Ladies and gentlemen, welcome to Halyk Bank first quarter 2019 results conference call. I will now hand you over to your host, Ms. Mira Kassenova, Head of Investor Relations. Madam, the floor is yours.
Thank you. Good evening, ladies and gentlemen. Please accept our apologies for the delay at the beginning of the call. Welcome to Halyk Bank conference call on presentation of financial results for the first quarter of 2019. Participants to today's call on Halyk Bank side are Ms. Umut Shayakhmetova, Chief Executive Officer of Halyk Bank, Ms. Aliya Karpykova, Deputy CEO, Chief Financial Officer, Mr. Murat Koshenov, Deputy CEO, Corporate Banking, Mr. Almas Makhanov, Chief Risk Officer, Mr. Viktor Skryl, Head of Strategic Office, International Activities, and myself, Mira Kassenova, Head of Financial Institutions and International Relations. During Q1 2019, the bank earned net income of KZT 74.5 billion, which is 20.1% higher compared to Q1 2018 due to higher net interest income and lower operating expenses in Q1 2019.
Total assets decreased by 1.1% versus the end of 2018, mainly as a result of partial withdrawal of funds by the bank's customers in Q1 2019. Compared with Q1 2018, net interest income increased by 21.7% to KZT 92.6 billion, 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 Kazakhstan Deposit Insurance Fund. As a result of net interest income growth, net interest margin increased to 5% per annum for Q1 2018 compared to 4.4% for Q1 2018.
Net interest margin decreased to 5% per annum for Q1 2018 compared to 5.6% in Q4 2018, mainly as a result of accelerated amortization of discount on the bank's Eurobond in the amount of KZT 7.4 billion due to its earlier partial prepayment on the 1st of March 2019, as well as decrease in average rate on loans to customers. The adjusted net interest margin for Q1 2019, excluding the effect of accelerated amortization of discount on the bank's Eurobonds, was 5.4%. Fee and commission income increased by 2.3% compared to Q1 2018. Starting from Q1 2018, 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 accounts in Halyk 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 2019 versus Q1 2018. Fee and commission expense increased by 19% compared to Q1 2018, 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 2018 versus Q4 2018 was mainly as a result of seasonal effect. Operating expenses decreased by 15.6% to 30.1 billion KZT versus 35.7 billion KZT for Q1 2018. This was mainly a synergy effect on the back of cost optimization during and following the merger process of KTB into Halyk.
The bank's cost-to-income ratio decreased to 24.1% compared to 30.7% for Q1 2018 on the back of lower operating expenses and higher operating income in Q1 2019 versus Q1 2018. 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 decrease in SME and retail portfolios due to seasonality. Halyk Bank's 90-day NPL ratio increased to 9.1% from 8.2% at the end of 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% at the end of 2018. The 90-day NPL coverage ratio was 120.7%.
Cost of fees for loans to customers for Q1 2019 was at 0.6%. The increase of Stage 3 loans in Q1 2018 was related to the transfer of problem indebtedness of some corporate borrowers to the subsidiary SPVs, which was previously classified as Stage 2 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 0.9% and 3.4% 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 outflow of funds to repay the external debt obligation of national companies. As of the 31st of March 2019, the share of corporate deposits in total corporate deposits was 50.3%, compared to 48.3% as of 31st of December 2018, where the share of retail 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 1st of March 2019 of Eurobond due in 2022 for the amount of $200 million. Compared with year-end 2018, total equity increased by 7.9% due to net profit earned by the bank during Q1 2019.
On the 18th of April 2019, the annual general shareholders meeting of the bank has approved to pay the dividends for 2018 financial year with 50% dividend payout ratio. It is important to mention that as of the 1st of May 2018, after the accrual of the dividend, the bank still maintains very high capital adequacy 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 zero one on your telephone keypad. Thank you for holding until we have our first question. Ladies and gentlemen, we're starting our Q&A session. If you wish to ask a question, please press zero one on your telephone keypad. Thank you for holding until we have our first question. Our first question from Ivan Tkachuk, Renaissance Capital. Sir, please go ahead.
Yes. Hello, colleagues, thank you 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 your NIM outlook for the next few quarters. Specifically, do you see any uses of FX liquidity that could potentially boost your net interest income? My third question would be on your NPL dynamics. What was the cause of the NPL ratio spike? Was that corporate loans? If you could share just some color on what industries, any particulars of what's happening there and what we should expect going forward, that would be very helpful. Thank you.
Hello, Ivan, this is Murat Koshenov. Thank you for your questions. With regards to your first question, the credit portfolio dynamics. Yes, as you see, there was some decrease in the first quarter. 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. Your question, I think, also was how it's translated into our guidance and what are 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'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 discount on banks Eurobond for the amount of KZT 7.4 billion, which is related to early partial repayments of 2022 issue, the amount of $200 million. 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%, given the fact that in this first quarter, the actual was five, we think that this target is quite achievable. In terms of NPL, there was indeed some increase in NPL level in the first quarter, there are two reasons. Reason number 1, as I said, there was some seasonal reduction of the portfolio, whereby the credit portfolio is reduced, and it should naturally increase the NPL percentage.
Secondly, those few corporate customers, which actually wasn't paid in previous periods. They were not following their payment schedule, whereby they fall in overdue situation. It doesn't affect the credit quality of the portfolio because that customer's already considered by the bank as impaired, and there is adequate provisions created against these customers. From the quality perspective, we think that is a neutral change.
Yeah. Thanks very much, Murat. Can I also ask about your rate outlook on the key rate of the National Bank of Kazakhstan, and how do you see corporate loan rates evolving over the next few quarters? Thank you.
Yes. Just a moment, please. Yeah. Basically, National Bank of Kazakhstan is following the foreign policy on targeting the inflation. The corridor which National Bank of Kazakhstan is targeting is actually 4% to 6%. Inflation is actually gradually decreasing in Kazakhstan. If the dynamic will continue to follow, inflation will stay or go down within that corridor, there might be potential for some reduction in the National Bank of Kazakhstan base rate. Saying that, we have to note that last year, there was quite significant reduction in the base rate. We started last year at the level, I think 10.25, and within a certain period of time, there was a 125 basis points cut. Starting from this year, the National Bank of Kazakhstan already cut interest rates once by a quarter of point. The potential for reduction is in place.
It's probably not that much. To a large extent, it will depend how the inflation dynamic will go throughout the year. Actually, there is indeed link between the base rate and trades on the loan. Typically, there is some lag for one to three quarters, depending 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. Questions.
Hello. Good afternoon. Can I just check that you can hear me?
Yes, we're hearing you.
Okay. Good afternoon. My name is Tolu Alamutu, and I'm from Tellimer. 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 redemption of that security. Linked to that, is there also any plan for Halyk to return to the bond market anytime soon? The second question is about the bank strategy going forward. Obviously, you're clearly number 1 in Kazakhstan at the moment. I just wanted to know whether you see any further opportunities for M&A, or if you see opportunities in certain businesses that you would like to build up going forward. 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?
I know you said that the shareholder will maintain a majority stake, how much? Could it fall to 50%, 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 2022 $700 million Eurobonds. At this point of time, there is no specific plans, as you know, the bank has a right with a 30 days notice to make a partial prepayment. We might consider that in the future, there is no specific plans in terms of the timing or 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. 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.
I want to highlight that at this point of time, we are in the process of obtaining the license in Uzbekistan for the banking license for Uzbekistan. This is a greenfield operation, we would be building the bank from the beginning. We are not acquiring the business, 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, Almex, with regards to its intention to partially sell its stake on the market with the aim to improve liquidity situation with Halyk Bank shares. We, as Halyk 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, their intention is to remain as a controlling shareholder of Halyk Bank.
Okay. Thank you very much.
Our next question comes from [Andrew Keeley], [Sberbank ]. Go ahead. Hello, Mr. Andre, please go ahead. Our next question from Andrew Keeley, Sberbank. Please go ahead.
Hi, good afternoon. I have two questions. Sorry, Murat, I missed actually most of what you were saying on Uzbekistan. All I caught was that I think you are 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? How much you would be thinking about investing in building this business, and whether it will be through branches or more through digital channels, and any kind of comments about the prospective size of the business over the next few years. Thank you.
Yes, Andrew, thank you for your question. Yes, as I said, we 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 KZT 15 million, we are starting from this position. Our main target is to become the main bank for the foreign international companies as well as Kazakh businesses which are already operating in Uzbekistan, or which are willing to enter Uzbek market. Yeah, we would build the business on a gradual basis as we normally do as Halyk Bank. We aim to start with corporate customers, but we also want to work with the private individuals. Also, we would like to develop the digital platform.
In Halyk Bank, we actually created, this year, the dedicated team, which the main task is to work on the digital proposition for our subsidiary banks, not only in the future for Uzbekistan, but also in other countries where we're present. For us, it is also important task.
Okay. Thank you. Do you have any kind of initial ideas about the size of this business the next few years? 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 and legislation platform. The short-term priority would be to set operations and then to understand the operating mode and what are the opportunities. 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. 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. 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. 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. The overall, if we talk about fees and commissions, income and expenses, first, I would like touch upon the fees and commission income. 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. Secondly, there was effect of merging KKB into Halyk Bank. Before the merger, transaction between accounts or cards of KKB to Halyk Bank and vice versa was considered as external payment, 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 third party cards, which are going through our acquiring network in the first quarter.
That actually increases the fee and commission expense through higher interchange fees. That was the main reason. We do not expect similar dynamic in future quarters. We expect that situation would be gradual coming to more normalized situation.
Right. By more normalized situation, do you have any sense of what kind of growth you would be looking for?
Andrew, we are not giving separate guidance for fees and commission income either on gross or net basis. Probably you can look for the quarters before which we were recording before that.
Okay. Thank you very much. I guess a final question. Excuse me. Sorry, I have something in my throat here. On your costs, obviously, it was a much better quarter than, say, on the fee income side. I am just wondering whether you can give us any thoughts on whether this kind of year-on-year decline on costs that we saw in the first quarter, how sustainable this is, or whether there were really one-off factors in there that suggest that this won't be the norm going forward. Thank you.
Yeah. Sorry for delay. Andrew, with regards to operating expenses, those actually the synergy effects, if you compare first quarter versus first quarter, because there was some reduction in staff expenses, also there was some other cost optimization as regards of cost synergy effects from the merger of Kazkommertsbank. You can look through our first quarter report, and you will see which particular cost lines also were reduced. Versus the fourth quarter, the main change was the seasonality. Typically, the first quarter is the lowest in terms of the expenses. 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%, we think that cost to income will not exceed that percentage.
Okay. Thank you.
Our next question is from Mikhail Shalamov, VTB Capital. Sir, please go ahead.
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 Q1. Perhaps you could share with us the size of this impaired portfolio, which you think is in the watchlist and which could filter through into the NPLs throughout the next couple of quarter. 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 loan growth dynamics and also the margin performance, perhaps would you be in position to update your outlook for a full year? Thank you.
Mikhail, thank you for your question. I think it's probably better to look from the IFRS 9 perspective, and we're showing the Stage 2 and Stage 3 loans. If you would look at that particular data, so you'll see that on a combined basis, Stage 2 and Stage 3 loans actually reduced in nominal amounts in the first quarter. There might be sometimes flows between impaired, but not past due loans into NPLs and backwards. This merely represents the approach of Halyk Bank, 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. The flip effect of that is obviously, there are chances that the customer might, on temporary basis, would slip from their agreed schedule.
For us, it's again, opportunity to sit down and discuss with the customer what are the next step in terms of working with them to improve the situation.
Murat, thank you for this. Could you perhaps elaborate what part of this Stage 2 loans you think are in this, let's say, fluctuating list or watchlist?
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 to NPLs. Overall, if you look at our Stage 2, at the end of the first quarter, Stage 2 loans comprise 3.1% of the gross portfolio.
Okay, that's helpful. If you could elaborate on the full year guidance, please.
With regards to what? I'm sorry.
Year 2019 guidance. Basically after the Q1, it seems like that the marginal depending with one-off, it's still holding up better versus what you've been guiding of around 5%. However, the long road so far has been disappointing. I was wondering on whatever you'd be willing to tweak the full year guidance after the Q1.
No, we typically are not revising the guidance at this point of time of the year. At this point of time, we keeping the guidance which we announced during our previous call.
Thank you. That's helpful.
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. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press 01 on your telephone keypad. We have a follow-up question from Mikhail Shalamov with VTB Capital. Sir, go ahead.
Yeah. Sorry, coming back with another question, but on a totally different topic. I think somebody was earlier asking about the plans of major shareholder to dispose part of the stake and not trying to improve liquidity and investor attractiveness of the Halyk stock. I wanted to ask on whatever you as management are recommending the shareholder to possibly change the listing of the paper. For example, to move from the current GDR based listing into a premium listing on 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 trying to gather the feedback, what they think we as the bank can improve. We typically find this feedback as a very useful source for us to understand what the bank should take in order to improve its investability or to improve interest from investors, to improve the attractiveness of our stock. During last year, we made extensive non-deal roadshow in the beginning of last year. Also we had quite a large number of meetings also here in Almaty, Kazakhstan. 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. On regular basis, we consolidated that feedback and delivered that to the board of directors.
We think that the recent announcement from ALMEX is a result of these feedbacks, which with the management was gathering during these meetings and delivering to our board of directors. With regards to your second question regarding the changing the listing, we, at this point of time, are not considering a change with that regard. GDRs are listed on LMAX Exchange, we are not recommending at this point of time a change to that setup.
Okay. Thank you.
Our next question from Conrad Alpha. Please go ahead.
Thank you for the presentation. It's somewhat similar to the previous question. Your upcoming Capital Markets Day, you have alluded to the fact that you regularly visit investors, gather feedback, et cetera. You try and find alternative ways to talk about the franchise so that people can understand the value offering of Halyk 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.
Conrad, 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. We spent a few days in London, in Frankfurt. We traveled to Stockholm, to Scandinavia. We visited New York and Boston. We find that exercise is very helpful and insightful for us as the management to be closer to our shareholding investment base. As I said, that was, first of all, opportunity to talk face-to-face in terms of what Halyk Bank is, and we appreciate that there was a lot of change that was happening to Halyk Bank during last two years, including the large acquisition of Kazkommertsbank and the merger which we were engaged in 2018.
This year, we decided that it would be good if we somewhat changed the format, we decided to make a Capital Day. It's not entirely new. A few years ago, we also had the Analyst Day in London, we also made one day which was devoted to the analyst. This time, we decided to have direct discussions with our investor base.
Okay. Thank you for that.
Ladies and gentlemen, as a reminder, if you wish to ask a question, please press 01 on your telephone keypad. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press 01 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 in our call today. As usual, our IR team remains open for any further questions. Thank you very much.