Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to Halkbank's Second Quarter 2020 Financial Results Webcast. Thank you for standing by. [Operator Instructions]

I'll now hand you over to Mr. Semih Tufan, Head of Investor Relations at Halkbank. Sir, the floor is yours.

[Semih Tufan, executive]

Thank you, Rob. Good afternoon, everyone. This is Semih Tufan, the Head of Investor Relations. I have my colleague, Eray Duran, from the Investor Relations team today. Welcome to our 2020 second quarter financial results conference call.

In advance of moving on to our presentation, I would like to touch upon a few highlights of this quarter. As you know, the impact of the pandemic on the global financial markets became more evident as of this quarter. We, at Halkbank, continue to make a strong contribution to the supportive steps taken by the public authorities in order to alleviate this impact. In this regard, during the second quarter, we focused on our lending activities, primarily aimed at the financing needs of the real sector within the scope of the Economic Stability Shield package, which was announced by the state. In addition, we continued our activities to meet consumer loans demand. In this context, the guarantee mechanism put into effect by the Board, the Credit Guarantee Fund and the Treasury itself were of great importance. On the other hand, the support provided by the Central Bank in terms of accessing the low-cost Turkish lira liquidity also constituted an important part of this process.

As a result of all these efforts, there are signs that the economic activity will be in a rapid recovery in the second half of the year and the normalization will be more pronounced. For example, the industrial production data for July, which was announced today, is valuable expectations and implies this rapid recovery trend. If this improvement in economic activity continues in the second half, the potential deterioration in the asset quality due to the pandemic can be expected to remain at more limited levels.

Now I leave the floor to my colleague, Eray Duran, to go through the presentation in detail. After the presentation, we will be happy to answer your questions.

[Eray Duran, executive]

Thank you, Semih bey. Good evening and welcome, everyone. This is Eray Duran from the Investor Relations team. I would like to thank all of you for joining us. I am pleased to report a strong set of results for Halkbank, particularly under these unprecedented and challenging global and domestic circumstances.

Now I would like to continue by going over the presentation. Starting with the first page. Strong growth in total assets stands out, thanks to our efforts in core banking activities. 37% and 33% year-to-date increase in net loans and total securities, respectively, has lifted our market share in total assets up to 11.1% from previous year-end 10.2%. The loans, in other words, the pioneer in our asset growth brings us to a 12.3% market share. From these aspects, Halkbank is the second largest bank in Turkey as of end of first half of 2020.

On the next page, we have details on our securities portfolio. Total securities make up 23% of total assets. There are multiple factors in the second quarter triggering the surge in our securities portfolio. One of them was due to the sale of subsidiaries. As you may remember, a large part of the purchase price was paid with the government bonds after the completion of the share transfer of insurance companies. The other one was TRY 7 billion amount of special form and inflation index government bonds. And on top of them, we have also increased our FX AFS portfolio through euro-denominated treasury auctions. Besides this, we have also added Turkish lira-denominated securities.

Looking at the classification of securities on the right-hand side corner of the page, 60% of them are composed of fixed rate securities and the remaining 40% portion of those are floating rate securities. Almost 60% of these floating rate securities consist of CPI linkers, for which our valuation is based on the year-end inflation rate assumption of 8.5%. In the second quarter, the gain on CPI linker portfolio was supportive, but even if we exclude them, as can be seen in the figure below, the contribution from gain on securities is quite satisfying.

The next page, Page #3. Within the scope of measures taken against pandemic, new loan packages were introduced at the end of March and during the second quarter. Most of these packages were treasury-backed support packages guaranteed either by the CGF or the Treasury itself. As for the rest, they were composed of consumer loans led by an advantageous mortgage loan package followed by vehicle loans and support loans for social life. Until end of the first half, we have extended almost TRY 75 billion loans under these supportive loan schemes, and they increased our market share in loans to 12.3%. 9% of these new loans are mortgage loans, 23% are Treasury-guaranteed SME support loans and 65% of them consist of support packages for continue to have employment for small-sized enterprises, for basic needs of citizens and for checks payment, which merge under the title of CGF packages. Through them, our total outstanding loan risk covered by CGF increased to TRY 65 billion.

On the next page, we have further details of the loan book. Turkish lira portion of the loan book continues to increase. It has reached 78% of our total loan book. Looking at the customer segmentation of loans, we have the SME loans, which have reached the highest level of recent times with a 45% share of the total loan portfolio. 25% of SME loans are guaranteed by the CGF and 36% of them are covered by the cooperative loan scheme. Therefore, more than 60% of SME loans are structurally quite secure.

On the bottom left-hand side of the page, you may see the sector breakdown of loans. Real estate companies' share within our loan portfolio is at 3% whilst both energy and tourism companies are at 5%. Looking at the next figure on the page, we have a breakdown of our retail loan portfolio, which constitutes 17% of total loan book. We deem it quite secure as well since more than half of it belongs to housing loans and 40% of it to consumer loans, of which 53% of them have been extended to our pensioners and payroll customers and a further 26% of them have been granted under the coverage of the CGF, which have been offered to retail customers in addition to corporate customers unlike previous protocols.

Flipping to the next page. You will see our NPL portfolio, which remains constant compared to previous quarter on account of the temporary extension of due periods from 90 days to 180 days. Considering loan growth on top of stable NPL portfolio, our NPL ratio declined almost 1 percentage point to 3.9% from 4.8%. Furthermore, the share of stage 2 loans in total loans decreased more than 1 percentage point to 7.5% level. Despite improving ratios, as we will see on coming pages soon, we have increased our coverage ratios in all stages. So we continue our prudent approach in provisioning, which elevate our NPL coverage to 62.2% level.

The next page presents us our NPL ratios by segments. All segments, apart from credit cards, having only a 1% share in our loan book, and they are diverging positively from the sector average. Moreover, distinctively, Halkbank has not sold or written off any NPL.

More details on asset quality metrics are on the following page. As I have already mentioned in previous slides, we keep our prudent approach in provisioning despite improved ratios to be on the side. We set aside TRY 2 billion provision on top of TRY 2.5 billion in the previous quarter. So we have TRY 4.5 billion total provision amount for expected losses, which indicates 232 basis points growth and 209 basis points net total cost of risk.

Coming to the next page. It is quite positive for us to maintain Turkish lira loan-to-deposit ratio, considering significant loan growth in the second quarter. Looking at the breakdown of the liabilities on the right-hand side of the page, growing share of deposits drove the attention, which was another positive factor considering a declining interest rate environment.

More details on deposits are on the following 2 pages. There is a significant jump in growth rates and market shares and deposits stand out in the second quarter. We have achieved above a 15% market share in Turkish lira deposits without denying the impact of loan activities and asset ratio requirements for the banks in the sector.

Moving on to the next page. The share of demand deposits within total deposits portfolio climbed to historically peak levels in the second quarter at 21%. While they have increased by 88% year-on-year, time deposits have grown by 51% on a yearly basis. On top of that, Turkish lira portion of customer deposits exceeds 60%, which has a blended cost going down sales from 16.5% level in the last year to 7.8% by the end of the first half of this year.

On the next page, we have cost, yields and spread dynamics. Cost of deposits maintained its declining trend. However, the rate of decrease in loan yields was more dramatic due to the light pricing impact on account of maturity mismatch but bringing down the cost spread to a certain extent. On the other hand, securities portfolio having relatively longer duration and higher yields continued to be supportive within the second quarter.

The next page, Page #12. As we all know and you may acknowledge, we have been going through an unprecedented and challenging global circumstances. However, despite this, the Turkish banking sector has proved its adequacy by delivering a strong set of results. Looking at our case, we have a declining but still reasonable net interest margin staying at 4.8% by the end of first half. A contraction in net fees and commissions income is apparent in this quarter, and it will continue to hover around those figures on the ground of pandemic and regulatory caps.

Still, we have enhanced our earning capacity compared to previous year, as can be seen on the next page. Quarterly net income increased to TRY 950 million while quarterly ROE stayed at 10.2% level.

The next page shows the expenditure side of the P&L. The first half was driven with certain one-offs in terms of OpEx. In the first quarter, we had a wage adjustment for our staff, a newly recruited IT personnel, TRY 56 million amount of support to the donation campaign. And in the second quarter, we had corona-related costs, such as day-by-day sanitation of the head office, support units and over 1,000 branches, a bonus payment to staff to reward their efforts during the pandemic on top of advertisement expenditures. Hence forward, we expect these one-offs to disappear and decline in the OpEx.

On the next page, we have one of the most important elements of the quarter. In other words, TRY 7 billion amount of capital injection via restricted rights issue given to the Turkish wealth fund. The impact of this transaction on the consolidated CAR was a boost of 185 basis points upwards from previous quarter. As of end of the first half, capital adequacy ratio on unconsolidated basis stays at 15.7%, and on a consolidated basis at 15.1%. Both are comfortably above regulatory minimum requirements. Please bear in mind that the impact of forbearance shown on the bottom of the page refers to the assignment of 0% risk weight to foreign currency-denominated receivables from the central administration. The other 2 measures, that's to say the forbearances regarding mark-to-market valuation of AFS portfolio and fixing of exchange rates to year-end exchange rates, have been already embedded in the first quarter which have a combined impact of around 60 basis points.

These were my final remarks for our presentation. Thank you for listening. We would now like to open the floor for any questions that you may have.

[Operator]

[Operator Instructions] I believe we have a question from [ Constantine ] from JPMorgan.

[Unknown Analyst]

Yes. I just had a single question to ask. So the team articulated the fact that state banks in Turkey have relatively large short open FX position. I just wanted to ask your view, how do you think this position would develop going forward in dollar terms?

[Semih Tufan, executive]

Thank you, [ Constantine ]. Please let me explain the situation on that way. We have roughly $6 billion FX results which are available to immediately use, including $3.6 billion required reserve, USD 1.5 billion right-way swaps and roughly $700 million cash and bank placement so far for the time being, I mean. On the other hand, we have also had an FX securities of $4.7 billion, which has been given to CBRT as collateral for raising the Turkish lira fund at the repo market, but -- which is available to be replaced with the Turkish lira-denominated securities instantly, so we can make them available to use for an immediately need. On the flip side, we have only USD 1.5 billion obligation, which will be maturing within 1 year. USD 1 billion is coming from our eurobonds, which we will redeem on the next...

[Eray Duran, executive]

In February.

[Semih Tufan, executive]

Yes. $500 million part will be redeemed in February and the next $500 million part will be redeemed in July 2021. So at the end of the day, we are very comfortable with the current FX position. Our wholesale funding portion in our -- to the total obligation is very limited. That's why, as I said, we are comfortable with the current FX position. And in the second half, we don't see any problem for meeting our obligation on FX.

[Unknown Analyst]

Just a confirmation on existing question. That's very clear. But in terms of the overall net FX position, so counting all FX assets on balance sheet, off-balance sheet and all FX liabilities on balance sheet, off-balance sheet. So the sector aggregate data shows that for the state banks, it's fairly high and negative. So I'm just curious about the developments about debt position specifically. So would it -- would you expect it to revert to the regulatory range, plus/minus 20%? Or would you expect it to remain high or even increase?

[Semih Tufan, executive]

Our net FX open position at the end of the second quarter is slightly above the threshold, 20%. It's around 22% on our case on the consolidated term, as I said at the end of the second quarter. As CBRT stated in a couple of weeks ago, this is a temporary case due to the unprecedented conditions not only in Turkey, but also in the globe, and we will see normalization definitely in the second half. We don't see any problem over there.

[Operator]

We now have a question from Mr. Deniz Gasimli from Goldman Sachs.

[Deniz Gasimli, analyst]

Just two questions from my side. One is on kind of quarter-to-date trend and what happened over the past week. Obviously, from what we saw, there's been kind of a tightening in terms of the funding rate that the Central Bank is using. And what we've been hearing that banks are raising deposit rates across -- around 150 to 200 basis points tightening that's happening depending on the size of deposits and maturities. I just want to get your point of view, what are you seeing in terms of deposit costs? To what extent have they been increasing over the past week? And also, are you seeing a similar increase on the loan side? And how does it make you kind of think about margins for the rest of the year? That's my first question.

And then the second question is just kind of a follow-up on the previous one. Could you just repeat again? I didn't quite catch the breakdown on the foreign currency liquidity. I think you said $6 billion of foreign currency liquidity. Out of which, more than $1.5 billion are swaps. And yes, if you could repeat again.

[Semih Tufan, executive]

Deniz, thank you very much. Please let me start with your last question regarding the FX position. As you said, we have a $6 billion FX reserve. The breakdown is $3.6 billion required reserve, $1.5 billion right-way swap and $700 million cash and bank placement versus only $1.5 billion obligation, which will be maturing within 1 year. I think it's okay.

When it comes to your first question, please let me start with the potential growth rate and potential loan growth that we expect in the second half of the year. The Turkish lira loan growth in the first half of the year is more than 50%. On a blended basis, it's around 40% level. It implies that the loan demand in the market has been already met to a great extent. We have already stated to follow the slowing trend of the loan growth from the middle of the second quarter, actually. For example, we realized roughly 60% of our lending activities in the second quarter only in April. And the lending activities taking place in May and June were at the level of 1/3 of April, respectively. We also almost fully utilized the current limits which were extended by the CGF, Credit Guarantee Fund, and the Turkish Treasury itself within the economic stimulation program.

Please bear in mind that 65% of the loans that we granted in the second quarter is covered by the CGF scheme and the rest, 23%, is covered by the Turkish Treasury guarantee. It implies 88% of the loans that were granted in the second quarter has been covered by the sovereign guarantee. And finally, of course, the relatively higher interest rate environment will limit the new loan appetite at the market. Therefore, we can easily say that the loan demand will remain relatively lower in the second half of the year compared to the first half, and this trend seems to be much more pronounced, especially in the retail loans. And the last thing, we have started to see that the lending activities of the private banks increased so far in the third quarter, and this will have a positive impact on the normalization of the public banks' lending activities in the second half of the year.

When it comes to the deposit side, again, in this quarter, we recorded a huge increase on the Turkish lira deposit side, which is over than -- which is higher than the sector average. In the second quarter, as it was in the first quarter, both Turkish lira net fixed deposit growth, as I said, was about sector average. And the lack of competition due to the active ratio was an important factor in that. In the second half of the year, it wouldn't be a surprise to see more challenging environment on the Turkish lira deposit market due to the increased marginal pricing contribution of deposit. But considering slowing loan demand, we expect to keep the current level of loan-to-deposit ratio during the second half of the year, which is 104% level in the second quarter 2020.

When it comes to marginal pricing, for now, we have already seen almost 150, 200 basis points increase on the Turkish lira deposit costs since the last week. We are now offering 12% for 1 month Turkish lira deposit bucket. For some selective accounts, we may be offering slightly more than 12%. And CBRT has also tightened the Turkish lira liquidity and increased the effective funding rate to overnight funding window, as you know. And currently, our average funding cost in interbank money market is slight level, 9% level, and this may increase a little bit more in the coming period.

Regarding the potential effect of the increased funding cost in the second half of the year, in the second quarter, our Turkish lira cost spread was 2.6% levels, considering the Turkish lira stock deposit cost was at 7.8% level. Turkish lira loan yield was at -- stock loan yield was slightly more than 10% level. Of course, it wouldn't be a surprise to see a shrinkage on the Turkish lira cost effect due to the increased funding cost. But on the other hand, thanks to the support of the FX cost spread, which is more than 5% in the second quarter and expected to be flat in the second half of the year. The potential shrinkage in the blended cost effect, which is at the end of the second quarter, 4.4%, is expected to be more limited, as I said, thanks to the support of the FX cost spread.

On the other hand, high-interest income generation performance of our security portfolio will offset the shrinking Turkish lira cost effect in the second half of the year. We have already seen this fact in this quarter. So we are still sticking with our net interest margin guidance, which was 70, 80 basis points higher than what we posted in 2019. And it implies roughly 4%, slightly lower than 4% for the full year 2020. I think that's okay for your question.

[Deniz Gasimli, analyst]

I just have a follow-up, sorry about that. Yes. Just -- no. Those are very clear. If I have -- if I can have a quick follow-up. So the increase in deposit rates that we've seen over the past week, is -- I mean is this basically to stabilize the market? Because I think there's been kind of dollarization of deposits since end of June. So now that you're raising deposit rates, are you seeing a bit of maybe stabilization in that trend? Or are you still seeing I guess a higher conversion to foreign currency deposits given 0 which tends to happen when our lira depreciate?

[Semih Tufan, executive]

Considering the current level of the CPI level, we think that the marginal pricing on the Turkish lira deposits are reasonable for the time being. When it comes to the dollarization in the second quarter, currency mix changed in favor of Turkish lira deposits on our case. The portion of FX deposits reduced to 39% while it was roughly 44%, 43% in the first quarter. Please bear in mind that this ratio was more than 50% during the first half of the last year, 2019, but we don't expect to see such high levels again in the FX deposit portion. And then depending upon the marginal pricing on the Turkish lira deposits, we may see a shift from the FX to Turkish lira deposits in the upcoming period in spite of recently increased dollar-denominated deposits as it was announced by the BRSA. But we expect to see in the coming period, there will be a -- the shift from the FX side will start.

[Operator]

[Operator Instructions] We have a question from Mr. -- hello? Do we? Yes, we do. From Mr. Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

Could you just talk a little bit through the granularity of the different movements in provisions in the second quarter? How you're feeling about sort of risk costs in the sort of post-lockdown period? And what you think that means for the full year, that will be useful. I mean clearly, something's happened on stage 3, and you've got less provisioning in stage 2 as well. So could you just give us a bit more of a flavor as to what those dynamics have been across the quarter? That would be helpful.

[Semih Tufan, executive]

Thank you very much, Alan. Please let me start with the provision that we made in the second quarter. For the standard loan, we made a provision in the amount of TRY 1.3 billion, which is higher than what we made in the first quarter. This shows our precautionary approach in provisioning. In the second quarter, we are continuing our precautionary approach. And we, again, made the provision, which was higher than what our IRB model is offering us. Year-to-date, the total amount of the provision that we made in the first half of the year reached to a TRY 4.4 billion level, which is very close to the total amount of the provision that we made in the last year, 2019. Why we are making this? Because just to be on the safe side, we increased our coverage ratio in all segments, including standard loans, stage 2 loans and the NPL. For example, in this quarter, NPL coverage improved by -- increased by more than 300 basis points and reached to more than 60%, which is in line with the sector average.

As I said at the beginning of my speech, we started having the negative impact of the COVID-19 with effect from the last days of the first quarter. So it's very early to talk about the NPL generation in the second half. But as I said, we have already received some good signals regarding the improved economic activity. The industrial production is showing a very good picture, and we have an optimistic opinion regarding the economic recovery. If those signals keep going well, we think that the NPL inflow will be limited in the second half of the year. But as I said, for the -- talking about the cost of risk levels and the NPL levels, we need to wait until the middle of the fourth quarter because maybe we extended some loans until the end of this year. More than 90% of the loans that we granted in the second quarter has a grace period of 6 months to 9 months, and it means the payment performance of the customers will be visible with effect from the middle of the fourth quarter. That's why we need to wait until then to see the repayment performance of the customers and then to say something about the NPL formation. But as I said, we will keep our provisioning policy in the second half as we did during the first half of the year.

[Operator]

We now have a question from Valentina Stoykova from Barclays.

[Valentina Stoykova;Barclays Investment Bank;CEEMEA Banks Equity Analyst, analyst]

I was just wondering whether you can give us the amount of the deferred installments as of 2Q and the overall outstanding balances of these loan deferrals. And if you can give us any sort of color on the sectors or the picture of the exposure, that will be great. Also, I wanted to ask you about the capital ratios without the forbearance measures and the risk-weighted assets total amount without forbearance on consolidated and unconsolidated basis. And lastly, I didn't see your LCR ratios. Can you just share these ratios with us as well?

[Semih Tufan, executive]

Please let me start with your first question regarding the deferred and extended loans. We extended roughly 6% of our total loan book for a further 6 to 9 months, as I said earlier. Those deferrals were constituted for 50% business and 50% retail loans. In this period, there will be no any principal or interest payment, but accruals will continue to be positive as usual. So there won't be any P&L effect. In the next period, such deferrals are expected to be limited compared to the first half of the year, depending on the improving economic activities at the market. As I said before, to give a more picture regarding which sector are being affected mostly, as I said, we need to wait for the fourth quarter to say something, to give you a more clear picture on this.

Your second question regarding the liquidity ratio. As you know, the BRSA has taken measures on liquidity ratio until the end of this year. We are just reporting our liquidity ratio, which is slightly below 100%. I have not certain numbers in front of me. But after the call, we can check and come back to you. What's your last question?

[Eray Duran, executive]

Forbearance measures.

[Semih Tufan, executive]

Forbearance measures.

[Eray Duran, executive]

The impact on capital adequacy ratio.

[Semih Tufan, executive]

Yes. In the first quarter, BRSA forbearance has an impact of 50 basis points on our capital adequacy ratio and 33 basis points on our common equity tier 1, and -- which came from the fixed exchange rate. When it comes to the second quarter, we have another forbearance, BRSA forbearance regarding the risk weights that we borrowed from the Turkish sovereign for the FX borrowings. It has another 50 basis points effect on our capital adequacy ratio and common equity tier 1. So in total year-to-date, in the first half of the year, you can assume that in total FX on our solvency ratio reached 200 basis points.

[Operator]

[Operator Instructions]

[Semih Tufan, executive]

I think that we have two questions from the webcast. The first one is regarding the NPL portfolio corresponding into 90 days to 180 days for BRSA forbearance. Currently, we have a TRY 4.1 billion levels, which is corresponding into -- which percentage level?

[Eray Duran, executive]

Less than 1/4 of the current NPL portfolio.

[Semih Tufan, executive]

Yes. Regarding the guidance of our loan growth and the other items of the P&L, for the second half of the year, it wouldn't be a surprise, as we said, to see much lower loan growth compared to the first half, especially the high interest rate environment and the repricing on loans will be more effective on the loan growth in the second half. But on the other hand, we also reached the limit of CGF scheme and the Treasury guarantee, which is another reason why we will see more stabilized loan appetite at the market. That's why we anticipate to close the year with a growth rate of Turkish lira loans, which is about 50% for the full year.

When it comes to net interest margin side, we are still sticky with our expectation at the beginning of the year. We were expecting 70, 80 basis points increase on the net interest margin on a cumulative basis compared to the last year. It seems that we will be able to achieve this target by the year-end.

On the fee and commission side, the pandemic impact and the regulatory measures will continue to be effective on that and the generation performance in the second half of the year. So we think that the net fee commission income for the full year may be hovering around what we posted in the last year or maybe slightly lower than that.

On the FX -- OpEx side in the first quarter and the second quarter, we had one-offs in terms of the OpEx. But in the second half of the year, we don't expect to see any one-off expenses. So it will be gradually reducing in the third quarter and the fourth quarter. We may slightly exceed our first guidance that we shared at the beginning of this year, which was more than roughly 2% higher than CPI level. For the time being, we can say this regarding the OpEx and fee and commission.

Regarding ROE, considering the new capital injection and the denominator effect, ROE is expecting to be high single digits by the year-end. Of course, the funding costs and the repricing dynamics will be effective on this.

[Operator]

[Operator Instructions] All right. I think we're going to wrap that up. Speakers, I believe we have no other audio questions and the Q&A, the written Q&A is -- if you have anything else, otherwise, we can move on to the conclusion.

[Semih Tufan, executive]

Thanks very much, Rob. I think that we have no further questions. I would like to thank all of you for joining us, and I wish a great weekend for all of you. Thank you very much again.

[Operator]

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