Fixed Income Analysis /

Halyk Bank: Q3 review – Another stellar quarter

  • We reiterate our Hold recommendations on the Halyk Savings Bank (HSBKKZ) 2021 and 2022 USD-denominated bonds

  • Q3 19 was yet another solid quarter at Halyk Bank

  • FY 19 net income target revised upwards – the bank now expects this figure to exceed KZT320bn

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
19 November 2019
Published byTellimer Research

Recommendations unchanged: We reiterate our Hold recommendations on the Halyk Savings Bank (HSBKKZ) 2021 and 2022 USD-denominated bonds. Fundamentals remain strong and Halyk still doesn’t plan to return to the eurobond market in the near term. Q3 19 was yet another solid quarter at Halyk Bank. Net income of over KZT87bn was slightly lower than in Q2, but was up versus Q3 18. On our calculations, the annualised ROE was almost 30%. The FY 19 net income target has been revised upwards – the bank now expects this figure to exceed KZT320bn, up from the previously-guided KZT300bn. 

Revenues up qoq and yoy: Operating revenue of more than KZT138bn was 1% higher than in Q2 19, driven by strong net interest income and higher trading gains. Net interest income was 5% higher than in the previous quarter, when one-offs related to assets sold by the bank’s SPVs impacted this figure. Further, interest expenses fell following the partial repayment of one of the bank’s bonds. Net fee and commission income was almost flat qoq, while trading gains increased to KZT11bn from less than KZT9bn, partly reflecting revaluation gains on a cross-currency swap with the central bank. Net insurance income fell qoq, as gross premiums written declined, but, as discussed, other revenues offset this, leading to the rise in operating revenue.

Costs higher than in previous quarter: Both staff and other administrative expenses increased qoq, leading to a 3% rise in total operating costs, which exceeded KZT34bn. As a result, the cost/income ratio was slightly higher than in Q2 19, but at 24.7%, this ratio is still quite low, in our view. 

Stage 3 loans fell qoq: Loans which were at least 90 days overdue accounted for 8.2% of gross lending, down from 8.7% at the end of Q2, and from 10.9% at end-September 2018. Loan growth and a decline in total amount of loans over 90 days overdue both contributed to this improvement. Total Stage 2 and Stage 3 loans also declined qoq. Despite all this, the cost of risk rose to 0.8% from 0.3% in Q2. Management noted that this reflects a normalisation – the Q2 19 CoR was unusually low, due to the repayment of large loans. Management stated that the asset quality review being run by the National Bank of Kazakhstan (NBK) is progressing according to schedule and should be concluded by early 2020 at the latest, but wasn’t able to give any guidance on the potential impact of this process.

LDR is still relatively low: The loans/deposit ratio was c58%, higher than at the end of June as deposit balances were almost flat qoq, while loans rose 2% driven by corporate and retail lending, and a modest rise in SME gross loans. Management disclosed that the NBK is looking to address concerns about the growth in unsecured consumer lending by tightening both risk weights and the definition of a customer’s income, possibly from the start of next year. However, the bank does not believe these changes will have a significant impact on its business, given the customers Halyk typically targets (primarily salary accounts). Further, changes are only expected to apply to new loans. Halyk reported cash and equivalents of over KZT1.7tn. While this has declined since the end of June (due to the repayment of a swap transaction with the NBK), we note that these liquid assets still account for c20% of total assets. Further, Halyk’s reliance on wholesale funding is modest, and the group has just two USD-denominated bonds outstanding. Most recent comments from management suggest that more of the 2022 bond may be redeemed prior to the final maturity and, given the availability of cheaper funding from other sources, a return to the eurobond market is unlikely in the near term. 

Capitalisation remains a strength: The Tier 1 and total capital ratios were 20% and 21.2%, respectively. Strong internal capital generation meant that both ratios were higher than a year ago. Halyk’s equity/assets ratio was 13.6%, up from 12.4% at end-June and from 11.7% a year ago. Management stated that the minimum total capital ratio, which would be comfortable at the current ratings level is c17%. Overall, capitalisation remains a strength at Halyk, and we do not believe planned changes to the dividend policy should cause concerns to credit investors. There was no further update on seeking a waiver from bondholders to allow Halyk pay higher dividends, though management did state that work on this continues at the bank.