TCS Group - P&L Still Packing a Punch Even as Risk Costs Rise

Heading into the year end, we have updated our forecasts for TCS Group (Tinkoff). While 3Q19 gave further evidence that provision charges are now on an upswing, we do not think this is particularly damaging as far as earnings momentum is concerned. Indeed, the P&L outlook for next year looks strong on several fronts, and we see Tinkoff delivering very decent 22% earnings growth (on the back of a 49% 2017-19E CAGR). As has always been the case with Tinkoff, the business is adjusting to a changing operating environment. That has meant a slowdown in loan growth (we expect a still-high 34% next year), lower acquisition costs and a further loan mix shift into secured loans, which will pressure loan yields but soften the impact of higher unsecured loan risk costs. Tinkoff's customer acquisition machine continues to chug along impressively, paving the way for cross-selling of loans and transactional services. We appreciate that credit risks are rising, but think that the Russian economy is in a much better place than in 2014-15, unsecured lending is starting to slow as regulation tightens, and falling interest rates are improving affordability. We keep our 2019 earnings forecast virtually unchanged while cutting our 2020-21 projections by 2% and 1%, respectively. We cut our target price to $25.50 per GDR and retain our BUY recommendation. We still see Tinkoff delivering mid-30s ROE a few years out and regard it as a leading global benchmark as a highly profitable fintech story.