Halyk Bank (HSBK LI)

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This Wednesday, I asked readers which stock you wanted me to cover. 28% of you suggested Halyk Bank (HSBK LI — US$5.5 billion), Kazakhstan's largest commercial bank. So here is my conclusion.

When putting together the deck, I received significant help from an American investor called Tyler, who owns the stock and has an excellent grasp of the business. I also received help from another subscriber on the ground in Kazakhstan.

Kazakhstan is a landlocked country right between Russia and China. It’s wealthier than most realize, with a great amount of natural resources such as oil & gas and uranium. Thanks to resource extractions and favorable demographics, GDP per capita has grown rapidly.

One of the biggest beneficiaries of that growth has been Halyk Bank - the country’s leading commercial bank. The compound annual growth rate of its earnings per share has been 17% in US Dollar terms.

Halyk was formerly part of the state labor banks of the USSR. After Kazakhstan became independent in the 1990s, then-president Nursultan Nazarbayev privatized the bank. And it just so happens that 70% of the shares ended up in his own hands through his daughter Dinara and her husband, Timur Kulibayev.

Halyk Bank itself is professionally run. It dominates the Kazakhstani banking system with an impressive return on equity of 30% and a cost-to-income ratio below 20%. It owns a super app with eight million monthly active users, representing over half of Kazakhstan’s adult population. Halyk Bank’s QR codes can be found at shops throughout Kazakhstan, enabling users to transfer money seamlessly.

The war in Ukraine has had a significant impact on the bank:

• Initially, the Kazakhstan Tenge depreciated against the US Dollar, and Russia instituted export bans, causing imported inflation to skyrocket.
• Second, money flowed across the border from Russia to Kazakhstan, leading to an overall increase in the country’s bank deposits.
• Finally, redemptions in Russia+ funds sold off their assets, causing selling across the board, with Halyk’s P/E dropping from 5x to just 3x.

The base case has to be that there will ultimately be a resolution to the war in Ukraine. If that occurs, I expect Kazakhstan’s inflation pressure to ease and interest rates to decrease. That would pressure Halyk’s net interest margin, at least in the medium- to long term.

I’m also worried about the rapid growth in unsecured retail lending. Halyk hasn’t reported any rise in the non-performing loan ratio as yet. But they’re certainly in the riskier category of loans. With Halyk’s employee count flat over the past few years, I wonder whether new loan officers can support the 20-30% yearly growth in the retail loan book. After the mid-2000s building boom, Halyk’s non-performing loan ratio reached 20%, and it had to seek government bailout money. For these reasons, I expect the provisioning for credit losses to increase from the current low level of just 1% to closer to 2%.

I also think Halyk’s effective tax rate will rise. President Tokayev released a new tax code raising the statutory rate from 20% to 25%.

Despite these assumptions, Halyk will still trade at no more than 3x P/E. Just be aware that if interest rates drop, the bank will face some near-term headwinds in terms of EPS growth.

As I see them, the key risks are NPL formation, President Tokayev's anti-corruption campaign and the war in Ukraine. I already touched on the first point. Regarding Tokayev, it seems likely that the Nazarbayev family would have to pay fines for past misdeeds. Bloomberg suggests they’ll have to pay the state a US$1 billion fine. Locals in Kazakhstan seem convinced that a fine will be paid but that the bank itself will be left intact. I certainly don’t expect the bank to be nationalized.

There is also a risk that Kazakhstan gets dragged into the war in Ukraine, but I consider it low. Kazakhstan’s Collective Security Treaty Organization membership doesn’t require intervening in conflicts outside Russia’s borders. For what it’s worth, President Tokayev is on friendly terms with Moscow.

For now, it’s business as usual. The bank continues to trade at 3x P/E with a low teens dividend yield. If there’s a resolution to the war in Ukraine, expect capital to return to Central Asia.

THIS WAS JUST A SUMMARY. To view the full PowerPoint presentation, click the “Download” button below: