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Thank you for standing by, and welcome to the TCS Group Holding First Quarter 2018 IFRS Financial Results Investor Call. [Operator Instructions]I would now like to hand the conference over to your speakers today, Oliver Hughes, CEO; Ilya Pisemsky, CFO; and Sergei Pirogov, Head of Corporate Finance. Oliver, please go ahead.
Thanks, Sergei. Good afternoon to everybody. Today, I'm going to present the group's financial results for the first quarter of 2018. Seeing as this is only the first quarter, and we're well on track for our guidance, I'm going to keep our remarks relatively brief.While the first quarter is always slow for seasonal reasons, the year is gathering pace on both the credit and fee and commission fronts. The net loan book grew by 7.8% to RUB 140 billion. Cash and point of sale loans represented 37% of our growth, bringing in a total of 500,000 customers, including credit card customers in the first quarter. As part of our ongoing diversification program, we launched tests of home equity and car loans. We'll have more to tell on this by the end of the year.In the first quarter, the cost of borrowing further reduced to 6.4%. Following the transition to IFRS 9 and the related one-off additional provisioning charge coupled with first quarter seasonality, cost of risk increased to 7.5%.Our transactional and servicing businesses are going great guns, bringing over RUB 6.8 billion or 27% of total revenue in the first quarter. Tinkoff business had 300,000 accounts opened by April. We accelerated on all fronts in SME, ramping up customer acquisitions to over 25,000 new accounts opened per month, focusing on retention and monetization through value-added services and driving growth of revenue per account.Tinkoff Investments marked its 100,000 brokerage account opened on the very same day that we announced the launch of Tinkoff Investments Version 2. We now do this entire business in-house on our own platform, and we also open, obviously brokerage accounts inside Tinkoff now that we have the Central Bank licenses.Tinkoff Black continues to perform well, as our locomotive product and over 350,000 new debit cards were issued in the first quarter, bringing the total number of Black accounts opened to 3.1 million.Tinkoff Mortgage is scaling up, and the plan is to at least double loan issuance through the mortgage broker by year-end.Tinkoff Insurance and [ Acquiring ] both made steady contributions to noncredit revenue with RUB 1.2 billion and RUB 0.8 billion, respectively in the first quarter. As a result, the group made a net income of RUB 5.7 billion. This represents a year-on-year increase of 70% and an ROE of 68.5%. Please bear in mind that the advent of IFRS 9 has affected many of our key metrics, including ROE, as Ilya will explain in a few minutes.Among other noteworthy events, I'd like to mention, Tinkoff Bank opened a development hub at the Skolkovo innovation center that will focus on delivering new business solutions based on blockchain and face recognition technologies. We now have 9 regional development hubs with the 10th coming soon in Sochi.Tinkoff Bank's website was named the best mobile website among Russian banks according to review by Google and CXPartners. Tinkoff's mobile banking app remains the best in the market according to several leading surveys over several years. Tinkoff Bank has received Mastercard's Outstanding Fraud Management System award for its achievements in security and fraud prevention. I am also pleased to say that the national, sorry, the Russian National Analytical Credit Rating Agency or ACRA reaffirmed Tinkoff Bank's rating at A(RU) with a stable outlook.On that note, I'll hand over to Ilya, who'll go through the results in detail.
Thank you, Oliver. So starting here from Slide 4. You can see that in the first quarter of 2018, our assets remained roughly on the same level as of year-end at RUB 266 billion, despite the steady growth of the gross loan portfolio.So on Slide 5, you can see that the gross loan portfolio was growth up by RUB 8.9 billion, together with loan loss provisions, plus there was a organic growth of the portfolio during the first quarter of another RUB 9.8 billion. So why the assets did not change significantly compared to year-end? This was a result of a onetime increase of loan loss provisions against capital of RUB 10.5 billion due to the introduction of IFRS 9.Apart from that, the growth of total assets was about 2.5%. As you can see, again, on Slide 4, on the chart at left, the composition of assets remained stable with 36% of assets in cash and debt securities and over 50% in the net loan portfolio.Without further ado, let's look at the post-IFRS 9 presentation of our loan book on Slide 6. You can see that 80.6% of the loan portfolio is in Stage 1, reserved at 6.6%, meaning that over a 12-month horizon, we expect about 7% of our first stage loans to fall into Stage 3.78% of Stage 1 loans are in the current category. Here, they are not overdue. 2.6% of the loans in Stage 1 are in the Monitor category. And there are 2 types of loans here. Newly issued loans where there was no due date yet and loans delinquent for more not more than 30 days. In the pre-IFRS 9 era, the Stage 1 portfolio would have been reserved at approximately 1.5%. Almost 5% of the loan book falls into Stage 2. And you can see that this group is reserved 11x higher, 73% of notional amount. Loans included into this group are current loans with high expected probability of default based on their behavioral scoring. Loans with high PD that missed their first payment and loans that missed their second and third payments. In the old dark ages of IAS 39 reporting, we would provision Stage 2 loans at approximately 54%.Nonperforming loans fall into Stage 3, provisions at 82%. You can see that nonperforming loans increased substantially from year-end from 8.8% to 12.6%. This is, of course, another rapid worsening of our loan book but presentation or transition effect. Up until now, we were suppressing our nonperforming loans for the accrued income that we would not be able to receive. We often refer to this exercise as netting. Due to the new standard, we had to put these accruals back to the gross loan book, which led to a simultaneous increasing of -- increase of nonperforming loan part of loan book and provisions against nonperforming loans. The effect of this change is 3.8%. Please bear in mind that 8.3% of -- most of the nonperforming loans are loans in courts that still produce a decent recovery of approximately 20% over 3 years.Okay, let's turn from the accounting stuff to the business discussion. On the next slide, you can see growth of the loan book, which came at RUB 9.7 billion or almost 6% in the first quarter. To reiterate, another RUB 9 billion came on the 1st of January. This was an effect of unwinding netting, which I talked about on the previous slide.We now also show a more detailed composition of the net loan book on this slide. This become important as non-credit card part of the book grew to 1x of the net loan book, and we expect that cash flows growth will outpace credit card growth this year. And therefore, we will be giving you more details on this part of our story.In first quarter, approximately 70% of cash loans were issued to our existing customers. The average size of our newly issued loans is RUB 214,000 and the construction -- convertible duration is usually 2 to 3 years. Growth in the credit card part of the book is the result of organic customer acquisition, which gave us 370,000 new activated credit cards in the first quarter compared to 340,000 credit -- new accounts in first quarter of 2017.You can also see the composition of nonperforming loans and NPL provision coverage on this slide. Nonperforming loans provision coverage have expectedly increased. I also have to mention that 98% of NPL volume have credit card portfolio origin, there's only 2% coming from POS or cash loans.We also started testing some secured loans in recent months. Car loans starting from March, home equity loans starting from May, and on the way of test of loans to SMEs. We do not expect that these sub-portfolios will be visible in our loan book this year.The group's funding structure can be seen on Slide 8. Customer accounts of individuals increased by RUB 3.2 billion quarter-on-quarter, while corporate accounts and wholesale funding remained at the same level. We are ready to repay the subordinated loan in June. In fact, we have only $83 million left in the market. The rest was repurchased earlier.On Slide 9, you can see that shareholder's equity decreased as of 1st of January due to introduction of IFRS 9. Basel III total and Tier 1 capital adequacy ratios also reduced on the back of the accounting change to below 18%. Statutory adequacy ratios to Russian accounting standards are not affected by IFRS 9, and therefore, remained well above the levels prescribed by the Central Bank of Russia.And now some comments on our profit and loss statement, starting on Slide 10, where we show the distribution of our revenue by major types and the growth dynamics. You can see that total revenue increased 56% year-on-year and 6.8% quarter-on-quarter. Interest income grew by 37% to RUB 17.7 billion on a year-on-year basis and 6.7% quarter-on-quarter. This growth corresponded to the growth in the loan book and securities portfolio.Gross interest yield on loans decreased to 38% due to several factors, including changing behavior of credit card customers, growth of the cash loan book and again, the introduction of IFRS 9. Interest expense increased by 16% to RUB 3.4 billion on a year-on-year basis and was flat quarter-on-quarter. The cost of borrowing reduced to 6.4% in the first quarter.On Slide 12, you can see that net interest income grew by 44% year-on-year to RUB 14 billion and 7.7% quarter-on-quarter. Net interest margin went down 7 basis points year-on-year to 25.5%, but improved 1% from previous quarter, while our risk-adjusted net interest margin decreased to 19.6% due to the risk seasonality effect and partially due to the introduction of IFRS 9. The [ approximate] loss effect of the introduction of the new standard was negative by RUB 250 million.It's worth mentioning again that historically, we observed certain seasonality in our cost of risk, where risk go down in December of each year and climbed back up in January, February of the next year as a result of longer holidays and shorter collection periods.Our fee and commission income on Slide 13 more than doubled year-on-year and amounted to RUB 5.8 billion for the first quarter. Quarter-on-quarter fees were flat due to the low season for SME and other transaction businesses. There was some growth in the credit commissions mostly attributable to the introduction of IFRS 9.Tinkoff Insurance portfolio tripled year-on-year and amounted to RUB 1.2 billion for the first quarter of the year. We observed a very good dynamic in auto insurance, which already gives 42% of insurance premiums. We are fast approaching the group of top 10 issuers in nonobligatory ARPU [indiscernible]. Our current account business is evolving at pace, as we acquire more and more customers, as you can see on Slide 14. At the end of the first quarter, we had over 3 million current account customers, with almost RUB 79 billion of balances. The continuous growth of customers and balances allowed us to build up fee income, which amounted to over RUB 1.3 billion in the first quarter, net of cash back that we return to our customers and the transaction volume on current account business is approaching RUB 200 billion third quarter, giving us good interchange fees and making us #4 in terms of MasterCard issuer volumes.Our SME business is developing rapidly, which can be seen on Slide 15, but showed some seasonal decrease in account balances and transaction fees. As of the -- at the end of the first quarter, we had 290,000 customers with RUB 24 billion in balances on current accounts. We earned about RUB 1.4 billion in fees in the first quarter in addition to treasury income. We continued to develop our mortgage broker platform. As of the end of the first quarter 2018, we had 11 partners and originated RUB 4.6 billion of mortgage loans through the platform in the first quarter, which gave us about RUB 75 million in fees.On Slide 17, you can see some operating statistics on our service Tinkoff Investments. In March, we received the brokerage license and now doing this business on our own as well as together with BCS. We see good potential in growing this business through a very solid franchise both in terms of number of clients and fees.Now turning to Slide 18 for some comments on operating expenses, which were relatively flat quarter-on-quarter, but increased over 60% year-on-year, due to high acquisition spend that grew by 72% over the year and continuous investments that we do into the development of our noncredit businesses.The cost to income ratio peaked in the fourth quarter of 2017 and now started to reduce gradually. In the first quarter, the cost to income ratio went down to 42.6%, more notably excluding acquisition costs. Overall, we were able to show a quarter profit of RUB 5.7 billion, which is 70% higher compared to the first quarter profit last year. There was a slight decrease in net income quarter-on-quarter, which is explained by seasonality in credit risk, the introduction of IFRS 9 and some negative regulation of ForEx swaps that hedged our balance sheet currency position. Our return on equity went up to 68.5%. Without IFRS 9, our return on equity would be about 53%, which is still an exceptional result. And we will again distribute part of our retained earnings according to the dividend guidance we announced last year.Oliver, back to you.
Thanks, Ilya. So to wrap up our call today, before we move to questions. I'd like to reconfirm our guidance for 2018. We expect net income to be at least RUB 24 billion. We expect net loan growth to be at least 25%. We expect cost of risk on an IFRS 9 basis to be in the 7% area. And we expect cost of borrowing of around 6% to 7%.To conclude, I'd like to announce that the group's board has approved a quarterly gross dividend of $0.24 per GDR or around $43.8 million based on the company's existing dividend policy as we previously communicated.Thank you very much, and we'll take questions now.
[Operator Instructions] We will now take our first question from Mikhail Ganelin of Aton.
I have couple of questions. First of all, about your cost of risk performance. Should we expect some decline in coming quarters, given that your provision coverage improved and compared to the previous year. So should we -- is there chances we might say -- see like 5%, 6% this year in coming quarters?
Yes, thanks for the question. So we've just reiterated our guidance for the year for cost of risk on an IFRS 9 basis. We said that's going to be in the 7% area. So we came in at around over 7% for the first quarter, but that's for seasonal reasons mainly, but also a little bit because of the effect of IFRS 9 introduction. So we would expect it to go down a little bit in quarters 2, 3 and always in quarter 4. You could -- you should look at quarters 4 and 1 together. So you shouldn't expect it to go up, and the reason why I say that, just based on the business numbers, so the leading indicators that we look up, delinquency rates, first payment default, second payment default, collections, efficiency, the whole rate. They're all in good order. It's exactly where we would expect them to be. They're stable, no deterioration. So the seasonal spike in risk, almost spike but a seasonal -- slight increase in risk in the same quarter 1 should mean that'll go down going further. But the one Ilya might -- may want to add to this, the one thing that may, let's say, slight awkward pressure on cost of risk under the new regime of IFRS 9 is that faster-growing portfolios tend to get, let's say, treated more harshly by the new system IFRS 9. And so in terms of credit cards, where we have steady fairly noticeable growth, by no means very rapid growth, there also on a big base with lots of history, there the numbers are more predictable. But in cash loans, for example, which is growing very rapidly from a small base, they're going to be creating more provisions and that may mean that the overall provision was a little bit higher, but again, it's not needle moving numbers. So you should expect it to come down over the next 3 quarters. Ilya, I don't know if you want to add anything to that?
Well, you're absolutely right. We used to reserve our current portfolio at approximately 1.5% previously. Now it's over 6%. So you can imagine that basically, if we grow portfolio like in cash loans, then you see loan loss provisions right away, which in my view, does not justify the expected defaults and future write-offs in these sub-portfolio, but that's what we now have and that's where we have to live. So, yes, we're saying that 7% area is where we're going to end up for the year.
Okay. And my second question is about how do you plan to fund your loan portfolio? I mean, historically, you provide funding from term deposits or bonds. And I see that in the first quarter, your loan portfolio increased faster than your term deposits. So what's your view in terms of funding structure this year to satisfy your loan portfolio growth?
Mikhail, this is Sergei. We continue to be absolutely comfortable relying on retail deposits as the primary source of funding for this type of growth, irrespective of how our diversification effort is on the asset side. But every now and then, you will see us coming back to the local market with tactical ruble bond offerings. On both fronts, we see a plenty of [indiscernible]. We see that our group continues to be very strong and the deposit supply is very elastic. We see very positive rates environment in the market. So we're quite comfortable for both sources of funding. There's no need for us to come to the international debt capital markets foreseeing that. If we see opportunities to grow faster than the rates we're guiding for at the moment, we might potentially consider coming back to the sub-debt market even when the market conditions.
Just a small addition to what Sergei said. On Slide 11 of our presentation, we show cost of borrowing on a blended basis, but also cost of borrowing separately for customer accounts and for wholesale. And from that -- these 2 line, you can distinctively see what's a favorable -- more favorable source of funding for us these days [indiscernible].
[indiscernible] from Sberbank.
My first question is on OpEx growth. So I understand the 60% growth year-over-year, given more expansion of the business and nonbanking business growth as well. But do you expect the same growth rate going forward, I mean, the same high growth going forward? Or when you expect the OpEx growth to slow down?
Well, we certainly expect growth in operating costs this year, as we are hiring more people and we're spending a lot on acquisition. We're not going to keep our costs flat in absolute terms quarter-on-quarter in second, third and fourth quarters. But as we -- gaining some -- our businesses -- new businesses is gaining some momentum, and we will be seeing more and more revenue from new businesses. We will see that it's basically the operating efficiency cost of -- cost to income ratio will be gradually going down. Again, it's -- we're not guiding for specific numbers in our operating expenses and our operating efficiency. And we think it's not sort of -- it's not a bucket, it's a feature. We want to have our, basically, hands untied. So if we see certain opportunities where we can spend more to get future profits and bring more value to shareholders, ultimately, we will do so. And high operating cost to income ratios won't stop us from that.
Okay. But you expect this -- do you feel this positive momentum will be visible next quarter or closer to the end of the year? Just maybe in terms of timing?
We think that, well, we have an expectation that there will be slow decrease in cost to income ratio to the 40% -- 40%, 41% area.
Let me just pick up on this as well because, as Ilya, quite rather, he pointed out, we don't have guidance for cost to income ratio and we don't have a target for cost to income ratio. We -- and I don’t mean to say that inside Tinkoff we're not keeping a very close eye on this. We keep control over costs. But as we've said repeatedly over last 2, 3 years, we're in investment mode. So we're building out new business lines. We're hiring developers, technologists, analysts to build out our platforms so the different IT systems that we have in place for lines -- new business lines and that continues as we ramp up growth. So it's something that we keep a close eye on, but it's not a target when we're in a market where we can grow, attract new customers too and we then cross-sell all the products and reinforce our competitive position over the coming years.
Okay. And another question on cost of borrowing, mainly on cost of deposit customer accounts. Do you feel any slowdown in cost of funding repricing as many -- as some banks noticed now at first quarter results?
Sure, so I'll pick that one up. In terms of deposits, we've recently reduced our 12 months deposit rates again. Then, it looks like the market has probably plateaued in this respect. And obviously some of our larger competitors, particularly the state banks follow these -- the movements in the Central Bank key rate. The Central Bank seems to be slowing down its or put on ice its key rate reductions, which means that probably the deposit rate by the larger players will not fall any further in the near future, which probably means that our deposit rate is going to remain where it is more or less for the time being. The deposit rates is, obviously, only one part of the story because we have our current accounts, which is, as Ilya mentioned earlier and Sergei was describing, is a larger and larger source of funding and that continues to come down. So we reduced our rates on Tinkoff Black accounts not long ago.
[indiscernible] Bank of America Merrill Lynch.
I have one question on consumer lending regulation. Oliv, this year you referred that on top of full cost of credit caps, the CBR actually might be looking to introduce PTI caps, both in mortgages and in consumer in the midterm. Would you be in position to comment how this discussion between the CBR and banks is progressing?
Sure, yes. So the indication that we have from the Central Bank, with whom we're in direct dialogue over this as well as working through the associations and with groups -- working groups, was that, that would be something made public by the end of April or into May. That hasn't happened because there's still quite an intense discussion going on. I mean the Central Bank hasn't actually come up with a specific view or announced a particular position, so still working on this. My understanding is that there will be the initiative made public at some point. I presume in the not too distant future, but we don't have any clear signals on that at the moment, which will then become a recommendation from the Central Bank. So there'll be monitoring done in the background. All banks will start reporting. It won't be a cap or a specific regulatory restriction. And then my expectation is that after a period of time, based on the information that the Central Bank has been gathering from the market, it will then become a hard piece of regulation. So there'll actually be a threshold PTI level, which will be introduced. And then there will be some limitations placed on banks in terms of the next loan, which pushes a consumer over that threshold. So it could be additional risk rates. For example, it could be restrictions on how our customers treat it in terms of collections or legal enforcement. So there's lots of different things being discussed. No specific measures are being agreed or decided on by the Central Bank. So it's still very much up for discussion.
And if we talk about potential mandatory caps, do we talk about for the next year rather than this year, correct?
I really couldn't say. So as I say, there'll be a period where this is a recommendation as opposed to a hard piece of regulation. And how long that period will be once this has actually been announced and introduced into the market? I don't know. I would imagine that it'd be at least 6 months. So that would probably push us into next year. I don't know, is the answer. And the second thing is it's not actually a hard cap. That's not what's being discussed at the moment. So it's not, for example, a PTI threshold of 70% over which a bank cannot lend, that's not being discussed. What's being discussed is risks, say, constraints on that to make it more onerous for the issuer of that loan. So for example, higher risk rates and/or restrictions in terms of collections, but it's all to play for. As I say, it's a bit of a moving feast at the moment.
Neri Tollardo, Morgan Stanley.
Two questions from me. One on Slide 13 on your fee and commission income composition. If you could just elaborate a bit on the acceleration in the credit-related fee and commission income. What's been driving that income? Do you expect that growth to continue this year? And then the second question is on your acquisition costs, which have remained relatively elevated for the last 2 quarters. And I'm wondering if you could elaborate a bit on why that is? Whether that's just you accelerating your acquisition rates or maybe finding it a little bit more difficult to acquire customers because competition has picked up? So any color on that would be great.
I'll take the first one. So that -- the growth in commission income relating to our lending is due to changes in accounting, due to IFRS 9 transition. And we will -- we would think that for further this -- there would be one -- wouldn't be increasing in the next quarter, so it's probably a onetime stuff. So you won't see a significant growth in this area.
On acquisition cost. Yes. So just as a kind of preamble, we have been doing a lot more brand advertising. So we've been investing in brand over last few years. As you know, normally goes a little bit quieter in the first quarter, and then things pick up in the spring. That's typically how it works. But this year, we've been investing a lot into [ ATL ], particularly TV and sponsorship in the first quarter as well. In terms of acquisition costs, we have continued to ramp up our SME business line, Tinkoff Black, cash loans, obviously credit cards and the new other business lines such as mortgage and investments. So you shouldn't expect to see that line decreasing. So it's another sign of us having less efficient acquisition by higher cost of acquisition per customer. It's a sign of us further stepping up our overall acquisition effort. That said, within different business lines, different products, you're obviously going to get some channel, some acquisition channels, which cease to be as effective as they were before where maybe a competitor comes in, maybe you've washed out a particular channel when you're reaching saturation and the economics got worse. So we're constantly working on new channels to open up new channels, to revive old channels, to modify existing channels or even close them. So you get movement within, but overall, you're not seeing an increase in cost of acquisition per customer.
Andrey Pavlov-Rusinov, Goldman Sachs.
I've got several questions. Probably the first is, if I may, another follow-up on your OpEx growth. Basically, I appreciate your comments that you are in active acquisition mode, but I guess what was a bit surprising is that despite seasonality your first quarter was actually higher than the fourth quarter. And I just was wondering whether there's any one-off expenses that were in the first quarter? Or it's just basically that you are ramping up your acquisition even further and hence the first quarter is -- another way of...
Yes, I can answer that. There was no one-off cost. I guess, the results, of course, at the same level with the fourth quarter is that we basically we increased -- there was annual increase of salaries to our employees starting 1st of November so that, of course, has its impact on first quarter. And second thing that our TV advertisement stayed on quite a high level in the first quarter -- I mean, expense was quite high for TV advertising. So we -- basically, we did not decrease our TV advertisement after the end of high season in the fourth quarter of last year. So these are probably [ the same part ].
And could you tell us what about the average increase in salaries, if that's possible?
So the average increase across the organization was around 9%, 10% and that's been something that's been a feature of the landscape for the last few years, fairly hefty increases, and that's a function of a number of different things. So firstly, a very weak ruble; secondly, high inflation; and thirdly, us having to attract good quality specialists in a range of different areas, particularly IT but obviously not exclusively IT as we ramp up the business and build new business lines to build them out. There's a number of different things, which have, let' say, stabilized and we're obviously a long way of November where we traditionally have our pay review, performance-based pay review I should add, but I hope it won't be 10% this year.
Okay. And if I may, just wanted to basically understand, if you could give us an idea -- okay, probably this year, your cost growth is not really slowing down and that's kind of valid given you're investing and you have new businesses. But generally, at what point could your cost growth moderate? Can we expect this next year or maybe only year after next?
Depends what you mean by moderate. So again, you shouldn't be looking at the absolute numbers. You should be looking at cost-to-income ratio, and Ilya indicated that we expect cost-to-income ratio to continue to decline slightly this year. Given that we've done a lot of our investments in the new business lines and those business lines are now bearing fruit, have been for a while, many of the bigger ones have reached breakeven last year, although we're still ramping them up obviously. I would very much hope that we dip below 40% next year, but that's not guidance. That's just me thinking ahead.
Okay. That's helpful. And my second question is a bit technical on the IFRS 9 impact. I just wanted to understand better what was the gross-up effect on your loan yield and on your cost of risk in the first quarter? And also maybe on the cost of risk, if you could give a breakdown between your kind of underlying cost of risk and this gross-up effect and actually the underlying IFRS 9 impact because of the change in the methodology related to high provisioning on the kind of stage 1, stage 2, maybe, loans?
Well, we showed the effect of sales for January. Of course, there were some effect during the first quarter. It's not on the top of my head. If it's of particularly interest, we can calculate this. But of course, we're not running 2 systems simultaneously for loan loss provisioning. Trying to preserve administrative costs and not hiring too many analysts for that. The only thing I thought would be important and what I asked to calculate before this call is how much we basically lost during the first quarter in terms of P&L effect, and as I said, it's approximately RUB 250 million. So I did not calculate the gross-up for the quarter. If it's of interest to you, let's reconvene by mail and we'll tell you.
Okay. But just generally, I just wanted to understand, on the loan yield, there should have been a positive impact, right? So basically, it means that underlying trends in the gross loan yield were actually stronger than we've seen from -- on your presentation, right?
Actually, the opposite because basically the growth in the denominator -- I mean, the gross-up in denominator, it drags the yield down. Probably counterintuitive, but it is what it is.
Andrey Mikhailov, Sova Capital.
My question is on Tinkoff Mobile. If you could share how it's progressing and maybe some metrics?
Sure. There's not many metrics to share at the moment because all very new. We're making the first baby steps and trying to work out what works, what doesn't, how to make sure our interface is a winner in the market, which distribution channels to use, understand the economics, et cetera and obviously sorting out a few bugs as well. And most of the bugs have gone, but -- so we've attracted less than a couple of tens of thousands of customers, so we're still very, very early stage. We're beginning to ramp up with some of the distribution channels, which work better. In terms of the economics of the business, there's really nothing to tell at the moment because we still have the numbers in terms of how people are behaving as they mature in terms of ARPU. But over the coming loans, we'll have more to share. So at the moment, it really is very much test and learn.
Mikhail Shlemov, VTB Capital.
I actually have 2 questions and both relate to the fee lines, especially the new business lines. If I would first look at your mortgage brokerage, it seemed like that your margin on mortgage brokerage side has started to fluctuate somewhat in the Q4 and given that you have added a couple of fairly big mortgage partners and you plan to significantly ramp up production, whatever you can share out, what kind of margin in the business line you think is sustainable? And the kind of similar question comes regarding the brokerage business once you have launched your platform, what should happen with the margin there and whatever you think you would see any change in terms of average balances or the velocity of the transactions from the client side?
Maybe I'll start with the mortgage business. So the situation with the margin because it's basically a blended margin for all our volume originated. And of course, when we have 11 partners, the margins with all these partners are different. And you can guess that we are adding new ones, especially big ones, the margin is lower. And we're trying to build up volumes through new partners who, for example, like Gazprombank or UniCredit have certain advantage in rates to customers. And therefore, mathematically, growing volumes with probably lower fees with some of the partners that drag the margin -- blended margin down. So that's basically the reason.
Just to add to that very briefly, so -- sorry, Mikhail, we're just adding various sort of bits and bumps in terms of value services, which actually increase the margin. So it moves around depending on the quarter, as Ilya said, depending on what partners are doing what, I mean, how we're managing conversion and the sales funnel. But equally, there are other ways that we can help push up a margin to defend the profitability of the business. Just to add as well so you understand, so we're very much in investment phase in mortgage. So last year was understanding how to do it properly. We finally got it. By the end of year, we broke even and we grew our volume basically by 4 or 5x in terms of the loans dispersed through the broker platform. And this year, we want to double it, maybe even triple it. So the prospects are good. The margin is defendable and we [indiscernible] costs. Maybe to answer the investment question.
Yes, if I may, I'd finish with the mortgage. I'd just like to make sure we're all on the same page. So basically thinking that 1.9% margin, which you had basically in the second half of last year, is something which you would have in mind as a longer-term margin for the mortgage broker?
I'm not giving any targets so please don't take this as guidance, but somewhere between 1.7% and 1.9% is probably the right number because we can broaden our sales funnel at the expense of margin by bringing lower-margin first partners in, but selling a lot more volume. So overall, that may actually make more sense this year as we ramp up -- as we gain kind of basically a bit of market share in this business and critical mass. Word of mouth, in fact, goes out there. And we're actually may end up making more rather than less. So we're in bigger pie, lower margin, but high profitability in terms of ruble numbers.
That's helpful. And if we can move to brokerage then.
Sure. So on investments, so maybe just to give you a little bit more color. Before we launched with BCS Broker, we were the front end, they were the back end. Accounts were opened in BCS. It was great. We really enjoyed working with them and that took us a long way and I think it was interesting experience for BCS as well. But then the time came for us to bring this in-house. So we built our own IT platform, hired a team and got the Central Bank licenses. So we now opened from -- as of couple of weeks ago, we opened all the brokerage accounts in Tinkoff and this enables us not just to add more products, but also to go into new segments because before we were essentially mass-affluent from our Tinkoff Black customer base. We didn't do any marketing. Nevertheless, we still opened 100,000 accounts working in that regime. But now, we're able to add a lot more products as a broker and over time doing some of that in our -- in-house. We, again, provide a lot more information so our research materials, recommendation, potential, social networks in terms of -- all the stuff you'd expect to see in an online platform for investments and securities. And we'll be able to go into different segments. So if now we're only in mass-affluent, soon we'll be going to affluent, so the lower end of high net worth, a lot larger tickets, with a lot obviously higher maintenance customers who require personal managers and decent research. And into the semiprofessional, if you like, kind of maybe amateur or semiprofessional day traders who require very different interface and have a lot -- higher frequency. So where exactly the numbers are going to come out and margin and whatnot is very difficult to say at the moment, but then we're very much in expansion phase and we see a huge potential in this business line.
That's very helpful, Oliver. And the last question is a little bit unrelated but just like looking at your initiatives in terms of mortgage broking and also I think there's sort of an announcement of you signing up an SME loan distribution agreement with MSP Bank. Perhaps you can a little bit elaborate on whatever you have at strategy on trying to become, let's say, a non-balance sheet loan provider or distribution channel for the higher -- or let's say, I would say higher-capital consuming and low-profitability products like mortgages or SME and whatever it would be the type of, let's say, thinking which you would be taking much more forward?
Sure. So forgive me in advance if my answer is a little bit, let's say, noncommittal, but we're a test-and-learn organization and so we do whatever works. In mortgage, we have no immediate plans to start deploying our own balance sheet to issue mortgage loans. So we'll continue to ramp up the Broker and sell all the [indiscernible] loans through our convenient interface and process. In terms of SME, we are, indeed, now testing SME lending, as Ilya mentioned earlier. So we have overdrafts, which is obviously a very small portfolio, but it's beginning to ramp up and we're gathering data on that. There'll be a short-dated loans, working capital, maybe something around merchant acquiring for SMEs in the relatively new feature. We're going to issue our first secured SME loans on our own balance sheet in the near future. But at the same time, we're also offering through our marketplace, if you like, non-balance sheet, non-Tinkoff loans, including MSP Bank, which is a state-owned organization specifically created to help SMEs in terms of loans where they may have -- not have available to lending loans elsewhere. So we have a hybrid approach. That's SME. In terms of auto loans, we've extended [ TCB Broker ], which is our broker that we established for point-of-sale lending, through which will lend Tinkoff loans and other banks loans into a point-of-sale, so basically sales finance. We've now extended the functionality of that and we've been selling for the last month car loans through [ TCB Broker ], very much in test and learn mode. We've already issued a few tens of loans. We're just working out with how the numbers are working at this particular level. So take rate from approval rate, approval rate from applicants, et cetera, and working out how to plug other banks into that. But at some stage, we'll end up with a hybrid where we're lending on our balance sheet and also lending from other balance sheets through that broker interface. So in different places, different approaches, but my feeling is where we'll end up over the next 2 or 3 years is a hybrid, what works well. So you increase the overall volume that can be dispersed through a broker model for your partner, whoever that partner might be. It's obviously better for the customer. And because they can get these products in one place, the partner has a higher aggregate approval rate. And we have the ability to drive our business, which is a mixture of both a balance sheet and fee in commission as a broker. Where exactly it'll pan out, it's difficult -- it's too early to say, but we like the hybrid approach.
[ Dmitry Tribivolsky ], [ DET Capital ].
Just a few questions that's already been answered. The first one will be on the SME. You are showing a very substantial, nice increase in the number of accounts. That I assume was just a couple of opened SME accounts. Should we think that number of active accounts, so when people are active, they have balances and transactions is following a similar trend. And related to that, what's the reason of a relatively flat fee income in the first quarter for the SME because the active accounts were not growing as fast as the total accounts or there were some other issues on why that wouldn't be growing especially on the transactional side? That will be my first question.
Sure, [ Dmitry ]. Yes, so the questions are very pertinent one. And we basically -- as we've been building these business lines, we've been relatively coy about the numbers we give out for a whole variety of different reasons, mainly competitive. And so we've been giving the numbers for the total amount of accounts opened, you're absolutely right. And not active accounts. On the 7th of June, we have our Strategy Day when we'll be giving a lot more granular information. We won't be completely laying ourselves naked, but we'll be certainly opening the kimono a lot more and a lot of the operational numbers, so if you're in London, please come along. And there, you'll see a lot of the -- some unit economics metrics, but also a lot more of the operational numbers, including active accounts. Are active accounts growing at the same speed as accounts opened? No. I mean, unfortunately, that doesn't work in business. It'd be nice if they were. But -- so there's an effect in time-like, number one. Number two, there's obviously attrition. And number three, which is a sub-point of number 2, if you like, is the way the Central Bank works with all of the banks in the SME segment, particularly small business, the smaller end of small business where there's quite a lot of, let's say, compliance-related closures as just a feature of this business. And so you'll see the -- if I'm not mistaken, Ilya, they'll see the active accounts on the SME side when we go to London.
Yes, I guess so.
So that's partially the explanation for a flatter fee level, total fees for the first quarter. But that's not the main explanation. The main explanation is pure and simple seasonality. So you get a lot more activity from SME, so these are individual entrepreneurs and the small end of limited liability companies [indiscernible] in fourth quarter and a very flat first quarter and that seasonality you can see already in our young business, so you can see that fourth quarter '17 -- '16 or fourth quarter of '17. So that's fine. You'll see a pickup in quarter 2.
Okay, so that would be a reacceleration as we go further into the year, right?
Yes.
Yes, okay. Sounds good. All right. My second question will be just on the -- a bit more like of a strategic one the cost of rates. Now you pretty much increased your reserves with the transition to IFRS 9, but especially visible on the Stage 1 loans. Does it mean that one would have a next credit cycle? Does it mean that your increase in the cost of risk will be kind of smoother because you sort of have higher capital, you have no provisions that you had to have by the time the [ credit event reaches ]? Or it will not be the case because the mathematics now is different and you will be moving from 12 months to lifetime immediately as soon as you get there, the first credit signals. And so things will cancel each other out. Have you thought about that, I mean, at all?
Yes, well, yes, thinking a lot about this. It's really a billion-dollar question. There will be contradicting -- forces moving our operations in different in directions. So first of all, if we think about the sharp increases like we had in 2014 when the delinquencies picked up quite fast, of course, loans going from close to second cycle of delinquency, increased loan loss provisioning quite fast and that would be reasonable right away. So that's on the negative side. On the other hand, on the positive side, if we can say anything positive about the crisis, of course, we will be slowing down issues. And immediately, we will have less new loans and therefore, probably basically, this front-loading effect will immediately go away. And what -- yes, there is a third component to that is there is a macro factor in the calculation as well and how it will play out, well, certainly, negatively. But again, the magnitude of it is difficult to predict right now. And therefore, what would be stronger and what we have higher loan losses during the previous crisis if we would have been already in this IFRS 9, it's really difficult to say. We don't have this depth of statistics, I mean, just to check it out. So yes, really difficult to answer.
Okay, okay.
I have to say at the moment, I think, personally, I think, the growth in loan loss per yield will be sharper, at least for the first quarter. But again, difficult to say the magnitude.
Bob Kommers of UBS.
I've got 2 questions. One is on your asset efficiency and last year your loans-to-assets were about 50% under IFRS 9. When do you think you can move that to loans-to-asset ratio over the next few years?
That's really a question how fast we're growing our Tinkoff Black and SME business because we have a lot of cash that we have to -- current account, mind you, that we have to deploy into securities portfolio. So it's -- and if the growth of securities portfolio outpaces the growth of loan portfolio, then you'll see a ratio changing not in favor of loans as a percentage of total assets. Second thing there is certain seasonality quarter-to-quarter. But well, at least for this year, it should be somewhat in the 50% area.
If I could just tag briefly, Bob. So basically, we have -- conceptually, we think of Tinkoff with 2 balance sheets and this kind of refers to a question that was asked earlier in this call. So we have our credit balance sheet where we have the credit cards, cash loan, small point-of-sale loan portfolio and at some point in the future if the test is successful, maybe it's secured loan portfolios, which are funded, particularly the cash loan and credit card portfolios, which have longer-dated debt, they're will be funded by deposits, by wholesale funded sources, bonds and equity. So we have our duration match. And then we have a second balance sheet, which is the bonds portfolio, which is funded by current accounts and that's Tinkoff Black and SME. So as Ilya says, our current account balances are growing very quickly. So we're attracting more and more customers on the SME front and on the individual current accounts on the consumer side and we can't attract our customer and give them a card for example, without getting their balance. So we have to have the balance, the balance is growing up very quickly. They're growing up more quickly than our credit cards and cash loan business and we have to park that money somewhere. We don't want to fund a longer-dated credit portfolio with short-dated current account money so we pocket the mainly reportable high-grade Russian bonds, so it's mainly ruble bonds, a little bit of Eurobond where we can match the currency positions. So that's how we think of it. So that means that following that logic, the current account portfolio is growing very quickly, as I said, the balance growing with it and that means that our bond portfolio could grow quickly with it and therefore the loans-to-asset ratio will change -- would decrease even further. That's fine.
Right. My second question is regarding the IFRS impact and I respect that maybe it's a bit technical question. But did the IFRS transition, IFRS 9, did that impact the accounting of interest income in any way?
It's mostly affecting impacting our loan balance and loan loss provisions for the balances. It is affecting interest income, but to a lesser degree.
All right. I respect that it's difficult to give...
How deep I should go into the specific calculations, but it's not so material.
Okay. All right. All right.
It increases a little bit because of these changes, but not so significantly as the loan balances and therefore it has a negative effect on gross yield.
With this, we conclude our question-and-answer session. And I would like to turn the call back to our speakers for any additional or closing remarks.
Sure, thank you very much, indeed. I'm sorry, we have some more questions, okay. Who's on? We have another question, apparently. Carlos?
[ Dmitry Tribivolsky ] has a follow-up question.
I just got one more, which I was [indiscernible] listening to the answers. That new resolution to issue up to 5% of your shares, if you have any color on that like are you [ asking ] advanced negotiations? I presume you cannot give so much color, but just tell us like do you really think you can buy someone like in the next 12 months? Or that's just something standby that you want to have in case you find someone?
This is Sergei. Look, we routinely use our annual shareholder meeting to take care of certain Board of Directors' authority. And as we become just a notch more acquisitive and we start looking around for interesting fintech and technology stories, we just thought it would make sense for us to bring our sort of M&A positioning in line with market practice. We looked around and we saw that the going practice in the market is for companies like ours to have a standby authorization for the board to issue up to 5% of the outstanding shares to be potentially used as a payment method for small-time M&A transactions. So that was the reason why we included this particular line item into our -- into the agenda of our annual shareholder meeting. And the first part of the resolution was passed. So the shareholders granted this authority to the board to issue up to 5%. However, the shareholders basically voted for us to come back to them with request to supply preemptive rights. So basically, this means that even when we come up with a potential M&A transaction, we'll need to come back to the shareholders' request and authorization to proceed with it and if this application of preemptive rights is going to be required.
And we have another question from Carlos Botelho from Limiar Capital.
Oliver, this is Ravi Vish from Limiar Capital. Question again on impact of IFRS 9 on the income statement. Do I understand that it increased or decreased the interest income slightly? And could you also comment on the impact on any other item in the income statement?
Sure, Ravi, Ilya will take this question.
Yes, interest income was slightly increased for a few hundred million rubles, like RUB 400 million probably in this area.
Almost [indiscernible]
All right. Any other impact on any other...
Sorry.
Any other impact on any other item in the income statement?
Yes, you saw that there was an increase in fee -- credit-related fees.
Okay. So what you think is the impact on the net income at the end of the day?
The impact on net income is approximately, on a pretax, it's RUB 250 million, net interest income, right. And then -- negative. So basically, with some, the deferred tax itself is about RUB 200 million on bottom line.
Okay. RUB 200 million negative on the bottom line, correct?
Absolutely.
I'm sorry?
Absolutely, right.
And there are no further questions in the phone queue, and now I would like to turn the call back to our speakers for closing remarks.
Okay, thank you very much, indeed, and have a good morning or evening depending on where you are. Bye now.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.