TCS Group - Credit Business Strategy Day

Yesterday, TCS hosted a deep dive into its credit business.> What are the main characteristics? Lending remains the key monetization engine for TCS. The credit offering has much evolved over the past 15 years. Tinkoff now has five core loan segments (credit cards, cash loans, POS, car and home equity loans) serving about one third of the group's customers (6 mln out of 18.5 mln), with mortgages on the way. According to the credit team, Tinkoff sticks to its key principles of NPV-based lending, speedy decision-making and a "low and grow" approach, but a change in the credit decision process in recent years is the greatly increased usage of proprietary data. > How big a player is Tinkoff? Tinkoff's roots lie in credit cards, and it is the second largest player after Sber (41% share), with 15% market share. Overall, Tinkoff's market share is 4.4% in non-mortgage retail lending and only 2.6% in total retail loans, which highlights the scope for long-term growth.> Product segmentation. Credit cards remain the key credit product, with 4.3 mln users, and are highly profitable with a 33% yield and higher than 12x LTV/CAC. Cash loan volumes have almost doubled in 9m21, and cash loans are the most cross-sold credit product, with more than 85% issued to existing customers. POS loans, while profitable, remain a useful acquisition device, with almost half now sold through Tinkoff Credit Broker, which serves SME and online retailers. A sizable part of the POS book is effectively 12m interest-free installment loans subsidized by the merchant, a kind of longer-duration precursor to the recently-launched shorter-duration BNPL. Secured loans are now 25% of the total loan book, with car loans issued at an average 85% LTV, three quarters to existing customers, and the distribution split mainly by Tinkoff's app and dealers. Home equity loans have an average size of R1.1 mln, 14% yield and just 30% LTV. The management sees mortgages as another line of engagement with customers, given that over 2 mln Tinkoff customers have mortgages at other banks and the long-term structural growth outlook remains attractive (mortgages/GDP at 9%).> Market size and growth. According to Tinkoff, the credit TAM amounts to $18.6 bln net revenues in 2023, compared with Tinkoff's 9m21 LTM $1.3 bln in net revenues.> Monetization. The LTV/CAC figures by product (which were also in the 2023 strategy presentation) show home equity loans and credit cards stacking up best (14.7x and 12.4x). The decent profitability of home equity loans was also highlighted due to their relatively low capital requirements, low risk costs and good cross-sell potential, with the potential for further risk-weight reductions should Tinkoff move to IRB, as may be required for SIFIs. > Financial targets. No specific revenue or profitability targets were given beyond the potential TAM. Loan growth guidance was very broad and conservative, with an above 20% loan CAGR over the next 3-4 years, and the caveat that growth could be much higher in any given year. We model a 36% 2022-23 gross loan CAGR. > How it fits into the ecosystem. Lending is seen as a key driver of building customer loyalty, as well as being the predominant source of revenues and profits for the group (56% of revenues and 79% of pre-tax profit in 9m21). > Competition. When asked about the rising threat from technology companies, the team argued that getting credit right is a tricky business, requiring complex processes, an understanding of how to use data, robust risk management and collection know-how, and, of course, substantial capital and funding. Tinkoff therefore thinks the potential challenge from "tech" is going to take several years to play out.