Joint Stock Co Kaspi.kz Q1 FY2025 Earnings Call

Hello, and welcome everyone to the Kaspi.kz First Quarter 2025 Financial Results. I will now hand you over to David Ferguson, Head of Investor Relations at Kaspi.kz to begin. David, please go ahead.

Great. Thank you, Maxine. Good afternoon. Good morning to everyone. Thanks a lot for joining us for our first quarter 2025 financial results. I'm David Ferguson. I'm joined as usual by Mikheil Lomtadze, our CEO and Co-Founder; Yuri Didenko, and Tengiz Mosidze, our Deputy CEOs. So Mikheil will take you through the strategic update. I'll run you through the operational performance in the first quarter. I'll do that quickly and then spend a bit more time on the guidance for the remainder of the year. There's a couple of moving parts to discuss, and then we'll open up the call for Q&A. So on that note, I'll hand it over to Mikheil. Mikheil, over to you. Thank you.

Hello, everyone. So let's just go through our first Q performance. In general, we have a good first Q. The company itself is performing at the levels which we expected, broadly within our expectations. The payments will continue their strong growth; revenues are up 16%, and net income is up 21%. The marketplace in the first group grew 20% year-over-year, and the revenue increased by 33%, with net income at 19%. The fintech origination volumes grew 17%, with an 18% rise in revenue and an 8% increase in net income. The monthly transactions have been strong, and we continue to have a very engaged consumer base, with revenue up 21% and net income up 16%. Overall, the company's underlying performance is probably within our expectations. It could have been better on the GMV side. There were requirements to register smartphones which were introduced in Kazakhstan, and that had a quite significant temporary impact on the demand for smartphones. Additionally, on the fintech side, we see a continuous high-interest rate environment, which will likely continue through this year. We are also introducing higher interest rates on new deposit products that I will discuss further. So next slide, David, please. Regarding e-Grocery, we have started one of the fastest growing businesses in our e-commerce sector. We continue scaling fast and expect to maintain strong growth throughout the year. The active consumers have reached almost 1 million. The GMV is up 64% year-over-year, and the purchases are up 66% year-over-year with 3.3 million purchases in the first Q. As you know, we are operating in the three largest cities and planning to enter another two cities. The team continues to execute in the grocery sector, and the average ticket remains stable. We will continue scaling across the country, and we expect e-Grocery to grow faster this year. We have launched new term deposits for consumers aiming at a higher interest rate. Our interest rate environment has been influenced by various factors unrelated to Kaspi itself. We are in a high-interest environment, and there is demand for deposits, which have high interest rates. The deposits are designed for savings where consumers can top up deposits at any time, but the term remains fixed for three or six months. The deposits have been very successful in the market, going from basically nothing to 84,000 consumers and almost 379 billion Tenge of those deposits. They are growing fast due to demand, and thus, this product has been quite successful. Our historical strategy has always focused on acquiring consumer deposits because those customers tend to make purchases through our other services. Again, in the future, we expect interest rates to decrease, offering additional opportunities for profitability. At this stage, we're in an environment that benefits us as well. We are undergoing various deposit term upgrades. This is just a bit of a timeline for you to understand. For example, we reduced the deposit rate in February of '24, from 14% to 15%. In '25, we introduced six-month maturity deposits at 17%. We also increased the rate on all our current deposits from 14% to 15%, and introduced a three-month maturity deposit at 18% interest rate. When we increase the rate of existing deposits, we reprice our entire portfolio. When we moved from 14% to 15%, we therefore repriced the existing portfolio of Kaspi deposits. The fastest growing deposits are those offering the higher interest rates of 18% and 17%. A couple of other points: we raised euro bonds, which is our first issuance of $650 million at 6.250%, due in 2030. This was an opportunity for us to build a track record with fixed income investors, aligning with our strategy for international expansion and investments in Turkey. It’s good to be in a position of financial strength, and this transaction was successful. We also signed an agreement to acquire Rabobank, a fully licensed bank without customers or a branch network. This enables us to develop fintech products in Turkey. Our initial plan is to invest roughly $300 million in February 2025 to fund our fintech strategy.

Yeah. Sure. So thank you, Mikheil. Firstly, on the payments platform, the volume growth is up 17% year-on-year. Faster TPV growth is up 23% year-on-year due to higher ticket sizes and inflation. All three core payment products are contributing to that growth: Kaspi Pay, bill payments, and B2B payments, with B2B payments expected to continue growing faster than overall TPV. The take rate has declined to 1.13%, consistent with the trend over the last 12 to 18 months, and this is simply a function of mix change, notably the growth in B2B payments and Kaspi Pay QR within the mix. Regarding the financials, the TPV growth with yield compression results in 16% revenue growth versus 23% TPV growth. Revenue growth on interest balances is slower. Average current account balances increased by 8% year-on-year, but overall, 16% is decent. With the payments business, the combination of tight cost control and inherent operational gearing ensures that strong top-line growth translates into bottom-line growth of 21%. The outlook for payments remains highly predictable, healthy, and unchanged since we updated the market in February. Moving on to Marketplace, it remains the fastest growing top-line platform. GMV growth is up 20% year-on-year in the first quarter, supported by a 36% year-on-year increase in purchases. Both e-commerce and e-Grocery are playing significant roles. All three services—e-commerce, m-commerce, and travel—are contributing to the growth. The take rate has increased, reflecting a continuation of themes seen over the last couple of years driven by value-added services. Take rate accretion will ensure that fast GMV growth translates to revenue increases at a faster rate. Specifically, e-commerce GMV increased by 23% year-on-year backed by a 97% increase in purchases. However, as Mikheil mentioned, in March, the Kazakh government implemented registration requirements for imported smartphones, resulting in increased prices and decreased demand in the last month of the quarter. This sharp decline in demand had a material impact on our GMV growth. Smartphones constitute about 18% of e-commerce, and we estimate the decline in demand in March reduced GMV growth by about seven percentage points. Therefore, that 23% GMV growth would have been around 30%. You can expect this trend to repeat in the second quarter, but the good news is that this will be a temporary issue. Once the situation normalizes, demand for smartphones in Kazakhstan is expected to recover, and we might even witness a catch-up effect in the second half of the year. Regarding m-commerce, we also saw decent growth, with GMV up 17%. Take rate growth from m-commerce is less significant than for e-commerce due to e-commerce being the main beneficiary of value-added services like advertising and delivery. Consequently, the e-commerce take rate increased to 12.5%. M-commerce take rate increased by 20 bps. The slowdown in smartphone sales in March also affected m-commerce, although to a much lesser extent than e-commerce. Kaspi Travel continues to deliver strong results, with GMV up 22%. Good growth across the board, but tours, introduced around 12 to 18 months ago, have significantly improved GMV performance, now making up to 11% of travel GMV from zero, contributing to take rate increases that have moved up to 5.3% from 4.5%. We plan further innovations in travel over the coming year. For Marketplace, strong GMV growth combined with take rate expansion across all three platforms leads to 33% revenue growth year-on-year, surpassing the 20% GMV growth. However, profit growth is lower, consistent with trends from the past two years, primarily due to growth in e-Grocery. We must mention that some large ticket discretionary transactions, largely in e-commerce, may be affected by broader macroeconomic uncertainty. Categories like consumer electronics and cars are examples, as high-value transactions significantly impact GMV with negligible contribution to the bottom line. We can revisit this later. Finally, moving on to the fintech platform, decent marketplace growth translates into decent TFV origination, driven mainly by the merchant side rather than consumers. For the past 2.5 years, the loan portfolio has grown faster than the deposit portfolio. This will now reverse, with the loan-to-deposit ratio being high, and just as seen in February 2022, we will leverage the high-interest rate environment to again focus on growing the deposit base. Following Mikheil's comments, more deposits will drive more transactions and income for our marketplace business. Pricing trends in fintech are stable year-on-year. The cost of risk increased to 0.6% from 0.5% due to macro provisioning, related to the sharp rise in interest rates in the first quarter. However, credit trends will remain unchanged, and we expect the cost of risk to stabilize throughout the year. The rise in the NPL ratio compared to the end of the year is expected, given Q1 seasonality. Reviewing prior Q1 calls, similar trends have been seen. Overall, decent TFV growth over the past 18 months has resulted in decent revenue growth of 18%. Higher cost of risk led to muted net income growth of 8%. However, we anticipate stable trends regarding the cost of risk, even though increased funding expenses will be a consistent theme as we increase the number of deposits, which have already seen substantial cost increases. At the start of the year, interest rates across the portfolio were at 14%, and within months, our latest product includes rates of 18%, representing a significant cost increase. But we view it as necessary investment into the business as long as we effectively attract deposits this year. Moving on to Hepsiburada: their first-quarter results were published at the close of the market on Thursday last week. You can refer to their disclosures for a detailed update. On the revenue side, the main factor is the politically driven consumer boycotts in March, which materially impacted GMV trends. This also led to a pullback in marketing performance, further exacerbating negative revenue momentum. From a cost perspective, negative operational gearing and increased loan loss provisions resulted in a net loss of TRY 355 million, with around 40% of that loss stemming from higher loan loss provisions. This is typical for early-stage fintech products as they test different risk models. Importantly, don’t confuse these products with Kaspi's acquisition of a bank in Turkey. They relate to initiatives that began last year and are part of Hepsiburada’s ongoing strategy. For Kaspi, despite lower smartphone sales in March and higher macro provisioning in Q1, results were largely as expected: revenue up 21% and net income up 16% year-on-year. Excluding the impacts of macro provisioning, net income would be around 19% year-on-year. Therefore, including Turkey, revenue increased to TRY 834 billion. Net income was TRY 254 billion in profit, with the loss from Turkey reflecting about TRY 6 billion at Tenge or approximately 2% dilution. This is a minor negative impact considering Kaspi's long-term opportunities in Turkey. Moving on to guidance, we adjust GMV growth to 15% to 20%, down from 25% to 30% previously. This shift is mainly due to the impact of the new rules for imported smartphones, leading to temporarily higher prices and lower demand. However, this is expected to resolve in the second half of the year and beyond. Additionally, we are facing macro uncertainty that may influence higher ticket verticals, such as cars, which are more susceptible due to the significant ticket size compared to typical e-commerce transactions. Changes in guidance should not signal a shift for the core 3P marketplace business outside the smartphone issue. The TPV outlook remains unchanged, but TFV growth is updated to around 15% at the lower end of the range, reflecting slower marketplace growth. There are other factors to consider: firstly, the high-interest rates act as a drag on earnings; while they are a headwind now, high rates in Kazakhstan could serve as future tailwinds. Secondly, we anticipate the Kazakh government to implement a 10% tax on revenue from investments, affecting interest revenue throughout 2025. Additionally, we expect national bank reserves to increase from summer this year. Both factors could diminish net income by approximately 200 bps this year. Several moving parts contribute to overall guidance. If there are questions about conservative guidance, we attempt to factor in these different scenarios as accurately as possible. Now, we'll open the call for Q&A.

Our first question comes from Ygal Arounian from Citi.

It's Ygal Arounian from Citi. Maybe just on the macro because I have a couple of questions. If you could expand on the macro uncertainty in Kazakhstan, is that driven just by the higher interest rates or are there more factors? Also, with regard to Turkey and the boycotts, has this changed your near-term integration expectations?

Thanks, Ygal. So on macro, I guess a few factors play in. Lower oil prices can mean slower GDP growth, which is one aspect. Commodity price volatility can lead to currency volatility and increased uncertainty, which I wouldn't overplay. We expect payment trends to be resilient throughout the year, suggesting overall spending remains steady. However, high-ticket discretionary transactions may be impacted, particularly in the marketplace, which could affect GMV. We're taking a conservative approach but maintaining an overall robust outlook for the year. Regarding Turkey, no impact expected from the boycotts, but Mikheil may want to add more.

In terms of our plans, there is no impact from the boycotts. Our focus remains on the quality of our products and services, which are crucial for long-term success.

Okay. Thanks. Just a follow-up on Turkey and the Rabobank acquisition. Can you provide more specifics about building out the fintech platform and product timelines?

We are still working on approval for the acquisition, which should occur in the second half of the year. Once obtained, we will begin rolling out fintech products in Turkey. We see many opportunities in digital and online services, and we are excited to take financial services to the next level once we get approval.

The next question comes from Darrin Peller from Wolfe Research.

Hi, thanks, guys. Can we delve further into those one-time factors impacting guidance? For instance, the interest rate on securities is a one-year item, but could you elaborate on its timing? Regarding the smartphone dynamic, can you explain what exactly happened and how you estimate its impact? What do you see as normalized marketplace growth currently?

Darren, firstly on smartphones: the requirement that came into effect in March requires all smartphones to be registered with authorities upon import, which is quite common worldwide. This has led to increased smartphone prices and a temporary demand drop. We saw this reflected in our numbers for March, and it will likely continue into Q2. However, it represents a short-term price correction. Normalizing expected e-commerce growth would be around 30% adjusted for this issue versus the reported 23%. Secondly, regarding interest rates, they are a significant drag, as higher national bank rates have been affecting deposit rates and costs. This is not a one-off issue as it will have ongoing implications, but we can anticipate normalization over the medium term. The 10% tax on revenue will remain as part of our future considerations but won’t have a significant impact on us. We've tried to reflect all these factors in our guidance accurately.

Thanks, David. Mikheil, could you elaborate on the payment side? What are the key drivers you are noticing, particularly the strengths and weaknesses?

Our payment business focuses on facilitating transactions. There’s less impact currently because we are driving cashless transactions. The B2B side has been expanding due to lower penetration and our services that allow payments between merchants and distributors. Overall, our payment business is in a strong position.

The next question comes from Reggie Smith from JPMorgan.

Thanks for taking my question. I want to follow up on the mobile phone situation to clarify. The government is cracking down on counterfeit phones, leading to a decrease in sales of legitimate phones. You mentioned improvements in the back half; can you elaborate on how this expectation shapes up, and was there any signaling about this coming?

I wouldn't categorize it as a supply issue; smartphones can still be imported to Kazakhstan. The situation has led to increased prices, which should normalize in the near future as consumers adjust and prices stabilize. This is a positive adjustment as it integrates transactions into the formal economy. Mikheil, any additional insights on potential regulatory developments?

We previously mentioned a proposed 10% tax on revenue from government securities, which is expected to be implemented, alongside a possible increase of the bank tax from 20% to 25%. These could affect our operations, but nothing further is currently concerning.

To clarify, previously, a large supply of cheaper mobile phones due to counterfeiting has led to now a market shortfall. Will consumers turn to more expensive legitimate phones, and does your demand outlook reflect that?

That's an accurate way to interpret it. Yes, we assume that as counterfeit phones taper off, legitimate phone prices will rise, altering consumer purchasing behavior.

Yes, we're expecting mobile phone prices to increase.

The next question comes from James Friedman.

Can you compare the Rabobank acquisition and your banking strategy in Turkey to Kazakhstan? Also, what will the $300 million investment aim to achieve?

We will discuss details in due time. The investment should the transaction be approved targets funding, product development, and ensuring the required capital for operations. The goal is to innovate around financial services. Major introductions are not expected this year as we will need to complete the acquisition and get the necessary approvals in place for future long-term success.

What is the guidance surrounding the growth of 1P versus 3P services?

1P currently primarily refers to Grocery, while 1P cars make up a lesser part. Grocery is growing considerably and outpacing the 3P growth rates, which were normalized around 30%. We suggest that any adjustments in GMV guidance should not dramatically affect net margins as most of these adjustments have minimal financial impacts.

The next question comes from Neeraj Chandra.

Neeraj, can you hear us? You seem to be on mute.

Sorry about that, David. I'll follow-up with you guys afterward. Apologies.

The next question comes from Gabor Kemeny.

Thank you for taking my questions. On funding, can you clarify how much more funding cost increases you expect due to higher deposit rates and changes in mix? Also, what pricing changes have you made on lending products?

No change in pricing—gross yield is flat year-on-year at 26%. We expect an annualized increase in funding costs between 100 to 250 bps. With a banking license, larger scales can yield more competitive rates as we can utilize deposit functionality to spur marketplace transactions.

The increase in funding costs of 100 to 150 basis points—was that the blended average?

Correct.

Our next question comes from Can Demir.

I have a couple of questions. First, why didn't you acquire Rabobank through Hepsiburada when the bank will work closely with them? Also, how will you manage the boycott-driven drag in Turkey?

The first question: Hepsiburada does not have the financial capacity to fund the acquisition. In the absence of a capital injection into Hepsiburada, it was not feasible for them to acquire the bank. The second question regarding the boycott should probably be directed to Hepsiburada's management team.

Got it. What do you think about the cost of risk given the macro outlook?

The trade-off involves balancing cost of risk and volume. You can maintain low cost of risk by adjusting volume downward, or risk increasing costs with higher transactional volume. Therefore, cost of risk should be viewed as a variable coupled with volume trends.

Our final question comes from Salman Ali.

Could you compare your 18% deposit rates with those offered by other banks? If the Central Bank increases reserve requirements, will that lead to further deposit cost increases?

Our strategy is to ensure products are attractive but not necessarily the highest rates on the market. Our deposit rates are among the lower end of what’s offered in the market. While reserve requirement changes may affect net income margins, they won't significantly impact liquidity for most banks, including us.

To clarify, what is your loan-to-deposit ratio (LDR)? You are currently at 97%. What's the system-wide LDR?

We can’t comment on other banks, but we have historically been between 80% and nearly 100%. In our case, we are performing well.

The final question comes from Ronak Gurdier.

Could you discuss the trend of the payments take rate declining over the past few quarters? The contribution hasn't much changed despite the decline. What’s leading to these reductions and when should we expect normalization?

The decline is gradual rather than dramatic. As our payment services grow, like Kaspi Pay, with its lower take rate, it inevitably lowers the average. The expectation is for ongoing gradual attrition in take rate, particularly as transaction volumes diversify into lower-margin segments.

Historically, our fastest growing transactions are cost-to-pay transactions, with a take rate of 0.95%. We always expected our performance to trend toward this figure as our business scales.

Thank you for your time today. We appreciate your questions. Please feel free to reach out if you have more inquiries, and we look forward to speaking with you again soon.

Thank you.

Thank you, everyone. This concludes today's webinar. You may now disconnect from the call.