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

Dear all, thank you very much for joining. We are ready to kick off Halyk Bank Full Year 2020 results call. The presentation will last for approximately 45 minutes and will be followed by a Q&A session. I am now passing the word to Halyk Bank team.

Thank you, Karim Good evening, ladies and gentlemen. Welcome to Halyk Bank conference call on presentation of financial results for the 12 months and fourth quarter of 2020. Participants to today's call on Halyk Bank side are Ms. Umut Shayakhmetova, Chief Executive Officer; Mr. Anton Musin, First Deputy CEO, Digital Banking, Transactional Business and IT; Ms. Aliya Karpykova, Deputy CEO, Chief Financial Officer; Mr. Murat Koshenov, Deputy CEO, Corporate Banking and International Activities; Mr. Dauren Sartayev, Deputy CEO, SME Banking, PR and Marketing; Mr. Zhumabek Mamutov, Deputy CEO, Retail Banking; Mr. Viktor Skryl, Financial Director, Finance and Subsidiaries; and myself, Mira Kassenova, Head of FI and IR. Now I would like to hand over the call to Murat Koshenov.

We are delighted to welcome everyone to our presentation of the financial results 2020. 2020 has been an extraordinary year with major challenges caused by unprecedented pandemic that impacted daily lives of our clients and employees. For Halyk Bank, from the onset of pandemic, the main priority has been to stay close to our clients and support them. We discussed this during our previous calls. Today, we see the situation has stabilized, and the economy is getting back to normal. In spite of these headwinds, we once again have proven unique resilience of our business model, which manifested itself in our very strong set of results for 2020. First of all, as always, in times of stress, we experienced clients flight to quality towards Halyk Bank. As a result, our client base increased by 9% and reached 8.7 million customers. At the same time, we experienced massive shift of our customers towards using digital channels. Our retail online bank clients increased by 41% to 6.2 million. We believe that customer preference towards digital are permanent and will remain going forward. And we are transforming our business accordingly. Our gross loan portfolio increased by 16%, with very strong growth momentum in retail and SME segments. We also continued to consolidate our dominant position in corporate segments with loan portfolio increasing by 10% in spite of market stagnating. Correspondingly, both our revenue base and net income for 2020 were well ahead of our 2019 numbers. Such strong performance was delivered during the year, which saw country GDP contracting by 6-point -- 2.6%. Finally, Halyk Bank is 1 of only a few banks globally that not only paid dividends in 2020, but more importantly, distributed record dividends to our shareholders with dividend payout of 60%. Around 12 months ago, we shared with you our financial guidance for 2020. Going in 2020, we were quite a bit on our business performance outlook. These performance metrics were shared with you well before impact of COVID on the economy and our business. We expect the loan portfolio to grow by more than 10%. Return on equity to exceed 20% and CET1 ratio to remain above 20%. As you may see, we over-delivered on all key target metrics. Growth of our net loan portfolio amounted to 18%, while return on equity exceeded 25%. I would also like to highlight our cost of risk, which despite massive headwinds posed by COVID amounted to only 0.4% in 2020. The only metric, which is broadly in line with our initial guidance is net interest margin. Contraction of which will be explained later in the financial section of the presentation. We are focused on maintaining strong momentum in 2021 and keeping our strong execution record going forward. Clearly, macroeconomic environment this year will be much more constructive and supportive for the growth of our business. We will share with you our guidance for 2021 a bit later in our presentation. I'd like to briefly summarize some of key milestones that we managed to achieve during the course of 2020. We accelerated our shift to digital channels. During 2020, we made most of our product and servicing available via digital channels, including fully remote onboarding, online consumer loans, auto insurance and lending to individual entrepreneurs. We made huge progress in expanding our ecosystem services that include online travel platform, Halyk travel, ticket operator Kino.kz, online brokerage Halyk.Invest, and online marketplace Halyk market. My colleagues will present these platforms in greater detail. ESG is becoming an important theme that we are taking very seriously. We continue to implement ESG framework and published our first sustainability report in accordance with GRI Standards. In spite of challenging operating environments, we affirmed our credit ratings and also took advantage of our strong liquidity to prepay 1 of our Eurobond issues. I already mentioned record dividends that have been paid to our shareholders in 2020. Finally, in recognition of our achievements during preceding few years, Euromoney, International Finance and Asiamoney extended to Halyk Bank several reputable awards. 2020 has been a challenging year for the global economy, Kazakhstan as well experienced GDP contraction of 2.6% on the back of COVID pandemic and low oil prices. At the same time, Kazakhstan has been 1 of the least affected economies in former Soviet Union and Central Eastern Europe region. We confidently took into strong economy rebounds -- we confidently look into strong economic rebound in 2021 on the back of efficient government support measures as well as oil price recovery of over 150% since March last year. Now I'd like to give the floor to Mira Kassenova.

Thank you. Now let me switch to Halyk Group consolidated financial results for the 12 months and fourth quarter of 2020. During last year, the bank generated KZT 352.7 billion of net income. The increase by 5.4% compared to 12 months of 2019 was due to the growth in net insurance income and other noninterest income, positively affected by the repayment of swap agreement with the National Bank in July 2020. As of period end, we demonstrated 25.5% return on average equity and 3.6% return on assets. Total assets of the group increased by 12.5% versus year-end 2019, mainly as a result of increase in the processes and total equity and revaluation of FX balance sheet positions due to KZT depreciation versus U.S. dollar during 2020. Customer deposits increased by 16.4% versus year-end 2019, mainly due to fund inflow from the bank's clients and to a lesser extent, as a result of revaluation of FX-denominated deposits. Increase in interest income on loans to customers was partially offset by the decrease in interest income on securities due to transfers in placement from high-yielding NBK notes into low-yielding FX deposits at the National Bank following the repayment of swap agreement with NBK for the amount of USD 912 million. As a result, interest income increased by 3.2% year-on-year, while net interest income increased by 0.4%. Interest expense increased by 6.9%, mainly due to the increase of average balance and share of KZT deposits in the amounts due to customers. Net interest margin decreased to 4.7% for 12 months of 2020 compared to 5.3% for 12 months of 2019, mainly due to transfers in placement from high-yielding NBK notes into low-yielding FX deposits with the National Bank following the repayment of swap agreement. Net interest margin decreased to 4.4% for 2020 compared to 5.4% in 4Q 2019, mainly due to transfers in placement from high-yielding NBK notes into low-yielding FX deposits in National Bank following this repayment of swap agreement and due to accelerated amortization of discount on the bank's Eurobonds in the amount of KZT 7.2 billion due to its partial prepayment in December 2020. Excluding this one-off tax effect, the adjusted NIM would be 4.7%. Our gross fee and commission income increased by 6.6% year-on-year as a result of growing volumes of transactional banking, mainly in payment card operations as well as bank transfer settlements. The increase in fees derived from bank transfer settlements by 17.3% was mainly due to the launch of online installment loans in 2020. The increase in fee and commission expense by 15.6% year-on-year was mainly due to increased number of transactions of other banks' cards in the acquiring network of the bank, partially offset by the decrease in deposit insurance fees, payable to the Kazakhstan Deposit Insurance Fund due to lower rates for the bank on the back of increase of capital adequacy ratios. Operating expenses increased by 8.9% year-on-year due to the increase in salaries and other employee benefits as a result of the increase in sales-based payments in retail business in 2020 and due to the loyalty program bonuses payable to the customers, which are included in operating expenses related to the advertisement starting from the fourth quarter of 2019. The bank's cost-to-income ratio increased to 26.8% compared to 25.4% for the 12 months of 2019 due to high operating expenses over the 12 months of 2020. On the balance sheet, compared to the year-end 2018, loans to customers increased by 15.9% on a gross basis and 18.5% on a net basis. Increase of gross loan portfolio at the year-end 2020 was attributable to increase in corporate loans, 10.1% on a gross basis, whereas SME and retail loans increased by 24.1% and 24.4%, respectively. The Bank's asset quality is notably improving despite turbulent economic environment. Last 90-day plus NPL ratio decreased to 4.1% from 6.4% at the end of third quarter, mainly due to write-off, repayment and restructuring of problem indebtedness. The 90-day plus NPL coverage ratio increased to 196.5%. Cost of risk for 12 months of 2020 decreased to 0.4% compared to 0.7% for the 12 months of 2018 and decreased to minus 1% in 4Q compared to 0.2% in 3Q mainly due to repayments of large ticket corporate loans. Stage 3 ratio decreased from 14.8% at the end of 3Q to 12.3%, mainly due to write-off repayment and restructuring of program indebtedness. We are additionally showing here how well the workout of problem loans collateral was done by the bank's SPEs during 12 months of 2020. On liability side, the corporate and retail deposits increased by 19.1% and 13.8%, respectively, compared to year-end 2019. At the year-end, the share of corporate KZT deposits in total corporate deposits was 59.9% compared to 55.5% at the end of 3Q were the share of retail KZT deposits in total retail deposits was 45.9% compared to 43.5%. Compared with the end of 3Q, total equity increased by 9.2% as a result of net profit earned by the bank during the fourth quarter. The bank continues to have significant capital buffers with CET1 and total capital adequacy ratio standing at 24.4% and trailing 5.5% at the year-end. Now I would like to hand over the call to Umut Shayakhmetova, CEO of the bank, to provide this year outlook and key strategic targets.

Yes. Good day, everybody. I'm glad to announce our guidance for 2021. As already stated, we managed to deliver strong 2020 results despite extremely challenging situation globally and locally. We made impressive progress across a number of strategic initiatives and delivered strong financial results. We remain very focused going into 2021 and plan to build on our ongoing business momentum. With a strong macroeconomic tailwind, we aim to capture even more growth opportunities in the market in 2021. We continued strong loan growth at 16%, with around 22% of growth for retail loans and 14% growth for corporate and SME loans. Net fee and commission income should grow at around 25%. Main drivers here are our initiatives to increase transactional activities by our customers and new digital products and services, which we launched last year. In terms of asset quality, we do not expect any surprises here and expect that our cost of risk will be in the area of 0.7%, reflecting our disciplined underwriting approach. Finally, we expect that in 2021, our consolidated net income should exceed KZT 400 billion, delivering ROE at around 27%. NIM expected at around 5% and robust operational efficiency with cost-to-income ratio of around 27%. As stated, one of our key strategic priorities for 2021 will be to further accelerate our digital strategy. We plan to significantly broaden customer engagement on our Homebank platform. And by the end of 2021 to have at least 4 million monthly active users, up more than 50% year-over-year. This will be driven by our ongoing product innovation, launch of new digital services and encouraging our customers to actively use digital channels. We see strong utilization of our digital channels for loan issuance, not only for retail, but for legal entities as well. Over 60% of loans to corporate and SME clients will be disbursed via online channels, while share of fully digital loans in retail and micro business segments will exceed 55%. We keep our focus on growth of transactional business. Share of noninterest revenue is expected to increase to at least 31% of total operating revenue. Overall, our digitally ecosystem services that we will cover in great detail a bit later, should bring more than 5% of total revenue already in 2021 from 1.4% for 2020. We expect them to become even more important business contributor going forward. Now I would like to hand over the call to Anton Musin, First Deputy CEO, who will provide you a digital update.

Hello, everyone. Let me give you quick highlights on the results of our digital transformation program that we have achieved in 2020 and key milestones in our 2021. We continue our focus on 4 major pillars of our digital transformation, which are development of our digital channels, our digital product and ecosystem, our technology platform and, of course, our organizational -- digital organization. Here on, on the slide, you can see major results we have achieved during last year. First of all, this is the significant growth of our digital channels. For example, mobile banking solution, Homebank achieved 136% growth in monthly active users last year, and corporate, SME customers, Internet banking solution online bank, even -- achieved even better growth, 175% year-to-year comparing 2019 and 2020. During last year, we have launched several new digital ecosystem services. First of all, this is Halyk Market, our brand-new e-commerce platform launched in the very end of 2020. Zhumabek Mamutov will provide more details on this project in the retail section. We have launched Halyk.Invest our mobile trading and investment platform in November 2020 as well as Halyk.Travel our mobile ticketing platform. In parallel with this, we have redeveloped our entertainment resource Kino.kz and launched new digital auto insurance service. There is a significant development in technology platform that we have launched in 2020. There is our Data Factory program. I will give more highlights a bit later in my speech. We are bringing new big data technology stack to the bank with this program and expect first monetization results out of the data insights by the end of 2021. Finally, speaking about our organization. It's important to say that we are growing a new digital team. Last year, we have about more than 100, [indiscernible] specialists, developers and others. Let me give you more details on different aspects of each digital pillars that -- and our targets for 2021. Please, next slide. In regards of digital channels, one of the important targets we want to achieve is 4 million daily active users in our Homebank, which is a significant growth according to 2020 results. We expect to achieve this, integrating our ecosystem services seamlessly into Homebank as well as adding access to government services through Homebank and introducing new products and services like digital auto loan. Regarding our SME digital solution online bank, we have launched new mobile banking solution last year and already achieving good numbers -- already achieved good numbers during last year. In the second part of 2020, we have developed a new set of functionalities, including InApp mobile POS terminal, online corporate card just have been launched as well as many other services. In 2021, we are launching a big promo campaign to distribute new online banking solution and we expect good results in MAU and DAU we're reflecting on this slide. Next slide, please. In regards of developing of our digital product, we expect to have a significant growth in 2021, both in retail and SME client segments. Here are some numbers, demonstrating this performance and for 2021. There is good continued growth in digital loans and retail year-to-year from '20 to '21, is 15% and SME digital loans, we expect 4x growth comparing to our 2020 results. Zhumabek Mamutov who is leading retail and SME client segments will give you more details in their sections in regards of digital loans portfolio. Next slide, please. Speaking about our digital ecosystem. There are a few important points that I want to highlight in our strategic approach. First of all, we start to position our Homebank as a s SuperApp, meaning 1 access point for our retail customers to the most of our ecosystem and banking services. This was 1 of the major strategic decisions we have done last year based on a number of strategic drivers listed here. In addition to this, it's important to mention that in Homebank, we have much high conversion ratio selling our digital service. For example, comparing this with other channels rather than Homebank, we have 5 to 10x higher conversion rate. In regards of our -- in regards of development of our ecosystem service, we focused our attention this year on further development of already existing ecosystem services, having the concrete and quite ambitious target for each project. Let me give you some highlights of these targets. For Halyk market, we expect 15% of the overall retail credit finance coming from Halyk market by the end of 2021. For Halyk.Invest, we expect significant ramp-up of customer base, and we're planning to have 30,000 new customers in 2021. For Halyk Travel, we plan to have 3x higher amount in 2021 and KZT 2.4 billion in GMV. For Halyk.Travel, we plan to have 3x higher MAU in 2021 and KZT 2.4 billion in GMV. For Kino.kz our plan to achieve almost 60% of market share, cinema tickets online sales and KZT 3 billion in GMV. In regards of our digital -- digital auto loans insurance project, we expect to gain premiums almost 4x comparing with 2020 plan in this fiscal 2020 -- '21. Next slide, please. Finally, let me give you some details regarding our organization and technology platform, major initiatives that we have started last year, as I was -- already mentioned this was the Data Factory. This should bring monetary results already in 2021. Here, our results per each segment -- for each client segment, we expect to gain during the next 14 months. The most significant growth we expect in retail, which is 18% in commission income and 19% in interest income. There are a few important initiatives that has to be mentioned in our digital part of the organization, we have created in the very beginning of this year, user experience and service design competence center, which will be focused on creation of best-in-class user experience, first of all, for our digital product and services and growth hacking of existing ecosystem projects. In the beginning of 2021, we have also created dedicated data science unit, which will bring data insights to our Data Factory program and other business and operations initiatives. And last but not least, we have started this year, very important project, Halyk Academy with the several major IT universities in Kazakhstan focused on preparation of dedicated IT specialists. Based on Halyk Bank technology stack. This will, we believe, will help us to minimize the lack of digital talent on Kazakhstan market that we are facing right now and a right pipeline of IT candidates for our digital transformation program. Let me pass the word to Zhumabek Mamutov, our retail head.

[Foreign Language] Thank you, Anton. Retail business, on key directions of retail, as of January 1, 2021. As a result of hard work we have obtained some high performance of customer-based growth of -- for active retail clients. Product-wise, I'd like to note the positive performance in 2020 in all directions. Lending, we have grown by more than 24% in the year, averaged TZK 1.3 trillion for the group. Speaking for Kazakhstan, our share in the retail portfolio has grown significantly at 16.1% to 18% as of the end of year. So 1.5% growth at the end of the year despite all the restrictions and headwinds of 2020. For the natural person's deposit base, growth of almost 14% for active cards. We have also seen active growth by plus 7% in a year. I'd like to specifically speak of our results for digital direction to show the growth of retail in 2020 as the whole strategy is built around digitalization of the ecosystem for product and services for our customers, making banking available online. And of course, we worked very actively on coming up with new online and digital products. As Anton mentioned, we see active users to 2.6 million active users per months. So the growth at 2.2x on a year. We're very happy that our work for continuous improvement of the service was not left without attention of the customer base. Next slide, please. Here, I'd like to speak that we remain the largest player for settlements, payments and other kinds of transactions as a result, in 2020, the volume of transactions stood at TZK 24 trillion. So in the year, we have achieved a growth of [indiscernible] 200%, continuing to increase our product lineup also teaching our customers to use our online service and the cashless transaction, we see the growth of cashless transactions by 52% of the overall volume. Next slide, really I spoke on how to focus on digitalization of our products and services. On this slide, I'd like to speak in more detail of our new product solutions that was launched online. Installment online, online cash loans, online deposits, digital cards and online finance. It's novelty launched this year in Kazakhstan. While launching our products online and building a proper customer path will be, first of all, looking at convenience and promptness of use, starting with digital cards that fully repeats the service of the digital card, where they have not all the payment settlements, transfers and cash withdrawal from our ATMs without a card. So without physical plastic, they can place an order for digital cards, get them in our outlets, or use them without the plastic card without paper. A separate product is online refinance. It's a new product launched in Kazakhstan, and we see the high demand for this product. Speaking of additional services and service launch as part of our ecosystem, Anton had already mentioned many products. I would like to simply add that we have took online product of Halyk app, we're speaking of our loyalty program that includes over 22,000 partners throughout Kazakhstan. Halyk Info, Halyk tour as separate marketplace. Letting our customers buy travel online and of course, Halyk market, of which Anton spoke and I'll be elaborating on that on my next slide. On top of these products and services, of course, we're developing our channels, actively developing cooperation with major retailers and further developing partnerships. And we can say we're now -- work with the overall customer traffic, also self-service channels in 2020, card issuance machines with identification of customers, which lets our customers to issue cards on their own, and we have great plans for developing the functionality of such devices. Next slide, please. Now a few more details of credit growth in retail in Kazakhstan despite the situation, we're growing very confident. We have great potential for further growth. Despite the lockdown in 2020, we have achieved comparing year-on-year to 2019, we've seen growth of 5% in sales, which speaks of the increased efficiency of our retail sales channels. Now comparing our performance, with the reduction of lockdown, we're growing 40%, speaking of loan products. Given our potential and I'm referring to the potential for products that have become available in the second half of the previous year and at the end, we see a potential for growth of 30% more. So reaching the level of TZK 900 billion for the year 2021. The growth drivers for sales is our online retail products. 50% of sales are planned -- of growth, excuse me, not of sales but 50% growth was planned through development of online lending. Speaking generally, we plan to sell online over 65% of the overall loans in 2021. Next slide, please. As on this slide, you can see in more detail information regarding lending. Of course, retail helps us capture new customer base and customer retention also through the use of services from competition. Well, we had just 3 partners for these services. Now their number has grown significantly. Additionally, we have reached out for the segment of airline tickets with our partner, FlyArystan, and we plan in the course of 2021 to actively increase the number of partners in our ecosystem. Now installment loans have reached 8.2% of all sales as of December '20, and we plan to increase online installment to 15% of all sales. Speaking in numbers in 2020, 34% of loans were written online. In 2021, we plan to increase this to 50% of installment loans in overall sales. Now Halyk Market 1.0 last year launched in the format, which, at the time of the first release included 19 partners available in 22 cities of the country and almost 19,000 unique products with all the payment methods available with installment, loan or card payments with our mobile app Homebank. The main goal for 2021 is the increase in the number of our partners in Halyk market, which should lead to a significant increase of the lineup of products in different categories. And we will also actively work on our platform in the following direction with high level of sustainability with high loads and resilience. We'll also work on functional keys to improve the convenience for our customers, and we plan to reach 15% share by the year-end 2021 through the structure of online sales. So we don't plan to we -- but we will continue further advancing our solutions with their further improvement. And in conclusion, I'd like to speak of key priorities in retail business development for the year 2021 for the development of sales channels, the main initiative for us is in launch of the service model called PHYGITAL for products and process. We shall continue digitalizing all our process and products available for natural persons. Speaking of Homebank, we shall be introducing all services online to -- so that 100% needs would -- for our customers will be covered online. For the advanced client analytics which Anton spoke before, we're actively working on implementation of advanced models for customer expectation. Models for the ecosystem, we're moving to the new format, which will be provided in our mobile app. And of course, customer loyalty programs. We're actively working on improving loyalty with a series of initiatives planned, which will increase loyalty and daily active users to reach up to 4 million a month, 65% of online sales of all loans. The share of online deposits to reach 30% and more. Share of non-cash part payments of no less than 60% at this year. Thanks, I'd like to give the floor now to Murat Koshenov.

Thank you, Zhumabek. Despite challenging market conditions, 2020 was another year when we enhanced our market leadership in corporate and SME segment. We further increased our SME client base by 15% to 337,000, improved our penetration among largest corporates in Kazakhstan to 79%. Due to pandemic, in institutional banking sector, the credit market as a whole was stagnant, as you can see. At the same time, given superior funding and capital position, Halyk Bank managed to show robust growth due to demand from our clients with strong credit profile as well was due to refinancing of selective companies from other financial institutions. Online bank is a powerful platform for our SME and corporate customers. We continue to develop its functionality. Last year alone, we added following services to online bank sites such as online clients onboarding and online loans to individual entrepreneurs. SWIFT GPI, transfers from card to current accounts via online bank. And we are the first bank on the market to launch online issuance of corporate cards with delivery. We see strong increase in number of corporate internal banking clients, which increased by 63% within the last 2 years. The service of online opening of accounts to individual entrepreneurs launched in 2020 is a strong catalyst for our client base increase. Increasing the number of clients and enhanced functionality were the drivers of strong increase in number and volume of online bank payments throughout the year. On a consolidated basis, the aggregate credit portfolio for our corporate and SME clients increased by solid 13%. Portfolio remains quite diversified by industries, as you may see. Despite challenging market conditions, we not only retained good asset quality, but also managed to reduce NPL ratio for corporate loans, mostly due to completion of a account process for large ticket problem corporate loans. We also continued developing new services and digital initiatives to further strengthen our value proposition for our corporate and SME clients. Now let's speak more in detail about large corporate segments alone of Halyk Bank. Despite already high market share, we increased the number of gross by 13%, and amount of gross loan portfolio by more than 8% on unconsolidated basis only. We continue with our cross-sell efforts to existing client base. Number of bank products per clients increased to 2.89 and for borrowers, the number of banking products per client exceeds 5. Our strong market leadership in large corporate segment is confirmed by Best Corporate and Investment Bank -- Kazakhstan 2020 award from Asiamoney, which we have received the second year in a row. On consolidated gross basis, large corporate loan book increased by more than 10% in 2020. Gross interest increased -- gross interest reached KZT 255 billion. NPL coverage is standing at very comfortable 350% level. Now let me give the floor to Dauren Sartayev, our Head of SME Banking.

[Foreign Language] Hello, everyone, we are really proud with our business results, business outcomes of the complicated 2020 while working with our SME customers. The growth of portfolio totaled 24%, but the number of borrowers has become even bigger, and increased by 32%. This was due to the implementation of our digital initiatives. There was a 46% growth of the account balances of our SME customers, which was basically predicted by our operational model, our credit ratings and the better service network. Next slide, please. Loan issuance in terms of the amount of loans we've been better versus in 2019, 5.7%. In almost third and fourth quarter also we produced more than 2019. The second quarter because of the lockdown was a little bit worse versus in 2019. But in general, in terms of volumes, we've been better. The number of loans, the numbers are even greater. Well, this is due to a very large number of loans for micro business loans in the number of new loans were increased by 20.2%, 45% of which have been digital. Plus another figure, which I'm really proud of, 83% of loans issued to micro businesses, individual entrepreneurs, these were digital. Next slide. Well, here on this slide, I would like to show you that the background of the growth of our loan portfolio. SME is getting better, meaning it's improved in quality and the level of NPL has gone down to 7.8%. Speaking about the industries in general. Traditionally, SMEs represented in trade. But last year was the special one and agriculture grew up to 13% in loan portfolio. Next slide. Well, our unique digital product for the online onboarding for individual entrepreneurs, increased our results 4x in terms of the influx of the new customers. Prior to its implementation would open 6,000 new accounts per month. Right now, this figure is 23,000 new accounts per month for individual entrepreneurs for onboarding. Plus we're setting some serious plans for 2021 in terms of the number of the borrowers, individual entrepreneurs, we're planning to grow by 44.6%. And the loan portfolio, we are planning to increase it by 30%. And you can see there is a great share of online transactions. After the hard 2020, we are planning to increase the revenue streams from our transactional SME customers by 20%. Next slide, our priority of working in 2021. We divided this into 3 main areas. This is continuing with our development of digital product space, lending and onboarding for individual entrepreneurs, also in terms of lending, we are planning to be a bit more active in our digital lending channels, specifically investing more into digital marketing. Also this year, we're planning to invest in investment loans for individual entrepreneurs. In terms of onboarding, we are planning to launch a lot of models of flexible subscriptions for individual entrepreneurs, depending on their specific needs, and we'll also continue working to improve the client's path, integrating Homebank and other facilities together for individual natural persons in individual entrepreneurs, plus digital factory -- Data Factory will ensure the 14% growth of our transactional revenues.

This completes our presentation. Thank you very much for your attention. And now we would like to open the floor for your questions, please.

[Operator Instructions]

Yes. Elena Tsareva of BCS Global Market. Thank you very much for detailed presentation and congratulation with great results and interesting target for 2021. My first question is about your 2021 guidance on loans. Loan growth, especially in corporate. I think 40% is quite massive interesting target. So where do you feel this huge demand is coming from in corporate segment? And also, fee and commission, 25% growth, which is like after 2 years of the subdued dynamics looks also very firm. So if you just guide by what source of like this growth are in terms of maybe different direction of business. This will be my first question.

Elena, thank you very much for your question. Yes, regarding the guidance for credit growth, as you can see, we divided it into retail loan growth and corporate and SME. So the 14% increase for corporate and SME. It includes not only large corporate but also SME segments. So one of the drivers might be the digital online loans, which we are providing to small businesses. And we continue to grow in the corporate and medium businesses. It's quite diverse demand which we are seeing. Actually, we have a quite strong pipeline. The number of loans also, which also include the investment loans, which have been already approved, and it's been installed. So we would see the drawdowns under these loans. Another growth might be coming also from our subsidiary in Uzbekistan, like the contribution of Uzbekistan. In last year, growth of portfolio was below 5%. And I expect this year, it would contribute close to 10%. So that is the additional source of growth, which we will start seeing this year as well. Regarding your second question on fees and commission income, as we mentioned, as you can see on this slide. We think that one of the biggest drivers would be developing -- further developing our digital ecosystem products, which was extensively covered during our presentation. And also by now, pay later loans, the development of our -- as a partnership with our key partners.

And just a follow-up onto this question on guidance. So your expectations of margin of around 5%. Does it mean that you don't affect -- do not expect this negative implications from allocating funds into lower yield in the fixed deposits. So you target high growth of lending, which is effectively higher margin.

Yes. Last year, particularly, you saw that net interest margin was affected by the shift of a certain part of our assets from high-yielding TZK instruments and low-yielding dollar instruments. We, as mentioned during our previous calls, we're tackling the situation. And so we think that's the activities which we've done -- which we were doing on the growth of loan portfolio, particularly the growth of loans to small businesses to retail customers, which has a high-yield compared to the rest of the portfolio on one hand, as well as repayments and prepayments of Eurobonds. This all would help to bring our net interest margin back to the level which we think is more appropriate given the mix of our balance sheet.

The next question is coming from Simon Nellis.

Thanks very much for the presentation. There are not many banks showing earnings growth this past year for paying dividends, so well done there. I guess the first question is on dividends. Given that earnings have gone up, can we expect the dividend to increase as well, if you could comment on that? That would be my first question. My second question would just be on asset quality. Maybe you could elaborate on why it improved so much in the fourth quarter. Although I see that Stage 2 loans actually continue to rise, one of the risks that you see migration from Stage 2 into Stage 3. And what are you expecting that's in your 70 basis points risk cost guidance? And then last, just on fees, I guess, a two-part question. Firstly, my understanding is that the increase of buy now pay later, you start seeing a lot more fee income rather than net interest income. So what portion of fee income is expected to be kind of more related to the buy now pay later lending activity versus kind of traditional fee sources? And then just a specific question on the competitive environment for acquiring. I think you're a leader there. I know KASE has rolled out this QR code-based acquiring system at a much cheaper cost than what I think is prevalent on the market. Do you think that could lead you to reduce pricing in acquiring?

Thank you, Simon, quite a number of good questions. It's okay. So if you're okay, I will start answering some questions. And I will keep probably answering dividend payout for a bit later during this call. Our CEO has just stepped out for a moment and when she will be back, I think I will get some of her comments -- yes, forget the response on this question. So your second question was regarding the asset quality. And what was the main drivers behind the improved in our asset quality reduction in NPLs and stages. As you probably know, we have increased our stages and NPLs at the time we merged with Kazakhstan Bank, and that was happened in 2017. And normally, it took a number of years until you will go through all the stages of the workout process. And part of the large corporate tickets problem loans, which we managed to successfully complete the workout was related to that particular transaction. Some of them were historic loans of Halyk Bank. But for which the process also were lasting for quite a number of time. What was surprising for us last year was how the demand for certain assets remains in the country, irrespective of the pandemic and lockdowns, which we witnessed. So for example, on this slide, you also see that our subsidies, SPVs, which are dedicated for working out the problem loans, they also see quite good dynamics in terms of disposal of assets. So it's almost 25% of reduction. And again, this is in respect of the fact that during certain months, most of the business on selling assets were paralyzed because the regulatory authorities was not working. The clients were restricted in terms of moving around the cities and among the regions. So from that perspective, the demand which we see on certain assets, including for quite illiquid ones, like, for example, land lots remained quite robust and was helpful. So the main answer is here that a number of loans, which we managed to work out, they had kind of a bit legacy type of nature. Yes. The next question, I'm not quite sure that we get it clearly. You were saying your question was on -- buy now pay later type of loan. Could you please a bit elaborate?

Yes, I guess the question is, my understanding is that you're showing a lot more -- you're recognizing a lot more loan-related fees now because of this product versus the past. And is that the main driver of the rapid growth in fee income that you're projecting? Or are you also looking for a nice pickup in the other more traditional fee income sources, which I guess are payments and cards?

Yes. I will ask Viktor Skryl, our Finance Director, to respond to this question.

Hello, Simon. Yes, we expect that contribution from that source of product would be around 13% to net income -- sorry, to net fee and commission.

13% in '20.

Around September. Yes.

Okay. That's very clear guidance. Okay. When the CEO's back, maybe you can touch on the last -- the dividend question later on.

Yes, yes. Yes, Simon. Yes. Umut Shayakhmetova is with us. So I'll repeat the question -- could you please repeat your question again?

Yes, the question is, very few banks have shown earnings growth and paid dividends, which you nicely have done. So well done there. Just question whether we could expect further dividend growth since your earnings grew in 2020 versus the 2019 dividend?

Yes. Yes, we, as Management Board, will recommend to the Board of Directors, which will take place on March 19 this week to pay out dividends this year. But as you know that shareholders' meeting will approve finally in the middle of April. So our recommendation would be to pay at least 60% of the net profit for the last year.

So the next question is from Andrew Keeley.

Great. Thank you. Yes, thanks very much for the call. And yes, congratulations on the results and outlook. I guess a couple of kind of slight follow-ups to previous questions. So just in terms of your asset quality, obviously, the cost of risk last year was a line that you comfortably beat your guidance. Through, it seems like more success in terms of working out problem loans than you perhaps initially expected. I'm just trying to understand whether you're kind of 0.7% guidance for this year. The extent to which that kind of includes how you see the kind of the pipeline of problem loan workouts playing out. Is there, again, the kind of potential that you could have a really nice kind of beat on that line in 2021? Or do you think given the kind of fact that you've probably worked through a lot of the kind of the big kind of ticket legacy problem loans, et cetera, the potential for kind of beating that guidance is perhaps more limited than we saw last year. So any kind of thoughts on that would be very helpful. And then a couple of other kind of questions. In terms of your fee income, I think, from what I can see, your deposit insurance fees were very, very low in the fourth quarter. And I think you referred to this in the presentation. Could you just give us a bit more color as to what kind of run rate we should expect for that going forward? Because that had a very big impact on your fee income in the fourth quarter. And then finally, just on Halyk market. Obviously, it's very early days, but do you have any kind of details or targets for the kind of GMV through Halyk market, and any kind of color on kind of take rate there? And then perhaps just how the credit finance is split between online cash loans and kind of buy now pay later?

Andrew, thank you very much for your questions. Let us answer one by one. On your question regarding the cost of risk guidance, and asset quality, I would like to ask Almas Makhanov, our Chief Risk Officer, to provide the response.

Yes. Hello, Andrew. As you see, we guide our cost of risk for the next year for 2021 at the level of previous years. If you look at 2019, cost of risk was around 0.7%. And historically, we've been around that level. So like Murat mentioned, today, the one-off impact of 2020 was due to continuous work that was done on legacy portfolio that we acquired from KKB. And this portfolio is somewhat decreasing. If you look at Stage 3 loans, you can see that the Stage 3 loans decreased significantly. So there's still room to recover those legacy loans. But in terms of focus for 2021, we should be probably looking at previous track record, specifically in 2019 and previous years.

Can you just also clarify, do you have any kind of macro provisions that you added from kind of COVID impact, et cetera, that are yet to be released and that could be released this year? And if so, what size of it?

Yes. We've -- actually, we've front-loaded reserves back in first quarter of last year, if you recall, to account for possible changes due to COVID situation. And through the time, we see that after the payment holders have ended, we see that actual payment discipline on retail and SME clients. So we've already adjusted our models in the third quarter of 2020. So going forward, we do not expect any significant changes to the models. So no possible big impact from reversals.

Andrew, I think you also had a question on our fees and commission dynamics. As far as I remember. So I'll ask Viktor Skryl to comment on this.

Yes. With respect to your question of what run rate we should expect with respect to deposit insurance fees. We expect that it would be lower by around 30% in 2021 compared to 2020.

And I think your third question was on Halyk Market. Do we have set any formal plans for this year? So I'll ask Zhumabek Mamutov, our Head of Retail Banking to provide response.

[Foreign Language]

[Interpreted] Thank you, Murat. Yes, in 2021, we're more focused on opening up a product segment. That is the main direction for this year as we need to work really strongly with the product lineup for all the needed categories, for our customers. So it will be there actively working starting partnerships with our customer for a major businesses SMEs and the corporate segment and also in like new partners from the market to our new platform. We plan to reach the level 100,000 [indiscernible] to have the minimum required based on that next year, 2022, we make some ambitious targets on GME. And also, a separate mainstream as part of our Halyk market development is the development of the platform itself, as it was launched just in December 2020. We need to continue working on the improving resilience of our platform and prepare for robust growth. That would be our focus for 2021 when it comes to Halyk market specifically.

The next question is coming from Tunde Ojo.

Sorry, I was on mute, sorry about that. Thanks for the presentation and congratulations on a very good result. Just a couple of clarifying points from me. On Slide 17, when you talked about asset quality, just wanted to clarify data point there. So if you look at the slide on the bottom right-hand side, on the debt payment holiday, that number for retail and SME, which is 13.6% and 21%, is that a percentage of gross loans? Or is that a percentage of loans in that particular segment? So just wanted to understand how it's going to prep those data points there.

Yes. So that is the percentage of a particular segment. So 21.3% of SME portfolio and 13.6% of retail portfolio.

And the other -- and the one below that are also interpreted in that way, right?

Yes, yes.

Okay. The other question I have is on your data factory that you mentioned. I mean I was quite intrigued about what you've done on the digital side in the very short period of time and the results you've achieved. But can you talk a little bit more about the initiatives you're actually making on the digital data factory? I understand it on the gross level is a big data, but you have huge amount of expectation in terms of contributions to operating income. And I just wanted to understand what exactly are you doing, I mean, as much as you can share. And also, more importantly, how you're handling cybersecurity risk going forward, given how much of your transactions are moving towards digital front in the next couple of years?

Yes. Let me answer to this question. And let me give you a few, I would say, details on what we are doing for the data factory. Actually, we are bringing us, as I said in my speech, bringing the new stake of the technology to the bank, focusing the first wave of the use cases, the big data use cases that we have developed in the end of -- from the business case perspective, we developed last year. And the realization of these cases will be done this year and the beginning of 2022, as it has been said here. So the results will be achieved during the next 14 months. There is the focus of the first wave of the program. We are focusing on retail SME corporate clients, focusing mainly on the cross-sell and reducing churn activities, outbound any inbound company. Speaking about the retail, we are focusing on some retail, some real-time campaigns that we can run with our customers, again, inbound and outbound. And so the results have been calculated, as I said last year. So I believe and I'm sure these results will be achieved based on this new capabilities that we're bringing to the bank. In regards of cybersecurity, please clarify your question. So you want...

Yes. I just wanted to understand your approach to cybersecurity and how much comfort you have around that. I know you haven't had any incident, but just wondering which approach is there, especially given how the way more transactions doing more online loans, doing more like transactions. And how -- what kind of approach do you have towards mitigating that sort of risk in there going forward?

Clear cybersecurity, especially developing our digital agenda is one of our major priorities right now. We are growing this team and -- I mean, the cybersecurity team, injecting cyber, as it's been mentioned, so we are redeveloping the digital organization as well. So we are injecting cybersecurity officers into the -- our, I would say digital teams who is working on the specific and dedicated digital products. So this is one of the new things that we have started implementing during last year. Then there are a few initiatives regarding the implementation, there is a roadmap actually in the bank regarding the implementation of the certain dedicated IT systems. So we are exactly in the middle of the realization of this roadmap. Some of them will be implemented this year in order to reduce some risks that we see related to the digital transformation. We also have a few questions which we received through online Q&A. So let us pick up a few of them. The following questions are coming from [ Karim Sawabini ]. The first question is on the cost guidance, what drives the highest cost expectations of 2021?

Let me cover this question. We have several components for cost growth for 2021. The first one is increase in salaries of our employees. And the second component is increase in loyalty programming expenses for bonuses and some promotions, which are -- which would be driving also transactional activity of our clients. So there -- they would be benefiting also to revenue growth and transactional activity growth, which we already covered.

The second question from Karim was regarding the competitive landscape Uzbek expansion. Yes, as you probably know, we have our Uzbek strategic bank, which is operational since 2019. It is a universal bank. It starts opening branches, already 2 branches has been opened. So there are plans to open a few more branches this year. It is a bank which operates within corporate segment and -- which obviously include SME business as well as retail. And we are looking at business with our Uzbek customers, not only from the perspective of developing our subsidiaries in Uzbekistan, but also from the perspective of providing cross-border transactions from Kazakhstan, who supporting the trade operations of our Uzbekistan customers with our Kazakhstan clients, we're supporting the export of Kazakh companies in Uzbekistan. So the developing of Uzbekistan operations should be considered from 2 perspective, again, from further building our subsidiary, but also the supporting of trade flows and trade business and expansion of Kazakh businesses. And we see more and more development, which is happening in Uzbekistan. And we also see more and more interest of Kazakhstan companies to start operating in Uzbekistan or to increase trading with the Uzbek counterparts. From the landscape perspective, as you probably know, the banking sector is dominated by state-owned banks. There are a number of midsized local-owned companies. There are new banks, which is entering the market. So the market is probably still at early developing stage. So from that perspective, it's quite interesting for us to focus on it and bring the expertise into the market and as well as support, as I said, our clients, which are entering rapidly developing Uzbekistan market. Let us pick further questions. The next question is coming from [ Kiara Salini ], who is asking the question on the following. You guided to net income above KZT 400 billion in 2021. What can you share on your dividend payout in 2021? Well, we have a dividend payout policy, which says that we are paying -- our dividend payout ratio is between 50% and 100%. As our CEO, Umut Shayakhmetova, just mentioned the proposal from the management to the Board of Directors, and which still needs to be approved by the General Shareholders Meeting is to pay dividend, 6% of net income for 2020. And for 2021, the decision will be done, obviously, once we have completed 2021, and we have the full year results available. The next question is coming from [indiscernible]. And the question is regarding the growth of commission expenses higher than commission profit. What is the reason? And I will ask Viktor Skryl to provide response.

Thank you. The reason for that is that we have a share of other cards issued by other banks going through our acquiring network. And thus, on one side, we are gaining higher revenue. But on the other side, we are also paying some high commission for those transactions, which are leading to a lower margin on those types of operations. And thus, we have like some different trends in operating income and operating expense on the card transactions. But going forward, we expect that the combination will be increasing. The combination of our cards and other cards will be changing, which would be beneficially influencing our net fee and commission results from payment card.

The next question is coming from Svetlana Aslanova, VTB Capital. The question from Svetlana is on market share in retail and corporate loans in 2021 as well as deposit base performance. I would ask Zhumabek Mamutov to answer the question regarding dynamics of retail loans and deposits into 2021. And then I would ask Dauren Sartayev to respond on the corporate probably from more SME perspective.

[Foreign Language]

[Interpreted] Thank you for the question. Regarding the retail lending, naturally, focused on further on our share, the numbers that were shared today in the presentation show that we intend to further grow our market share for unsecured loans. Also, you can see growth in the need of population in secured lending. I will of course, be speaking more about mortgage, and we'll be very active developing in these directions. And of course, we'll continue being focused on retail lending for our retail business, generally. Now on the deposit base side, we plan to continue increasing our deposit base. Yes, we shall actively raise new customers. And we see for this year, growth of not less than 14%. We plan to reach these results. We plan to grow not only the balance of our customers, but also the deposit base, speaking of the overall number of customers that will use this product. Speaking of accounts, naturally, business growth will continue to be based on attracting new customers as well, not only improving our relations with the existing crit folio and customer base will continue growing. And this -- next year will be mostly raising it to the accounts. So we achieve -- we expect a positive growth with customers in this direction next year. So Dauren, I will pass it over to you.

[Foreign Language]

[Interpreted] Yes, speaking of lending to SMEs, we see growth points through penetration of credit products to our transaction base. We are the major transaction bank in the country with the large base of customers using our accounts in online banking. We see, not all are currently using our loan products. And well, with the major growth of lending to small and micro business was through penetration of lending through the transaction base. And we expect the same in the midsized business in the course of this coming year. Also, you see the balances are growing of our SME customers who plan to continue their growth through introduction of new underwriting with new products that have already been tested and show good performance and moderate customers to do more transactions through the bank. Thank you.

Thank you, Zhumabek and Dauren. The next question is coming from [ Ulle Adamson ] The question is the following. What is the -- the question is on the effective tax rate for 2021, that's you're assuming in your guidance.

Yes, we expect that it should be slightly higher compared to 2020 and be around 11%.

The next question is coming from Patrick [indiscernible] regarding the decline in risk-weighted assets in 2020 despite strong growth in loan book. How much of this risk-weighted assets decrease is related to temporary regulatory measures? With CET1 ratio at 24%, your return on equity guidance at 27% and 60% payout ratio, your CET1 will exit 2021 at mid- to high 20s. At what stage do you consider you capitalize utilization as excessive? Yes, there are obviously the impact from the regulatory measures. Probably I can speak the effects of temporary regulatory relief as an impact on CET1, it's around 1.7%. So probably the effect on risk-weighted assets. I don't have exact figure that probably it will be more or less of the same magnitude. Regarding the capitalization, yes, we do not have the formal guidance on capitalization. Typically, when we're making a decision on the dividend payout ratio, we're looking on a few factors, including the prospects of growth where we can profitably deploy our capital. As you can see, last year was quite good in terms of credit growth. We also have ambitious growth perspective for this year. So we think we have the ways where we can profitably deploy our capital. Another way, we also look at the current macroeconomic condition because we think that it is important to protect our credit ratings because these are the elements of our business model, which help us to secure a strong position in Kazakh banking sector and which supports our strong position in terms of funding costs. The next question is coming from [ Lyle Taylor ]. Though we can see the KASE is growing your payment network as a competitive threat, what strategic actions, competitive responses are you considering? Could you please allow one moment, please?

Yes. Let me answer to this question. Yes, this is one of the things that we have to, I would say, see on the market and that we have to compete. And there are a few actions that we have already taken in order to answer to this strategic challenge. One of the answer is the tap-to-phone solution that we have launched last year, which is developing quite good and demonstrating the good numbers where we have the -- I would say, the commission and fees rate that -- the fees rate, which is comparable with what KASE is providing. And the numbers that we are demonstrating with this solution are quite good. Plus, we are working on a few different strategic answers, technological and not technological in order to respond.

Thank you, Anton. We have another question from Tunde.

Sorry. Thank you. Yes. So just a follow-up for me is on your strong growth on the loan book in 2020, which as you rightly laid out in the presentation, you gained market share. I'm just wondering, as we move forward into 2021 and even years ahead, right, what kind of industry group rate, are you sort of estimating for 2021, given you're expecting to grow at least 16% in aggregate? Do you expect to continue gaining market share despite be the largest player in the market? And if you can please sort of elaborate on what has been the source of the recent market share gains? Is it just -- are they small enough? Or is it because of digital initiatives and orders not doing it? Or are there any other things that you could have pointed to the reason for your increase in source of competitive advantage?

Tunde, thank you very much for your question. I think the tendency, which we saw in 2020 would continue in 2021. When we talk about the sources of growth, it's, I think, coming from different sources. One thing is, of course, our strong client base because we deal with strong clients which are leaders in their respective sectors, leaders in their respective regions. They also took the advantage of current situation in order to further strengthen their position. And that's why we were able to support the strong customers with providing financing, both on working capital, which is on setting the financing for their capital expansion. Another source of growth is the refinancing from other financial institutions. It might be from other banks in Kazakhstan, and situation is still not good with all banks, and you probably know that there are some news on consolidation, some news which some banks were using the license. And that situation actually helped us to capitalize on our strong capital and funding position and to cherry pick on a very selective basis with customers. So typically, that happens when the station in the banking sector or with certain bank, I would say, is shaking or we have the situation like in last year. Typically, this is at the time when we try to further strengthen our position, both on retail and corporate as well as the SME customers. And I think another layer of growth, which I think is probably relatively new, which we witnessed last year is a small business. And so we see that a big number of small customers, which were not traditionally funding themselves from the bank because they are considering other procedures are quite difficult, and the perception was that taking the loan from bank is a very difficult task, and on one hand. On another hand, because the cash flows in the economy was quite high. The banks were also considering these customers is quite risky. And as Dauren was mentioning in our presentation, we launched innovative digital loan proposition for our small and micro clients, we call them individual entrepreneurs, which have a very comprehensive, the risk -- digital solution behind that. And so we see increased number of noncash payments in the economy, which makes these customers more transparency to the banks. And online decision-making is making this loans taken from the bank is much more easy and affordable for these type of customers. So we think that last year, we opened another target client segments. And we think this is another way how we look into the credit growth and create demands into 2021. Yes. Another question is coming from Ruchir Desai. What will your bank branch strategy looks like going forward? We will look to reduce the number of bank branches as your digital business increases.

[Foreign Language]

[Interpreted] Thank you. Speaking our brand strategy in the bank. Like I said previously, within our larger initiatives, the growth of whole service channels for customers. Well, right now, we are focusing our work on this project that's called digital format, digital. Basically presumes the transformation of our service models. It's now being more oriented on training our customers and digital services rather than issuing simple products, dispersing simple products. So the -- and training customers and the digital services will probably take more and more. So that we could basically move to a brand-new format that will enable us to actually reduce the number of physical branches, physical outlets, reducing the number of physical branches. This is simply an inevitable [indiscernible], let's say, uses. We see the trend, we see the behavior of our customers, the needs and demands of our customers. So we're getting prepared for this, and we will do this right. We do this right, first of all, by changing our operational procedures and changing our service model. Thank you. This is it.

Dear all, for the time being, there are no more hands and no more new questions in the chat. So is there are any final remarks?

Yes, dear, ladies and gentlemen, thank you very much for participating in our annual results call today. and as usual, our IR team remains open for any further questions or comments. Take care. Stay safe. Thank you very much. Bye.

Thank you very much.