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

Good evening, ladies and gentlemen. Welcome to Halyk Bank's conference call and the presentation of group's results for the 12 months and the fourth quarter of 2023. Thanks, everyone, for joining us today. 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. And the participants for today's call on Halyk Bank's side are Ms. Umut Shayakhmetova, 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; Ms. Olga Vuros, Deputy CEO, responsible for Corporate Banking; Mr. Dauren Sartayev, Deputy CEO responsible for SME Banking, Transactional Banking, PR and Marketing; Mr. Zhumabek Mamutov, Deputy CEO responsible for Retail Banking and Soft Collection; Mr. Nariman Mukushev, Deputy CEO responsible for Digital Government Services, Ecosystem and Customer Experience; Mr. Almas Makhanov, Financial Director; Mr. Viktor Skryl, Strategy Director; and Nurgul Mukhadi, Rustam Telish from IR team and myself, Mira Tiyanak, Head of FI and IR. Firstly, we would like to highlight our achievements in increasing client engagement and selected business lines scaling up during 2023. Halyk Super-App MAU increased by 46% year-on-year, which led to a 48% increase in payments and transfers through our Super-App. Onlinebank, our Internet platform for legal entities, demonstrated strong increase in DAU by 24% year-on-year, which was accompanied by strong increase in payments by 20%. Marketplace GMV grew almost 2x, while Halyk Market increased by 2.7x. Kino.kz, our entertainment tickets platform, was 2.8 million MAU, increased GMV 2.6x and reached 37% of market share. Brokerage services MAU increased 2.2x, and we were the main platform in the last 4 months for 2 national public offerings. We continue to provide our shareholders with strong returns of consistent dividend payments. Next slide, please. We are also glad to highlight a further progress in implementation of ESG principles throughout the business and corporate governance system, and this is an important strategic priority for us. Continuing to follow best practices in sustainable development, we became the first bank in Kazakhstan to join the UN Global Compact in January 2023 and published a sustainability report in line with the TCFD recommendations in July 2023. In June, Halyk received the Best Green Investment Bank award for commitment to environmental values and effective implementation of the principle of sustainable development from AIFC. We're also glad to note our last year ESG report ranked first among companies in the financial sector by PwC. Next slide, please. For effective achievement of sustainable development goals in 2023, we have developed such corporate documents as Responsible Finance Policy, Methodology for ESG Segmentation of Loan Portfolio by Industry and Corporate Business Portfolio Carbon Footprint Calculation Methodology. Moreover, a Green Finance Policy is now in the process of development. Next slide, please. One of the bank's key ESG strategic risk is the environmental impact management. In 2023, Halyk 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 completed the work with international consultant to implement the ESG agenda in the lending process. We have integrated ESG into the bank's risk management system and implemented the responsible finance principles. Subject to certain thresholds, our approach includes exclusion list, ESG risk assessment of the customer through self-declaration, full ESG scoring of the customer, project assessment for CapEx financing. Also, we have implemented the ESG components in the bank's lending process. Moreover, we continue to calculate Scope 3 on indirect emissions, including from the finance portfolio. It is worth noting that the bank has implemented an ESG KPI system to support the sustainable development strategy and developed an action plan to achieve medium- and long-term goals. Next slide, please. Being socially responsible bank, we support the accessibility of our services for the country's remote regions, maintaining 1 in 5 out of 570 branches in small and single industry towns. Moreover, remote regions represent 27% of the bank's SME loan portfolio. We are actively interacting with 4 major universities in the country by opening IT laboratories and regularly holding lectures. Last year, we established a strategic partnership with a leading educational platform in the country, and we will provide you more details on this later in our presentation. In 2023, jointly with the Amanat political party, we have launched a large-scale social project called Debt Free Community to provide financial literacy training to the rural population of Kazakhstan. Next slide, please. Following the principle of sustainable development, we provide financing of sustainable projects that help reduce environmental impact, so Halyk finances supply of natural gas to residential houses of socially vulnerable citizens as part of the social gasification program. In 2021 and 2022, we connected about 100 houses of Almaty residents to the natural gas supply system. And in 2023, the gas infrastructure was expanded to 200 houses in Almaty and Astana. On top of that, the bank provides 0 interest lending for individuals for connection of private houses to the gas supply system in Almaty and Astana. In 2023, we also financed a number of sustainable projects in different parts of the country for the total amount of KZT 191 billion, and you can see here on the slide the brief descriptions of these projects. The bank also provides support for women's entrepreneurship. 55% of our IE borrowers are women. Under our own women entrepreneurship lending program, we have already financed 573 entrepreneurs in the amount of KZT 5.6 billion. We also finance health care projects of private medical companies and pharmaceuticals. And as of the end of the year, the portfolio of such projects amounted more than KZT 100 billion. Now let me hand over the call to Viktor Skryl. Thank you.

Thank you, Mira. We would like to deep dive in retail business results. Halyk Super-App added 2.5 million MAU in 2023, while active client base increased by 3.4%. We were able to increase penetration of our Super-App in that base from 54% in 4Q 2022 to 77% in 4Q 2023. Halyk is a trusted partner for our salary project clients. 42% of employees in Kazakhstan choose Halyk salary card. Next slide, please. Open ecosystem ideology allowed us to launch 3 new value-adding solutions for our clients. Kundelik is the first such service. Kundelik is a leading digital educational platform in Kazakhstan, which covers 73% of all schools in Kazakhstan. We reached agreement to integrate Halyk's loyalty program into Kundelik platform for junior and high school students. In addition, we provided ability to open payment cards for those children. This project gave us opportunity to attract new younger clients and make Halyk their first bank. Retail loan book increased by 22.7% year-to-date, with strong market share of 17.9%. Volume of issued loans almost doubled in 4Q 2023 year-over-year. 84% of our loans by count were issued digitally in 2023. On next slide, we show retail deposits, which increased by 11.2% year-to-date, with strong market share of 27.4%. 78% of our deposits by count were opened online in 2023. Next slide, please. On this slide, we would like to show in details synergy effect, which we may reach through our lines of business. In September 2023, we launched new product, digital auto loans. This was done in partnership with the bank's corporate clients, country's leading auto dealers. Number talks to themselves. We reached 24.4% market share in auto loans in December 2023, 12.2x increase. Now Halyk solution accounts for major share in credit sales of auto partner dealers. Next slide. Auto insurance is continuing to deliver strong GMV growth as more clients switch to Halyk's digital solutions. Halyk Travel GMV increased by 20.4% year-over-year. Kino.kz, our entertainment platform, demonstrated strong growth in MAU and GMV. As a result, its market share in the entertainment market further improved to 37.3%. Next slide, please. Because of our continuing focus and efforts, we see strong dynamics in marketplace GMV. We attracted more partners and increased SKU base to provide a better experience for our clients. Next slide, please. In our brokerage services, we also see increase in client base and volume of their transactions. In 2023, Halyk Finance entered new market of pension assets management and was able to reach 51% market share. Assets under management increased by 63% year-to-date. Next slide, please. We would like to show how historically strong investment bank, Halyk Finance, was able to leverage Halyk's retail client outreach to provide remarkable results in recent IPO placement. Next slide, please. During the year, we added 17 new government digital services into our Super-App, making us the market leader. More than 13 million times our clients used government services. And now, we are moving to an update on SME and corporate banking. In 2023, we were focusing on increasing transactional activity of our clients. As a result, DAU increased by 23.8% on the back of this increased number and volume of transactions through our platform. Next slide, please. Corporate loans increased by 13.3% year-to-date. Penetration amongst largest taxpayers remained strong and was 84%. Halyk is the largest provider of financing to the economy with market share of 51.8%. Product penetration metrics improved during the year. On next slide, we show SME banking update. SME loans increased by 25.1% as well as volume of new loans issuance, which increased by 42.1%. Product penetration metrics significantly improved during this year. On next slide, we provide digital update on SMEs. Digital loans for LLP showed strong momentum since launch in April 2022. Loan portfolio surged significantly by 6x year-to-date. In January 2022, we introduced a groundbreaking product for the market, digital blank bid bonds. Number of digital bid bonds increased by 3.7x year-over-year, with volume increasing by 4.6x. Number of borrowers of digital loans retained -- related to nongovernment programs grew by 35.2%. However, number of borrowers enrolled in government program decreased due to downscale of such programs. And I would like to hand over to Nurgul, please.

Thank you, Viktor, and now we are moving to geographical expansion, especially in Uzbekistan. Uzbekistan remain our key market and priority outside of Kazakhstan. Halyk overall exposure to Uzbekistan amounts to KZT 477.1 billion and include direct equity investment and cross-border financing. Tenge Bank generated KZT 92.5 billion of interest and fee and commission income over 3 years. Halyk is creating important channel for payments between Kazakhstan and Uzbekistan. More than KZT 1.1 trillion were transferred between 2 countries in 2023. Retail segment has strong dynamics with increased number of clients and loans and deposits growth. Tenge is developing its digital propositions through Tenge24 app. Corporate business line is also performing well. Loans, deposit and number of clients increased during the year. And on this slide, we put together loans provided by Tenge Bank and Halyk Bank. As a result, Halyk Group takes fourth position among 10 largest private banks in Uzbekistan. And now we would like to switch to the overview of Halyk Group consolidated financial results for the 12 months and fourth quarter of 2023. During our semiannual results call in August last year, we provided our updated financial guidance for 2023. Despite a volatile operating environment and quite upbeat outlook, we delivered all key target metrics. Growth of our net loan portfolio amounted to 18.2%, with 23.1% growth in retail segment and 16% in corporate and SME. Net fee and commission income grew by 19.5%, and cost of risk was at 1%. The next 4 metrics were impacted by one-off negative effect from the accelerated amortization of discount on the deposit of Kazakhstan Sustainability Fund, which was partially prepaid by the bank in December 2023 for the amount of KZT 40 billion. Therefore, we are showing here is the adjusted numbers. Thus, excluding this effect, our net income would have amounted to KZT 718.2 billion. Return on equity would have reached 33.6%, and NIM would be 6.5%. And cost of risk -- cost-to-income would have equaled to 18.7%. Let us remind you that starting from 1st January 2022, Halyk Group's financial statements have been transited to IFRS 17 insurance contract from IFRS 4. Moreover, in preparing the consolidated financial statements for the year ended 31st December 2023, the group carried out an inventory of its financial instrument. The inventory process identified our financial instruments measured at fair values through the profit and loss that were previously restricted in use and accordingly were measured at historical cost. As a result, the group revalued these financial instruments and recognized prior period adjustments. All above mentioned results in recalculation of certain balance sheet items as of 31st December 2022 and 1st January of 2022 and P&L items for 12 months 2022 and retained earnings of prior years. All of the ratios were also recalculated accordingly. For more detailed information, please refer to Halyk Group's consolidated financial statements and independent auditors' report for the year ended 31st December 2023, note 4b. During 12 months, the bank generated KZT 693 billion of net income. The year-on-year increase, 21.8%, was mainly due to significant increase in lending and transactional business despite earlier mentioned one-off negative effect from accelerated amortization discount on the deposit of Kazakhstan Sustainability Fund, which was partially prepaid by the bank in December 2023. Other noninterest income decreased by 17.3% for the 12 months of 2023 versus 12 months of 2022 mainly due to lower net foreign exchange gain amid high volatility of exchange rate and interest rates in 12 months of 2022. Net insurance income for 12 months of 2023 improved by 89.2% versus 12 months of 2022 due to overall life and general insurance business growth. In the 12 months, we demonstrated 32.5% return on average equity and 4.8% return on assets. Total assets of the group increased by 7.6% year-to-date due to increase in amounts due to customers and debt securities issued. Customer deposit increased by 4%. We will discuss this in more details later in the presentation. Our bank continues to perform well in terms of net interest income. Despite its decrease by 8.7% year-on-year for the 12 months of 2023 due to the decline in net dealing income, we should mention the notable increase in net insurance income and net fee and commission income. In the 12 months, the bank interest income increased by 33.8% year-on-year mainly due to increase in the average rate and balances of loan to customers, while interest expense for 12 months 2023 increased by 48.6% versus 12 months 2022 mainly as a result of growth in average rate on amounts due to customers and increase in the share of tenge amounts due to customers as well as a one-off negative effect from accelerated amortization of discount on the deposit of Kazakhstan Sustainability Fund, which was partially prepaid by the bank in December 2023 for the amount of KZT 40 billion. Consequently, net interest income for 12 months 2023 grew by 21.1% versus 12 months of 2022. In 12 months 2023, net interest margin was affected by the increase in average rate on both loans to customers and amounts due to customers following the significant increase in the 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 to 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 6.2% for 12 months 2023 compared to 5.6% for 12 months 2022. Net interest margin for 12 months 2023 and fourth quarter 2023 was negatively affected by the above-mentioned accelerated amortization of discount on the deposit of Kazakhstan Sustainability Fund. Excluding this effect, net interest margin would have amounted to 6.5% for 12 months 2023 and 7% for fourth quarter 2023. In 12 months compared to the year before, the overall dynamics of fee and commission income and expense was driven by the increased number of clients and increased clients' transactional activity. Net fee and commission income for 12 months increased by 19.5% year-on-year due to increase in net transactional income of legal entities and individuals as well as in fee -- on letters of credit and guarantees issued. Net fee and commission income for fourth quarter 2023 decreased by 20.3% versus fourth quarter 2022 due to increased expenses on loyalty program bonuses and deposit insurance fee payable to Kazakhstan Deposit Insurance Fund. Operating expense for 12 months increased by 14.5% year-on-year mainly due to indexation of salaries and other employee benefits starting from March 1, 2023, as well as increase in IT investments and expenses for card business development. The bank's cost-to-income ratio equaled 19.2% in 12 months of 2023 compared with 19% in 12 months of 2022 due to higher operating expenses. On the balance sheet, loans to customers increased by 18% on a gross basis and 18.2% on a net basis year-to-date. The increase in the gross loan portfolio was attributable to a rise of 13.4% in corporate, 25.1% in SME and 22.7% in retail loans. Cost of risk on loans to customers for 12 months was at normalized level within the scope of our full year guidance and was at level of 1%. Despite some increase in absolute terms, Stage 3 ratio decreased to 7.5% at the end of fourth quarter due to loan portfolio growth. Compared with the year-end of last year, the deposits of legal entities and deposits of individuals were 11.2% and 9.3%, respectively, due to fund inflow from the bank's clients. As at the end of 2023, the share of tenge deposits in total corporate deposit was 72.9% compared to 60.6% as at the end of last year, while the share of total retail deposits was 63.4% versus 52.6%. On consolidated basis, capital adequacy ratio of the bank increased in the fourth quarter of 2023 as a result of net profit earned by the bank during 2023. And I am pleased to present our outlook for the financial year of 2024. Retail net loan portfolio growth is expected to be in the area of 15%. 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 in the area of 17%. Growth of net fee and commission income is expected to be in the area of 20%. Cost of risk is expected to be circa 1.2%. Consolidated net income is to be more than KZT 800 billion. Return on average equity is to be more than 30%. Net interest margin is expected to be in the area of 6.5%. Cost-to-income ratio is expected to be in the area of 20%. Dear ladies and gentlemen, this completes our presentation. Now we would like to open the floor for your questions, please.

[Operator Instructions] And the first question comes from Ronak Gadhia.

Just a couple of questions. Firstly, when I look at your guidance, specifically the net interest margin guidance, it's 6.5% increasing from last year. Could you just help us understand how that would be achieved, given that the NBK has reduced rates at least a couple of times already and seems like interest rates are on a downward trend. So maybe just some thoughts around that. And the second question is with regards to the early redemption of the special funds in December, what brought that about? Why did the bank decide to redeem some of -- a portion of that earlier? And what impact does that have on the dividend policy of the bank, if any?

Ronak, thank you for your questions. Regarding the question on the net interest margin. We, first of all, see that both tenge rates as well as USD rates have effect on net interest margin. With regards to USD rates, we get notes from higher-for-longer approach taken by Fed. So that is probably helpful to sustain NIM at higher level for longer period of time than it was initially anticipated last year, for example. And with regards to tenge, we're also hearing recent remarks from the National Bank, which expect that the reduction of rates is probably -- would be taking -- or easing cycle would be taking probably longer period of time after recent series of reduction in rates. So from that perspective, we see that the pace of reduction would be slower until end of this year. We see that we continue to grow faster on retail and especially SME business, which have higher rates compared to corporates. And third element is that we still have repricing upwards on longer-term instruments, which was originated by the bank 5, 6 years ago. So those are still at maturity -- are repriced at high rates. So even currently, current rates are relatively high compared to historic averages. So taking all these into account, we see that we have opportunity to maintain high net interest margin this year. Regarding your second question on partial redemption of state support, which was taking place in December, we saw that the bank was showing strong profitability last year compared to our initial guidance. So from that perspective, we saw the opportunity to start partially prepay state support because we had such possibility. Secondly, we believe that such early amortization might be helpful in terms of vision from all stakeholders if we talk about the -- all stakeholders of the bank. And that initially might benefiting the business in the longer run. So that was our consideration.

Okay. Could that potentially translate to a higher effective dividend payout ratio for ordinary shareholders because the proportion of capital contribution from the state is now lower?

Basically, the state contribution is already lower even after our first repayment. So technically, we are at 10% threshold. So from that perspective, we might definitely, in case the banks pay dividends, we need to make a pro rata repayment of state support in the same manner as we did during the first half of last year, but we potentially also might consider some of the cycle repayments in the same manner as we did last year.

And the next question comes from Olga Naydenova.

I actually was also wondering about the early redemption and the pace. How much of the state support you have left? And how quickly are you going to -- are you looking to redeem that funding? And also with regards to potential dividend payments, are you planning to do interim payment -- introduce interim payments already this year? And if the 17% -- for equity Tier 1 capital adequacy is still intact for the dividend policy? And is that what you will be looking at when making decisions?

Olga, thank you very much for the questions. Just a moment, please.

Yes. Thank you, Olga, for the question. This is CEO, Umut Shayakhmetova. And I would like just to say that we are considering to pay out this year the dividends twice a year. So this year will be the transition year to go for the dividend payments twice a year. And we expect that -- and our advice was to the Board of Directors that the first payment will be based on the decision of the Annual Meeting of the Shareholders. And the total amount would be not less -- as an absolute amount, not less than the last year payment, which means it will be around 40% of the net profit of last year. And the second payment will be in the second half of this year, and expectation is that it will be around 10% of the net profit of the last year. On the state debt payments, definitely, it will be paid according to the regulation, but we also can consider to pay out extra as we did last year.

But this is not a prerequisite to pay dividends in the amount of at least 40%?

Let me probably clarify here. So as Umut said that the management proposes to Board of Directors to consider paying the dividends in the first half of this year, which would be in the amount not less than or close to the amount which was paid last year, which is translated into 40% of the net profit of last year. So in case the Board of Directors would take that decision and subject to approval of the General Shareholders' Meeting, we would need first to proportionately prepay the state support, so the 10% of that amount. In case of the second payment, again, we'll need to make the same exercise. So the state support should be prepaid before we make any dividend payment. On top of that, we might consider some additional payments of the cycle in the same manner as we did last year.

And prepayments do not count for the ability to pay -- your ability to pay dividend? The amount you prepaid does not -- is not included somehow in...

No, no, no. It's -- like we made KZT 40 billion payments last December, so we cannot take that into account while making dividend payments this year. So we need to make, let's say, these mandatory payments.

Okay. And is that included in your net interest margin guidance?

It is included in net interest margin, ROE, net income, basically in all profitability metrics, which you see in our outlook.

Okay. And if I may, where is the discussion on possible tightening of the regulation, possible extra taxes on the banking sector? Could you please provide some broad overview where you are now?

There are a few discussions last year on the taxation, which might affect financial sector. One was concerning the state securities. That is introduced from March this year on the National Bank notes. And taxes on treasury instruments, instruments issued by the Ministry of Finance is postponed for a few years. I cannot recall the exact year, but I think it's 2030 -- or 2027 or 2030. So it's -- for a number of years, it's postponed. The second element is concerning the rates on the corporate income tax. So the statutory rates for the banking sector, as for any other corporate in Kazakhstan, is 20%. There were discussion to increase corporate income tax for a few sectors. That would include banking sector among those sectors. However, there were a number of other proposals on taxation like increasing the VAT tax, introducing not the flat, but the proportionate scale for taxes for private individuals. And when the new government is -- was changed early this year, there was order from the President to look again at the proposals. And currently, it's probably a bit earlier what particular proposals would end up in the new revision of the tax code. So probably we'll have that a bit later during this year. [indiscernible] what was discussed is increasing corporate tax for the banking sector from 20% to 25%. But again, we don't know what the particular suggestions would be advanced further.

The next question comes from Mikhail Butkov.

I just have a few clarification questions on capital allocation and dividend. So firstly, on dividend, why -- maybe could you provide a little bit more color why will you propose to split it into 2 payments? And also can you consider in your second payment when you pay 10% to include also the profits from the first half of the year or it will be 10% of the profits from 2023? And also on capital, we can see that it started to build up again quite strongly. So can you consider some other capital allocation opportunities on the top of dividends? So what could that be? Do you look at some maybe inorganic areas of growth? You mentioned in particular Uzbekistan as the new -- the geographical expansion there. Can you allocate more capital there or maybe you could consider buybacks or something else?

Mikhail, thank you for your questions. Regarding the dividend payments, I think that was a long suggestions from investor community to consider a more frequent dividend payment. And as many of investors noticed last year, we put that possibility in our charter. So according to charter from the last year, the bank has a possibility to pay up to 2 years the dividend. But the dividend policy was not changed at that time because we were still having internal discussions to moving from 1 year to potentially 2 years payment. And this year, we're making proposal as the management. So along with decision on dividend payments, the changes in dividend policy is also introduced where it will be aligned with a frequency which was already incorporated in our charter. So from that perspective, we are moving from 1 year to 2 years. And I believe -- we believe that it is addressing the view from many of the investors. Regarding from which -- what will be sources of repayment, according to Kazakhstan legislation, dividends can be paid from either retained earnings or profit which was audited. So from that perspective, the second payment should go from results which already went through audit procedures. So technically, that would be from retained earnings. But as a reference, we will take net profit of last year. So if we take that into perspective, the reference -- if we take as a reference net profit of last year, so basically, for the whole year, the dividend's anticipated to be in the area of 50%. Again, this is subject first to Board of Directors' approval, Annual Shareholders' Meeting approval for the first payment as well as the recommendation from Board of Directors and a second approval of shareholders' meeting in the second half of this year. Regarding capital allocation, you see that the bank is growing. It's growing relatively high, given the size and scale of the bank. So even if you take the outlook into perspective, so we see that overall net profit we anticipated would be growing close to the last year in the area of 17%. So from that perspective, we see that the capital is also needed to support the organic growth of the bank. We're, first of all, focusing on the organic growth, both in Kazakhstan and Uzbekistan. We see a lot of opportunities to do that on the large corporate side, on SME, on retail. We, however, are also looking at some inorganic, but that is not at the large scale at the first place. And secondly, it is focused on expanding our ecosystem.

And these inorganic opportunities, they are local or they're both Kazakhstan and Uzbekistan?

At this point of time, we'll focus only in Kazakhstan. But if there will be opportunities in Uzbekistan, we might also consider. But the first priority in terms of ecosystem, that will be in Kazakhstan. But we are open for our key markets to which Uzbekistan belongs.

And the next question comes from Can Demir.

Yes. I just wanted to clarify one thing that Murat said actually, and I don't -- I didn't write it down very precisely, but you said something along the lines of we may pay dividends off-cycle as we did before. But I don't recall Halyk paying 2 dividends in a year. So did you mean buybacks, Murat, when you said off-cycle?

Regarding the off-cycle, I was talking about the state support repayment. So we did SP legislation when we make the decision to pay dividend. That was in the first half of last year. And by off-cycle, I mean that we made some voluntarily partial prepayment of state support back in December last year. That was not triggered by dividend decision. So that's what I meant by off-cycle.

Okay. Okay. And I don't want to put words into your mouth, but given how the stock is trading, would buyback be out of question? Or do you think -- given you're reforming your capital returns a bit, do you think that would come back on the table, given where the stock is trading?

Technically, we have such instruments in our arsenal. Historically, we made share buyback. So to recall, we did a big one in end of 2021. At this point of time, we are focusing on dividend payment. And according to -- and because of change of legislation, that also need to be accompanied by a partial return of state support. Any buybacks would also trigger the partial return of state support. So technically, we might consider some buybacks in the future. So that cannot be fully ruled out. But our, let's say, short-term priorities is dividend policy. That's why we're also amending that, developing that. That's why we're also moving into 2 dividend payments.

Understood. And maybe one last question on the fee growth. I mean it's been a bit erratic, given that the growth in the first 9 months was much higher than the full year growth figure. So -- and I know this is related to the insurance fund and loyalty expenses. But I mean, especially in terms of loyalty expenses, why do they come in, in a specific quarter? And I don't know. I mean is there a chance that the growth is going to be more smooth going forward? I guess that's the question.

Yes. In the fourth quarter last year, our fees and commission was affected exactly by 2 items, which you mentioned, the increased payment to Deposit Insurance Fund. This is because we saw some strong increase in retail deposits in the second half of last year, but primarily because of the loyalty program. We did that -- this big loyalty promotion second year in a row. Last year, that was particularly aimed at promoting the QR payments, which we introduced as a Halyk QR. And that was very successful in terms of getting more clients on board, which is witnessed by increased number of monthly active users on our platform. We see a greater engagement of our clients with our platform. We see a quite strong response from our clients to QR -- Halyk QR, which we introduced recently. So these promotions, they, as we saw from the past, having a long-lasting effect. So that might have, I would say, an impact on the fees and commission in particular quarter, but we expect a long positive impact, which is translated in our guidance for net fees and commission, again, at the 20% for this year.

The next question comes from Simon Nellis.

Most of my questions have been answered. I just kind of have follow-up questions on the guidance. Can you confirm that the guidance then does not -- it assumes that the current tax regime remains unchanged. That's number one. And also the guidance, just to confirm, it doesn't take into account any further one-off extraordinary repayments of the state support? And then sorry, I joined the call a bit late, but I'd be interested in any guidance or kind of if you could tell us how insurance income and other noninterest income is likely to look like going forward this year?

Simon, thank you for your question. As I said, the profitability guidance, which we provided for 2024, is incorporating the -- our projections on state support money return. So that is our view. It's probably a bit not narrow in terms of certain items. We hope that we'd be able to provide more, let's say, narrow guidance when we'll be reporting 6-month results. But so far, it's reflecting our expectations. In terms of the...

Sorry. Is that just paying down the required amount or you have penciled in -- or you have some kind of extraordinary repayments also in that guidance? It's not clear.

That includes at least the statutory payments or payments according to legislation. But also there are certain cushion is, let's say, allocated by us. But we do not have the specific amount at this point of time.

Now it's clear.

Well, in terms of the taxation, the bigger changes, as I said, is not introduced yet. The one which is introduced concerns only taxation on the National Bank notes. And for us, it's a very minimal impact. If any, it is again incorporated in the profitability guidance.

The corporate tax rate of 20% is still the...

Yes, yes, yes because this is the rate which is for this year. Regarding your other questions, like on dealing on insurance, I probably cannot provide specific guidance on insurance portion. On dealing, we saw that it's -- after, let's say, coming to new normal last year after extremely successful 2022, we think that we are coming to certain, let's say, new normal in terms of dealing. And we expect that from that will be -- start growing at some normalized levels basically in -- yes, it's normalized, but it will start growing from the base in line with clients' activity.

Okay. And actually, sorry, one more. Can you update us on the proposed regulation to maybe lower the consumer loan rate cap? Is that still a topic of debate?

We have not seen -- hearing recently what the regulator is going to do in that particular aspect.

The next question comes from [ Lyle Taylor ].

Yes. Can you hear me okay?

Yes.

Okay. Excellent. I just wanted a quick clarification, if I could, on the dividends. So if I understand you correctly, you're saying you're anticipating essentially paying a 40% final dividend and then a 10% interim payment for a total payout of 50%. But it sounds as though the interim payment you're introducing is going to be in respect of the profits of the prior year. And if I have understood that correctly, I mean, I think the reason why investors were sort of clamoring or pressuring for an interim dividend is that they didn't want to wait till the end of the year to get the profits. They wanted to get a dividend payment in respect of the first half 6 months earlier. But the way -- if I've understood what you're saying correctly, it would actually mean that investors actually have to wait longer, right, because they're only getting the 40% and then have to wait for the interim payment. So have I understood that correctly? And why would you not consider paying an interim dividend in respect of the profits earned in the actual first 6 months of the period?

Yes, thank you for your question. Yes, you understood correctly. However, we are not only looking at dividends as a percentage of the profit. We're also looking at dividend per share. And we also want to have a bit more profitability, predictability in terms of dividend payment and avoid any, let's say, big movements. So this is one of the considerations which we're looking at. On the technical legislation level, as I mentioned during response for one of the previous questions, we, according to legislation, can pay dividends basically either from retained earnings or net profit, which went through audit checks basically, to say it in simple words. Audit results, the results only for full year is audited. The interim results like quarterly, they are reviewed. So in our opinion, so technically, we cannot make interim payments. That's why we're also not, I would say, naming that payment as an interim. So still as a reference, we'll be taking net profit of last year. In terms of why we are not increasing the amount, you have to appreciate that when it talks -- when we're talking from the capital as well as liquidity perspective, actually, we are not only paying dividends. But on top of that, we're also making some repayment of state support money. So from the bank perspective, actually, last year, we made a bigger distribution to our shareholders as well as a part of state support return. And that would also be the case for this year. So if you take that into account, then the impact for the bank is higher than simply 50% of the net profit.

Yes. Okay. Understood. I mean I think 50%, certainly in my opinion, is about the right number. It's not too high, not too low. But wouldn't it -- I know this is not that important in the grand scheme of things. But yes, technically, it has to be paid out of audited profit. But why could -- in respect of prior periods, why could you not tap into the retained earnings, technically, the retained earnings that have been earned and audited in prior periods and use that to pay effectively in substance the profit out of the first half earnings? Is that -- I don't want to spend too much time on this, but I'm not sure if that's possible. But I think if it's ultimately leading to a deferral of the dividends compared to what would otherwise have been the situation, I suspect that investors would actually have preferred that you kept it at the prior 50% payout. Yes, anyway...

Do you want me to respond? Or it was just comments from your side?

Look, I mean, I don't want to take up too much time. So maybe just one other one on insurance, if I may?

Okay. We can look from different perspectives, but I think paying dividends in the same amount in nominal terms or dividend per share, if you like, in the same manner as last year and leaving opportunity to make a second payment, I think, in itself is -- should be accretive to the shareholders. And definitely, as I said, we are moving. So for us, it's a transition. I do understand that probably users -- holders want to have 50% for last year and then 50% again for the first half. In our opinion, it's a bit too stretchy. Again, taking into account they need to make a partial repayment of state support money in 1 particular year at the first place. Secondly, we have to look at opportunities because we definitely see opportunities to profitably -- to allocate capital and do that in most profitable way because our return on equity during last few periods, as you see, is exceeding 30%. So from that perspective, retaining certain amount of net profit and reinvest it into the business. We think it is accretive to shareholders, which would allow the bank to maintain growth of our net profit and ultimately grow dividends on dividend per share basis.

Okay. Understood. Just one very quick one on insurance if we have time. The insurance contribution has been very volatile in the last couple of years, I mean, partly associated with the accounting policy changes. Without asking you to provide any kind of fixed guidance because I know it's volatile, could you just give us an indication of where you think the sort of, I guess, normalized or average run rate of that insurance net income line should be over time based on where it is kind of smoothing out the volatility elements? That would be very helpful.

Thank you for your question. With regards to insurance, it will be probably quite difficult to give you some normalized level due to a few reasons. The introduction of IFRS 17 is probably one of the biggest reason because it's a new policy document. I think many insurance companies globally are still kind of introduced, but trying to, let's say, properly incorporate that into their projections and budgeting. I think we are not different from other insurance companies in that regard. Secondly, we have relatively a new insurance sector in Kazakhstan, where new products are introduced. Certain products are -- get modified. There are elements of mandatory insurance as well as voluntary insurance. And on top of that, we have life insurance and nonlife insurance. So the scale and evolution of insurance is probably making us a bit difficult to give you specific guidance in terms of insurance. But overall, we see that insurance business is profitable in Kazakhstan. It is growing, and our insurance companies are among leaders in their respective segments.

The next question comes from Olga Naydenova.

Just had a follow-up. If you could please remind us regarding the rules of how much you need to repay each time you decide to pay dividends and whether it's -- whether at this point, it depends on how much you pay, how much dividend you pay? And also if you could briefly tell us -- there are initiatives to restrict collectors' activity also in Kazakhstan, if you could tell us whether you expect any effect on your business?

Olga, thank you again for your questions. Regarding your first question, just to remind to the investors and analysts who probably missed the discussions last year, intensive discussions, actually, according to new regulation of the banks who received or have state support instruments on their balance sheet would fall under this regulation. With regards to Halyk Bank, actually, we fall under that regulation because the state support funds, which was received by Kazkommertsbank by Kazkom back in 2015 was migrated to Halyk Bank as a part of acquisition and further merger between Kazkom and Halyk Bank. That's why we also fall under that regulation. According to that regulation, basically, the banks need to look what is the proportion of state support, the capital component of state support in overall capital. Last year, we have a higher proportion because the nominal amount of state support was KZT 250 billion compared to our equity around KZT 2 trillion. So that was above 10% proportion. Because we made repayments in 2 tranches last year, KZT 28 billion as a part of dividend payment and KZT 40 billion, the additional payments in December last year, the notional amount of state support reduced to roughly KZT 182 billion. Because our capital end of last year is exceeding KZT 2.4 trillion, the proportion of state support capital component is below 10%. So from that perspective, the floor, which is incorporated in legislation, applies to us. So with any dividend payments or any buybacks, which the bank is doing or potentially might do, the 10% of that amount need to be on the -- will be used as early prepayments, partial prepayments of the state deposit.

Okay. So like KZT 18 billion for this coming payment and...

Yes, yes.

And 16...

As our CEO mentioned that we are looking at roughly 40% of last year payment for this year. It's roughly translating to KZT 277 billion. So basically around KZT 28 billion. So basically 10% of that amount needs to be prepaid by the bank on the mandatory basis.

Okay. And on collection?

And on the collection side, indeed, there is intention from the regulator to limit activity of collection companies in Kazakhstan. As I understood, that will be active for a number of years. We think that from the market perspective, that is probably not the decision which is welcomed by financial sector. We think that any potential irregularities with any particular collection company might be solved by working with a particular company. There might be, let's say, some changes to the regulation but not such a drastic change. But yes, we have to deal with that. So we are looking at some other initiatives internally like strengthening our internal hard collection to -- so the bank would not have, I would say, impacted by such decisions.

Okay. And what is the proportion of -- how much do you sell to collectors if you disclose? How big of an impact the business with collectors...

It will not be a big impact for us because we have strong internal soft collection. We also have some hard collection, which is focusing on some products. But there are some products which we prefer to sell to collectors because it's more efficient in terms of internal processes. It's not a big amount. It's a small fraction of the NPL book of our retail portfolio.

And now I will take the questions from the Q&A chat. The first question is, according to the cost trading calculation, Halyk Bank in comparison with Kaspi.kz in terms of P/E, P/BV, P/S as well as EPS to share price multipliers look greatly undervalued. What does the bank's management intend to do -- minimize this undervaluation? What specific steps are planned to be taken, especially in digital development? The second question is, why doesn't Halyk Bank practice buyback following the example of Kaspi.kz if management sees the company is undervalued? And the third question, is a scenario of nonpayment of dividends based on the results of 2023 being considered as a part of return of the state aid?

[ Daniel ], thank you for the questions. I think you placed the question at the beginning of the call. That's why I believe your second and third question regarding the buyback as well as the potential payment or nonpayment dividends is being extensively covered during the first part of our Q&A. So I'll respond to your first question, which is a really good question. I think Halyk Bank is doing a lot in terms of became a more modern digitalized financial institution. We are universal financial services group. That's why we have a much broader scope of products and services on which we had to work. Obviously, we started from retail because that is probably the most obvious choice for any financial services group. And I think we did a lot in previous periods as well as lately. Specifically, if we talk -- if we take 2023 alone, we substantially increased the engagement of our Halyk Super-App, which is aimed on our retail clients. Our monthly active users increased by 46%. Daily active users increased by 35%. And volumes of payments and transfers increased by 48%. Again, it's in 1 year alone. And we continue to improve the proposition of our Super-App. We're incorporating a number of lifestyle services. So we think that we -- and we will continue to further leverage and expand the proposition of our services to retail clients. Secondly, we -- the -- what we did to retail clients in terms of digitalization, we start introducing moving to our corporate segments. We started from individual entrepreneurs. Lately, we start digitalization of our client journey of limited liability partnerships. We're also having strong results from that perspective. Again, on the -- in terms of the activities, we increased daily active users of our Onlinebank by 24% last year. We increased number of payments by 22%. So again, it's a rapidly increasing platform for legal entities, and we think that it's a leading platform. We're also doing a lot in terms of other products like, for example, in our presentation, we also mentioned that last year, we came with innovative products on issuing guarantees. And Halyk Bank was not the largest bank in terms of issuing tender guarantees, for example. But due to strong utilization efforts, we clearly, by far, became #1, and we increased the volume of that guarantees payment by many margins. We also are making some advances in digitalization areas where other bigger competitors are not present like on brokerage. I hope that you and audience is familiar with what we are doing in terms of the brokerage. So we have proposition with our subsidiary, Halyk Finance. We, in the end of 2022, introduced Halyk Invest solution for our retail investors on Halyk Super-App platform. And these 2 platforms were instrumental in the recent successful IPOs like KazMunayGas in 2022, that was the first digital retail IPO, KEGOC and lately Air Astana, where a significant portion of the orders was placed through Halyk Bank platform. And again, it's a good example where we can leverage our different parts of the business like retail and investment banking, for example. The example which we posted on auto loans, which was launched in the second half of last year, but already for December, the bank managed to reach almost 1/4 of the market share. Again, this is the synergy between retail and corporate business, where we team up with our top corporate clients in auto segment. And I can continue. So we -- I think we're doing a lot. And hopefully, sooner or later, investors would start noticing that the bank is also actively developing digitalization in many products. We're already a digital bank.

The fourth question from [indiscernible]. Halyk Bank has an absolute advantage in the financial system of Kazakhstan corporate lending. Will this advantage be used? Or does Halyk Bank intend to focus on retail segment where Kaspi dominates?

Yes, I probably partially answered this question, but probably I can continue. Indeed, we have a very strong large corporate banking platform in Kazakhstan. And lately, we also engage with large blue chips companies in Uzbekistan. And actually, Halyk Bank is one of the biggest foreign banks which are present on syndicated market in Uzbekistan, along with largest U.S., European and Asian banks. We're probably the only bank in the region who do that. With regards to Kazakhstan, we are looking at synergies between large corporates and SME segments. We are looking at the supply chain solutions. We look at SME from the perspective of B2G, B2C and B2B. So historically, we're strong in B2B segments, where our large corporate segments was interacting with SME business. That was historically strong. In terms of B2G, the products, which I mentioned, the issuing of guarantees is -- substantially puts Halyk in the front position with regards to providing solutions to our SME clients. And our latest focus is on SME clients in B2C segments where we are actively trying to look at different solutions, including acquiring the Halyk QR, which we also discussed is one of the instruments. And we continue to leverage all that segments.

And the next question from [indiscernible]. Retail loan growth guidance seems low. Is there a specific reason?

Thank you for your question. We historically in the beginning of this year is providing probably a bit more cautious guidance, which is typically fine-tuned in the middle of the year. So we will see. There might be the case that, again, we are taking a bit cautious approach, but we are just at the beginning of the year so it's a bit difficult to provide probably more specific guidance from that perspective. But we also can note that retail was showing quite strong growth during the last few years. So one of the reasons for initial guidance at least is the higher base rate.

The next question from our Q&A chat is from [ Harry Sirkin ]. Was the increased income from Russian immigration in 2022 mostly gone in 2023? How much excess income was still attributable to maybe temporary residents of Kazakhstan?

[ Harry ], thank you for the question. Actually, Halyk Bank from -- immediately from February 2022 took a conservative approach in terms of opening accounts to nonresidents that concerns both retail and corporate and SME segment. So we don't think that it has any meaningful impact on our results. So we are definitely not the largest, not the second, probably not the third bank in terms of opening accounts to nonresidents. And I'm talking about the nominal, not the relative volumes.

The next question comes from [ Andre Krisnov ]. What kind of M&A opportunities are you looking for or what would you consider a good fit for Halyk?

[ Andre ], thank you for your question. We are not considering M&A opportunities in the banking. We think that we have all the ingredients in place in terms of the capital, in terms of the team, competences, instruments to leverage our strength on the clients and products to further grow our ecosystem and our traditional banking. We might, as I said, occasionally look at some ecosystem elements, and that not necessarily needs to be done in the form of M&A. Like in this presentation alone, we provided 2 examples. One is leveraging our retail with investment banking, our retail with the large corporates in terms of auto loans. On top of that, I can mention our strategic partnership with Kundelik, which is the educational platform. So when we talk about exceeding the business, we at the first place -- or we should not look only from M&A angle because the sector can offer a lot of different opportunities. But as I said, we are looking also -- open to M&A and that in the first place probably would be around some ecosystem solutions. There was one question that's done in Russian from a local investor. I'll probably try to briefly translate. There's a clarifying question on dividends that the bank is not oriented on the dividend payout ratio, but on the dividend per share. And the second clarification is whether the bank is aiming to recommend to the Board of Directors 40% and 10% subsequently. So the second question, I think it was covered extensively. Yes, it's 40% plus 10%. And in terms of the first question, we are looking at the both. So our dividend policy says that we are looking at dividend payout ratio, which is set between 50 to 100 of the net profit of the last year. But also, we are looking at other factors like, for example, capitalization level. We're looking at prospects in terms of the business opportunities. We're looking at potential risk and stress scenarios. And we're also looking at dividend per share. We see that this is one of the instruments which shareholders also looking at when we are collecting the feedback from the shareholders. So it's not from one to another. It's basically both aspects are taken into account by the bank.

And the last 2 questions come from [indiscernible], and the questions are following. Regarding your deposit base, NBK still maintains cap on USD deposits at 1%. Have you had discussions with NBK on that matter? BCC is issuing short-term notes being around 5%. Do you plan to follow the course? And the last question is, you have mentioned your progress in ESG. [indiscernible] and most modern bank are employing artificial intelligence solutions to their business processes. Do you plan to follow suit?

Actually, yes, NBK indeed is maintaining a cap of USD deposits at 1%. We understood that banks were approaching the regulators last year to probably revise that cap, but it retained as is. That's why a number of banks start issuing some securities, mostly dedicated to retail clients. We did the same. If you see in our balance sheet, the securities on the liability side increased somewhat, and that is the notes which we're issuing for our retail clients, and the rates which we're offering is 3.5%. And the last question on ESG and AI, I think we provided extensive information of what we are doing as ESG. I think the bank, given its massive scale, presence in many regions, interacting with different client segments has a wider role in the country. That's why we understand our responsibility from that perspective. And even during the previous strategy or current strategy, I should say, we incorporated SDG goals in our strategy. And that is acknowledged by different respectful organizations, as you see on this slide. We do a lot in ESG in terms of our own impact. We do, however, understand that -- where the bank can play a role through indirect impact. That's why we're revising our policies. We are doing a lot in terms of providing sustainable finance. We do a lot in terms of gender equality, supporting our female clients through different instruments. We're supporting clients in remote areas. So we play a bigger role. With regards specifically on AI, definitely, we're also a modern financial institution. In some aspects, we do certain solutions where we have not seen examples, not only in Kazakhstan, but in other markets as well like, for example, on issuing digital guarantee, which is done based on -- just on the unique number of state tender and decision and issues guarantees happening within 4 minutes. We witnessed that by introducing the auto loans where time to yes is less than 1 minute. It's actually around 50 seconds. So that is also, I think, is one of the greatest examples. And definitely, we're looking at AI. We're looking at different solutions, but we want to keep it a bit low profile because AI still needs to be looked carefully. There are different vendors who are offering, some of them are fitting, some are not. There are a lot of issues with regards to cybersecurity, stability, et cetera. But definitely, we are looking at a number of use cases.

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.