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

Good evening, ladies and gentlemen. Welcome to Halyk Bank conference call on the presentation of financial results for the 12 months and fourth quarter of 2022. Thanks, everyone, for joining us today. The session will start with the presentation by Halyk team and will be followed by Q&A. Please note that the call is being recorded. The participants to today's call on Halyk Bank side are Ms. Umut Metova, Chief Executive Officer; Mr. Murat Koshenov, Deputy CEO, finance subsidiaries and International Activities; Mr. Roman Maszczyk , Deputy CEO, Compliance Risk Management, Data Science and Collateral Chief Compliance Controller. Ms. Olga Vuros, Deputy CEO, Corporate Banking; Mr. Dauren Sartayev, Deputy CEO, SME Banking, Transactional 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 responsible for IT and innovation. Mr. Almas Makhanov our Chief Risk Officer; Mr. Viktor Skryl, Financial Director, responsible for finance and subsidiaries; Mr. Margulan Tanirtayev from IR team; and myself, Mira Kassenova, Head of FI and IR. 2022 has been another record year for Halyk despite unprecedented challenges and macro shocks, we went through this time. The numbers speak for themselves. Our active client base continued to grow. Corporate and SME business reached more than 2,000 and 3,000, and 10,000 active clients, respectively, while retail business reached almost 10 million customers. At the same time, we see continuous shift of our customers towards using our apps as such, our Halyk Homebank and online bank clients increased by 17.5% and 53.2% accordingly. We recorded an outstanding 32.5% growth in our gross loan portfolio. Correspondingly, both our operating income and net income have grown by 42% and 20% in 2022, respectively. Return on average equity stood at 31.7%. It is important to note that earnings per GDR in U.S. dollar terms has increased by 16% year-on-year. Next slide, please. Around 12 months ago, we shared with you our financial guidance for 2022 and then revise it upwards in August. Despite the turbulent operating environment and quite upbeat outlook, we overdelivered on all key target metrics. Growth of our net loan portfolio amounted to 33.8% with 32% growth in retail segment and 34.6% in corporate and SME. Return on equity reached 31.7% supported by higher NIM of 5.6% lower-than-expected cost of risk of 1.2% and operating efficiency with cost-to-income ratio of 19%. Thanks to significantly increased transactional activities, we were able to reach 25.8% increase in net fee and commission income. As a result, our net income amounted to KZT 553.8 billion, beating our guidance of KZT 500 million -- KZT 500 million, sorry. Now I would like to highlight key milestones that we managed to achieve during a storm in 2022. The resilience of bank's credit profile remains undisputable. Fitch, Moody's and S&P have reaffirmed our credit ratings. Our bank was successful in utilizing a onetime opportunity offered by the changes in the operating landscape. We acquired a portion of a very diversified portfolio with good asset quality from Kazakhstan beer. Despite an extraordinary geopolitical situation entailing uncertainties and global macro stocks, in October last year, we paid 30% of net income in dividends for the financial year of 2021. It is worth to note that this is the fifth year in a row where the average payout ratio amounted to 47%. During 2022, we disposed our subsidiary banks in Tajikistan and Russia and emphasized our international expansion in Uzbekistan as a strategic focus. We are going to present a dedicated section on this later today. We are also making a significant progress in our ESG initiatives, which we will showcase in the next part of this presentation. Lastly, in the second quarter of 2022, we made a game-changing breakthrough. We launched brokerage service Halyk Invest, which is integrated in our Halyk Homebank Super App. Evidently, Halyk Invest was well received by users, which means an increasing number of clients and third as a vital infrastructure of the [indiscernible] IPO. Next slide, please. On this slide, we are glad to highlight the substantial progress in implementation of ESG principles throughout the business and corporate government system, and this is an important strategic priority for Halyk. In 2022, based on the road map, worked out jointly with international consultant, a sustainable development action plan for 2022, 2024 was developed. The social issues committee under the Board of Directors was transferred into the Sustainable Development Committee. And ESG functions were distributed among the committees under the Board of Directors. The bank's management Board was instructed to update the Board of Directors on the progress of the sustainable development action plan, at least semiannually to ensure a quality ESG issuance management. We are proud to be the first bank in the country to receive the reputable awards as an acknowledgment of our achievements in developing and improving sustainability practices. Thus, in December 2022, the experts from the International Financial Magazine, Asia Money recognized Halyk Bank as the best bank for ESG and the Best Bank for diversity and inclusion in Kazakhstan. We are glad to note that last year, our ESG report was in the top 10 of ESG information disclosure rating list from PwC and was awarded by Kazakhstan Stock Exchange at the best year report in the financial sector. Moreover, in January 2023, Halyk Bank became the first bank in Kazakhstan to join the UN Global Comp, implying our commitment to its 10 principles and our willingness to support the UN objectives and initiatives in the sustainable development area. Next slide, please. One of the key ESC strategic areas is the environmental impact management. In 2022, the bank continued to reduce its direct impact on the environment by improving resource use efficiency. At the same time, fully understanding our main environmental impact being indirect. Last year, the bank has engaged an international consultant for implementation of the ESG agenda in the lending process. We have started integrating ESG into the bank's risk management system and implementing the responsible finance principles. Moreover, we have commenced to calculate scope free on indirect emissions, including from the finance portfolio. This year, in the sustainability report in line with the recommendation of TCFD, we are planning to disclose our approach to accessing climate risk and progress on implementing the ESG principles in the lending process. Next slide, please. Now I would like to continue with the update on our digital initiatives for the fourth quarter of 2022. During last year, our core digital platforms, which are Halyk Homebank and online bank demonstrated substantial growth of customer engagement. The number of MAU and DAU of Halyk Homebank app has increased by 28.6% and 27.4% year-on-year, respectively. MAU reached KZT 5.4 million in the fourth quarter of 2022. We also see a growth in the number of active users of online bank app for businesses and the number of MAU reached almost KZT 254,000, increasing by 62.2% year-on-year. Halyk Homebank and online bank apps continue to be within leading financial platforms in the country. We are glad to know that we achieved all of our goals for 2022, continuously developing our client proposition and improving customer experience. Next slide, please. To increase in customer engagement within our digital platforms continues to support a notable growth in credit and noncredit products for retail clients and businesses. Share of digital loans issued equal to 76% in 2022, which is up 10 percentage points year-on-year. The share of yield online deposits increased by 14 percentage points last year and was at 41%. In the absolute terms, the number of new online deposits for the fourth quarter of last year equaled to KZT 63,000. The share of noncash card payments reached 68% last year, which is up 13 percentage points. We are demonstrating a year-on-year growth by 17.8% in the number of digital loans issued to legal entities. The decrease of digital loans issued in the fourth quarter of last year compared to the fourth quarter of 2021, mainly appeals to the effect of inflation increase, resulting in the base rate hike to 16.75% in 2022 and tightened risk policies. To compensate, we were shifting our focus in SME from lending to transactional business which successfully displaced in the strong growth of online credit payments number and volumes, which have grown by 45% and almost 60% year-on-year, respectively. We are proud to highlight that we'll ramp up our offering to legal entities and launch digital loans and onboarding for LLPs in April last year. Consequently, online onboarding for legal entities increased by almost 99% last year. Next slide, please. In the past 2 years, we have introduced a vital products and services through our ecosystem verticals to meet our client needs and further improve customer experience. In the fourth quarter of 2022, GMV of Halyk insurance decreased by 3.3% year-on-year due to the shift of the client's focus to the profitable segments, while Q-on-Q dynamic has demonstrated 13.4% growth. We are glad to note that the GMV of Halyk Travel and Kino.kz have expanded 2.7x and 2.6x year-on-year, respectively. The market share of Kino.kz out of online sales of entertainment tickets increased from 16.7% to 25.4% year-on-year. Development of our marketplace platform, Halyk Market, remains one of the key priorities for us. We achieved 15.2% Q-on-Q increase in GMV in the fourth quarter of 2022. More details on Halyk market will be discussed later in this presentation. As I previously mentioned, we launched brokerage service Halyk Invest integrated in our Halyk Homebank Super app. And now we would like to discuss it in a broader way. On this slide, we are delighted to represent a new structure of our brokerage service offerings. In the beginning of second quarter of 2022, we launched the Halyk Invest, a brokerage service integrated in our Halyk Homebank super app. It is an app solution targeted primarily on broad scope retail investors. At the same time, we are enhancing digital solution of our brokerage arm, Halyk Finance for which the main scope of clients are qualified retail and institutional investors. This is a game-changing breakthrough, which is confirmed by 4.8x increase in joint basis number of clients of its brokerage services from second quarter to the fourth quarter of 2022. Additionally, 34% of total brokerage accounts and 77% of Omnibus accounts in the country were opened within Halyk Invest last year. Our bank was the first financial institutions in Kazakhstan to pursue the opportunity of providing broker services not only to legal entities, but also to individuals, any change in the legislation on banks and its activities. We also reached 4.6x increase in transaction volume in Halyk Invest and Halyk Finance combined in the fourth quarter, mainly propped by the KMG IPO in December of 2022. 34% or KZT 52 billion of total KMG IPO placement amounts we have made through Halyk Group's infrastructure. 69% of orders in this IPO were made through Halyk's brokerage services. 57% of retail investors participated in KMG transactions, transaction were Halyk's clients. At the moment, the bank possesses the most dynamically growing client base. During the KMG IPO, we opened around 90,000 accounts for our clients. Next slide, please. Now let me switch to business segments update for the 12 months and the fourth quarter of this year. Moving to our retail segment performance. We are particularly proud with the team's solid performance across key dimensions. We continue to see a strong customer engagement and increasing digital footprint within our Halyk Homebank app and growing transactional activity. The transactions volume has increased by 23.4% year-on-year. On a consolidated basis, the retail gross loan portfolio has expanded by 32%, partially propped by the acquisition of best loan portfolio. Moreover, customer deposits increased by 18.2% year-to-date. We also like to see a solid growth in retail products penetration by 6.2% year-on-year. Next slide, please. Our main focus remains on enhancing the Halyk Homebank app Super app, which formed the foundation of our offering to retail customers. We keep on to see notable results in customer activity. Moreover, the mouse penetration rate in retail active client base has risen from 46% to 54% during last year, showing a further potential for growth. On an unconsolidated basis, our retail portfolio has grown by 35% year-on-year. In 2022, the loan issuance volumes have increased by 1.6% year-on-year and in the fourth quarter, the loan issuance volumes decreased by 18.7%. This mainly appeals to the effect of inflation rise resulting in the base rate hike to 16.75% last year and tightened risk policies. On the other hand, digital sales increased by 27.7% year-on-year and reached 41% of total retail loan sales in 2022. Despite some turbulence in the operating environment, we observed stable asset quality in retail lending with NPL 90 days plus ratio standing at 3.9% and with NPL coverage ratio of 171.7%. Next slide, please. To give you more color, let's discuss Halyk marketplace dynamics in more detail. Our team was able to successfully withstand the challenges brought by the operating landscape. And in 2022, the GMV for our Halyk marketplace increased by 1.8%. In the fourth quarter, Halyk market per GMV decreased by 32.8% year-on-year. This mainly relates to the high base effect, there was a white scale loyalty bonus program in the fourth quarter of 2021 as well as effect of inflation increase resulting in the base rate hike in 2022 and tightened risk policies, including for NPL products. It is worth noting that we are continuing to deliver scale development of UI/UX design of Halyk market. During last year, we made significant progress in modernizing our architecture and capabilities. These improvements resulted in a substantial increase of partners number and SKUs. In 2022, the number of partners grew by 3.5x year-on-year and SKUs raised by 2.8x. Next slide, please. During 2022, we continue to develop our retail platform in order to simplify our clients' life and meet their needs. As we discussed earlier, one of the -- of our bright elevation was Halyk Invest brokerage services integrated in Halyk Home Bank app. Next slide, please. Over the fourth quarter of 2022, we continue to focus on further upgrade of GovTech. We launched a number of new government services such as the proactive benefits for socially vulnerable groups and lean removal in case of other redemption and insurance policy on vehicles and insurance report and insurance agreement and statement of legal entities. It is essential to note that we are the bank with the highest number of online government services available among second-tier banks in Kazakhstan . At the end of 2022, our clients had an access to 35 government services. Last year, the government services were used over 10 million times. Next slide, please. In regards to our corporate and SME businesses, we want to start by emphasizing our bank's role as the biggest player in lending to legal entities in Kazakhstan. On this slide, we are demonstrating the market lending dynamics with and without Halyk. As you may note, last year, market was thus increased by 16.7%, whereas market without Halyk increased only by 2.6% year-on-year. Last year, our bank's legal entities loan portfolio increased by 33.7% year-on-year. It is important to highlight that as of the year-end of 2022, Halyk's share in total market legal entities loan portfolio was around 52%. Next slide, please. Turning to corporate segment. We would like to note that on a consolidated basis, our loan book has expanded by 35.1% year-on-year. Our corporate portfolio remains well diversified across industries, while local currency loans comprised 75.3% of the loan book. As of 1st of January of 2023, the segment NPL ratio decreased to 0.8%, while the provisioning coverage increased to 557%. We see a sound growth in our active corporate client base as it reached over 2,300 customers in the fourth quarter of 2022. Essentially, the product penetration and transaction activity have been notably increasing as well. Next slide, please. The SME banking continues to demonstrate a solid performance. The number of SME mile in online bank digital platform has raised by 55.3% year-to-date. We also want to highlight that at the year end of 2022, on a consolidated basis, our loan book has expanded by 23.8%. The number of SME borrowers has increased by 1.7x. Segment NPL ratio decreased to 3.6%. We are continuously enhancing our digital proposition for SME clients. In 2022, we achieved 36.9% growth in SME loan issue and volumes year-on-year. Mainly, it has been driven by digital loans, which already comprised 33% of our SME loan portfolio. Number of IE borrowers increased by 69.7% year-to-date, where 71% of IE borrowers were served digitally. Number of LLP borrowers raised by 49.2% year-to-date, where almost 18% of LP borrowers were served digitally. Following the launch of digital tender guarantees in January of 2022, we saw substantially increasing demand for this quite a unique product. Last year, the number of issued digital bank tender guarantees reached 22,000 where the number of clients was 1,600. As a result, the total number of issued blank tender guarantees was 7.8x up year-on-year. Now I would like to hand over the call to our Financial Director, Viktor Skryl. Thank you.

Thank you. Hello, everyone. Now I would like to present the group's progress on continuous business expansion in Uzbekistan. Next slide, please. As an active regional financial player, Halyk has always been interested in the Uzbekistan market. Uzbekistan has the largest population in Central Asia, the largest and fastest-growing economically and active population. The country's economy has demonstrated consistently high GDP growth rates for several consecutive years. And additional factors that bolstered interest in this market was the rapid growth of trade and investment links between businesses in Kazakhstan and their partners in Uzbekistan. A few figures supporting these strategic focus. First, since 2019, the trade turnover between the 2 countries has expanded from $3.3 billion to $4.6 billion through the implementation of agreements reached between the heads of state governments of the 2 countries. Kazakhstan is one of Uzbekistan top 3 trade partners. Second, businesses from Kazakhstan are investing very actively in joint projects with their partners in Uzbekistan. The number of enterprises in Uzbekistan with shareholders from Kazakhstan has increased from 510 in 2019 to around 1,200 in 2022 on the other hand. The number of enterprises in Kazakhstan with shareholders from Uzbekistan has increased from 1,800 in 2019 to 3,700 in 2022. There has been significant progress in the digital technologies development in recent years. The Internet and smartphone penetration rapid growth is developing dynamically as well as the active growth of noncash payments demonstrates the trend of increasing demand for digital financial services. Next slide, please. Halyk began to consider a potential market entry in Uzbekistan back in 2017, 2018, following the initial successes of the country's wide-scale reforms and policy of openness for investors. After taking the decision to enter the market, the bank established a subsidiary in Uzbekistan and in May 2019, Tenge Bank received a license from Central Bank of Uzbekistan to conduct banking preparations. As of now, Tenge covers 9 regions with over 70% of population. It's worth to note that continuous expansion on the market of Uzbekistan is an integral part of our group overall development strategy. To strengthen our Uzbek market position and further enhance cross-sell capabilities across the board. Last year, we have started to provide nonbanking products to our clients in Uzbekistan. In 2Q 2022, our life and nonlife insurance subsidiaries began to issue reinsurance for Tenge Bank insurance partners. Halyk Kazakhstan report has registered its subsidiary interest and is now entering the market of data processing and cloud services in Uzbekistan. We had to launch marketplace platform in gear market in the first half of 2023. At the same period, Halyk Service will establish its subsidiary in Tashkent to start providing Internet acquiring services. Next slide, please. We are looking to the expansion in Uzbekistan comprehensively. And apart from the development of Tenge Bank, we provide financing from Halyk's Bank's own balance sheet to support trade and cross-border business expansion between 2 countries. Starting from 2020, the total financing amount has reached more than $550 million, out of which around $180 million were provided as bilateral loans to state-owned companies, SMEs and Kaza Uzbek joint ventures. Around $400 million were provided as indicated loans for corporate clients and financial institutions. In 2022, the bank actively participated in trend finance transactions to support trade between Uzbekistan and Kazakhstan via issuance of export letters of credit and import guarantees. Next slide, please. Now I would like to highlight the results that Tenge Bank has achieved since launch. Tenge Bank is the first financial institution with foreign capital established in Uzbekistan after the launch of major reforms. It has a unique market position due to several competitive advantages. First, and the most important is Halyk's strong focus on this market as evidenced by the solid capital injection of more than $113 million, #1 among subsidiary banks in Kaza Uzbekistan. This gives the bank a solid base in terms of capitalization and liquidity compared to competitor banks. Second, high international credit ratings at Paris with Bakestan Sovereign rate, which serves as additional factor of trust in establishing relationship with clients and partners. The bank is now servicing around 2,000 corporate and more than 200,000 retail clients. Since its inception, the bank has positioned itself as a part of the larger group that offers major companies the possibility of co-financing from Halyk. Gross loan portfolio of Tenge Bank totaled $223 million. Tenge Bank is continuously improving clients' digital proposition by developing removal channels, reformating BPM software and providing in-house processing. During 2022, Tenge Bank launched mobile banking solution for retail clients and web banking platform for legal entities. Next slide, please. In 2022, Tenge Bank's corporate loan portfolio increased by 14.8% year-over-year to almost $127 million, while the corporate deposits grew by 2.2x to $70.3 million. Tenge Bank provides its corporate clients with a full range of lending and nonlending products, including such unique services and settlements between Uzbekistan and Kazakhstan in national currencies, direct purchase of Kazakhstania, minimal commissions for payments within Halyk Group. The bank is also actively developing its web bank platform for legal entities, which was launched in May 2022. Next slide, please. Tenge Bank positions itself as a universal bank, but also actively develops its retail business direction. In 2022, Tenge Bank's retail loan portfolio increased by 92% year-on-year to $96.3 million. In the same period, Tenge Bank's retail deposits grew by more than 5.3x to almost $72.7 million. Tenge Bank offers the diversified range of lending and non-lending retail products and provides convenient and sophisticated multichannel customer service format, including mobile banking app launched in April 2022 and marketplace platform to be launched in the first half of 2023. It is worth to mention that Tenge Bank has entered the top 3 auto lenders in Uzbekistan, thanks to introduction of automated credit process and scoring system. Next slide, please. Tenge Bank is actively developing its digital client proposition. The web banking for legal entities in gear business provides for different types of payments 24/7 and online statement generation being launched in May 2022. It already demonstrates quite a good client engagement with almost 1,000 users. The mobile banking Tenge24 app enables retail clients with fast identification and aligned onboarding capabilities, ability to use the app without having physical card, P2P payments and the fixed transactions. At the year-end, the app had more than 260,000 users. Now I would like to hand over the floor to my colleague from IRT Margulan Tanirtayev.

Thank you, Viktor. Hello, everyone. Now let me switch to the overview of Halyk Group consolidated financial results for the 12 months and fourth quarter of 2022. During the 12 months, the bank generated KZT 553.8 billion of net income. The year-on-year increase by 19.8% was mainly due to significant increase in lending business, including acquisition of Burst loan portfolio as well as increase in net gain on foreign exchange operations and net fee and commission income. Other noninterest income increased by 2.4x for the 12 months of 2022 versus the 12 months of 2021, mainly due to the volatility of exchange rates and interest rates, which resulted in significant growth of net gain on foreign exchange operations through net dealing operations, which was partially offset by a loss on disposal of subsidiaries amid the sale of subsidiary banks in Tajikistan and Russia. Net insurance income for the 12 months of 2022 decreased versus the 12 months of the last year. Let us remind you that 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 12 months of 2022, we demonstrated 21.7% return on average equity and 4.1% return on assets. Next slide, please. Total assets of the group increased by 18.4% versus the year end of 2021 as a result of growth in amounts due to customers to support the expansion of lending business. Customer deposits increased by 23.8% as a result of the client's inflow due to changes in the operating landscape. Next slide, please. Interest income for the 12 months of 2022 increased by 41.8% versus the 12 months of 2021, mainly due to increase in average rate and balances of loans to customers. Interest expense for the 12 months of 2022 increased by 57.4% versus 12 months of the last year, mainly as a result of the growth in average rate and balances of amounts due to customers. Consequently, net interest income for the 12 months of 2022 grew by 30.6% versus the 12 months of 2021. In the 12 months of this year, net interest margin was affected by the increase in average rates on both loans to customers and amounts due to customers following the base rate hike from 10.25% to 16.75% in the 12 months of 2022. Furthermore, the share of loans to customers in total interest-earning assets increased substantially. Moreover, there was an increase in the average rate and average balances of FX amounts due to from credit institutions and FX interest-earning cash and cash equivalents following the global increase of USD interest rates. As a result, net interest margin increased to 5.6% per annum for the 12 months of 2022 compared to 5.2% per annum for the 12 months of 2021. Next slide, please. We made a new slide to our regular earnings results presentation, which represents our bank's core net noninterest and transactional income. It includes net fee and commission income, net dealing income and net insurance income. This new approach to the disclosure provides more in-depth view of the revenue generated by our bank from sources assets and interest income. Moreover, net interest income is an important component of our revenue mix. It provides a stable source of income that is not dependent on interest rate movements. Our bank has performed very well in terms of net noninterest income as it increased by 87.4% for the 12 months of 2022 versus the 12 months of 2021, mainly due to the notable increase in net dealing income and net fee and commission income. Next slide, please. The management of the bank made a decision to change the disclosure of fee and commission income and believe that this representation provides a better view of the bank's financial results or this line item of the consolidated financial statements. Accordingly, the bank has revised its representation of fee and commission income as at year-end of 2021 to conform to the presentation for the current period. Transactional income of individuals and legal entities includes fee and commission income derived from bank transfer on settlements and salary projects, maintenance of customer accounts and plastic card operations, cash operations and servicing customer pension payments. Transactional expense of individual and legal entities includes fee and commission expense derived from payment cards, bank transfers and cash operations. In the 12 months of 2022, the overall dynamics of fee and commission income and expense was driven by the increased transactional activity as a result of the clients' inflow due to changes in the operating landscape. Net fee and commission income for the 12 months of 2022 increased by 25.8% versus the 12 months of the last year due to increase in net transactional income of both legal entities and individuals as well as in fees on letters of credit and guarantees issued, which was mainly propped by the increase in overall volume of letters of credit and guarantees issued. Next slide, please. Operating expenses for the 12 months of 2022 increased by 11.7% versus the 12 months of 2021, mainly due to the indexation of salaries and other employee benefits starting from 1st March of 2022, the employee premiums reserve accrued in the 12 months of this year as well as increase in charity expenses and IT investments. Operating expenses for the fourth quarter of 2022 increased by 2.9% versus the third quarter of 2022, mainly due to the employee premiums reserve accrued in the fourth quarter of this year, increase in withholding taxes due to the disposal of subsidiaries and advertisement expenses growth. The bank's cost-to-income ratio decreased to 19% compared to 24.1% for the 12 months of 2021, amid higher operating income for the 12 months of this year. Next slide, please. On the balance sheet, compared with the year-end of 2021, loans to customers increased by 32.5% on a growth and 33.8% on a net basis. The increase in the gross loan portfolio was attributable to a rise of 35.1% in corporate, 23.8% in SME and 32.7% in retail loans. We also have to mention that share of FX loans was at historical low level of 17% as at the end of fourth quarter of 2022. Next slide, please. Cost of risk on loans to customers for the 12 months of 2022 was at 1.2% compared to 0.2% in 2021, reflecting more normalized credit loss expenses on corporate and SME loan portfolio and higher credit loss expenses on retail loan portfolio. Cost of risk on loans to customers decreased to 0.4% compared to 1.4% in the third quarter of 2022 due to repayment and recovery of corporate and retail problem loans. 90-day NPL ratio decreased to 2.1% from 2.7% as at the end of third quarter of 2022, mainly due to restructuring of previously impaired corporate loans. Next slide, please. Stage 3 ratio decreased to 7.5% as of the end of fourth quarter of 2022, mainly due to recovery and repayment of corporate problem indebtedness. Next slide, please. On liability side, the corporate and retail deposits increased by 29.8% and 18.2%, respectively, compared with the year-end of 2021 as a result of the client's inflow due to changes in the operating landscape. As at the end of fourth quarter of 2022, the share of KZT deposits in total corporate deposits was 60.6% compared to 52.9% as at the year-end of the last year, while the share in total retail deposits was 52.4% compared to 50.6% as at the year-end of 2021. Next slide, please. On a consolidated basis, capital adequacy ratios of the bank increased in the fourth quarter of this year as a result of net profit earned by the bank during the fourth quarter of 2022 amid the slight increase of risk-weighted assets and payment of dividends. Risk-weighted assets were almost flat compared to the third quarter of 2022 due to regulatory easing in risk weighting of SME loans in the fourth quarter of 2022. Next slide, please. I am pleased to present our outlook for the financial year of 2023. Retail net loan portfolio growth is expected to be circa 12%. Corporate and SME net loan portfolio growth is expected to be in the area of 18%. Total net loan portfolio growth is expected to be circa 16%. Growth of net fee and commission income is expected to be in the area of 15%. Cost of risk is expected to be around 1.2%. Consolidated net income is to be more than KZT 700 billion. Return on average equity is to be in the area of 35%. Net interest margin is expected to be more than 6%. Cost-to-income ratio is expected to be 20%, 22%. Dear, ladies and gentlemen, this completes our presentation. Now I would like to open the floor for your questions, please.

[Operator Instructions] And the first question comes from Elena Karaseva.

A very strong 2022 results. I have several questions. So my first question is about 2023 guidance. So what kind of noninterest income we can expect in 2023, given that contributed quite a lot in 2022. So especially, I mean maybe on dealing income. Another question is on net interest margin and especially implications from quite a high interest rate level in Kazakhstan. So as you said, Vicky, rate is 16.75%. So how it's going to be passed on borrowers? Do you see any concerns regarding quality, quality. So what kind of situation quite elevated level of interest rates. And the last question is on capital distribution, given you have a very strong 2022 and guidance for 2023 is quite robust. What kind of capital distribution you can see for 2022? I mean, dividends out or maybe you can see any M&A deals you are quite successful in Uzbekistan expansion? Do you see any M&A opportunities there or maybe anything else, that's it.

Elena, thank you very much for your questions, these wonderful questions. Let me answer one by one. Regarding noninterest income, indeed 2022 was quite strong. And actually, we saw increase in dealing business, we also see increase in the fees and commission business, which actually exceeded our expectations. Both items was due to strong client activity also due to change in the rating environment because we saw some inflow of customers linked to borrowing buying portfolio from SberBank, but also we see some inflow on -- which was not directly related to this particular transaction. We see volatility in the market. We see that some of these elements would continue in 2023 so we expect to further grow our client base. We expect that certain volatility will remain in the market, but we are not taken as a base case as such unusual situations with which we are facing during 2022 so we expect somewhat lower volatility. So from that perspective, we still see that there is further room to grow our fees and commission income. And as you see from our outlook, we expect that it will grow further by around 15%. But we expect the decrease in the dealing revenue, which would be lower than in 2022, but which would be definitely substantially higher than in previous years, like 2021. While we are not providing the specific figure for total operating noninterest income, I think that provides sufficient guidance in that regard. Regarding the net interest margin, again, let me briefly reflect why our NIM improved during 2022 despite increasing in the rates. Actually, there are a few contributors. One is that we saw a higher proportion of loans in our total assets. And within that loan portfolio, we see that, for example, with the purchase of portfolio from SberBank, some higher portion of retail loans landed in our balance sheet. So the higher income-generating assets actually the share has been increase in the mix of our total assets. Secondly, around 1/3 of our balance sheet is related to foreign currency, which is dominated by U.S. dollars. And the increase in U.S. dollar rates actually substantially improved net interest margin for dollar portion of our balance sheet. Because on funding sites, the rate has not increased substantially compared to increase on the asset side. We expect again that some of these elements would continue in 2023 and that's why we expect that we have potential to further grow our net interest margin to the area of 6%. And regarding the capital distribution, I would like to give the floor to Umut Shayakhmetova, our CEO.

Good evening, everyone. I would like to say that we see quite good results for the year 2022. And as you see in our guidance for 2023, we also see it positive. And we expect that the shareholders' meeting in May. The decision will be made on paying out the dividends for year 2002 and at the level of our normalized levels, which are established in our dividend policy.

And the next question comes from Olga Naidenova.

Congratulations with a very strong set of results. I again wanted to -- I would like to return to the dividend question, just to reconfirm that the policy remains to keep the 17% core equity Tier 1. And if I may, are you in any way restricted in your dividend payout given the funding from the regulator on the acquisition of Ascom. And my second question would be regarding your provision charges and why did you reduce the coverage of Stage 3 loans in -- by provisions, considering your very strong loan growth and what are the main scenarios, -- why is that happening even though, of course, the asset quality has improved over the quarter.

Olga thank you very much for your questions. Regarding the regulation, probably, let me provide some reflection on that. As you know, the law has been passed, which says that there should be certain conditions met before the bank on which is still subject to certain funds which we received during different support situations have to met before making any dividend distributions. And the law is referring to a sub-law, which needs to be taken by the regulator. The sub-law has not been taken yet. The regulator has not been taken yet. There is still some discussions going on. We expect that within the next few weeks, this regulation would finally developed. We expect that this regulation would set up certain conditions, which needs to be taken by the bank in order to make dividend payment decisions. Some banks might pass that conditions, some might not pass. We see that within Halyk Bank capital structure, the portion of state support, which was actually received not by Kazakhstan bank, which was taken by Halyk Bank back in 2017 is not material related to total capital of the bank that's why we expect that after the regulation would come into force and after we make necessary check-ins regarding the conditions. We expect that we still be able to make dividend payments. We largely expect that it will be in line with our dividend distribution policy and largely in line with dividend payment history, which you might look during last 5 years. At this point of time, we are not in position to provide any specific dividend payout ratio because that would be subject to shareholders' meeting decision. And after the regulation would be put in force. And in dividend policy we have a reference to mostly as a guidance which is linked to our capital adequacy ratio. And we are currently comfortably above this level, which is guided in the policy. As far as provisioning and Stage 3 loans coverage ratio, we would like to underline positive trends that took place in 2022. Overall, as you can see, the problem portfolios decreased in 2022. And the coverage that decreased by a couple of percentage points is the result of our overall assessment of the quality of the Stage 3 loans. It's not a significant change in our opinion and reflects the fact that those loans that were in Stage 3 at the end of the year were better collateralized than they were at the beginning of the year. So our assessment of that is that is not a significant change and is not related to any changes in provisioning practices.

And the next question comes from [ Tunde Ojo ].

All right. Just a follow-up on the dividend question. Would you -- or would you expect that you would need to get approval from the regulator before you are able to pay dividend even after shareholders approved during the shareholder meeting in May. That would be my first question. And the second one, which I already sent you by chat anyway, it's around the news about the controlling shareholder, Amex trying to sell their shares and which you didn't deny as a bank. And I was just wondering if you could provide more color on that if you have any about why at this sort of valuation? And is that being forced by the regulator or just a signal of any sort of problems in the back? Just for you to clarify if you can on that news document in the market a couple of months ago.

Tunde, thank you very much for your questions. Regarding your first question, from draft, what we see, we do not expect that banks would need to explicitly apply for regulatory approval, but there will be certain conditions which banks need to check in order to make a decision whether they are in position to make dividend payments and what potentially limitations might be in terms of size or percentage-wise. But still, because we are regulated entities, definitely, we would expect that the banks would be fully in compliance with any such conditions.

Yes.

And regarding your second question, there was a report from Bloomberg, which was saying that they have the -- their expecting that the Amex might be coming with certain transactions. I think immediately after that Amex came in a local business media, that's the statement, which they made back in 2019 that Amex from time to time might consider bringing some shares to the market in order to support liquidity. It is still in place, but nontransactions -- none of transaction is considered and contemplated at that point of time. That report from Bloomberg I think took place almost 1.5 months ago, but as we see, none of transaction took place since then. For us as Halyk Bank is difficult to comment because it's not the transaction which initiated or potentially might be initiated. But again, the fact is that no transaction took place since that note came from Bloomberg.

Got it. Just if you don't mind me adding just one more because I need to have you on, is on asset quality, you've had a pretty good year in 2022. It started with you thinking it was going to be really bad, and then it turned out not to be as bad. Now you have given a sort of more stable outlook in terms of your cost of expectation. I'm just wondering what is it that has changed from your client base that gives this sort of benign asset quality environment, given all of the problems are still there in terms of inflationary pressures, higher interest rate, Russia, Ukraine, problem next door is still there. If you can just give us a sense of how you're thinking about this risk numbers going forward? And what gives you this sort of comfort.

Let me answer this question. But to understand the all the sites or aspects of this question, let me go back a little bit to the history of 2022. As you remember, we had quite an unfortunate series of events at the beginning of last year. First, let's start with domestic problems in Kazakhstan in January. And then at the end of February, we had this unfortunate military conflict in Ukraine. So overall, when we even couldn't finish our first quarter last year, we already saw quite a combination of negative factors that caused our bank to be more careful in our guidance. That affected both dividend policy last year and also the assessment of asset quality. But it appears that last year was quite benign, especially for our bank. First, we played a very important role in the Casdaq financial sector as the only bank that had enough time and prepared itself to help the banks that fall into those problems, Russian banks that fall under the sanctions. So we bought $1.2 billion in assets from SberBank. And it boosted our -- both quality of the portfolio and profitability. Then we saw that the military conflict didn't affect the overall situation in Kazakhstan. On the contrary, we also saw that there were positive effects for the whole banking sector and for our customers. For example, certain companies that were active in Russian market started relocating and boosted the overall economic environment in Kazakhstan. We didn't see any negative effects for retail customers. So we -- although we -- at the beginning of the year tightened our credit policies, then started releasing them as well. So overall, it was a positive year for us that found its reflection in our financial statements. Going forward, we think that this, I would say, this trend will continue. And if we do not see any shocks that are difficult to be right now even imagine, right? Those trends will continue this year until interest rates in Tenge start changing. But that would happen probably in the second year -- in the second half of this year.

And the next question comes from Mikhail Butkov.

Congratulations on the results. One question on dividends and the capital ratio guidance. So the beginning of the question is how robust is this guidance on 17% minimum CET1 ratio, how strict is that? Because if we look at the capital buffers over the 17%, it is around 120 basis points, which is equal to around KZT 120 billion implying a lower percentage rate as percent of net profits than 50%. This will be around 22%. Then does it mean that you will -- you will pay out profit -- you will pay out dividends, including some profits from the months of 2023, which will actually bring the overall CET1 ratio at that point of time, also close to the level of 17% or there are some additional considerations which we should take into the account .

Mikhail, thank you for your question. As I said, it's not a rule. It's mostly kind of guidance. It doesn't say that we should not drop below 17% in any day throughout the year. It's mostly -- you mostly can look at the kind of average through the year. Obviously, during the period of dividend payout, we might, for some short period of time, drop below that threshold. But I also recommend to look at the internal capital generation capacity of the bank with our guidance for full year of more than KZT 700 billion in net profit, it provides quite a good source of internal capital generation. And supposing that dividend would be approved during month of May. We are talking about 3 -- sorry, 4 to 5 months of 2023, which might be contributing internal capital through ongoing operation of the bank.

All right. And another question is also, can you maybe remind on your FX hedging policies so far on the repricing of assets and liabilities. It looks like that from the end of the presentation, it looks like you expect some moderate depreciation of Tenge into '23. So how does that fluctuations are hedged currently?

Halyk's financial investment has issued the macroeconomic reports where it says that under the base case, they expect that Tenge versus U.S. dollar would be at the level of 480 and the end of the year. So first of all, we do not expect some bigger changes year-over-year basis. There might be some volatility throughout the year related to the fact that there are certain influence on the rate due to certain companies activities to sell dollars in order to pay taxes, for example. So we might see some volatility around tax payment dates. But overall, we are not expecting substantial volatility on the FX side. Secondly, as a matter of fact, we are not preferring to run open currency position in general. Our treasury might take certain short-term position in order to gain from some short-term momentums. But normally, we are having close to 0 open currency position on average.

And the next question comes from Ronak Gadhia.

My first one is on respect [indiscernible]. Could you just maybe share some broad level KPIs of that subsidiary? What is asset profit contribution in ROE? And what do you expect that to be in the next maybe 3 or 5 years? And then the next question is on regulations. Apart from the regulation on dividends, is there some other regulation that you're aware of that may impact the bank over the next 12 or so months. Just this morning on one of the local dailies, I was reading that the President has signed a decree to reduce the debt level of Uzbekistan and there's also a degree to increase the lending to the priority sectors of the economy. So can you just talk about that regulation? And if there are any other regulations that may impact that.

Ronak, thank you for your question. I will start answering from the first question. As we presented in this presentation, we look at the Uzbekistan on comprehensive way. So we having not only banking out of balance sheet and P&L of Tenge Bank, but we also do a lot of -- around developing our business was biggest time out of balance sheet of Halyk Bank. That includes not only direct lending, but also transactional banking, payment-related services. We also developing -- start developing certain ecosystem services in Uzbekistan. So at this point of time, we are not providing, let's say, guidance specifically on our subsidiary. We probably might consider doing that at some point of time going forward. But at this point of time, please consider our guidance on a consolidated basis. But again, we decided to provide much more details around what our thinking is about Uzbekistan and how we're approaching that situation. Again, Uzbekistan continues to be our primary focus in international area and we trying to leverage these services not only on the banking some but also of our subsidiaries. Regarding your second question, let me give the floor over to my colleague, almost on Almas Makhanov.

On the second question, I did yesterday, there was a publication on decree issued. It was -- it has a general level. Of course, some specific several regulation to be issued by a regulator. But overall, yes, the decrease focused on increasing the priority of financing the real sector, specifically priority customers that work in priority industries, plus decrease in overall indebtedness of individual borrowers, including question on rates for consumer loans. And because there's no specific regulation yet and it's to be issued we should expect that probably summaration will -- that regulation will limit increase in consumer lending. So in terms of the impact on the bank's portfolio, the structure of the portfolio says that around 30% is in retail segment. The rest is for SME and the corporates, so that impact should be somewhat balanced between real sector lending and consumer lending. In terms of profitable cap on rates, we do not expect a significant impact because of the structure of our retail portfolio, mostly -- most clients, they work at the corporate and SME segment, they receive salaries. And the risk level is relatively low than the risk in the overall sector. That's why the rates for that type of -- for those type of clients are lower than average. So we don't expect that the cap on rate should also impact our portfolio.

So just to recap, the regulation is still quite weak. But when you -- when it comes through, you're expecting some sort of caps on interest rate increases on the consumer loans? Is that -- did I understand that correctly?

Yes, I couldn't hear you quite well. Can you please repeat the question again?

Yes, I'm just saying, just to understand, so the degree is still very way -- it needs to be formalized, but when it does get formalized, you're expecting some sort of caps on consumer loans. Is that correct?

The decrease, the sub is still to be issued. So mostly that could relate to limiting the indebtedness of retail clients, consumer lending and probably then some changes in interest rate regulation, specifically, probably there might be some cap on consumer lending.

Okay. And in terms of prioritizing lending to priority sectors, do you expect some sort of quota that might be introduced and that will require the bank to land the minimum mark of the balance sheet or capital to a certain segment?

Ronak, let me understand that. No, we don't expect any such radical changes in this regard.

Okay.

One more thing. Maybe those changes that were mentioned by Almas should be also complemented by one change in low in Kazakhstan. Namely, it is possible right now for individuals to apply for bankruptcy. So individuals may -- the procedure is quite complicated, but they may end up as bankrupted entities with certain of the loans being written by the financial institutions. So that is also something that we factor in our guidance for 2023. As you can see, the growth in retail portfolio is not that aggressive as it used to be.

And the next question comes from [ Tom Jakobi ].

I got 3 of them. First is the European Union tries to increase trade relations to Kazakhstan. How can you participate in that? Is there any direct participation? Second is on your salt subsidiaries, especially in Russia. I want to know is there any direct relation to the Russian war in Ukraine or why did you solve them even with the loss? And third question is about your stock when your main shareholder is trying to sell stocks. Are there any plans to make stock available to trade in Europe or North America also without the GDR structure, which is making it a bit less attractive than the real stock?

Tom, thank you for your question. Regarding trade relations with EU, I think, yes, because we -- the largest corporate bank in Kazakhstan, obviously, we see that due to current geopolitical situation, many clients who was historically importing different goods, especially some capital goods from Russia because there was a number of European companies having Russia as a center of distributing different machinery and equipment out of Russia. Now they are switching to direct trade between particularly EU country and Kazakhstan. So this is one example. Second example, as you know, there is a lot of done during last year in terms of discussion between China and Kazakhstan, some Central Asia and countries like Georgia and Azerbaijan in terms of promoting transacted route. And we expect that certain companies might start investing activity in terms of leveraging that transportation route. Again, we've been the largest corporate bank in Kazakhstan whenever our clients would be ready to engage in that activity would be definitely looking in terms of how we can, as the bank supports the capital activities. Regarding selling subsidiaries, actually, we sold 2 subsidiaries last year, 1 in Russia and 1 in Tajikistan. Apart from geopolitical situation, one of consideration was that both subsidiaries was quite small, but they required a lot of attention from the management. And also, they were not quite profitable. That's why we think that even with exiting these countries with some loss, we might, again, in terms of bringing more focused attention from the bank's management into the growing areas, but also we would be able to redirect the capital into more profitable parts of the business. So from that perspective, we think that the situation might do from a different color. In terms of stock, again, there is no -- there was no transactions was done on which Bloomberg was reporting in the beginning of this year. So there is no stock which the bank on itself actually can sell to shareholders at this point of time. Regarding switching stock exchanges, our GDRs already listed in London and our stocks are listed on Kazakhstan Stock Exchange and [indiscernible]. I think there is a possibility to for investors to open accounts with our brokerage arm, our investment arm or any other broken Kazakhstan and can trade in local stock, if they wish. But there is no plan to bring our stocks directly to other stock exchanges because we are Kazak incorporated company. So our shares can be listed on local stock exchange only.

We have received several questions via chat, and we believe that questions from Jose Tangri, Tunde Olo and [indiscernible] are already covered previously. We also received 2 questions from Azamate. The first question was already covered. And the second question is, do you consider to pay dividends quarterly as other banks and not yearly.

At the moment, we stick to our annual dividend payment policy. We do not rule out that at some point in the future, we might consider having some semiannual payments, but no decision has been done yet. I do not think that we would be considering to switching to quarterly payments.

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