eye-catching 230 bps market share gain last year in this product, we added 100 bps market share in just third quarter alone. In SME loans, through a prudent and selective growth strategy, we expanded our market share by 172 bps year-to-date. Please also keep in mind, while benefiting from our comparatively low market share in SME loans, we have been managing maturity extensions based on pricing. Our organic growth strategy also features a prudent balance between risk and return with timely adjustments in lending criteria as required. Advanced analytics and excellence in technology are essential to our growth strategy, driving our robust asset quality, enabling us to take quick and timely actions. Please also note that in terms of volume, around 85% of GPLs or general purpose consumer loans are preapproved, and around 30% are to salary customers. As for the FX loan side, we successfully grew the loan book by a solid 25% year-to-date, already reaching our full year guidance of above 20%. Our bank-only growth was even stronger at 43%, excluding the impact of the big ticket redemption during the first quarter in our fully owned subsidiary, Akbank AG. This robust growth led us to gain 170 bps market share among private banks year-to-date with strong foothold within high-profile blue-chip corporates. Thanks to our already deleveraged foreign currency loan book, we have significantly mitigated our risk and remain committed to expand the portfolio, which will also be margin supportive. Moving on to the security side. In light of the disinflation environment, we have also actively adjusted composition of our TL security portfolio by incorporating higher yielding assets. We adopt a strategic and balanced approach in FRNs and fixed rate bonds. We have been increasing our positioning in TL floating notes since the beginning of last year. Its share in our securities is up by 11 percentage points over the last 7 quarters. Accordingly, FRN's majority, of which are TLREF-indexed bonds, have a decent 60% average yield and a solid 22% share in our TL securities. In TL fixed rate securities, while we are positioned strategically at favorable rates, we continue to lead the sector with our strong positioning in TL corporate bonds. Our high-yielding corporate bond portfolio was at the end of quarter 56% yield, stands at TRY 35 billion or around 9% of our TL securities. Our strategic approach also incorporates to decrease the share of CPI linkers in our TL securities. This strategy already resulted in a cumulative reduction of 19 percentage points since the end of 2022. Meanwhile, our treasury's proactive positioning in CPI linkers with a positive real rate continues to be a differentiating factor considering the tightening spread between policy rate and inflation. On the funding side, we maintained our disciplined funding mix whereby deposits have continued to be the main source of funding. We have a well-diversified deposit base, making up 66% of our total liabilities, while our TL time deposits remain resilient, with 60% of total consisting of low-cost and sticky TL time deposits. On top of our strong and widespread deposit base, our TL LDR remains low, as Kaan Bey earlier mentioned, at 82%. This low LDR has enabled us to cost effective funding strategies and tactical shift in market positioning, providing edge in cost optimization this year. Please note that this TL LDR will also be crucial, as stated earlier, in supporting our margins going forward, offering significant capacity for future growth, asset repricing and margin enhancement. Moving on to the P&L. Without any doubt, pressure on split and margin evolution were the major challenges faced by the sector this year. The tight monetary policies targeting disinflation, along with competitive pressures and growth caps, which have limited asset repricing, continue to put pressure on NIM evolution in the third quarter. To put it into figures, higher reserve requirement ratios effective as of May 23 put additional 30 bps pressure in NIM in third quarter. Please note that even though the bank is eligible for maximum remuneration from its reserve requirements, the interest earned remains significantly below the funding rate. To put into figures, on average, our reserve requirements make up 10% of our TL assets and 25% of our FX assets. Last but not least, change in the composition of short-term TL funding towards higher cost repos following the Central Bank's decision to terminate swap transactions with the banks has put significant pressure on quarterly NIM evolution. Our cumulative 9 months of adjusted NIM now stands at 2.2%, which creates downward risk to our full year NIM guidance, especially when considering high underlying trend in inflation, which requires tightness of monetary and macro prudential stance. On the other hand, our balance sheet is ready to expand margin and NII in the upcoming disinflationary phase, thanks to our agile and proactive asset liability management. On the asset side, we have strategically increased our TL loans by focusing on maturity extensions and have also significant growth in FX loans while adjusting our lending criteria to manage risk. Additionally, our balanced approach to security portfolio will create substantial opportunities for NIM enhancement in the coming period. On the funding side, our robust TL deposit base and low TL LDR will provide additional opportunities for margin improvement going forward. As highlighted earlier, we are committed to grow our customer base and enhance our customer-driven recurring revenues. In line with our strategic targets, our active customer base reached 14.2 million, up 69% since the end of 2021 with an eye-catching 5.8 million net active customer growth. Without any doubt, the success of our organic growth strategy lies in our customer-centric initiatives with a focus on customer satisfaction and continued innovations. Our active product portfolio, a function of active customer base and average cross-sell per customer has enhanced further by 10% year-on-year, reaching a new all-time high. Meanwhile, our growing young customer base, which increased further by 18% year-on-year, strengthens our robust and recurring revenue base. Our digital strategies have proven successful through the expansion of our customer base and advancement in our sustainable fee income. Similar to last year, 2/3 of our new-to-bank customers were acquired via digital onboarding. Number of digital customers reached 12.3 million with a robust 85% growth since the end of 2021, well exceeding the net active customer growth in the same period. Accordingly, digital penetration continues to excel, up by 8 percentage points to 86% since the end of 2021, while migration of transactions to digital channels already reached 96%. We continue to leverage our digital excellence, innovative solutions to revamp our value proposition and to maximize a number of customer touch points. Please note that our digital channels have achieved an impressive share accounting for around 70% of our credit card sales over 90% of general purpose consumer loans and more than 80% of time deposit account openings. On the fee and commission income side, we achieved 136% year-on-year growth in the first 9 months of the year, significantly outpacing the OpEx growth and well on track with our full year guidance of around 100% growth. This outstanding fee performance is without question driven by our dedicated investments, strong customer acquisition track record, broad product portfolio and diverse fee income base. I'm delighted to share that we have already reached our 2025 strategic target to increase our fee-to-OpEx ratio above 80%. Our fee income more than doubled year-on-year. This resulted in our fee-to-OpEx ratio to improve by an outstanding 26 percentage points in 7 quarters to 84%, with an even higher quarterly figure of 91%, thanks to all-time high fee chargeable customer base and strong cross-sells. It is important to underline that we have an impressive around 3 percentage point market share gain since end of 2021 to this year. And our fee income market share among private banks remains unchanged actually year-to-date at 16.1% on top of the 3 percentage point growth as a result of our intensified commitment to enlarge our customer base while deepening the relationships. So the message is clear. The bank is now operating at a higher plateau in fees in terms of market share. On the cost side, our OpEx was up by 83% year-on-year in the first 9 months of the year, while quarterly increase in limited at single-digit second quarter in a row. Accordingly, despite the ongoing challenges in OpEx, cost growth has been easing towards our full year guidance of around 70% levels. Meanwhile, tight monetary and macro prudential policies put pressure on revenues, resulting in a temporary high cost-to-income ratio. However, I must underline that our mid- to long-term ambition of mid- to low 30s remains firmly in place, and this is in line with our historical averages, thanks to our dedicated investments for sustainable growth and profitability as well as our disciplined cost management. Moving on to asset quality. Our focus on risk returns supported by proactive provisioning, excellence and advanced analytical capabilities across retail segments, machine learning-based credit decision models have enabled us to maintain firm asset quality. For GPLs, we have 100% automated credit decision models where we differentiate ourselves in terms of sophistication with substantial number of scorecards in decision processes. For credit cards, on top of machine learning-based decision models, advanced mathematical optimization in limit decisions enables us to secure quality. For SME loans, this year, we have also applied our proven analytical capabilities to already digitized micro segment, not enabling only the substantial market share growth but also to manage the quality while growing. Please note that the uptick in new NPL inflow is driven mainly by our proactive approach in staging of a big ticket file, which was already provisioned adequately and has limited net income impact, while the robust and broad-based collection performance across all customer segments supported the NPL ratio to remain at 2.5%. Share of Stage 2 and Stage 3 in our growth loans, which will be considered, let's say, more problematic potentially, remained limited at 8.3%, while coverage remains strong. During the quarter, our continuous provision buffer buildup has carried our total provisions to around TRY 39 billion. While our Stage 3 coverage remains solid even with a negative 100 bps impact due to the TRY 1.7 billion NPL sale during the quarter. Adjusting for our -- this NPL sale, our Stage 2 coverage would be at 58%, and our Stage 2 -- and Stage 3 coverage would be at 28%. Also, please note that the coverage of Stage 2 came slightly down due to the previously mentioned big ticket file migrated to Stage 3. Otherwise, our Stage 2 coverage would have remained flattish. All in all, we ended the first 9 months of the year at 87 bps net cost of credit, excluding currency impact. Despite the deteriorating asset quality environment, net cost of credit is well managed within our guidance of around 100 bps, thanks to our well-diversified loan book, sophisticated digital capabilities, along with our proactive provisioning. Looking ahead, we anticipate that any potential uptick in cost of credit will be offset by the strengthening of the net interest income during the disinflationary phase. Despite the sector-wide profitability challenges, which limits internal capital generation capabilities, our total capital, Tier 1 and core equity Tier 1 ratios, without forbearances, remained outstanding at 17.2%, 14.6% and 13.4% as of 9 months. As you know, we are saying this is temporary risk weight for -- high risk weights for the newly generated consumer credit cards and GPLs in third quarter. And this had 122 bps positive impact on our total capital. On top of this, when adjusted for the temporary risk weight for commercial loans, which remained actually unchanged, as you all know, our CAR would be even 50 bps higher at 17.9%. Strong capital reserves continue to provide protection against extraordinary market challenges and fluctuations offering critical resource for long-term and profitable growth. Before moving on to Q&A, as usual, I'd like to share a few highlights regarding our ESG journey. As you have all watched in our ESG video at the start of our presentation, we continue to embed sustainability into the core of our operations. And we are proud to be honored with the integrated report and ESG awards underlining our commitment to sustainability, responsible banking with a strong dedication to transparency and accountability. During third quarter, we have provided TRY 126 billion sustainable finance, bringing the cumulative to TRY 352 billion since 2021, and this accounts for 44% of our 2030 target. In addition, 62% of our wholesale funding is sustainable. In ecosystem management, our commitment to financial inclusion is evident in our efforts to provide more accessible services. We have successfully completed our first mentor check-up event in Istanbul with 30-plus start-ups to fulfill the needs of our entrepreneur customers. To encourage eco-friendly transportation for our customers, we offered monthly refunds on charging transactions and advantageous vehicle loan pricing with a special campaign package. As for people on community pillar, we continue to take important steps in diversity and inclusion, youth and education projects. In alignment with our 0 tolerance policy towards violence, we have joined the Business Against Domestic Violence Network and will work on concrete steps for the victims of violence. Our commitment to becoming net zero bank by 2050 remains central to our climate change pillar. We are pleased to be the first deposit bank in Türkiye to reveal our net zero strategy, baseline emissions and sectoral approaches. In addition, we have announced our commitment to phasing out of coal by 2040, considering the principles of just transition. As a final note, while our fee generation has been robust, due to the ongoing sector-wide challenges, it is evident that there is downside risk to our NIM and therefore, our ROE guidance. However, to repeat, as Kaan Bey mentioned at the start of the call, based on the latest trends, we believe that third quarter was a bottom in earnings, and we are well positioned for better profitability ahead. This concludes our presentation.

Now moving on to the Q&A session. [Operator Instructions] Nida, because you raised your hands first, I would like to allow you to talk first. Please go ahead, Nida. You can ask your question.

I have a few questions. Firstly, just starting off on the margin side of things. With rate cut expectations now being pushed out to next year, what are your expectations in terms of exit rates for 4Q? And secondly, in terms of the margin inflection into 2025, just want to get a better understanding of how important easing of the macro potential measures is, i.e., even if we see rate cuts, is there a scenario where macro potential measures remain tight, and therefore, we see perhaps slower-than-expected margin expansion? My second question is on if you can comment on asset quality and the outlook for cost of risk into 2025, please.

Thank you. I'll leave the floor to Turker, our CFO.

Actually, yes, based on latest developments, like we expect, probably the first rate cut will be happening in the new year. So therefore, actually, there won't be like any impact into fourth quarter, like NIM evolution. But having said that, like we have already talked slightly about it. Actually, we have seen that bottom on the net interest margin side in the third quarter. In the fourth quarter, maybe not very significant, but we are like observing initial signs of net interest margin recovery mainly coming from the slightly improved reserve requirements interest payments as well as some easing on the deposits cost side as well as on the TL wholesale funding side. So these are showing first signals of the net interest and -- NIM recovery, but as I said, not very material. But what I can say is actually, like Ebru has already touched upon, it seems that we won't be able to meet our like revised guidance. So like observing that third quarter net interest margin was 2%, probably exit NIM will be somewhere between 2% to 3% levels. But surely, the -- next month, like November and December will be important in terms of like yield trends, deposit cost trends. With regard to like '25, surely did -- again, Central Bank's decisions on the macro prudential side will be important on top of the rate cut scenario because, as you know, currently, we are subject to 2% monthly growth cap. On top of it, we have to meet some conversion as well as rollover ratios on the FX-protected deposit scheme. So Central Bank's potential decisions on this -- in these areas will be again important like with regard to the NIM recovery next year. But just maybe like assumption, assuming that these macro prudential measures like limitations stay the same, but surely, there will be a rate cut trend. Maybe we don't know the timing yet because there are some like critical events, critical dates this quarter, which will be impacting also the rate cut cycle. But we can say that we can expect a gradual recovery in the net interest margin for '25. But surely, the pace of this recovery will depend on the rate cuts trends as well as the like potential changes in these macro prudential measures. Surely, the pricing dynamics in the market will be important, so we have to wait and see that. Maybe one final remark. As I said, so in the coming months in November and December, as I said, there are some critical dates like, as you know, elections in the U.S., next MPC meetings, October and November inflation data for Türkiye as well as in December, the minimum wage increase, at what level it's going to like finalize. So these will be also impacting -- probably impacting the rate cut decisions of Central Bank. With regard to asset quality, as we expect, actually, like as we have also shared in the second quarter earnings call, our cost of risk is normalizing towards 1% for full year. In the third quarter -- third quarter, only cost of risk was at 1.5%, cumulative cost of risk at [ 87% ]. So probably it's very likely that we will be ending the year in terms of cost of risk in line with our full year guidance, like 1%. For next year, still, we are in the budgeting process and probably also like the regulators or BRSA's potential movements in this area may impact the cost of risk evolution. But probably as of today, we can expect like 1.5% to 2% cost of risk as a proxy for next year. In terms of inflows, like we are observing the most of the inflows coming from the retail side, except for, let's say, in Akbank case, for 1 big ticket in the third quarter, which was already provisioned in Stage 2. But apart from this case, like mainly the inflows are coming from retail side. I think it will evolve like that in the next year. As you may remember, end of September, BRSA has like announced a restructuring scheme for overdue credit card receivables as well as general purpose loans, which was like a one-off action, but it may be repeated going forward like next year. So probably it may also impact the pace of NPL formation. But all in all, I think we can take cost of risk of like 1.5% to 1.5% to 2% as an initial proxy for next year.

Maybe just to add a few comments on the NIM side, Nida, I already mentioned in the call and we actually have shown also in our NIM slide as well, but just to repeat, as you know, normally speaking, swaps are less costly than repos for the banks. And when you look at the overall swap basically that were terminated as of -- as you know, as of July, there were no more swaps actually out for the banks with the Central Bank. These swaps auctions were usually around, let's say, 45% or so. But the repos, as you know, goes between 47% to 53% and actually especially in August, there was a lot of volatility in the market that led for the repos to touch the upper band, which actually also was another reason for the overall NIM pressure in the third quarter. We have also shared that in our presentation as well. So nowadays, we're seeing in the last few weeks that the repos are actually below 50%, maybe around the 48% level, so that is also helping the overall NIM actually evolution this quarter. And on top of that, the remuneration that we are actually getting as well versus the previous quarter has -- is also giving us. So all of these will be additional to what Turker has mentioned, supportive for the NIM evolution.

Very helpful. Can I just ask one small follow-up question? I just want to confirm if the banks are going to start reporting under hyperinflation accounting from January 2025 and if my understanding is correct, that tax will still be based on nominal earnings.

Yes, Nida. As you may recall, BRSA had postponed IAS 29 implementation by banks for 1 year. So it's no change. We will be subject to IAS 29 starting from Jan 1. But again, you're right. On the tax filing side, in '25, we'll be using the nominal like P&L, i.e., unadjusted figures for tax filing if there is no change, but I don't expect any change in this area.

Thank you. The next question comes from [ Jihan ]. [ Jihan ], please go ahead. You may ask your question.

I have a couple of quick questions. One is about the market share gain in SME. I mean during the time of economic slowdown, what makes you think that increasing the SME market share is not going to have any ramifications on asset quality? That's one. And second is could you comment what the NPL flow would be if you strip out the large ticket NPL that you had in the quarter. And the third question, I saw that you reduced your market share in time deposits. But if you think about the funding available, probably time deposit costs are the lowest if you compare it with the swaps and the repos. So why are you positioning the balance sheet in a way that the contribution of time deposits and funding mix is less?

This is Turker. Maybe let's start with your second question. Like close to like 40% of inflows in the third quarter belongs to big ticket file in third quarter. We can say, like 8 billion wouldn't look like without like these big tickets files. On top of it, SME market share gain on the SME side, as you know, we are like coming from a lower base. And on the micro side, again, we are using like AI -- machine learning and AI-based models. So these loans are created like -- are analyzing the data surely, but on top of it, we know it's a difficult environment. Surely, we are always also like taking -- paying attention to our collateralization. As long as we have like healthy collateralization levels, there's -- you can always recover like of -- potential NPLs in the future. But as I said, like we are currently maybe benefiting from coming from relatively lower base. So that makes us relatively more comfortable. But having said that, we should -- we are well aware of the like potential asset quality deterioration trends in the upcoming quarter. With regards to time deposits, actually when we compare like marginal time deposit costs like gaining from the market, time to time, you may have to pay like up to 50%, whereas on the offshore side, like wholesale funding is slightly lower than -- maybe 2%, 3% lower than that. And maybe really not to forget, the banking system is trying to meet these ratio requirements, improvement of TL deposits -- total deposits ratio, therefore, actually like always gaining additional deposits, maybe costlier than the back book. Therefore, actually, we are making this -- the calculation of the mathematics.

And also the area that we are optimizing, [ Jihan ], is more the costly side of the deposit base basically and trying to, let's say, mix -- let's say, substitute that with the offshore where possible. And maybe one last thing on the SME side is, I mean, yes, we are gaining market share and growing. But if you look at -- we have shared also in our investor presentation -- I mean, in our earnings presentation, it is still actually below or around -- it is still below 9% of our gross loan book. So yes, we are gaining market share and growing, but it's still a single digit of our overall loan book. Let's move on to now Mikhail. Please go ahead and ask your question, Mikhail.

Yes. Can you hear me?

Yes, we can.

I have 2 questions. One is on, yes, on asset quality. So looking at the third quarter, do you already see the effect of reducing support from the recoveries in corporate sector, which I think was a narrative for a couple of -- yes, for the previous quarters, which essentially pushes up cost of risk upwards? Or are there other effects? That's the first question. And the second is on net interest margin, yes, dynamic. Yes, you outlined a couple of reasons for the -- for its incremental pressure in the third quarter. But if we split this into 2 sides compared to the outlook, which you shared in the second quarter, what was more unexpected and had a more negative effect? Were that the additional macro prudential measures, which were unexpected or it was -- or the borrowing costs are developed in a more unexpected way maybe than you expected? And looking into the fourth quarter, also, where do you see maybe more risks, more risks in the area of prudential measures or -- yes, or the development of borrowing costs?

Maybe just to start with the recoveries, I can say that, actually, we continue to see collection performance this quarter as well coming in from big ticket items because, as you know, these are long-term, let's say, legacy books that we have, some of them. So this quarter, we will also see a strong recovery. At least so far, we have seen some strong recoveries coming in on that side. So we haven't seen a slowing down in that trend. And maybe I'll leave the NIM message to Turker.

Mikhail, on the net interest margin side, like what's been unexpected in the third quarter, one of them was the TL wholesale funding side. As Ebru has already mentioned, in -- the volatility in July, August area has negatively impacted our TL wholesale funding cost from -- especially from offshore. Like the rates went up. And on top of it, actually, by the end of second quarter, actually, we were expecting that we would be able to see some easing on the deposit cost side, TL deposit side, cost side in the third quarter, but it not -- it did not realize. And also during that time, Central Bank has also made some changes in the ratio requirements. So this has somehow like kept the deposit cost at similar levels. But for the fourth quarter, as I already mentioned, we are seeing some easing on both sides. So therefore actually probably like -- it's very likely that our fourth quarter exit NIM will be better than the third quarter net interest margin. With regard to next year first quarter, what may be like the risk, if I understood correctly, maybe potential for that and maybe like further delay in the rate cuts, maybe the case or the recovery or the improvement of the core spreads if the loan demand stays like muted. For instance, third -- fourth quarter so far, TL loan growth in the system is like close to 0. And in such circumstance, actually, the marginal yields for -- on the lending side may be like below our expectations, as we have also observed, especially in the first quarter of this year actually, for instance, and we started the year, we were expecting like higher yields. But it did not realize, and it has also impacted the NIM evolution this year. So like this loan demand for next year will be also important for NIM evolution.

May I just follow up on the corporate recoveries? For how long maybe do you see the pipeline of these recoveries continuing? Is that a question of quarters or maybe years?

Yes. Actually, it will depend like from file to file because there are some files, which takes many years for the liquidation process. But there were some files in our legacy book, like where we have -- really have seen strong recoveries this year in the second quarter, third quarter.

And now as well.

And also, we will see also some on the -- in the fourth quarter, but probably it's too early to give some insight for next year. So it really depends from file to file.

The next question comes from [ Murat Inabekshil ]. [ Murat ], please go ahead and ask your question.

You answered actually a couple of them. I just want to make sure. Let's roll back to the end of second quarter when you shared the guidance. So I would assume you were not expecting any rate cut before the mid of fourth quarter. So what made you confident back then that the NIM would increase? I mean the reduction of the onshore swap, I mean, I'm speaking hindsight obviously, but might have been expected as the Central Bank is buying dollars and flushing the market with Turkish lira. Maybe you thought that it will -- the financial condition would be loose, right? So was it the main reason why this did not turn out to be the case? And this is a question not only for you, but for all the members of the banking sector obviously. So could you elaborate more on that, please? And I have a second question, too.

Okay. Actually, if I'm not remembering wrongly, actually, also during that time, actually, we had said that this revised guidance of 3%, whilst taking into consideration a rate cut, because during that time also, we were expecting the rate cut to happen towards the end of the year. So like post the impact of this potential rate cut assumption at that time was quite immaterial. But actually, in our scenario at that time, actually, we were expecting an improvement in the core spreads coming from both lending side as well from deposit side, which did not realize so far as we were expecting. And on top of it, actually, the third quarter's worsening on the TL wholesale funding side like mainly also stemming from the risk of [ moat ] globally was not taken -- like was not considered at that time because it was not there. But unfortunately, this risk of [ moat ] has also negatively impacted the wholesale funding side. And also lately, like also there were some final adjustments in the reserve requirement side, which have also negatively impacted the NIM evolution. But just recall, so our revised cuts at that time was not factoring in an early rate cut.

I see. And second question is about -- I mean, following the weekly Central Bank data and loan yields have been easing. And I assume banks are competing to lock the loan books at higher rates before the rates decrease, so -- and there's the 2% monthly cap. So does this create a competitive environment to secure these loans? I mean does it bring down the loan yields further? Do you see a pressure over there?

Yes, maybe as I was trying to like answer Mikhail's question, actually, this relatively moderate or muted loan demand, so also like we are trying to fill this 2% monthly growth cap. Yes, that's, on one hand, creating like pricing competition in the market. So that is maybe like one reason for the easing of this Central Bank data trend. But also on top of it, the bank, also Akbank, we are trying to grow in longer maturities in installment type of loans as Ebru has shared like where we have gained market share in order to lock the spread going forward, so -- to benefit from positive carry in longer term. This is also another reason like why there is some easing. So I can say it's a combination of all these factors actually.

I see. You expect change in this monthly cap or if they change it? What would be the effect?

Probably like in the near future, I don't think that it's likely. But maybe -- like my personal opinion, maybe over time, they may reconsider the loan types or segments, which are exempt from growth cap. Maybe that may be the case like before they touch the 2% growth gap.

So all in all, to summarize, I think you're pretty much giving a similar guidance that this is the bottom, but I think there are no more aggressive assumptions or assumptions for the funding side too. So you think that this is -- you're at a more visible position compared to second quarter? Is your confidence higher compared to second quarter about the guidance you provide now?

Actually maybe -- like I am talking based on the latest trends actually. When I look at like back book versus front book are -- deposit costs in the back book is at like 46%, 47% levels, whereas the margins are rather like low 40s to mid-40s. And as you know, over time, the portion of the KKM is coming down, which is subject to conversion requirements, where we have to pay higher rates in the first account opening. Like based on the latest trends, there is some easing, but what I can say is actually, I don't want to be very, very aggressive like in terms of the net interest margin improvements. So like we have to see how coming weeks evolve.

Okay. That's very clear.

Okay. We will [indiscernible] another. Mehmet Sevim, please go ahead and ask your question.

Turker Bey, if I may ask just one clarification to your NIM comment also. You've now positioned the balance sheet for lower rates, and we are waiting for this trigger to happen. But do I understand it correctly from your comments that you're expecting a more gradual improvement in NIM now throughout next year rather than a sharper, more visible increase as it would have been towards the end of this year if everything had gone according to plan previously? So we're assuming rates come down according to market expectations. What kind of trajectory do you have in mind at this stage? And just also my second question is on the implementation of the inflation accounting. Just wanted to see if you had any color on the direction of travel in the authorities' minds right now given, if nothing happens, then we will get that. But I'm trying to understand the motivation from their side and how your feelings are about this given obviously we're in this disinflationary space now, but this will be a lot of added operational burden. I just wanted to understand if you have any additional thoughts or color there.

Let me start from the second question. Yes, it's an operational burden for sure for our colleagues. But as of today, actually, we haven't like any signal from BRSA, which would indicate that there will be another postponement actually. Like as of today, we are preparing ourselves for January 1. And probably, yes, we are in disinflationary environment, but having said that, as you know, like 1 of the rules for inflation account is 3-year cumulative inflation of 100%. It's not the only rule, but one of the critical like criteria. To probably -- we will have the 3-year cumulative 100% inflation for at least 2 or 3 years. So therefore, actually -- so similar to nonfinancials, like probably we will also be subject starting from January 1. That's what I can say actually. So it will not disappear immediately. That's what I mean. On the net interest margin side, as I said previously, there are some critical dates, critical key events we have to wait and see, which would also impact our forecast or assumptions for next year, like October, November inflation, like Central Bank's MPC meeting outcomes in the next 2 months. They will also share their own inflation report for next year in the coming weeks that -- and finally the minimum wage adjustments to be decided by the end of this year. But as of today, I don't like -- I don't expect that this rate cut will be front loaded. Probably as of today -- as I said, there are some uncertainty as of now. But we can say probably this rate cut will happen gradually throughout the year, like coming down to maybe mid-20s by the end of next year. So therefore, actually, we can expect the NIM recovery to happen gradually. Maybe also -- maybe one additional comment maybe as a response to one of the previous questions with regard to the yield development and maybe potential threat. As you may recall in the past, the early redemption option for companies -- like the penalty for early redemption was quite limited, like 1% or 2% depending on the maturity of the loan. But it has been changed by the end of June. Now it is linked to the duration as well as the interest rate level of the loan. So therefore, actually early redemption commission to be paid by the corporates and commercials is going up to like mid- to high single digits. So therefore, actually, one may ask this early redemption option may be like a spread to the yield development. So after this latest regulation change, this risk maybe has not disappeared, but it's relatively lower now.

Thank you, Mehmet. And now the last question that we see, Simon, would you like to go ahead?

Just quick ones for me. On the cost of risk for next year, you said between 1.5% and 2%. But you also mentioned that, that assumes no other regulatory intervention. So just wondering what regulatory intervention you might be worried about on the risk cost side. And then my other question would just be on fees. Do you think -- I know you're preparing the budget for next year. But do you think you can maintain well above inflation growth in fees? Just any guidance there would be helpful.

On the cost of risk side, maybe not worried but like maybe quite opposite. Surely, there are always risks like downside risk. But what I meant was like the regulators may implement some standard restructuring schemes based on asset quality developments going forward, which may, in this way, actually like smooth out the NPL formation trend or help on the asset quality formation. That was what I was trying to mean. Maybe -- could you maybe again repeat your second question? I wasn't able...

It's just on fee growth. Whether you think -- whether you can maintain such high fee growth.

We are in the initial phase of our budget process, but surely, we will be like aiming -- trying to aim a real growth on the fee income side. Surely, the growth outlook in the economy or how the -- these macro prudential measures will evolve throughout the year, whether they will be rather restrictive on the lending side will be also important as well. Maybe a little bit more like patient, so we will share our guidance in the beginning of next year. But in the coming months, again, we are always in touch. We can also share maybe more color.

Okay. So I guess there are no further questions. Thank you all for joining our call today. If you do have any further questions, please feel free to reach out to our Investor Relations team. We're always happy to help, and we look forward to meeting and updating you on our progress in the future. I'd like to thank all of you for joining us and Kaan Bey especially for joining us from Washington, and have a great day. Bye-bye.