Turkiye Halk Bankasi AS

IST:HALKB.E

Earnings Call Analysis

Halkbank Aims for Solid 2024 Growth

Halkbank reported solid financials amid macroeconomic and regulatory challenges, with policies creating a supportive environment for core banking activities. Turkish lira core spread improved, while CPI linkers may exert pressure on the first half's net interest margin (NIM). A bounce-back is expected in the second half, targeting a flat year-end NIM. For 2024, the bank anticipates high-teen loan growth and a balance between Turkish lira and foreign currency loans and deposits, with NIM pressure offset by a stronger second-half performance.

Halkbank Concludes Year with Strong Financials Amid Market Challenges

In a tumultuous economy marked by regulatory pressures and macroeconomic challenges, Halkbank has reported very solid financial results for the year. Encouraged by recent governmental steps toward economic normalcy and policy rate adjustments, the bank has seen improvements in its Turkish lira core spread, despite the increasing costs of funding. This financial rebound has been particularly noteworthy in the second half of the year, with an anticipated uptick in profitability, although headwinds such as a decrease in contributions from the Consumer Price Index (CPI) linkers were present due to lower inflation expectations.

Expectations and Guidance for the Next Fiscal Year

Looking ahead to the next year, Halkbank is setting its sights on achieving significant growth. The institution foresees a high-teen total loan growth, with specific currency breakdowns projecting high teens in Turkish lira loan growth and low teens in foreign currency loan growth. Deposit trends are expected to be more subdued, with total deposit growth anticipated to be below inflation and foreign currency deposit growth in the low teens. The bank's proactive management ensures that despite these ambitious goals, net interest margins are expected to stay flat, mirroring the previous year's levels. In addition, despite the operational expenditures being projected to rise above inflation, the bank maintains an optimistic outlook for profitability and expects a return on equity in the low teens by the end of the next year.

Remarkable Surge in Digital Customer Engagement

A continued commitment to digital transformation has yielded impressive growth in Halkbank's digital customer base, which has increased by 14% year-over-year. This surge underscores the bank's adaptability and responsiveness to the evolving preferences of customers, increasingly favoring digital banking solutions. This shift is also reflected in the transaction patterns, with the majority of transactions now being conducted through non-branch channels, highlighting the high acceptance of the bank's digital platforms.

Earnings Call Transcript 2023-Q4

[Mirac Tas, executive]

Hello, everybody. Welcome, and thank you for joining our fourth quarter earnings call. I would like to wish you all a happy and prosperous new year. This is Mirac Tas speaking, Head of Halkbank Investor Relations.

I have with me Mr. Ahmet Ho?can, Head of Treasury Management as well as our IR managers, Kamer and Gizem.

Before moving on to our bank, I would like to share briefly on Turkish economy, the monetary tightening maintenance in order to stabilize and rebalance the economy, along with the gradual tightening steps, domestic demand has started to cool down and gave a signal for further [ declaration ]. A local strong support from external demand also has a negative impact on GDP growth forecast. Therefore, we expect 2024 GDP growth to be around 4%, in line with the target of the medium-term program.

We forecast that inflation will slow down to 33% by end of 2024, given the expected significant decline in initial inflation starting from the second half of the year. And the new Governor, Mr. Karahan, maintaining the CBRT's communication that the level of the monetary tightness has been rich and [indiscernible] (00:01:33)

We as Halkbank ended the year with very solid financial results despite all the macro economy, challenges and regulatory pressures. Recent normalization steps both on the regulatory majors and policy rates have created a more supportive environment for core banking activities. As such, Turkish lira core spread has improved on the back of the [ creek ] pricing of the loan yields despite the ongoing rise of the cost of the funding. Of course, there will be a gradual improvement on Turkish lira.

This was expected to see Turkish lira core -- in positive [indiscernible] (00:02:20), especially for the second half of the year. Even though, CPI linkers are expected to have a relatively weaker contribution due to lower CPI expectation. It will be compressed by better core spread evolution in the second half of the year. Accordingly, on the margin side, there might be some additional pressure on net interest margin in the first half, which stands from weaker contribution of CPI linkers and incomplete recovery of Turkish lira core spread.

In the second half, we will largely compensate this with [ accurate ] momentum of core spread improvement. Finally, we aim to end the year with a flat headline net interest margin compared to previous year. Along with the first practice of the tightening, the policy rate surged by 33% -- percentage points and reached the 45% level as of to date. So Turkish lira loan growth in the fourth quarter was a natural outcome of the surge in loan rate following the rate hike. Also, Turkish lira growth was down by 1% quietly. We already reached a strong 52% grow on Turkish loans for entire year of 2023. By doing so, we sustained a roughly 11% market share for total loans in the banking sector as of the year-end.

Similar to the substitute loan growth in the fourth quarter, Turkish lira deposit growth normalized and it was by up only 4% quarterly. Please bear in mind that we reached a segment 94% growth on the Turkish lira deposit for the entire year of 2023.

Last but not least, I would like to provide our expectation for 2024. We expect to finalize the year with a high-teen total loan growth. In terms of the currency breakdown, we expect high teens on Turkish lira ground via low-teens construction on a fixed loan.

As for deposits, we forecast at low inflation total deposit growth below the inflation on Turkish lira deposit growth and the low teens construction on the FX deposit. When it comes to power -- P&L items, just to remind you, the numbers of 2020, our headline net interest margin was 2.70%. We expect to have a flattish headline net interest margin by the end of 2024 compared of the previous year.

On the fee side, as a reminder, our fee income was very supported with 124% growth for entire year of 2023. We expect our fee income growth to be above inflation for full year in 2024. On OpEx growth, our expectation is above the inflation in the year of 2024. Just to remind you that NPL ratio was 1.5 in 2023. We expect flattish NPL for 2024. As for gross total cost of risk, we left a really low cost of risk year behind around 30 basis points for 2023.

Accordingly, we expect a normalizing gross total cost of risk at about 100 basis points by the end of 2024. This all should result in a return on equity for year 2024 in the low teens.

Now Mr. Kamer will provide you insights regarding our fourth quarter performance. Following his presentation, I will be available to address your questions. Thank you very much. Kamer, I'm handing over to you.

[Kamer Olkay Asik, executive]

Thank you, Mirac. Welcome, everyone. Thank you for joining us. This is Kamer speaking. We are happy to share another strong quarter. Let me start our presentation with Page 1, details of our assets.

Total assets increased by 57.7% year-over-year and amounted to TRY 2,195 billion in Q4. You see the asset mix in the middle, the share of loans inched up to 55.7% from 54.7% in the previous quarter. Our FX liquid assets, mainly consist of the reserve requirement and swap transactions. Our swap increased to USD 5.3 billion in Q4, which was USD 4.9 billion a quarter ago.

On the right-hand side chart, total FX liquid assets make up $13.6 billion in total, and it's 2x higher than our FX wholesale debt including bank deposits maturing within 1 year. Please recall, our 3-month average FX LCR stands at 570%, which is far above the regulatory requirement of 80%.

On the next page, we have details of our securities. Their share within total assets increased to 26.6% in Q4, that was 24.7% previously. On the right-hand corner of the page, you may see the classification of securities. CPI linkers portfolio reached to almost TRY 217 billion as of Q4 from TRY 192 billion previously, which is reflected as a growth of 13% quarter-on-quarter. Accordingly, CPI linkers within the portfolio stands at 40%.

CPI linkers valuation rate was adjusted to the realized inflation rate of 65% from 60% in the previous quarter. We have seen an almost TRY 31 billion income from CPI linkers in Q4. When it comes to fixed-rate TRY securities, their share in total securities are as low as 15% comparing with 19% a year ago, while the share in total assets is a low 4%.

Moving on the loan growth, Page 3. Total loans up by an almost 51% on a yearly basis, mainly driven by SME loans. This reflected at 16 -- this reflected at 60% growth year-over-year in SMEs, having a market share of roughly 19% by the year-end. We also grew on business loans by 43%. And in terms of retail loans, we have seen 43% yearly growth. However, on a quarterly basis, we had slight contraction on SMEs and retail segments, where as business loans had a few percentage growth. By doing so our loan market share stabilized at around 10.5%, [ and we see ] our place as the third largest bank in terms of loans. On currency-wise, TRY loans had a slight contraction by 1% quarterly, while FX loans in other terms, increased by 2.4% quarterly, in line with the sector trend.

Moving to loan growth on Page 4. You see further details on the loan book. TRY loans make up 79.3% of the total loan book, while the remaining 20.7% consist of FX loans. On the right-hand corner of the page, you may see the balanced breakdown of the loan portfolio. SME portfolio dominates with a 49% share, 38% of SME loans belong to cooperative scheme and 9% of SME loans are guaranteed by CGF. Thus, roughly 50% of SME loans are structurally quite secure. To add more, retail loans as a 13% share in our total loan book.

On the bottom right-hand side, you see retail loan on more details. Mortgage loans have a 60% share in retail book, which are inherently well collateralized. As for the rest, almost 18% of retail book belongs to consumer loans, 44% of these loans were granted to pensioners and payroll customers.

Flipping to next page, Page #5. In the fourth quarter, fresh NPL inflows were completely offset by our strong collections. Accordingly, our NPL portfolio even retreated by an almost TRY 24 million quarterly. NPL ratio stabilized at 1.5% in Q4 from 2.2% a year ago. Similarly, the ratio of Stage 2 went slightly up to 6.3% in the fourth quarter from 6% previously. On the bottom -- on the top right-hand side, NPL coverage stands at a comfortable 81.6% in Q4 from 81.2% a quarter ago.

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

Turning to Page 7, you'll see more details on asset quarter metrics. We continue to strengthen Stage 3 provisions during the quarter. Along with applying this conservative provisioning, our total loans coverage ratio secured a comfortable level of 3.82%. Although we didn't set aside Stage 2 provisions within the quarter, our coverage ratios across all stage seems quite strong, thanks to the front-loaded provisioning from the Europe 2022.

Let's move on to Page 8, presenting details of liabilities. We witnessed loan-to-deposit ratio realized at a comfortable level of 67.6%. In more detail, TRY LDR was down to 91% while FX LDR was stabilized at 33.7%. As for FX wholesale funding, it continued to stay a comfortable 3.4% within the total liabilities versus sector average of 16%.

Switching to the next page, you will see further details of our deposits. Total deposits are up by almost 5.2% quarterly, 74.3% on a yearly basis. TRY deposits inched up by 3.9% quarterly, while FX deposits stayed flat quarterly. Total FX protected deposits shrinked by 21% quarter-on-quarter, and the amount was almost TRY 335 billion, which refers to 20% of total deposits as of December. Currently, FX protected deposits declined by 7% quarter-to-date and stands at roughly TRY 310 billion as of today.

Here, you can see more details on deposits. The demand deposits saw a 10% increase quarter-on-quarter, while time deposits increased by 6%. Accordingly, our demand deposit share within the total deposit realized at 22.5%.

Cost, yields and spread details on Page 11. TRY core spread has improved on the back of quick repricing of loan yields despite the ongoing price on the cost of funding. TRY deposit costs increased by 859 basis points to 33.3%, while TRY loan yield surged by 961 basis points quarterly. Therefore, TRY deposits, TRY core spread improved almost 100 basis points compared to previous quarters. As for TRY FX blended core spread, it jumped by 309 basis points to 3.47% as of December.

Moving to P&L items on Page 12. Net interest income amounted to roughly TRY 11 billion in the fourth quarter, which is mainly driven by the high interest income from CPI linkers. The headline net interest margin came in at 2.7%, while swap-adjusted NIM is 1.5% due to the ongoing high utilization of swaps. In the fourth quarter, our 3-month average swap volume was around TRY 150 billion, which was BRL 130 billion in the previous quarter. On the bottom left-hand side of the page, we can see that our fee and commission income surged by 41% quarter-on-quarter, 150% year-over-year. The payment systems made the highest contribution for the entire Europe 2023. Its growth was almost twice the pace of other fee items. Other contributors to our strong fee income were noncash loans and corporate commissions.

Turning to page, Page #13, you see quarterly net income realized at TRY 2.62 billion in the fourth quarter, thanks to our strong performance of NII and fees. ROE posted 9.3% as of December on a cumulative basis.

Cost details are on the next page. OpEx had a slight 1% contraction on a quarterly basis. Both HR and non-HR expenses at a nearly 1% contraction quarterly due to the lack of wage rise impact. As always, the wage rise impact will be visible on the OpEx in the first quarter of 2024.

On the next page, we have detailed on solvency ratios. Currently note that BRSA's forbearance measures are included in the ratios presented here. As of fourth quarter, our reported consolidated CET1 ratio is 10.9%. Forbearance measures positive impacts are roughly 140 basis points on CET1.

Excluding forbearance measures, we still have 150 basis points of buffer on CET1 since the legal regulatory limit is 8%. Similarly, excluding forbearance measures, we also have approximately 140 and 200 basis points of buffers in CAR and Tier 1 ratios, respectively.

If you look as of today, along with the less contribution from fixing currency measure, forbearance measures positive impact that we saw in fourth quarter will clearly decline as of the first quarter. However, there is still sufficient buffer in our consolidated capital efficacy ratio, excluding regulatory [ effects ].

Last but not least, our nonfinancial strengths are on the next page. The numbers announced that we are in the right path. Our digital transformation gained momentum significantly. We increased our digital customers by 14% year-over-year. As such, the number of active digital customers increased to 6.3 million as of December.

On the bottom left-hand side, you see digital transactions growth yearly. Our digital transactions grew by 45% in financial year '23 compared to financial year '22. On the back of the accelerated digital transformation non-branch channels share within the total transactions realized at 98%.

These were my final remarks for our presentation. Thank you for listening. Now I would like to leave the floor to you for any questions that you may have. You will be able to ask your questions either by a raise hand button or by typing them into Q&A area.

We don't have any audio questions right now.

[Operator]

We don't have any questions. Now I give the floor to Mr. Mirac Tas for final remarks.

[Mirac Tas, executive]

Thank you so much for joining our conference call. You would like to see you our next call again. Have a wonderful day. Thank you.