Fixed Income Analysis /

Tinkoff Bank: Q1 review – Profitability remains a strength

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    17 May 2019
    Published by

    Recommendation unchanged: We reiterate our Hold recommendation on the TCS Group/Tinkoff Bank (AKBHC) 9.25% Perp after another strong set of results. A new eurobond is still under consideration at the bank. There were no new details given on anticipated changes to consumer credit regulation. However, we continue to think that the Group’s more diversified product mix should reduce the impact of regulatory changes covering credit card lending. 

    Solid start to the year: In Q1, the TCS Group generated an annualised ROE of over 64%. While this is not the highest ROE the issuer has generated, profitability continues to compare well with other banks in our coverage. Management highlighted that profitability tends to improve through the course of the year. Net income of RUB7.2bn was 25% higher than a year ago, and TCS Group expects FY net income to exceed RUB35bn. The Group reiterated previous guidance for 40% FY net portfolio growth this year, but believes this may be exceeded. It also guides to a 6-7% cost of borrowing and 6-7% cost of risk.

    Net interest income and insurance income were strong: Operating revenue was up both qoq and yoy, reflecting very strong net interest income, a reversal of trading-related losses (due to gains on debt instruments) and a stronger result from the insurance business, where income doubled yoy. Net interest income of RUB18.5bn was c30% higher than in Q1 18. The blended cost of borrowing improved to 5.3% from 6.4% in Q1 18. This offset the decline in yields in the credit portfolio (partly due to changing product mix). Strong volume growth also contributed to the rise in interest income. Net fee and commission income of RUB4.4bn was down qoq, reflecting seasonally lower commissions in the SME business and on debit cards. However, net fee and commission income was 16% higher than in Q1 18. 

    Efficiency ratio flat yoy: Operating expense of RUB11.5bn was up more than 30% versus Q1 18, driven by higher deposit insurance expenses as well as a rise in customer acquisition costs (including staff costs, and marketing and advertising). Other staff costs and other administrative expenses also rose yoy – unsurprising, given continuing IT-related investments. Despite this, the cost/income ratio was almost flat yoy, at 44.8% on our calculations. We note that this was an improvement on the previous quarter.

    Loan growth led to NPL ratio improvement: Although total non-performing loans increased qoq, the NPL ratio improved to 8.1% from 9.4% at end-2018, reflecting very strong loan growth. We note that the coverage ratio remains significantly higher than 100%. There was a marked rise in provision in Q1 19 – to RUB4.9bn from RUB2.3bn in Q4 18, partly reflecting shorter collection periods due to holidays early in the year.

    LDR much higher than at end-2018: The LDR rose to 85.6% from 70.7% as loan growth exceeded 20% in Q1 19. As a result, questions about underwriting standards dominated the results call. Management emphasised that growth was partly driven by new business lines and credit quality has not been compromised – there was no significant change in approval rates in Q1. 

    Capital ratios down qoq due to higher RWAs: The Tier 1 ratio was 14% and the equity/assets ratio was 11.5%. The Tier 1 ratio fell qoq, reflecting the impact of loan growth on risk-weighted assets. Given strong profitability at this bank, we don’t see capitalisation as a concern.