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Edited Transcript of AKBNK.IS earnings conference call or presentation 25-Jul-19 3:30pm GMT

Q2 2019 Akbank TAS Earnings Call

Istanbul Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Akbank TAS earnings conference call or presentation Thursday, July 25, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kamile Necat Ebru GÜVENIR

Akbank T.A.S. - SVP of IR & Sustainability

* Sabri Hakan Binbasgil

Akbank T.A.S. - CEO & Member of International Advisory Board

* Türker Tunali

Akbank T.A.S. - CFO

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Conference Call Participants

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* Alan Ramsey Webborn

Societe Generale Cross Asset Research - Equity Analyst

* Deniz Gasimli

Goldman Sachs Group Inc., Research Division - Associate

* Gabor Zoltan Kemeny

Autonomous Research LLP - Research Analyst

* Samuel Magnum Goodacre

JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks

* Yulia Di Mambro

Federated Investors, Inc. - Senior Investment Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Akbank Quarter 2 2019 Consolidated Financial Results Conference Call and Webcast. I will now hand over to Mr. Hakan Binbasgil, CEO. Sir, please go ahead.

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Sabri Hakan Binbasgil, Akbank T.A.S. - CEO & Member of International Advisory Board [2]

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Thank you, Ali, and hello, everybody. Welcome to our Second Quarter 2019 Financial Results webcast and conference call. This is Hakan, the CEO of the bank. And you are very familiar with my colleagues who are with me today, Türker, our CFO; Ebru and [Ilker] from our IR team. I'd like to kick things off by going over a number of highlights this quarter, and afterwards, Ebru will cover our presentation in detail.

Our solid core operating performance continued in the second quarter. We expanded on them, continued with our superior fee generation, preserved our best-in-class cost-to-income ratio, maintained our benign asset quality performance and reinforced our capital strength. And this solid performance was achieved in a quarter when loan growth was muted, TL deposit and swap costs were higher, nonoperating lines, such as trading income and CPR-linked contributions were lower, and we have also fully reflected the 2% negative CPI adjustment to our second quarter numbers. And finally, we have once again made a negative mark-to-market adjustment to our LYY loan.

Despite all the challenges, thanks to our core operating strength, we were able to continue to invest in our future. These investments will further strengthen our bank to capture further sustainable and profitable growth. We have successfully transformed Akbank into a technology-driven, innovative company. As a result of all this, I am proud to share with you that Akbank was recently named the World's Best Digital Bank by Euromoney. This is the first time an emerging market bank has received this award. So this is a particular source of pride for me and all my colleagues. An important factor that contributed to us getting this award was our best-in-class efficiency, which is a crucial financial metric for all of us. This is the outcome and proof of our successful digitization vision and it goes beyond mobile, covering all our activities with a holistic approach. Years of hard work and dedication have led to the achievement. I have full confidence that our strong capital, solid liquidity, together with our investments in technology and talent, will provide us with considerable competitive advantage.

And now Ebru will go over our performance in detail. And then we will be more than happy to answer your questions.

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Kamile Necat Ebru GÜVENIR, Akbank T.A.S. - SVP of IR & Sustainability [3]

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Thank you, Hakan Bey. Our first half top line grew by 14% year-on-year to TRY 8.9 billion, indicating sound core operating performance. Our first half swap adjusted NII reached TRY 6.5 billion. Despite challenging loan growth, our fee income continued to be strong pace of first quarter, beating TRY 2.4 billion for the first half. Our first half net income was down by 19% at EUR 2.7 billion. The Q-on-Q drop was more limited at 11% despite the muted loan growth, the higher swap cost, the lower contribution from trading income as well as our CAR adjustments from 14% to 12%. As you know, banks have different methodologies for CPI linkers. We fully reflected the 2 percentage point adjustment in our second quarter numbers, indicating effectively 12% CPI usage for the first half of the year. Therefore, the 2 percentage point downward adjustment has negatively impacted our second quarter net income by around TRY 150 million.

Last, but not least, similar to Q1, there was an additional negative mark-to-market adjustment for our LYY loan, which was around TRY 240 million. Therefore, our year-to-date CPI adjustments for this loan has reached around TRY 630 million. As you may remember, as a part of the restructuring, there was a pending step regarding the capitalization of the LYY loan, i.e., the 20 -- the 20% of the equity swap. The legal procedures are completed in July. And this swap is expected to take place in third quarter, which will, to some extent reduce the mark-to-market sensitivity to foreign currency movement going forward.

It is also worth to highlight that our pre-provision income was up by 10% year-on-year. Our OpEx growth was flat Q-on-Q, but up 23% year-on-year by the end of first half. We expect our full year OpEx growth to be around 2018-19 rolling CPI as guided. That being said, our low-cost base continues to give the bank flexibility as our cost-to-income ratio remains best among our peers at 33.8% below our guidance of 35%.

On the NIM evolution, it continues to be better than expected despite the increase in TL deposit rates due to loan growth in the quarter, higher swap costs and CPI adjustments. We reached 3.91% swap-adjusted NIM in the second quarter (inaudible). If we had used 12%, starting from the beginning of the year, our NIM would have been up about 39 bps Q-o-Q. So what supported our NIM? On the foreign currency side, due to our strong foreign currency liquidity and low foreign currency loan growth, which was mainly due to low demand, we were able to improve our foreign currency core spread on average around 40 bps, with the main contributions coming in from the foreign currency deposits started easing.

On the TL side, higher TL deposit cost impact started to be seen mid-May. However, we were able to dynamically manage our average TL funding cost, thanks to our proactive treasury management in optimizing repo, swap and money market activities. Also, we have been active on the TL security side and the repricing has supported the TL securities yield evolution at (inaudible). All of these, underlying our effective balance sheet management.

As of third quarter, we are currently operating our second quarter NIM. This is due to both lower average TL funding costs to lower swap costs as well as further support from TL securities book, which I will go into detail later. However, we are using 12% for our October to October CPI inflation. If inflation is to come lower, every 1 percentage point has around 5 bps full-year NIM impact. But then again, if this materializes, we may see some support from both the decline in TL funding side as well as the increased volume on TL loan, elevating the overall loan portfolio yield. As deposit rates have already started to price in the rate of expectations in the last few weeks, we expect the main contribution in core improvement on the TL side to come in from the deposit side. Taking all into consideration, we are confident that we will beat our full year NIM guidance of 3.5%.

On this page, you may also find the details of our swap costs and CPI linker income costs. Our swap cost includes short and long-term swap, which is a TRY 656 million. On average, total swap is around TRY 19.6 billion, on around 15% Q-on-Q. TRY 12.9 billion is our average short-term swap utilization, while TRY 6.7 billion is our average long-term swap.

As for our CPI linker portfolio, I shared earlier, we are targeting 12% inflation expectation for TRY 19.5 billion CPI linker portfolio. And everyone is -- every 1 percentage point inflation has 5 bps NIM impact. Our CPI linker income was at TRY 589 million in the second quarter.

Now on to our fee side. Our fee income was up by a superior 38% year-on-year at TRY 2.4 billion in Europe, which is well above our 20% full year guidance. The normal run rate was similar to first quarter despite the muted loan growth. Increased transactions and repricing were supportive. However, it is worth also to underline that our digitization efforts and investments have helped diversify our fee base, providing it sustainability. I will share some more detail on this topic in the following slides.

Strong performance was, once again, driven by payment systems, business loans and money transfers. Payment systems, which make up 52% of our fee base have performed very strongly, up by 50% year-on-year, thanks to both issuing and acquiring. We had a strong performance in business loan fees, up 69% year-on-year, supported by both cash and noncash. On money transfer fees, which are 8% of our total fees were up 22% due to increased number of transactions, repricing and some currency impact. On the Bancassurance side, we have strong cooperation with our partners, AvivaSA and AkSigorta. As you know, insurance fees are very much linked to loan growth. However, we have been increasing our stand-alone noncredit-linked insurance products, which have been supporting our insurance fees. Noncredit-linked insurance fees were up by 18% year-on-year and stand-alone premium to total premiums are at 70%, up by 5 percentage points year-on-year. Taking into consideration our fee income trend so far, and the second quarter performance was despite low -- like muted loan growth, we believe there's a significant upside to our fee -- full year 20% guidance.

As you know, we continue to invest and leverage the new technologies, which create competitive advantage. We invested around $200 million in 2018 in technology investments and are investing a similar amount in 2019. As a part of our investment, 276 branches have been transformed so far, and we plan to transform further 35 to 40 branches for the remaining of the year. As you know, we have already opened up new screens and analytical models for all of our existing branches as of third quarter of 2018. For our phygital branches, migration of teller transactions to E-teller is now at 65%, and this contributed to our total transactions outside of the branch to reach 95%. This enables our customers to spend less of their valuable time in cash transactions and increases the type and focus of our relationship managers in new customer acquisition, value-added and tailor-made products. As a result, income generation in these transformed branches is up by 22% year-on-year, while fee generation is up around 40%. As you can see, both figures are above the bank's competitive performance, underlining the success of the transformation.

As Hakan Bey mentioned earlier, we have recently been awarded the World's Best Digital Bank in 2019 by Euromoney, which for the first time has been granted to an emerging market bank. We received the award due to the bank's holistic and integrated digitization vision. An important criteria was best-in-class efficiency, which is a crucial financial metric for all. Our digital customer base is about 4.8 million. Mobile log-ins, on average for customers, is 30x, and the cross-sell of a digital customer is at 2.2x that of nondigital.

On a separate note, digital banking state in noncredit linked fees is about 48%. Also, 70% of general-purpose consumer loans and 51% of credit cards are sold through direct channels. All of these support the sustainability of our revenue base.

And now on to our balance sheet. Our total assets were down by 2.6% Q-on-Q to TRY 376 billion. Total net loans, which reflect Q-on-Q now make up 56% of our total assets. FX loans are around 33% of our total loans. TL business banking loans are 39%, while consumer loans including credit card are 19% of our total loans. We continue to selectively increase our securities book, which is now 17.3% of our total assets. As you know in the first quarter, we had increased our foreign currency securities book by $1 billion to $6 billion, which continues to support our interest-earning assets. In the second quarter, we have increased our TL Securities book.

I will show details regarding our strategy and where we stand now in the upcoming slides. However, it is worth underlining that the asset strategy was implemented due to benign global monetary condition, and in a muted loan growth environment along with the anticipation of expected decline in Turkey's inflation to be followed by interest rate cuts. As we shared in the previous slide on NIM, our dynamic treasury management continues to be a supportive factor in our NIM evolution.

Our optimized and responsible asset allocation, along with our low leverage at 7.6x and robust capital of 17.7%, all create competitive and unique growth opportunity for the bank. So thinking about long-term shareholder value remains at the focus of our capital deployment strategy.

And now on to our loans. Our TL loans were up by 3.4% year-to-date, down 1.7% Q-on-Q. Business banking loans at TRY 81.5 billion, which includes corporate, commercial and SME, are 67% of our total loans. Our FX loans were down by 1.5% year-to-date, while up 0.8% Q-on-Q. 64% of our FX loans are project finance and export companies. The balance is multinational and corporate, which generate foreign currency cash flow.

As you know, overall loan demand was low in the quarter for the sector, both economic activity and official rate cuts played a role in the delay of the new loan demand. But we believe the rate cuts of today, pricing may become more attractive and hence support loan growth in the second half of the year. In this respect, we have been adjusting our loan prices recently. For the full year, we continue to expect TL loan growth to drive the overall loan growth, while FX loan growth should remain muted.

We've maintained our balanced loan portfolio. Energy generation makes up around 6% of our total gross loans. Since 2016, 100% of our new loan originations in energy generation have been to renewable projects. As of today, 83% of our energy generation loans are renewables and about 53% are government guarantees. 6.5% of stage 2 loans and 8.3% of stage 3 loans are energy generation loans. Real estate makes up around 10% of our total gross loans. Our real estate portfolio is predominantly project finance and repayments are linked to project stable cash flow generation. The LTV of our real estate book is around 60% to 80% with most up-to-date valuation. It is also worth to highlight that 16% of the real estate book is FX cash collateralized, 13.3% of stage 2 and 9.1% of stage 3 are real estate loans. Construction is only 3.8% of our gross loans. 60% of the construction book is in FX and 75% of the FX part is government-guaranteed on debt assumptions. 4.9% of the stage 2 and 6.6% of stage 3 are construction loans. Long story short, our gross loans staging breakdown is broadly similar for this most questioned sector.

And now on to our securities side. Year-to-date, our total securities book is up by 14% to TRY 65 billion, of which TL and foreign currency have equal share. As you can recall, in first quarter, we utilized our excess foreign currency liquidity to increase our foreign currency securities book by $1 billion to $6 billion, which continues to support our NIM. In the second quarter, our foreign currency securities were down by 7% Q-on-Q. As for the TL side, during the second quarter, we have taken some proactive positioning ahead of the expected easing in the interest rate cycle and increased our TL securities book by 8% Q-on-Q to TRY 33 billion. This was mainly driven by our fixed rate portfolio as its share in our TL securities book has increased by 6 percentage points Q-on-Q to 30%.

CPI linkers now make up 59% of our TL securities book with an average remaining maturity of 3 years, while floating rate portion is 11%. As a result, in the second quarter, we gained around 70 bps market share among private and foreign banks in TL securities. To give you some indication for third quarter, we continue with the same strategy in the latest treasury auctions and have gained further 2 percentage points market share in TL securities among private and foreign peers, and this is according to the latest BRSA data, weekly data as of July 12. This positioning continues to support our NIM in an environment where loan demand has been muted.

And now on to the funding side. We have a well-diversified and disciplined funding mix. Deposits, which make up 61% of our total liabilities were up by 10% year-to-date, of which 35% is TL and 65% is FX. The mix hasn't changed Q-on-Q. Deposits continue to be the main source of our funding. And demand deposits by 22% of our total deposits, while 77% of TL deposit base is SME and retail, which is less price sensitive and stickier in nature. Our total LDR went down to 91%, led by the improvement in our TL LDR to 139%. In the second half of the year, we will continue to broaden our deposit base and aim to increase our share in demand deposits. All this will further improve our average funding costs. So far, in third quarter, we are on track with this strategy as our marginal TL deposit rates chain below our TL bank book -- deposit bank book, while we have even further improved our TL LDR ratio.

We have a well-diversified borrowing mix, which is now less than 16% of our total liabilities. Our total wholesale borrowing has come down from around $11 billion in 2017 to $10 billion in 2018, and now, down further to $8 million with an average maturity of around 3 years. This reduction was mainly led by the decrease in our short-term wholesale liabilities by around $2 billion. Our first indicated rollover in the first quarter of this year was a big success with 1.6x oversubscription and 8 new lenders. For the remaining of the year, we have $1.35 billion worth of redemption, of which less than $1 billion is our syndication maturing in October. We do not have any capital market reductions, i.e. covered bond or Eurobond until the first quarter of year 2020. Thus, we have an ample FX liquidity to serve more than 4 years of wholesale funding without borrowing one penny from the market. We will be opportunistic in our wholesale funding strategy depending on the pricing.

And now on to asset quality. Our stage 2 loans of TRY 31.4 billion make up 14.2% of our loans, 33% is in FX and provisions are fully hedged with hedged loan position. We have further increased our coverage ratio for stage 2 from 10.1% in first quarter to 11.5% in the second quarter. Only around 12% of stage 2 are past due 30 days, while around 73% are nondelinquent. Inflow from stage 2 to stage 3 remained below 9%, similar to Q1. Our restructured loan amount is at TRY 19 billion, which are all followed under stage 2. The increase in restructured loans versus first quarter is due to the completion of a large syndicated file destructuring process, which has already in stage 2 since fourth quarter of 2018. Our stage 3 coverage is at 59.2% with strong collateralization. Our total coverage, excluding the TRY 650 million free provision is at 102%. There was not any major one-off additions in stage 2 and inflows were widespread among sectors and segments. We do not expect a significant change in the share of stage 2 to total loans for the rest of the year.

Our NPL ratio stood at 4.5% at the end of second quarter. The asset quality evolution continues to be better than expected. Collection performance, though slower than first quarter mostly due to less working days, continues at good pace. Both inflows and collections have been diversified on corporate, SME and retail segments as well as various sectors. Looking at previous cycles of loan growth and NPL formation, we can say that NPL is a relying indicator. And as a result, we expect NPLs to continue trading higher throughout the year. However, we have -- may have been overly cautious with our guidance of 6%. NPL ratio can be skewed due denominator effect or NPL sales. Therefore, rather than NPL ratio, we believe cost of credit is a better metric for asset quality evolution.

On a quarterly basis, our cost of credit was up by 20 bps to 217 bps. Stage 3 recovery for second quarter was at TRY 124 million, amounting to TRY 300 million for the first half of the year. Overall, our cumulative total cost of credit evolution is at TRY 208, and it continues to be better than what we guided for the full year.

Currency impact for the first half was immaterial. There was no change in our macro assumptions, and we will continue to prudently apply IFRS 9 provisioning. We will revisit our assumptions towards the end of the year.

And now onto our capital. Our capital strength has even further improved in the second quarter. Our CAR reached 17.7%, and our Q1 was at 15%, both well above regulatory requirements. Internal capital generation continues to be one of the key drivers of our robust solvency ratio. Change in volume of liquid assets, which had a 40 bps impact is a reversal of first quarter excess liquidity held at Central Bank. Lower volumes and derivative loans as well as foreign currency securities, all had a positive impact on our CAR. Market risk, which was mainly related with the currency risk, had a slightly negative impact. According to 2019 Basel III minimum requirement, we have TRY 16.6 billion excess total capital and TRY 14.4 billion excess Tier 1. Thanks to our solid capital buffers, we are well positioned to generate profitable growth. We will continue to optimize capital deployment to achieve high sustainable returns for our shareholders and also ensure sustainable long-term dividend policy.

And now to sum up, I have shared with you throughout the presentation the actual figures on this slide. We are on track with our full year guidance. 2019 continues to be a year of result which we believe is healthy. And we are excellently positioned in the market with our solid capital, strong liquidity, robust infrastructure, best-in-class efficiency and digitization. All of these will give us significant competitive advantage to capture sustainable profitable of growth going forward.

And operator, you may now open the line to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Samuel Goodacre, JPMorgan.

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Samuel Magnum Goodacre, JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [2]

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Hakan, Ebru. I've got a couple of questions on asset quality. The first one is related to your comments that you do not expect a material change in your stage 2 ratio over the rest of the year. Could you tell us about the potential recovery of any stage 2 loans back into the stage 1 bucket? If there is any migration backwards that you're seeing? And then similarly, what extent of loans that are you seeing migrate from stage 2 into stage 3? That would be my first question on asset quality.

And the second one is related to the draft law submitted to parliament a couple of weeks ago, that potentially may accelerate further restructuring given it is positive for rate cuts and debt-to-equity swaps and things like that. Could you give us an update on that? And if this is indeed a catalyst as you see it and could lead to a structural shift in restructurings.

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Sabri Hakan Binbasgil, Akbank T.A.S. - CEO & Member of International Advisory Board [3]

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Thank you very much for your question. As Ebru mentioned, the conversion from stage 2 to stage 3, the ongoing rate is around 9%, and I think this number will continue to be like 9%, 9%, 10%. So we are not really expecting any deviation from stage 2 to stage 3. And your -- regarding your question from stage 2 to stage 1, I think this is a possibility. Because when you look at some of these loans that we have restructured in the last year, the payments are actually completed according to the schedules. And in some of these restructuring, actually, the income actually -- the payments are even much better than some of the scheduled payments. There's a lot of asset disposals in some of these companies, and there are no late payments at all. So I think this is a possibility, but it's a bit early to say this at this stage. But a couple of months down the road, this can be a possibility.

And regarding this last legislation change in the parliament, I think it is putting some discipline and some principles about restructuring in the market. But if you ask specifically about Akbank, we have done majority of our big restructuring in the past. So as you know, there were some cases, which everybody was very familiar with, and we have completed all these. And that is the reason why we have like roughly 14% stage 2 loans to our total loans. So that is all I can say at this stage.

There are some discussions with the other banks. So as you know, there have been some discussions about creating funds, et cetera, for the energy sector, like maybe on the real estate side. But there's nothing solid at this stage. But as you know, when we look at Akbank's overall portfolio. I think we have completed the majority of the big restructuring. So the impact would be relatively less on our institution.

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Operator [4]

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Our next question comes from Deniz Gasimli, Goldman Sachs.

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Deniz Gasimli, Goldman Sachs Group Inc., Research Division - Associate [5]

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Three questions from my side. One on margins. Obviously, post today's Central Bank decision where rates have been cut by 425 basis points. Just wanted to get your view on what does it mean for the deposit costs for the second half and going forward? I mean at this point, if you look at the Central Bank data the marginal deposit costs are just below 22%. So maybe they shouldn't come down by the full extent of 475 basis points. But I just wanted to get your view on where deposit costs are heading, and what does it mean for margins and swap costs as well going forward.

Second question is on fee income. I mean so far, fee income has been doing above guidance, up 38% for the half versus your guidance of 20% or above. I think big part of it is driven by the payment system, which is driven by higher rates. The exchange fees driven by the interest rates. And given that we're now in a environment where rates are coming lower, to what extent would that drive your fee income generation lower? I mean where do you see fee growth normalizing in that -- in a lower rate environment as rates are being -- I mean we are in the environment where rates are being cut.

And lastly, on cost of risk, so we're trending around 210 basis points for the half, better than your expectation of less than 300 basis points. So it's a cost is doing better than expected. So do you have any view or an idea of where do you see cost of risk for the next year? Maybe -- I understand if it's quite early to discuss it, but just want to get your view, or maybe your preliminary expectations of where you could see cost of risk in 2020.

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Sabri Hakan Binbasgil, Akbank T.A.S. - CEO & Member of International Advisory Board [6]

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Deniz, thank you very much. Very valid questions. First of all, let me start with the interest rates. First of all, my opinion about this Central Bank rate adjustments today, I think, it was a very balanced rate adjustment. And I think it was very well accepted by the markets. When you -- when you look at the currency, the currency is stable. When you look at the bond markets, I think the -- actually, the reaction was very good. The rates were down by roughly 20 basis. When you look at swap markets, I can say, similar comments about the swap market. And I think it was a very well balanced rate adjustment. So it will, of course, have some implications on the deposit rates, which is something very favorable for all of us. First of all, our cost of deposit is actually lower than what you have stated. So you said like, roughly 22%, but in our Akbank's case, since we have this franchise and have the ability to have widespread deposits, our -- actually, average cost is significantly lower than this. So it is somewhere above 20% but less than 21%. And when you look at our expected cost of deposits in the coming months, so I wouldn't really be surprised if we reach a level which is around 19%. So I think that is possible. So we have been seeing this trend over the last couple of days. So I think this is a possibility. So this will be something very beneficial for our margins. As Ebru mentioned, our NIM is around 3.9%. So this is well above our guidance, which was like 3.5%. And I think we will be able to keep this, maybe even improve this, but one maybe downside risk is the CPI linker. So as you know, we started with 14%. Now we decreased that to roughly 12%. So when you look forward, the level of inflation at the end of October will probably be approaching around 10%. So therefore, we may have to actually adjust even further. So that will have some -- that will put some pressure on our NIM. But on the other side, the advantage of having lower deposit rates, I think, will more than offset this, actually decrease related to CPI linker. So I'm overall positive about the NIM progression looking forward.

Second quarter was the most difficult, probably quarter for the banks and for Akbank as well. And we were able to improve our NIM. So I think that, that was a very successful NIM management by the ALCO, by the treasury and all the other colleagues. Regarding the fee side, the payment systems, we have a very balanced portfolio. So when you look at the issuing side and the acquiring side, it is more or less in balance. So therefore, if we are losing some, actually let's say, some piece from one side, the other side will easily compensate. So therefore, I don't see a major, major impact on the payment system side. That is my second -- second answer.

And last but not the least, about cost of risk. Yes, we are operating around 210. Our guidance is like 300. Just to be on the conservative side, I think we will finish the year somewhere in between, probably let me say around -- it's, again, too early, but probably 240, 250. So I think that's a reasonable assumption.

And looking forward, I think 2018 and 2019, these 2 years were the most difficult years for the banking system and as well as Akbank. So as you remember, last year we have provisioned around TRY 6 billion, and this year, again, we have a similar trend. So 2 consecutive years, this is roughly EUR 12 billion. So actually, this is a lot of provisioning. So therefore, I'm comfortable. So hopefully, starting from the next year, our cost of risk should decline. Of course, there are lots of parameters. There are lots of variables, but best case scenario, I think we should be able to have a better number next year. And eventually, Akbank should stabilize somewhere around probably 100 to 150 basis, eventually. Not next year, not next year, but eventually, in 2 to 3 years' time, let me say. This is the kind of plateau where you will see us operating.

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Operator [7]

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Our next question comes from Gabor Kemeny, Autonomous Research.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [8]

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I have a question on growth and another one on margins. You talked about a possible recovery in loan growth in the second half on the back of the rate cuts. Would you want to increase your market share in this environment? So does this assume -- does this guidance assume increased market share? And where do you have the highest appetite? Which segments? And for the broader system, do you expect any additional lending-related to the Credit Guarantee fund?

The second topic is on your strategy of building the TL securities book. What sort of margins do you have on the TL securities? I think you showed a 16%, roughly 16% yield. And you talked about a little bit higher TL deposit cost earlier.

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Sabri Hakan Binbasgil, Akbank T.A.S. - CEO & Member of International Advisory Board [9]

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Gabor, thank you very much. Regarding the growth, I am more positive for the second half. Actually Akbank did very well on the first quarter, but the second quarter was a bit slow for us and actually, it was slow for the whole industry. But with the lower interest rate environment now, the trend at least, I think there will be more growth. So when you look at our guidance, it was like 10% growth on the TL side and a flat growth, 0 growth on the FX side. So we are speaking to these actually guidance for the loan growth. So will Akbank increase its market share? Eventually, yes, because when you look at our existing market share, it's in a record low for the company. So as you know, we have a very strong capital adequacy ratio and liquidity-wise, again, the bank is very strong. So therefore, eventually, yes, that will be the case. But as you know, we are an institution where sustainability and profitability, long-term approach is key to our activity. So whenever there is an opportunity, you will see us as a very active bank.

And when you look at our infrastructure as well, I mean I call this internally now Akbank has become a sales machine, which is really the case. So there was a lot of investment in analytics, machine learning, artificial intelligence and all that. So in terms of systems, we have been doing projects with lots of Silicon Valley type of companies where we use data much more efficiently than what we used to have before. So these will actually give us a lot of competitive advantage in gaining market share when the time is right. So the bank is really ready for this, financial strength-wise as well as structure-wise.

So where do I see the opportunity? I mean it's probably general purpose loans, cards maybe, SME, corporate, commercial, so across all segments. So what is really critical to us is the quality -- quality of them all. So it can be anywhere quite frankly. And this is also the case with CGS. We don't have a great market share in CGS. But if there's an opportunity on that side as well, of course, we will be more than happy to debate on this.

Regarding the securities book. My colleagues, actually did an excellent job in this. So you haven't really seen the impact of the [CET] on our numbers because some of these bond purchases actually happened after June 30. But there was some significant bonds purchased by Akbank at a magnitude of, let me say, several billion Turkish lira. And I think it was a very good attempt by the bank. So we booked all those bonds with the rates like about a couple of weeks ago. So we are familiar with the rates in Turkey. And I think that is something very profitable for us looking forward. So we have increased our market share to be frank with you. Roughly 2 percentage on the -- within the private sector banks and roughly close to 1% in the whole sector. So this was a good attempt. So that will also contribute to our NIM in the coming months.

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Kamile Necat Ebru GÜVENIR, Akbank T.A.S. - SVP of IR & Sustainability [10]

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Gabor, just a clear indication. These were mainly basically purchases of the treasury option. So if you know treasury option yield, you can get the security deals.

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Operator [11]

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Our next question comes from Alan Webborn, Société Générale.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [12]

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Sabri, when you think about asset demand in the second half of the year, clearly, having a 425 bp rate cuts, maybe a 600 basis point rate cut by year-end is possible. But clearly though, the impact of high prevailing rates in the market has dampened demand considerably. And are we still, in your view, some way away from normalized demand? It seems illogical even after a 425 bp rate cut that suddenly demand for mortgages or demand for cars, loans suddenly picks up massively because they're still prohibitively expensive compared to where they were a couple of years ago even in a high inflation environment. So when do you think we get really to the turning point that perhaps pent-up demand that then maybe starts to kick in? I mean do you think it will happen already after the 425 bp rate cut we've had? Or do you think it's going to take some time before the confidence comes back and affordability is there? And I'm thinking I guess particularly on the retail side because I guess the working capital loans have to be rolled over to some extent. So I'm interested in your view as to what is a reasonable level of rates when we start to get back to perhaps more normal demand, because clearly, you're telling us that you think you can get to about a 7% growth in TL lending between now and year-end. And it would just be interesting to understand where you thought that was going to come from.

And I guess, the second question was, it seems that the banking sector and the government have not been able to reach agreement over bad banks and so on. I mean what's your view of that? Is it that restructuring is proving relatively smooth for you as a bank? So why do you need the government? What do you think is the reasoning behind that? And do you think at some point, we will see a more permanent structure put into place?

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Sabri Hakan Binbasgil, Akbank T.A.S. - CEO & Member of International Advisory Board [13]

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Alan, thank you very much. Regarding the loan demand, in Q1, there was a reasonable loan demand. The interest rates were more reasonable in Q1. Q2, we had to increase the interest rates because our cost of funding was higher. And as a result of this and some other factors as well, the demand was very limited. So starting from Q3, I think there will be a more positive trend in the growth, but all of a sudden, we should not really expect a huge demand. So I think it will come with time. But my personal expectation is that it will be better than Q2. It will be better than Q2, but I think the demand will be still not huge, but much better. And when you look at the expected inflation, as I mentioned in September, October and so on, when you look at the existing policy rates and the interest rates today, there may still be some room for improvements. So we will experience that all together because now, still with the expected inflation in the future, still the real interest rates are still high. If you compare Turkey with the other emerging markets, we are still actually paying a lot of -- from the consumer point of view, from the borrower point of view, a lot of real interest rates. So therefore, we might still see some further easing in the interest rates in the market. So that may even push -- that may further push the demand of -- demand for getting loans from the banks. So in short, yes, the turn will be positive. But the demand will be gradually actually picking up and when you look at the level of interest rates today that we are demanding for loans, it's lower than what we used to have like a week ago, like 2 weeks ago. So we started seeing some positive trends in loan growth as well, but that will take time.

Regarding the bad bank. Yes, there were some discussions in that area several months ago, but I don't think that will be the case anymore. Initially, when we started having those problems at the beginning, it took a while for banks to act together. But now, we have lots of experiences, and good experiences, restructuring experiences with some big clients, smaller clients. So I think our banks, as a system, know how to handle such issues nowadays. So I think we can cooperate together. Of course, we don't have to restructure everything. But business has to be actually a feasible business. If that is the case, if the banks believe that if we help the company, eventually, that will be something we will be actually contributing to our economy. And then we will be restructuring this. I think this is the overall understanding of the banking system. And for the time being, I think it goes more smoothly than the initial times because now the banks have more experience in this. There are certain standards and more experience in this.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [14]

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Okay. So for the moment, you think it's going to be self-help rather than ongoing discussions to find a sort of a big solution?

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Sabri Hakan Binbasgil, Akbank T.A.S. - CEO & Member of International Advisory Board [15]

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I would imagine so. And when you look at our books, actually, we have already restructured, written off lots of loans until now. I gave my bank's numbers. So last year -- this year, we have provision like TRY 12 billion. So we are talking about big, big figure here. So we have already started tackling with our own issues, problems, and we are tackling with our problems all together with the other friends, the other banks, and I think it's a more cooperative environment today. Still there are still issues, which is yet to be resolved. So I cannot say that everything is resolved in the system. Still, there are some issues that we have to resolve on the real estate side. There are some issues on the -- I'm referring to the system, not specific for Akbank. There is some issues on the energy side as well, but I think now we have more experience and more positive looking forward.

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Operator [16]

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Our next question comes from Yulia Di Mambro, Federated Investors.

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Yulia Di Mambro, Federated Investors, Inc. - Senior Investment Analyst [17]

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I have a few follow-up questions, please. Firstly, on the rate and cut deposit repricing. Could you give us an update on what you're seeing in terms of deposit de-dollarization at this stage? And what real rates do you think that could reverse and we could see more dollarization? That's my first question.

My second question is on the reserve requirements. Could you please give us some thoughts on the proposal to tie reserve requirements for lending? Have you seen any more detail? And do you think it could affect your lending appetite?

My next question is on the securities portfolio. Just to follow-up on the discussion. You've increased the share of fixed rate securities as you mentioned. Do you expect to increase the share further over the next few quarters? And what is kind of your target percentage point?

And then my last question is on your FX liquidity. Could you give us an update where it stands now? It looks to me like it's declined slightly in Q2. So if you could tell us where that's been deployed, that would be great.

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Sabri Hakan Binbasgil, Akbank T.A.S. - CEO & Member of International Advisory Board [18]

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Thank you very much. Let me start with the easiest question, which is the reserve requirement. So we don't know much about this. So I cannot really make too much comment about this. So we don't know the details. So that's all I can say for the time being. So there is nothing concrete as far as we know. There are probably discussions within these institutions. But I don't know much about the trend at this stage.

Related to real interest rates, as I said at the beginning, this rate adjustment was a very fair and a very balanced rate adjustment. Still, Turkey pays a lot of real interest rates. If you compare Turkey with any other emerging markets today, still, we are talking about a huge, real interest rate, no matter how you look at it. When you compare the existing policy rates with current level of inflation, with anticipated level of inflation, still the real interest rate the country is paying is higher than the other emerging markets. So I think looking forward, there may be some further room for adjustments. So that is what I can say.

And I think you were asking about the impact of this on the deposits. And I think I've answered this question. But my expectation would be very positive for the banks. So we have started seeing those trends. So we have started with an average cost of deposits. Current deposit cost over 20%, and now hopefully in the next couple of months, I'm expecting to see my institution operating around 19%, maybe even lower, depending on the market environment. So this is the interest rate part.

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Yulia Di Mambro, Federated Investors, Inc. - Senior Investment Analyst [19]

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Sorry. And just in terms of the mix of deposit by currency, at what sort of real rates would you expect that to shift in either direction? It has been fairly stable over the last couple of quarters. Do you expect that to change?

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Sabri Hakan Binbasgil, Akbank T.A.S. - CEO & Member of International Advisory Board [20]

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Eventually, the dollarization was high in the first quarter. In the second quarter, it stayed the same. So it was around like 54%. So it was constant throughout the quarter. So still, Turkish lira is actually paying still a lot of real interest rate. And when you look at the demand for foreign currency in the country, I think the developments are also quite positive. When you look at the current account deficit of the country, so it is now something very marginal. So we are talking about like roughly EUR 2 billion euros. And it used to be a huge number in the past. But now the country is now approaching around roughly minus EUR 2 billion, which is like actually a record low number for this country.

Trading revenues are actually pretty good. When you look at the trade deficit, I think now Turkey has the -- this is maybe a portion of current account, this is it but the trade deficit is actually -- is now a minimum now. And so these are actually all very good signs and still good real interest rate on the TL. So we may start to see some shift. So it is a matter of time. I mean of course, this will take time, restoring confidence on the Turkish lira and so on, but I'm positive on this. So therefore, I think this will happen over time. So I'm positive.

Regarding the security. Do we have a target? We don't have a target. So it really depends on the rate and the opportunities in the market. But what I can say is we have a very flexible balance sheet. We have a lot of liquidity. Maybe -- maybe I can leave the liquidity question to our CFO, Türker. But what I can say, we have a lot of liquidity and a lot of flexibility. So I think that this is something very positive for the bank.

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Türker Tunali, Akbank T.A.S. - CFO [21]

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Thank you, Hakan Bey. Yes, Yulia. As Hakan has mentioned, we feel very comfortable with our liquidity. Actually, you can look at it from different angles. If you adjust to get the cash sitting in foreign banks and foreign currency at the end of the second quarter, it is that at around USD 3.5 billion, adjusted amounted to that USD 3.5 billion. We can look at that way. Or if you look from the liquidity coverage ratios, we are also disclosing in the report. If you look at the monthly evolution of our foreign currency, LCR, it is at around 200 percentage point, which is again a strong figure. And also, when you look at -- run also cost through our redemption from swaps, et cetera, actually, this liquidity increases to around USD 9 billion, which also allows us right around more than 3 years to pay the CAR wholesale funding without borrowing any single penny from abroad. So we feel very comfortable. And also, we manage our FX liquidity. Cost linked to overall profitable (inaudible) that's a very important factor.

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Operator [22]

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We have no other audio questions. Speakers, we can now switch to the written Q&A.

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Kamile Necat Ebru GÜVENIR, Akbank T.A.S. - SVP of IR & Sustainability [23]

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Okay. Thank you, Ali. There's one question on the web. It is asking about the exact currency guarantees on our construction book as regarding to debt assumption.

These are project finance loans and in case of noncompletion, there's a debt assumption, which means that the debt is taken over by the government for the payment. And also, after completion, if there's also minimum CAR passage guarantee, and as we mentioned during our call as well, all of these guarantees are [linked] to FX. This is the only question left on the web. So I'll now give the floor to our CEO for the closing remarks.

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Sabri Hakan Binbasgil, Akbank T.A.S. - CEO & Member of International Advisory Board [24]

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Okay. Thank you, Ebru. And thank you, again, for your kind attention. As you know, we are always fully committed to transparency, and we'll continue to be in close contact with all of you. And I want to once again thank all our people for their contribution in achieving such solid results. We are all aligned in our ambition to maximize sustainable shareholder value. And I have full confidence that our exceptionally talented people will be delivering on our promise. Once again, thank you very much, and have a good evening. Thank you. Bye-bye.

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Operator [25]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.