Participants on today's call on Halyk Bank side are: Ms. Umut Shayakhmetova, Chief Executive Officer, Mr. Murat Koshenov, Deputy CEO, Finance, Subsidiaries and International Activities, Mr. Roman Maszczyk, Deputy CEO, Compliance, Risk Management, Data Science and Collateral, Chief Compliance Controller, Ms. Olga Vuros, Deputy CEO, Corporate Banking, Mr. Dauren Sartayev, Deputy CEO, SME Banking, Transactional Banking, PR and Marketing, Mr. Zhumabek Mamutov, Deputy CEO, Retail Banking and Soft Collection, Mr. Nariman Mukushev, Deputy CEO, Digital Government Services, Ecosystem and Customer Experience, Mr. Anton Musin, General Managing Director, IT and Innovation, Mr. Almas Makhanov, Chief Risk Officer, Mr. Viktor Skryl, Financial Director, Finance and Subsidiaries, Mr. Margulan Tanirtayev from IR team, and myself, Mira Kasenova, Head of FI and IR.
Now we would like to start our presentation with a digital update for Q1 2022.
The customer engagement within our core online platforms, Halyk Homebank and Onlinebank, showed fairly good growth against Q1 2021. The number of monthly and daily active users of Halyk Homebank app has increased by 50% and 62.5% year-on-year, respectively. The monthly active users number reached 4.5 million in Q1 2022. We see a sound growth in the number of active users of our Onlinebank app for businesses, and the monthly active users number reached 164,000, increasing by almost 93% versus Q1 2021.
We are glad to admit that Halyk Homebank and Onlinebank apps are ranked number one within the respective categories in Kazakhstan. In the Q1 of this year, we launched additional services and functions within our digital platforms, such as SWIFT transfers and currency control.
Despite of the fact that during Q1 2022, the digital loans and online onboarding dynamics was negatively affected by the January events in Kazakhstan, we see a notable year-on-year growth in credit and non-credit products for retail clients and businesses.
We see continuous shift to cashless transactions. 65% of retail payments volume were represented by non-cash card transactions in Q1 2022, a sound increase from 47% a year ago. Online sales were the key driver for retail loan growth as we issued 75% of loans digitally.
We started new relationships with 17,000 business clients entirely via Onlinebank in Q1 2022, and we see a strong growth in online transactions and payment volumes, which have grown by 20% and 38% versus Q1 2021, respectively. The ecosystem verticals showed sound growth versus Q1 2021.
The quarter-to-quarter dynamics was unfavorably affected by the January events in Kazakhstan and the geopolitical situation in the region. Premiums written within our online auto insurance service increased by 48% year-over-year, while in Q1 2022, GMV of Halyk Travel and Kino.KZ have expanded over 3 and 10 times year-over-year respectively. Development of our marketplace platform, Halyk Market, remains a key priority for us.
Our total marketplace GMV has increased by 31.5% year-over-year, reaching KZT 24 billion in Q1 2022.
Turning to retail segment, we would like to highlight a solid performance across key dimensions. We continue to see a strong customer engagement, an increasing digital footprint with our Halyk Homebank app, and growing transactional activity. The transactions volume has increased by 40% year-over-year.
On consolidated basis, the retail gross loan portfolio has expanded by 43.3% year-on-year, while the customer deposits increased by 18%. We see a growth in retail products penetration by 11% year-on-year. Halyk Homebank super app is at core of our retail customer proposition, and we continue to develop it further. We already see notable results in customer activity.
Moreover, the monthly active users penetration rate in retail active client base has risen from 15% to 52% during the recent years, showing a further potential for growth. On unconsolidated basis, our retail portfolio has grown by 41% to KZT 540 billion in Q1 2022, while the loan issue volumes have increased by 18% year-on-year.
The growth has been primarily driven by digital sales, which increased 2.1 times year-on-year and reached 38% of total retail loan sales in Q1 2022. At the same time, the asset quality stayed almost at the same level at 4.3%, while we continue to maintain conservative provisioning policy with NPL coverage ratio of 156%. Halyk Market remains one of our top priorities as we develop comprehensive service proposition both for retail clients and merchants. The GMV of our ecom platform, Halyk Market, increased by almost 14 times since a soft launch a year ago.
Our network expanded to more than 1,000 merchants offering over 245,000 SKUs, and we're focused to expand our footprint further. Over Q1 2022, we continued to develop our retail platform and focus greatly on GovTech.
We are the first bank on the market who launched digital documents, seamlessly integrating access to them into Halyk Homebank app. These new functions was used more than 800,000 times only in the first months. Turning to corporate segment, we would like to highlight that our loan book has expanded by 38.6% year-on-year.
Our corporate portfolio remains well diversified across industries, while local currency loans comprise 73% of the loan book. The segment NPL ratio decreased to 0.9%, while the provisioning coverage increased to sort of 562% as of the first of April 2022, reflecting a solid asset quality and our prudent risk management. We see a strong growth in our active corporate client base, as it reached over 2,100 customers in Q1 2022.
Essentially, the products penetration and the transaction activity have been notably increasing as well. We are proud of the performance we achieved in SME banking. In Q1 2022, we have 137,000 actively transacting SME clients, an increase almost 63% year-on-year, reflecting our continuous efforts in development of online daily banking and transactional services. SME gross loan portfolio grew by 24% year-on-year, while the number of borrowers has increased by 2.4 times.
The segment NPL ratio kept at the level of 6%. We achieved 10% increase in SME loan issuance volumes year-on-year. It has been primarily driven by digital loans, which already comprise 32% of our SME loan portfolio. The number of SME borrowers has shown a very strong growth by 2.1 times year-on-year.
In Q1 2022, we onboarded 90% of new IE clients online. We also increased digital lending to IE by almost 23% year-over-year in terms of number of issued digital loans. Now, I would like to hand over the call to my colleague, Margulan Tanirtayev. Thank you.
Good evening, ladies and gentlemen. Now let me switch to the overview of Halyk Group consolidated financial results for the Q1 of 2022.
During the Q1 , the bank generated KZT 124.2 billion of net income. The increase by 28.3% compared to the Q1 of the last year was due to significant increase in lending business and in net gain on foreign exchange operations. We also have to mention that net insurance income for the Q1 of this year significantly decreased versus the Q1 of 2021. Previously, the bulk of income from insurance on unsecured loans were recognized on the side of the bank. Starting from 2022, this income has been transferred from the bank to its subsidiary, Halyk-Life.
Halyk-Life, in turn, has created an insurance reserve for the full amount of insurance on consumer loans. Consequently, there was increase in insurance reserve expenses. In the Q1 of 2022, we demonstrated 31.2% return on average equity and 4% return on assets.
Next slide, please. Total assets of the group increased by 5.2% versus the year-end of 2021 as a result of growth in amounts due to customers, which was partially offset by the decrease in amounts due to credit institutions. Customer deposits increased by 9.7% versus the year-end of 2021 due to fund inflow from the bank's clients. Next slide, please.
Interest income for the Q1 of this year increased by 31.1% versus the Q1 of the last year, mainly due to increase in average balances of loans to customers. Interest expense for the Q1 of this year increased by 34.9% versus the Q1 of the last year, mainly due to the increase of average balance of KZT deposits in the amounts due to customers and due to increase in interest expense on amount due to credit institutions as a result of growing volumes of repo transactions attracted to provide current cash flow in KZT within the bank's operating activities, which was partially offset by the decrease in interest expense on debt securities as a result of redemption of bank's high yielding eurobonds.
As a result, net interest income for the Q1 of this year increased by 28.3% versus the Q1 of the last year. Net interest margin increased to 5.2% per annum for the Q1 of 2021 compared to 4.9% per annum for the Q1 of 2020, mainly due to improved structure of placement of interest bearing liabilities into interest earning assets and due to savings on coupon payments as a result of an early redemption of bank high yielding eurobonds. As you remember, net interest margin in Q1 of 2021 was negatively affected by the recognition of discount on receivables on sale of assets in installments and by the one-off accelerated amortization of discount on large ticket deposits.
Excluding this effect, net interest margin decreased to 5.2% per annum for the Q1 of 2022 compared to 5.4% per annum in Q1 of 2021, mainly due to increase in interest expense on amounts due to credit institutions as a result of growing volumes of repo transactions attracted to provide current cash flow in KZT within the bank's operating activities. Next slide, please. In the Q1 of 2022, the overall dynamics of fee and commission income was negatively affected by January events in Kazakhstan. Consequently, fee and commission income for the Q1 of this year increased only by four point eight percent versus the Q1 of the last year.
As a result of spike in volumes of transactional banking in Q1 of 2021 versus the Q1 of 2020, there was an increase in the service commission expenses payable to the international payment systems. This led to the increase in fee and commission expense for the Q1 of 2022 by 28.2%. Moreover, loyalty program bonuses for the Q1 of 2022 increased by 83.5% versus the Q1 of 2021.
Thus, the net fee and commission income decreased by 18.3% versus the Q1 of the last year. The decrease in fees derived from bank transfer settlements for the Q1 of 2022 by 7.9% versus the Q1 of 2021 was mainly due to the decrease in merchant fees as a result of shrinking volume of online installment loans or BNPL loans issued. This was due to the temporary suspension of BNPL and further reopening with tightened underwriting conditions. Next slide, please.
Operating expenses for the Q1 of this year increased by 21.4% versus the Q1 of the last year, mainly due to the indexation of salaries and other employee benefits starting from the first of March 2021, and increase in charity expenses, including KZT 3 billion contribution to a special charitable fund for the people of Kazakhstan. The bank's cost-to-income ratio decreased to 19.7% compared to 23.2% for the Q1 of 2021 due to high operating income for the Q1 of this year. Next slide, please.
On the balance sheet, compared with the year end of 2021, loans to customers increased by 6.9% on a gross basis and 7% on a net basis, while corporate loans increased by 12.4% on a gross basis, SME decreased by 3.4% on a gross basis, and retail loans increased by 3.1% on a gross basis respectively. Next slide, please. Ninety-day plus NPL ratio remained flat at 2.6%. Cost of risk on loans to customers in Q1 of 2022 came at 1.5%, partially reflecting more normalized level and increase in credit loss expense on retail loans, including the assessment of the macro parameters effect. The provisioning rate stood at 6%. The stage three coverage ratio increased to 75.5%. Next slide, please.
As at the end of the Q1 of this year, stage three ratio remained almost flat in absolute terms and reduced to 7.9% in percent, in percentage terms. We are additionally showing here how well the workout of problem loans collateral was done by the bank's SPVs during the Q1 of this year. Next slide, please. On liability side, the corporate and retail deposits increased by 18.2% and 1.8% respectively compared with the year end of 2021 due to fund inflow from the bank's clients. As at the end of the Q1 of this year, the share of corporate KZT deposits in total corporate deposits was 54.7% compared to 52.9% as at the year end of 2021.
Whereas the share of retail KZT deposits in total retail deposits was 46.5% compared to 50.6% as at the year end of 2021. Next slide, please. Capital adequacy ratios of the bank decreased in the Q1 of 2022 as a result of increase in risk-weighted assets by 3.7% versus the year end of 2021. In the Q1 of 2022, total equity of the bank increased by KZT 23.9 billion or by 1.5% compared to the year end of 2021. Whereas the net income for the Q1 of 2022 amounted to KZT 124.2 billion.
This was due to loss on revaluation of debt financial assets at fair values through other comprehensive income, which totaled KZT 105 billion in the Q1 of this year. The loss mainly relates to the treasury bills of the Ministry of Finance of Kazakhstan, which have decreased in price due to base rate hike from 10.25% to 13.5% in this Q1 of this year. Next slide, please. The bank observed a significant inflow of deposits for the period from the first of February to the 1st of May of this year amid significant changes in the operating environment.
Thus, the inflow of retail deposits amounted to KZT 217.5 billion, or KZT 153.4 billion, excluding an exchange rate effect, and inflow of corporate deposits amounted to KZT 745.4 billion or KZT 619.6 billion excluding an exchange rate effect. Moreover, in April of this year, the bank acquired a portion of Kazakhstan Eximbank's loan portfolio. Total acquired loan portfolio amounted to KZT 550.4 billion, which is 8.2% of total gross loans of the bank. Corporate loans amounted to KZT 101.5 billion, which is 2.7% of total corporate loans of the bank, with 26 clients, out of which 19 are entirely new clients not using any of the bank's products.
SME loans amounted to KZT 111.9 billion, which is 11.1% of total SME loans, with 8,000 clients out of which 5,400 are entirely new clients. Retail loans amounted to KZT 336.9 billion, which is 17.1% of total retail loans with 114,600 clients, out of which 34,100 are entirely new clients. The acquired retail loans include 8% of auto loans, 39% of mortgages, and 53% of consumer loans. Next slide, please. Turning to the rationale for the transaction, we would like to highlight that the bank acquired a very diversified and good quality portfolio with no NPLs. There is no new risk segment as the target client base is fully matched with ours.
The transaction advances the efficient and quick gain in market share without an increase in operating expenses or engaging in a complex M&A transaction.
The acquired portfolio has a good profitability on par with similar Halyk Bank's products, further underpinned by matched funding on the government programs and by discount on retail and SME loans. 7% of the total purchased retail and SME loans were acquired with matched funding, and 30% were acquired with 7% discount. We are glad to note that it has been an efficient utilization of capital. K1 and K2 capital adequacy ratios stood at 17.8% and 18.5% as of 1 May 2022, compared to 19% and 19.8% as of 1 April 2022. The following principles were guiding us in this transaction. Firstly, we made a detailed analysis of the borrowers before the execution of the transaction.
That was a portfolio analysis of retail and small business borrowers, and one-by-one analysis of medium business and corporate borrowers with ability to cherry-pick the best clients. Secondly, no NPLs were acceptable. On top of that, there is an option to return back the loans with deficient credit dossier. Dear ladies and gentlemen, this completes our presentation.
Now we would like to open the floor for your questions, please. Just a quick instruction. To state a question, you can raise your hand in Zoom, or if you joined via the cell phone, please star nine to raise your hand. You can also enter your question in the written form via chat. While stating your question, please also mention your name and company. The first question comes from Mikhail Bukov. Mikhail, please go ahead.
Yes, good day. Thank you very much for the presentation. My first question will be on the trading and FX gains in the Q1 . Could you maybe provide a little bit additional color what was driving this line in the quarter, and also what's your outlook, you know, for the rest of the year, if you could comment?
Hello, Mikhail. This is Murat Koshenov. On FX, there are probably two biggest drivers. Driver number one, there was obviously due to turmoil on the geopolitical side. We see increased demands from the customers as well as a big volatility on the FX side. That usually actually drives more business on the FX side. The part of that gain is related to dealing income, which was generated.
The second part relates to some gains on derivatives because typically the bank might have some open currency position on the balance sheet, which is closed through some off-balance sheet instruments.
Because of change big changes on the FX side, I'm talking about the US dollar to tenge as well as US dollar to Russian ruble, there was some FX gains which was due to the sharp changes on the FX market side. Typically, that part is volatile and might swing back if the rates would turn into other direction.
Okay. Like, in the light of appreciation of tenge, which is happening in the last months, do you see the same activity of clients? Maybe what color can you give for the Q2 already?
I think the most volatility happens in the Q1 . We see that during March already, the rates start being normalized, and we didn't see big swings on the FX side. We also saw that some reversal of tenge and Russian ruble versus US dollars, which we expect might reverse some FX gain which I mentioned.
Okay, thank you. Two more questions from me. One is on the cost of risk. You generated 1.5% for the Q1 . Your full year guidance is between 2%-3%. Maybe could you provide us some latest update and view for the asset quality till the rest of the year? Where do you think the risks can come from, given that you are so far tracking ahead of the guidance? Also, what is the latest view on dividends, any dividend update, given that board of directors recommended no dividend for the previous year? I think it was mentioned that, well, depending on the situation, any different opportunities could be evaluated. What's your latest view on dividend payment as well? Thank you.
Yes. When we provided the guidance on the cost of risk side, we did that immediately after the conflict between Russia and Ukraine started. That also had some element of stress test.
Actually, in the Q1 we see that the cost of risk was recorded lower than the guidance which we provided for the whole year. 1.5% also includes some parameters, some assessment of some macro parameters effect. How the situation would be well, so at the Q1 situation seems a bit better than we projected in our full year guidance. Saying that, I think at this point of time, it's a bit premature to provide the guidance or updated guidance for the full year.
We still see the situation has not been fully resolved. We still see some elevated levels of inflation. At the same time, we see some positive data, but not only, I'm talking not only about cost of risk, but also other lines of business. What we typically do, and we started and we due to start this process shortly in the middle of the year, we typically launch some fine-tuning of the budget until year-end. As I said, shortly, we'll launch that process. Hopefully, we'll be promoting half-year results.
We will be in position to come with updated guidance on our net profit for the whole year. That also would include cost of risk.
I think by that time we would be providing our vision on the dividend payout, if any, for this year. Sorry, for the last year. Which, as you are right to mention, the decision was taken by the general shareholders meeting to defer that decision for the second half of this year.
Okay, thank you very much.
The next question comes from Elena Tsareva. Elena, please go ahead.
Good afternoon. Thank you very much for the presentation. I think I have a couple of questions. First is that Q1 enjoyed very healthy inflow of corporate deposits, which helped to stabilize customer funding. How sustainable this inflow? Do you see that there could be some outflows already on corporate side? Another question is on fees. Basically Q1 affected by events of January. If the dynamics are like in April, May, it looks more normalized and healthy for fee and commission side. Maybe a little bit on e-commerce initiatives. This kind of GMV decline in Q1 . Is this something seasonal or this some other reasons for the decline? That would be helpful. Thank you.
Elena, thank you very much for your questions. Regarding deposits inflow, we think it's permanent because as you probably know, there was some structural changes in the Kazakh banking sector with all three Russian banks actually falling under the sanctions. There was the news that Alfa-Bank Kazakhstan has been acquired by another Kazakh bank, Bank CenterCredit, but Sberbank and VTB Bank actually they still need to find their new destiny. In the meantime, we see the redistribution of business from these three Russian banks to other Kazakh banks, and we see that a number of banks actually witness inflow. Like for example, Citibank Kazakhstan, some medium-sized Kazakh banks.
I think we took a good portion from the corporate deposits because we are big corporate bank, and actually not all the remaining Kazakh banks they have focus on the corporate. There are some pure retail players. I think we're taking the portion among banks which is dealing with the corporate customers. We think that it's that distribution probably here to stay for quite some time.
Regarding fees and commissions and e-com, to a certain extent, they're interrelated issues, because in fees and commission income, I can say there was certain effects from January events in Kazakhstan when for couple of weeks or probably three weeks, there was some reduced activity on the retail side.
We also, as you probably remember, last year, changed accounting treatment for the loyalty bonuses, which was previously accounted in the OpEx. Since last year, they start being deducted from the fees and commission income. If you compare Q1 this year, with Q1 of last year, that also had some impact on the fees and commission income. The portion which, I think, affects both e-com and fees and commission income is BNPL. Because of January events and then subsequently, the heightened geopolitical issues increase in inflation, there was some temporary closure of certain BNPL programs, and they have been reopened since then, but with some tightened conditions in the Q1 .
That affected, as you can see, from our presentation, the fees which we generate from the merchants. We think that the situation has became more clear on the economic side, while, as I said, probably not everything has been fully cleared yet. We already start looking into the ways how we can probably readjust our retail programs, where we see possibility probably to bring them under more normalized terms. This work just started, and we expect that some changes to the program might take place later in the Q2 .
Thank you very much. That's it.
The next question comes from Tunde Oyo. Tunde, please go ahead.
Hi. Thank you. Can you hear me?
Yes, yes, we can hear you.
Okay, good. Thank you so much for the presentation. Just a quick question from me on asset quality, just a follow-up to what you've already talked about earlier, right? You know, I understand that the performance has been better than expectations, but you also cited that a lot of the risk and the provisions are coming from the retail portfolio. I was wondering if you could provide more color on what segment of the retail portfolio are you seeing risk. Is this mortgage? Is this unsecured? And what exactly is impacting your retail clients, and what are the expectations going forward?
Hello, Tunde. This is Almas Makhanov. In terms of focus on dynamics on cost of risk for retail segments, we see that the dynamic model, we are more driven by unsecured segment, unsecured portfolio, and it was mostly caused by overall changes in macro to our estimation that overall, the dynamics reflect the changes in overall economy situation. As you can see, NPL dynamics are almost flat. We see a slight increase in overdue loans, which actually are reflected in the cost of risk numbers for the Q1 .
Let me understand how this works in practical terms. There are changes in macro estimates. Why is it impacting your retail portfolio more disproportionately than your SME and corporate? Just wanna understand if it's just a macro overlay or is there anything specific in the unsecured portfolio that makes you more cautious. You know, are people losing jobs? Just if you can get a little bit more granular into why you checked those estimates, that would be helpful for my understanding, please.
Yes. Mostly relate to the scenarios that we use to forecast the future economic conditions. They mostly reflect inflationary risks causing the increase in interest rates, base rate, which will actually impact the creditworthiness of unsecured clients. That's why that portfolio is mostly we see the impact mostly on that portfolio in our stress scenarios.
Okay. That's very helpful. Thanks. The other question is on your digital product and, you know, sort of like a trend in your GMV. You know, the first part of the presentation, that's quite helpful. But I also wanted to highlight that the impact of the January protest and, say, geopolitical risk and all this stuff we had in Q1 on you is quite significant, compared to, I mean, what I've seen for your competitor, Kaspi. I was wondering why are you more impacted? I mean, they were impacted as well, don't get me wrong, but I was just wondering why are you more impacted by these events than they are.
Is it because you closed your business, you know, for a longer period or any other color you could share on why you underperformed during that period would be helpful?
Tunde, thank you for your question. I think we probably were taking more conservative approach, but which probably resulted in our GMV dynamics. But I think we still had job to do on the e-commerce on the ecosystem side. As you can see from our presentation, we were working hard in terms of increasing number of partners. Like, for example, on our Halyk Market platform, we increased number of partners from 673 to over 1,000. We increased number of SKUs from 175,000 to quarter of a million SKUs. We also continue to onboard our partners on our open ecosystem. Number of partners almost doubled within the Q1 to close to 5,000 partners.
We continue to introduce new solutions in our platform. From that perspective, I think we building firm more firm base for our ecosystem platform, for our marketplace and Halyk Market. As I said, we start looking into readjusting our credit solutions, namely BNPL. We start this job and we hope that by the end of Q2 , we might readjust our terms, which should provide more support to our GMV dynamics in the second half of this year.
Okay, thanks. I know your BNPL side. I know you said you tightened your underwriting standards a bit. I was just wondering, are you seeing besides, you know, if you take away the January protest and, you know, sort of geopolitical risk, is there any area of concern in particular for you? Are you seeing more asset quality issues on that area? Or is this just you being, you know, cautious as usual?
Yeah. I think it's regarding BNPL. I think same comments which Almas provided generally for unsecured retail would be fair.
Okay. Got it. Thank you so much. Appreciate it.
The next question comes from Simon Nellis. Simon, please go ahead.
Oh, hi. It's thanks very much. Simon Nellis from Citi. My first question would just be on the very high fee expense. Can you just elaborate on that and, you know, what's the outlook going forward? Is this very high fee expense has been a trend for a while, and is there any hope that it'll calm down? That'd be a question. I guess my second question, I can just tell you all my questions up first. If you could just give a bit of an outlook on the credit growth, kind of underlying, excluding the Sberbank transaction and what you're seeing on the ground, and in terms of pricing on the lending book as well, would be interesting.
Last, just on the dividend, I mean, it seems that, you know, you've already made one-third of the lower end of your full year target. Your ROE is about 20%, capital position is strong. You know, management has been doing share buybacks. You know, assuming that the results kind of are similar to this quarter, I mean, is there anything else that would necessarily stop you from paying out a dividend? Because I think it's something that investors are obviously very interested in.
Would be useful if you could provide any more color there. Thank you.
Simon, thank you for your questions. Regarding fees and commission expenses, which indeed grew by 28% year-over-year, that was mainly due to increase in payment card expenses, which is the result of growing transactional banking number of transactions. Certain impact was from loyalty program bonuses. As you see, we had a very strong increase in transactional activity in the Q4 . A portion of the fees which is charged by the Visa, Mastercard, UnionPay, Amex, they came in the Q1 . Going forward, we expect that that would be slightly smoothed out.
Again, regarding the full year guidance, we, as I mentioned, would be looking into that and would be providing after half year results. Just to recap, for this whole year so far, our guidance is the growth of net fees and commissions at the level of not less than 5%. I think until we revise that, please take that as a valid guidance.
On the loan growth, yeah, the Sberbank transaction itself, I think, is providing sufficient boost to our loan portfolio. Even if you do not take into account the Sberbank transaction, and actually the Q1 results do not include them, I think we already ahead of the initial guidance indeed which we provided earlier this year.
Again, that guidance was at the beginning of conflict that had some stress test elements. As I said, we would be looking into our revised guidance shortly. Definitely with or without Sberbank transaction, it seems like the dynamics is better in terms of the growth than it was provided earlier this year.
In terms of dividend payments or buyback, I have to say that on the buyback, we did our transaction December last year to remind that we purchased back close to KZT 150 billion of shares outstanding. That itself was a transaction which optimized our capital by that time.
We see that organic growth of total assets of credit portfolio is stronger than we anticipated ourselves in the beginning of this year. The Sberbank transaction itself, as we presenting today, is efficient utilization of capital.
When the management would be looking into decision on dividends in the second half of this year, I think it will take into account the dynamics of capital adequacy, which happens due to Sberbank transaction, due to organic growth. We would be looking into further projections, how the business would be evolving throughout the year. Of course, we still have to take into account the risks which are still remaining in the economy. Inflation, as it was reported, for April, is standing at elevated 13.2%.
Our Halyk Finance is projecting that inflation by year-end would be in the range between 12% and 14%. Central bank, National Bank of Kazakhstan, increased recently base rate to 14%. Again, our Halyk Finance recently provided guidance that they anticipate base rate to stay between 13% and 15% by the year end. The conflict has not removed yet.
There might be still further tightening of sanctions. We would be looking at the business prospects. We'd be looking at the risks by that time. We'll be looking at the dynamic of our net profits, which again is in the Q1 ahead of our initial estimations. We'll be taking the balanced view on that before making any decisions.
Just on the credit growth. The Sberbank transaction closes in 2Q, yeah? Was there any negative goodwill on that transaction? Doesn't seem so, just looking at the capital ratio.
There is no goodwill because we purchased the
Oh, there's no goodwill. Sorry. Portfolio. Yeah. Sorry.
Yeah, we purchased portfolio.
Yeah.
To recap, the portion of that portfolio, namely, 30% of SME and retail portfolio came with 7% discount.
Yes, yes. Sorry. Just going back to the fee expense issue. Is that just a function of when your clients use cards that you have to pay payment systems, so it's just a function of increasing transaction volume? Is that pretty much it? I mean, other than the loyalty-
Yeah. There are a number of fees which is attached. There are interchange fees, there are service fees. But basically, it's a function of transactional activity and then which card are used, and some other nuances.
What?
Basically, it's transactional driven.
Yeah. Why is it so much prevalent on the expense side and not on the fee income side?
One bigger portion is related to service fees, which is charged by the international card companies. As I said, some of that in the Q1 was attributed to heightened activity, which was in the Q4 . As I said, that effect will be smoothed out throughout the year.
Okay. Is there any, like, accounting lumpiness in terms of?
Basically the Q1 is seasonally slower than the Q4 . Also, in the Q1 , we had some impact from the general event. That's why the transactional activity in the Q1 is substantially less than the Q4 . While some fees on the expense side, you know, was attributed to activity of the Q4 .
Yeah. On the loyalty side, I mean, I know sometimes banks. It's not accrued evenly over the course of the year. Is that also an issue with you? Is it kind of lumpy or?
No, no. It's a function of transactional activity as well as the rates of bonus program. As you remember, last year, we launched the promotional program from September last year until January of this year.
That was applicable to either full transactions or there was some modification to the program. It's a function of two things. Again, the transactional activity of clients, as well as the level of bonus which we are attaching to these transactions.
Okay. Thanks very much.
The next question comes from Ronak Gadhia. Ronak, please go ahead.
Thank you. Thanks for the presentation and taking my questions. Three or four questions. Firstly, on the acquisition of loans from Sberbank, have you done any due diligence? And within the due diligence, have you figured out if, you know, the borrowers you have acquired have any relationship with Russia, you know, direct or indirect, through value chains?
The second question is on margins. Could you just maybe provide what the outlook for margins is through the rest of the year? You know, when you gave your full year guidance at the end of the full year, there was expectation the margins would decline this year. Should we still expect that to come through, especially given the recent increase in funding costs?
Also, on a more medium-term basis, given your increasing exposure to the retail segment, should we expect your margins to structurally increase over the medium term given the increased retail exposure? Then my final question is, again, related to Russia. Has there been any Russia-related write-offs in the Q1 , be it, you know, from your subsidiary in Russia or, you know, the exposure you had on your balance sheet via Halyk Bank?
Thank you.
Yes. Hello, Ronak Gadhia. Thank you for your questions. On the Sberbank, again, we had some principles which guided our transactions. We made our due diligence on retail and small businesses actually be done on the portfolio basis. We had certain criteria which were attached, and that was not the transaction like all or nothing.
We have possibility to get portfolio on retail and small business side, which corresponds to our criteria. On medium-sized and corporate borrowers, we had detailed due diligence. Actually, we had information which was provided by Sberbank, but also, because in parallel, some of these clients were approaching us with request for refinancing. We had the opportunity to have direct interaction with these companies and get the direct information from them.
From that perspective, we had the full picture on medium-sized and corporate customers. We again had the ability to cherry-pick and decline companies and transactions which do not correspond to our risk parameters.
Obviously, when we make due diligence look at all risks, including any potential risks to their revenues, to their profitability, we as a matter of fact, starting from February during our credit reviews with the customers, looking at the elements of exposure to Russia on trade side. Same principles was applied when we make due diligence of these new clients. On the margins, yes, as you can see from the portfolio which we acquired from Sberbank, the bigger proportion was on the retail side.
Actually, our retail business actually benefited probably the most. That indeed might impact the structure of our credit portfolio, and that all things being equal, should have positive impact on net interest margin.
Obviously, we have to see how the increase on the funding side due to increase in the base rate might also affect the overall balance between assets and liabilities. We expect that on mean basis, we should be able at least to defend the levels which we have so far. I didn't remember your last question, if you could.
The last question was, have you done any write-offs in Q1? Were there any Russia-related write-offs, either because of the subsidiary you have in the country or direct exposure on Halyk Bank's balance sheet?
Our subsidiary in Russia, it's quite small. It's less than 1% of our balance sheet. Its credit portfolio is half to retail clients and half to SME clients. From that perspective, we at this point of time do not see reasons for any additional provisions.
They are having business as usual from that perspective. When saying about business as usual, they are not lending at this point of time. From collecting from existing clients, they have no restrictions or they are not seeing any unusual behavior from their current client base.
As we were also mentioning before in our press release, we have some direct exposure on Halyk Bank books to a couple of clients which operate in trade centers. They were actually impaired before, long before current events.
They are covered by collateral at the same time. Our current analysis shows that there is no need for any additional provisions. They have some good provision which was created well before 2022. There is no additional provisions warranted at this point of time. Obviously, we continue to monitor situation. We continue our analysis on regular basis, but I'm talking as of now.
Okay, understood. Thank you.
I think we have a few questions provided to us in the Q&A format. I think we answered most of them. Most of them relates to potential dividend payouts. There was also a question on NIM dynamic. I think we also covered that question.
One question relates to the nature of increase in balance and average interest rate for interbank liabilities. What kind of products are these exposure in? Why did average interest rate increase by so much, and what kind of counterparty banks are the increase due to? For example, overseas banks or domestic? As we mentioned during our call, we had some increase in repo transaction which we get to accommodate more transaction activity from the client base in the Q1 .
That rate also increased because of increase in the base rate. Future dynamics of interest rates for this particular line, interbank liabilities, will depend on dynamics of the base rate going forward. Since in Kazakhstan, all repo transactions in tenge are done on Kazakhstan exchange through central counterparty, we are not seeing any counterparty risks from these transactions.
There is one more question just came. Would you be able to elaborate on actual bottom line contributions to their bank loan portfolio position? Yeah. Viktor, I think it's a bit premature to give any specific guidance because I do not have the particular figure in front of me. But we guided that we provided some information on the structure of the portfolio.
We provided guidance that, on the high level side, profitability of acquired portfolio, corresponds to that of, Halyk Bank. There is no new, client risk segments, which we acquired. We provide some information on discounts which was achieved. Probably, there is information to make some, high level judgment of profitability of the portfolio, but I do not have the exact figure and do not want to provide some unverified information at this point of time. Thank you. Yes, there is also one question, landed on increasing insurance expenses in the Q1 . Is it one-off or should we expect this trend to continue in, next quarters?
As we mentioned during the call, there was some restructuring of, let's say, the relationship between bank and our insurance company on selling some insurance products and certain fees being now landed in our insurance subsidiary, which resulted in corresponding increase in insurance reserves. We expect that insurance reserves would follow the activity of our retail lending portfolio.
On the expense side and reserve side, there might be still continuation of charges throughout the year. At the same time, part of these reserves, which was charged during the Q1 , would start amortizing through profit, and that should provide increase in the net insurance income as a result.
The next question comes from Robert Holmes. Robert, please go ahead.
Thank you very much. Just I'd like to follow up on the dividend issue, and your propensity to pay the dividend. I was wondering whether or not your propensity has changed following the events in January, and whether you see it as really just a purely financial issue, or whether domestically, given the high inflation rates, whether or not it's politically now acceptable to be paying out significant dividends. I was wondering whether or not there's been a bit of a change in terms of your thinking in that regard.
Robert, thank you very much. I think we have same principles not changed when we're making dividend decisions on potential dividend distribution. We look typically at a few things. One thing is, what are the business opportunities to do we see opportunities to grow risk-weighted assets for which we need to allocate capital in aggressive way? If we see business opportunities, that actually is one of the issues which we are looking at. Secondly, we look at the risks, risk factors. In Kazakhstan, there are a few factors which influencing the. I'm talking about the economic risk, obviously. We're still looking at potential volatility on the FX side.
FX is very important for Halyk because almost half of our balance sheet and half of risk-weighted assets is in US dollars. Any sharp changes in FX rate actually leads to increase in risk-weighted assets and correspondingly consumes capital. Secondly, on the economic side, we look at the inflation, we look at the interest rate environment and how that might affect our potential asset quality and cost of risk side. Thirdly, we look how much excess capital we have.
You see that historically, until probably last year, we had capital which is substantially above 20%, which was providing substantial cushion in the capital. Due to the fact that last year we showed quite strong increase in credit portfolio and risk-weighted assets.
We completed buyback transaction end of last year. We see continuation increase in the loan portfolio on organic basis. We allocated capital in the acquisition of Sberbank transaction. Obviously, we have need to carefully look how much of any potential excess of capital given the current level as well as potential internal generation of capital through profitability is providing a cushion for dividend payment. We would be looking on balance, looking at all the aspects which I mentioned.
Okay, thank you.
Dear ladies and gentlemen, it seems that there is no questions remaining, so this completes our presentation. Thank you very much for participation. As usual, our IR team remains open for any of your further questions. Take care and goodbye.