Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Halkbank Third Quarter 2019 Financial Results Conference Call and Webcast.

I would like now to hand over to Mr. Umut Kovanci. Sir, please go ahead.

[Umut Kovanci, executive]

Thank you, Philippe, and good afternoon, everyone. Welcome to our third quarter financial results conference call. This is Umut Kovanci from Investor Relations team. Today, I have Mr. Semih Tufan, the Head of Investor Relations, alongside my colleagues here, and it is always a great pleasure being with you all on this call.

Before going over to presentation, I would like to point at some of the trends we see and how we positioned ourselves over a quarter of stabilization and rebalancing in the economy. The third quarter presented us a good opportunity to build up a high-yielding and well-collateralized loan portfolio in a relatively less competitive environment. Having become the second biggest franchise in terms of total assets, loans and last but not the least deposits, we were able to further expand our deposit base despite the decline in pricing. With falling interest rates and restored confidence as a result of steps successfully taken by the authorities, operating backdrop started to play out towards the guidance shared within the new economic program. On the back of improving demand dynamics, loan market is getting more competitive by the day and proactive lending strategy that we followed in the previous quarters provided us with flexibility with respect to our lending strategies and targets. Besides as one of the banks being best positioned in a falling interest rate environment, we hope to continue to develop strategies that brings us solid set of results going forward.

I would like to briefly mention that our funding costs came down during the third quarter, albeit to a relatively limited extent versus its potential run rate-cutting cycle and its impact on repricing are fully complete. On the other hand, our loan yields performed really well and proved to be very resilient, which left us with superior margin enhancement. Our marginal funding costs quarter-to-date have been improving, and we believe there is room for the rates to further decline giving CPI expectations and high level of real interest rates. So far, stock cost of Turkish lira deposits dropped around 350 basis points in the fourth quarter as we witnessed steady improvement on a daily basis.

Thanks to the CBRT's rate cuts, we have a little benefit out given our sizable utilization of short-term TL repos and right-way swaps. These are all together paving the way for a significant margin expansion to be seen in Q4 even though CPI Linkers portfolio will undergo an adjustment from 16.2, which was the base CPI expectation for Q3 to year-end CPI print by the end of the year. These are -- there are different methodologies in treating CPI Linker accruals across different banks, and it is decided to apply December-to-December CPI print when released to adjust for excessively accrued interest on CPI Linker portfolio. Despite that, headline NIM expansion in Q4 is expected to be quite visible. And accordingly, cumulative headline NIM has a good potential to exit the level of last year.

Before switching to the presentation, just a few words on the asset quality. As loans in and off the BRSA list turning into nonperforming, our NPL ratio displayed a deterioration of around 60 basis points and reached 4.6% as of September. In the first half of Q4, we saw further migration from performing portfolio to nonperforming and expect to end the year at around 5.5% level, with a total cost of risk expectation of 170, 180 basis points. The decline in cost of risk in Q3 mainly stemmed from lower coverage for new NPLs as an outcome of IFRS 9 model, but assuming a stable stage 3 coverage as NPLs are aging cost of risk is likely to go up towards the guided levels.

Having touched upon frequently asked topics, let me now switch to our presentation that hopefully you will find informative and useful.

On Page 1, you will see our assets growing by 3.4% Q-on-Q and 14.5% year-on-year, reaching TRY 443.5 billion nominally, which placed us into the rank #2 in terms of total assets among Turkish banks. Loans continued to make the biggest portion in total assets with 66% share and followed by the securities that accounts for 21.7% of the total.

Liquid assets that dominated consist of foreign currency assets, as you can see in down right make up 8.2% of the total and reveals how strong we are in terms of foreign currency liquidity, as also shown by our liquidity coverage ratio which was at 375%, far above the required level of 80%.

Last but not the least, we have the breakdown of our own -- of our foreign currency liquid assets. Cash and bank placements of USD 913 million, CBRT receivables of USD 5.1 billion and right-way swaps of USD 4.2 billion, which makes more than USD 10 billion available liquidity as of end of September versus USD 1.9 billion runoffs which will be due within 12 months.

Page 2 displays the details of securities portfolio. As shown on top left, securities share in total has slightly declined to 21.7% and TL portion corresponds to 7% to 8% of it. While TL fixed rate securities clearly make up the greater portion in the mix with a total volume of TRY 31.8 billion, CPI Linkers amounted to TRY 20.8 million and generated TRY 958 million interest income. Please bear in mind that we continue to use 16.2% CPI assumption for the Linkers portfolio, which will be made subject to an adjustment by the end of the year as described.

Securities measured at amortized cost have the lion's share with 73.3% in total securities, whereas securities at fair value through P&L is at 15%. Please also bear in mind that the latter includes almost TRY 15 billion worth of securities borrowed.

Page 3 displays strong loan growth, which was led by retail and corporate loans. Loan book grew 5.5% Q-on-Q, while retail has contributed the most with 9.9% increase. Our TL lending activities with big-ticket companies, especially during the first half of Q3, when the rates were relatively higher, provided us a yield enhancement opportunity. Corporate lending showed 8.8% growth Q-on-Q and helped overall market share to further expand to 11.3%. CGF loans slightly decreased to TRY 23.6 billion, whereas total SME loans inched up by a mere TRY 1 billion to TRY 110 billion. Further details of the loan book we have on next page. Turkish lira have a loan portfolio start apparent with 70% share in total loan portfolio.

As for FX loans, they're up to 85% comprised of corporate customers with whom we feel ourselves quite comfortable due to strong collaterals and treasury guarantees.

The next chart illustrates SMEs and corporates, each enjoying 33% share in the loan mix, latter gained more ground in Q3. When we look at the sectoral breakdown of loans, we can see that our exposure to construction and energy loans is not excessive, with only 8% and 6% shares, consecutively.

In terms of the coverage of construction loans, we have a large amount of excess provisions, especially for those that are performing, as you can see. When it comes to retail book, which makes up 17% of total loan portfolio, it is, again, quite secured on account of housing loans, which constitutes 55% of it and consumer loans, of which 64% granted to pensioners and payroll customers.

To elaborate more on asset quality, let's flip to Page 5. As you may follow, NPL increase on a notional basis showed an acceleration in the last 2 quarters and 4.6% NPL ratio was reached as of end of September, which is still better than the sector, as shown in the chart down right. NPL coverage continued to decline in the last 2 quarters following methodology change in Q2 and lower coverage for the new NPL formation in Q3. Furthermore, stage 2 loans dropped in volume from TRY 22.7 billion to TRY 21.4 billion and in the share of total loans from 7.9% to 7%, which is still one of the best in the sector.

Page 6 manifests that NPL ratios of both consumer and SME loans are remarkably lower than sector average, for which we have always emphasized on our conservative structure. Just to remind you, NPL ratio jump of the second quarter in corporate and commercial segment was primarily resulted from migrating a big-ticket loan.

On next page, Page #7, we can see the quarterly decrease in year-to-date and quarter-to-date total cost of risk. Year-to-date cost of risk showed an improvement in Q3. However, we expect to finalize the year at 170, 180 basis points higher.

Net cost of risk came in at 83 basis points, also pushed down by the strong collections without any write-offs and decrease in stage 2 loan volume with an almost flattish coverage ratio.

Switching to the next page, we lay emphasis on our low reliance on FX wholesale funding and our FX liquidity. As it has been mentioned earlier, it's more than enough to compensate FX wholesale debt maturing in 12 months. Despite intensified lending activities, loan-to-deposit ratios improved, blended LDR came down to 105.6%, which is below that of sectors. TL LDR also dropped to 147.6%, which is even lower at 136.6% if Turkish lira bond issuances are included.

Deposits still make the biggest portion in total liabilities with 64% share and followed by interbank money market with 13% share, putting us in a good position to see the positive impact of declining interest rates on our interest expenses going forward.

Looking at the next page, as emphasized before, despite sharp decrease in interest rates, deposit volume growth was strong at 7.7% Q-on-Q in the third quarter. This has led to an increase in market share. TL deposit market share went up from 11.6% to 12.3% and total deposit market share is at 11.4%.

On Page #10, we see the breakdown of deposits by maturity structure and currency. We must say that alongside improving deposit costs, we are also pleased to see considerable portion of demand deposits in our portfolio, which rose 31% on a yearly basis. Furthermore, currency composition in deposits has gone in local currency's favor unlike the picture in the first half, which makes us very happy.

Page 11 shows us that successive decline in cost of deposits and similar increase in loan yields have led to steady enhancement in core spread. Moreover, it is really nice to say that deposit costs have further room to go down for subsequent quarters. Having bottomed out in Q4 2018, one can easily notice on top right our blended core spread recording consecutive expansion and touched 4.7% from 2% a year ago.

Coming to the next page, Page #12, it is obvious that core banking activities exhibit excellent performance yielding into revenues. On a quarterly basis, the year-over-year increase is above 42%, also accompanied by 18.2% increase from a quarter ago. ROE is around 4%. That was in recent periods. On the other hand, we expect that picking up is imminent. Further details on core revenues on next page.

The increasing interest income and declining interest expense resulted in 24% quarterly increase in NII, which in turn reflected on net interest margin progress. In addition, fees continued to deliver significant contribution to our revenues with 48% boost on a yearly basis.

Turning the page, we have seen episodic rise in OpEx, and it increased 19% year-over-year by contribution of base effect as well. However, disciplined approach of us in terms of managing expenditures persists, which is already reflecting in low OpEx to assets and also promising for cost-to-income ratio improvement.

Let's have a brief look at our solvency ratios on Page 15. Current levels of solvency ratios are quite strong considering regulatory requirements. Still we desire further enhancement, especially in common equity Tier 1, although we feel quite comfortable with existing level. Now conditions are better both for profitability and risk-weighted assets as we expect positive repercussions.

Coming to the last page, the breakdown of banking transactions show that the lion's share of 55% refers to digital channels. And we are quite happy to see digitalization efforts are paying off, which is also visible in many of the business aspects of us. As illustrated in down left, the number of branches reached 992, indicating 4 new branches were added into the distribution network year-to-date. Adding headcount showed a slight decrease of 148 employees in the third quarter.

That's all. Many thanks for your patience. Philippe, we can now switch to Q&A session, please.

[Operator]

[Operator Instructions] We have a question from Ovunc Gursoy from BNP TEB.

[Ovunc Gursoy, analyst]

I have a couple of questions. The first one is about the tax. As far as I see, there is a tax reversal. Is it coming from the Bahrain branch? Or could you give some color on that? And the second one is about the swap cost this quarter, what was it? And what is your current swap volume? And how you expect the trend going forward? And also if you can give us some guidance for 2020, we will be happy. And last question is the process going in the U.S.A., what can you say about it at the moment?

[Semih Tufan, executive]

Thank you very much for your questions, Ovunc. Please, let me start with your last question. As you know, we have already made our public disclosure in the first half of October when we received the court case, and it includes the very detailed information. There is no any updated information so far. So we have no any further comment on it. When we receive any update information, yes, we would be happy to make any additional public disclosure. When it comes to the swap transaction, we increased our volume in the third quarter from USD 3 billion to USD 4 billion levels. In the next year, yes, we will continue to get the benefit from the reducing swap costs to raise the Turkish lira funding. For the guidance 2020, we are yet to prepare our guidance for the next year. But if you are asking for the loan growth, we can say that we will be in line with the upper threshold of the range, which was set by the BRSA. Regarding your question regarding the tax reversal, there is no tax reversal in this quarter from Bahrain branch. It's a cumulative number that you see at the bottom line of the third quarter results.

[Umut Kovanci, executive]

Many thanks, Ovunc. Many thanks for your questions. This is Umut speaking. Actually, as Semih Bey said, you see tax reversal on a cumulative basis, but looking at the quarterly numbers, the effective tax rate is at around 35%, which is really high, but was not enough to bring the cumulative effective tax ratio into the positive territory, which should be seen at the end of the year, actually. We will continue to have a high effective tax rate going forward by the end of this year. And not to forget your question on swap cost, the quarter swap cost was TRY 1,153 million, which is quite similar to that of previous quarter.

[Operator]

You have no other questions for the moment. [Operator Instructions] We have a question from Mehmet Sevim from JPMorgan.

[Mehmet Sevim, analyst]

Just one question from my side. Can you please explain how you see overall profitability in the remainder of the year, taking into account all moving parts, such as better core profitability, more NPL recognition as well as the CPI Linker adjustment that you will likely do in the fourth quarter? So how do you see that overall? And what kind of ROEs would you then expect? And just a follow-up on the previous question, sorry if I missed it, but what is the amount of the swap cost that you booked this quarter, not the total volumes, I understand it is TRY 4 billion, but the amount of the costs?

[Umut Kovanci, executive]

Well, the amount of the cost is, as I said, TRY 1,153 million.

[Semih Tufan, executive]

Regarding the profitability for the third quarter and cumulative basis, as you know, in the second quarter, we have already posted roughly 400 basis points in blended term split. When it comes to third quarter, we have posted 66 basis points in terms of the stock cost of deposits. When it comes to the lending side, we have improved roughly 10 basis points stock lending yield. When it comes to Turkish lira core spreads, we improved it roughly 50 basis points. When it comes to the blended side, we have recorded roughly 30 basis points expansion on the spread. If we need to talk about the fourth quarter, maybe the 2019 in a cumulative basis, we expect to see further more than 300 basis points reduction on the stock cost of deposits. When it comes to lending side, thanks to the duration mismatch and re-pricing duration on the lending side, we will see very limited reduction on the stock lending prices. It will be around 100, 120 basis point level. So we expect to see more than 200 basis points Turkish lira core spread improvement. When it comes to the blended side, it would be fair to say that we will see more than 100 basis points expansion on spreads, and we will see -- we will see roughly 50 basis points expansion in it in overall.

[Operator]

We have a next question from Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

Could you talk a little bit about what happened to your costs in the third quarter, sorry, if I missed that? Just a bit of a jump from where you were in the second quarter. Are there some elements there? That would be helpful. And then in terms of -- I think you gave a view of what you think risk costs will be for the full year, was that 170 to 180? And could you also talk a little bit about where you see FX spreads moving in the fourth quarter as well?

[Semih Tufan, executive]

Thank you very much for your question, Alan. Please, let me start with the OpEx. In the second quarter, we didn't make the provision for the bonuses for the staff. When it comes to the third quarter, we, again, started making the provision in terms of the bonus payment for the staff. That is why you see a slightly increase in OpEx compared to the second quarter. When it comes to the cost of risk, we recorded 148 bps in gross and total in terms of cost of risk. As you know, the restructuring process and the NPL formation process will have been considerably completed by the year-end. As you know, we moved a one-off big ticket to NPL in the second quarter, and we shared the provision. And we have a plan to move some other loans to NPL in the fourth quarter. And according to our calculation, we expect to see 190 basis points by the year-end in terms of the total and gross cost of risk. It may be slightly lower than 190 basis points, it may be 170, 180 basis points level.

When it comes to the FX spreads, we think that in the fourth quarter we will see a slight reduction on the FX deposit side. We will start to get benefit from the deposit cost reductions on the FX side. Then definitely, we will get the benefit, and it will affect on the FX cost spread.

[Operator]

[Operator Instructions] We have a new question from Simon Nellis from Citibank.

[Simon Nellis, analyst]

Just one last question for me on fee income. I was just wondering what the impact of the cap on merchant acquiring fees is going to be for you? And what does that mean for the outlook for fee growth going into next year?

[Umut Kovanci, executive]

Many thanks for the question, Simon. This is Umut speaking. It should be quite negligible in our case given the fair pricing that we've been applying on the payment systems. Despite payment systems make the greatest portion in total, the commission that we apply was relatively lower and more competitive. And accordingly, once the CBRT apply the cap, we should be one of the least impacted banks. And accordingly -- according to our calculations, we came up with TRY 40 million, TRY 50 million negative impact on a yearly basis, which is quite negligible, I guess.

[Simon Nellis, analyst]

TRY 40 million to TRY 50 million on an annual basis?

[Umut Kovanci, executive]

Right, right.

[Operator]

We have no other questions for the moment.

[Umut Kovanci, executive]

Thank you, Philippe.

[Operator]

We actually have a follow-up question from Ovunc Gursoy from BNP TEB.

[Ovunc Gursoy, analyst]

Just a follow-up question about the CPI adjustments. You will make it in the fourth quarter, right? And according to December-to-December CPI print, am I correct?

[Semih Tufan, executive]

Yes, this is correct. We will use the year-end -- year-over-year inflation number October to October -- sorry, December to December. And then we will make these adjustments by using the year-end inflation rate.

[Umut Kovanci, executive]

I guess there is no other question on the audio side, but we have 2 questions that were sent through webcast. The first one is coming from Klim Fedoff from Lord Abbett. He asks about our plans to raise capital.

As I tried to explain in the beginning, we believe in the fundamentals -- I mean of the economy and of our bank. You know we would really enjoy having higher capital and higher set of capital adequacy ratios. But having gone through many volatilities, continue to grow our risk-weighted assets, challenges on -- challenges arising from nonperforming loans and other things, we believe we have done a very good job so far when it comes to managing the capital base of the bank and now happy with the existing levels. As profitability improves, as things continue to turn around in a more visible manner, which looks to be the plan within the reach, we believe our capital adequacy ratios will be well supported and there will not be any need to raise capital.

And we have other question coming from Gülçe Deniz, OYAK Yatirim. Wondering the growth trends for fee income in 2020.

Good shape. I mean we're still in the process of finalizing our operating plan for the next year. But I mean we can't deny that we have already reached a high base in terms of volume in fees and commissions. So it should be quite difficult to deliver another growth, which is similar to that of this year at around 40%, may not be the case next year. So I would say, fees and commission growth, which is in line with the loan growth of next year should definitely be considered.

And I think that's all. Many thanks for joining our earnings call, being with us. We have tried our best to help you with whatever you need, and please do not hesitate to contact either me or Semih Bey or my other colleagues if you have follow-up questions. Thank you.

[Semih Tufan, executive]

Thank you very much, everyone.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's web conference. Thank you all for your participation. You may now disconnect.