Tinkoff IPO beats consumer credit fears

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By:
Dominic O’Neill
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The IPO of Tinkoff Credit Systems, a Russian consumer finance bank, trounces rivals’ valuations, even as bad debts tick up and tighter regulations loom.

Russia’s most colourful banking entrepreneur, Oleg Tinkov, could be forgiven for feeling smug after his firm’s $1.09 billion IPO in London this week. Tinkoff Credit Systems, the consumer finance bank he set up in 2006, achieved a valuation his arch-rivals, the state banks, can only dream about.

While bigger Russian banks have struggled to raise equity on the public markets recently, Tinkoff’s IPO was eight times oversubscribed. It rose on the first day of trading on Tuesday, after pricing at $17.50 per global depositary receipt, valuing the firm at $3.2 billion: 12 times forecast 2014 earnings, and 4.8 times book value.

That compares with Russian medians, according to VTB Capital, of 4.7 times forecast 2014 earnings and 0.6 times book value. Even state-owned Sberbank – the biggest and one of the most profitable Russian banks, and often seen as the safest – trades barely above one-times book value.

Oleg Tinkov, founder of Tinkoff Credit Systems
It is even more impressive given that banks such as Sberbank, as CEO German Gref has explained to Euromoney, are pushing for tighter consumer finance regulation. In September, VTB, the second-largest bank, also state-owned, cheered a mooted rise in risk weightings of 600% for unsecured loans above 60% effective APR.


Market insiders praise Tinkoff’s management, headed by Visa’s former Russia head, Oliver Hughes, and a well-marketed deal. Goldman Sachs, Morgan Stanley, and Sberbank CIB were global coordinators, alongside joint bookrunners JPMorgan and Renaissance Capital. Pareto Securities was the selling agent.

Existing investors raised $912 million in total. The founder sold a 10% stake, retaining 51%. Goldman Sachs, which has backed Tinkoff since 2007, reduced its stake to 4.5%. Three eastern Europe-focused private equity firms – Baring Vostok, Horizon Capital and Vostok Nafta – also sold down to below 5%.

The proverbial killer app was being able to sell the IPO as an internet and emerging market consumer story, rather than just a bank. That helped bring in investors present in deals for consumer-oriented tech firms Qiwi and Yandex, which have both roughly doubled in value since placements earlier this year.

Tinkoff does not have branches, relying instead on credit-card mailshots and the internet, which it sometimes uses imaginatively (for example, in the way it screens applicants). Its founder, moreover, has a brand-conscious knack for marketing his own personality alongside his products.

It is fitting that among other share deals last month, Stock Spirits, the largest vodka producer in the Czech Republic and Poland, launched its £206 million IPO the day after Tinkoff. Existing brand recognition from another alcohol product – beer – helped launch the bank. Tinkoff, the beer, was also named after the man.

“We are destroying the traditional banks,” Tinkov told Euromoney late last year. “Our approach is that there’s no difference between consumer business and the banks’ business. Getting a credit card must be as thrilling as buying an iPhone, or Coca-Cola – or beer.”

On 2012 figures, Tinkoff has the highest return on equity (almost 60%) and the lowest ratio of problem loans among eight Russian consumer finance banks rated by Moody’s. A single origination centre in Moscow might help tighten lending quicker if it sees a spike in defaults, says Moody’s analyst Semyon Isakov.

But Tinkoff’s bad-debt levels are on the up: 6% at the end of June, from 4.7% in December. Russia-wide, a booming consumer finance sector has fuelled rising household debt, while the economy has slowed. Now real disposable incomes are starting to slip too.

Retail non-performing loans in Russia have increased 35% so far this year, according to Alfa Bank research. One retail-focused lender, Orient Express, reported a net loss in the first half of the year. In October, Moody’s took negative ratings actions against every consumer finance bank it rates, except Tinkoff.

Tinkoff’s IPO raised $175 million in new capital: an important reason why it was saved from any negative ratings action in September. Equity markets specialists, however, say a recommendation to buy the stock might be difficult, if it remains near its issue price, as maintaining profitability could require risky moves.

Up to now, consumer-related firms have done well as the state has distributed proceeds from high oil prices via pensions and public-sector wages. But a dip in the oil price, leading to a weaker rouble and higher unemployment, could mean more severe losses at Tinkoff than at such companies as Yandex.

“[Tinkoff] should get recognition for how it uses the internet; it should be more expensive than other banks, but not at five-times book,” says Olga Naydenova, research analyst at BCS Investment Bank in Moscow. “It’s regulated by the central bank; it sells loans. It’s a bank.”