Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, welcome to Halkbank Fourth Quarter 2019 Financial Results Conference Call and Webcast. I now hand over to Mr. Semih Tufan, Head of Investor Relations. Sir, please go ahead.

[Semih Tufan, executive]

Thank you, Lenissa. Good afternoon, everyone. Welcome to our fourth quarter financial results conference call. This is Semih Tufan, the Head of Investor Relations. I have [ Mustafa Semerci ] and Eray Duran from the Investor Relations team. I would like to thank you for joining this call at first.

In advance of going through the presentation, I would like to touch on some points very briefly. Thanks to strong and precise measures taken by the authority, the fourth quarter was a quarter in which stabilization and rebalancing in the economy became much more visible and the risk sentiment continue to recover. As it was in the last month of the third quarter, we again saw an immediate transmission of the policy rate cuts into the funding costs on both deposits and interbank money markets. It gave us strong momentum to the margin and spread expansion during the last quarter of 2019.

As you will see detailed through in presentation, the main driver behind enhanced profitability and improved capital base in this quarter was income generation from core business and the lower interest rate environment. In this regard, we should also emphasize on the capital gain from our security portfolio that is printed, thanks to sharply reducing interest rates.

We were also able to further expand our Turkish lira deposit base in spite of declined pricing. Considering recovered demand dynamics on the loan market, lending activities became more competitive, especially within the retail segment. Now we are closing year 2019 with a strong recovery in terms of profitability and the capital base. We predict that the upside trend will continue during the first half of 2020, and margins will continue to improve in this period. From the beginning of the second half, we expect margins to become more balanced due to funding costs stabilizing and completion of repricing on the back book of the loans.

Following this brief introduction regarding trend topics in this quarter, I will now give the floor to my colleague to go through the presentation in detail. At the end of presentation, we will be happy to answer your questions. Thank you.

[Eray Duran;Investor Relations Specialist, executive]

Thank you, Semih bey. Good evening, everyone. Thank you for joining us, and welcome to our year-end financial conference call again. This is Eray Duran from Investor Relations team. I would like to start by going over the presentation.

Starting with Page 1. When we look at total assets and growth dynamics on that, loans and securities come to the forefront, and we have seen that growth was led by a securities portfolio, which increased by 38% (sic) [ 20.8% ] on a yearly basis. We will elaborate more on securities and loans going forward. Before that, on the right-hand side of the page, we see our foreign currency cash, CBRT receivables and bank placements, which we deem as liquid. We are also very comfortable with our existing level of FX liquidity. And please note that aside from bank deposits, FX wholesale funding maturing in 12 months was $1.7 billion; however, we paid off a $750 million eurobond last week. We currently have 2 outstanding eurobonds at $500 million each, which will mature next year, 1 in February and the other in July.

Switching to the next page. We go into details of our securities portfolio. We opportunistically increased the portfolio during the year by adding Turkish lira fixed rate and floating rate securities. Not only that this portfolio provides us satisfying yields, but also it helps us to raise repo funding should the need arise. We have a compound yield of around 14% for both TL fixed and floating rate securities.

As for FX securities, they correspond to $3.8 million and their average maturity is more than 10 years with an approximate 5% yield. I would also like to point out that during the last quarter, we adjusted the income from CPI-linked securities for which we used a 16% inflation estimation rate for the first 3 quarters. This revaluation was calculated according to the realized December inflation rate, which was 11.84%.

For 2020, our valuation will be based on 8.5% inflation estimation, which is in line with the foresight of new economic program. Despite lower gain from CPI linkers in 2019, interest income on marketable securities increased by 30% on a yearly basis. In addition to this, we generated a TRY 300 million profit from the sale of marketable securities, which was recognized under the trading line.

Page 3, we see that our performing loans grew by 17% on a yearly basis and thus are currently the second largest bank in Turkey in terms of loans with a market share of 11%. This capacity embodies huge potential, especially when you have a positive tailwind. Interest rate dynamics have been supportive and will continue to be supportive, especially during the first half of the new year. We'll -- I'll emphasis on 2 important and selective loan packages alongside with other products. One of them is an employment-oriented financing package, whilst the other one is a local production, technology-oriented and export supportive financing package.

Up to year-end, we granted more than TRY 10 billion loans through these new products, and we'll continue to utilize these new unique products. And with these products, we are proud to continue to contribute and support the overall economy whilst benefiting ourselves.

On the next page, we have further details of the loan book. The lion's share in terms of currency for our loan portfolio is Turkish lira with a share of more than 70%. In terms of customer segmentation of these loans, SME loans have the greatest with a 40% share of the total portfolio, of which more than 50% of these loans are guaranteed either by treasury or cooperatives via CGF or via our unique cooperative loan scheme.

Real estate companies' share within our total loan portfolio is at 3%, whilst energy companies are at 6%. Within this, 49% belongs to coal-fired energy companies, 37% to renewable energy and 14% to energy distribution companies. On the right-hand corner of the page, we see the segmentational breakdown of our retail loans, which makes up 18% of our total loan portfolio. We feel comfortable with our retail loan book thanks to the proportions of housing loans with a 56% portion, followed by general purpose consumer loans that are mainly provided to our pensioners and payroll customers, whom have a combined share of 70% of the total [ retail ] book.

Coming to this next page. Below sector NPL ratio maintained with a ratio of slightly above 5%. Excluding interest accruals and rediscounts, net NPL inflow in 2019 was [ TRY 5.8 billion ]. On the other hand, share of Stage 2 loans in total loan portfolio increased to 8.2%. We expect to stay below the sector average in terms of the NPL ratio, and Stage 2 migration will remain limited compared to the previous year.

More details on asset quality are on the following 2 pages. On account of our broad experience and products regarding SMEs, our NPL ratio there is visibly lower than the sector average. On the next page, we see an increase in quarterly cost of risk, which we can attribute to new NPLs plus aging impact with almost same level of Stage 3 coverage ratio.

Flipping to the next page, we have details on liabilities. It is quite pleasing to see continuous improvement in LDR, both for the system and in our case. In the last quarter, we witnessed that a fair amount of FX deposits shifted to Turkish lira; therefore, our FX loan-to-deposit ratio inched up to 63.8% from 61.5%. On the other hand, thanks to TL deposit growth despite a sharp decrease in interest rates, our Turkish lira loan-to-deposit ratio improved to 130% levels from 150s.

On Page 9, we have sector comparisons with regards to growth rates in deposits and our market share trend. We have the second largest deposit franchise in the sector with an 11% share. On TL side, it's close to 13%. The increase in Turkish lira deposits during the last quarter was driven by commercial deposits, which increased its share within total deposits to 34%.

The next page shows deposits according to maturity structure, a considerable amount, 17% portion of total deposits belongs to demand deposits. In blended terms, cost of Turkish lira stock deposits decreased significantly by 450 basis points to 11.4%.

Turning the page, we see yield and cost trend and spread dynamics during the year. Lower CPI ratio and our corresponding return adjustment on CPI linkers narrowed security spread; however, significantly dropped stock cost versus stickier yields boosted the core spread and overcompensated the impact that we have seen on securities, such that as we may follow on next page, we have seen 1 percentage point increase in quarterly headline NIM, which brings it to a 3% level on a cumulative basis, indicating almost 20 basis points upside compared to the end of 2018.

Net fees and commissions income increased significantly in 2019. We cannot deny low base effect of course, but to touch on main drivers in Q4, banking transactions of both retail, and corporate customers helped a lot and declining commissions paid regarding our credit card business was also beneficial. When we join those parts together, as can be seen on the next page, our core business maximized our net income, which consequently lifted the ROE to double-digit level again on a quarterly basis.

Looking at expenditures on next page, year-over-year increase in OpEx was quite in line with the average headline inflation rate observed during the year. Thanks to a better performance in revenues and disciplined expenditure management, cost-income ratio improved and we expect this recovery to continue based on similar dynamics.

There are details on solvency ratios on the next page, Page #15. We feel comfortable with current levels of solvency ratios considering regulatory requirements, and we anticipate those ratios to increase further on account of revenue generation throughout the year. In Q4, we have 24 basis points negative impact from TL depreciation, 10 basis points negative from increasing credit risk and 29 basis points negative impact due to increasing market risk, whereas equity increase contributed 77 basis points to capital adequacy ratio thanks to increasing internal generation capacity. On a consolidated basis, capital adequacy ratio is at 13.65% level. Tier 1 and CET1 ratios are at 11.1% and 9.3% level, respectively.

Last but not least, we have our branch network and human resources page. The number of our domestic brands reached 1,000, which renders us as the third largest bank in terms of branch network in Turkey. It's quite helpful, both for us and our customers to be accessed easily through this network, which helps us to further understand our customers and vice versa. We deem this network to be very useful, especially when it comes to relationship with SME customers all around the country.

On the other hand, beyond any doubt, we have no intention to remain limited with branch. We have been extending our transactions to digital channels as well. Therefore, mobile and Internet banking together have the highest share within total transactions.

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] The first question comes from Mehmet Sevim from JPMorgan.

[Mehmet Sevim, analyst]

Congratulations on the strong results. Are you please able to provide us with an overview of your expectations for 2020, especially in terms of the lending growth I was going to ask because of the slowdown in the fourth quarter? What are your expectations for volume growth but also the other income statement lines?

[Semih Tufan, executive]

Mehmet, thank you very much for your question. Please let me start with our expectation for the loan growth. In Turkish lira, we expect to see 23% to 25% increase in denominated Turkish lira. When it comes to the FX side, our intention to reduce the weight of FX lending by roughly 15% [ up ], so it means, at the end of 2020, we would like to see roughly 12%, 13% loan growth in blended terms.

If we need to talk about the asset quality, as you saw, we closed the year in terms of the NPL ratio with a 5.1% level. According to our expectation, we will see roughly 50 basis points increase in terms of NPL ratio for the new year. When it comes to total cost of risk, we expect to see 20 basis points -- 25 basis points improvement in that term.

If we need to talk about the spreads and margin, as you saw, we recorded a record-breaking margin expansion in the fourth quarter compared to the previous quarter. We think that this trend will continue, especially in the first half of the new year. And then considering the rebalancing on the cost of deposit side and the completion of the repricing on the lending side, we think that we will see more stabilized spreads in Turkish lira with effect from the beginning of the second half of the year. And it brings us 70, 80 bps improvement in terms of net interest margin. And for the next year, for 2020, we think that our swap volume and swap transactions will gradually reduce. So the split between swap-adjusted and unadjusted net interest margin will get reduced. I think that this answer is -- okay, if you have any further questions regarding our expectation, you are very welcome.

[Operator]

[Operator Instructions] The next question comes from Cihan Saraoglu from HSBC.

[Cihan Saraoglu, analyst]

Could you tell us the swap expense for the fourth quarter because I couldn't find it in the presentation? And also if you could share your guidance for fee growth and OpEx growth for next year, that would be great.

[Semih Tufan, executive]

Cihan, thank you for your question. In the fourth quarter, we recorded TRY 828 million swap cost. For the next year, as I said, due to the reduced weight of our FX lending, we expect to see lower swap transactions. When we reached at the half of the year, we think that our swap volume will be almost 0. And our swap costs will be much lower compared to 2019. When it comes to your second question regarding fee and income generation for the next year, 2020, it will be most probably in line with 2019. Considering the CPI levels, we may see an increase, which is -- which will be in line with the CPI print in terms of fee and income generation. And the same thing is available for the OpEx. As you saw on our quarter results, our OpEx was in line with the average CPI in 2019 and the same picture will be available for the next year.

[Operator]

[Operator Instructions] There are no further questions. Dear speaker, back to you for the final remarks.

[Semih Tufan, executive]

Thank you very much, Lenissa. I would like to thank you again for joining us today. We believe that the new year will be a better year not only for Halkbank but also for the sector in terms of profitability, asset quality and capital accumulation. We will keep strongly supporting the Turkish economy as we have done so far and continue to be one of the leading actors in the sector as well. And I wish you all a nice evening. Thank you very much for joining us today.

[Operator]

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