Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the Halkbank First Quarter 2020 Financial Results Webcast. Thank you very much for standing by. There will be a Q&A session following the presentation by the speakers. [Operator Instructions]

With that, I will now hand you over to your host, Mr. Semih Tufan from Halkbank. Mr. Tufan, the floor is yours.

[Semih Tufan, executive]

Thank you, Rolf. Hello, everyone. Thanks for joining us today. And today, my colleagues Gizem and Kemal will assist me as usual. In advance of going through the presentation, let me give you some brief information regarding what we did in the quarter in general terms. After a moderate loan growth last year, the TL loan growth during the first quarter of this year reached the sector average with around 10% level. The growth was mainly driven by the SME loans and partly housing loans.

On the funding side, Turkish lira deposits continued to be the main funding source. On a quarterly basis, we achieved Turkish lira deposit growth close to the sector average. As of today, the total volume of the FX protected deposits reached TRY 100 billion level. In this product, we have achieved the target rate as of April. On the other hand, the size of our security portfolio increased by 18% level in this quarter. The share of CPI-linked papers also increased from 32% to 37%, playing an important role in increasing profitability. After the capital increase that was realized at the beginning of March, our solvency ratio has improved by roughly 300 basis points.

With enforcement of the newly announced loan packages in the second quarter of the year, we expect the loan growth aimed at export investment and the new employment, especially for SMEs to continue. For now, we maintain our forecast for the loan and deposit growth, asset quality, profitability and the capital adequacy, which we shared at the beginning of this year. However, depending on the changing market dynamics, we may update this in the second half of the year.

Now I would like to hand over the floor to my colleague, Gizem, to go through the presentation. And after that, I will be happy to answer your questions. Thanks.

[Gizem Yucesoy, executive]

Thank you, Semih. Good evening, everyone. This is Gizem from the Investor Relations team. I will go through the presentation, then we can switch to the Q&A session.

Starting with the OpEx on Page 1. Halkbank recorded 7% FX growth quarter-on-quarter, led by main securities and TL loans. You may see our asset mix in the middle chart. Loan share increased to 58% from 57%, and securities share increased to 27% from 25%. Remaining part is liquid assets, having an 11% share in total assets, that consists of mostly reserve requirements held at CBRT. The left-hand side table shows that we have approximately $1.9 billion of swap transactions, which are mostly with the CBRT. Our short-term FX wholesale funding is currently $316 million, consisting of largely IFI funding and repo transactions. As you may see in the upper right-hand side of the page, our 3-month average foreign currency LCR is at 232%, which is comfortably higher than the regulatory requirement of 80%.

The second page shows the details of our securities. Their share within total assets reached 27% with the help of TRY 24 billion increase in the CPI linker portfolio. On the right-hand side of page, you may see some decrease in TL fixed rate securities, while FX fixed-rate securities share increased. This is because we shifted our $900 million demand government securities into FX portfolio from TL.

Regarding lower left-hand chart, we are still evaluating our CPI linkers with 36%, as such in the prior quarter and printed roughly TRY 6 billion income. I'd like to recall that it was BRL11 billion income from those securities in 4Q, as we evaluated them with the actual December CPI print in fourth quarter. Please keep in mind that every 1% increase in the CPI linkers evaluation rate, has an 11 basis points or TRY 870 million impact on year-end net interest margin.

Moving to loan growth on Page 3. Halkbank grew a moderate 8.5% quarter-on-quarter backed by our leading segments, SME loans and by corporate loans and the increase in the retail loans mainly consists of mortgage loans. TL loans up 10% and FX loans in USD terms, contracted 3% quarter-on-quarter.

On to Page 4, the detailed breakdown of loans. TL loans make up 72% of total loans and the remaining 28% consists of corporate segment dominated FX loans. In terms of customer segmentation, you may see that our SME portfolio dominates the total loans, with a 42% share. 12% of SME loans are guaranteed by CGF and 35% of SME loans belongs to our unique cooperative loan scheme. 39% of our total loans, consist of corporate loans and roughly 33% of our corporate loans consists of project finance loans.

Regarding the sector breakdown, our loan portfolio is largely driven by manufacturing, trade, services and retail segments. As for the retail loans, which you can see on the lower right-hand side of the page, mortgage loans have approximately a 65% share, with a well-collateralized structure. 28% of retail portfolio consists of consumer loans, 54% of which are provided either to our pensioner and payroll customers or utilized as CGF backed consumer loans.

Switching to the next page, Page #5. We have seen a 5% increase in NPLs in nominal terms and our NPL ratio down by 10 basis points to 2.9%. Accordingly, our NPL coverage ratio has been increased and reached 75%, both by our prudent approach and by IFRS model requirements. In terms of Stage 2 loans, their share in total loans increased by 90 basis points and reached 9.6%, we will see its coverage details on the coming page.

Moving to Page 6, NPL ratio by segments. You may see that our NPL ratios in almost all segments, recorded decreases or stayed flat. Consumer loans NPL ratio stayed above the sector average, due to one of our pandemic-related support loan package. But the volume of this package is 1% of total loans, and no new NPL inflow was recorded in this quarter. Our successful collateral structure is behind these below-sector average NPL ratios in business and SME loans. Besides, 12% of both SME and consumer loans are under CGF scheme, and they create almost 0 NPLs.

Turning to Page 7, we show the details of cost of risk. After a quite prudent provision approach in prior quarter amounting TRY 10 billion. This quarter, we set aside provisions for mainly Stage 2 and Stage 3 loans. For Stage 2 loans, we have set aside some additional provisions for some big ticket commercial customers. So Stage 2 coverage increased to 17% from 15%. As for the Stage 3 loans, we made some model adjustments. To make it clear, in every 3 months, we set aside provisions for NPLs to reach eventually [Technical Difficulty] due to new NPL inflows.

By this way, our NPL coverage has risen to 75%. Regarding provision reversals, they were considerably lower than the prior quarter, while we continued our prudent approach, and that's the reason of the increase in net cost of risk in cumulative terms. It increased approximately 40 basis points quarter-on-quarter, in both total and specific terms.

Switching to Page #8, the liability details. Our LDR improved 85 basis points to approximately 86%, while TL LDR is a comfortable 128%. FX LDR, up by 5 points due to the decline in our FX deposits.

Next page, Page #9, shows the figures related to our deposits. TL deposits up 27% and most of this increase is coming from the commercial customers, which is mainly due to FX protected deposit schemes and the remaining part of this increase is supported by savings and public sector deposits. FX deposits in USD terms shrank 14% quarter-on-quarter, again, mainly due to the FX protected deposits from customers who converted their deposits into TL from FX. In this scheme, we have roughly 12% share in FX historically, and the demand is still going on.

As a reminder, we are comfortable regarding the Central Bank's conversion rate of 3% FX accounts to TL accounts implementation, as our current rate is more than 10% for a while. As for the corporate conversion rate target of 20% until August, our rate has exceeded 20% recently. So in blended terms, total deposits increased by 7% quarter-on-quarter and reached TRY 670 billion.

We may see more details on deposits on Page 10. While we achieved a TR rate of deposit growth, TR deposit share increased by 8 points to 49% from 41%. Demand deposits up 4%, while time deposits up by 6%.

Cost, yield and spread details are on Page 11. TR cost of deposits, up by 170 basis points to 15.4%. As you know, the FX protected deposits rates were relatively competitive in the beginning of this year, the rates reached more than 20%. For mainly this reason, the stock cost is still high, and we offer approximately 17% for these deposits. TR loan yields up a slight 30 basis points, in line with loan growth. As a result of this, blended costs were down by approximately 170 basis points to 5%.

General items are on the next page. In the previous quarter, NII was a strong TRY 20 billion due to the CPI linker aggregation, with 36% for the full year. So we saw the full year impact on the fourth quarter. But in this quarter, we are still evaluating our linkers with 36%, and the income from the securities is TRY 6 billion, as I mentioned in the previous slide. As a result, quarterly headline and swap adjusted NIM declined, while they improved comparing with the full year 2021. Fees and commissions up by 14% quarter-on-quarter and a stellar 98% year-over-year, with the help of mainly corporate and commercial customers, credit cards and allocation commissions.

Moving to Page 13. To sum up our P&L, we printed strong NII and fee and commissions income. Net trading growth got better due to decreased swap usage. The average swap volume contracted to TRY 30 billion from TRY 48 billion, while swap costs came in at TRY 1.1 billion. On the upper left side of the page, other line includes TRY 400 million of NPL reversals, due to collection performance and TRY 1.8 billion of tax provision. This resulted in a net income of TRY 2 billion and 15% ROE, with a 340 basis point quarterly improvement.

OpEx details are on the next page. HR expenses up by 10%, while non-HR expenses up by 3% quarter-on-quarter. Total OpEx increased 45% year-over-year, well below the inflation. Cost to income ratio improved by 10 points to 32% from 42%.

Solvency ratios are on Page 15. Recent TRY 13.4 billion of capital injection has approximately 260 basis points impact on our solvency ratio, which provides us quite comfortable buffers. The recent regulation from the BRSA dated 23 April, 2022, which takes into account Central Banks and 2021 TL-USD currency on risk-weighted OpEx, has approximately 50 basis points impact on our current solvency ratios, on both consolidated and unconsolidated basis.

Turning to digital activities on Page 16. Our digital transformation gained momentum significantly, since the beginning of the pandemic. We continue to improve our digital capabilities. We reached up to 4.7 million active digital customers as of March. The upper left-hand side, you may see active customers by types; mobile-only customers volume up by 29% year-over-year to 3.9 million from 3 million. Total digital transactions volume up by 33% and mobile transactions volume up by 45% year-over-year. The lower right-hand side of the page shows that 96% of our transactions have been made via non-branch channels, while mobile transactions have a 62% share in total transactions.

These were my final remarks, I thank you all for listening, and now we can switch to the Q&A session.

[Operator]

[Operator Instructions] We've got a question from Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

You touched on the regulatory changes that are coming in and potentially the impact on your -- I think, your SME business. I mean could you just talk us through how you think those regulatory changes are going to impact you, and what sort of -- what should we see in the next couple of quarters, as you sort of -- you adapt to that? So that would be the first question.

I didn't hear properly what you said about the difference between forbearance capital ratios and nonseverance. So could you repeat that for us again? And could you talk a bit about how you see the dynamics of the different constituents of the loans in the future quarters of 2022? And also interested to see that your mortgage business was doing perhaps a little bit better than some of your peers. And just to give us an idea of how you see the evolution there as well?

[Semih Tufan, executive]

Thank you, Alan. Semih Tufan speaking. For the first question, as you know, the BRSA announced the 3 different adjustment. The first one is with effect from the beginning of April 2022, for some certain types of the loans, if the growth for the commercial loans is higher than 10%, you will need to have a reserve requirement with the CBRT. But lots of the loans taking place in our portfolio, is not involved in the scheme. For example, SME loans, cooperative loans. The loans aimed at the export and investment customers. Let's say, some corporate credit cards and some exposures to the financial institutions are not involved in the scheme. That's why the biggest part of our portfolio is made up of that kind of loans.

So we don't see any considerable impact for this scheme. According to our calculation by the year end -- until the year-end, we may need additional TRY 125 million new liquidity for parking with the CBRT and it's very negligible amount in terms of having an impact on our P&L side. When it comes to second and third adjustment -- for the second one, during the first 5 months, if the loan growth for the commercial loans is higher than 20%, you will need to have some additional reserve requirement. But according to this date, we have roughly 15 days until the end of May. The commercial loan growth rate for that kind of loans will not be higher than 20%, and there will be no impact on our side.

For the third adjustment, which is regarding the real person conversion rate from the FX-denominated deposits to Turkish lira ones. As of April, the threshold should be higher than 10%, and we achieved this target. The second additional 10% we need to have until 8th of July, if I'm not wrong. And we think that we will achieve this target again. So we don't expect to see any impact in that term.

When it comes to the second question regarding the BRSA impact, as Gizem said in the presentation, we have roughly 50 basis points as of the beginning of May, the impact of the BRSA for banks in consolidated and unconsolidated term.

The third question, if I'm not wrong, was regarding the mortgage increase mortgage loan movement during the first quarter. As you can easily see, the portion of the retail loans is making up only 16% of our total loan book and 50% of these loans are being made by the mortgages. We are offering for now, 1.29% on a monthly basis for these housing loans, and the NPL ratio is quite low structurally, and we don't see any problem -- in the future. As you know, very nearly, housing mortgage packages was announced by the government, and will take place for these loans in the near future. But our main target is to grow for the loans aimed at the SMEs, especially acting on the export investing, and creating new employment sites.

[Operator]

Okay. [Operator Instructions]. And we will stand by for a few moments for any more audio questions. If not, we will move into the written Q&A.

All right, speakers. It does not appear if we have any more audio questions. So if you'd like to switch to any written questions that you might have, that would be great.

[Semih Tufan, executive]

All right Rolf, I think that we have a question from the webcast. Mr. Hakan Aygun, he is asking our confirmation for the level of FX deposit conversation (sic) [conversion] threshold, which is higher than 20%. Yes, for the legal side, legal person side, it's higher than 20% for the time being. For the real person, it's around 12% to 13% level. And as I said, we have a time until the 8th of July, to achieve the target, I mean, another 10%, up to 20%. And we don't see any problem for achieving this target. Yes, we will get this threshold until that date.

And the second part of the question is regarding our forecast for net interest margin and capital adequacy ratio evolution. We are now, as I said at the beginning of my speech, sticky with our guidance regarding the net interest margin and capital adequacy -- solvency ratios. I mean, by the year-end, we expect to have roughly 5% in terms of the net interest margin. And the -- as we said, in terms of the solvency ratios, we are quite comfortable with the current level. And then we will -- we are planning to close the year on a consolidated basis in terms of the capital adequacy ratio, which will be more than 13% level according to our calculation, which is, of course, subject to update or change, depending upon the market dynamics.

[Operator]

Thank you, Mr. Tufan. We don't have any more audio questions, if you have any more written questions. That would be great. Otherwise, we can conclude.

[Semih Tufan, executive]

Yes, I think that we have no further question from the webcast. And then if we don't have any further question, I just wanted -- for all the participants, thanks for joining us, and have a good evening.

[Operator]

Thank you, Mr. Tufan. Thank you so much. Well, thank you, ladies and gentlemen, that concludes today's webcast call. Thank you for your participation. You may now disconnect.