Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to Halkbank's Third Quarter 2020 Financial Results Webcast. Thank you so much for standing by. [Operator Instructions] I will now hand you over to the Head of Investor Relations, Mr. Semih Tufan. Sir, the floor is yours.

[Semih Tufan, executive]

Thank you, Rolf. Hello, everyone. Good evening, and welcome to our third quarter financial results 2020 webcast and conference call. This is Semih Tufan speaking. Today, I have also my colleagues from IR team with me. I hope that, at first, you and your all loved ones are in good health in these days when our hopes are increasing due to the positive news flow about the COVID-19 vaccine.

As in the rest of the world, we witnessed a significant contraction in the economic activity in our country, especially in the second quarter due to the COVID-19 outbreak. On the other hand, we observed that economic activity has improved significantly in the third quarter of the year, thanks to the measures and supportive steps taken by the actors of the economic administration. The improvement in preliminary indicators, such as industrial production, foreign trade data and real sector confidence index, points to a strong growth in the third quarter.

During this quarter, especially in the second quarter and partly in the third quarter, the credit facilities provided by our bank for both our business and retail customers played an important role in terms of returning to normal economic activity. In addition, we see that the fluctuation in Turkish lira has slowed down significantly, thanks to the tightening steps taken by the Central Bank and the measures taken by the other regulatory authorities. We believe that the positive reflection of all these steps will gain momentum in the coming period. And with the increase of the promising news on the COVID-19 front, we will end 2020 in a much more positive atmosphere.

Now I would like to hand over to my colleague, Eray Duran, to give you details regarding the third quarter results. After the presentation, we will be happy to answer your questions. Thank you.

[Eray Duran, executive]

Thank you, Semih Tufan. Good evening, everyone. This is Eray Duran from the IR team. Thank you for joining us. Let me go over our presentation in a nutshell, and then we are going to switch to the Q&A session.

Starting with Page 1. Our asset growth, which in the previous quarter was led by loan growth, continued to grow albeit at a relatively slow pace. The growth was primarily driven by securities portfolio; and secondly, through our liquid assets, thanks to increasing CBRT receivables. This is also reflected within our asset mix. Securities share in total assets increased to almost 24% from 23% last quarter and liquid assets to 6.8% from 5%. Thanks to these developments, our FX liquid assets are 3x higher than our short-term FX wholesale funding.

The next page shows the upward trend in securities over the course of 3 quarters, both in nominal terms and in terms of revenue generation. The key factor behind the increase in securities portfolio in this quarter was FX securities, which we added through the treasury's auctions in the primary market. FX gains in addition to TL gains were quite satisfying. And as a result, total interest income on securities increased to TRY 4 billion, including TRY 1 billion income from the CPI linkers.

Switching to the next page. As you know, in the previous quarter, support packages dominated our loan growth in order to support the public and minimize the adverse impacts of the pandemic, especially on economic activities. Thanks to those efforts, the normalization period kicked in rapidly, and we saw signs of recovery in the third quarter. During this period, loan growth reached a much more reasonable level, and the large part of this growth came from mortgage loans, thanks to the support package introduced at the end of second quarter and continued throughout July.

On the next page, we have further details of the loan book. In terms of customer segmentation of the loans, the lion's share continues to belong to SMEs with a share above 40%, of which 60% of these loans are granted either by the CGF or are part of our cooperative loan scheme. On the other hand, we saw that retail loans increased its share in the third quarter drive by solid mortgage loans, which have an almost 60% share in total retail book. As for the best part of the remaining portfolio, it's composed of consumer loans that are mainly provided to our pensioners and payroll customers and followed by the recently introduced CGF loans that are offered to retail customers.

On the next page, we see that NPL coverage continues to increase whilst we witnessed a decreasing NPL portfolio. On the other hand, the share of Stage 2 loans within total loans increased [ a tad ], but its coverage ratio has also risen above 10%. Despite not witnessing any standout problematic loans, the bank maintains its prudent approach to be on the safe side. On the following page, we see our NPL ratio by segments. In this particular, except from credit cards, which only have [ about ] 1% share within our total loan book, all other segments continue to have a lower ratio than the sector averages.

The next page presents the maintained prudent approach on provisioning. Stage 3 provisions went up within this 9-month period due to the abolishment of the hybrid model provisioning methodology where both collective and individual impairment analysis are used and the readoption of collective impairment analysis in all exposures. The absence of a huge amount of new loans on one hand and the normalization process on the other necessitated less provisioning than previous quarters where we witnessed the peak level of pandemic-related uncertainties. Moreover, in this quarter, collection performance was much better, thanks to the normalization process. Therefore, we had a fair amount of provisioning reversals. Under these conditions, net cost of risk continues to decline from its peak at the end of March.

There are details of the liabilities on the next page, Page #8. Turkish lira loan-to-deposit ratio remained at a similar level with previous quarters. FX LDR, on the other hand, came down further, thus bringing the total loan-to-deposit ratio to almost 100% level.

Looking at the details of the deposits on the next page. The market share of Turkish lira deposits preserved its upward trend and reached 15.5%. Within Turkish lira deposits, public sector deposit standout as its share increased to 14% from 6% in the previous quarter. On account of having a maximum [ cap off ] pricing and thereby having relatively lower interest rate, the [ interest ] rate of increase in Turkish lira deposit [ grows ] to some extent.

More details on deposits on the next page, Page #10. Demand deposits make up 20% and time deposits, 80% of total deposits. Looking at currency wise, TL deposits are 58% of total deposits versus FX deposits having a share of 42%.

Looking at deposits on the basis of cost. During the first half of the quarter, TL stock deposits cost continued its downward trend. However, after the tightening steps of the CBRT in mid-August, they started to increase and the marginal pricing started to push the stock cost up. Therefore, trend of the first half of the quarter and the contribution from public sector deposits hindered the dramatic increase in cost of Turkish lira deposits.

Let's switch to the next page, which has cost, yield and spread dynamics. Due to maturity mismatch and keeping in mind the bulk amount of loans extended through support packages with attractive rates at the end of the second quarter and the mortgage loans offered, again, with favorable rates in June and July, Turkish lira loan yields inevitably reacted later than deposits through the rising interest environment. Therefore, it fell below previous quarter's loan yields. But as of today, we are observing that repricing has started and yields are going up. However, deposit costs will be compelling in the subsequent quarter in terms of spread dynamics and net interest income. It is expected that this will be compensated by the probable CPI adjustment by the end of this year.

Page 12. Despite the increase in interest expenses, we managed to increase NII, and on top of that, succeeded to boost our NFC up closer to normal levels after the suppressed level that we witnessed within the previous quarter. Mortgage loans contribution through cross-selling like insurance sales was a [ stubborn fact ]. But on the other hand, due to the revival of offshore trade, commissions on noncash loans were also supportive, which hang in the hedge due to pandemic in the second quarter.

Looking at the NIM. Thanks to the limited increase in Turkish lira deposit costs hindering the dramatic spread contraction and thanks to the yields on securities compensating the higher cost in short-term funding through our money market, the decrease in both reported and swap adjusted NIM was limited. Our guidance for NIM was to complete the full year 80 basis points higher than the previous year. We are still sticking with that guidance as we are expecting much more tightening in cost spreads within the coming quarters.

Turning the page. We see that despite challenging expenses during 2020, a remarkable increase in net interest income painted a promising picture. As such, this indicates that once these challenging and unprecedented conditions are over, we are most likely going to see astonishing profitability measures.

Switching to the next page. As you know, during the first half of the year, we had certain one-off expenses, and most of those were pandemic related, such as a donation to a campaign or bonus payments to staff. In the absence of them, OpEx fell below the levels of previous 2 quarters, and we expect it to continue in the same way in the rest of the financial year.

Last but not least, on the next page, we have the details on solvency ratios. I would like to remind you that they refer to the ratios calculated by taking into account the BRSA's provisional forbearance measures. Lower contribution from bottom line to capital generation in addition to a fair amount of loan growth led to a slight decrease in capital adequacy ratio, solvency ratios compared to previous quarter. However, regardless of the impact of forbearance measures, all solvency ratios are comfortably above the regulatory thresholds.

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

[Operator]

[Operator Instructions] I believe we have a question from Mr. Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

If you could just walk us through the bottom line in the third quarter, just to explain how we get from the net interest income performance down. I mean, clearly, there's a lot of noise in the trading line. But could you just sort of talk us through [ at that ] progression across the quarter? That would be very helpful.

[Semih Tufan, executive]

Alan, thank you very much for your question regarding the trading line. You are right. This is a very important effect on the bottom line income. As you have always realized through the [ sectoral ] data, the trading loss increased mainly due to the high volatility in exchange rate, especially during the last 3 months starting from the August. But thanks to tightening measures taken by the Central Bank and effective communication especially during this week, the volatility seems to reduce, even we saw that Turkish lira considerably appreciated during this week. If I am not wrong, it closed today below 7.70. And the -- so we started to see recovery. But of course, its size will be based on the stabilization of the Turkish lira in upcoming period. But we believe that in the last quarter, the performance of the Turkish lira will have a positive impact to reduce the trading loss and, of course, to generate the bottom line income.

[Alan Webborn, analyst]

I mean, could you possibly give a little bit more granularity of what's actually going on within that line and whether there are elements that you would expect to reverse when the lira pick up a little bit? I mean it's just -- could you give us a little bit more explanation?

[Semih Tufan, executive]

You mean the main driver behind the trading loss?

[Alan Webborn, analyst]

Yes. I mean there's a [ TRY 3.2 billion ] negative...

[Semih Tufan, executive]

Roughly 60% is driven by the open FX position on balance sheet, partly we had in the past and we closed for now and partly our current open FX position on balance sheet. But there is an accounting effect on the numbers, namely, roughly 40% of the total trading loss is coming from the gold-denominated securities. Let me explain on that way. We are investing the gold-denominated securities which was issued by the Turkish treasury, and income on gold-denominated securities has been posted as the security income on P&L side and it's posted under NII. But the...

[Eray Duran, executive]

As Turkish lira...

[Semih Tufan, executive]

As Turkish lira. But the depreciation in Turkish lira or any reduction in the value of the gold compared to U.S. dollar, the loss we had is being posted under trading loss. So roughly 40% of the total trading loss has been already offset by the security income, which is coming from the gold-denominated securities within the NII. So you can imagine roughly 60%. So far on cumulative basis, if I'm not wrong, we have TRY 5.2 billion trading loss, roughly TRY 2.2 billion of which has been offset by the income on the gold-denominated securities.

[Alan Webborn, analyst]

Okay. So am I right that the -- so 60% of the trading loss in Q3 is essentially a one-off open FX position hit that won't repeat and won't reverse? Is that right?

[Semih Tufan, executive]

Right. Roughly -- yes, 50% to 60% level. Right.

[Eray Duran, executive]

We may not call it as one-off maybe, but it's because of the accounting methodology.

[Alan Webborn, analyst]

Okay. But it won't reverse because you've closed the position?

[Semih Tufan, executive]

We may consider one-off for the half of the 50% and 60% level because half of it was driven by the open FX position we had in the past, but we closed it. But we have already currently FX position, which is below 20%, the regulatory threshold, 20%.

[Operator]

And we go now to Mr. Sam Goodacre from JPMorgan.

[Samuel Goodacre, analyst]

Just 3 questions from me. There seems to be an amount of write-backs within other provisions. I think it's about a TRY 200 million reversal within the other provisions line in the 3Q. Could you explain where that is coming from? There are also tax gains this quarter, so it would be useful to know the driver of that. And then third and finally, if you could just confirm for us what your capital ratios are without forbearance and also at the consolidated level, if that is possible?

[Semih Tufan, executive]

Thank you, Sam. Let me start with your first question regarding other provision. It's like free provision, not a free provision exactly, but it's like free provision. We shared day by day in line with our prudent approach, depending on the IRB model. It's revising in each quarter and collectively at the end of the year. If we need to adjust the provision, we are benefiting from this line. That's why we shared this provision, and in this quarter, we used it to adjust our provision need for the other items, including Stage 1, Stage 2 and Stage 3.

When it comes to your third question regarding the capital ratio, the BRSA forbearance impact on the consolidated and unconsolidated at the same time, for the CAR ratio, the impact size is 169 basis points. For the core capital, it reduced to 128 bps. When it comes to your second question regarding the tax gain...

[Eray Duran, executive]

Let me explain it briefly. Thank you for your question, Sam. This tax -- when you look at this tax amount on a quarterly basis, yes, it seems like a gain. However, if you look at for 9 months period, last -- I mean, in the first half, our effective tax rate was 23%, and after 9-month period, it dropped to 18% level. It fluctuates. We have to complete the full year in order to evaluate the real impact of this tax rate. And sometimes, IFRS methodology -- I mean, IFRS accounting may differ from our tax laws that considers some items as income or some items as loss. It differs from IFRS model. So this provision for tax may be misleading if we assume it as a kind of tax [ profit ]. It just fluctuates within this 9-month period. But after we complete the full year, it may reach again to 20% level or 22% level.

[Operator]

[Operator Instructions] All right. I think we -- speakers, I think we are out of audio questions, and I believe we have -- I've been informed, we have no written Q&A. Is that correct?

[Semih Tufan, executive]

Yes, I think that we have no further question. I would like to thank all of participants for our presentation today, and I wish a healthy day for you and your families and loved ones. Thank you again.

[Operator]

Thank you. Thank you kindly for that. Ladies and gentlemen, as you heard, this concludes today's webcast call. We'd like to thank you for your participation. You may now disconnect.