Good morning everyone, thank you for joining us for the Capital Markets Day today. I'm really happy to present to you our latest results and give you some update on our midterm targets. With me today, we have Murat Koshenov, who is Deputy CEO, responsible for corporate banking and international activities. Viktor Skryl, head of our strategy office, as well as Mira Kassenova, she's the Head of FI and IR. As you know, since acquisition of Kazkommertsbank, we have received multiple questions from various investors and analysts about the bank and its future. We decided to organize this dedicated Capital Markets Day and show you what is the bank today and how we see Halyk 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. We go for the slide number six. You can see on this slide that Halyk 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 645 sales outlets, 8 million payment cards, with total population in Kazakhstan of around 18 million, 285,000 SME clients, and 71,000 POS terminals. We have the highest credit rating among the banks in Kazakhstan, I'm referring to the locally owned banks, and we are only two notches below Kazakhstan sovereign rating.
We are also a leading digital franchise servicing 3.6 retail clients and 168,000 corporate clients online. On slide number seven. This is about our history, as you know, Halyk Bank is today almost a 96-year-old financial institution. It was founded in 1923, we are listed on the Kazakhstan Stock Exchange from 1998. We first accessed the global market in 2004, having placed our first Eurobond. Also, at this year, we acquired our two subsidiaries in Russia and Kyrgyzstan. We were listed in London Stock Exchange in 2006 and still remain listed there. Another moment in our history was acquisition of Kazkommertsbank 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 the bank from HSBC. It was a local subsidiary 100%-owned bank by HSBC.
In 2017, we sold 60% of the shares in Altyn Bank, which was renamed from HSBC to China CITIC Bank. Now we have this joint venture with CITIC Bank where we hold 40% of the shares and 60% belongs to China CITIC. Maybe also you remember that we were offered in 2013 to acquire BTA. We've done the full due diligence of that bank. We refused to purchase BTA in 2013. Also, on this slide, you can see some selected international 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 Halyk Bank represents a unique investment opportunity to consider. We are operating in a large and growing economy with banking sector that currently is still underpenetrated when comparing to other economies.
We think there is still potential for growth. Halyk is a domestic champion enjoying number 1 position across all the key market segments with large margin in market shares to its competitors. Halyk 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 Halyk 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 POS terminals.
We also continuously invest in and develop our digital proposition for both of our retail and corporate customers. Halyk 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 slowdowns, and at the same time, being able to control our asset quality. We have a solid capital position with one of the highest Tier 1 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 2006, and we have followed U.K. corporate governance codes 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 Halyk 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 Koshenov to give further background on each of these strengths.
Hello, everyone. Thanks for joining us at the Capital Markets Day today, and thanks for those who were able to dial in. I will go through the key investment case areas in more detail. On slide 10, we are showing that we, as Halyk Bank, operating in large and growing economy. We actually the second-largest economy in CIS and the largest one which is not under sanctions. 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 highest GDP per capita in CIS after Russia. The population is growing, and you know that since Kazakhstan took independence, there was some slides in the population because of immigration.
Since then, the population of country was steadily growing. We see that overall population and population of working age is growing and continue to grow at roughly 9% from 2016 to 2024. Also, the annual real growth rate per capita is also increasing. It is expected that during 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. It remains the case during 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 last few years.
On this slide, you see that loan and assets for the banking sector have reduced during last three years. That was mainly result of cleanup of the sector when some of the banks saw their license revoked as part of this process. We'll talk about that a bit later. If you add up the cleanup amount, still the loan growth, 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. We think that the sector has been deleveraged substantially. That creates the opportunity for the banking sector to grow in the coming years. Halyk Bank is domestic banking champion in any dimensional metric.
There is also substantial gap to the second player on most of these metrics. We dominate the market from 30%-50% of market share on the metrics which you can see on the slides as well. There is 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 twice. With share in assets and loans at the level of 30%-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 3 position in terms of total assets. We have number 2 position in terms of customer deposits and net income.
Even if you add to the comparison the state-owned banks, we still enjoy strong positions, number 9 in terms of the assets, number 6 in terms of total deposits, and probably what is more important, we enjoy number 4 position in terms of net profits amongst CIS 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. 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. Here, just to note, Jusan Bank is previously known as Tsesna Bank, they went through rebranding recently.
In the economy where we have around nine million economically active customers, we have more than eight million clients with payment cards. It gives the depth of our penetration in the economy and among the private individuals in Kazakhstan. You know that digital proposition became important not only on a global scale. In Kazakhstan also, digital proposition is developing very fast economy-wide, as well as banking sector-wide. We at Halyk Bank are also prepared to benefit from further digitalization of this sector. On this slide, you can see a 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 Halyk Bank is using Apple Pay, and the payments in the first quarter is above one million.
It's low level at this point of time, we see the strong growth potential in that area. We were also the first bank, and at this point of time still remain the only bank, which launched QR code payments, which makes payments even easier. Like our customers can make payments through QR codes 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 a few days ago. If we talk about the online bank proposition, we have two platforms. Both of them came as a part of acquisition of KKB. Homebank is devoted for retail customers and we have roughly 3.6 million users at the end of the first quarter.
Onlinebank is a devoted online platform for corporate banking customers, and we have roughly 170,000 users at the end of the third quarter. In order to further make a better proposition to our customers, we have some exclusive agreements, like with Booking.com, with 7% cashback. We have agreement with Avis Rent A Car. Now we can talk about how this translated into 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 KTB. At the same time, net interest margin remains in the healthy area between 5% and 6%. Here you can see also comparison with our competitors from margin perspective. Here we are putting the risk-adjusted net interest margin. As well, you can see the mix of the businesses.
We see that Halyk Bank is enjoying the mix of the businesses, unlike some of competitors which are focusing on certain products only, basically are monoliners. 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 a very good operating efficiency if we measure that by the cost-to-income ratio. During all this period of time, our cost-to-income ratio was fluctuating between 38%-32%, and this is below the levels which our peers are showing. Also in terms of return on equity, we also have a much better position, actually the best position in the country among the big top banks. Now let's see to put our performance stability into perspective on the regional scale.
We are putting on this graph comparison with Eastern European banks, with U.S. banks, Kazakh banks, and Western European banks. Clearly, you see that in terms of both cost to income ratio as well as return on equity, we are showing great results. We have not managed to show that last year, we are putting here calculations on a 5-year average basis, we have been quite consistent here. Interesting to note that if we're comparing ourselves versus the Western European banks, our cost to income ratio is roughly 2 times less than our Western European peers, while return on equity is 3 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, 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 40%. 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. On metrics in terms of net loans, total deposits, and total assets, our market share improved from 13-18 percentage points. On the next slide, we see the asset quality, which is one of our priorities. Here we can see that during 2018, we managed to bring an NPL 90 days plus ratio to a lower level than it was before acquisition of KKB. In 2017, there was some increase in NPL due to acquisition of KKB. 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 KKB acquisition. Our funding base remains solid and conservative, deposits constitute about 80% of non-equity funding. Because we have ample liquidity, the net loans to deposit ratio is quite a low level, it's reduced even further post-acquisition of KKB and currently stands at roughly 53%. Liquid assets constitute close to half of our total assets. This is an 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. Here you see that our return on equity is the strongest among peer banks, despite the fact that our Tier 1 capital ratio is also one of the strongest.
If you put the capital level to the same level, 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 assets reaching 4%-5% over the last five years. As a result, we have quite a healthy capital buffer, which allows us to think about returning it to shareholders. Also during this period of time, we are progressively deploying some of the capital. We also want to show our dividend distribution history. In 2011, we introduced a dividend payment policy, 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%-50% in 2017 and 2018.
There are only two years when we hold the dividend payout ratio. In 2015, due to sharp devaluation of tenge, sharp reduction of oil prices, that was mostly a precautionary measure from the bank. In 2016, the payment was halted because we were already in talks with KKB to acquire that bank. Once the acquisition had been completed and the capital level remained at high levels 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 the dividend distribution policy, 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.
While the UK Corporate Governance Code is not directly applied to Halyk Bank, we still base our corporate governance code, which is linked to that. You know that according to World Bank, it measures the Doing Business index, and Kazakhstan has the highest protecting minority investor score among all the countries which is assessed. We also have all necessary committees, which is working under the board of directors. Here you see also the combination of the board of directors. We have seven board directors, including CEO and shareholder representatives, and we have five independent directors, including the chairman. All directors have enough experience in banking sector, international banking, in economy-wise. I also want to highlight that recently, Anton Musin joined the board of directors as an independent director, and he is a managing partner of Accenture.
We think that he would add value in terms of bank's ambition, in terms of developing digitalization. We also have best-in-class corporate governance. It's not only covering how the board is working, but also, we put a lot of attention in terms of operation of our internal audit department. It works according to the international professional standards. In September 2017, the bank received a certificate from PwC, which confirms that the activities of internal audit department of Halyk 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 15 to 20 years. They have long-term experience with Halyk Bank. It's quite stable. Most of management board members have experience from international banks like ABN AMRO, Citibank, RBS.
Couple of people, they have experience working with BTA Bank as well. Finally, in terms of the investment highlights, on the next slide, we present aggregate results of Halyk Bank during all this period of time since 2018. You can see that the economy went through quite a challenging period, like in 2008, 2009, aftermath of the global economic crisis, and 2015, 2016, the slowdown due to collapse of oil prices, sharp devaluation of tenge, and introduction of sanctions against Russia. Despite different cycles of economy, we still managed to show the average return on equity at a level close to 19% on the aggregate basis during this period of time. We have never recorded during this period of time the years of losses.
The lowest return on equity was close to 7%, and the highest return on equity, that was actually last year, return on equity almost reached 28%. We have a business model which we think is resilient 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. Despite the acquisition of KTB, our financial stability even strengthened during this period of time, which is confirmed by the actions of rating agencies. You see that the rating agencies, they actually improved either their outlook or upgraded ratings post acquisition. We see here what the ratings were pre-acquisition and what are the current moves. You can see the most recent actions. Now moving to the next 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 it is continuing to grow. The nominal level of GDP is $173 billion, despite the fact that tenge actually saw almost twice devalued during the last five years. Kazakhstan economy demonstrated high level of real GDP growth of 4.1%, both in 2017 and 2018, and showing decrease in inflation and decrease in unemployment level. Kazakhstan also enjoys positive trend in terms of trade balance, with exports exceeding imports, strong inflow of foreign direct investment. Kazakhstan is rated with investment grade by all three major rating agencies.
Important to mention is that Kazakhstan, in 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 any of the rating agencies since then. Kazakh economy recovered from the crisis, which was caused by the fall in global oil prices. The real GDP growth, even in difficult 2015, 2016 level, was still positive level, like 1.1% in 2016. During last couple of years, as I mentioned before, 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 contribution is coming from services and industrial production, and both these areas were contributing to the growth of GDP during the last three years.
Back of on the increasing oil prices, the trade balance has improved since then, and current account was in some period of time was at negative territory. Fourth quarter last year, and first quarter this year, current account balance, Kazakhstan is in positive territory, which is a good sign. The primarily export is linked to the minerals product, including oils and mining, oil and gas, metals and mining, chemicals and food production. Kazakh economy is quite open in terms of the trade, and you 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. In terms of the oil, Kazakhstan is 11th largest country in the world. Except oil, we have resources in metals.
In terms of uranium, chromium, zinc, and some others, we enjoy top positions globally. We are large player in global markets. Extraction of these and exports of these items are large part of Kazakh economy. Recent positive price dynamic for natural resources have helped Kazakhstan to increase its export revenues from natural resources, and it exceeds KZT 50 billion in 2018. Oil production recently increased due to launch of Kashagan oil fields, and Kazakhstan oil production is expected to grow further to over 2 million barrels per day in 2020, back on recoveries of oil prices. If we talk about the monetary policy of Kazakhstan. You know that before 2015, there was close to peg regime on the FX side, when tenge was linked to the US dollar, 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 this year, inflation on a year-over-year basis are standing even at lower level at 4.8%. National Bank reduced corridor for inflation, and it gradually was reducing from 6%-8% to 5%-7% last year. From this year, National Bank set the target from 4%-6%. Along with inflation targeting, National Bank introduced so-called base rate, which is the indicator for short-term money, under which the National Bank is managing the interest rates in the market. On the inception, the rate was set at high level, 17%, and because of reducing inflation level, it's gradually reducing the base rate. Currently, it's standing at 9%. Last year, as you see, those number of cycles reduction.
Halyk Finance, which our brokerage facility, is expecting that base rate would go further and expect at least one more reduction this year to 8.75%. 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 FX reserves of the country to GDP is standing above 50%. Another area where Kazakhstan government is focused on structural reforms, they aim to increase the transparency and stability of the public authorities, implement best justice practices, including the introduction of investment committee, under the Supreme Court. It's developing the international arbitration center based on English law in Astana International Financial Centre. One of the areas where the government is focusing economic reforms, including privatization. Privatization is going underway.
Last year, you know that there was IPO set by Kazatomprom and a few more state-owned companies are set to go through IPO in coming period of time. 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 unemployment level, increasing contribution of SME sector to economy. It is difficult to compare countries on different metrics. Few global institutions try to do that. One of them, which is widely recognized, is the World Bank Doing Business ranking. You see that the government, due to structural reforms, managed to substantially improve its position from 77th 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. If the country would be focused on this, there is still potential to further improve our Doing Business ranking. Talking a bit on the Kazakh banking sector. As you know, Kazakh banking sector experienced some turbulent time 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 loan portfolio was steadily growing. What is important to see on this slide is that, on retail side, it's not only growth on 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.
Currently in the banking sector, we have more retail deposits than the corporate one. Loan portfolio and deposit portfolio banking sector remains diversified in terms of sources and uses. Important aspects in countries like Kazakhstan is a level of dollarization, especially on deposit side. That was very important topic when there was a peg, factual peg between tenge and dollar. Since National Bank moved to more flexible regime, it helped also to improve on that front. You see that currently, tenge deposits again start exceeding the dollar deposits. National Bank also introduced some measures in order to stimulate the usage of tenge deposits, like applying different cap for deposits, which is guaranteed by Kazakh Deposit Insurance Fund, as well as reducing the cap on the dollar deposits. National Bank, historically, Kazakh banking sector was quite developed in terms of regulation.
The country was the first among former Soviet Union countries in order to bring banking regulation to best international standard. It was back in 1995. Kazakhstan was the first country amongst them, moving from local accounting standards to international accounting standards. That has been in place already for more than 15 years. Again, with global rollout of IFRS 9, Kazakh Bank was also among the first one. IFRS 9 was introduced in January 2018. Also during 2018, there was important changes in the banking regulation when the authorities of National Bank have been upgraded, and now National Bank has more power in terms of utilizing its motivated judgment with the aim to have more risk-oriented approach towards the banking regulation.
It is also expected that this year, National Bank will conduct the asset quality review of the banks. Also, during the last few years, the 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 banks to hand over, or in some cases, they revoke banking license. All that went to further consolidate banking sector and to actively clean it up. We see that the number of banks reduced substantially from 48 in 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 the last few years, banking sector has significantly deleveraged. That also helped to improve the equity base. We see that equity of Kazakh banks has increased. Also, the profitability of the banking sector is restoring from lower levels, 7% in 2015 to over 20% in 2018. 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. You see that accrued interest, which also includes interest on loans which are not shown by the banks as NPL, also has reduced by roughly 50% during the last four years. Now I want to hand over the floor to Viktor Skryl to talk about the overview of Halyk Bank.
Thank you. Good morning, everyone. Let's move to page 38, group structure. Halyk is the largest financial group in Kazakhstan. You can see our detailed corporate structure here. The main takeaway is that most of our business is based in Kazakhstan, and alongside our core banking business comprise also insurance and asset management businesses. You can also see that our international footprint have presence in our CIS markets. We'll discuss this in more detail in the next slide. We would also like to provide you with 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, Altyn Bank, formerly CITIC Bank Kazakhstan.
As we already mentioned, in April 2018, we have completed sale of 60% stake in Altyn Bank to China CITIC Bank and Shuangwei Investment. We remain holder of 40% of that subsidiary. Our investment banking and asset management business comprise Halyk Finance and Kazkommerts Securities, which we acquired together with KKB 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, Kyrgyzstan, and Tajikistan. We're also in the process of setting up a new subsidiary in Uzbekistan, and we expect to commence operations later, but very soon. We will provide you with the information in the next slide. With Uzbekistan, we will have presence in six countries, including Kazakhstan.
This is the largest coverage of CIS market among peers which operate in the region. The next closest competitor, as per our analysis, is only VTB, which also have presence in six countries. On slide 40, we would like to start discussion of our core businesses in more detail. 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 closest competitors. You will see the next four closest peers all together have market share smaller than we do. You also would see that market has undergone some consolidation recently, with the share of top five banks increasing by about seven percentage points over the last few years. Obviously, our position was significantly strengthened by VTB. 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 KZT 10 billion by revenue per year. The clients with smaller amounts of revenues are treated as clients of SME business line. You see that in large corporates, we have 2,700 clients, of which 430 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 Kazakhstan corporate space that out of top 100 largest corporate clients, 75 are clients of Halyk Bank. On the next slide, we would like to provide you the overview of 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 a single segment. From the standpoint of view of currency breakdown for loans, you would see that around 39% of loans are issued in foreign exchange currency, in foreign currencies, and those loans are mostly to corporate loans. SME borrowers take funds mostly in tenge. We provide fixed loans only to financially strong clients, which may sustain any turbulence in the market, and only to those clients which have revenue in Fx from their export transactions. For currency breakdown for deposits, you would see that it's roughly 50/50 for KZT and Fx. On the next slide, we would like to provide you with information on other products for our corporate clients.
We have a range of supplementary products which support our clients in their businesses and daily activities. First is the payroll product. This is an important source of cheap funding for us, and this enables us to build a proprietary database of retail customers and cross-sell our retail loan products to customers with consistent income flows. As of 31st March 2019, we had 4.4 million of payroll cards issued, again, comparative to 18 million 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 KZT 24.5 billion of fee income in gross terms in 2018. This business is supported by 303 cash settlement units. Next business line is acquiring, which is very significant business for us, which we have significantly strengthened with acquisition of Kazkommertsbank.
We process around 45% of all card payments and 75% of e-payments in Kazakhstan. We are really strong in merchant acquiring with about 17,500 of point of sale terminals. Off-balance-sheet products, guarantees and letters of credit. I think it's fair to say that this is where we really dominate the market. You can see it from our strong market share. This business is supported by wide network of correspondent accounts around the globe. 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 Halyk Bank and no other bank. On the next page, we would like to start with retail banking and provide you the competitive landscape through showing our share in retail deposits. We have 37% share, number one position.
Similar to corporate business, the sector has seen some consolidation recently, and we have benefited from the acquiring of Kazkommertsbank. On slide 45, I would like to provide you key highlights of retail banking. As I mentioned earlier, on the loan side, it is approximately a quarter of our loan book. We have about 836,000 of retail loans outstanding currently, of which 39,000 are mortgages. On the deposit side, KZT 3.2 trillion of retail deposits are represented by 6.6 million of active retail accounts, and we have 9.2 million of payment cards linked to those accounts, which is unrivaled. We also have 3.6 million 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 with a sense of the range of the products we issue to our retail clients.
The majority, 67% of the book, are the consumer unsecured loans. It is, however, important to notice that the majority of these loans are issued within our payroll product so that they are covered by the future salary payment into the customer's account. The bank is the first in line to debit the card in order to withdraw payments for the loan. In the future, payments raised on physical collateral, but we consider them materially safer than a classic consumer secured loan. Mortgages are our second largest segment, 24% of the book, and it is important to mention that these are tenge-denominated mortgages, and the fixed mortgages are lent by the law. Other segments are retail secured and credit cards and auto loans.
In terms of credit cards, the majority of clients were acquired through Kazkommertsbank, where they have a more active segment and more active clients for that type of product. On slide 47, we would like to provide you with overview of online banking services. We are really proud of our digital proposition. Homebank is the online platform for our retail customers and the leading Kazakhstan internet banking platform. 3.6 million users with 8 million to 9 million customer visits monthly. The functions include all you would expect from a really user-friendly online platform. We provide payments, card issuance, card-to-card payments, loan applications, and also using Homebank, our internet banking platform for retail clients. You may make Western Union transfers, you can book appointments at the outlet, and you also can withdraw cash from ATM without a card. We provide all such services on this platform.
Onlinebank is a platform for the legal entities with 166,000 users. We are currently the so-called payment ecosystem and have made significant progress recently. 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 24/7 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 in the digital space. As we mentioned earlier, we are early adopters of QR Payments and Apple Pay. We have launched it ahead of some developed European countries, and we are the only bank in Kazakhstan that enables QR code payments. We also allow our customers to pay traffic fines via our mobile banking platform.
We have some interesting offers to our customers for hotel and car bookings for quite a on the platform. On slide 49, we would like to provide you with information on digital banking in Kazakhstan and its potential. Despite all the innovational digital products we just described, there is still some way to go in terms of penetration 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 that the activity picked up recently in terms of numbers of transactions and volume. Maybe just also to provide you with recent updates, for Q1 2019, share of non-cash transactions increased to 72% from 65% in 2018.
For 2017, such share was 50%. You may see that number of non-cash transactions increased by roughly 50% for 2.5 years. Average amount of cash withdrawals and non-cash transactions is decreasing, and these are data supporting the above mentioned trend. On slide 50, we'd like to provide you with information on our insurance business. Our insurance activities are carried out from two entities, Halyk-Life, which is life insurance, and insurance company called Halyk, formerly known as Kazakhinstrakh. We are 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 both, in gross written premiums 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 how we can optimize duplicating preparations. As part of this exercise, we have transferred all assets under management from Kazkommerts Securities to Halyk Finance. You may see selected awards that acknowledge our strong position in the market. On the last slide on this section, we would like to provide you with information about our international subsidiaries, the asset size, and the ratings where applicable, and a very brief description. We generally cover them. This is just a summary to give you the sense of our presence in those markets. This is the last slide in this section. According to schedule, we have a coffee break. There are some updates. We suggest first to go through updates of the merger with KKB section, 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 beginning of 2017, we started negotiations with Kazkommertsbank, which followed by a proposal from the controlling shareholder, Mr. Kenes Rakishev, in February 2017, to acquire a stake in Kazkommertsbank. In March 2017, we signed a memorandum of understanding with respect to the potential acquisition of CTB with a number of counterparts, including the government, the National Bank, CTB, BTA Bank, the distressed asset fund, and some other parties. In July, we completed acquisition of CTB shares. On fifth of July, we acquired a controlling stake from Mr. Kenes Rakishev and Samruk-Kazyna. 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. The National Bank also carried out its own due diligence. After acquisition of Kazkommertsbank, we started analysis on how we shall develop further this bank. In December 2017, the board of directors took decision to merge banks. Starting from that, we started developing the roadmap for integration, and acquired also professional advisors to support us. In April, the joint general shareholder meeting approved a decision to merge Kazkommertsbank into Halyk Bank. In July 2018, legal and technological merger happened. We will provide you with more details on the merger later in the slides. We would like to highlight that following merger, rating agencies improved their view on the current situation in the bank.
For example, S&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 Kazkommertsbank acquisition was the last transaction for Halyk Bank. As I mentioned previously, we did a very thorough due diligence, and BTA loan in amount of KZT 2.4 trillion was removed from Kazkommertsbank balance sheet before transaction and transferred to bad loan fund, thus cleaning up the banking system. Additional provisions were created in sufficient amount, and Kazkommertsbank was recapitalized by Halyk Bank at a later stage. 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 the transaction. Introduction was truly the risk. We discussed this earlier.
We have created a true leader by many metrics in Kazakhstan and number 3 privately owned bank in the CIS. When we say privately, we exclude government and owned institutions. We have strengthened our retail and SME footprint in the country Kazakhstan as well. We became a leader by the number of issued cards in POS terminals. We have grown our gross written insurance premium by 85% when you compare 2018 to 2016, the year before merger, and increased underwriting results by 140%. The synergy extraction is now largely complete with branch network and staff optimization, as well as redemption of expensive Kazkommertsbank bonds, which all resulted in boost of our return on equity, which means that the capital has been deployed in a profitable way.
Digital proposition is something that Kazkommertsbank was known for, and we acquired 85,000 of digital users of our internet banking platform for NLB entity. Acquiring, we are now number 1 with nearly 50% market share by POS terminals and grew our card-related fee and commission income by nearly three times 2018 as compared to 2016. You will see that in our financials. On the next slide, we provide information of synergy effects. Branch network reduction was by around 80% since first day of the merger. Staff optimization 20% less than pre-merger. We have also replaced Kazkommertsbank bonds that we have inherited from Kazkommertsbank 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 synergies.
On the last slide in this section, we would like to provide you with some overview of integration program and give you a few numbers. Management was highly involved in this process, as indicated by the number of man days spent. Transaction was carried out using phase bank approach, which means that integration was done within weekend. IT systems of Halyk Bank and KTB were fully integrated. Client data, which included historic data and transactions, were integrated from one system to another. This was allowed thanks to seven months of very hard work of around 700 people from both banks. The transaction of such type was carried out during seven months, which is a very short time for the history of such mergers. Again, integration was carried out in terms of legal integration IT platform. Bank was operating as single bank following this merger.
This completes this section, and we would like to invite you for a coffee break for around 20-30 minutes. We suggest to have a coffee break for 20 minutes, and then we continue.
Thank you. Okay. 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'll discuss in details. 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 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 Halyk Bank is focused on positioning itself as a key partner to its customers across all the market segments. We are stressed 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 flow 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 Halyk Bank develops key initiatives for each of its business segments. 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. 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, we have the market leader position.
We are introducing the ecosystem in the bank, for example, today we are the only bank who is providing services for 24 hours, seven days a week. Halyk is the only bank who are offering this kind of services. 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 models 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 on board 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. 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. 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. Again, just to stress that usually we do only on an annual basis. The first is growth. We are targeting the growth of the loans in the loan portfolio, in line with the market. You saw in our numbers, our strong position in the market and the market shares we have across all the products. Our plan is to keep the prudent approach to growth and grow organically with the market. We are not considering M&A in the medium term. 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. Cost to income ratio. We are done with the restructuring, and now we can already enjoy the synergies from the acquisition of KTB. 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 too aggressive balance sheet expansion at the expense of asset quality. We believe that the cost of risk for the next medium term will be around or below 1%. Last but not least, the capital. Historically, we also maintain a significant buffer above the minimal requirements, and our capitalization ratios are also usually above 17% and 18%.
We expect, and we target, the Basel I ratio of the capital will be above 17%. At the level of 17% and above, how we can support its growth plans presented here and retain 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 distributions. I mean special dividends. 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 into account our new targets of the bank and including our overall capital targets. This is the section on the numbers, and again, the questions will come at the end of the presentation. Now we go to this section number 7 on our financial performance.
Yes. Talking about the recent financial performance, starting from the balance sheet on slide 65, you see recent development 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 loans level due to acquisition of Kazkommertsbank. Since then, we have been growing prudently. The slight reduction in the first quarter this year is caused by seasonal effect and it's typical. At the same time, we know that the composition of the credit portfolio either in terms of the client segment or in terms of currency, has not changed materially with acquisition of Kazkommertsbank.
On the other asset side, you see there has been significant increase in the government securities in 2017, which was part of the Kazkommertsbank 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 it provides quite attractive yield, which is also a tax-free and also zero risk weight. Return on equity-wise, this is quite attractive. The remaining portfolio of securities is also conservative. Most of them are comprised of either other governments or corporate bonds with investment grade ratings. On the funding base, our liabilities are quite evenly split between corporate and retail deposits. We also have some debt securities which we will discuss more in detail on the next slide. You see further reduction in loan-to-deposit ratio in 2017.
This was due to Kazkommertsbank merger, when Kazkommertsbank loan got replaced with the government securities, whereby reducing loan-to-deposit ratio. As you see, the transaction with Kazkommertsbank was a good deal from standpoint of deposits. There have been increase in the current account balances, and also from the perspective of effects when the dollar liability exposure has been somewhat reduced. On the next slide, we're showing the maturity profile of our debt. Here you see both Eurobonds and local bonds. We have around KZT 828 billion worth of debt instruments which are spread in terms of the repayment schedule. Against these liabilities, we have more than sufficient liquid assets, which exceeds KZT 4 trillion.
We already used part of that liquidity in order to prepay Kazkommertsbank bonds, both in 2018 and 2019. As you already know, we have a very strong capital position, that has not been an issue for us. We have been deployed some of it during the Kazkommertsbank merger. As you see, it was with positive from profitability point of view. In terms of capital structure, I can only add here that the quality-wise, it's also very strong, and the majority of capital is comprised from a solid Tier 1 instrument, so it's pure capital. 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 end of first quarter 2019, which is significantly lower than it was pre and post-merger with Kazkommertsbank.
Furthermore, NPL ratio of Halyk Bank has reached a lower level than it was in 2016, which is the last year before Kazkommertsbank was purchased. In the first quarter 2019, increase in NPLs was mainly driven by several corporate loans, which were previously impaired. These borrowers became overdue. From quality perspective, there was no significant change. Furthermore, we have adopted a rather conservative approach to risk, and currently there is sufficient coverage of NPL portfolio by provisions which exceeds 120%, that has been quite consistent. For quite a number of years, we have coverage above 100%.
Exception was 2017 when post Kazkommertsbank acquisition, there was some decrease in coverage, that was due to application of IFRS 3, according to which NPLs of Kazkommertsbank 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're showing the split of our NPL across the client segments. Most of bank's NPL have legacy nature, and the bank has actively addressed the asset quality, especially during the last couple of years. Halyk has able to reduce its NPL ratios across all key customer segments. We see it is the case with the corporate portfolio, SME, as well as retail. At the same time, we have a healthy coverage of NPL portfolio by provision. The larger part of bank's NPL are in corporate segment.
It's around 40%. To remind, our corporate portfolio exceeds 60% of entire loan portfolio of the bank. 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 the 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 Kazkommertsbank, the bank's NPL in absolute size has been more than doubled. The bank is working through restructuring and NPL clean up on both banks' legacy NPL, having significantly reduced absolute amount of both banks' NPLs. You see on this slide, we separated NPL by legacy Kazkommertsbank portfolio and the portfolio of Halyk Bank.
On both NPLs portfolio, you see quite a significant progress. Whilst the bank is focusing on addressing legacy asset quality issues, acquisition of Kazkommertsbank didn't materially affect bank risk profile. Halyk's risk policies have not been materially changed after Kazkommertsbank acquisition, and bank still applies same prudent risk management risk assessment as prior to Kazkommertsbank acquisition, and same stringent underwriting standards for its new loan generation. Acquisition of Kazkommertsbank didn't materially affect the bank's credit profile, as the bank still remains largely geared towards the corporate segment, whilst it has increased its exposure to attractive SME and retail portfolio. Cost of risk for retail increased somewhat due to different risk profile of Kazkommertsbank customers but has generally decreased across most of segments and on overall portfolio basis. We believe that we have reached a normalized level of cost of risk.
After having acquired Kazkommertsbank and reporting spike in its NPL ratio, the bank put extra efforts on managing its asset quality. During last year, the bank wrote off more than KZT 100 billion of its NPL or about quarter of 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 acquisition of Kazkommertsbank. Furthermore, the net NPL flows was not exceeding the reduction of NPL due to repayment and restructuring of loans. The bank also actively manages NPL through recoveries and write-offs and through restructurings 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. For Halyk 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, Kazakhstan applied IFRS 9 for the asset quality indicator. Here on this slide, you see the dynamics of Stage 2 and Stage 3 loans. The bank Stage 2 loan ratio reached 3.2% in the first quarter 2019, and Stage 3 loan ratio reached 20.4% in first quarter 2019. The increase in Stage 3 loan in the first quarter was related to the transfer of problem indebtedness of some corporate customers to subsidiary SPVs, which was previously classified in Stage 2, with a further aim to recognize this indebtedness an investment in property. We expect that ratio to drop in coming periods.
Despite increase in total Stage 2 and Stage 3 loan in recent quarters, we also here showing the net amount, which is actually the Stage 3 loans minus the provisions which are created against these loans. From that metric, on the net basis, you see that the net 2 and net Stage 3 loans level has been reduced. After significant increase in provisions in 2017 as a result of increased level of impairment on Kazkommertsbank loans, the bank has returned to more stable cost of risk levels, which reflect positive trends it has observed in NPL formation trends. Bank provisioning rates shows the conservative approach of the bank. While the NPL level has been reduced, provision rates remain at sufficient level above the 10%. Now moving to the next section, let's talk about the profitability.
Here, you see how we grew on interest income over these years. We see our interest income increased by 43% during the last couple of years. It is important to note that the KZT 92.6 billion of net interest income for the first quarter, it also includes one-off negative effect of KZT 7.4 billion, which is related to prepayment of EUR 200 million bonds, which has a negative accounting effect. In other words, without this effect, our net interest income would be KZT 7.4 billion higher. On the NIM, we also showing the reported figures as well as the figures which is adjusted for one-off effects, both in the first quarter 2018 and first quarter 2019. We make adjustments for accounting effects, which relates to prepayment of bonds, Kazkommertsbank bonds, which happened in both of these quarters.
You see that net interest margin remains at very comfortable level across this period. On fees and commission income side, you see how our non-interest income developed over time and how Kazkommertsbank really boosted it, in particular, with regards to card-related income, which bringing on board a significant number of retail and merchants acquiring customers. You see a small reduction year-over-year on the bank's transfer commission. This is really a side effect of the legal merger with Kazkommertsbank. When the transaction between Kazkommertsbank and Halyk's customers were previously considered an external and having certain fees attached to that, after the legal merger, this transaction became internal, we stopped charging our customers for this. Historically, Halyk Bank was very strong in terms of cost control and showing very strong efficiency, which is measured by cost to income ratio.
On this slide, you see how the synergy effect has worked. We're showing it on the operating expenses level. We show it separately that on how the cost of income ratio is developing. Separately, we're showing the number of branches and outlets, the number of FTEs, which reduced post-acquisition of KTB. 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. 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 almost 27% first quarter this year.
Now we go to section eight. Actually, to end our presentation, you see the, again, investment highlights, which we already discussed in detail. I'm just thinking on timing. We have half an hour to go for lunch. Before the lunch, what should we do? We go directly to Q&A section. Q&A? Okay. Let's start.
Thank you.
For Q&A session, we suggest that you introduce yourself and ask a question. Everyone knows we don't have questions. Thank you.
Ladies and gentlemen, we will start now our Q&A session. If you wish to ask a question, please press one on your telephone keypad. Thank you for holding until we have our first question.
Martin Roth from Ferret Capital. I'm just looking a little bit at this equation about the loan growth, the return on equity, and the capital adequacy. If you basically have all the inputs to it, but the dividend policy doesn't seem to be in line with those numbers. Not with all the calculations you might have, but I think you've cleared up most of the problems by what it looks like.
Well, I already mentioned that, yes, these are the main numbers which we are targeting for the next midterm. On the dividend payout today, we have this policy of paying dividends from 15% to 15%. I mentioned that the board right now, in the next several months will consider on maybe our new dividend policy. For this year, the target is remaining. The policy will work still from 15% to 15%. Starting from the next year, probably it will be revised. We do not plan to have one of big dividend payments out to reach this 17% level.
No, I guess you would be thinking 20. Yeah.
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 Halyk Bank, that we have very high capitalization ratios, and we have also very high ROE. Still, we do not see the need for high capital for the next period of time. We do not, again, plan any big acquisitions. We always say that in case of acquisition, we have in mind always value-adding transactions. You know our history of BTA, for example, when we were able to refuse if the transaction is not value-adding to Halyk. In this regard, I think the board will work on revision of our dividend policy.
What's the timing of this?
For this year, so for the results of 2019, we do not expect the revision of this maximum amount of payments. We expect it in the near future, the revision of the dividend policy.
Ivan Margelov from [Sber CIB]. Given your market position, do you envision any regulatory pressure on yourselves? What are the sort of institutional limits to your growth within the country, if you see them, when you become subject to more strict regulation?
Before the acquisition of KTB, we had all the approvals from the state agencies, including the Antimonopoly Regulation Agency, where we have no restrictions in terms of the market share or in terms of the assets growth. To be honest, Halyk 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 KTB. We hold more than 50% of market share in the budget salary payments and stipends payments, for example. In some segments, like ATM machine provisions, we have even more than 50% of market share. There is no particular regulation on that. Being the only systemic bank in Kazakhstan for the last several years, we are regulated more on the capital, higher requirements on the 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.
Can you clarify the nature of this more stringent regulation on the capital interface? Can you elaborate, capital?
Basically, on the capital requirements, Kazakhstan moved to the Basel III, there is a basic capital requirement. Also the regulator can implement the countercyclical buffers, it can implement the buffers for systemically important banks. The main difference between us and normal banks would be application of buffers for the systemically important institutions. As we mentioned here on this presentation, our capital is far exceeding the minimum required by the regulation. For us, it's in no way is a limitation. We're almost twice higher than the minimum required.
Sorry, just to follow up on this too. As we discussed, with that big capital buffer, you can either obviously reduce capital requirements and dividend, or you can lever up more. If you give a better understanding of where this trade-off is, given your market share here and how much more do you want to grow organically within the market? How much more do you want to gain in this market share?
Maybe I can add that the loans in our balance sheets are around 50% of the total assets. We can, again, when we are talking about growth of the loan, we can grow within our balance sheet. 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 aggressive numbers on growth. The structure within the bank, yes, we target the loan growth around 10% this year, and then in line with the market.
That will decrease your capital adequacy ratio.
Very quick, that should grow.
Will it increase profitability? How profitable are your non-loan assets?
Actually, it should increase profitability if the loan book will grow.
I don't know what type of assets are these, the 50% of the balance sheet on the asset side. What are they?
The substantial portion of other assets is represented by state-owned securities. It includes the medium-term treasury bills, which are issued by the Ministry 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 a good return because they're also tax-free returns. 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'd have a deeper relationship with that customer. In medium to longer term, it's a move of the structure of the assets.
The yield on this loan is a lot, significantly higher than yield on
It depends on the segment. If we talk about corporate banking, yes. If we talk about SME and retail, it should be higher.
Thank you.
Hi. Phillip Khoury from Impera Capital. I have three questions for you. The first concerns the doubtful stage 2 and stage 3 loans. Okay? If I look at page 71, you have relatively high coverage of NPLs, which I'm assuming is effectively at stage 3. Okay. On page 74, interest accrued and not paid, you said is roughly 10%, right? It's 90% gets paid. On page 75, you have fairly low stage 2, right? Running at around, I think, 3%. Relatively high stage 3. I'm trying to reconcile this 10% of interest accrued but not paid with the low number of stage 2s. Okay? Also the high coverage of NPL and that 10% of interest accrued but not paid as well. I'd be grateful if you could clarify that.
Also, I don't quite understand whether the bad asset management subsidiaries, whether they're on the balance sheet or whether they're off the balance sheet, right? When you have this SPV, I just want to make sure that it's on balance sheet. That's question number one. Question number two relates to the FX side of your balance sheet. Okay? Do you keep part of your capital in foreign currency so that when there's a devaluation, your equity base in local currency rises automatically, and that provides a hedge to your foreign currency risk-weighted assets automatically? That's question number one. Question number two, what is your policy regarding loans on the FX side of your balance sheet, compared to loans on the local currency side of your balance sheet?
I'd imagine that you have a lower target for loans with deposits on the foreign currency side than on the local currency side.
Thank you, Philip. Very good question. Let's start from the question on SPVs. On the consolidated financials, you see the portfolio of SPVs are showing as either investment assets or investment property or the commercial property. They are not showing as a part of the trade portfolio. It's on consolidated basis. Typically, we transfer those assets at the market value. In case we are transferring a problem loan, so we make sure that only the properly valued assets are moved to the SPVs, and any amount which is exceeding is left on the bank and typically is written off against the provisions. On the capital, according to law, all the capital is recorded in local currency.
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. Any change in the currency immediately will not have any effect. You should look for the third side effect, like, for example, change in the asset 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 are loans provided to the corporate customers, which have exposure to dollar proceeds, dollar revenues or which have hedges available.
The loans to retail customers, by law, can be done only in local currency. Loans to SME is majority, again, exposed in local currency. In terms of your question was how IFRS 9 stages compared to the cash gap and compared to NPL coverage. On the IFRS side, you know that the stages. The stages basically gives you the impairment characteristics since the inception of the loan. I think the fact that Stage 3 loan is much higher volume than Stage 2 is exactly showing that most of NPL have a legacy nature. They are long-term, they have their legacy, and recently there was no much significant change in the asset quality. Typically, Stage 2 would show any 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 up to 30%. In some banks, it's even higher. The cash gap of Kazkommertsbank before acquisition, I think, was running at a level of 40%. No, not the gap, 60%. Actually, Kazkommertsbank was collecting roughly 40% of accrued amount. For Halyk Bank, the gap was traditionally more narrow. For last year, the gap was close to 5%. There might be quarter-over-quarter variation and seasonality because some customers are paying on a monthly basis, some paying on quarterly basis, some customers are paying on semi-annual basis. It's better to look at the year-over-year development. 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, it's partially related to the cash gap. The more you have provisions, then you have more appropriate calculation of your net portfolio. Typically, the banks which have higher coverage by provisions and more adequate coverage by provisions, they would show more narrow cash gaps. Basically, for us, it's the case. We have more coverage of our entire portfolio, and we have acceptable cash gap. 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 of portfolio. It can be the case in the situation when the bank is financing immediate term projects where the customers might have some grace periods for half a year or one-year grace periods. Typically, cash gap always present, even in the case when the bank is fully covered by provisions.
Thank you. Just a couple of questions that I think you answered, if I may. How do we reconcile the 20% Stage 3 with the much lower NPL percentage? Because usually Stage 3 is NPL, right? When we look at most banks, there's a strong sort of overlap.
Here it could seem that roughly half of Stage 3 and half of this is the NPL.
I think that's the question of definitions. The NPLs we're showing is actually the loans which are past due more than 90 days. Typically, Stage 3 is impaired loans. 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. In our annual report, in the section which describes the composition of the trade portfolio, you would see another asset quality point, not as a restructured loan. If you add restructured with NPLs, you'll be coming to the Stage 3. It's not, let's say, direct, but it gives you more or less the same-
Understood. It explains the % accrued in there.
There are some personal loans in Stage 3.
Okay. Understood. Okay. Thank you very much. Just that question on the balance sheet use. Obviously, what I was trying to aim at was, I guess you look at your balance sheet into two parts, the local currency side and the foreign currency side, right? 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, the central bank is not going to be able to provide the same degree of liquidity to your foreign currency balance sheet as it will to your local currency balance sheet, the principle. Do you target a different loan-to-deposit ratio on the foreign currency side than on the local currency side?
Actually, for Halyk Bank, it's absolutely not an issue. If you would decompose loan-to-deposit, actually, on dollar side, we have much lower loan-to-deposits. This is merely the fact that we will talk about the dollarization or de-dollarization, and you saw that just about 50% of deposit is dollar denominated. If you look at the asset side, and we talked that loan portfolio represents less than half of the asset side. Within that half of the assets which represent by loan, only 30% is in US dollars. Actually, on dollar side, the bank have a massive liquidity.
This is by nature of the structure of economy and structure of our client base.
Yeah. This is understood. I think we're aligned here.
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? What I'm trying to get at is, obviously, as your balance sheet becomes more local currency, as obviously the National Bank of Kazakhstan is trying to incentivize deposits to shift to local currency, then I guess you can have a higher loan-to-deposit ratio.
We're monitoring that, but we do not have a hard ratio at this point of time because the ratio is so low. 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 Halyk Bank, and they prefer to keep deposits in US dollars, whereby we still, by legislation, have limitations on placing US dollar loans.
Thank you.
Hello. It is Mikhail Shchemo from VTB Capital. I would like to talk a little bit more about medium term loan growth outlook. When you were talking about the macro. Expect approximately 4% real GDP growth and a troubling inflation of around 5% in line with the National Bank target. Together with some growth, inflation pretty much gives a very easy growth of 10% plus, I would say even closer to mid-teens if we would expect some growth in the inflation ratio going forward. Is this something, an acceleration of the loan growth, which you would expect from the next year and the year after? Perhaps you could elaborate on how you see this relationship between corporate and loan growth. Thank you.
No, I don't think that our loan growth will be in teens for the next three years. Again, I think that the level will be around 10%, because you have to see that the base is also very high. If you apply the growth of the total loan portfolio, the base itself is already quite high if you compare to other banks. If we look inside of the segments, usually what we see on a corporate side, the loan growth is around 10%, maybe a little bit below, like 8%, 9%. On SME and retail is higher. Because, again, the composition inside of the loan portfolio, the 60% or a little bit higher than 60% is the corporate loans in our book, and around 15% are SMEs and 25% retail. On retail side, we usually have growth around 10%, 15%.
Last year it was lower. On SME, again, it's also around 12%, 13%, above 10%.
Thank you. Just like to what extent the pace of the growth being at base of 10% is actually impacted by the high share of the state tax lending programs, which exist across the bank. If I would look at the things like this has been a recent phenomenon started from 2015, as the state has increased the amount of lending. I've seen some estimates from the state agencies which say that up to that one third of all the lending programs is actually coming from the state. Do you think that it's sustainable model setup going forward given the long term recent programs or a certain stage of state would be willing to actually come out of the tax lending programs and actually allow a more free market-based distribution?
Well, actually about the state programs. Yes, there are programs for SME and last year it was introduced also for mortgages. I think you are referring more on the numbers which are related to mortgages. We have Zhilstroysberbank, which is fully based on the state provision for mortgages. Also it was a program introduced by the state, which is called Baspana. Baspana Hit and Baspana Company. When there is a 7-20-25 program, it's for 7% interest rate, 20% down payment in 25 years for the loan tenure. It's provided for mortgages. The main growth in this segment. In terms of the other state programs, I would say the opposite. For the last 2 years, the government is decreasing the state programs to support on SME side. On corporate, for example, it was closed I think more than 3 years ago.
It was also decreased in the agro sector as well. Up in 2009, 2010, 2011, 2012, the government was supporting a lot on corporate side and on agro sector. For the last 2 years, again, it's only for SME. Last year, they introduced new program of KZT 600 billion for again, the industrial companies. It still is not so much active. Out of KZT 600 billion, the loans were issued I think around 12 after 9 months. 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 loans are very strict and very narrow. If you look on the total numbers, I would say that the government reducing for the last 2, 3 years already support on the corporate side in terms of the lending.
The main growth only comes on, again, cheap mortgages.
Can I ask you about your capital markets plans and ideas? There was the mention of share placement. What would that be on your plans?
Far as Halyk, we do not comment much on this issue because the announcement came from Almex, our main shareholder. Their plans about to place some part of the shares in the market. They mentioned that they will keep majority and control in the bank. How much and when it will be done? We do not know.
Can you clarify on the shareholder structure then, who the Almex people are?
Well, 74% of shares are held by Almaz Group. Within the Almaz, there are two physical individuals, Mr. Timur Kulibayev and Mrs. Dinara Kulibayeva, which are split by 50/50. 25% are publicly traded shares, which include around 17%-18% on London Stock Exchange, 6% State Pension Fund of Kazakhstan. We have more than 25,000 physical individuals are shareholders of the bank. This is under the Soviet Union privatization program, which was done in late 1990s when the employees and the deposit holders within the bank received shares.
Do you have any plans to, say, stop paying dividends and use your own cash to buy out, squeeze out portfolio?
No, we don't have these plans. Actually, bank was doing that in 2013 and 2012, and it was not done to buy out the shares of every shareholder. It was done to buy out shares from Samruk-Kazyna. Well, if you know the history of the bank, then in 2009, the state went into the capital of four banks. It's Halyk, KTB, BTA, and Alliance. We are the only bank which repaid full capital to the state within one year and bought back shares from Samruk-Kazyna.
No.
That's actually a couple of things. The shares of private shareholders.
Yes.
They just lost.
We were shareholders in KazMunayGas, and maybe many other investors in potential investment there is. KazMunayGas basically used its own cash to manipulate the share price down by stopping dividend payment and then squeezed out portfolio investors by threatening delisting and loss of profits and so on.
I see that Frank Gilus is on your board, and he was chairman of KazMunayGas and was very active in promoting this campaign to threaten investors into selling their shares at low price. Maybe he has repeated skill, and maybe he can sell it. We are very grateful for him.
No. Again, as I said, we do not plan to have this kind of stuff.
In my view, his presence is a risk factor. He is going to keep the leadership.
Well, Mr. Frank Gilus, he is not the chairman of the board in Halyk Bank. He is the independent director in Halyk, and he is not the only person at the board who makes the decisions.
Maybe just to add, according to the new regulation, there are some limitations on how much bank may buy back from the market. There is a limitation of 25% which can be done. There are certain restrictions in place, which also takes into consideration. I probably would add that the whole logic what the management was doing recently is actually the opposite one. We want to be more open, and we actually opened in meetings with our existing potential investor base. Last year, we went on the expensive road show. We have been almost seven days visiting existing and potential investors in London, in New York, and Boston, Frankfurt, Scandinavia. In the meantime, we also see that we are managing the capital as it is. Almost every week, we are visiting on one basis and speak to a delegation of investors in Kazakhstan.
This is number one. Secondly, the announcement of public is also showing the intention of this largest shareholder to bring more minority investors into the shareholding.
To increase liquidity of the shares.
Sure. No, no. That's I mean.
We're actually moving as we are.
After they sell, what would be the added motivation? After they sell, what is the motivation? Of course, KazMunayGas also had an IPO when they sold their shares, and they actually invited investors to participate. At that time, people bought their shares, they decided they didn't want to sell anymore, they stopped, and it wasn't done.
We saw potential, I think, from public people with these announcements. A regular meeting is that actually during our meetings, we are receiving the feedback, and we try to collect the feedback from various aspects. One of the consistent feedback which we are receiving during the last two years, actually, is that the banking sector is likely to receive, which of certain sectors either to increase their stake or to enter the position altogether. As a management, we are trying to convey or actually to transfer this message, which we receive from shareholders to the board of directors.
We've been quite consistent on dividend payment as a bank, starting from 2012. Just exception was for two years, in 2016 and 2017. The 2016 year, it was a big crisis year, if you remember. Especially, it was a big devaluation in Kazakhstan. We decided just to not to pay out dividends for more conservative approach. In 2017, already we were in transaction of acquisition of Kazkommertsbank, discussions with Kazkommertsbank on the acquisition. Again, that's why the capital was not paid out. The assets itself and the business grew or helped them. Then we again restarted to pay out. As you know, this year, it was the historical high of 50% paying out dividends of the total net profit.
If I may continue on actual question of asset section to increase the investor tracking for the bank. As the board will be considering the new dividend policy, would you be open also to look at the changes in the compensation scheme of the management? For example, introducing the partial share-based compensation scheme of management. The second question, regarding the composition of the board, you mentioned that you are adhering to the U.K. Corporate Governance Code, which actually gives you a fairly decent position to explore the prospect of upgrading your listing on the London Stock Exchange or perhaps adding up additional listings as per the Nursultan Stock Exchange. Are there any other options the board or you as the management would consider trying to do?
Well, on the ESOP program, the share offering for the management, to be honest, we not at this time of any consideration or discussion, maybe we have to think about it. On the placement in AIX in Nursultan of our shares, in case of the placement, I think it's possible. I cannot, again, say right now if we go or not. We have to come back with this answer later. Definitely, we will inform if there will be new steps taken.
In terms of the upgrading, your level of listing at the London Stock Exchange, is there something which you would consider?
I think it depends on decision of the main shareholders if the liquidity of the shares really will increase to the level which is applicable. I know maybe we can also consider. Maybe too early at this point of time to answer.
We may ask those of you to speak a bit closer to the microphone while asking the question. Thank you.
Hi. Andrew Keeley from Sberbank. I'm interested in your thoughts on your fee income outlook. You talked quite a bit about the improved position you have in digital payments. Could you tell us a bit about how you see this market as a competition in the payment space? Obviously, it seems like there's quite aggressive players like Kaspi. What's happening in terms of yields in payments? Are you getting decent yields in things like P2P payments and things like merchants acquiring and interchange? It would be interesting to hear what's happening with fees there. Just overall, what you would sense in terms of how fee income is likely to grow relative to interest income over the next few years. Thank you.
Well, in general, we expect that our fee and commission will grow on annual basis up to 8%. We see the competition there, this competition from different companies, not today, but for the last several years, including Kaspi.kz, as you mentioned, but also not only Kaspi.kz, but other smaller providers and telecommunication companies. 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're using. For example, in Halyk, the commissions which we charge when you issue the loan goes as amortized interest income of the loan. Some banks, they show as a one-time commission, but actually, it's still related to the interest rate on the loan. It's important to understand what is the nature of the commission.
If it's pure commissions on payments and on transfers, we, the Halyk, usually are showing around, again, 10%-15% annual growth. It's including not only retail but corporate SMEs and the clients which are loan related and non-loan related. We are market leader in terms of acquiring business in Kazakhstan and especially after acquisition of Kazkommertsbank. They were, before, the leader in this business. Again, as I mentioned already, that 71,000 of POS terminals in the country and around 5,000 ATMs are provided by Halyk Bank. Every second ATM and more than 50% of the market share on POS terminals, again, it's Halyk's. Yes, the fee and commission income is growing. What is important is the net fee and commission will grow again for this amount, maybe around 10%.
Please look to this analysis of how the other competitors are booking commission or booking income in commission.
Thank you. Just to follow up, is there any regulatory pressure in terms of the fees for payments or merchant discount rates?
Yes. I think it's a global tendency, and it's not only in Kazakhstan. 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. The market is moving itself also. We already analyzed, and we provided this analysis to our central bank, that the market itself is moving down. If, I don't know, 10 years ago, maybe the interchange commissions were up to 3%, even 4%, which were charged by the banks, now they are down to around 2% level. I think that the pressure will still continue. It's not only Kazakhstan. It's also global tendency on regulation of the commissions. Again, we are preparing for that.
We understand that commissions maybe is not the area where we'll see the aggressive growth. 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. If it's, for example, big retail, we also do provide collection of cash services. Those commissions are not regulated. It's, again, not banking. It's not to the banking business related. It's non-banking. Still having the client 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.
Well, different commissions, but I can also add that last year, because of the merger of Kazkommertsbank to Halyk Bank, part of transactions became fee-free because they were previously considered as external payments between customers of Halyk and Kazkommertsbank. After the legal merger, they became internal bank transfers, so a part of commissions have been removed. We should look more into perspective because for the customers, it became more profitable to make payments within the bank. Meaning that these balances actually retained with the bank, so they're kept on the card account, which is also very low, or in many cases, zero rate, and we can place that liquidity profitably. Whereby we would be earning on the interest income. Looking on the fees and commissions is just only part of the story. You better look from the overall perspective of the customer.
Maybe just the recent case, when some banks were charging commissions on loan-related accounts, Halyk was never charging this kind of commissions. It's prohibited now by the law. It was prohibited in 2012, also in 2016. It's, again, different commissions which our banks are charging. Yes, general regulation is putting down this commission level and type of commissions.
Good afternoon. As inflation is coming down, probably will continue down, we also expect the central bank to cut their key rate, maybe significantly. How will that impact with your loan growth and profitability with the bank?
Yes, inflation is going down, the target is 4%-6% of inflation. The base rate today is 9%, I do not expect that, for example, this year, it will go significantly down. Still, we see some lag on adaptation of commission on the interest rates on loans and in deposits in banking in general. The interest rate on official National Bank of Kazakhstan state securities are moving down. Now it's around 8.5% yield. On the loan side, in general, the tendency is also that the interest rates are going down. On the corporate side, today we charge around 11%-12%. On SME, it's higher, up to 14%. In retail, it's on average, I would say, 17%-18%. The rates will be maybe moving down, but also the cost of funding will also decrease.
The deposit rates also will be in line with the overall interest rates.
Actually, if you see from 2010, there has been different movements in terms of the rates. They were going down, especially in 2015, 2016, they materially went up. Now we're again on the downward trend. In terms of net interest margin, we were more consistent. We were, as Halyk Bank, were keeping net interest margin between 5% and 6%. From that perspective, we are more neutral. It can be just temporarily increase or decrease the NIM due to adaptation, different periods adaptation of official liability side to the movement of rates, but not structural change, not structural effect of the net interest margin.
We see this is the lowest level of the loans of the balance sheet, of the loan portfolio in the bank, around 50%. Usually, we were between 60% and 70% of the total balance sheet on the loan portfolio. Again, as loans will grow on our balance sheet, I would expect that the NIM also should grow.
Andrew Keeley again. Do you have any sense you could share with us about how big a role you see the business in Uzbekistan being as part of your overall business over the next few years?
Well, in Uzbekistan, we see opportunities, even to become maybe the leading bank inside of Uzbekistan. Maybe I would stress that overall, the subsidiaries are marginal to our balance sheet and to our net profit. The main business, the main income comes, of course, from Kazakhstan, of banking and non-banking operations. I wouldn't expect that in the next even two, three, maybe even five years, it will be big portion of the loan book or the, again, income side. If you know the Uzbek market today, the total banking sector of Kazakhstan is twice less than our total balance sheet. It's really small. Of course, it can grow quite fast. We are entering into the market, again, we will grow the balance on the risks and the growth.
You know that Halyk is always considering risks as well, and that is policy.
Ivan.
Ivan Kachkovski with Renaissance Capital. Speaking about quality, your Stage 2 and 3 loans are quite substantial, almost quarter of gross loans and associated, mostly legacy loans, as you say. If you look at them on a net basis, net provision, they're still over half, KZT 310 billion, close to half of your capital, which is again, very significant number. In your midterm target, in your outlook, what's your outlook for the problem loans on your balance sheet? Any hard targets that you set for a team that you can share with us? At least, some color on how you working them out. What's your medium-term plan for that? The second question, very much related to it, what's your collateral coverage for these loans and what types of collateral do you have? What's your experience portfolio on these collateral?
If you could share color on that would be great.
Thank you for your question. Yes, indeed. When you look at the Stage 2 and Stage 3, on the nominal basis, they have more than 23% of the total portfolio. Again, as we discussed, mostly related to Stage 3, which is Most of the portfolio has a legacy nature. On one of the slides, we were showing the progress which we already have with regards to working on the legacy portfolio separately for KKB's portfolio and the portfolio which came from KTB. We expect that we will continue to work on cleaning up the legacy portfolio. At the same time, we do not have the hard targets which we are sharing with you in terms of the NPL level.
We have target on the cost of risk, which we think the definition that will be not that much new NPL formation, whereby we will continue to work on our NPL. NPL itself, as we speak now, is actually less than NPL position was before KTB acquisition. We have good progress despite the fact that some material came from KTB. Maybe just to add that, since optically may look as a large number, if you take a look on qualitative aspects, like cash interest gap, you will see that we have very stable and good situation there. Probably to add a couple of things. On the Stage 3, as 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 follow according to the new schedule, but we never remove the loan until full repayment from that category. In fact, part of the loans which are considered as restructured or are sitting at the Stage 3, which are fully performing already for last two, three, five years, we still keep at that definition until full repayment. That is probably a bit more on conservative side. Also on collateral, Viktor mentioned figures, but I want to add that we also have quite conservative approach in terms of how we assessing the collateral, which we apply for our provision purposes. Actually, we are putting quite a long recovery period on the collateral side. Depending on different collateral types, three, five, up to seven years of time period until realization.
Again, we look at the history, we look at the core procedures, and our data actually never exceeds the actual which we realize. In many cases, we realize collateral at more short period of time than we assessing in our calculation, which are resulting in release of provision. That is why you see that our cost of risk is actually lower. We typically say that our normalized level is probably around 1%, but for some recent periods, except the periods when we had to create additional provisions as part of KTB acquisition, our cost of risk is even below 1%. This is actually the fact that we are realizing collateral at quicker pace than we set in our provision calculation.
Yes, my name is Patrick Pastollnigg from Calibrium. I have a question on the prepayment of the Eurobond, 200 million that you repaid. As far as I can see, you have 780 billion KZT on your cash side in US dollars. I was wondering, as you showed that the T-bill yield is 2.4% while you maintain this bond outstanding at 5.5%. The second question, you hinted at the exchange rate being artificially low, maybe you can comment on standard bank quality in that regard, and maybe also state your sensitivity in terms of capital ratio during group and exchange rate.
On the second question, I didn't hear the first question.
Can you comment on the sensitivity of capital ratio relative to a move in the exchange rate?
If the exchange rate moves 10% higher or lower, what that would mean for your capital adequate ratio?
I didn't understand.
If you allow us, we'll look at the sensitivity is variable because as I said, the open currency position which we try to maintain at the bank level is close to zero, but we have non-bank subsidiaries which are running certain open currency positions. We cannot give exact figures on sensitivity. Again, as I said, there are two elements to that. The one is the nominal sensitivity, which is, let's say, one day impact of movement in currency and how it's translated into the capital. Second is the side effect due to change in the under profile or deposit profile. When we talk about sensitivity, we can talk about the one day impact. Just for one minute, maybe just again.
If you look historically on our capitalization ratios, you can see that there is almost no impact because we've been through the 50% devaluation and even almost 100% devaluation within the one year, 2014, 2015, and before in 2009. You can see that the capitalization ratios of the bank are still remaining very high, up to around 20%.
Okay.
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. I don't think that we will consider to buy back them or redeem them early. The second Eurobond, which we took from the acquisition of KTB with the yield of 5.5%, they were in the total amount of EUR 750 million, out of which EUR 200 already we redeemed, because there is a clause that with the announcement of 30 days in advance, you can redeem this bond. Again, we did this first step, redemption of EUR 200 million. I cannot say if we will keep them till the end of December 2022 maturity. It's possible that we will maybe in stages redeem them before the maturity.
At the closest period of time, we are not planning.
Okay.
So
It's Mikhail Shchemo from VTB Capital again. We have talked about the pillar in terms of the 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 will 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 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 regions and in some rural areas is important for us to be able to contact with the clients, especially in the rural areas. What we do, we close the smaller branches and we create bigger, more digital, more technological points of sales. Again, I do not expect in the next three years big numbers to be cut. Still, of course, the optimization will be as a normal type of business. On the headcounts, 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. Again, digitalization is not so much on optimization of the cost, it's more on the growing of business. We expect that 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. At least we are not planning to increase the staff to support growth business.
Just returning to the question in terms of the sensitivity. The move of KZT to USD by 15% actually has the impact on the net profit and capital in the area of KZT 6 billion. Actually, if you look our financials for last year, actually, the KZT exactly moved around 15% throughout the year. We see that there is no material impact either on our net income or the capital. Again, this is the fact that we are running the neutral position. Only small facilities have open position because of the nature of their business.
Yes. Maybe let's to the previous question on the number of outlets. If you saw from our strategic objectives, we are also focusing on improving client services. 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 more complex products like mortgages, application loans, getting some other services. Instead of providing services in our branches, we would be focusing more them on sales of complex products. Thus, we don't expect that
decreased significantly. We, from time to time, optimize them, but that's our regular course of business. 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 Almunshi from Tellimer. Go ahead. Charlie, your line is unmuted. Please go ahead.
Hello?
Hi. Yes, we can hear you.
Oh, good afternoon. My name is Charlie Almunshi from Tellimer. I just have a couple of questions. One of them is a follow-up on the asset quality questions. There's been a lot of talk about the stage 2 and stage 3 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. A second one is more a 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. 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 Halyk return with a 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? Linked to that, could Halyk consider a tenge-denominated Eurobond given that the sovereign is considering one? Thank you.
Thank you. Yes. Hello, Charlie, thank you for your question. Regarding the asset policy, specifically talking about the stage 3. Again, I 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. We do not have a certain period of time within which we decide to move them into stage 1 again. The stage 3 would contain the loans which are impaired. It would contain loans which are in the 50 situation, but also would contain the loans which have been restructured, and which have been performing for quite a significant period of time. When we talk about the SPV, typically, we've overall 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 makes sense from the overall value-added perspective. If the loan has been restructured and it's performing, definitely it will retain on the bank balance sheet. If the loan is not being performing, we have option either to keep on the bank balance sheet or move it to SPV. 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. In two examples. One example, if 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 complete in terms of construction, we, the bank, cannot do that on our balance sheet because it's a limitation in terms of the banking license. From that perspective, moving that asset into SPV, when the SPV can complete the construction and would 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 give the example of certain business, be it a business center, for example, we, the bank, are limited in terms of getting the revenues or to get the control over the cash flows, because again, we have a limitation in terms of the banking license.
We can move that exposure to SPV, as a part of the settlement with the loan, SPV would get the ownership and control of the asset and the cash flow. It can upgrade, it can improve the tenants, then it improves the market value and potential for higher recovery. These are considerations we are taking into account when
Making decisions whether to keep loan on the bank's balance sheet or transfer it through SPV.
In terms of the fixed income capital markets, I would say that, yes, we are not expecting in the near future to go to the capital markets for the borrowings. You see that the bank is over-liquid, especially in the dollar terms, financing would be much higher through the capital markets than we can today attract within Kazakhstan. Just as an example, we recently issued local bonds through AIX in dollars with the interest rate of around 3% for three years. You see that today within Kazakhstan, to attract quite cheap financing in dollar terms is a better opportunity than going to the international capital markets. At the same time, we have this dilemma. We want to be present on the international capital markets. We again consider ourselves as a public company, we want to be present on international capital markets.
We have this dilemma, to be honest. We will see. Again, in the near future, we do not plan to go for the bond market.
Also the question with respect to KZT Eurobonds. We think that it may be attractive in case of very good interest rate. Again, we would compare it to our average funding cost 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. We are very open to answer any of your questions in the future. You can contact anybody sitting here today out of our team. Also we have our team members in Kazakhstan at any time. Again, we are quite open to any contact. Thank you.
Thank you.