Fixed Income Analysis /

Tinkoff Bank: Capital increase may mean no new bond

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    5 June 2019
    Published by

    We are keeping our Hold recommendation on the Tinkoff Bank/TCS Group (AKBHC) 9.25% Perp, after the bank announced plans to raise US$300mn in new equity. Management said the bank will not require additional capital ‘in any form’ in the near term if this plan is approved by shareholders. This suggests there may now not be a new subordinated bond issue this year. Capital ratios will clearly be boosted by the planned actions. However, the positive impact on the AKBHC Perp may be limited, given the very strong loan growth which the issuer anticipates, and given continuing regulatory pressures. Our other takeaways from the conference call discussing the capital increase were as follows: 

    • The Group has revised its FY 19 loan growth forecast to 60% from 40%. This is the primary reason why TCS Group is seeking shareholders’ approval to raise US$300mn. The EGM is scheduled for 27 June.
    • The Group has not changed previous FY 19 net income guidance – management still expects net income of at least RUB35bn. Strong loan growth anticipated in H2 19 is only seen contributing to the bottom line in 2020, as customer acquisition costs and higher provisioning on new loans (due to IFRS 9) will likely offset the impact of these new loans on interest income.
    • TCS Group continues to target net income of US$1bn in the next 3-4 years. This will be driven, in part, by cross-selling within the existing ecosystem, and by further monetisation of new business lines. The Group will continue to diversify its business lines, as it has done in recent years. The ROE will likely be lower than the record levels achieved in recent quarters.
    • The capital increase is expected to add 2ppts to the bank’s N1.1 ratio, which was 8.21% on 1 May. This boost to the core capital ratio takes planned loan growth and upcoming changes to risk-weights (which are known) into account. New capital will be used to fund loan growth, rather than fund new projects the bank may embark on. Importantly, no acquisitions are planned in the near term.
    • Oleg Tinkov, the founder and main shareholder, has not yet disclosed if he will participate in the new offering. Management expects a decision from him at the EGM. No anchor investors have been secured yet, but management said the capital increase will be open to all key shareholders. The capital increase requires approval from both class A and class B shareholders.
    • Management believes the Russian lending market is mid-cycle, rather than late cycle. There has been no significant change to underwriting criteria, and there appears to be little concern about asset quality deterioration. Cost of risk guidance has not changed – TCS Group still expects a 6-7% cost of risk this year, and a 10-11% through-the-cycle cost of risk.
    • Changes in regulation remain a risk. Of note, the bank is in talks with Russian authorities on payment/income ratio regulations. It is not yet clear what impact this may have on capital ratios.
    • No change to the dividend policy – up to 30% of net income will be paid out. In light of this, management was asked why suspending the dividend was not considered as an alternative to the capital increase. Management believes investors prefer the dividend to be maintained, rather than cancelled, even though the Group is raising new capital.
    • Strong growth in the credit business means the non-credit business will not account for 30% of total operating income. Management expects operating income of RUB6-10bn from that business this year.