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

Ladies and gentlemen, welcome to HalkBank Second Quarter 2026 Financial Results. Before I introduce the speakers, I need to tell you that we will have a question-and-answer session following the presentation by the speakers. [Operator Instructions] With that, I will introduce our hosts, and they are Mr. Mirac Tas, the Deputy General Manager of International Banking; Mr. Muharrem Baykara, Head of International Debt Capital Markets and Investor Relations; and Mr. Kamer Olkay Asik, Investor Relations Manager. Gentlemen, the floor is yours.

Thanks, Rob. Dear friends. Good evening, everyone, and thank you for joining us for HalkBank Second Quarter 2026 Earnings Call. It's a great pleasure to welcome to you all today. The second quarter represents another important milestone in our journey. We continue to deliver strong financial performance while further strengthening foundation for sustainable and profitable growth. Our results once again demonstrate the resilience of our business model, the strength of our franchise and the disciplined execution of long-term strategy. Joining me today are Kamer Asik, Investor Relationship Manager, who will be present our financial results in detail; and Mr. Muharrem Baykara, Head of the International Debt Capital Markets and Investor Relations, who will be providing an overview of the latest macroeconomic outlook and developments in international capital markets. Our performance this quarter reflects Europe disciplined execution and strategic focus. By remaining committed to our core banking business, we have continued to reinforce the HalkBank long-term earning capacity while making prudent and resilient balance sheet. Loan growth remains the primary driver of our balance sheet expansion, supported by strong demand across the retail, SME and commercial banking segments. Following the exceptional securities expansion recorded last year, securities growth naturally normalized during the last quarters, while continuing to represent approximately 26% of total assets, preserving a balanced and diversified asset structure. Beyond the financial figures, I would like to highlight several strategic achievements that further strengthen our firm competitive positions. Our core banking franchise continued to generate strong and sustainable revenues. Net interest income improved significantly, supported by higher contribution from our CPI-linked securities. At the same time, robust fee and commission income together with the strong performance of our subsidiaries further and change our profitability. Despite ongoing macroeconomic challenges, we maintained resilient asset quality through the disciplined underwriting standards, proactive risk management and prudent provision policies. These measures continue to reinforce resilience of our balance sheet while positioning us for future growth opportunities. After successfully executing the USD 210 million AT1 issuance in the first quarter, we have done another Turkish lira denominated AT1 issues with an amount TRY 11 billion during the second quarter. We are exploring all the options from our potential investors in order to support our capital buffers and diversify our funding source. At this point, before I elaborate the surging external funding opportunities, I'm pleased to tell you about our upcoming project that reflected on our Board Director resolution. According to our disclosed resolution, we will increase our capital by 25% through the public offering. We appointed [indiscernible] as the intermediary institution for domestic transactions and Citigroup Global Markets Limited and JPMorgan Securities PLC as joint global coordinators and joint book runners for the sale transactions to be carried out to international institutional investors. In connection with the secondary public offering of the shares of our bank, you will see the details and the time line of projects in coming term, please stay turn. Turning to funding. We made significant progress in diversifying our funding base, improving the international market conditions enable us further stretching our wholesale funding strategy. By increasing the share of foreign currency wholesale funding, we continue to optimize our funding mix, reduce our reliance on deposits and improve the overall funding expenses. To reach our goal, we established our GMTN program and standing by to execute bond issuance depending on market conditions. We are monitoring the market together with all the parties to do our first issuance since almost, as we say, a long-term frame, while we are aiming to be a regular issuer in the international capital market reduce wholesale funding gap. We will be opportunities in terms of the pricing. Looking ahead, we see substantial opportunities to further expand our international funding platform and stretching our relationship with global financial institutions. We remain committed to our funding diversity while supporting the sustainably and profitable growth across all business lines. Overall, we are executing our strategy with the confidence, discipline and clear long-term vision. Every milestone we achieved today strengthen the HalkBank position for tomorrow. Before the concluding, I would like to express my sincere appreciation to our all colleagues. Their dedication, professionalism, unwavering commitment continue to be driving the force behind our achievements. I also extend my heartfelt thanks to our shareholders investors and business partners for their continued confidence and support. Thank you again for joining us today. We greatly value your continued trust in HalkBank. I will now hand over to Kamer Asik, who will guide you through our second quarter financial results.

Thank you, Mirac Tas. Hello, everyone. Let me start with the second page. Before getting through the financials, let me give you a brief explanations about macro environment. This inflation trend continues and rate cuts are possible in the last quarter of the year. Despite the tight financial conditions, Turkish economy managed to engineer soft landing, which is a good sign for asset quality. Almost completing earthquake -- completing earthquake spending burden, budget balance started to satisfy Maastricht criteria. Let's continue with Page 3. Turkish economy doubled in size over a decade in spite of comparatively lower credit-based growth. Debt space room of Turkiye is a promising factor that can fuel the growth in coming years. Sovereign CDS spread is close to its lowest levels since 2018. On Page 4, we witnessed HalkBank is in the top 5 by the key sector indicators in the Turkish banking sector. We maintain our position as leading SME bank with 14.1% market share. Now I will walk you through our second quarter financials, starting on Page 5. Total assets increased by 29.4% year-over-year, reflecting a quarterly growth of 6.5%. Accordingly, total assets exceeded TRY 4.7 trillion as of the second quarter. Loan portfolio was the main driver of quarterly asset growth. The share of loans bounced back to 49% from 47.5%, thanks to our accelerated loan growth. On the other hand, the securities growth lagged behind the loan growth as of second quarter. Nevertheless, the securities resumed their upward trend after flattish growth in the previous quarter. Accordingly, total securities accounted for an almost 76.4% of total assets. In coming quarters, we continue to rebalance our asset mix in favor of loans returning back to pre-U.S. case, aligning with the sector average. Meanwhile, as HalkBank, we have abundant FX liquidity and our FX liquidity coverage ratio satisfies regulatory requirements. Now moving into securities portfolio. Total securities increased by 5.2% quarter-on-quarter, in which TL securities grew by 8.2% and FX securities contracted by 6.7% in USD terms. The contraction on FX securities caused by deleveraging in the onshore FX-denominated sovereign bonds. We would like to remind you that CPI linkers valuation methodology changed in the second quarter of previous year. Since then, we have been evaluating our CPI linkers portfolio using forward-looking inflation path derived from overnight index swap curve. The OIS curve shifted upwards during the second quarter due to volatility in the energy prices. Although valuation rate of CPI linkers revised down slightly from 28.3% to 28% for 2026. The long-term market inflation curve shifted upwardly. We realized a supportive TRY 42.6 billion income from CPI linkers portfolio during the quarter. In a scenario of higher-than-expected inflation outlook, our hefty CPI linkers portfolio would continue to hedge our balance sheet and support our margin outlook going forward. As for securities composition, fair value through P&L securities share decreased from 8.6% to 7%. During the quarter, amortized cost securities inched up to 68.8% from 67.3% -- while fair value OCI securities was stable at 24%, our conservative securities portfolio would protect our balance sheet against future shocks. Let's walk through the loan growth dynamics on Page 7. Total loans grew by a strong 9.3% quarterly. TL loans up by 7.7% quarterly, which is slightly below sector average. FX loans in USD terms increased by 7.7% quarterly, which is significantly above the sector average. Total loan growth continues to ensure our healthy loan book with a sustainable risk return approach. Accordingly, total loan growth was supported by all customer segments. SME loans were the largest driver of total loan growth. Those growth belong to both standard SME loans and cooperative loans, which is mostly TL denominated. Business loans were the second largest driver of total growth, which stems from high FX denominated loan growth appetite. It's also worth mentioning that retail loans kept their growth pace and contributed to total loan growth. Both consumer loans and credit cards have seen significant growth during the quarter. Turning to next page, more details on loan portfolio. TL loan growth was well distributed across all segments. SME segment had the highest contribution to TL loan book in which the cooperative standard SME loans and CGF loan utilization were the main supporters. FX loan growth was mainly supported by business loans. Within the business loans, corporate segment had the highest contribution to FX loan growth. Corporate demand on FX loans kept its momentum during the quarter, given sticky and high TL funding cost environment with support of stable exchange rate. On the back of increasing FX loan utilization, our FX loan market share reached to 7%, while our TL loan market share stood at 8.8% -- in the new era, we are going to continue to grant FX loans in order to bridge the market share on FX loans with our peers. Expected increase in external funding will enable us to grow healthy in FX loans. Turning to next page. Structurally, our balance sheet is more TL dominated. TL loans make up nearly 69% of total loans, while FX loans make up 31%. SME loans with a 47% share are the largest segment within our loan portfolio. Corporate and commercial segments continue to have the second largest share. Additionally, we benefited from our high-yield retail book. Accordingly, the credit card share within retail loans increased to 44% from 42% sequentially. Similar to credit cards, our consumer loan share increased to 26% within the retail loan book, which was 25% in the previous quarter. Asset quality details are on the next page. We had an almost TRY 11 billion TL NPL inflows during the quarter, which is mainly initiated by SME segment. De-anchoring inflation expectations and the CBRT's higher for longer approach have led to additional Stage 3 inflows compared to the previous quarter. Accordingly, NPL ratio slightly deteriorated to 3.7% from 3.5% in the previous quarter. Please note that there were no NPL sales during the quarter. On the other hand, we saw some deterioration in the Stage 2 ratio increasing to 9.4% from 8.6%. Even though continued Stage 3 inflows further put down on asset quality, we set aside proportionate Stage 3 provisions to sufficiently cover Stage 3 inflows. Our Stage 3 coverage further strengthened to 63.2% from 62.9%, which is comfortable levels. We will continue to increase our Stage 3 coverage ratio, aiming to converge sector average. Turning to Page 11. We saw some deterioration, especially on SME segment, but corporate commercial loans NPL ratio was actually improving. On the other hand, credit cards and consumer loans NPL ratio continued to increase. The BRSA's restructuring measures compensated some of the deterioration seen in credit cards and consumer segment, which help us keep them from increasing further. As a reminder, credit card segment accounts for 4% within the loan book. Moving to asset quality details on Page 12. We maintain to act proactively and set aside more than our Stage 3 provisions compared to the previous quarter. Taking into account all provision expenses cumulatively, our total loan coverage ratio further strengthened to 3.3% level. We only had NPL collections supporting our other income. There is no reversal of performing loan provisions as of second quarter. Gross total cost of risk stood at 188 basis points. Taking into account reversals, our net total cost of risk further strengthened to 121 basis points, which was 79 basis points in the previous quarter. Now moving on our liabilities on the next page. Loan-to-deposit ratio increased to 63% from 62%, considering its low levels versus sector average of 88%. There is further room available for loan growth in the upcoming quarters. Our deposit franchise remains strong, making up 77.4% of our total liabilities. On the other hand, our DCM team have been exploring further opportunities to increase the wholesale funding. We have done another TL-denominated AT-1 issuance with an amount of TRY 11 billion TL during the second quarter. As a result of our efforts, FX wholesale funding share within liabilities stood at 5.9%. It's well below sector average, which is 19.2%. Therefore, our balance sheets have much potential in terms of additional wholesale funding. As we disclosed in public disclosure platform, the case in U.S. was dismissed, clearing the way for surging external funding opportunities from the international capital markets. Turning to next page. Deposits maintained as the main funding -- main source of funding. Total deposits grew in line with the sector trends. Our efforts to increase public sector deposits, which has lower cost and average deposits have been continuing. The share of it within TL deposits reached to 13%, which was 5% at the same quarter of last year. Next page shows additional information regarding deposits. The increase in our demand deposits continued, albeit a limited decline in the share of demand deposits, which was caused by faster growth in time deposits. Our deposits are mostly TL deposits with a share of 63%. This TL heavy funding structure will help us improve our profitability with the support of the assuming rate cutting cycle. Cost yield spreads on the next page. In line with the market trends, we witnessed pressure on our spreads due to prolonging tight financial conditions. Page 17 indicates NIM outlook. With the support of hefty CPI linker income, our NIM held its course above 4%. Moreover, our increasing appetite on loans supported the growth in the net fees and commissions. In upcoming quarters, we are expecting sustainable support from our increasing FX noncash loans, thanks to dismissal of U.S. case. Furthermore, our increasing appetite in credit card business and aligning credit card market share with merchandise fee share will also help us grow our net fees and commissions over the coming quarters. Page 18. We posted roughly TRY 8.2 billion TL net income in this quarter. Accordingly, our bottom line grew by 75% year-over-year. OpEx details on the next page. Our OpEx increased by 20.6% quarterly, which is mostly derived from cyclical wage increase. As a result, the improvement in cost-to-income ratio was paused temporarily. Our CAR -- on the next page, we see solvency ratios. Our CAR improved from 13.4% to 14.14% in solo terms. Additionally, our CET-1 ratio has been -- continued to satisfy regulatory thresholds. At this point, Mirac touched upon our management decided to do public offering in order to replenish our solvency ratio -- now these are all my final remarks. I will hand over to Muharrem Bey, please go ahead.

Thank you, Kamer. Hello, everyone. Before starting the Q&A session, I would like to touch upon the domestic and global developments that shape the operating environment. Geopolitical developments continue to set the market agenda and shape international financial markets. The recent escalation in the Middle East has once again injected high volatility into energy prices, making market sentiment extremely susceptible to incoming headline news. As a result, global monetary policy trajectory remains clouded. Central banks in major economies are forced to stay patient, balancing sticky inflation risks against softening growth outlook. Until a lasting geopolitical deescalation is achieved, market expectations will likely fluctuate, keeping inflation expectations anchored and global financial conditions tight. Resurgence in commodity prices have inevitably spilled over into domestic front. Turkish economy has absorbed the first round effects of the exogenous energy shock, which temporarily paused inflation -- the inflation trajectory and caused volatility in the bond yields. In response, the CBRT has firmly maintained its stance to anchor inflation expectations. While the proactive and decisive tight monetary policy stance is essential for the long-term price stability, delaying the shift towards the policy normalization has kept cost of funding high across all the segments. Consequently, sector-wide banking margins have remained under pressure due to high deposit costs and tighter macro prudential measures. Against this backdrop, our balance sheet strategy successfully cushioned our core performance. A key anchor for us this quarter was our substantial CPI linked portfolio. Functioning as a powerful inflation hedge, CPI linkers portfolio generated healthy interest revenues that offset broader net interest margin compression across our loan book. Looking ahead, we expect gradually improving margin recovery. As macro conditions allow the CBRT to resume one degree of funding, our cost of funding will be reduced, unlocking margin expansion and driving a rebound in our bottom line with the support of further gradual rate cuts in the remainder of the year. As you all know, the complete and conclusive dismissal of the United States case marks a major strategic turning point for our bank. Clearing this uncertainty has immediately started to normalize Halk Bank's perception and pave the way for external funding from international debt capital markets. This renewed international access will significantly reduce our marginal borrowing costs and enable us to manage the required reserve ratio costs well. To fully capitalize on this momentum, our newly established GMTM program gives us the flexibility to execute opportunistic cost-effective issuances abroad. We will be performing our debut depending on the market conditions following the reopening of the market by September. As Mirac touched upon in his speech, and you will all in our latest public disclosure announcement as of today, we obtained the resolution from our Board of Directors to plan our new public offering. We have then institutional experience about public offering transactions. As you know, in our track record, we have successfully executed our IPO and SPO in 2007 and 2012, respectively. This successful transaction background in our track record will guide us in our slated public offering, and our experience will streamline our new project to be morphed into life. According to the Board of Directors resolution, HalkBank will increase its paid-in capital by 25% -- in other words, it is slated to be increased to nearly 9 billion loss of HalkBank shares from approximately 7.2 billion loss of HalkBank shares. You can find the precise numbers available on our relevant Board of Directors resolution. These planned public offerings will reduce our financial leverage, replenish our solvency buffers and increase our competitiveness in the new era. Additionally, increasing free float of HalkBank shares will support its liquidity, widening our shareholder structure and getting us on the radar of the global institutional investors. In summary, raised equity funding through our slated public offerings will increase the share of the common Tier 1 equity within our funding. This structural change in our liabilities is good for the strength and the profitability of our balance sheet. Expected funding from CET-1 will substitute excess time deposits that has higher cost and will generate additional income for the coming quarters, which implies an organic growth potential. Over the last years, our market share in the time deposits has been higher than the peers and its required reserve ratio cost has been amplifying the total burden of this funnel. In the coming quarters, we will cut down the time deposits with the help of the capital increase and enhanced external funding facilities. Moreover, we will deploy the FX liquidity raised through external funding to expand our FX loan market share. This strategy will allow us to rebalance our TL loan share in line with the sector averages, ultimately helping us align our high-cost TL time deposit share with the sector banks. Concurrently, we have significantly expanded the number of global correspondent banks in our onboarding pipeline, and this process is evolving swiftly as planned to broaden our counterparty limits and clearing capacity. These international tailwinds are already enhancing our commercial execution. Our increased strength in foreign trade operations will boost trade volumes, drive strong momentum in fees and commissions income that will be earned from noncash loans while generating high-margin cross-selling opportunities across the corporate clients. On the top of the ongoing change in the liability structure, we also plan to change the asset mix in favor of the loans, which is comparatively more profitable than the security investments. We will be strategically shifting capital away from fixed income securities and reallocating it towards high-yielded loans. Increasing the loan share in our asset mix while reducing securities reliance will structurally improve the NIM. I will conclude my speech by reminiscing you that before the United State case, HalkBank was recognized as the Turkiya's most profitable and efficient bank according to Banker magazine named as Top 1,000 World Bank in 2013. We will rewrite our destiny with our strategy reshuffle, increasing external funding facilities, strengthening competitiveness, expanding core business penetration and surging cross-selling capabilities. Thank you for your patience. Now I'm leaving the room for Q&A session.

Indeed, ladies and gentlemen, it is now time for the question-and-answer session. We're going to begin with audio questions first and then we'll get to the written.[Operator Instructions] Without further ado, I believe we have a question from Mr. David Taranto.

Firstly, on CPI linkers, as you highlighted in the presentation, valuation assumptions remained broadly unchanged at around 28%, yet fee income increased substantially this quarter. Could you help us understand the key drivers behind this movement and how we should think about the linker income over the coming quarters if the current year-end inflation expectations remain around the current levels? Second, on guidance. Could you walk us through the key changes to your full year outlook following the recent shift in the macro environment, particularly around the major P&L lines and the profitability please? And finally, following the announced SPO, how should we think about your target capital buffer? And more broadly, how the stronger capital position may influence your strategy? Would you be keen to regain market share, for example?

Thank you, David. I want to answer your question. CPI linkers, as we just mentioned in our presentation, we are using a different methodology, which is argued with the audit firm and negotiated with the audit firm, and we've finalized it in the second quarter of the 2025 -- so we're not only evaluating our current year inflation expectation, but also we are using the -- using a longer-term inflation expectation, which is derived from the overnight index swap. So we are not only using the current year, we are also using the inflation expectations beyond the current year. So we are inflating our CPI linkers with the curve of the inflation expectations for the 10 years, and we are discounting back with the internal rate of this securities portfolio because of this reason, while we are putting a bit slightly downside adjustment on our current inflation expectation, the inflation expectations beyond the current year have been shifted upwardly because of this reason, our CPI linkers get a boost from the shift in the always an overnight index swap, which is impacted from the conflict in the Middle East due to increase in oil prices. So when it comes to the second question, I think the second question and third question is very related to each other because we will have some events in the scope of our SPO. And at that event, we are going to present our business plan, and we will have some investor presentations on that event that will elaborate our strategies going forward. Probably after 3 or 4 weeks, we will hold a Capital Markets Day and all the analysts and all the investors will get -- find the opportunity to understand our strategies going forward, and you will find the opportunity to ask questions regarding the guidance. Now we are working on the guidance and just trying to do our business plan going forward. After we hold our Capital Markets Day, as I told you within 3 or 4 weeks, then we are going to start to do our deal roadshows. So you are going to see in Istanbul, London and other financial centers, HalkBank will present its business plan, will tell the investors and the analysts its strategies in the new era, you will understand. We -- regard of the third question, we are going to raise our paid-in capital by 25% -- the expected amount that we will raise from this SPO will be -- will change depending on the market conditions. So the price will be important. We don't know what price we are going to sell this new issued shares. So it will be dependent on the regulators' calculations. So the time will decide on the pricing. And the total amount of the CET-1 that we will raise from the market will be dependent on the market price. So we are going to probably use this funding to optimize our liabilities because, as you know, in the case era, the case put pressure on our balance sheet and our balance sheet mostly liraized. We had a Turkish lira heavy balance sheet structure and the CBRT's higher for longer approach impacted our profitability negatively more than our peers. So we're going to optimize our funding structure with the help of the raising the CET-1 through isolated SPO. And also, we are going to use this funding naturally to increase our competitiveness. But as I told you, the optimization in our liabilities and the changing in our asset mix in favor of loans will generate income, and this will be an organic income growth. This will replenish our capital buffers in the new era. I hope this works, David.

All right. And just a quick thing. Right. [Operator Instructions] We don't seem to have any more audio questions. I'm just looking gentlemen. No more audio questions. All right. So if there are any written questions, over to you.

Yes, Rob. We have one written question from Orkun Bey, he says, thank you for presentation. Following the resolution of U.S. litigation process, along with the increased funding diversification, you plan to introduce new era. What level of range do you target for the share of demand deposits in total funding over the midterm?