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

[Audio Gap] consolidated financial results. I'm retina, Head of FBR. And joining on the call today are Mr. [ Mucha Metro ], Chief Executive Officer; Mr. Mora Acierno, CFO, Deputy CEO, Finance, subsidiaries, Compliance and International Activities; Mr. Dorian Sarta, Deputy CEO, B2B Banking, Marketing PR and acquiring and transactional banking; Ms. Olga ores, Deputy CEO, Corporate Banking; Mr. Nariman Makos, Deputy CEO; Garate and ecosystem; Mr. Michael Hassen, Deputy CEO IT. Mr. Kiri Bahar, Deputy CEO of B2C Banking; Mr. Almas Mohan, Financial Director; Mr. [ Vitor Screen ], Strategy Director; and Mr. Stan Talech from IR team. This session will start with a presentation by our team and will be followed by Q&A. And please note that the call is being recorded. Let me start with our B2C business update. The first half of 2026 continued to demonstrate strong engagement across the Halyk [ Sepura ] ecosystem with transaction activity growing at a healthy pace. As the first of July, monthly active users reached 8.6 million while daily active users stood at 2.8 million. Monthly transacting users reached 6.1 million, and our active client base stood at 11.5 million. The scale of customer engagement is also reflected in transaction activity. During the first half of 2026, the number of payments as a [ transit ] increased by 8.1% year-on-year to [ 234.7 ] million, while transaction volumes grew by 14.1% to [ KZT 10.5 ] trillion. We also maintained a strong position in our core customer segment, with active salary cards representing 39.3% of the contract employed population. Overall, the first half performance demonstrated [indiscernible] Initial ecosystem and the scalability of our digital platform. Turning to our [ retail lending ] business now. The retail gross loan book reached KZT 4.8 trillion as of first of July 2026, which is up 10.7% year-on-year. From an asset quality perspective, the NPL 90 days [ plus ] ratio stood at 9.2% with coverage at 81%. Loan issued in the second quarter amounted to KZT 730 billion, up 16.8% year-on-year, demonstrating a recovery in origination activity the regulatory tightening impact seen earlier in the year. And we continue to maintain a strong market position with 17.8% market share, serving approximately 1.83 million borrowers. Digital channels remain a key part of our distribution model with 88% of loans issued digitally by number. Now turning to retail deposits. Our retail deposit portfolio reached KZT 8.3 trillion as of the first of July, increasing by 10.5% year-on-year. We maintained a strong market position with 26.9% market share, while [ Ting ] denominated deposits accounted for 75% of the portfolio, supporting the stability of our funding base. Digital adoption remained strong with 95% of new deposits opened digitally. The combination of a large and growing deposit base, strong digital adoption and the high share of local currency funding continues to support the resilience of our retail funding franchise. Now let me turn to our B2B ecosystem. Online [indiscernible] can continues to scale rapidly, strengthening the connection between merchants, distributors and Halic retail customer ecosystem. Quarterly GMV increased strongly, reaching KZT 68.9 billion in the second quarter, which is up 35.6% year-on-year. The number of connected stores reached 18,800 representing approximately 2.8x the level of the second quarter of 2025. This continued expansion strengthen the network effect between merchant suppliers and Halyk customers and creates additional opportunities to increase the share of Halyk payments within the merchant ecosystem. Online [indiscernible] in is, therefore, becoming an increasingly important component of our broader B2B and transactional banking proposition. Let me now turn to the performance of our Onlinebank platform. We continue to maintain our leading position in B2B digital banking in [ Cargoston ]. And as of the first of July, monthly active users reached approximately 317,000, while daily active users stood at 145,000. Monthly transacting users reached approximately 232,000. The platform continued to demonstrate healthy growth in transactional activity. During the first half of the year, the number of KZT payments increased by 10% year-on-year. to KZT 29.4 million, while transaction volumes increased by 25% to KZT 89.6 trillion. In the second quarter, payment volumes also remained strong, increasing by 23% year-on-year. Next slide, please. Now turning to our [ corporate lending ] business. The gross [ corporate loan ] portfolio reached KZT 6.8 trillion as of first of July, increasing by 11.3% year-on-year. The portfolio remains well diversified across the industries with no single sector representing a dominant concentration. This diversification continues to be an important strength of our [ corporate ] franchise and support overall portfolio resilience and risk management. Local currency loans represented 54.7% of the [ corporate ] portfolio. Next slide, please. Turning to our [ corporate ] business performance now. We continue to maintain strong relationships with our corporate clients, serving approximately 3,000 active clients. And product presentation remains quite high with an average of 4.5 products per client, while the total quarterly number of transactions reached approximately 3 million. Our borrower base also demonstrate a high level of engagement with an average of 5.9 products per borrower. We continue to maintain our leading position in [ corporate banking ] with 86% penetration among [ Carsten ] largest taxpayers, a 47.6% share of loans to legal entities and 31% share of deposits of legal entities. Asset quality remains strong with the NPL 90 days ratio at 2.6% and coverage at 122.6%. Now turning to our SME business. The SME segment continue to be one of the key growth areas of the bank during the first half of 2026. The SME gross loan portfolio reached KZT 2.4 trillion as of first of July, increasing by 24.7% year-on-year. Loan issuance also remained very strong, increasing by 23.7% year-on-year during the first half, while second quarter issues grew by 19.8%. Digital lending continues to be an important growth driver here. And the [ digital loan ] portfolio for legal entities reached KZT 113 billion, representing an increase of almost 52% year-on-year and 20.4% growth compared with the beginning of the year. Now turning to portfolio quality and client activity in the SME segment. Asset quality was strong with the NPL 90 days ratio at 5% and coverage at 105.8%. At the same time, client engagement remains high. Our [ semi ] customers used an average of 2.7 bank products per [ active ] lines, while monthly transaction activity reached 5.2 million transactions with a total market transaction volume of KZT 16.3 trillion. Digitalizations remain a key feature of our [ semi ] franchise with 93% of loans issued digitally by account. Taken together, these segment dynamics demonstrate the continued strength of SME business and its role in the bank's broader digital ecosystem. And now let me hand over the call to my colleague from my team stand [ Teles ]. Thank you.

Thank you, [ Myra ], and good day, everyone. Now I will take you through the financial results for the first half and second quarter 2026. Here, you can see that the composition of the net income in the first half 2026 versus first half 2025. Net income for first half 2026 is down 15.3% year-on-year due to the impact of increased minimum reserve requirements, tighter regulations in retail lending and increase in average interest rate on amounts due to customers amid flat average interest rate on loans. At the same time, net interest income showed positive growth of 2.6% despite the pressure from minimal reserve requirements and tighter regulations in retail lending. Let me briefly highlight key balance sheet trends. Total assets of the group increased by 5.4% year-to-date. Average total interest earning assets in the first half 2026 grew by 6.2%, while average total earning parent liabilities grew by 7.9%. Total deposits to total liabilities ratio was at the level of [ 80.8%]. As of the end of first half 2026, total equity of the bank increased by 4.1% compared to the year-end 2025 due to the net profit earned. Loan-to-deposit ratio was at a level of 89.2%. Interest income for first half 2026 was up 12.2% versus first half 2025, mainly due to increase of average balance [indiscernible] on to customers. Interest expense for first half 2026 increased by 21.6% versus first half 2025, mainly as a result of the increase in average interest rate and balances of [ batty ] customers. as well as the growth in the share of [ Ting ] amounts due to customers. Consequently, net interest income for first half 2026 grew by 2.6% versus first half 2025. Net interest margin decreased to 6.8% for first half 2026 compared to 7.3% for first half 2025 due to the introduction of new minimum reserve requirements coefficients. NIM adjusted for the effect of [ Titan ] minimum reserve requirements would be 7.2%. Net fee and commission income for first half 2026 decreased by 19.6% versus first half 2025, mainly due to negative dynamics of [ BNPL ] transactional income amid data underwriting resulting from regulatory changes as well as a gradual pass-through of PAT on certain banking services to clients. At the same time, net fee and commission income for second quarter 2026 increased by 18.4% versus first quarter 2026. Here is an overview of operating expenses, which increased by 5.5% versus first half 2025, mainly due to the indexation of salaries and other employee benefits as well as IT development and related costs and increase in VAT. The cost-to-income ratio increased to 19.2% compared to 17.2% for first [ half 2025 ] and meet lower operating income in first half 2026. Year-on-year both to customers increased by 13.2% on a gross basis and by 13% on a net basis. Compared with the end of first quarter of 2026, loans to customers were up 4.1% on a gross basis and 4% on a net basis. The share of [ Ting ] loss to total net loans was at the level of 74.3%. Expected credit losses are in line with [indiscernible] full year cost of fees in the first half 2026 was at the normalized level of 1.4%. Stage 3 loans increased to 8.6% as of the end of first 2026 as a result of continuing moratorium on the sale of retail loans to collect their agencies as well as the lower retail loan portfolio growth. On a year-on-year basis, deposits of individuals increased by 10.5%, while deposits of legal entities increased by 5.4%. Compared with the year-end 2025, deposits of individuals were up 3.8% and deposits of legal entities were up 3.6%, with total deposits up 3.7% year-to-date. As of the end of first half 2026, the share of total retail [ tinge ] deposits was 75%; while for legal entities, it was 67%. Capital adequacy ratio of the bank decreased in second quarter 2026 due to the dividend payment. RWA increased by 3.2% year-to-date. As of the end of first half 2026. RWA [ density ] stood at 89% compared to 87% at the end of first quarter 2026. Based on our 6 months financial results, we have updated the outlook for the full year of 2026. Retail net loan portfolio growth is expected to be in the area between 8% to 10%. Corporate and SME net loan portfolio growth is expected to be in the area between 10% to 13%. Total net loan portfolio growth is expected to be in the area between 9% to 12%. Net fee and commission income is expected to increase by 10%. Cost of [ fix ] is projected to be in the area of 1.5%. Consolidated net income is expected to be in the area of [indiscernible]. Return on average equity is expected to be in the area of 89%. Net interest margin is estimated to be in the area of 6.8% and cost-to-income ratio is projected to be in the range of 18% to 20%. Dear ladies and gentlemen, that's a look through the financials. We will now open the floor for your questions.

[Operator Instructions] And the next question comes from [ Gene ] Yes, please go ahead.

Thanks Thanks, Mira, for the presentation. It's [ Jens El Matthew ] from Cavendish. Two questions from my side, if that's all right. Firstly, just on the NIM and sort of the structural earnings power there, I appreciate we've seen an impact from the higher minimum reserve requirements of, I think, it was 40-odd basis points or so. But just looking beyond that mechanical effect, how should we think about the underlying margin, given sort of what you see in terms of deposit repricing and the current competitive environment? I appreciate you've reiterated the guidance of -- in the area of 6.8%. How should we think about that going forward? Is that 6.8% a level that you think is sustainable? And then secondly, just on net fee and commission income. I appreciate sort of the year-to-date trends and some of the recovery in the second quarter. If we separate the impact we've seen from the [ BNPL ] regulation and the VAT from the underlying trends, so what do you see in terms of underlying transaction activity and customer monetization trends? And where do you think the run rate could go once we've really absorbed these regulatory changes?

[ Jens ]. Thank you very much for your questions. Regarding the net interest margin, I would say there were two reasons which were driving NIM recently. One is indeed the impact from higher [ medium ] reserve requirements. And we actually provided how the net interest margin would look like in the absence of increase in [ mean ] of reserve coverments which actually happens in two stages, one September last year; and the second one, mid of April this year. So actually, in the absence of these increases, the net interest margin would be standing at 7.2%. Another trend which was influencing the net interest margin was increased in deposit rates in [ Ting ] for retail clients, we saw that sector-wise during last year, especially in the second half of last year, with stabilization of the rates and the cycle of base rate decreases, which was started by the National Bank this year. We saw not only the stabilization, we see that some banks start gradually reducing the rates, including us among some few banks. It's not, let's say, the widespread reduction yet, but this is, I would say, the early signs that the rates on retail deposits might follow the overall trend in rates reduction. Regarding the net fees and commission, we were pointing during Q1 couple of reasons, which was influencing decrease in net fees and commission. One was the introduction of VAT [ for ] some of the banking services, particular so-called [ documentary ] business, which would include guarantees [ and ] LCs, which was issued. And for us, it requires, in some cases, renegotiation; in some cases, the interpretation of VAT with new instruments, which would be issued. And secondly, the regulatory tightening as well as our more cautious approach for some e-commerce-related financing, specifically BNPL. And you'll see in the [ preen -- ] in this presentation as well as the presentation of the first quarter, where we saw that -- where we were showing that share of [ BNPL ] was decreasing as a part of our retail portfolio. Apart from that, as you see from the presentation, we see strong underlying business. The number of transactions and the volume of transaction continue to increase, both on retail as well as on B2B segments. So for us, it means that the client activity remains robust. And once the impact of the mentioned items would start phasing out, I think we might come to level of increase in fees commission, which we saw in periods before we saw this disruption. Saying that, we see quite tight competition on the transactional banking, specifically on retail parts. But that part of the business and [ in respect ] of that, I think we should be able to come to the positive result on the fees and commission starting from the next year. And probably I'll add to you rightly pointed that in the second quarter, we already see a turnaround. [ Why ] we're still showing the negative guidance for the full year because the result of the first quarter was strong -- was strongly negative, and we think that where we'll be able to start reversing that as it was weakness in the second quarter. That will not be enough in order to compensate the impact of the Q1. .

And the next question comes from [ Bernard harder ]. The next question comes from [ Milou].

I have three, if I may. Firstly, can you maybe talk us through the reasons for the somewhat weaker net insurance income in the second quarter, in particular, the spike in the net finance interest expense? Then secondly, maybe you can also give us some background to the strong sequential growth in deposits in Q2. Then finally on -- in terms of your guidance for retail loan growth, it implies a pickup in the second half of the year. Is it because you see an improving credit quality across the retail market. maybe partly driven by the reduction in interest rates or other factors that would be helpful? Thank you.

So thank you for your question. we were mentioning during the first quarter call that on insurance income, there are a few items which was impacting. One specifically, was higher loss ratio on one of the products related -- it's mandatory, so not to accept that related to [ auto ] loans. And couple of items, which was influencing that result. One thing is inflation. So actually, cost of covering cases when the insurance case was -- is triggered became higher. But tariff revision is lagging. So we hope that in the second half of this year, the tariffs would be revised and the profitability start improving on that product. Secondly, on other line on insurance expenses, that is partially related to increase in certain [ premium ] on certain product last year, which was translated in some higher payments on the claims. And third one, related to net finance insurance expenses, one thing related to some revision of insurance liability assessment, so we think that is having a mostly one-off effect. And secondly, it's related to increase in certain annuity-related products where the accrual on the liability is accounted in the insurance expenses [ pot ]. But the profitability side is actually sitting in the interest income side. So it's not visible in, let's say, the particular insurance lines, but it's visible in the interest income side. So I hope that that probably explains the dynamics on the insurance side. I missed your second question, if you would repeat that?

Yes, sure, of course. So I was wondering if you could give us some background for the quite strong sequential growth in deposits in the second quarter, specifically compared to Q1.

I think we saw increase both in the [ corporate], in retail portion. I think it's broad-based. It's probably difficult to point out any specific -- one particular specific reason in what it's related. So probably we might see some slowdown in growth in the second half. But indeed, it's sector-wise. It's not specifically related to Halyk. We saw similar increase sector-wise. Regarding the retail loan increase, I think there are a couple of reasons for that. First of all, during a number of previous quarters, we saw a slowdown in retail loan growth. That means that we're now seeing some stabilization in the base. And when we see that, it became a bit easier to start growing back and because during the previous quarters, we saw that the market share of Halyk in retail lending was increasing. I think we just started gradually going back to the market share which we had 12 to 24 months ago. This is the reason number one. Secondly, you see that we start increasing more secured portfolio, specifically [ auto ] loans. That was the second reason.

And the next question comes from Will Kelly. .

[ Will Kelly from Tara ] Capital. I just wanted to ask, we track the monthly figures that are reported to the. And I know these are bank-only figures, but there was a pretty significant divergence between these numbers and what you reported this quarter that I haven't really seen before. . Could you describe what might have contributed to that? I mean it seems like it might have been a weaker insurance and noninterest income result, things that are outside of the bank-only numbers. Is that correct?

Yes. [ Will ], thanks for your question. Yes, I can probably repeat what I told as a response to one of the previous questions that we saw some weaker results in the insurance income. This is because of the higher loss ratio on one of the product related to auto insurance. Second is related to some, I would call it, model revision in terms of the assessment of insurance liabilities. So that is probably a couple of reasons which which might explain the difference between consolidated and [ solar ] results.

The next question comes from [ Simon Kitchen ].

Thank you. This is Simon from [ emerging Frontier ] Capital. There was something where the national bank Central Bank has been talking in recent comments about the difficulty for them [ for predicting ] an inflation path because of fiscal and quasi fiscal stimulus. And the last comment they put out, they said that there had been an agreement between the National Bank and the government and [ beta rack ] holdings on the scope of this quasi-fiscal stimulus. So I've got a question in two parts. One is how, if at all, has that -- quasi-fiscal stimulus you've seen, how has that affected [ a leak ] in the past 6 months? And the second question is how has this -- how will this agreement between these various authorities, how will that affect this [ case ] fiscal stimulus in future? And what does that mean for loan growth for fee and commission income in the future?

[ Simon ], thank you for your question. I'll probably start answering that question probably by providing comments what was the reason for inflation decrease. Partially it was also reflected by the National Bank but also it's to a certain extent, the share by our economist. So basically, the continuation of a relatively tight monetary condition is one of the reasons. Secondly, the strengthening of [ Tingyi ] because part of inflation in previous periods was considered as imported because of some, [indiscernible] weakening. The third reason which the National Bank is highlighting is actually stabilization of consumer demand. In previous periods, also Central Bank was pointing to high increase in consumer loans as one of the reasons why consumer inflation was staying high. And because of the recent polling on the consumer lending, they also pointing that now becoming one of the factor of inflation deceleration. And the fourth element is [ monitor ], which was agreed last year between National Bank and the government, the moratorium on tariff increase and regulated prices increase. Basically, it's related to utilities prices as well as the prices on petrol. Despite the fact that, indeed, the Central Bank made decrease in base rates already during two meetings, they pointing that in the second half, they potentially might see certain vulnerabilities. And indeed, they appointing that it's a bit unclear in terms of what the government would be doing in terms of previously imposed moratorium on the regulated tariffs. So this is a [ reasonable ] one. And secondly, indeed, we also saw these comments from the National Bank, which says that they came to certain agreements with the government, particularly with [ Baiter ] in terms of how the previous plans of [indiscernible] might be revised in order not to put additional pressure on the inflation side, one thing; and secondly, without unnecessarily stepping into sphere of the commercial banks. What we understand is that, first of all, they say that they will not be touching loans, which is mostly considered medium-sized loans, like below [ 16 ] billion year and secondly, trying to limit financing from [ Baiter ], which would also include the Development Bank of Kazakhstan to larger projects, infrastructure-related ones. We actually see that the plans for [ biterec ] is not too much affecting us. We see quite a strong pipeline on our large corporate space. We also saw quite strong dynamics of our SME business in the second quarter. So we think that is enough in order to reconfirm our guidance for the full year in terms of the loan portfolio growth.

the next questions come from [ Demi Half ].

This is [ Dan from ] Virgin. Congratulations. Just one quick question from me. Given that this year obviously contains a few one-offs that are distorting the underlying performance of the bank minimum reserve requirements as well as macro potential measures on the consumer side, how should we think about the dividend for 2026? Should we think of it as being usual so 60% dividend payout ratio? Or would you consider having a higher dividend payout ratio to reflect the underlying profitability as opposed to KZT 1 trillion that we'll see on the headline basis?

Dan, thank you for your question. Indeed, we see that specifically to a certain extent, in the third quarter as well as second quarter had some one-offs, which probably do not fully correlate with underlying business and client activity, which we see. We expect -- we already saw actually a larger loan portfolio growth in the second quarter. I think we remain optimistic regarding the second half results. So we think that capital would be needed to support our growth going forward. Saying that, we, also probably as a matter of showing our, I would say, confidence in the banking results; probably decided to bring the second dividend payment slightly upfront because last year, we did that a bit later into the year. So this time, we are making that in the third quarter, of course, subject to shareholder decision shareholders' decision.

Clear. But for next year, we could -- would you say we can fairly comfortably assume that the payout ratios from the previous years would continue, given the strong capital generation anywhere between 50% to 60% dividend payout ratio?

Of course, I cannot say we certainly whether it will be, let's say, 50, 55 or 60 or some other figure because it's subject to a recommendation from Board of Directors and then subject to decision on the general shareholders meeting. But we as the management are looking still at strong profitability of the bank. We see the strong capital position of the bank. And even with continuation of growth, which we at least see until this year ends and hopefully, would continue to see into the next year. It still gives us, I think, [ believe ] that we would be striving to stick to the dividend policy, which actually says the dividend payout 50% plus.

Thank you so much -- and the next question comes from Simon Dellis.

Yes. My question would be just on fees. You're guiding for 10% down now, but that would still mean that you're looking for around 30% growth in the second half versus the first half. So I'd be interested in knowing where you're so optimistic about a recovery in fees, where is it coming from? And then I guess, a related question is, you changed your fee guidance quite substantially. It's like a KZT 25 billion drag, but you're reiterating your KZT 1 trillion earnings guidance. So where do you expect to make up the difference?

Yes. Thank you for your question, Simon. We already saw increase in the second quarter compared to the first quarter. And if you would look last few years, actually, you would not see a big difference between second and third quarter. So that is probably one of the reasons why we think that the second half should be stronger because the second quarter is already providing us some comfort. In terms of where we are looking that revival and what would be the reason, one is a gradual revision with new instruments to be issued, which would already incorporate VAT. So that was one of the reasons of the second quarter, and that would continue to influence into the second half. We see increasing client activity as the base, and we practically revised [ piece ] on certain products.

Which -- how large are those increases? And what percentage of your product suite did you increase pricing, if I may ask?

We did some tactical for SME and for retail. It's a number of products. It's not probably high from the client perspective because that's probably affecting some, I would say, mass products. But in terms of the volumes, it's adding some positive delta to fees and commissions. .

And then maybe just one last one on fees. I mean, once these kind of one-offs clear, where do you think your fee growth returns to like on a normalized state?

Of course, it's subject to competition because competition might also drive the tariffs up or down. If we assume that, that would not be the factor which would be influencing [ Fesa ] mission, we think that we can come to around 10% growth, might be higher. But again, it's not the official guidance. I think it's better to wait until we'll be providing, let's say, more specific guidance. It's just estimation based on fees and commission traction, which we saw before [ 2026 ].

And the next question comes from Roman silo. Raman.

Thank you. I just wanted to follow up on Simon's question. So I didn't understand clearly from your response about where the [ offsetting ] income would be coming from -- to offset the the reduction in expected fees and commissions for the year. I'm a little surprised because it seems like if you're expecting 29% ROE for the full year and the first half realized outcome was around 25%, it would suggest that the second half would be 30% plus. Is that right? I'm surprised that, I guess, the business performance would improve so dramatically half-on-half. I understand that there's some seasonality to that, but I would have thought that, I guess, the headwinds that you've absorbed both on net interest income and on fees in the first half, to some extent, would still continue to affect second half if you look at it year-over-year. But this looks like it would be quite a strong outcome for the second half based on what you're suggesting for the updated guidance. Maybe if you could just talk about that in that in a little more detail.

[ Raman ], are you talking about the guidance for net income?

Yes. Yes, that's correct. .