Halyk Bank of Kazakhstan Joint Stock Company (HSBK) Earnings Call Transcript

Good day, ladies and gentlemen. Thank you for joining us on this conference call to review Halyk Bank's unaudited financial results for the first half of 2025. My name is Mira Tiyanak, and I am Head of FI and IR. We have our executive team joining us on the call today, including Mr. Umut Shayakhmetova, Chief Executive Officer; Mr. Dauren Sartayev, First Deputy CEO for B2B Banking, Marketing NPR and Acquiring; Mr. Murat Koshenov, CFO and Deputy CEO for Finance Subsidiaries, Compliance and International Activities; Mr. Roman Maszczyk, Deputy CEO for Risk Management, Data Science and Collateral; and Ms. Olga Vuros, Deputy CEO for Corporate Banking; Mr. Nariman Mukushev, Deputy CEO for B2C Banking and Digital Government Services; Mr. Andrey Zavarzin, Deputy CEO for IT and ecosystem; Mr. Viktor Skryl, Strategy Director; Mr. Almas Makhanov, Finance Director; and Rustam Telish, Nurgul Mukhadi from IR team. The format for the call today is as follows. We will start with our presentation by Halyk team covering our B2C and B2B business segments, our new strategic partnership in Uzbekistan and the first half financial results. Then we will open up the floor for Q&A session, and please note that this call is being recorded. We will begin today with an update on B2C segment. Let us remind you that our B2C platform, the Halyk Super-App forms the core of our digital ecosystem and gives consumers access to our banking and finance services as well as a broad array of lifestyle solutions that help them manage their daily lives. In the first half of the year, we saw the number and volume of transactions carried out through the Halyk Super-App grow by almost 32% and 26% year-on-year, respectively. The Super-App now has 8 million monthly active users, including 5.6 million who carried out transactions and 2.8 million daily active users. Halyk Bank has a total of 11.1 million active clients as of the end of the first half, and we account for 38% of active salary cards in Kazakhstan. 94% of the retail loans we issue are arranged through the Super-App. Our gross B2C loan book rose by 20.6% since Q2 of last year, reaching KZT 4.3 trillion, though on the back of low loan issuance. And we have a 19% market share for retail loans in Kazakhstan. In terms of deposits, Halyk Bank has a 28.7% market share in the country and 70% comprised of deposits in tenge. A full 94% of deposits are now open digitally through the Super-App. Q2 saw a large increase in the number of deposits opened to almost 275,000. B2C deposits grew by 5% further strengthening our leading market position. Next slide, please. Taking a look at some of the value-added services in our digital ecosystem, you can see remarkable growth in our car insurance offering with 45% year-on-year increase in the number of clients and twofold growth in the volume of premiums. The GMV of our entertainment tickets platform, Kino.kz grew by 21%, while the number of tickets sold increased by 2.6% showcasing increasing user engagement. Travel booking grew by 18% as compared to the first half of the last year. Next slide, please. Halyk Marketplace and Halyk Market both saw GMV growth by more than 24%. We have substantially more partners working with us versus a year ago, thereby increasing product choice for our consumers. Halyk Market has now almost 3x as many SKUs as it did just 1 year ago. Next slide, please. Now let's move to our digital brokerage platforms where we offer 2 key solutions, Halyk Invest, InApp solution within our Super-App and Halyk Finance provided by our investment banking subsidiary. We continue to see a strong growth in this segment, reinforcing our market leadership. The number of active clients rose by 50% as compared to Q2 2024 and transaction volume expanded by 58%, highlighting an increased client engagement. Assets under management and total brokerage assets were both substantially high year-on-year as of the end of the second quarter. I should also note that Halyk has a 67% share of pension assets under management and 66% market share among private asset managers. Now we'll move on and take a look at our B2B segment. Let me again remind you that Onlinebank is our platform for the B2B segment, offering a range of tools to help our commercial clients and particularly small and medium-sized enterprises with banking, lending, insurance, payroll solutions and more as well as access to Halyk Marketplace. Next slide, please. MAU for Onlinebank stands at 313,000 including 227,000 monthly transaction users during the second quarter. Daily active users stand at 107,000. And in the first half of the year, the number of payments processed through the platform rose by over 25% year-on-year, and the volume of transactions was 26% higher at KZT 71.6 trillion. Next slide, please. 63% of our corporate loan portfolio are in local currency. As you can see from the industry breakdown on the right, we finance clients across a range of sectors from trade businesses to industrial enterprises in every industry. Our corporate loan book has grown by 15.6% since Q2 of last year. Halyk Bank works with 86% of Kazakhstan's largest taxpayers and accounts for 49% of loans to legal entities, along with 33% of their deposits. We have strong product penetration among our 3,000 active commercial clients who carried out 2.4 million transactions during the second quarter. Next slide, please. You can see here that our gross SME loan portfolio is up 21.4% year-on-year, while digital loans, in particular, are up over 15%. We continue to see a notable growth in the issuance of digital performance and bid bonds via our platform. 93% of new loans were issued via Onlinebank, reflecting our strong digital capabilities. Our SME clients carried out 4.8 million transactions for the amount of KZT 13.3 trillion per month during the second quarter. Now let me update you on creating a strategic partnership in Uzbekistan. We would like, firstly, to highlight that Uzbekistan remains a strategic market and is a natural fit for Halyk. And Uzbekistan is one of the largest trading partners for Kazakhstan, engaging businesses from both sides. In addition, there are strong cultural and interpersonal ties. Next slide, please. Strategic agreement with Click allows us to scale up our existing banking business with reach to millions of users of Click SuperApp by passing years of organic build. Next slide, please. Both Halyk and Click would be creating a leading digital financial platform in Uzbekistan by a reciprocal shareholding. Tenge Bank provides a full suite of bank products, whereas Click is bringing on one SuperApp, retail payments, lifestyle and merchant services. Our joint focus would be on retail, SME and IE segments, developing transactional and ecosystem products. Next slide, please. Through partnership with Click, our total addressable market in Kazakhstan and Uzbekistan is reaching 57 million people. Aggregate B2C client base is reaching circa 33 million. In addition, we are capturing aggregate total payment volume in the amount of USD 316 for both markets as measured by statistics for 2024. Next slide, please. Click demonstrates robust operational and financial performance. Total payment volume increased by 30.3% in the first half of 2025 and revenue and net income increased by 25.8% and 28.3%, respectively, for the same period. Next slide, please. The transaction structure makes Tenge Bank and Click strategically aligned and operationally independent. Partnership with Click enhances Halyk's digital capabilities and footprint in Uzbekistan and unlocks cross-sell and fee-based revenues. Now let me pass the floor to my colleague, Rustam Telish from IR team. Thank you.

Thank you, Mira, and good day, everyone. I will take you through the financial results for the first half 2025. Here, you can see the composition of the net income growth in the first half 2025 versus the first half 2024. It was primarily driven by the increase of net interest income by 27.2% year-on-year and other expenses, noninterest income, which was impacted by the base effect of one-off recognized loss in a view of expected early repayment of the deposit of KSF in accordance with the IFRS in first quarter 2024. Net income was negatively affected by the excess profit tax, which was introduced on profit from certain banking operations for 2025 only. The net income growth adjusted to repayment of the deposit of KSF and excess profit tax would be 19.8%. Next slide, please. Here is a quick look at the balance sheet. Total assets of the group increased by 5.8% year-to-date due to an increase in amounts due to customers. Average interest-earning assets at the same period grew by 21.6%, which led to an increase in its share in total assets from 91.9% to 93.3%. Total deposits to total liabilities ratio was at the level of 83.7%. Total equity of the bank increased by 4% compared to the year-end 2024, mainly due to net profit earned by the bank during first half 2025. Loans-to-deposit ratio was at 85.4%. Next slide, please. Interest income for first half 2025 was up 27.4% versus first half 2024, mainly due to increased average balances of loans to customers. Interest expense for first half 2025 increased by 27.6% versus first half 2024, mainly as a result of the increase in average rate and balances of amounts due to customers as well as the growth in the share of KZT amounts due to customers. Despite the increase in average rates in amounts due to customers in first half 2025. NIM was positively impacted by the increase in share of total interest-earning assets versus total interest-bearing liabilities as well as increase in the share of KZT interest-earning cash and cash equivalents. As a result, net interest margin has grown to 7.2% for first half 2025 compared to 6.9% for first half 2024. Next slide, please. In first half 2025, the average rate of total interest-earning assets has grown to 14.6%. The average rates on securities grew to 8% in first half 2025, mainly due to the increase in the share of KZT securities and growth in the rates of fixed securities. The increase of rate of amounts due from credit institutions and interest-earning cash and cash equivalents from 10.5% in first half 2024 to 13.3% in first half 2025 was due to an increase in short-term KZT deposits with NBRK. Next slide, please. Average rate of total interest-bearing liabilities has increased by 0.9% from 8.2% in first quarter 2025 to 9.1% in the second quarter 2025, mostly due to higher interest rates on amounts due to customers following the increase of the base rate in March 2025. Next slide, please. In first half 2025 compared to first half 2024, the overall dynamics of fee and commission income and expenses was driven by the increased number of clients and the growth of client transactional activity. Net fee and commission income for first half 2025 increased by 11.2% versus first half 2024 due to an increase in net transactional income of legal entities as well as in fees on letters of credits and guarantees issued. Net transactional income of individuals slightly decreased due to the increase in the amount of bonuses from the loyalty program. Next slide, please. Here is an overview of operating expenses, which increased by 26.5% versus first half 2024, mainly due to the indexation of salaries and other employee benefits, including the cost of the long-term incentive program as well as IT development-related costs. The cost-to-income ratio decreased to 17.2% compared to 18.5% for first half 2024 amid higher operating income for first half 2025. Next slide. Compared with the year-end of 2024, loans to customers were up 2.4% on a gross and net basis, with retail loans growing by 4.3%, while the loan portfolio of legal entities increased by 1.4% on a gross basis. The share of fixed loans on total net loans was 22%. Next slide, please. Cost of risk in first half 2025 was a level of 1.4% compared to 1.3% in the first half 2024. Next slide, please. Stage 3 loans decreased to 6.6% as at the end of the second quarter 2025 as a result of workout of problem loans and loan portfolio growth. Next slide, please. Compared with the year-end 2024, the deposits of legal entities and deposits of individuals were up 8% and 4.1%, respectively, due to fund inflow from the bank's clients. As of the end of first half 2025, the share of KZT deposits in total deposits was 72.1% compared to 69.1% as of the year-end 2024. In corporate deposits, the share was 74.2% versus 70.9% at the year-end 2024, while the share in total retail deposits was 70.1% versus 67.5% as at the year-end 2024. Next slide, please. On a consolidated basis, the capital adequacy ratio of the bank decreased to 18.1% in first half 2025 as a result of dividends paid by the bank for the financial year of 2024. RWA were up by 3.8% following the increase of retail loan portfolio. Next slide, please. This slide summarizes the regulatory changes to minimum reserve requirements for the second-tier banks in Kazakhstan. On the left, you can see a comparison between the current and amended minimum reserve requirement standards. Minimum reserve requirements increased to 5% for Category I and II KZT liabilities and to 3.5% for Category III KT liabilities. For FX liabilities, minimum reserve requirements increased to 15% for Category I and II and to 10% for Category III. The right table shows the step-wise implementation schedule. Transition is split into 3 phases, September 2025, April 2026 and September 2026. At the bottom, the definition of categories clarifies which liabilities are included in each category. Category I standard short- and long-term liabilities, except reports and bonds. Category II, direct repo adjusted for reverse repo and interbank market positions. Category III, its long-term bonds with no early redemption and that are not used for liquidity management. Additionally, banks that have outstanding state support must set aside on an extra 10% minimum reserve requirements on that amount. Next slide, please. Based on our 6-month financial results, we have updated the outlook for the year -- full year of 2025. Retail corporate and SME net loan portfolio growth is expected to be in the range of 15% to 20%. Growth of net fee and commission income expected to be in the range of 10% to 15%. Cost of risk is projected to be in the area of 1.4%. Consolidated net income is expected to be in the area of KZT 1 trillion. Net income guidance was corrected mostly due to the increase of minimum reserve requirements as well as the introduction of excess profit income. Return on average equity is expected to be more than 30%. Net interest margin is estimated to be in the area of 7%. NIM guidance was partially by increased minimum reserve requirements. Cost-to-income ratio is projected to be in the range of 17% to 19%. Dear ladies and gentlemen, this completes our presentation.

Now we would like to open the floor for your questions, please. Just a quick introduction -- instruction. [Operator Instructions] And the first questions come from Milosz.

It's Milosz Papst from Edison Group. Firstly, I wanted to ask where do you think Halyk is in the deposit repricing cycle? And what are your expectations in terms of your average cost of funding in the second half of the year? We've obviously seen a pickup in Q2 compared to Q4 last year, so over the first half of the year, which was partly due to higher deposit rates and partly due to a higher share of tenge deposits. So maybe -- if you could talk us through your expectations on the change in the cost of funding, excluding any changes in the share of tenge deposits? Secondly, can you maybe shed some light on also the reasons behind the somewhat slower growth in your retail loan book in the first half of the year and the reduced outlook for 2025? Is it due to the impact of regulations, higher competition or for other reasons? And thirdly, I saw that you have moved some of your corporate exposures from Stage 1 to Stage 2 in the second quarter due to an increase in the credit risk caused by a temporary deterioration in the operating performance of some of your customers. But I think it was coupled with the lower provisioning rate for your Stage 2 loans. So maybe you can also shed some light on that.

Well, thank you for your questions. There were a number of them. So let's pick them one by one. So regarding the funding cost, indeed, as you mentioned, there are a few reasons which was impacting higher funding costs. First of all, the general increase in rates because Central Bank, the National Bank of Kazakhstan increased the base rate from 15% in the quarter to 16.5% during the course of the first half of this year, which was impacting the overall interest rate environment, and that also increased the rates, especially the deposit rates on retail side. Secondly, despite some weakening of tenge, as you see from this slide, the share of tenge deposits increased both on the retail and B2B side, which also increases the funding cost. Secondly, if we switch to NIM, that was also partially affected by the fact that deposit growth was higher than the growth in the lending book, which had some headwinds on the net interest margin. With regards to the cycle, as we were mentioning a few times, actually, we see that the first repricing is coming on the funding side, on the liability side. And it requires around 2 quarters or 3 quarters for lending book to start picking up. So we expect that in the second half of this year, that stabilization would start happening irrespective of the fact that starting from September this year, the National Bank of Kazakhstan would introduce higher minimum reserve requirement rates, which in itself would be having some negative impact on NIM. So while we were providing the guidance for NIM as a 7% for the full year, we also take into account the impact from higher minimum reserve requirements because we'll be earning no interest on the money which is set as a reserve asset. And given the fact that overall interest rate environment is high, so that also would be a quite noticeable impact from a NIM perspective. With regards to growth on the retail side, I think there are a few reasons for that. First of all, the higher -- the higher base because our retail book was growing rather quick during last few years. And the -- in order to keep up the growth in the lending portfolio, we need to be in line in terms of the issuing of new loans. So first of all, I would mention the base rate. Secondly, the impact from the regulation. So regulator was gradually tightening different requirements on retail lending during last period. And for example, some of the regulatory requirements kicked up -- kicked in the second half of last year, like, for example, getting the [indiscernible] for loans exceeding certain percentage amounts or getting some additional information for people new to loans, especially for younger age or older people. So these kind of regulations also impacting the overall growth of the retail book. Thirdly, the overall high interest rate and inflation is impacting the real disposable income of population and actually, which leads us to be a bit more cautious on the lending side in terms of the approval rates. And probably we also mentioned that there are some other things like regulator introduced maximum rate on mortgages, which actually slowed down the issues of new mortgages certain more aggressive action on the auto loans from some competition and which we were not able to -- which we were not willing to fight for basically unprofitable issuance of auto loans. We see that currently situation has improved. So we would be restarting our more active auto loans issuance in the second half of this year. That's why overall, if you see for the guidance, it's showing quite healthy projection for retail growth for the second half of this year compared to the first half of this year. I think you also had a question on this Stage 2 loans. Actually, we had a number of corporate customers from large corporate and medium-sized where we had some temporary deterioration in operational performance of these customers. They are from different sectors. They are not, in our opinion, having some systemic situation. That is cases which are isolated to that customer. So that's why there was some increase from Stage 1 to Stage 2 loans. At the same time, we're pointing that Stage 3 loans actually somewhat reduced in the second quarter. We can also add that on these loans which were transitioned from the Stage 1 to Stage 2, they are a good situation in terms of the collateral coverage. And we feel that the amount of provisions which we created and the cost of risk, which we are allocating in our budget for the rest of the year would be sufficient to cover that situation.

Yes. That's all clear. Maybe just one follow-up question to my first question. I mean, if you isolate the impact of the MRR impact and the change in tenge deposits and the fact that deposits outpaced your loan growth. I mean, can you share any expectations on just the average deposit rates in the second half of the year? This is where we are now? So do you expect a further pickup in the deposit rates in the current quarter?

No, we expect that on deposits, the -- if they will change, they will not be material in our opinion that the larger portion of deposits has been replaced.

The next question comes from Mikhail Butkov.

I have a few questions. Firstly, on taxation. So it looks like that in the second quarter, you already -- your taxation cost was a little bit more than normal already. Did you front-load some of the costs already for the second quarter? And also, I wonder how much is of the incremental taxation costs related to the tax code is left for the second half of the year and 2026, maybe. And then I also had a question continuing on the last one on net interest margin. So isolating the increase in reserve requirements, would you expect the loan deposit spread to increase in the second half of the year given that as far as I understand, you expect deposits have peaked now while loan yields still have room for increase? And lastly, if you could once again clarify what do you expect to be the drivers of growth acceleration in the second half for the corporate and retail lending, would also appreciate those comments.

Mikhail, thank you for your question. Again, very comprehensive number of questions. So let me pick them one by one. So regarding the taxes. So we recently saw that in the current tax code, there was some amendment introduced, which would be applicable for 2025 only. So it will not be applicable for the next year for the new tax code. And this is actually the excess profit tax, which will be applicable for banks regarding certain types of profit, which primarily would include profit from state securities, but also would have some elements of repo derivatives and placement with the Central Bank. Because the [ syndicate ] signs these amendments in the end of June. So we set aside -- we already allocated the pro rata on pro rata basis amounts which would be attributed for the first half because the excess profit tax would be applicable for entire year. So indeed, a good catch. So around KZT 20 billion of profit of the corporate income tax is attributed to excess profit tax. So the remainder would be allocated for the second half. So the total impact for the year would be around KZT 38 billion. Your second question was on the margins as far as I remember.

Yes, correct. On loan deposit spread into the second half, would you expect it to increase, isolating the impact of the reserve requirements?

We expect that there will be no substantial change because we expect the pickup in the lending and also the lending in the retail book. So that's why we think that situation on the interest rate spread will be more or less stable in the second half of this year.

But if you expect an increase in lending book, so your loan-to-deposit ratio should improve possibly somewhat in the second half plus also the question. So do you see that loan yields have repriced to the terminal level into the response of the latest hike or there is still some room for the repricing of loan yields upwards?

On the loans, there will be still repricing because certain loans are being matured and new issuance is at higher rates. And also, if you see that we're allocating certain increase in loan book in the second half, which would be coming with the new rates.

Okay. Understood. And then if you once again could clarify on the lending growth. So what do you expect to be the drivers of acceleration in the second half, both on retail and corporate lending?

Yes. On retail, as I said that there were certain products which was impacted like on the mortgages, we see that regulator is likely reverse the decision. So we're expecting at least that -- at least the market is expecting certain decisions. Secondly, on auto loans, as I mentioned, we expect better market conditions for the margins, which would enable us to be more active on auto loans. And on retail, because we saw some slowdown. So the base effect, base has been improved because there were no major regulatory changes recently. So that effect would be gradually fading out, and we expect that retail loan book would start picking up more actively. On retail, on the corporate and SME, we're looking at a pipeline of loans and transactions, which we have. And that's why this providing us the base for keeping the guidance at previous level.

All right. Very helpful. And just one last clarification on taxation. So basically, yes, you prorated already the tax related to extra profits. Did I understand it correct that you do not expect it to repeat in 2026. So this taxation on extra profits, taxation on securities, on report derivatives? And are there any other regulations which we should be aware of, except once again, taxation on government securities and repo and the increase of minimum reserve requirement, which is for this year.

The excess profit tax, as I said, is introduced for 2025 only. From the next year, we expect that new tax codes would be active. But we do not have, let's say, the full scope of the impact. I think we'll be providing that once we'll be finalizing this year and providing guidance for the next year.

And the next question comes from Tom Jakobi.

Yes. Can you hear me?

Yes.

Wonderful. Yes, this is Tom Jakobi from wikifolio Doppelanalyse. I've got 3 question blocks in a similar direction, which we have heard before. First is related to the minimum reserve as well, but not in direction of costs. I wonder, will there be any slowdown or even shrinking in your business related to this minimum reserve because you can't spend too much money into loans or whatever? Second question is about the taxes, the taxes regarding 2026. I have read that the corporate tax for banks is fixed now. It should be -- it should rise from 20% to 25%. Can you confirm that? And that there's going to be a turnover tax for banks as well. And I really wonder where -- on which products this turnover tax will come on top? Will this more or less be related to the fee section? Or will it even be related to some interest sections? And third and last question is about the Russian invasion. Are there any forecasts for Kazakhstan economy as a whole? How a possible pace there and the release of all sanctions what it would -- how it would affect the Kazakhstan economy?

Thank you for your question. Regarding the minimum reserve requirements, indeed, this is one of the instruments in the arsenal of the Central Banks in order to influence their policies next to the interest rates. So the Central Bank said -- the National Bank of Kazakhstan said that our minimum reserve requirements is far below compared to some other neighboring countries. That's why they also decided to more actively use that instrument. And indeed, one of the aim is to have it as another measure to control the inflation, to counter the inflation. In that sense, obviously, it might impact the credit activity of the banks. At the same time, West Halyk Bank has substantial capacity of the funding and especially if you see from the first half results when our deposits were growing quicker than the lending book. And on top of already a very robust funding position before, the introduction of minimum requirement itself would not be, let's say, limiting us in terms of the guidance, at least the guidance which we're providing for this year. Regarding the tax code for 2026, indeed, there was -- there are some changes which will be impacting the banks or our clients like increasing in the VAT level from 12% to 16%, introducing corporate income tax for the banks at the level of 25%. At the same time, there will be certain lower tax rate applicable for lending, which is allocated to so-called real economy. There's entire different tax code, which is quite big and it requires a very thorough understanding all the peculiarities. Not everything is described in the tax code itself. There are certain references to be made in the bylaws. Not all bylaws are introduced yet. So that's why this -- from current perspective, we cannot provide, let's say, the full scope of the impact. That's why, as I said, we need time in order to fully digest and have all the set of bylaws to be available to us as well.

Yes. Understood. Can you explain on which products that VAT will come on top?

On the 25% would be the general corporate income tax. And for income, which is generated from lending to real economy, the applicable tax rate would be 20%. But the way how it will be calculated, it should be available in the bylaws, which is not introduced at this point of time. So it is work in progress. Regarding your question on the Ukrainian situation, it's already more than 3 years. Obviously, the economy entire region, economy in Kazakhstan has adapted. The banks has adapted. So we are following very strict rules, which is also impacting in certain ways, the clients because not all the operations, which was available 4 years ago is available now. But as I said, regulators, companies, economy and the banks has fully adapted.

And is there anything like a forecast from science, for example, from the Central Bank, how a possible piece would affect the Kazakhstan economy as a whole?

We didn't see such analytics. And I think the situation is so complex that it's really difficult to provide good guidance. I think no one knows what the agreements, for example, would be reached in the next few weeks. So I have not seen any even global or regional analytics in that regard.

Okay. Would be cool to get an update on the tax questions in the next earnings call.

The next question comes from Olga Naydenova.

Yes. Can you hear me?

Yes.