Halyk Bank of Kazakhstan Joint Stock Company (HSBK) Earnings Call Transcript & Summary

Good day, everyone. Welcome to the JSC Halyk Bank 1Q 2020 Results Conference Call. At this time, I would like to turn the conference over to Mira Kasenova. Please go ahead.

Thank you, Nicol. Good evening, ladies and gentlemen. Welcome to Halyk Bank conference call on presentation of financial results for the 3 months of 2020. Participants in today's call on Halyk Bank's side are Ms. Umut Shayakhmetova, Chief Executive Officer of Halyk Bank; Ms. Aliya Karpykova, Deputy Chief Financial Officer; Mr. Murat Koshenov, Deputy CEO, Corporate Banking and International Activities; Mr. Almas Makhanov, Chief Risk Officer; Mr. Viktor Skryl, Financial Director, Finance and Subsidiaries; and myself, Mira Kasenova, Head of FI and IR. Now I would like to hand the call over to Murat Koshenov, Deputy CEO.

We welcome everyone to our first quarter 2020 results call. We hope that everyone is safe and healthy. I would like to start our presentation with an update on the current situation with fighting coronavirus in Kazakhstan. As of today, there are 13 -- 11,300 confirmed cases or 60.3 cases per 100,000 people, 41 infected individuals died. These metrics are considerably lower versus those registered in most developed and developing countries. Such results has been achieved by timely and efficient steps taken by our governments and society. Despite the gradual lifting of lockdown measures, the epidemiological situation in the country is under control, thanks to active testing for the COVID-19 being implemented and comprehensive government protocols on contact tracing and testing as well as operation modes for various types of businesses. Already in January, as soon as news of COVID-19 reached Kazakhstan, the government started to implement rigorous steps of measures to contract the virus. In terms of time frame for such measures, we may split those into 3 main steps or phases. Phase I, initial phase, which lasted until March 16 and encompasses suspension of all air traffic with exposed regions, such as China, some Asian and European countries in order to prevent spread of virus to Kazakhstan. Phase II launched on March 16. It included full closure of borders and establishing state-of-national emergency, imposing lockdowns in major cities and social distancing regime. These were harsh but necessary measures, crucial for minimizing the virus impact. They delivered positive results and helped us to avoid dramatic consequences that are noticeable in some other countries. Already by end of April, the situation has stabilized and the virus spread was contained. The government started to remove certain limitations. Phase III. On May 11, the state of emergency was removed, and we proceeded with opening up economy, starting with industrial, construction and transportation sectors, gradually moving towards services sector. On May 25, nonfood retail and restaurants were opened, subject to following strict sanitizing requirements. It is important to note the country's substantially expanded testing capacity over the last 2 months. Since early April, the number of conducted tests per day increased from 2,000 to more than 26,000 tests per day. Currently, about 80% to 85% of daily cases are symptomatic patients. Now let me speak briefly about the impacts on Kazakh economy and its consequences. Besides the virus in the first quarter, we also witnessed dramatic collapses in oil prices. Combination of these 2 factors prompted significant business contraction in the first 4 months of 2020. The most affected sectors were trades, down 8.9%; and transportation, down 11%. At the same time, the economy proved quite resilient and some sectors managed to expand over this period, mostly those related to production, mining, communication services. New economic reality also required adjustments to the government policies and macroeconomic forecast used in the budget planning. Business lockdowns and revision of oil prices forecast for 2020 to $20 per barrel from the previous $55 per barrel has knock-on effect on the key macroeconomic metrics, moving the exchange rate forecast to KZT 430 -- KZT 440 per U.S. dollar from a level of KZT 380, increasing the inflation forecast to the range of 9% to 11%. GDP is expected to shrink by 0.9%. The government views both the low oil prices and coronavirus as temporary factors, and we'll try to mitigate their negative economic effects through increased budget spending, which is expected to increase fiscal deficit in 2020 from 2.1% to 3.5%. At the same time, success in containing of coronavirus provides us more confidence regarding potential pace of economic recovery. It is important to highlight that Kazakhstan has improved resilience with respect to external shocks, and hence, we feel better equipped to weather economic situation -- current economic situation. It is evident if you look at our position today in the context of the past crisis, 2009 and 2015. We believe that Kazakhstan is better prepared today. Our international reserves stands at roughly USD 90 billion, around half of our GDP. Level of public debt remains quite low at around 18% of GDP. Floating exchange rate regime allow us better adapt to changing external environment. There are no disbalances or excessive leverages in the economy as we experienced in the past crisis. Also, the banking sector is in better shape now in terms of capitalization, asset quality, liquidity and our -- and other metrics. Share of FX loans and deposits reduced quite dramatically. Leverage remains decent with retail credit below [ 9.2% ] of GDP and total banking credits at only 21.5% in Kazakhstan. This elevates pressure on our economy during these tough times. Credit rating agencies share our confidence in Kazakh economy. Recently, Moody's reiterated its positive outlook on Kazakhstan, sighting economic resilience due to significant buffers against external shocks, supported by robust medium-term growth prospects and rising incomes. On Slide 10, we provide additional details on our national reserves as well as KZT exchange rate dynamics. As I mentioned before, weakening of tenge was driven by collapse in oil prices. The currency weakened by around 10% year-to-date, which helped the economy to adjust to external shock. At the same time, National Bank of Kazakhstan was making necessary steps to support tenge and reduce impact of some speculative trends. First of all, it conducted foreign exchange interrelations. It also hiked the key rates from 9.25% to 12% on March 16, following stabilization of the key rate was reduced to 9.5% on the 6th of April. We also want to put your attention to recent positive macroeconomic developments in tenge appreciation -- with tenge appreciation by 6.2% since the beginning of May on the backdrop of increasing oil prices. Consolidated international reserves totaled USD 87.2 billion at the end of first quarter 2020, of which the national fund assets amounted to USD 57.5 billion and gross international reserves of National Bank, [ USD 20 billion ]. Gold holdings constitute 66% of NBK reserves at the record high level of USD 19.7 billion, with remaining 34% represented by foreign exchange holdings. National Bank reserves close to USD 30 billion covered 12.5 months of imports, which is far in excess of accepted metrics of 3 months. Kazakhstan has more than sufficient resources to meet any of its external short-term debt obligations. Based on our assessment, Kazakhstan has implemented one of the most massive fiscal support programs among our peers, amounting to close to 9% of GDP. These programs encompass social payments to vulnerable citizens, affordable housing initiatives, tax holidays, various measures to support SMES. We will cover these initiatives in greater detail on the next slide. As mentioned earlier, the government expected 0.9% GDP contraction this year. Most international organizations, such as EBRD, IMF, World Bank, in their forecast expect contraction of GDP this year in the magnitude of 0.8% to 3%, followed by strong rebound in 2021 in the range of 3% to 4.8%. In our view, a lot will depend on how effective the government's measures aim at supporting the economy prove to be. Therefore, let us provide a bit more detail on this matter. The government announced a comprehensive set of measures to support individuals that may potentially be impacted by COVID-19. Such measures include payment of minimum monthly salary to those who lost income, various support measures for socially vulnerable individuals, including subsidies, complementary salaries for medical workers. Debt repayment holidays, state employment programs establishing additional 250,000 jobs, housing program with very favorable terms, including 10% down payment and 5% interest rate and tax holidays. SMEs remained one of the most exposed to COVID-19 sectors of the economy, given that most companies belong to service industries, and hence, they were severely impacted by imposed lockdowns. The government has undertaken excessive -- extensive set of measures to support them, improving availability of credit and also subsidizing interest rates for borrowers, debt repayment holidays for SMEs, property tax exemptions for the period of 1 year, a reduction of VAT rates from 12% to 8% for social imported goods until October 1, an exemption of SMEs from taxes and social payments until October 1. Additional certain support measures on macro and micro level for channels by National Bank and the Agency for Regulation and Development of Financial Sector. These measures include support of national currency exchange rates, the requirements for the quasi-sovereign sector entities to sell part of their export proceeds in the domestic FX market. Furthermore, quasi-sovereign sector entities have to return the FX deposit placed abroad back to Kazakhstan. I've already mentioned measures of tightening monetary policy via base rate. They were aimed at stabilizing the inflation expectations and limiting transition of external shocks to the financial market. Now let me provide a bit more detail on the program for debt repayment policies. Banks were requested to provide to individual entrepreneurs and the SME borrowers affected by the current situation, a great period on principal amount in interest for up to 90 days. The interest, however, continues to accrue. As of end of April, more than 1.8 million individuals and 13,000 SMEs submitted their application with approval rates ranging circa at 90%. At the same time, banks received certain temporary relaxation of provisions requirements on these restructured loans. Another important element of the government policy encompasses support for the banking sector. In order to mitigate potential stress on the banking system, NBK made decision to [indiscernible] certain regulatory requirements. Key measures include, on the various slides, I already mentioned relaxation -- on the previous slide, I already mentioned, the relaxation of provisions requirement for restructured loans. Relaxation of capital adequacy requirements, namely conservation buffer by 1 percentage point, a reduction of risk-weighting assets requirement on certain categories of risk exposures. The relaxation of calculation of maximum risk per single borrower. Temporal decrease of certain liquidity requirements, for instance, liquidity coverage ratio. Important to emphasize that these measures are temporary for the period of crisis. Also, these measures are broadly in line with the similar initiatives pursued by regulators in other countries and underpin the importance of maintaining strong solvency and asset quality of the banking sector. Now I would like to hand the call over to Viktor Skryl, Financial Director.

Good afternoon. On this slide, we would like to highlight why we believe that Halyk Bank is well positioned to weather the current crisis. Halyk Bank enjoys undisputed leadership position in Kazakhstan across all key business segments, accounting for 36% of all customer deposits and 39% of the banking sector's net income. We remain one of the most profitable banks globally with average return on equity of around 20% for 2008 to 2019, the period that included 2 severe crises of 2009 and 2015, with dramatic fall on oil prices in both of them. Our profitability is underpinned by best-in-class operating efficiency and healthy margins and stringent risk management. We are one of the best capitalized banks in the region with CET1 ratio staging at 20.6%. The bank also enjoys exceptionally strong liquidity and stable granular deposit base. Liquid assets amount to 45% of our asset base. Historically, we have been always very conservative in our risk appetite and risk management, maintaining conservative provision coverage and decreasing FX lending exposures. In the current global economic crisis and deterioration in the operating environment, the bank's international credit ratings have been confirmed by Fitch and the superior rating agencies, which has the highest long-term credit ratings among Kazakh banks without foreign ownership and proves the bank's high resistance to any external shocks. Finally, over the past few years, we have been stepping up our investment in digital proposition for our clients. Today, our market-leading online platform is experiencing significant acceleration of customer engagement. On the next slide, as I mentioned previously, our business model and financial position have always been very resilient to economic shocks. That has been exemplified in previous crises of 2009 and 2015. We strongly believe that today, Halyk Bank is even better prepared to stand in adverse development, which is evident from the key metrics represented on this slide. First, strong capital buffers with CET1 ratio being the highest among regional peers; second, having strong liquidity position, which comprised of 44% of total assets; third, substantially improved asset quality, higher provisioning coverage and also lower share of loan book in total assets and lower FX exposure; fourth, best-in-class operating efficiency with cost-to-income ratio of 26%; and fifth, and importantly, for this downturn, much high utilization of digital channels by our retail and corporate clients. Next slide, please. Being a systemically important institution in Kazakhstan, Halyk Bank has been at the forefront of the fight against COVID-19, providing necessary financial infrastructure for day-to-day client activities and government support measures, ensuring that financial services are fully available 24/7 on nationwide scale. Our leading payment platform has been crucial for seamless delivery of ever-increasing payment and cash settlement volumes as well as over 9 million social payments and pension transfers. The bank has served as a key channel for provision of various government social support measures and has opened over 1 million payment card accounts remotely. Over 700,000 cards were delivered to our customers at their homes. We ensured full business and operational continuity amid strict anti-COVID-19 pandemic measures undertaken. We provided full range of services to our customers during lockdown with 77% of our branches remaining operational nationwide and 90% of ATMs at service. As COVID-19 posed certain challenges to businesses across Kazakhstan, most of each our clients, we have efficiently adopted measures to support them in the time of economic turmoil. We have participated in all support programs and provided additional support to SMEs that were most severely impacted by the pandemic, including concessional lending programs and debt payment holidays. We have utilized KZT 71 billion out of KZT 180 billion concessional SME lending programs allocated to the bank and provided debt repayment holidays for 3,500 SME clients. We have also launched KZT 24 billion support program to agricultural sector, together with JSC Agricultural Credit Corporation. For our retail clients suffering from temporary loss of income due to decreased economic activity, we provided debt repayment holidays for up to 3 months. By the end of April, 130,000 applications for debt repayment holidays were approved by the bank. We have also supported our existing clients offering full product suite via online and mobile banking platform and prolonging any expiring cards issued as well as offered fully online onboarding for new clients willing to set up an account or apply for the loan at our bank. Our bank remain fully operational, and we efficiently moved 40% of our employees to remote workplace; 30% of our staff stayed in our branches and offices, keeping strict social distancing and hygiene requirements; 30% were on paid forced leaves to support caring dependents. With easing of lockdown in Kazakhstan, we consider our priority to ensure safety and health for our customers and our employees, also supporting health care services of our communities. We have ensured strict infection prevention measures in our office throughout the bank's employees. Our branches follow strict guidelines to provide greater safety for our customers while they are visiting our offices. We launched dedicated program to provide support to medical workers involved in treatment of COVID-19 patients. Our 1,500 people received the support to date. We launched mass established coronavirus testing with our partners as well as supported hospitals with ambulances, ICU ventilators and specialized medical automobiles for disabled people. We have limited exposure to most vulnerable sectors affected by the current economic turmoil. Out of our total retail borrowers, only 15.6% have requested credit deferral up-to-date and for loans in total amount of KZT 21 billion. Our exposure to the sectors most affected by the current downcycle, including hotels, passenger transportation, commercial real estate and oil and gas sector, comprised 15% of our loan book and remains manageable. We are in constructive dialogues with most of our customers that were impacted by COVID-19 to support them through this period. The debt payment holidays for retail and SME clients usually imply loan maturity expansion upon deferral of interest and principal payment for 3 months. The payment deferral does not have direct impact on provisioning or IFRS stage reclassification. As previously mentioned, we have launched dedicated state concessional lending program to SMEs with a total amount of KZT 180 billion allocated to the bank. As of May, we financed over 277 SME clients in the amount of KZT 71 billion, which is 46% total sector's utilization. Halyk Bank has a well-diversified loan book with 26% represented by retail segment, 15% by SME lending and 59% by corporate loans. Our FX lending exposure has substantially decreased over the past few years. And now FX loans comprise only 29% of the loan book and are primarily issued to the borrowers with FX-linked income. The bank's corporate loan book remains well diversified amongst various sectors of the economy, while retail loans is issued to payroll clients or secured by real estate or other properties. In this section, we would like to provide you with digital and transactional banking update. We gained the momentum in the changing environment and improved utilization of digital channels and continued to develop our digital proposition, expanding the offering through digital channels by products and services, which we have previously provided exclusively only at the bank's branches. Development of digital platform has been one of the top priorities for the bank over the last years, and it proved to be a major advantage within the COVID-19 outbreak and the commonly lockdowns as we experienced a dramatic increase in demand for remote and online services. We have seen a strong pickup in online client activity. We experienced 5x increase in traffic growth on the bank's website. Number of payment cards issued remotely posted 9x growth during the lockdown period, and we issued over 560,000 cards by the end of April. In 1Q 2020, we have also seen explosive growing demand for noncash payments and P2P transfers compared to the 4Q 2019. Combined loans and deposits are gaining significant traction, and we have increased by 3 and 8.5x, respectively, since the state of emergency was declared. At the same time, we have been continuously advancing our retail and corporate online platforms, expanding their products verticals, functionality and service tools to provide our clients with opportunity to fully manage their financial life online. Our Homebank online retail platform provides online and QR payments for a large number of partner services, online card to card and international money P2P transfers, online loan issuance and account and deposit opening as well as loyalty program for our customers. We offer fully online client onboarding and workforce to launch a number of innovative technology solutions for our clients. Dedicated SME and corporate platform online bank provides full scope of transactional banking online financial products and various supporting businesses and services online. We have also introduced recently a dedicated online marketplace for SMEs. During the pandemic, we were focused on launching a number of strategic projects aimed at proving Halyk's digital proposition and offering a comprehensive online platform for our customers. Just within the last 3 months, we introduced a number of innovative services for our retail and SME clients. We have launched fully online client onboarding without physical branch visit to attract new customers as well as introduced deposits and loans issuance and Western Union money transfers via mobile app in April. In partnership, this largest appliance retailer, Technodom, will launch a fully consumer loan product in March. Our payments platform now includes over 5,000 services for payments online. We have been #1 finance app in Kazakhstan by number of downloads in App Store and Google Play during the lockdown. We have seen the same massive pickup in number of online, SME and corporate users and continue to develop our business platform within SME marketplace launched in April, a new mobile app launched in May. As I already mentioned, we have seen an explosive pickup in online client engagement amid lockdown. This Slide #27 provides some useful statistics on these trends. Even with the lockdown easing, we expect our customers will continue to rely on digital platform for managing their everyday financial life. We remain fully committed to further investment in the development of our digital capabilities. And now I would like to hand the call over to Mira Kasenova, Head of FI and IR, to comment on details on our financial results for 1Q 2020.

Thank you. Now let me switch to Halyk Group consolidated financial results for the first quarter of 2020. In the first quarter of 2020, we earned KZT 81.1 billion despite the tightening operating environment and related to a substantial increase in credit loss expenses, following conservative but typical for us, risk management approach. The bank's net income increased by 8.8% compared to 1Q 2019, mainly as a result of higher net interest income and other noninterest income in 1Q 2020. This allow us to stay consistent in delivering strong return on equity at 24.1%. Reduction of net income compared to 4Q 2019 was entirely driven by substantially higher credit loss expenses, reflecting market changes according to IFRS 9. Total assets of the group increased by 8.7% versus the end of 2019, mainly as a result of revaluation of FX balance sheet positions due to local currency depreciation versus U.S. dollar during 1Q 2020. Interest income increased by 1.8% to KZT 179.3 billion for 1Q 2020 compared to KZT 176.2 billion for 1Q 2019, mainly as a result of increase in average balances of interest-earning assets. Interest expense decreased by 9.9% compared to 1Q 2019. As a result, the net interest income increased by 12.4% to KZT 104.1 billion. Net interest margin increased to 5.3% per annum for 1Q 2020 compared to 5% in 1Q 2019, mainly due to accelerated amortization of discount on the bank's eurobonds in the amount of KZT 7.4 billion in 1Q 2019, following its early partial prepayment. Another NIM growth driver was decrease of deposit interest rates and increase in average rates on loans to customers in 1Q 2020 versus 1Q 2019. Compared to 1Q 2019, our fees and commissions grew by 14.2% to KZT 30.8 billion in the first quarter of 2020 as a result of growing volumes of transactional banking, mainly in payment card operations, decrease in client transaction activity due to the lockdown measures, some pressure on our fees and commission income in Q1 2020 versus for 4Q 2019. However, the main effect was seasonality. Fee and commission expense increased by 47% compared to Q1 2019, mainly due to increased number of transactions of other banks' cards in the acquiring network of the bank. Operating expenses for 1Q 2020 increased by 28.3% versus 1Q 2019 mainly due to the indexation of sellers and other employees' benefits starting from the 1st of March 2019, a loss from impairment of nonfinancial assets of KZT 1.9 billion in 1Q 2020 and loyalty program bonuses payable to the customers, which includes operating expenses related to the advertisement starting from 4Q 2019. Operating income increased by 26.7%, mainly due to increase in net interest income and other noninterest income on the back of higher net gain from derivative operations and securities mainly related to significant positive revaluation of the swap agreement with the National Bank as a result of tenge depreciation in 1Q 2020, partially offset by net loss from FX operations. As a result, the bank's cost-to-income ratio slightly increased to 23.8% compared to 23.5% for 1Q 2019. Next slide shows, from a different perspective, our strong liquidity position, where deposits as a percentage of [indiscernible] 9.9%. The share of liquid assets in total assets was 45.1%. In addition, we have relatively low leverage with net loans to deposits equal to 57%, and net stable funding ratio was at 1.85%, well above the regulatory requirement. On the balance sheet compared with the year-end 2019, loans to customers increased by 6.4% on a gross basis and 5.9% on a net basis. Increase of gross loan portfolio in 1Q 2020 was attributable to increase in corporate loans, 8.3% on a gross basis, mainly due to revaluation of FX loans; increase in SME loans, 0.1% on a gross basis; and increase in retail loans, 5.9% on a gross basis. Halyk Bank's 90-day NPL ratio slightly increased to 7.1% from 6.9% at the end of 2019, entirely due to revaluation of previously impaired FX loans. The provision rate increased to 10.3% from 9.8% as of the end of 2019. The 90-day NPL coverage ratio was 146.1%. As mentioned earlier, in 1Q 2020, credit loss expense increased significantly to KZT 18.1 billion due to additional allowances for expected credit losses of KZT 11.7 billion, reflecting macro changes with the increased risk and uncertainty from the COVID-19 outbreak, although the group's loan portfolio remains robust and well positioned. As a result, the cost of risk increased to 1.7% in 1Q 2020 compared to 0.6% for 1Q 2019. The bank management has concluded that in accordance with the requirements of IFRS 9, it is necessary to take into account the potential impact of the macroeconomic situation on a possible change in the quality of the loan portfolio in the future. The revised expected credit losses overlay will be monitored and refined as more observable data on economic and customer outcomes becomes available. Although market dynamics are challenging a number of sectors and corporate customers, the corporate portfolio's diverse client base and limits are being proactively managed and have relatively limited exposure to the most vulnerable sectors affected by the coronavirus outbreak. The impact of the COVID-19 scenario and weighting adjustments has resulted in an increase in credit loss expenses from the previous scenario, primarily driven by the higher probability of default in retail unsecured loans. These drivers are partially offset by the impact of the National Bank, government and other support measures, which are assumed to mitigate a material portion of future losses. Stage 3 ratio continued to decrease from 16% at the end of 4Q 2019 to 15.5%, mainly as a result of write-off and repayments of previously impaired indebtedness of corporate borrowers. We are additionally showing here how well the workout of problem loans collateral was done by the bank's SPVs during 1Q 2020. On liability side, the deposits of legal entities and individuals increased by 6.3% and 10.2%, respectively, compared to year-end 2019, mainly as a result of revaluation of FX deposits due to a tenge depreciation versus U.S. dollar during 1Q 2020. At the end of 1Q 2020, the share of corporate KZT deposits in total corporate deposits was 50.8% compared to 49.4% as of the end of 2019, whereas the share of retail KZT deposits in total retail deposits was 37.6% compared to 43.7%. Compared with the year-end 2019, total equity increased by 4% as a result of net profit earned by the bank during 1Q 2020. The bank continues to maintain very high capital adequacy ratios. The decision not to pay dividends for 2019 has come from uncertainty about the duration and extent of the negative impact of a number of factors, both on the economic situation in Kazakhstan and globally, such as coronavirus pandemic, low oil prices and slowdown in various sectors of the economy of Kazakhstan. The capital retention under current conditions will allow the bank to pass-through any possible stressful scenarios more confidently. The payment of dividends from the bank's retained earnings of previous years may be reconsidered in the second half of 2020, subject to economic recovery in Kazakhstan and the reduction of uncertainty in the global economy. The previously provided guidance for 2020 was put under review, the current operating environment is too uncertain to provide any estimates to our financial performance for this year at this point of time. This completes our presentation. Now we would like to open the call for your questions.

[Operator Instructions] And we'll take a question from Elena Tsareva from BCS Global Markets.

I have a first question on guidance. So I understand this is under view currently. But what could be the expectations of, firstly, the key rate? As I understand there is no key rate in market assumptions. So what could be the direction of key rate? What you assume going forward throughout the year and implications on margin level? Is it quite resilient in the first quarter? And if you can just say what do you expect from OpEx on OpEx side? Do you feel there are some initiatives -- cost initiatives you may imply to support? Maybe you can just give some color on OpEx side as well. This will be my first question.

Yes. Elena. Please allow us 1 minute. Regarding the base rate, we do not expect a material change from current level. There might be some reduction, but we do not think that they might be material in that sense. Regarding the OpEx, we already announced that we took certain measures in order to control our costs, and especially the -- related to controlling the epidemiological situation like we restricted the business trips, most of the meetings are being conducted online. We also implemented measures such as freezing the new hirings, except for certain areas, which are required. At the same time, we see that certain new cost items appeared like expenses for sanitizing measures. But all in all, we expect that operational expenditures should be constrained this year.

And my second question is about like more on dividend side. So given that you have strong capital ratios, so do you have any like certain levels of CE Tier 1 ratio of capital adequacy ratio to sustain dividend payout unchanged when you consider it in the second half of the year?

In our previous interactions with investment community, we were saying that we do not have hard target rates for the Tier 1 ratio. 17% might be taken as a minimum below which we do not like our Tier 1 capital to drop. But to really set the target is a bit difficult because we're also looking at the prospects of business needs for the capital. We are looking at the states and prospects of the economy.

And we'll take a question from [ Marina Davies from MMZ ].

I wanted to ask about the accrued interest. The -- I'm sure you received these questions in the past. I just didn't look at the bank for some time. And the accrued interest through the P&L is lagging behind the interest received in cash through the cash flow. Could you please remind me how do you accrue your interest? And what is the reason for that? And how do you expect this to evolve going forward? And then maybe also some expectations for later this year in terms of how quick we can -- how different impact can we see in Q2 on the operating activities and how quick the recovery can be in the Q3 and Q4, whatever you can say about it?

Yes. [ Marina ], thank you for the question. It's actually very important aspect, which we're also looking at. So basically, looking at the cash interest gap, you -- actually to look from 2 perspectives. One is the gap for the loans to customers only. And secondly, the overall cash interest gap. There is pretty much difference between two for the reason I will explain you a bit later. For the interest gap for the loans to customers for 2019 was standing at 98%. So basically, there was virtually no gap between interest received and interest accrued. And for the first quarter of this year, it was ranging close to 83%. And there are 2 reasons for that. One is it's better to look at this ratio for a bit longer period than 1 quarter because there are loans for which interest are paid on a monthly basis. However, there are also loans for which interest payments are set on quarterly or semi-annual basis. So that gives you somewhat fluctuation for this ratio quarter-to-quarter. And in the second half of March, certain loans for mostly retail customers as well as SME customers, we already start providing the -- we are already making the schedule for interest payments because of the introduction of emergency situation. When we talk about the overall gap for interest income accrued, then these ratios are lower. And the main reason for that is that if you look at our balance sheet, there is substantial portion of government securities, a portion of which is represented by the National Bank notes. And these notes not pay interest. Basically, banks are buying these notes at discounts, and they mature at par. For this part of securities, the interest is accrued, but interest is not paid because the interest is earned not through the interest payment, but through amortization of the discount. So from that perspective, there will always be a natural gap in -- for these type of securities. And the gap for overall interest income for last year, it was standing at a level higher than 89%. And for the first quarter, it was close to 35% -- 75%, sorry. And I'm talking about the percentage, not the gap, but the percentage of interest received.

This is received versus -- yes, received versus accrued. Yes. No, that's very clear. Is there any like 1 big customer who -- or several big customers who are causing the 83% situation in Q1? Or is it like just the general situation? Because sometimes when the customer can, for example, not manage to pay in the quarter and it goes -- it just goes in the next quarter, and this can be sometimes causing this discrepancy. Is there any particular chunky ticket, you can...

In general -- yes, in general, there is no specific customers which were impacting that ratio. As I said, the guidance is that typically, there is a fluctuation quarter-to-quarter because of the timing difference between the accrual and received. With regards to particular current situation, as you know, due to situation with lockdown and quarantine measures, there was a program set for certain type of customers for which the banks were taking measures in order to provide payment holidays for the interest. And that program is lasting up to 3 months. So that took certain impacts on the ratios in the first quarter.

Sure. So do you think then it's going to be better in Q2?

Excuse me, could you please repeat?

Does it mean that this number will be better in Q2?

In Q2, probably not because the state of emergency was introduced mid of March. And it was lifted in the middle of May. So most of the period was happened exactly in the second quarter. But in the second half of this year, we expect that ratio start going back to normal, but it might take some time until we come back to the levels which we experienced in 2019.

[Operator Instructions] We'll take a question from Andrew Keeley from Sberbank.

I have a few questions. First of all, in terms of your fee income, I'm just trying to understand in terms of the drop in the fee income being driven by much higher fee expenses. And as I can understand, I mean this is related to the plastic card expenses where you say due to more transactions on other -- from other bank cards. So this is basically you, as an acquiring bank, having to pay out more into change income to other banks, people using their cards, I presume. I mean it's been growing pretty strongly now for several quarters. I'm just trying to understand, is this kind of one particular bank [ KASB ] something that's the quarter mix or that's not the case? And in your presentation, you basically showed very strong dynamics to your payment card issuance. So I'm just trying to kind of square that with the fact that we've seen in like constantly pushing down your overall fee income. Just some thoughts on that would be very helpful.

Andy, it was not a good line. But I do understand correctly that the main question was regarding the fees and commissions expenses, which grew at a faster pace than fees and commission income. Yes. If this is the question, then the answer is yes. This is because we see increasing number of cards issued by other banks being using our acquiring network. We actually have taken a number of measures, and we tried to present them in current presentation by making the usage of our cards more actively. We, as you probably also see in the presentation, were the most active bank in issuing cards and opening card accounts on a remote basis, actually also relates to social support measures, but also issuing for other customers, which were not entitled for the social payments. We made a lot of digital developments in our applications. And you probably also know that in Kazakhstan, the fee level interchange, which is called interchange is relatively high if you compare to the other similar markets, including neighboring markets. And there are discussions at various levels, including with companies like Visa, MasterCard, the National Bank and the banking community, how that levels can be brought to lower level, which is more normally seen in the countries, which can be considered as peers to Kazakhstan. This is a separate thing, which probably can be called as market-driven. So -- but if that implemented that also might have a positive impact on our net fees and commissions.

Okay. So I mean do you expect to start seeing this kind of consistently strong growth from this payment card expenses to start kind of cooling down fairly soon or not?

Yes. We start seeing that the activity of our customers has increased, and particularly it's increased during this lockdown period. We think that strong momentum, which we gained during this quarantine lockdown period, will eventually bring us to the situation when, first of all, fees and commissions -- net fees and commissions income would be stabilized, but eventually, would help us to start -- would be, again, shifted to the positive trend. But as we previously said, it might take some time. But the bank is taking a number of different measures like -- on developing the client acquisition on different digital propositions. We introduced a lot of new initiatives during lockdown period. So we will try to work further on that to improve situation with net fees and commissions.

Okay. That's very helpful. Just a question on your asset quality. So roughly 2/3 of your cost of risk was due to changes in your macro inputs in something like 0.6% usual kind of usual course of business. That kind of 0.6% level, I mean do you see that as a particularly kind of good quarter or more or less the kind of run rate that you're thinking about kind of you would expect generally going forward, assuming a fairly kind of stable environment and aside from any potential further changes in your macro inputs? And I guess just another related question. You show in your presentation, I think, 31% of retail loans have been restructured or have taken the payment holidays. But basically half of that volume for Halyk, I think, 16%. I mean is that would you say basically because of the higher quality borrowers in jobs that have generally been more resilient that you have compared to the rest of the sector. Just any thoughts on that would be helpful.

Yes, Andrew, thank you for your questions. So I will start from loans. So regarding what we see in terms of dynamics on retail portfolio, yes, indeed, the percentage customers, which -- for which we made restructuring, is way lower than the average for the market. And the main explanation is the client base. As you know, for installment loans, we mostly provide loans to the customers who receive salaries. And that includes people working for large corporates, but also that includes people who are receiving salaries from the budget like teachers, medical workers, et cetera, et cetera. And this particular part of the people, you might call them essential workers. They were not affected by the lockdown measures. That's why many of these customers, they were not experiencing drop in the payment of salaries. And they were able to serve their schedule without application for the reschedule. And for other banks, situation might be different. With regards to cost of risk in the first quarter, indeed, we made certain provisions, not because we already observed certain changes in the asset quality, but nearly as a result of changing macro assumptions. And these macro assumptions are changing quite rapidly, I would say, in current environment. And we would make this assessment on a quarterly basis. And depending on that, we might adjust those assumptions, and that might potentially impact the cost of risk in coming quarters. Obviously, we will continue to make risk assumptions on individual loan basis, depending on the evolving situation, and that might take its own dynamic. Because there is some sort of uncertainty how the situation with pandemic would be evolving in the second half. What would be dynamic on the oil price in the second half of this year, it is probably a bit premature to provide particular guidance on the cost of risk situation. But I want to reiterate again that we do not see these balances in our credit portfolio. It is quite diversified. We see that our portfolio was not growing rapidly compared to some banks in certain particular areas. We think that we have a strong quality in our credit portfolio, which would be helpful in maintaining that through current turbulent times.

That's very helpful. And then just a couple of quick questions. Can you tell us what your FX kind of adjusted loan and deposit growth was in the first quarter if we strip out the move in the tenge? And I think you mentioned in the presentation about positive reevaluation of the swap agreement with the NBK due to the tenge's depreciation. Can you just reiterate, remind us the kind of terms and size of that swap agreement? And would -- can we kind of conclude that if the tenge, as it has appreciated in the second quarter, does that mean that there should be some loss on that transaction?

Do you need me to move on to the next question?

Yes, Andrew, just a moment, please. Yes, Andrew. The situation we swap as a swap is a function of 2 things, is -- one is the change in spot rate; and secondly, the timing until maturity of this instrument. So basically, when dollar is appreciating, it is having the positive impact on P&L. When tenge is appreciating, it is having the negative impact. But all in all, once the tenure is approaching its maturity, these differences -- temporal differences should be eliminated. Yes. To give you a guidance for the second quarter, we have to look how the FX rates would be changing in the second quarter. So far, tenge is appreciating. So meaning that it has a negative effect so far on the P&L. But we still have 1 month until end of the quarter. And the timing of that swap is also approaching. And because there was some appreciation. So it naturally would be putting negative pressure on P&L because of approaching maturity anyway.

Can you remind me with regard to change?

Even if the rates will not be changing, it will be good.

[indiscernible] begin until of July.

Yes, the maturity date is beginning of July. So even if the rate would remain as this because we had a gain in the first quarter, in the second quarter, it would be minus because it will be compensating because of approaching maturity. And change in late, it's just speeding that process. With regards to FX loans and deposits, there was no substantial change, basically, almost none on deposits and a slight increase like 1 percentage point on the loan side.

We'll take our next question from Tunde Ojo with Harding Loevner.

A few questions. First is on the debt payment holiday you mentioned during the call, you highlighted the total amount for retail, I think it's about KZT 20 billion. But can you please disclose what the amount is for your SME book? I couldn't find it anywhere in the presentation. And also, if you have any sort of corporate. I don't know if any corporate -- we have built this sort of debt payment holiday as well, [ if there are ]. If you can please share what the total amount is for that, that will be helpful as well. That's my first question. And I'll go to the next one after that.

Yes. Tunde, thank you for the question. One moment, please. Yes, for SME, the number of customers for which we make that amendment is 3,500 customers. And the amount of rescheduled payments is around KZT 46 billion. For corporates, we do not have that statistic because we are just following the individual customer approach. And we do not have a substantial number of corporates applied for this program. Because for retail and SMEs, there were certain category of sectors, which were defined by the regulator, for which basically banks were taking the formalistic approach in providing these holidays. It do not necessarily mean that these customers were experiencing difficulties with repayment or experiencing liquidity situations. But simply because the operations were restricted during quarantine, during lockdown period, they were entitled for that payment holiday. And again, it is important to reiterate that the interest payment holiday does not mean that the banks halted the interest accrual. So the interest accrual remains at the existing interest rate.

Got it. Right. And the affected sectors, are those the ones you have on Slide 22? Real estate, passengers, hotels or are they bigger than that? Those ones qualified for this holiday.

Yes, it's like trading centers, it's hotels. It is -- if we talk about the SMEs, it's like hairdressers, cinemas. All the, let's say, segments which require interaction, physical -- close physical interaction with people. Formally, it also includes nonfood retail, but we know that with current digitalization mainly, especially if we talk about the medium and especially large nonfood retail, they will continue to operate through online shops and deliveries to the customers. So that business -- well, shops were physically closed, but some companies, especially large ones, they will continue to operate through physical delivery and online shops.

Yes. The second question I have is on the cost of risk. I understand you suspended your guidance, and I can appreciate that in this environment. But just want to get a better handle of where things are going for you? I mean you mentioned earlier that consumers or your clients are behaving normally, which I assume that the current on the obligation. But my specific question here is you had these buckets of clarification of your cost of risk where you show the changes in the model for IFRS 9, and you obviously have macro changes in there. Can you please share what sort of inputs you had to arrive at that? Does that include COVID-19 specific impact yet? Or are we going to see that more from Q2 going forward in arriving at 1.7% cost of risk we had in Q1? Just to get a sense of where things potentially could go from here.

Tunde, one moment, please. I would say that the change in macro indicators is a combination of COVID and reduction in oil prices because we had kind of effects. And we're making our projections based on -- there are a number of them, but the main 3 are oil price, inflation and real GDP growth. And we set the range for each of these indicators. For oil price per barrel, we have ranged between $20 to $40 per barrel. For inflation, it is between a 6.9% to 10.4%. And for real GDP growth, it is between minus 0.6% and 1.5%.

Got it. This is very helpful. That's very helpful. And so any changes in these variables going forward would then change your expected loss credit charge coming from this particular event, correct?

Yes. Any material changes from that level might trigger the new assessment. So far, we see that dynamics is probably better, but with current situation is better than it was linked in that indicator. But we will do that on a regular basis, that assessment. Depending on projections at the time of [indiscernible].

Yes. And thanks for that and the elaborate disclosure. Again, I really liked the presentation this quarter. You mentioned on Slide 22, some sectors specifically affected by the economic downturn, about 15% of your portfolio. Are you seeing stress already coming from some customers in that segment yet, meaning the asking for renegotiation or [ billing arrears ] or anything like that? Or you just identify this, but there's no problem? I just want to get a sense of what you've experienced in on ground.

Yes, we showed that sectors, which naturally might be affected by either a drop in oil prices or because of lockdown measures. That does not necessarily mean that we see deterioration in these segments. Because for many of that customers, most of that sector is actually represented by large corporate. As I said, they have a sufficient cushion in terms of capital and liquidity. We do not see massive requests from that sector from the customers to provide interest payment holidays. There are a few, but it's not for the large scale. And because the lockdown in Kazakhstan is already lifting, so we think that these clients are already coming to the normalized business activities in coming weeks and months. As the situation stands now, we do not expect deterioration in these sectors. This is nearly for the benefit of investors to see our exposure to that particular segments or subsectors.

Got it. Got it. That's very helpful. That's very helpful. And the last question for me, please, is on the concessional lending from the government. You disclosed the number, you have KZT 180 billion allocated to the bank. You've disposed KZT 71 billion so far. Do you mind sharing the terms of this loan? I know you gave a figure for the borrow -- the interest rate to the borrowers, but I'm not sure what the interest rate to you at the banks. So what kind of spread do you make on this loan? And are they allowed to use this money or phone to repay existing debt? Or this has to be separate to help clients for auditing? Just want to understand the terms broadly for this concessional loans?

Yes. The margin for the government programs is more or less the same. It's close to 4%. I don't have exact specifics for this program, but I think it's also close to 4%. And this is program lasting for 1 year, typically providing lending for affected customers for the customers from affected sectors for the working capital need or for refinancing of existing debt actually helping them to reduce debt service during this period of time. And we are active participants to that program. We had allocation of KZT 180 billion out of KZT 600 billion. So our allocation was 30%. But so far, we provided lending for the amount of KZT 71 billion, which is more than 40% of overall sector disbursements.

Yes. And who takes the credit risk on this loan? Is it a bank? Or is it the government? When do you disburse this to...

Yes, yes, it's entirely on the bank. And majority of loans which we provided is actually for refinancing of existing loans basically to hedge a capital loss and increasing risk for that segment. But on contrary, we are helping the customers to reduce the existing debt service.

And we'll take our next question from [ Peter Boone ] from [ Channels Trust ].

Obviously, Q1 was also very good. So congratulations on that. I had one question related to dividends. And then a second question related to your strategic position. But on the dividends, the regulator has said no dividend should be paid by banks this year, or they recommended that. I presume you're feeling that they'd be happy to modify that or they would make exceptions as long as the economy continues to recover as you see it. And then within that, I just -- I wondered, your policy has been to pay 50% to 100% of earnings. And given the strong performance this quarter and assuming things improve gradually over time, would you be thinking that you need to modify that? Or is that still likely to be your plan for dividends if the economy stabilizes? And then the other question on strategic position. Other banks have been talking about how COVID has obviously caused a more rapid development of the digital platform. Do you feel now, with what you've done, that you are now a leader in that in Kazakhstan or the leader? Or do you feel there's more development needed?

Peter, thank you for your questions. One moment, please.

Yes. This is Umut Shayakhmetova, the CEO of the bank. And regarding the dividends, when the decision and recommendations were made to the Board of Directors and then to the shareholders' meeting, we were just at the beginning of the pandemic situation and at this extraordinary situation, which was taken in Kazakhstan. And the advice was to withdraw the dividend payment in the first half of the year. But today, I can say that starting June, and already seeing the end of first half of the current year, we have a more, I would say, positive mood. And as we already said that it's possible that, in the second half of this year, the bank will make a decision or reconsider our view regarding the dividend payment. This is all I can say right now.

Regarding your second question, so if I understood correctly, the question was regarding our position on digitalization and whether we're one of the top banks in that regard. Yes, in Kazakhstan, there are probably a handful of banks, which are very active in developing digital propositions on the markets. There are also some nonbank organizations, which are also trying to issue digitalization wave like telecom companies, some companies who have large client base on retail segments. We believe that we are one of these few organizations in Kazakhstan, one of few banks, which are at the front of that changes. The market, we believe, would continue to grow, which would leave the room for a number of such organizations to gain the markets and to gain a decline base. And we think that we would be one of the leaders, one of the beneficial, but definitely not the only. There are a few of them, as I said, not only in the banking segment, and the market is growing and continuing to grow.

And we have a question from Andrey Mikhailov from Sova Capital.

I have several questions. Some of them are related to the way things are shown in your financial statements. And in particular, and that's the kind of a traditional question. You have other income this quarter in the amount of approximately KZT 13 billion. Is this mainly composed of a gain from the realization of foreclosed assets? And if not, would you be able to elaborate on this? And I'll have other questions too.

Yes, Andrey. Yes, you are right. The -- most of other income was attributed to sale of assets above the balance sheet value by our SPVs.

That's clear. My second question is on the restructuring -- the potential restructuring charge related to your retail and SME loan restructure and maybe corporate restructurings as well. Do you expect such a charge in the second quarter?

Could you please elaborate what do you mean by restructuring charge?

Yes. What I mean is that is the amount of so-called loss, which results from the fact that the interest payments are scheduled and not paid as originally planned or scheduled so when you discount your cash flow for a particular loan, you get a lower NPV for that loan compared to what you had previously. So these charges are shown by some banks right now in the current environment, especially on the retail portfolio side.

Yes. Understood. Thank you. Because, as I said, the payment holiday does not mean that we stop accruing interest. We also are not providing, let's say, reduction of interest as a result of that exercise. So basically, the NPV of loan is not changed at all or probably these changes might not be considered as material. So from that perspective, the -- from present value of cash flow perspective, we do not see the impact if we're talking about that particular concession program. So it should be neutral from that perspective.

And just a clarification, could you see a bigger impact in some parts of your corporate loan book where you might be doing some restructurings, which are not formally driven by the state?

If we talk about the corporate segments, we provided some payment holidays in the sectors, which were affected by lockdown. Mostly the companies which are dealing through shops working with general public. But we consider these companies having strong position. We do not think that these temporary measures might be material affecting their credit standing. So as we speak now, we do not see the need for material change in the creditworthiness assessment of these companies.

Okay. And my third question is on the negative revaluation of your securities book, which was posted directly into equity in Q1 in the amount of approximately KZT 35 billion. As I understand, things have already improved in this regard. And well, as of today, you will have a very -- a portion of that. And my question would be how big could this portion be? The portion that could have been reversed between April 1 and now? And also, how would it improve your capital ratios?

Yes. Because most of securities, which were affected comprehensive income through reassessments were in tenge, they basically link in the change in the interest rate environment, mostly linking to the base rate. Because base rates reduced substantially, but it didn't reach yet the level which were before that assessment. Most of that revaluation should return as a result of change of base rates, but would not compensate the full drop. But most of that should be reversed back. But of course, saying that we have to say that the quarter has not changed yet. And so we have to be aware that there might be some other instruments. But if we talk about the tenge instruments alone, to large extent, that evaluation should have positive effect in the second quarter.

And we have no further questions in the queue at this time. I would like to turn the conference back over to our speakers for any concluding remarks.

Dear, ladies and gentlemen, thank you very much for participating our call today. Our IR team is available for any further questions. Please stay safe, and bye.

And once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today. You may now disconnect.