Good day, welcome to the JSC Halyk Bank 12 month and fourth quarter 2019 results conference call. At this time, I would like to turn the conference over to Mira Kassenova. Ma'am, please go ahead.
Thank you. Good evening, ladies and gentlemen. Welcome to Halyk Bank conference call and presentation of financial results for 12 months and the fourth quarter of 2019. Participants to this call on Halyk Bank side are Mr. Umut Shayakhmetova, Chief Executive Officer of Halyk Bank; Ms. Aliya Karpykova, Deputy CEO, Chief Financial Officer; Mr. Murat Koshenov, Deputy CEO, Corporate Banking; Mr. Almas Makhanov, Chief Risk Officer; Mr. Viktor Skryl, Head of Strategic Office, International Activities; and myself, Mira Kassenova, Head of Financial Institutions and Investor Relations. Let me highlight key milestones of the past year, which demonstrated outstanding performance of Halyk Group. In March 2019, Halyk Group made early partial prepayment of the bank's Eurobond. In May, S&P Global Ratings upgraded the bank's standalone credit profile from BB- to BB.
Moreover, in May, the Central Bank of the Republic of Uzbekistan issued a license to a new subsidiary, Tengri Bank JSC, which started to operate in July. In June, the bank's dividend policy was revised in terms of dividends payout ratio range. In October, holding group, ALMEX, successfully completed secondary public offering, as a result of which the free float level increased from 16.2% to 26.2%, and the liquidity of GDRs has been improved significantly. In December, Fitch Ratings upgraded the rating of the bank from BB to BB+ with positive outlook. As recently announced, the bank has successfully passed the asset quality review conducted by the National Bank of Kazakhstan. Secondly, let me present Halyk Group's consolidated financial results.
Net income increased by 31.6% to KZT 334.5 billion for 12 months 2019 compared to KZT 254.2 billion for 12 months 2018, mainly due to net interest income growth in 12 months 2019. For 12 months 2018, the bank had higher loss from impairment of non-financial assets of KZT 27.3 billion compared to KZT 7.4 billion for 12 months 2019. In Q2 2018, there was the recognition of tax loss carry forward of KZT 43.3 billion by KTB due to the merger into Halyk Bank. At the year end 2019, the total assets increased by 3.1% versus year end 2018 and reached KZT 9.2 trillion. The structure was improved thanks to the increased share of high yielding loans to customers. Interest income increased by 4.1% to KZT 710.3 billion for 12 months 2019, compared to KZT 682 billion for 12 months 2018.
That was mainly driven by increase in average balances of interest earning assets by 9.8%. Interest expense for 12 months 2019 decreased by 6.4% compared to 12 months 2018, mainly due to continuous repricing of retail term deposits following the decrease of deposit interest rate cap by Kazakhstan Deposit Insurance Fund. As a result of increase in net interest income and due to increase in the share of placement of interest bearing liabilities into interest earning assets and improved asset structure, net interest margin increased to 5.3% per annum for 12 months 2019, compared to 5.1% per annum in 12 months 2018. The fee and commission income dynamics continued its positive trend in Q4 2019, increasing by 4.2% versus Q3 2019.
Fee and commission income for 12 months 2019 increased by 8.8% versus 12 months 2018 as a result of growing volumes of transactional banking, mainly in payment card iterations, as well as letters of credit and guarantees issued. Fee and commission expense increased by 40.1% compared to 12 months 2018, mainly due to increased number of transactions of other bank's cards in the acquiring network of the bank. Operating expenses for 12 months 2019, including loss from impairment of non-financial assets, increased by 3.6% per annum versus 12 months 2018, mainly due to increase in salaries and other employee benefits as a result of increase in the number of employees and indexation of salaries and other employee benefits from the 1st of March 2019.
Starting from the introduction of the new loyalty program in Q4 2018, the expenses related to the bonuses payable to the customers are included in operating expenses related to the advertisement. On the back of lower operating expenses and higher operating income for 12 months 2019 versus 12 months 2018, the bank's cost to income ratio decreased to 26% compared to 31.7% for 12 months 2018. On the balance sheet compared with the year end, loans to customers increased by 6.9% on a gross basis and 7.8% on a net basis. The increased gross loan portfolio in 2019 was attributable to increase in corporate loans, 5.9% on a gross basis increase in SME loans, 9.4% on a gross basis, and increase in retail loans 7.9% on a gross basis.
The stage one gross loans grew by 11.8% from the beginning of the year, while the stage two and stage three gross loans decreased by 9.2%. Halyk Bank's 90-day NPL ratio has significantly decreased to 6.9% from 8.2% at the end of Q3 2019. The provision rate decreased to 9.8%, and the 90-day NPL coverage ratio increased to 145.2%. Cost of risk of loans to customers for 12 months 2019 was at 0.7%, a more normalized level compared to 0.5% for 12 months 2018, which was mainly due to repayment of a large ticket impaired corporate loan and transfer of few problem corporate loans to subsidiary SPVs in Q4 2018. The effective and successful problem loans workout measures taken by the bank during the past year resulted in significant improvement of asset quality, decreasing the stage three ratio to 16% from 19.6% at the end of 2018.
On this slide, we're additionally showing how well the workout of problem loans collateral was done by the bank SPVs during 12 months 2019. On the next slide, we're showing the results of the recently completed AQR by the National Bank. As expected, the AQR results of the bank did not affect its financial condition and stability. According to the National Bank, the adjustment of the value of the bank's assets and capital as of the 1st of April 2019 could be equal to KZT 18.9 billion. This assessment does not take into account changes in the market environment and changes to the bank's portfolio that occurred since the AQR check date. Currently, a plan of corrective measurements regarding the recommendations received following the AQR is being agreed with the National Bank.
The bank further does not expect any impact of the AQR results on its financial condition and stability. Compared to the year end 2018, the deposits of legal entities increased by 0.8%. The deposits of individuals decreased by 4.3%, mainly due to partial withdrawal of funds by the bank's customers to finance their ongoing needs and transfer of a part of FX retail deposits into USD-denominated bonds placed at Astana International Exchange. At the end of 2019, the share of corporate KZT deposits in total corporate deposits was 49.4% compared to 49.6% at the end of Q3 2018. The share of retail KZT deposits in total retail deposits was 43.7% compared to 42.2%. Compared with the year end 2018, total equity increased by 22.7% as a result of net profit earned by the bank during 12 months 2019. The bank continues to maintain very high capital adequacy ratios.
Based on our 2019 financial results, we have provided the forecast for financial year 2020. Net loan portfolio is expected to grow by more than 10%. Consolidated net income is to be in the area of 350 billion tenge. Cost of risk will be around 0.7%. Cost to income ratio is to be below 30%. Net interest margin is expected to be in the area of 5%. Return on average equity is to be more than 25%. On slide 18, we are highlighting the main banking regulation developments from January 2020. The next slide is showing our developed unique customer-centric ecosystem for retail and corporate clients. On the following slide, we are highlighting our selected strategic initiatives for 2020 in digital space, such as ecosystem, online lending, payments, internal digitalization, and switch to digital. We continue to improve the functionality of online banking and enhance our digital product proposition.
This completes our presentation. We would like to open the floor for your questions, please. Thank you.
Thank you, ma'am. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. Our first question will come from Elena Tsareva with BCS Global Markets.
Good afternoon. Thank you for presentation. I would like to ask several questions. First question is about voting results of bond holders on the proposal you did in March. As I remember, today should be, or even yesterday, the results should be announced. If you could give any color on how this proposal was voted. This is my first question.
Yes. Hello, Elena. Yes, indeed. Yesterday we made the announcement that on both Eurobond issues, we have quorum and enough votes to declare that the vote was in favor of amendments.
Yeah. Thank you. Thank you very much. My second question is mostly your current expectations, given all the macro volatility and oil price shock, and if it is really damaged now your expectations on new payouts of range of 50-100, I mean, dividend payout range for 2019? If new inputs really affect negatively your previous expectations or understanding?
Yeah. Thank you for your question. Probably first I will talk about the current situation of how we assess them. Actually, this is not the first time in recent years when the country and the bank was facing with a sharp decrease in oil prices.
At least we can remind the year 2009, then we can remind 2015. This is actually not the first time we are in more or less the same situation in terms as if the oil price is concerned. What we have to say that in current situation, actually, the bank is coming with much more stronger position than it was in previous years given our capitalization, given the fact that we already make a lot of cleanup in terms of bad loans, which we had both from Halyk Bank itself and those which came from KKB. The country itself, I think, due to the problems which the country experienced in 2015, 2016, with sharp devaluation, actually, we didn't have cases now where we can say that there are bubbles. For example, the prices on real estate are at right level.
The currency has been continuous. Thank you very much for detailed explanations, analysis. Another question is about fee performance. Last year was a bit on the mild side. If you just give some color what you expect for this year on fee and commission? Yes, actually, the soft results on fees and commissions which you're referring to was kind of the function of a few things. One thing we have, let's say, development of the card business fee. There is a second story with regards to situation which is caused by the fact that Halyk Bank acquired KKB, and that to a certain extent affected our fees because as we mentioned a few times before, the external payments of customers between Halyk and KKB they became transaction within the bank. Basically, we have to set zero fees for these kinds of payments.
Secondly, we had some overlap in terms of the customers. When we had customers who were both customers of Halyk and KKB, we needed to unify fee structure. In most cases, we were taking the fees which was the lowest for the customer of two banks. Now, for that type of fees, actually, we reached probably the base. It's better to see how the 2020 would be compared to 2019, which as that would be considered as a base. On the card business, yes, because of situation when we were in the process of merger with KKB, we actually, had for technological reasons, freeze our IT developments on that side. That was actually in the situation when there was a big dynamic in terms of increase of non-cash payments in the country.
After we completed the merger and we unfreeze our IT development, we start quickly to catch up with our product developments. To name the few, we actually launched Apple Pay being the first bank. This year, we were the first bank which launched Samsung Pay. After that, we using our own platform for mobile banking called Homebank, we launched the Homebank Pay, actually opening the contactless payments by using the smartphone on the Android platform. We introduced new loyalty program in the end of last year. We expect these initiatives and further work which we continue to do on the product development would eventually benefit our fees and commission business. Normally, it might take some time before we start seeing, let's say, better dynamics on this line.
Thank you very much. Just maybe another question, if I may. Just in the current share price severe declines, we see some companies announcing buyback to support share price levels. As I understand, one of the paragraphs of their proposal to note holders was also about conducting buybacks. If you just can share your views, even especially given that capital ratios are quite comfortable on Halyk. If you could share your views on buyback to be supportive and if you may consider such initiative.
Elena, we at this point of time do not have plans as the bank to make any buybacks of shares.
Understood. Thank you. That's it from me.
Thank you once again. If you'd like to ask a question, please press star one. Our next question comes from Andrei Mikhailov with Sova Capital.
Hello. Thank you very much for the call. I have a wide range of questions. I'll be asking them one by one. I'll start with the one on the local bondholder meeting, which you disclosed in the very last paragraph of your FY 2019 IFRS report. It's scheduled for March 18th, as I understand. My question is, do you need the consent of the 10-year bondholders to finally approve the recent changes in your dividend policy?
Yes, we have local bonds, in which there is a similar covenant introduced. Yes, there is a separate process for that. Basically, let's say procedure is more or less the same as we went through with dollar Eurobonds. We will make announcements on the results once we have them.
Thank you very much. That's clear. Thank you for this. My second question is on the current market and oil shocks. I think there are two lines, two trends that could impact you. First of all, your loan book may become riskier, and you may have to charge more in provisions. At the same time, as the economy slows down, maybe your plans for loan growth will also moderate. What do you think will be the total impact on your capital? Would you need more or less capital because of the current event?
Yes, Andrei. Thank you for the question. Yes, we actually have different stress tests, which we on a regular basis run as the bank. Yeah, under the stress scenario, we think that cost of risk should definitely increase. We might expect that the growth of our credit portfolio might also slow down, which might affect the profitability which we would expect in the, let's say, base case scenario. We do not expect that it will affect the capitalization ratios, because under even stress scenario, we expect the positive results for the bank.
Thank you very much for this. On sensitivity, you also disclosed a lot in your report, the sensitivity to the changes in exchange rates and the sensitivity to changes in interest rates. What I would like to ask you is, in what you disclosed, there is a sensitivity exercise where interest rates on both KZT and say, dollars, go up or simultaneously go down. What is the bank sensitivity to the current scenario where the KZT rates have gone up by three percentage points, as I understand, and the dollar rates have fallen, may keep falling. What would be the impact on your capital in the current scenario for the KZT rates, but if the dollar rates fall further, say by 25 or 50 basis points from the current level? Thank you.
Thank you, Andrei, for this question. We are not disclosing other sensitivity except the one which we showed in our report. To give you some guidance you might see at the situation during 2015 and 2016 when there was a real shock in terms of the increase in the rates because when National Bank of Kazakhstan made tenge free floats, the rates on the money market in Kazakhstan increased from a level of 6%-7% to above 20%, and that was for the period of two to three months, until the National Bank of Kazakhstan introduced the base rate, which was initially set at 17%, and then slightly going down within the year to the level of 13%-14%.
We, at this point of time, while we can see that this increase is sharp, it's not as sharp as we had the banking sector experienced a few years ago. Even in that sharp scenario which I'm referring to, the impact on NIM was between 50 to 100 basis points for a couple of quarters, and then starts to normalize to the level which we are seeing in more recent period of time. To summarize, we might expect some impact on NIM, but we do not consider it as a sharp effect on NIM. Probably we are talking about 0.2, 0.3 percentage points, but not at higher scale.
Thank you very much for this analogy. May I just follow up on this? There is also an effect on your bond portfolio as you have both 10-year bonds in your book and dollar bonds in your book. What do you think the effect on the bond portfolio revaluation could be?
Yeah. On 10-year bonds, it will be, let's say, the negative impact. On USD, it will be the positive impact. On that basis, it will be slightly more than KZT 10 billion per year. The negative effect.
10 billion negative. Yeah. As far as I understand.
That would be a negative. Thank you very much. That's very detailed and a very good analogy. Actually, my final question is a bit technical. This other non-interest income line increased again in Q4 in 2019. Could you please explain what drove it? Maybe just go through the constituents of this line. Thank you.
Just a moment, please. Your question is about the other income line?
Yeah. Yes, exactly.
Actually, the main impact was the profits from assets, which were sold by our SPVs, which actually to remind, they are holding the problem assets, which was foreclosed by the bank, and they were sitting at the balance sheet of these SPVs. The main task of them is to work out these assets. A few assets have been successfully being worked out, and the sale to external parties has been completed with a profit to the bank.
Thank you very much. Thank you. That is all from me.
Thank you. Our next question will come from Andrew Keeley with Roth Capital.
Good afternoon. I have a few questions. Some have been answered, but some follow-ups. In terms of your expectations of the impact of the asset quality review, you mentioned in your presentation that the roughly 40 basis points impact doesn't take into account any changes in the kind of affected portfolio since April 2019. Given that we're nearly a year down the road from there, can you make any additional comments as to whether you expect that this impact will be around this 40 basis points, or do you think given the changes made in collateral, et cetera, it would be lower? I'll ask another question afterwards. Thank you.
Yes. Actually, the result of AQR, which was published by the National Bank February this year, is actually a reflection of the bank's portfolio as of April last year. Actually, since then, the bank will continue to work with its problem in payment assets, and AQR results are not taking into account this fact. Secondly, the bank was on a regular basis were assessing the right level of provisions against these assets. Actually, if you take into account the fact that bank was working on the repayments, the bank made some adjustment to the provisions. All these measures have been taken by the bank during the year 2019. The results which we are publishing for the full year 2019 already taking into account all these actions.
That's why we are saying that we do not believe that the AQR results would have further effects on the financial results of the bank.
Okay. All right. Okay. That's very helpful. Thank you. Second question is just generally on the operating environment within this kind of current oil price level. In the past, in Kazakhstan, there's been problems when you've had sharp plunges in the oil price, and the currency has moved in terms of unhedged kind of FX lending exposure. I'm just wondering whether you can just give any comments now as to whether you see that as a risk anymore. You have 30% of your loan book also in FX, or that really isn't something we should consider a risk in this environment. Thank you.
The level of dollar portfolio in Kazakhstan in our book is probably the lowest which we've had in history because you can recall to the dollarization of our portfolio in previous periods, it was like, for example, before 2015 oil price decrease, it was at the level of roughly 35%. Actually, now it's at the level of 28%, despite the fact that tenge actually devalued twice since that time. Actually, if you would be taking constant FX rates, the portion would be even lower. That's why I was saying that from loan portfolio, while we reasonably should expect deterioration of the asset quality, our portfolio is much more robust than we had in, let's say, previous similar situations when the oil price had experienced such a sharp reduction.
Okay, thanks very much for that. Just you mentioned on the kind of bond impact of the rates changes on the bond portfolio, and you mentioned, I think a kind of negative KZT 10 billion or so, revaluation impact. Is that number kind of included in your KZT 350 billion earnings forecast?
Yes. There are, let's say, two things here, Andrew. Thing number one, this impact on the bond portfolio is not going through P&L. It's actually the comprehensive income. It should be affecting the capital directly. Number two, the guidance which are showing to you today, is actually based primarily on our budgeted results. It's not, let's say, a reflection of the current situation. We actually evaluating and following the developments, at this point of time, it's a bit difficult to assess whether the current shock scenario would have a very, let's say, a relatively short-term impact or it will be more kind of longer term situation and longer term environment.
Okay. Yeah, sorry. Yeah, of course, that makes sense on the bond evaluation. Apologies for that. I guess the final question is just clarifying the kind of margin impact of the NBK's rate hike. Am I right in thinking you're saying that it basically has a kind of over the maybe near term next quarter or two, you would say it has a kind of 20-30 basis points negative impact on your margins. Is that right?
Yes. It's kind of not the hard assessment. It's kind of the, if we judging from the previous experiences when we had two large scale. Take it not as, let's say, the hard guidance, but the more kind of the directional or the scaled type of assessment. Because as we previously mentioned that typically our balance sheet tends to adapt to any changes upward or downward in the interest rates. Like in current environment, we see the increased rates actually might impact the short-term corporate deposits when the customers would be asking for higher rates on deposits. At the same time, we have a substantial part of our portfolio in uncommitted working capital facilities where we already also setting rates higher. There might be some timing difference, which might reflect in some fluctuation of NIM in the probably scale which I mentioned.
Our NIM tends to normalize once the both sides of balance sheet are adapting to new interest rate environment.
Okay. Thank you. Have you made changes to your retail deposit rates?
Very marginal.
Okay. All right. Thanks very much for that.
Thank you. Again, as a final reminder, please press star one now if you would like to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal. Again, that is star one if you would like to ask a question. We do have a final question from Tunde Ojo with Harding.
Hi. Thank you for the presentation. To follow up on the bond proposal amendment. I want to get clarity on that, because I was of the view before that it was just the Eurobond approval that you need, but it sounds from your answer to previous caller's question that there's also a local bond that you need to get approval for. If you don't mind walking me through when you think that process is going to end, and if you have any other bond at all that you also still need to get approval for before you can actually pay above 50% dividend payout. Thanks.
Yes, Tunde. Hello. Thank you for your question. Actually, the results would be available on March 18th, and this is the only decision which we're waiting for. There is no more instruments on which there are similar kind of covenants.
Got it. Thanks. Thank you. A follow-up from me is on the banking regulation regarding unsecured consumer loan, where there's a restriction on that. I know you've talked in the past that you don't think it's going to be a big issue for you. Is that still the case? If so, just looking at your guidance where you're giving over 10% loan growth, are you looking at more corporate or retail or SME to drive that growth? If you can please just maybe talk a little bit about the segments you're thinking about driving that growth. I know you said this guidance was before this whole macro disturbances, but just how you're thinking about that even before any sort of macro imbalance would be helpful. Thank you.
Yes. According to our assessment, we still believe that the impact on us would be more neutral in terms of the new regulation on the retail loans. With regards to different segments where we seeing the growth, we expect, or we budgeted the growth in all segments in large corporate SMEs and retail. The larger growth was set in SME business, followed by retail, and the lowest level of growth we expect in large corporate segment.
Okay. Great. Just finally for me is on your cost of risk guidance, which is at about 70 basis points, which is sort of the same as last year. Given past episodes of the crisis, would you now expect that to be much higher than that, say towards the 1% range, or would you still be confident given the quality of your portfolio today that you could achieve that even in this oil price scenario? Just trying to get your thoughts on that. Thanks.
Yes. The figure which we are showing today is based on the budget which was drafted in the end of the last year. With regards to whether that guidance would need further corrections or not, in our opinion, it pretty much depends on how long and how deep the current shock scenario would remain. If we would be in situation that the oil price would quickly reverse back, then potentially there will be no need for revision. If we stay in a longer stress scenario, and in scenario when the oil prices will stay at current level for longer, for few months, the tenge and Russian ruble would need to further devalue.
If you adhere the current coronavirus situation, which might potentially impact certain industries, impact travel and the delivery of goods, then obviously we would need to sit down and see how it might impact the credit portfolio. Probably it's a bit premature to say what our further guidance would be. We need to have more assessment of current situation.
Okay, great. Thank you very much.
Thank you. We have a next question from Simon Nellis with Citibank.
Hi. Thanks for the call. Actually, most of my questions have been answered. Just on the macroprudential regulation for consumer loans. You said it's neutral. I guess that's neutral to earnings. How much of your portfolio, if the rules applied to it today, would have a risk rate above 150%? What would be the rough impacts on the capital ratio? That would be my first question. Just maybe a follow-up question on asset quality. I'm actually looking at page 59 of your financials, and you have a breakdown of the portfolio. I guess, which sectors do you think are most at risk from both the oil price correction and the general coronavirus slowdown issues? That would be helpful. I realize it's early days, but if you can elaborate, that would be useful. Thanks.
Yes. Probably I will start from your second question. If we talk about the purely impact of lower oil prices, then obviously you would look at the oil and gas segments. There are certain services sectors which are servicing particular oil and gas segment. It is not all under services, but some fraction of that. If you talk about the, let's say, situation when the coronavirus pandemic might further restrict transportation and move of people, then probably you have to look at the hotel industry, the transportation segments. I think this would be all the same for other countries of a similar size. Not the same, which would, having the similar type of situations.
Just on the services sector, because it's 14% of your portfolio. Roughly, what fraction is serving the oil and gas sector, would you say, roughly?
I cannot tell you by heart, but this is something one-fifth probably, or potential one quarter.
Okay.
Could you please repeat your question on the potential regulation?
Yeah. If the macroprudential regulation had applied to existing consumer loans, what would the impact have been on your capital ratio? How much of your existing consumer loans would have a risk rate well above or above 150% now, if it applied retrospectively?
Cannot probably give you the exact figures on risk-weighted assets. As far our risk management team was calculating, we didn't see any material change to the risk weighting of our consumer portfolio.
Basically, you won't have to change much your underwriting approach.
Yes.
Okay.
We haven't seen that change as having material impact on our risk-weighted assets and capitalization ratios as a result.
Just last, maybe you can just briefly comment on how business is going right today. Have you seen any initial impacts from the global events, or is business kind of carrying on as usual?
What we have seen, probably we start seeing some impact on coronavirus. Not too much on the, let's say, oil price decrease or tenge correction because I think it's just the situation of recent days or weeks. With regards to coronavirus, we see some, let's say, at this point of time, sporadic impact when there was some SMEs customers back in February saying that they were facing with delay of equipment which were purchasing from China. Most recently, we saw that transportation has been restricted. Airline transportation has been restricted. We saw that certain restrictions was imposed on people gathering, like in, for example, cinemas. Yeah, we keep looking at the situations. At this point of time, we do not see as, let's say, a systemic thing or having, let's say, a material impact.
We have some individual cases of the customers which are asking the bank at this point of time to, let's say, change the schedule of payments, let's say, for one month because of current situation.
Okay. Thanks very much.
Thank you. Our next question comes from Andrei Mikhailov with Sova Capital.
Thank you very much. I have a follow-up question on the meeting of the local, of the tenge bondholders. Is there any consent fee offered to the tenge bondholders? Thank you.
We are not disclosing that to outside the, let's say, bondholders which are concerned.
Thank you. I appreciate that. Thank you.
Thank you. At this time, I am showing no further questions in the queue. I will now turn it back over to management for closing remarks.
Ladies and gentlemen, thank you very much for participating in our call today. As usual, our IR team is open for any further questions. Thank you very much. Bye.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.