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Good day. And welcome to the TCS Group Holding First Quarter 2020 IFRS Financial Results Call. [Operator Instructions] Today's conference is being recorded.And at this time, I would like to turn the conference over to Oliver Hughes. Please go ahead, sir.
Thank you. And good afternoon to everybody. The first quarter of 2020 was a very eventful one. We reported a strong net profit of RUB 9 billion, up 26% year-on-year and amounting to 37.5% ROE. Despite the fact that towards the end of the quarter, we had to deal with the repercussions of the oil price decline and the COVID-19 outbreak. We also decided to be super prudent to create hefty additional provisions through adjustments to our IFRS 9 macro factors. While Ilya will take you through our first quarter performance in more detail, I feel it's important to provide the latest on the impact of and our response to the COVID-19 crisis.Please, could you turn to Slide 3 of the presentation. You can see on this slide that we have experienced a noticeable step-down in activity across some of our businesses. If we look at the April averages relative to the first 2 weeks of March, our card transaction volumes were down 38%, predominantly driven by a decline in offline volumes. Our SME clients' revenues were down 13%, while gradually recovering from the lows seen at the end of March. And our online merchant acquiring volumes were only down 4%. This was a big shock. Well, the good news is that we are seeing stable behavior now and even some mild improvement. Of course, time will tell how these metrics will evolve over the next several months. But while negative, the situation looks manageable. In some businesses like Tinkoff Investments, we are even seeing noticeable improvements with average brokerage volumes for April up 15% relative to the first 2 weeks of March.So how did Tinkoff deal with this shock? I'm proud to say that over the last few months, Tinkoff Group demonstrated many of its capabilities and showed its best qualities. We showcased our ability to adapt quickly, our resilience in responding to external shocks, our commitment to building mutually beneficial relationships with customers and stakeholders, our ingenuity and creativity in developing new solutions on the fly. This is illustrated on Slide 4.Our first priority was to safeguard the health and safety of our employees while ensuring total business continuity for all of our customers. Testament to this swift and early response is the fact that we only have 19 confirmed COVID-19 cases, all of them mild, I'm glad to say, among our 27,000 employees. By the second week of March, way ahead of the rest of businesses in Russia, over 95% of our office-based employees had successfully moved to homeworking. Today, only around 150 critical employees remain in the office.Our 3,000-or-so smart couriers continue to deliver our product all over Russia. They are all equipped with the necessary PPE, or personal protective equipment, and are still carrying out over 25,000 meetings per day, despite the difficulties with logistics due to lockdown. We have decided to reward their commitment and the dedication of other front-line staff by increasing their compensation by 15% to 20% during this difficult period. We have not seen any loss in productivity or employee engagement, despite the rapid move to a remote-working regime.All of us at Tinkoff recognize the difficulties that our customers are facing. We see it as our social duty to provide support to those in need at this time. We have, therefore, earmarked RUB 1 billion in social programs to help the community in which we live and work. We've deployed our cloud-based home call center platform to assist the Moscow City Government and the People's Social Front with fielding calls from people beset by COVID-19 and related problems. We've also helped hospitals.We are proactively assisting troubled borrowers by offering both government and proprietary restructuring programs, details of which we'll provide later in this presentation.As we know, the small business has been severely impacted by the lockdown measures. Across our 500,000 SME customers, we saw a 28% average decline in revenues for the first week of the lockdown period and a 21% average decline for the first 3 weeks. Expectedly, the most severely affected were travel agencies, beauty salons, sport and entertainment companies. We are, therefore, assisting small business to move their operations into the cloud, move online. We've lowered online acquiring fees, and we're participating in the government initiative to provide loans to lockdown-hit small businesses for them to continue paying the salaries.As we have communicated in several investor updates over the last few weeks, we have adjusted activity in our credit business lines to prepare for the expected macro deterioration caused by the social distancing and the decline in oil prices. We have shifted resources from sales to pre-collection and collection, listed out various collections and restructuring tools and introduced time to origination standards with our credit card approval rates now down to around 10%. Thus far, we can say that the deterioration in asset quality, while noticeable, is manageable and stable. The requests for payment holidays are much lower than our initial expectations, as Ilya will show later.We noticed a sharp increase in delinquency rates in the beginning of April, for the first week, up by around 30% since pre-lockdown levels, but these have now settled back down to just over the pre-crisis levels. While these signs are encouraging, we're very conscious of the low visibility and plan to remain cautious for the foreseeable future. We are, therefore, focused on keeping risk costs, liquidity and OpEx under tight control.But this is not all about crisis management. We have opportunities to grow as well. Tinkoff Black is performing very well, and we have continued to grow our customer base into the crisis with a record 608,000 new accounts opened in April. And Tinkoff Investments is the star in this regard. The number of downloads of the Tinkoff Investments app evened out over a number of downloads of our main yellow mobile banking and lifestyle services up for a spell of time. We've been the #1 retail broker in Russia by a number of active customers for the fifth consecutive month since December 2019, which has led to record inflows and transaction volumes.We launched a new process to onboard customers without the need for a physical meeting. We redesigned and improved the web terminal for traders. We launched 6 new currencies that can be traded at the interbank rate. We began a series of online events, webinars and investment shows. These new features contributed to over 600,000 new accounts opened year-to-date. As a result, we have now hit the over 2 million brokerage accounts.We had record inflows in April of RUB 23 billion, and this all led to a 12% year-to-date increase in the average balance. Over 250,000 customers also used our investment social network, Pulse, which has been a runaway success. We have also had the challenge of strengthening engagement with customers, despite social distancing measures. As you can imagine, we have several natural advantages over the competition here who were hamstrung by their reliance on their physical network. Thanks to our digital model, our ability to communicate with customers has never been more relevant as Russians spent time in lockdown.Our monthly active users and daily active users, MAU and DAU, have continued to grow throughout the last few months. Now we're reaching 5.6 million and 1.8 million, respectively, from 5 million and 1.6 million at the end of 2019. And we've been active in introducing solutions and offers that meet the new reality. We have gone against the overall trend and increased cash backs and discounts for Tinkoff Black customers on online services, products and subscriptions that are particularly in demand during isolation.Tinkoff Mobile has implemented functions allowing customers to open accounts through virtual SIM cards. Tinkoff Business has launched their service, allowing the self-employed to register remotely with the tax authorities and easily manage their income and taxes. Tinkoff Car Lending launched an online service for car dealers, allowing customers to apply and receive a loan without leaving their home. The pipeline of new products and solutions for the rest of the year is very busy. As in previous crises, we look at this as a time when we will come out even stronger yet again.As you can see on Slide 5, Tinkoff is an agile yet sturdy cutter. We're able to grow quickly, but in the good times, we never compromise our ability to withstand future shocks. The management team running Tinkoff is now going through its third severe crisis, following the challenges of 2008, 2009 and 2014, 2015. We know how to handle these stress situations, and just as important, we know how to make the most out of the opportunities that arise during these periods. Underpinning this are a range of advantages, not all of which we had going into the previous crises. We have a large loyal and engaged customer base as evidenced by our high and growing MAU, DAU and uploads.We have strong brand recognition. We have a flexible operating model that is easily adaptable to all environments with a lean organizational structure and over 1/3 of our OpEx being variable costs that can be quickly switched off and when required.Our underwriting standards are conservative and we've had 30% hurdle rate, ensuring large buffers for potential downturns. Our revenues are increasingly diversified with over 1/3 of them coming from less cyclical fee-generating business lines.Our liquidity is incredibly strong. We have RUB 210 billion of cash and investments on our balance sheet, covering 50% of customer accounts, which have been stable throughout the fourth -- sorry, the first quarter and growing into the second quarter. And our capital ratios are comfortably above the minimum requirements. Importantly, we're confident that this year, we will generate profit and maintain adequate capital ratios.Turning to Slide 6. You can see that our high margin business lines, the increasing contribution from fee-generating businesses and our high share of variable costs ensure that we can remain profitable, despite a meaningful increase in cost of risk. Tinkoff's loss absorption capacity means that we can withstand an increase in cost of risk of 2, 2.5x relative to 2019 and still stay bottom line positive.We're often asked how this crisis compares to 2014 to '15 -- and '15 for Tinkoff. Slide 7 should help answer this question. All the values and policies that have made us so successful and resilient over past years remain in place. We have a customer-centric ecosystem approach. We systematically test and learn, constantly testing new processes and analyzing. We base our decisions on NPV models with a 30% hurdle rate, building a safety cushion that book for future crises. We issue small-ticket and short-duration unsecured loans. We implement a strict low-and-grow credit limit increase policy. We price for risk. We proactively pre-collect, remote collect and remotely enforce through the court. We ensure assets and liability duration is matching, and we hedge all FX risk and swap to maturity.Added to these core values and policies is Tinkoff's stronger structure as of 2020. Relative to 2014, 2015, we have significantly more diversified assets with credit cards amounting to 60% of our total book versus over 90% in 2014 to 2015. We are better diversified funding with customer accounts now accounting for over 80% of total liabilities versus less than 50% in 2014. And we have more diversified revenue and bottom line contributors with fee, commission and insurance income, covering more than 100% of admin expenses, and this was virtually nil back in 2014.We have substantial loan loss provisions despite a more diversified, lower risk loan book and a more mass affluent customer base. We have very sizable liquidity buffers with 35% of our assets being cash and investments higher than we've ever had in our history. And we have very comfortable capital levels and leverage. Our customer base is larger than ever and growing, having reached almost 11 million customers at the end of quarter 1 versus less than 3 million back in 2014, 2015. This customer base is also more engaged than ever, benefiting from a suite of credit, transactional and lifestyle products that is significantly broader than the predominantly credit card offering we had back in 2014, 2015. All this gives us the confidence that we can take the current and upcoming challenges and come out on the other side stronger than ever.On that, I'll hand over to Ilya for more details.
Thank you, Oliver, and hello, everybody. Additionally, I will start with the balance sheet composition on Slide 9. In the first quarter of 2020, our assets grew 4.7%, with the lending business starting to get tighter on disbursement in March in anticipation of more serious lockdown in April. At the same time, our cash balance and securities portfolio continued to grow at a healthy pace, changing the composition of the assets, with net loans decreasing to 55% of the total.On Slide 10, you can see that the gross loan portfolio increased by 4.2% or RUB 16 billion to RUB 400 billion. The credit card part of the loan book was the main contributor to this growth with 353,000 new credit cards utilized. The share of secured lending rose to 16% of the total book, while point-of-sale lending stopped growing.Despite our NPL ratio inching up sequentially to 9.4%, our NPL coverage increased by 14 percentage points to 170%. This was largely due to a RUB 5.9 billion increase in provisioning due to adjusting our IFRS 9 macro factors. This was done in response to the expected macro deterioration brought by the COVID-19 outbreak and the decline in oil prices.In fact, the next slide, Slide 11, shows that these macro factor adjustments led to an increase in the provisioning of Stage 1 loans that rose from 4.7% to 6.2%. While there was already a small increase in monitor and substandard group of loans, throughout 2020, these 2 groups will increase more significantly. And the current macro factor buffer will be partially used to cover for this growth.Slide 12 shows some statistics on the restructuring programs that we started offering towards the end of Q1. We can highlight 3 main types of programs: The first is one set out in Federal Law 106, which gives payment holidays of 6 months to customers with a decline in income over 30%, and which cuts the allowed interest rate over that period. Eligibility for this program is quite stringent. We, for us, can offer our clients 2 types of proprietary programs: A, a restructuring option of up to 3 months or a 1-month temporary relief program. So eligibility criteria for our own programs are less stringent and are more flexible for customers and for us.For the period between March 20 and May 12, we have given 1-month temporary relief to 115,000 accounts. We have restructured 24,600 accounts based on our own restructuring programs up to 3 months, and we have restructured 2,200 accounts based on the Federal Law 106. In total, we have received about 274,000 requests for restructuring, and the pace of requests is declining every week.The group's funding structure can be seen on Slide 13. Total quarterly growth of the group funding was 5.9%. Most of the growth came from retail term deposits and current accounts, while the account balances of SME seasonally decreased. Nevertheless, customer acquisition in these businesses has not stopped, as you will see in the following slide. The top-right chart shows the currency composition of our customer accounts, and you can see that the depreciation of the ruble in March led to some lower funds from rubles to dollars. This is typical in Russia when the ruble sharply depreciates. One of our customer management policies allows to convert time deposits among currencies without losing accrued interest, which our customers like. It allows us to preserve their funds in the bank so that the volume of deposits we're growing prematurely remains very low.Slide 14 shows, from a different perspective, our strong liquidity position. First, 83% of our assets are expected to mature within 12 months, meaning our portfolio naturally turns into cash very quickly. Second, our credit card portfolio is an important liquidity management tool for us. When we reduce issuance and credit limit increases, the net repayments from the credit card book immediately bring a whirl of cash to support liquidity in stress situations.On Slide 15, you can see that shareholders' equity remained almost flat quarter-on-quarter due to the negative revaluation of bonds in our investment book and payment of the fourth quarter dividend. Our Basel III CET1 and Tier 1 ratio remained, nonetheless, stable at 15.5% and 19.2%, respectively.As for our statutory ratios, please turn to Slide 16. Our statutory N1.0 increased to 12.8% as the statutory cost of the bank grew proportionately faster than risk-weighted assets. The statutory core capital adequacy ratio, N1.1, is hovering around 9%, and we think that our capital adequacy ratios are comfortably exceeding the minimum requirements and do not foresee any problems with keeping them at these levels, even in the current uneasy situation.Net interest income can withstand doubling of paid risks. It is supported by other income sources and flexible cost structure. Additionally, the relation of the investment book does not affect the statutory capital adequacy ratios.And now some comments on our profit and loss statement. Starting on Slide 17, where we show the distribution of our revenue by major types and the growth dynamics. We can see that the total revenue increased 38% year-on-year. 1/3 of the revenue is coming from noncredit sources. More importantly, noncredit revenue is growing faster than operating costs and now covers more than 100% of total admin and 3 quarters of all expenses. Cost management is critical during crisis times, and our cost structure allows ample room for maneuver, especially on the acquisition side.You can see it on the next Slide 18 that in the first quarter of the year, acquisition costs already declined as a proportion of total costs, and we are perfectly able to reduce it further, if needed, especially in the lending businesses. However, right now, it's not that -- the moment in our view. And we still see several areas of our business where we can invest profitably and support the development of our franchise. Interest income grew 37% year-on-year and 5% quarter-on-quarter to RUB 31.5 billion. I'm turning to Slide 19. This growth corresponded to the growth in the loan book. Gross interest yield on loans was also stable quarter-on-quarter at 29.7%. Interest expense increased 26% year-on-year and decreased 5% quarter-on-quarter to RUB 5.6 billion. Cost of borrowing fell to 4.8% in the first quarter.On Slide 20, you can see that net interest income grew 40% year-on-year and 7% quarter-on-quarter to RUB 25.3 billion. Net interest margin declined 1.5% year-on-year to 20%. So it was relatively flat in the first quarter. It's worth mentioning again that, historically, we observed certain seasonality in our cost of risk where risks go down in December of each year and climb back up in January, February of the next year as a result of longer holidays and shorter collection periods. And first quarter of this year was not an exception. And the macro factor risks went up from 8% to 9.9%, pushing our risk-adjusted net interest margin down to 12.9% (sic) [ 12.2% ] due to the risks we now detect.And as I hinted earlier in the presentation, the adjustment to our IFRS 9 macro factor changed this picture significantly. Given our strong capital position and conservative approach to asset quality, we used a relatively heavy hand and decided to sizably form low provisions adding RUB 5.9 billion of expenses, which brought our cost of risk to 15.9% and our risk-adjusted net interest margin to 7.6%. These macro factor adjustments will be utilized in the upcoming months to asset growing delinquencies and restructurings called by the COVID-19 pandemic.The next 2 slides will give more granular information about the unsecured and secured part of the loan book, including gross yield and cost of risk. Slide 21 shows the more mature unsecured loan book, where you can see a mild deterioration in asset quality, but still very attractive risk-adjusted margins.Slide 22 shows the younger secured part of the portfolio, where the risk parameters and nonperforming loans are not yet fully shaped on fast-growing portfolios, but heading in the right direction, I think. You can also see how the macro factor adjustment changed cost of risk curves on both secured and unsecured, and the latter was obviously affected more severely.Our fee and commission income, Slide 23, grew 31% year-on-year and amounted to RUB 10.2 billion for the first quarter. Quarter-on-quarter, fees were almost flat due to the low seasonal for SME and other transactional businesses, offset by fast-growing revenue from our brokerage operations.The Tinkoff Insurance portfolio more than doubled year-on-year and amounted to RUB 4.8 billion for the first quarter of the year, led by credit-related insurance, which follows the lending business growth. Nevertheless, auto insurance provides almost 1/3 of all our insurance premiums.Our current account business is growing steadily as we acquire more and more customers, as you can see on Slide 24. At the end of the first quarter, we had over 8.1 million current account customers with RUB 225 billion on balances. For seasonal reasons, the transaction volumes were flat. Fee and commission income still rose 21% year-on-year, despite the decline in interchange income. The blue box on this chart, which declined due to the recent change in tariffs.Our SME business, which can be seen on Slide 25, is also growing despite some seasonal decrease in account balances and transaction fees. As of the end of the first quarter, we had 545,000 customers with almost RUB 51 billion in balances on accounts, and we earned RUB 2.6 billion in fees in the first quarter in addition to other income.On Slide 26, you can see operating statistics of Tinkoff Investments, which is profitable and is growing remarkably fast. You can see that the number of customers grew more than threefold year-on-year to 1.4 million. Quarterly transaction volumes exceeded RUB 1 billion compared to RUB 100 billion a year ago. The total balances held on accounts have grown over a year to over RUB 85 billion. Fee income grew almost 7x year-on-year and almost doubled compared to the fourth quarter of 2019. This business' contribution to group results is becoming more and more visible with the kind of cyclical revenue growth coming at a very useful time in this difficult year. This is one area of the business where we will continue to invest into our platform and product development as well as into customer acquisition.If you could, please turn to Slide 27. Throughout 2019 and in January, February of this year, we have accumulated significant positive revaluation of our bond portfolio. We do not frequently trade bonds, and therefore, usually keep this revaluation as additional capital. And this time, we decided to realize its positive gains at the beginning of 2020 and to commence them into the calculation of statutory capital adequacy ratios. The total pretax amount of our net trading gain in the first quarter of 2020 exceeded RUB 3.3 billion, but clearly a very timely decision, given the deterioration in bond prices towards the end of March.Overall, we were able to show a quarterly profit of RUB 9 billion, which is 26% higher compared to the first quarter profit last year. There was a decrease in net income quarter-on-quarter, which is explained by the usual seasonal effect in credit and some key businesses. More importantly, it's explained by macro factor adjustment, which has amounted to RUB 4.6 billion after-tax. If not for the macro impact, our net income would have been RUB 13.4 billion, our regional equity would have been about 55%, and our return on assets would have been above 9%.Now back to Oliver.
Thanks very much, Ilya, for a great presentation and definitely some exceptional financials in the difficult period.So just to round up. If you could please turn to Slide 28, where we'll discuss the outlook for 2020. As you can see, we've decided to officially withdraw our previously issued guidance for 2020. The current operating environment is too uncertain to provide pinpoint estimates of our financial performance for this year, as I'm sure you can appreciate. As such, we would like to comment on certain trends that we expect for the rest of 2020, mindful of the fact that the situation remains fluid and may change quickly. As for our loan portfolio, the gross loan portfolio, we expect it to be in steady-state with the net portfolio being negatively affected by rising provisions.On cost of risk, we expect it to remain elevated given the necessity to front-load provisions and the expected migration of loans to Stages 2 and 3.On borrowing costs, we expect them to decline year-over-year, thanks to our continued success in gathering retail current accounts from the declining rate environment.On the bottom line, we do not currently see a scenario in which we do not generate a profit and maintain adequate capital ratios. This underpins our decision to pay an interim dividend of RUB 0.14 per share within our existing dividend policy.So to conclude, there are 3 messages that I want investors to take away from today's call. First, we're better positioned to weather the storm than we have ever been. We have the right business model, a strong customer and brand loyalty, the necessary liquidity and capital buffers and extensive management expertise.Second, while we're not in a position to provide guidance for 2020, given what we know now, we see no scenario in which we do not generate a profit and maintain adequate capital ratios this year.Third and lastly, the long-term prospects for our business are excellent. We think this crisis will prove once again that our strategic direction, our technological and digital capabilities, our data-driven approach, our approach to customers and stakeholders and our all important organizational DNA, all give us a sustainable growing business into the future.And on that, I'd like to conclude our opening remarks, and we'll hand it over to questions. Thank you.
[Operator Instructions] And our first question comes from the line of Andrew Keeley of Sberbank.
A very detailed presentation. It's very helpful. A couple of questions on it. In terms of your asset quality and your cost of risk and you talked quite a lot about the 6% macro adjustment impact on your cost of risk and the kind of ensuing impact on your profitability. Can you share with us any color on the changes in your main kind of macro assumptions that underpin this in the first quarter, whether that relates to how you think about GDP growth for household consumption, et cetera? And should we expect that basically the kind of major macro changes are now behind us, given that you have more visibility now on -- some more visibility on the kind of business outlook? And hence, should we see the kind of 9.9% cost of risk, which you've been flagging, excess macro input, more or less is a kind of base to work from going forward? That's my first question.
Thank you. Ilya should take that to kick off.
Yes. I'll [ probably try and visit out ] to help some. Right, we have to think hard how we adjust macro factor to accommodate all the tendencies that we saw in April -- in the beginning of April. And I can say right now that there were following drivers in the macro factor that we have calculated. So first and the heaviest was the worsening of roll rate. So basically, the loans that go from current to first delinquency and from first delinquency to second and et cetera. So we took this worsening of roll rate in April and extrapolated the forecast to 12 months as we have to, basically, look for the non-NPL loans at a 12-month horizon. And the total effect of this worsening of roll rates was approximately RUB 4.6 billion.Then second is the restructuring. So we looked at the restructuring as we were coming out in April and changed again -- made a forecast for restructuring in the few upcoming months. And obviously, the probability of default of the lower restructured is higher than of those who are continuing to serve at the usual pace, and effect of this was approximately RUB 900 million.And then when we look into the first quarter already NPL, we also had some conservatism there and given default because we see that in April, payments from these reported customers has reduced, and obviously, that -- they're going to be worse than usual for the few upcoming months. And therefore, that added approximately RUB 4 million -- RUB 400 million. There were smaller effects. So for example, the 106 lower restructuring is used in some profits in the future, but that -- these effects were really small. So the first 3, I mentioned, are most important.
Thanks, Ilya. I guess a follow-up to that. I mean, so roughly 80% or so of the macro adjustments were due to the worsening of the roll rates. But from what I understand from your -- I think your -- all of these comments earlier, you've exceeded actually off that kind of quite sharp worsening of the roll rates. You've seen some improvement or stabilization more recently. So does that imply that we should think that there may be -- there shouldn't even be such a kind of -- certainly not nearly as a stronger kind of macro adjustment in the second quarter or even some kind of positive reversal or change in terms of your kind of macro adjustments?
So maybe I'll pick up on, Andrew. So our current thinking on this is based on what we see and a bit of gut feeling going on here because obviously, everyone is in unchartered territory. We believe that once lockdown, maybe the quarantine as we call it in Russia, is loosened, and we probably -- we think that's probably going to start happening basically from the end of May, mid-June. Then on the one hand, you're going to get some easing of the problems that have been caused in certain sectors of the economy. But on the other hand, you're going to get customers who are -- who have experienced problems in terms of, let's call it, disruption to their household income. They've got some cushions in terms of cash, which they've been using. So they'll be continuing to service that -- the loans. But by that time we get to the end of the summer into the autumn, they then -- their cash cushioning and reserves, household reserve may have started to run down a bit. So really, it all very much depends on what we see happening. Let's say, the autumn time, as people come out with some restructuring programs, as people come out of the, let's say, semi-hibernation in lockdown and return to work. Have they got a job to go back to? If they haven't, what's the financial situation like at that time? Do we go into more of a V-shaped recovery or is it a longer recessionary scenario? So until we know the answers to that, we can't really answer your question. But our feeling is that we definitely need to be erring on the side of caution, which we are as you can see from the macro provisions that we've made, the macro factor, and the continued conservative stance that we'll be deploying over the next few months until we have a better answer to that question.
Okay. Fair enough. I guess the second question is still on asset quality, a bit of a different angle. It's good. On the slide you showed the kind of some of the main business parameters, how they are different now from 2014, '15, and a couple of things that stand out. So obviously, the composition of the loan book is quite different now. I'm just wondering how you think about your loan loss provisions, which rose very nicely in the first quarter to 16% of gross loans against the kind of 21% peak then. And obviously, your coverage went up pretty strongly, too. Do you feel that, that kind of 16% provisioning level is something that you feel is unlikely to go much higher from here, given what you said about how the book looks now compared to where you were previously and given what's happened with your coverage?
Ilya, do you want to start on that?
Well, you're absolutely right in saying that our -- the competition of our portfolio has changed significantly from that time. And when you look -- if someone wants to compare apples to apples in 2014 and now, it's better to look on unsecured book, a little bit unsecured because it's obviously different dynamics there. But another thing, which is, I think, different between these 2 credits is that we now see that 2014 was more V-shaped, while -- as Oliver mentioned already, in this case, there could be a more prolonged period of credit deterioration. Right now we -- I don't think that I'm in a position that -- to say that the second quarter reserve would be significantly better than the first quarter. But the macro factor which we turned on for the first quarter will absorb some of the problems that we're already seeing in our books in April, May.
Okay. And just a final question. On your Slide 12, you mentioned restructured volumes are 5.8% of the gross book as of the 31st of March. Does that mean that the restructured volumes kind of as they are now equate to that 5.8% of the book as it was at the end of March? And do you have any pointers on what we should expect in terms of P&L impact from that kind of level of restructured volume?
Well, the immediate P&L impact is not very significant because there is no loss, no significant loss of accrued revenue. And most of these loans will -- most of these customers were getting a temporary relief for one payment. They are still in the first stage loans. But obviously, they expected probability of default should also increase. And later, we will see growth in their expected probabilities of default. Hopefully, our macro factor adjustment is enough to cover for this increase in their individual risk.
We will now move to our next question from Mikhail Shlemov from VTB Capital.
Several questions for me. First thing which I wanted to ask is actually about the performance of your SME clients. You noted that just like the offline activity has been significantly down by around 30%. And I was wondering, whichever -- even with your -- loan portfolio to let me think of timing, I was wondering how we should think about your SME base by the end of the year, assuming the macro scenario we should be looking at? Should we see a fairly significant fee base with a number of these SMEs we're actually closing and then starting to grow again or how we should be thinking about it?
Mikha, thanks. You're talking about the number of customers in the SME customer base, yes?
Yes, exactly. Basically, the number which is driving fee and commission income on the current accounts for SMEs.
Sure. Sure. Because as you correctly said, our test loan portfolio for SMEs is very small. It's basically around RUB 1 billion. So fortunately, we're going into this crisis, a lot of which is basically an SME crisis, unfortunately, with a very small loan book. And we can see how it performs, but there is absolutely no material impact on our -- on overall business. So if we come back to your question, we currently have around 450,000 customers -- active customers, and they -- the numbers are stable. We'll have to see what happens over the next 6 months to our SME customers, particularly on the vulnerable end in the service sectors and tourism, that kind of thing. But right now, the numbers are stable, and we even see signs of maybe growing that customer base a little bit because we have some advantages in this space. So for a customer to open an account in a financial institution today is actually quite difficult if you have to go somewhere offline. In our case, obviously, it's all online. So we have all that sorted out as we always have them. So the account opening procedure and servicing are obviously seamless to customers whether they're locked down or not. And we're actually seeing -- if we're seeing less new companies formed for obvious reasons during the crisis, and therefore, less new customers coming from that pocket of our newly created companies, we are seeing more customers from the existing pockets of companies coming to us. And then I think -- we're thinking of ways of actually taking more of that market from existing companies. They're normally of a larger size, and we're seeing some encouraging signs. So we think that our SME business will grow. It will probably grow in customer numbers. It's actually shown very robust performance in terms of its topline over the last couple of crisis months. And we actually hope that it's going to increase its contribution to operating income this year. So I don't want to overpromise that, but that's our expectation as things stand at the moment.
Good. Oliver, perhaps, you could share the share of SME clients, which are actually in the vulnerable industries like services, I don't know, coffee shops, travel, beauty salons and so ever, just like to give your estimate.
Sure. Yes. I mean I gave you some numbers in my presentation, and it's in, obviously, the presentation Ilya went through, which gives you a bit of an insight into this. So without giving the actual numbers of SME customers who are actually in these vulnerable brackets because [ stalled ] the information in my head, I said that the turnover on SME accounts dropped by basically over 30% in the acute couple of weeks of the crisis, which is basically last week in March, first week in April. And has then since picked up, and so we're now only down by 22% relative to what we saw in before the crisis, basically in February, March -- early March. So this is customers moving online or just the business is picking up, the volume is picking up in general.
Excellent. Just like -- the second question, which I want to ask was actually about the growth yield. It was actually a little surprising to see that the growth yield holded up so well in the Q1 as the loan mix should have been contributed to somewhat low level of the yield. But nevertheless -- but I was wondering, the significant restructuring efforts which we are doing, obviously, with our loan book turning over quite a bit as your approval rates went down quite dramatically. How does it impact the gross yield outlook, which have been shared previously? We were talking about 3 to 4 percentage points compression per annum. I was wondering how the recent events changed the plans and thinking of yours.
Ilya, do you want to take that?
Yes. It was a pretty bad line. But as I understood, the question is about how the restructurings will affect the gross yield going forward.
How restructuring and lower customer acquisition will affect gross yield, yes.
Well, the restructuring -- the programs that most of our customers take, they do not affect the group gross yield, per se, because there is no significant deterioration of yield, except for the program candidacies. There is a deterioration of yield, but these -- the number of these restructurings is relatively small. The decrease in customer acquisition, obviously, will have to -- will have a negative effect on gross yield. But again, that's not going to be a very significant one. Still, we -- over a year, we will see a certain reduction in our gross yield, but it's -- it will mainly come from the diversification of our loan portfolio.
[Operator Instructions] We will now move to our next question from Andrey Kulakov from Gazprombank.
Congrats for the great performance in difficult times. I guess a couple of questions. The first one is about -- probably, I missed that, what the macro assumptions you used for your macro provisioning. And the second question is how you expect the interest rate of your loan book to be seen this year? I mean, the key rate decline probably will be even lower? And what are your expectations in this regard or your implications for your loan book? And on the deposit side, at what level do you think that retail deposits -- at what level of the interest rate, retail deposits you think will be particularly sensitive to the outflow?
It looks like that the third part of the question was exactly what Andrew Keeley asked a little bit earlier, right?
[indiscernible]
So again, so the working of roll rate subsequent to the end of the quarter, the working of PD of customers restructured and decrease in LGD for the NPL customers. These are 3 main part -- 3 main variables in our macro factors...
Yes. That's understandable. And have you used like general macro factors like the GDP decline this year on...
No. No, Robert, we don't see a significant correlation -- proven correlation between the GDP numbers and the performance of our book.
And sorry, Andrey, on the second part of your question, I didn't understand. Was it -- this about yields on the loan book or is this about retail deposit rates?
It's about both. I mean the key rate decline. I'm just wondering how the interest rate of your loan book will be seen. And at the same time, my question was about at what level the retail deposits rate, according to your expectations, would be sensitive to some outflow or volatility?
Okay. So the change in the gross yield on the loan book, as Ilya mentioned a couple of minutes ago, will drift down, not because we're repricing loans, but because we're -- we'll see a further evolution in the loan mix, yes? So you'll see more loans, larger loans, which have -- which are secured loans. This is mainly home equity and car loans. Less car loans at the moment for obvious reasons, but we're still disbursing some. This changes the overall composition of the loan book. And this is a drag factor on gross yield as a result of the different loans that we're going into. So it's different loans in the loan mix, which have a lower yield, but lower risk. So that is a long-term trend, and that will continue throughout the crisis as we continue to originate customers in secured and unsecured lending. So we will not be repricing if that was your question. The question on retail deposits. So yes, the key rate has gone down, and we think the market view seems to go down further based on -- and this is now [indiscernible] latest statements. The market in terms of deposit rates has actually gone down a little bit recently. We're going down with it. So our deposit rates have actually been reduced a little bit more in the recent date. So we'll stay in line with the market. We don't need to have a rate of deposits which is above market because we're not in a major deposit collection phase because we're not growing the loan book particularly at the moment, yes? As we mentioned earlier, we don't expect the gross loan book to grow. We would call it steady state, and that's where we want to keep it. So that means we don't need to raise extra funding, which means we don't need to put our deposit rates up. So let's just sit mid-market where we're very comfortable, and that's actually lower than it has been over the last few months. In terms of outflows, we had our own stress tests a little bit earlier than the rest of the market, and we saw no outflows in the first quarter. We actually grew our retail customer accounts a little bit. And going into the second quarter, we're actually seeing, I wouldn't call it strong growth, but we're seeing quite noticeable growth in our current accounts and deposits. So we're very, very comfortably funded. We don't need to do anything in terms of our product or in terms of our rates. And we've got a deposit book which is growing. There's no outflows. There haven't been any outflows this year.
Okay. That's very helpful. And probably one more question about your customer acquisition expenses. Given the fact that your client expansion was one of the key goals, how low you think you could adjust this line in the period of prices? In other words, to what extent it would be reduced this year?
Ilya?
I think that we can reduce -- quite fast, we can reduce our customer acquisition expenses by RUB 1 billion, which we don't want to do right now at these things, but that's what we can do. Further reduction of our customer acquisition cost is possible, but it's getting more difficult because, let's say, it's really dismantling the whole acquisition machine. But again, if it's a real [indiscernible], then we'll probably can do more. As for other administrative expenses, we were also taking some measures taking some money. So we reduced the pace of getting new employees, for example, renegotiated some prices of [ current ] right now, obviously, every business is doing. And some other things where we're trying to optimize our costs.
The best way to think of this, Andrey, is -- sorry just to quickly add, the best way to think of this is hard landings, yes? So we're not in a hard landing scenario at the moment. We're still booking new customers. We're still developing a business in many areas -- most areas. So we're not viciously cutting cost, but if we need to, if we go into a real hard landing scenario than we can, Ilya said that we can fairly straightforwardly strip our RUB 1 billion cost per month. But then if we need to cut closer to -- into the flesh and closer to the bone, then we can take out a lot more than RUB 1 billion, but we're just not in that territory at the moment.
We will now move to our next question from Elena Tsareva from BCS Global Markets.
Congratulations with strong results in this really shaky environment. My first question is about your like expectations, not guidance, but expectations for this year in terms of state of loans for gross loans. If there is any like diversity-amount type of loans, maybe you see unsecured more under pressure. And maybe you heard from -- will you see more opportunities in secured, like in terms of growth or in terms of opportunities? And if this 10% approval rate is somehow differentiated among your different types of winning. This is my first question.
Sure. So it's -- it's very, very early days. We don't really have much visibility as to how this all -- is going to pan out over the next couple of months and even less visibility on what it'll look like by the end of the year. So again, it really depends on whether we have a V-shape type scenario where we can recover and start to grow on all cylinders again by the end of the year, which, in my view, looks unlikely, but who knows. Or more of a kind of U-shaped, or heaven forbid, L-shaped crisis. In which case, we won't be going back into growth mode this year. So it's very difficult to tell, but in terms of the split between secured and unsecured, the proportions are -- we retained the same proportions, let's say, broadly speaking right now in terms of disbursement rates. Some loan types, we've reduced a lot more. So we have a lot lower approval rates in personal installment loans, for example. But it's just too early to give you any meaningful steers on that because whatever I say now, maybe out to date in the next couple of weeks one way or the other, because, we are actually looking at ways that we can be a little bit more precise in our scoring and actually maybe increased disbursement levels a little bit from where we are today. So it's a bit difficult to give you some proper steer on that, I'm afraid.
Oliver, understood. Very clear. And my -- another question I have. So in a press release, you stated that actually benefiting from Rocketbank winded down the situation. But this maybe in total market given you have already set up a quite strong online platform. Maybe you can provide some color there, the views -- the benefit from like, correct to say now, from the situation of lockdown with your strong online platform compared to other banks, which may just started this online presence, if you see the opportunity, and just so -- some migration from other banks and [ fees ].
Sure. So again, it's very early days, but we definitely see an opportunity to grow our transactional customer base. The 2 main prongs of attack there are obviously Tinkoff Black, which is consumer current accounts, and the brokerage business through Tinkoff Investments. You've seen the numbers, so Tinkoff Investments is just firing on all cylinders and going extremely well, obviously, helped by tailwinds in the markets and in terms of what's happening to bonds and stocks. On the Tinkoff Black side, we are making some, let's say, product enhancements, doing things in terms of, let's call it, innovating further our onboarding platform. And if you look back to what we saw coming into the crisis, we were increasing the number of customers, the number of accounts that we were opening on Tinkoff Black anyway and that's continuing. So I'm not sure if April will be very -- representative because that was when people were readjusting. Well, hopefully, as we go into May and beyond, you'll see an increase in the number of accounts being opened for Tinkoff Black, but April was very robust as well. So there's certainly an opportunity. And what's driving that? Obviously, ease of account opening, strength of service, the fact that you don't need to go anywhere if you're sitting in self isolation or quarantine, and then somebody comes to you with a mask, gloves, sanitizers and all the other stuff and opens account. And that's not just on the Tinkoff Black side, that's all sorts of different products. There may be opportunities to grow our insurance online through direct channels, car insurance and other insurance products. Tinkoff Mobile with e-SIMs and offline distribution through a smart courier network as well. So there's lots of opportunities. It's obviously more difficult for clunky banks who rely on branches to continue their operations. I'm sure they're managing it by hook or by crook. So if you look at what's been coming out of the news recently, some banks have actually sealed their staffing branches. And they're living there as if they were on an oil rig for 3 months or whatever in complete isolation and talking to customers through 3 layers of glass. So there is something going on, but obviously, they don't have the underlying advantages that we do in terms of being online anyway. So we're using this opportunity. On the one hand, on the lending side, we're obviously cautious as you've heard at the moment. And so we understand how things are going to pan out. On the transactional business lines and noncredit business lines, in general, we're very bullish, and we're investing.
But just more follow up to these trends in online, so -- especially on this move to maybe more cashless economy, if you can comment -- if you see this real trend given all this fears around pandemic and viruses. Is it real to see more like less need for cash and [indiscernible] cash?
Sure. So again, this is looking through into the longer term. It's a very good question. So who knows what the world is going to look like in a few months' time. I think as employers of a large number of people, we're going to look very different. And I think everybody on this call understands that because we're working from home or remotely. So obviously, the world is going to change in terms of working practices. That's one rather obvious thing to say. But answering your question in terms of cashless payments, so I would put it slightly differently. The move to online as opposed to cashless payments, because there's a big swing to cashless payments anyway, especially in Russia, which is ahead of many markets in the world in terms of the technology deployed to move people to cashless payments, particularly penetration of mobile payments. So if you look at it in terms of online, my breathing of the situation is as follows. There are people who just don't do online financial services. They just don't do it. They may use cards. A lot of them will do, obviously, but they're not particularly interested, or they don't lean towards taking up new financial services to our online channels. And they don't use mobile apps and internet banking and whatever else. So they're more old fashioned. They tend to be older. And it's unlikely that, that segment of population is going to significantly change its habit. Then you have your younger online population who obviously were early adopters of mobile banking, and for them, it's just like breathing air to do all of their financial servicing online, and they're online anyway. And then you get this fairly big segment in between, yes, so they kind of -- maybe they're younger, but they tend to be, I would say, more middle aged. They are more willing. A lot of them are online, but a lot of them are not online. And it's this middle segment that I think has been forcefully moved so the inertia has gone, and they've moved online. They're doing everything online now. A lot of them are buying their food online. They're doing a lot of their nongrocery and nonessential shopping online. They're spending more time online because they've probably got more time in general on their homes. And they're -- a lot of them have been prompted to do their online financial services for the -- probably, maybe the first time, online. And so they've been given a bit of a jolt, which means that the addressable audience coming out of this crisis for us will be a lot larger. So it's -- then it's down to how we can access those customers and get them booked on to the Tinkoff platform.
We now move to our next question from Andrey Pavlov-Rusinov from Goldman Sachs. [Operator Instructions]
I've just got still a couple of questions. Although, all of them have been covered already. So basically, first of all, I just want to talk a little bit about the fee income and particularly, about the merchant acquiring and interchange fees. Essentially, it was a very good to see charts on merchant acquiring volumes dynamics in April, but maybe could you comment a little bit about what you expect from this regulatory cap on the merchant acquiring fees? And how it will impact the -- your fee income in the second quarter and first quarter? And also maybe just a bit broader, what is the share of online versus offline in your merchant acquiring overall? And also on interchange fees, basically, I noticed that even despite the fact that the volumes didn't really contract a lot quarter-on-quarter for the debit card transactions, that'd still be -- interchange fees declined a lot. So essentially, meaning that interchange margins have declined. Can you maybe explain what's driving it? That's my kind of first big question.
Sure. I'll kick off, Andrey, and then Ilya will pick over. So on the acquiring side, there is indeed a cap. It's basically for -- somewhat bizarrely in my view, given that it's the only part of the cards business, which has actually got a pulse at the moment. And there was a regulatory cap on merchant service fees introduced for the duration of lockdown, but basically, to the end of October, if I recall, end of September, 6 months, which basically cuts the merchant service fees that acquirers can charge for essential online transactions. It's not a major need or moving number. That's all. And in fact, it actually may help us penetrate some new segments, but it does apply a bit of downward pressure on some of the commissions that we get as an acquirer. But to be honest with you, I mean, Ilya, correct me if I'm wrong, I don't think this is going to register in our P&L results at all at the end of the year. It's not a major move. Just before I hand over to Ilya to answer that online and offline...
On acquiring, yes.
Just before you pick up or -- yes, sorry, I'll just wrap up the bit on online, offline. So in our case, well over 95% of our acquiring volumes are online. So we have a very small offline business. Ilya, sorry, over to you.
Yes. So on interchange, right?
Yes.
On -- I think you answered on acquiring. So yes, there will be, of course, negative to our operating income on acquiring in general, but that still gives us some opportunities. On interchange, well, basically, we started seeing a decrease in interchange in the fourth quarter when there was a decrease in our interchange rate for partially important category, as you remember. And then in Europe, there was a significant decrease in the change in our operation, which was always significant add-on for a -- that's why -- that is one -- and of course, continued into the first quarter. And second that is more seasonal is that the transaction in first quarter is a bit flat compared to the fourth quarter. It happens every year. And then in the first quarter, you are seeing some cash back that people getting for the high season in December. So there is also seasonality in the first quarter and it should change.
Okay. So -- that's basically -- some kind of margin should come back in the second quarter as probably there is lower cash back for the first quarter. So there should be some...
Yes. That's one thing. That's one thing. And second, market in general, we have to reassume its approach to cash back. Basically, cash back is the other side of interchange. And therefore, you just have to reduce cash backs for certain categories as well. Make it a market [indiscernible]
So if I may...
Yes, sure.
If I just may clarify, Oliver, your point about the acquiring fees that you basically expect very little effect on the overall of the year, do you mean that it's from -- there will be some effect on the rate, but the volumes will compensate for that. Is that what you meant or is there something else?
Yes. Yes. So there's 2 things I meant. Firstly, the volumes are obviously very perky. So the volumes haven't fallen in terms of online acquiring as people move their purchases online, and it's growing. That's number one. So that offsets somewhat the cap, which is placed of 1% on certain categories. The second is that by no means, all of our merchants, as an online acquirer, are in the categories which have been capped. So we have lots of other categories which are not capped. And there, in some places the volume has been falling a bit, some places have been growing. But generally speaking, the number that -- which will result from this, we don't think is a number which we'll basically register in our P&L at the end. Yes. So there will be a bit of a decline if you look at this very locally in terms of the acquiring business line on a standalone basis. But in terms of our overall results, it does make a difference.
That's very clear. And if I just may, just a little bit follow up on the restructuring. I just wanted to kind of again clarify. How do you usually kind of would provision for the restructured loans under their state programs, long holiday program? Would you -- if we assume that there is no asset quality deterioration that's directly linked to this restructuring, so just the pure effect of restructuring, would you move that loan and that like exposure to stage 2 loans? And would you apply the usual kind of coverage that you have for stage 2? Or could that be actually lower, say, in the second quarter onwards?
So their share part of restructuring is not -- it is important, but not the final words on how we -- where we place this loan into the first stage or second stage. It's more important the -- for the moving into the second stage, there should be a significant deterioration of the quality of the loan. And so right now, there is a temporary release that we are offering for the most of the customers who asked for that relief. We are -- we will leave them in the first stage. Again, we'll have to see what will happen in May. But for the month of April, well, the customers got into the difficult situation not because they are bad customers, and they're -- but a specific situation when they just temporarily lost that job. They have to stay at home and wasn't getting salaries for the month. So we'll have to see how this situation with these customers will evolve over the next couple of months. So we are fortunate that we have to report IFRS, not on a monthly basis, but on a quarterly basis. So we will see how the situation will point out. And by the end of the second quarter, we have -- definitely see for these restructured customers in the second stage. Some of them remaining in the first stage. Some of them going out of the problem state where they are right now. So it's difficult to say, but right now, well, if there would be -- we'll be presenting you a report -- IFRS report for the 1st of May. Then in this case, most of these 115,000 customers will be in first stage again.
Ilya, that's very clear. And just a final question for me. I just wanted to touch a little bit about your dividend policy, and how it's changing. Not the policy itself, but the decisions are changing with regards to some of the measures announced by Central Bank. So basically, one of the slide is showing that you are using one of the forbearance measures from the Central Bank. And recently, there was a communication from the regulator that they are asking the banks using the forbearance measures to move the decision on dividends towards later in the year. So does this, in any way, impact your ability to distribute quarterly dividends? Or given that you are paying on their parent holding company level, that's not really the problem for you. And you're paying from other sources rather than their local bank dividends. And also maybe if you could mention a little bit about what impact could be from this withholding tax decrease that's announced for next year in Russia?
Sure. Thanks, Andrey. We'll bring in Sergei Pirogov for this one.
Yes. Sure. Andrey, well, just to remind you that the basic philosophy underlying our approach to dividend policy has been unchanged for many years now. For us, it's a residual decision. So obviously, in good times and in bad times, we'll first make sure that we create sufficient adequate capital buffers for -- both for growth and for hypothetical deterioration of the credit quality of our asset base. We capitalize for growth. And whatever capital we feel is extra, we can recommend to the Board to distribute that to the shareholders. So this time around, this happens to be -- to work out at approximately $28 million. So that's exactly what we announced. This year is one where visibility for quarterly dividends is limited, and we'll have to play quarter-by-quarter. So for that reason, we are not issuing any split guidance for our quarterly dividends this year. So we'll continue to apply exactly the same approach on the back of our Q2 results and Q3 results and beyond. You're absolutely right that the amount of dividend payment is an integral decision for us based on the performance of all companies, which are members of our group, our holding company. And of course, the decision is integral as well. And of course, if the tax environment -- tax regime for the dividend payments changes, we'll stay compliant with it. And which -- and if we see that the tax rate that has to be withheld at source will be a hike, we will -- we'll be witholding 15% source as well.
[Operator Instructions] We are now going to move to our next question from Andrey Mikhailov from Sova Capital.
My question also revolves around asset quality. And the government support measures, as we all know, there was another package announced just a couple of days ago, which includes the partial reopening of the economy and very broad support measures to the general population, including payments to families of children, which I think could directly impact your asset quality improvement. And I will formulate the question in a way that, let's say, if you haven't yet factored this in, would you expect -- could there be a chance that your assumptions on the default rates and loss given default right now are actually on the conservative side? And would there be a chance for them to improve when you post your second quarter result in August?
Thanks for the question, Andrey. We're optimistic as well. We hope it will, but who knows in the situation. So this is just one factor of tens, dozens of different factors which influence the risk profile and ability to service the loans of our customers. So it's just way too early to speculate on that. So we maintain a conservative position. As usual, we hope for the best, prepare for the worst. And until we have much more visibility on what's going on inside the portfolio, and we won't get that for the next 2 or 3 months, it's just not -- it won't be helpful to anybody if we speculate on that. But thanks for pointing out to us.
As there are no further questions in the queue, I would like to turn the call back to our speakers for any additional or closing remarks.
That's it. Thank you very much indeed to everybody. Thanks for your time. And if you have any follow-up questions, as always, you know you can drop us a note. We'll turn that around as quickly as possible, and stay safe. Thank you. Bye now.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.