TCS Group - Lie of the Land: Thoughts from Management Call

TCS Group published 4Q21 IFRS results last Friday and held a conference call. Given the rapidly evolving situation, it was useful to hear the management's thoughts on how it sees the current operating environment. Here we highlight some of the key points.> Deposit situation stabilized. As of Friday's call, the TCS management stressed that there were no restrictions on clients withdrawing funds, in any currency, albeit the system as a whole was facing challenges topping up ATMs with physical dollars. After the initial deposit outflows in late February, TCS had been seeing inflows, helped by new account openings, and by pushing short-term deposit rates up to almost 20%. The LDR at end-2021 was just 64%, and dollarization of the deposit base was fairly moderate, with the share of FX deposits rising about 5 pp to 22-23%. > Further FX controls announced after call. On March 9, the CBR announced a six-month cap on FX withdrawals of $10k (with the remainder available in rubles at the prevailing market rate), and it remains to be seen whether this puts more pressure on deposit flows.> Banks helped by supportive CBR measures. The capital position has been materially supported by the CBR's release of additional consumer loan risk-weight buffers, which has freed up about 4 pp of CET1 capital. Other supportive measures include easing reserve requirements, introducing unlimited CBR liquidity facilities, and potentially allowing account openings and fund transfers without physical KYC.> Different business from 2014. TCS is a much bigger and more diversified business than in 2014, most evidently in its loan book mix (CCs only 47% of loans now versus 93% in 2014) and lending customer base and in the share of non-credit revenues (54% of the total in 2021 versus 1% in 2014). As a bigger and much more well-established bank now, it sees opportunities in the current challenging market situation.> Able to scale down quickly. New lending has been drastically scaled back, and with customer acquisition costs at over 40% of total costs, the business can quickly move into defensive mode.> Risks remain on several fronts. The situation is clearly evolving quickly, but as of now, the management is not seeing any signs of rising delinquency rates. The withdrawal of US technology providers may throw up challenges, but most of the IT infrastructure has either been built in-house or uses open source, and the IT system is not cloud based, with data needing to be stored locally.> Considering listing options. There is obviously much uncertainty around the GDR listing on the LSE, which has been temporarily frozen as part of the broader UK sanctions. It is also not clear when the MOEX line will reopen. If the LSE freeze continues, TCS said it would consider moving the primary listing to Moscow. If the LSE listing remains unworkable over the longer term, the company would consider other listing venues.> International plans still on track. The international plans remain on track. TCS is still working on acquiring banking licenses, a project that does not require much capital at the moment. It is also looking at launching an acquiring business in Mexico, but there are few details for now. > What can 4Q21 numbers tell us about this year's outlook now? Given everything that has happened since the end of last year, we won't dwell on the 4Q21 numbers, but there were a few interesting points for the outlook. One is that new customers have been joining in record numbers, with almost 2 mln new active customers and 2.3 mln new Tinkoff Black customers in 4Q21. This has been reflected in surging deposit volumes (up 51% y-o-y in 2021) and an ample liquidity cushion (just 64% LDR at end-2021, and cash and equivalents at 24% of assets). As for margins, while short-term deposit rates have risen sharply, over 80% of TCS customer accounts are much lower rate current accounts or brokerage accounts, and TCS is able to place excess liquidity at the CBR at high rates. On the asset-quality front, provisions/gross loans were 11.4% at end-2021, compared to 10.2% Stage 3/POCI loans. While the coverage ratio (113%) has been steadily falling, this is a reflection of the changing loan mix, and TCS could likely withstand overall cost of risk well into the mid-teens and remain profitable (especially if costs are reined in). As for capital, the local RAS ratios will be materially boosted by the CBR's removal of additional loan risk-weight buffers. Moreover, the OFZ portfolio (over 50% of securities) was transferred to hold-to-maturity by end-2021, and revaluations of non-OFZ bonds are not accounted in regulatory N1.1 capital. Under IFRS, TCS posted around a R6 bln securities gain in 4Q21, driven by the revaluation of its 5% St Petersburg Stock Exchange stake, which looks likely to be reversed in 1Q22. > What impact will Visa and Mastercard pulling out have? Last weekend, Visa and Mastercard announced that they are suspending operations in Russia. TCS operates primarily with Mastercard. As is the case with other Russian banks, TCS cards will continue to work in Russia, being processed by the CBR's National Payment Card System, but the cards will not work for cross-border transactions. A couple of potential implications are that once cards expire, new cards may be Mir/Union Pay co-branded, while interchange will be lower, which may feed into lower cashback. > Leaving forecasts unchanged for now. In light of how rapidly the situation is changing and the very high degree of uncertainty, as well as the fact that the stock is currently not trading, we are not updating our forecasts in this report. We will update them in due course. > Bottom line: Tough and fluid times, but getting through them. Our main sense from the conference call was that - to state the obvious - this is clearly a very difficult time, but TCS has entered this crisis with a very strong balance sheet and has ample experience of working through such tough times. However, the situation remains very fluid, with things changing on an almost daily basis.