Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, welcome to Halkbank Fourth Quarter 2020 Financial Results Audio Call and Webcast.

I will now hand you over to Mr. Semih Tufan. He's the Head of Investor Relations at Halkbank. Mr. Tufan, the floor is yours.

[Semih Tufan, executive]

Thank you, Rob. Good evening, everyone. Thank you for joining us today. I and my colleagues from IR team hope that you are doing well and wish you a good and healthy week. As you know very well, we left behind a year where global economic activities significantly declined due to the pandemic.

During this period, Halkbank continued its lending activities and preserved its ranked as the second largest bank in total loan and total deposit terms. We significantly improved our digital banking activities during this period, gained 2.5 million new customers and expanded our service area.

Internet banking and mobile branch infrastructure enabled our customers to complete their transactions without coming to the branch. In this context, last year, 2 million customers have been credited through our digital channels, and a total of 3.8 million customers used digital channels.

Despite the unfavorable conditions created by the pandemic, Halkbank managed to increase its net interest income by 77% and its total operating income by 40% in 2020. Net profit also increased by 51% despite the relatively high provisioning expenses resulting from the prudent provisioning policy and operational expenses above our expectations due to the pandemic.

On the other hand, preliminary macroeconomic indicators, such as industrial production, capacity usage, PMI and confidence indexes, indicate that the GDP growth of 2020 will be positive above expectations, and economic activity started 2021 with a strong momentum. So in this year, we will continue to provide loans to our customers in all segments primarily SME customers, who produce imported substitutes and provide additional employment.

In advance of gearing into my remarks, I just want to give a bit color on our expectation for 2021. In this year, we expect Turkish lira loan growth to be at mid-teens levels. We also anticipate FX loans to contract around 10% level. Accordingly, our loan growth expectation on a blended basis will be in low double digits.

On the deposit side, there will continue to be our main funding sources this year as well. Assuming the acceleration of the de-dollarization process, we expect an increase of 23% in Turkish lira-denominated deposits. It implies mid-teens growth in deposits on a blended basis.

When it comes to asset quality, it's early to give an indication of possible deterioration as BRSA forbearance has been extended until the end of June. By the year-end 2020, the forbearance impact on the NPL ratio is 150 basis points.

On the other hand, thanks to the prudent provisioning and higher coverage policy applied during the last year, a decrease of 100 basis points in total and gross cost of risk and a decrease of 30 basis points in specific cost of risk are expected for the year 2021.

As a result of the tight monitory policy being implemented by the CBRT, we expect Turkish lira funding costs to remain at relatively high levels until the second half of the year and to gradually decline with effect from the third quarter depending on improving inflation expectations.

In this regard, we forecast a decrease of approximately 100 basis points in the headline net interest margin for 2021. However, thanks to stabilized exchange rate and reduced gold prices, we expect a material recovery in the trading line and a meaningful growth in the profitability metrics. In this year, we expect the fee and commission income to increase at mid-teens levels. Our expectation in OpEx growth is again at mid-teens levels. Finally, we are comfortable with the current level of capital, and we expect to see similar levels by the year-end 2021.

Now I would like to hand over to my colleague, Eray Duran, to give you details regarding the third quarter's results. And after the presentation, we will be happy to answer your questions. Thank you.

[Eray Duran, executive]

Thank you, Semih Bey. Good evening, and welcome, everyone. This is Eray Duran from the Investor Relations team. I would like to thank all of you for joining us today. Now if you allow me, I would like to go over our presentation, and then we will run the Q&A session.

Starting from the first page. We faced a strong asset growth in 2020 driven by loans in the first place and securities in the second. As you are well aware, we were very active in lending new loans particularly in the second quarter in order to minimize the adverse impacts of the pandemic. Additionally, the loan portfolio continued to grow during the third quarter thanks to the new mortgage loan packages. On the other hand, coming to the fourth quarter and onwards, we see a slowdown in the credit growth rate.

As for the securities, they also increased significantly in the second quarter. However, please keep in mind that the share transfer of the insurance companies in exchange for local currency government funds and the addition of TRY 7 billion to the securities portfolio after capital injections were among the key factors as well as the additions of foreign currency government bonds.

Looking at the other items of the total assets, the liquid assets stand out. Its share in the total assets climbed up to almost 10% from 5.4% at the beginning of the year thanks to the adjustment by the CBRT regarding the reserve requirement ratios. Please note that FX wholesale funding mentioned on the right-hand side corner of the page contained EUR 500 million amount of Eurobond that we paid off last week. We now have only one outstanding Eurobond, which will become due in July.

Switching to the next page, we go into the details of our securities portfolio. Its share within our total asset is still over 23%. When we look at the securities classification, we can say that we diversify our portfolio opportunistically in accordance with the interest rate environment. Interest income on securities continue to expand. And due to higher CPI link in 2020, 38% of this income comes from gains on CPI links.

The next page shows the figures regarding our total loan portfolio. Annual loan growth is 48%. Nevertheless, if we rule out the exchange rate effect, it corresponds to 39%. Incentive packages and mortgage campaigns during the second and third quarters have a significant share in this growth rate.

After stimulus packages broadly extended in the second quarter, our loan growth has moderated and apparently reached a saturation point in the fourth quarter of 2020. To add more, the loan growth was across the board in terms of customer segmentation.

More details on the loan portfolio can be found on the next page. Looking at the currency wise, the share of Turkish lira loans makes up almost 80% of the total loan book. The bank has a solid loan book thanks to its well-diversified structure and lower risk segments within it.

As Semih said, the lion's share of loans and 60% of the SME book is guaranteed either by the CGF or our unique cooperative loan scheme. The 3 of our loan book belongs to the corporate companies and thereby to large investment and project finance loans.

As for the retail loans, they constitute 19% of our total loan book. And speaking of the retail loss, 60% of them consist of mortgage loans. As for the rest of the retail book, the largest share belongs to the consumer loans, which includes CGF backed consumer loans as well as substantial pensioners and payroll customer base.

Asset quality metrics are on the next page. The inflow into the nonperforming loans continued to grow with delay due to the extension of the BRSA's forbearance measures regarding recognition days. Our gross NPL portfolio, including interest accruals, reached TRY 16.9 billion by the end of 2020, and its proportion to total loans decreased to 3.8% from 5.1% last year. We need to be reminded that we wrote down circa TRY 600 million amount of NPLs during 2020. They were fully provisioned, so there was no P&L impact.

On the next page, we have segmental breakdown of the NPL ratios. Except for credit cards, all segments have visibly lower ratios than the sector averages. Moreover, the SME book, which is our line of country in other saying, clearly show this difference, is NPA ratio is at 4% versus the sector average of 6.4%.

More details on asset quality metrics are on the next page. Although we didn't see a material NPL inflow due to the forbearance measures regarding recognition days, we maintained our prudent approach in provisioning during 2020. Our net total cost of risk increased by 57 basis points and ended the year at 158 basis points. We expect this cost to normalize and converge to the average levels of recent years going forward.

If we move on to the next page, we see the details of the liabilities. With the effect of increasing interest rates towards the end of the year, the Turkish lira loan-to-deposit ratio is improving. Foreign currency loan-to-deposit ratio on the other side continues to decline due to dollarization in deposits contrary to demand of foreign currency loans. And in this incremental interest rate environment, we expect the de-dollarization to take place, and the Turkish lira will thereafter continue to improve.

More details on deposits are available on the following 2 pages. Our market share in total deposits increased by 1.5 percentage points in 2020, and our share of Turkish lira deposits increased by 3.4 percentage points. We would like to remind you that Halkbank is the second largest in the sector in terms of deposit size with a 12.6% market share.

Well, how is the maturity and currency breakdown? We see them on the next page. The share of demand deposits in total deposits is 18.6%. It started to decline after the third quarter due to the inherent inverse correlation between demand deposits and interest rates. However, when we look at the whole year, we see that demand deposits got a share from time deposits during 2020.

Coming to the currency side. We still have a Turkish lira dominated deposit book with a 57% portion. And having said that, we see that the stock cost of Turkish lira deposits increased to the levels of the previous year as of the end of the year with the tightened managed deposits towards the end of the year.

This policy also reflected on our spread dynamics, which can be viewed on the next page, Page #11. Yield on loans lag behind cost of deposits by reason of duration mismatch. We expect our loan portfolio to be fully repriced after the first half and spread dynamics to perform better in the sequel.

Core banking income sources can be followed on the next page. Considering the size of our deposits and the short-term money market funding, the repricing gap has taken its toll on interest expenses. Moreover, while we were reaping the benefit of our gold-based bonds when gold prices were rising in the previous quarters, now decreasing gold prices turned the tide against this capacity.

And taking these multiple factors into consideration, our CPI adjustment at the end of the year couldn't make up for all of them so as to carry our net interest income. However, despite this challenging year, our reported NIM increased by 80 basis points, in line with our guidance that we shared last year. And as for swap adjusted NIM, it improved almost 160 basis points.

Flipping to the next page. Despite more provisions and higher-than-expected OpEx on top of the hit by the net trading loss compared to 2019, net interest income including swap costs contributed significantly to the revenue, nearly doubling the previous year's figures. And the bottom line expanded by more than 50%. And hopefully, we will continue to build up on it throughout the current fiscal year and onwards to ensure that our profitability metrics reached the desired level in a short time.

We have the details of the operating expenses on Page 14. In addition to the inflation-related natural increase in expenditures, we saw a considerable amount of one-off expenses during 2020 due to unprecedented conditions we have been experiencing. Donation to the campaign against pandemic, cost of sanitation and cleaning services, the improvement of technological infrastructure and it's obviously to facilitate work at home for digital banking purposes and across-the-board bonus payment to the staff are the main examples of these one-offs. Leaving them all behind, we expect our operating expenses to normalize going forward.

On the next page, we have details on solvency ratios. Please note that the BRSA's provisional forbearance measures are included in the ratios presented here. If we rule out the forbearance impact, then our capital adequacy ratio should be 92 basis points less than the current figure. Still, we are comfortably above the regulatory thresholds.

Needless to say, it's undeniable that the capital injection of the Turkey west fund contributed much to the solvency ratios. On the other hand, we have also expanded our capital to some extent via earnings and the provisions that meet the conditions specified in Article 8 of the regulation on capital of banks. All in all, we were able to compensate for the surge in total risk-weighted assets.

These were my final remarks for our presentation. Thank you for listening. We would now like to open the floor to any questions that you may have.

[Operator]

[Operator Instructions] All right. I believe we have a question from Mr. Alan Webborn. I hope I'm saying that correctly, Mr. Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

I'm sorry to ask this again, but could you just run through your 2021 guidance? The line isn't particularly good, and you were breaking up once or twice, maybe my fault. But if you wouldn't mind just going through that again, that would be very helpful.

[Semih Tufan, executive]

Alan, thank you very much for the question. I will repeat again our expectation for 2021 for the growth. On the Turkish lira side, the loan growth that we expect will be at mid-teens levels. When it comes to FX loans, we expect to see the contraction at around 10%. So on a blended basis, the growth rate will be low double digits.

On the deposit side, we expect to see the de-dollarization process especially in the second half of the year. Then we expect an increase of 23% in Turkish lira deposits. It means mid-teens growth on a blended basis in terms of deposit growth.

When it comes to asset quality, in terms of total and gross cost of risk, we expect -- we anticipate to see a decrease of 100 basis points in total and gross cost of risk and 30 basis points in terms of specific cost of risk for this year.

When it comes to NIM as a result of tightening on the market policy which is implemented by the CBRT, as I said, we forecast to see 100 basis points decrease approximately in the head net interest margin. For fee and commission and OpEx, we expect to see mid-teens growth in both OpEx and fee and commission.

I think that we have a question regarding the capital levels. We are comfortable with the current level of the capitals, and we expect to see similar levels by the year-end. By the way, our current capital levels in terms of CAR by the year-end was 14.5% level. When it comes to common equity Tier 1 ratio on a consolidated basis, 10% around.

[Operator]

All right. Mr. Webborn are you happy with that?

[Alan Webborn, analyst]

Yes. Could I just have a quick follow-up? Are you expecting that interest rates will start to come down in the -- from the third quarter? Is that what's in your view? And could you just clarify? I think you said that repricing would be finished by the end of the second quarter, so does that mean you're expecting your NIM to bottom out in the first quarter?

[Semih Tufan, executive]

Let me give you an indication regarding what we experienced in the last quarter to answer this question. In the last quarter, we saw a significant contraction in spreads as a result of, as you said, rapidly increasing funding costs. We had 290 basis points contraction on TL cost of risk. When it comes to FX side, it reached to 250 basis points. So it means the first quarter will be the difficult -- most difficult quarter not only for Halkbank but for the other banks in the industry.

We have no any specific opinion regarding the marginal pricing, but it seems that considering the inflation rate, we reached to the highest levels in April or May at 16% or 17% level. So it means we may be in a position to see the highest level of the marginal pricing on the Turkish lira deposit side. And depending on the recovery on the inflation path, we expect to see a gradual rate-cutting process in the mid of the second half of the year, again, which is depending on the recovery on the inflation path.

[Operator]

And now we've got a question from Mr. Simon Malos from Citibank.

[Unknown Analyst]

Yes, my question would just be on the risk cost. I hear right that the risk cost guidance is for 100 basis points. Can you just tell us what the macro assumptions are behind that in terms of growth where you see the risk in terms of the upside and the downside?

[Semih Tufan, executive]

Thank you. According to our economist, they expect to see in terms of the GDP growth at around 5% level. When it comes to CPI level, according to our opinion, it will be around 10% level by the year-end.

[Unknown Analyst]

Maybe is lower growth a key risk to the risk cost by coming in at that level? Or is there some other factors that you're potentially looking at?

[Semih Tufan, executive]

We are not distributing guidance for the other items for the macroeconomic indicators.

[Unknown Analyst]

Okay. So what I mean for risk costs, is there -- can you just talk through what the risks could be to your risk guidance for this year as you see them?

[Semih Tufan, executive]

The biggest risk is the duration mismatch. We started repricing our stock loans starting from the beginning of the fourth quarter. And we have roughly 3 quarters repricing duration for our stock loans, and it means the pricing period will be completed at the beginning of the second half of the year. That's why maybe further until the first half of the -- second half of the year, we may not be in a position to see any rate cut. And the cost of funding, especially TL-denominated deposits, may remain high. That's why we anticipated a contraction in terms of total and gross cost of risk up to 100 basis points.

But on the other hand, during 2020, we applied proactive provisioning policy. That's why we increased our provisioning significantly compared to 2019. And then if everything goes well, as we expected, especially during the second half of the year, we think that the provisioning amount will be much more moderate compared to the previous year. And then this may be a positive contribution in terms of provisioning and in terms of total cost of risk levels by the year-end.

[Unknown Analyst]

Okay. Sorry, I didn't see the presentation. I don't think it's up on your website yet. What was the cost of risk in 2020?

[Semih Tufan, executive]

In cumulative basis, total cost of risk is 1.80%. Specific cost of risk...

[Unknown Analyst]

Are you saying -- sorry, go ahead.

[Semih Tufan, executive]

Total cost of risk -- total and gross cost of risk by the year-end 2020 was 1.80%, 1.8%. Specific cost of risk, 0.94%.

[Unknown Analyst]

And you're saying both will go down by 100 bps?

[Semih Tufan, executive]

Right.

[Unknown Analyst]

Okay. Got it. That's all for me.

[Semih Tufan, executive]

It will be most probably less than 1% by the year-end in both terms, the total and gross cost of risk and specific cost of risk.

[Unknown Analyst]

Actually, maybe I can ask just one last question. You mentioned that you thought trading result will come back strongly. Can you give us a little more color on that, like by how much?

[Semih Tufan, executive]

On the trading line, yes, appreciating Turkish lira, diminishing gold prices and shrinkage on our actual open position in the last quarter 2020, we posted trading income TRY 351 million opposed to what we posted in the third quarter. Another driver behind this improvement was the swap cost, the total swap cost for the full year 2020 reduced to only TRY 1.1 billion, 1/3 of the swap cost in 2019. With a limited swap volume, stabilized local currency and open FX position, which is close to 0 for now, we expect to see more stabilized trading line compared to previous year in this year.

[Unknown Analyst]

So what level is kind of a run rate for trading, if I may ask, do you think?

[Semih Tufan, executive]

We have not any anticipation because it's depending on the several factors, as I said. The swap cost, because we have been utilizing the swap transactions, because the cost of funding on the swap side is a bit less than the deposit side, it depends on the volume of the swap transactions, as I said. Nowadays, Turkish lira is performing quite well against the hard currencies, and it seems that it will continue especially during the first quarter. And it depends on the development. But I can say the trading line, for now, we expect to see roughly 70% less trading loss compared to previous year. But of course, that picture may change.

[Unknown Analyst]

Yes, of course. That's very clear.

[Operator]

All right. So I believe that's it for the audio questions. [Operator Instructions] Speakers, I believe we can now switch to the written Q&A. Thanks very much.

[Eray Duran, executive]

All right. We have one written question from a debit investment. The question is regarding our ROE guidance. What is our ROE guidance for 2021?

[Semih Tufan, executive]

Exactly according to our budget, we expect to see low single-digit ROE by the year end. Especially as I said before, it's mostly subject to our performance on the trading line considering the pressure on the spread. But considering our prudent provisioning approach that we applied during 2020, we think that in terms of the bottom line income, the profitability metrics will be much better compared to 2020 and we will achieve this target at low double-digit levels by the year-end.

When it comes to the other question, Eray?

[Eray Duran, executive]

All right, I can read it for you. What are your capital ratios with our forbearance?

[Semih Tufan, executive]

We have roughly 150 basis points impact for the BRSA forbearance. Sorry, sorry, this is an impact on the NPL. Sorry, when it comes to solvency ratio, it's around 95% level.

[Eray Duran, executive]

Yes. For capital adequacy ratio is 95 basis points. For Tier 1 ratio, it's around 85 basis points. And for CET1 ratio, it's around 70 basis points, 7-0.

[Semih Tufan, executive]

We have another question?

[Eray Duran, executive]

We have another question on the web.

[Semih Tufan, executive]

Regarding the dividend, it's subject to the decision of the general assembly, but we have no exact information regarding the date of the general assembly. Once it's published, we will make the public disclosure.

[Eray Duran, executive]

Another question from the -- we are getting is regarding the guidance for cost of risk, whether we included our cost of risk guidance, the reversals.

[Semih Tufan, executive]

No, it's not included the reversals. Just to give you an indication regarding the reversals, for example, we have roughly TRY 100 billion new loan that we granted during the pandemic. Roughly 10% of these loans were due during the last quarter and partly in this quarter. And the collection -- successful collection performance reached to 94% for these loans. We have only 6% problematic loans.

I think that the similar collection performance will be available for the NPL and Stage 2 loans. When you have a look at the historical data, the transmission from Stage 2 loans to NPL is changing between 15% to 20%. Considering this historical data and the fact, we think that the reversals will be better compared to 2020. But we have not any assumption for the time being. It doesn't include the reversals.

[Eray Duran, executive]

Another question from that. They ask for more color regarding the U.S. case.

[Semih Tufan, executive]

We have no more detail regarding this. When we have, we will make the disclosure -- public disclosure.

[Eray Duran, executive]

And we have another question.

[Semih Tufan, executive]

Can you give us more color on deferred loan portfolio amount and performance? We have TRY 24 billion -- sorry, TRY 40 billion deferred loans. It's around 9% of the total loan book. 77% of it belongs to business. And the rest, 33%, belongs to retail. Deferred loans, most part will be on due within the first half of 2021 and roughly 60%, 65%. And the rest, 35% part will be undue in the second half of this year. That's all regarding the deferred...

[Eray Duran, executive]

There is a question regarding the CPI linkers, and its impact on our NIM in 2021. And how much was the total CPI linkers in 2020? Total CPI linkers income in 2020 was around TRY 5.8 billion. And we have roughly TRY 40 billion amount of CPI linkers in our portfolio. And I think in 2021, we are going to value this -- I mean, we evaluate this portfolio with a CPI expectation of 13% for now. Could you please repeat ROE guidance Semih Bey because they couldn't hear us, I guess, low single digit or low double digit?

[Semih Tufan, executive]

Yes, low double digit. Guidance, ROE, okay.

[Eray Duran, executive]

I think we covered all of the questions from the web and audio. All right. You can conclude.

[Semih Tufan, executive]

Yes, I think it's okay. We answered all the questions that we see.

[Operator]

All right. Is that it, Mr. Tufan?

[Semih Tufan, executive]

I would like to thank all of you for joining us today, and I wish you a good and healthy week. Thank you for, again, joining us.

[Operator]

Thank you very much, Mr. Tufan. And there we go, ladies and gentlemen. This now concludes today's webcast call. I want to thank you for your participation. You may disconnect now.