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Edited Transcript of HSBK.AL earnings conference call or presentation 18-Nov-19 1:00pm GMT

Q3 2019 Halyk Bank AO Earnings Call

Republic of Kazakhstan Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Halyk Bank AO earnings conference call or presentation Monday, November 18, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mira Kasenova

Joint Stock Company Halyk Savings Bank of Kazakhstan - Head of Financial Institutions & and International Relations

* Murat Uzakbaevich Koshenov

Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board

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Conference Call Participants

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* Andrew Keeley

Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst

* Andrey Mikhailov

Sova Capital Limited, Research Division - Research Analyst

* Babatunde Ojo

Harding Loevner LP - Portfolio Manager of Frontier Emerging Markets, Analyst of Frontier Emerging Markets & Partner

* Conrad Scheurkogel

Artha Capital Management, Inc. - Research Analyst

* Mikhail Shlemov

VTB Capital, Research Division - Equities Analyst

* Simon Nellis

Citigroup Inc, Research Division - MD and Director

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the JSC Halyk Bank 9-month and Q3 2019 Results Conference Call. I will now hand over to your host, Mrs. Mira Kasenova. Madam, please go ahead.

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Mira Kasenova, Joint Stock Company Halyk Savings Bank of Kazakhstan - Head of Financial Institutions & and International Relations [2]

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Thank you very much, Kai. Good evening, ladies and gentlemen. Welcome to Halyk Bank's conference call and presentation of financial results for the 9 months and third quarter of 2019. Participants to today's call on Halyk Bank's side are: 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 Kasenova, Head of Financial Institutions and International Relations.

First of all, we are glad to welcome our new investors who joined our shareholder base as a result of recent secondary public offering of Halyk Bank. Around 70 institutional investors from different parts of the world have participated in this SPO. As per our estimation, the bank's identified number of institutional investors has been almost doubled.

Following the successful transaction, the free float level increased from 16.2% to 26.2% and the liquidity of GDRs has been improved significantly. We are proud to note that this has been the largest secondary fully marketed follow-on offering in EMEA since 2017 and the largest financial institutions group equity capital markets offering in CIS since 2014.

Now let me switch to Halyk Group's consolidated financial results. During 9 months of 2019, our bank's net income increased by 53.3% to KZT 251.4 billion compared to KZT 164 billion for 9 months 2018 mainly due to net interest income growth in 9 months 2019. In addition to this, as you remember, for 9 months 2018, the bank had higher loss from impairment of nonfinancial assets of KZT 31.5 billion compared to 0 for 9 months 2019. And in Q2 2018, there was the recognition of tax loss carryforward of KZT 43.3 billion by KKB due to the merger into Halyk Bank.

Total assets increased by 0.4% versus the end of 2018, mainly as a result of increase in loans from Kazakhstan banks under REPO agreement and decreased by 0.7% versus Q2 2019 mainly because of decrease in loans and deposits from Kazakhstan banks, including loans under REPO agreements. Cash and cash equivalents decreased by 17.9% compared to Q2 2019, mainly as a result of a decrease in the short-term deposits with the National Bank of Kazakhstan due to repayment of the swap transaction with NBK. Securities increased by 9% versus Q2 2019, mainly as a result of purchase of NBK notes and Astana light rail transport bonds in the amount of USD 400 million with 3.25% coupon rate.

Interest income increased by 5.7% to KZT 531.4 billion for 9 months 2019 compared to KZT 502.6 billion for 9 months 2018 mainly as a result of increase in average balances of interest-earning assets by 10.3%. Interest expense for 9 months 2019 decreased by 5.7% compared to 9 months 2018, mainly 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 5.2% per annum for 9 months 2019 compared to 4.9% per annum in 9 months 2018 despite the negative effect from accelerated amortization of discount on the bank's Eurobonds in the amount of KZT 7.4 billion due to early partial prepayment on the 1st of March 2019.

Compared with Q2 2019, interest income decreased by 2.6% mainly as a result of increase of share of lower-yielding FX interest-earning assets in total interest-earning assets following the repayment of swap transaction with the NBK. In spite of this, in Q3 2019, the net interest income increased by 4.6% to KZT 102 billion, mainly due to one-off expenses in Q2 2019 related to the amortization of discount on receivables on sale of assets in installments. As a result, net interest margin increased to 5.4% per annum for Q3 2019 compared to 5.1% in Q2 2019, and net interest spread increased from 5% to 5.3% per annum, respectively.

The fee and commission income dynamics continues its positive trend in Q3 2019, increasing by 4.6% versus Q2 2019 as a result of growing volumes from transactional banking, mainly in payment card operations and the bank transfer-settlements. The decrease in fees derived from cash operations in Q3 2019 versus Q2 2019 and Q3 2018 was mainly due to increased volumes of noncash transactions. Fee and commission expense increased by 10.1% compared to Q2 2019, mainly due to increased number of transactions of other banks' cards in the acquiring network of the bank.

Operating expenses for 9 months 2019 decreased by 27.5% versus 9 months 2018, mainly due to loss from impairment of nonfinancial assets of KZT 28.5 billion in Q2 2018 and cost optimization on the back of synergy effect from merger of KKB into the bank.

On the back of lower operating expense and higher operating income for 9 months 2019 versus 9 months 2018, the bank's cost-to-income ratio decreased to 23.2% compared to 33.8%. Operating expenses for Q3 2019 increased by 3.3% versus Q2 2019 mainly due to increase in salaries and other employee benefits as a result of increasing premium reserves in Q3 2019.

On the balance sheet, compared with year-end, the loans to customers increased by 2.6% on a gross basis and 2.5% on a net basis. The increase in loan portfolio was attributable to increase in corporate loans, 1.7% on a gross basis; increase in SME loans, 0.4% on a gross basis; and increase in retail loans, 5.9% on a gross basis. The Stage 1 gross loans grew by 5.6% from the beginning of the year while the Stage 2 and Stage 3 gross loans decreased by 7.3%. Halyk Bank's 90-day NPL ratio decreased to 8.2% from 8.7% at the end of Q2 2019. Provisioning rates slightly decreased to 10.6%, and the 90-day NPL coverage ratio increased to 170 -- 131.9%.

Cost of risk on loans to customers for 9 months 2019 was at 0.6% due to one-off repayments of large-ticket problem loans in 2Q 2019 while cost of risk on loans to customers for Q3 2019 was at a more normalized level of 0.8%. Stage 3 ratio continued to decrease from 18.6% as at the end of Q2 2019 to 17.9%, mainly as a result of repayments of previously impaired indebtedness of corporate and retail borrowers. We are additionally showing here how well the work-out of problem loans collateral was done by the bank SPVs during 9 months 2019.

On liability side, the deposits of legal entities and individuals decreased by 3.5% and 6.7%, respectively, compared to year-end 2018, mainly due to partial withdrawal of funds by the bank's customers to finance their ongoing needs, including the repayment of external debt obligation of national companies and transfer of a part of FX retail deposits into USD-dominated bonds placed at Astana International Exchange.

As at the 30th of September 2019, the share of corporate KZT deposits in total corporate deposits was 49.6% compared to 55.8% as at the 30th of June 2019 while the share of retail KZT deposits in total retail deposit slightly increased to 42.2%. Compared with Q2 2019, total equity increased by 8.8% as a result of net profit earned by the bank during Q3 2019. The bank continues to maintain very high capital adequacy ratios.

On Slide 19, we are showing our selected strategic initiatives in digital space, such as customer-centric transformation and loyalty program improvement, leading to increased number of clients and volume of transactions. Go Digital division was created, and external consultants were hired by the bank to develop these new initiatives. We continue to improve the functionality of online banking and enhance our digital product proposition. On the following slide, you may see that the number of Internet banking users is increasing as well as growing transactional activities of our clients.

This completes our presentation. Now we would like to open the floor for questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question received is from Andrew Kelios (sic) [Andrew Keeley] from Sberbank.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [2]

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I have a few questions. I can take them one by one. First of all, just in terms of your earnings guidance, I don't see any change in terms of your outlook for this year. But given you've done KZT 250 billion or so, so far, do you keep your KZT 300 billion full year earnings guidance? And if so, are you expecting a fairly kind of significant drop in earnings in the fourth quarter relative to the past few quarters?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [3]

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Yes. Andrew, thank you for your question. Yes. While we typically do not update our outlook during our 3 quarter results, yes, currently, we see that we're in a good position to hit the previous guidance, which was standing at the area of KZT 300 billion. So we now feel that we can say that we expect consolidated net income at the level above KZT 320 billion.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [4]

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Great. That's very helpful, Murat. Second question is on your capital and dividends. Clearly, you continue to accumulate capital very impressively. And just in light of that and previous comments from the CEO on potentially seeking waivers from bondholders in order to be able to pay out a higher dividend, could you just give us your kind of current position and thinking on that and the dividend outlook? And would you say that there's any chance that you could pay out above 50% for 2019?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [5]

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Thank you for the questions. Yes, indeed, during our previous discussions with investment community, we were saying that this is one of the areas which we potentially could study. So we are currently in the stage where we are evaluating the possible actions in that regard. But no decision is done yet at this point of time with regards to whether we would go and apply for waivers or not. So this is currently work in process internally.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [6]

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Okay. And I guess a final question. Could you give us an update on the National Bank's asset quality review process? Just be good to hear where things are with that. And do you think that there's any chance that you would be required to write additional provisions as a result of this?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [7]

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The AQR process goes very well. In terms of the process, it's -- with regards to our procedures, it's all going according to the schedule. So it's progressing well. With regards to any potential outcome, we think that it's too premature to discuss or to provide any guidance because, currently, we're still in the process of providing the information and responding to the inquiries from the parties which are engaged in the AQR. And we are not receiving yet any feedback on the results. So it's premature to discuss any potential outcome.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [8]

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Okay. I mean can you give us any sense of the time line involved in terms of when you expect this kind of process to be of wrapped up and recommendations suggested?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [9]

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We expect this will be early next year, from January to February.

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Operator [10]

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We have no further question at this time (Operator Instructions) The next question received is from [Ivan Wolf] from [QRG].

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Unidentified Analyst, [11]

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Congrats on the very strong results. Really quick question for you. Looking through your financial statements, I noticed that in the fee and commission segment, the fees and payments on debit cards have increased a lot more than the revenues from payment cards since last year. What is the reason for this?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [12]

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This is -- thank you for your question. Yes, the fees and commission expenses grew somewhat higher than fees and commission income on the card side. This is due to the fact that we see -- because we are a large bank with the largest POS terminal network, we see increasing number of cards issued by other banks which have been processed through our POS terminal network. Saying that, we also have to mention that we have a number of initiatives also to increase our fees and commission income on the card side. The one initiative to mention is the launch of new loyalty program, which we launched at the 1st of October. And we are planning to see on other initiatives going forward as well.

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Operator [13]

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And the next question received is from Conrad Scheurkogel from Artha Capital.

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Conrad Scheurkogel, Artha Capital Management, Inc. - Research Analyst [14]

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Congratulations with another set of solid results. Just on your comment on fee and commissions, it seems a little bit lackluster, and it's great to hear that you have initiatives in place. How long do you think it will take for -- sorry, actually, 2 questions -- for us to start to see a more promising trend in fee and commission income?

And then kind of similar to that, it looks as if expectations for GDP growth in Kazakhstan into 2020 is starting to look a little bit more positive, and I'm talking here ex oil. So I want to be clear on that. If what I see -- so maybe you can also tell us whether you concur with that view that we start to see a little bit more activity in the economy away from energy. Will we potentially see better loan growth in 2020? Do you start to see change of that coming through the book?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [15]

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Yes. Conrad, thank you for your questions. With regards to fees and commission income, yes, you are rightly pointing the dynamics which we see, the most recent dynamics. As I mentioned in my answer to the previous question, similar question, is that we have a set of initiatives that's around the client-centric transformation, around the loyalty programs, around our mobile application. So there is a set of initiatives on which we are working, and we expect them to announce once they would be coming on there. And so we expect that this set of initiatives would improve dynamics on the fees and commission income.

With regards to your second question, we also see that this year, GDP growth is already quite, quite strong. There are expectations that it will grow above 4%. We see that one of the main drivers is the government spending. We probably expect also strong growth in GDP next year. It's probably a bit difficult to say whether it will be duly on the ex-oil side, but probably also including the oil part of the economy because, as you know, there are 3 big projects running in Kazakhstan. And particularly one of them, on TCO, there is a big project underway with a lot of capital spending, which also is one of the drivers, for example, for this year. But otherwise, we see that there is quite sufficient new loan, which has been an underwritten, both on the retail part and on the corporate side, the SME or large corporate.

The thing is that we see that the banks -- and I can also particularly talk about the Halyk Bank. We continue our work-out process on the impaired loan side, which is probably reducing the net increase, if you like. And also, what we see on the large corporate segment is that the rate while being -- reducing are still relatively high. That's why we've also seen that whenever the company accumulates sufficient liquidity buffers, they try to use that in order to prepay the loan. So in order for this relatively good new loan generation to be translated in a net increase, we think that somewhat more cleanup of impaired loans should happen. And secondly, probably, the rate needs to drop in order to, first, to stimulate further demand for the loans and also to incentivize the companies to prepay existing loans.

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Conrad Scheurkogel, Artha Capital Management, Inc. - Research Analyst [16]

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Okay. That's very helpful. And maybe just sort of to round off this, sort of looking a little bit into the future. If -- you kind of indicate your current -- well, we know we're running at KZT 250 billion. You said KZT 320 billion is a reasonable number for the full year, so we will print somewhere around KZT 70 billion in Q4. And that's sort of running slightly below -- well, a bit below what we've seen on average through most of the year. Does that mean that on the OpEx line or on the cost of risk line, that there's something that we should be looking out for? Or can we assume that the status quo in looking out for those 2 line items in Q4 will remain?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [17]

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Typically, there are somewhat higher OpEx booked in the fourth quarter. It's a historic trend. And secondly, yes, when I said KZT 320 billion, I mean -- I meant that it will be not less than KZT 320 billion.

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Operator [18]

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The next question received is from Mikhail Shlemov from VTB Capital.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [19]

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I wanted to ask about the recent headlines which are actually coming from the National Bank of Kazakhstan about the state of unsecured consumer lending regulation in Kazakhstan, whether you'd be expecting any impact to come out of those initiatives and how they could impact both the pace of growth of the unsecured consumer part of the book but also the profitability. And the second question is regarding the slide devoted to the new digital initiatives specifically. It seems like that you're going to introduce a cash-back option for the customer. What impact are you expected to have on either your fee and commission income line if it's going to be in commission expense or on the operating expense going forward?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [20]

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Mikhail, thank you for your questions. One moment, please. Yes, with regards to your first question, yes, indeed, the central bank has taken the initiative to, let's say, tighten -- somewhat tighten regulation with regards to unsecured consumer lending. Specifically, they're looking at tightening risk-weighted parts of -- risk weighting approach and also the definition of income which the customer is receiving. We expect that, in most cases, it will affect the customers with lower income and the customers with -- who cannot prove fully the sources of income. Because we, as Halyk Bank are typically aiming at the customers which are receiving salaries through us, so we rely on transparent and approved sources of income and we are reliant on the customers which has good employment, we expect that it would less affect Halyk Bank than some other banks in the system.

With regards to your second questions -- second question, yes, the bonuses or cash-backs, so they are typically showing in the fees and commission expenses. We expect that since we launched that initiative, we probably first would see increase of expenses as a first result. But we expect that later on, it will attract more customers, it would stimulate the customers to make more payments. And gradually, income part would also grow in excess of expenses.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [21]

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If I may follow up with 2 things. Just like -- first of all, in terms of regulatory tightening, when do you expect this to take place and whether it would happen in one go or in several stages? And the second one, regarding the loyalty expense. How do you think this loyalty expense would actually impact the overall pace of growth of fee and commission income into the next year compared versus 2019?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [22]

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On the regulation, we expect that they will introduce in the 1st of January 2020, but they will be applicable for new loans. So then you have to see what is the average tenor of the loans. So there are banks which are focusing on the shorter-term loans. For us, the tenor for consumer loans is close to 18 months. So that element might also affect how quickly the new regulation would be translated to the whole portfolio of consumer loans of a particular bank. With regards to your question, we are currently in the budget process, and typically, we are disclosing our outlook and guidance once we come in with the full year results. So we expect to do that much next year.

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Operator [23]

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The next question received is from Simon Nellis from Citibank.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [24]

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Just 3 quick questions. I see, on Slide 21, you have some interesting statistics on issued cards and card transaction volumes. I was just wondering if you could give us your figures for both market share or some kind of indicated market share for those 2 figures.

Second question would be just on your capital position. I mean, you're well above the minimum requirements. I'm just wondering what kind of buffers you think you need above your minimum requirements to continue to be able to lend effectively to your corporate clients.

And then, just last on lending growth. I mean it seems that you are growing at a much slower pace on the retail than the sector. I think you kind of answered it. It seems like it's related to your strategy in lending to salary accounts, but if you could comment on why you're losing share. And then on the corporate side actually, why are you gaining share?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [25]

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Thank you for your questions. Just one moment, please. I think we've got only your 2 questions, but I will respond first to them and kindly would kind of ask you to remind what was your third question. On the card business, according to our estimation, our market share is around 30%, both in terms of cards issued and in terms of the number of transactions.

On the growth side, if we talk about the lending side on the consumer versus legal entities, we -- on the consumer side, there are 2 portions. One is unsecured consumer lending, and secondly is the mortgages. On the mortgages, the market is growing -- started growing this year, but around 80% of that growth is attributed only for one institution. It's a state-owned housing construction bank. So the rest of the banking sector is growing at much less pace than it is showing by the overall sector statistics.

On the unsecured consumer lending, yes, we typically are focusing on the people who are receiving salaries through us. That is probably translated in somewhat slower growth than some of other banks which are particularly focusing on the unsecured consumer lending. But we are also doing that in more secured way, which is translated in much lower cost of risk. And also, we have to be aware how the upcoming regulations starting from next year would affect the growth rate sector-wise as well as on the particular players. Saying that, we also mentioned before that we're looking at other opportunities in the consumer lending. We have a number of areas where we're also currently looking at. And as I mentioned before, we -- once we'd be ready to announce them, we will do that in due course.

On the corporate lending side, which would include large corporate as well as SME lending, we as Halyk Bank traditionally has a very strong position, which on -- particularly on the SME side is strengthened by acquisition of KKB. And this is the area where we see high growth. I'm talking about the particular SME sector. And we see that particular segment is performing in terms of the growth very well this year. So that probably would be the highest growing segment in Halyk Bank in 2019. And could you please remind what was your...

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [26]

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Yes. The question was on your capital requirements. I mean you current capital position is much higher. Just wondering what kind of buffer above the minimum requirements you really think you need to have to be able to kind of meet the large single-party exposure limits, et cetera.

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [27]

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Yes. There is no hard target or hard minimum, and I will explain to you why. This is because the calculations which we are doing, it is based on the Basel as well as the regulatory requirements. But for us, it is also important, how, for example, rating agencies is calculating capital and capital adequacy ratio. They're looking at the risk adjusted capital, which are looking at completely different set of risk weights on the different segments of the portfolio. So they're looking at particular sector exposures, for example, construction -- lending to the construction sector as a matter of example. And that's why for us, it's difficult to give any hard figure. But still, we think that with return on equity above 20% or 24%, with the growth in risk-weighted assets at the level of 5% to 10%, we're still in a position to improve our dividend payout rate. That's why, starting from this year, we amend the dividend policy, as you know. So starting from this year, we said that the minimum payout ratio would be 50%. And yes, you can refer to the first question which we discussed during the call.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [28]

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Yes. But is there a level of capital at which you wouldn't want to go below because it would impact your rating? I'm just trying to get a sense of how far above the minimum requirements you might be willing to go?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [29]

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Yes. Again probably -- again, please do not -- yes, please do not take it as a kind of the hard guidance. But we feel that yes, the level of somewhat 20% and above is the level which we believe that we should be comfortable with our ratings.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [30]

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Excellent. And then just maybe one follow-on question. You're talking about potentially higher risk weights on consumer lending, I think. Do you -- has there been any indication of what level? Or would it be somehow tied to the APR as it is in Russia for consumer lending?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [31]

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It's, let's say, big table, which have a different, let's say, references to different aspects and which has translated to different level of risk weighting. But the maximum is going up to 300%. First, kind of you look at the different risk parameters, and then it says that it's 100, 150, 200 and the maximum for the most risky type of loans. It's a metric which incorporates the loan parameters as well as the borrow parameters. So the highest risk weighting can go up to 300 on particular loans to particular customers.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [32]

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But I guess, given your -- the nature of your book, you would probably have a lower risk weight than the 300 maximum, right? That's fair to assume?

p id="271938718" name="Murat Koshenov" type="E" />

Yes, yes, sure. And even for other banks, you might have different tenors for the loan, you might have different debt service ratio for the customers, you might have different situation with his proof of salary. So there are different components which are taken into account. So in the typical portfolio, you have different sub portfolios to which you would apply different risk weighting. But for our bank, we expect that majority of loans should have lower risk weighting than average for the sector.

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Operator [33]

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The next question received is from Andrey Mikhailov from Sova Capital.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [34]

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I have 2 sets of questions. The first one is on this one-off effect on your NIM in Q2. What would be the magnitude of such effect in Q3, if any? And what's the outstanding value of that receivable that gives the effects?

And the second set of question is on consumer lending. You mentioned a number of new initiatives. Could these include the purchases of existing loan books from other banks and maybe stakes in other banks which are doing consumer finance mostly?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [35]

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Yes. Thank you for your question. With regards to your question on the second quarter impact on the net interest margin, yes, there are few assets which have been sold by our SPVs in the second quarter. As far as I remember, the total value of those assets was at the level of close to KZT 15 billion. And because they were sold with some repayments, it was sold in installments. So repayment should be coming in the next few quarters. We have to discount to the present value of these receivables. And the amount of that discount will recover roughly to KZT 7 billion. But with every quarter, we expect that discount should be amortized back to the face value of the transaction. So it's a temporary effect on the net interest income.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [36]

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All right. Just to make sure. I meant third quarter, not the second quarter, and I think you meant 2. And did I understand you correctly that the effect in nominal terms should be similar in Q4 to that in Q3?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [37]

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So there was -- we didn't have any special in the third quarter. There was somewhat decrease in net interest margin in the second quarter, and that was, as explained, due to discount on receivables. But this is a timing difference so we expect that discount would be amortized in coming quarters. Yes, if your question is whether the impact of amortizing discount would be similar -- would be same in the fourth quarter compared to third quarter, yes, it should be more or less the same.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [38]

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All right. Yes. Everything is clear on this one. And the question on consumer finance?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [39]

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Do I understand correctly that your question was whether we're looking at acquisition potential for consumer finance especially?

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [40]

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Yes, maybe some -- yes, exactly, but not maybe other banks but maybe portions of their books.

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [41]

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No, we are not looking into such opportunities.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [42]

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I'm sorry for another clarification. So you aren't looking at either buying stakes in other banks or buying an existing books of such banks? Is that correct?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [43]

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Yes, we are not looking either in acquiring any bank with retail or non-retail. And also, we are not looking into acquiring any great portfolio, be it retail or non-retail.

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Operator [44]

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And we received a follow-up question from Andrew Kelios (sic) [Andrew Keeley] from Sberbank.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [45]

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I just have another quick question on the margin. I mean your third quarter margin was obviously pretty strong relative to generally how you've been guiding kind of margin over the last few quarters, and you've generally been of the view that kind of 5% or so is the kind of sustainable level. I mean do you think that the -- that this kind of quite elevated third quarter level can be sustained perhaps over the next few quarters?

And it seems like one of the reasons for the higher NIM in the third quarter is quite a strong drop in the cost of deposits? And if you could just shed any light on what's happened there, that would be helpful.

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [46]

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Andrew, thank you for your question. Just a moment, please. Yes, we do not see any big changes to NIM, which during recent quarters was between 5.1% to 5.4%. So we expect that largely NIM should remain in this range.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [47]

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And is there any particular reason why the cost of deposits fell quite strongly in the third quarter?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [48]

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Yes. According to our calculations, there was increase -- there was decrease in cost of funding, but it was kind of 0.1, 0.2 probably percentage points. We think that, that was basically due to repricing of retail deposits, which have higher tenors typically compared to the corporate deposits. And there was still some retail deposits which was maturing and being repriced. But that was, I think, for not material portion. There might be impact of changes in the currencies because there are some fluctuations between dollar and tenge deposits, and they're fluctuating around a certain split between these 2 portions. And in some quarters, there might be a higher portion of dollar deposits, whereby during certain momentum, it might impact the overall cost of funds. But in general, we didn't see some big shifts in the cost of funding recently.

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Operator [49]

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And the next question received is from Tunde Ojo from Harding Loevne.

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Babatunde Ojo, Harding Loevner LP - Portfolio Manager of Frontier Emerging Markets, Analyst of Frontier Emerging Markets & Partner [50]

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Sorry, my questions have all been answered.

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Operator [51]

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And we received a follow-up question from Conrad Scheurkogel from Artha Capital.

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Conrad Scheurkogel, Artha Capital Management, Inc. - Research Analyst [52]

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Yes. I just wanted to follow up on all the questions on the net margin. Could you perhaps explain or give us an indication. You mentioned that the SME side loan is growing pretty well. Is that a contributor to the NIM margin, the mix effect that's coming through from faster than -- well, not faster than expected because you did tell us several quarters ago that this is an area that you focus on. But can you provide us with some insight on how much that contributes to NIM expansion, the mix effect?

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Murat Uzakbaevich Koshenov, Joint Stock Company Halyk Savings Bank of Kazakhstan - Deputy Chairman of the Management Board [53]

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We probably -- for us, it's difficult to point to any particular area which, let's say, contributed to higher net interest margin. I think it's a combination because our consumer lending has been growing, our SME portfolio has been growing, but we also saw probably a higher drop in the interest expenses. And I would also add -- because this is similar to the previous question, I should also add probably that in the interest expense -- we saw that our general trends in the interest expense is -- was better due to previous partial repayments on bonds. So there's no, I would say, particular area where we should say that was the main contributor to the net interest margin dynamics. So it's a combination of factors.

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Operator [54]

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We have no further questions. Dear speakers, back to you for the conclusion.

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Mira Kasenova, Joint Stock Company Halyk Savings Bank of Kazakhstan - Head of Financial Institutions & and International Relations [55]

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Yes. Ladies and gentlemen, thank you very much for participating in our call today. As usual, our IR team remains open if there's further questions. Thank you very much. Bye.

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Operator [56]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.