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

Good evening, ladies and gentlemen. Welcome to Halyk Bank conference call on presentation of financial results for the 6 months of 2021. The session will start with the presentation by our team and will be followed up by a Q&A session. Please note that the call is being recorded. 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 Financial 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, our 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 half of -- and second quarter of 2021. During the first half, the bank generated KZT 225.4 billion of net income. The increase by 44.5% compared to the first half of the last year was due to the overall business growth across all segments and recovery of credit loss expense, which reflect the economy rebound and bank's leading position on the financial markets. In the first half of this year, we demonstrated 29.9% return on average equity and 4.3% return on assets. Next slide, please. Total assets of the group increased by 5.9% versus the end of first quarter of 2021 as a result of growth in amounts due to customers, both individuals and legal entities. Customer deposits increased by 7.5% versus the end of first quarter due to fund inflow from the bank's clients. Next slide, please. Interest expense for the first half of this year increased by 12.1% versus the first half of 2020 mainly due to the increase of average balance and share of KZT deposits in the amounts due to customers, which was partially offset by the decrease in interest expense on debt securities as a result of a redemption of bank's high-yielding euro bonds. Interest income for the first half of 2021 increased by 13.3% versus the first half of 2020 mainly due to increase in average balances of loans to customers. Net interest margin decreased to 5% per annum for the first half of 2021 compared to 5.2% per annum for the first half of 2020 mainly due to transfers in placement from high-yielding and BRK notes into low-yielding FX deposit within BRK following the repayment of swap agreement. Net interest margin decreased to 5.4% per annum for the second quarter of 2021 compared to 4.7% per annum for the first quarter of 2021 mainly due to improved structure of placement of interest-bearing liabilities into interest-earning assets and due to savings on coupon payments as a result of an early redemption of bank high-yielding Eurobonds. Net interest margin in the first quarter of 2021 was negatively affected by the accelerated amortization of discount in the amount of KZT 5 billion on bank's euro bonds due to its full prepayment in the first quarter of this year. Next slide, please. Compared to the first half of the last year, our gross fee and commission income increased by 17% as a result of growing volumes of transactional banking mainly in plastic card operations, bank transfer settlements and cash operations. The increase in fees derived from bank transfer settlements for the first half of this year by 36.4% versus the first half of the last year was mainly due to increase in merchant fees as a result of growing volume of online installment loans issued. The increase in fee and commission expense for the first half of 2021 by 4.8% versus the first half of 2020 was mainly due to the increase in payment card expenses as a result of growing volumes of transactional banking and noncash transactions, which was 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. Next slide, please. Operating expenses for the first half of this year increased by 12% versus the first half of the last year mainly due to the indexation of salaries and other employee benefits starting from the first March of this year, increase in charity expenses as a result of onetime contribution to charity funding and increase in IT investments. The bank's cost-to-income ratio decreased to 23.5% compared to 25.8% for the first half of 2020 due to higher operating income for the first half of this year. Next slide, please. On the balance sheet, compared with the end of the first quarter of 2021, loans to customers increased by 11.9% on a gross basis and 13.3% on a net basis, while corporate loans increased by 12.8% on a gross basis, and SME and retail loans increased by 7.3% and 13% on a gross basis, respectively. Next slide. 90-day plus NPL ratio decreased to 4% from 4.4%, and cost of risk decreased to minus 0.8% from 0.4% as at the end of the first quarter of 2021 mainly due to repayments of large ticket problem and previously impaired corporate loans. The provisioning rate decreased to 6.8%. The NPL 90-day plus coverage ratio was at 175.2%. Next slide. As at the end of the second quarter of 2021, Stage 3 ratio decreased to 10.4% from 12.2% as at the end of the first quarter of this year mainly due to repayments of large ticket problem and previously impaired corporate loans. We are additionally showing here how well the workout of problem loans collateral was done by the bank's SPVs during the first half of this year. Next slide, please. On liability side, the corporate and retail deposits increased by 5.8% and 9%, respectively, compared to the end of the first quarter of this year due to fund inflow from the bank's clients. As at end of the second quarter of this year, the share of corporate KZT deposits in total corporate deposits was 57.3% compared to 56.6% as at the end of the first quarter of this year, whereas the share of retail KZT deposits in total retail deposits was 49.2% compared to 47.5% as at the end of the first quarter of 2021. Next slide, please. Compared with the year-end 2020, total equity increased by 1.1% as a result of net profit earned by the bank during the first half of 2021, which was partially offset by the payment of dividends for 2020. The bank's capital adequacy ratio decreased as a result of risk-weighted asset growth by 11.1% versus the end of first quarter of 2021 and payment of dividends for 2020, with CET1 and total capital adequacy ratio standing at 21.1% and 22.1%. Next slide, please. Based on our 6-month financial results and following the revision of the overall business growth prospects, we have updated the outlook for the financial year of 2021. Retail net loan portfolio growth is expected to be in the area of 27%. Corporate and SME net loan portfolio growth is expected to be in the area of 19%. Total net loan portfolio growth is expected to be in the area of 21%. Growth of net fee and commission income is expected to be in the area of 29%. Cost of risk is expected to be in the area of 30 basis points. Consolidated net income is to be around KZT 450 billion. Return on average equity is to be in the area of 28%. Net interest margin outlook remains unchanged and we expect it to be in the area of 5%. Cost-to-income ratio also remains unchanged and expected to be in the area of 27%. Now I would like to hand over to Mira Kassenova, Head of FI and IR.

Good evening, everyone, and I would like to provide you with digital and business segment update. Customer engagement within our core online platforms, Homebank and online bank has continued to grow nicely into 2Q 2021. The number of monthly and daily executors of Homebank app, our key retail digital channel, has increased by 74% and 90% year-on-year, respectively. Monthly active users reached 3.3 million in 2Q 2021, and we are well on track to reach our 4 million target by 2021 year-end. We see a strong growth in our mobile platform for businesses Onlinebank bank app. Notably, a number of its monthly active users has increased by over 5x year-on-year. The app is ranked #1 within the respective category in Kazakhstan and is highly scored by both on Android and iOS users, reflecting seamless experience and service we offer to our clients. At the same time, the web platform of Onlinebank remained a key digital channel, where we see 37% growth in monthly active users. In the first 6 months, we launched majority of services and functions that were planned for 2021 within our platforms. This includes a number of innovative services, such as online loan refinance or easy car registration Homebank and PIN on Glass and Halyk POS within Onlinebank. Next slide, please. Web migration of customers to our digital platform supported strong growth in credit and noncredit products for retail clients and businesses. Online sales were the key driver of retail loan growth as we now issue over 55% of loan digitally, plus 20 percentage points year-on-year. For online retail deposit share, in spite of a flat, it will stay on the same level, but the number of online deposits has grown by 45%. We see continued shift to cashless transactions, and 52% of the retail bank loans were [indiscernible] by noncash card transactions include until this year a notable increase from 32% a year ago. For SME business, we are well on track with our annual plan, reaching 6,100 digit loans issued in the first half of 2021. We started new relationships with almost 20,000 business clients entirely via Onlinebank in the first half, and we see strong growth in online KZT payments number and volumes has grown by 40% and 33% year-on-year and Q2 2021, respectively. In Q3, we expect to increase online onboarding of new businesses with the launch of additional functionalities and benefit from seasonal ramp-up in online lending, supported by both standard products and state subsidized programs. Next slide, please. We see a substantial progress across our retail ecosystem verticals. Our premiums retail within our online auto insurance platform increased 5x year-on-year, while GMV of Halyk.Travel and Kino.kz has increased by 3x and 6x year-on-year, respectively. We'll almost hit the number of customers in Halyk Invest we targeted for 2021 as our investment platform expands swiftly. Development of our marketplace platform, Halyk Market remains a key priority for us. Our network expanded for 224 partners, offering over 88,000 SKUs nationwide as of 2021, and a focus to expand our footprint further. Halyk Market is fully integrated with Homebank app, and we offer a full range of checkout and financing options as well as additional features such as order tracking. Our marketplace GMV reached KZT 20.6 billion in 2Q 2021. At the same time, we are expanding our ecosystem, introducing new services in Homebank app, which are convenient for our clients and support high customization and cross-sell in our [indiscernible] app. For example, we launched Halyk remote refueling service, which enables our customers to easy to pay and be served at the gas station without getting out of the car. Next slide, please. Turning to retail segment, we would like to highlight solid performance across key dimensions. We see increase in digital footprint with our Homebank app and growing transactional activity. The transaction volumes have increased by 31% year-over-year, and we processed over KZT 14.6 trillion of transactions in the first half this year. More importantly, products per customer increased to 3 versus 2.5 years, reflecting strong customer engagement. Retail loans and deposits have shown strong growth of 17.3% and 12.5% year-to-date, and our market share by retail loans reached 18.2% as the first half 2021. Next slide. As mentioned, we have shown a very robust growth in retail lending. Notably, loan portfolio growth for the first half year of 2021 is more than 2x higher versus the first half 2020 dynamics. Our retail portfolio has grown by 16.6% on a standalone basis year-to-date, while the loan issuance volumes have increased by almost 2x year-on-year in the first half of this year. At the same time, asset quality has improved with retail NPL ratio, decreasing from 6.2% in Q1 to 5.5% in Q2, while we retain conservative provision levels. We see continuous demand for retail financing across products and continue to grow our monthly issuance of loans, reaching record high new loan disbursement in June 2021. The growth has been primarily driven by digital sales, which increased 10x year-on-year and reached 22% of total retail loans in the first half of 2021. Next slide, please. Corporate banking, our loan book has expanded by 12.8% Q-on-Q or 19.5% year-year in Q2 2021 as we increased financing almost for new and existing customers with the recovery of Kazakhstan economy. Corporate portfolio remains well diversified because industries now affected comprised 32% of the loan book and are primarily issued with the goals with FX-linked income. Corporate NPL ratio decreased to 2.5%, while we maintain conservative provisioning coverage of over 235% as of Q2 2021. This reflects solid asset quality and our prudent risk management. We got to see increase in cross sales, plus the strength in customer engagement, and borrowing transactional activity was 1,800 active corporate clients, 5.50 products per borrower and 169.7 monthly transactions per active transactor, plus 25% year-on-year. Next slide, please. We will continue to develop Onlinebank as a powerful platform for our SME and corporate customers. Over the last months, we added a number of services such as Halyk POS, PIN on glass, auto cash box and Apple Pay for legal entities. We also introduced simple tariff packages and online loans for individual entrepreneurs via app. Most of our customers are actively using Onlinebank either in app or via web interface. In fact, 99% of payments and transactions online, the [indiscernible] digital services has been a strong catalyst for our client base growth as 60% of new clients where onboarded online in the first half of 2021. Next slide, please. We are proud of the performance we achieved in SME banking recently, supported by the implementation of our digital initiatives, which we mentioned previously, regarding the health of our 353,000 SME customers and continue to focus on offering a wide range of daily banking and transactional services online to meet our clients' needs. As a result, a number of [indiscernible] has increased by 30% to almost 90,000. SME loan portfolio grew by 26%, while the number of borrowers has doubled year-on-year in the first half of 2021. The loan portfolio is well diversified within service trade, agriculture and other sectors and demonstrate healthy asset quality. The segment NPL ratio has decreased to 7.3% as of the end of the 2Q. Next slide, please. In the first half of 2021, we achieved 45% increase in loan -- issuance loans versus the first half of 2020. We continue our strong shift to digital, with 92% of loans to small deposits issued online. Our convenience for the online onboarding supports our interest of new customers. In the first half, we onboarded over 68% of new clients online. The number of small enterprise borrowers has increased by 70% year-to-date, with 58% share of digital loans, while the loan portfolio has grown by more than 20%.

Ladies and gentlemen, this completes our presentation. Now we would like to open the floor for your questions, please, and just a quick instruction. [Operator Instructions]

And the first question comes from Elena Tsareva.

And congratulations with the record results. I have several questions, so maybe the first one on your cost of risk guidance for this year. So it assumes that, more or less, you guide for second half of this year at 0.8 of the risk, more or less at this area, but was previously the guidance for the full year. So this is normalized cost of risk you see going forward for the next year as well. And if any guidance, like how all these big releases, maybe any expectations for another one-off provision release the same size or different size going forward? Just maybe some sectors you see can recover, some exposures or something else. That will be helpful. That will be my first question.

[Interpreted] Hello, this is Almas Makhanov. Yes, for the second half of the year, we expect cost of risk to come back to normal levels, so the guidance for entire year incorporates that. In terms of the 2022 and going forward, it's hard to provide any guidance because we see that the factors that impact the quality also come from a change in economy. But overall, you can see that for the years going forward, we will keep on track on -- based on our historical levels.

And on one-off provision releases, if any, understanding how sectors evolve, what's just any potential for big reversals going forward? In this one particular area that you cover stronger, you see some kind of exposures recovery for them.

[Interpreted] Yes. No specific areas that we see that might recover in big numbers. But as you know, we have been working on legacy portfolios that came from the purchase of KKB. So that legacy portfolio keeps decreasing. So I think going forward, we should see -- in terms of recoveries, we should see our normal numbers and -- namely -- maybe you should look at the agricultural sector that might recover and -- but no specific guidance for any specific sectors. Did I answer your question?

Yes. So just some quick. Follow-up. If any, like, understanding of the amount of this legacy portfolio from KKB, if you can disclose it.

[Interpreted] Yes. I think if you look at the NPL levels and Stage 3 levels, you could say that relatively half of that amount may be still attributed to legacy portfolio, but it's been decreasing and amortizing pretty well for the past 3 years. So it's about half of our Stage 3 loans.

Understood. The next question is on your capital position and actually upgraded guidance. So given that higher ROE and yet it's accompanied by stronger growth expectations, but still feels that like card is running -- CET1 ratio is running above what you guided for '21, '22 guidance on CMD above 70%. So if any idea or any guidance for possible payouts for this year given such a robust dynamics would be helpful.

Elena, this is Murat. Actually, yes, we upgraded guidance for return on average equity from 27% to 28%, which is also higher than the figure which we recorded for last year. But we're also upgrading the growth of our credit portfolio from -- net portfolio from 16% to 21%. So if you see, actually, the risk-weighted assets growth is also quite significant. It's probably a bit premature, as normally we are not discussing the exact dividend payout, which is normally a decision which is done in the first quarter of next year. By that time, probably, we again would be looking what are the prospects of growth, what the expected profitability of that growth would be, and also we'll be looking what the current capital position would be at that point of time. So far, probably it's a bit premature. But yes, we're upgrading both the return on equity, but also we're upgrading the guidance for growth as well.

Understood. And on digital ecosystem projects, if you can disclose what kind of investments you already did, you plan to do within midterm horizon, like percentage of equity in absolute terms would be helpful.

I think this is probably not a big figure from the capital position. So all -- so far, all the proprietary ecosystem investments, which are shown in our presentation on the Slide 19, is actually done organically through developing our own solutions. So I don't think that we'll be spending big in terms of the capital position. But definitely, we're determined to continue developing our ecosystem services going forward as well.

Understood. And just a quick follow-up, what we discussed on dividends about. So given like yet it's too early to say about next year growth in loans, but given that like this year growth was quite spectacular and typically what we see before. It was quite subdued on the corporate side. May we see the same strong demand? Of course, it will be from a higher base, but still can be the same strong demand next year. There is something structural shift in loan demand from corporate SMEs or maybe some ideas, what, in terms of growth expectations beyond this year.

Yes. Probably -- I will not give the specific figures, but probably, let's give me answer from directional perspective. So the growth, which we are seeing now is actually coming from various sources. It's on the large corporate side. We see demand from SME, also from small business for which we developed actually digital lending platform. And retail, it's the growth coming from our regular installment loans, which are given to people who receive salaries, but also related to buy now, pay later types of loans. At the same time, we saw that the portion, which are attributed, for example, mortgages, actually shrink because of additional money, which was allowed for people to be disbursed from their pension accounts. And part of that actually used in the first quarter to repay mortgages, and also our auto loan portfolio is quite slow. So next to all the sources, which I mentioned, it is also potential to grow in terms of the mortgages and auto loans as well. So it's quite, I would say, broadly based demand, which we are seeing now in legal entities, which is both for large corporate and SME. We also saw demand coming for working capital loans as well as for capital expenditures. It seems like there are some periods, during which businesses were under investing, and now the timing also comes to catch up with their plans.

Next question comes from Andrew Keeley.

Can you hear me?

Yes, yes.

Okay. Great. Well, you answered some of the questions. I guess, just a follow-up on the lending. So I mean, incredibly strong second quarter, particularly relative on the kind of corporate side relative to the first quarter. I mean, any kind of color on why kind of such kind of lumpy quarter in terms of the growth? And I guess, you're kind of expecting that, that will kind of slow down to kind of low mid-single digits over the next, kind of, couple of quarters, but just interested to know why there was such strong growth in the second quarter. And then on the retail side, it's interesting what you said about the releasing pension funds early. So people were kind of paying down mortgages, but it's still pretty striking with the difference in the growth between the consumer lending and the mortgages. And I'm just wondering, given how kind of low the penetration in mortgages is in Kazakhstan, whether you kind of think that there's -- when do you see the chances of this kind of market picking up and the growth kind of returning there. And in terms of the unsecured loans, could you tell us a little -- any detail you can give us on the relative shares of cash loans and buy now, pay later, or anything on the kind of duration or size of the loans would be great.

Thank you very much, Andrew, for your questions. Well, regarding the spike in lending to large corporates in the second quarter, actually, this is due to the fact that we're working on pipeline. And on the large corporate segment, it takes quite some time. Actually, most of the loans, which was disbursed in the second quarter, we start working with them even in the last quarter last -- in the fourth quarter last year as well as beginning of this year. So it's simply like part of this loan where, actually, the transactions was closed not in the first quarter, but in the second quarter. So there's no more specific reasons for that, and we continue to have a strong pipeline also remaining, which we think is one of the driver why we're upgrading the guidance for the second half of this year. But when it will be realized, particularly smoothly in the third or fourth quarter or it will be more realized in one of these quarters, it's, again, for large corporates, it's a bit difficult to say because it's -- you can appreciate that transaction -- working transactions can take quite some time. Well, in terms of mortgages, actually, the mortgages in the market were growing quite significantly. I do not have specific statistics for early years. But if you look for 2019, sector-wise, mortgages grew by 32%. And in 2020, they again grew by 32%. So cumulatively, actually, mortgages grew in these 2 years, something like by 80%. And actually, they were flat in the first quarter, but simply because there were some repayments of mortgages, which was down from pension fund proceeds. But already in the second quarter this year, mortgages resumed their growth by 11%. So it is actually growing quite fast. And frankly, I don't think that the growth can be any quicker given that it's already taking place for quite some time. Obviously, one of the main drivers for that growth are the government programs. So I think that the continuation of that growth partially would be subject to how long these government incentives, government programs would last. But even apart from that, there is some commercial mortgages available on the market as well, and that also might support the growth in the mortgages, but probably to a lesser extent. And so regarding your question, the split between salary loans and buy now, pay later loans, I guess, we are not providing that statistics. So I think that, at this point of time, I'm not able to provide figures on that question.

Okay. Fair enough. I guess, it's just interesting your point on the mortgages that during that time of very strong market growth, I think Halyk's overall mortgage book has basically been flat, which is -- so it's been quite a long period of time when your mortgage book hasn't really been growing, and its order growth has been in consumer. And I guess, sorry, just a final follow-up. I mean, so obviously, you're talking about the consumer growth coming through the expansion of digital loans and tapping into your payroll base. Can you give us any sense of kind of how much further potential you have in terms of consumer lending to your payroll base? I mean -- and you kind of -- and probably, you're not going to tell us what share of that number you've kind of lent to. But just generally, is there quite a long way to go still to run in terms of tapping into your payroll base?

Yes. Again, probably not talking about from specific figures, but we think that the current penetration allow us to further grow in terms of the number of customers. And also if you see there is a continuation of increase in salaries, actually, already for 3 years, there is increase in salaries. And actually, the salary increase became more broadly based because, also, people who actually work in the area of education, health care, they're also seeing increase actually from the start of pandemic, and that is also growing in real terms. And as we discussed in our previous calls, these are one of the main components of our target clients and one of the main share of our current salaried customers. So the growth might be coming from further penetration as well as from increased base from existing customers.

Next question comes from [indiscernible].

Okay. Congratulations with outstanding results for the second quarter. I have a couple of questions. What is the impact of new COVID wave starting in July? What do you think -- what could be the impact on the third and fourth quarters?

Well, [ Leonid ], good question. Indeed, we are seeing a spike probably for last 1.5 months. And actually, in terms of the numbers, the figures are higher than we witnessed during the previous waves. What we are seeing, first of all, the number of people who vaccinated actually has increased. And if you saw in our presentation on Slide 40, currently, there are 6 million people who already received first components and close to 5 million of people who received the second component. So from that perspective, actually, Kazakhstan surpassed Russia in terms of percentage of people who received either a full vaccination or at least the first component. What areas are still impacted? On education, like not all universities would be open again this autumn. So students, most of -- or part of the students would continue to study online. But schools, at least, it was pledged that schools would be reopened and will start working online. In terms of the businesses, it seems like the government finds some formula, which actually have, let's say, 3 components. Component number 1 is vaccination. So the businesses and especially those which involves a lot of interaction with customers, there is increase in demand for workers to have -- to being vaccinated. This is one component. The second one, the government -- actually, those digital platform called Ashyq, which in Kazakh means open, was developed, where, actually, each person can see status. It can be -- if you -- if the person is infected, it has a red status until he get cleared. It can be yellow if the person is considered as contacted. It can be blue if there is no specific status. And if the person is actually vaccinated or if he has 3 months past his infection, he has a green status. And actually, most of shops, especially bigger ones, like shopping malls, all restaurants, they are required to check the people status through that system. And actually, there are many cases when people with, for example, red status was actually detected through the systems, and they get penalized. So this is kind of the third element how the government wants to make sure that business stay open, but with some control over the -- of infected people. And the fourth one is called the weekend lockdowns. So for example, restaurants -- cafes, restaurants, hair dressers, shops in locations, which has a red status is actually closed. So they can work on weekdays, but they're closed on the weekends. Obviously, this affected certain companies who operate only offline and who has not changed this model into online mode. But it seems like many businesses, at least in large cities, they kind of adapted to the situation, which we are witnessing now.

That's helpful. So you expect the impact -- there is no big impact on your business in this year as a positive the last year?

I think it will be as related to certain businesses. Again, if we talk, for example, restaurants, there are many restaurants who already adapted themselves, and they see a big sales done through deliveries. And these deliveries firms I think they are increasing their businesses. And interestingly, in Kazakhstan, we have such, let's say, delivery start-ups from Europe like Glovo and Wolt. I think they're expanding their business in Kazakhstan quite rapidly, not only in Almaty, in Astana, but also in some other cities across the country as well.

Okay, okay. And second question, given your outstanding result in the second quarter, your guidance for the full year, it seems quite conservative. So am I right? So yes, there -- you expect about 45 -- KZT 450 billion net income compared with almost KZT 130 billion in second quarter alone. Even if we deducted onetime gain, so it's about KZT 141 billion for second quarter alone. And as I understand, you're expected -- you're expecting continued growth of credits and so on. So could you give some more comment about your guidance for the full year?

I think there are probably 1 or 2 reasons for that. One is on the cost of risk because in the first half, there was a release of provisions. And in the second half of this year, we're expecting kind of normalization of cost of risk. So the preprovision figures would be somewhat different. And secondly, we have expansion on our retail, not only on the credit side, but also on the fees and commission. And there are further plans to grow our active client base, and that would involve some expenses related to loyalty programs. But the bigger one I think would be cost of risk impact.

And the next question comes from [indiscernible].

So I wanted to ask you about SME. So if I look at the SME borrowers as a percentage of total SME clients, only a small portion of your SME client base actually borrow from the bank. So I was going to ask you how do you plan to strengthen your foothold further in this field. And is it -- is that accurate prediction to say that SMEs will be the next battleground in the sector? So that's my first question. The second question is, could you also tell us your definition of your -- of corporates and SMEs in the bank? And the third question, and this is not really related to the second quarter results, but just to get a general idea of what's going on. On the retail side, can you talk a bit about regulation risk there? How does regulator regulate interest rates and APRs on unsecured lending? It would be great to know that.

Yes. Well, thank you very much for your question. I think it's a good point to discuss on SME because we've not regularly discuss that particular segment, which I think is not becoming the battleground. I think it's already the full battleground, and this is a segment on which we probably increased our focus during the last couple of years. If you look at the Slide 27, where we are seeing the shift to digital on SME side, this is exactly the showcase how we are tackling that segment because if we start, for example, from segmentation, there is no kind of the hard segmentation. So we look at the revenues per group of customers. The difference between small business and large business is in the area of KZT 10 billion, which is the annual revenue for the group. And there is another split between small business and medium business. And within small business, we have another category, which is called individual entrepreneurs. And actually, last year, we launched a big digitalization project where we did 2 things. One thing, we introduced a solution, which allows digital onboarding of these individual entrepreneurs. So for that, they do not need to come to the bank. It's actually a matter of minutes during which we would be onboarding these customers. And if you see from this slide, actually, in the first half of this year, 68% of new accounts opened for individual entrepreneurs were done through this digital platform. Next thing, we introduced digital lending to these individual entrepreneurs Actually, again, for getting these credits, they do not need to come to the bank because they have already their account opens digitally. They also can apply through their mobile application for these loans. And there is a very quick time to yes and time to money. It's up to 4 years -- up to 4 hours time to money. And again, if you look for this slide, actually, 92% of loans, which was granted to small businesses in the first half of this year with digital loans. So again, this is the area of interest because it's growing quite fast. We -- by doing that, we're expanding a number of our customers. And secondly, we're making these customers -- we allow these customers to get credits in more quicker and more convenient way. Another point, I think it was a good question from your side. Indeed, the penetration for entire SME segment is not that high. And for us, I think it's the next area on which we should focus is actually to penetrate in our transactional banking system. And to do that, we launched another project, which is called Data Factory. This project which we launched beginning of this year, which aimed, on one hand, on retail customers; and secondly, on SME customers. And through these projects, we also want to expand transactional activities of our client base; and secondly, also to expand our lending products into our transactional client base. So this is a good catch. It's an important segment for us. It became tight in terms of competition because a few banks are focused on that, but we think that we have good place to perform well and to outperform the market in that segment. And regarding your question regarding the regulation, yes, there is a regulation in place, which governs the maximum rates. It is calculated in effective rates terminologies. So it's not only nominal rates, but also all the fees which is attached, and so the maximum cap is 56% in effective rates -- annual effective rates.

Okay. And do you -- I mean, it's obviously impossible to foresee that, but do you feel that the regulator is a bit worried about where the rates are in this market because these are very high margin products and probably very profitable for the banks as well, I mean you and as well as your peers? So do you see any -- anything there -- any of the risks emerging possibly?

I don't think there is some near-term risk on that side because the competition, I think, is driving the rate at the first place. So this is number one. Reason number two, except banks that are nonbanking financial institutions like microfinance organizations, which are also actually targeting, more or less, same client base, and some of them are also developing digital solutions. For them, the maximum allowed rate is 100%. So from that perspective, I think they are a bit more under pressure. And I think, first, the rates for that category would start reducing before there might -- reduction come on the bank side. But again, what we're seeing now, actually, the market is making its own job, and competition is driving the pricing. And another reason is for SME, in general, there is quite a number of governmental programs, which allows many SME customers to get credits even lower -- even low the inflation. So there are many government programs on which SME can get loans at 6%. That is specific conditions, which are applied for that category.

The next question comes from Tunde Ojo.

So can you hear me?

Yes, yes, we can.

Okay. Sorry. I was -- I think was on mute. So my question is on your super app, so on digitalization effort, right? I'm curious to get an update on the progress on that front. In Q1, you mentioned you made about KZT 1.7 billion in fees from buy now, pay later loans. Do you mind giving an update on the first half numbers for that in terms of your contribution to your fee income? That's my first question, and then I have a subsequent question on that front.

Tunde, this is Viktor Skryl. Let me answer your questions. With respect to super app development, we are adding a number of services. As Murat mentioned earlier, we include a number of services, for example, government service called Ashyq, which is open -- means open. And it also allows us to attract new customers. We also added another service, which is called remote gas application, where a driver can go to gas station and load -- and fuels the tank with tool without need to exiting a car. You can use the service in application. And also we continue to add more and more merchants to our application. And we also built Homebank as a window to other services within our group, like insurance, travel, Kino, invest. So these all services are available at fingertip, and you can access that through our super app. With respect to your second question of how much fees we generate from this buy now, pay later product and other existing products, I would say, for -- like for this year, we target around 50% of net fee and commission growth coming from that services.

The question I have on the -- centrally focused on this Slide #19 now is you've had a big, huge growth in your number of merchants and partners. You went to 47 to 224. I recall you have said 219 target for the year, so you're making progress on that. But when I look at the GMV growth quarter-on-quarter, it doesn't seem to have moved that much. And I'm wondering, is it because you are moving towards a smaller sized merchants now? What are the dynamics going on there?

One second, please. Tunde, so this is because these merchants were attracted only during -- most of them were attracted during last month, so we continue to see increase in GMV for these newly added merchants.

Okay. That makes sense. And just last question for me on this point is, can you give a sense of how profitable this super app marketplace venture has been for you? I know it's still quite new for Halyk Bank. You started mostly last year. Well, is it loss making? Is it profitable? Is it profitable in terms of returns? Is it similar to the overall bank? Or is it still trailing significantly? Just any color on that would be helpful.

Yes. Tunde, thank you for this question. We see that our applications are generally profitable because they -- first of all, they generate leads, which create sales. On the other hand, and secondly, we are able to eliminate staff costs because those are created during these channels. At this stage, we do not like to provide exact numbers, but our numbers have showed that this channel and this application is profitable.

We have several questions from our chat. So the first comes from [ Evan Karl ]. In which areas of digital banking are you lagging behind Kaspi? And what are you doing to catch up with them?

It's Zhumabek. Good question. Frankly speaking, I would like to say that we are not lagging. In my opinion, we are trying to be closer to them. In concrete direction, let me mark the marketplace, this business line. I'm sure that you are very interested in that area of business. Why I'm saying that we are not lagging, why I'm saying that we are catching them because I'm looking in this business line through number of years on the market. If you look at us, we are just at the initial stage. We are only 6 to 8 months' time that we have presented our business line in the marketplace on the market. And according to our results that have presented today, you see that we are growing on quarter-to-quarter, and we have still very strong potential to grow further. During so -- across -- if you compare us across our main competitor, you'll, of course, understand that the business that you are trying to compare us -- with us, if you look at number of years on the market, we are not, I think, comparable to these figures. But it is better if you compare us with the dynamics on the market. So if I'll finish my answer to your question, I would like to say that in marketplace business line, we are trying to catch up our competitors, and we are trying to grow much further than our main players on the market. Of course, we understand that being successful in this direction, we will be also very quite efficient, and we will have strong growth in acquiring business at all. I hope you understand.

Next question comes from [ Simon Cross ]. So the first question is fantastic results. Well done. Do you have an aspirational target for the net fee and commission income as a percent of total net income?

Yes. We currently do not have such target. I think we would better get back to that once we announce our next strategy. But at this stage, I may say that around 1/3 of our operating income are coming from noninterest income sources.

And next question from Simon is how does Halyk Pos compare to other incumbent competitors in terms of customer, ease of use, setup and pricing?

Can you repeat the question one more time, please?

The question from Simon. How does Halyk Pos compare to the other incumbent competitors in terms of customer, ease of use, setup and pricing?

Thank you, Simon, for the question. Regarding the comparing of our Halyk Pos to other -- the same decision in the market, first of all, I would like to say that we have a very simple onboarding process. When any merchant would like to upgrade this payment decision, they can do it purely online 100%. This is one of the main features that we have in our product. And if you compare into tariffs that we offer, that tariff is very comfortable for our potential customers. So we think that our offer that we call Halyk Pos is very competitive right now in the market. So we have also introduced PIN on Glass as a decision in our Halyk Pos payment offer that can give more opportunities when you compare our decision to our competitors. It means that you can make transactions more than a certain amount through this electronic cost that be -- that can be used through any smartphone of our customer -- of our merchants. So this is the new service that we have introduced, PIN on Glass. Still, you cannot find the same decision on the market at current time.

And the next question from the chat comes from anonymous participant. There is actually 3 questions. First off, how much of the provision reversal is due to macro assumption changes, how much due to actual NPL upgrades? Second question, can you elaborate the source of retail loan growth, salary loans, buy now pay later, secured or unsecured and et cetera? And the last question, can you comment on outlook for risk-weighted asset density given higher retail loan growth?

Let me answer the first and the third question. In the second quarter, the reversal of provision was mainly due to recoveries on problem loans and impaired loans. No impact from macro change -- macro assumption changes. For the third question, we do not expect a rapid change in RWA structure. But given the growth levels for retail loans, we expect some changes, increase of retail loans in loan portfolio structure. And for the second question, like Murat mentioned earlier, we do not provide this type of specific details. But as you've seen from statutory reports, the growth was coming from unsecured loans for the third quarter, yes.

And the last question from the chat comes from Patrick [indiscernible]. Congrats for the spectacular set of results. Net interest margin at 5.4% was a very positive surprise. Could you talk about the positive, negatives that led you to not change 2021 guidance above 5%? Was the sequentially higher average interest rate on loans to customers in second quarter mostly driven by change in mix in BNPL, installment type of products?

Yes. Let me answer this question. Yes, for 2021, we expect 5% net interest margin, which, of course, include results for the first quarter when we had negative impact from repayment of the euro bond. Secondly, we see that share of KZT deposits is increasing because of stable exchange rate. And on that source of funding, we bear higher interest expense. And also we see that corporate loans are also increasing, and they typically are yielding low rate compared to retail and SME book. Thus, overall, this lead us to net interest margin of 5%.

Dear, ladies and gentlemen, it seems that there is no questions remaining, so this completes our presentation. Thank you very much for participation. As usual, our IR team remains open for any further questions. Have a great rest of the day, and goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]