TCS Group - Catch-Up with the Two CEOs

We caught up in Moscow with TCS's two bosses, Oliver Hughes, the group CEO, and Stas Bliznyuk, who was earlier this year appointed CEO of Tinkoff Bank and has in fact been at Tinkoff longer than even Oliver Hughes. They provided an update on how they see the lie of the land.> Overall, they are still excited about many areas of great growth potential. These include the following areas in particular: > Tinkoff Private. Wealth and asset management for higher net worth customers is a market that is highly underserved at present.> Insurance. It has not been easy, but TCS has been gaining some traction in non-captive insurance, an underpenetrated market ripe for disruption. The issue of the possible incorporation of credit-related insurance into PSK calculations was raised earlier in the year by the CBR, but it doesn't seem to be a particular focus for the CBR now, and TCS is used to adjusting to regulatory changes.> SMEs. Lending is only just scratching the surface. > Credit. Mortgages are in test mode for employees and likely to be rolled out in the autumn. We think TCS could have a competitive product here, and it has already done a securitization of the home equity loan book. > BNPL. Buy Now Pay Later was recently launched, so it is still very early days, but this is a new product for the Russian market and one that has proved popular elsewhere. > Lifestyle services. There are currently more than 1 mln users. The main areas taking off include fuel, travel and ticketing (both obviously Covid-impacted), restaurants and flowers. The strategy is still based on partnerships and building out e-commerce services as part of merchant solutions. There are no plans for TCS to come out with its own marketplace offering.> Tinkoff firmly a top four player by current account turnover. Although Tinkoff is only the 15th or so biggest bank by assets in Russia, it is in fourth place in terms of current account turnover, behind Sber, VTB and Alfa Bank, and it looks to be closing in on Alfa's number three spot. This is another angle that highlights the success of Tinkoff Black. > International expansion a long-term game. Looking at this with a longer five- to ten-year view, international expansion could be another platform for growth beyond TCS's pure Russia focus. It will take a couple of years to get up and running. There is a clear intention to monetize from day one, thinking about the debit product (and maybe credit, payments and investments as well) and looking at the Asia-Pacific region.> Customer acquisition still strong, cross-sell stepping up. We expect 2Q21 IFRS numbers (due August 26) to show still-strong growth in active customers. Cross-sell is stepping up too: the share of customers with two or more products has risen from 25% in 2019 and 33% in 2020 to 40% as of now.> Cost pressures remain. There remains lots of competition for IT talent (TCS now has around 4-5k developers in around 70 regional hubs), but the management is not overly concerned with high cost growth at this stage of the cycle given the strong customer acquisition and revenue growth. Oliver Hughes said another challenging issue has been integrating many new hires (including more than 1,000 new developers this year) into the Tinkoff DNA given the shift to remote working.> Comfortable with high credit growth. High credit growth is coming from different angles and increasingly tapping into the existing customer base (which is data-rich) for things like cash loans, so the management is not concerned by the pace of growth. They also stressed that the average ticket on cash loans has barely moved, and is still around R250k, whereas some of the other big banks are writing way higher tickets.> MVNO still seen as an integral ecosystem product. Although the competitive environment is tough (price competition, low ARPU), Tinkoff's MVNO is gaining traction, with 60-70% of new MVNO customers coming from the existing customer base. The management considers the MVNO an integral part of its in-house ecosystem offering.> Looking beyond NPV model to LTV. As customers are taking out more products, TCS is starting to look at lifetime value (LTV) metrics on a per customer basis, on top of their traditional NPV per product approach. This is a work in progress, but it gives a more rounded view of customer value. > M&A deals working well. The management is pleased with the Koshelok mobile wallet purchase. Koshelok has 10 mln MAU and only 20% overlap with TCS's customer base. Now they are looking at incorporating more financial services products into their offering. They also see a sound business logic in the St Petersburg Exchange stake purchase given TCS's active role in foreign equities trading and the growth potential of the exchange, including the possibility of an IPO.> Capital plans - possible AT1 issue. The management is considering an AT1 issue this autumn, which would beef up both the Tier 1 and total capital ratios. There are no plans for additional CET1 capital. > Ecosystem regulation to have limited impact. The CBR's recently announced ecosystem regulation plans do not look to be a big risk for TCS given its open ecosystem approach and relative lack of "immobilized assets."> Still limited competition from new entrants. A couple of tech names are starting to make moves in financial services, but the company is not seeing anything so far that looks particularly ground-breaking.> Oleg Tinkov tax trial postponed to September. The hearing that was most recently planned for July has once again been pushed back, this time to September. > Upcoming events. TCS will hold an acquiring strategy session on July 21 and will publish 2Q21 IFRS results on August 26. The stock trades at 2021 and 2022 P/Es of 22.4 and 17.7.