Halyk Bank - Where From Here?

The tumultuous events over the new year in Kazakhstan raise questions about the extent and duration of the impact they will have on the country. As some form of stability is gradually returning, the banking system has started coming back on line, albeit services have not been fully restored in Almaty. While it's still early days in terms of gauging the full impact on the banks, at this stage it doesn't appear that the operational impact will extend much beyond 1Q22. Looking further out, the political landscape and its implications for the banking sector and Halyk Bank are hard to fully assess. Longer-term risks around Halyk Bank's core ownership may have risen, and the government sounds like it wants to address pockets of high consumer indebtedness, but we think this should not materially affect Halyk Bank's payroll-driven lending. We may be in for a bit more of a volatile ride, but we continue to see good value in Halyk Bank, even given a higher risk premium. We retain a BUY recommendation, keeping our TP at $20.50 per share.> How is the banking system looking? Banking services are coming back online across the country, including payments and currency transfers, branch reopenings and the restocking of ATMs. Our base case is that there may be some near-term deposit and tenge volatility. To help address the former, deposit insurance coverage has been extended from KZT15 mln to KZT20 mln ($45k) and the maximum covered interest rates raised, while the NBK will try to manage the latter through interventions. We may also see some bottlenecks in the restoration of credit services, but all of this is likely to be mostly absorbed in 1Q22.> How has our economic outlook changed? We also think the immediate economic impact will be relatively mild and short-lived, and we adjust our 2022 GDP forecast down to 4.2% from 3.8%. We expect to see a looser fiscal policy as social spending picks up (-3.5% budget deficit in 2022), which should at least support household consumption and be broadly manageable given Kazakhstan's high monetary reserves (around $90 bln, in an $190 bln economy). We also expect a slightly weaker tenge, averaging USD/KTZ 435 in 2022.> How has the longer-term risk profile changed? The mid- to long-term implications of the recent events on the country's political landscape and the distribution of wealth are hard to gauge. Regarding Halyk Bank, there are legitimate questions about the longer-term controlling ownership of Halyk Bank (held by Almex, which is owned by Timur Kulibayev and Dinara Kulibayeva, the daughter of former President Nazarbayev). We also wait to see if and how "large oligarch-owned" companies will be required to contribute more to state coffers We do not expect any near-term change in dividend policy, modelling 60% dividend payout ratio for 2021, implying a 15% dividend yield. > View from the ground: Catch-up with Halyk Bank. We caught up this week with Halyk Bank's management, and we have several main takeaways. First, most of its services are back on line, with 75% or so of the branch network reopened. Second, it is not seeing any deposit outflows and the liquidity situation is stable. Third, regarding the credit outlook, things are less clear on the retail side as the regulators have announced measures to try to address over-indebtedness (which was seen as one of the original drivers of the protests), including planned higher risk-weights on consumer loans and tighter calculation of income levels, limiting retail loan rates and introducing a personal bankruptcy law. The details are yet to be worked out, but we think the impact on Halyk Bank, which is primarily a payroll retail lender, will not be that material. The SME and corporate credit outlooks look fairly benign, with large corporates more or less unaffected and the government making encouraging noises about supporting SMEs, including potential compensation for damages incurred. Fourth, regarding questions about large enterprises doing more to support state coffers, the management's view was that there are far more obvious sectors to target than the highly competitive banking sector, including natural resources and certain monopolistic businesses. Fifth, the president has repeatedly stated that he and his government need the full support of foreign investors, and hence measures that could damage the investment climate will be very carefully considered. Unsurprisingly, the management had nothing to add on any potential impact on dividends. Our initial take on these points is broadly positive, particularly in terms of any potential materially negative developments for Halyk Bank minorities. > How have our Halyk Bank numbers changed? Our updated 2021 earnings forecast is 10% higher than our previous estimate. Positive operating trends in terms of credit growth and margins, despite some softness on fee income, still feed into a strong outlook for 2022 despite the expected disruption in 1Q22. We therefore raise our 2022-23 earnings forecasts by 4% per year. Incorporating the recent buyback (which amounted to 7% of the outstanding shares), we think Halyk Bank will still deliver 27-28% ROE in 2022-23.> Risks have risen, but still a BUY. We continue to use a GGM valuation, and incorporate the elevated risks into Halyk Bank's investment case by increasing our cost of equity by 2 pp to 18% (100 bps for higher sovereign risk and 100 bps for higher company-specific risk), which we apply alongside 24% long-term ROE and 5% growth assumptions. We also adjust our average 2022 KZT/USD exchange rate forecast to 435. From this, we derive an unchanged target price of $20.50 per share. We think there could be more volatility ahead in terms of news flow in Kazakhstan, but Halyk Bank remains a very important lynchpin of the financial system, which we think will stand it in good stead operationally. Trading at a 2022E P/BV of 1.0 and a 2022E P/E of 3.8, with long-term ROE in the mid-20s, we think the stock remains a long-term BUY. At our target price, it would trade on attractive P/Es of 5.1 for 2022 and 4.8 for 2023.