Good evening, ladies and gentlemen. Welcome to Halyk Bank conference call on presentation of financial results for the 12 months and fourth quarter of 2021. The session will start with the presentation by our team and will be followed by Q&A session. Please note that the call is being recorded.
Participants to this today's call on Halyk Bank side are Miss Umut Shayakhmetova, Chief Executive Officer, Mr. Murat Koshenov, Deputy CEO, Corporate Banking International Activities, Ms. Aliya Karpykova, Deputy CEO, Chief Financial Officer, Mr. Anton Musin, Chief Managing Director, Digital Banking, Transactional Business, and IT, Mr. Zhumabek Mamutov, Deputy CEO, Retail Banking, Mr. Viktor Skryl, Financial Director, Finance and Subsidiaries, Mr. Almas Makhanov, Chief Risk Officer, Mira Kasenova, Head of FI and IR, and myself, Margulan Tanirtayev from IR team.
We are delighted to welcome everyone to our presentation of the financial results of 2021. 2021 has been a record year for Halyk. Despite the pandemic waves have continued to occur throughout the year, the Kazakhstan economy has recovered swiftly with strengthened consumer and business confidence, increasing transactional activity and strong credit uptake.
As Halyk, we have substantially transformed our business model, improving and digitalizing our customer proposition, being at forefront of our clients' needs. Our client base continued to grow and reach nine million customers. At the same time, we see continuous shift of our customers towards using our SuperApp. As such, our Homebank client increased by 29% to eight million.
We recorded a notable 30% growth in our gross loan portfolio, with very strong momentum in retail and SME segments, which have grown by 44% and 31% respectively. We also continue to consolidate our dominant position in corporate segment with loan portfolio increasing by 22%. Correspondingly, both our operating income and net income have grown by 27% and 31% in 2021 respectively.
Return on equity stood at 29.7%. It is important to note that earnings per GDR in U.S. dollar terms has increased by 27.6% year-on-year basis. Next slide, please. Around 12 months ago, we shared with you our financial guidance for 2021 and then revised it upwards in August last year.
Despite we were quite upbeat on our business performance outlook, we expected loan portfolio to grow by more than 21% and return on equity of 28%. We over-delivered on all key target metrics. Growth of our net loan portfolio amounted to 32%, with 47.7% growth in retail segment and 26.2% in corporate and SME, well ahead of 27% and 19% targets.
Return on equity reached 29.7%, supported by higher net interest margin of 5.2%, lower cost of risk of 0.2%, and excellent operating efficiency with cost-to-income ratio of 24.6%. As a result, our net income amounted to KZT 462.4 billion, exceeding our guidance of KZT 450 billion.
There has been a change in presentation of loyalty program bonuses, which impacted the representation of fee and commission income and operating expenses ratios. It will be explained later in the financial section of the presentation. Next slide, please. I would like to briefly summarize some of key milestones that we managed to achieve during the course of this year.
We made huge progress in expanding our ecosystem services that include online travel platform Halyk Travel, ticket operator Kino.kz, online brokerage Halyk Invest, and online marketplace Halyk Market. Our GMV across these platforms has grown multiple times. We launched GovTech product for consumer and businesses, efficiently making most of government services available via our super apps. We're making substantial progress on ESG front. Our ESG rating has been upgraded by MSCI as we continue to improve our ESG disclosure.
We have been the first bank in Kazakhstan to issue a green loan and have further plans in our ESG agenda. Following ratings upgrades by all three international credit rating agencies in 2021, we are the only local bank in Kazakhstan with investment-grade ratings, which highlights our resilient business profile and fortress balance sheet.
We redeemed our $500 million Eurobonds in January 2021 and fully prepaid $750 million Eurobonds due in 2022 in March 2021, taking advantage of our strong liquidity profile. In December 2021, we repurchased 7.2% of outstanding common shares and GDRs, fortifying the capital structure of the group. Next slide, please.
In 2021, the Kazakhstan economy rebounded substantially throughout the major sectors of economy on the back of restored business activity, efficient government support measures, and oil price recovery. We are saddened by developments of the current geopolitical situation in the region and greatly hope for the soonest diplomatic resolution of the ongoing Russia-Ukraine conflict. We are constantly monitoring the situation and implications it might have on the economy.
Kazakhstan economy shall naturally benefit from the significant spike in oil and commodity prices. Importantly, U.S. Treasury issued a clarification specifically allowing Kazakhstan crude oil flows through the Caspian Pipeline Consortium, which is responsible for 79% of the country's crude exports. Moreover, Kazakhstan economy shall naturally benefit from the significant spike in oil and commodity prices.
Kazakhstan credit profile remains decent as all international rating agencies affirming the sovereign rating in the first quarter of 2021, including S&P affirmation on March 4th. The country's profile, among others, is benefiting from strong fiscal and external buffers amounting to circa 46% of GDP and modest government debt levels. NBK is following inflation targeting policy and increased base rate by 325 basis points to 13.5% to preserve high stability.
Tenge, which has been highly correlated to ruble historically, has depreciated by circa 17% to U.S. dollar, but at the same time strengthened by 17.5% to Russian ruble since February 24th. While we follow closely the situation, we believe the Kazakhstan economy is well positioned to withstand the external shocks and continue its development path. Next slide, please.
Halyk itself has been resilient to macroeconomic vulnerabilities through the cycles and has ever stronger profile to withstand against turbulent economic environment now. First of all, we have no exposure to Ukraine and no loans or other created direct exposure to sanctioned entities in Russia. We adhere to best international compliance practices, ensuring no dealing with sanctioned entities.
Halyk Group has limited exposure to Russia, mostly via its subsidiary, Moskommertsbank, which is mainly retail and SME-focused bank. As of year-end 2021, the share of Moskommertsbank in Halyk Group's total assets and net income was 1% and 0.6% respectively. Out of $283.5 million of our Russian subsidiaries' total assets, only $148.5 million are funded by Halyk Bank.
In addition to that, we have $50 million exposure to several Russian corporates directly on balance sheet of Halyk Bank, comprising 0.5% of the group net loan portfolio and $15.7 million exposure at our subsidiary SPVs. Halyk has a balanced FX position. The share of foreign currency loans is now at a historic low of 21.4% of the bank's net loan portfolio, issued mostly to companies with fixed revenues.
We have substantial capital buffers with CET1 ratio standing at 19.3%. The bank also enjoys strong liquidity and stable granular deposit base. We have recorded strong through the cycle profitability with average return on average equity of 20.8% since 2008, which has been a result of best-in-class operating efficiency, healthy margins, and stringent risk management.
Halyk has a very experienced management team, having run the bank throughout the turbulent 2008, 2009, 2015, 2016, and coronavirus crisis. We are closely following and managing the situation to ensure that the group safely goes through these challenging times. Now let me switch to digital and business segments update for 2022.
Customer engagement within our core online platforms, Halyk Homebank and Onlinebank, has increased significantly in 2021. The number of monthly and daily active users of Halyk Homebank app, our key retail digital channel, has increased by 62% and almost 70% year-on-year, respectively. MAU reached 4.2 million in fourth quarter of 2021, well above our four million MAU target. We see sound growth in our digital platform for businesses, which is Onlinebank.
Notably, number of active users of our Onlinebank app have reached 156,000, increasing by 83.5% since the beginning of the year. The app is ranked number one within the respective category in Kazakhstan, reflecting seamless experience and service we offer to our clients. In fourth quarter of 2021, we launched additional services and functions within our platforms.
This includes a number of innovative services such as Google Pay and Face ID and Touch ID transfers for retail customers, installment loans and QR payments for merchants. Next slide, please. Digital platforms have become key touch point for our customers, as evident by strong growth in credit and non-credit products for retail clients and businesses. We see continuous shift to cashless transactions.
Over 55% of retail payments volume were represented by non-cash card transactions in 2021, a notable increase from 36% a year ago. Online sales were the key driver of retail loan growth as we issued over 77% of loans digitally. We started new relationships with over 46,000 business clients entirely via Onlinebank in 2021, and we see strong growth in online transactions and payment volumes, which have grown by 22% in this year. Next slide, please.
We achieved substantial progress across all our ecosystem verticals. Premiums written within our online auto insurance service increased by almost 3.7 times in 2021, while in first quarter of 2021, GMV of Halyk Travel and Kino.kz have expanded over 9 times and 31 times year-on-year respectively.
We hit 44,000 mark in the number of new customers in Halyk Invest, exceeding our target for this year. Development of our marketplace platform, which is Halyk Market, remains a key priority for us. Our network expanded to 673 partners, offering over 175,000 SKUs nationwide as of year-end, and we focus to expand our footprint further.
Halyk Market is fully integrated with Halyk Homebank app, and we offer full range of checkout and financing options, as well as additional features such as order tracking. Our total marketplace GMV has increased five times year-on-year, reaching KZT 70 billion in first quarter of 2021. Next slide, please. Now let me turn to our retail segment performance.
Our active retail client base has grown to nine million clients as of 2021, and we see increasing digital footprint with our Homebank app and growing transactional activity. The transactions volume has increased by 33.3% year on year as we processed over 32 trillion KZT of transactions in 2021. Essentially, customer engagement with Halyk has been growing as products per customer increased to 3.2 in 2021 versus 2.8 a year ago. Retail loans has expanded by 44.2% in 2021, while customer deposits increased by 19.4%. Next slide, please. As mentioned, we have shown a very robust growth in retail lending.
Our retail portfolio has grown by 42% or KZT 536 billion in 2021, while the loan issuance volumes have increased by 90% in 2021 with record KZT 141 billion new issuances in December alone. The growth has been driven by digital sales, which increased 7.6 times in 2021 and reached 33% of total retail loan sales in 2021.
At the same time, asset quality has continued to improve further with retail NPL ratio decreasing from 4.8% in third quarter to 4.2% in first quarter of this year. While we maintain conservative provisioning policy with NPL coverage ratio of 148%. Next slide, please. Over this year, we continued building our comprehensive retail ecosystem.
We launched a number of new products and services such as online refinance and online auto loans, which allows us both to bring new clients to Halyk and increase engagement with existing customers. We focused greatly on transactional services, introducing P2B, Halyk QR, and Google Pay payments, as well as launching instant transfers to Uzbekistan. Developing our lifestyle proposition, we launched a number of convenient GovTech services online.
Our customers are selling and buying cars, conveniently paying for government services online, transferring one-off pensions withdrawals to Halyk and receiving social benefits for childbirth, all without visiting a citizen service center. Next slide, please. Halyk Market remains one of our top priorities as we develop comprehensive service proposition for retail clients as well as merchants. This strongly supports our strategic shift towards online business model.
Overall, eCom and mCom GMV has increased five times year-over-year in first quarter of this year and contributed substantially to our growth in retail segment. In December 2021, more than half of retail loans were originated within marketplace platform, representing 23% in total issuance volume. Our eCom platform, Halyk Market, has been gaining momentum since the soft launch in first quarter with multiple GMV growth over September and December.
We continue to onboard more partners across categories and already have more than 670 merchants as of December 2021. Next slide, please. We continue to strengthen our retail platform, focusing on development of superior digital offering while maintaining multiple customer touch points within our phygital service model.
Homebank is at core of our customer proposition, and we continue to develop it as a convenient super app which addresses financial, transactional, and lifestyle needs of our customers. We are further advancing our analytical and marketing tools, providing personalized and seamless customer journeys, which in turn drives customer engagement and LTV. We already see notable results in customer activity and adoption of our online services.
Loans and deposits issued online already comprise 82% and 32% respectively, and more than 63% of the customer transactions volume were cashless in December 2021. Next slide, please. In corporate banking, our loan book has expanded by 3.8% quarter-on-quarter, or 22% in 2021, as we increased financing volumes for new and existing customers with the recovery of Kazakhstan economy.
We serve 77% of the largest corporates in Kazakhstan and remain an undisputed market leader with 45% share by loan and 32% share by deposits of legal entities in the country. Our corporate portfolio remains well diversified across industries, while local currency loans comprise 70% of the loan book.
The segment NPL ratio decreased to 1%, while already conservative provisioning coverage increased to circa 518% as of year-end of 2021, reflecting solid asset quality and our prudent risk management. We see strong growth in our active corporate client base as it reached over 1,900 customers in 2021. Essentially, customer engagement and transaction activity have been increasing as well. Next slide, please. We continue to develop Onlinebank as a powerful platform for our SME and corporate customers.
Over the last months, we added an opportunity to issue digital tender guarantees and became number one bank issuing guarantees in just 5 minutes. Most of our customers are actively using Onlinebank, either in app or via web interface, conducting 99% of payments and transactions online. The convenient digital service and number of services we launched in 2021 have been a strong catalyst for our client base. Next slide, please.
We achieved record performance in SME banking, supported by the implementation of our digital initiatives we mentioned previously. In first quarter of this year, we have over 135,000 actively transacting SME clients, an increase of 61% year-on-year, reflecting our continuous efforts in development of online daily banking and transactional services.
SME loan portfolio grew by 31%, while the number of borrowers has increased by 2.2 times in 2021. Asset quality has been continuously improving as segment NPL ratio has decreased to 5.9% in 2021. Next slide, please. We achieved 39% increase in SME loans issuance volumes achieved in 2021. It has been primarily driven by digital loans, which already comprise 30% of our SME loan portfolio.
Our convenient fully online onboarding supports strong influx of the new customers. In 2021, we onboarded over 77% of new individual entrepreneur clients online. We also increased digital lending to individual entrepreneurs by 6.4 times year-on-year in 2021. We are proud to say that we exceeded our 2021 year targets for both digital loan issuance and online clients onboarding. Now I would like to hand over to Mira Kasenova, Head of IR.
Thank you, Margulan. Good evening, ladies and gentlemen. Now let me switch to the overview of Halyk Group's consolidated financial results for the 12 months and 4Q of 2021. During 2021, the bank generated KZT 462.4 billion of net income. The increase by 31.1% compared to 2020 was due to the overall business growth across all segments.
At the year end of 2021, we demonstrated 29.7% return on average equity and 4.2% return on assets. Our total assets of the group increased by 16.4% versus the year end of 2020 as a result of growth in amounts due to customers and amount due to credit institutions.
Customer deposits increased by 13.6% versus the year-end of 2020 due to the fund inflow from the bank's clients. Next slide, please. Interest expense for the 12 months of 2021 increased by 9.9% versus the previous year, mainly due to the increase of average balance and share of KZT deposits in the amounts due to customers, which was partially offset by the decrease in interest expense on debt securities as a result of a redemption of the bank's high-yielding Eurobonds. Interest income for the 12 months of 2021 increased by 20% versus the 12 months of 2020, mainly due to increase in average balances of loans to customers. As a result, net interest income increased by 24.4% year-on-year.
Net interest margin increased to 5.2% per annum for the 12 months of 2021 and to 5% per annum for the first quarter of 2021, 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 the bank's high yielding Eurobonds.
Net interest margin in the fourth quarter of 2021 was negatively affected by the recognition of discount on receivables on sale of assets installments and by the one-off accelerated amortization of the discount on large ticket deposit, which was withdrawn by the borrower to repay the loan to the bank. In total, these facts led to KZT 12.5 billion of non-cash interest expenses in the Q4 of 2021.
Excluding these effects, net interest margin decreased to 5.4% per annum for the fourth quarter of 2021, compared to 5.5% per annum in the third quarter of 2021, mainly due to increase in interest rates on the deposits of legal entities. Next slide, please. Starting from the year-end of 2021, the loyalty program bonuses payable to the customers are included in fee and commission income.
All the previous periods were reclassified accordingly. Fee and commission income for the 12 months of 2021 increased by 11.5%, versus the previous year as a result of growing volumes of transactional banking, mainly in plastic card operations and bank transfer settlements, which was partially offset by the increase in loyalty program bonuses.
The increase in fees derived from bank transfer settlements in the 12 months of 2021 by 38.2% versus the 12 months of 2020 was mainly due to increase in merchant fees as a result of growing volume of BNPL loans issued. The increase in fee and commission expense for the 12 months of 2021 by 13.6% versus the previous year was mainly due to the increase in payment cards expenses as a result of growing volumes of transactional banking and non-cash transactions, partially offset by the decrease in deposit insurance fees payable to the Kazakhstan Deposit Insurance Fund due to low rates of the bank on the back of increase of capital adequacy ratios. Next slide, please.
Starting from year-end 2021, the loyalty program bonuses payable to the customers are excluded from the operating expenses. All of the previous periods were reclassified accordingly. Operating expenses for the 12 months of 2021 increased by 20.9% versus the previous year, mainly due to the indexation of salaries and other employee benefits starting from March 1st, 2021 and increase in advertisement expenses. The bank's cost-to-income ratio decreased to 24.6% compared to 25.8% for the 12 months of 2020 due to higher operating income for the 12 months of 2021. Next slide, please.
On the balance sheet, compared with the year-end of 2020, loans to customers increased by 29.6% on a gross basis and 32.1% on a net basis, while corporate loans increased by 21.9% on a gross basis, and SME and retail loans increased by 31.1% and 44.2% on a gross basis respectively. Next slide, please. Ninety-day plus NPL ratio decreased to 2.6% from 3.4%, mainly due to repayments of large ticket problem and previously impaired corporate loans. Similarly, cost of risk on loans to customers for the 12 months of 2021 decreased to 0.2% compared to 0.4% for the 12 months of 2020.
The provisioning rate decreased to 6%, and the NPL 90-day plus coverage ratio increased to 238.3%. Next slide, please. At the year-end of 2021, stage three ratio decreased to 8.6% from 9.8% at the end of the third quarter, mainly due to repayments of large ticket problem and previously impaired corporate loans. We additionally shown here how well the workout of problem loans collateral was done by the bank's SPVs during the 12 months of this year. Next slide, please. On liability side, the corporate and retail deposits increased by 8% and 19.4% respectively compared to the year-end of 2020 due to fund inflow from the bank's clients.
At the year-end of 2021, the share of corporate KZT deposits in total corporate deposits was 52.9% compared to 55.2% at the end of the third quarter, whereas the share of retail KZT deposits in total retail deposits slightly increased to 50.6%. Next slide. Compared with the year-end of 2020, total equity increased by 5.4% as a result of net profit earned by the bank during the 12 months of 2021, which was partially offset by dividend payment and the repurchase of 7.2% of the bank's outstanding common shares.
In December of 2021, the bank repurchased 7.2% of its outstanding common shares, including shares in the form of GDRs for the total amount of KZT 154 billion. The rationale of the repurchase was to optimize the capital structure of the group. As a result, the bank's capital adequacy ratios decreased as at the year-end of 2021. Next slide, please. Given the current situation, our outlook for the financial year of 2022 is provided on a conservative basis. Total net loan portfolio growth is expected to be more than 10%. Growth of net fee and commission income is expected to be more than 5%. Cost of risk is expected to be in the range of 2%-3%.
Consolidated net income is to be in the range of KZT 300 billion-KZT 350 billion. We are closely monitoring the situation, and the guidance for 2022 is to be revised during the year. Dear ladies and gentlemen, this completes our presentation. Now we would like to open the floor for questions, please. Just a quick technical instruction. To state the question, you can raise your hand in Zoom, or if you joined via cell phone, please press 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. Thank you.
The first question comes from Mikhail Dmitriev. Mikhail, please go ahead. Unmute yourself and proceed.
Hello, this is Elena Tsareva from BCS. I have several questions. My first question is on cost of risk. If you could provide the figure adjusted for provisionary recoveries last year, so like underlying cost of risk 2021. Given just introduced guidance for 2022, 2%-3% cost of risk seems to be quite conservative, so it's like levels of 2010, 2011.
What the areas of concern you have in retail or in corporate exposures? Also, do you expect any supportive measures to be introduced? I mean in general Kazakhstan. As well into the discussion, what is like the current situation in terms of clients' behavior, in terms of deposit flows, fixed deposit flows? Another question, is this kind of situation now implies risk of decline of payouts for 2021 compared to 2020? Thank you.
Elena, thank you for your question. Typically, well, if we talk about cost of risk for last year, we typically do not divide, let's say, cost of risk for regular portfolio and netting versus some one-off repayment. Because as you probably saw, we from time to time have these one-off repayments. Within the last five years, it happened probably three or four times. Just probably take this figure as we report it. In terms of our guidance for this year, which we put in the range 200-300 basis points.
As you probably see, we put that our guidance is conservative. There is a big, I would say, uncertainty at this point in time, and I think you should appreciate that, because every day the news flows are coming in terms of new sanctions introduced. For us, it's a bit difficult probably to provide a more, let's say, narrow guidance at this point in time. Throughout the year, once the situation will start being clarified, I think we'd be able to come with more clarified guidance as we usually did. I think for this year it would be especially valid.
In terms of where we see potentially more risks, we think it's in retail and SME, as it usually happens during previous crisis, probably to less extent, for the corporate portfolio side. This is in terms of cost of risk. I think your next questions was on the client behavior and how that might affect our prospects on dividend payments. To answer these questions, I would turn the floor to Ms. Umut Shayakhmetova.
Hello, good evening, everybody. I would like just to answer the question about the dividend payout, the either possibility or not. I would like to say that at this point of time, for us, it's difficult to recommend to the board of directors, which will be held next week, as a management of the bank, what way to make on the dividend payment.
We see that it was a very high profit, historically high profit for the next year. However, situation and events what are happening right now in Kazakhstan and in the geopolitics around still have a lot of uncertainties. We would be more on conservative side. We will consider and look to the situation which is developing on a daily basis.
The Board of Directors will be held next Friday. Until the very end, we still keep this option to make the final recommendation on the final decision. At the same time, as you remember, in 2020, when COVID happened, Halyk decided in April not to pay out the dividend, to wait how this situation will be developing with the capital, with liquidity, with NPLs.
Later in August, we called the extraordinary shareholders meeting, where the decision was made to pay out the dividends. We keep both options open at this point of time. Also, there was a question about the deposits and what is happening in the market right now.
I can say that in January, when the situation with the social unrest happened in Kazakhstan, we as Halyk saw outflow of deposits from the accounts of legal entities and physical individuals. The outflow of legal entities were to the other banks in Kazakhstan and, for physical individuals, it was more for the safe deposit boxes. What we see in February and now in March, the situation completely changed, and we see more incoming flows into the bank, and we even outperformed the outflows in January. We see big demand from the clients on opening and moving accounts and businesses and loans and deposits into Halyk.
However, at the same time, we are quite strict on our compliance, and we are not taking any client from the street. We have today compliance stricter than the regulator advises, and look for every client, for every contract, for every loan, in order to take qualitative assets.
Thank you very much. Maybe anything on FX conversion. If any FX deposits sure reacted quite significantly in recent weeks.
Yes. What we see that the demand for dollars in Kazakhstan in terms of cash increased. We as a bank are meeting most of those demands if the client needs to take out the deposits in the way of cash. Today, only Halyk and the central bank is able to bring cash dollars into Kazakhstan. We just have received cash in dollars to service only our clients of Halyk Bank.
Also we have non-cash demand in terms of the buying the dollars. That demand is also met by the national bank. If we talk about the legal companies, then it's based only for the contracts. The client should bring the contract to show the purpose of the purchase of the currency. Then it goes through the, like, standard exchange procedure.
Understood. Thank you very much.
The next question comes from Ronak Gadhia . Ronak, please go ahead.
Hello?
It seems that there's a problem. Yes, the next question comes from.
Sorry. I couldn't mute. I couldn't see the mute button. Sorry about that. Thanks for doing the presentation, taking my question. I have a couple of questions. One or two questions, I guess, or a couple of just follow-ups. On your cost of risk guidance of 2%-3%, could you maybe elaborate a bit more in terms of what kind of GDP growth or contraction you're factoring into that? Further to that, what kind of impact are you expecting on the Kazakh economy from the ongoing crisis? The second question is to do with your Russian subsidiary.
As you've highlighted, you know, the exposure is relatively modest, but are you looking to maybe write down the size of that exposure or, you know, make some provisions on those? The third factor, again, going back to the earlier comment about increasing dollarization and also general increase in rates across the industry, what kind of impact does that have on your margins?
Ronak, thank you for your questions. Let's answer one by one. On cost of risk, we also see similar questions coming through our chat. Basically, I think the question is, what is drivers for that growth? Is it something related to geopolitical risks? Or your question is whether it's related to our anticipation of, let's say, reduction of GDP.
We think that GDP growth will continue this year because it's pretty much dependent on extraction sector, mineral sector. As you probably know, oil and gas and metals and mining are main, actually, export commodities for Kazakhstan. Our base case, that's there will be no interruption of export of main commodities which Kazakhstan produces.
Even in, let's say, more negative scenario, we believe that the GDP will continue to grow. However, where we see the risks, particularly on retail side, is mostly related to inflation, which we think is global phenomenon. Given the current situation in the region, we think that presents additional risks to the inflation, which potentially might lead to some increase in NPLs on retail side.
That's why we factor in that risk. On SME side, it is partially also related to potentially lower demands from retail side because of increased inflation and probably change of demand and preferences on retail side, but also partially related to potential disruption in the supply chain.
I think this is probably the main two factors which we think having a high risk, even in the case when economy as a whole would continue to grow. I mean, at least figure-wise. In terms of exposure to Russia, I think we prepared a special slide on that so we can decompose that. As you probably know, we have subsidiary bank in Russia. It's rather small bank. It's outside top 100 banks. On the asset side, most of exposure is on retail and SME segment. It is mostly ruble exposure. And we just provided information in dollar terms just for convenience purposes.
It is partially funded by Halyk, which represents capital subordinated deposits and regular deposits, so it's roughly $150 million. We have some exposure directly from the balance sheet of Halyk Bank. It's to a couple of trades centers in Russia. Exposures are mostly in Russian ruble and partially in tenge. We also have some assets which belongs to our SPV, SPVs who working on the problem loans.
It's below $16 million. This is the total exposure. For some of them, we already created provisions, probably in this updated guidance on cost of risk. Lots of factors, some additional provisions, but I think given the size, it's probably not the main factor. Could you please, again, repeat your third question?
The third question was on margins. Given the increasing dollarization and also the higher interest rates across the industry, what kind of impact should we expect on your margins, net interest margin? Thank you.
Yeah. It's one of the biggest questions. I think, here we have to see how long and what the policy of the central bank would be vis-à-vis, the base rate. We saw that central bank reacted with increasing base rates to 13.5%. We saw similar reaction two years ago when the oil price collapsed in March 2020. A couple of years ago, we saw that central bank relatively quickly returns rates to lower levels. When we talk about net interest margin and the general credit margins, I think we have to see what the actions of the central bank would be.
I think they will be clearly reacting on external factors as well as internal factors in terms of inflation. If the rates would continue at current level, we think that for this year might have somewhat negative impact on margins simply because the liability would be repricing somewhat quicker than the asset side.
If situation will start normalizing by middle of this year and central bank would start reducing the rates, then probably this impact would be to low extent. I want to reiterate that we currently, I think, in the middle of unprecedented uncertain times, the whole world, the region and the country. I hope that you appreciate that it's difficult to provide more granular guidance at this point of time.
No, absolutely. If I may, just if I could take you back to the second question on your Russia exposure. Like, you mapped out that the exposure, especially from the subsidiary level, is quite small. Internally, there's been no decision for now to write off that exposure, right? Is my understanding correct?
No, we at this point of time see no reason to make any, let's say, write-offs. The bank is operating, and so these companies against which we have exposure is also operating. No one applied here for even making some delay in the repayments. We'll be watching. I think it will be nothing special compared to our normal policies.
We should look what the quality of the assets are, and then we need to see what the cash flows would be available to make repayments. When we talk about the direct exposure from Halyk Bank, all this exposure, including KZT 50 million and KZT 16 million, it's fully covered by assets. At this point of time, we see no reason to make some, let's say, extraordinary write-offs. Absolutely not.
Understood. Thank you very much.
The next question comes from Can Demir. Can, please go ahead.
Yes, good afternoon. Thank you very much for taking my question. On the one-off at the margin level before we move on to bigger questions. Does accelerated amortization mean that the client got the full interest before the deposit was due? Can you explain a bit more about the nature of this one-off? That's the first question.
The second question may be a follow-up on Roman's questions on the macro assumptions. You mentioned the inflation should be high in 2022, but what kind of range would you foresee for inflation? Maybe just to add a bit of context to the Russian-Ukrainian conflict or war. What does this exactly mean for Kazakhstan?
Meaning, we obviously see the economic link between these two countries, meaning Russia and Kazakhstan on a spreadsheet. But perhaps you could put some more anecdotal evidence or anecdotal context in terms of the hardships you see this time around. The fourth question is, I apologize that there are just too many questions on my end this time. On the positive side of things, can you open accounts for Russian citizens? And could you benefit from the potential capital outflow from Russia? That's all from me. Thank you very much.
Can, thank you for your questions. Just a moment, please.
Hello?
Just one please. Yeah. We
Yeah. Sorry.
We'll be back in a moment.
Yep.
Yeah. Can, thank you for waiting. In terms of deposit, let me explain that. There was a deposit which came from Kazkommertsbank, so it was inherited from Kazkommertsbank, and it was accounted with some discount. That deposit was used to repay one corporate problem loan in the fourth quarter. Because that deposit, it was a term deposit, and because it was prematurely accelerated, that created additional expense.
It's non-cash. That's why in our presentation, in the section of interest income, we specifically showing how our net interest margin would look like if this and a couple of more non-cash interest expenses would be excluded. I don't know whether I answer your question.
Well, I mean, I didn't really understand why it was discounted in the first place. I mean, if it's a liability, if you owe someone $100, then it's $100. I mean, why would you book it as a non-cash liability?
IFRS allows accounting for assets and liabilities not at nominal terms. When they price to market. Basically, if the deposit is provided not at prevailing market terms at the moment it was booked, it can be accounted with discount or with premium. It's according to IFRS.
Okay. Got it.
On the inflation side, we indeed see some pressure on inflation. Recent data from the National Bank is guiding that inflation is continuing to accelerate. It was standing above 8%. The central bank governor also, I think, in his recent speech was saying that they carefully watching inflation developments and see at what level inflation would be anchored.
They deliberately didn't increase the base rates during the most recent meeting because I think they don't have enough information at this point of time to make further calls on the base rate. I think we concur with that because it's a bit difficult in current environment because there's many moving parts and dependencies.
On one hand, there is historically high trade with Russia, but in the situation when Russia itself is closing borders, the appreciation of tenge might not necessarily lead to high inflation. At the same time, we understand that some clients actually working on their new supply chain and logistical issues because some purchases from Russia or through Russia would not be valid anymore. They're looking at alternative routes from Turkey through Georgia and Azerbaijan, through Caspian Sea. Some are looking at Chinese sources. All that moving parts might lead to some probably further inflationary pressure.
At that time, I think if it would be going too high, we think that National Bank might step in with some further action in order to try to curb the inflation. Again, I'm sorry, probably it's difficult to provide any particular figures at this point of time, but we think inflation might go further up before it would start going down this year.
Just to add context, we're probably not talking about 10%, 15% inflation. You know, if a worst case scenario happens, right, then we're talking about a major inflationary shock if
If it will be inflationary shock, we historically had similar cases in 2007. When there was a shock, particularly on the grain and the food. Inflation in one month went up to, I think, if I remember, to 17%, but that was short-lived. It will be, I think, short in terms of the time. The base rate, the base, the high base would start kicking in.
Okay.
In that case.
Understood.
In terms of the broader context, we talking to our clients, and so far, except probably for few clients, it seems like current situation is not materially affecting their businesses. They trying to find new routes. They trying to find, let's say, new markets in terms of the purchasing certain goods.
No one hinted that it's, let's say, something which might materially affect them, except probably for few clients for whom the let's say main market was Russia. Even in latter case, it's not the strategic issue per se, but simply the question of less favorable for them rate between tenge and Russian ruble because their product is becoming less competitive on the Russian market.
In terms of your question, where we see benefits, as Umut Shayakhmetova mentioned, for us, it's important that we adhering to all sanction restrictions. It's very important for us. I think not in the rush to open any accounts at this point of time to foreigners. But what we see, we see two trends. One is that we have subsidiaries of Russian banks in Kazakhstan, and we see some flow of the business.
It's a natural flow. Like, some of clients who have accounts with those banks, they actually increasing share of Halyk in their business. We see new accounts opened by new clients. We see that across the board. We see for large corporates. For large corporates, mostly, let's say, increasing share of wallet, because, in most cases, they have accounts with few banks.
We see also flow from SMEs and retail clients. That is probably the most trend which we see as the benefit. We also hearing that some companies actually shifting some stuff to Kazakhstan. We see some clients who have regional offices in Moscow. It can be actually international companies or regional companies. We're hearing that they're relocating people.
They're relocating some, let's say, regional services. These are clearly, I think, would be benefit. We're hearing that some IT companies, it can be bigger ones, can be also smaller ones, they also looking at relocations. I don't know whether it will be to large extent or to small extents. The more we see that probably the more the country, the more banking sector would benefit. At this point of time, it's not clear whether it's the bigger trend or it's more talks rather than the actual shift of the business.
Understood. This is extremely helpful. Thank you very much.
The next question comes from Simon Nellis. Simon, please go ahead.
Hi. Thanks very much. Can we go back to the dividend? Are there any regulatory restrictions that you expect on dividends from you? Yeah. I guess, you know, do you see longer term any required shifts in your dividend policy given what's been happening domestically and internationally? Thank you.
Yes, Simon. There is no regulatory restrictions on that side. I think that any decision would be our own decision. In terms of longer-term trends, so far, we are not revising our dividend policy. As usual, to reiterate, any dividend repayment is subject to few things on which we are typically looking. Again, we are looking at the prospect of the business because any growth of the business requires capital, for which, if we have opportunities to profit or allocate capital within the business, I think this should be accretive to our shareholders, and that portion of capital would be retained.
We're looking at risk side as well, whether starting from, let's say, general credit risk or simply risks of change in the rate because as you see, the big portion of our balance sheet is in U.S. dollars, so any weakening of tenge is naturally increasing risk-weighted assets, and that is also consuming capital. Thirdly, we look at general capitalization level because it's important to maintain a strong credit ratings. We reiterated multiple times that strong ratings are part of our business model because it allows us to continue showing the strength in the market and to attract funding at appropriate terms.
Okay. I mean, assuming that the currency stabilizes and assuming that you achieve your KZT 300 billion-KZT 350 billion tenge income targets, I guess, you know, would you assume that you'd go back to the 50% payout ratio? Is that something that you're still committed to?
If we will tick all boxes, then we see no reasons to withhold capital. I want to reiterate that last year, I think that was the showcase when we not only paid dividends last year, but also we decided to make buyback of shares, and that was for substantial amount as you remember. I think we clearly were showing that if we see that there is excess capital, we will not be sitting on that and we'll be distributing mostly through dividends, I think less likely through buyback because I also see some questions regarding the buyback. We see it's more likely through dividends rather than buybacks.
Okay. My other question would be on regulation. I think we've heard that the central bank is thinking about potentially lowering the rate cap on, for consumer lending. Are there any other initiatives that are kind of being considered? Also, I think there's a new personal bankruptcy law coming into effect at some point. Do you anticipate any impacts there? Yeah, just general comments on regulatory outlook, any changes.
For that question, I would ask our CRO, Almas Makhanov, to respond.
Yes. Hello, Simon. Indeed, there have been changes in the regulation to cap the rate, and the changes were made for collateralized loans. For uncollateralized loans, the cap remained the same. However, there has been ongoing discussion on tightening the regulation for retail loans, and one of them, one of the tightening will be for income calculation. We see that the regulator already tightened the income calculation requirements, and this might have impact on the segment of clients who do not have salaries or who do not have transactions on the card accounts with the bank.
In addition, as you mentioned, there is a current ongoing discussion on introducing personal bankruptcy, and this also might have impact because, as we see, the impact on other countries after the introduction of such law, some of the segments of clients behave more poorly than before the law is introduced. Two major impacts that we might see on retail Clients is a tightening of income regulation, income calculation regulation, and introduction of the new law.
You're not really hearing about any kind of implementation of a rate cap on consumer loans?
Oh, no. The rate cap already happened for the collateralized loans. Basically it's for mortgages, the rate cap has been decreased. For uncollateralized retail loans, the cap is still the same, so it didn't change.
Doesn't change. Okay.
The most changes will relate to tightening of income.
Understood
...requirements.
Very clear. Thank you. Thank you very much.
I think we have unanswered probably one question or a couple of questions which came through Q&A flow. One came from Odile Badekian. The question is the decline in net income year-over-year is mainly driven by higher cost of risk or is there any other factor for the decline? I would say that cost of risk is probably the main factor. There are a couple of more probably factors is increase in operating expenses. This is partially driven by high inflation, but also continuation of our investments into IT and ecosystem projects.
We continue hiring on this IT stuff while we are trying to be more shrewd in terms of overall operating expenses bank-wide, but also partially due to moderation of fees and commission income. That is on one hand more conservative approach going forward, but also we see a partial impact of January when we saw that the transactional activity was reduced due to January events.
Another question came from Jean-Baudouin de Lassus. The question is regarding capital ratio sensitivity to 10% 10-year depreciation against the USD. I can refer to our report, and there you can see sensitivity to currency risk, and we providing, let's say, higher volatility. We factored in 30% volatility of tenge versus U.S. dollars. The impact on equity would be roughly KZT 13.5 billion as a result of FX volatility.
The next question comes from Shahin Barvani. Shahin, please go ahead. Please unmute yourself, Shahin, and proceed.
Hi. Actually, it's Nick Padgett with Frontaura Capital. Thank you. My first question is, it's kind of a follow-up again on the dividend. Was there any point, if we go all the way back to the financial crisis and also look at the oil crash period and the flotation of the currency, 2014-2016, where the central bank did restrict dividends either to maintain capital buffers in the banking system or to help manage the decline in the currency, you know, not wanting to see $hundreds of millions potentially leave out of the country to go to foreign shareholders? That's my first question.
The second is, we have seen in other countries where the leading bank has had to, and I'm thinking of, Central Europe, where the leading bank has had to quickly acquire the assets of Russian subsidiary banks in those countries, such as Sberbank and VTB. My question is both on the impact of Russian banks in Kazakhstan on the health of the Kazakh banking system and, what's the likelihood that, Halyk would, for the national good, be, required to take over a Russian subsidiary bank within the country?
Then a third and final question would be on, the policy rate for the central bank. I know it's extremely hard to predict anything. I'm just looking for your best educated guess. I don't think anyone's gonna hold you to what you say given the times.
You know, right now they're running a quite positive real rate, 4.8% versus the last inflation print. Of course, you know, everyone expects inflation to go up from here. Do you think they would look to maintain a similar real rate to help keep the tenge from depreciating more? Or would you expect that real rate will just naturally decline due to higher inflation prints? Obviously over time it may decline, but I mean as long as the uncertainty is high, do you think they would look to move up the policy rate in line with inflation increases or not? Thank you.
Shahin, thank you very much. Very good questions. Let's go one by one. In terms of the dividend restrictions, in observable history, there was, I think, no cases when central bank, let's say, sector-wise or the governments, let's say, economy-wise, was making any decision which would be restricting dividend payments. There was one case in 2020 when the COVID situation started evolving.
Central bank issued a recommendation, which simply says that the banks, before making decision on dividend payment, has to, let's say, take a very calculated approach in terms of analyzing potential risks evolving from current situation to make sure that none of regulatory requirements and ratios are breached. It was a real recommendation, that was not a hard stop.
Again, to recap, we did pay dividend even in 2020, but we did it in the second half of the year. But that not because of that recommendation per se, but because simply we as the management thought that making decision in March when the whole situation started evolving, it was too premature, and so we didn't have enough information to assess what any implications of dividend payment decisions might be on the bank.
Regarding Russian banks, we also saw that in some countries there was indeed local banks taking over buying portfolios from Russian banks. As I told before, we currently see inflow of clients, and that is happening on the corporate, SME, and retail side. So we, I think, are in position to grow naturally.
We are not considering buying any Russian bank. We might look at some refinancing, but again, any, let's say, acquisition of clients would be done if we see, let's say, value added, for the bank. Regarding the policy rates, indeed currently, as you correctly said, the real rates probably standing around 4%. In their monetary policy, as far as I remember, central bank was saying that, they are aiming or targeting a real rate between 2% and 4%.
So from that perspective, I think they have still the buffer. Generally, looking at the current decision and the voice from the, central bank, we think that they would be acting very carefully. I do not expect that they will be making any, let's say, rash decisions with increasing rates, even if we start approaching, for certain reasons, 2% threshold, which I mentioned.
Just on the Russian banks, I understand you're not looking to do that, but as the leading bank, I presume there could be a situation where the central bank asked you to do something like that for the good of Kazakhstan. Am I wrong about that?
Well, we're a private bank, and I think we proved multiple times that all decisions by the bank is done in the best interest of shareholders, stakeholders of the bank. Starting from the case when the government offered us to buy BTA back in 2013, which the bank declined. BTA, by that time, was one of the largest banks in Kazakhstan. From that perspective, we are not considering any acquisitions at this point of time. Even if that request would be coming from any other party, we would be doing that only if we see a value added.
We do not see a value added at this point of time, because again, we see quite an inflow from clients at this point of time. From the bank's perspective, the natural growth, the natural acquisition of the client is our current priority.
Okay. Thanks a lot.
Probably to answer the final question which we received through our chat. What the base rate performance do we expect in 2022? What USD KZT exchange rate do you expect by year-end 2022? For budget purposes, we're not budgeting big difference from the level which we achieve at this point of time. It's close to 500 for the purpose of outlook. We see that at this point of time, it's a bit difficult to predict on the forex side because there are various factors which are affecting rate.
At this point of time, we think that some probably emotional pressure within the country simply because the players in Kazakhstan still trying to look at the cross rate tenge to Russian ruble. We would agree with the central bank, which says that given the current structural situation, there is no strong reasons that the historical cross rate of 5-6 is dead at this point of time.
That was voice of the central bank. From that perspective, we think that in their policy, they would not be strongly linking tenge to Russian ruble. That should reduce pressure on tenge going forward, provided that there'll be favorable commodity prices until year-end, and provided there is no distortion to export routes of our commodities, which is currently the case. If that situation would continue, we think that emotional parts would start fading out once we're moving through the year, and that should allow tenge not to depreciate further.
Dear ladies and gentlemen, it seems that there is no questions remaining. This completes our presentation. Thank you very much for participation. As usual, our IR team remains open for any further questions. Take care and goodbye.