Hold on both HSBKKZ USD bonds: We downgrade our recommendation on the Halyk Bank (HSBKKZ) 5.5% 2022 bond to Hold from Buy, and reiterate our Hold recommendation on the HSBKKZ 7.25% 2021 security. The downgrade of the 2022 bond follows the partial redemption of that bond. We note that Halyk currently has no plans to return to the eurobond market. This, S&P’s recent upgrade of Halyk’s standalone ratings and the bank’s solid fundamentals, should continue to support valuations of both the 2021 and 2022 bonds.
Solid performance overall: Net income of KZT74.5bn was 20% higher than a year ago, reflecting solid net interest income and lower costs. The annualised ROE was c27% on our calculations. Overall, this was another solid quarterly result from Halyk. There was little additional information on plans for Almex, Halyk bank’s largest shareholder, to sell down a portion of its current stake. Importantly, as Almex stated on 2 May, it will remain the controlling shareholder in the bank.
Weaker commissions qoq due to seasonal effects: Operating revenue of cKZT122bn was 12% lower than in the previous quarter. Net interest income of cKZT93bn was down qoq, but was 24% higher yoy. The weaker qoq result reflects a decrease in loan yields and expenses related to the partial redemption of one of the bank’s eurobonds. Management attributed the qoq decline in net fee and commission income to seasonal effects. Higher realised gains on financial assets contributed to a better qoq trading result. However, in total, non-interest income fell both qoq and yoy.
Cost/income ratio was under 25%: Operating expense of just over KZT30bn was lower than a year ago, as personnel and other administrative costs both fell, which management attributed to merger synergy benefits. The decline in revenues meant that the cost/income ratio was higher than in Q4 18. However, at under 25%, we think efficiency remains a strength at Halyk.
NPLs up, coverage remains >100%: Halyk’s NPL ratio was 9.1%, up from 8.2% at end-2018, but much-improved on March 2018. Management attributed the qoq deterioration to reclassification of some Stage 2 loans as Stage 3, and noted that the sum of Stage 2 and Stage 3 loans fell to KZT901bn from KZT906bn at end-2018. However, the rise in NPLs meant that the cost of risk turned positive – it was negative in Q1 18 and Q4 18. Positively, the bank’s coverage ratio remains well above 100%.
No plans to return to the eurobond market: At 53.6%, Halyk’s LDR was only marginally higher than at end-2018. Loans (net) and deposits both fell by c2% qoq. SME and retail loan portfolios declined due to seasonal effects and there was a decline in deposits from legal entities in Q1. However, we don’t see it as a concern, as the LDR remains relatively low. Halyk disclosed cash and equivalents of cKZT1.5tn, which was lower than at end-2018, following the partial repayment of the 2022 bond. These liquid assets still account for 17% of total assets. Management stated that there are no current plans to return to the eurobond market.
Capital ratios improved qoq: The Tier 1 and total capital ratios were 19.5% and 20.9%, respectively. Both ratios were higher than at end-2018, partly reflecting a decline in risk-weighted assets. Halyk’s equity/assets ratio was 13%, up from 11.9% at end-2018 as total assets fell in the quarter while net income contributed to an 8% rise in shareholders’ equity. Overall, capitalisation remains a strength at Halyk.