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

Good afternoon, everyone, and welcome to Halyk Bank's conference call and the presentation of financial results for the First Half and Second Quarter of 2023. Thanks, everyone, for joining us today. And the session will start with the presentation by Halyk team and will be followed by the Q&A session. Please note that the call is being recorded. The participants on today's call on Halyk Bank side are 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. Viktor Skryl, Financial Director covering Finance and Subsidiaries, and Margulan Tanirtayev and Nurgul Mukhadi from IR team and myself, Mira Kassenova, Head of FI and International Relations. Let me start with an update on our digital initiatives for the first half and second quarter of 2023. And in the second quarter, our customer engagement metrics grew significantly versus last year, as you can see on this slide, and the number of MAU and DAU of Halyk Homebank app has increased by 30% and 20.7% year-on-year, respectively. The MAU reached KZT 6.3 million. The number of users of online bank increased by 35.5% and the number of MAU increased by 21.7%. Halyk's apps remain among the top financial platforms in the country. Next slide, please. Growing customer engagement on our platform drives credit and noncredit products further expansion. And in the first half, the share of retail digital loans issued reached 82%, while in the second quarter, it reached 79% by total count, which is up 7 percentage points year-on-year. In the first half, the share of new online deposits issued reached 72% while in the second quarter, it reached 77% by count, which is up 37 percentage points. In the first half, the share of noncash card payments reached 72%, which is 7 percentage points up. Our legal entities digital loan portfolio has grown by 46% year-on-year, and we are glad to know that portfolio of loans issued to LLPs is continuously increasing. And in the first half, the number and volume of payments made through online bank have grown by 31.5% and 36%, respectively. Online onboarding for legal entities, increased by more than 5% as a result of continuous improvement of customer proposition in online bank app. Next slide shows the update on development of proprietary ecosystem services of the bank. In the second quarter, the GMV of Auto Insurance increased by more than 69% year-on-year. Halyk Travel GMV grew by 52.4% and Kino.kz, experienced a threefold increase. The market share of Kino.kz out of online sales of entertainment tickets increased by almost 10% to 20% -- by almost 10 percentage points to 28%. Halyk Marketplace GMV grew by 41.7% year-on-year. More details on this will be shown later in this presentation. Now let me present our performance in the brokerage service. In the second quarter, number of clients soundly raised by 6.7x year-on-year and reached more than 540,000 clients, and MAU increased by almost 10x and equaled 236,000. We are glad to note that the transactions volume grew by 3.2x and reached KZT 19 billion. Our brokerage assets increased by 20% and reached KZT 1.8 trillion. Now let's move to the business segments update. We continue to maintain strong performance across key dimensions in our retail segment. Our active retail customer engagement drives transactional activity growth and the transactions volume raised by 12.3% year-on-year. The number of retail active clients grew by 6.4%. On a consolidated basis, the retail gross loan portfolio has expanded by 7.9% year-to-date and the customer deposits increased by 1.1%. We are glad to see a solid growth in Retail products penetration by 6.1% year-on-year. Next slide, please. We have primarily dedicated to further upgrade our Halyk Homebank super app, which is the core of our retail customer offering. And in the first half the MAU's penetration rate in retail's active client base, significantly rising from 54% to 63%. On a consolidated basis, our retail portfolio has grown by 14% year-on-year. And in the second quarter, the loan issuance volumes have increased by 44%. On the other hand, the digital sales increased by 96% and reached almost 50% of total retail loan sales by volume. We observed increasing segment NPL 90 days+ to 4.8%, while maintaining quite strong NPL coverage ratio of 158%. Next slide, please. To give you more color, let's discuss marketplace dynamics in more details. And in the second quarter, the GMV of our Halyk Market increased by 1.7x. The number of partners of Halyk market grew by almost 2.3x year-on-year, and SKUs raised by 2x. During second quarter, we continue to keep our intention on further development of GovTech. We launched a number of new government services such as reissue of driver's license, online queue reservation at the public service center, et cetera. And we continue to be the top provider of online government services in the market. As at the end of the second quarter, our clients had an access to 48 government services. And in the first half, the government services were used over 5.7 million times. Turning to corporate segment, we would like to note that on a consolidated basis, our loan book has expanded by 11.3% year-on-year. Our corporate portfolio remains well diversified across industries with local currency loans comprising 87% of the loan book. At the end of the second quarter, the segment NPL ratio equaled 1%, and the provisioning coverage comprised over 415%. Our active corporate client base stays at the level of 2,200 customers. Also, there has been a notable increase in both the penetration of our products and transactional activity. Next slide, please. The SME banking is continuously performing well. The number of SME MAU in online bank digital platform has raised by over 20% year-to-date. We also want to highlight that year-on-year on a consolidated basis, our SME loan book has expanded by 14.6%. The number of SME borrowers has stayed almost flat and there has been a substantial increase in SME client transactional activity. As of the end of second quarter, the segment NPL ratio comprised 4.2%. Next slide, please. We are continuously developing our digital offering for SME clients. And in the first half, we achieved a 44.5% growth in SME loan issuance volumes year-on-year. Mainly, it has been driven by digital loans, which comprises over 30% of our SE loan portfolio. Number of IE borrowers increased by 2% year-on-year. Number of LLP borrowers raised by almost 45%. We saw a substantial increase in demand for digital guarantees. As a result, the total number of issued digital blank tender guarantees was 5.4x, up year-on-year. Now let me hand over the call to my colleague from IR team, Margulan Tanirtayev. Thank you.

Thanks, Mira. Now let me switch to the overview of Halyk Group consolidated financial results for the first half and second quarter of 2023. Starting from first January of 2023, Halyk Group's financial statements have been transited to IFRS 17 insurance contracts from IFRS 4 which resulted in recalculation of certain P&L items for the first half and second quarter of 2022. All of the ratios were also recalculated accordingly. For more detailed information, please refer to Halyk Group's financial statements for the second quarter of this year, note number 4. During the first half, the bank generated KZT 365.2 billion of net income. The year-on-year increase by 27.8% was mainly due to significant increase in lending and transactional businesses. Other noninterest income decreased by 34.3% year-on-year mainly due to lower net gain from financial assets and liabilities at fair value through profit and loss and net gain on foreign exchange operations as a result of higher volatility of exchange rates and interest rates in the first half of 2022. Net insurance income increased by 9.2x year-on-year due to overall business growth and as a result of recognition of insurance reserve expenses on unsecured consumer loans with the borrower's life insurance bundle in the first half of the last year. In the first half, we demonstrated 36% return on average equity and 5.2% return on assets. Next slide, please. Total assets of the group decreased by 0.3% year-to-date as a result of decrease in amounts due to customers. Customer deposits decreased by 3.2%. We will discuss the reasons for this movement in more details later in this presentation. Next slide, please. In the first half, the bank's interest income increased by 41.5% year-on-year, mainly due to increase in average rate and balances of loans to customers. While the interest expense increased by 55.5% mainly as a result of the growth in average rate and balances of amounts due to customers. And as a result, the net interest income grew by 29.6%. In the first the bank's net interest margin was affected by the increase in average rates on both loans to customers and amounts due to customers following the significant increase in interest rates. Furthermore, the share of loans to customers in total interest-earning assets increased substantially. Moreover, there was an increase in the average rate of FX amounts due from credit institutions and a FX interest earning cash and cash equivalents following the global increase of USD interest rates. As a result, net interest margin increased to 6% per annum compared to 5.2% per annum for the first half of 2022. Net interest margin in the first half and second quarter of this year was negatively affected by the accelerated amortization of discount on the deposit of Kazakhstan Sustainability Fund, which was partially prepaid by the bank as a requirement under new regulation requiring banks with the state support funds on their balance sheet to make such prepayments in case of dividend payments. Excluding these effects, net interest margin would have amounted to 6.3% per annum for the first half and 6.5% per annum for the second quarter. Next slide, please. Our bank continues to perform well in terms of net interest income as it increased by 3.5% year-on-year for the first half of 2023, mainly due to the notable increase in net insurance income and net fee and commission income. Next slide, please. In the first half of this year compared to year before, the overall dynamics of fee and commission income and expense was driven by the increased client transactional activity. Net fee and commission income for the first half increased by 45.8% year-on-year due to increase in net transactional income of legal entities and individuals. Operating expenses for the first half increased by 9.6% year-on-year, mainly due to the indexation of salaries and other employee benefits starting from first March of 2023. The bank's cost-to-income ratio decreased to 17.9% compared to 19.2% a year before amid higher operating income for the first half of this year. Next slide, please. On the balance sheet, loans to customers increased by 4.2% on a gross and 4% on a net basis year-to-date. The increase in the gross loan portfolio was attributable to a rise of 2.4% in corporate, 3.3% in SME and 7.9% in retail loans. The share of FX loans was at 16.4%. 90-day NPL ratio slightly increased to 2.6% as at the end of second quarter mainly due to increase in nonperforming corporate and retail loans. Cost of risk on loans to customers for the second quarter was at normalized level within the scope of our full year guidance of 1.2%. Stage 3 ratio slightly increased to 8.1% as at the end of second quarter, mainly due to increase in nonperforming retail loans. Next slide, please. Compared with the end of the last year, the deposits of legal entities were down 7.5% mainly due to overall transfers of funds across the banking sector in the higher-yielding securities market in light of elevated interest rates. While deposits of individuals were up 1.1% due to fund inflow from the bank's clients. As at the end of the second quarter, the share of KZT deposits in total corporate deposits was 63.7% compared to 60.6% as at the end of the last year, while the share in total retail deposits was 58.2% versus 52.6%. Next slide, please. On a consolidated basis, capital adequacy ratios of the bank increased -- I am sorry, decreased in the second quarter as a result of dividends paid by the bank for the financial year of 2022. Next slide. Based on our 6 months financial results, we have updated the outlook for the full year of 2023, only in terms of the net fee and commission income growth, which is expected to be more than 20%. All of the other items in our guidance remain unchanged. 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 Ronak Gadhia.

Good afternoon. Thanks for the presentation today. And first, congratulations on the results as well. 2 or 3 questions. Maybe if you could just go back to the net interest margin discussion. I think you mentioned that the funding costs were slightly elevated because of some prepayments of state funds. If you could just elaborate on that. So did the bank end up paying back to the state over and above the dividend that was paid. So I believe 10% of the dividend was attributable to that. So did the bank end up paying more than that, and therefore, the amount of state funding contribution within the bank has declined? And if that is the case, maybe you could elaborate how much is left now? The second question is on loan growth. I see you've maintained your guidance, but the growth trajectory in the first half was relatively modest. So does that -- does that suggest that we should see an acceleration in the second half? And if that is the case, what particular sectors should we be expecting that growth to come through? And then my final one is on the digital ecosystem. It's great to see the monthly average users increasing but the DAU to MAU ratio seems to be slightly lower. I think it's declined by about 2, 2.5 percentage points around 28 points. Likewise, if I look at the GMV in the marketplace, that seems to have stagnated around KZT 40 billion to KZT 42 billion. Could you just maybe talk around why the utilization rate on the ecosystem seems to be flat lining and what the bank's strategy is to improve that?

Ronak. Let me pick it one by one. On the net interest margin, indeed, the interest expenses were higher because of the prepayments of deposits, which actually was transferred from KKB as a result of merger back in 2018. Because the deposit was provided by problem loan funds to KKB at below market rates and which was further modified before the acquisition of KKB by Halyk Bank. Parts of that deposits was accounted and still accounted in the capital. Because of change in the regulation for banks which have part of the state support on the balance sheet. So technically, Halyk Bank was following under that regulation. In case these banks are making dividend payments, they also have to make prepayments of state support money and the proportion of state support money is accounted in the capital. So in our case, there was a certain proportion of state support money in the capital. It was just above 10%. So because of these dividend prepayments, we had to make payments to amount of state support to be returned. So that was around KZT 28 billion out of KZT 250 billion outstanding and portion of that amount of KZT 28 billion was accounted in the liability and portion was accounted in the capital. The capital portion is around -- was around KZT 14.5 billion. So because of the IFRS, that amount is not entered directly from the capital, it should flow through P&L, whereby increasing our interest expense. That's why in order to provide for investors information how much net interest margin would be in the absence of that additional amortization. On Slide 25 of our presentation, we put in net interest margin as it is reported for the second quarter as well as first quarter -- first half of the year as well as the adjusted amount.

Okay. Sorry, just before you go to the other question. So just to clarify, the total that was repaid was just the KZT 28 billion. It wasn't over and above the KZT 28 billion. Understood.

So then we have less the remaining portion. So basically, we have around 220 -- close to KZT 222 billion of remaining deposits. So when the bank and if the bank would be making further dividend payments, so the process will be reiterated. In terms of the loan growth, as I understood, yes, we -- indeed, our gross loans grew by less than just above 4%. Net loans grew by 4% in the first half. But if you see for the second quarter loan, so the growth rate was higher and we're also looking at the pipeline, which we have in our large corporate portfolio. We're looking at the dynamics which we are having in most recent periods. So this gives us the comfort in maintaining the guidance for the full year, both for the legal entities, corporate plus SME, which is 18% growth as well as for retail portfolio, which is -- the guidance is 16% for the whole year. And in terms of digital ecosystem. So we have a number of them. So indeed, we have marketplace, we have Kino.kz, we have Travel, we have our digital insurance products, we have brokerage. So we see indeed more engagement of the customers. Some digital products they are having stronger dynamics than others. But basically, we are working on further developing all the ecosystem elements, which I mentioned. So we have plans for further developing brokerage. We have plans further to develop our travel, auto insurance as well as Kino.kz and marketplace. With regards to marketplace, we working on a few initiatives this year. So we have -- we hope that they will help us to drive further the growth of GMV, which is probably not that visible as of current reporting period, but we have plans further to drive out the GMV through a number of initiatives, which we are currently working on. I hope that will be -- can discuss these initiatives further where we progress through the year.

Okay. Just a very quick follow-up on the last one. So we saw your fee income grow by about 46% year-on-year. How much of that could be attributable to the traction you're getting on the digital ecosystem?

To a large extent, I think it's attributed by our core business. It's basically the transactional fees and commission income is increasing both for retail clients as well as legal entities. So this is a combination of, first of all, increasing client base, which we managed to attract last year because of the change in the operating environment. If you remember, few Russian banks was exiting and we managed to potentially increase our client base. And secondly, because we continue to increase products and services proposition to our clients, we see more and more clients client activity. Partially, it's attributed to 2 ecosystems, but they probably are not -- at this point of time, they're probably not to a large extent, a direct fees and commission generating services, but they are definitely increasing engagement of our clients with our core platforms, which is Halyk super app application as well as Halyk Online Bank for SME and corporate clients.

Understood. Thank you very much.

The next question comes from Olga Naidenova.

So I have a couple of technical questions. First, with regards to net interest margin. Do I understand correctly that when you -- that you accrue this deposit amortization only for the second quarter once you have the approval of dividends or this will be smooth through the year?

Olga, thank you for your question. According to IFRS, when the instrument is provided at below-market rate, actually, the liability is provided at below market rate. So we should accumulate or reflect a certain portion of that liability in the capital. And then we -- on the remaining portion, which is attributed in the liability portion, we should accrue interest expenses based on the effective rate. And basically, even before the early prepayments, the effective rate on the liability portion of that liability was part of our interest expenses. But because that repayment is high, and it's proportionately affecting the liability portion and the capital portion. So that increase -- that having a one-off effect of increasing interest expense, which, again, is not a direct entry to the capital but should rather go through P&L. That's why it's having a one-off effect to such a large scale.

Okay. Okay. My other question is about your NPL. It keeps growing. You have somewhat reduced your coverage. Do you have any targeted level of NPL coverage? And could you shed some light on why NPLs keep growing and where do you expect them, say, towards year end? Or how do you expect asset quality development?

Well, basically, we see that asset quality generally is if you also look from the cost of risk situation has stabilized since last year, which bring a big drop because of the geopolitical situation as well as the sharp increase in inflation. So we do not see the current trend as actually worrisome. In fact, we keep our cost of risk guidance for the full year intact. And actually, the cost of risk for the first half of this year is substantially lower than for the first half of last year. When we -- and we specifically do not have a targeted cost of risk coverage because on the coverage side, actually -- sorry, we do not have a targeted level of NPL or the coverage because coverage is actually a function of IFRS. So we look at retail and small business on the portfolio basis and then we look at the function of the rollover. We look at the different LGDs as well. And with regards to medium-sized and larger corporates, we look on an individual basis. And coverage is the function of what are the expectations of foreclosures. So what is the expectations of [book over], what is the expectation of cash flow from the business as well as the collateral. So it's just a calculation base. So from that perspective, any increase up or down is a reflection of our expectations. So basically, the reduction of coverage might be also treated by the fact that we have improved the expectations of cash flow from the pool of loans, which is in the Stage 2 and Stage 3, so.

But what generally are your expectations with regards to asset quality for coming here or whatnot?

Again, we probably -- I'm not -- we probably cannot provide kind of medium-term or longer-term horizon. Specifically, I mean, in terms of the figures, we only in terms of the guidance, providing the figure for cost of risk, which again is -- remains intact. But if you look from the economic perspective, you see that the economy is growing. We see it's broad-based. There are a lot of industries which is contributing to the current growth. We also remain positive in terms of the economic developments for last year. Obviously, inflation situation is something which was point of concern in recent periods, which according to statistics, is still -- was a driver behind a reduction in real revenues for population in Kazakhstan. But we see that inflation is on the downturn trend. And we expect that the policies of the National Bank, the efforts of the government would help to slow down inflation. Albeit we see a number of headwinds like the potential impact on inflation from prices on petrol, from prices on utilities. But still, we clearly see that inflation is already on the moderation mode, which should be helpful in terms of providing stability on the retail part.

Okay. And if I could ask a bit of a broader question as far as I understand your new strategy should be coming soon. Any update on when we can expect your new strategy update?

Yes. We're currently working on the strategy which is covering the years from 2022 to 2024. So we'll start working on the new strategy sometimes next year and probably close to the end of last -- next year, sorry, we potentially might be coming to the market with a strategy update.

We also have questions from our chat. First question comes from [Burjan Talebov]. At the conference on the 14th of March, you mentioned that Halyk Bank could switch to semiannual dividend payments. When can this happen? Could it happen this year?

[Burjan], thank you for your question. It's a very good question. Indeed, we -- on a constant basis, receiving the feedback from the investment community in terms of dividend policy. And as many have noticed, we made certain amendments to our charter. I probably have to say here that the updates to the charter is not happening on a very frequent basis and because we had a number of amendments, which we need to introduce to the charter this time, also triggered by changes in the regulation around the governance updates on the name -- the full name of the bank. So we also decided to introduce that possibility. However, at the same -- at this point of time, the dividend policy is not updated. So in short-term period of time, definitely this year, we are not switching to semiannual dividend payments. So the discussions and possibility to shift on that is still under discussion within the bank. From that perspective, I cannot provide guidance when we would be ready or would be, in fact, shifting to these semiannual payments. But at least one step with this, as I said, like making that possibility in the bank charter.

Next question from the chat comes from [Betty Hu]. There are 2 questions. First, could you remind us the net interest margin sensitivity to every 100 basis points of interest rate cuts. The second question, your operating costs have been kept very steady. With the recent high growth in business size, do you anticipate any point that you may need to grow expenses more?

[Betty,] thank you very much for your questions. Well, on the net interest margin, we have to segregate, let's say, the accounting portion as well as the reality. In terms of the accounting portion the sensitivity there is, let's say, I don't have the exact figure, but this is something in the area of plus/minus KZT 20 billion to 100 basis point shift. But saying that we have to say that, in reality, the sensitivity is less and it can be prolonged for a longer period of time because when the rate is increasing, we have possibility to reprice our loans probably quicker than it is stated in our loan agreements. And when the rate is moving in either direction. Again, there is a possibility from the clients to reprice the loans down trend. So as I said, accounting calculation might be one way to look at on that, but in reality, we see that sensitivity is lower and actually taking a bit longer period of time. That's why the general sensitivity to net interest margin is not that high if you look for a longer period of time in how our net interest margin is fluctuating. On the operational costs, yes, basically, if you look for longer trend, the cost to income has improved substantially. This is probably due to our larger scale of operation, which is positive in many cases to the optimized cost to income. And secondly, I think is our general -- should approach in terms of controlling operating costs. And thirdly, I think it's becoming a more important factor is digitalization of products and services, which help to scale operations without corresponding increase in the operating costs. At the same time, digitalization also require continuous investments, both in processes, systems and people and below 20% is already, I think, a very low level by any standards. That's why we kept our guidance for cost to income at the level of 20% to 22% for full 2023.

Next question come from the chat comes from [Dimitri Zemin]. How could you explain the decreased marketplace performance in second quarter of this year? What is your forecast for the third quarter?

Yes, [Dimitri]. Thank you for your question. As I said, we are working on number of initiatives which we think would help our GMV of Halyk Markets to drive to higher levels in the second half. In terms of variations, it's clearly the seasonality effect. The fourth quarter is more active for the clients as well as for the business. That's why GMV basically for the fourth quarter is the most high if you compare different quarters through the year. We are not providing specific guidance for GMV of our marketplace, Halyk Market. That's why we'll be reporting as the quarters would pass by.

Next question comes from [Alex Moscover]. How do you assess the potential of pension accounts management business for Halyk Invest Finance pulling regulation changes allowing 50% transfer from the Central Bank? And if any, proactive strategy to acquire pension account customers are employed?

[Alex], thank you for your question. We have 2 brokerage companies, which have operationally joined their forces but technically, 2 companies are still operating when it comes to pension. And beginning of this year, Halyk Finance actually reentered the pension market, the pension asset management market. And we think in terms of the -- if you look from the client perspective, the companies which are entering now are providing better opportunities in current interest rate environment for pension contributors to improve their profitability. Simply from the fact that existing pension funds, they have a legacy portfolio of different maturities of securities with different historic interest rates. And the new entrants basically they have the possibility to enter markets at the current interest rate level. That's why they're providing better opportunities simply by these facts to pension contributors. So we are trying to provide marketing from that angle. But it remains as a part of activity of pension contributors. Unfortunately, when private pension system was demolished around 10 years ago. We see less interest from contributors actively looking into performance of the pension accounts. That's why we see some inertia probably from the pension contributors in terms of actively looking for alternatives within the companies. But I think when the private asset management companies were showing consistently within a short period of time, at least higher returns compared to the incumbent, we hope that it will attract more interest from pension contributors.

We also have the last question from our chat from [Asad Mongolov] regarding the semiannual dividend payments. We believe it was covered previously. Dear ladies and gentlemen, it seems that there are no questions remaining. So 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.