Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to Halkbank's First Half 2021 Financial Results Webcast. There will be a Q&A session after the presentation. [Operator Instructions].

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

[Semih Tufan, executive]

Hello, everyone. Welcome. Thank you for joining us today. I'm here with my colleague, [ Gizem Yücesoy Yilmaz ], from the IR team.

We left behind the quarter with an improved spread net interest margin. We also performed where we generating higher fees and commissions compared to previous year -- previous quarter, sorry. We have also managed to maintain our NPL level below the sector. And we also see that -- this positive momentum is continuing in the last quarter.

In the interest of time, now I would like to give the floor to my colleague, [ Gizem Yücesoy Yilmaz ] for the detailed presentation. And after that, we will be happy to receive your questions. Thank you.

[Gizem Yücesoy, executive]

Good evening, everyone. This is [ Gizem ] from the Investor Relations team. I will now go over our presentation and then we can switch through the Q&A session.

Starting with Page 1. Our total assets increased by 9% year-over-year to TRY 724 billion in the third quarter. You may see in the middle chart that our asset mix, consists of 63% of loans, 24% of securities, and 11% of liquid assets. These liquid assets comprises of 89% of FX, with a predominant share of assets, which held at CBRT. You may also see on the right-hand side of the page that our current swaps amounted to $6.7 billion, which has increased in this quarter due to the rising swap usage. We had TRY 357 million of FX wholesale funding due within 12-month, [ 6.8% ] of which is IFI funding and [ 25% ] of which is repo. Please note that we redeemed our last Eurobond amounting $500 million in July.

As you may see in the top right side of the page, our 3-month average foreign currency and liquidity coverage ratio is at 470%, which is considered higher than the regulatory requirements.

The next page shows the figures regarding our securities portfolio. Its share within our total assets has reached 24% with the help of roughly TRY 4 billion increase in the CPI linkers portfolio. You may see in the right-hand side of the page that linkers' share in total securities has been steadily increasing throughout the year, and its share reached 31%, amounting to TRY 48.6 billion as of third quarter. We also increased the valuation rate to 19% in August from 16% in the second quarter.

Accordingly, CPI linker income posted roughly TRY 3 billion, which accounts to a 50% increase quarter-on-quarter. Kindly note that every 1% increase in the CPI linkers' evaluation rates has 8 basis points or TRY 408 million impact on year-end net interest margin.

The following page shows the details of our loan portfolio in terms of customer segmentation. After reaching a 48% in 2020 with the impact of the pandemic, we have seen a stabilization in our lending appetite in 2021. Though as an SME bank, we are still supporting our small and medium entrepreneurs as their loans increased by 5.6% from September 2020, and 5.8% from the end of 2020. The loans that we have granted from the beginning of pandemic, which amounted to roughly TRY 100 billion, has performed quite well, and 98% of the total matured loans have been paid on time.

The next page, Page #4, exhibits a further detailed breakdown of loans. TRY loans still make up 78% of total loans, and 22% of which constitutes of corporate segment dominated FX loans. On the right-hand side of the page, you may see that our SME portfolio dominates the total loans with a 44% share in terms of customer segmentation. 15% Of SME loans are guaranteed by CGF, and the 38% of SME loans long to all unit corporate loan scheme. 34% of our total loans consist of corporate loans, and roughly 35% of our corporate loans consist of project finance loans.

In terms of sector breakdown, the shares of the sectors are similar with the previous quarter. Our loan portfolio is mainly driven by trade, manufacturing, and retail segments. As for the retail loans, mortgage loans have roughly a 61% share, with a well collateralized structure. 32% of retail portfolio consists of consumer loans, 70% of which are provided either to our pension and payer customers or utilize a CGF-type consumer loans.

Pivoting to the next page, Page #5. We can see the volume of nonperforming and Stage 2 loans. With roughly TRY 100 million decrease in NPL portfolio, our NPL ratio is hovering around 3.4% as in the previous quarter, and still is below the sector average. Despite limited new NPL inflows and strong collections performance, we further strengthened our provisions to be on the safe side. Our NPL coverage ratio inched up to 60% from 59% in the previous quarter.

The deferred loans increased roughly TRY 100 billion as of September, which was TRY 93 billion in the second quarter. Please bear in mind that deferred loans portfolio includes COVID-19 restructured loans of TRY [ 26 ] billion as of September. If we exclude this restructured portion, our deferred loans would make up 16% of the total loans book. Please note that our loan default schemes have already ended as of September, ending of report in process on the portfolio, we will not be able to give the details of the deferred tons in the coming quarters.

Restructured loans make approximately 7% of the total loan book, and 39% of these loans are followed under Stage 1. Another key highlight is ending of the staging forbearances, effective from the beginning of Q4. Assuming all of 90 to 108 days [indiscernible] under Stage 2 are booked as NPL, it will add up to 100 basis points to our year-end NPL ratio as our collection performance is going quite well, we expect there will be limited impact on P&L due to our prudent provisioning policy. We remain confident our year-end NPL ratio stable our sector average.

The following page compares the NPL ratio of the sector of data. Having the largest share in total loan portfolio, corporate, commercial, and SME loans, our NPL ratio is far below sector averages. You may see an increase in consumer loans NPL ratio as of June. 1 of our pandemic-related loan packages support loans for basic needs package, has a 4% deferral on its matured loans, which is the reason for this increase.

The increase in consumer loan NPL to 3.6% from 2.9%, mostly driven by quarterly TRY 170 million NPL inflow. Moreover, collateral structure is the main driver behind our below sector NPL ratios. 15% of the SME book, and 18% of consumer loans are under the CGF scheme, and both of them generate almost 0 NPL. Also, 38% of our SME book consists of corporate loans, and they create only 10 basis points NPL historically.

As for the rest of the retail book, mortgage loans only have a 15 basis point impact, while pensioner and payroll customers creates only 10 to 15 basis points NPL. As for the credit card NPL ratio, it has contracted in line with the sector, but still above the sector average. However, I'd like to recall that our credit card volume has only 1.1% share in total loans.

Flipping to the next page, the asset quality dynamics. After releasing some of our provisions in the second quarter, which have been set aside in the current year, we set aside some provisions for both performing and nonperforming loans.

Performing loan provisions are set aside depending on customers' credit scoring. As for the NPL provisions, it's a regular process that, in every 3 months, we set aside provisions for NPLs to eventually reach 100% provisioning over 6 years. As a result of this, roughly TRY 700 million has been set aside in total in this quarter.

In terms of reversals, we have made roughly TRY 200 million of NPL reverses due to the improvement in customers' scorings, and roughly TRY 100 million of performing loan reversal due to collection performance. Therefore, the gross total and specific cost of risk has come at 50 and 40 basis points, respectively, on a cumulative basis.

Liability details are on the next page, Page #8. Due to the increase in TL deposits, total deposit share in liabilities rose by 3 points. So we would see its impact on the loan-to-deposit ratio, which came at a comfortable level at 85%. Since post-TL and FX deposits have increased, our TL LDR decreased by roughly 5 points, while FX LDR decreased by roughly 3 points quarter-on-quarter. You may also see that our FX wholesale funding share in total liabilities decreased to 3.2% from 2.9%, since we paid off a $500 million amount as eurobond in July.

More details on deposits are on the next page. With an expectation of a likely decline of interest environment in the beginning of the third quarter, we have achieved a growth of 5.2% in TL deposits, and it was mainly driven by interbank and savings accounts. As for the FX deposits, while the nominal growth is roughly $1 billion, the quarterly 5.8% growth includes 2% currency depreciation, while the real-term increase is 3.6% on a quarterly basis.

So in blended tons, we have reached 5.5% quarterly and 21% year-over-year growth. Therefore, we are still the second largest bank in the sector in terms of total deposits with a 14% market share.

Next page shows a further view on deposits. While demand deposits grew by 8.4% quarter-on-quarter. Their share in total deposits increased by 82 basis points to 19.4%. On the right-hand side of the page, we can see that our TRY deposits still has a 51% share in terms of currency. As you may see in the lower right-hand of the page, our cost of TRY deposits started to fall with the half of expectation of a rate cut environment.

Cost, yield, and spread details are on the next page. TRY loan yield stands out with a 210 basis points improvement on a quarterly basis. The rate of the [indiscernible] loans was around 10% in the beginning of 2020, but it was updated to 15% and 19%, respectively, for the stock loans. As a result, the treasurer had announced that they will also cover the additional rate increase, therefore, as such in the previous quarter, we have an income from this interest rate difference. We have already reflected some of this income in our balance sheet, and expect to see the remaining in the fourth quarter.

We can say that repricing period still continues, but addressing that also continues to narrow with a faster pace, as you may see from our blended spreads, which improved 200 basis points quarter-on-quarter. As I mentioned in the previous slide, we are starting to see a downward trend in costs as you may see in the lower right-hand side of the page, but we expect to see its impact, especially in the fourth quarter.

P&L items are on the next 3 pages. With the impact of the shrinkage on the pricing period and CPI linkers' income, we have managed to boost our NII by roughly 300% quarter-on-quarter, 4 points higher than the previous figure. On the expense side, there's a contraction too as we have a less unit on interbank money market, so their costs decreased by 17% on a quarterly basis. In terms of headline NIM, it has improved more than 200 basis points on a quarterly, and more than 80 basis points on a cumulative basis, and reached 2.8% and 1.2%, respectively.

For the swap adjusted NIM, as I mentioned, we have raised our average swap usage to TRY 56 billion from TRY [ 20 ] billion in this quarter, yet it still improved by 120 basis points to 1% on a quarterly basis.

Looking at fees and commissions income, where we see a 17% increase Q-on-Q by reaching a stellar 63% increase year-over-year with the help of main corporate and commercial credit card commissions.

The following page shows the profitability details. Strong NII and fee and commission income with an increased net trading loss, due to boosted swap usage, generated TRY 92 million in net income, with a roughly 30 basis points in first quarter ROE.

Cost management details are on Page 14. We continue with disciplined cost management. OpEx was up only 14.8% year-over-year despite currency volatility and elevated inflation outlook. For the full year, we expected to stay around annual inflation figures. In terms of the breakdown after OpEx in the non-HR expenses, the biggest portion still comes from the banking services with a 13% share similar to the previous quarter.

Details of the solvency ratios are on Page 15. Our reported unconsolidated capital adequacy ratio came at 13.43%. If you rule out BRSAs forbearance measures dated 16th April and 8th December of 2020, the negative impact would be approximately 8 basis points on CAR, 6 to 7 basis points on Tier 1, and 55 basis points on CET1 on both consolidated and unconsolidated basis.

The following page indicates our strong focus on digital channels. At Halkbank, our digital transformation picked up remarkably since the beginning of the COVID pandemic. We continue to enhance our digital capabilities. As such, we reached up to 4.3 million active digital customers as of September. The upper left-hand side, you may see active customers by types, our mobile-only customers, volume has increased by 33% to 3.5 million from 2.6 million. Taking into account other digital users, our total active digital customers increased by 20% year-over-year, amounting to 4.3 million.

The lower right-hand side of the page shows that 95% of our transactions have been made via non-branch channels. More importantly, mobile transactions dominate other channels, it has a lion's share of 56% in total. The migration of the lending activity to this digital platform is 1 of our digital transformation priorities. Our efforts paid efficiently as of September. [ 3% to 5% ] of consumer loans granted via digital channels on a 3-month basis.

And this concludes our presentation. Thank you for listening, and we can switch to the Q&A session.

[Operator]

We will now start our question-and-answer session. [Operator Instructions]

We have a question from Alan Webborn. Please sir go ahead.

[Alan Webborn, analyst]

It's Alan Webborn from SocGen. Thanks for your time this afternoon. Could you give me an idea of what you're currently paying for Turkish lira deposits? What's the sort of the marginal rate now? And could you also give me an idea -- I mean, I know you've been going through a process of repricing loans in the third quarter, which clearly has had a good impact on your NII.

But in terms of the statements that you've been making along with the other state banks after the rate cuts, could you talk a little bit about what you're doing in terms of your pricing structure post the rate cuts that we've seen. So we can understand the dynamics between the 2, that would be very helpful?

[Semih Tufan, executive]

Alan, thank you. Let me start with your first question. We are applying roughly 16% level in terms of the marginal pricing for the TL-denominated deposits.

When it comes to the second part of your question, in this quarter, we benefited from -- especially the repricing activities on the cooperative loan. Let me give an indication regarding the pricing of this loan in terms of the stock and the -- for the new cooperative loan. We increased our marginal pricing for the cooperative loan to 19% level, while it was only 17% level during the first half of this year. With effect from June, for the stock cooperative loan, we were applying 15%. And with effect from the August, we increased this pricing to 19% level. So it implies that, for the new loan and the stock loan, we are now applying 19% level for the cooperative loan. That's why our NII in this quarter improved roughly 300% compared to previous quarter.

And in terms of the spread, the Turkish lira core is a bit improved by more than 200 basis points in this quarter compared to previous quarter. And in the last quarter so far, we are seeing this positive trend by the year end, we think that in terms of the Turkish lira, cost of debt will be on the positive side.

In terms of the blended cost spreads, together with the contribution of the FX side, we will close the year at around 4%, maybe higher than 4% in terms of the net interest margin. We think that our net interest margin by the year-end will be around 1.5% level.

[Alan Webborn, analyst]

Okay. All right. So 1.5% for the full year by year-end? Okay.

[Semih Tufan, executive]

Right. Because quarter-over-quarter, we increased our net interest margin 210 basis points level. On a cumulative basis, it's now 100 to 200 basis points until the year-end with this positive contribution, we think that we will close the year with net interest margin at 1.5%.

[Alan Webborn, analyst]

Okay. Great. And I mean, what's your view, presumably, the swap costs will come down a bit in Q4. Would that be a reasonable assumption?

[Semih Tufan, executive]

In the last quarter, we think that we increased our swap volume to more than [ TRY 50 billion -- TRY 56 billion ] level for the third quarter. And the last quarter will be similar to this quarter. And in total, for the full year, the swap cost for the full year will be around TRY 7 billion, TRY 7.5 billion level. So it implies net interest margin, swap adjusted net interest margin, will be close to 0 on the positive side.

[Alan Webborn, analyst]

Okay. Okay.

[Semih Tufan, executive]

Because we have been using the swap transactions very actively instead of the Turkish lira-denominated deposits because of the rough partly pricing advantages. And as you know, we have been seeing enormous amount of the FX-denominated deposits. Constantly demoted loan growth, we think that the picture will be similar at least the beginning of the next year.

[Alan Webborn, analyst]

Okay. That's helpful. And just in terms of costs, I think you -- just can you confirm that you said that you thought that the CPI would be about the level of costs for 2021?

[Semih Tufan, executive]

For the first quarter, we were using 15% level. When it comes to the second quarter, we increased this evaluation rate of 16%, in case if I'm not wrong. For the third quarter, we are using 19% level. That's why after this adjustment after the sale adjustment, we posted extra roughly TRY 1 billion interest income from the CPI linkers due to the repricing effect and the volume increase. We have been regularly increased the CPI linker volume in our total security portfolio. CPI linkers securities to total securities portion increased to 30% level. In the floating rate Turkish lira-denominated securities, its portion is at 70% level.

[Alan Webborn, analyst]

Okay. That's good. And just in terms of operating costs, could you just confirm, I think you said that you felt that they would grow at about the CPI level for the full year. Was that right?

[Semih Tufan, executive]

Yes, we are planning to grow in terms of OpEx in line with the CPI level, maybe 1% or 2% higher than the CPI level. When you have a look at the development on the OpEx during 2021, as we said at the beginning of this year, we will close the year with the guidance that we shared at the beginning of this year. It will be roughly 1% or 2% or 2% higher than the CPI levels.

[Alan Webborn, analyst]

Okay. And I know you won't yet be in the process of budgeting, but given where inflation has been in the last sort of couple of months, I mean, presumably that's quite a challenging level for cost growth for next year. Is that fair?

[Semih Tufan, executive]

We can get it -- CPI levels. Yes. By the year end, we think that the CPI level may reduce to below 19% level. So it's fair to say that the OpEx level for the full year of next year will be in line with this level. As I said, plus 1% or 2%.

[Alan Webborn, analyst]

Okay. Okay. That's helpful. And then just could you just talk me through how you feel the end of year, cost of risk dynamics will be? I mean after the -- a still relatively low level of risk costs in -- at the end of -- by the end of September.

Just could you just tell me how you feel the fourth quarter is going to go. Now the sort of I think you said that even though there will be -- the NPL moratorium has gone that there won't be much impact on your P&L. Could you just talk me through that?

[Semih Tufan, executive]

In terms of the total cost of a specific cost of risk, we performed in line with what we shared at the beginning of this year. We said that we will close 2021 with the total cost of risk at around 80 basis points.

In terms of the specific cost of risk, we would close the year with 60 basis points level in terms of the specific cost of risk. When I have a look at the latest figures as of the third quarter, we will achieve these targets, and we will close the year below 80 basis points in terms of the total cost of risk, which is very close to 60 basis points, lower than 60 basis points in terms of the specific cost of risk. And this picture will be similar for the next year, considering demoted and the moderate loan growth. Maybe we need to have a look at the lending activities and loan growth, to achieve this target. Because during 2021, we have a negative real loan growth on the Turkish lira side. For example, in this quarter, our Turkish lira-denominated loan growth is almost 0, compared to the sector average at around 4.5%. And then this picture will be available for the last quarter. And our loan growth will be lower than the inflation rate.

So that will be a negative loan growth. So we think that because of -- as we said in the presentation, because of the strong collateral structure, after the -- as you know, the BRSA forbearance, we think that there will be forbearance impact up to 100 basis point level for the NPL, but it doesn't mean that the full 100 basis points will be moved to NPL.

Now, these loans were partly subject to the restructuring depending on the repayment performance of these loans. So we will see that some part of these loans will be classified under Stage 2 or maybe Stage 1, and then partly, of course, will be moved to NPL class.

[Alan Webborn, analyst]

Okay. That's helpful.

[Semih Tufan, executive]

But all in all, in terms of the NPL ratio, we will be lower than the market average for this year and for the next year.

[Alan Webborn, analyst]

Okay. And in terms of -- I mean, we understand that you've had quite muted loan growth, and I know it's early in terms of budgeting. But I mean, for you now, the market conditions looking more attractive, presumably in terms of starting to grow the book a bit more.

I mean, I guess you will tell us more about that early next year, but is that the thought process that you're still seeing fairly, I guess, muted loan growth in but potentially, I guess, we'll see what it's going to be, but are you feeling that you have more opportunity to grow now?

[Semih Tufan, executive]

Alan, as you said, it's quite early to talk about the next year lending activities. Our budget preparation process is now under construction. But I can say that in terms of the general interest levels, as you know, we are an SME bank, and we saw that on the SME side, and the corporate, and commercial side. The loan appetite is quite muted so far, because especially during the pandemic, as you know, our loan growth, especially towards these segments are quite higher than the market average, especially the private bank. That's why we think that we met the front-loaded demand of that kind of loans from this segment.

So -- We think that for the next year, our loan growth will be in line with the CPI level compared to this year. That will be there, will be positive real lending growth -- loan growth in the next year for the time being, I can say that.

[Alan Webborn, analyst]

Okay. That's very helpful. Thanks for all of your answers.

[Operator]

[Operator Instructions]

[Semih Tufan, executive]

I think that we have no further questions. If you don't have, I would like to thank you all for joining us today, and have a good weekend.

[Operator]

Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation.