Emerging Europe: Tinkoff defies Russian consumer squeeze

Bad debts spark second wave of sector losses; CEO says low-cost, credit card model key to success.

Leading Russian consumer finance specialist Tinkoff Bank is set to buck sector trends for a second year in succession by posting a full-year profit. 

The online lender notched a modest profit of R203 million ($3.1 million) in the six months to June and is guiding investors to a net result of R500 million to R1 billion for 2015. By contrast, its main competitors sank deeper into the red this year as economic recession took a heavy toll on Russian households.

Oliver Hughes-160x186
  When the music
stopped a lot of lenders
fell off a cliff

Oliver Hughes,
Tinkoff

The country’s largest locally-owned consumer finance lenders, Russian Standard Bank and Orient Express Bank, both saw their ratings slashed to triple-C in September after substantial first half losses, of R22 billion and R6.6 billion respectively, all but wiped out their capital bases. The other leading retail players, Czech-owned Home Credit Bank and OTP Russia, also posted another round of heavy losses as bad debts soared across the sector.

Oliver Hughes, chief executive of Tinkoff, says its resilience is due to its refusal to join the rush to ramp up customer leverage during the boom years before 2014. "Pre-crisis many other banks in Russia gave ever-larger loan sizes for ever-longer duration," he says. "Those customers were then taking multiple loans out of different banks to service their existing debt. It was a classic case of a consumer lending boom and when the music stopped a lot of lenders fell off a cliff."

By contrast, Tinkoff adopted what Hughes calls a "low and grow" model. "We grew our business not by doubling the balance of customers but by doubling the number of customers each year," he says. 

This was possible thanks to Tinkoff’s focus on credit cards, rather than cash loans and its online-only business model, says Hughes. "Other Russian consumer lenders have a branch-based model with high fixed costs, which exacerbated the tendency to give large initial loans and increase balances rapidly." 

Hughes also notes that, unlike other retail specialists, Tinkoff took action to improve risk management ahead of the introduction of central bank curbs on consumer lending in 2013. "We started reducing our approval rates and tightening up on our underwriting algorithms in mid-2012, at least a year before the rest of the market, and that has stood us in very good stead," he says.

Asset quality

Nevertheless, Tinkoff has not been immune to the turmoil in the Russian economy. Asset quality has deteriorated as real wages have declined, with non-performing loans rising to 14.3% of the total by the end of June. Provisioning is high at 140%, however, and the bank’s cost of risk had fallen to 16.6% by mid-September from a high of 20.5% last year.

The decision to refinance Tinkoff’s wholesale funding with deposits following December’s rouble collapse also proved costly due to an emergency interest rate hike and stiff competition from other lenders. This helped push the bank to a R193 million loss in the first quarter. By September, however, deposits were up by 70%, allowing Tinkoff to redeem the last of its senior foreign-currency Eurobonds. 

Meanwhile, Tinkoff has also bucked sector trends by continuing to grow its loan book this year. "There are still good customers to be had but with very conservative underwriting," says Hughes.

The bank’s approval rate for loans is around 15%. This has been achieved through a combination of organic growth and acquisition. In July, Tinkoff bought two credit card portfolios worth around R3 billion from Svyaznoy Bank. "We assisted them to exit the market in an orderly way by providing liquidity to them and cherry-picking assets in their portfolio at par," says Hughes. "That is a model we like and hope to do more of."

Further reading
rouble-R-large 
Russia: special focus

Tinkoff is also working to increase the proportion of revenues generated from commissions. This year has seen the launch of tinkoff.ru, a financial supermarket site that will sell the bank’s own products alongside those of other lenders, including mortgages, car loans, and trading services. 

A platform for SMEs will be added this autumn in a bid to target a sector that is largely overlooked by Russia’s bigger banks. "SMEs are very much underserved, particularly at the smaller end of the market," says Hughes. "Few banks can provide the service package they need so there’s not much competition and plenty of opportunities." 

Tinkoff’s upbeat forecasts are endorsed by local analysts. Natalia Berezina at UralSib Capital expects the bank to record a return on equity of around 3% this year, while Armen Gasparyan at Renaissance Capital is confident the bank can remain in the black. "Over the longer term I can see them delivering a solid double-digit ROE," he says.

Gasparyan also endorses Hughes’ prediction that retail banking in Russia will be much less competitive when the segment eventually recovers. "Most of the current specialist consumer finance lenders are unlikely to survive this crisis," he says. 

Berezina agrees. "The biggest universal banks will likely dominate the retail market in Russia in future," she says. "They already have a big market share and they have much stronger fundamentals than the consumer lenders in terms of capitalization, state support and funding costs."