Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Analysis

Significant Financial Growth and Strategic Asset Adjustments

In the recent quarter, the company's total assets increased by 10% to TRY 2.4 trillion, largely due to rising securities and liquid asset holdings. Net interest income improved by 19%, while net fees and commissions surged by 17% quarterly and 168% year-over-year. Operating revenues grew 42% quarter-on-quarter. The bank reported a net income of TRY 4.8 billion, marking a 134% increase, with a return on equity reaching 14.8%. Total deposits rose by 5%, driven by foreign currency savings accounts. Furthermore, the company's loan spreads benefitted from proactive interest rate adjustments and regulatory guidance, setting a positive outlook for asset repricing and core spread improvements for the year.

Turkish Economic Outlook

The Turkish economy demonstrated resilience with a growth rate of 4.5% in 2023, primarily driven by robust domestic demand. As we look forward, projections for 2024 anticipate a slight slowdown in growth to around 4%, in line with the government's medium-term objectives. This outlook is set against a backdrop of evolving global monetary policies, where central banks are beginning to pivot towards easing. Such changes, especially movements from the European Central Bank, are vital for Turkey's economy, which heavily relies on exports to Europe.

Inflation and Monetary Policy

Inflation remains a significant challenge, but expected base effects and the tightening of financial conditions are likely to provide relief by mid-2024. The Central Bank of the Republic of Turkey (CBRT) has taken decisive actions, including raising policy rates and modifying its operational framework, which can enhance its ability to stabilize prices. This proactive approach has seen the current account deficit improve dramatically from around $60 million to $30 million, positive indicators that have garnered favor from credit rating agencies.

Banking Sector Adaptations

The banking sector has effectively adapted to the changing financial landscape, managing to reprice loans based on anticipated interest rate hikes. This has resulted in higher yield loan repricing despite a noted normalization in loan demand, which could constrain interest income. Yet short-term gains from CPI linkers and fees are expected to support income generation during this transition.

Performance and Asset Growth

Halk Bank reported a solid start to the year with total assets reaching TRY 2.4 trillion, marking a 10% increase quarter-on-quarter and a staggering 49% increase year-over-year. The composition of these assets has shifted, with loans dropping from 56% to 53% of total assets, indicating a strategic move towards increasing liquid assets under tighter financial measures prescribed by the CBRT.

Future Expectations for Margins

Looking toward the future, the Turkish lira core spread is expected to gradually improve, particularly in the second half of the year. While some initial pressure on net interest margins is anticipated, it is forecasted that the overall margin will remain flat compared to the previous year. This resilience in margins highlights the bank’s confidence in weathering the tightening effects while maintaining profitability.

Concluding Thoughts

With a strategic focus on restoring macroeconomic stability and enhancing credibility in the market, the outlook for Halk Bank appears cautiously optimistic. The firm believes that the shift in monetary policy will pave the way for lower inflation and sustainable growth. The combination of improved external balances and a favorable regulatory environment positions the bank well for future success, despite the challenges faced in the current economic scenario.

Earnings Call Transcript 2024-Q1

[Mirac Tas, executive]

This is [indiscernible] Mirac Tas speaking, Head of Investor Relations. Today, me and my colleagues, Gizem and Kamer will host you in our earnings call. We will update you on the operating environment and Halk Banks' financials. At the end of the presentation, we will hold a Q&A session. Before delving into the specifics of our performance, I will start with the operating environment.

As you know, the Turkish economy grew by 4.5% in 2023. Domestic demand continued to be the main driver of the growth last year. Leading indicators show that the economic activity has remained strong during the first quarter of 2024 on the back of resilient economic demand. Along with the lag effect of the tightening in the financial conditions, economic activity may lose some momentum in coming quarters.

On the external side, weak global macro backdrop has weighed on the global economy. The late rate cut expectations from the Fed has put some pressure on the economic activity. Yet some of other notable central banks, such as the Switzerland National Bank already started to cut rates. Moreover, money markets, it is surprising that the European Central Bank will start cutting its policy rate by June.

The European economy is very important for the Turkish economy because it is responsible for more than half of the Turkey's exports. So ECB's potential rate cuts are positive for the Turkish economy. In summary, we are at an inflection point when it comes to global monetary policies. Some central banks already started to pivot, others will follow, and then they'll probably synchronize on easing cycle.

By the way, Fed's taper from constructive tightening also [indiscernible] easing cycle in the global monetary policies. Under this domestic and external landscape, we envision somewhat a slowdown is likely for the full year. So we expect economic growth in 2024 to be around 4%, in line with the medium-term program's target.

The inflation trend continued to remain relatively high. The challenges caused by the underlying inflation are expected to ease by middle of the year with the help of the strong base effects. Divergence between CBRT and CRM forecast and the market participants meeting inflation expectation is a key factor that shapes the CBRT's response function in which CBRT has strengthened its [indiscernible] recently.

Furthermore, CBRT is not only hiking its policy rate but also simplifying its policy framework and deploying it with macro potential policies. For instance, exiting for security maintenance practice is reflected in high yields in the bond markets. All in all, monetary transmission mechanisms start to run efficiently and this makes CBRT policies more effective to reach the price stability goal.

Furthermore, external balance indicators have also been improving by the help of the coordinated tightening in the monetary and fiscal policies and improving consumer sentiment that may push back the consumption demand. In this regard, current account deficit narrowed from $60-ish million to $30-ish million. This dramatic improvement in the current account balance explains the credit rating agencies positive decisions in favor of Turkiye.

To sum up, CBRT's decisive tilt towards orthodox monetary policies, recovery in external balances, shift service decline in country risk premium, replenished international reserves, and finally, re-rating negative are all the obvious outcomes in the new era. Following the rate hikes carried out by the CBRT to tame inflation, the asset repricing continued throughout the quarter.

So cost of funding of the sector has increased in line with the rate hikes and additional tightening with alternative tools. On the other hand, with the help of the CBRT's evidence success in its forward guidance, following this policy shift in May 2023, banks have managed to reprice loans quickly because they could forecast interest rate hikes before the monetary policy Committee meetings. In this context, the ongoing tightening enabled the banks for high-yield loan repricing while curb excess loan impact.

The normalization in the loan demand is assumed to limit the interest income generation for the sector. However, the sector could generate income from CPI linker's, fees and commissions, remuneration on required reserves and other earnings items in the short run.

In the medium and long run, restoring macro and financial stability will create a favorable environment for the banks to utilize the growth potential with widening core spreads. We, as a bank start the year with relatively solid financial results. Securities support asset growth in the first quarter. Yet continuing normalization steps both on the regulatory measures and the policy rates have created a more challenging environment for the loan growth.

However, Turkish lira spread has improved on the back of the current asset repricing despite the ongoing rise on the cost of fund. There will be gradual improvement on the Turkish lira core spread throughout the year. Thus, we expect to see Turkish lira core spread in the positive territory, especially for the second half of the year.

On the margin side, there might be some additional pressure on the net interest margin in the first half of the year, which stems from incomplete recovery of Turkish lira core spreads. But in the second half of the year, we will largely compensate it with an accelerated momentum of core spread improvements. Finally, we aim to end the year with a flat headline in net interest margin compared to previous year. In summary, we firmly believe that the policy shift will result in lower inflation and sustainable growth.

Moreover, rebalancing economy, improving expectations, increasing credibility, declining risk premium, decreasing exchange rate volatility and increasing visibility in the market will shape banking sector balance sheet in the coming period. Gizem will now provide insights regarding our first quarter performance. Following her presentation, I'll be available to answer your questions. Thank you very much. Gizem, I am handing over to you. Please go ahead.

[Gizem Yücesoy, executive]

Thank you, [indiscernible] Welcome, everyone. Thank you for joining our presentation today. Starting with the first page details for assets. Total assets grew by 10% quarter-on-quarter and 49% year-over-year and reached TRY 2.4 trillion but mainly due to the increase in securities and [ TL ] liquid assets. Total loans share in total assets dropped to 53% from 56%, while liquid asset's share raised 15% from last quarter's 13%.

Liquid assets basically consist of reserve requirements, which has increased quarter-on-quarter due to the tight financial measures taken by the CBRT. On the right-hand side chart below, you might see total FX liquid assets make $13.4 billion in total, including swaps and it is roughly 2x higher than our FX wholesale debt maturing within 1 year.

Page 2 shows the details of our securities. Total securities increased by 12% compared to previous quarter, mostly resulting from the increase in FX fixed rate bonds. On the bottom left-hand side chart, you may see our CPI linkers income produced in roughly TRY 28 billion, while we continue to evaluate our linkers with 65%, in line with the previous quarter. Their [ volume ] reached TRY 236 million, as their share makes up 39% in total securities.

And please recall that every 1 point increase in CPI linker's valuation rate has roughly 26 basis points impact on net interest margin or TRY 1.2 billion impact on NII.

Turning to Page 3, details of loan growth. Total loans were up by limited 4% quarterly, predominantly driven by SME loans, mainly cooperatives. This below sector growth reflects the tight monetary policy cores and low loan demand considering high rates.

While TL loans were flattish with a 1% increase quarter-on-quarter, we've seen sentiment for tax loans. Considering the high share of the corporate segment in the FX loans, growth is mostly due to the corporate segment. The reason for this is that companies have turned to FX funding due to the high TL funding costs.

Following page shows more details on our loan portfolio. TL loans make up 77% of total loans, while FX loans make up 23%. On the right-hand side chart, we may see that SME loans had a lion's share with a 49% share in total loan book as in the previous quarter. So 38% of it belongs to our unique cooperative loans, which is a low risk profile being subsidized 50% of interest payments by treasury.

Corporate loans follow SME loans with a 34% share in total loans. And retail loans make up 13% of total loans, while they are largely consists of mortgage loans, which are inherently well collateralized. I'll set forward to details on Page 5.

NPLs increased by a slight 4% in line with the loan growth. Therefore, our NPL ratio remained same at 1.5%. On the bottom left-hand side chart, we've seen Stage 2 loans share in total loans has increased to 6.5%, which is mostly driven by the currency depreciation. Further details on NPL ratios on next page.

You may see corporate, commercial and consumer loans NPL ratio stays below sector, while SME loans is in line with the sector. Credit cards NPL ratio is slightly below sector. However, their share in our total loan book is only 2%. You've moved into further details for quarter on Page 7. On the left upper side of the page, you may see that in this quarter, we have set aside some Stage 2 loan provisions due to expected credit loss trade adjustment according to individual assessments.

On Stage 3 side, we set aside the written provision, similar with the previous quarter, while NPLs are aging, their provisions gets higher automatically. That is the reason we set aside those provisions. As you may see on the bottom left-hand side of the page, our total loan coverage ratio is still at a prudent 3.8% level.

Turning to liabilities on Page 8. Loan-to-deposit ratio decreased 6 to 8 basis points to 67% due to our muted loan growth this quarter. On the right-hand side table, we see that deposit share in total liabilities declined roughly 4 points while interbank money market share inched up by 4 points. So this strategic shift aims to mitigate the margin cost. In terms of the FX wholesale funding consisting of mainly subordinated debt as of first Q only makes up 3% of total liabilities.

Details of deposits are on the next slide. Total deposits are up by 5% quarterly and 53% on a yearly basis, mainly driven by FX savings accounts. TL deposits went by 2% quarterly, in line with the decrease in [ capacities ] for TL loans. In terms of FX deposits in USD terms, they increased roughly 5% quarter-on-quarter, driven by savings accounts and interbank deposits. On Page 10, we'll see further details of deposits. Demand deposits up 9% quarter-on-quarter, reaching up 3% to 4% share in total deposits, which alleviates the pressure on deposit costs stemming from the policy rate hike cycle.

On Page 11, cost, yield, and spread detail. Following the 750 basis points increase made by the CBRT against the increase in the main [indiscernible] inflation the revaluation process of assets continued throughout the quarter due to the success of the CBRT in forward guidance in the recent periods. Banks have carried out loan price in corporate in advance as their forecast of interest rates increased. In this context, there has been an overall improvement in spreads due to the asset pricing trends. Blended spreads improved by 240 basis points in detail, [ TL ] loan yields have increased 600 basis points while cost of deposits increased by 500 basis points despite the 750 basis point policy rate hike since end 2023.

So our TL spread improved by roughly 100 basis points. In terms of FX loan yields, it increased 50 basis points, while FX deposit costs improved 100 basis points, and this reflects as the 150 basis points improvement in FX spreads.

Moving to the notes on Page 12. Net interest income is up by 19% quarterly driven by the improvement in spreads. In terms of net fees and commissions, they improved 17% quarterly and 168% year-over-year, both above the inflation rates, mainly due to the continuing progress in payment systems. Next, details of the profitability. Total operating revenues up 42% quarter-on-quarter, driven by the improvement in NII and net fees and commissions.

As you may see in the right-hand side chart, net trading costs came in at TRY 11.6 billion, similar with the previous quarter, and it is due to rising swap costs resulting from the increased rates. Though we have produced some trading gains and bond sales income this quarter, which makes our trading growth similar with the previous quarter.

On the regulation side, remuneration on acquired reserves also supported our income. All in all, we reported net income of TRY 4.8 billion, up by 134% quarterly, while ROE came at 14.8%, improving 8 points compared with the fourth quarter.

On Page 14, we have cost details. OpEx up by 38% quarter-on-quarter driven by HR expenses due to the salary increase made in the beginning of the year.

On a yearly basis, OpEx up by only 2% because of the TRY 7 billion amounted [indiscernible] If we exclude this, OpEx would be up by 8% year-on-year. Now to solvency ratios. Reported unconsolidated CAR came in 13.2%, down by roughly 100 basis points compared with the previous quarter, mostly driven by currency rate change for risk weighted assets in BRSA'S forbearance measures.

If we exclude forbearance, CAR and Teir-I would be roughly 100 basis points and CET-1 will be roughly 95 basis points lower from the reported ratios.

Moving to our digital activities on the next slide. The number of active digital customers reached 6.4 million with the help of our ongoing efforts to acquire new customers. Total digital transactions grew by 31% year-over-year, while our nonbranch transactions share maintained its great position with 9% to 8%.

This was my final remarks, and thank you for listening. Now we can move to the Q&A session. Thank you.

[Mirac Tas, executive]

[Operator Instructions] I think there is no question. Thank you for all joining our quarterly earnings call. Have a nice day.