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

Good day, ladies and gentlemen. Thank you for joining us on this conference call to discuss Halyk Bank's interim results for the third quarter and the first 9 months of 2024. I'm Mira Tiyanak, Head of FI and IR. Joining me on the call today from our side are Mr. Umut Shayakhmetova, Chief Executive Officer; Mr. Murat Koshenov, Deputy CEO, Finance, Subsidiaries, Compliance and International Activities; Mr. Roman Maszczyk, Deputy CEO, Risk-Management, Data Science and Collateral; Ms. Olga Vuros, Deputy CEO, Corporate Banking; Mr. Dauren Sartayev, Deputy CEO; SME Banking, Transactional Banking, PR and Marketing; Mr. Nariman Mukushev, Deputy CEO, Retail Banking, Digital Government Services, Ecosystem and Customer Experience; Mr. Viktor Skryl, Strategy Director; Nurgul Mukhadi and Rustam Telish from IR team. And we will begin this call today with a presentation by the Halyk Bank team followed by time for Q&A session. Please note that the call is being recorded. First up, I would like to update you on progress in our retail business so far this year. As many of you know, Halyk is focused on leveraging digital platform to deliver growth in our retail business and we have seen rapid growth in that sector over the course of the year. The monthly active users of our Super-App are up 11% year-on-year, and the daily active users are up 21%. Our overall active retail client base also grew by 10% year-on-year during the period, almost in line with the growth in monthly active users. So we saw digital penetration remained steady at around 70%. Our retail clients have increased their use of Super-App to manage their finances as reflected by a 42% increase in volume and 27% increase in the number of payments and transfers carried out so far this year. We maintain a leading 39% share of active salary clients among country employee population. Next slide, please. Our retail lending operations are conducted almost entirely digitally. So you can see that digital loans processed by Super-App now make up 91% of our portfolio in terms of count and about 3/4 of new loans issued in terms of value. Total loan issuance was up over 30% for the quarter and over 51% for the year-on-year. As of October 1, our gross retail loan book was up 25% year-to-date without any decrease in asset quality. In fact, there was a slight improvement in our already strong portfolio quality. Retail deposits grew 12% over the 9 months of the year, and the vast majority of that increase came via the Super-App. 90% of your deposits were opened online year-to-date, and we see the trend going upward as 92% of your deposits were opened online in Q3. Next slide demonstrates a snapshot of some of the key offerings via our digital ecosystem. We saw progress in auto insurance, which more than doubled year-to-date in terms of both GMV and client volume. Halyk Travel and Kino.kz both experienced increased traffic year-on-year when comparing the 9 months results of 2024 with those of 2023. Halyk Marketplace added 5,000 of new partners in Q3 and 20,000 since Q3 of last year. In 9 months, the total GMV of transactions rose by more than 50% year-on-year when comparing the 9 months results of 2024 with those of 2023. Halyk Market, which offers a multi-partner platform for online purchases, added 1,200 partners in Q3 and over 3,000 since Q3 of last year. The number of SKUs for sale more than doubled since this time last year and GMV likewise doubled year-on-year. We will wrap up our look at the retail business with an update on our brokerage business. The total transactions volume rose by more than 50% year-on-year when comparing the 9 months results of 2024 with 2023 where assets under management more than doubled and brokerage assets increased by 20%. Now we have a 72% market share in pension assets under management and almost 61% market share among private asset managers. Now it's time for a look at our corporate and SME business. Online bank is the digital platform for our legal entities clients. We continue to witness rapid growth in monthly and daily active users. The number of payments processed through this service grew by 18% for both the first -- third quarter and 9 months, while transaction volume rose by 13%. Halyk Bank is undisputed leader in commercial banking in Kazakhstan and currently accounts for 50% of all lending as well as 32% of corporate deposits. Our loan portfolio has increased by almost 14% since the end of Q3 last year and portfolio quality remained strong. SMEs are a core focus of our commercial business. And you can see that our SME loan portfolio is 17% larger year-on-year. Loan issuance increased by 24% and over 94% of new loans were arranged via online bank. You can see that reflected in the size of the digital loan portfolio, which is up 70% since this time last year, while keeping our portfolio quality on a good level. We have also seen a notable increase in issuance of digital bonds via our platform. That's a quick look at progress in our retail and commercial businesses, and I will now pass it over to Nurgul Mukhadi to take you through the financial results. Thank you.

Thank you, Mira, and good day, everyone. I will now take you through the financial results for the third quarter and 9 months of this year. In preparing the consolidated financial information for the year ended on December 31, 2023, the group carried out an inventory of its financial instruments. The inventory process identified financial instruments measured at fair value through the profit or loss that were previously restricted in use and were incorrectly measured at cost. The group revalued this financial instrument and recognized the prior period adjustments. The consolidated statements of profit or loss for the 9 months ended September 30, 2023, has been reclassified to conform to the presentation for the year ended December 31, 2023. Because the presentation of the current year report provides a clearer picture of the group financial performance, all the durations were also recalculated accordingly. For more detailed information, please refer to Halyk Group's interim condensed consolidated financial information for the 9 months ended September 30, 2024 note 4b. Halyk had a strong quarter in Q3 with net income rising 29.1% quarter-on-quarter and 53.7% year-on-year. This contributed to an 18.3% boost in net income for the 9 months of the year to KZT 638.8 billion versus KZT 539.8 billion during the same period last year. Here's a quick look at the balance sheet. Total bank assets were KZT 17.65 trillion as of October 1, which is just under 13.9% more than at the beginning of the year. Interest income was 30.3% higher for the 9 months, mainly due to increases in average rates on both loans to customers and amounts due to customers. Interest expense also rose around 27.9% due to the average rate on amounts due to customers and growth in share of Tenge amounts due to customers. Consequently, net interest income before credit loss expenses for 9 months 2024 grew by 38.7% versus 9 months 2023. In 9 months 2024, net interest margin was affected by the increase in average rate on both loans to customers and amounts due to customers. Furthermore, net interest margin was positively impacted by the increase in the share of high-yielding retail loans in total loan portfolio and share of loans to customers in total interest-earning assets as well as increase in share of Tenge interest earning cash and cash equivalents. As a result, net interest margin has grown to 7.1% per annum for 9 months 2024 compared to 6.3% per annum for 9 months 2023. Fee and commission income in 9 months 2024 increased by 2% year-on-year. Growth in this metric was negatively impacted by base effect related to transition to amortization of tariff packages for commercial clients beginning in November 2023. Moreover, there was a revision of some retail tariffs in the second half of 2023. On top of that, the amount of bonuses for the loyalty program significantly grew due to increased transaction activity by retail clients and the growing of -- share of QR payments. Fee and commission expenses in 9 months 2024 grew by 7.3% year-on-year, mainly due to increased service fees for payment cards and higher deposit insurance fees payable to the Kazakhstan Deposit Insurance Fund, in line with our growth in retail deposits. As a result, despite the growth of clients' transactional activity, net fee and commission income for 9 months 2024 decreased by 2.7%. And next slide. Here is an overview of operating expenses, which you can see increased by 17.2% for 9 months 2024 versus last year, mainly due to the indexation of salaries and other employee benefits. The cost-to-income ratio equaled 17.6% in 9 months 2024 compared with 17.9% in 9 months 2023 due to higher operating income for 9 months 2024. Compared with the year-end of 2023, loans to customers were up 11.4% on a gross and 11.2% on a net basis. The increase in the gross loan portfolio was attributable to a rise of 25% in retail loans, while legal entities loan portfolio were up 5%. The share of FX loans was 20.1%. Cost of risk in 9 months 2024 was at normalized level with the scope of full year guidance and was at the level of 1.3%. At the end of third quarter 2024, Stage 3 loans decreased from a level of 7.5% to 6.9% year-to-date as a result of workout of problem loans and loan growth. Compared with the year-end 2023 the deposits of legal entities and the deposit of individuals were up 6.5% and 12.3%, respectively. Due to fund inflow from bank's clients, we are seeing a noticeable shift to the deposits in Tenge. On a consolidated basis, capital adequacy ratio of the bank increased in third quarter 2024 as a result of net profit earned by the bank during third quarter 2024. Dear ladies and gentlemen, that's a quick look through the financials. We will now open the floor to your questions.

[Operator Instructions] And the first question comes from Milosz.

It's Milosz Papst from the Edison Group. I wonder which SME segments do you currently find most attractive in terms of the combination of growth, margin and credit risk? Are these the medium-sized enterprises, smaller businesses? Can you shed some light on that, please?

Milosz, thank you for your question. Yes, if we divide SME into small and medium-sized business, so far this year, we see that dynamics in small business is strong in terms of percentage growth. And obviously, profitability adjusted core risk is also higher in small businesses.

Okay. And within the SME segment, do you like -- do we have some internal classification in terms of subsegments? And do you focus on any of those in terms of total loan exposure? Or would you say that it's rather quite, well, consistent group in terms of the size of loan book exposures, et cetera?

In small business, the medium-sized business is more diversified. It includes services, some production and trade, while the small business is probably more geared towards the trade and to a certain extent, also services.

Okay. Maybe my last question would be in terms of the cross and upsell opportunities within the SME segment. Can you maybe just comment on this, please? And what channels do you use for cross and upsell within your SME client base?

Yes, we have a multiple of channels to cross sell our products. Obviously, we have a strong distribution through our application, and we use our so-called Data Factory in order to generate different personalized proposal to our clients whom we can reach through application, through SMS, we also have outgoing the call center, which -- and finally, obviously, we have a strong physical network, which can also be used in order to cross sell to our clients.

The next question comes from [ Nick Hawkins ].

Two questions, please. Firstly, your performance in expected credit loss expense was very strong because you were able to write back some loans, which were previously at Stage 3. That's obviously very encouraging because it suggests strongly that your provisioning is conservative enough. I wonder two things on this, please. Firstly, should we assume that there are further write-backs to come? And secondly, over the medium term, should we expect the cost of risk to increase gradually because of the change in your assets favoring household -- the household sector and retail loans? That's my first question, please.

Hello. Thank you for the question. I'm going to cover that, Roman Maszczyk speaking. So overall, the structure of the portfolio is changing as you probably noticed already. And with growing percentage of retail loans, cost of risk is slightly stabilized over the years. The main reversals of provisioning were mainly due in Corporate segment because, yes, we are more conservative there. So in the short-term perspective, we are going to stay within our annual guidance, and we do not expect any surprises in this regard. In medium term, we think that there are still quite benign conditions for the credit activities. And we do not expect much of deviation from our guidance. As far as the proportions of segments sub portfolios are concerned, we think that they are not going to impact cost of risk over the longer term. As far as larger reversals, they are mainly coming from the corporate business, and we do not expect significant reversals in the short term perspective. Longer term, it's a still open question.

That's really clear. My second question concerns the cost-to-income ratio and the performance that was achieved in the third quarter, which was exceptional at 220 basis point improvement. I just want to check that I haven't got this wrong. Is that largely because of the growth in net income or were there some special factors which held down the growth in costs?

Primary factor indeed was a strong growth in operating income. At the same time, we also provided information that operating expenses also are increasing year-over-year basis, mainly due to indexation of salaries and other employee benefits. And also typically, seasonally, operating expenses are somewhat higher in the fourth quarter. So that's why we -- in our guidance, we're providing somewhat higher cost to income than it was achieved by 3 quarters so far.

Okay. The guidance stays, yes?

Yes, the guidance stays because typically, we are not revising at this period of time. But if I may, probably there is some better performance in terms of cost to income than we initially anticipated.

And the next question comes from Tom Jakobi.

Tom Jakobi from Doppelanalyse wikifolio. I've got two questions as well. First is about the net insurance income. It quite jumped up. You might think that insurance business is a quite stable thing. So maybe you can give us some more details about the changes in the insurance.

Thank you for your question. The main reasons for trends on the net interest margin are as follows. First of all, we were increasing our loan portfolio quicker than total assets. But within the credit portfolio itself, we saw strong increase in retail and small businesses compared to large and medium sized. And typically, these businesses are having higher margin. And thirdly, we saw some reduction in the interest rates, which probably had some additional tailwinds as far as NIM is concerned.

I'm sorry, maybe you haven't understood me the right way. I was not talking about the interest margin or the interest income. I was talking about insurance income.

Sorry, I probably some misunderstood you. On the insurance income, basically, as I was mentioning during previous call, it is better to look not quarter-over-quarter basis, but in a longer period of time because there are some -- the timing of when the new contracts are signed, the timing of release of reserves and the timing of claims when they receive, they all influencing the net insurance income if we compare short -- if we take a short period of time like quarter-over-quarter. So that's why it's better to look in the longer horizons. Yes, if you see, for example, 9 months versus 9 months, then there is no big fluctuations.

Yes, I see. And second question is about the outlook. You were talking about the outlook for the full year already and that you don't plan to update anything. I'd just like to know if you see fourth quarter like similar to third quarter? Or are there expected to be bigger changes in net income? And what about your dividend plans too?

Yes. Regarding the guidance, as I said, as a matter of fact, we are not revising the guidance typically at this period of time. Seeing that we are not seeing the third quarter as being influenced by any, let's say, one-offs, so it's more close to, let's say, regular quarter in these regards. We are not anticipating any, let's say, one-offs in the fourth quarter either. So probably I cannot say more in this period of time. In terms of the dividends, yes, we have a dividend policy in place, and it remains as is after we adjusted that beginning of this year when we introduced possibility second payments. And probably, as you know, we're anticipating the decision by general shareholders meeting December this year on making a decision for the second payment for 2023.

Is there a number proposed already?

Yes. The number is proposed, it corresponds to 15% of the net income of 2023.

The next questions come from Olga Naydenova. Our next questions come from [indiscernible].

Can you hear me?

Yes, please go ahead.

Just to clarify on the dividend. Did you say that the proposed dividend is 50% or 15% of the 2023 net income. I hope it's 50%. That's the first sort of quick...

It's 15%, 1-5.

1-5, okay.

So we paid percentage-wise, 40% of the net income during our first payments. And this is additionally 15%, 1-5.

One thing I'd like to understand, you -- in the beginning of the presentation, I saw a slide that said you had 11.2 million customers, active customers. Given that there are about 14 million adults in the country, that's -- I mean that's pretty amazing statistic. How much can you really grow this now from where you are is my question. Then the second question I had was, once you answer that one, is on back to the net interest income. I'm trying to get a sense of what the outlook is for it because, as you mentioned towards the end of your discussion in the last question, that there were rate cuts, and that benefited you initially. But sooner or later, it has to start putting some pressure on your asset yields. When do we start to see those coming through? Is it going to be as soon as the next quarter or in the next couple of quarters?

Thank you for questions. Just a moment, please. Yes. First of all, I think this is the number of active clients, it doesn't provide information how many products are used by these clients and whether they're active digital or not. So we think that for Halyk Bank, we can act in multiple ways. First of all, transferring these active clients into digital space, and secondly, increasing the cross-sell of our products. This is, let's say, one angle at which we can look at the penetration. And secondly, typically, in Kazakhstan, clients are not using a single application. Typically, they use application of 2, 3, 4, sometimes more banks. So again, at some point of time, it's not the number of clients by -- but what the share of wallets one or another application or one or another bank is taking in the competition. Well, regarding your second question, we think that there is still potential further to reduce interest rates in Kazakhstan, and that would be primarily the function of inflation, how it will be evolving. We know that the National Bank is taking the stance with interest rates, which would, let's say, put the inflation further. Obviously, it would require the action not only from the National Bank, but from the government as well. And provided that inflation would be going down from current level of 8.5% to a level which is targeted by the National Bank, there is still potential for interest rates in Kazakhstan to go further in the upcoming quarters and probably years. So from that perspective, we still see potential for further decrease in interest rates. Typically, in terms of sensitivity, we see that the interest rates are coming -- the net interest margin is, let's say, coming to more normalized level in 2 to 3 quarters. But next to that, I could remind what I said a bit earlier when responding to other question that the net interest margin in case of Halyk is also driven by change in composition of the assets and the change of composition of the credit portfolio. So that is additional big driver next to overall change in the interest rate line.

Our next question comes from Can Demir.

I have two questions. One is on the net interest margin outlook for next year given the, I guess, stronger-than-expected margin performance in the third quarter. Maybe you could give us your initial thoughts on what you think about 2025 margin? That would be very much appreciated. And second question is on fees, which haven't really been growing as much as you expected. And I understand there is some client acquisition costs and maybe there are different accounting technicalities coming in. But can you give us perhaps not exactly a timeline, but your best guess on when fees would grow in line with loans or assets so that we can model it accordingly?

Can, thank you very much for your question. Probably at this point of time, I'm not able to provide guidance for the next year, either for net interest margin or fees and commission because we typically provide that when we're reporting for full year results. But we see that situation with net interest margin is good in terms of that we so far continue to see stronger growth in both retail and small businesses. And we continue to see the trends in terms of credit portfolio growth. So that should provide sufficient comfort overall in terms of net interest margin. And on top of that, we see that both in Tenge site the expectation that rates would continue to decrease. That might be a question in terms of the timing and scale. And as I said, that pretty much would be the function of how successful the joint effort from the National Bank and governments would be in terms of containing inflation. When the fees and commission is concerned, yes, we provided comments that the current trend in fees and commissions is impacted by few things. One is the accounting treatments because we're moving into providing subscription to our primarily SME clients and some portion of the corporate clients. And accounting treatment requires amortization compared to cash method. Second element is that currently, at this point of time, we include in our fees expenses deposit insurance fees. And because of the strong dynamics in retail deposits, that is also increasing the fees and commission expenses. And third element that we abandoned certain retail tariffs in the second half of last year, and that has still impacted us as far as 9 months results are concerned. The good elements on the transactional income is that we continue to see the strong transactional activity, and that, at some point of time, we think, should be translated in better trends on fees and commission. And yes, as I said before, probably at this point of time, I cannot provide the timing or scale of that. Hopefully, we can be more specific when we'll be providing the guidance for 2025.

The next question comes from Olga Naydenova.

Congratulations on the great set of results. I have a few questions, if I may. One, maybe as a follow-up for the NIM, so that we better understand your NIM trends. Maybe you could specify the impact of the portfolio shift towards higher-yielding assets versus the underlying trend of where would it be if the asset structure stayed where it was? And where do you think it's going on the constant basis? My second question, and I appreciate you, you mentioned that you believe the environment remains benign and cost of risk will remain stable. But with that shift in your portfolio, what do you think is the through the cycle average cost of risk that we should think of in our models? And maybe my last question would be if you could please update on the regulatory environment and maybe if any understanding or discussions with regards to taxation and taxation dividends are in place? And if you could comment on that, at least where things stand now?

Thank you very much. Regarding your first question, if it's -- we cannot provide the information which you requested because we think that would be too complex exercise. So we are not providing that in our audit financials and that's why it will be not possible to answer your question regarding what the interest income margin sensitivity is due to different factors. Regarding your question on cost of risk and through the cycle, again, on the cost of risk, we see that it depends on a number of factors. First of all, it really depends on the structure of the credit portfolio. And you see that the credit portfolio is changing over time. And from that perspective, the through the cycle cost of risk might be also changing again. So again, that would be making that exercise too complex. What we can do probably is that we see that 2024 is probably close to normal. It's probably not still normal because the interest rates remains at relatively high level compared to, I would say, average rates, which we would normally expect in the economy. At the same time, we have not seen, I would say, substantial economic risk, but probably some changes in the FX. But because our FX structure of the credit portfolio is heavily now into Tenge compared to foreign currency, that particular element is also not considered as some big risk in terms of the asset quality -- if we talk about the asset quality. So probably cost of risk from that perspective is probably close to normal. But again, whether it's through the cycle or not, it's probably something which is difficult to answer on this call. Regarding your third question on the regulation, we can split it into, let's say, three parts. And I see that we, from that perspective, might answer some questions which we received also through our Q&A platform. One is regarding taxation. The changes in the tax code is being postponed by 1 year. So no tax changes anticipated to be introduced since -- from January 2025. So any changes which will be introduced, they will be effective from 2026. At this stage, it's still open what particular tax suggestions, tax provisions would be incorporated in the new tax code. I think it will be clear -- it will be more clear by mid of the next year. The second regulatory changes, which we anticipate is changes in loan banks. Again, we are not seeing yet at this point of time the particular draft. What we're hearing from the comments from the regulator, again, the first draft will be appear probably close to the half -- mid-year of 2025. But overall, we expect a more balanced loan banks, at least with market participants anticipating that. And the third element is the work of the National Bank on the digital infrastructure. There are a few elements there. National Bank is working on the digital Tenge, which would be introduced in making, let's say, better governance of different projects, which is financed by the government, like, for example, project finance, the state finance projects. Second element might be better administration of VAT. So this is one, I would say, stream. The second stream is -- relates to QR payment and national payment system. The National Bank already started pilot projects, but the full scope, the full rollout, we expect in 2025.

And we are going to switch to the written Q&A sessions. And the next questions come from [indiscernible]. Are you surprised with the growth in Tenge deposits given depreciation this year? What is Tenge sensitivity to further Ruble decline?

We have not made, I would say, specific calculation of correlation between Tenge and Ruble. Overall we see that there is probably less correlation now compared to situation before 2022 because the trade between two countries as a percentage of the trade volumes is also somewhat decreased during the last 2 or 3 years' time. In terms of the trends on deposits overall, we did see that retail deposits continue to grow, partially that is probably the function of higher rates on deposits. And secondly is continuation of the, I would say, fiscal policy of the government in terms of providing different stimulus.

The next questions come from [ Tyler Holly ]. Considering the improved share liquidity and valuation another Kazakh company has enjoyed after moving from LSE to U.S. listing, is a move to U.S. equity listing something Halyk would consider?

Tyler, we are not considering such moves at this point of time.

And the next questions come from Alexandre Antonov. Can you disclose the level of collateral coverage Stage 3 loans?

Okay. Let me address this question. So as you probably expect, our portfolio structure heavily depends on the segment and obviously, is related to our product structure. And in terms of retail loans, the majority of our loans are unsecured and most of the NPL or third-stage loans from retail banking are unsecured. The next segment is SME. We have quite a mixture of third-stage loans there. But the loans that are unsecured are the minority of loans for SME segment because most of those loans are from offline services or channels and the four are mainly secured on collateral. The third corporate segment has not a high third-stage portfolio. Still it exists. But all the loans there are covered with a collateral. I don't have the aggregate figures because that wouldn't be proper to calculate that for the whole portfolio. But we have them separately in the order I just mentioned, and they heavily depends on the segment.

And the next questions come from [indiscernible]. For potential growth of brokerage and pension business, do you expect more local IPOs next year? What is the current asset mix in the pension funds?

Indeed, any local IPOs would be beneficial overall for further developments of the securities market in Kazakhstan and would be benefiting brokerage and pension business. In terms of the plans, I don't know what the particular specific plans for IPO for the next year. But overall, the government has a strategy to bring some further state-owned companies to the capital markets, but I have not seen any short-term plans from that perspective. But as far as most recent deals were concerned, you probably know that at the beginning of this year, there was an IPO of Air Astana and then before that, SPOs of -- opportunity. So generally, the government is working on that. I cannot probably provide specific timing for any future deals in that regard. In terms of the asset mix in pension fund, I probably can talk about the overall. In Kazakhstan, mostly pension funds and probably the biggest unified pension fund is having most of their assets invested in state securities that probably would be close to 40%, probably somewhat higher. And big portfolio, which is invested in the securities of the -- on the international market would be a mix of sovereigns and the corporates and also corporate bonds in Kazakhstan. I think the share of equities would be not that high, but I have not a figure in front of me at this point of time.

And the last questions come from [ Patrick ]. Could you help me understand which factors led to the strong net gain on trading operations as well as a solid net FX dealing profit in Q3?

There are two factors, first of all, the increased activity on the FX market because there were some mobility on the FX market in the third quarter compared to the previous quarters. The second element is trading gain on our securities portfolio.

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

Thank you very much. Bye-bye.