Equity Analysis /
Global

TCS Group: Strategy 2023 takeaways – Reiterate Equalweight

  • Yesterday Tinkoff presented its Strategy 2023

  • Overall the approach to doing business remains unchanged with client acquisition, product development

  • Tinkoff targets growing net income with at least 20% CAGR 2020-23F, reaching at least RUB75bn in 2023F

Evgeniy Kipnis
Evgeniy Kipnis

Senior Banking/Consumer Analyst

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Alfa
8 April 2021
Published byAlfa

Yesterday Tinkoff presented its Strategy 2023. Overall the approach to doing business remains unchanged with client acquisition, product development and cross-selling the key drivers of revenue and bottom line growth. With regards to financial targets, Tinkoff traditionally follows an “under-promise/over-deliver” approach, and the >20% net income CAGR 2020-23F with >30% ROAE target appear to us as relatively at the low end of what the bank actually has in mind. At the same time, after an 80% rally YTD (on the back of the Founder’s voting share conversion and MSCI inclusion) we believe the current stock levels already reflect more aggressive earnings expectations than guided by management. That justifies our E/W rating in the name with a 12M forward TP of $55.5/GDR.

Key business growth pillars remain intact: new client acquisitions … After years of business expansion, Tinkoff remains relatively small in size (occupying c.4% of its total serviceable addressable market at YE20, according to its own estimates) and sees room for further market share expansion. During 2021-23 Tinkoff is going to continue growing mainly through new client acquisition, targeting to increase its active client base to at least 16.5mn customers by YE23 (vs 9.1mn active customers at YE20 and the 10mn customer milestone reached so far in 2021).

…product development… In the “bread and butter” credit business, the bank still has an opportunity to outpace the market in terms of growth, we believe. We estimate 23% avg. annual loan book growth in 2021-23F vs 11% p.a. by the market, driven by both credit cards and new products (secured loans and cash loans). That implies Tinkoff’s share of the lending market growing from 2% in 2020 to 3% by 2023F. A solid liquidity cushion (68% LDR ex. brokerage account balances at YE20) and record low funding costs (4% avg. for 2020 and 3.3% in 4Q20) provides a meaningful support to the lending business, while service quality allows adequate pricing for risk. That, in turn, allows the bank to think about scaling up SME lending and introducing mortgages (not yet part of our model). Among non-credit businesses the retail brokerage business is set to become the largest P&L contributor in the medium-term, according to the company. New products (such as private banking, leasing etc.) and international expansion are among the opportunities being analyzed by Tinkoff.

…and clients engagement growth. Cross-selling is becoming increasingly important – the bank grew the avg. number of revenue-generating products per client to 1.4 at YE20 vs 1.1 at YE17 and sees potential to further improve it to 1.7 by YE23. Currently only 2.8mn active customers (31% of total) have 2+ active products, according to the bank. The Tinkoff Black debit card remains the cornerstone client acquisition and engagement driver, with 1.7 product per Tinkoff Black clients on average vs 1.4 average for the group (at YE20). That coupled with AI-driven tailored offerings allows the bank to optimize customer acquisition costs and unit economics (given the cost of Tinkoff Black customer acquisitions is just $18 vs $38-70 for cash loans and credit cards, $258- 351 for secured loans, $35 for brokerage and $102 for insurance). On our estimates, Tinkoff already managed to reduce acquisition costs per unit by c.18% vs 2018 levels.

Financial projections. On the bottom line, Tinkoff targets growing net income with at least 20% CAGR 2020-23F, reaching at least RUB75bn in 2023F (BBG cons. RUB82bn) with ROE exceeding 30%, and keeping at least a 200bp capital buffer over the minimum regulatory requirements. Considering Tinkoff’s traditional conservativeness in guidance and its track record (33% avg. bottom line growth in 2018-20), we treat that as the low end of what the bank actually has in mind. We forecast Tinkoff to grow its bottom line by c.27% p.a. in 2021-23F to ~RUB90bn in 2023 (~35% ROAE), suggesting flat net income per active client vs 2020 (~RUB5.4k, which is an upper end of management’s estimates). However, we think the stock price already reflects more aggressive earnings expectations for 2023 than guided by the company.

Valuation

Tinkoff trades at 5x P/TBV 2021F (56% premium to 5Y average) and 15.9x P/E 2021F (83% above 5Y average and 145% premium to SBER). On our 2023 estimates, however, the valuation metrics appear closer to historical levels – 3.2x P/TBV (in line with 5Y average) and 10x P/E (15% above 5Y average and 54% premium to SBER). We have incorporated more bullish expectations for 2021-23F into our model, which translate into our 12M TP of $55.5. Seeing 5% downside from current levels, we maintain our E/W rating on Tinkoff. Key downside risks to the investment case are 1) a worsening Russian macro and geopolitical environment; 2) abnormal lending growth, leading to asset quality deterioration; 3) restrictive regulatory initiatives by the CBR; 4) management team turnover and outflows of IT specialists; 5) potentially growing competition vs IT companies on financial markets (though, that is mitigated by Tinkoff’s risk management expertise and client acquisition capabilities).