Good morning, everyone, and thank you for joining us for the Capital Markets Day today. And I'm really happy to present to you our latest results and give you some update on the our midterm targets. With me today, we have Murat Kasenov, who is Deputy CEO responsible for Corporate Banking and International Activities. Viktor Skrill, Head of our Strategy Corporate Banking, Head of our Strategy Office, as well as Mira Kasenova, she is the Head of FI and IR. And as you know, since acquisition of KKB, we have received multiple questions from various investors and analysts about the bank and its future.
So we decided to organize this dedicated Capital Markets Day and show you what is the bank today, and how we see HALIC developing in the future, and also answer your questions at the end of the presentation. We would like also to take this opportunity and start the presentation. So, go for the slide number six. And you can see on this slide that Halik is really the backbone of the Kazakhstan's financial system. We are really, by far, the largest bank by total assets, loans, and deposits, as well as many other metrics you can think of.
We are more than twice the size of our closest competitor. We have unrivaled customer reach, as you see on the slide, with the six forty five sales outlets, 8,000,000 of payment cards with total population in Kazakhstan of around 18,000,000, two and eighty five thousand of SME clients, and 71,000 of post terminals. We have the highest credit rating among the banks in Kazakhstan. And I am referring to the locally owned banks, and we are only two notches below Kazakhstan's sovereign rating. We are also a leading digital franchise servicing 3.6 retail clients and 168,000 of corporate clients online.
On slide number seven, this is about our history. And as you know, Haluk Bank is today almost 96 years old financial institution. It was founded in 1923, and we are listed on the Kazakhstan Stock Exchange from 1998. And we first accessed the global market in 02/2004, having placed our first Eurobond. Also, this year, we acquired our two subsidiaries in Russia and Kyrgyzstan.
Then we were listed in London Stock Exchange in 02/2006, and still remain listed there. Another moment in our history was acquisition of KKB in 2017. As you know, we will explain a little bit later on all the details of this transaction. Prior to that, in 2014, we acquired HSBC the bank from HSBC. It was the local subsidiary, 100 owned bank by HSBC.
And then in 2017, we sold 60% of the shares in Altium Bank, which was renamed from HSBC to China Citibank. And now we have this joint venture with Citibank where we hold 40% of the shares, and 60% belongs to China Citibank. Maybe also you remember that we were offered in 2013 to acquire BTA, and we've done the full due diligence of that bank, and then we refused to purchase BTA in 2013. Also, on this slide, you can see some selected internationally recognized awards of the bank. If we go to slide number nine, where we are presenting with our key investment highlights.
In essence, why we believe Howard Bank represents a unique investment opportunity to consider. We are operating in a large and growing economy with banking sector that currently is still under penetrated when comparing to other economies. So we think there is still potential for growth. Halik is a domestic champion enjoying number one position across all the key market segments with large margin in market shares to its competitors. Howard Bank is a proxy for Kazakhstan as we represent the economy, and we have the largest client base in the country servicing the retail customers, SMEs, large corporates, as well as government entities and government itself.
We have actually extensive client reach with at least one person from every family is dealing with Halic Bank. It's either the student, or pensioner, or the salary payment customer, or just having the worker of one of our corporate clients. We serve our customers via the largest distribution network in the country with more than 600 branches, more than 4,000 ATMs, and more than 71,000 of cost terminals. We also continuously invest in and develop our digital proposition for both of our retail and corporate customers. Halig also has a very strong profitability track record.
We have managed to generate and grow our bottom line from year to year at times of economic growth and also economic slowdown, and at the same time, being able to control our asset quality. We have a solid capital position with one of the highest Tier one ratios in Kazakhstan and broader banking space that has allowed us to provide attractive capital returns to our shareholders. Last but not least, we have high corporate governance standards. We have been listed on London Stock Exchange since 02/2006, and we have followed UK corporate governance code to develop our own internal corporate governance principles. We have largely independent board with five out of seven directors being independent, including also the chairman, as well as having two foreigners on the Board representing our minority investors.
Key management of the bank have been with HALIC for many years, already successfully steering the bank through times of economic growth as well as headwinds. With this, I would like to invite Murat Kasenov to give further background on each of these strengths.
Hello, everyone. Thanks for joining Markets Day today, and thanks for those who were able to dial in. So I will first try to go through I will go through the key investment case areas in more detail. On the Slide 10, we are showing that we, as Alex Blanche, operate in large and growing economy. And we actually the second largest economy in CIS, and the largest one which is not under sanctioned.
The growth rate during the last couple of years in Kazakhstan was above 4%, and it is expected that Real GDP growth will remain at the level around 4% in the next three to five years. The country is also benefiting from higher GDP per capita in sales after Russia. The population is growing. And you know that since independence, the Kazakhstan took independence, there were some slides in the population because of immigration. But since then, the population of country was steadily growing.
And you see that overall population and population of working age is growing and continued to grow at roughly 9% from 2016 to 2024. Also, the annual real growth rate per capita is also increasing, and it is expected that during the same period of time from 2016 to 2023, the average growth rate of real wages would be at the level of 9%. Kazakhstan historically were very active in attracting foreign direct investments to the country. And it remains the case during the last four years, cumulative average growth rate of FDIs in Kazakhstan was set at the level of 16%. While economy has reported healthy growth recently, the banking sector went through some structural changes during the last few years.
On this slide, you see that loan and assets of the banking sector have reduced during last three years, and that was mainly a result of cleanup of the sector when some of the banks saw their license revoked as part of this process. But we will talk about that a bit later. But if you add up the clean up amount, so still the loan growth, net deposit growth of the banking sector remains to be in place. With that changes which the banking sector is undergoing, the level of banking sector penetration has reduced to the area of 20, if we talk about the loans of the banking sector to GDP. So we think that the sector has been deleveraged substantially and that creates the opportunity for the banking sector to grow in the coming years.
Halib Bank is a domestic banking champion in any dimensional metric. And there is also substantial gap to the second player on most of these metrics. We dominate the market with 30 from 30% to 50% of market share on the metrics, which you can see on the slide as well. And there's substantial gap, as I said, to the second competitor, like on the total assets, we have more than four times higher market share than our second competitor. With regards to net income, it's wise.
But with share in assets and loans at the level of 30% to 35%, we enjoy close to 40% market share in terms of net profit. Now, if we talk about the regional perspective, you can see that on the next slide. If we took only private commercial banks from CIS, we have number three positions in terms of total assets, and we have number two positions in terms of customer deposits and net income. But even if you add to the comparison the state owned banks, then we still enjoy strong positions. Number nine in terms of the assets, number six in terms of total deposits, and probably what is more important, we enjoy number four position in terms of net profits amongst the banks, including the state owned.
We maintain the largest branch network in the country, which help us to serve the largest client base. Our branch network has more than three times coverage to our next competitor. And what is important that if you take the next four banks after us, we still have a number of branches which are higher than these four banks on combined basis. And here, just to note, Kusan Bank is previously known as TESNA Bank, so they went through rebranding recently. And in the economy where we have around 9,000,000 economically active customers, we have more than 8,000,000 clients with payment cards.
So it gives the depth of our penetration in the the economy and among the private individuals in Kazakhstan. You know that digital proposition is became important not only on a global scale in Kazakhstan, also digital proposition is developing very fast economy wise, as well as banking sector wise. And with Khalid Bank also prepared to benefit from further digital stabilization of the sector. On this slide, you can see our few areas where we were developing recently, like on Apple Pay. Apple Pay in Kazakhstan was launched in November 2018 ahead of Germany.
At this point of time, more than 70,000 customers of Calib Bank is using Apple Pay, and the payments in the quarter is above 1,000,000. It's low level at this point of time, but we see the strong growth and potential in that area. We were also the first bank and at this point of time, we remain the only bank which launched QR code payments, which makes payments even easier. Like, our customers can make a payment through QR code in some of public transportation companies in different cities. We actively use promoting P2P payments, and we expect to launch online lending platform in May.
Actually, we have some test launch few days ago. And if we talk about the online banking proposition, we have two platforms. Both of them came as a part of our position of KTB. Home bank is devoted for retail customers and have roughly 3,600,000 users at the end of the first quarter. And online bank is a devoted online platform for corporate banking customers, and we have roughly 170,000 users at the end of the third quarter.
And in order to further make a better proposition to our customers, we have some exclusive agreements like with booking.com, which is 7% cashback. We have agreements with Agoda, rental car. Now we can talk about how this translated into the our profitability. If we look at the margins and net interest income, our net interest income has increased almost three times, partly due to organic growth and partly due to acquisition of ETB. At the same time, net interest margin remains in the healthy area between 56%.
Here, you can see also comparison with our competitors from a margin perspective. Here, we are putting the risk adjusted net interest margin. As well, you can see the mix of the businesses. So we see that Halit Bank is enjoying the mix of the businesses, unlike some of competitors, which are focusing on certain products only, basically are monolineers. At the same time, due to our conservative approach, our risk adjusted margin is the highest in the sector according to our estimates.
We also traditionally are having very good operating efficiency if we measure that by the cost to income ratio. And during all this period of time, our cost to income ratio was located between 38 to 32%. And this is below the levels which our peers are showing. And also in terms of return on equity, we also have a much better position, actually the best position in the country among the top banks. Now, let's see to put our performance profitability into perspective on the regional scale.
So we are putting on this graph comparison with Eastern European banks, VTS banks, Kazakh banks, Western European banks. So clearly, you see that in terms of both cost to income ratio as well as return on equity, we are showing better results. And we are not managed to show that last year, but we are putting here calculations on five years average basis. So we have been quite consistent here. Interesting to note that if we comparing ourselves versus the Western European banks, our cost to income ratio is roughly twice less than our Western European peers, while return on equity is three times higher.
This slide also demonstrates some of our performances on which we can be proud of. Our net income during the last nine years, and it also includes some challenging periods like 2015 and 2016. Our net income grew sevenfold during this period of time. At the same time, total assets grew roughly by 4%. So on a lower growth of the assets, we managed to grow our net income at higher speeds.
Also, you see how our market share has grown. So on metrics in terms of net loans, total deposits, total assets, our market share improved from 13 to 18 percentage points. We on next slide, we see the asset quality, which is one of our priority. Here, you can see that during 2018, we managed to bring net NPL ninety days plus ratio to lower level than it was before acquisition of KKB. In 2017, there was some increase in NPL due to acquisition of KKB, actually.
And we are running quite prudent coverage of NPLs, which are standing above 100%. The cost of risk is also at normalized level. There was only one spike in 2017, again, due to some additional provisions which were required as a part of the KKB acquisition. Our funding base remains solid and conservative, and deposits consist above 80% of non equity funding. And because we have ample liquidity, the net loan to deposit ratio is quite low level, and it's reduced even further post acquisition of HEKB and currently stands roughly 53%.
And liquid assets can suit close to half of our And this is important aspect. We'll talk about that later. Again, on the next slide, we are showing comparison with the regional peers. At this slide, we want to compare how return on equity and capital ratio is presented.
So here, you see that our return on equity is the strongest among peer banks, despite the fact that our Tier one capital ratio is also one on the strongest. So if you put the capital level to the same level, then probably our return on equity would be even at higher level. Moving to the next slide, we have had a very strong organic capital generation level with our return on average on average assets reaching 4% to 5% over the last five years. And the result, we have quite healthy capital buffer, which allows us to think about returning it to shareholders. But also during this period of time, we are profitably deploying some of the of the capital.
We also want to show our dividend distribution history. In 2011, we introduced a dividend payment policy. And since then, we were consistently paying out dividend to shareholders, gradually increasing the dividend payout ratio from the level of 17%, 18% in 2011 and 2012 to 40% to 50% in 2017 and 2018. There are only two years when we hold the dividend payout ratio in 2015 due to sharp devaluation of ten year, sharp reduction of oil prices. That was mostly a precautionary measure from from the bank.
And in 02/2016, the payment was not the payment was halted because we were already in talks with Kikibi to acquire that bank. But once the acquisition has been completed and the capital level remains at high level in 2017, we again resumed to make paying dividends. Obviously, for us, the next step would be to decide and to think what we want to do further with dividend distribution policy, and we can talk about that later. On next couple of slides, we are talking about the corporate governance model. We think that it's based on the international standards.
We while The UK corporate governance code is not directly applied to public bank, we still base our corporate government code, which is which is linked to that. And you know that according to World Bank, it measures the doing the business index, and Kazakhstan has the highest protecting minority investor score among among all the countries, which which is assessed. We also have all necessary committees, which is working under the board of directors. And this here, you see also the combination of the board of directors. We have seven board directors, including CEO and shareholder representative, and we have five independent directors, including the chairman.
And all directors have enough experience in banking sector, international banking, in economy wise. I also want to highlight that recently, Anton Mussin joined the board of directors as independent director, and he is a managing partner of Accenture. So we think that he would add value in terms of banks ambition in terms of developing digital digitalization. And also have best in class corporate governance. It's not also only covering how the bot is working, but also we put a lot of attention in terms of operation of our internal audit department.
It's work according to the International Professional Standards. And in September 2017, the bank received a certificate from PWC, which confirms that the activities of internal audit department of Khalid Bank is in compliance with international professional standards on internal audit and the code of ethics. Beneath board of directors, there is experienced and stable management team. Most of management board members have bank experience from fifteen to twenty years. They have long term experience with the League Bank.
It's quite stable. Most of the board members have experience from international banks like ABN AMRA, Citibank, RBS Bank. Couple of people, they joined the team from
have experience working with KTB as well.
And finally, to finally, in terms of the investment highlights, on the next slide, we present aggregate results of the public bank during all these periods of time since the 2018. And you can see that the economy went through quite a challenging period, like in 02/2008, 02/2009, aftermath of the global economic crisis and twenty fifteen, twenty sixteen. We slowed down due to collapse of oil with sharp devaluation of tingue and introduction of sanctions against Russia. Despite different cycles of economy, we still managed to show the average return on equity at the level close to 19% on the aggregate basis during this period of time. We have never recorded during this period of time the yield of losses.
The lowest return on equity was to 7% and the highest return on equity that was actually last year, the return on equity almost reached 28%. We have a business model which we think is a challenge to macro risk. We have a credit conservative policy. We have high cost efficiency and cost control. We have proven track record of debt servicing.
And despite the acquisition of KB, our financial stability even strengthened during the period of time, which is confirmed by the actions of rating agencies. And you see that the rating agencies, they actually improved either their outlook or upgraded the rating post acquisition. So we see here what the ratings was pre acquisition and what are the current current moves. And the reasons you can see that the the most recent Now moving to the next set section, we'd like to talk on the economic and banking sector update. Kazakhstan market has a strong macro fundamentals.
As you know, Kazakhstan is the largest economy in Central Asia. The population at this point of time is 18.5%, and the GDP is continuing to grow. The nominal level of GDP is $173,000,000,000 the fact that India actually saw almost twice devalued during the last five years. Kazakhstan economy demonstrated high level of GDP, real GDP growth of 4.1% both in 2017 and 2018 and showing decreasing inflation and decreasing unemployment level. Kazakhstan also enjoys positive trend in terms of trade balance with exports exceeding imports, strong inflow of foreign direct investment.
And Kazakhstan is rated by invest with investment grade by all three major rating agencies. Important to mention is that Kazakhstan, in 02/2002, became the first country in Former Soviet Union, which received the investment grade rating from Moody's. And since then, it's never lost investment grade status by by any of rating agencies since then. Kallax economy recovered from the crisis, which was caused by the fall in global oil prices. Real GDP growth even in difficult 2015, 2016 level was still positive level, like 1.1% in 2016.
And during last couple of years, as I mentioned before, it stood at 4.1% because of the strong consumption growth and recovery of exports. You'll see also the composition of the GDP. The most contributions coming from services and industrial production in both these areas that were contributing to the growth of GDP during last three years. Back on the increasing oil prices, the trade balance has improved since then. Current account was in some period of time was a negative territory, but fourth quarter last year and third quarter this year, current account balance of Kazakhstan is in positive territory, which is which is a good sign.
The primarily expertise is linked to the mineral products, including oil and mining, oil, oil and gas, metals and mining, chemicals and food production, because economy is quite open in terms of the trade and see that on exports and imports, it is quite diverse range of our partners, and we trade with European Union, with China and Russia. All three regions are our main trading partners. Kazakhstan is abundant by mineral resources. In terms of oil and gas, we in terms of the oil, Kazakhstan is eleventh largest country in the world. Except where we have resources in metals.
And in terms of uranium, chromium, zinc, and some others, we enjoy positions globally. We are a large player in global market. Extraction of these and exports of these items are a large part of Kazakh economy. And recent positive price dynamic natural resources has helped Kazakhstan to increase its export revenues from natural resources and it exceeds $50,000,000,000 dollars in 2018. Oil production recently increased due to launch of Khashoggan oilfields, and Kazakhstan oil production is expected to grow further to over 2,000,000 barrels per day in 2020 back on recovery of oil prices.
Now we talk about the monetary policy of Kazakhstan. You know that before 2015, there was close to peg regime on the peg side when India was linked to the US dollars. And only once in a while, it experienced one time devaluation. In 2015, the National Bank of Kazakhstan adopted inflation targeting regime, which helped to significantly reduce inflation from close to 14% to 5.3% in 2018. In the first quarter of this year, inflation on a year over year basis are standing even at lower level at 4.8.
And also, Bank reduced corridor for inflation, and it gradually was reducing from 6% to 8% to 5% to 7% last year. From this year, National Bank set targets from 4% to 6%. Along with inflation targeting, National Bank introduced so called base rate, which is an indicator for short term money under which the National Bank is managing the interest rates in the market. And on this inception, the rate was set at high level 17%. And because of reduced inflation level, it's gradually reducing the base rate, currently standing at 9% last year.
As you see, there was a number of cycle of reduction. Halifinance, which our brokerage subsidiary is expecting that base rate would go further and expect at least one more reduction this year to 8.75%. And because of moving to more flexible regime, the country managed to maintain its reserves. And you see that the reserves remain at very healthy level. Total tax reserves of the country to GDP is standing above 50%.
Another area on where Kazakhstan government is focused on structural reforms and the aim to increase the transparency and the view to the public authorities, implement best justice practices, including the introduction of investment committee under the Supreme Court. Also, developing the International Abitrash Center based on English law in ASONA International Finance Center. Also, one of the areas where the government is focusing economic reforms, including privatization. And privatization is going underway last year. You know that there was IPO set by Kazakhstanprom and few more state owned companies are set to go through IPO in coming period of time.
And here, you can see a few targets which the government set for itself in the medium term period, like increase of GDP per capita, maintaining low employment level, increasing contribution of SME sector to the economy. It is difficult to compare countries on different metrics. A few global institutions try to do that. One of them, which is widely recognized, is the World Bank doing the business ranking. You see that the government due to structural reforms managed to substantially improve position from seventy seventh place in 2015 to place number 28 in 2019.
We have the highest rank in terms of protecting minority interest and global rank. There are a couple of areas where Kazakhstan is still lagging. It's getting permission for electricity and on some trade bureaucracy. So if the country will be focused on this, there is still potential to further improve our doing the business ranking. Now talking a little bit on the Kazakh banking sector.
As you know, Kazakh banking sector experienced some turbulent times during last few years. Currently, it's undergoing the recovery path. While the corporate loan demand still remains subdued in this period of time due to deleveraging. We expect that there is potential in medium term horizon. At the same time, we know that the retail portfolio was steadily growing.
What is important to see on this slide is that on the retail side, it's not only growth on the loan side, but also on deposit side. Last year, we went through important milestone when the retail corporate deposits actually exceeded retail deposits exceeded corporate deposits. So currently, in the in the banking sector, we have more retail deposits the corporate one. Loan portfolio and the portfolio banking sector remains diversified in terms of sources and views. Important aspects in countries like Kazakhstan is a level of dollarization, especially on deposit side.
That was a very important topic when there was a peg, factual tech between, I think, yen and and and dollar. Since national banks move move to more flexible regime, it it helped also to improve on on that front. And you see that currently, Tengue deposits, again, start exceeding the gold deposits. And National Bank also introduced some measures in order to stimulate the usage of Tinker deposits, like applying different cap for deposits, which are guaranteed by Kazakh Deposit Insurance Fund, as well as reducing the cap on the dollar deposits. National Bank, historically, the government banking sector was quite developed in terms of regulation.
And the country cap was the first in order to was the first among former Soviet countries in order to bring banking regulation to best international standard. It was back in 1995. Kazakhstan was the first country among SAS moving from local accounting standards to international accounting standards, and that has been placed already for more than fifteen years. Again, with global rollout of IFRS nine, covered banks was also among the first one. So IFRS nine was introduced in January 2018.
Also, during 2018, those important changes in the banking regulation when the authorities of National Bank have been upgraded. And now it is National Bank has more power in terms of utilizing its motivated judgment with the aim to have more risk oriented approach towards the towards the banking regulation. It is also expected that this year, National Bank will conduct the asset quality review of the bank. Also, during last few years, National Bank was quite tight in terms of how it allows the banks to operate. And if it sees that some banks do not have proper capitalization levels, and they have a weak financial standing.
It allow the banks in order it allow banks to to hand over or or, in some cases, they revoke bank banking license. All that went to further consolidate banking sector and to actively clean it up. So we see that the number of banks reduced substantially from 48 in year 2000 to 28 in 2018. This year, we will expect that the number of banks will further reduce because of some banks already announced either they already completed the merger or they would be making decisions on that in coming weeks. As mentioned before, over last few years, banking delivered.
That also helped to improve the equity base. So we see that equity of Kazakh banks has increased. Also, profitability of the banking sector is restoring from lower level of 7% in 2015 to over 20% in 2018. And the loan to deposit ratio also was reducing from close to 100 to a level of 80% last year. There is continuous improvement in the asset quality, not only which is measured by NPL ratio, but also one of the important characteristic is accrued interest.
And you see that accrued interest, which also includes interest on loans, which are not showing by the banks as NPLs, also have reduced by roughly 50% during the last four years. Now I want to hand over the floor to Victor Fried to talk about the overview of how the bank.
Thank you, And good morning, everyone. Let's move to page 38, the structure. Halik is the largest financial group in Kazakhstan. You can see our detailed contract structure here. And the main takeaway is that most of our business is based in Kazakhstan and alongside our core banking business comprised of also insurance and asset management businesses.
You
can
also see that our international footprint has presence in our CIS market. We will discuss this in more detail in the next slide. But to provide you the idea, what we also like to provide you is the idea that 95% of our assets are attributable to the bank itself. On Slide 39, you will see the overview of our banking insurance and asset management subsidiaries. Let's start with Kazakhstan.
Here we have associated company, Altium Bank, formerly HSBC Bank Kazakhstan. As we already mentioned, in April 2018, we have completed sale of 60% stake in Altium Bank, China Citibank and Shangwei Investment. And we remain holder of 40% of that subsidiary. Our investment banking in asset management business comprised Halic Finance and Kaskemerz Securities, which we acquired together with Kikibi in 2017 and provide all sorts of investment banking and asset management services locally. In insurance businesses, we have two subsidiaries focusing separately on life and non life insurance, which will have significant local footprint and sizable market share.
We also have strategic presence in neighboring countries, Russia, Georgia, Kazakhstan, and Tajikistan. We are also in the process of setting up the new subsidiary in and we expect to commence operations later, but very soon, and we will provide you with the information in the next slide. And with Uzbekistan, we will have presence in six countries, including Kazakhstan. This is the largest coverage of the market amongst peers which operate in the region. The next global competitor, our analysis is only BTB, which also have a presence in six countries.
On Slide 40, we would like to start discussion of our core businesses in more detail. And let's start with corporate banking. You will see on this slide that our position in corporate deposits is really unrivaled. We have around 40% market share in corporate deposits, and this is four times more than our competitors. And you'll see that next
four quarters
peers altogether have market share smaller than we do. You also will see that market has undergone some consolidation recently with the share of top five banks increasing by about 30 percentage points over the last few years. Obviously, our position was significantly by TPG acquisition. On next slide, 41, we'd like to provide you some key highlights on the corporate business just to give you a sense of scale. We generally separate our corporate business into large corporates and SMEs, where large corporates are generally the ones with more than QZT and billion by revenue per year.
The clients with smaller amount of revenues are treated as clients of SME business lines. You see that in large corporates, we have 2,700 clients, of which four thirty are borrowers. And in the SME segment, we have 282,000 clients, of which 7,400 are borrowers. Some other important numbers to give you a sense of our strong position in corporate space. Out of top 100 largest corporate clients, 75 are clients of Halifax.
On the next slide, we'd like to provide you the overview of the loans and deposits attributable to our corporate and SME clients. From the industry breakdown of loans and deposits, you would see that our position is diversified, and we do not have very strong concentration in single segment. Statement. From the standpoint of view of currency breakdown for loans, you would see that about 49% of the issued of loan, 39% of loans are issued in foreign exchange, current and current currencies. And those loans are mostly the corporate loans that, to me, borrowers take funds mostly in India.
And we provide fixed loans on this to financially strong clients, which may sustain any turbulence in market, and only to those clients which have revenue effects from the export transaction. For foreign currency breakdown for deposits, you will see that it's roughly fifty-fifty for the TTMFX. On the next slide, we would like to provide you with information on other products for our corporate clients. And we have a range of supplementary products which support our clients in their businesses and daily activities. First is a payroll product.
This is an important source of cheap funding for us, and this enables us to build a proprietary proprietary database of the sale customers and cross sell our retail loan products, customers with consistent income flows. As of thirty first March, twenty nineteen, we had 4,400,000 of payroll costs issued, again, compared it to 18,000,000 of overall population in Kazakhstan. Second largest business line is our cash management, which is essentially the cash collection and management services for our clients, and where we have 24,500,000,000 of fee income in gross terms in 2018. And this business is supported by three zero three cash settlement units. Next business line is acquiring, which is very significant business for us, which we have significantly strengthened with acquisition of TTB.
We process around 45 of all cards card payments and 75% of e payments in cover stock. We are really strong in merchant acquiring with about 17,500 of point of sale checking out. Off balance sheet products, guarantees of letters of credit, I think it's fair to say that this will really dominate the market. You can see it from our strong market share. And this business is supported by wide network of correspondent accounts around the globe.
And also thanks to strong trade ratings, we have limits from almost all of our correspondent banks. We heard anecdotally from some of our clients that their counterparties would only accept guarantees and letters of credit from Halibanc and no other banks. On the next page, we would like to start with retail banking and provide you the competitive landscape through showing our share in the retail deposits. We have 37% share in number one position. And similar to corporate business, the sector has seen some capitalization recently and have benefited from the acquiring of this business.
On Slide 45, we'd like to provide you key highlights of retail banking. As I mentioned earlier on the loan side, it's approximately a quarter of our loan book. We have about 836,000 of retail loans outstanding, of which 39,000 are mortgages. On the deposit side, 3,200,000,000,000.0 of retail deposits are represented by 6,600,000.0 of active retail accounts. And we have 9,200,000 of payment cards linked to those accounts, which is unrivaled.
We also have 3,600,000 of Internet banking users and are the sole issuer of American Express cards in Kazakhstan.
On the next
slide, we would like to provide you new sense of the range of the products we issue to our retail clients. The majority, 67% of the book, the consumer unsecured loans. It is, however, important to note that the majority of these loans are issued within our payroll products so that they are covered by the future salary payments into the customer's account. And the bank is the first in line to debit the card in order to withdraw payment for the loan. So in the future, payments are rated on physical collateral, but we consider them materially safer than a classic consumer unsecured loan.
Mortgages, our second largest segment, 24% of the book. And it's important to mention that this is denominated mortgages and the fixed mortgages are meant by the law. Other segments, retail secured and credit cards and auto loans. In terms of credit cards, the majority of clients who are acquired through PKB where they have more active clients for that type of product. On Slide 47, we'd like to provide you with overview of online banking services.
We are really proud of our digital proposition, and HomeBank is the online platform for our retail customers and the leading kind of some Internet banking platform. 3,600,000 users, eight, nine million customer visits monthly. The functions include all you would expect from a really user friendly online platform. We provide payment card issuance, card for card payments, loan applications, and also using HomeBank, our internet banking platform for retail clients. You may make Western Union transfers.
You can book appointment of the outlet, and you also can withdraw cash from ATM without the card. We also provide all such services on this platform. Online bank is a platform for the legal entities with 166,000 of users. We are currently the so called payment ecosystem and have made significant progress recently. And we are working on developing some payment ecosystem to attract new clients and to engage existing customers to make more transactions with us.
One thing to highlight is the 20 fourseven payment availability for the legal entities, which none of other banks in Kazakhstan have currently. On Slide 48, we would like to highlight some key partnerships. We have launched it ahead of some developed European countries, and we are the only bank in Kazakhstan that enables to afford payments. We also allow our customers to pay traffic fines via our mobile banking platform. We have some interesting offers to our customers for hope of inherent looking worldwide, as you see on the slide.
On Slide 49, we'd like to provide you with information on digital banking in Kazakhstan and its potential. Despite all the innovation of digital products we just discussed, there is still some way to go in terms of administration of online banking in Kazakhstan, which enables us to advance our digital proposition. You see that among middle income countries, we have a significant percentage of population with internet access. However, smartphone penetration, which actually enables people to use online banking, is relatively low. It is, however, very pleasant to see the the cut activity picked up recently in terms of number of transactions and volume.
And maybe just also to provide you with a recent update, for Q1 twenty nineteen, share of noncash transactions increased to 72% from 65% in 2018. And for 2017, such share was 50%. So you may see that number of noncash transactions increased by roughly 50% for two point five years. And average amount of cash withdrawals and noncash transactions is decreasing, and with data supporting the above market trend. On Slide 50, I would like to provide you with information on our insurance business.
Our insurance activities are carried out from two entities, Halifax, which is life insurance, and insurance company called Halix, formerly known as Gavas and Scarf. We are a market leader in life insurance and number two in property and casualty when measured by gross written premium. You can see a significant increase in gross written premium and underwriting results as a result of the acquisition in 2017. On next slide, 51, we have information about investment banking and asset management subsidiaries. We have two entities that are running similar activities, and we are reviewing we can optimize duplicating operations.
As part of this exercise, we have transferred all assets of the management from Kafcom Securities to Finance. And you may may see selected awards that acknowledge our strong position in the market. And on the last slide on this section, we would like to provide you with information about our international subsidiaries, their asset size, and their ratings where applicable, and their very descriptions. So we generally cover them, so this is just a summary to give you the sense of what our presence in those markets.
And this
is the last slide in this section. So according to schedule, we
have a copy paste.
There are some updates. We suggest first to go through updates of the merger with CTB section, and then we would have a coffee break. Could you please go to Slide Number 54? Here, we provide key milestones of our successful merger, starting from the acquisition and to the legal and technological merger. In the 2017, we started negotiations with Kasimov Bank, which followed by proposal from the controlling shareholder, Mr.
Srzakinia Takinschev, in February 2017 to acquire stake in Kafka Netbank. In March 2017, we signed number of contracts, including the government, national bank, BTB, BTA Bank, distressed asset funds, and some other parties. And in July, we completed acquisition of BTB shares. On July 5, we acquired controlling stake from Mr. Srzyby and Srzybyl Khazomov.
But before acquisition, we did a very thorough due diligence on financials, on legal side, on business and IT side. We hired professional advisors to support us, and those include financial advisors, investment banking firm. And we also used our bank professionals, in house professionals, to understand the bank. And also, the National Bank also carries out its own dividend. Just after acquisition of ETB, we started analysis on how we shall develop further with banks.
And in December 2017, the board of directors took decision to merge banks. And starting from that, we started developing the roadmap for integration and acquired a host of professional advisers to support us. In April, the joint general shareholder meeting approved decision to merge CKB into College Bank. And in July 2018, legal and technological merger happened. And there, we will provide you with more details on the merger later in this slide.
But we would like to highlight that following merger, agencies improved their view on the current situation in the bank. For example, S and P revised its outlook from negative to stable, and Fitch revised outlook from stable to positive. On next slide, 55, we would like to update you or to remind that KTB acquisition acquisition was was the the risk risk transaction for Halig Bank. As I mentioned previously, we did a very thorough due diligence, And PPA loan in amount of 2,400,000,000,000.0 was removed from ETB balance sheet before transaction and transferred to bad loan fund. That cleaned up the banking system.
Additional provisions were created insufficient amount, and the ETB was recapitalized by Halit Bank at a later stage. And in addition, we have carefully assessed the strategic rationale to ensure value creation for our shareholders and other stakeholders of the bank. On slide 56, we have information which evidence that we reached our strategic rationale, which we put before So, the transaction was truly the risk. We discussed this earlier.
Secondly, we have created the true leader by many metrics in Kazakhstan and number three privately owned banks in the CIS. When we say privately, we exclude governments and all institutions. Number three, we have strengthened our retail and SME footprint. As well, we became a leader by number of issued cards in previous. We have grown our gross written insurance premium by 85% when you compare 2018 to 2016, the year before merger, and the increase underwriting results by 140.
The synergy extraction is now largely complete with branch network and staff optimization as well as redemption of TKB bonds. This all resulted in a boost of our return on equity, which means that the capital has been deployed in profitable way. Digital proposition is something that ETB was known for, and we acquired 85,000 of digital users of our investment platform and our video. And acquiring, we are now number one with nearly 50% market share that IPO was saving off and grew our cost related fee commission income by nearly three times twenty eighteen as compared to 2016. You will see that in our financials.
On the next slide, we provide information of synergy FX And branch network reduction was by around 80 since first day of the merger. Staff optimization, 20% less than pre merger. We have also repaid TTB bonds that we have inherited from TTB as a result of the merger. Please note that restructuring is now behind, and we do not expect to incur any further costs to extract the energy. On the last slide in this section, we would like to provide you with some overview of international integration program and review the numbers.
Management was highly involved in the process as indicated by the number of mandates spent. Transaction was carried out using face back approach, which means that integration was done within weekend. And IT systems of Halit Bank and CTB were fully integrated. Client data, which included historic data and transactions, were integrated from one system to another. And this was allowed thanks to seven months of very hard work of around 700 people from both banks.
And the transaction of such types was carried out during seven months, which is a very short time for the history of such mergers. And again, integration was carried out in terms of legal integration platform. So bank was operating as single bank following this merger. So this completes this section, and we would like to invite you for coffee break for around twenty, thirty minutes. We suggest to have a coffee break for twenty minutes, and then we continue.
Thank you. So the strategy for the next three years. The bank's strategic mission is to provide services in all the segments of the financial market in Kazakhstan and other countries in accordance with the sound international banking practice and creating high value for customers and our shareholders. We would like to highlight our five key strategic objectives, which we will discuss in detail. And these objectives are to keep leading positions in all key customer segments, to be highly client oriented and to focus on quality of the services, to develop our digital proposition further, which we internally call as the Be Digital and Go Digital, to be main transactional bank of the country, and to expand internationally where we see attractive opportunities, and still being balanced on our risks.
On the next slide, 61, this is again just in more details. I would like to say that Halig Bank is focused on positioning itself as a key partner to its customers across all the market segments. And we stress that we are diversified and we work in corporate, SME, and retail banking. We are focused on further strengthening of our competitive advantages by addressing customer needs and improving customer experience in long term. The digitalization agenda of the bank includes development of digital services and solutions in accordance with the best market practice.
We are pursuing to utilize our wide client outreach in order to develop our transactional services, aspiring to be the leading provider of transactional services for payment flows in Kazakhstan. We are considering a number of expansion opportunities which would allow us to further diversify our business. However, we would like to take a prudent approach to growing our business by making sure all the risks are in line. On the Slide number 62, I also would like to show that Halib Bank developed key initiatives for each of its business segments. And if we talk about corporate banking, you see that we will go for the initiatives on the growth of fee and commission income per each customer.
We are introducing new products like factoring, which we'll be doing through online structured credit products and cash management. We would like to increase client coverage by dedicated teams and product specialists. And actually, it's already been working within the bank for the last year. We are focusing on transactional services to our clients. In SME, where again, have the market leader position, we are introducing the ecosystem in the bank.
And for example, today, we are the only bank who is providing services for twenty four hours, seven days a week. Is the Halik is the only bank who are offering this kind of services. And we see that there is a new inflow of clients into the bank. We are working again on the improvement of our client relationship management, the online lending for micro businesses, and improving the client services. In retail, we are working also on development of new business model through the segmentation of customers and services.
We are also developing the marketplace initiatives. We are introducing the new product like online lending, and also the initiative to bring more onboard non salary related clients to the bank. In transactional banking, we are developing and working on sales of innovative and technological services. We are developing remote channels of sales and services. We are, again, working on a cross sell of different services to our clients.
And to support all of this, we are doing a lot of inside initiatives in the back office operations. We are working on the new business procedures and processes within the bank and introducing the organizational structures like agile teams and introducing products in streams. In international banking, again, being today the most widely presented bank in the region, again, we are presented in six countries, in Kazakhstan, Russia, Georgia, Kyrgyzstan, Tajikistan, and we are opening in Uzbekistan. We are always stressing that the growth will be there where the opportunities we see. But again, balanced on risks and growth.
And if we go to the slide number 63, these are the numbers which we usually present only for the next year targets. This time, we are announcing our medium term financial targets. And again, just to stress that usually we do only on an annual basis. So the first is growth, and we are targeting the growth of the loans in the loan portfolio in line with the market. And you saw in our numbers our strong position in the market and the market shares we have across all the products.
And our plan is to keep the prudent approach to growth and grow organically with the market. We are not considering M and A in the medium term, and we are not also considering aggressive market share expansion. But at the same time, if we do not target the big numbers in terms of the assets growth on the balance sheet, we are still targeting the growth of the loan within the balance sheet numbers. On NIM, you saw our NIM lately comfortably above 5%, and we are planning to maintain it above 5% in the medium term. Also income ratio, we are done with the restructuring and now we can already enjoy the synergies from the acquisition of KTB.
And we are planning to maintain our cost to income ratio around 30%. Return on equity, we are planning to maintain our average return on equity in excess of 22%. In terms of the asset quality, as I said, we are not planning to upgrade this balance sheet expansion at the expense of asset quality. So we believe that the cost of risk for the next medium term will be around or below 1%. And last but not least, the capital.
So historically, we also maintain a significant buffer above the minimal requirement. And our capitalization ratios are also usually above 1718%. So we expect and we target that this year one ratio of the capital will be above 17%. At the level of 17% and above, how it can support its growth plans presented here and retaining comfortable buffers. Also, our capital target is consistent with our credit rating.
We do not intend to hoard the capital, while we do not foresee any large one off distribution. So it's special I mean, special dividend. We aim to return capital for our shareholders, potentially through higher annual payouts. A 50% payout ratio is aligned with our year end communication. The board is currently reviewing the dividend policy, taking note that taking into the account our new targets of the bank, and including our overall capital targets.
So this is the section on the numbers. And again, on the questions, we will come at the end of the presentation. And now we go to this section number seven on our financial performance.
The recent financial performance starting from the balance sheet on Slide 65, you see recent developments on the asset side, including the loan portfolio. You see no surprise here, we have significantly increased the total asset level as well as the net loss level due to acquisition of KKB. And since then, we have been growing prudently. The slight reduction in the first quarter this year is caused by seasonal effect and is typical. At the same time, we note that the composition of the credit portfolio, either in terms of the client segments or in terms of currency has not changed materially with acquisition of Kikibi.
On the other asset side, you see there has been significant increase in the government securities in 2017, which was part of the KKB balance sheet cleanup exercise ahead of the merger when BTA loan was replaced with the government securities. We are very comfortable with such a setup as they provide quite attractive yield, which is also a tax free and also zero risk weight. So return on equity wise, attractive. And the remaining portfolio of securities is also conservative. Most of them is comprised of either other governments or corporate bond with investment grade rating.
On the funding base, our liability is quite evenly split between corporate and retail deposits. We also have some debt securities, which we will discuss more detail on the next slide. You see further reduction in loan to deposit ratio in 2017. And again, this was due to KTB merger when KTB loan got replaced with the government securities, whereby reducing loan to deposit ratio. As you see, the transaction with KTB was a good deal from some point of deposits.
There have been increase in the current account balances and also from the perspective of FX when the FX the dollar liability exposure has been somewhat reduced. On the next slide, we showing the maturity profile of our debt. Here, you see both Eurobonds and local bonds. We have around $828,000,000,000 yen of debt instruments, which are spread in terms of the repayment schedule. And against these liabilities, we have more than sufficient liquid assets, which exceeds 4,000,000,000,000 Tingyi.
And we already used part of that liquidity in order to prepay KKB bonds both in '20 in 2018 and 2019. As you already know, we have very strong capital position, and that has not been an issue for us. We have been deployed some of it during the Hikibbe merger. But as you see, it was with positive from profitability point of view. And in terms of capital structure, I can only add here that the quality wise, it's also very strong.
The majority of capital is comprised from a solid Tier one instrument, so it's pure capital. Now moving to the asset quality, which is on Page 71. We continue to focus on improving the asset quality of our portfolio. On consolidated basis, NPL of the bank has reached 9.1 as of 2019, which is significantly lower than it was pre and post merger with KTB. And furthermore, NPL ratio of Halibank assets reached a lower level than it was in 2016, which is the last year before TTB was purchased.
In the first quarter twenty nineteen, increase in NPLs was mainly driven by several loans, corporate loans, which were previously impaired. So these borrowers became overdue. But from quality perspective, there was no significant change. Furthermore, we have adopted rather conservative approach to risk. And currently, there is sufficient coverage of NPL portfolio by provisions, which exceeds 120%.
And that has been quite consistent. So for quite a number of years, we have coverage above 100%. Exception was 2017 when post KTB acquisition, there was some decrease in coverage and that was due according to which NPLs of KKB on consolidated basis were added on the net basis, where only net NPLs were added without showing provisions on the consolidated basis. On Slide 72, we showing the split of our NPL across the client segments. Most of banks NPL have legacy nature, and the bank has actively addressed the asset quality, especially during the last couple of years.
HALIC has able to reduce its NPL ratios across all key customer segments. So we see it is the case with the corporate portfolio SME as well as retail. At the same time, we have healthy average of NPL portfolio by provisions. The larger part of banks NPL are in corporate segments. It's around 40%.
But to remind, our corporate portfolio exceeds 60% of the entire loan portfolio of the bank. And you also note that for the corporate portfolio, NPL ratio has reduced from 7.1 to less than 6% at the end of first quarter this year. The coverage of SME portfolio is lower than for other segments, but it still exceeds 60%. And lower coverage is just representing the fact that on SME portfolio, we have very substantial coverage by collateral, which is available to cover the net NPL portfolio. After acquiring KKB, the bank's NPL in absolute size has been more than doubled.
The bank is working through restructuring an NPL cleanup on both banks' legacy NPL, having significantly reduced absolute amount of both banks' NPLs. So you see on this slide, we separated NPL by legacy KTV portfolio and portfolio of Halib Bank on both NPLs portfolio, we see quite a significant progress. Whilst the bank is focusing on addressing legacy asset quality issues, acquisition of Kikibi didn't materially affect bank risk profile. Halixir's policies have not been materially changed after Kikibi acquisition, and banks still apply same prudent risk management assessment, risk assessment as prior to KKB acquisition and same stringent underwriting standards for its new loan generation. Acquisition of KKB didn't materially affect bank's credit profile as the bank still remains largely geared towards corporate segment, whilst it has increased its exposure to effective SME and retail portfolio.
Cost of risk for retail increased somewhat due to different risk profile of TTB customers, but has generally decreased across most of segments and on overall portfolio basis. And we believe that we have reached normalized level of cost of risk. Having acquired KKB and reporting spike in its NPL ratio, the bank put extra effort on managing its asset quality. During last year, the bank wrote off more than 100,000,000,000 in year of its NPLs or about a quarter of its NPL portfolio size, which was at the beginning of the period. These write offs didn't lead to spike in cost of risk in 2018 because bank already provisioned most of them before or immediately after position of Kikibi.
Furthermore, the net NPL flows was not exceeding the reduction of PL due to repayment and restructuring of loan. The bank also actively manages NPL through recoveries and write offs and through reflections where possible. One of important criteria for asset quality in Kazakhstan is calculation of cash interest gap between the interest accrued on loans and interest received. For many banks, it became a big issue. And for Khalid Bank, you see, for quite a number of years, we have been quite consistent in having low cash gap around 10% in some periods we reported even less.
As it was mentioned in 2018, ASAN applied IFRS nine for the asset quality indicator. And here on this slide, you see the dynamics of Stage two and Stage three loans. The bank Stage two loan ratio reached 3.2% in the first quarter twenty nineteen, and stage three loan ratio reached 20.4% in first quarter twenty nineteen. The increase in stage three loan in the first quarter was related to the transfer problem indebtedness of some corporate customers to subsidiary SPVs, which was previously classified in stage two with a further aim to recognize this indebtedness and investment in property. So we expect that ratio to drop in coming periods.
Despite increase in total Stage two and Stage three loan in recent quarters, we also here showing net amount, which is actually the Stage three loans minus the provisions, which created against these loans. So from that metric on the net basis, you see that the net two and net stage three loans level has been reduced. After significant increase in provisions in 2017, as a result of increased level of impairments on TDB loans, bank has returned to more stable cost of risk level, which reflect positive trends it has observed in NPL formation trends. And bank provisioning rates showed the conservative approach of the bank. And while the NPL level has been reduced, provision rate remained at sufficient level above the 10%.
Now moving to the next section, and let's talk about the profitability. Here, you see how we grew on interest income over these years. So we see our interest income increased by 43% during the last couple of years. And because it is important to note that the 92,600,000,000.0 of net interest income for the first quarter, it also includes one off negative effect of 7,400,000,000.0, which is related to prepayment
of 200,000,000
Eurobond and which has a negative accounting effect. In other words, without these effects, our net interest income would be 7,400,000,000.0 higher. On the NIM, we also showing the reported figures as well as the figures which is adjusted for one off effect both in the first quarter twenty eighteen and first quarter twenty nineteen. We make adjustments for accounting effects which relates to prepayment of bonds, KTB bonds, which happens in both of these quarters. And you see that net interest margin remains at very comfortable level of quality across this period.
On fees and commission income side, you see how our non interest income developed over time and how Kikibi really boosted it, in particular with regards to card related income, which bringing on board a significant number of retail and merchant acquiring customers. You see a smaller reduction year over year on the bank transfer commission. This is really the side effect of the legal merger with KKB. When the transaction between KKB and Halix customers were previously considered an external and having certain fees attached to that, after the legal merger, this transaction became internal. So we stopped charging our customers for this.
Historically, HaligBank was very strong in terms of cost control and showing very strong efficiency, which is measured by cost to income ratio. And on this slide, you see how the synergy effect has worked. We showing it on the operating expenses level. We show it separately that on how the cost of income ratio was developing. And separately, we're showing the number of branches and outlets, a number of FTEs, which reduced post acquisition of Kikibi.
And also to sum it up, all these measures both on the developing the business as well as realizing synergies both on the income and cost side. The profitability numbers are showing quite a positive trend. And that also helped us to boost net income and other metrics like net income to operating income, and also helped us to bring return on average equity to the level above 27% last year and twenty seven percent first quarter this year.
And now we go to Section eight.
Actually,
to end our presentation, you see the, again, investment highlights, which we already discussed in detail. And I'm just thinking on timing. We have half an hour to go for lunch. Before the lunch, what should we do? Or we go directly to Q and A section?
Q and A? Okay. Let's start. Thank you. Ladies and gentlemen, we will start now our Q and A session.
Thank you for holding until we have our first question.
Matthias Bretman from Credit Capital.
I'm just
looking at this equation about loan growth, the return on equity, the capital adequacy. And if you you basically have all their inputs all the inputs to it, but the difference to it doesn't seem to be in line
Well, I already mentioned that, yes, these are the main numbers which we are targeting for the next midterm. And on the dividend payout, today we have this policy of paying dividends from 15 to 50. And I mentioned that the board right now in the next several months will consider on maybe our new dividend policy. And for this year, the target is remaining. The policy will work still from 15 to 50.
And starting from the next year, probably, it will be. But we do not plan to have, like, one off big dividend payments out to reach this 17% level. Still, also, we understand that we have been always overcapitalized, and this influences our ROE numbers. Because if you look to the return, then on the very high capital, this is, I think, unique for a college bank that we have very high capitalization ratios and we have also very high ROE. And still, we do not see the need capital for the next period of time.
We do not, again, plan any big acquisitions. Or we always say that in case of acquisition, we have in mind always value adding transaction. So you know our history of BTA, for example, when we were able to refuse if the transaction is not value adding to HOLIC. So in this regard, I think the board will work on revision of our dividend policy.
Again,
for this year, so for the results of 2019, we do not expect the revision of this maximum amount of payment. But, yeah, we expect it in the near Before the acquisition of KKB, we had all the approvals from the state agencies, including the Anti Monopoly Regulation Agency, where we have no restrictions in terms of the market share or in terms of the assets growth. And to be honest, Halib Bank, even before the acquisition of KTB, we were already market leader in different segments. Like, for example, pension payments. We hold more than 70% of the total pension payments in Kazakhstan, and it was also previous to KKB.
We hold more than 50% of market share in the budget salary payments and type in payments, for example. So in some segments like ATM machine provision, we have even more than 50% of market share. So there is no particular regulation from that. But being the only systemic bank in Kazakhstan for the last several years, we are regulated more on the capital, higher requirements capital buffer, on commissions and fees. There is a general banking law, which is not allowing more than 56% of the interest rates to be charged, effective interest rates to be charged by banks.
Yeah. Basically, on the capital requirements, the Kazakhstan moves to the So there is a basic capital requirement. Then also, regulator can implement the countercyclical buffers. It can implement the buffers for systemically important banks.
So the main difference between us and normal bank would be the application of buffer for the systemically important institution. But as we mentioned here on this presentation, our capital is far exceeding the minimum required by by the regulation. So for us, it's in no way is is a limitation. We're almost twice higher than the minimum required. And if you if you give a better understanding of where the trade up is given your market share again and how much more do you want to grow organically within the market?
How how much more do do you want to get in this market share?
Maybe I can add that the loans in our balance sheet are around 50% of the total assets. So we can, again, when we are talking about growth of the loan, so we can grow within the our balance sheet. So and this is actually the main target. In terms of the assets by itself, in terms of the balance sheet of the total assets of the bank, we do not have, like, aggressive numbers on growth, but the structure within the bank, yes, we target the loan growth around 10% this year and then in line with
the The substantial portion of other assets is represented by state owned securities. It includes the medium term treasury bills, which are issued by the Minister of Finance. And we also have a portion of National Bank notes. The National Bank notes are typically a short term instrument. Profitability wise, they're giving because they're also tax free returns.
But moving part of that into the loan portfolio can be better in the longer term because on the corporate customers, we also can earn the non income interest because we would have a deeper relationship with with that customer. So in medium to longer term, it's it's a move of the structure of the asset.
Because because the yield from
the loan is significantly higher than the yield on it.
It depends on the segment. If we talk about corporate banking, yes. If we talk about SME and retail, then it should be higher.
Philip Currie from Imperial Capital. I have three questions
for you.
The first concerns the doubtful stage two and stage three loans. Okay? So if I look at page 71, we have relatively high coverage of NPLs, which I'm assuming is effectively at stage three. Okay? On page 74, interest accrued and not paid, you said it's roughly 10%.
Right? So it's 90% And on page 75, you have fairly low stage two, right, running at around, I think, 3% memory, but relatively high stage three. So I'm trying to reconcile the high you know, the 10% of interest accrued that not paid with with with the low number of stage two. Okay? And also the high coverage of NPL and that high level and and that 10% of interest accrued that were paid as well.
So I'd be great if you could clarify that. Also, I'm I I don't quite understand this whether the bad asset management subsidiaries, whether they're on the balance sheet or whether they're off the balance sheet. Right? So when when you have this this SPV, I just wanna make sure that it's on balance sheet. That that's question number
one. Mhmm.
Question number two relates to the FX side of your balance sheet. Okay? So do you do you keep part of your capital in foreign currency so that when there's a devaluation, you you know, your your equity base and local currency rises automatically, and that provides the hedge to your foreign currency risk weighted assets automatically. That's question number one. And question number two, what is your policy regarding loans on the FX side of your balance sheet compared to loans on the local currency balance sheet?
I imagine that you have a lower target for loans deposits on the foreign currency side than on the local currency side.
Thank you, Philippe. Very good question. Let's start from the question on SPVs. So on the consolidated financials, you see the portfolio of SPVs are showing as either investment assets or investment property, or the commercial property. So they are not showing as a part of the credit portfolio.
It's on consolidated basis. And typically, we transfer those assets at the market value. So in case we are transferring a problem loan, so we make sure that only the properly valued assets are moved to the STVs and any amount which is exceeding is left on the bank and typically is written off against the provisions. Provisions. On the capital, according to law, all the capital is recorded in local currency.
So in potential situation with devaluation from pure capital perspective, it has a neutral effect. But then we have to see what is the open currency position on the other assets and liability side. Typically, we as the bank are running a neutral open currency position. So any change in the currency immediately will not have any effect. Then you should look for the third side effect, like for example, change in the other policy, but it's a bit other story.
On the asset quality, I think your question also was on the effects composition of the loan portfolio. We have just below 30% of loans in foreign currency. And majority of that alone provided to the corporate customers, which have exposure to dollar proceeds, dollar revenues of which have hedges available. The loans to retail customers by law can be done only in local currency and loans to SME is majority again exposed in local currency. And in terms of your question was how IFRS nine stages compared to the cash gap and compared to NPL coverage.
On the IFRS side, you know that the stages. So the stages basically gives you the impairment characteristics since the inception of the loan. I think the fact that stage three loan is much higher volume than stage two is exactly showing that most of NPLs have a legacy nature. So they are long term, they have their legacy. And recently, there was no much significant change in the asset quality.
And typically, page two would show any change, a recent change in the asset quality. In terms of the cash gap, as I said, it's a very important factor for Kazakh banks. And for many banks, you see the gap can go to 30%. In some banks, it's even higher. The cash gap of Kikibi before acquisition, I think, was running at the level of 40%.
No, no, not the gap, 60%. So actually, Kikibi was collecting roughly 40% of accrued amount. For HaligBank, it was traditional at the gap was traditionally more narrow. For last year, the gap was close to 5%. There might be quarter to quarter variation.
So and seasonal because some customers are paying on monthly basis, some are on quarterly basis, some customers are paying on semiannual basis. So it's better to look at the year over year development. And your third question was on the coverage. I think there is no particular connection to previous two items. It just shows you how much we are provisioned, probably partially related the cash gap.
So the more you have provisions, then you have more appropriate calculation of your net portfolio. And typically, the banks which have higher coverage by provisions and more adequate coverage by provisions, they would show more close, more narrow cash gap. And basically, for us, it's the case. We have more coverage of our incentive portfolio and we have acceptable cash gap. And even in a situation when we have full coverage by provisions, there still might be the cash gap.
It's just the formula also of the growth portfolio. It can be the case in the situation when the bank is financing immediate term projects where the customers might have some grace period for half an hour, for half a year or one year grace period. So typically, gap always present even in the case when the bank is fully covered by provision.
Thank you. Just a couple of questions that I think
you answered, if I may.
So how do we reconcile the 20% stage three with the much lower NPL percentage? Because usually, there's a strong usually, stage three is NPL. Right? When we look at most banks, there's a strong sort of overlap.
I think that's a question of definition. So the NPLs we're showing is actually the loans which are past due more than ninety days. And typically, stage three is impaired loans. So that would include loans which are past due and also would include the loans which have certain signs of impairment, but which are not past due. Typically, this is the loans which we have restructured.
And in our annual report, in this section which describes the composition of the trade portfolio, you would see another asset quality point note as a restructured loan. So if you add restructured within yield, you'll be coming to the wage. It's it's not the, let's say, direct, but it gives you more or less the same.
Understood. And it explains the percentage of Yeah. Yeah. Yeah. Including.
Mhmm. Okay. Okay. You very much. And just that question on the balance sheet you I mean, obviously, you know, my what I was trying to aim at was that, you know, I guess you look at your balance sheet into two parts, the local currency side and the foreign currency side.
Right? And the asset composition of your foreign currency side can be very different to the local currency side, right, due to the need to maintain more liquidity because effectively, you know, the central bank is not gonna be able to provide the same degree of liquidity to your foreign currency balance sheet as it was to your local currency balance sheet, you know, as a principle. So do you target a different loan to deposit ratio on the foreign currency side than on the local currency side?
Actually, for Halig Bank, it's absolutely not an issue. If you would decompose loan to deposit, actually, on dollar side, we have much lower longer deposits. And this is merely the fact that we will talk about the dollarization or the dollarization. And you saw that roughly 50 just about 50% of deposit is dollar denominated. And then if you look at the asset side, and we talked that the low portfolio represents less than half of the asset side.
And within that half of the assets which represent by loan, only 30% is in US dollars. So actually, on dollar side, the bank has a massive liquidity. And this is by nature of the structure of economy and structure of the our client Understood.
And I think, no, we're aligned here. But I was just trying to say, do you have a cap to your loan to deposit ratio in foreign currency that you'd like to maintain or not?
By regulation, no.
Okay. Internally? I mean, is I mean, obviously, as the what I'm trying to get at is, obviously, as your balance sheet becomes more local currency as and, obviously, the central bank is trying to incentivize the cost to shift local currency, then I guess you can have a higher balance to profit ratio. I mean, that's what I'm
trying Yeah. We we we monitoring that, but we are not we do not have a hard ratio at this point of time because the ratio is so low. And actually, I think that would remain the case because if you look at the company on our deposit side, you see that there are a lot of exporters in Kazakhstan. Many of them are placing deposits with Halibank, and they prefer to keep deposits in US dollars, whereby we still, by legislation, have limitations on placing US dollars of the loan.
No. I don't think that our loan growth will be in team for the next three years. Again, I think that the level will be around 10%. But because you have to see that the base is also very high. So if you apply the growth of the total loan portfolio, then the base itself is already quite high if you compare to other things.
If we look inside of the segments, then usually what we see on a corporate side, the loan growth is around 10%, maybe a little bit below, like 9%. Then on SME and retail, it's higher. But because, again, in the composition inside of the loan portfolio, 60% or a little bit higher than 60% is the corporate loans in our book and around 15% are SMEs and 25% retail. So in on retail side, we usually have growth around 15%. Last year, was lower.
On SME, again, it's also around 12%, 15% above Well, actually, about the three programs, yes, there are programs for SME. And last year, it was introduced also for mortgages. And I think you are referring more on the numbers which are related to mortgages. We have bank, which is fully based on the, like, state provision for mortgages. And also, it was a program introduced by the state, which is called the When there is a seventwentytwenty five program, it's for 7% interest rate, 20% down payment in twenty five years for the loan tenure is provided for mortgages.
So the main growth in this segment. In terms of other state programs, I would say the opposite, because for the last two years, the government is decreasing the state programs to support on SMAsat. And on corporate, for example, it was closed, I think, more than three years ago. And it was also decreased in agro sector as well. Up in February, the government was supporting a lot on corporate side and on agri sector.
For the last two years, again, it's only for SME. Last year, they introduced new program of 600,000,000,000 in year for, again, the industrial companies. But it still is not so much active. So out of 600,000,000,000 the loans were issued, I think, around 12 after nine months. So the program itself is introduced, but to be able to apply for this program and conditions when the company can apply for this kind of loan are very strict and very narrow.
So if you look on the total numbers, I would say that the government reduced it for the last two, three years already support for on the corporate side in terms of the lending. Mhmm. The main growth only comes on, again, cheap mortgages. So far, as Halik, we do not comment much on this issue because the announcement came from Almex, our main shareholder. Their plan about to place some part of these shares in the market.
They mentioned that they will keep majority and control in the bank. But how much and when it will be done, We do not know.
Mhmm.
Well, 74% of shares are held by Almex Group. And within the Almex, there are two physical individuals, mister Timur Kulibayev and missus Zinara Kulibayev, which are split by 50%. Then 25% are publicly traded shares, which include the around 1718% on London Stock Exchange, 6% State Pension Fund of Kazakhstan, and we have more than 25,000 physical individuals, shareholders of the bank. And this is under the Soviet Union privatization program, which was done in late nineties when the employees and the deposit holders within the bank received shares. No, we don't have this plan.
And actually, was doing that in 2013 and 'twelve. And it was not done by out the shares of every shareholder. It was done to buy out shares from Samur Kizuna. If you know the history of the bank, then in 02/2009, the state went into the capital of four banks. It's Halib, KKB, BTA, and Taliance.
And we are the only bank which repaid full capital to the state within one year and bought back shares from some.
No.
No. Again, I as I said, we do not plan to have this kind of stuff.
Because in in my view, his his presence is is a is a risk factor.
Well, mister Frank Skylarz, he's not the chairman of the board in Hollis Bank. He's the the independent director in Hollis, And he's not the only person at the board who makes the decision. And we've been quite consistent on dividend payment at the bank starting from 02/2012. Just exception about for two years in '16 and '17. The sixteen year, it was the crisis year, if you remember, especially it was a big devaluation in Kazakhstan.
So we decided just to not not to pay out dividends for more conservative approach. And in Sabatin, already, we were in transaction of acquisition of KTB, discussions with KKB on the acquisition. So again, that's why the capital was not paid out. But the assets itself and the business grew of house bank. And then we again started to pay out.
And as you know, this year, it was the historical high of 50% paying out dividends of the total net profit. Well, on the ESOP program, the share offering for the management, to be honest, we not at this time of any consideration or discussion. So maybe we have to think about it. And on the placement in IX in the full time of our shares, in case of the I think it's possible. I cannot again tell you right now if we go or not.
So we have to come back with these answers later. But, definitely, we will inform if there will be new steps taken.
And in terms of the upgrading, the level of
ability of the loan to change to the Again,
I think it depends on decision of the main shareholders if the liquidity of the shares really will include increase to the level which is applicable? I don't Maybe we cannot consider. So maybe too early at this point of time to answer. Asking the question. Thank you.
Hi. It's Andrew Keating from Webex. I'm interested in your thoughts on your
fee income outlook. You talked quite a bit about the kind of improved position you have in digital payments. Could you tell us a bit about, you know, how you see this market, the kind of competition in the payments space? Obviously, it seems like, you know, there's quite aggressive plans and capacity. You know, what's happening in terms of of kind of yields in payments, you know, other item gains kind of decent yields, things like B2B payments and things like
merchants acquiring
and and interchanges. It would be interesting to hear, you know, what's happening with fees there. And, you know, overall, what you were kind of thinking of how fee income started
to grow
relatively interesting for the next few years. Thank you.
Well, in general, we expect that our fin commission will grow on annual basis up to 8%. And we see the competition there, this competition from different companies, not today, but for the last several years, including CASTIC, as you mentioned, but also not only CASTIC but other, like, smaller providers and telecommunication companies. I I just want to maybe stress that the fee and commission business, which some our competitors are showing, it's also important to know how they book it, what kind of accounting standards they use. For example, in the commissions which we charge when you issue the loan goes as the amortization amortized interest income on the loan. Some banks, they show as a onetime commission, but, actually, it's still related to the interest rate on the loan.
So it's it's important to understand what is the nature of the commission. If it's a pure commission on payments and on transfers, then we, the how it usually are showing around again, it's 10% to 15% we are market leader in terms of acquiring business in Kazakhstan and especially after acquisition of CPB. They were before the leader in this business. And again, as I mentioned already, there's 71,000 of terminals in the country and around 5,000 ATMs are provided by our bank. So every second ATM and more than 50% of the market share on both terminals, again, it's HALICs.
So yes, the income, fee and commission income is growing. And what is important is the net fee income It will grow again for the amount maybe around 10%. And please look to this analysis of how the other competitors are booking commission or booking income in commission.
Thank you. Just a follow-up. Is there any regulatory pressure in terms of of the fees for for payments or, you know, merchant discount rate?
Yes. Yes. I think it's a global tendency, not only in Kazakhstan. And for example, the law was introduced with the limit of 56% of the effective interest rate. As I mentioned, it was done, I think, five years ago on retail side.
Also, there is pressure. It's not yet regulated, but still the pressure on the interchange commissions as well. And but the market is moving itself also. So if you we already analyzed and we provided this analysis to our central bank that the market itself is moving down. And if, I don't know, ten years ago, maybe the interchange commissions were up to 3%, even two percent, which were charged by the banks, now they are down to around 22%.
Level. And I think that the pressure will still continue, and it's not only Kazakhstan, but also global tendency on regulation of the commission. And again, we are preparing for that. And we understand that commissions maybe is not the area where we will see the aggressive growth. And for us, it's more important to have this cross sell to keep the client inside of our ecosystem in the bank where you can provide not only banking services, but also non banking services like insurance, life insurance, if it's retail clients.
We do provide our investment banking services to our clients. Then if it's, for example, big retail, we also do provide collection of cash services. So those commissions are not regulated. And it's, again, not banking it's not to the banking business. It is non banking.
So but still having the clients in one ecosystem providing all different services, and we are the only financial group in Kazakhstan which can do provide this kind of full range of services, this part is not regulated and is not considered as a banking commission.
Also, that last year, because of the merger of KTB to Halic Bank, part of transactions became fee free because they were previously considered as external payments between customers of Halic and KB. And after the legal merger, they became internal bank transfer. So a part of commissions have been removed. But we should look more into perspective because for the customers, it became more profitable to make payments within the bank. So meaning that these balances actually retained with the bank.
So they are kept on the current account, which is also very low or in many cases, zero rate, and we can place that liquidity profitably. So whereby we would be earning on the interest income. So looking on the fees and commissions, just only part of the story. So you better look from the overall stability.
And maybe just recently, When some banks were charging commissions on loan related accounts, Hollywood never charging this kind of commissions. And it's prohibited now by the law. It was prohibited in 2012, then also in 'sixteen. So it's against different commissions which our banks are charging. And, yes, general regulation is putting down this commission commission level and types of commissions.
Yes. Inflation is going down, and the target is four to 6% of inflation. The base rate today is 9%, but I do not expect that, for example, this year, it will go significantly down. But still, we see there's some lag on adaptation of commissions on the interest rates on loans and in deposits in banking in general. So the interest rate on the National Bank note on state securities are moving down.
So now it's around point 5% yield. And on the loan side, in general, the tendency is also that the interest rates are going down. So on the corporate side, today we charge around 11%, 12%, on SME it's higher, up to 14%. And in retail, it's on average, I would say, 18%. So the rates will be maybe moving down, but also the cost of funding will also decrease.
And the deposit rates also will be in line with the overall interest rates.
Actually, if you see from 2010, there have been different movements in terms of the rate. They were going down, then especially in 2015, 2016, they were materially went up. Now again, on the downward trend, but in terms of net interest margin, we were more consistent. So we were at Halibanco keeping net interest margin between 56%. So from that perspective, we are more neutral and just can be just simply increase or decrease the NIM due to the patient, different serious adaptation of asset or liability side to the movement of rates, but not structural change operational effect to the net investment margin.
And also, we see this is the lowest level of the loans of the balance sheet, of the loan portfolio in the bank, like around 50%. Usually, we were between 6070% of the total balance sheet on the loan portfolio. And again, as loans will grow on our balance sheet, I would expect that NIM also should grow.
Andrew Keely again. Do you have any sense you could share with us about how big a role you see the business in in Uzbekistan being part of
your overall business over next year?
Well,
in Uzbekistan, we see opportunities and even to become maybe the leading bank inside of Uzbekistan. But maybe I would stress that overall, the subsidiaries are marginal to our balance sheet and to our net profit. So the main business, the main income comes, of course, from Kazakhstan, of banking and non banking operations. So I wouldn't expect that in the next even two, three, maybe even five years, it will be a big portion of the loan book or the, again, income tax. But if you know the Uzbek market today, the total banking sector of Kazakhstan is twice less than our total balance sheet.
So it's really small. Of course, it can grow quite fast. So we will are entering to the market. And again, we will grow the balance on the risk and the growth. So you know that how it is always considering risks as well as
asset quality.
For the problem loans on your balance sheet? Any hard targets that you set for a team that you can share about? Or at least, do you have some color on how you're working about what's the medium term plan for that? And the second question, very much related to it, what's your collateral coverage for base loans? And what types of collateral do you have?
What's your experience portfolio on this collateral? If you could share color on that. Yeah. Thank you for your question. Yes, indeed.
When you look at the Stage two and Stage three on the nominal basis, have more than 23% of the total portfolio. But again, as we discussed, mostly related to the nature, which is just the notion that most of portfolio has a legacy nature. On that one, one of the slides we are showing the progress, which we already have with regards to working on the legacy portfolio separately portfolio and the portfolio which came from.
And maybe just to add that since optically may look at a large number, if you take a look on the qualitative aspects, you would like cash interest gap, you would see that we have very stable and good situation there.
And probably to add a couple of things. On the Stage three, we discussed why it's not that correlated with NPL figure. This is because we have a policy that once the loan we structured and which became actually impaired, it can become fully performing. It can fall according to the new schedule. But we never remove the loan until full repayment from that category.
So in fact, part of the loans which are considered as a restructured or are sitting at the stage three, which are fully performing already for last two, three, five years, we still keep at that definition until full repayment. So that is probably a bit more on conservative side. And also on collateral, Victor mentioned figures, but I want to add that we also have quite conservative approach in terms of how we are assessing the collateral, which we apply for our provision purposes. Actually, are putting quite a long recovery period on the collateral side. So depending on different collateral types, three, five, up to seven years of time period until realization.
So again, we look at the history, we look at the core procedures, our data actually never exceeds actual which we realize. In the case when we in many cases, we realize collateral at more short period of time than we are assessing in our calculation, which is which are resulting in the release of provisions. That's why you see that our cost of risk is actually lower. So we typically say that our normalized level is probably around 1%, but for some recent periods, the period when we have to create additional provisions start off like the acquisition, our cost of risk is even below 1%. So this is actually the fact that we are realizing collateral as, in fact, at quicker pace than we set in our provision calculation.
My name
is Patrick Pastorini from Collibro. I have a question on the
prepayment of the euro bond, 200,000,000 that you repaid. As far as I can see, you have €780,000,000,000 CASAK payment on your cash side in U. S. Dollars. So I was wondering, as you showed that D Bill's free yield is 2.4%, while you maintain this drawdown standing at 5.5%.
And the second question, you needed that the exchange rate being artificially low. So maybe you can comment on standards and quality in that regard and maybe also state your sensitivity in terms of capital ratio during the different exchange rates. Can you comment on the sensitivity of capital ratio relative to a move in the exchange rate?
So if
the exchange rate moves 10% higher or lower, what that would mean for your capital adequacy
ratio? If
you allow us to we look at the at at consistency is very low because as said, the the open current position is which we try to maintain at the bank level is close to zero. But we have nonbanking subsidiaries which are running certain open currency positions. We can give exact figures of sensitivity. But again, as I said, there are two elements for that. The one is the nominal sensitivity, which is, let's say, one day impact of movement in current and how it translated into the capital.
And second is the side effect due to change in the other profile or deposit profile. So when we talk about
on our capitalization ratios, then you can see that there is almost, like, no impact because we've been through the 50% devaluation and even almost 100% devaluation in one within the one year, 2014, 2015 and before in 02/2009. So you can see that the capitalization ratio of the bank was still remaining very high up to around 20%. So there is a quite low correlation. In terms of our eurobond outstanding, yes, we do have two eurobonds. One is maturing in January 2021.
This one is traded today above the nominal value. So I don't think that we will consider to buy back them or redeem them earlier. And the second euro bond, which we took from the acquisition of KKB with a yield of 5.5%, they were in the total amount of $7.50, out of which 200 already redeemed, because there is a clause that with the announcement of thirty days in advance, you can redeem this bond. Again, we did this first step, you know, of 200 redemption of 200,000,000. I cannot say if we will keep them till the December 2022 maturity.
So it's possible that we will maybe in stages redeem them before the maturity. But at the closest period of time, we are not planning it.
From DDP Capital again. We have talked about the pillar in terms of the digital further digitalization of your business. Perhaps you could elaborate how you expect your branch numbers and the headcount numbers to change in the medium term as the mobile and digital offerings would be rolled forward?
Yes, good question. In terms of the branch network and the redemption in the number of staff, on the branches, I do not expect the, like, big numbers to be cut. Why? Because still we see that the client base is growing within the bank, and still the coverage and the presence in the region and in some rural areas is important for us to be able to contact with the clients, especially in
the rural
areas. But what we do, we close the smaller branches and create like bigger, more digital, more technological points of sales. So again, I do not expect in the next three years big numbers to be cut. But still, of course, the optimization will be like normal type of business. On the headcount, maybe some cuts will be there.
I cannot give you right now the exact number, but I do not expect it in the amount of 20% like we did last year. But again, digitalization is not so much on optimization of the cost. It's more on the growing of business. So we expect that the clients will the number of clients will increase, especially on retail side. We expect that number of transactions also will increase.
We expect that the volumes of transactions also will increase. So and at least we are not planning to increase this tax to support growing business.
Just returning to the question in terms of the sensitivity. So the move of Tengue to U. S. Dollar by 15% actually has the impact on the net profit and capital in the area of 6,000,000,000. And actually, if you look our financials for last year, actually, exactly moved around 15% throughout the year.
So we see that there is no material change in terms of no material impact either on our net income or the capital. So again, it's the fact that we are running the neutral position. Only small facilities have open positions because of the nature of their business.
Yes. And maybe to the previous question on the number of outlets. As you saw from our strategic objectives, we are also focusing on improving client services. And while we would be increasing usage of our digital channels in order to do a number of transactions remotely. We will be encouraging our clients to use branches for like more complex products, like more immediate application, phone, getting some other services.
So instead of providing services in our branches, we will be focusing more than on sales of like complex products. And thus, we don't expect that number of outputs will decrease significantly. We, from time to time, optimize them, but it is our regular course of business. And maybe just to remind that we also have participants on the line. And if you have some questions, please let us know.
We have a question. Our first question is from Charlie Almucci from Teramera. Go ahead. Charlie, your line is unmuted. Please go ahead.
Hello?
Hi, good afternoon.
My name is Cholu Alametu from Telomere. I just have a couple of questions. One of them is a follow-up on the asset quality questions. You there's been a lot of talk about the stage two and stage three loans. I just wanted to know whether you plan to transfer any more loans to the separate SPV or whether you're okay to handle whatever problem loans that you still have on balance sheet on your own?
That's the first question. The second one is more sort of broader strategy bond market question. A lot of the focus today has been a little bit, I guess, skewed to the equity side in terms of your growth and looking to Uzbekistan and other countries and so on. And you've been talking about potentially even redeeming more of your Eurobonds in the medium term. I just wanted to know how you think bond market investors should view the bank now.
Is it as a bank that is gradually exiting the bond market? Or do you think that in the near term we could see HALIC return with the Eurobond? I know that in the first quarter results call you said there's nothing imminent, but could we in the next year or two maybe see you come back either with a senior or subordinated deal? And linked to that, could HALIC consider a 10 gate denominated Eurobond given that the sovereign is considering one? Thank you.
Thank you. Yes. Thank you for your questions. Regarding the asset policy, specifically talking about the Stage three, again, want to reiterate that the policy of the bank that once the customer has been restructured, it remains at that status until the loan is fully repaid. So we do not have a certain period of time within which we decide to move them into stage one again.
So the stage three would contain the loans which are impaired. It would contain loans which are in the positive situation, but also would contain the loans which have been restructured and which have been performing for quite significant period of time. When we talk about the CV, typically, we've brought up the process of working out in order to consider whether the loan would retain at the bank balance sheet or to be transferred to SPV. It depends on where we see the better recovery prospects and where it it makes sense from the overall value added perspective. If the loan has been restructured and it's performing, so definitely, it will retain on the bank's balance sheet.
If the loan is not being performing, then we have option either to keep on the bank balance sheet or move it to SPV. And typically, the loans which are moved to SPV, in case where we see that that movement would give more recovery prospects, It can be broadly in two aspects. One in two examples. One example is the asset should be further improved before we would consider potential sell down of that asset. Basically, if we talk about the legacy real estate portfolio, then if the real estate needs to be upgraded or needs to be completed in terms of construction, we, the bank cannot do that on our balance sheet because it's limitation in terms of the banking license.
So from that perspective, moving that up into SPV, when the SPV can complete the construction and start selling, the readily available real estate would improve the quality. Secondly, in some cases, the bank has a lack of control over assets. Again, if we get the example of certain business, be it a business center, for example, we, the bank, are limited in terms of getting the revenues or became the to get the control over the cash flows. Because, again, we have the limitation in terms of the banking license. So we can move that exposure to SPV.
And as a part of the settlement with the law, SPV would get the ownership and control of the asset and the cash flows. It can upgrade it. It can improve the tenants. And then it improves the market value and potential for higher coverage. So these are considerations that we are taking into account when making decisions whether to keep loan on the bank balance sheet or transfer it to SPV.
And in terms of the fixed income capital markets, I would say that, yes, we do not expect in the near future to go to the capital markets for the borrowings because you see that the bank is over liquid. And especially in the dollar terms, financing would be much higher to the capital markets than we can today attract within the Kazakhstan. And just as an example, we recently issued local bonds through IX in dollars with the interest rate of around 3% for three years term. So you see that today within the Kazakhstan to attract quite cheap financing in dollar terms is a better opportunity than go to the international capital market. So but at the same time, we have this dilemma.
We want to be present on the capital market international capital markets. We are, again, consider ourselves as a public company, and we want to be present on international capital markets. So we have this dilemma, to be honest, and we will see. But again, in the near future, we do not plan to go for the bond market.
And also, my question with respect to Q2K Eurobond, we think that it may be attractive in case of very good interest and interest interest rate. But, again, we will compare it to our average funded cost and to the terms and to the length of the fund.
Great. Thank you very much. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press 01 on your telephone keypad. Thank you for holding. We have no further questions.
Dear speakers, back to you for the conclusion. Okay. It looks like there are no more questions. Thank you very much for participating at our Capital Markets Day, and we are very open to answer any of your questions in the future. You can contact anybody sitting here today out of our team.
And also, we have our team members in Kazakhstan at any time. Again, we are quite open to any contacts. Thank you.
Thank you.