Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Analysis

Company Forecasts Strong Loan and Deposit Growth

In the third quarter, the company's net profit soared by 343% quarter-on-quarter, bolstered by solid gains in interest income from CPI linkers, robust fee and commission performance, and effective collection strategies, all while maintaining control over operating expenses. Looking forward to 2023, the company expects a spirited expansion, with total loan growth projected at 50%—Turkish lira loans increasing by 55% and foreign exchange loans contracting by 13%. Simultaneously, deposits are set to surge by 70% overall, with Turkish lira deposits jumping by 90% and foreign exchange deposits anticipated to decrease by 10%. In operational metrics, fee income is expected to double, with operating expenses climbing to 103-120%. The net interest margin (NIM) is predicted to stabilize at 3%, with a return on equity (ROE) in the high single digits and a total gross cost of risk closing the year at a mere 30 basis points.

Growth Driven by Assets and Loans

The company reported significant growth, with total assets reaching TRY 2.2 trillion, marking a 13% increase from the previous quarter and an 80% surge from the previous year. This growth was largely fueled by Turkish Lira (TL) liquid assets, amplified by strict reserve requirements in the third quarter. The company's securities witnessed a 10% quarterly and 45% yearly jump. Notably, Consumer Price Index (CPI) linkers now comprise 39% of the securities portfolio, with their valuation adjustment contributing positively to income. Loan growth remained robust at 70% year-over-year, outpacing the sector and reinforcing the company's status as the third-largest bank by total loans. TL loans grew by 4%, while foreign exchange (FX) loans declined by 7% in dollar terms within the quarter.

Solid Market Shares and Risks Managed

The bank maintained a strong position in SME loans, representing 50% of total loans, and boasts a low-risk profile for its cooperative loans segment. Mortgage loans were the dominant category within retail loans. The bank's nonperforming loans (NPLs) portfolio saw a minor increase of 4%, maintaining an NPL ratio in line with industry standards at 1.5%. Provisions for stage 3 loans mirrored the previous quarter as the company continued to exercise prudence in its coverage ratios.

Improved Deposits and Lowered Funding Costs

Deposits experienced significant quarterly growth at 16% and 94% annually, led by a spike in savings account balances. TL deposits increased 19% during the quarter, while FX-protected deposits, which now constitute 48% of the time deposits, helped reduce average costs. TL deposit share climbed to 60% from 53% in the previous quarter, indicating adherence to Central Bank of Turkey's regulations. This led to a comfortable loan-to-deposit ratio (LDR) for TL at 95%, with the company surpassing regulatory targets.

Increased Net Interest Income and Enhanced Digital Footprint

The bank's net interest income (NII) soared by 96% from the prior quarter, buoyed by CPI linkers and a 40% lift in interest income from loans. With significant gains in NII and fee income, net income for the quarter ballooned more than fourfold to TRY 3.1 billion. However, operating expenses (OpEx) rose by 15%, with human resources costs up 40% following a wage increase in July. Despite this, the bank has effectively grown its digital customer base to 6.2 million users, with digital transactions increasing by 45% year-over-year — a testament to the bank's successful digital strategies and campaigns.

Capital Adequacy and Profitability

The bank reported a capital adequacy ratio of 13.2%, which decreased by approximately 40 basis points due to higher imposed risk weights in the retail segment. Nevertheless, the performance of core financial metrics reflected a healthy profitability profile, especially with the drastic uplift in the quarterly net income.

Earnings Call Transcript 2023-Q3

[Mirac Tas, executive]

Hello, everybody. Welcome, and thank you for joining our Third Quarter Earning Call.

This is Mirac Tas, [indiscernible] Head of Investor Relations, Halkbank. I'm honored to take the leadership of investor relations [indiscernible]. I'm very pleased to make my first presentation as of today.

I have with me Mr. Onur Bilgin, head of international banking and financial institutions; as well as our IR Managers, Gizem and Kamer.

We are celebrating Republic of Turkey 100th year anniversary. We wish the second century of our century-old republic bring prosper and success.

We are proud to announce our solid set of results. Before going into our performance, I will share with you some information about the operating environment. Following the first half of the year, the new [ economic ] administration moved to more orthodox policies and implemented gradually tightening -- [ urging the ] economic administration tightening the policy. Accordingly, the total increase in the policy rate in the last [ 5 meeting ] reached 26.5 percentage points. Keeping the pace of the hike and no sign for a break is positive and clearly shows CBRT's determination of fighting against inflation. The key message on the monetary policy stance is that the monetary tightening, the process, will continue until a significant improvement in the inflation outlook is achieved. In addition, new measures were recently established to reduce the FX-protected deposit scheme as needed.

Along with all these normalization steps, we are witnessing the higher rates on the -- both lending side and the deposits. Rising caps on the loan yields have been supporting our margins, while the exit strategy from the FX-protected deposit scheme has some negative impact on our cost of funding. Of course, it will take some time to see stability in term of the margins.

Before getting into numbers. The [ top quality ] of our financial performance [ reveals that ] our core banking revenues continue to be the main drivers of our [indiscernible]. We continue to increase our CPI linkers portfolio, and their interest income contributes significantly to our top line. Besides, net fees and commission performed very strongly, as well as disciplined operating expense management. We focus on keeping our balance sheet intact by strong collection, very limited new NPL inflow and keeping fixed-rate bond purchases at minimum level. On top of the robust core revenue performance, we keep our assets quality metric intact despite limited NPL flow. However, we protect our strong NPL coverage ratios just to be on the safe side.

[ All-in ] corporate net profit increased [ 343 ] quarter-on-quarter in the third quarter, with the help of elevated linker income, strong fees and commissions, significant support from the collections and well-acceptable and modest increase on operating expense.

Last but not least, I would like to provide you summary of our guidance for 2023. We expect to finalize the year with a 50% total loan growth. In term of the currency breakdown, we expect a 55% growth on Turkish lira loan and 13% [ contraction ] on FX loans.

As for deposits, we forecast 70% growth on total deposit, 90% growth on Turkish lira deposit and 10% shrink on FX deposit. When it comes to [ PL ] items, our fee growth guidance, 100%. Our operating expense growth guidance is around 103 -- 120%. We forecast headline NIM will -- end of the year with 3%. [ Our ROE ] expectation is high single digit, while total gross cost of risk, we will finalize the year with 30 basis point.

Now I'm leaving the floor to Gizem to provide you -- more details to you. Thank you so much.

[Gizem Yücesoy, executive]

Thank you, Mirac [indiscernible]. Welcome, everyone. Thank you for joining us.

Let me start with Page 1, details of our assets. Total assets reached TRY 2.2 trillion with a 13% quarterly and 80% yearly increase. This increase is mostly backed with the TL liquid assets due to the strict reserve requirements on third quarter. On the right-hand side chart: Total FX liquid assets make $13.7 billion in total, and it is 2x higher than our FX wholesale maturing within 1 year.

On next page, you may see our securities details: total securities up by 10% quarterly and 45% on a yearly basis. On the right upper side of the page, it is seen that CPI linkers' share increased to 39%, while their volume raised by 23% quarterly. CPI linkers valuation rate was adjusted to 60%, from 50%, in the third quarter; and we've seen its total income effect in the same quarter.

In terms of TL fixed-rate securities, their share in total securities is 15% compared with 19% a year ago, while their share in total assets is a low 3%. Please recall that every 1 point increase in CPI linkers evaluation (sic) [ valuation ] rate has a roughly 10 basis points impact on net interest margin or TRY 1 billion impact on NII.

Moving on to loan growth on Page 3: total loans, up by flattish 3% on a quarterly basis, mainly driven by corporate and SME loans, but if you look at on a year-over-year basis, the growth is 70%, which is higher than the sector, so we maintained our position as the third largest bank in terms of total loans.

On currency-wise. TL loans, up by 4%, while FX loans in dollar terms shrank by 7% quarter-on-quarter. In the third quarter, we have granted TRY 72 billion amount of loans to SMEs, our leading segment, while we still have a solid 20% market share.

Next page shows the breakdown of our loans. TL loans make up 81% of total, while FX loans have a 19% share, predominantly consist of corporate loans. On the right-hand side chart, you may have seen that the SME loans have 50% share in total loans, as in the previous quarter. 36% of SME loans consists of cooperative loans, which have a low-risk profile due to being subsidized 50% of interest payments by treasury.

As [ through ] the breakdown of retail loans, mortgage loans has the biggest share with 61%, while they have low risk, considering their highly collateralized profile. Credit cards' share in retail loans inched up to 14% from 12% quarter-on-quarter, while consumer loans' share decreased to 19% from 21%.

On the following page, you may see the assets [ for its ] detail. Nonperforming loans portfolio increased a slight 4%, while their share in total loans stood at 1.5%, which is in line with the sector average. You may see in the right-hand side chart that we have kept our prudent approach in terms of NPL coverage ratios. On the bottom left-hand side table, it is seen that stage 2 loans had boosted in the second quarter due to the currency depreciation, though there is no significant inflow.

Page 6 shows the NPL ratios by segments. You may see our NPL ratios are similar with the sector, except from the credit cards, but I'd like to mention that their share in total loans consists of a limited 2%.

Moving on to next page, Page 7, further details of the asset quality. On the left upper side of the page, you may see that, in this quarter, we have set aside some stage 2 loans provisions due to expected [ credit loss rate ] adjustments stemming from individual assessments. On the stage 3 side, we set aside a written provision similar with the previous quarter. While NPLs are aging, their provisions get higher automatically. That is the reason we set aside those provisions.

On Page 8, [ the liability ] details. LDR decreased by roughly 9 points to 70% through increased TL deposits, similar with the sector. In contrast with the prior quarter, we decreased our repo transaction usage and provided our funding [ via ] deposits and swaps. In the meantime, expanded TL deposits improved TL LDR to a comfortable 118% (sic) [ 95% ] level.

As you may see in the right-hand side of the page, our deposits share in total liabilities surged to 81% from 78%, while interbank money market's share shrank to 5% from 7%. In terms of FX wholesale funding, consisting of main subordinated debt -- only makes up 3% of total liabilities.

Moving to the next page, you will see further details of our deposits. Total deposits are up by 16% quarterly and 94% on a yearly basis. The biggest contribution to this increase is from savings accounts. TL deposits raised by 19% quarterly. Total FX-protected deposits increased by 28% quarter-on-quarter, while they make up 48% of our TL time deposits, which is decreasing our average costs.

In terms of FX deposits in dollar terms, their [ shares ] increased 6% quarter-on-quarter due to savings and commercial institutions deposits [ accounts ]. We are decoupling from the sector because we were accepting FX deposits in order to reach the conversion target in the beginning of the quarter.

Next page, more details on deposits. Both demand and time deposits increased by roughly 20% quarter-on-quarter. On the right-hand side of the page, we may see that TL deposits' share in terms of currency breakdown has surged, 60% from 53% a quarter ago, due to the security maintenance regulations introduced by the CBRT. As of October, most of the security maintenance [ rules ] have been replaced by [ commission's ] targets, and so far, we can say that we are above the limits.

As we may see in the last chart, we saw some pressure on TL costs due to the aggressive approach on deposits. The increase is also derived from the additional interest payments to the FX-protected deposits, as we watched them in FX line in previous quarter but now we see them in TL line.

On to Page 11, cost, yield and spreads detail. Blended cost spreads improved by 50 basis points due to the increase in TL loan yields. In detail: TL deposits costs increased by roughly 100 basis points, while TL loan yields improved by 450 basis points, as the loan caps have been released and we were able to grants loans with higher rates.

In terms of FX loan yields, it shrank roughly 280 basis points. We have [ a better spread here ] since we were watching the advanced interest payments in FX line, so it was high last quarter, but now we watch them in TL, so costs look lower. And we are offering lower rates to FX deposits, and that's another reason for the decline in costs.

Moving to P&L items on Page 12. Net interest income is up by 96% quarterly mainly because of the rise in income from CPI linkers due to the 10% (sic) [ 10 percent point ] increase in the evaluation (sic) [ valuation ] rate. And another reason behind this improvement is a roughly 40% boost of interest income from loans.

As you may see in the left below chart, our net fee and commissions has improved 100% [indiscernible] the yearly inflation rate.

Switching to profitability details. With a half of improved NII and fees, quarterly net income is more than 4x higher, comparing to previous quarter, and came at TRY 3.1 billion.

Cost details are on the next page. OpEx lifted 15% on a quarterly basis: HR expenses up by 40%, resulted from the wage rise in July, while non-HR expenses increased by 5%.

On to solvency ratios on Page 15. Reported capital adequacy ratio came at 13.2%, down by roughly 40 basis points due to the BRSA's decision of the increase in the retail segment risk weight to 150% from 75% in July.

Looking our digital activities on the next page. The number of active digital customers reached 6.2 million with the help of our ongoing efforts to gain further customers. Total digital transactions grew by 45% year-on-year, while our non-branch transactions share maintained its great position with 97%. We are actively performing campaigns and informative activities to enrich our mobile banking application in order to enhance our market share.

These were my final remarks, and thank you for listening. And now we can move to the Q&A session. [Operator Instructions]

[Audio Gap]

[Operator Instructions]

[Audio Gap]

[Mirac Tas, executive]

Well, thank you for actually listening -- us. We are so glad to see you next -- our call. And if you do not have any questions, actually we will -- closing to our call. Thank you, and have a wonderful day.