January 20, 2022

Earn Money

Business Life

Edited Transcript of TCS.L earnings conference call or presentation 11-Mar-20 2:00pm GMT

Moscow Mar 12, 2020 (Thomson StreetEvents) — Edited Transcript of TCS Group Holding PLC earnings conference call or presentation Wednesday, March 11, 2020 at 2:00:00pm GMT

Public Joint-Stock Company Bank Otkritie Financial Corporation, Research Division – Research Analyst

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

Good day, and welcome to the Full Year 2019 IFRS Financial Results Media Call Conference. On today’s call, we will have Oliver Hughes, CEO; Ilya Pisemsky, CFO; and Sergei Pirogov, Head of Corporate Finance.

I will now turn the conference over to Mr. Oliver Hughes. Please go ahead, sir.

Thank you very much, and good afternoon to everybody, and thanks for joining the call. 2019 was another record-breaking year for Tinkoff with exceptional business development and financial achievements. Our ecosystem strategy is bearing tangible fruits with our products and services more joined up than ever, our customers more engaged than ever. We’ve come a long way in the last 7 years, and we have evolved into a fully fledged and rapidly growing lifestyle and financial services ecosystem with a suite of transactional, lending and lifestyle offerings that are looked by our customers.

2019 was a year of significant growth. We added a total of 3 million customers, more than we have ever added in a single year to reach the milestone figure of over 10 million customers. These customers are increasingly using more of the Tinkoff suite with almost 1/4 of them having 2 or more products.

So not only are we growing customer numbers, but we are also engaging more with each one of them, thanks to our continued efforts on customer experience, user interface, cross-sell, data management and loyalty initiatives.

Our DAU, or Daily Active Users, have reached 1-point million from 1.1 million a year ago and now — 1.9 million, sorry, from 1.1 million a year ago. And our MAU, or Monthly Active Users, have reached 5.3 million from 3.7 million a year ago. We see further engagement gains ahead as we leverage our SuperApp, the first of its kind in Russia and Europe. This SuperApp contains all our digital services under one umbrella and allows our customers to satisfy their lifestyle and financial needs at the touch of a screen by seamlessly accessing Tinkoff as well as partner products and services. This is a highly technological platform that enables us to have very quick time to market and to provide an extremely engaging customer experience in a capital-light and flexible manner.

Our Lifestyle Services are going great guns. We have over 0.5 million monthly active users for these services alone. Each month, our customers are buying 350,000 cinema tickets, 25,000 concert tickets, 20,000 theater tickets, making 10,000 restaurant bookings, 50,000 flight reservations and 50,000 hotel bookings. We have a great pipeline of additional entertainment and ticketing options as well as other services, but should continue to drive customer engagement on this lifestyle platform.

More recently, we announced a cut — tranched EUR 25 million investment into a European fintech venture. They will offer noncredit products to customers in Europe. It’s just too early to discuss the details of this project, but please watch this space as our colleagues put our expertise in building and growing a fintech business to test outside of Russia.

Growth did not come at the expense of the bottom line and profitability. In fact, despite the investments required for our fast-paced growth, our 2019 net income of RUB 36.1 billion rose 33% year-over-year, giving us an industry-leading ROE of 55.9%.

You may recall in 2016, we promised to the market that our net income would grow 20% to 40% per annum until 2019. I’m proud to say that as of the end of 2019 we delivered 49% annual growth over the last 3 years. This is an outstanding achievement.

Our net loan book grew 66% year-on-year as of the end of 2019, reaching RUB 329 billion that was powered both by our more mature credit card product as well as our newest credit products, personal loans and point-of-sale loans on the unsecured side and home equity and car loans on the security side. The secured parts of the portfolio grew from RUB 5 billion to RUB 48 billion, now accounting for 15% of total loans. These secured products will continue to be major drivers of growth in future years. Our credit risk-adjusted margins against a high-quality mass-affluent customers and the relatively capital light. As you know, we like them a lot. To capture these credit growth opportunities, in 2019, we decided to raise $300 million of fresh equity and RUB 20 billion of debt financing. We thank all investors for their support and continued confidence in our business.

2019’s profitability was powered not only by the fast-paced growth of the credit portfolio, but also by the ongoing scaling up of our noncredit lines. I’ll give you a brief update on the maintenance here. Despite some regulatory pressure on small business, our SME business line closed the year with 535,000 customers and a record operating income of RUB 4.7 billion. Our product suite is increasingly geared to larger and more profitable accounts, helping to deliver high-quality growth of the SME business line into the future.

Tinkoff Insurance more than doubled its revenue and is one of the fastest-growing business lines in the ecosystem, albeit from a low base. This remains a tricky market, one that is primed to be disrupted. Tinkoff Investments went from strength to strength, breaking even in July 2019 and finishing the year with 1.1 million individual customers. We were the #1 retail broker on the Moscow Stock Exchange, both in terms of account openings and active customers. This is a highly engaging platform with different tariffs with different types of segments of customers with a social network called Pulse, which has over 100,000 users, where investment ideas and discussion forums are held. With a wide selection of financial assets on offer, some of which Tinkoff now provides itself through the in-house asset manager called Tinkoff Capital. This is a business line we are particularly excited about as households should continue to diversify their savings away from cash and deposits.

Our online merchant-acquiring business grew revenues by 57% from RUB 4.2 billion to RUB 6.6 billion, as we consolidate our position as the third largest online acquirer in Russia. This business line is profitable, and we know how to grow it further.

Tinkoff Black, our current account business, has gone viral as we added 2.6 million customers. This product remains the key feeder to our ecosystem. In fact, more than 40% of Tinkoff Black customers use 2 or more Tinkoff products, and this is just the start.

Overall, despite the rapid growth, we managed to keep our operating expenses and funding costs in check. As more of our new businesses hit breakeven, our cost-to-income ratio declined by 5 percentage points in 2019 from 41.9% to 37.1%. And on the funding cost side, our attractive product and brand composition led to a 64% year-over-year increase in retail customer accounts, which contributed to our funding costs declining 50 basis points to 5.7%. This was below our guidance for the year.

And now a word on asset quality. 2019 was the first year since the 2014 and ’15 crisis, where we saw the cost of risk increase year-over-year from 6% to 8.5%. There were several factors at play. First, the impact of front-loading provisioning due to IFRS non-accounting, which is especially meaningful in a fast-growing portfolio. Second, there was some deleveraging of the consumer in some pockets of the population. This led to a softening of roll rates, meaning that when customers went into delinquency that became slightly more difficult to collect and return to current status. We identified this trend very early on, sooner than the competition and tightened our approval rates.

The results of these initiatives were seen in the fourth quarter with cost of risk declining sequentially to 8.1%. As we look into 2020, we’re monitoring the situation. And as things currently stand, we do not see any red flags. We believe that we can continue to disperse high-quality loans with attractive risk-adjusted margins and returns.

Our business has never been more sustainable, and we’re in an excellent position to grow it further profitably. Our credit portfolio has never been more diversified. Our noncredit businesses are gaining momentum and increasingly contributes to our bottom line. Our customer base is increasingly composed of highly transactional, highly engaged, young, urban customers. Our technology and advancements in artificial intelligence and machine learning, how everything we do at Tinkoff. We know how to acquire customers with positive unit economics and have very clear monetization strategies. So while 2019 was an exceptional year, everyone at Tinkoff is extremely excited and motivated for what is ahead, as we work to double our active customer base in the coming years.

With that, I’ll hand over to Ilya for the details and then later I’ll wrap up. Ilya?

——————————————————————————–

Ilya Pisemsky, TCS Group Holding PLC – CFO [3]

——————————————————————————–

Thank you, Oliver. Hello, everyone. I would now like to describe some of the main trends and patterns that we observed in our business throughout 2019. Traditionally, I will start with the balance sheet composition on Slide 4. To the left, the group grew by 44.3% year-on-year and by 14.1% in the fourth quarter. The substantial growth in cash balances and in the investment portfolio during the fourth quarter was a result of strong inflows from SME and retail current account. This trend was especially pronounced during the fourth quarter pushing the balance sheet proportions towards a strong balance of 1/3 in cash and securities at the year-end with net loans at 57% of total assets.

The structure of our securities portfolio changed throughout the year towards more state and quasi-state bonds, which now represents more than 80% of the book, as shown on Slide 30 of the presentation. Throughout the year, we built a significant position — a positive regulation on this portfolio, part of it was realized during 2019 and part of it will be realized in 2020, positively contributing to our net income in the first quarter of 2020.

In 2019, the total return on the securities portfolio was over 13%. Our loan portfolio showed an impressive 63.6% growth for the year on a gross basis and 65.8% growth for the year on a net basis, beating our revised guidance of 60% plus. This growth was driven by several components of the credit book, including credit cards, cash loans, point-of-sale loans and culturalized loans, as you can see on Slide 5. SME lending remains in test mode, but even there the results are encouraging.

The fourth quarter loan book growth was a moderate 4.1%, as we rebalanced our channel mix and managed cost of risk. The credit card portfolio grew 38% year-on-year, thanks to strong customer acquisition efforts. We added 590,000 new activated credit cards in the fourth quarter and 2.4 million cards in 2019 as a whole. The main channel for distribution during the year were our Internet and mobile, cross-sell and telesales. Despite showing the strongest year-on-year growth in credit cards in our history, the share of credit cards in the loan portfolio declined to 61% of the net credit book as a result of the solid growth in other components of the portfolio.

That said, credit cards remain a key core product for us, and we still see huge potential in this market. The cash flow in portfolio did not increase in the second half of the year despite strong loan disbursement. The reason for this is the high early repayment rate for cash loans at the level of approximately 10% per month. Despite this slowdown, this sub-portfolio still grew by 65% year-on-year.

Looking forward into 2020, this part of the lending business will be an essential middle point between credit cards and home equity loans, allowing us to capture all the upsell and downsell credit opportunities in terms of size, duration and yield.

Home equity lending was a story of success in 2019, growing profitably 11 folds from a mere test into a meaningful business line with over RUB 33 billion loans disbursed during the year and RUB 9 billion loans repaid.

State-of-the-art onboarding and collateral registration processes allowed good conversion rates and high net promoter scores from our applicant, which, in turn, led to relatively cheap acquisition costs and positive selection in terms of risk. Two loans have gone through the full repossession cycle already with apartments sold on the auctions by Bailey’s in 2020. In both cases, we lost no money despite the loans going into default. That’s a testament to our strict underwriting standards and low LTV.

Car lending is also developing strongly and already became breakeven in the second half of the year. We target 2 key sales channels here, offline through dealerships in the regions where we try to bundle our loan product with car insurance and online through car sale aggregators, both approaches seem to be working well. So we will continue our effort there in 2020.

The point-of-sale business surprised us greatly in 2019. Point-of-sale loans is an important channel for cross-sell, and we were ready to tolerate it being a mildly loss-making on a stand-alone basis. However, constant optimization of our product offering, conversions and mix of partners led this business to become profitable in 2019 with the portfolio growing 68% year-on-year. We expect it to remain profitable on a stand-alone basis in 2020.

Cost of risk improved in the fourth quarter after the mild deterioration seen early in the year. This was due to certain adjustments to our approval and channel mix in the summer and a certain degree of seasonality towards the end of the year. The NPL ratio went up to 9.1%, which is still lower than a year ago, while loans 90 to 180 days overdue increased to 3.3% of the growth portfolio.

That said, looking into 2020, credit risks in January and February are stable, which allows us to look ahead with some optimism. Our funding base, as depicted on Slide 6, is growing strongly, mirroring asset growth. The total funding balance of the group grew by 45.5% year-on-year and by 15.7% in the fourth quarter. You can see that growth is mostly visible in retail, current accounts, term deposits and funds from SME customers, which grew by 54%, 37% and 49%, respectively, during the year.

Most of the current account money funds our treasury portfolio or resides in cash, while term deposits together with bonds and most of the equity fund the loan portfolio. There is an overlap in this fund distribution as we use current account’s money to fund shorter duration loans, such as point-of-sale loans and credit cards in grace period. And at the year-end lease overlap constituted 20% of the gross loan portfolio, the same as a year ago. Our liquidity position, therefore, remains exceptionally strong.

In light of recent volatility of Russian ruble, I’d like to reiterate that we — that the group holds a neutral currency position with all long-term liabilities covered to maturity with ForEx swaps. So we do not expect any negative impact on our 2020 product and loss statement.

On Slide 7, you can see shareholders’ equity increase by 15.2% in the fourth quarter to RUB 96.1 billion, thanks to strong quarterly profit and the suspension of dividends for 2 quarters. Our Basel ratios are in the 19% area. Statutory ratios have increased after this pure and dividend suspension. The N1.0 and N1.1 ratios went up to 12.1% and 9.5%, respectively.

Going forward, we will target N1.0 above 12.5% and N1.1 above 9%. These are targets, we believe, we can achieve while resuming our quarterly dividend payments this year.

As a reminder, because of the low share of ForEx-denominated efforts and our dollar-denominated perpetual instrument, the sensitivity of our capital ratios to changes in ruble exchange rates are negligible.

On the next slide, you can see how the risk-weighted efforts of the bank are distributed amongst credit, operational and market risks. During the year, our RWAs grew by 53.9%, mostly because of the credit component, which has almost doubled.

On the right-hand side of the slide, you can see the density risk weights in the retail portfolio and total credit risk, which also includes other assets, cash and some securities. We expect retail book — RWA densities to grow from 168% at the year-end to 175% or 180% in 2020. This is due to the gradual implementation of higher-risk weights announced by the Central Bank, which will in part be offset by increased proportion of secured loans with 100% risk weight.

Now I will turn to the income statement, starting on Slide 10, where you can see our revenue dynamics. Compared to 2018, our revenue grew by 45% to RUB 165 billion, with a share of revenue from credit business lines, declining from 68% in 2018 to 67% in 2019, despite the strong growth of the credit business. This trajectory will continue in 2020.

In 2019, interest income grew by 43%, as seen on Slide 11. Our headline gross interest yield on the credit portfolio decreased from 36% to 32.1%, mostly due to the more rapidly growing part of noncredit card loan portfolio, as we already saw on Slide 5. It’s safe to assume that during 2020 gross yield will continue to gradually move down to the 27, 28 area as a result of the changing portfolio mix.

Interest expenses grew 38% year-on-year compared to 45% growth of average funding base. Our blended cost of borrowing declined from 6.3% to 5.7%, thanks to large inflows of cheaper retail and SME funding sources. Despite the recent macro volatility, we are optimistic about our cost of funds outlook.

Net interest income increased by 45% in 2019, while net interest margin went down to 21.6% and our risk-adjusted net interest margin decreased to 14.9%. This is due to the reduction in the gross yield, explained earlier, and growing cost of risk, which went up into the 9% area during the summer and went down into the 8% area during the fourth quarter. Cost of risk for the year increased from 6% to 8.5% aiding to RUB 8 billion negative pretax effect, amounting to approximately 17.5% of our pretax profit.

Nevertheless, even at this level of cost of risk, we continue to see many NPV positive lending opportunities and thus remain very upbeat about our lending products in 2020.

The next 2 slides give more granular information about the unsecured and secured part of the loan book, including gross yield and cost of risk.

Slide 13 shows the more matured and secured loan book where you can see a mild deterioration in asset quality, but few very attractive risk-adjusted margins.

Slide 14 shows the young secured part of the portfolio, where the risk parameters and NPLs are not yet fully shaped on fast-growing portfolios, but are heading in the right direction. What is very clear is that this portfolio has lower cost of risk than our unsecured portfolio. And therefore, we will have a positive impact on our 2020 cost of risk than next.

Now some comments on our fee and commission business on Slide 15 to 18. In 2019, fee and commission income increased 31% with impressive growth across all business lines and especially strong dynamics in the growth of insurance premium earned. With over 7 million customers and with almost RUB 212 billion of balances, our current account business contributed RUB 8.2 billion in fee and commission income in 2019. Net of cash back that we returned to our customers. We continue to develop this product as the cornerstone of subsequent cross-sell opportunities. We still intend to keep our bottom line result for this business at a breakeven. We see more value in growing the customer base and in the potential synergetic effect with other businesses — business lines rather than as a source of pure net income.

Our SME business is developing at a good pace, which can be seen on Slide 17, bringing us new customers, which in turn increase the transaction volumes. And at the end of 2019, we had 535,000 customers with over RUB 60 billion in balances on SME current accounts. We earned RUB 9.6 billion in fees during the year in addition to treasury income. The SME lending business is still in test mode with a total loan balance of about RUB 1 billion.

Our investment business is profitable and is growing remarkably fast. Over 1 million customers opened accounts on our Tinkoff Investments platform with quarterly transaction volumes exceeding RUB 500 billion compared to RUB 77 billion a year ago. The total balances held on accounts have tripled over a year to over RUB 53 billion. Fee income grew almost 5x, if we compare the fourth quarter 2019 with the fourth quarter of 2018. While these businesses’ contribution to group results was still marginal in 2019, we are very optimistic about its profit in 2020 and onwards.

We will continue to develop our platform, product proposition and grow our customer base in 2020, as always, trying to find a fine line between the profitability and growth.

Now some comments regarding operating expenses. Please turn to Slide 19. In the recent quarters, you can see that our costs were relatively flat, which had a positive effect on our operating efficiency with cost-to-income ratio declining almost 5% for the year from 41.9% to 37.1%.

Total administrative costs grew 27% year-on-year, which is only 60% of our top line growth and only 50% of our asset growth. This is a testament to the business’ ability to keep lean and to show economies a skill.

And now to the final slide of my presentation, the group yet again achieved a quarterly record profit of RUB 11 billion in the fourth quarter and RUB 36.1 billion for the 2019 year, which is 33% higher than in 2018. Return on equity of 55.9% remains industry leading despite the significant increase in our equity base. Return on assets remained at a very high 8% despite an outstanding liquidity buffer of 33% of total assets.

And now back to Oliver for closing remarks.

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [4]

——————————————————————————–

Thanks, Ilya. I’d like to wrap up with guidance, dividends and a word on the current situation. We issued the following guidance for 2020. We expect net income of at least RUB 42 billion. Our net loan growth will be at least 20%. We expect cost of risk to be in the 9% area. We expect cost of borrowing to be in the 6% area.

As previously communicated, we’re pleased to announce the dividend payments will be resumed for fourth quarter 2019 after a suspension of 2 quarters in quarter 2 and quarter 3 following SPO. The dividend will be paid in accordance with the existing dividend policy. It will be around $42 million. It will be paid around 30th of March 2020.

Given recent events, I feel that it is important to say a few words about our response to the current situation and covenants. We’ve been receiving a number of queries from investors and it makes sense to tackle on here. I’m sure that you also appreciate that there are some points that we cannot cover due to either the sensitive nature because of the ongoing court case or due to the fact that we are simply not a party to this information. In the latter case, we would advise you to contact Oleg Tinkov’s personal communications and legal teams, who are managing this case on his half. This legal case is being launched against Oleg Tinkov as an individual. This does not affect the group or any of its operating companies in Russia. For us, it is business as usual, despite the turbulence in the external environment.

We have obviously activated our response team within Tinkoff Group. This team is working literally around the clock, the areas that we cover, and they are constantly monitoring our managing customer relations as we handle inquiries from customers and the public in our contact centers and service channels. But we have obviously seen an increase in the number of questions on this topic. The situation is entirely calm. We’re not seeing any change in customer behavior. Public relations to make sure we’re proactively managing the information flow to the media and disclosing what we’re required to do in the right way and at the right time.

Investor Relations, to communicate information to the market as soon as we’re able, to field your questions in real-time or close to real time and to provide full answers as possible given the sensitivities of the situation.

Liquidity management, to make sure that we have ample liquidity to cover all possible situations. We have RUB 120 billion to RUB 130 billion of instantly available liquidity, as Ilya was mentioning earlier. This is a massive amount of liquidity for all eventualities.

In the highly unlikely event that we need more, we can do this with short notice. We have several sources to draw up on, including our own portfolios. The team has also been keeping Central Bank and all the key stakeholders fully apprised of the situation.

Just to remind you, Tinkoff has been in existence for 13 years, and we’ve been tested by a number of different stress situations. These include the 2008 to 2009 global financial crisis, the 2014 to 2015 Russian crisis, which included a sharp ruble devaluation and the run on the banks across the whole system. We know how to handle ourselves in all situations. We factor stress situation — stress scenarios into our planning as a matter of course. We’re always ready.

Oleg Tinkov has not been involved in the day-to-day operations of Tinkoff Group Holding Company for several years. He is in Moscow for less than 5 months each year, and he’s not been in Moscow for the last 5 months. He is involved at the strategic level, obviously, but is not involved in business decisions, product rollouts, even larger investment decisions. The group is managed by a large team of professionals that have been together for many years, headed by myself. There can never be — no question of any discontinuity in terms of running the business. From the team on the ground, nothing has changed. We have a great strategy, and we know how to execute on it, as we’ve demonstrated time and time over the last decade.

We have always strived to maintain the highest standards of corporate governance at Tinkoff. While there are no legal implications for the group or the bank as a result of the ongoing legal case against Oleg Tinkov. We realize that there were questions in investors’ minds, and we take these very seriously. Irrespective of recent efforts — sorry, recent events, efforts have been taken over the past year to further enhance our governance so that it is commensurate with the current size and scope of the company.

In terms of the Board of Directors of Tinkoff Group Holding Company, we will update our road map of changes in order to evolve governance at the holding company level as well as legal input. We will seek investor input into this process in order to incorporate as much feedback as possible. I’m sure that you will understand that there are some things that are possible in the near-term and some things which are more complex. We will think of longer-term solutions to these more complex issues to try to balance the interest of all parties. Lastly, there have been suggestions that Tinkoff is now more vulnerable to hostile moves by certain entities in Russia. We see these concerns as completely groundless. The corporate structure that has served us well over last 13 years remains unchanged. The management team is intact and totally engaged. We are a reputable public company with a very good name, a transparent structure and a high-quality business in Russia. We’re in good standing with all the institutions that regulates us. First and foremost, of course, the CBR. And finally, we are now a large and very visible institution that does not make an easy target for any hostile moves.

Tinkoff Group Company — sorry, Holding Company has made an announcement today that the company will conduct a buyback program. The maximum number of GDRs that may be repurchased under the program will be 650,000 and the aggregate purchase price will not exceed $10 million. This will take place during the period, 12th of March to 31st of March of this year.

To finish, I’d like to remind you that we are still planning to hold a series of strategy days in London, New York and San Francisco on the 6th, 8th and 9th of April. However, the events surrounding quarantine and trouble restriction restrictions may mean that we have to review the situation. We’ll keep you posted on this, and we will find the right format to provide these important strategy updates.

On that we conclude our statements, and thank you very much for your attention. We’ll hand over to questions now.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) And our first question comes from Andrew Keeley.

——————————————————————————–

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

——————————————————————————–

I have a couple of questions on your guidance for this year. First, I guess, on asset quality. I mean, generally, it sounds like you were making quite positive noises in terms of you made adjustments when you started to see some worsening back last spring and summer and things have been pretty stable since. You’ve also got a couple of quite supportive factors this year in terms of further loan mix change in favor of secured loans and also quite a strong slowdown in loan growth that you’re guiding. So there’ll be less basically IFRS 9 provisioning impact. So I’m just interested why given all of those factors you’re guiding an increase in the cost of risk this year? And I’m just wondering whether the — what — events of the last kind of week or 2 in terms of what’s happened with the oil price, the ruble, et cetera, have been kind of influenced your thinking there in any way? And I’ll ask another one afterwards.

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [3]

——————————————————————————–

Sure, yes. Thanks, Andrew, and thanks for breaking it down for us, so we don’t get all the questions running to one. So you are right in everything you said in your question. We have a changing loan mix, which works in our favor. We have a lower loan growth rate, which, obviously, we don’t know what the loan growth will be, but we’re saying it’s going to be over 20%. So it’s going at a decent pace, but who knows it could be higher. We’ll see how the year pans out. And this works in our favor in terms of cost of risk. So we’re guiding for a number in the area of 9%, so that obviously implies a range. It could be lower, it could be a little bit higher, but that’s the number we want to put out in the range — around — or in the area to be precise of 9%, which is slightly higher than we finished last year with 8.5% for the year. So you’re absolutely right. You answered basically the question — your own question. There’s an element of conservatism being built into that number. That’s my answer.

——————————————————————————–

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

——————————————————————————–

Okay. Sorry, the line is not great. I lost you a bit at the end, but I think I caught most of it.

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [5]

——————————————————————————–

Let me just repeat. Let me just repeat that last bit then. There is an element of conservatism baked into that number.

——————————————————————————–

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

——————————————————————————–

Okay. Understood. Fair enough. And a question on your loan yield. So the last couple of quarters, I mean, we’ve seen basically the loan yield coming down pretty much 2 percentage points a quarter, which seems to be quite a lot stronger run rate than, I think, Ilya was kind of referring to 2020. So could you just elaborate why you think that kind of downward pressure on loan yields is going to ease? And I mean, is it basically just a factor of an effect of the kind of slowdown of the impact in terms of the changing loan mix, but that would be good just to get some thoughts on that?

——————————————————————————–

Ilya Pisemsky, TCS Group Holding PLC – CFO [7]

——————————————————————————–

Yes. In the fourth quarter, there was a significant pressure on our gross yield downward pressure. So I think that the reduction that we saw in the fourth quarter was a bit stronger than expected. And, therefore, it will flatten out a little bit in 2020. But again, it’s depending on the loan mix. It’s obviously depending on growth. It could be lower or higher, but that’s our expectation potentially.

——————————————————————————–

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

——————————————————————————–

Okay. And just briefly, on your fee income growth, I guess, that was probably the one slightly disappointing part of, otherwise, very good numbers with less than 20% year-on-year. I mean, could you just give some thoughts on how you see the outlook for this line in 2020? And what you think the main kind of growth drivers there will be?

——————————————————————————–

Ilya Pisemsky, TCS Group Holding PLC – CFO [9]

——————————————————————————–

Are you talking about net fee and commission income or growth?

——————————————————————————–

Andrew Keeley, Sberbank CIB Investment Research – Head of Financial Institutions Research & Senior Analyst [10]

——————————————————————————–

Yes. Yes.

——————————————————————————–

Ilya Pisemsky, TCS Group Holding PLC – CFO [11]

——————————————————————————–

Net fee income grew over 30%. Yes. So we actually — we had to make certain reclassification for the payment channels that our credit customers use. So we — historically, we’ve been showing this as a reduction of our gross yield of our interest revenue. But after some consultations with our auditors, which involved audit teams from U.K. and U.S. even, we decided to — that it’s more prudent to show this payment channel fees as a part of fee and commission expense. And therefore, in the fourth quarter, and you can find it in the our — in the north of the financial statements, in the accounting policies, you can see that we made this change. We also made it very perspectively. But obviously the amount this year was more significant than in the last, last period; therefore, it has a certain effect — visual effect on fee income — net fee and commission income. It obviously did not affect our bottom line, so it’s just a reclassification. But the payment channels for the amount of this expense for 2019 is RUB 1.3 billion, including almost RUB 400 million in the fourth quarter. So I guess that’s a result and it’s — sorry about this, but it’s more of a visual because of the reclassification rather than slow down in the fee and commission income. We are obviously worried a bit about our non-credit incomes, but there is also probably one thing that should be taken into account is that the — basically some of the credit-related revenue is divided between credit fees and commissions — in the commission side, and the insurance premiums included in — other insurance premiums in — on the insurance side. So it also has a certain effect on this.

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [12]

——————————————————————————–

So you just think of sources of growth where they’re coming from — sorry, just to add to that. So slightly bigger picture. We have Tinkoff Black, our current account product, which drives fee and commissions income strongly. We have SME, which after being in the doldrums a little while is picking up and moving nicely this year. We have online merchant acquiring. And obviously, we have Tinkoff Investments with Tinkoff Insurance. So they are the 5 drivers of growth. We’ll see a good tick up from SME this year investments and benefit from all the business — big business lines, I just mentioned.

——————————————————————————–

Operator [13]

——————————————————————————–

Our next question comes from Andrey Pavlov-Rusinov.

——————————————————————————–

Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division – Research Analyst [14]

——————————————————————————–

Congrats for the results. I’ve got several questions. First of all, could you possibly give us a little bit of a breakdown of your growth ambitions by products? I appreciate 20% is still a solid growth level. But I guess, in your new products, you will be growing faster given the base effect. So what are you thinking about the — your core credit card book? How fast can it grow? Also, we have seen some slowdown, obviously, in the growth in the fourth quarter. And in January, the result was a bit better than monthly results in the fourth quarter, but still not as strong as the previous quarters of last year. So can you also give some idea what’s happening in the current issuance? And whether you have been changing the approval rates recently or not?

——————————————————————————–

Ilya Pisemsky, TCS Group Holding PLC – CFO [15]

——————————————————————————–

Okay. I’ll start with a picture on our different lines in our credit mix. We do not give an exact guidance for the specific products. It won’t be prudent because the situation is changing. And you know that we are able to basically — to manage this situation properly and sometimes increase the gear or increase the speed of growth in some products and slow them down. So I’ll use more generalistic words to describe how we see growth in main products. So of course, credit cards, it’s our favorable product. It’s most profitable for us. And of course, we’re going to grow it faster than average — faster than that 20% plus, probably, and then it’s obviously going to be a locomotive for the growth, for the overall portfolio. Home equity and car loans, again, they are going to grow much faster than everything else, simply for the fact that they grow from a smaller base, and we have certain amount of demand, which is not utilized. So we see a pretty good perspectives there. And we — of course, we’re working and find new possibilities, new subchannels to distribute more in these — in home equity and car loans.

As far the cash business concerned and point-of-sale business, they have a similar “problem” there. Basically, the loans are repaid very fast. So the nature of all of these products are quite different, especially in terms of size, but the nature of them is quite similar. They are short term. So the point-of-sale loans, they are repaid very fast. There are small loans and point-of-sale locations. And our personal installment loans or cash loans, again, they repay very fast because of high prepayments. So we distribute a lot of these loans to mass-affluent clientele, who has a specific need at some point. But they tend not to hold it to the maturity of the loan, which is usually 3 years. So by the time, the 2 years pass, they basically — all of these loans usually repay. So these 2 portfolios, we don’t — we will be — disburse loans in these 2 — into these portfolios at a higher rate, but we do not expect them to grow significantly.

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [16]

——————————————————————————–

I’ll just add to that. Firstly, please be cautious about using last year as a baseline for your comparisons. Because last year, as you know, was a bumpy year in terms of the portfolio growth of 66% of the net loan growth — net loan book. And you should look at a more normalized number, if you like, the previous years, where we still had a good rate of growth. We’ll have a good rate of growth this year, but it shouldn’t be compared to the bumpy year last because that was a bit of a special year, as we explained many times, especially around this period of time, number one. Number two, just others, a little bit about approval rates. It’s a bit meaningless these days talking about an aggregate approval rate because you’ve got different channels, which are moving around all the time for operational reasons, the seasonal reasons, a number of different reasons, testing, ramping up, maybe been ramping down on the different products. So they have their own different approval rates anyway.

So I suspect asking more about credit cards, as you probably implied in your question, Andrey. The credit card approval rates came down more or less into large steps last year. But obviously, again, it’s just — I’ve a little caveat to my answer because it’s a moving piece because of the different channel mix, which moves all the time even within credit cards as a business line. Credit card approval rate is currently around 18%, 20%. And it’s pretty stable. It’s been at a level for quite a few months now. We don’t expect it to go down given that — as I said in my opening statements, we don’t see any red flags in the credit environments currently. And that gives us the confidence to make these strong statements about the outlook for growth of the loan book.

——————————————————————————–

Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division – Research Analyst [17]

——————————————————————————–

Just a follow-up on basically on the home equity lending. The fact that there was a slowdown in the fourth quarter, was it kind of essentially demand issues or higher repayments or basically your desire to maybe put a little bit of a pause and to test your scoring models in this product?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [18]

——————————————————————————–

Right. So on the home equity side, specifically, we continue to disperse. We sent a lot of feedback on the line. We continue to disburse home equity loans right the way throughout the year, including in the fourth quarter. We did have some recalibrations of our scoring as we basically do retro analysis based on all the information, the data that we’ve gathered and that reduced the approval rates a little bit for sure in home equity. We did some — made some changes to our channel mix and home equity, but none of that really explains the slowdown, I think, you’re referring to, Andrey, basically, that was more about the fact that we started seeing some repayments coming in. So these are, let’s call them, early repayments of some of the loans that are being dispersed in home equity over the last couple of years. And that’s the future of the landscape with this product that Ilya was referring to, which means that we’ll be continuing to grow this. We also have repayments and earlier vintages catching up. It’s just the way the product works.

——————————————————————————–

Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division – Research Analyst [19]

——————————————————————————–

Sure. Just my second question is about your OpEx growth this year. Obviously, we have seen several quarters already of very stable cost base and especially in the fourth quarter, which is very good to see. So should we expect that there’s basically going to be quite serious slowdown in year-over-year growth rates this year as well? Or you would expect certain accelerations throughout the year?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [20]

——————————————————————————–

Okay. So if you think about this and break it down into its different components. So we have growth-related OpEx. We have marketing brand building related OpEx. And we have running the business type of OpEx, which is mainly staff cost and some related stuff. So the growth-related OpEx will obviously be high, maybe not as high as last year relative to our top line because, as we said, we had a bumpy year, but we’ll still be spending a lot on growing our different business lines, not just the lending business lines. So we’re going to be spending a lot on customer acquisition. So we’re scaling up. So let’s say that there’s an element of economies of scale coming through that.

We have our marketing expense as in brand equity. And there, again, relative to our top line, which has obviously grown a lot year-on-year, we’ll be spending in absolute terms, around the same amount. And you can see that we’ve just announced and already started the Russian Premier League sponsorship. We have TV advertising planned throughout the year. And one of them has already started — one of the clients. But in absolute — so in absolute terms, it’s similar, but obviously, compared to our top line is relatively lower.

In terms of staff costs, we’re growing. We’re doing lots of development. We’re hiring tech guys, as we have been in the past, and we’re hiring people in the commercial side. But generally speaking, in terms of HQ costs, we will continue to grow relative to our revenue growth at a lower speed, which will help cost to income. And then finally on the servicing side, we’re doing a lot in terms of automation, robots, so its coolbots and chatbots, optimization, moving stuff into the cloud. So we, at least, maintain our spending levels. So they’re not going to be growing either relative to top line. Ilya, you want to add some more detail here?

——————————————————————————–

Ilya Pisemsky, TCS Group Holding PLC – CFO [21]

——————————————————————————–

No.

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [22]

——————————————————————————–

Okay. So that’s the long and the short of it.

——————————————————————————–

Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division – Research Analyst [23]

——————————————————————————–

Pretty clear. And just my final question is a bit of a technical one. I’ve noticed basically that the interchange fees and the debit cards had another step down and in year-on-year terms, I think it’s basically — the decline was like 3%. So I guess you are still running some promos and the cash backs. Can you give us some sense of what’s happening there? And what we should expect for this year, whether you will continue doing so or not?

——————————————————————————–

Ilya Pisemsky, TCS Group Holding PLC – CFO [24]

——————————————————————————–

Unfortunately, for us, the market is changing. So the interchange is going down recently, where we had like decrease in fourth quarter, for example, because of the interchange in Europe. We…

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [25]

——————————————————————————–

And some of it in Russia as well.

——————————————————————————–

Ilya Pisemsky, TCS Group Holding PLC – CFO [26]

——————————————————————————–

Right, some in Russia and then some new developments made by Central Bank, obviously, also have its effect on the reduction of interchange fees. We will continue to basically to give back some of the interchange income to our customers in terms of cash back, but obviously, looking for ways how we can optimize this. So that basically, we won’t suffer. We won’t have a decrease in our profitability because of that. And at the same time, the customers will remain happy with our programs, with our loyalty programs and now promotions. So for that reason, we will have to actively work with our partners in the framework of our SuperApp. So basically, they will have to take some of the cost when we are talking about leading our customers.

——————————————————————————–

Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division – Research Analyst [27]

——————————————————————————–

And may I ask just which kind of measures by — Central Bank measures, do you mean are affecting the interchange?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [28]

——————————————————————————–

Ilya, it means that there — the C2B payments through the faster payment system in Russia over the next months and quarters.

——————————————————————————–

Operator [29]

——————————————————————————–

And our next question comes from Andrei Mikhailov.

——————————————————————————–

Andrei Mikhailov, Public Joint-Stock Company Bank Otkritie Financial Corporation, Research Division – Research Analyst [30]

——————————————————————————–

I have 2 sets of questions. First of all, I would like to discuss a bit credit protection insurance, and in particular, on which loan products, is it not offered? And maybe there are also products where there’s offered but not really taken?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [31]

——————————————————————————–

Sorry, there was a lots of background noise there. But if I understood correctly, so there are different credit protection enhancement products in different lending business lines. And so there’s obviously a take rate — an initial take rate, maybe there’s not sell rates in terms of the insurance product. And then there’s a dropout rate and attrition rate, because, as you know, we can’t have — now if we just take the credit cards, for example, it can’t be bundled with the product. So it has to be a voluntary additional product for the customer. So not all of them take them in the beginning. Some then will have tried. And in our case, they can switch off in the mobile app on the website, if they want in the Internet bank, or through the call center. And there we have an attrition rate of, depending on the month, normally around 1.5% each month.

——————————————————————————–

Andrei Mikhailov, Public Joint-Stock Company Bank Otkritie Financial Corporation, Research Division – Research Analyst [32]

——————————————————————————–

All right. Okay. And my second question is on the current trends. And namely, if you could share or describe the dynamics of your amounts due to customers month to date? And the number of new clients of Tinkoff Investments month to date and compare it to the previous year?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [33]

——————————————————————————–

We’re not actually releasing that information at the moment. So I can tell you that our run rate in terms of monthly customer acquisition in Tinkoff Investments has increased significantly compared to the first few months of last year. So if you take the first 3 months of this year compared to last year then it’s a lot higher. To be honest with you off the top of my head, I can’t give you the quantum, but it’s probably double or triple. And I’m not sure I understood the first part of your question, to be honest with you.

——————————————————————————–

Andrei Mikhailov, Public Joint-Stock Company Bank Otkritie Financial Corporation, Research Division – Research Analyst [34]

——————————————————————————–

Sorry about that. The first bit was on deposits, customer deposits, both amongst these individuals and the amounts due to the government entities. And whether you could comment on how these evolved month-to-date this March?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [35]

——————————————————————————–

Okay. So if we compare our balanced position in terms of retail deposits and SME deposits, it’s about the same. So if your question is about outflows of deposits, nothing has moved. We’ve obviously been on top of the situation. We’re managing information that’s out there in terms of media and the social media, et cetera, et cetera, as you can imagine. We’re also working through our contact centers with customers. We’ve been doing a little bit on the product side. And as you probably recall, obviously, the latest wave for us has been — so the first wave was all like related. The second wave was then devaluation related, which is a familiar story for all banks or whether the storms of times gone by. And we, as you — hope you recall, we have a deposit feature which means that you can switch your ruble deposits into another currency without losing your accrued interest, and that’s a very important retention tool when times get tough for the ruble. So obviously, all that’s been in play. We’ve had lots of information being provided by our service teams through chats and whatnot, and there’s no panic, everybody’s calm.

——————————————————————————–

Operator [36]

——————————————————————————–

And our next question comes from Mikhail Shlemov.

——————————————————————————–

Mikhail Shlemov, VTB Capital, Research Division – Equities Analyst [37]

——————————————————————————–

I have actually several questions and I would like to start with the cost of risk. Well, I appreciate your comments that just like the guidance for 2020 at 9% looks conservative. I was wondering if you could comment on how the quarterly dynamics on the cost of risk couldn’t be changing as the patents have dramatically changed since the introduction of IFRS 9, so given that the loan growth is slowing down, perhaps you can provide a little bit more color, how it would be changing within yet? That’s the first question and I’ll follow-up later.

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [38]

——————————————————————————–

Sorry, are you asking — Mikhail, hi, it’s Oliver. Are you asking about the first couple of months of this year? Or how we think this is going to pan out over the year in terms of cost of risk? I’ve been quite…

——————————————————————————–

Mikhail Shlemov, VTB Capital, Research Division – Equities Analyst [39]

——————————————————————————–

Oliver, I’m asking about the quarterly volatility, because just like what — so far, we have been seeing typically before the IFRS 9 has been introduced, the Q4 tended to be the lowest in terms of the cost of risk with kind of the Q1 balancing out and being notably higher than the Q4. I was wondering how you see those trend changing with IFRS 9 being with us and the loan growth slowing down?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [40]

——————————————————————————–

Got it.

——————————————————————————–

Ilya Pisemsky, TCS Group Holding PLC – CFO [41]

——————————————————————————–

Yes, I got it. So IFRS 9 (inaudible) this effect of seasonality that we always had, but it is still the case, I’d say. So the fourth quarter, there was a reduction of cost of risk. And the first quarter, there is a certain increase in cost of risk simply for the fact that January/February short working months in terms of collection. People came from holidays, paying less for sorts of reasons. So a lot of holidays in the first 2 months in Russia. So yes, first quarter is a higher cost of risk, it’s still the case. But the effect is not that sharp that used to be 2, 3 years ago.

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [42]

——————————————————————————–

And it’s probably a good moment to say because we haven’t given any color on this call in terms of what we see in the first couple of months. So I’m just sensing that maybe you guys are reading into this guidance for cost of risk in the 9% area. You’re reading into that, that somethings gone maybe a little bit array with our numbers in the first quarter. That’s not the case. Obviously, the first quarter hasn’t finished yet. But the first 2.5 months that we see, we have January with a seasonally higher cost of risk, but absolutely nothing out of the ordinary. February was kind of going down, as usual, as you’d expect. After January, March is going down again. So we are where we thought we would be. There’s absolutely nothing going out of whack.

——————————————————————————–

Mikhail Shlemov, VTB Capital, Research Division – Equities Analyst [43]

——————————————————————————–

Okay. Moving to slightly different topic, which haven’t been yet touched on the call, and that’s actually Tinkoff Insurance. We saw quite an acceleration of growth last year, actually. And once I start to look at actually the profitability numbers that we think of insurance, given the higher pace of growth, we look, I mean, really astonishing with the loss ratio in the — around 30%. I was wondering if you could share with us, what is the underlying loss ratio on a more seasoned part of the insurance book? And what we should be looking at in the somewhat longer term?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [44]

——————————————————————————–

Sure. So please bear in mind that there are 2 Tinkoff Insurances, yes, that’s the captive part, which we see as part of our other businesses. A lot of it, obviously, credit related, as we addressed in the previous question. And there’s a non-captive part, which is mainly auto insurance with a little bit of travel insurance, a little bit of home insurance. And that’s what we run our insurance business, too, which is the external or non-captive part. So here, we have a mixed picture. We’ve done a lot on the CASCO, the voluntary insurance side and got some together. We’ve got some things together where we’ve managed to start executing. I wouldn’t say anything particularly exciting is happening. But slowly but surely, we’re chipping away, and we’re looking for that silver bullet, which we’ll be able to disrupt this market because we still very much believe that this market is ought to be disrupted, but we’re not there yet. On the Saga side, Saga, which is the mandatory insurance product. We had a few experiments last year. I can’t say that we were entirely successful. Our — the profitability of that product is challenged, as you can probably see from the segment section in the IFRS accounts. And we’re basically restarting that. So why do we still believe that this — I’m sorry, maybe just not so quickly. We have a relatively small but profitable business on travel insurance and obviously, there’s lots of synergies we will be doing in other parts of our lifestyle services and the travel products. There’s a few of the bits and buts, but they’re not really worth mentioning. So why do we still believe in this and we still want to keep investing, and we want to keep chipping away. Firstly, because, let’s call it, the external market outside of the Tinkoff’s ecosystem is pretty traditional, not particularly technological. Most of it is off-line, not just about all this off-line, to be honest. And we think that Insurtech is just right to happen here, but we haven’t quite cracked the code ourselves.

The internal side of the non-captive business, which is basically how we cross-sell to our customer base, we’re uncracked either. We’ve been doing more, but we haven’t quite got it together. But we think there is our customer base grows from 10 million to 20 million, that we can do a lot of cross-sell and profitable business with low-cost of acquisition there. So it still remains a bit of a challenge for us. We don’t make any bones of that, but we want to keep plodding away and get it right.

——————————————————————————–

Mikhail Shlemov, VTB Capital, Research Division – Equities Analyst [45]

——————————————————————————–

Really appreciate this. And probably last question on the Tinkoff Investments. I would assume that the extremely secular growth in terms of the new clients, which you have been showing last year has come at a certain part of the subsidizing declines or at least getting some promotional pricing for your investment services. I was wondering where your promotional activity to attract new clients or to reengage the dormant ones stands right now? And how we should think about the margins of the Tinkoff Insurance — Tinkoff Investments, sorry, business into 2020?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [46]

——————————————————————————–

Sure. So we broke-even in July 2019, but we’re not giving any guidance specifically, but I remember that Ilya let slip a number on the previous call, I think it was around RUB 1 billion, but let’s treat the RUB 1 billion of operating income with a healthy dose of salt because we don’t want to be — we don’t want to tie ourselves to a number in terms of targets and net income — sorry, operating income for the Tinkoff Investments when we see a terrific continuing growth opportunity. And we — if we want to invest more in growth, we will, at the expense of the operating income number. But it will be a positive operating number for the year. We booked over 1 million accounts. So we were 1.1 million, correct me if I’m wrong, brokerage accounts opened by the end of the year. And obviously, that’s still continuing that growth, of which around 1/3 are, what we call, utilized. So they’re activated and funded. And then you break it down into 3 segments. You have — and that number, by the way, is typical for the market.

We have our wholesale cost of acquisition, and we have all sorts of promotions and marketing activity in order to onboard these customers, activate the customers if the dormant for a period of time, then we’ll try and activate the latest. There’s also sort of that we’ll be doing, which obviously has a cost. We will build that in, obviously, under as per our unit economics. Our unit economics are obviously positive, but there’s different unit economics in different segments. So you got your mass, let’s call it, mass-affluent or mass retail segment, and these are customers, investors who are coming from our, mainly from our Tinkoff Black customer base, but only entitled to come — can come from other sources, including external sources. They tend to be more buy and hold, much lower ticket. So obviously, less frequency with obviously higher rates because it’s a different tariff plan there.

We then have our second segment, which are the, what we call quite a professional, higher frequency, higher demand traders, who we’ve given them a terminal, a virtual terminal. We have all sorts of, as I mentioned earlier, network, social networks or posts, with lots of trading ideas and discussion forums and seeing what’s moving and what’s not. Now we have all sorts of additional visual displays and we have lots of features, we should expect to see, like take profit stop-loss in terms of all the stuff. So we’ve built out our product still going, but that’s something where we have a very different income profile because there’s much higher frequency, higher activity and larger amounts involved. And then we have the third segment, who are, what you might call premium customers, they’re not high net worth — certainly not the mid- to high net worth. The lower end, which is a space, which we think is underserved in Russia, and we’ve started catering to these guys with personal — virtual personal managers. Interesting interface asset manager, Tinkoff Capital starting at the low end and building out this product with all sorts of investment ideas and ideas, let’s say, platforms for educational activity initiatives and promoting different investment ideas. So all of these have different profiles in terms of the bonds of these customers, the frequency of these — activity of these customers and the revenue that we generate, but all of them are unit economic positive and we’re growing all of them. We like what we see.

——————————————————————————–

Operator [47]

——————————————————————————–

And our next question comes from Andrzej Nowaczek.

——————————————————————————–

Andrzej Nowaczek, HSBC, Research Division – Analyst [48]

——————————————————————————–

I want to talk a couple of things. First of all, how would you describe the outlook for customer acquisitions? Is it harder now to acquire customers, which is why we need to keep your incentives high? Or is it perhaps the cross-selling is proving more difficult than you thought and you have to keep growing customer numbers, even though your loan growth plans are relatively modest?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [49]

——————————————————————————–

So I’ll take the first question. Relatively modest from a large base of 20% plus. I’ll start — didn’t sound very modest to me basically. That’s quite a large number in terms of the absolute disbursements that we’re giving and the net loan book increase, even if we just do 20% as opposed to a higher number, is actually quite large. Customer acquisition is increasing as it does normally at the beginning of each year. So we ramp up from a short month in January, a short working month due to holidays and a short month calendar effect in February into March where we start motoring. And that’s exactly what we’re doing now. If your question is about the short-term stuff that’s been happening all the noise around Oleg Tinkov and obviously, the coronaviruses and whatnot, that’s had absolutely no impact on our acquisition rates of new customers. And we’re, as I say, ramping up. And you can see that coming — you’ll see that coming through the numbers. We’re actually booking more customers month-on-month.

In terms of cross-sell, we’re increasing cross-sell. We’ve got more arterial routes to cross-sell. The number of customers with 2 products or more has increased drastically over the last couple of years. On the number of

(technical difficulty)

that’s the question. Is that you, Andrey? Well, that’s good. You’re recording my answers. And then just to move on to the next one, why we’re growing the customer base? Because it’s kind of like you implied rather strangely in your question that we’re having to grow the customer base because they run out of ideas how to cross-sell or grow the loan portfolio, which has been a bit weird, but anyway. So why are we growing the customer base? We’re growing the customer base with largely through Tinkoff Black, our current account product for consumer because this brings the right type of customer we’re in, let’s call it, mass affluent into our ecosystem to cross-sell. So why are we doing all this? Why we’re spending money on bringing these customers in? Firstly, we want to double the customer base as one source of growth. Secondly, we can then cross-sell so that we have the (inaudible) of the sources of growth (inaudible) revenue bearing products per customer.

——————————————————————————–

Andrzej Nowaczek, HSBC, Research Division – Analyst [50]

——————————————————————————–

Oliver, the line is really bad. I mean, it’s getting worse as we go along in this call. Hopefully, somebody will transcribe it. Can — am I heard?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [51]

——————————————————————————–

Yes, we can hear you perfectly.

——————————————————————————–

Andrzej Nowaczek, HSBC, Research Division – Analyst [52]

——————————————————————————–

Okay. So maybe just quickly on something different. Those news recently suggesting the Central Bank will offer some forbearance measures, do you know what exactly is being considered? I think capital requirements may be one, but maybe there’s something else?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [53]

——————————————————————————–

To be honest with you, I’ve been following it very closely. It’s not relevant to us, is my understanding.

——————————————————————————–

Andrzej Nowaczek, HSBC, Research Division – Analyst [54]

——————————————————————————–

Right. So it’s probably just FX-related.

——————————————————————————–

Operator [55]

——————————————————————————–

(Operator Instructions) And our next question comes from Elena Tsareva.

——————————————————————————–

Elena Tsareva, BCS Financial Group, Research Division – Senior Banking Analyst [56]

——————————————————————————–

This is Elena Tsareva from BCS Global Markets. I have a broader question around what’s going on, happening with like oil price and actually, all the risk globally now. So I assume this 2020 guidance you provided, it doesn’t account for like low oil price scenario and the potential impact on Russian economy. So if we see this really low price to stay for and maybe some recession risk, so how would you say we can see this 2020 operating going forward? So just on like potential higher cost of risk account, non-banking businesses development in terms of precision?

——————————————————————————–

Sergei Pirogov, TCS Group Holding PLC – Head of Corporate Finance [57]

——————————————————————————–

Elena, this is Sergei Pirogov. You’re absolutely right, when you have to deal with a few dimensions of uncertainty issuing guidance for the next 12 months is not an easy task. So as both Oliver and Ilya mentioned, what you have in our guidance is a certain degree of conservatism baked into each line. We’ll also reiterate the fact that we have both product customer and operational flexibility. So depending on how each of the layer of uncertainty unfolds, be it the oil-driven macro volatility or virus-driven global instability and certain other things. Depending on all of that, our op strategy could potentially just to renew developments and credit strategy. So for that reason, you see a quite conservative outlook for our great business growth, although, as Oliver said, and at least 20% of growth given the high base, can hardly be called modest sort of growth. Risk and cost of fund all of that assumes a certain degree of volatility and so — and uncertainty. However, we’re pretty confident that if realistic sort of 2 pessimistic scenario were to come into force, we’ll be able to deliver on the guidance just issued.

——————————————————————————–

Elena Tsareva, BCS Financial Group, Research Division – Senior Banking Analyst [58]

——————————————————————————–

And actually, I think in the beginning of the presentation, you actually mentioned about corporate governance changes. Could you just maybe provide any details, what this is about, if you may?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [59]

——————————————————————————–

We said that we have a road map for evolving our corporate governance and that we will be giving some more thought based on feedback from the market, from investors, from input from the lawyers. So we will be revealing details in the coming weeks, months.

——————————————————————————–

Elena Tsareva, BCS Financial Group, Research Division – Senior Banking Analyst [60]

——————————————————————————–

And also a question on — it’s very, very hypothetical and just very, like, an extreme scenario of major shareholder change just on like management team, dedication to the business, just because like a lot of things is happening around and a lot of uncertainty around. So just, I guess, breakthrough scenario. So how you deal with any like this risk?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [61]

——————————————————————————–

Sorry, Elena, you are breaking up there a little bit. So the question is about how the management team is dealing with this?

——————————————————————————–

Elena Tsareva, BCS Financial Group, Research Division – Senior Banking Analyst [62]

——————————————————————————–

Yes. And going forward, in terms of very extreme, extreme scenario, hypothetical if major shareholder change?

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [63]

——————————————————————————–

Okay. So we don’t envision any major shareholder change whatsoever. And so basically, you can just take that as a factor of your thinking. In terms of the management team, as you can imagine, it’s not just about Sergei Pirogov with (inaudible) issues. We have 3,000 people in our headquarters, where all sorts of different ways of management. A lot of us have been together, and I’m talking about the top 100-or-so people here for a very, very long time. We have a horizontally split organization in terms of business lines, which are full stacked business lines being carved out. So they do end-to-end product development, interface development that will make their own commercial decisions, pricing decisions, product development. Each one has a business leader who looks up to the P&L. Some of those P&Ls are tens, if not hundreds of millions of dollars. And they make their own and, in fact, investment decisions with oversight and coordination from the rest of us. So this is basically, if you like, a collection of product verticals that act in a concerted way, but are independent of each other. And then on top of that, you have this layer of functional heads and coordinating people, what we call them (inaudible) in Russian. So it’s kind of like, if you like, business sponsors or business champions, who help all this thing hanging together. There’s absolutely no change to the way we run our business, the way we think about our business, to where we think about the long-term. There’s no change to what’s happening in terms of liquidity, capital profit. So we understand, for you guys that this looks like a big jolt. But on a business level, we run the business day-to-day, year-to-year, decade-to-decade with no exaggeration. Nothing’s changed, and we’re getting on with our jobs.

——————————————————————————–

Operator [64]

——————————————————————————–

And we have no additional questions at this time.

——————————————————————————–

Oliver Charles Hughes, TCS Group Holding PLC – CEO [65]

——————————————————————————–

Thank you very much to everybody. Have a good day.

——————————————————————————–

Operator [66]

——————————————————————————–

Thank you, ladies and gentlemen. This concludes today’s presentation. You may now disconnect.

Source Article