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

Ladies and gentlemen, welcome to the Halkbank First Half 2022 Financial Results Webcast. I want to thank you very much for standing by. There's going to be an audio Q&A session following the presentation by the speakers. [Operator Instructions] With that, I will now hand you over to your host, Mr. Semih Tufan from Halkbank. Mr. Tufan, the floor is yours.

Good evening, everyone. Thanks for joining us today. We have prepared a detailed presentation for you. Again, this quarter -- in advance of moving to it, I would like to give you a brief and general information regarding our activities in the quarter. During the second quarter, we kept lending to customers who have been investing exporting and creating new employment. Turkish lira loan growth was 16.5% within this period, while having a 7.8% negative growth on the OpEx side. During the second half of the year, we will continue to prioritize lending to these customers. SMEs artisans and Craftsman will also continue to be our main customer segment for lending. On the funding side, while Turkish lira deposits continued to be our main funding source. We were also active in the internal money market for raising Turkish lira funds with competitive rates compared to the deposit market. In this regard, our average swap volume with the CBRT increased to TRY 39 billion from TRY 30 billion in the first quarter. We also continued utilizing repo facilities with both CBRT and the other players in the market. During the second quarter, we also performed quite well in accumulating FX-protected TR deposits. The total volume on this form of deposit increased by 50% compared to the previous quarter, and reached TRY 120 billion by the first half. And as of today, FX protected deposit volume reached to TRY 130 billion TR level. Thanks to this growth. We achieved to record 100 basis points reduction in TR stock cost of funding and another 100 basis points expansion in TR cost on a quarterly basis. Considering the high performance of the CPI link securities, net interest margin also quarterly increased by 100 basis points and reached 5.8% level. The prudent approach on provisioning also continued in this quarter. Accordingly, total and gross cost of risk partly increased by 282 basis points and reached 4.8% level, while the coverage ratios improved. Considering the market dynamics and the fast changing trends, we have recently updated our guidance for the current year. Accordingly, Turkish lira loan growth on annual basis is projected to be 42% by the year-end, while FX loan growth is projected to be on the negative side with 9%. SME loans, as I explained earlier, will be the segment with the priority. Turkish lira deposit growth rate is projected at 66% annually by the year-end. On the FX side of the deposit, a 13% annual contraction is projected by the year-end. Considering the spread dynamics and the performance of the CPI linkers, we also updated our net interest margin expectation upside to 6% by the year-end. Accordingly, we also expect ROE to be at the mid-teens level. In light of the prudent provisioning approach, total cost of risk is estimated to be 4% by year-end. But there will not be any material change on the NPL ratio and is projected to be 2.6%, excluding appeals by the year-end. Now I would like to hand over the floor to my colleague to go through the presentation. And after that, I will be happy to answer your questions. Thank you.

Good evening. This is [ Kamal ] speaking. Thank you all for joining us in our first half earnings call. We are happy again to present solid set of results. Starting with the assets on Page 1. Total assets increased by 52.1% year-over-year to TRY 1,089 billion in the first half. You see the asset mix in the middle. The share of loans saw a slight decline to 57.9% from 58.1% whilst securities share stayed at 76.8%. As for the remaining items, the share of liquid assets inched up to 12% from 11.3%, which mostly consists of the reserve requirements held at CBRT. Having set another contribution to our FX liquid assets, our swap transactions reached to roughly $2.8 billion, which was $1.9 billion in the previous quarter. Our FX wholesale funding, excluding bank deposits is only $390 million as of June, consisting of mostly IFI and funding. We feel comfortable that our total FX liquid assets outpaced the total FX wholesale debt due within 12 months. Kindly note that our 3-month average foreign currency LCR is at 342%, which is favorable the regulatory requirement of 80%. On the next page, we have the details of our securities. Their share within total assets stayed at 77%. On the right-hand corner of the page, you may see the classification of securities. Our CPI linkers portfolio continued to grow during the second quarter. They reached almost TRY 100 billion in the second quarter from TRY 87 billion in the prior quarter, which is reflected as a growth of 14% quarter-on-quarter. By implementing new regulations as of June, increased [indiscernible] of CPI linkers being used for CBRT repo funding and the requirement of holding long-term fixed-rate securities at CBRT regulations, changed the demand for securities in the market. The market demand for CPI linkers diminished and instead the market demand switched more to the fixed rate securities. Accordingly, we expect CPI-linker share within the total securities book will maintain at the same level in the coming quarters. On the CPI linkers front, we revised our annual CPI estimation to 40% in Q2 from 36% that we used in Q1. As of June, CPI linkers posted TRY 80.2 billion interest income, which accounts to a 36% increase quarter-on-quarter. By adding interest income from the remaining securities, total securities income reached to almost TRY 12 billion, which is reflected as an increase of 30% quarter-on-quarter. In the light of recent CPI realizations, the valuation rate was updated to 60% since the beginning of August. Moving to loan growth on Page 3, you may see the details of the loan portfolio. We observed a moderate 30% loan growth quarter-on-quarter. By doing so, we preserved our market share of almost 10%. We were selected and growing mainly on TRY side, while our FX lending kept contracting in real terms, which is in line with our guidance. As of second quarter, total loan book managed to grow by 16.5%, while shrinkage of FX loan book in real terms was by 7.8% quarter-on-quarter. As for customer segmentation, largest driver of this increase was SME loans, which is up by 40% quarter-on-quarter as our main focus area micro SMEs continued to have the greatest contribution to the growth in SME segment. One of the remaining contributors of SME loan growth plus CGF support packages granted as short-term loans in the form of investments, exports and working capital needs. And entrepreneurial loans were another active products during the quarter. Additionally, business loans contributed to the loan book growing by an almost 7% quarter-on-quarter. Almost all of these are granted as good asset TR loans and also our retail loans were relatively stronger in Q2 compared to the previous quarter. We saw retail segment with an almost 13% growth quarter-on-quarter. On the next page, we have further details on the loan book. Looking at current slides, TR loan book makes up 74.4% of the total loan book. The remaining 25.6% consist of FX loans, which almost fully belong to our corporate customers. On the right-hand corner of the page, you may see the balanced breakdown of loan book. SME portfolio dominates with 42% share. 32% of SME loans belong to low-risk cooperative scheme and 10% of SME loans are guaranteed by CGF. Therefore, 42% of SME loans are structurally quite secure. The remaining 39% of our loan book belongs to the corporate companies and roughly 32% of our corporate loans consists of project finance loans. To add more retail loans has a 16% share in our total loan book. On the bottom right-hand side, you see retail loans in more detail. Mortgage loans have a 65% share in the retailable, which are inherently well collateralized. As for the rest, almost 26% of the total of the retail book belongs to consumer loans, 54% of these loans have been extended to the pensioners and payroll customers and a further 9% of them have been granted under the coverage of CGF. Flipping to the next page, Page #5, shows asset quarter metrics. New NPL inflows were broad-based and collections maintain very strong. Although our NPL portfolio extended by TRY 1.3 billion, that was totally in line with our budget. As of second quarter, we had TRY 764 million write-off with a 100% coverage, which has no P&L impact, thanks to outstanding collection performance as well as denominator effects. Our NPL ratio came down to 2.8% from 2.9% in the previous quarter. Similarly, our Stage II ratio as a percentage of gross loans came down to 8.8% from 9.6% a quarter ago. On the top right-hand side, you see NPL coverage had a slight decline to 73.6% from 74.5% a quarter ago due to EUR 764 million write-off. If that we didn't have a write-off in Q2, our NPL coverage would have been even higher than the previous quarter. Despite not witnessing any material increase in the problematic loans, we maintain our conservative provisioning policy going forward. The following page compares the NPL ratio by segments. Considering the dominant share of 84% in the total loan book, corporate, commercial and SME loans NPL ratios remain below sector. On the other hand, both credit cards and consumer loans NPL ratio stay evolved on the sector, although they started to decline as of June. Please recall that the main reason behind both sector NPL ratio of consumer loans was due to our pandemic-related support loan package. However, the share of this package came down below 1% within the total loans. As for credit cards, their share were only 1% within the total loans. Turning to Page 7, we show the details of provisions. As of the second quarter, provisioning across all states pointed out our conservative approach once again. More than 100 companies across all states were evaluated regarding individual assessment approach, then we set aside additional provisions for these companies. As a result of that, our net cost of risk in the quarter came at 453 basis points, which translated into cumulative net cost of risk reaching at 315 basis points. We have taken proactive actions for strong coverage, especially in the last 3 quarters, in line with our prudent stance we increased Stage 1 and Stage 2 coverage ratios. Stage 1 increased to 0.66% from 0.42% a quarter ago. Similarly, Stage 2 increased to 22.4% from 17.3% in the previous quarter. Our total loan coverage ratio stepped up to 4.6% from 4.2% earlier. Let's move on to Page 8, presenting details of liabilities. We switch our funding source through low-cost interbank money market considering high competition on TRY deposits, especially at the end of quarter. Despite increased rate of interbank funding, we witnessed loan-to-deposit ratio realized at a comfortable level of 87.6%. In more detail, TR LDR increased to 136.9% while FX LDR was down by 42%. As for FX wholesale funding, there is no material difference. We feel comfortable at the current 3.5% share in the total liabilities versus sector average of 17.9%. More details on deposits are on the next page. Total deposits reached almost TRY 741 billion, with a 10.7% increase quarter-on-quarter. On the currency basis, we saw a decent 8.5% increase quarter-on-quarter in TR deposits, whose growth rate was supported by both public sector deposits and FX protected TR deposits. On the other hand, FX deposits in USD terms fell by 0.8% quarter-on-quarter. As for FX protected TR deposits, we are proud to share that our strong efforts to get on board these deposits are definitely paying off. We managed to reach 120 billion as of second quarter by holding 11% share in the sector. Most recently, we have further increased from Q1 levels as well. As a reminder, as of July 8, we comfortably met the conversion target rate of 10% and 20% for real persons and corporates, respectively. As for reaching target rate of 20% until September, while looking at the current trends and realizations, we expect each of them to meet 20% target rate separately. We may see more details on deposits on Page 10. While demand deposits grew by 9.8% quarter-on-quarter, their share in total deposits remained at 24.5%. On the top right-hand side, we can see that our TR deposits still has a 48% share in terms of currency breakdown. On the bottom right-hand side, our cost of TR deposits managed to fall on the back off in the inflow -- on the back of the inflow of public sector deposits and FX protected TR deposits. Cost, yield and spread details are on the next page. Thanks to our dynamic balance sheet management. We have seen roughly 30 basis points improvement in our blended core spreads. On the back book, TR deposit costs declined 107 basis points and TR loan yields was down by 5 basis points quarterly. Therefore, TR core spreads have picked up almost 100 basis points. Moving on to P&L items on the Page 12. The NII increased almost by 36.6% quarter-on-quarter than the previous figure on the back of guidance spreads and strong contributions from CPI Linkers. In terms of swap adjusted NIM, it widened by 93 basis points on a quarterly basis and almost 49 basis points on a cumulative basis and reached 5.2% and 4.7%, respectively. Headline NIM improved to 5.8% from 4.8% previously on a quarterly basis, and also improved to 5.3% from 4.8% on a cumulative basis. As for net fees and commissions income, its short by nearly 29% quarter-on-quarter and reached a still 90% increase compared to the same quarter of the previous year. Turning to the page -- Page #13. You see quarterly net income realized at TRY 2.575 billion in the second quarter. Thanks to our strong core banking earnings performance, our core revenue in the quarter comfortably compensates higher provision expenses. ROE reached to 15.8% on a quarterly basis and 16.8% on a cumulative basis. We have details of the operating expenses on Page 14. Disciplined cost management remains as our strong muscle despite elevated inflation backdrop. Operating expenses increased by only 18.7% quarter-on-quarter and rising almost 81% compared to the same quarter of the previous year. Combined with our strong core revenues, cost-to-income ratio further improved to 29.3%, which could be seen as our historically low level. On the next page, we have details on solvency ratios. Slightly note that BRSA's forbearance measures are included in the ratios presented here. our reported unconsolidated capital adequacy ratio came at 14.68%. If you rule out BRSAs forbearance measures negative impact will be roughly 250 basis points on card, 230 basis points on Tier 1, 190 basis points on CET1 on both consolidated and unconsolidated basis. Last but not least, our nonfinancial strengths are on the next page. The numbers show that we are in the right way. We add up almost 700,000 digital customers in the recent years. As such, the number of active digital customers increased to $4.9 million as of June. The customer empowerment through digital channels fare much better. To make it concrete, 60% of our consumer loans were utilized through digital at the beginning of 2022. As of June, we are proud to say that almost 90% of our consumer loans were granted through digital. On the bottom left-hand side, you see more details of customer transactions. As the number of digital transactions raised by 23% -- 23.5%, our mobile transaction realized an increase of 30% year-on-year. With the support of accelerated digital transformation, non-branch channels share in total transactions reached to 97%. These were my final remarks for our presentation. Thank you for listening. Now I would like to leave the floor to -- for questions you may have.

[Operator Instructions] And first, if we got a question from Mehmet Sevim from JPMorgan.

I've joined slightly late. So if you could please repeat if you have already your full year guidance from here, that would be very helpful.

Thanks, Mehmet. Of course, I'll repeat our guidance for the current year. For Turkish lira loan growth by the year-end on an annual basis, 42%. FX loan growth on the negative side with 9%. When it comes to the deposit side, the Turkish lira deposit growth will be 66% on FX side. We estimated a new contraction with 13% level. When it comes to net interest margin, we updated its upside to 6% by the year-end. ROE is expected to be at the mid-teens level, and total cost of risk is estimated to be 4% by the year-end. And finally, NPL ratio, there will be no any material change on it. And is expected to be 2.6% by the year-end.

[Operator Instructions] All right, Mr. Tufan, it looks like -- all right, we do have 1 here. It's from Cihan Saraoglu from HSBC.

I have a quick question about your cost of risk. In the first half your cost of risk was very high. And then I look at your coverage ratios they now look kind of healthy, but you're still guiding for a cost of fiscal 4% for full year. So why are you -- why are you planning to keep raising the coverage ratios in the second half of the year? That's my first question. Second question is, when I look at your Turkish lira loan book yield has been more or less flattish on a Q-on-Q basis. Is there any reason to expect an improvement in the lending yields in the second half of the year? 15% kind of books on the low side? And how do you expect your TR lendings evolve in the second half of year.

Okay. Let me start with your first question regarding the cost of risk. As you know, we have been provisioning prudently, especially for the last 2 years, in spite of having no any material deterioration on the asset quality. And we did the same approach within this quarter. That's why we increased our provisioning more than what the IRB model is offering us, to be just on the safe side. That's why the total cost of risk is expected by the year-end to be at the relatively high level. But NPL ratio will not change. It will be around, as I said 2.6% by the year-end. And we will continue this policy at least the second half of the year. When it comes to your second question regarding the growth of lending side, in the second half, we will continue to lend especially SMEs artisans and craftsmen, we target to increase our market share on SME side from 17% to 20% level. When you have a look at our guidance for the current year, you will see that the Turkish lira loan growth expectation is slightly higher than 40%. But considering the CPI estimation by the year-end, it shows a negative growth in real terms. But as I said, the SME segment will continue to be our first segment to grow up. And then we will keep our lending to this segment at first. And then on the retail side, we will keep our lending for the housing loan, especially for the projects that we provided the guarantee, the first-hand projects, I mean. So I think that I touched all the questions.

Moving on to our next question. It comes from Konstantin Rozantsev from JPMorgan.

I wanted to ask a question about the rollover versus FX protected deposits that are held by corporates. So I understand that some of these deposits have already started to mature since late July. So I'm curious to know what traction of the maturing deposits is reinvested into the scheme up on maturity and what fraction leads this scheme, if you could please comment.

Thanks, Konstantin. Let me give you the breakdown. The volume of the FX protected deposits we have from the beginning of this year. During the first quarter, the collected amount in the form of deposit is TRY 8 billion level. When it comes to the end of the second quarter, it increased to TRY 120 billion, which means a 50% increase. And as of today, the total volume reached to TRY 130 billion level. And it means if we need to talk about the breakdown for the real person and the legal person, sorry, the breakdown for the treasury and the CBRT, 52% of this deposit belongs to CBRT side, tertiary side and the 47% belongs to CBRT side. As you know, the CBRT side includes the real person and the legal person and the treasury side is including only real person And the rollover ratio is now higher than 60% level and we think that, as you know, until the second of September, we need to achieve a target not to have a 1.5% commission penalty. And there will be no -- any problem for us to achieve this target. We are quite comfortable. And currently, we are higher than the threshold for both sides, legal person and the real person.

Just a quick confirmation. If you could maybe specifically mention for the corporates, what can the experience of the past next couple of weeks, so the deposits that have matured within the scheme held by corporate specifically, but what short deliveries have you been observing there?

Frankly speaking, we don't see any problem on the legal side. As I said, our rollover ratio is quite good for us. And we will achieve the target for the legal side. So up to now, we don't see any problem.

[Operator Instructions] But I think it's too fun. I think we are done with all your questions. We can switch to the written questions, if you like.

Rob, I think that we can move to the written questions. We have the 3 questions from Alan Webborn. The first question is regarding the OpEx and fee income guidance for this year. For the net fee and commission guidance, we expect to see TRY 7 billion. It means roughly 60 basis points increase -- a 60% increase in terms of net fee and commission compared to the previous year. Considering the current level of the CPI by the year-end, it means the growth rate for the net fee and commission for this year will be aligned with the current CPI level. When it comes to OpEx side, it's also estimated 60% increase regarding the OpEx side, and it will be, again, aligned with the CPI level. The second question regarding the impact of the forbearance on capital adequacy ratio for the second quarter. We need to -- if we need to talk about the main impact out of forbearance, it's coming from the FX forbearance because the other 2 forbearances are still in place, and it seems that it will be available for the next period. That's why we saw the main impact as -- the main impact is coming from the FX for forbearance. For the current quarter, on the solo -- the single figures, it impacted 85 basis points level on capital adequacy ratio. When it comes to the consolidated side, it's 81 basis points on card. When it comes to third question, the loan growth by segment in the second half of year -- second half of the year. As I said, we are targeting to grow up in SMEs, especially the micro SMEs, artisans and craftsman. And our current market share is slightly over 17%, and we are targeting to increase this portion to 20% level. We have another question from Sadrettin Bagci regarding the NIM guidance for the current year by the year-end. Our NIM guidance is around 6% level. I think there we have another question regarding the inflation accounting. But unfortunately we have not any certain information for the time being because our relevant department is working on that. I think that we will need to wait until the last quarter to give you more color regarding the impact of inflation accounting.

Tufan, there are no more written questions. Would you like to conclude?

I think there we have no further questions. Thank you for joining us today, and I wish you all have a good weekend. Thank you.

Thank you. Thank you, Mr. Tufan. Right, ladies and gentlemen, that you heard it. This concludes today's webcast call. Thank you very much for your participation. You may now disconnect.