Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Analysis

Halkbank Shows Strong Growth Amid Economic Challenges

Halkbank's total assets rose by 30.8% year-over-year to TRY 2.9 trillion, primarily driven by a robust securities portfolio which grew 12.7% quarter-on-quarter. Despite a tightening monetary policy, total loans were up 4.9%, with demand deposits increasing 15.7%. The bank's net income for Q3 was TRY 2.96 billion, a 14% decline from the previous quarter, yet ROE stood at a solid 11.3%. The cost-saving measures led to a decrease in operating expenses by 1.4%. Looking forward, the bank anticipates a positive boost in margins post-expected interest rate cuts, projecting a strong earnings growth trajectory through 2025.

Solid Growth in Assets

Halkbank's total assets reached TRY 2.9 trillion in Q3, marking a substantial year-over-year increase of 30.8%. This growth was primarily driven by a robust expansion in their securities portfolio, which increased by 12.7% quarter-on-quarter, largely due to government spending on earthquake recovery and a high volume of securities issues. As a result, securities comprised 25.6% of total assets, while the share of loans declined to 48.8% due to weaker loan demand.

Performance of Loan Portfolio

In terms of loan growth, total loans grew by 4.9% quarterly, mainly propelled by business loans, particularly in foreign exchange (FX) formats. The significant FX loan growth counterbalanced a more subdued performance in Turkish Lira (TL) loans, attributed to the existing high interest rates and tight monetary policy. Currently, TL loans constitute 73% of the total loan portfolio, while FX loans hold about 27%. This structure is expected to enhance earnings growth moving into 2025.

Challenges in Asset Quality

Though asset quality remains good, Halkbank reported some non-performing loan (NPL) inflows, with the NPL ratio increasing to 2% from 1.5% in the previous quarter. This rise occurred without any NPL sales, indicating underlying challenges. The higher inflows were partly driven by a one-off NPL, while Stage 2 loans saw a slight uptick as well. Nevertheless, the bank continues to adopt a prudent provisioning strategy, maintaining an NPL coverage ratio of 62.4%, consistent with sector averages.

Robust Deposits and Funding Strategy

Halkbank's total deposits surged by 8.2% quarterly, and increased by nearly 30% annually, indicating strong funding health. TL deposits, in particular, grew by 11.2%, contributing positively to liquidity. Interestingly, the bank's loan-to-deposit ratio decreased to 61.2%, demonstrating a solid deposit base, while only 4.3% of total liabilities derived from FX wholesale funding. This structure positions Halkbank as a key beneficiary amid potential rate cuts in the coming quarters.

Positive Economic Outlook and Strategic Initiatives

The management expressed confidence in a gradual reduction in inflation rates, projecting an improvement to below 20% by 2025. They also highlighted a favorable environment for the banking sector as Turkey moves toward a more market-friendly economic model. Moreover, the bank is planning to issue up to TRY 40 billion in subordinated debt to bolster its capital base, and anticipates internal capital generation to sustain robust capital buffers through 2025.

Expectations for Future Growth

Looking ahead, Halkbank aims to benefit from a favorable shift in banking trends as interest rates are expected to decline. The bank’s focus will increasingly be on capitalizing on high-yield TL assets and increasing the share of fixed interest rate loans. This strategic direction hints at a strong growth momentum anticipated for 2025, reinforcing the bank's resilience and potential to navigate forthcoming market changes successfully.

Earnings Call Transcript 2024-Q3

[Mirac Tas, executive]

Welcome, and thank you all for joining our third quarter earnings call. I hope you are all well. This is Mirac Tas speaking, Group Head of International Banking. I have with me Mr. Muharrem Baykara, Head of Investor Relations; as well as our IR Manager, Kamer Asik.

I'm very delighted to be back and honored to take the leadership of our International Banking Group as we celebrate our 86th foundation year. We are broadly serving our customers, supporting our real sector, creating value for our SMEs and contributing to development of the Turkish economy in line with our mission. Halkbank, with its outstanding achievements, stands out as the fourth largest bank in terms of asset size in Türkiye.

We are aware that recently geopolitical tension may pose some additional uncertainties on growth and inflation outlook. On the flip side, the market-friendly policies, high priority for restoring price, stability, normalization in monetary and fiscal policies, stable decline in risk premium and reduction in risk regarding contingent liabilities such as KKM are much appreciated by the sector actors in general.

I believe that the transition to more market-friendly operating environment will definitely be beneficial for the banking sector. Furthermore, syndication of the notable global central banks in rate cuts and potential positive impacts of the rate cuts on global output will also support the Turkish economy onwards.

Before moving to our bank, I would like to share a brief view on Turkish economy. The monetary policy tightening means in order to rebalance the economy and restore price stability, along with the tightening steps, household demand has started to cool down. Unfortunately, a lack of strong support from external demand also had a negative impact on GDP growth. Therefore, we expect 2024 GDP growth to be around 3.5%, in line with the medium-term program forecast.

Central Bank has built up the colossal FX reserves, and gross reserves hit a historical record level, with the USD 157.4 billion. Moreover, the current account deficit recovered to USD 11.3 billion level as of August and exceed all expectations. All in all, the reserve allocation ratio, which is an important risk factor for the international rating agencies in their rating methodologies, improved beyond market expectation. Therefore, we can see that credit rating agencies will continue to increase Türkiye sovereign rating, and rerating [ narrative ] in new area will continue to unfold.

This inflation process has now started after the CPI peaked above 75% in May. After the impacts of strong base effects in recent months, headline CPI slipped below the policy rate and entered a positive real interest rate territory in terms of export calculation. We are seeing that economy management is very confident about getting inflation below 20% in 2025. In this context, the economy management underlined that they will coordinate the implication of the monetary, fiscal and income policies.

In summary, sooner or later, December or January, CBRT will start to cut the policy rate with the help of the positive real interest rate conjecture, dramatically improving the current account balance and [ rebrand ] portfolio inflow. Therefore, looming interest rate cut will create earning growth momentum in our balance sheet due to the high Turkish lira asset composition and increasing fixed interest rate loan share as part of our total loan with high yields.

Let's move to key indicators of banking sector. Despite the regulatory environment, banking sector [ profitability ] remained resilient. On the other hand, normalization of the market rates in the Orthodox policy regime have recovered operating environment for core banking activities by contributing to positive margins. 2025 will be the year of the benefiting from the shifting in banking trends.

All in all, we at Halkbank ended the quarter with comparatively solid financial results despite all the restrictive credit policies and macroeconomic challenges, which seem from both the weak household and external demand. Looking forward, I can assure you that our journey ahead will continue to be one of the progressive growth, collaboration and full of the energy.

Now Mr. Kamer bey will provide you insights regarding our third quarter performance. Following his presentation, we will be available to address your questions. Thank you very much.

[Kamer Olkay Asik, executive]

Thank you, Mirac bey. Let me start with the first page. Total assets increased by 30.8% year-over-year and amounted to TRY 2.9 trillion in the third quarter. The main driver was the solid growth of the securities portfolio. On the TL side securities, we managed to expand by 12.7% quarter-on-quarter due to ongoing earthquake spending by the treasury and the high volume of securities issuances continues, while higher TL loan rates put additional pressure on the loan demand. To sum up, the share of total securities in our assets increased slightly to 25.6%.

On the flip side, the loan share in our total assets gradually decreased to 48.8%, along with the weaker loan growth. On the other hand, the liquid asset share is currently above 20%, owing to the increase on required reserve ratio.

On the next page, you may see our securities details. On the right side of the page, it's seen that CPI linkers' share increased to 43%. CPI linkers' valuation rate was revised down to 55% from 60%. We managed to increase our CPI linkers' income despite valuation rate adjustments.

CPI linkers' income reached TRY 28 billion in the third quarter due to the following: firstly, the volume effect. Amount of CPI linkers in our portfolio continued to increase with the widening real rates. Secondly, there was more CPI linkers reduction during the second quarter, while the reduction during the third quarter were lower. So we saw effect of those reductions was much more than it was supposed to be in the second quarter. Finally, average real rates on the CPI linkers portfolio increased compared to the second quarter. However, we will see the biggest impact of the revisions in the last quarter because technically, all the prior whipsaw effects accumulated on the last quarter due to the continuing CPI assumption revision through the previous 3 quarters.

Turning to Page 3, details of loan growth. Total loans were up by 4.9% quarterly, predominantly driven by business loans, mainly in the form of FX loans. As for SME loans, they mostly grew on the standard segment categories and in TL. On total loans, below sector growth reflects the tight monetary policy, restrictive credit policies and the weak TL loan demand given the current high rates. The significant loan growth on FX side offset a mild TL loan growth. Therefore, we have a limited contraction on our total loan market share.

Following page shows more details on our loan portfolio. TL loans make up 73% of total loans while FX loans make up almost 27%. Our cooperative loans were successfully repriced for not only new utilization but also for the existing portfolio during the second quarter. Since then, we have seen a significant improvement on TL back book loan yields in Q2 and in Q3 as well. The repricing contribution will continue in the following quarters. Please bear in mind that nearly 20% of our total loan book are comprised of cooperative loans. Structurally, our balance sheet is more TL enhanced compared to our peer banks. So we expect earnings growth momentum to be our story in 2025.

Asset quality details are on the next page. Similar to the sector, we have also had some NPL inflows during the third quarter. Half of those flows derived from a one-off NPL. The remaining half of flows were generated by all segments. Accordingly, NPL ratio deteriorated to 2% from 1.5% in the previous quarter despite no NPL sales. At the same time, our Stage 2 ratio increased slightly to 7.5%. On the top right-hand side, NPL coverage stands at 62.4%, in line with the sector average. We maintain our prudent approach to provisioning.

Further details on NPL ratios are on the next page. You may see corporate commercial loans NPL ratio increased, while consumer loans NPL stayed below the sector. We also witnessed a slight deterioration in SME segment. In addition, we saw an increase on credit card NPL ratios, but their share within our total loan book was almost 3%.

Moving to further details of asset quality on Page 7. We have not faced any hard landing in the Turkish economy despite higher-for-longer approach of CBRT. As anticipated risk levels realized below expectations, we released some performing loan provisions. On the other hand, we continue to strengthen Stage 3 provisions during the quarter. As you may see on the left-hand side of the page, our total loan coverage ratio is at a healthy 3% level.

Turning to liabilities on the next page. Loan-to-deposit ratio decreased to 61.2%. On the right-hand side table, we see that deposit share within our total liabilities are hovering above 80%. It's a clear signal that Halkbank will be the main beneficiary in the coming quarters given the upcoming rate cut cycle. Only 4.3% of our total liabilities are derived from FX wholesale funding versus sector average of 17.3%.

Details of deposits are on the following page. Total deposits are up by 8.2% quarterly and almost 30% on a yearly basis. TL deposits increased by 11.2% quarterly. In terms of FX deposits in USD, they contracted by 1.4% quarter-on-quarter as dedollarization continues.

On Page 10, we will see further details of deposits. Demand deposits jumped by almost 15.7% quarter-on-quarter due to the bank's main focus on rising demand deposit market share. Moreover, TRY deposits account for nearly 2/3 of our total deposits.

On Page 11, cost yields and spread details. Another positive development was that TL core spread returned back to the positive territory after 6 quarters. Digging deeper, TL loan yields have increased by 241 basis points, while TL cost of deposits declined by 200 basis points. So our TL core spread improved by roughly 440 basis points. Blended spreads improved by 63 basis points.

Moving to P&L item on Page 12. Net fees and commissions continued to grow through the quarters. It grew by 12.9% quarterly and 122% year-on-year, both above the inflation rate, mainly due to the continued progress in payment systems.

Next page, details of profitability. Total operating revenues are up by 48.7% quarter-on-quarter, 61.7% year-over-year, driven by the yearly improvements on net fees and commissions. As you may see in the right-hand side, net trading loss came in at TRY 1.7 billion in Q3 while refers to almost 80% improvement compared to the previous quarter. We reported a net income of TRY 2.960 billion, down by 14% quarterly, implying that ROE came in at 11.3% on the cumulative basis.

On Page 14, we have cost details. OpEx was down by minus 1.4% quarter-on-quarter, supported by our efforts on cost cuttings relating to the state saving plan.

Now the solvency ratios. Reported consolidated CAR came in at 13.9%, up by 33 basis points, while CET1 ratio realized at 10.20%, up by 10 basis points compared to the previous quarter. If we exclude forbearance, CAR and Tier 1 would be roughly 160 basis points lower, and CET1 would be roughly 140 basis points lower than the reported ratios.

Those are my final remarks. Now I will hand over to Muharrem bey.

[Muharrem Baykara, executive]

Hello, dear guests. This is Muharrem Baykara speaking, Head of Investor Relations. Before we proceed to Q&A session, I would like to touch upon some important issues.

We have managed capital buffers well in 2024 by adjusting our loan appetite, optimizing securities portfolio classification and recovering TL core spreads. Moreover, high risk-weighted asset practice rollback of BRSA in consumer loans also supported our capital adequacy ratio. As of now, we have enough capital buffers.

On the other hand, as announced on the public disclosure platform, we got authorization from our Board of Directors up to TRY 40 billion sub debt issuance. We applied for this issuance to the Capital Markets Board of Türkiye. We notified the BRSA, too. In addition to regulatory preparations, we are in contact with qualified investors and trying to measure the potential demand.

Moreover, internal capital generation will enable us to sustain or even boost our capital buffer through 2025. Our TL core spreads already migrated to positive territory, and potential decline in cost of funding after the looming rate cuts will boost our profitability.

Furthermore, we are implementing balance sheet strategies. We are lowering the maturities of deposits and densely granting fixed rate loans, except overdraft loans and credit cards. Additionally, Turkish lira-dominated asset structure will also generate tailwinds to our profitability.

Finally, we are one of the state-owned bank. As you know, Türkiye Wealth Fund owns the majority of Halkbank's shares. Over the last years, Türkiye Wealth Fund has injected capital proactively when it was needed. Now we have enough buffers, but if it is needed, Türkiye Wealth Fund stands ready to inject further capital.

Now we can start our Q&A session. [Operator Instructions]

It seems there is no question. Thank you for your participating in our earnings call. I want to thank you again on behalf of our friends, on behalf of our department. Have a nice evening. See you next time.