Ladies and gentlemen, welcome to Halic Bank First Quarter twenty nineteen Results Conference Call. I will now hand you over to your host, Ms. Mira Kasenova, Head of Investor Relations. Madam, the floor is yours.
Thank you. Good evening, ladies and gentlemen. Please accept our apologize for the delay at the beginning of the call. Welcome to Halic Bank Conference Call on Presentation of Financial Results for the 2019. Participants to today's call on Halic Bank's side are Mr.
Muchaevnietova, Chief Executive Officer of Halic Bank Mr. Alya Karpyskoyev, Deputy CEO, Chief Financial Officer Mr. Murat Kasenov, Deputy CEO, Corporate Banking Mr. Omaz Makhanov, Chief Risk Officer Mr. Oskar Skrill, Head of Strategic Office, International Activities and myself, Mira Kasenova, Head of Financial Institutions and International Relations.
Q1 twenty nineteen, the bank earned net income of 74,500,000,000.0 Tengue, which is 20.1 percent higher compared to Q1 twenty eighteen due to higher net interest income and lower operating expenses in Q1 twenty nineteen. Total assets decreased by 1.5% versus the 2018 mainly as a result of partial withdrawal of funds by the bank's customers in Q1 twenty nineteen. Compared with Q1 twenty eighteen, net interest income increased by 21.7% to 92,600,000,000.0, mainly due to increase in average balances of interest earning assets and due to continuous repricing of retail term deposits following the decrease of deposit interest rate cap by Callison Deposit Insurance Fund. As a result of net interest income growth, net interest margin increased to 5% per annum for Q1 twenty eighteen compared to 4.4% for Q1 twenty eighteen. Net interest margin decreased to 5% per annum for Q1 twenty nineteen compared to 5.6% in Q4 twenty eighteen, mainly as a result of accelerated amortization of discount on the bank's Euro bond in the amount of 7,400,000,000.0 yen due to its earlier partial prepayment on the 03/01/2019, as well as decrease in average rate on loans to customers.
The adjusted net interest margin for Q1 twenty nineteen, excluding the effect of accelerated amortization of discount on the bank's euro bonds, was 5.4%. Fee and commission income increased by 2.3% compared to Q1 twenty eighteen. Starting from Q1 twenty eighteen, the portion of fees related to payment card operations which was previously accounted within cash operations and bank transfer is represented as fees derived from payment card operations. Figures for all preceding 2018 quarters were recalculated accordingly. Prior to the merger, the transfers within legal entities current account in HALIC and KTB were treated as external transfers and relevant fees were applied.
After the integration, the transfers between those current accounts are being treated as internal and therefore are free of charge. As a result, fees derived from bank transfer settlements decreased in Q1 twenty nineteen versus Q1 twenty eighteen. Fee and commission expense increased by 19% compared to Q1 twenty eighteen, mainly due to increased number of transactions of other banks' cards in the acquiring network of the bank. The decrease in fee and commission income in Q1 twenty eighteen versus Q4 twenty eighteen was mainly as a result of seasonal effect. Operating expenses decreased by 15.6% to 30,100,000,000.0 in year versus 35,700,000,000.0 in year for q one two thousand eighteen.
This was mainly a synergy set on the back of cost optimization during and following the merger process of KTP in. The bank's cost to income ratio decreased to 24.1% compared to 30.7% for q one two thousand eighteen on the back of lower operating expenses and higher operating income in q one two thousand nineteen versus q one two thousand eighteen. Operating income increased by 7.1% mainly due to increase in net interest income. On the balance sheet compared with year end 2018, loans to customers decreased by 1.5% on a gross basis and 1.7 on a net basis. The decrease in loan portfolio was mainly on the back of in SME and retail portfolios due to seasonality.
Halib Bank's ninety day NPL ratio increased to 9.1% from 8.2% as the 2018. The increase was mainly as a result of some indebtedness of previously impaired corporate borrowers became overdue. The provision rate increased to 10.8% from 10.5% as the 2018. The ninety day NPL coverage ratio was 120.7%. Cost of fee from loans to customers for Q1 twenty nineteen was at 0.6%.
The increase of stage three loans in Q1 twenty eighteen was related to the transfer of problem indebtedness of some corporate borrowers to the subsidiary SPDs, which was previously classified as stage two loans. In April 2019, this indebtedness started to be recognized as an investment property of the bank. On liability side, deposits of legal entities and individuals decreased by 0.93.4% respectively compared to the year end 2018 mainly due to partial withdrawal of funds by the bank's customers to finance their ongoing needs. It is important to note here that there was a decrease in the whole banking sector deposits due to the outlook of funds to repay the external debt obligation of national companies. As of the 03/31/2019, the share of corporate Tingya deposits in total corporate deposits was 50.3% compared to 48.3% at the 12/31/2018, whereas the share of retail senior deposits in total retail deposits was 42.6% compared to 41% as of year end 2018.
Debt securities issued decreased by 8.1% compared to year end 2018, mainly due to early partial prepayment on the 03/01/2019 of Eurobond due in 2022 for the amount of 200,000,000. Compared with year end 2018, total equity increased by 7.9% due to net profit earned by the bank during Q1 twenty nineteen. On the 04/18/2019, the Annual General Shareholders Meeting of the Bank has approved to pay the dividend for 2018 financial year with 50% dividend payout ratio. It is important to mention that as of the 05/01/2018, after the accrual of the dividend, the Bank still maintains very high capital and equity ratios. This completes our presentation.
Now we would like to open the floor for your questions, please.
Thank you. We will now start question and answer session. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. Thank you for holding until we have our first question. Ladies and gentlemen, we're starting our Q and A session.
Thank you for holding until we have our first question. Our first question is from Ivan Kaczkowski, Renaissance Capital. Sir, please go ahead.
Yes. Hello, colleagues, and thank you for for the call. I have a few questions. First of all, can I please ask on the rate dynamics and particularly on corporate loan yields? They seem to have declined in the first quarter.
What is the reason behind it and how does it look going forward throughout the next few quarters? That's the first question. My second question would be overall on the on your NIM outlook for the next few quarters. And specifically, do you see any any uses of FX liquidity that could potentially boost your net interest income? And my third question would be on your NPL dynamics.
What was the cause of the NPL ratio spike? Was it corporate loans? If you could share just some color on what industries, you know, any any particulars of what's what's happening there and what we should expect going forward, that would be that would be very helpful. Thank you.
Hello, Ivan. This is Murakashana. Thank you for your questions. With regards to your first question, the credit risk credit portfolio dynamics, Yes, as you see, there was some decrease in the first quarter. That is actually the main reason is the seasonality effect And the main areas where there was some reduction in the credit portfolio is SME as well as retail, while the corporate portfolio largely remained flat.
In terms of and your question, I think, also was how it's translated into our guidance and what our projections for the rest of the year. We, at this point of time, are sticking to outlook which we provided earlier, where we said that we anticipated we're anticipating roughly 7% growth for the loan portfolio this year. With regards to net interest margin, we reported net interest margin according to our calculation at the level of 5%. It was, to a certain extent, affected by accelerated amortization of discounts on banks Eurobond for the amount of 7,400,000,000.0, which is related to earlier partial prepayments of 2022 issue, the amount of 200,000,000 US dollars. Without that effect, net interest margin would be at the level of 5.4%.
The guidance which we provided for the whole year is the area of 5%, but given the fact that in this first quarter, the actual was 5%, so we think that this target is quite achievable. In terms of NPL, there was indeed some increase in NPL level in the first quarter. And basically, there are reasons. Reason number one, as I said, there was some seasonal reduction of the portfolio. So whereby the CRE portfolio is reduced and it should naturally increase the NPL percentage.
And secondly, those and and as a few corporate customers which which actually was impaired in previous periods and they were not following their their payment schedule whereby they fall in overdue situation. But it doesn't affect the credit quality of the portfolio because that customers already considered by the bank as impaired and there is adequate provisions created against these customers. So from the quality, as quality perspective, we think that is a neutral change.
Yeah. Thanks. Thanks very much, Murat. Can I also ask about your rate outlook on the on the key rate of being of the National Bank and how do you see corporate loan corporate loan rates evolving over the next few quarters? Thank you.
Yes. Just a moment, please. Basically, National Bank is following the following policy on targeting the inflation, and the corridor which National Bank is targeting is actually 4% to 6%, and inflation is actually gradually decreasing Kazakhstan. So if the dynamic will continue to follow, I mean, will stay or go down within that corridor, there might be potential for some reduction in the National Bank base rate. Saying that, we have to note that last year, there was quite significant reduction in the base rate.
So we started last year at the level, I think 10.25, and within the year, was Within a certain period of time, there was 125 basis points cut. Starting from this year, the National Bank already cut interest rates of funds by a quarter of point. So the potential for reduction is in place. It's probably not that much, and to a large extent, it will depend how the inflation dynamic will go throughout the year. And actually, there is indeed link between the base rate and trades on the loan.
But typically, there is some lag for one to three quarters pending on type of the loan.
Thank you very much. That's very helpful. Thanks.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press 01 on your telephone keypad. Thank you for holding. Ladies and gentlemen, I would like to remind you, if you wish to ask a question, please press 01 on your telephone keypad. Thank you for holding.
We have no other question at this moment. Dear speakers, back to you for any point you wish to raise.
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We have a question from the participant. Please introduce yourself. Hello? Good afternoon.
Can I just check that you can hear me?
Yes. Yes. We're hearing you.
Okay. Good afternoon. My name is Tolu Alamater, and I'm from Telomar. I just have a few questions for you. The first is on the bond issue which you've partly redeemed.
I just wanted to know whether there's any plans to do any further buybacks or or redemption of of that security? And linked to that, is is there also any plan for Halluc to return to the bond market anytime soon? The second question is about the bank strategy going forward. Obviously, you're clearly number one in Kazakhstan at the moment. I just wanted to know whether you see any further opportunities for M and A or if you see opportunities in certain businesses that you would like to build up going forward.
And the the final question is about the release you put out regarding a potential sell down of the stake of your majority shareholder. Is there any update on the timing of that? And I know you said that the shareholder will maintain a majority stake, but how much could it fall fifth could it fall to 50 or or do you think it stays significantly above that? Thank you.
Thank you for your questions. Just a moment, please. Yes, thank you again for your question. With regards to the partial prepayment, which we exercised on the $202,200,000,000 euro bonds. At this point of time, there is no specific ones, but as you know, the bank has arrived with thirty days notice to make a partial prepayment, so we might consider that in the future, but there is no specific plans in terms of the timing of our size as we speak now.
We also, at this point of time, do not have specific plans with regards to going to the debt capital markets with the new issues. So this is regarding the bonds. In terms of looking at the other businesses, we do not have any plans at this point of time. We currently are not considering acquiring any new business, but I want to highlight that at this point of time, we are in the process of obtaining the license in Uzbekistan for the banking the bank's license for Uzbekistan. This is a greenfield operation, so we would be building the bank from the beginning.
So we are not acquiring the business, so it will be the new bank which we'll be establishing in Uzbekistan. With regards to your third question, yes, there was announcement done by major shareholder Alnex with regards to its intention to partially sell its stake on the market with the aim to improve liquidity situation with Halic Bank shares. We, as Halic Bank, do not know details of their intention, including any potential amount or timing of that potential event. We only can refer to their press release, which says that they intend to do that subject to favorable market condition. And the intention is to remain as a controlling shareholder of Halig Bank.
Okay. Thank you very much.
Our next question comes from Andreo Ngo, Neddinghau, Go ahead. Hello, mister Andreo. Please go ahead. Our next question is from Andrew Key, Sberbank. Please go ahead.
Hi. Good afternoon. I have a couple of questions. Sorry, Murat, I missed actually most of what you were saying on Uzbekistan. All I caught was that I think you're planning to launch a bank there, a greenfield operation.
Could you just give us any more details about any metrics that you have for this? I mean, how much you would be thinking about investing in building this business and whether it will be kind of through branches or more through kind of digital channels? And and any kind of comments about, you know, the, prospective kind of size of the, the business over the next few years. Thank you.
Yes, Andre, thank you for your question. Yes, as I said, we shortly shortly expect to receive the banking license for Uzbekistan and hope to start operations by mid or in the second half of this year. According to Uzbekistan legislation, the minimum capital level is $15,000,000 we are starting from this position. And our main target is to become the main bank for the foreign international companies, as well as Kazakh businesses, which are willing to which are already operating in Uzbekistan, which are willing to enter Uzbek market. And yeah, we would build the business on a gradual basis as we normally do as Halibank.
We aim to start with corporate customers, but we also want to work with the right individuals. Also, we would like to develop the digital platform in Khalid Bank. We actually created this year the dedicated team, the main task is to work on the digital proposition for our subsidiary banks, not only future for Uzbekistan, but also in other countries where we are present. So for us, it's also important
task. Okay, thank you. And do you
have
any kind of initial ideas about the kind of the size of this business over the next kind of few years and any thoughts about what your plans are?
Yeah, since this is for us the new market and also you might know that the country is rapidly developing its banking legislation platform. So the short term priority would be to set operations and then to understand the operating mode and what are the opportunities. So probably no hard data which we are able to share with yourself at this point of time.
Okay. Thank you. I have a second question just on your fee income, which was pretty weak in the first quarter. And I'm just wondering if you can just elaborate a little bit about why that was the case and how we should think about this going forward? Is it was it more a kind of one off bad quarter?
If I look at, say, the fee expense, there was very strong growth in the plastic cards fee expense. It would be good if you could just explain what happened there and just what your thoughts are on the outlook for fee income. Thank you.
Thank you for your questions, Andrew. Just just Yeah, the overall, if we talk about fees and commissions, income and expenses, first I would like to touch upon the fees and commission income. So one, there are basically two reasons which explain dynamic in terms of if we talk about the income side. One is typically the first quarter is seasonally weak compared to the fourth quarter. And secondly, there was effect of merging Kikibi into Halig Bank.
Before the merger, transaction between accounts or cards of Kikibi to Halik Bank and vice versa was considered as external payments, whereby there were certain fees attached to that. After the merger, all these transactions became internal transactions within the bank, whereby affecting the reduction in the fees and commission income. With regards to fees and commission expense, we see increasing number of cards, of third party cards, which are going through our network in in the first quarter. And that actually increases the, fee commission expense through higher, interchange fees. So that was the main reason.
We do not expect a similar dynamic in in future future quarters. So we expect that situation would be gradual coming to more normalized situation.
Right. And and and by more more normalized situation, I mean, do you have any, you know, sense of of of what kind of growth, you know, you would be looking for?
Andrew, we are not giving separate guidance for fees and commission income, either on gross or net basis. So probably you can look for the quarters before which we were recording before that. Okay.
Thank you very much. And I guess the final question. Excuse me. Sorry. I have something to recall here.
On your costs, obviously, it was a much better quarter than, say, on the fee income side. And, you know, I'm just wondering whether you can give us any thoughts on, you know, whether this kind of, kind of year on year decline on costs that we saw in the first quarter, you know, how sustainable this is, or whether there were kind of really, you know, one off factors in there that that that suggest, you know, that this won't be the kind of norm going forward. Thank you.
Yeah. Yeah. So so sorry for delay. Andrew, with regards to operating expenses, those actually, the synergy effects, if you if you compare first quarter versus first quarter, because there was some reduction in staff expenses. And also, there were some other cost optimization as regards of cost synergy effects from the merger of KKB, and you can look for our first quarter report and you'll see which particular cost lines also will be reduced.
And versus the fourth quarter, the main change was the seasonality. So typically, first quarter is the lowest in terms of the expenses, so probably throughout the year, we will see somewhat increase in the cost to income. For the whole year, we provided the guidance, cost to income of 30%. So we think that cost to income will not exceed that percentage.
Okay. Thank you. Our
next question is from Mikhail Shalama with Capital. Sir, please go ahead.
Yes. Good afternoon. Thank you very much for the presentation. If I may ask two questions. The first question is regarding the impaired loan similar to the type of loan which has migrated from the impaired into the NPL causing the NPL spike in the q one.
Perhaps you could share with us the size of this impaired portfolio, which you think is in the watch list and which could filter through into the NPLs throughout the next couple of quarters. And the second question is about your full year 2019 guidance. I know it's fairly early into the Q1, but just like looking at the lower of dynamics in those margin performance, perhaps would you be in a position to update your outlook for a full year? Thank you.
Nico, thank you for your question. I think it's probably better to look from the IFRS nine perspective, and we are showing the stage two and stage three loans. If you would look at that particular data, you will see that on a combined basis, stage two and stage three loans actually reduced in nominal amounts in the first quarter. There might be some time flows between impaired, but not past due loans into NPLs and backwards. And this is merely represents the approach of Hollybank where once we're restructuring the customer, we try to set a very tight repayment schedule in order to closely follow the situation with the customer.
So the flip effect of that is obviously there are chances that the customer might on a temporary basis would slip from their agreed schedule. But for us, it's again, opportunity to sit down and discuss with the customer what are the next step in terms of working working working with them to improve the situation.
Murat, thank you for this. And could you perhaps elaborate what part of this stage two loans you think are in this, let's say, fluctuating list or which list?
We do not have, let's say, the specific list which clearly says that these customers are, let's say, the major suspects for going into NPLs. But overall, if you look at our stage two, at the end of the first quarter, stage two loans comprised 3.1% of the gross portfolio.
Okay. That's helpful. And if you could elaborate on the full year guidance, please?
With regards to what? I'm sorry.
Yeah. '19 guidance. As basically, after the q one, it seems like that the margin will depending with the one off. It's still holding up better versus what you've been guiding of around 5%. However, the long growth so far has been disappointing.
I was wondering on whatever you'd be willing to tweak the full year guidance after the q one.
No. We typically are not revising the guidance at this point of time of the year. So at this point of time, we keeping the guidance which were announced during our previous call.
Thank you. That's helpful.
And gentlemen, I would like to remind you, if you wish to ask a question, please press 01 on your telephone keypad. Thank you for holding. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press 01 on your telephone keypad. We have follow-up question from Mikhail Slava with BTB Capital. Sir Yeah.
So sorry. Coming back with another question, but on a totally different topic. I think somebody was earlier asking about the plans of a major shareholder to dispose part of the stake in trying to improve liquidity and less of attractiveness of the Hewitt stock. I wanted to ask on whatever you as a management are recommending their shareholder to possibly a change of the listing of the paper, for example, to move from the current GDR based listing into a premium listing of the London Stock Exchange or look at the alternative listing options as a part of this process? Thank you.
Basically, during our regular meetings with investors, we're trying to gather the feedback, what they think we as the bank can improve. And we typically find this feedback as a very useful source for us to understand what the bank should take in order to improve its instability or to improve interest from investors to improve the attractiveness of our stock. And during last year, we made extensive non deal roadshow in the beginning of last year. And also we had quite a large number of meetings also here Almaty, Kazakhstan. And in many meetings, we received the feedback that overall investors see the value in the bank, they like performance, and the main issue which they're facing with is lack of liquidity of the stock.
And so on a regular basis, we consolidated that feedback and delivered that to the Board of Directors. And we think that the recent announcement from Alnex is a result of these feedbacks, which with the management was gathering during these meetings and delivering to our Board of Directors. And with regards to your second question regarding the changing, the delisting, we at this point of time are not considering change with that regard. So GDSO listed on LONAC stock exchange, and we are not recommending at this point of time change to that setup.
Okay, thank you.
Our next question is from Konrad Swerkodgel, Alpha KV. Please go ahead.
Thank you for the presentation. It's somewhat similar to the previous question. Your capital upcoming Capital Markets Day, you have alluded to the fact that you regularly visit investors, gather feedback, etcetera. You try and find alternative ways to talk about the franchise so that people can understand the value offering of Halig Bank. Is that the premise?
Is that the aim behind your Capital Markets Day? I mean, obvious answer is I will have to wait and see. But can you give us some indication what's the intent with the Capital Markets Day? Thank you.
Konrad, thank you very much for your question. I just want to remind for those who are not following us closely, last year, in the first quarter, we made extensive non deal roadshow. So we spent a few days in London, in Frankfurt, we traveled to Stockholm, to Scandinavia, we visited New York and Boston. So we find that exercise as very helpful and insightful for us as the management to be closer to our shareholding investment base. And as I said, we were gathering quite that was, first of all, opportunity to talk face to face in terms of what Bank is.
We appreciate that there was a lot of change that was happening to Halik Bank during last two years, including the large acquisition of KKB and the merger which we were engaged in 2018. So this year, we decided that it would be good if we somewhat changed the format, so we decided to make the Capital Day. But it's not entirely new. A few years ago, we also had the Analyst Day in London, so we also made one day which was devoted to analyst. And this time, we decided to have direct discussions our investor base.
Okay. Thank you for that.
Zero one on your telephone keypad. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press zero one on your telephone keypad. We have no other question at this moment. Dear speakers, back to you for the conclusion.
Yeah. Ladies and gentlemen, thank you very much for participating our call today. As usual, our IR team remains open for any further
questions.
Thank you very