Türkiye Halk Bankasi A.S. (HALKB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Halkbank's First Half 2021 financial results. There will be a Q&A session after the presentation. [Operator Instructions] I will now hand you over to your host, Mr. Semih Tufan, Head of Investor Relations; Ms. Gizem Yücesoy Yilmaz, IR specialist; and Mr. [ Kamar Olcay Aashiq ], IR Specialist. Sir, the floor is yours.

Thank you, Mitra. Hello, everyone. Thanks for joining us today. I hope you all are well. As Mitra said, I have my colleagues, Gizem and [ Kamar ] from the IR team today. Please let me give you a brief outlook for the second quarter in advance of moving to the presentation. Thanks to ongoing vaccination process, in this quarter, we started to see positive effects of the economic activity accelerated, especially since the beginning of this year. In this context, we have collected 22% of the COVID loans that we granted during the pandemic last year. Successful collection rate here is 99%, and we have only 1% problematic collection rate here. We expect that this trend will continue in the second half of the year. On the other hand, due to Turkish lira funding costs rising from the last quarter of 2020, the pressure on the spreads, unfortunately continued in this quarter. However, we saw that the TL funding cost has reached its peak level at the beginning of the second quarter. So that the contraction on Ti cost of debt has slowed down on the back of loan repricing. We also achieved a growth of 33% in fee and commission income compared to previous quarter, and it implies a better performance than the last year. Especially in the last quarter of this year, depending on the inflation trajectory, we expect to see relatively lower marginal pricing on the funding side and more recovery on all figures, mainly including the spread and net interest margin. Now I would like to give the floor to my colleague, [ Kamar ], for the presentation. And after that, we would be happy to answer your questions. Thanks.

Thank you, Semih Bey. This is [ Kamar ] from Investor Relations team. Starting from the first page, after strong asset growth in 2020, our start to the year 2021 was muted. We continued a modest 3% asset growth in Q2 '21. It's mainly backed by SME loan growth. Accordingly, our asset mix didn't see a material change, 63% of which are loans and 73% are the securities. Looking at the other items of the total assets. The liquid assets stands out its share in the total assets, inched up to 10.3% from 9.5% in the previous quarter. The key factor behind the increase in FX liquid assets was FX swaps where average swap volume soared to TRY 30 billion from TRY 20 billion in Q1. In line with the swap volume upsurge, our outstanding swap transactions reached to $5.6 billion. Please bear in mind that FX wholesale funding indicated on the right-hand side corner of the page, contains $500 million amount of Eurobonds that we paid off on 13 July, which has been only one outstanding Eurobond left. And kindly note that our 3-month average foreign currency liquidity coverage ratio is at 294%, which is far above the regulatory requirements. The next page shows the details on our securities portfolio, its share within our total assets is still over 23%. Looking at the classification of securities on the right-hand side, you easily see that we diversify our portfolio opportunistically in line with the tight monetary environment. In light of the rising inflation outlook, we revised our annual CPI estimation during the second quarter. Accordingly, our valuation used in CPI linkers increased by 1 percentage points to 16% in the second quarter where it was 15% previously. In an opportunistic manner, CP linkers volume increased by almost TRY 3 billion during the second quarter and reached up to TRY 44 billion. Please note that CPI linkers portfolio acts as a natural hedge in the tight monetary scheme. On TL Securities front, 60% of TL securities book are floating rate notes and 70% of these floating rate notes are CPI linkers. On the other hand, CPI linkers share in TL securities soared by 10 percentage points since 2020 year-end, and its share make up 45% of TL securities in the second quarter. As for the interest income on securities, as can be seen in the figure below, is quite satisfying. CPI linkers gains make up 39% of total securities income. Kindly note that every 1 percentage increase in our CPI linkers valuation results in TRY 447 million or 7 bps positive impact on year end NIM. Now let's look in more detail to our loan portfolio in terms of customer segmentation on Page 4. After funding support package broadly expand in 2020, especially in the second and third quarter last year, the loan growth remains below sector average both in the first quarter and the second quarter in 2021. As of second quarter, total loans were up 2.5% Q-on-Q, which were mainly driven by SME portfolio. In terms of currency breakdown, TL loan book managed to grow by 1.9%, while, shrinkage of FX loan book was by 1.7% in real term quarter-on-quarter. On the next page, we have further details on the loan book. Looking at the currency mix, TL loan book make up almost 78% of the total loan book. In terms of customer segmentation, SME loan book continues to have lion's share with a 44 share -- 44% share of the total loan book. 56% of these loans are guaranteed either by CGF or unique cooperative loan scheme. Speaking of corporate loans, they constitutes 34% of the total loan book, which are mainly large investment loans and project finance. As for the retail portfolio, they are composed of 18% of the total loan. Looking in more detail, mortgage loans have a 60% share in the retail book and the 33% of the retail book belongs to consumer loans and 52% of these loans have been extended to pensioners and payroll customers and a further 22% of them have been granted under the coverage of CGF. Switching to the next page, Page #6, you will see our gross NPL portfolio, including interest accruals remained almost constant to TRY 15.9 billion as of end of June. Although limited loan growth didn't help the denominator growth, our NPL ratio improved slightly to 3.4% as of end of June, which remains its level below the sector average of 3.7%. Looking at year-to-date figures, new NPL formation remains half of our budget forecast, whereas the collections nearly doubled from the initial expectations. As of end June, the collections reached an almost 85% of our 2021 end budget forecast of TRY 3 billion. Currently note that new NPL formation comes with the delay given the extension of BRSAs forbearance measures regarding recognition days. In terms of Stage 2 loans, its shares within total loans increased by 30 basis points to 9.3% on account of restructured loans and the forbearance loans on -- forbearance on loan classification. If we rule out BRSAs for balance, Stage 2 ratio will be lower 59 bps than the current figure. 40% of Stage 2 loans are composed of restructured loans. At the same time, restructured loans make up almost 6% of total loan book. Deferred loans increased to roughly TRY 93 billion by the end of June, which refers to 20% of total loans. These loans were TRY 73 billion in the first quarter. Please bear in mind that deferred loans includes the restructured loans of TRY 21 billion for those who restructured due to pandemic starting from March 23. Now moving on to the next page, Page #7, we see our NPL ratio segments. Consumer loans, the consumer loans impaired ratio increased to 2.9% from 1.8% in the previous quarter, which is mainly driven by 6 months grace periods of CGF consumer loans. Although credit cards NPL ratio is above the sector average, they have only 1% share in our total loan book. Except for consumer loans and credit cards, all segments have lower NPL ratios than the sector average. As you may know, collateral structure is the main driver behind our successful below sector NPL ratios by segments. On a very positive note, 18% of SME book and 22% of consumer loans are under CGF scheme, both of them creates almost 0 NPL. Moreover, 38% of SME book consists of cooperative loans, which creates only some basis points NPL historically. As the rest of retail book, mortgage loans has only 15 basis points of NPL generation. Pensioners and payroll customers create only 10 to 15 basis points NPL. All in all, 40% of total loan book has NPL generation below 50 basis points. For the rest of this year, we expect this trend to continue the same way. We are sticking with our NPL guidance of 4% or less than 4% and maintaining below sector NPL ratio until the year-end. More details on asset quality metrics are on the following page. During the second quarter, we readopted hybrid model provisioning methodology in NPL assessment. In line with the reutilization of individual assessment approach, 13 companies classified under NPL portfolio have been reevaluated. As such, we have realized -- we have released roughly TRY 900 million NPL reversal. TRY 600 million of it has been classified on this other income item. The remaining TRY 300 million reversal was classified in provision expense, creating income effect on P&L due to these provisions being set aside within the current year. As for performing loan reversal, we have released roughly TRY 1 billion provisions. All of them belongs to the performing loans since they had been provisioned more than the model required, the excess provisions was released, and they turn back to their own model requirements. During the second quarter, the absence of aggressive loan growth and BRSAs forbearance measures enable us to set aside less provisioning compared to previous quarters. Under these conditions, both total and specific risk costs declined to 43 basis points on gross and cumulative basis. Let's move on to Page 9, presenting details of the liabilities. TL loan-to-deposit ratio increased by 5 percentage points to 138% contrary to foreign currency loan-to-deposit ratio declined by roughly 5 percentage points to 40%. All in all, the reflection on the blended loan-to-deposit ratio were quite positive and blended LDR improved to 90% in the second quarter. Our FX wholesale funding share in total liabilities became flat at 3.9%, which is far below compared to the sector average of 19%. On the right-hand side of the page, growing share of deposits drove the attention, which was another positive factor considering lessening impact on the bank's reliance on foreign currency wholesale funding. The share of deposits reached up to 70% in the liabilities compared to the first quarter of 68%. More details on deposits are available on the following pages. Our market share in total deposits preserved at the level of 12.5%. Total deposits have reached TRY 504 million with a 7.4% increase quarter-on-quarter. The main drivers were 6% TL depreciation and the increase in FX deposits by 12.3% in the real terms. We continue to take low cost and longer maturity saving deposits on board. And looking at year-to-date figures, its share raised by 10 percentage points to 44% as of end of June. More details, deposits are on the Page #11. The share of demand deposits in total deposits increased by 50 basis points to 18.6%. Looking at currency-wise, TL deposits have a dominant 51% share in total deposits versus FX deposits having a share of 49%. Looking at cost of T deposits, TL stock cost deposits -- TL stock deposit cost continued its upward trend, but a much slower pace. Slowing -- following previous 2 quarter sequential increase of almost 300 basis points, TL stock deposit cost increased by only 111 basis points as of end of June. Since TL marginal cost has stabilized starting from the second half of March, TL deposit costs lost its expansionary momentum in the second quarter. Let's switch to the next page, which has cost yield and spread dynamics. Our blended stock deposit cost has increased almost 26 basis points and the loan yield up by 60 basis points. Therefore, the blended spread has risen by 40 basis points. We hope to see some improvement on spreads, to some extent in the beginning of last quarter of the year. However, it still depends heavily on the recovery of inflation trajectory. Core banking income sources can be followed on the next page. Thanks to the limited increase in TL deposit costs and CPI linkers contribution, NII came in the positive territory again after the suppressed level that we witnessed in the previous quarter. Accordingly, headline net interest margin came up to 0.7% quarter-on-quarter. As our average swap volume increased from TRY 19 million in the first quarter to PLN 30 billion in the second quarter, our stock cost almost doubled, which brings our swap-adjusted NIM at minus 0.2% level. Looking at net fees and commissions income. We managed a huge increase of 34% quarter-on-quarter. During the second quarter, we continued to raise fee income through corporate and credit card commissions. Taking these factors into consideration, we are sticky with our mid-teens growth expectations in net fees and commissions. Turning to Page #14. We see that core operating revenue increased more than doubled and reached roughly TRY 2 billion quarter-on-quarter. Despite challenging items such as NII and net trading loss, mostly composed of TRY 1.4 billion of swap cost, strong net fees and commissions income and limited operating expenses painted a promising picture. Quarterly net income realized at TRY 64 million, while quarterly ROE stays at 0.6% level. Switching to the next page. We have details of the operating expenses on Page 15. As a reminder, new staff recruitment and inflation adjustments on dates took its toll on personnel expenses in the first quarter. When it comes to the second quarter, recruitment and inflation adjustments related one-offs faded away and personnel expenses normalized, we expect them to be flat going forward. As COVID-19-related one-offs faded away last year, we saw normalization on non-HR expenses in the first quarter. During second quarter, we had some one-offs kicked in, such as advertisement expenses and banking and insurance transaction taxes derived from bank's profit of increased gold sales. As such, non-HR expenses increased by 8.8% quarter-on-quarter. As of end of June, while OpEx, including personnel expenses, declined by roughly 5 percentage points quarter-on-quarter, on the other hand, it increased at 9% year-on-year on a cumulative basis. On the next page, we have details on solvency ratios. Kindly note that the BRSAs forbearance measures are included in the ratios presented here. Our reported unconsolidated capital adequacy ratio came at 13.7%. If we rule out BRSAs forbearance measures dated April 16 and December 8 of 2020, negative impact will be roughly 100 basis points on cards, 85 basis points on Tier 1, 70 basis points on CET1 on both consolidated and unconsolidated pesos. These were my final remarks for our presentation. Thank you for listening. Now I would like to leave the floor to you for questions you may have.

[Operator Instructions] We have a question from Alan Webborn from Societe Generale.

Again, what the impact -- the total impact of reversals in the second quarter was on the P&L and just go through the origins of those again. So could you just sort of clarify that? Sorry, if I didn't quite get it the first time. And then you mentioned a couple of your targets for the year and whether you were revising them or not. It would just help if you could go through each of the targets that you recognize and say where you're sticking to more improving them for the full year. And obviously, it's been it's been quite an interesting first half, and it would just be helpful to have a quick recap, if you wouldn't mind.

Thank you, Alan, for the question. I missed the first words of your question, but I guess you are asking the impact of the reversals on our P&L.

Just to understand that because there seem to be 2 parts to them, and I didn't fully understand it. So if you could just take it -- tell to us simply, that would be great.

Yes. Please let me give you an indication regarding the reversals in the second quarter that we made. During the first quarter and last year, for roughly 20 companies, we applied an override in terms of the provisioning. That's why in this quarter -- and these companies are coming from the Stage 1 and Stage 2. They have the standard loans. We posted roughly TRY 1.2 billion reversals and only 124 million part has been posted under provisions and the rest TRY 1.1 billion part has been posted under other operating income as reversal. When it comes to the NPL side, from time to time, we applied the comprehensive approach for some companies, and while we were applying the individual approach for some companies. In this quarter, we applied the individual approach for the number of 13 companies while we were applying the comprehensive approach. After this change, we posted a reversal for these companies in the amount of TRY 927 million. 1/3 of this amount has been posted under provisions cost and rest, roughly TRY 223 million part has been posted under other operating income. When it comes to your -- second part of your question, the target for the year. Yes, we disclosed our expectation at the beginning of this year, but lots of things changed. And we are aware of that, especially for the profitability metrics, we are not in the position that we would like to see as of the first half of the year. If we need to give more color regarding what we target in terms of the net interest margin ROEs and other ratios, let me give you what we have done in the second quarter in that regard. In the first quarter, we have been -- we used a CPI estimation at around 15% level. In the second quarter, we increased this level to 16% level, depending on the upward change on CPI level. In the third quarter, we will be using a 19% level for the CPI linkers evaluation. So we expect to see roughly TRY 1 billion extra interest income from this adjustment in the second half of the year. And then maybe you are aware at the beginning -- in the last week or June, we updated upwards the marginal pricing on the cooperative loans. Until the end of 2020, we were applying a 15% level for our cooperative loans, which is making 38% of our SME total SME loan book. And we increased this marginal pricing for the first half of this year to 17% level. And with effect from the beginning of June, we started applying 19% level. And we posted roughly TRY 250 million only in this quarter for this change. And he -- for the second half of the year, we expect to see an extra -- roughly TRY 800 million extra interest income from these loans. At the end of the day, after this adjustment and pricing adjustment and the CPI evaluation adjustment, we have another good news regarding our net fee and commission collection performance. After the first quarter -- in the second quarter, we achieved a 34% increase in terms of net fee and commission print quarter-over-quarter basis. And we think that this trend will continue in the second half of the year. And we expect to see a fee and commission income, which will be more than TRY 3 billion by the year-end. And mainly because of the base effect, especially in November and December, we expect to see slowdown on the CPI level. And we think that we will close the year at 16% to 17% level in terms of the CPI. And we think that the CBRT has a room for a potential rate cut to, let's say, 100 basis points or 150 basis points. And it will have a positive impact in terms of the spread and net interest margin, especially in the last quarter of this year. That's why, all in all, we expect to see roughly 1.5% level in terms of net interest margin by the year-end. When it comes to the ROE, we think that ROE will be at around 1% or 1.2% level by the year-end. When it comes to the total cost of risk, we think that we are now sticky with our guidance that we set at the beginning of this year. In terms of the total cost of risk, we think that 70 or 80 basis points level. It will be 70 or 80 basis points level. I mean the total cost of -- total and gross cost of risk. When it comes to the specific cost of risk, we think that it will be around 60 basis points level.

Yes, do you have any further questions, Mr. Alan Webborn.

No, that's fine.

[Operator Instructions] We will now switch to the written questions. Sir, the floor is yours for the written questions.

I think that we have no further questions, written or verbal. Then I would like to thank you all for joining us, and wish you a good weekend. Thank you.

Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation.