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

Ladies and gentlemen, welcome to the Halkbank First Quarter 2025 Financial Results. [Operator Instructions] With that, I'll now hand over to our speakers, Mr. Mirac Tas, the Group Head of International Banking; Mr. Muharrem Baykara, the Head of Investor Relations; and Mr. Kamer Olkay Asik, Investor Relations Manager from Halkbank. Speakers, over to you.

Hello, my friends. Welcome, and thank you for joining us in Halkbank's First Quarter 2025 Financial Results Webcast. This is Mr. Mirac Tas, Group Head of International Banking. Today, we have Muharrem Baykara, Head of Investor Relations; and our Investor Relations Manager, Kamer Asik, presenting. Before we dive into our presentation, I would like to briefly touch upon the earthquake that struck near Istanbul. Thankfully, we have had no bad news from our colleagues or the community. We wish a swift recovery and well-being to everyone impacted. Now moving into the first quarter financial results. We kicked off the year with a solid financial performance. We are again proud to deliver very strong and resilient results. Key driver of this earnings strength is our strong core banking income. Looking forward, we remain confident that our financial strength will help us navigate an uncertainty as demonstrated by our strong track record in the past as well. We broadly announced a foreign currency-denominated subordinated debt issuance sailing via public disclosure platform on 8th of April. Accordingly, we apply to Capital Market Board of Turkey to receive an approval, including Tier 1 and Tier 2 issuance, the amount might reach up to USD 1 billion. These issues are planned to be sold abroad via public offering and our private placement and our sales to qualify investors in 1 tranche or more tranches. We will continue to provide good results throughout 2025 on the back of additional financial source, including the potential Tier 1 issuance, as I mentioned. Moreover, we are also exploring further opportunity to touch international markets with various instruments. In a nutshell, our activeness in the financial market will increase in coming quarters to raise wholesale funding. Halkbank provides service in the corporate, commercial, SME and retail banking segments through the 1,087 domestic branches, 2,022 employees as of today. The Bank also operates in North Macedonia, Netherlands and Serbia via its subsidiaries. As integrated financial company, the Bank's credit card service through a total of 13 consolidated subsidiaries and affiliates such as leading to factoring, mortgage, brokerage. Our Bank with all subsidiaries continues to further strengthen our dominance in the banking sector, which also helping turn of the further expansion of spreads, net interest margin and profitability. We surely continue to be dominant player across lending deposits, core banking income, [indiscernible] metrics. All in all, this reflects the success of our continuous strategy and execution this year. I would like to take this opportunity to thank our employees for their dedication. We will keep building a meaningful future together, working with the love of our country and nation, leading to innovation and success. Kamer now will provide insight regarding our first quarter performance. Following his speech, Muharrem will offer some perspective on the macro and banking sector. Thank you very much for your patience. Have a nice evening to all. Thank you.

Thank you, Mirac. Let's dive into the first quarter financial performance, starting with the first page. Total assets increased by 32.9% year-over-year, reflecting quarterly growth of 6.7%. As a result, total assets exceeded TRY 3.2 trillion in the first quarter. Similar to the previous quarter, the securities portfolio was the main driver of the asset growth. The share of total securities continued its upward trend, reaching 27.5% of total assets. On the other hand, the loan share declined to 46.8%, reflecting our prudent loan underwriting strategy. Now moving on to our securities portfolio. Total securities increased by 12.6% quarter-on-quarter with TL securities increasing by 12.4% and FX securities by 5.8% in USD terms. The composition between fixed and floating rate notes remained largely stable. We continue to benefit from CPI Linkers' revenue, securing an additional TRY 30.1 billion interest income during the quarter. CPI Linkers had a valuation rate of 41%, providing a solid revenue stream from this portfolio. Their volume grew by almost 10% quarter-on-quarter, supported by a widening positive bill rate. Regarding securities composition, the share of fair value through P&L securities increased to 9% from 7.4%. During the quarter, amortized cost securities decreased to 70.7%, while fair value OCI securities declined to 20%. Let's walk through the loan growth dynamics on Page 3. Total loans increased by 5.5% quarterly. TI loans saw a limited growth of 1.4%, while FX loans in USD terms rose by 9.2%. Business loans were the primary contributor to loan growth driven by strong demand for FX loans. Given the elevated FX demand from deposit holders and the resulting rise in FX liquidity, we demonstrated strong appetite for FX loan issuance this quarter. Our below sector total loan growth reflects our strategy of capital preservation and selective lending. While TL loan growth remained subdued, FX loan largely offset this impact, maintaining a balanced and sustainable risk return approach. Turning to next page, more details on loan portfolio. The second quarter may represent challenge, yet our TL-denominated loan portfolio stands to benefit from a rate cut cycle in the second half of 2025. TL loans account for 71% of total loans, while FX loans comprise 79%. Surging FX loan demand and increasing FX liquidity have shifted the composition in favor of FX loans. SME loans continue to represent the largest segment within our loan portfolio, holding 48% share. Additionally, credit cards maintained strong momentum with their share within retail loans rising to 30% from 28%. Asset quality details are on the Page 5. We recorded NPL inflows of TRY 6.7 billion this quarter compared to TRY 1.9 billion in the previous quarter. The lagged effect of CBRT's higher for longer approach contributed to additional Stage 3 inflows compared to the last quarter of 2024. These inflows remain rather granular, leading to an NPL ratio deterioration to 2.4% from 2.1%. Our NPL ratio remains 0.5% above the sector due to 2 main factors. The first one, we neither sell nor write-off NPLs, maintaining a more conservative approach. Over the past few years, we have cooled down our lending appetite. Therefore, the denominator impact slightly elevated our NPL ratio above the sector. On the positive side, our Stage 2 ratio showed improvement, decreasing to 8.2% from 8.4%. Additionally, our Stage 2 coverage remains robust at 13.4%. Further details on NPL ratio are on the next page. We observed some deterioration, particularly in the SME segment, while the NPL ratio for corporate commercial loans remained stable. Although the NPL ratio for consumer loans increased meaningfully, it's aligned with sector trends. Additionally, the NPL ratio for credit cards rose, but their share within the total loan book was almost 4%. Moving to asset quality details on Page 7. As anticipated, risk levels realized below expectations, prompting us to release some of our performing loan provisions during the first quarter. On the other hand, we adopted a prudent approach by setting aside significantly higher Stage 3 provisions compared to the previous quarters. Taking into account all cumulative provisions expenses, our total loan coverage ratio remains healthy at 2.9%. Gross total cost of risk realized at 150 basis points cumulatively. Net total cost of risk realized at 56 basis points, reflecting our prudence in the first quarter, considering the negative figures observed over the last 3 consecutive quarters. Now moving on to our liabilities on the next page. Loan-to-deposit ratio declined to 57.7% from 60% with deposits continuing to serve as our primary funding source. On the right-hand side, we see the deposit share within our total liabilities. Our deposit base remains strong and well diversified, accounts for 82% of our total liabilities. This indicates that our bank is well positioned to benefit from the looming rate cut cycle through the middle of the year. Only 3% of our total liabilities are derived from FX wholesale funding versus sector average of 18.1%. We are currently exploring opportunities to access international markets for additional wholesale funding. Therefore, our growing appetite for wholesale funding may lead to an increase in its share. As Mirac mentioned in his opening remarks, we plan to issue a subordinated debt in coming months. Details of deposits are on the following page. On the deposit side, we maintain our concentration on widespread and granular core deposit base. Total deposits were up by 10.2% quarterly and almost 33.7% on a yearly basis. TL deposits increased by 2% quarterly, while FX deposits in USD terms surged by 18.3% quarter-on-quarter, driven by heightened FX demand among deposit holders. On Page 10, we will see further details of deposits. Demand deposits gained momentum and surged by 16.9% quarter-on-quarter. This was largely due to the bank's main focus on increasing market share in demand deposits, while time deposits increased by a strong 9.4%. Please bear in mind, this is a statistically important relationship between FX deposits and demand deposits. The strong increase in FX deposits contributed favorably to demand deposits, which in turn helps ease margin pressures. On Page 11, cost yield and spread details. Another positive development in the quarter was the accelerated improvement in TL core spread, especially TL loan yields declined by 170 basis points, while TL cost of deposits declined by 290 basis points, resulting in a 120 basis points improvement in TL core spread. Taking into account FX core spread, blended core spread improved by 110 basis points. Moving to P&L items on the next page. NII surged by 86% quarter-on-quarter due to lower deposit costs, efficient loan repricing and CPI Linkers income support. Net fees and commissions contributed to support our income base, growing by 16.1% quarterly by 58.6% year-on-year. Headline NIM continued to recover and increased to 2.9% from 1.9% a quarter ago, while adjusted NIM improved to 2.5% from 0.2%. Next page details of the profitability. Total operating revenues grew by 31.7% quarter-on-quarter, 117.2% year-on-year, mainly driven by core banking income items. As you may see in the right-hand side, net trading loss came in at TRY 2.952 million in Q1. We reported a net income of TRY 7.51 million, up by 81.4% quarterly. In other words, ROE shifted from low teens to high teens. On Page 14, we have the cost details. Calendar effects influenced OpEx growth as wage increases are generally reflected in the first quarter. Therefore, OpEx rose by 36.6% year-on-year, remaining below the current inflation level. Now the solvency ratios. Reported consolidated CAR came in at 13.6% and while CET1 ratio realized at 9.8%. If we exclude forbearance, CAR and Tier 1 would be roughly 130 basis points lower, while CET1 would be roughly 120 basis points lower than the reported ratios. These are my final remarks. I will now hand over to Muharrem. Thank you.

Good afternoon, everyone. This is Muharrem Baykara, Head of Investor Relations. Before we proceed to Q&A session, I would like to address a few important issues. Let me start with the broader perspective on the operating environment. Over the recent quarters, both indigenous and exogenous shocks have reshaped the macroeconomic framework. In response, the CBRT has acted decisively raising policy rates proactively and adjusting forward guidance in a timely manner to stabilize market expectations. These policy measures reflect a higher for longer approach alongside restrictive credit policies, both of which have significantly tightened Turkish lira liquidity in the market. As a result, Turkish lira supply has declined, yields have risen and financial conditions tightened further. All these factors are essential components of the inflation trajectory that we now see unfolding. This inflation outlook is also supported by external developments. Fears of a global recession alongside declining oil and commodity prices contributed positively to price stability. Turkey's current account balance has shown strong improvement, while the budget balance is steadily moving towards normalization, reinforcing the fiscal discipline. These macroeconomic policy pillars collectively build confidence in a sustained inflation process. Turning to our own performance, we entered the year with a strong momentum. In the first quarter, our profitability increased significantly, driven by strategic balance sheet management and a favorable operating environment. CPI Linkers continue to provide a reliable source of income, while the expansion of our securities portfolio has supported asset growth. On the lending side, Turkish lira-denominated loans have shown limited growth due to tightening financial conditions and the CBRT's restrictive credit policy. However, our FX loan portfolio has expanded meaningfully, driven by increased corporate client demand, mainly due to opportunity cost perspective of lower FX loan rates and decent exchange rate expectations of our corporate clients. As a result, the share of FX loans in our total loans portfolio has increased. At the same time, we recognize the asset quality implications of tight monetary policy. The effects of this policy stance are beginning to materialize in the asset quality. Nevertheless, our prudent and conservative approach to risk management remains a cornerstone of our operational strategy. While market dynamics have become more volatile, our disciplined underwriting and provisioning practices enable us to navigate these conditions with stability and foresight. If the CBRT pivot to a rate cut cycle through the middle of the year, asset quality may start to recover gradually in the second half of the year. On the funding side, we observed a notable increase in FX deposits. FX deposits and the demand deposits are closely correlated, meaning the rise in the demand deposits could offset some of the pressure on the cost of funding. Moreover, the CBRT's last required reserve ratio increase drove the FX deposit rates lower. Together, these deposit trends strengthen our liquidity profile and cushion our margins in a tightening financial condition. In addition to increase in demand deposits, driven by FX deposit trends, fee and commission income is poised to provide further support given our lower starting base relative to our peers. Additionally, management has set ambitious yet achievable targets to strengthen our bottom line and our head office and branches remain focused on executing these objectives. Looking at our profitability, the first quarter was quite strong. Our return on equity has improved meaningfully, shifting from low teens to high teens, thanks to both robust core earnings and efficient balance sheet management. Our focus on operational efficiency and the revenue diversification continues to yield positive results. On the cost side, we remain vigilant. Operating expenses increased in the first quarter, mainly due to calendar-driven effects, which can be shown on the human resource expenditure growth. While the CBRT's current monthly loan growth cap have temporarily softened competitiveness among peers, we anticipate this environment to shift once lending caps are eased. However, the timing of this potential policy change maintains uncertain. Our goal is to prepare well for potential return to full orthodox market dynamics. To that end, we have already taken proactive steps to strengthen our capital base, most notably through our recent plan for Tier 1 issuance. Beyond that, we are actively exploring further opportunities to replenish our capital buffers. Therefore, our increasing appetite for wholesale funding may lead some increase in the share of wholesale funding. Finally, I want to emphasize that we are a state-owned bank and continue to operate with the strategic backing of our main stakeholder, Turkiye Wealth Fund. As demonstrated in previous years, our main stakeholders [ stand ready ] to inject capital if needed, providing an additional layer of strength and returns to our long-term strategy. To conclude, despite the challenging macroeconomic and regulatory environment, we have entered the year with strong momentum. Our diversified income base, prudent risk stance and strategic capital initiatives position us well to navigate the remainder of the year. We remain committed to delivering value and resilience through every market cycle. These are my key points I wanted to cover. Thank you. Over to you, Rob.

Thank you, Mr. Baykara, the Head of Investor Relations at Halkbank. Now ladies and gentlemen, I must apologize in advance if I don't pronounce your name accurately. I will do my best. But it is now time for questions. [Operator Instructions] Over to you, Kamer.

Thank you, Rob. I think we have no audio questions. And also, I'm checking Q&A box, and we have no further questions in the written question box. Now Mirac will conclude.

Thank you very much. If you have any follow-up questions, please feel free to contact us. Have a wonderful day. Good evening.

Thank you very much, speakers. We appreciate your presentations. Ladies and gentlemen, as they said, you can contact them any time if there are any questions that you have outside of the presentation. Thank you for your participation. This now concludes today's conference call. You may now disconnect.