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

Dear all, we are ready to kick off Halyk Bank First Quarter 2021 Results Call. The session will start with presentation by the management and will be followed by Q&A session. Please note that the call is being recorded. I'm now passing the word to Halyk Bank team.

Good evening, ladies and gentlemen. Welcome to Halyk Bank conference call and presentation on financial results for the first quarter of 2021. Participants to today's call from 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; Mr. Almas Makhanov, Chief Risk Officer; Mira Kassenova, Head of FI and IR; and myself, Margulan Tanirtayev, from IR team. Now let me start with overview of Halyk Group consolidated financial results for the first quarter of 2021. During the first quarter of 2021, the bank generated KZT 96.8 billion of net income. The increase by 19.4% compared to first quarter of 2020 was due to increase in net insurance income, net fee and commission income and decrease in credit loss expense. In first quarter of 2021, we demonstrated 25.1% return on average equity and 3.8% return on assets. Next slide, please. Total assets remain unchanged versus the year-end of 2020, despite the decrease in debt securities, which was partially offset by increase in amounts due to customers. Customer deposits increased by 2% versus the year-end of 2020 due to fund inflow from the bank's clients. Next slide, please. Interest expense for the first quarter of 2021 increased by 14.4% versus first quarter of 2020, mainly due to the increase of average balance and share of KZT deposits in the amounts due to customers and due to accelerated amortization of discount on bank's Eurobonds in the amount of KZT 5 billion to its full prepayment on 1st of March 2021. Interest income for the first quarter of 2021 increased by 8% versus first quarter of 2020, mainly due to increase in average balances of loans to customers. Net interest margin decreased to 4.7% per annum for first quarter of 2021 compared to 5.3% for first quarter of 2020, mainly due to transfers in placement from high-yielding NBRK notes into low-yielding FX deposit with NBRK following the repayment of swap agreement and due to accelerated amortization of discount on bank's Eurobonds in the amount of KZT 5 billion due to its full prepayment on the 1st March of 2021. Excluding the effect of accelerated amortization of discount on bank's Eurobonds, net interest margin increased to 4.9% per annum for first quarter of 2021 compared to 4.7% in the fourth quarter of 2020, mainly due to timely and full redemption of the bank Eurobonds on 28th of January, 2021. Next slide, please. Compared to the first quarter of 2020, our gross fee and commission income increased by 9.4% as a result of growing volumes of transactional banking, mainly in plastic card operations as well as bank transfer settlements. The increase in fees derived from bank transfer settlements for the first quarter of 2021 by 33.8% versus the first quarter of 2020 was mainly due to increase in merchant fees as a result of growing volume of online installment loans issued. The decrease in fee and commission expense year-on-year was mainly due to 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, partially offset by the increase in payment card expenses as a result of increased number of transactions of other bank cards in the acquiring network of the bank. Next slide, please. Operating expenses for the first quarter of 2021 increased by 7.3% versus first quarter of 2020, mainly due to the indexation of salaries and other employee benefits starting from the 1st March of 2021. The bank's cost-to-income ratio increased to 24.4% compared to 23.8% for first quarter of 2020 due to higher operating expenses for the first quarter of 2021. Next slide, please. On the balance sheet compared with the year-end of 2020, loans to customers increased by 0.8% on a gross basis and 0.8% on a net basis, while corporate loans decreased by 1.2% on a gross basis, and SME and retail loans increased by 2.7% and 3.8% on a gross basis perspective. Next slide, please. 90 day NPL ratio increased to 4.4% from 4.1% as at the end of 2020, mainly due to migration of previously impaired corporate loans to NPL. The 90-day NPL coverage ratio decreased to 185.6%. The provisioning rate increased to 7.9%. Cost of risk for the first quarter of 2021 was at 0.4% reflecting normalization of post-COVID performance along with repayments of problem loans. Next slide, please. At the end of the first quarter of 2021, Stage 3 ratio remained almost flat at 12.2%. We are additionally showing here how well the workout of problem loans collateral was done by the bank's SPVs during the first quarter of 2021. Next slide, please. On liability side, the corporate and retail deposits increased by 1.1% and 3.0%, respectively, compared to the year-end of 2020 due to fund inflow from the bank's clients. As at the end of the first quarter of 2021, the share of corporate KZT deposits in total corporate deposits was 56.6% compared to 59.9% as at the year-end of 2020, whereas the share of retail KZT deposits in total retail deposits was 47.5% compared to 45.9% as at the year-end of 2020. Next slide, please. Compared to the year-end of 2020, total equity increased by 6% as a result of net profit earned by the bank during the first quarter of [Audio Gap] continues to have significant capital buffers with CET1 and total capital adequacy ratio standing at 24.6% and 25.8% as of the end of the first quarter of 2021. Now I would like to hand over to Mr. Viktor Skryl, Financial Director, Financing Subsidiaries.

Hello, everyone. We would like to start with a digital update. We see strong growth in customer engagement within our core online platforms, Halyk App and Onlinebank. The number of monthly active users of Halyk App has increased by 131% year-over-year, reaching 3 million in first quarter 2021. At the same time, the customer activity has increased significantly. We aim to reach 4 million monthly active users by end of this year, integrating our ecosystem services seamlessly into Halyk App as well as adding access to government services and introducing new products and services, such as online auto loans. We have further developed our legal entities' Internet banking platform, Onlinebank, with a new set of functionalities, including InApp mobile POS terminal, online corporate card issuance, international transfers and payments, amongst others. Number of Onlinebank clients reached 233,000 in first quarter 2021, increasing by 35% year-over-year. On the next slide, we present some KPIs outlining rapid migration of customers to our digital platform, supporting growth in credit and non-credit products for retail clients and businesses. Customer engagement through digital channels has been growing rapidly as we now issue over 57% of retail loans digitally, while 47% of payment transactions are cashless and 27% of retail deposits are opened online. We opened new relationship with almost 10,000 business clients entirely via Onlinebank in first quarter 2021 alone. And we see strong growth in number of online transactions and digital loans issued to individual entrepreneurs. We have made a substantial progress in our retail ecosystem development. We have introduced a number of proprietary lifestyle and additional services for retail customers last year, all of which have been showing strong growth and high level of customer engagement. We see more than 3x growth in monthly written premiums within our online auto insurance platform since January 2021. Halyk.Travel, our search, compare and buy engine for air and railway tickets and hotel booking has been showing 8x growth in GMV since launch in third quarter 2020. We are building the largest ticket operator in Kazakhstan, Halyk Kino. We already reached over 19,000 customers at Halyk.Invest, an online brokerage platform we launched at the end of 2020. And we are well on track to reach year-end target of 30,000 new customers. Development of our marketplace platform, Halyk Market, remains a key priority for us in this year. We increased the number of partners to 47 as of March 2021 and now offer over 71,000 SKUs in 22 cities in Kazakhstan and focused to expand our footprint further. Halyk Market is fully integrated with Halyk App, and we are offering a full range of checkout options, be it buy now pay later installments, long-term loans or card payments. As a result, our marketplace GMV has been consistently growing and reached KZT 18.5 billion in first quarter 2021. Turning to retail segment. We would like to highlight solid performance across key dimensions. We see strong customer engagement, increasing digital footprint with our Halyk App and growing transactional activity. Transaction volume has increased 18.5% year-over-year. Retail loans and deposits have grown by more than 3% year-on-year, and our retail loan market share reached 18% as of first quarter 2021. We see growth in retail products penetration by 26% year-on-year. Despite the pandemic, we have shown a very robust growth in retail lending. Our retail loans portfolio in 1Q 2021 have increased by 3.8% compared to last year, where we achieved record high issuance volumes in March 2021. Despite the growth, our retail portfolio demonstrates good dynamics, where NPL ratio decreased by 0.4% in first quarter 2021. The growth has been primarily driven by digital sales, which reached 22% of total retail loans sales by volume. Partnerships with our open ecosystem provide access to new customer base and support higher customer engagement. We had just 3 retail partners a year ago, and now their number has grown significantly across various categories. Online installment loans issued by our ecosystem partners have shown 16x growth since the launch of the service last year, both by volume and total count and increased by 35% in 1Q 2021 compared to the fourth quarter of 2020. Our portfolio remains well diversified across industries. FX loans comprised only 29% of the loan book and are primarily issued to the borrowers with FX-linked income. Despite challenging market conditions, we maintained strong quality of corporate loan book. NPL ratio amounted to 2.7%, while we maintain conservative provisioning coverage of 268% as of end of first quarter 2021. Also, we have good dynamics in product penetration. Bank's products per client in first quarter this year was 3.08, while bank's products per borrower increased from 4.27 to 4.42. Onlinebank is a powerful platform for our SME and corporate customers, and we continue to develop its functionality. In first quarter this year, we added a number of services such as deposits payments by phone number and conversations available online via app. We were the first bank to launch issuance of digital corporate cards. Number of online transactions increased by 14% year-over-year, while volume of Onlinebank payments demonstrated growth at 12%. The convenient service of online account has been a strong catalyst for our client base growth as 60% of new clients were onboarded. Halyk Bank was awarded in the SME Banking Club's list of most innovative banks 2020 having #1 SME Banking Club ranking position. We are proud of the performance we achieved in SME banking recently supported by the implementation of our digital initiatives we mentioned previously. We currently have over 339,000 SME customers and continue to focus on offering combined range of daily banking and transactional services online to meet our clients' needs. The growth of SME loan portfolio amounted to 2.6% compared at year-end 2020, while the number of borrowers has become even bigger and increased by almost 71% year-over-year. At the end of first quarter 2020 (sic) [ 2021 ], we have 4.5% and 10.5% year-on-year growth in bank's products for medium-sized clients and small-sized entrepreneurs, respectively. While our loan portfolio is growing at attractive rates, asset quality has been also improving with the level of NPL decreasing to 7.6% as of the end of first quarter 2021. Traditionally, SMEs are represented by trade and services sector companies, which comprise half of the loan portfolio. More recently, we launched special lending programs for agriculture business with the segment already comprising 13% of the loan portfolio as of the end of this year. We currently issue over 84% of loans via online channels which has been the key driver of 26% year -- of year-on-year increase in loan issuance volumes, which we achieved in first quarter 2021. Our convenient, fully online onboarding supports strong influx of the new customers. In first quarter this year, we onboarded 63% of new clients combined. And this completes our presentation.

Dear, ladies and gentlemen. Now we would like to open the floor for your questions.

[Operator Instructions] We have one live question from Elena Tsareva.

Elena Tsareva from BCS. I have several questions. Firstly, on corporate loan dynamics first quarter, maybe some details over some subdued dynamics? And what do you expect compared to guidance for this year? Do you expect this to catch up to this 10% to 12% growth? And my second question is on cost of risk. So partially it was driven by some repayments. Could you please provide some details, maybe just what part of this cost of risk is attributed to repayments? And can we expect more going forward next quarters? And third question is, whether you can provide any update of regulation initiatives? Anything on what, like compared to Russia's recent initiatives in IRB approach for rate decrease or something about maybe unsecured lending regulation. Anything was updated recently, if any?

Elena, thank you for your questions. Let me answer them one by one. On the corporate book dynamics, yes, we were telling when we were reporting the full year results that we have a good pipeline. So we remain to have this good pipeline on the corporate loan book. So we think that it's just a temporary reduction, partially explained by seasonality, partially explained by some prepayments from some of corporate customers. But we think that having this strong pipeline, we would be quickly catching up with the growth, and we're confident in achieving the targets overall for corporate and SME, which to remind, we are seeing in the area of 14% for the full year. So from that perspective, we're still confident in achieving these figures. On the cost of risk side, this is -- in the end of last year, in the fourth quarter, as you know, there was negative cost of risk because of write-backs due to some workout initiatives. And now we are seeing the normalization of cost of risk, so we are in the process of normalizing that. So we have not seen anything in the first quarter, which, let's say, we can see that as a one-off in either direction. So it's -- we're in the process of normalization of cost of risk. And so on regulatory initiatives, I understood you were mentioning some initiatives of Russian Central Bank on cooling down the growth on the retail side. We have not seen recently any initiatives from Kazakhstan regulatory authorities on that side. In fact, a couple of years ago, there was some tightening to limits -- to somewhat limit the growth of retail book. Since then, there was no change. There are still some regulatory relaxations which were granted as a part of anti-COVID fighting package. Some of them has been returned. Some of them will be returned probably in stages. This is probably the only regulatory initiatives which might be coming -- which might potentially impact calculation of capital adequacy, but nothing more yet at this point of time.

The next question is coming from Andrew Keeley.

Yes, I have a couple of questions. One on your costs and your headcount. I mean, I see that there was, I think, a 4% drop in headcount in the first quarter. I'm just wondering if you can tell us what's -- kind of what drove that? And generally, what you see is the kind of outlook for your headcount, whether you'll be kind of cutting that further or need to be kind of taking on new staff, such as in kind of IT areas, et cetera? And can you also just clarify what the increase in salaries was? And whether that was kind of across the board for all staff? That's my first question, and then I'll ask another one in a minute.

Andrew, thank you for your question. In fact, actually, since the whole pandemic situation started, there were some limitations in terms of new hiring. So -- because there was some temporary freeze on onboarding new staff, but we have not laying staff who was working. So from that perspective, I think we didn't implement, let's say, the hard measures from that perspective. I would also like to mention that in some parts of the bank, actually, we were hiring. It's primarily the people who are focusing on business, people who are focusing on IT, on our digital initiatives. So in some parts of the bank, actually, we were actively hiring last year, and we continued to hire them. We, however, also reviewed salaries this year. This is the regular process. Normally, every 18 months or so, we're revising the salaries to adjust them to reflect some inflationary tendencies, but also to, let's say, to look -- from the HR market perspective. So that's -- that what also happens on the salary front, if you like.

Can you tell us roughly how much salaries increased by?

It's in the area of 15%. But again, it's not, let's say, the one figure for all. It's -- as I said, it's reflecting the market because different parts of the bank, it is quite the different corrections.

Okay. A question on your fee income. It was a little bit weaker, well, perhaps than I'd expected in the first quarter. Obviously, you're coming off a pretty low base from the first quarter last year. So the year-on-year growth still looked quite strong. And I guess there's some seasonality. I just wonder whether with that first quarter kind of fee income number, you're still comfortable with your 25% target for this year?

Yes, Andrew. We see this as more of seasonal effects, and our target for this year remains the same.

Okay. And just a question on your marketplace GMV. Could you clarify just what exactly is included in this inStore and mCommerce? So I'm just kind of interested that it's gone from well, virtually 0, KZT 1.4 billion a year ago to nearly KZT 19 billion in the first quarter. So I'm just trying to understand exactly what's kind of in there, would be helpful.

Let me come in here. This is Anton Musin speaking. So we have the KZT 400 million GMV as of now earned purely from our e-commerce marketplace, integrated into our SuperApp. The rest of the story of this is the -- consists of 2 pieces, the inStore and mCom revenues coming from our -- integration of our -- the mCom is the integration of our mobile app, Homebank, with our partners the -- across the country, where we're providing the pay now buy later and own products through this mobile application. So this is purely So this is a purely digital product that we are providing through this app. And inStore, this is the program that we organized in some of our partners, where we're providing same products, but inside of these stores using the same technology. So we are combining these revenues. And here, you see these results.

Okay. Can you tell us -- sorry, how many merchants you have, you're signed up with or working with on this inStore, mCommerce side?

Okay. I need help from Zhumabek. Zhumabek, if you can comment on inStore and mCom?

Yes, sure. It's about 21 partner as of now.

21. Okay.

But they're the biggest in Kazakhstan in electronic trading and other sector stores.

Yes, here, probably I can add to what Zhumabek has said. In some sense, in Kazakhstan because in some -- the most active markets, like, for example, on electronics market, there are quite a big number -- quite large players. So from that respect, it's probably irrelevant to look purely at the number of merchants. Because they can provide the widest range of SKUs. And I can also add that we are building the open ecosystem. So from that perspective, the GMV, which we are showing on this slide, it shows both the open and our proprietary market. So from that perspective, we are increasing the reach to our customer base. And we also increasing reach to new customers because some of the customers of our open market -- open ecosystem partners, they -- during the process of getting our buy now pay later loans also onboarded and became eventually customers of Halyk Bank as well.

Okay. And can you just clarify, I mean, how many merchant partners do you kind of expect to sign up maybe by the end of this year or over the next couple of years, yes, would just be helpful?

If you take this year as our target, we are looking up to 250 partners by end of this year on our Halyk Market platform.

Okay. But again, we are speaking about big and medium-sized companies, yes, first of all, as the first wave.

Just to clarify our aims, I would like to say that we are not going into the count of partners, I mean, the quantity of the partners. We are going -- we are running our strategy by inviting our partners on the market through SKUs that we would like to present to our customers. I mean, the main target is to provide to our marketplace customers more than 100 offers or, let's say, SKUs on the market that should be available.

More than 100,000?

Yes.

100,000, right.

Yes.

This is the main goal. And the drivers are, of course, the -- you know them, it's the partners that we would like to bring on our market platform.

Okay. And just a very quick final question. On your lending, I noticed that on the retail lending side, I think there was a quite strong contraction in the mortgages in the first quarter. Is that just a kind of seasonal thing? Or are you expecting that consumer lending will continue to be much stronger as a kind of retail loan growth driver than mortgages this year?

Yes. Andrew, do I understand correctly? The question is on the loan growth dynamic on the retail portfolio?

Yes, yes.

As you probably know, there have been introduction of possibility to extract pension withdrawals as a onetime initiative. So people are able to withdraw some excess pension savings in order to either repay their mortgages or probably to buy housing if they do not have the one. So from that perspective, we had some activity from our customers, and we see that there were some repayments -- excess repayments on mortgages, which were taken from that initiative. So this, to a certain extent, affected the growth dynamic on the retail portfolio. But irrespective of all that, you can also see that the dynamics of new loan issuance is quite strong. It's showing on the Slide 22. And the year-over-year basis, the new loan issuance in the first quarter this year actually was 35% up. And if you look within the first quarter, the -- during month of March, we had a historically high amount of new loan issuance. It's reached KZT 28 billion, which itself is 61% higher than the figure achieved in January of this year.

Okay. So you're comfortable with your guidance for retail lending growth this year?

Yes, absolutely.

We have another live question from Simon Nellis.

I was hoping you could give a little more color on the outlook for the net insurance results, which was growing nicely year-on-year and also the other operating income, the KZT 7.8 billion that you posted in the quarter. Was that, again, driven mostly by recoveries? And how is that looking going forward?

Simon, thank you for your question. Yes, our insurance business would be growing from its natural, like operations and also supported by inflow from retail operations of the bank. At this stage, we are not able to provide you like exact number, but it would be supported by these 2 factors.

But the result in the last several quarters, you've produced kind of between KZT 7 billion to KZT 8 billion. Is that kind of run rate likely to continue? Is that expected?

Yes. And yes, we think it will be even higher with the growth of retail loan portfolio.

And is that driven primarily by credit insurance? Or is it a mix of different things?

Yes, by mix, like by growth of retail business and also by -- it's like other insurance business, which we have like in general and life insurance.

And on the other income?

Yes. Other income will be supported by our other subsidiaries' operations and also some other bank's operations, like treasury, dealing about run rate. It will be probably the same as the results for the first quarter, but at this stage, we're not able to provide you with more precise guidance.

And can you disclose the recoveries that were included in that number for the first quarter, foreclosed assets.

One second, please.

Simon, if we go through other questions, and once we have the figure, we'll announce.

Yes, I have one last question, which is, maybe it's too early for this question, but what portion of your fee income is coming from buy now pay later and marketplace kind of take rates if there are such things.

There was KZT 1.1 billion expenses on other credit losses. So next to, let's say, cost of risk figure, the other expenses on reserves is KZT 1.1 billion.

Sorry, I'm not...

If I understood your question correctly?

No, I was asking what part of fee income...

Sorry, I didn't get your question. Could you please repeat it again?

Yes, the question was about contribution of buy now pay later loans to our net fee and commission income. And I can answer that. It's around KZT 1.7 billion for first quarter of 2020 -- 2021, sorry.

And are there any other fees you charge to merchants if you facilitate transactions on the marketplace? I guess it's mostly...

No.

I'm now passing the word to Murat Koshenov to take several questions that came through the chat.

Yes, there are a couple of questions, which we get through our online Q&A. So one question is coming from [ Fabian Guimann ]. And the question is as follows. There seems to be a strong focus on digital initiatives. I'm surprised that we do not see higher costs accompanying this. How should we think about cost-to-income ratio on a 3-year view in light of your digital initiatives? At this point of time, probably, we are not able to give you a 3-year guidance. But for full year, our guidance was cost of risk to be at the area of 27%. So it's somewhat higher than what we recorded in the first quarter. This is partially probably due to the fact that first quarter, normally, it's a low season. We already talked about that we actually were hiring. Despite some salary freezes in some parts of the bank, we are actively hiring people in IT area, people who are working on our digital initiatives, including ecosystems. We were adjusting salaries to the market, and you can assume that also with some focus on digital initiatives. So from that perspective, I think cost of risk would be growing, but still, we think that it will remain within 30% and specifically for this year, it's 27%. Another question we have from [ Beiji Guo ] and the question is as follows. Can you talk about your thinking on excess capital? What would prevent you from increasing dividend payout further, including special dividends? The capital ratio, which are showing here on this slide is actually not reflecting 2 things. One thing is actually our dividend payments. And to recap, we announced 60% dividend payout, and that would be happen in the second quarter. And we also didn't -- what potentially can impact the capital adequacy ratios is normalization of regulatory norms, which, as I mentioned before, was partially relaxed due to COVID situation. The level which we might expect from these 2 things is on the dividend payout is roughly 3%, slightly more percent impact. And on regulatory normalizations, if we assume that it will happen in 2 waves, the first wave might have impact of roughly 60 basis points. And the second would be roughly 80 to 90 basis points. So altogether, it's from 1% to 1.5% till the end of this year. So from that perspective, we would be -- if you take all these, let's say, things into account and applied it as a one-off as immediate impact, so that will give you probably in the area of 5 percentage points. So that would already bring capital adequacy ratio at the level of 20% or so. And also you have to recap our guidance on the growth of credit portfolio. So from that perspective, we think that capital adequacy is at the level which, on one hand, provides us sufficient comfort and also allowed us to improve our ratings, which was recently upgraded by Fitch to investment grade. At the same time, would allow us to fulfill our ambitions to grow business further. And we have one more question came to the system from Tunde Ojo. And the question is, why did market share fees declined in Q1? What is #1 bank doing that you didn't do? And is this because you haven't started charging merchant fees yet? We think that looking 1 quarter versus -- it's probably a bit difficult to give, let's say, the exact answer because I think you have to look at a bit longer horizon. In terms of the fees, we actually -- because we also introduced the buy now pay later type of loans, so we're also charging the merchant fees. So that is not obviously the reason. And because as we showed on one of our slides reflecting the Halyk Marketplace, the amount of financing, which we are doing to support GMV growth, our merchant fees is actually increasing. Tunde, did I answer your question?

I believe we may not hear the response now. There are no any live questions for the time being. So if there is anything else, someone else on the line who would like to raise hand and ask questions, please do that now.

Dear, ladies and gentlemen, this completes our conference call. Thank you very much for your participation. Our IR team is always open for your questions and communication. Goodbye.