Edited Transcript of TCSq.L earnings conference call or presentation 6-Aug-20 1:00pm GMT

Moscow Aug 7, 2020 (Thomson StreetEvents) — Edited Transcript of TCS Group Holding PLC earnings

Moscow Aug 7, 2020 (Thomson StreetEvents) — Edited Transcript of TCS Group Holding PLC earnings conference call or presentation Thursday, August 6, 2020 at 1:00:00pm GMT

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

Good day, and welcome to the second quarter and first half of 2020 IFRS financial results investor call.

Today’s conference is being recorded.

Today, on this conference we have Oliver Hughes, CEO; Ilya Pisemsky, CFO; and Sergei Pirogov, Head of Corporate Finance.

At this time, I would like to turn the call over to Mr. Oliver Hughes, CEO. Please go ahead, sir.

Thank you very much. And good afternoon to everybody.

Today, I’m pleased to report very strong second quarter financial results. We reported net profit of RUB 10.2 billion, our second highest quarterly result ever, representing 25% year-on-year growth and an ROE of 40%. This result is particularly impressive when taken in the context of a very challenging operating environment. The coronavirus outbreak and the consequent lockdown measures, asset quality deterioration, transaction volume declines and regulatory changes tested all parts of our business. We had to shift swiftly to remote working regime. We had to change our underwriting policy on the fly. We had to ensure comfortable liquidity and capital buffers and we had to live up to our commitment to support our communities and stakeholders, all this while not jeopardizing and, if anything, strengthening the long-term growth ambitions of the company. Tinkoff proved to be an agile yet sturdy culture with a flexible business model and strong organizational DNA.

If you could turn to Slides 3 and 4, you’ll see that across the business we’re currently performing at, if not better than, precrisis levels, aided by — both by a V-shape recovery and continued customer acquisition efforts throughout the second quarter. Off-line debit card volumes are around 20% higher than they were in February, while online debit card volumes are 30% higher. Our online merchant acquiring volumes are 15% higher than in February, testament to the accelerated shift towards e-commerce. Revenues of SME customers are some 15% higher than they were in February. And throughout the crisis, our retail brokerage volumes continued to grow steadily.

While the longer-term shape of the recovery remains somewhat uncertain and we wait for the autumn to better understand the longer-term impact on the economy of the COVID-19 shock, what we see for certain is the resilience of the Tinkoff business model. On Slide 6, we’d like to take a moment to dwell on what exactly gives Tinkoff this remarkable resilience: an experienced management team, having stewarded Tinkoff through the ’08 and ’09 crisis, ’14 and ’15 Russian crisis and now the 2020 COVID crisis; a loyal and growing customer base, with total customers exceeding 11 million, DAU growing to 2 million and MAU to 6.1 million, testament to the appeal of the Tinkoff ecosystem; a flexible business model that allows us to shift internal resources quickly from businesses that we needed to run more conservatively to businesses with booming growth prospects; a diversified revenue structure with a portfolio of complementary products and services that ensures that temporary slowdowns in certain businesses can be offset by other businesses like, for example, retail brokerage; our conservative NPV-based lending approach centered around small ticket lending and a low-and-grow approach, a 30% hurdle rate, pricing for risk and low approval rates. This ensured that delinquencies and restructuring activity remained in check and improved gradually since April and that risk-adjusted net interest margins remained comfortably positive throughout the whole crisis. Our ability to control liquidity and generate capital, with liquid assets having grown in second quarter to 43% of total and our N1.1 capital ratio reaching the highest levels for the last 1.5 years.

On Slide 7 is another reminder of how the structure of the business has evolved since the 2014, 2015 crisis; and additional evidence of why the business performed so well throughout the current shock. We are more diversified than ever both within the overall credit businesses and across the credit and noncredit business lines. Our noncredit businesses accounted for a record high of 37% of total revenues in the second quarter. Our provisioning rates are very conservative and higher than they were at the peak of the 2014, 2015 crisis. Our liquidity is abundant and capital ratios are solid. Our loyal customer base keeps growing.

As well as demonstrating this resilience yet again, we think that our business is very well positioned to capture many of the accelerating trends of which we were pioneers in Russia. Tinkoff Black, our current account business, continues to drive the growth of our ecosystem, with a record high of 1.2 million current accounts opened in the second quarter, reaching 9.3 million accounts opened; and balances growing to RUB 270 billion, with a total of RUB 45 billion coming in just in the second quarter alone. Thanks to word of mouth and the popularity of the product, 80% to 85% of customers opening a Tinkoff Black current account do so with virtually 0 customer acquisition cost to us. And very importantly, the more mass affluent, urban, tech-savvy customer base that is coming through the current account is a kind of customer that is most interesting — interested in trying out other services within the ecosystem, driving our cross-selling efforts. This continued customer growth effort allowed us to increase F&C income, fee and commissions income, from this business line year-over-year by 6% despite the inevitably lower transaction volumes dictated by lockdown.

Our retail brokerage platform Tinkoff Investments had another great quarter. We added 0.5 million customers in second quarter, reaching 1.9 million at the end of June. Our assets under custody grew from RUB 86 billion to 44 — sorry, RUB 144 billion. Transaction volumes grew from RUB 1.2 trillion to RUB 2.2 trillion. And our revenue from this business grew from just over RUB 800 million to almost RUB 1.6 billion. We’ve been bowled over by the fast growth of this business line; and currently are heavily investing to make sure we maintain our leadership as a brokerage platform with the highest number of active customers, catering to all categories from small buy-and-hold investors to active traders, to higher-net-worth individuals who look for a more tailored financial approach. As traditional savings tools like deposits become gradually less appealing and in an environment of falling interest rates, we think Tinkoff Investments can continue to capture this structural trend and grow its importance within the Tinkoff ecosystem and Tinkoff’s P&L.

I think it’s also worth highlighting one of the businesses that doesn’t always get the attention it deserves, merchant acquiring. This business line enables businesses to receive payments and process transactions predominantly online. As a matter of fact, we’re the third largest online acquirer in Russia, and this is a business that generates positive operating income and has done for several years. We work with large leading companies in Russia like [S7], Mail.ru, AliExpress, Yandex.Taxi, Avito, Kassir.ru; as well as with smaller and medium businesses, especially through our online payment solutions developer CloudPayments, in which we own a 90% stake. Our offering is the most technologically advanced in the market, for example, in the field of fraud monitoring, payment conversion and innovative solutions, including P2P for classifieds and marketplaces. With e-commerce still in its nascent stages in Russia, we think this is a business with great prospects, especially in light of the accelerated transition to online transactions, as we highlighted earlier. Online merchant acquiring volumes are already some 15% above precrisis levels.

Our SME business remains our largest noncredit business line, with a profit before tax of RUB 3.1 billion in the first half of the year, accounting for more than 12% of the group total. This business performed better than expected and managed to improve its competitive positioning throughout the quarter. Many SMEs in Russia were left to fend for themselves during the pandemic without the ability to move online and weather lockdown. Tinkoff SME customers instead benefited from our ability to help them migrate to online payments, to do their accounting and tax reporting fully online through our cloud software, to build websites, to set up electric documentation processes, to set up delivery services with partners and to provide partner finance credit lines to help companies throughout the crisis. This, together with our relentless focus on growing the customer base and growing the share of larger enterprises in our customer mix, is why our SME fee and commission income still grew 10% year-on-year and why we think that we should be able to improve the financial results from this business line in 2020 relative to 2019. As more SMEs realize the importance of having a technologically advanced banking partner, we think we can continue to take market share and grow this business profitably.

Our credit business lines, despite the challenges, performed well. Operationally, we had to adjust our underwriting models quickly to incorporate sectoral factors into our scoring and portfolio management. From an asset quality perspective, we had to deal with a spike in both delinquencies and in restructuring activity in the first weeks of lockdown. Our more conservative lending stance at the beginning of the quarter translated into a slight decline of the loan book in the second quarter. Since then, however, approval rates have gradually increased back to precrisis levels, and we’re now disbursing similar amounts to those prior to the crisis. The deterioration in cost of risk was manageable but was in part offset by the conservative front-loading of provisions we carried out in the first quarter through IFRS 9 macro factor adjustments. Delinquency rates and restructuring activity have been consistently improving since the first half of April and are now more or less in line with precrisis levels. We’ve, therefore, returned to growth mode across the loan portfolio, and we’ll continue to ramp up NPV positive growth in the coming months.

Last but not least, I want to highlight some of the most innovative solutions that we developed in the second quarter. During a time where many corporates and banks were busy trying to figure out how to work remotely, Tinkoff introduced a range of innovative services. We launched a prepaid Tinkoff Black account with a virtual card that can be opened without physical KYC. The customer can opt to convert this account to a fully fledged Tinkoff Black debit card by requesting a meeting with one of our smart couriers. We’re confident this will help us further accelerate Tinkoff Black customer acquisition and grow our customers — sorry, our ecosystem’s user base. Tinkoff Investments launched its new Investment Box functionality, Russian’s first micro investment service. This service allows customers to set up regular top-ups of their investments accounts from their Tinkoff Black card. This can be done by choosing from the options in the mobile app: rounding up transactions, reinvesting cashback, reinvesting the interest earned on the current account or setting up an automatic fixed regular investments amount. As of this week, customers can also elect to reinvest their cashback into charitable funds and foundations of their choice.

The development of our SuperApp continues apace. Tinkoff announced a partnership with goods.ru, a marketplace that brings together Russia’s leading online stores. This will enable customers to shop at goods.ru right from the Tinkoff app and receive 5% cashback on each purchase. By year-end, the app will offer the full range of items from goods.ru, which is more than 1.7 million goods in 16 main categories. Tinkoff Business introduced a B2B service for taxi fleets and aggregators that allows them to pay drivers instantaneously. This service significantly reduces the time it takes to issue payments, payment documents; optimizes the load on dispatches; and simplifies the taxi fleet’s accounting. Tinkoff also introduced new technology that allows merchants to move away from issuing paper receipts and send electronic receipts either by e-mail or directly to the bank’s mobile app.

With that, it’s time to hand over to Ilya for a more detailed look at our financial results for the second quarter.

Thank you.

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

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Thank you, Oliver. Good day, everybody.

I will start with the balance sheet composition on Slide 9. In the second quarter of 2020, our assets grew 10.3% despite the fact that the net loan portfolio contracted compared to the 2019 year-end levels, as we disbursed fewer loans during the pandemic and loan loss provisions grew. The increase in total assets came from our cash balance and securities portfolio, which continued to grow, changing the composition of the assets, with net loans decreasing to 48% of the total. You can see the composition of the investment portfolio in the supplement to this presentation, on Slide 39. In the second quarter, government ruble-denominated securities represented the majority of the investment book. We have increased the duration of the portfolio in the fourth quarter of 2019 and first quarter of 2020 in anticipation of CBR rate cuts, which allowed us to realize trading gains of RUB 2.9 billion in the second quarter and RUB 6.2 billion in the whole first half of 2020.

On Slide 10 you can see that the gross loan portfolio declined slightly by 1.2% or RUB 5 billion to RUB 395 billion. All the portfolios of the loan book contracted during first 6, 7 weeks of the quarter; and then started to gradually resume growth. As a result, the secured part of the book slightly grew quarter-on-quarter. Credit cards were flat. And other parts forming the unsecured book such as personal installment loans and cash loans amortized faster in the absence of active issuance. Our NPL ratio grew to 10.8%, including [fresh] noncourt NPLs growing to 4.3%, as collectability of nonperforming loans was more challenging during April and May and more third-cycle delinquency loans went into the NPL status due to the economic turmoil. Our NPL coverage remained in 160%, 170% area, as we timely created provisions for this type of problem.

The next slide, Slide 11, shows the development of all stages of our loan portfolio in accordance with IFRS 9 as well as the provisioning levels. Despite releasing approximately RUB 1 billion of the RUB 5.9 billion macro factor adjustment taken into the first quarter, in second quarter, our provisioning levels remained roughly unchanged quarter-over-quarter.

Slide 12 shows some statistics on the restructuring programs. We can highlight 3 main types of programs. First is one set out by Federal Law 106, which gives payment holidays of 6 months to customers with declining income over 30% and which caps the allowed interest rate over that period. Eligibility for this program is quite stringent, which made our proprietary programs [deployable] to many of our customers, either a restructuring option up to 3 months or a 1 months temporary relief program. Eligibility criteria for our own programs are less stringent, and the programs are more flexible for both customers and for us. So far in the period between March 20 and July 31, we have given 1 months temporary relief to over 122,000 customers. We have restructured a similar number of accounts based on our own restructuring programs up to 3 months. And we have restructured 3,500 accounts based on Federal Law 106. Right now, the number of customers in our programs is significantly less, as you can gather from this slide. Total amount of restructured portfolio right now is RUB 17.7 billion or 4.5% of the portfolio, down from 5.8% as of May 12 when we reported first quarter results. And most of these restructured loans are currently classified under stage 1, although with higher provisioning rates and loans.

The group funding structure can be seen on Slide 13. Total quarterly growth of the group’s funding base was 8.8%. Most of the growth came from retail current accounts, which grew 20% in a single quarter despite the economic turmoil. And I guess this period of self-isolation proved the benefits of a truly online banking concept for a lot of skeptics. Account balances of SMEs increased after a seasonal decrease in the first quarter.

Slide 14 shows from a different perspective our strong liquidity position. Just more than 83% of our assets are expected to mature within 12 months, meaning our portfolio naturally returns into cash very quickly. Second, our credit card portfolio is an important liquidity management tool for us. When we reduce issuance and credit limit fees, the net repayments from the credit card book immediately brings a lot of cash to support liquidity in stress situations.

On Slide 15, you can see that shareholders’ equity grew 11.9% quarter-on-quarter, supported by healthy net income and positive revaluation of bonds in our investment book. Our Basel III CET1 and Tier 1 ratio remained stable at 16% and 19%, respectively. And for our statutory rations, please turn to Slide 16. Our statutory N1.0 reduced slightly to 12.4%, as we annually remeasured operational risk in April. The statutory core capital adequacy ratio, N1.1, reached 10.1%, thanks to the strong profitability at the bank level. We expect our capital adequacy ratios to remain at similar levels in the second half of the year even if we resume more active growth of the loan book.

Let’s turn to our profit and loss statement, starting on Slide 17, where we show the distribution of our revenue by major types and [its growth] dynamics.

You can see that the total revenue in the second quarter increased 21% year-on-year. The share of the revenue from noncredit sources grew to 37%, a record high, and continues to cover more than 100% of total administrative costs. And cost management is critical during crisis times; and our cost structure allows ample room for maneuver, especially on the acquisition side. When the pandemic crisis loomed in the beginning of the second quarter, we were ready to reduce acquisition costs to the minimum if needed. In fact, we reduced them in the lending business. At the same time, we saw several areas of our business where we could invest profitably, and so we did. As the result, acquisition costs did not fall in the second quarter compared to the first quarter of the year. Still you can see that our cost structure is very lean, taking into account the number of different businesses that we develop simultaneously.

Let’s turn to Slide 19. In the second quarter, interest income grew 14% year-on-year and almost flat during — flat quarter-on-quarter at RUB 31.9 billion due to the fact that our loan portfolio did not grow. Gross interest yield on loans was quite resilient quarter-on-quarter and only fell 0.3% to 29.4%. This kind of resilience in both first and second quarters is a combination of several factors: first quarter seasonality, elevated risk and absence of growth in the second quarter due to the pandemic. We were warning a few quarters ago about a gradual decline of the gross yield of 0.5% to 1% per quarter and I am going to stand by these words, so please expect that in the second half of the year, when our lending activity comes back to normal, the reduction in gross yield will accelerate a bit to compensate for the stability in the first half of the year. And I want to reiterate once again that we do not see the gross yield as a holy grail. We make our credit decisions based on the NPV approach, which has a much greater correlation with our bottom line growth and high return on equity.

Interest expense increased 2% year-on-year and was flat quarter-on-quarter at RUB 5.6 billion despite the fast growth of the funding base, thanks to the positive rate environment and inflow of relatively cheaper current account money. Last, cost of borrowing fell to 4.4% in the second quarter of the year.

On Slide 20, you can see that, in the second quarter, net interest income grew 19% year-on-year and 3% quarter-on-quarter to RUB 26.1 billion. Net interest margin declined 4.5% year-on-year and 0.9% quarter-on-quarter to 19%. In the second quarter, reported cost of risk, which includes macro factor adjustments, fell 3.4 percentage points quarter-on-quarter to 12.5, which is a clear sign that the worst of the crisis is over. Underlying cost of risks, which strips out the impacts of macro factor adjustments, obviously grew significantly, as the second quarter was absorbing the credit quality problems in April, May. So far, we see the situation in July as similar to the end of the second quarter, so hopefully, in the absence of a severe second wave of the pandemic, risk should start to normalize to pre-COVID-19 levels, which in turn would allow us to increase our approval rates across the range of our lending products and increase the loan portfolio growth. The next 2 slides give more granular information about the unsecured and secured parts of the loan book, including gross yield and cost of risk. Slide 21 shows the more mature unsecured books, while Slide 22 shows the younger secured part of the portfolio. You can also see that pandemic crisis affected both secured and unsecured part of the book in a similar manner, but the resilience of the secured part of the book is obviously stronger. And it returned back to the normal faster, hence giving us more room for increasing our lending activity.

Our fee and commission income, Slide 23, grew 19% year-on-year. All transactional businesses, except brokerage, were negatively affected by the crisis in April but started to recover in May at different pace; and were back to normal in June, July. Our brokerage business thrived through the crisis months. And transaction volumes were through the roof and drove its profitability growth in June, allowing the total fee and commission income to remain flat quarter-on-quarter at RUB 10.2 billion. The Tinkoff Insurance portfolio grew 1.6x year-on-year and amounted to RUB 4.6 billion for the second quarter of the year. There was a decrease in insurance revenue quarter-on-quarter due to, well, no surprise, the pandemic crisis. Credit-related insurance is dependent on portfolio growth, so it fell alongside with lending volumes, while car insurance is related with new car sales, which dropped 27% year-on-year in the second quarter. Still the insurance business remains above breakeven both in auto and nonauto segments.

Our current accounts business growth has accelerated yet again in terms of number of customers and balances on accounts, as you can see on Slide 24. At the end of the first quarter, we had 9.3 million current account customers, with over RUB 270 billion of balances. The transaction volumes were down for the whole quarter, with a clear April fall, but fully recovered in June and have grown in July. Fee and commission income rose 6% year-on-year, but it is down 2 quarters in a row just on the back of a decline in interchange income, which declined due to the change in tariffs in November 2019; and due to transaction decrease in April; and then due to the decrease in ForEx fees, as our customers stopped flying abroad. If we speak bottom line, this does not mean that our current account business went away from the breakeven mode, thanks to the support from the investment income on the balances.

Our SME business, which can be seen on Slide 25, saw a decline in transaction fees due to lower economic activity. Still we are moving forward and developing our SME franchise. Account balances have recovered performance to the December levels. Transactions are back to precrisis levels as well. We are booking new customers faster than in the first quarter of 2020; and as of the end of the second quarter, we had 565,000 customers, with over RUB 57 billion in balances on accounts. We earned RUB 2.4 billion in fees in the first — in the second quarter, in addition to treasury income.

On Slide 26, you can see operating statistics of Tinkoff Investments, where growth has accelerated yet again in the second quarter. You can see that the number of customers grew more than threefold year-on-year and surpassed the 2 million mark in unique customers in July. Quarterly transaction volumes double every quarter and now well exceeded to 3 million (sic) [RUB 3 trillion] compared to RUB 100 billion a year ago. Total balances held on accounts have grown year-on-year to over RUB 143 billion. And our revenues from this business line grew over 10x year-on-year and almost doubled compared to the first quarter of 2020. This business’ contribution to group results is becoming more and more visible, with its countercyclical revenue growth coming at a very useful time in this difficult year. And we look to this area of the business with great optimism and continue to develop our platform and products, so as Frank Sinatra sang, the best is yet to come.

If you could please turn to Slide 27. Here we have added a new slide on the business line which we think will benefit from the accelerated transition to e-commerce. Our Internet acquiring business is the third largest in Russia, processing more than RUB 100 billion per quarter and generating RUB 1.7 billion of fee and commission income. This business works both with large aggregators as well as individual merchants in a roughly 50-50 split. Our gross acquiring commission is stable at 1.6%, 1.7%.

Last but not least, if you could turn to Slide 28. Overall, we were able to keep our return on equity at about 40% this year for quarterly profit of RUB 10.2 billion, which is 25% higher compared to the second quarter profit last year. This is all despite flat credit revenue quarter-on-quarter and elevated cost of risk. This profitability and returns resilience should not be a surprise, as I would yet again mention the value of our [ceiling] cost model and the importance of diversification both into different credit products and into transactional businesses. And that is not all. With great respect to our investor community, I would return exactly 1 year ago, when we were explaining the rationale for the capital increase which allowed to accelerate our growth, lay a solid foundation for this year’s profits whilst keeping our capital adequacy far enough from the wires.

Thank you again to all of you. And with that, now back to Oliver.

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

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Nice one, Ilya. Thank you.

So just a few concluding remarks to wrap up before we go into Q&A.

The second quarter was another good quarter for Tinkoff, especially in light of the — a challenging operational environment. We’ve once again proven our ability to withstand shocks of all different kinds, to maintain high profitability, to continue innovating throughout and to continue growing our customer base. This underpins our decision to keep paying dividends, having declared a $0.20 dividend per share for the second quarter.

While the situation remains somewhat uncertain, we think we have enough confidence to give new 2020 guidance under the key underlying assumption of no further severe lockdown measures. First, we expect our net loan portfolio to return to steady growth in the second half of 2020. Second, we expect reported cost of risk for the year to be in the 12% area. That’s for the full year, to be in the 12% area. Third, we expect our cost of borrowing to be in the 5% area. And last but not least, we expect to generate net income of RUB 30 billion to RUB 35 billion.

With that, we’ll hand over to Q&A. Thank you for your attention.

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Questions and Answers

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Operator [1]

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Our first question today comes from Elena Tsareva of BCS Global Market.

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Elena Tsareva, BCS Financial Group, Research Division – Senior Banking Analyst [2]

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Congratulations with strong results, another strong quarter. And my question is about your full year guidance, which implies half of — second half earnings to actually decline and compared to first half where you have RUB 90 billion. So given that like there is some recovery, you expect cost of risk to decline in second half and actually steady growth of loans, so should be also helpful. So what kind of negative implications are in this part — in this guidance and — for the second half?

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

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Sure. Elena, I’ll kick off, and then Ilya will probably want to add something about the provisions side of the question. So we wanted to put a floor basically because there’s all sorts of different numbers floating around in people’s heads, and the way — the range out there is very wide. So we decided to basically say, look, we’re going to have a good year, come out with this range of RUB 30 billion to RUB 35 billion. This shows that we’re doing very well on the fee and commissions businesses despite the slight drop in volumes that we saw in the spring. Our lending businesses are all ramping up again; and will grow the loan book, the total loan books, in the second half. All this will move us definitely into the range that we’ve been talking about. And maybe there’s a little bit of conservative built in there because we just don’t know what the autumn holds also in store for us. So I’ll hand over to Ilya on that note.

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Ilya Pisemsky, TCS Group Holding PLC – CFO [4]

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All right. I would add several things. So one of them is obviously we don’t know how elevated the risks, credit risks, will remain; what potential second wave of pandemic might bring. So yes, on the cost of risk, that’s — though we think it will go down a little bit, but still we want to be on the conservative side. Another thing which strikes when you look into our financials, you will see that we earned RUB 6 billion in treasury income. And [that was securities]. And we do not have any specific plan for similar profit in the second half. Maybe we’ll get something, but we definitely cannot put this into the guidance. So when you’re basically multiplying our first half results by 2, you — [perhaps] you could extract this trading gain. And another thing, which is again business-driven, is when we obviously — we want to accelerate growth of our loan portfolio. And if we do so in the autumn, this — we will have our customer acquisition expenses booked, while profits are sort of spread over longer term so that they are not immediate. And practice shows that a break-even point for a single loan, depending on products, channels, et cetera, lies somewhere in the sort of few months, sort of 5 to 7 months, away from issuance of that loan. So obviously the old loans that we will issue in the second half, probably starting from August and definitely from September, would be P&L negative for the second half results. And they will — so that’s the foundation for the profits that we will get in 2021. So that were our considerations, additional considerations to what Oliver said, when we’ve been thinking about our net profit guidance.

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Elena Tsareva, BCS Financial Group, Research Division – Senior Banking Analyst [5]

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Understood, but another question, in retail investments broker strategy, maybe just some longer-term (inaudible) expectations that you may share. So just market is very strong. And we see different ways of development [depicted] by the players, like some partnerships. And Yandex is also again saying that they want to go into financial services. So is there like some strategy you can share of further growth for this particular retail investment and development?

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [6]

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Sure. So the strategy is to diversify. So we’ve segmented the potential addressable customer base in Russia. We already, for last year or so, have been working on expanding the product offering for the different segments. So we have mass affluent customers, what you might call mass retail, who tend to be longer term, buy and hold, small ticket in the beginning or, let’s say, brand investors, yes, so people who maybe take small positions in household names in equities, for example. So that kind of animal in terms of the biggest segment and the biggest opportunity, who over time will build up positions as they build up confidence, as they gain knowledge as to what they’re doing. And that will be an absolutely huge number over time in the Russian market. So it’s the — I don’t want to sound too overblown here but the democratization of investing in Russia, which has hitherto been the domain of the rich in terms of very high-end brokerage. These guys, as well as having obviously access to some fairly standard products, they require assistance in terms of the information we provide. So obviously it’s robo advising. It’s understandable materials. It’s educational seminars, podcasts and a load of other stuff which helps them gain confidence, knowledge, understands the risks — understand the risks and build up a portfolio approach. So that’s one very large segment. And if there’s, I don’t know, 3 million, 4 million active customers in the market today in that segment, it could well be 10 million, who knows, maybe even 20 million over the next few years.

Then there’s the more higher-frequency traders who could either be certainly professionals or people who do this on a more regular footing. They have a terminal. They have a social network called Pulse. If I’m not mistaken, we now already have 250,000 MAU in this social network, where they exchange all sorts of information and tips in terms of investing. People run their own blogs within this social network. And there’s all kinds of things like research materials made available to them, stop loss, take profit, et cetera, et cetera. So there’s loads of stuff which is all being built out as we speak and which enable those higher-frequency traders to use our platform. And they obviously give a lot of the liquidity that’s in there. And then the third segment is a segment which we’re just dipping our toe into. Actually, we’ve already got a fair amount of customers in this particular segment. This is — you can’t call it high net worth. This is kind of a private banking service for premium customers. So this is probably from around, I don’t know, $250,000 up to $1 million. So it’s part of the market that’s underserviced. We obviously have — and we have customers with larger balances as well, and they have virtual personal managers. They have more tailored financial advice. They have access to IPOs and primary placements in terms of bonds. And they — we’re doing a lot more on the structured notes side and general structured project — products. So this is something which we think will grow the assets under management quite significantly over the next few years. So really, what I’ve just described, I don’t know if it’s a strategy, but it’s certainly a product build-out. It’s a road map for product developments over the next 2 or 3 years. We’ll be doing a lot more, some I can tell you now. I just have. Some, I can’t tell you about yet. I won’t be. It’s a bit early to share it, but there’s tons of stuff going on. Just one other thing that we have to mention is this micro investing Investment Box product — function, I should say, that we launched literally last month, which is within the yellow core banking mobile app. And you use tumblers to switch on, to basically do transaction roundups or invest your cashback or invest the interest that you accrue on — that you earn on your deposit on Tinkoff Black balances. So if you’re not going to send that to charitable foundations, charities, which we launched a couple of days ago, which is an extremely important project, in my view, you’re going to invest it. This micro investment facility is the first in Russia, one of the first in the world that we’ve seen of this kind that’s integrated with a retail banking offering. And we think this will open a new, let’s say, segments of customers in the Tinkoff Black customer base who haven’t necessarily opened up a brokerage account through Tinkoff Capital. So this could be something which also gives a further boost and increase the range of services and their accessibility. So tons of stuff going on. We love this business line, which is now basically 3 or 4 business lines already in 1. And we’re going to continue building out and investing in this.

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Operator [7]

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Our next questions now come from Andrew Keeley of Sberbank.

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

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Oliver, Ilya, I have a first question, I guess, on asset quality. I think previously, Oliver, you spoke that it would take some time before you really see the kind of full picture in terms of your clients’ kind of ability to repay once payment holidays end and people need to start kind of stepping up their payments. Given that we’re now a few months on from kind of the initial restructurings in kind of March, April and some way into the third quarter, it will be good to kind of just hear your thoughts on how you’re kind of seeing the environment now and whether your kind of expectations in terms of people’s repayment habits, as they kind of roll off the payment holidays, is kind of more or less kind of as you were thinking and — or if that’s not the case. And a question in terms of your macro input changes. So it looks like, as I understand, you’ve kind of unwound around about 15% to 20% of the macro inputs that were booked in the first quarter in the second quarter. So is it right that — in terms of expectations, that the cost of risk will come down in the second half? Is it that you expect this to be driven by kind of further revisiting the macro inputs that you put in, in the first quarter? And I’ll ask another question afterwards.

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [9]

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Sure. Ilya, do you want to take those 2, those questions? I’ll chip in if required.

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Ilya Pisemsky, TCS Group Holding PLC – CFO [10]

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Sure, yes. So just on the restructuring and our relief measures. So we gave some statistics on the 12th page of the presentation. And so we gave approximately 250,000 loans restructurings during this second quarter — well, starting in late March. And our own programs were the dominant here. And what we see is — especially for temporary relief for 1 month, is it actually gave real relief to our customers because the — not so many of them went into delinquency after all. At the same time, I would say that, those 14 — more than 14% — or more than 14,000 customers who are still in this program, many of these customers went into this sort of 1-month program not first of time. So some customers asked for the second month of payment waiver, and some even for the third one. And basically the volume of these requests went down since second half of May and right now it is obviously not that significant, so we sort of — we have a tail. And still we do not want to close these programs altogether. And we — even right now, if the customers come and ask us for some restructurings, we’ll listen to them and help them, try to help them because we see that when — after the restructuring programs, they — majority of these customers coming back into their payment schedule. It’s — yes, it’s difficult to say for a longer program, which usually takes 3 months. So we will see how [it’s going to roll out] in the third quarter of the year, which still approximately 75,000 customers are in these programs. What we asked in our restructuring programs, especially longer ones, is to have at least some payment discipline during the time of restructuring. So we want our customers to pay at least something, a small, sometimes symbolic amount, which also I think works in our favor. So it keeps the discipline. And hope I answered your question, Andrew, the first one…

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Andrew Keeley, Sberbank CIB Investment Research – Head of Financial Institutions Research & Senior Analyst [11]

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Yes, yes. Any comments on the macro inputs…

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Ilya Pisemsky, TCS Group Holding PLC – CFO [12]

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Yes, yes. So yes. We increased our macro factor significantly in — as of 1st of April, in our first quarter report. And we had to reduce it in our second quarter for RUB 1 billion. And it will — there is a certain — there will be a long process of the sort of winding down this macro factor in the second half of the year and maybe in the first half of next year, as this — some of these problems will potentially turned into the real loan book. So — but again that’s what the statistics that we sort of gathered in the first — in the second quarter shows that right now the — I guess the total volume of this macro factor is — RUB 4.8-something billion is what we think adequate coming into the second half of the year.

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Andrew Keeley, Sberbank CIB Investment Research – Head of Financial Institutions Research & Senior Analyst [13]

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Okay. So actually — so just to understand. I mean, if we look at your unsecured cost of risk, I mean, it went up pretty sharply, kind of underlying unsecured cost of risk in the second quarter to from [10.7], I think, to [14.9]. As things stand at the moment, do you feel fairly confident, barring any kind of major second wave, et cetera, that you will have seen a peak in that unsecured cost of risk in the second quarter?

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [14]

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Sure. I’ll take this one. So all of the metrics have been improving. So as we’ve said several times, there was a bit of a spike at the beginning of April. And delinquency entry rate went up by between 20% and 40%, depending on the credit business line; stayed elevated for 2 or 3 weeks in April; and then started gradually coming down. And so if you look at our delinquency rates now, they’re just about all back to where they were pre crisis. The roll rates are all improving. As Ilya mentioned, the restructured loans, many of them have been coming into their payment schedule. Our first — second payment defaults are very low. And so this is new vintages that we’ve been booking. So all of the metrics have been going in the right direction and have all basically gone back to where they were. So this gives us much more confidence to put a foot on the accelerator in terms of new loan disbursements. And so we like what we see, and that’s why we say we’re going to grow the loan book in the second half. We’re already growing it. We’re already helping for a couple of months.

However, just to add a little bit of color. There’s still a bit of a question mark as to — around the autumn. So we keep saying we don’t know what the autumn holds in store for us. It’s because we feel that — this is more kind of gut feeling than science, that there will be — the risks that are in the system, especially around supply chains, as we come out of lockdown, they’re going to kind of become more visible in the autumn, September, October. That’s what we feel are probably going to be the main kind of crunch months. So either there’ll be a lockdown or some kind of limited lockdown as a result of a second wave, which looks highly unlikely given the way Russia performed in the first wave of COVID with a very mild lockdown; or just some of the risks working their way through the system and coming through to consumer, where customers’ cash reserves have been run down over last few months and then they basically run out in — by the time we get to end of August, September. But this is just us being conservative. This is a risk which is potentially there, but right now we just don’t see that coming through in our numbers, hence all of the upbeat guidance that we’ve been giving today and the numbers that Ilya has been talking about.

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Andrew Keeley, Sberbank CIB Investment Research – Head of Financial Institutions Research & Senior Analyst [15]

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Okay. And just quickly on your guidance, a couple of things. You guide around 5% funding costs or so for this year. If we look at the first half, I think your funding costs were about 4.6%. And you’ve been cutting your savings rates again recently, so would you kind of agree that 5% area looks a fairly cautious guidance? And is there any reason why funding costs in the second half shouldn’t kind of fall further from where we are, the 4.6% or so we’ve seen in the first half? And then on your loan growth, I realize that you’re probably going to not give me any figures, but when you talk about steady state in terms of growth, I mean, what’s your sense here of — like is it kind of 5% a quarter or something from second half of the year? Just any thoughts about for where you see that would be helpful.

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

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Ilya, do you want to take the first? And I’ll take the second.

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Ilya Pisemsky, TCS Group Holding PLC – CFO [17]

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Sure. Well, we haven’t been borrowing on the wholesale market for quite some time, first, because we didn’t need to; and second, because there was a crisis and that rates in the markets were not favorable, but we see that the markets go back to normal slowly but steadily. And therefore, there might be an interest for us to tap the bond markets, including international ones, which will have an effect on the funding rate. Again, that’s very speculative and we don’t have any specific plans right now, but we have certain placeholders.

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

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And on the loan growth question. So you’ll see it coming through the July numbers on the RAS side. So our RAS reporting will come out in the next few days — I’m sorry, next week. And that will show the numbers for July, which will give you an insight into where we’re heading for this. So we — you’re right, Andrew. Sorry. We’re not giving numbers for the year in terms of outlook for loan book growth. It’s certainly not going to be numbers in the high double digits or anything like that, but it will be a bit of [a pace]. So you’ll see that our loan book growth will pick up. If we don’t see any second waves, any recessionary problems and all is more or less as it is at the moment, continuing in the second half of the year, then that will enable us to grow profitably and to continue to basically ramp up all of our different channels across all of the different lending products. And just it’s a bit early to give you numbers on that, but as I say, you’ll get a bit of an insight when you see July numbers.

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Operator [19]

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Our next questions today come from Ivan Kachkovski of Morgan Stanley.

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Ivan Kachkovski, Morgan Stanley, Research Division – Equity Analyst [20]

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Yes. Congrats on the results. A couple of questions for me. First, if I may continue on the loan book growth. So yes, no numbers but maybe just like where in — like where particularly maybe you see most growth potential like for the [new risked loans] for the second half, be it credit cards or cash loans or secured loans? Yes, that’s my first question.

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [21]

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Sure. So in the — a crisis scenario and when we’re coming out of a crisis scenario such as this one, you would expect to see us growing more quickly in shorter-duration, smaller ticket loans. And the reason for that is because longer-duration, higher ticket loans such as car loans and in particular home equity loans, they’re more likely to see a higher level of restructuring in the loan book. And until we know exactly how the restructuring is going to play itself out — and so as Ilya was saying, things looking good. It’s been had a lot less impact than we anticipated when we were back in — looking at this back in March, April before we actually went into the crisis. So restructuring programs have worked well, have given customers breathing space. And we see people coming back into their payment schedule in large numbers. So it’s all going in the right direction, but we just want to get through this famous September, October autumn effect. Until we’ve got through that, we don’t know exactly what’s going to happen with all the restructuring programs. So there’s just this little element of uncertainty. And the higher the loan size, the longer the loan by duration — by term, sorry, the more likely it is to be restructured. So we’re going to be growing quicker in the smaller unsecured shorter-term loans, and then as soon as we understand, we have better visibility on the longer loan products, then we’ll start growing those a bit more quickly as well.

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Ivan Kachkovski, Morgan Stanley, Research Division – Equity Analyst [22]

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And then if I just like follow up based right on that. If I heard correctly, I think Ilya mentioned you expect the loan book yields to come down a bit in the second half of the year. And — but if you now talk about more growth coming through smaller ticket loans, which usually in your case are actually higher yielding, how does that — how do these things reconcile between themselves?

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Ilya Pisemsky, TCS Group Holding PLC – CFO [23]

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So Ivan, it’s not necessarily true because the yield on point-of-sale loans is much lower than yield on credit cards. The economics is different there. And you know that there are — a lot of issuance in the point-of-sale segment is done on a very low or 0 interest rate, the products such as (inaudible). So it’s not necessarily true. If it’s even would be only credit cards, then you will probably be right.

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Ivan Kachkovski, Morgan Stanley, Research Division – Equity Analyst [24]

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Yes, sure, sure. Got you. And then maybe one more question for me. On the regulatory environment, what are the expectations for the second half of this year? I mean like in both restrictions in acquiring fees and any other further changes or tightening you expect, be it credit or anywhere else.

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

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Sure. So on the acquiring fee side, the discussions are just starting to warm up now as to what happens in — at the end of September, when that 6-month period comes to an end where online acquiring fees were reduced through a piece of temporary regulation, whether that will just fall away because the coronavirus crisis has ended or whether it will be extended for some reason. So you can imagine that there’s a bit of a lobby on the side of the merchants to have it extended. And I know there’s been a few conversations about that recently, but my expectation — so my base case is that it will just fall away because the crisis is over, but we’ll see how that pans out. So obviously there’ll be conversation between the regulator and the various stakeholders in this issue. There’s no other new legislation or regulation that — just searching my memory banks, that we would expect to see, but you probably know that they’ve just passed the law, on the third reading, for simplified collections. So there’s — sorry, bankruptcy. So it’s a simplified bankruptcy procedure. And we’ll have to see how exactly that is fleshed out and what the practices will be, but that raises the threshold for personal bankruptcy — sorry, decreases the thresholds for personal bankruptcy and makes the process a bit more streamlined for individuals seeking to go through the bankruptcy process. Apart from that, there’s nothing that’s hit my radar recently. I think it’s unlikely that we’ll see anything else this year, but you never now. We’re in a highly regulated industry and there’ll be more regulation as we go along.

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Operator [26]

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Our next questions come from Olga Veselova of Bank of America.

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Olga Veselova, BofA Merrill Lynch, Research Division – Equity Banking Analyst [27]

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I have several remaining questions. One question is on this net gain from disposal of debt securities. I see they were high again in the second quarter. Can you remind us what was the nature of this gain, how it occurred? And I do hear you that we shouldn’t extrapolate it in the future quarters, but I just want to understand. Why did you book it in the second quarter? My second question is about cost of risk. I appreciate that I shouldn’t be asking your early outlook on cost of risk for 2021, but do you think that normalization will be reasonably fast in cost of risk? Or it may take 2, 3 years. It will be really a long-lasting normalization of provision charges. My third question is about…

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

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Olga, let’s — okay. Can you hear me?

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Olga Veselova, BofA Merrill Lynch, Research Division – Equity Banking Analyst [29]

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Yes.

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [30]

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Sorry. Stop there. Otherwise, we’ll forget your questions. Let’s — we’ll take your first 2, then you can ask the next one. Sorry. We’re bearers of very little brains. We can’t hold more than 2. Ilya, will you take the first?

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Ilya Pisemsky, TCS Group Holding PLC – CFO [31]

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Yes. So I’ll start with our treasury income. So our investment portfolio is growing. And the investment universe in Russia is not particularly very wide. So we invest in — right now mostly in state securities or quasi-states. And in the falling rate environment, we started seeing positive revaluation of these portfolios — of this — of investment portfolio. And at some point in time, we decided that we should fix this positive revaluation into the profit and loss statement to support our capital adequacy, so we did. We started doing it in fourth quarter of last year to a small extent. A significant amount of these trades were done in the first quarter, but in the second quarter, the rates continued to go down. And there was again significant positive revaluation, which again we’ll put it to work for the capital [again]. And as I say, for us it’s difficult to make any kind of forecast if we will be able to do similar things in the future. Therefore, we — even when we build up our own business plan, we do not sort of make plans for this kind of gains to be realized.

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [32]

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On the cost of risk question, normalizing into 2021. Obviously, as you quite rightly pointed out in your question, Olga, we don’t expect to see — we don’t — we’re not giving any longer-term outlook for next year. Obviously it’s very early. We’ve only just revised — renewed our guidance for this year, having withdrawn it, for one, but — and all things being equal, assuming that there’s no economic recession which is caused by what we’ve just been through in terms of COVID crisis, then my expectation will be that we’ll go back into the long-term trend of cost of risk that we’ve been seeing over the last couple of years. So this is when you look at the total book and we’re going into new segments. So basically this has been going on for 5, 6 years already. We’ve been going from mainly mass market business in terms of credit cards to mass affluent through Tinkoff Black, and we cross-sell other loan types as well as credit cards. And so that changes the yields on the credit card book, which tick down over time, but also cost of risk ticks down because you’ve got a different customer base with a different mix and a different transactional behavior using that credit card. And in the loan book, in general the mix changes over time as well. So you have a much greater share of secured loans in that loan book, and so I very much hope that we’ll be able to show much stronger growth by the end of this year in secured loans again once we got through the autumn uncertainty. The secured loans obviously have a very different risk profile with a much lower cost of risk. They’re currently around 15%, if I’m not mistaken, of our total loan book, but in the longer term, they’ll be — will account for a much larger share of our total loan book. And we have other lending — loan types as well, such as point-of-sale loans which gives a much lower cost of risk as well. So as the loan mix changes, you’ll see that our cost of risk, normalized cost of risk, starts to trend — continuing to trend down.

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Olga Veselova, BofA Merrill Lynch, Research Division – Equity Banking Analyst [33]

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Got you. My last question is about provision coverage. I noticed that your underlying cost of risk went up. I think this was asked earlier, but also I noticed that your provision coverage of stage 2 loans went up. So I wanted to understand how you look at this provision coverage of stage 2 stage — loans given that the coverage is extremely high versus your near peers. Do you maintain high coverage because of this high uncertainty right now? And once things become clearer, you would drop coverage to more normal levels. Or this is your normality. This is what you want to maintain in the long run, just to have this very high coverage of stage 2 loans in the long-term period.

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Ilya Pisemsky, TCS Group Holding PLC – CFO [34]

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Well, that’s, well, we do not have any kind of specific desires. Or I mean they do not matter at — it’s just the strategics that shows the expected probabilities of default. And they have, as such, been second-stage loan. That’s what we have to live with. I guess, well, if you have some very specific interest, we can basically give you sometimes in the future a more sort of detailed breakdown of this, but that’s how it works strategically, unfortunately.

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Operator [35]

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(Operator Instructions) Our next questions come from Mikhail Shlemov of VTB Capital.

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Mikhail Shlemov, VTB Capital, Research Division – Equities Analyst [36]

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Congratulation on great results. I actually wanted to touch the things — and first, to start with — or actually with the investments business. As the product has obviously sit — the product market sit in the current environment, especially with the interest rates going down, how should we think about the sustainable long-term commission rates in the business specifically given that you are targeting a fairly different group of customers? Also perhaps you could elaborate us how the average account which is active has actually changed from the pandemic, whatever you have seen, people are actually putting more money into their accounts. And perhaps you can share the number of active accounts and how — or what it takes or how much time on average people take from actually opening account to start putting money in. That’s my first question.

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [37]

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Sure. So the statistics for the market are pretty standard. Around 30% of all accounts opened are active, and that was — it’s not too dissimilar to that. The length of time that it takes for a customer to actually fund that account, it varies actually quite a lot depending on the segment. I was talking about the 3 segments earlier, but it also depends on what’s happening in the market at the time. So obviously we’ve had a very good time for the brokerage business over the last couple of months — well, last 5 months, as for reasons that you all understand, obviously. And so the time to funding of the account has actually shrunk. So they actually activate and have funded quite quickly. The first transaction is performed quite quickly, but typically — again depending on the segment, typically it will be a low-ticket transaction. So the first transaction will be buying a couple of bonds; or Sberbank bonds — or sorry, VTB bonds, let’s say; or a couple of Apple shares; or whatever it might be. And then the customers are basically testing the platform, trying to understand the product. And then over time, they will start to build that balance up, but your question was also about how behavior has changed during the COVID crisis and all the market volatility that we’ve seen. So all of the metrics have been going up. We’ve seen that not only has the time to do the first transaction, after accounts opening, shortened, but we’ve also seen the number of accounts that have been funded increase over time. So it’s not just a certain vintage metric where you see, I don’t know, about X percentage of accounts being funded. All of the older vintages which have been opened over the last couple of years have also been going up in terms of the number of accounts funded, i.e., money being put on that account. So that’s very encouraging, but obviously the average balance has gone up as well. So it’s been a very good time for Tinkoff Investments and for brokerage in general across Russia as we’ve seen this revolution happening over the last 18 months or so. And we’ll see how it pans itself out over the next few months because obviously the market dynamics are changing a little bit.

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Mikhail Shlemov, VTB Capital, Research Division – Equities Analyst [38]

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That’s really helpful. And my second question is actually on the SME transactional business. Just — like looking at the customer numbers in the second quarter, the numbers still kept going up even despite the difficulty which probably the SMEs have experienced for quite some time. Do you think that we are going to see any drop or basically bankruptcies, a reduction in number of SME clients at all in the second half of the year? Or it’s fair to say that the growth would be steadily continuing there.

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [39]

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Sure. So again this comes back to our regular reference to the autumn, but we just don’t know what exactly we’re going to see in the autumn. It feels like the worst is behind us, but we’re just being extra cautious in terms of how we guide you in terms of the way you think about this. So we’re actually very surprised about how robust our SME customer base was. They’re very resilient. They adapted very quickly. So obviously it was a very, very tough month for them, especially in April. And it wasn’t particularly clever for them May, June, July until lockdown was eased; and obviously it’s still affecting some parts of the service industry as we come out of lockdown. So lockdown in Russia was fairly mild. It was relatively short. That all helped, but the SMEs have shown themselves to be very adaptive. So we saw a drop of 25%, 30% in throughput on SME accounts, but that actually started to recover really quite quickly. So from mid-April, we saw that bounce back. And by the time we got to end of June, basically SME turnover, account turnover, was back up to precrisis levels and it’s been growing ever since. So that’s, a, showing the adaptability of SMEs and the fact that the crisis was actually relatively mild. I choose my words carefully. And b, it shows that we probably have a certain, let’s say, skew in our SME customer base to online and IT consultancy-type guys who had a better crisis, as opposed to a service sector-dominated customer base who had a tougher crisis. And c, some of the things that we were doing with our SME customer base to help them ride through the crisis. I mentioned some of them in my script. D, very importantly, we’re actually growing. So we’re bringing new customers and we’re growing the customer base in SME. So the number of net active accounts is growing month-on-month, and that also obviously drives volume. So we will definitely see growth in the second half, and actually I think Ilya referred to this. We’ll see a growth in operating income for 2020 from the SME business line versus 2019.

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Operator [40]

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Our next questions come from Andrey Pavlov-Rusinov of Goldman Sachs.

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Andrey Pavlov-Rusinov, Goldman Sachs Group, Inc., Research Division – Research Analyst [41]

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Congrats for the strong results. Most of my questions have been answered, but I’ve still got a few. First of all, maybe if you could talk a little bit about your OpEx projections. Essentially in the second quarter, we have seen that you have increased your staff costs. Maybe you could explain what was driving it, whether there was any increases in salaries. Or maybe there are some kind of bonus accrual changes you have observed. And generally, for the entire year, would it be fair to assume that you would be able to keep your OpEx growth within, say, below 10% or so? Or actually, with acceleration in loan growth, we should expect much more in the second half.

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

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Ilya, do you want to do that?

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Ilya Pisemsky, TCS Group Holding PLC – CFO [43]

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We do not guide for the OpEx or for OpEx growth and for the fact that we’ve actually explained many times. We are — look at our OpEx costs, especially acquisition costs, as certain fuel for the growth. So if we want to get far, we just need more fuel, and therefore we’ll put it into the tank. So yes, we’re not — if we will be able to spend more in the second half of this year, spend it with positive NPV, thinking about the profits not only this year but the years ahead, then we will do so without any hesitation. As for the OpEx — and I guess part of the question was about the — some growth in other admin part of our office, right?

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Andrey Pavlov-Rusinov, Goldman Sachs Group, Inc., Research Division – Research Analyst [44]

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Yes, both with the admin and staff costs, Ilya.

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Ilya Pisemsky, TCS Group Holding PLC – CFO [45]

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Yes, yes, yes. So there was one specific item which actually went through this line, is we created some provisions for some of our financial assets that we have on our balance sheet. So these are not loans or advances to customers. It’s some other financial items, so we had to obviously create some provisions in the second quarter. So that was a [sort of a specific] increase. Otherwise, obviously we have increased loan loss provisions — or sorry. We have increased salaries at the end of last year, so that’s — that played through the first half of the year. We are accruing some bonuses for the year. And with this kind of financial performance that we have, our employees are probably — have full right to expect some bonuses at the end of the year.

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Andrey Pavlov-Rusinov, Goldman Sachs Group, Inc., Research Division – Research Analyst [46]

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That’s clear. My second question is…

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Ilya Pisemsky, TCS Group Holding PLC – CFO [47]

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Yes, maybe one more. I’ll just mention one more thing which also increases compensations in general admin, is we have beefed up some our — some of our programs, motivational programs, long term, which are linked to the group’s equity performance. And you can find this in the notes.

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Andrey Pavlov-Rusinov, Goldman Sachs Group, Inc., Research Division – Research Analyst [48]

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So there wasn’t any change there. Or essentially just the fact that you increased the number of employees is — basically is driving that higher cost.

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Ilya Pisemsky, TCS Group Holding PLC – CFO [49]

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Well, there were some changes made. Again that’s — I don’t know if is it the right time to go into the core details of this program. So some of them are shareholder equity-based; and that allowed us to sort of increase the number of participants, a very good program that we have designed. And that this program — so it’s shareholder equity-based. It’s — does not have any implications for the real GDRs. So that’s one of the examples how we’ve changed that. And obviously the administrative expenses, salary expenses increased, not significantly but still increased in the first half of the year because of these.

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Andrey Pavlov-Rusinov, Goldman Sachs Group, Inc., Research Division – Research Analyst [50]

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So my second question is about your very strong liquidity and essentially in this environment where you still see the growth in your current accounts which is very strong. And it will continue to be so, I guess, because you will be expanding in terms of the number of Tinkoff Black clients. So do you have any bit more maybe longer-term thinking about what you will be using with that inflow? Would you be kind of going into other lending products, maybe mortgages? Or will you be using some of that liquidity to essentially [land] in credit cards because that would probably match in terms of the maturity? So — or you will be just basically buying government bonds as you do now.

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Ilya Pisemsky, TCS Group Holding PLC – CFO [51]

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Oliver, should I answer these as well?

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [52]

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Yes, go for it. Sorry.

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Ilya Pisemsky, TCS Group Holding PLC – CFO [53]

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Yes. So right. As I said, the liquidity has grown during the second quarter. 2 factors here: First, we did not increase lending, and in fact our loan portfolio contracted a little bit. And second, customers who are joining Tinkoff are coming in great numbers. So again, our current accounts increased 20% in a single quarter. So that’s a lot. Unfortunately — well, we designed our current account business in a way that we want to attract more and more customers. That’s our strategic decision. And I — that’s my probably favorite phrase, that unfortunately these people come with money. And therefore, our account balances grow to the extent that we probably don’t need that much. Well, investing them into longer-term lending products, and you mentioned mortgages here, is obviously tempting because of the rate differential. But I guess it’s a play with fire. And we want to be — still want to be very cautious on the liquidity front and don’t want to put our current account money to a significant extent into the long lending products. For — buying state securities is a sort of intermediate option. Looking into this sort of over longer term, and that’s please don’t take it as a guidance but as more of my — as my personal view on these things, I guess the development of investment business, our brokerage business is the way how a lot of this money would be effectively used by our customers. So when — in the falling rate environments, when they cannot enjoy significant interest on current accounts or saving account deposits, people will be turning more and more into investment products and place their excess cash that they will probably don’t need in a day-to-day life into their investment accounts. But it’s, again, this trajectory will obviously take longer term.

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Andrey Pavlov-Rusinov, Goldman Sachs Group, Inc., Research Division – Research Analyst [54]

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Again that’s very interesting, how it will proceed. So — and my kind of other question is, if I may, about the taxation of the — with taxation changes in Russia regarding the dividends to offshore, yes, locations. Basically if you could share your thoughts about how it could impact your financials essentially. And also just for us to understand how it could show up in — whether it’s — it could show up in your capital as a negative item or it may show up in our — other taxes you pay in terms of your admin costs, this kind of increase in — by 10 percentage points on the dividend you pay — sorry, on the tax you pay on your dividends to the parent company.

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Ilya Pisemsky, TCS Group Holding PLC – CFO [55]

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All right. So I guess there are 2 sides to — or 2 sides of your question. One of them was sort of what — how the situation develops and what will we do, and secondly is about accounting. And on first part of this question, I’d say that it’s sort of we’re monitoring what’s going on between Russia and Cyprus. And there were all sorts of news recently. So one day, Russian Minister of Finance says that they’re starting the [enunciation] of the treaty. The next day, Ministry of Finance of Cyprus makes a completely sort of opposite statement saying that the negotiations continue and will continue through to August. So we will see it. It’s really difficult right now to speculate. And we don’t have any specific position or any specific decision what would we do. Second is about accounting and probably size of the dividend. So we are still holding to our promise to distribute up to 30% of our net income for — IFRS net income per quarter. And right now, most of the distribution goes to our investors, and small portion to the state in terms of withholding tax. And that share that we distribute to the states or the taxes might obviously increase, but we’ll see. Again, nothing is decided yet. In terms of accounting, this withholding tax sits in the profit tax, together with the normal profit tax that we pay on our operational trading companies in Russia. And this is done so because [it’s this is a sort of 2-step structure so that it] hold [5%] when we pay dividends from operating companies to the holding level. And then on the holding level, our Board’s decide what to do with this money. And I guess, even if [they decided to start paying 15%] in some not-so-distant future, then that’s — the accounting treatment wouldn’t change [because of this]. We do not put it into that (inaudible).

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Andrey Pavlov-Rusinov, Goldman Sachs Group, Inc., Research Division – Research Analyst [56]

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Ilya, that’s very comprehensive [for this matter]. And if I may, just a very final small question. You’ve — also have seem to have booked quite strong other operating income, and I guess a large part of this was coming from your marketing rebates from the cards payment networks. And I guess that’s probably also — recoups for the lower amounts you’ve got in the first quarter, but maybe you could give us an idea whether we should expect just something similar to their average first half amount going forward or there might be any further changes.

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [57]

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Ilya, can you take that one? It sounds like we may have lost Ilya.

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Ilya Pisemsky, TCS Group Holding PLC – CFO [58]

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Sorry, sorry. I, yes, turned off the sound. So yes. I say you basically nailed it on rebates. In the first quarter, we didn’t book them because there was an uncertainty in February we will be able to fulfill their obligations before their — or payment systems and if we will be able to renegotiate them also, but there is much more visibility right now. So we started booking them again in the second quarter, and we have an expectation that we will get a bigger income booked in the second half of the year

(technical difficulty)

volumes based — volume-based. And our volumes are going to recover. Or they have recovered already and they’re going to maybe recover the year’s expected volumes. So that’s why, yes, [we’ll pull] them back in.

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Operator [59]

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That will now conclude the question-and-answer session. I would like to hand back to our speakers today for any additional or closing remarks. Thank you.

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Oliver Charles Hughes, TCS Group Holding PLC – CEO [60]

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That’s it. Thank you very much indeed for your interest, for your support. And I wish you all a good day or a good evening, wherever you are. Thank you. Bye now.

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Operator [61]

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That will now conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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