Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2021-Q1

[Operator]

Welcome to Halkbank First Quarter 2021 Financial Results Webcast. Thank you very much for standing by. [Operator Instructions]

With that, I now hand you over to Mr. Semih Tufan. He's the Head of Investor Relations at Halkbank.

All yours, Mr. Tufan.

[Semih Tufan, executive]

Thank you, Rob. Good evening. Welcome to our first quarter 2021 financial results webcast and conference call today.

I have my colleagues, as usual, Gizem and [ Kamar ] from the IR team.

First of all, we hope that you are all fine and healthy. In advance of moving to the presentation, I just want to touch some points stepping forward in this quarter. As we stated earlier, the impact of the increased cost of funding became more visible on spread and margins in the first quarter of this year. Despite momentum of the shrinkage has been gradually reducing, the trend seems to continue for a while. On the flip side, we have good news in terms of the collection performance from the NPL loans. And it's, of course, the reflection on the asset quality metrics. You will see more details on that in our presentation. We have also a better performance on the generation of fee and commission income compared to previous quarter.

Although the uncertainties regarding the pandemic are still in place, we witnessed a swift recovery in the economic activities, especially in the manufacturing sector. With the contribution of the vaccination, we think that normalization in all aspects will be much more pronounced in the second half of the year.

Now I would like to give the floor to my colleague Gizem for the presentation. And after that, we will be happy to receive your questions.

[Gizem Yücesoy, executive]

Thank you, Semih Bey. Welcome, everyone. This is Gizem from IR team. Thank you all for joining us today.

And now I'd like to go over our presentation, starting with Page 1 which presents our asset growth and its [ mixture ].

After strong growth in 2020, we have managed a modest 2% asset growth in the first quarter of 2021, and it is mainly backed by our securities and SME loan growth. On the right-hand side of the page, you may see our asset mix. 63% of our assets are loans, and followed by [ about ] 24% sale of securities. Liquid assets make up 9.5% of our total assets, consist of 85% of FX. And 88% of these FX liquid assets are [ headed to ] CBRT through the reserve option mechanisms.

We also have outstanding swap transactions of $2.8 billion and FX wholesale funding amounting $931 million. Almost 30% of FX wholesale funding is [ IFRS ] funding. 10% is repo, and 55% is Eurobonds amounting $500 million. Please bear in mind that this one is of our only outstanding Eurobonds and will be redeemed in July. And I would like to mention that our 3-month average foreign currency liquidity coverage ratio is at 211%, which is quite above the regulatory requirements.

On Page 2, you may see the details of our securities portfolio. Total securities increased by 4% quarter-on-quarter, and its share in total assets reached to almost 24%. Looking at the TRY securities portfolio, floating securities share in TRY securities is 7%, which favor us in this tight monetary policy environment.

As for the interest income from securities, CPI linkers [ gain ] makes up 44% of total securities income. And it is important to mention that we valuate CPI linkers with a 15% rate for this year.

Flipping to the next page, Page #3. We can see the normal breakdown of our loan portfolio in terms of customer segmentation. As from the beginning of the pandemic, we have supported our economy through various favorable loan packages. Accordingly, [ 53% ] of pandemic support loans are guaranteed by CGF, and 17% by treasury. However, TRY loan growth was muted due to lack of demand in the first quarter. Therefore, we have seen a slight 0.3% increase in TRY loan portfolio.

Our COVID-19-related loan utilization of last year performs quite well, so far. By the end of March, the current amount of COVID-19-related loans is roughly TRY 82 million, with a stellar payment rate of 98%. As you may see in the chart, albeit the loan demands remain muted, we've been maintaining our spread to SMEs and raised our SME portfolio by roughly 3% quarter-on-quarter.

The next page exhibits a detailed review of our loan portfolio. Turkish lira loans hold its own with 78% share in our total loan book. And the remaining 22% consists of FX loans, which predominantly belong to our corporate customers. Having a 44% proportion of SME loans provides us an [ advantageous qualitative ] opportunity. Accordingly, 20% of SME book is guaranteed by CGF, and 38% is backed by our [ unique ] cooperative loan scheme.

In terms of sector breakdown of loans. 2 of the largest shares belongs to companies operating in manufacturing and trade. They have low risk exposure considering they have been continuing their operations in the pandemic environment. As for the retail loans, mortgage loans has the lion's share of 60% in retail book, which are inherently well collateralized. 34% of retail loans compose of consumer loans, while [ 56% ] are provided either to our pensioners, payroll customers or [ utilized ] CGF-backed consumer loans. We also have low risk exposure on credit cards since they constitute 1% of our total loan book.

Flipping to the next slide, Page #5. We can see a decrease in our NPL portfolio due to our successful collection performance, and this collection exceeds 50% of our 2021 [ and budget forecasts ]. The share of stage 2 loans within total loans increased by 50 basis points due to restructured loans; and forbearance on loan classifications, which includes loans overdue by 90 to 180 days in stage 2. Restructured loans make up roughly 6% of total loans by the end of March. Furthermore, [ 37% ] of restructured loans [ are followed under ] stage 1. And 60% -- 62% are under stage 2. Nearly 99% of restructured loans consist of business loans.

Deferred loans increased TRY 72.6 billion in the first quarter, which refers to 16% of gross loans. Its amount was TRY 41 billion at year-end 2020. As a reminder: Deferred loans include restructured loans of TRY 18.9 billion, [ for those ] restructured due to pandemic, starting from 23rd of March in 2020. If you rule out BRSA forbearance measures regarding loan classifications, our NPL ratio would be 196 basis points higher than the current figure. Accordingly, stage 2 ratio would be 81 basis points lower than the current figure.

NPL ratio fell by 30 basis points considering the outflows from the portfolio and muted loan growth and is still below the sector average as such in the previous quarters. Following page compares the NPL ratios by loan segments with sector data. As you may see in the figures, the bank's NPL ratios are below the sector, excluding credit cards. And that one makes up 1% of the total loan portfolio, as I mentioned in a previous slide. Quality of structure is the main driver behind our successful below-sector NPL ratios by segment.

On a very positive note, 20% of SME book and 25% of consumer loans are under CGF scheme. Both of them creates almost 0 NPL. Moreover, 38% of SME book consists of cooperative loans, which creates historically only 10 basis points NPL. As for the rest of retail book, mortgage loans have only 15 basis points of NPLs generation. Pensioner and payroll customers creates only 10 to 15 basis points NPL.

All in all, 41% of total loan book has NPL generation below 50 basis points. For the rest of this year, we expect this trend to continue. And we are sticking with our NPL guidance of 4% or less than 4% and maintaining below-sector NPL ratio until the year-end.

More details on [ such core ] metrics are on the next page. Our strong collection performance reflected a total TRY 3.3 billion of TRY's -- of reversal from both nonperforming and stage 2 loans. We have released TRY 1 billion from NPL provisions due to cash collection. And another TRY 1 billion reversal comes from restructured loans depending on partial collection. TRY 1.3 billion reversal comes from the release of excess provisions that were being set aside more than the IFRS 9 model requires. Besides, it is worth to share that we still have excess provisions more than the IFRS 9 model requires.

As for the cost of risk, you may see, respectively, 22 and 25 basis points quarterly increase in gross and specific cost of risk. And it is reflecting the continuation of our prudent provisioning policy to reduce nominal increase in the NPL provisions.

Page 8 presents the details of our liabilities. While blended loan-to-deposit ratio fell to 95% in the absence of the loan demand, TRY and FX area decreased by roughly 115 basis points. Our FX wholesale fundings in total liabilities decreased to 3.8% from 4.3% since [ the payment of ] $500 million amount of Eurobond this February. We anticipate this rate to decrease further once our outstanding Eurobonds will be redeemed in July.

Details of deposits growth are on the next page. Total deposits have reached almost TRY 470 million (sic) [ TRY 470 billion ] with a 3% increase quarter-on-quarter mainly due to the depreciation in the currency. And FX deposits in USD terms fell by 3.5%. While we let relatively higher cost of commercial deposits leave, we welcomed low-cost savings deposits with longer maturity, and thereby its share raised to 38% from 34%. And I would like to recall that Halkbank is still the second largest bank in the sector in terms of [ the version ] of deposits.

More details of deposits are on Page #10. Demand deposits share in total deposits declined by 50 basis points, while time deposits share increases at same rate. When we look at the right-hand side of the page, deposits by currency, we can see that TRY deposits share in total deposits is 56%, which is a [ very ] comfortable level in contrast to what you'll see in the sector. Having a TRY-weighted deposits portfolio provides us a more favorable environment in terms of deposit costs considering [ the authorization trends obviously going on ].

Cost, yield and spread details are on the following page. As you know, there has been a sharp increase in the policy rate since the last quarter of 2020. We have witnessed 675 basis points increase in Q4 and the front-loaded 200 basis points increase in the policy rate in the first quarter of this year. As a consequence, we have seen a contraction in our spreads. Our blended [ stock ] deposit costs have increased roughly 170 basis points, and the loan yield is up by 130 basis points. Therefore, the blended spread has shrunk by 40 basis points. However, this contraction has good momentum and is not as high as in the previous quarter, but downside risks are still in place since repricing period extended due to deferred loans and loans with grace period which we granted during the pandemic.

We expect to see some expansion on spreads to some extent in the middle of the second half of the year, but this depends on the recovery of inflation outlook and, accordingly, at policy rates.

Moving on to P&L items on Page 12. As I mentioned in the previous page, there was a margin squeeze in this quarter due to rising funding costs. Besides, there was roughly 300 basis points increase in the money market costs, as we have been actively using the interbank money market mechanism. All in all, as our repricing period has been still going on, interest on loans could partially offset the boost in funding costs. Accordingly, the net interest income and net interest margins came under negative territory.

In the meantime, we have achieved an 11% increase in our net fees and commissions income, as we have raised our commissions for credit cards, transfers, letters of credit and [ safety product box ] by approximately 10%; and have started to charge some items we had never charged before such as cash placements to the ATMs without debit cards. With these improvements and more, we are sticking with our mid-teens growth expectation in net fees and commissions.

Moving on to the next page, Page #13, we may see the evolution of our profitability on the right-hand side of the page. In a nutshell, 11% increase in net fees and commissions quarter-on-quarter; strong other income prints due to the collection performance; and trading [ losses that ] composes of TRY 711 million of swap costs, normalized operational expenses and dividends income from our subsidiaries generate a net income of TRY 59 million.

And cost management details are on the next page. We had some one-offs in 2020 such as disinfection expenses related to COVID-19, computer and IT department expenses due to the home office adaptation and advertisements and donation expenses. We also recruited 1,600 new staff in 2020, roughly 8% of total head count, mostly in December; and saw its impacts on costs this quarter. Still, while the increase in personnel expenses is approximately 20% quarter-on-quarter due to new staff recruitments and inflation adjustments on wages, non-HR expenses declined by almost 10% because of normalization of one-off expenses I just mentioned. Accordingly, including personnel expenses, OpEx increased by only 2% quarter-on-quarter.

And we have the details of the solvency ratios on Page 15. Our reported unconsolidated capital adequacy ratio came in at 14.6%. If you rule out the BRSA forbearance measures dated 16th April and 8th December of 2020, the negative impacts would be approximately 105 basis points on CAR, 90 basis points on Tier 1 and 75 basis points on CET1 on both consolidated and unconsolidated basis.

And on the final page, we may see the details of banking transactions, in which mobile banking share in total transaction channels raised to 56% from 46%, with effects from the beginning of the pandemic March 2020. During the same period, the number of active digital channel users increased by 30%, and the transaction volume increased by 53%.

And that concludes our presentation. I thank you all for listening. And now we can switch to Q&A session if you have any questions.

Thank you.

[Operator]

[Operator Instructions] And we'll begin with Mr. Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

[Audio Gap]

in terms of Q1 today. Could you firstly just repeat? I think you were giving us the difference between the forbearance and nonforbearance capital ratios. I'm afraid you -- I think you did it a little bit fast, so could you possibly just tell us what that difference is again? And then I mean, secondly, I think you flagged that this was going to be a very difficult quarter in terms of the net interest margin. I mean, how do you see the sort of the second quarter [ maybe ] trending? I mean clearly you're expecting that things will get somewhat better in the second half. And perhaps you could give us an idea of where you think it's possible to be at the end of the year if your -- if we, for example, just get some moderate rate cuts in the second half. But could you give us an idea about what you think -- today you think the second quarter is going to look like in terms of trends compared to what we've seen in the first quarter, as far as the sort of the moving parts of the net interest income are concerned?

[Semih Tufan, executive]

Thank you for this question, Alan. Gizem, can you help us for the first part of the question?

[Gizem Yücesoy, executive]

Sure, Semih Bey. Repeating the forbearance impacts, Alan: The negative impacts would be approximately 105 basis points on CAR, 90 basis points on Tier 1 and 75 basis points on CET1. It is both on consolidated and unconsolidated basis. It's similar.

[Semih Tufan, executive]

For the second part of your question. I think that we have a similar question from the webcast, Ms. Valentina. I think that we will be in a position to answer both of you. As we stated in the presentation, the first quarter, of course, was the worst quarter in terms of the net interest margin and the contraction on spread, but as we stated in the presentation, the momentum, the shrinkage on the spread has been gradually reducing. Just to clarify this picture, please let me give you an indication regarding the size of the compression on the spread. Let me give you the shrinkage in the last quarter 2020. On TRY side, it was 290 basis points. I mean the TRY core spread contraction, but when it comes to the first quarter 2021, it reduced to 180 basis points level. Similarly, on the FX side, the shrinkage on FX core spread in the last quarter 2020 was 250 basis points, but when it comes to the first quarter, because of the Turkish lira depreciation, FX core spread expanded by 110 basis points. So it has a positive impact in terms of partly offsetting the blended core spread. And the blended core spread in this quarter reduced -- blended core spread contraction reduced by 42 basis points levels, while it was roughly 200 basis points in the last quarter of 2020.

So why I'm giving these indications to you. Because just to show that, the most negative impact in terms of the spreads, we saw in the first quarter. And for the second quarter, so far, we started feeling gradually reducing negative impact in terms of the NIM and spreads. That's why, yes, on a quarterly basis, our net interest margin reduced to almost 0, on a quarterly basis, but we are still sticking with our guidance in terms of the net interest margin as we shared at the beginning of this year. Of course, it may be subject to some revision, but we would like to see the figures and the situation by the end of the first half to make any potential revision on our guidance in terms of the profitability metrics. Just to remind you: We expect to see 100 basis points reduction on net interest margin by the year-end.

[Operator]

All right, so the floor is now open for audio questions. [Operator Instructions] All right, speakers, I believe that is it for the audio questions. We can switch to the written questions, if you have any. Over to you.

[Semih Tufan, executive]

Rob, I think that we have no any further question. It shows that we have already given all the details regarding our situation in the first quarter. I think that we have already answered -- or my answer is satisfying for Valentina, I guess, for the question coming from the website. And if it's the case, I would like to thank you, all of you, for joining us today.

And I wish you a good weekend for all. Thank you.

[Operator]

All right, thank you, Mr. Semih Tufan. And ladies and gentlemen, that, I believe, now concludes today's webcast call. I'd like to thank you for your participation. You may now disconnect.