Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to the Halkbank Third Quarter 2022 Financial Results Webcast. Thank you very much for standing by. [Operator Instructions] With that, I will now hand you over to your host, who is Mr. Semih Tufan from Halkbank. Mr. Tufan, the floor is yours.

[Semih Tufan, executive]

Thank you, Rob. Good evening, everyone. Thanks for joining us today. In the interest of time, I would like to give the floor directly to my colleague, Gizem. She will give you details regarding Q3 results in a presentation. After that, I will be here to answer your questions. Thanks.

[Gizem Yücesoy, executive]

Thank you, Semih Bey. Welcome, everyone. This is Gizem from the IR team. I will go through our presentation, then we will be pleased to answer any questions that you may have.

Starting with Page 1, you may see our prudent asset distribution and its growth, which is up by 12% quarterly and 69% on a yearly basis. FX liquid assets share in total liquid assets increased by 3 point to 86% due to the raise in the reserve requirements had in the CBRT.

On the right-hand side chart, you may see our FX liquid assets breakdown, which is $9.9 billion in total and 72x higher than our short-term FX wholesale funding amounting $461 million.

Moving to second page, you may find the details of our securities. The share in total assets increased to 27.5% and TRY securities share in total portfolio increased by 3 points.

On the right-hand side table, you may see that the share of TRY fixed rate securities increased to 19% from 16% owing to the recent regulations of the CBRT. CPI linkers volume reached TRY 119 million, while its share within total securities increased to 38%. In July, we adjusted our CPI linker valuation rate to 60% from 40% and reflected all of the evaluation impact within the third quarter.

The following page shows our loan growth details. Halkbank's lending grew by 13% quarter-on-quarter and 62% year-on-year with the help of mainly SME and corporate loans. As you may see on the bottom of the middle chart, we have increased our market share and maintained our position as the third largest bank in terms of total loans.

In the third quarter, we have granted TRY 63 billion amounted loans to SMEs, our leading segment, and this reflected as a 15% quarterly growth on SME loans with a stellar 18% market share. As you may remember, CBRT's decision on maintenance of securities at 30% caused the losing bank's appetite on expanding TRY commercial cash loans, excluding designated loan segments.

SME segment is one of the excluded segments. We made use of the relevant decisions and mainly focused on SMEs. On top of it, CBRT's another decision on the growth cap of 10% by the year-end which also excludes SME segments. By taking advantages of board decisions, we are comfortable with keeping up our support to SMEs and are not expecting to exceed the 10% cost gap by the year-end, thanks to our SME weighted loan portfolio.

Turning to Page 4, you will see the breakdown of our loans. TRY loans share in total loans increased by roughly 2 points to 76% quarter-on-quarter, mainly due to the lack of demand in FX corporate loans. On the right-hand side of the page, you may see the details of the customer segmentation. SMEs continued to predominate the portfolio with the growing share, and we are actively supporting cooperatives which have a low risk profile due to being subsidized 50% of interest payments by treasury. Their share in total SMEs loan book is 30%. Corporate share decreased to 38% from 39% quarter-on-quarter due to the cyclical decrease in their demand, as I mentioned.

On the lower left-hand side of the page, we see that manufacturing and trade loans share in total loans increased slightly compared to previous quarter, while the other small scale segment share declined. Last chart of this slide, shows the retail loans by types. You can see that credit cards make up roughly 9% of the retail loans, which was 8% on the previous quarter. We had the aim of growing our market share in this area as it is a great supporter of fee and commission income.

Moving to Page 5, asset core details. Our NPI portfolio is up 4%, while their share in total loans improved to 2.6%, thanks to our strong collection performance as well as denominator impact. Still, we maintained our prudent approach and set aside a similar amount with the second quarter. Although we saw a limited amount of NPL inflow, we have further strengthened NPL coverage which reached up to almost 8%.

Page 6 exhibits the NPL ratios by segment. All of the shown segments either decreased or stayed flat in line with the sector with the help of the denominator effect. Even so, as I mentioned, we keep our coverage ratios on a cautious level. Besides, the [indiscernible].

Looking at the cost of risk details on Page 7. We increased our provisions, especially for loan capped at Stage 1 and 2 for the purpose of being prudent in next year in case there are challenges that may arise from a potential global recession. By doing so, all of the 3 stages coverage ratios improved and our total loan coverage stepped up to 5.65% from 4.6% in the previous quarter. Along with applying this conservative provisioning policy, our net total cost of risk materialized at 487 basis points, which was 315 basis points a quarter ago cumulatively.

Turning to Page 8, the liability details. LDR decreased by roughly 8 points to 81% through floored Tier deposits, in line with the sector. In contrast to the prior quarter, we decreased our repo transaction usage and provided our funding via deposits and swaps. In the meantime, expanded Tier deposits improved TL LDR to a comfortable 118% level. As you may see in the right-hand side of the page, our deposit share in total liabilities surged to 74% from 69%, while interbank bond market share shrank to 10% from 16%. In terms of the FX profile funding, consisting of mainly subordinated debt, they make up 3% of total liabilities.

Switching to the next page, you will see further details of our deposits. Total deposits are up by 21% quarterly and 69% on a yearly basis. The biggest contributions to this increase is from commercial customers and public sector deposits. TL deposits raised by 33% quarterly, while public sector deposits share in total TL deposits increased. As you know, public sector deposits interest rates are falling below sector's average rates, so we took the advantage of this low-cost opportunity.

Total FX protected deposits increased by 30% quarter-on-quarter, while they make up roughly 40% of our TL time deposits. In terms of FX deposits in USD terms, they state nearly flattish or declined by 7% year-over-year.

Here, you can see more details on deposits. Though there is a 15% increase in demand deposits, time deposits soared by 24% quarter-on-quarter and their share in total deposits reached to 77%. On the right-hand side of the page, we may see that TRY deposit share in terms of currency breakdown reached 53% from last quarter 48%, thanks to our strong efforts to make TRY deposits attractive. As we may see in the last chart, deposits are worth about a roughly 30 basis points increase in our cost of TRY deposits.

On Page 11, cost, yield and spread details. Loan yield increased by 70 basis points due to the increase in TRY loan volume, while FX loan yields decreased by 40 basis points, considering the lack of appetite in the FX lending. In terms of cost, so cost of TRY deposits up by 40 basis points, mainly due to the relative higher rates in FX-protected deposits in the previous months. Cost of FX deposits up by 108 basis points due to the current depreciation. In blended terms, cost of deposits increased by roughly 1 point while loan yield up by 55 basis points, so blended spreads declined to 4.8%.

Moving to P&L items on Page 12. Net interest income is up by 89%, mainly because of the rising income from CPI linkers due to the raise in the evaluation rate. Quarterly headline net interest margin came in at 9.6%, while swap adjusted NIM is 1.9%. In the third quarter, our average swap billion was lrar 43 billion, while it was TRY 39 billion in the previous quarter. Service swap cost increased slightly by 17%.

On the bottom left-hand side of the page, we can see that our fee and commission income is up by 32% quarter-on-quarter and 115% on a yearly basis, which is quite higher than the September inflation print of 86%. We managed to grow our fee and commission income via credit card commissions and fee and commissions collected from corporate customers.

Switching to profitability details. Total operating revenues were up by 83% quarterly backed by CPI linker gains and fee and commissions income, along with a moderate OpEx and cautious provisions. All-in-all, net income came at TRY 4.3 billion with a 67% increase compared to the previous quarter. ROE reached up to 24%, which is higher than our initial year-end guidance of mid-teens levels.

Cost details are on the next page. OpEx lifted 33% on a quarterly basis. HR expenses up by 42%, while 9 [indiscernible] as such in the most companies. As for the other expenses, we had some one-offs in this quarter, such as advertisement expenses. To add more, 9 months cumulative OpEx only increased by 8%, below inflation print. By this way, cost-income ratio came at a record low level of 25%.

On to solvency ratios on Page 15. Capital adequacy ratio came at 14.3%, down by roughly 40 basis points due to extended loans. I'd like to recall that figures on this page are including CBRT for variance measures. Those regulations positive impacts are roughly 106 basis points on CAR, 100 basis points on Tier 1 and 82 basis points on CET1 on an unconsolidated basis.

Looking at our digital activities on the next page. The number of active digital customers reached 5.2 million with the help of our ongoing efforts to gain further customers. Total digital transactions grew by 27% year-on-year, while our non-branch transaction share maintained its stand position with 97%. We are actively confirming campaigns and informative activities to enrich our mobile banking application in order to enhance our market share.

I will finish here and I thank you all for listening. Now we can switch to the Q&A session.

[Operator]

[Operator Instructions] We've got a question from Konstantin Rozantsev from JPMorgan.

[Konstantin Rozantsev, analyst]

I've got two questions that I wanted to ask. The first question, so I understand that a lot of corporate deposits within the FX protected deposits came to have maturities during November. So I just wanted to ask you, as we go through November, how high do you see the average rates for those corporate deposits invested in the scheme, what fraction remains within the scheme as opposed to how much is leaving the scheme? And overall, do you observe that this size of the FX protected deposits scheme continues to grow on a daily, weekly basis.

And the second question, I wanted to ask what's the outlook for the lending growth for Halkbank in the fourth quarter as compared to, say, third quarter of this year?

[Semih Tufan, executive]

Konstantin. This is Semih Tufan. Thanks for your questions. Let me start with your first question, the corporate portion and the FX protected deposits at 60% level. If we need to talk about the average because it's changing during the quarter, it changed between 50% to 60% level.

When it comes to the second question regarding the lending growth. In the third quarter, our loan growth on TL side was 15% level, which is slightly higher than the sector average. When it comes to the FX side, there was a contraction like the other previous quarters. It was roughly 60% level, which is slightly lower than the sector average.

In total, on a quarterly basis, we grow roughly 13% level in total on the lending side. It's quite early to talk about the year-end and the next year, but it seems that we will close the year with a loan growth at 65% to 70% level. So it means there won't be any real growth on lending side, considering the CPI print from December to December. -- we think that the CPI print will be around 75% level -- 70%, 75% level by year-end.

[Konstantin Rozantsev, analyst]

Understood. Just a quick clarification on the first question. So you're saying that 50% to 60% of existing corporate deposits they chose to remain within this momentum. The balance is leaving the scheme, right? But that's the first piece. But kind of overall, does the size of the scheme continue to grow week-to-week from...

[Semih Tufan, executive]

No, I mean, in total, we saw a discounting momentum in terms of the total of FX protected deposits. It reduced to TRY 150 billion, TRY 156 billion level. It's around USD 8.7 billion. There was a little bit reduction over there. There was no any new demand from corporate side or the real person side.

[Konstantin Rozantsev, analyst]

Got it. Got it. And that's been the reduction since the end of third quarter or...

[Semih Tufan, executive]

You're right, third quarter.

[Operator]

We have a question now from Mr. Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

Could you talk a little bit about the what you're seeing in terms of loan yields and deposit costs as we currently compared to what you show in the presentation for Q3?

And clearly, the sort of regulatory restrictions are quite clear. And what are you feeling about the sort of the balance in terms of loans and deposit costs in -- as we see it currently? I mean, I guess you're going to see now a further sort of uplift in Q4 in terms of your CPI linkers and I wonder what you think the -- presumably the margins are going to be up again in 4Q? I know it's not -- we're not at the end yet, but I just wondered where we are now.

And then in the second question, and clearly, you've made some substantial uplifts in terms of your provisioning in the third quarter. And I guess that's a balance from the high contribution of the CPI linkers. Is there any target there in terms of -- or will you just keep increasing the level of provisioning because it seems to be mostly stage 1 and stage 2 while you've got these sort of very high revenue streams coming in from the CPI linkers. I'd just be interested to see what the strategy is there.

[Semih Tufan, executive]

Thank you, Alan, for your complex questions. Let's start with your first one regarding the loan yields. When you have a look at the second quarter, maybe remember, our loan lending yield depending on the policy rate was around 14.5%. When it comes to the third quarter, as you know, in line with the policy rate cut we reduced our marginal pricing on the lending side to 13.5% level. There was 1% reduction over there.

But when it comes to the other side, on the deposit side, regarding the lack of the Turkish lira liquid market, especially during the last 2 or 3 weeks, we saw with increase on the marginal pricing on Turkish lira deposit side, we were offering 22% during the second quarter in average. When it comes to the third quarter, it increased to 26% level. Nowadays, we are offering 25% to 26% level for the Turkish lira deposits. There was not any considerable change on the FX side in terms of the deposit.

When it comes to these CPI linkers side of your question. Yes, the main rationale behind the bottom line income is the CPI linkers adjustment. During the third quarter, we used 60% for the evaluation, considering the increased CPI print by the end of the third quarter.

In the fourth quarter, yes, it seems that there will be another further adjustment in terms of the CPI prints we will use a new -- we will use the evaluation rate depending on the annual CPI print, which will be December to December. So there will be a final adjustment, as I said, in the fourth quarter. And the -- it seems that there will be another contribution in terms of the CPI linkers.

If we need to talk about the BRSA regulations in terms of loan growth. As you know, there are two important regulation. The first one is keeping the treasury bonds at 30% for the loans which -- on a selected basis. Yes, we are in spite of a state of bank, we are exposed to this regulation. And so far, we have roughly TRY 8 billion amount of treasury bonds that we shared for the part of that kind of loans, which is collapsing into this regulation.

When it comes to the second important regulation regarding the loan growth, as you know, there was a cap, there is a cap, which was set by BRSA for the Turkish lira loan growth on an annual basis and the monthly basis, 3% and 10%, respectively. But when you have a look at the lending segment, we are lending mostly to SMEs, which is excluded by this regulation change. So there was not any impact in that term on our case.

When it comes to the third regulation regarding the pricing. For the November, the pricing ranged between 17% to 22% level. And the -- when you have a look at our total lending pricing, which is collapsing into this range, the amount of the loan is TRY 17 billion, and it means TRY 3.4 billion that we need to make -- to set aside the treasury bond for these loans.

So all-in-all, we can say that the impact of the BRSA regulations is quite limited on our case because, as I said, we are lending mostly to the segment of the loans and customers, which are excluded by the BRSA regulations, monthly SMEs. And the company's operating, I mean, at the exports, and having the working capital for the export and making investment. That's why this regulation's impact is quite limited.

When it comes to the question of provisioning, yes, thanks to the high -- relatively high bottom line income, we keep relatively high provisioning during the third quarter. And our -- according to our coverage ratios increased. In the fourth quarter, what we'll do is completely depending on the profitability and the CPI print levels because as I said at the beginning of my speech, our NII growth is mainly coming from the CPI linkers.

Let me give you some breakdown regarding the portion of the CPI linkers during the third quarter. It increased to 58% level. And considering the adjusted evaluation rate, the evaluation rate we adjusted in the fourth quarter, we think that there will be another strong bottom line income, and it means that there may be a strong provisioning in the fourth quarter. I think that I touched all the questions.

[Alan Webborn, analyst]

Okay. And in terms of the asset quality of the loan book. Is there any areas where you're seeing any concerns?

[Semih Tufan, executive]

In terms of the NPL inflow, no, there is no any deterioration on our asset quality. By the year-end, we expect to see to 2.5% to 3% level in terms of the NPL ratio. So the high provisioning doesn't mean that we expect to see or we anticipate to see any deterioration on the asset quality side. We are just acting to be on the prudent side in terms of high provision just to increase our coverage.

It's completely depending on a potential recession that we may see, especially for the next year. But maybe, for example, Fitch and other players that the markets are showing the potential GDP growth of the country, especially for the next year increase as opposed to other global factors of including the U.S. and the EU. So we don't see any problem when we have a look at the industrial production and the other items of the economy that have been going well. So we don't see any problem in terms of NPL inflow.

[Operator]

All right. Mr. Tufan, we don't seem to have any more audio questions, if you like to move to the written questions, that would be great.

[Semih Tufan, executive]

Okay. So we have a written question regarding the CPI income in the fourth quarter.

Depending on the CPI print that we will see in the fourth quarter, but we assume that there will be around TRY 25 billion interest income from the CPI linkers in the fourth quarter.

And the second question, the -- whether we will be -- we will see the pressure on TRY loan deposit spread in the fourth quarter. Most probably, this trend that we saw during the third quarter, especially the last 2, 3 weeks, we will continue to see this trend during the fourth quarter and -- there will be additional increase, especially on the Turkish lira denominated deposits, up to 30% level.

When it comes to the lending side, depending on the policy rate, potentially, we will see another 1.5% rate cut on the policy side by the year-end. So there may be some additional pressure on spreads. But considering the -- our security portfolio combination and considering the continuing contribution from the CPI linkers in terms of the net interest margin, in terms of the bottom line income, we think that there will be another strong bottom line income in the fourth quarter.

I think that we have no any further written question.

[Operator]

All right. There are no questions yes.

[Semih Tufan, executive]

I think that we have no further -- any questions from the audio or written. And then I just want and wish a good weekend. And I would like to thank all of you for joining us today. Thank you.

[Operator]

Thank you, Mr. Tufan. All right, ladies and gentlemen, this concludes today's webcast call. I want to thank you for your participation. You may now disconnect. Thank you.