Turkiye Halk Bankasi AS

IST:HALKB.E

Q3-2025 Earnings Call

[Operator]

Ladies and gentlemen, again, welcome to Halkbank's Third Quarter 2025 Financial Results. We will have a question-and-answer session following the presentation [Operator Instructions].

Now I will leave the floor to our host. Sir, the floor is yours.

[Mirac Tas, executive]

Dear friends, good evening, and welcome to our third quarter earnings call. This is Mr. Mirac Tas, Group Head of International Banking. I'm excited to be with you on another strong quarter. After my remarks, I will leave the floor to our Investor Relations Manager, Kamer Asik, who will go through the financial results and our Head of Investor Relations, Mr. Muharrem Baykara, who will share his thoughts on the broader macro and operating environment.

Before moving on to financial, I would like to go through the overall performance, how we position ourselves on the upcoming quarters. During the quarter, core banking continues to be our main strength, delivering strong revenue, growth and underlying sustainable nature of bank profitability. We delivered a healthy interest income growth accompanied by strong fee generation. Thanks to our solid customer base and support from payment system. We continue our disciplined cost management, which is reflected in the operating expense contraction on quarter basis.

Another important driver was the subsidiaries contribution due to the applied methodology in line with the sector. Our security driving asset growth remain as key differentials. Security make up almost 28% of assets, suggesting a slight increase compared to the previous quarter.

At the same time, we continue to expand our loan book. With the help of the FX loan, we supported total loan expansion. Fixed loan growth was quality driven, fully aligned with our discipline and selective lending strategy. As always, we demonstrated resilience in managing asset quality, remain fully focused on asset quality and risk management. Our prudent underwriting standards, proactive monitoring and well-diversified portfolio continue to support resilience of our asset base.

On the funding side, we saw the strong performance in demand deposits and changing the F&C, our funding base besides growing the wholesale funding appetite balanced deposit reliance. Our dedication to wholesale funding continue on expanding and deepening. This reflected as USD 300 million bilateral loan during the quarter.

We also made another announcement about the new additional USD 250 million amount of bilateral loan agreement on the public disclosure platform. Going forward, we can say that we are well equipped to register meaningful improvement in the FX wholesale funding opportunities on the back of our growing equity through FX from abroad. We are executing today by transforming tomorrow through a clear long-term vision. Thanks to our teams and their hard work, they truly drive our success.

I sincerely thank you to all friends. Thank you for continuing to trust and support. I look forward to seeing you all again soon.

[Kamer Asik, executive]

Thank you, Mirac bey. Turning back to our third quarter financial performance. We start with the first page. Total assets increased by 40.1% year-over-year, reflecting a quarterly growth of 10%. Accordingly, total assets exceeded TRY 4 trillion as of the third quarter. Similar to the previous quarter, the main driver was the solid growth of securities portfolio. Total securities sustained their growth momentum accounting for an almost 28% of total assets. On the other hand, the share of loans kept declining and decreased to 43.7% due to our prudent loan underwriting strategy.

Now moving into our securities portfolio. Total securities increased by 12.8% quarter-on-quarter in which TR securities grew by 11.9% and FX securities by 7.2% in USD terms. The composition between fixed and floating rate notes was largely similar to the previous quarter. CPI linkers continue to be valued at the same rate as 30%.

The front-loaded income effect stemming from the last quarter's methodology led interest income on CPI linkers to normalize to TRY 22 billion in the third quarter. As for the securities composition, fair value through P&L securities share increased to 8.6% from 8.1%. During the quarter, amortized cost securities slightly decreased to 68%, while fair value of CI securities increased to 23.4%.

Now let's go over to loan growth dynamics presented on Page 3. Total loans gained some momentum quarterly. FX loan growth fueled total loan growth, while TL loan growth still realized below the sector despite gaining some traction during the quarter. As such, FX loans in USD terms increased by 6% above the sector, while TL loans grew by below sector 5.7%.

Business segment was mainly supported by strong FX loan growth. Similar to the sector, we had a strong appetite on granting FX loans during the quarter due to strong FX demand from firms and increased FX liquidity. Our below sector total loan growth reflects our capital protecting strategy and selective loan approach. It's also worth mentioning that retail loans started picking up and contributed to total loan book. With respect to consumer loans, both credit card and overdraft loans have seen significant growth during the quarter.

Turning to Page 4, more details on loan portfolio. Structurally, our balance sheet is TL denominated compared to peer banks. TL loans make up nearly 69% of total loans, while FX loans make up 31%. Yet surging FX loan demand and increasing FX liquidity continue to change the composition in favor of FX loans. SME loans with a 48% share are the largest segment within our loan portfolio. Additionally, the continued momentum on credit cards reflects itself that its share within retail loans increased to 36% from 32%.

Asset quality details are on Page 5. We had an almost TRY 10 billion inflow -- NPL inflow this quarter, sorry, TRY 10 billion NPL inflows this quarter. NPL inflows were mainly initiated by SME segment like FX of policy tightening have led to additional Stage 3 inflows. On the other hand, NPL inflows were broadly granular. As a result, NPL ratio [ deteriorated ] to 3.2% from 2.8% in previous quarter.

Our NPL ratio is decoupling from sector, which stems from 2 main reasons. The first one, we are neither selling nor writing off. The second one, the denominator impact drove our NPL ratio above the sector average. However, NPL coverage further strengthened to 62%, which is comfortable and compatible with the sector average. In other words, we further increased our prudency.

On the other hand, our Stage 2 ratio remained flat at 8.8%, in line with the previous quarter. We saw additional deterioration, especially on SME segment, while corporate commercial loans NPL ratio was stable, although consumer loans NPL increased to some extent, they realized slightly above the sector. In addition, we saw an increase on credit cards NPL ratios, but their share within total loan book was almost 4%.

Moving to asset quality details on Page 7. We again acted prudently and set aside significantly higher Stage 3 provisions compared to the first 3 quarters of the last year. Taking into account all provision expenses cumulatively, our total loan coverage ratio remains above 3% level, which is compatible with the sector average. We had again, NPL collections and released some of our performing loan provisions. Those 2 factors supported our total reversal income during the third quarter. Gross total cost of risk reached at 192 basis points cumulatively. Taking into account total reversals, our net total cost of risk realized at a comfortable 116 basis points, whose number is a simple reflection of our prudence. Looking back to history, net cost of risk was in a negative territory for the same quarter of the last year.

Now moving on our liabilities on the next page. Loan-to-deposit ratio increased to 65.5% from 55.1% considering its lower level versus that of sector average. There is much potential available for the loan growth over the next quarters, depending on bank strategy.

Our deposit base remains strong, making 78.7% of our total liabilities. On the other hand, we continue to optimize our funding structure. Our DCM team have been exploring further opportunities to increase wholesale funding. Our dedication to wholesale funding continued on expanding and deepening. This reflected as USD 300 million bilateral loans during the quarter. We also made an announcement about new additional USD 250 million amount of bilateral loans on public disclosure platform. As a result of our efforts, wholesale funding share within the liabilities increased to 5.4% from 4.4%.

Despite some increase in this ratio, it's well below the sector average, which is 19.2%. Therefore, our balance sheet have a lot of gap in terms of additional wholesale funding. We will be more active in external funding for upcoming quarters, including further offshore bond issuances and bilateral loans. Details of deposits are on the following page.

On the deposit side, we maintained our concentration on widespread granular core deposit base. Total deposits were up by 7% quarterly and almost 37.6% on a yearly basis. TL deposits increased by nearly 6% quarterly in terms of FX deposits in USD terms, which surged by 4.4% quarter-on-quarter due to ongoing FX demand on deposits holders.

Following to Page 10, the share of demand deposits reached to 74% with 13.5% quarterly growth. Therefore, the increase in demand deposits supported the core spread. TL-driven deposit structure will continue to impact our metrics positively in the rate cut cycle.

On Page 11, cost yield and spread details. During the quarter, both TL core spreads and blended spread showed solid momentum driven by higher loan yields and lower funding costs, outperforming the sector. Our TL core spread recorded a significant increase of 840 basis points. Despite a slight 15 basis points contraction on FX side, our blended spread improved by 510 basis points, marking the strongest quarterly expansion among the peers.

Following the Page 12, NII more than doubled on a yearly basis. On the flip side, normalizing CPI linkers income caused slight contraction on a quarterly basis. Net fees and commissions managed to grow low teens quarterly, thanks to strong contribution from the payment system.

Now moving into Page 13. Total operating revenue increased by 13% quarterly. Moreover, our net income surged by 64% quarter-on-quarter, stamping the bottom line at TRY 8.2 billion. In summary, on a cumulative basis, ROE stick to mid-teens.

Further details on Page 14, we continued our disciplined cost management, which is reflected in the operating expense contraction on a quarterly basis. Therefore, OpEx declined by 2.6% quarter-on-quarter, mainly driven by non-HR-related expenses.

Now solvency ratios. We saw the positive impact of recent subsidiaries methodology change on solvency ratios. Our CAR, Tier 1 and CET1 ratios were boosted by 70 basis points from this methodology change. If we exclude forbearance, CAR would be roughly 180 basis points, Tier 1 170 basis points and CET1 would be roughly 150 basis points lower than the reported ratios. Reported consolidated CAR came in at 15.3%, while CET1 ratio realized at 10.1%.

Additionally, you can find our accomplishment on the sustainable banking files. In line with our sustainability approach, companies who apply for loans have been subject to sustainability and environmental assessments since 2016. More than 250,000 women entrepreneurs have been supported since its launch a total of 108 billion loans were granted. At the same time, this also represents 33% of total sector credit risk for women entrepreneur as of September.

On the other hand, the share of green investments within the investment loan portfolio are targeted to increase to 75% level. We are included in BIST Sustainability Index and FTSE4Good indexes.

Other details also are on the Page 19. You can also check out our sustainability journey at Page 19, as I say.

Thank you for joining us today. These are my final remarks. I will hand over to you, Muharrem bey. Thank you.

[Muharrem Baykara, executive]

Good evening, everyone. First of all, sorry for the delay due to technical difficulties. This is Muharrem Baykara, Head of Investor Relations. Before we proceed to Q&A session, I would like to address a few important issues.

Let me start with a broader perspective on the operating environment. Despite the front-loaded rate hikes and the CBRT's higher for longer approach, the Turkish economy has managed to engineer a soft landing. Meanwhile, global central banks continue to ease their monetary policies. The Federal Reserve has turned back into the rate cut cycle following the deceleration in the United States labor market, while the ECB's policy rate reached almost neutral 2%. It is expected that the shutdown of the United States government may exacerbate the economic conditions more. Therefore, macroeconomic outlook in the United States may trigger more rate cuts into the 2026.

On the other hand, European Union, the biggest trading partner of the Turkey disclosed a colossal defense package. This exogenous factor highly likely to support export dynamics of the Turkish economy. In summary, easing global and monetary and fiscal policies will pave the way for a vibrant external demand, which is good for the Turkey's real GDP growth. Tight Turkish lira financial conditions are being offset by the easing FX financial conditions. Banks have high FX liquidity, which is derived from increasing FX deposits and favorable external funding conditions. The downward trend in the global interest rates and declining risk premium have contributed to increasing external funding volumes.

Therefore, banks prefer to grant more FX loans, presumably in the form of selective loans. In addition to FX loans, Turkish corporates have actively tapped international capital markets to raise funds.

In summary, declining risk premium and easing global financial conditions have shielded the economic activity despite high local interest rate conjuncture. This inflation slowed recently due to transitory factors such as drought and frost for the food prices and seasonality effects in the education-related items. Afterwards, the CBRT has adjusted its response function, lowering down the pace of the rate cuts to 100 basis points levels lately.

The CBRT attaches more importance to deposit trends, inflation outlook and inflation expectations. Therefore, the CBRT has maintained its cautious forward guidance, conveying the message of the rate cut steps will be reviewed prudently on a meeting-by-meeting basis with a focus on inflation outlook despite real high interest rates. All in all, the CBRT's decisive prudence and the relatively tight financial conditions will support the CBRT to contain inflation.

Furthermore, subdued crude oil prices and strong Turkish lira in terms of real effective rate may support the inflation process in the coming months. The spread between the policy rate and the CPI is currently above 6%, suggesting that the upcoming meetings would be live meetings. In other words, in the base case scenario, it is forecasted that the CBRT will continue to cut the rates with smaller steps as long as the real interest rates remain relatively higher than its historical norms.

On the other hand, conditions have started to change in favor of Halkbank to optimize our funding structure. Interest from our correspondent banks regarding the wholesale funding has been surging. Both the number of the engaged banks and the volume of the transactions have been ascended. Increased appetite for the wholesale funding can continue to scale up the share of the wholesale funding as of our total liabilities. This strategic change will decrease our deposit funding reliance and in return, improve our deposit pricing edge. Therefore, in addition to additional FX funding, the efficient deposit pricing will also support our profitability in coming years.

Thanks to these looming factors that I tried to articulate above, internal capital generation will support our capital base in next year. Furthermore, the steps we took to align with the peer banks through methodological approaches also supported our equity increase this quarter.

As of the third quarter, we started to evaluate our subsidiaries and associates using the equity method instead of fair value method in line with the practice adopted by peer banks in the sector. There are 2 major effects of this change. Firstly, net-net, it supported our quarterly bottom line with TRY 2.4 billion. Secondly, our equities were replenished by TRY 18.1 billion with the increase in the retained earnings.

To sum up, switching to the equity method contributed to our total equity, approximately TRY 20 billion in the third quarter and had a sound positive impact on the [indiscernible] capital adequacy ratios. You will see the footnotes then you check out the independent audit report or the earnings presentation. It is only reflected in retained earnings on our balance sheet, yet the independent audit firm distributed those retained earnings on the relevant year figures for information purposes. In the related pages on the audit report, you can see that the related years retained earnings figures distributed backwardly on the related quarters and years.

There is another accounting methodology change relating to the NPL accruals. Before the third quarter, we were recognizing the NPL accruals of balance. As of the third quarter, we started to recognize those accruals in the balance sheet in line with the peers.

These are my key points I wanted to cover. Thank you. [indiscernible] bey, over to you.

[Operator]

[Operator Instructions] We are waiting for your questions.

[Muharrem Baykara, executive]

[indiscernible] it looks there is no question.

[Operator]

Yes, you're right.

[Muharrem Baykara, executive]

Yes. Before I close the session, I want to double down that we are sorry for the technical difficulties we [indiscernible] the earnings presentation. And if you have any follow-up questions, please feel free to contact us. Thank you very much for your interest and attention. Have a nice evening. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now leave.