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

Participants to today's call on Halyk Bank side are Mr. Umut Shayakhmetova, Chief Executive Officer; Mr. Murat Koshenov, Deputy CEO, Finance, Subsidiaries and International Activities; Mr. Roman Maszczyk, Deputy CEO, Compliance, Risk Management, Data Size and Collateral, Chief Compliance Controller; Ms. Olga Vuros, Deputy CEO of Corporate Banking; Mr. Dauren Sartayev, Deputy CEO, SME Banking, Transaction Banking, PR and Marketing; Mr. Zhumabek Mamutov, Deputy CEO, Retail Banking and Soft Collection, Mr. Nariman Mukushev, Deputy CEO; Digital Government Services, Ecosystem and Customer Experience; Mr. Anton Musin, General Managing Director, IT and Innovation; Mr. Almas Makhanov, Chief Risk Officer; Mr. Viktor Skryl, Financial Director, Finance and Subsidiaries; Mr. Margulan Tanirtayev from IR team and myself, Mira Kassenova, Head of FI and IR. Now I would like to start our presentation with a digital update for Q1 2022. The customer engagement within our core online platforms, Halyk Home Bank and online bank showed fairly good growth against Q1 2021. The number of monthly and daily active users of Halyk Home Bank app has increased by 50% and 52.5% year-on-year, respectively. The monthly active users number reached 4.5 million in Q1 2022. We see a sound growth in the number of active users of our online bank app for businesses and the monthly active users number reached 164,000, increasing by almost 93% versus Q1 2021. We are glad to admit that Halyk Home Bank and online bank apps are ranked #1 within the respective categories in Kazakhstan. In the first quarter of this year, we launched additional services and functions within our digital platforms such as Swift transfers and currency control. Despite of the fact that during Q1 2022, the digital loans and online onboarding dynamics was negatively affected by the January event in Kazakhstan, we see a notable year-on-year growth in credit and noncredit products for retail clients and businesses. We see continued shift to cashless transactions, 65% of retail payments volume were represented by noncash card transactions in Q1 2022, a sound increase from 47% a year ago. Online sales were the key driver for retail loan growth as we issued 75% of loans digitally. We started new relationships with 17,000 business clients entirely via online bank in Q1 2022. And we see a strong growth in online transactions and payment volumes, which have grown by 20% and 38% versus Q1 2021, respectively. The ecosystem verticals showed sound growth versus Q1 2021. The quarter-to-quarter dynamics was unfavorably affected by the January events in Kazakhstan and the geopolitical situation in the region. Finance retail within our online auto insurance service increased by 48% year-on-year, while in Q1 2022, GMV of Halyk Travel and Kino.kz have expanded over 3x and 10x year-on-year, respectively. The development of our marketplace platform Halyk Market remains a key priority for us. Our total marketplace GMV has increased by 31.5% year-on-year, reaching KZT 24 billion in Q1 2022. Turning to retail segment, we would like to highlight the solid performance across key dimensions. We continue to see a strong customer engagement and increasing digital footprint with our Halyk Home bank app and growing transactional activity. The transaction volume has increased by 40% year-on-year. On a consolidated basis, the retail gross loan portfolio has expanded by 43.3% year-on-year while the customer deposits increased by 18%. We see growth in retail products penetration by 11% year-on-year. Halyk Home Bank's super app is at core of our retail customer proposition, and we continue to develop it further. We already see notable results in customer activity. Moreover, the monthly active users penetration rate in retail active client base has risen from 15% to 52% during the recent years, showing a further potential for growth. On an unconsolidated basis, our retail portfolio has grown by 41% and of KZT 540 billion in Q1 2022, while the loan issue volumes have increased by 18% year-on-year. The growth has been primarily driven by digital sales, which increased 2.1x year-on-year and reached 38% of total retail loan sales in Q1 2022. At the same time, the asset quality stayed almost at the same level at 4.3%. While we continue to maintain a conservative provisioning policy with an NPL coverage ratio of 156%. Halyk Marketplace remains one of our top priorities as we develop a comprehensive service proposition, both for retail clients and merchants. The GMV of our e-com platform Halyk market increased by almost 14x since the soft launch a year ago. Our network expanded to more than 1,000 merchants, offering over 245,000 SKUs, and we focus to expand our footprint further. Over Q1 2022, we continue to develop our retail platform and focus greatly on gov tech. We are the first bank on the market that launched digital documents, seamlessly integrating access to them into Halyk Home Bank app. This new function was used more than 800,000 times only in the first month. Turning to Corporate segment. We would like to highlight that our loan book has expanded by 38.6% year-on-year. Our corporate portfolio remains well-diversified across industries, while local currency loans comprised 73% of the loan book. The segment NPL ratio decreased to 0.9%, while the provision coverage increased to circa 562% as of 1st of April 2022, reflecting a solid asset quality and our prudent risk management. We see a strong growth in our active corporate client base as it reached over 2,100 customers in Q1 2022. Essentially, the product penetration and the transaction activity have been notably increasing as well. We are proud of the performance we achieved in SME banking. In Q1 2022, we have 137,000 actively transacting SME clients, an increase almost 63% year-on-year, reflecting our continuous efforts in development of online daily banking and transactional services. SME gross loan portfolio grew by 24% year-on-year, while the number of borrowers has increased by 2.4x. The same NPL ratio kept at the level of 6%. We achieved 10% increase in SME loan issuance volumes year-on-year. It has been primarily driven by digital loans, which already comprised 32% of our SC loan portfolio. The number of SE borrowers has shown a very strong growth by 2.1x year-on-year. In Q1 2022, we onboarded 90% of new IE clients online. We also increased digital lending to AE by almost 23% year-on-year in terms of number of issued digital loans. Now I would like to hand over the call to my colleague, Margulan Tanirtayev. Thank you.

Good evening, ladies and gentlemen. Now let me switch to the overview of Halyk Group consolidated financial results for the first quarter of 2022. During the first quarter, the bank generated KZT 124.2 billion of net income. The increased by 28.3% compared to the first quarter of the last year was due to significant increase in lending business and in a net gain of foreign exchange operations. We also have to mention that net insurance income for the first quarter of this year significantly decreased versus the first quarter of 2021. Previously, the bulk of income from insurance on unsecured loans were recognized on the side of the bank. Starting from 2022, this income has been transferred from the bank to its subsidiary Halyk Life. Halyk Life, in turn, has created an insurance reserve for the full amount of insurance on consumer loans. Consequently, there was an increase in insurance reserve expenses. In the first quarter of 2022, we demonstrated 21.2% return on average equity and 4% return on assets. Next slide, please. Total assets of the group increased by 5.2% versus the year-end of 2021 as a result of growth in amounts due to customers, which was partially offset by the decrease in amounts due to credit institutions. Customer deposits increased by 9.7% versus the year-end of 2021 due to fund inflow from the bank's clients. Next slide, please. Interest income for the first quarter of this year increased by 31.1% versus the first quarter of the last year, mainly due to increase in average balances of loans to customers. Interest expense for the first quarter of this year increased by 34.9% versus the first quarter of the last year, mainly due to the increase of average balance of KZT deposits in the amount due to customers and due to increase in interest expense on amount due to credit institutions as a result of growing volumes of repo transactions attracted to provide current cash flow in KZT within the bank's operating activities, which was partially offset by the decrease in interest expense on debt securities as a result of the redemption of banks' high-yielding Eurobonds. As a result, net interest income for the first quarter of this year increased by 28.3% versus the first quarter of the last year. Net interest margin increased to 5.2% to annum for the first quarter of 2021 compared to 4.9% 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 a redemption of bank high-yielding Eurobonds. As you remember, net interest margin in fourth quarter of 2021 was negatively affected by the recognition of discount on receivables on sale of assets in installments and by the one-off accelerated amortization of discount on large ticket deposits. Excluding this effect, net interest margin decreased to 5.2% per annum for the first quarter of 2022 compared to 5.4% per annum in the first quarter of 2021, mainly due to increase in interest expense on the amounts due to credit institutions as a result of growing volumes of repo transactions attracted to provide current cash flow in KZT within the bank's operating activities. Next slide, please. In the first quarter of 2022, the overall dynamics of fee and commission income was negatively affected by January events in Kazakhstan. Consequently, fee and commission income for the first quarter of this year increased only by 4.8% versus the first quarter of the last year. As a result of spike in volumes of transactional banking in first quarter of 2021 versus the first quarter of 2020, there was an increase in the service commission expenses payable to the international payment systems. This led to the increase in fee and commission expense for the first quarter of 2022 by 28.2%. Moreover, loyalty program bonuses for the first quarter of 2022 increased by 83.5% versus the first quarter of 2021. Thus, the net fee and commission income decreased by 18.3% versus the first quarter of the last year. The decrease in fees derived from bank transfer settlement for the first quarter of 2022 by 7.9% versus the first quarter of 2021 was mainly due to the decrease in merchant fees as a result of shrinking volume of online installment loans or BNPL loans issued. This was due to the temporary suspension of BNPL and further reopening with tight underwriting conditions. Next slide, please. Operating expenses for the first quarter of this year increased by 21.4% versus the first quarter of the last year, mainly due to the indexation of salaries and other employee benefits starting from the 1st March of 2021 and increase in charge expenses, including KZT 3 billion contribution to a special terrible fund for the people of Kazakhstan. The bank's cost-to-income ratio decreased to 19.7% compared to 23.2% for the first quarter of 2021 due to higher operating income for the first quarter of this year. Next slide, please. On the balance sheet, compared with the year-end of 2021, loans to customers increased by 6.5% on a gross basis and 7% on a net basis, while corporate loans increased by 12.4% on a gross basis, SME decreased by 3.4% on a gross basis and retail loans increased by 3.1% on a gross basis, respectively. Next slide, please. 90-day plus NPL ratio remained flat at 2.6%. Cost of risk on loans to customers in first quarter of 2022 came at 1.5%, partially reflecting more normalized level and increase in credit loss expense on retail loans, including the assessment of the effect of the macro parameters effect. The provisioning rate stood at 6%. The Stage II coverage ratio increased to 75.5%. Next slide, please. As at the end of the first quarter of this year, Stage 3 ratio remained almost flat in absolute terms and reduced to 7.5% in percentage terms. We are additionally showing here how well the workout of problem loans collateral was done by the bank SPVs during the first quarter of this year. Next slide, please. On liability side, the corporate and retail deposits increased by 18.2% and 1.8%, respectively, compared with the year-end of 2021 due to fund inflow from the bank's clients. As at the end of the first quarter of this year, the share of corporate KZT deposits in total corporate deposits was 54.7% compared to 52.9% as of the year-end of 2021, whereas the share of retail cavity deposits in total retail deposits was 46.5% compared to 50.6% as at the year-end of 2021. Next slide, please. Capital adequacy ratios of the bank decreased in the first quarter of 2022 as a result of increase in risk-weighted assets by 3.7% versus the year-end of 2021. In the first quarter of 2022, total equity of the bank increased by KZT 23.9 billion or by 1.5% compared to the year-end of 2021, whereas the net income for the first quarter of 2022 amounted to KZT 124.2 billion. This was due to loss on revaluation of debt financial assets at fair value through other comprehensive income, which totaled for KZT 105 billion in the first quarter of this year. The loss mainly relates to the treasury bills of the Ministry of Finance of Kazakhstan, which have decreased in price due to base rate hike from 10.25% to 13.5% in the first quarter of this year. Next slide, please. The bank absorbed a significant inflow of deposits for the period from the 1st of February to the 1st of May of this year amid significant changes in the operating environment. Thus, the inflow of retail deposits amounted to KZT 217.5 billion or KZT 153.4 billion, excluding an exchange rate effect and inflow of corporate deposits amounted to KZT 745.4 billion, or KZT 619.6 billion, excluding an exchange rate effect. Moreover, in April of this year, the bank acquired the portion of Kazakhstan Sberbank's loan portfolio. Total acquired loan portfolio amounted to KZT 550.4 million, which is 8.2% of total gross loans of the bank. Corporate loans amounted to KZT 101.5 billion, which is 2.7% of total corporate loans of the bank with 26 clients after which 19 are entirely new clients not using any of the bank's products. SME loans amounted to KZT 11.9 billion, which is 11.1% of total SME loans with 8,000 clients out of which 5,400 are entirely new clients. Retail loans amounted to 336.9 billion, which is 17.1% of total retail loans with 114,600 clients, out of which 24,100 are entirely new clients. The acquired retail loans include 8% of auto loans, 39% of mortgages and 53% of consumer loans. Next slide, please. Turning to the rational for the transaction. We would like to highlight that the bank acquired a very diversified and good quality portfolio with no NPLs. There is no new resegment as the target client base is fully matched with ours. The transaction advantages the efficient and quick gain in market share without an increase in operating expenses or engaging in the complex M&A transaction. The acquired portfolio has a good profitability at par with similar Halyk Banks products, further underpinned by match funding on the government programs and by discount on retail and SME loans, 7% of the total purchase retail and SME loans were acquired with much funding and 30% were acquired with 7% discount. We are glad to note that it has been an efficient utilization of capital. Q1 and Q2 capital adequacy ratios stood at 17.8% and 18.5% as of 1st of May of 2022 compared to 19% and 19.8% as of 1st April of 2022. The following principles were guiding us in this transaction. Firstly, we made a detailed analysis of the borrowers before the execution of the transaction. That was a portfolio analysis of retail and small business borrowers and one by one analysis of medium business and corporate borrowers with ability to cherrypick the best clients. Secondly, no NPLs were acceptable. And on top of that, there is no -- there is an option to return back the loans with efficient credit dose. Dear, ladies and gentlemen, this completes our presentation. Now we would like to open the floor for your questions, please. Just a quick instruction, to state the question, you can raise your hand in Zoom or if you join via the cell phone, please bear in mind to raise your hand. You can also enter your question in the written form via chat, while stating your question, please also mention your name and company. And the first question comes from Mikhail Butkov.

My first question will be on the trading and the FX gains in the first quarter. Could you maybe provide a little bit of additional color, what was driven this line in the quarter? And also, what's your outlook for the rest of the year, if you could comment.

This is Murat Koshenov. On FX, there are probably 2 biggest drivers, driver #1, there was obviously due to turmoil on the geopolitical side, we see increased demands from the customers as well as a big volatility on the FX side. So that usually actually drives more business on the FX side. And the part of that gain is related to dealing income, which was generated. The second part is -- relates to some gains on derivatives because typically, the bank might have some open currency position on the balance sheet, which is close through some off-balance sheet instruments -- and because of change -- big changes on the FX side, I'm talking about the U.S. dollar to Tenge as well as U.S. dollar to the Russian Ruble. There was some FX gains, which was due to the sharp changes on the FX market side. Typically, that part is volatile and might swing back if the rates would turn into other directions.

Okay. But like in the light of appreciation of Tenge, which has happened in the last months, do you see the same activity of clients? So maybe what color can you give for the second quarter already?

I think the most volatility happens in the first quarter. We see that during the March already the rates start being normalized, and we didn't see big swings on the FX side. We also saw some reversal of Tenge and Russian ruble versus U.S. dollars, which we expect might reverse of some FX gain, which I mentioned.

Okay. Two more questions from me. One is on the cost of risk. So you generated 1.5% for the first quarter. Your full-year guidance is between 2% and 3%. So maybe could you provide us some latest update and view for the asset quality until the rest of the year, where do you think the risk can come from given that you are so far tracking ahead of the guidance? And also, what is the latest view on dividends, -- dividends, any dividend update given that Board of Directors recommended no dividend for the previous year. But I think it was mentioned that well, depending on the situation, any different opportunities could be related. So what's your latest to your own dividend payment as well.

Yes, when we provided the guidance on the cost of risk side, we did that immediately after the conflict between Russia and Ukrainian started. So -- and that also had some element of stress test. Actually, in the first quarter, we see that cost of risk was recorded lower than the guidance which we provided for the whole year and 1.5% also includes some parameters, -- some assessment of macroparameters effects. How the situation would be -- so at the first quarter situation seems a bit better than we projected in our full year guidance. Saying that, I think at this point of time, it's a bit premature to provide the guidance or updated guidance for the full year. We still see that situation has not been fully resolved. We still see some elevated levels of inflation. At the same time, we see some positive data not only -- I'm talking not only about cost of risk, but also other lines of business. So what we typically do, and we started -- and we do to start this process shortly. In the middle of the year, we typically launch some fine-tuning of the budget until year end. So we, as I said, so we launched that process. So hopefully, we'll be posting half year results. We would be in a position to come with updated guidance on our net profit for the whole year. That also would include cost of risk. And I think by that time, we would be providing our vision on the dividend payout, if any, for this year -- sorry, for the last year which as you're right to mention the decision was taken by the Gena Shareholders' Meeting to defer that decision for the second half of this year.

And the next question comes from Elena Tsareva.

I think I have a couple of questions. First is that the first quarter enjoyed very healthy inflow of corporate deposits, which helped to stabilize customer funding. But how sustainable this inflow do you see that there could be some outflows already set out for some corporate side? And another question is on fees. So basically, first quarter affected by events of January. So if dynamics are like in April, May looks more normalized and healthy for the fee and commission side. And maybe a little bit on e-commerce initiatives. So this kind of GMV decline in the first quarter is something seasonal or there's some other reasons for the decline? That would be helpful.

Elena, thank you very much for your questions. Regarding deposits inflow, we think it's permanent because as you probably know, there was some structural changes in the Kazakh banking sector with all 3 Russian banks actually falling under the sanctions, there was a news that Alfa-Bank has been acquired by another Kazakh Bank, bank center credit, but Sberbank and VTB actually, they still need to find the new destiny. In the meantime, we see the redistribution of business from these 3 Russian banks to other Kazakh banks, and we see that number of banks actually weakness in flow like, for example, City Bank of Kazakhstan, some medium-sized Kazakh banks. I think we took a good portion for the corporate deposits because we are a big corporate bank and actually not all the remaining Kazakh banks, they have focused on the corporate. So there are some pure retail players. So I think we've taken the proportionate portion among banks, which is dealing with the corporate customers. So we think that it's -- that distribution probably here to stay for quite some time. Regarding fees and commissions and e-com, to a certain extent, the interrelated issues. -- because in fees and commission income, I can say there were certain effects from January when Kazakhstan went for a couple of weeks or probably 3 weeks or some reduced activity on the retail side. We also, as you probably remember, last year, changed accounting treatment for the loyalty bonuses, which was previously accounted in the OpEx. And since last year, they start being deducted from the fees and commission income. And if you compare the first quarter this year with first quarter of last year, that also had some impact on the fees and commission income. And the portion in which I think affects both e-com and fees and commission income is BPO. Because of the January event and then subsequently, the heightened geopolitical issues increase in inflation, there was some temporary closure of certain BNPL programs. And they have been romping since then, but with some tightened conditions in the first quarter. That affected, as you can see from our presentation, the fees which we generate from the merchants. We think that the situation has become more clear on the economic side. Well, as I said, probably not everything has been fully cleared yet. But we already started looking into the ways how we can probably readjust our retail programs where we see possibility probably to bring them under more normalized terms. So this work just started, and we expect that some changes to the program might take place later in the second quarter.

And the next question comes from Babatunde Ojo.

Just a quick question for me on asset quality. Just a follow-up to what you've already talked about earlier, right? And I understand that the performance has been better than expectations. But you also cited a lot of the risk and the provisions are coming from the retail portfolio. And I was wondering if you could provide more color on what segment of the retail portfolio are you seeing in risk? Is this mortgage? Is it unsecured? What exactly is impacting your retail clients? And what are the expectations going forward?

Babatunde, this is Almas Makhanov. In terms of focus on dynamics on the cost of risk for retail segments, we see that the model were more driven by secure segment and secured portfolio. And it was mostly caused by overall changes in macro to our estimation that overall, the dynamics reflect the changes in overall economy situation. But as you can see, NPL dynamics are almost flat. We see a slight increase in overdue loans, which actually are reflected in the cost of fixed numbers for the first quarter.

So let me understand though how the studies work in practical terms. So the changes in my question is, why is it impacting your retail portfolio more disproportionately than your SME and corporate? Just want to understand if you're just a macro overlay or is there anything specific in the unsecured portfolio that makes you more cautious? Are people losing jobs? Just if you can get a little bit more granular into why you check those estimates, that will be helpful for my understanding, please.

Yes, mostly related to the scenarios that we used to focus future economic conditions, and they mostly reflect inflationary risks, causing the increase in interest rates as rate which will actually impact the credit volumes of unsecured clients. That's why that portfolio is mostly received the impact post on that portfolio in our stress scenarios.

Okay. Okay. That's very helpful. The other question is on your digital products and sort of like a trend in your GMV on the first part of the presentation, that's quite helpful. But I also wanted to highlight that the impact of the January protest and geopolitical risk and all the stuff we had in Q1 on you is quite significant compared to, I mean, what I've seen for your competitor, CASB. And I was wondering why are you more impacted? I mean, they were impacted as well. Don't get me wrong, but I was just wondering why are you more impacted by these events than they are? Is it because you close the business for a longer period? Or any other color you could share on why you underperformed during that period, would be helpful.

Tunde, thank you for your question. I think we probably were taking a more conservative approach. -- but which probably resulted in our GMV dynamics. But I think we still have a job to do on the e-commerce -- on the ecosystem side. And as you can see from our presentation, we were working hard in terms of increasing number of partners. Like, for example, on our Halyk Market platform, we increased a number of partners from 673 to over 1,000. We increased number of SKUs from 175,000 to a 250,000 SKUs. And we also continue to onboard our partners on our open ecosystem, hence number of partners almost doubled within the first quarter to close to 5,000 partners. And we continue to introduce new solutions in our platform. So from that perspective, I think we're building some more firm base for our ecosystem platform for our marketplace and Halyk Market. And as I said, we start looking into readjusting our credit solutions, namely BNPL and we start this job, and we hope that by the end of second quarter, we might readjust our terms, which should provide more support to our GMV dynamics in the second half of this year.

Okay. And on your BMPO side, I know you said you tightened the underwriting standards a bit. I was just wondering, are you seeing besides -- if you take away the January protest and sort of geopolitical risk, is there any area of concern in particular for you, are you seeing more asset quality issues on that area? Or is this just you being cautious as usual?

Yes. I think it's -- regarding the NPL, I think the same comments that Almas provided for unsecured retail would be fair.

The next question comes from Simon Nellis.

Simon Nellis from Citi. Yes, my first question would just be on the very high fee expense. Can you just elaborate on that? And what's the outlook going forward? Is this very high fee expense has been a trend for a while? And is there any hope that it will calm down? That will be a question. I guess my second question, I can just tell you all my questions first. If you could just give a bit of an outlook on the credit growth kind of underlying, excluding the Sberbank's transaction and what you're seeing on the ground and in terms of pricing on the lending book as well, would be interesting -- and then last, just on the dividend, I mean, it seems that you already made 1/3 of the lower end of your full year target. Your ROE is above 20%. Capital position is strong. The company has been doing share buybacks. Assuming that the results kind of are similar to this quarter, I mean, is there anything else that would necessarily stop you from paying out a dividend? I think it's something that investors are obviously very interested in. So it would be useful if you could provide any more color there.

Simon, thank you for your questions. Regarding fees and commission expenses, which indeed grew by 28% year-over-year. That was mainly due to increase in payment card expenses, which is the result of growing transactional banking number of transactions, but also certain impact was from loyalty program bonuses. And as you see, we had a very strong increase in transactional activity in the fourth quarter and a portion of the fees, which is charged by the Visa, Mastercard, UnionPay, Amex, they came in the first quarter. So going forward, we expect that, that would be slightly smoothed out. Again, regarding the full year guidance, we, as I mentioned, would be looking to that and will be providing after half-year results. But just to recap, we -- for this whole year so far, our guidance is the growth of net fees and commissions at the level of not less than 5%. So I think until we revise that, please take that as a valid guidance. On the loan growth, yes, the Sberbank transaction itself, I think, is providing sufficient boost to the -- to our loan portfolio. But even if you do not take into account the Sberbank transaction and actually the first quarter results do not include them, I think we are already ahead of the initial guidance indeed which we provided earlier this year. Again, that guidance was at the beginning of conflicts that had some stress test elements. As I said, we would be looking into our revised guidance shortly. But definitely, with or without the Sberbank transaction, it seems like the dynamics is better in terms of the growth than it was provided earlier this year. In terms of dividend payments or buyback, I have to say that on the buyback, we did our transaction December last year, to remind that we purchased back close to KZT 150 billion of shares outstanding. So that itself was a transaction that optimized our capital by that time. We see that organic growth of total assets of credit portfolio is stronger than we anticipated ourselves in the beginning of this year. The Sberbank transaction itself, as we presenting today is itself is the efficient utilization of capital. So when the management would be looking into decisional dividends in the second half of this year, I think it will take into account dynamics of capital adequacy, which happened due to Sberbank transaction due to organic growth, we would be looking into further projections how the business would be evolving throughout the year. And of course, we still have to take into account the risks which still remain in the economy. Inflation, as it was reported for April is standing at elevated 13.2%. Our Halyk Finance is projecting that inflation by year-end would be in the range between 12% and 14%. Central Bank, National Bank of Kazakhstan increased recently base rate to 14%. Again, our Halyk Finance recently provided guidance that they anticipate base rate to stay between 13% and 15% by the year-end. The conflict has not removed yet. There might be still further tightening of sanctions. So we would be looking at the business prospects, we'll be looking at the risks by that time. We'll be looking at the dynamic of our net profit, which again is in the first quarter ahead of our initial estimations. And we'll be taking the balanced view on that before making any decisions.

Okay. Just on the credit growth. So the Sberbank transaction closes in 2Q, yes. Was there any negative goodwill on that transaction? It doesn't seem so just looking at the capital ratio?

There is no goodwill because we did purchased. Yes, we purchased portfolio and to recap the portion of the portfolio, namely 30% of SME in retail portfolio came with 7% discount.

Yes. Yes, sorry. And then just going back to the fee expense issue. So is that just a function of when your clients use cards that you have to pay payment systems, so it's just a function of increasing transaction volume. Is that pretty much it? I mean, other than the...

There are a number of fees, which is attached. There is interchange fees, there are service fees, but basically, it's a function of transactional activity and then which card I used and some other nuances, but it's transactional-driven.

Yes. But why is it so much prevalent on the expense side and not on the fee income side? Because I guess there should be a...

One bigger portion is related to service fees, which is charged by the international card companies. And as I said, some of that in the first quarter was attributed to heightened activity, which was in the fourth quarter. So as said, that effect would be smoothed out throughout the year.

Okay. So is there any like accounting lumpiness in terms of...

So basically, first quarter is seasonally slower than the fourth quarter. Also in the third quarter, we had some impact from the general win. That's why the transaction activity in the first quarter is substantially less in the fourth quarter, while some fees on the expense side was attributed to activity on the fourth quarter.

Yes. And on the loyalty side, I mean, I know sometimes banks -- they -- it is not accrued evenly over the course of the year. Is that also an issue with you? Is it kind of lumpy or...

No, no. It's a function of transaction activity as well as the rates of the bonus program. As you remember, last year, we launched the promotional program from September last year until January of this year, and that was applicable to the full transactions or there was some modification to the program. So it's a function of 2 things. Again, the transaction activity of clients as well as the level of bonus, which we are attaching to these transactions.

And the next question comes from Ronak Gadhia.

Three or four questions. Firstly, on the acquisition of loans from Sberbank. Is there -- have you done any due diligence? And within the diligence, have you figured out if the borrowers you have acquired have any relationship with Russia in a direct or indirect through value chains? The second question is on margins. Could you just maybe provide what the outlook for margins is through the rest of the year when you gave your full year guidance at the end of the full year, there was expectations that margins would decline this year. Should we still expect that to come through, especially given the recent increase in funding costs? And also on a more medium-term basis, given your increasing exposure to the retail segment, should we expect your margins to structurally increase over the medium term given the increased retail exposure? And then my final question is, again, related to Russia. Has there been any Russia-related write-offs in the first quarter, be it from your subsidiary in Russia or the exposure you had on your balance sheet via Halyk Kazakhstan?

Yes. So Ron, thank you for your questions. On the Sberbank, again, we had some principles, which guided our transactions. So we made our due diligence. On retail and small businesses actually be done on the portfolio basis. So we had certain criteria, which were attached and that was not the transaction like all or nothing. So we have possibility to get portfolio on retail and small business side, which corresponds to our criteria. On medium-sized and corporate borrows, we had detailed due diligence. Actually, we had information which was provided by Sberbank, but also because in parallel, some of these clients were approaching us with requests for refinancing. So we had the opportunity to have direct interaction with these companies and get direct information from them. So from that perspective, we have a full picture on medium-sized and corporate customers. And we, again, have the ability to cherry-pick and decline companies and transactions, which do not correspond to our risk parameters. Obviously, when we made due diligence, we look at the -- all the risks including any potential risks to the revenues to the profitability, we, as a matter of fact, starting from February during our credit reviews with the customers looking at the elements of exposure to Russia on trade side and same principles was applied when we make the diligence of these new clients. On the margins, yes, as you can see from the portfolio which we acquired from Sberbank the bigger proportion was on the retail side. And actually, the retail -- our retail business actually benefited probably the most. So that it might impact the structure of our credit portfolio. And that all things being equal should have positive impact on net interest margin. Obviously, we have to see how the increase on the funding side due to increase in the base rate might also affect the overall balance between assets and liabilities, but we expect that on a NIM basis, we should be able, at least to defend the levels, which we should have so far. And I didn't remember your last question if you could...

The last question was, have you done any write-offs in Q1? Were there any Russia-related write-offs either because of the subsidiary you have in the country or direct exposure on Halyk Bank's balance sheet?

Our subsidiary in Russia is quite small. It's less than 1% of our balance sheet. And its great portfolio is half to retail clients and half to SME clients. So from that perspective, we, at this point of time, do not see reasons for any additional provisions. So they're having business as usual from that perspective. But when I'm saying about business as usual, they are not lending at this point of time. But from collecting from a different client, they have no, I would say, restrictions or they are not seeing any unusual behavior from the current client base. As we have also mentioned before, in our press release, we have some direct exposure on Halyk Bank books to a couple of clients which operate in trade centers. They were actually impaired before -- long before current events. They are covered by collateral at the same time. Our current analysis shows that there is no need for any additional provisions. So they have some good provision which was created well before 2022. So there is no additional provisions warranted at this point of time. Obviously, we continue to monitor the situation. We continue our analysis on a regular basis, but I'm talking as of now. I think we have some -- few questions provided us in the Q&A format. I think we answered most of them. Most of them relates to potential dividend payout. There was also a question on NIM dynamic. I think we also covered that question. One question relates to the nature of increase in balance and average interest rate for interbank liabilities. What kind of products are these exposure in? Why did average interest rate increase by so much? And what kind of counterparty banks are the increase due to, for example, overseas banks or domestic. As we mentioned during our call, we had some increase in repo transaction, which we get to accommodate more transactivity from the client base in the first quarter. Hence that rate also increased because of increase in the base rate. So future dynamic of interest rates for this particular line, interbank liabilities will depend on dynamics of the base rate going forward. Since in Kazakhstan, all repo transactions in Tenge is done on Kazakh exchange for central counterparty, we are not seeing any counterparty risks from these transactions. And there is one more question, just came. What you be able to elaborate on actual bottom line contribution of Sberbank loan portfolio position? Yes, I think it's a bit premature to give any specific guidance because I do not have a particular figure in front of me. But we guided that -- we provided some information on the structure of the portfolio. We provided guidance that on a higher level side, profitability of acquired portfolio corresponds to that of Halyk Bank. There is no new client risk segments, which we acquired. We provide some information on discounts, which was achieved. So probably, there is information to make some high level judgment of a profitability portfolio, but I don't have the exact figure and do not provide some unverified information at this point of time. Yes, there is also one question, landed on increasing insurance expenses in the first quarter. Is it one-off? Or should we expect this trend to continue in next quarters? As we mentioned during the call, there was some restructuring of let's say the relation between bank and our insurance company on selling some insurance products and certain fees being now landed in our insurance subsidiary, which resulted in a corresponding increase in insurance reserves. So we expect that insurance reserves would follow the activity of our retail leasing portfolio. So on the expense side and the reserve side, there might be still continuation of charges for the year. At the same time, part of this reserve, which was charged in the first quarter would start amortizing through profit and that should provide increase in the net insurance income as a result.

And the next question comes from Robert Holmes.

Thank you very much. Just I'd like to follow up on the dividend issue and your propensity to pay the dividend. I was wondering whether or not the -- your propensity has changed following the events in January and whether you see it as really just a purely financial issue or whether domestically given the high inflation rates, whether or not it's politically not acceptable to be paying out significant dividends. I was wondering whether or not there's been a bit of a change in terms of your thinking in that regard?

Robert, thank you very much. I think we have same principles, not changed when we're making dividend decisions on potential dividend distribution. -- we look at typically a few things. One thing is what are the business opportunities to -- and do we see opportunities to grow risk-weighted assets for which we need to allocate capital in an accretive way. So if we see business opportunities that actually is one way, which we are looking at. Secondly, we look at the risk factors. In Kazakhstan, there are a few factors which are influencing the -- I'm talking about the economic risk, obviously. We're still looking at potential volatility on the FX side. And FX is very important for Halyk because almost half of our balance sheet and half of risk-weighted assets is in U.S. dollars. Hence any sharp changes in FX rate actually leads to increase in risk-weighted assets and correspondingly consumes the capital. Secondly, on the economic side, we look at the inflation, we look at the interest rate environment and how that might affect our potential asset quality and cost of risk side. And thirdly, we look how much excess capital we have. You see that historically, until probably last year, we had capital which is substantially above 20%, which was providing a substantial cushioning in the capital. Due to the effect that last year, we showed quite a strong increase in credit portfolio and risk-weighted assets. We completed a buyback transaction at the end of last year. We see increase -- continuous increase in the loan portfolio on an organic basis. We allocated capital in the acquisition of Sberbank transaction. Obviously, we need to carefully look how much of any potential excess of capital given the current level as well as potential internal generational capital profitability is providing a cushion for dividend payments. So we would be looking on balance, looking at all the aspects which I mentioned.

Dear ladies and gentlemen, it seems that there is no questions remaining. So this completes our presentation. Thank you very much for your participation. As usual, our IR team remains open for any of your further questions. Take care and goodbye.