Still worth holding on to: We are keeping our Hold recommendation on the TCS Group/Tinkoff Bank (AKBHC) 9.25% Perp. Priced to the September 2022 call, the indicative mid z-spread on this bond is almost 150bp tighter than at the start of the year. However, the AKBHC Perp has performed less well than some comparable securities, including the Alfa Bank (ALFARU) perps. Q2 was another stellar quarter for performance at TCS Group, with very strong revenue generation offsetting higher operating expenses and provisions, leading to an annualised ROE of just under 65%. Statutory capital ratios declined in the quarter, but the SPO completed in July should mean these ratios improve. More stringent regulation remains the key risk for TCS Group. A change in some applicable risk weights contributed to the drop in statutory capital ratios, and further adjustments to risk weights are expected later this year.
Another stellar quarter: Q2 19 was yet another strong quarter at TCS Group, with net income of RUB8.2bn up 37% yoy. The bottom line improvement primarily reflects strong revenue generation, which more than offset higher costs and provisions. In addition, Basel III capital ratios improved qoq (but statutory capital ratios fell) and coverage remains high. Loan growth exceeded 40% in the first half, and the issuer now expects FY 2019 loan growth to be ‘substantially higher’ than the 60% previously guided and has revised its cost of risk guidance accordingly (now 7-8%, up from 6-7%). TCS Group still guides to FY 2019 net income of at least RUB35bn. Importantly, H2 loan growth is expected to be less strong than in the first half. However, given the full year net income target and the H1 2019 net result of RUB15.4bn, the bottom line is seen rising in H2.
Revenue generation remains a strength: TCS Group disclosed Q2 19 operating revenues of just under RUB30bn, 50% higher than a year ago, reflecting broad-based revenue improvements. Net interest income was up over 50% versus a year ago, at RUB22bn, reflecting both solid growth and improved margins. Although gross loan yields improved qoq to 33.5% in Q2, this yield is seen falling to 28-30% over the next year, reflecting a shift to lower-yielding business. Net fee and commission income was almost 20% higher than in Q2 18, at RUB4.6bn, as current account commissions, acquiring commissions and other fees increased. In addition, the trading result was a small positive and the contribution from the net insurance result was up 85% versus Q2 18.
Cost/income ratio improved: Operating expenses rose to more than RUB12.3bn as personnel costs, deposit insurance costs, customer acquisition expenses and other operating costs (including marketing and advertising) all increased yoy. Reclassification of certain costs impacted qoq changes in costs. We note that strong revenue generation meant that the cost/income ratio improved to 42% from 45% a year ago, which we see as a positive.