Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to Halk's First Quarter 2020 Financial Results Conference Call and Webcast. I now hand over to me, Mr. Semih Tufan, Head of Investor Relations. Sir, please go ahead.

[Semih Tufan, executive]

Hello and good afternoon. Thank you for taking the time to join our first quarter financial results conference call.

In advance of moving on to our presentation, I would like to give you some brief information about the steps that we have taken due to the COVID-19 outbreak, the effect of which has been felt very strongly all over the world as [indiscernible] for the last few months. In this process, our priority is to minimize all contamination risks that will threaten the health of our customers and employees. In this context, necessary precautions are taken continuously in our branches and other working areas as well. We have also directed a significant portion of our banking services to digital channels and provided our employees with the facilities required to continue serving from their home.

On the flip side, shouldering the steps taken by the government and the regulatory authorities to eliminate the impact of the epidemic, we have been also taking the actions to meet liquidity needs of especially small and medium-sized enterprises and households. In this regard, we introduced new loan packages aiming at our customers in all segment. We also offered extension of some loans with a grace period of 3 to 6 months. We believe that the economic recovery will likely become more visible in the second half of the year. Thanks to all these precautions taken by the government and the other financial sector players.

Following this brief introduction, I will now give the floor to my colleague, Mr. Mustafa, hereby to go through the presentation in detail. At the end of the presentation, we will be happy to answer your questions. Thank you.

[Unknown Executive]

Thank you, Semih bey. Now let's move on to the first quarter results. On Page 1, we see a strong asset growth of 7.5% quarter-on-quarter without compromising its well-balanced structure. Loans had the biggest portion with 68%, followed by the securities with roughly 22%. Liquid assets are composed of predominantly foreign currency assets, 86%, thus, we enjoy ample asset liquidity as against less than USD 1 billion short-term lease.

Moving on to Page 2. Securities increased by 6.7% quarter-on-quarter, keeping its currency and rate composition pretty much the same. Securities portfolio had a strong contribution to the bottom line. Despite downside supply adjustment, income generation performance of securities was remarkable, increasing by almost 35% year-on-year. Speaking of which, CPI-linked securities amounted to TRY 24 billion, generating TRY 674 million income. For 2020, our valuation is based on 8.5% year-end CPI expectation.

Next page, we increased our market share with an almost 13% growth rate in loans quarter-on-quarter. Loan book grew on the back of Turkish lira loans, which increased by 16.5%, while FX loans underwent a sizable contraction by minus 6%.

Looking at the quarterly evolution of loan book, business and SME make the business contribution with roughly 15% and 13%, respectively.

Moving on with the next page. Looking at currency mix, Turkish lira loans make up roughly 73% of total loans. In the absence of FX loan demand, the weight of the Turkish lira loan is on the rise. In terms of customer segmentation, SME has the largest portion with 40%. It's notable that 45% of these loans is guaranteed either by treasury or cooperatives on the CGF or cooperative loan scheme. As for sector breakdown, we see that there is no material concentration. And also for those sectors which are regarded as troubled, our exposure is very measured and restrained. As for the details on retail loans, by type, housing and consumer loans had a portion of 56% and 36%, respectively. Besides material collaterals of housing loans, consumer loan portfolio has an inherent safe structure since 71% of these loans is granted to payroll customers and pensioners.

Next page. With regard to the asset quality, we witnessed that NPL ratio improved, coming down to 4.8%, while NPL coverage was increasing to 59.1%.

Moving on to next page. Looking at NPL ratio by segments. Corporate commercial NPL ratio dropped below sector average. NPL ratios of both consumer and SME loans are significantly lower than sector average, thanks to our inherently safe model.

Next page. When we look at the provisioning, we witnessed a prudent approach reflected on high allocation figures despite the fact that NPL formation slowed down significantly. Net specific cost of risk quarterly came down to 112 basis points on the back of strong collection performance, of course. On the other hand, net total cost of risk came up to 241 basis points.

Next page. Looking at the composition of interest-bearing liabilities, we see that the dollarization trend continued as Turkish lira funding gained further weight. Growing share of deposits in liability mix underpins low dependence on wholesale funding and granularity of funding sources.

Next page. On the funding side, we have expanded our deposit base by almost 10% quarter-on-quarter. This growth mainly stems from Turkish lira deposits, which increased by 11.7%, while FX deposit is being muted. As for the source of deposits, saving is the largest part of it, 39%, followed by commercial deposits with 34%. Public deposits, on the other hand, gained more ground by rising to 9% from 6%.

Next page. Looking at the matured of deposits. Demand deposits came up to 19.2% from 17.3%. In terms of currency composition, Turkish lira portion came up to 57% from 56%, and cost of it dropped to 9%.

Next page. During the quarter, we felt that the momentum of downward price movement is shifting from deposit to loans. Accordingly, cost of deposit came down to 5.6% and yield on loans to 11.2%, bringing [ cost of it ] to 5.8%. On security side, however, the yield jumped to 12.9% from 7.8%. This is because of the normalization after December 2019 CPI adjustment.

Moving on to next page. We see that net interest income increased by roughly 39% quarter-on-quarter. This significant increase is attributable to the normalization of yield on securities after December 2019 CPI adjustment. Consequently, net interest margin expanded, reaching up to 5.2%. And as for the intricate subject of the quarter, net fees and commissions increased 17% year-on-year. Despite recent regulations, fees continued to make a strong contribution to our revenues.

Next page. Core banking equities displayed an outstanding performance, yielding double-digit ROE. Quarter-on-quarter increase is roughly 33%. Net income came up to TRY 825 million, outpacing the previous reading.

Next page. Looking at OpEx, we see that it has increased 11.4% quarter-on-quarter. The increase is mostly attributable to annual pay rise. Our diligent cost management proved to be effective in containing costs and promoting efficiency, which is indicated by a significant lower cost-income ratio.

Next page. When it comes to solvency ratios, we feel comfortable with the current levels, considering regulatory thresholds. High profitability, as the source of internal acuity generation, uplifted the shareholders' equity to TRY 32.9 million (sic) [ billion ].

Next page. Lastly, as for the transaction channels, we are pleased to see that 93% has been done through nonbranch platforms and 56% on digital platforms.

Well, this is the end of my presentation. Now we can carry on with Q&A session, if you like.

[Operator]

[Operator Instructions]

The first question comes from Mehmet Sevim from JPMorgan.

[Mehmet Sevim, analyst]

My first question will be on loan growth, please. What are your thoughts on growth trends in the coming quarters, given this very meaningful growth trend that we've seen in the first quarter? And that -- connecting to your equity raise, while the announced equity raise is very significant and obviously crucial, how do you see the interplay between capital and your growth ambitions going forward? So how do you think how sustainable capital ratios will be in connection to your growth ambitions?

[Semih Tufan, executive]

Mehmet, thank you for your questions. Please let me start with your first one. Regarding the loan growth, yes, as you said, we had a huge jump in terms of the loan growth, especially on Turkish lira side. I look alike what we experienced in this quarter to what we saw in the first quarter 2019, in the advance of the Istanbul election. Of course, the conditions were quite different. We had experience in the financial crisis effect. But nowadays, the source of the crisis are different. But we have been experiencing a similar trend. That's why we saw a huge jump in our -- especially, as I said, Turkish lira-denominated loans.

We launched in -- maybe remember, we started feeling the negative effect of the coronavirus crisis with effect from the last 2 weeks of March. In this period, we have recently introduced the new loans, aiming at, especially the SME customers. And the other customers from the other segment, including retail customers.

Please let me give you an indication. Let's say, we have launched the new loans in the amount of TRY 50 billion level. It means roughly [ 12% ] of our total loan book. Only 10% of this newly launched loan belongs to retail, and the rest, 90% belongs to the business customers, including mainly the SME and micro SME customers. When it comes to the second quarter, so far, we have been seeing that this trend, in terms of the loan growth, is continuing, especially from the retail side. So far, we had a demand of roughly TRY 65 billion loan from the retail side, and we launched roughly TRY 5.5 billion exposure to that segment. In the second half of the year, we think that this trend will continue with a gradually reducing pace, according to the development, especially regarding the coronavirus crisis.

When it comes to your second question, of course, the loan demand is putting a pressure on the solvency ratio. But in the last week, we made a public disclosure regarding the capital increase. This operation will include the 3 public banks, including Halkbank. And we will make an increase on our core capital ratio in the amount of TRY 7 billion. And after this operation -- by the way, this operation will likely be completed in the next week. After this operation, we expect to see, on the consolidated basis, 175 to 185 bps improvement in all pillars of our solvency ratio. At the end of the day, we expect, on the consolidated basis, again, core capital ratio more than 10% and the capital adequacy ratio, which will be more than 15% level. So the new levels, in that term, we will feel very comfortable for the new levels in terms of the solvency ratio.

In terms of the loan demand, which, as I said, will likely be seen in the next period of the year, we think that these new levels of solvency ratios will be enough to handle this loan growth, potential loan growth.

[Mehmet Sevim, analyst]

Great. This is very helpful. And my second question will be on cost of risk, please. If you can talk more in detail about the approach that you followed in the first quarter when you increased your coverage levels, I think that will be very helpful. For example, how much of the provisioning this quarter is forward looking? And how do you see cost of risk also evolve in the coming quarters? Do you have any preliminary expectations for the full year?

[Semih Tufan, executive]

We thank you. In this quarter, as I said at the beginning of my speech, we started having a negative effect with effect from the only last 2 weeks of this quarter. That's why we didn't see any deterioration on our asset quality in terms of NPL formation or S2 formation. But in spite of it, just to be on the safe side, we preferred to make the provision in higher amount than the amount which was offered by our model, IRB model.

Please let me give you, as you can easily see from the figures. In the last quarter 2019, we made a huge provision for the NPL. As I said, we prefer the -- made the same level -- similar level provision for the NPL loans in spite of having a very negligible NPL movement in this quarter. Especially when it comes to stage 2 loans, we prefer to have a huge jump in terms of the provision amount in that segment, as I said, just to be on the safe side, to be ready against any potential deterioration, which will likely be with effect from the second half of the year. That's why you saw a huge jump in terms of the coverage ratio, including the NPL coverage, S2 coverage and total loan coverage, up to 200, 200 basis points level. But we are sticky with our guidance that we shared at the beginning of this year in terms of the cost of risk levels. We are still thinking of that. We will close the year with an improvement of 70 basis points, 80 basis points improvement in terms of total line gross cost of risk. We have yet to make a revision on this expectation so far, but we will be successful to achieve this target, we think. Thank you.

[Operator]

The next question comes from Deniz Gasimli from Goldman Sachs.

[Deniz Gasimli, analyst]

Three questions from my side. First, on -- just to follow up on the previous question on growth. So looking at the RSA weekly data on loans and deposits, I can see that loans for state banks are up 16% in April sequentially compared to March, deposits are up 19% for state banks. So it's really like the highest growth, even higher than in 2017. This is why private banks are -- have marginal growth this -- in April. So I mean, I suppose on loan growth side, this is driven by the [ category NT fund ] and I suppose this means that you're capturing more market share compared to private sector banks. But I wanted to ask about deposit growth. This 19% growth in April compared to March that I'm seeing for BRSA, is this something that you're seeing for your bank as well? And does that mean that you're capturing deposit market share from private sector banks? And I mean, also curious to understand how this is happening given maybe there is currency weakness, real rates are quite low to negative. So what do you think is driving this very meaningful deposit growth in April for state banks? That will be my first question.

Second question on capital. I can see on the -- on your slides, there's around 50 basis point decline in CET1 ratio sequentially. Could you disclose what was the benefit of forbearance measures during the quarter? How much benefit in basis points forbearance measures bring?

And just a third point on cost of risk. Could you repeat just the target for 2020 in terms of cost of risk? Was it -- did you say 70 to 80 basis point improvement in cost of risk? Or I thought it was previously 20 to 25 basis point improvement. [indiscernible]

[Semih Tufan, executive]

Thank you, Deniz, for your questions. Please let me start with you the latest one, regarding our total line gross cost of risk expectation. As I said, we are sticky with our first guidance that we shared at the beginning of this year. Yes, we expect to see 70 basis points, 80 basis points improvement in terms of total and gross cost of risk.

When it comes to your first question, as I said at the beginning of my speech, we were again quite active on the lending side, which is similar to what we have done in the first quarter 2019. Yes, you are right. Our lending activities are mostly covered by the CGF fleet. Let me give you an indication regarding this. The 75% of our newly launched loans is covered by the CGF. And as you know, their risk weight is 0. That's why this loan growth are burning relatively a low heavy on our solvency ratios.

On the other hand, on the deposit side, as you know, the BRSA has taken some measures, including RP ratio. When you have a look at the latest BRSA data weekly base data, you will see that the private banks are more preferring to invest in the public securities rather than lending market. On the other hand, when it comes to the other side, they are not competing on the -- especially the Turkish lira deposit side. That's why the floor is clean for the public bank. We started this trend with effect from the last quarter 2019. Maybe you remember, we recorded a huge jump in terms of the Turkish lira-denominated deposit collection. And this trend is still continuing. We saw this trend, as you can easily see from our growth numbers in the first quarter. We recorded, as you said, roughly 10% increase in blended term deposits. When it comes to the Turkish lira side, we recorded roughly 12% growth. As I said, this trend is continuing so far in the second quarter because -- mainly because of lack of competition on the Turkish lira deposit side. And of course, it brings us an advantageous position to fund our assets. The -- please let me give you a trend we have been seeing on the cost of deposit side. In the last quarter 2019, we recorded 450 basis points reduction on the [ TS ] cost of deposits in stock term. In the first quarter 2020, we recorded further 250 basis points contraction. And we think that we will see, again, more than 100 basis points contraction in the Turkish lira-denominated stock cost of funding in the second quarter.

That's why considering the huge loan growth, in terms of the liquidity, the dynamics are working in favor of the public banks in all aspects, including the profitability, including the cost of funding and the solvency ratios.

When it comes to your second question regarding the BRSA forbearance, it has an impact of 50 basis points in terms of the capital adequacy ratio. When it comes to the core capital ratio, this impact reduced 33 basis points. Before -- but of course, after the operation, we are yet to complete. And the next week, most probably we'll complete. And after the core capital injection, as I said, our core capital ratio will be more than [ percent ] and the capital adequacy ratio will be more than 15% in consolidated level. And again, I'm repeating the solvency ratio, our capital base. In terms of the capital base, we will be very comfortable with the current -- for the current loan growth. Thank you.

[Operator]

[Operator Instructions] The next question comes from [ Anil Talomar ] from Bank of America.

[Unknown Analyst]

I have just 2 quick questions. First, can you remind us how much swap costs you have incurred this quarter? I think it was small, but can you just give us the number? And my second question is about all these loans that have been deferred. How much -- I mean Halk has deferred as of today? I mean what's the total exposure that you have to these clients who ask for loan deferrals?

[Semih Tufan, executive]

Thank you, [ Anil ]. Regarding the swap cost, in this -- in the first quarter, the average swap volume we reduced to, in Turkish lira term, TRY 12 billion. It's around, in average term, USD 800 million, USD 900 million level. But because of the funding links, increased funding links, and because of the competitive rates on the internal money market side, we increased our swap volume to more than USD 1 billion levels average. In 2019, we recorded TRY 3.8 billion swap cost. In this year, we think that the swap cost will be limited to TRY 2 billion level at most for the time being. Of course, it will be subject to any revision.

When it comes to your second question, the total amount of loans, new postponed loans with a further period of 3 months to 6 months, is roughly TRY 22 billion. It's around 6% of our total loan book.

[Unknown Analyst]

So just to clarify for the swap cost. I mean, what's the -- I mean, you expect TRY 2 billion for the full year, but how much was incurred just in first quarter? Do you have this number?

[Semih Tufan, executive]

300. Roughly TRY 300 million.

[Unknown Analyst]

300.

[Semih Tufan, executive]

Right.

[Operator]

[Operator Instructions] There are no further questions over the phone. Dear speakers, back to you for the written questions.

[Semih Tufan, executive]

I think that we have a question from the web that we have already answered, I think, regarding the deferred loans.

If there is no any further question, we would like to thank all participants. And we hope that we will see a better days in the second half of the year regarding the coronavirus crisis, hopefully in the global. Thank you very much again for your joining.

[Operator]

Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation, you may now disconnect.