Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2023-Q1

[Semih Tufan, executive]

Hello, everyone. This is speaking, Semih Tufan, the Head of Investor Relations Department. Welcome to our first quarter '23 financial results conference call. Thank you for joining us today. I have my colleagues, Gizem and [ Kamal ] during the call.

Please let me touch some key points in this quarter in advance of going through the presentation. We recorded a slight decrease in the core business revenues compared to the previous quarter due to the swift and sharp increased funding costs and decreased yield of CPI linker security. The CPI prints come down during this period. In spite of that, our bank successfully managed to reach a satisfactory net profit figure due to the increase in noninterest income and lower provision expenses compared to previous quarters.

Right after the great earthquake disaster that our country experienced on February 6. Halkbank immediately rushed to the aid of our citizens and made a donation of TRY 7 billion, the first step to meet emergent needs. Also, the launch of our retail and commercial customers who were affected by the earthquake totaling an amount of TRY 56 billion postponed for the next 6 months in the first run.

In addition to these contributions, we announced earthquake support loan packages to provide additional financial support to our customers in the region, including retail and commercial customers. And in this regard, the exposure amount reached to TRY 6.6 billion level.

Now I would like to give the floor to my colleague, [ Kamal ], to get through the presentation. And after that, I will be happy to answer your questions. Thank you.

[Unknown Executive]

Thank you for joining us today in our first quarter earnings call. We are happy to share another strong quarter. After the presentation, we will receive your questions in our Q&A session.

Starting with the Page 1. Total assets increased by 67.6% year-over-year and reached to TRY 1.618 billion in Q1. You see the asset mix in the middle. The share of loans inched up 58.7% from 56.7% in the previous quarter. Our FX liquid assets mainly consist of the reserve requirements and swap transactions. Our CBRT receivables stayed at the same level compared to the last quarter. However, our swaps lessened to USD 3.8 billion in Q1, which was USD 5.7 billion a quarter ago. Please recall that our 3-month average FX ACR stands at 454%, which is far above the regulatory requirement of 8%.

On the next page, we have details of our securities. Their share within total assets decreased to 27.1% in Q1. That was 26.9% previously. On the right-hand corner of the page, we may -- you may see the classification of securities. CPI linkers portfolio reached to almost TRY 150 billion as of Q1 from TRY 135 billion previously, which is reflected as a growth of 12% quarter-on-quarter.

Accordingly, CPR linker's share within the portfolio stands at 38%. When it comes to the fixed rate TRY securities, its shares is up to 20% within the portfolio. On top of this, we estimated our CPI linkers with a valuation rate of 58% for Q1, which was 64% in financial year 2020 -- 2022.

As of the first quarter, CPI linkers posted TRY 15.7 billion interest income. By adding interest income from the remaining securities, total securities income reached to almost TRY 21 billion.

The following page shows our long growth details. We saw a roughly 74% year-over-year loan growth, which translates into 19.4% increase in the first quarter. SME segment was the main contributor on the quarterly growth figure. To recall, SME segment is one of the selected segments to avoid loan requirements on holding additional fixed rate government bonds.

In the first quarter, SME loans grew by 31.3% quarter-on-quarter on the back of recently announced CGF loan tickets and also accelerated usage of treasury subsidized micro SME loans. In addition to that, business loans were up by a modest 7.4% while retail loans saw a moderate growth of almost 15% quarter-on-quarter.

Looking at currency-wise, on TRY loan side, we have seen 19.4% increase in Q1, which is valuable in the sector average, while FX loans saw a slight decline of 0.5%, in line with the sector average.

Moving to the loan growth on Page 4. You see further details on the loan book. TRY loans make up 81.7% of the total book, while the remaining 18.3% consists of FX loans.

On the right-hand column of the page, you may see the balanced breakdown of loan book. SME portfolio dominates with a 50% share, a 36% share of SME loans belong to our cooperative scheme and 8% of SME loans are guaranteed by CGF. Thus, roughly 45% of SME loans are structurally quite secure. To add more, retail loans have 14% share in our total loan book.

On the bottom right-hand side, you see retail loans in more details. Mortgage loans have a 62.3% share in the retail book, which are inherently well collateralized. As for the rest, almost 70% of the retail book belongs to consumer loans, and 52% of these loans were granted to pensioners and payroll customers and a limited 1% of them are extended under CGF.

Flipping to the next page, Page #5. In the first quarter, fresh NPL inflows were quite limited and collections were strong. Accordingly, our NPL portfolio retreated by an almost TRY 780 million nominally. NPL ratio went down to 1.8% in Q1 from 4.2% a quarter ago. Similarly, the ratio of H2 2 to total loans came down to 6% in the first quarter from 6.8% previously. On the top right-hand side, NPL coverage further strengthened to 82.6% in Q1 from 81.5% a quarter ago.

The following page compares the NPL ratio by segments. Considering the dominant share of 86% in total loan book, corporate, commercial and SME loans, NPL ratios remain below sector. On the other hand, both credit cards and consumer loans NPL ratio stayed above the sector despite their promising decline being seen since the first half of 2022. Please recall that credit card exposure has a very limited 1.4% share within the total loan book. Similarly, consumer loans have an almost 3% share.

Turning to Page 7. You see more details on asset quality metrics. We continue to strengthen Stage 3 provisions and elevate Stage 3 coverage ratio during the quarter. Along with applying this conservative provisioning, our total loans coverage ratio secured a comfortable level of 5.24%. Although we didn't set aside an additional Stage 1 and Stage 2 provisions within the quarter, our coverage ratios across all stages seems quite strong, thanks to the front-loaded provisioning from last year.

Let's move on the Page 8, presenting details of liabilities. We witnessed loan-to-deposit ratio realized at a comfortable level of 78.2%. In more detail, TRY LDR was down to 103.3% while FX LDR was down by 37.1%. As for FX wholesale funding, it's continued to stay a comfortable 2.8% within the total liabilities versus sector average of 14.2%.

Switching to the next page, you will see further details of our deposits. Total deposits are up by almost 70% quarterly and 88% on a yearly basis. TRY deposits jumped by 39% quarterly, while FX deposits declined by 5% quarterly. Total FX protected deposits increased by 32% quarter-on-quarter, and the amount was almost TRY 190 billion, which refers to 15% of total deposits as of March. Currently, FX protected deposits increased by almost 40% quarter-to-date and reached roughly TRY 270 billion as of today.

Here, you can see more details on deposits. The demand deposits saw a 25% increase quarter-on-quarter while time deposits increased by 72%. Accordingly, our demand deposit share within the total deposits realized at 73.5%.

Cost, yield and spread details on Page 11. TRY cost of deposits, up by 170 basis points to 15.7% percentage points, and TRY loan yield was down by 110 basis points quarterly. Therefore, TRY cost spread have deteriorated almost 280 basis points compared to the previous quarter. As for TRY FX blended core spread, it was down by 262 basis points to 2.4% as of March.

Moving to P&L items on Page 12. Net interest income is up by 75% on a yearly basis due to the high interest income on CPI linkers. The headline net interest margin came in at 5.2%, while swap-adjusted NIM is 4.7%. In the first quarter, our average swap volume was around TRY 84 billion, which was the same level in the previous quarter.

On the bottom left-hand side of the page, we can see that our fee and commission income is up by 9% quarter-on-quarter and 109% year-over-year, which is quite higher than the March annual inflation print of 50.5%. We managed to grow our fee and commission income through insurance income and commissions collected from corporate customers.

Turning to Page #13. You see quarterly net income realized at TRY 4.56 million in the first quarter. Thanks to our strong performance of the operating revenues, our solid operating revenue in the quarter comfortably enabled TRY 7 billion amounted -- TRY 7 billion amount of earthquake donation. Already posted at 16.5% as of March, both on a quarterly and a cumulative basis.

We have the details of operating expenses on Page 14. Operating expenses increased by 168% quarter-on-quarter and rising almost 383% compared to the same quarter of the previous year. Earthquake donation weighted on OpEx as of -- a one-off expense. Please recall that if we exclude TRY 7 billion donation, OpEx would be up by 45.7% quarter-on-quarter and up by 162% year-over-year.

On the next page, we have details on solvency ratios. Kindly note that BRSA's forbearance measures are included in the ratios presented here. Our reported unconsolidated capital adequacy ratio came at 15.16%, up by almost 50 basis points compared to the previous quarter. According to new regulation came in at the end of January, the fixed exchange rate for our RVA calculation was revised, too. And 2022 data USD-TRY currency of TRY 18.7, which was TRY 13.3 for the previous regulation. Therefore, the most positive impact for fixing currency disappeared as of end of March. Along with less contribution from fixing currency, forbearance measures positive impacts are roughly 13 basis points on CAR, [ 7 ] basis points on Tier 1 and 11 basis points on CET1 both on consolidated and unconsolidated basis.

Last but not least, our nonfinancial strengths are on the next page. The numbers announced that we are in the right path. Our digital transformation gained momentum significantly. We increased our digital customers by 23% year-over-year. As such, the number of active digital customers increased to TRY 5.8 million as of March.

On the bottom left-hand side, you see digital transactions growth yearly. Our digital transactions amount increased to TRY 4.254 million in financial year '22 from TRY 2.445 million in financial year '21, which can be translated into 74% growth year-over-year. On the back of the accelerated digital transformation non-branch channels share within the total transactions realized at 97%.

These were my final remarks for our presentation. Thank you for listening. Now I would like to leave the floor to you for any questions you may have. [Operator Instructions]

[Unknown Executive]

Here, we have one question from Alan. Alan, please go ahead.

[Alan Webborn, analyst]

Alan Webborn from SocGen. I guess the sort of the question that comes to mind at the present time is that we're a few days sort of your -- the start of your election period. And no one has a crystal ball. But I wonder in terms of the balance sheet and the structure of your lending, how you feel about potential short-term changes to the interest rate environment and how you feel prepared for that. I guess you've known that there was something coming, and I just like to understand how you feel Halkbank is positioned to manage and to deal with whatever happens in the short term, whether it be currency appreciation, currency depreciation, higher rates. As I said, none of us know, but I'd be interested to know how you feel Halkbank is positioned and what you've been doing to prepare for a period of potential change.

[Semih Tufan, executive]

Thank you, Alan. This is Semih Tufan speaking. I think that this is the biggest question at the market in advance of the elections. As you know, we saw that the cost of funding, especially the deposit pricing, has been gradually increasing from the beginning of this year, especially. And currently, we are offering 25%, 28% for the base deposits when it comes to the marginal pricing for the big tickets reached to 33% levels. And it seems that, as you said, this upside trend on funding cost, we continue after the elections at least in the short term.

When it comes to the FX side, yes, we also see an upside risk over there in the short term after the elections and then maybe a stabilization in the mid-term. According to our calculations, our stress test, we calculated that each 100 basis points increase on TRY funding cost has an impact of 10 basis points negative impact on capital adequacy ratio in terms of the single and consolidated basis. There is no material differentiate between them, only 3 bps.

When it comes to the FX side, 10% change in the currency basket has an impact of 16 basis points negative impact on CAR. I think that most wondered impact of this potential upside risk on the security portfolio, we think that its potential negative impact will be limited on our case because, regulatory-wise, bond purchase on our side is quite low. As you remember, the regulations on that enforced in August 2022. And since then, the portion of the fixed rate bonds on our portfolio increased by only 3% from 17% to 20% by the end of the first quarter.

On the other hand, CPI linkers portion is now 38% level, which is the higher portion in our portfolio. And we recorded annual increase of 125% on interest income from CPI-linked securities, which help us make quite high provision during this period to be ready for any potential hit that we may see after the elections.

So all in all, we can easily say that we are comfortable to manage potential risks, which may arise due to the pricing fluctuations after elections. And finally, we can say that the main risk is to manage margin and spreads due to the, as I said, the upside risk on cost of funding and exchange rates and the loan growth, and asset quality will be the main issues to be focused on during the second half of the year.

[Alan Webborn, analyst]

Okay. That's helpful. And do you agree that because of the constraints that have been in place that you feel there is sort of pent-up demand in the corporate sector, are you -- the constraints that all banks have had in terms of lending? Is it rational? Do you think that after whatever short-term volatility we might see as things stabilize, would you expect that in a slightly different environment that there is the idea of that being pent up in the corporate lending demand? Is that something that you can see?

[Semih Tufan, executive]

Yes, it would be fair to say that. If we saw -- if we see any going on increase on the interest rate side, especially material depreciation on the TRY side, it would be fair to say that the demand at the market and the appetite coming from the market, especially from the commercial and corporate side, will be limited during the second half of the year compared to the first half of the year as well.

[Alan Webborn, analyst]

Okay. So it depends on whether interest rates will end up in sort of perhaps towards the end of the year, whether...

[Semih Tufan, executive]

It depends on several things, including the interest rate fluctuations, FX rate fluctuations and the much more color regarding the policy rate, much more color regarding the position of the government side, if there is any new ruling party or the existing party in regards of that.

[Alan Webborn, analyst]

Okay. Super good. Well, interesting times to come. And we'll be seeing how you get on.

[Semih Tufan, executive]

We thank you.

[Unknown Executive]

We have no other audio questions. And now we can switch to missing questions. We have a question from Valentina to ask, how do you see the trajectory of loan deposit spreads and NIM going forward?

[Semih Tufan, executive]

Let me start with the second part of your question regarding net interest margin. On a quarterly basis, net interest margin reduced by 340 basis points and reduced to 5.2% level. We think that we will close the year with a net interest margin at around 6% level, which is slightly lower than what we posted in the last year, 2022. But as you know, the main part is coming from the CPI linkers in terms of the net interest margin. Super adjusted net interest margin is expected to be around 2% level by the year-end.

Regarding your question, the trajectory of the loan deposit spread in the first quarter of 2020 to reach around 25% in total terms when it comes to TRY-denominated loan-to-deposit ratio is around 100%, and these ratios will be similar by the year-end.

When it comes to your second question and regarding reversal in the first quarter in nature, I'm not checking with my notes. We posted roughly TRY 1 billion NPL reversal due to the cash collection, especially in the last year. And so far in this quarter, we were quite active on the collection from the NPL loans. And we left behind a successful quarter in that term in terms of the collection from our loans, which is classified under NPL. And we also posted TRY 800 million reversals from the performing loan. This is the contribution part for this quarter in terms of the net profit because of the reasons that I said when I answered to the question of Alan Webborn, for this quarter, after a long time with effect from the mid of 2021.

In terms of the core business, we posted a negative -- slightly -- not negative, but slightly lower net interest income in this quarter compared to previous quarter, but well performance in terms of the net fee and commission. And well performance of the collection from the NPL and Stage 2 loans, we were successful to post a satisfied net interest -- net profit in this quarter. As I said, these reversals was the contributing part of our activity.

[Unknown Executive]

We have a question from [indiscernible] on what is the bank's non-forbearance consolidated CET1 ratio?

[Semih Tufan, executive]

It's 11%, including currency forbearance.

I think we have no further question. And again, I would like to thank all of you for joining us and wish you a good evening. Thank you.