Against the credit in Russia: Case Tinkoff

  • INTRODUCTION
    • Tinkoff Credit, Russian fintech
    • Low 6.4x P/E 2019E, based on guided profit for 2019, which management kind of indicated will be beaten
    • Modern digital only consumer “financial supermarket”, focus on credit cards
    • Probably the biggest and most profitable digital-only bank in Europe (~8,4 m. customers)
    • Excellent long-term growth track record, 38 % net profit growth in 2018 (along with Russian banking sector)
    • Originally backed by reputable western VCs; Vostok Emerging Finance, Baring Vostok and Goldman Sachs
  • THESIS:
    • Multiple growth levers with big potential as business model shifts from credit card focus to wider selection “financial supermarket”
      • New home equity loan product to non-existent green field market
        • Big loans relative to bread and butter credit card loans
        • It is enough for Tinkoff to sell the product to 5% of the 8,4 m. existing customer to move the needle (see model in the appendix)
        • Most Russians (87 %) own their home and only few have housing loan (23 %) –> customers can use their home equity to reduce interest on loans and finance their bigger purchases
        • Not bubbling housing market, so the security should be good, no similar risk of blow up like happened in the US subprime crisis
        • Tinkoff first entrant to the non-existent home equity loan market (“HELOC”)
        • HELOCs are biggish market segment in other countries per my impression –> indicates big market opportunity
          • Especially given the mentioned Russian market peculiarities
      • New car loan product with good potential
        • Easy, almost automated loans in partnership with biggest Russian car classified website Auto.ru
          • Fast check didn’t show competitors with same solution integrated to the website, exclusive?
          • Should be good source of leads
        • Also traditional direct partnership with dealers
        • Doesn’t have to take big market share to move the needle, big loans relative to bread and butter credit cards
        • Still, I assume very modest growth contribution in the model due to seemingly crowded market (feeling that there could be surprise on the upside though, see model in the appendix)
        • Tinkoff already has 700 partners in POS loans –> should be predictive of ability to build similar partnerships with car dealers
        • Russian car market recovering from 2014-2016 downturn and used car market increasingly moves to dealerships –> market growing
        • Opportunity to cross sell existing car insurance products in bundle
      • All other “financial supermarket” products that are also growing
        • Fastest growing retail stock broker in the market, second largest retail stock broker in the market after Sberbank
          • Currently teaser fees, could double or triple fees easily
          • Users and transaction per users growing
          • Moves the needle if growth continues, as every indication is
          • Investment/savings market has only started to develop
            • (Where are all the Russian value investment blogs?)
        • Fast growing micro SME business, this could be big
          • 6 m. small businesses in Russia
          • Tinkoff has 0,4 m. customers which grew 75 % last year
          • History indicates big fees per customer, really moves the needle if the customer growth continues (see appendix for model)
        • Fast growing insurance business, cross sold with credit cards and car loans?)
        • Strong position in growing e-commerce merchant acquiring (15 % share per management estimate in Q4’18 conf call)
        • Very fast growing deposit customer base (from 2,8 m. to 4,5 m. customers in 2018)
        • Bread and butter credit cards still growing nicely, just started to ramp up POS and cash loans (competitors have big cash loan portfolios and Tinkoff has only 17 %)
      • Bad Russia sentiment, going against the grain
        • Important American VC jailed earlier, very bad investor sentiment in Russia
        • I’m going against the grain as there doesn’t seem to be positive news anywhere
        • All Russian stocks, state-owned or not, have very low multiples
        • Russian economy humming good and lot of western businesses are doing just fine
        • There are also experienced investors that are long-term optimists of Russia (e.g. Prosperity Capital, Vostok Emerging Finance/New Ventures)
        • Financial markets have short memory and forgets old sins quickly –> if there is improvement in the global politics/sanctions threats, lot of upside in Russian assets
        • Having said that, risks are real, cannot and will not take big position
    • RISK AND OTHER DISCUSSION
      • Rarity for fintech; Tinkoff is mostly deposit funded and it has excellent liquidity –> balance sheet seems OK for bumpier environment
      • Provides consumer loans –> credit quality is objectively bad and thus earnings can be expected to be very shaky in downturn
        • For example credit card stage 3 NPLs 15 % for Tinkoff vs. 9 % for Sberbank per Q4’18 reports
        • Not optimistic of the performance in bad times
      • Despite the low credit quality, I trust Tinkoff’s books, as the provisioning ratios are disciplined
        • Provisions 100% cover all 1+ days late loans
        • Provisions 164 % cover all 90+days late loans
        • –> Tinkoff’s Earnings means earnings and net assets that you own it, shouldn’t blow up unexpectedly
        • Historically, Tinkoff has been profitable practically every year, so as long as they charge high enough interest rates to cover the credit losses, the credit quality per se shouldn’t matter too much
      • Important for the thesis; currently Russian economy is growing nicely, unemployment is low and interest rates are coming down –> short-term credit quality and loan market growth prospects are good
    • Longer term, underdeveloped Russian financial market big opportunity for financial market players
      • Household debt to GDP only 16 %
      • 25 % has housing loan
      • 20 % has credit card
      • 87 % owns their home
      • Cashless payments only 36 % of retail sales
      • 60 % has debit card
      • Retail investments to GDP 20 % (vs. 40 % in Poland and Hungary, say)
      • Tinkoff is participating in all of those market
      • (See exact figures and sources in the appendix)
    • SUMMARY
      • Fast growing, biggest and one of the most profitable digital only banks in Europe
      • Low P/E
        • I would assume this quality, growing and deposit funded western fintech with wide product assortment would be 15-20x+ earnings
      • Underdeveloped Russian financial market has good long-term prospects
      • Western CEO, tech focus, successful digital only model, product innovation, partnerships and industry publications gives feeling of competent management and good company
      • Like the management
        • They focus on net profit growth and speak about tight credit (although my data indicates competitors have better metrics (see appendix))
        • Management owns 6 % of the company and main owner 47 % –> they don’t want to blow up –> probably they know what they are doing
      • Strange combination of seemingly high quality fintech winning market share in underdeveloped growing market but serious questions about the loan book quality / cyclicality
      • Bad Russia sentiment and low valuations –> unexpected positive news could have big impact on stock price (s)
      • Bad credit profile but short-term market prospects seems ok

Disclosure: Long Tinkoff with 3,5 % position. But mentally preparing to change my mind quickly with this if growth starts to lose steam, credit quality starts to sink or economy stalls

Edit 28.4.2019 10:38: Edited few worst writing errors so the post is little more readable…

APPENDIX 1: Immediate growth opportunity model

Note that this is my back of the envelope estimate how things could go if reasonable optimistic forecasts materialize.

There are million other scenarios that also could materialize and I haven’t tried to make “probability weighted” estimates.

This is just thinking tool for me what KPIs to follow and to verify that there is enough upside given the risks.

The consensus estimates that can be found in 4-traders seems to be much lower, but still assuming significant growth. I don’t know what is assumed in them or where’s the difference.

High level model summary:

Tinkoff_Model

Valuation and potential CAGR:

Tinkoff_Model_valuation

Interest income assumptions:

Tinkoff_Model_assumptions 1

Fee income assumptions:

Tinkoff_Model_assumptions2

APPENDIX 2: Key product category growth (key basis for the model assumptions)

APPENDIX 3: Loan portfolio development (moving to new products as assumed in the model)

screenshot_20190419_1301095622317785810088078.jpg

APPENDIX 3: Historical key Financials (model assumes similar growth for the future)

APPENDIX 4: Market position

Key products market share (deposits big opportunity, as assumed in the model):

Tinkoff_Key products

Credit card market share 2012-2019/2:

Overall consumer credit market share 2012-2019/2 (model assumes that Tinkoff keeps winning share, especially in other than credit card market):

Investments market share (Tinkoff top players in growing market):

Tinkoff_Card investments

Investments growing the fastest in the stock brokerage business (and other growth positive news):

Tinkoff_growth news.png

Tinkoff Investments ranks first in number of private investors brought to the Moscow Exchange in 2018

Tinkoff Bank partners with Auto.ru to offer pre-owned car loans

Tinkoff wins four awards at Banki.ru’s Bank of the Year event

APPENDIX 5: Owners and management

APPENDIX 6: Underdeveloped Russian financial market big growth opportunity

Russia’s household debt relative to disposable income is lowest in OECD (30 % vs. 63 % in Poland and 139 % in Finland):

Tinkoff_Debt to Income Russia

Russia has one of the lowest household debt to GDP in Europe (16 % vs. 35 % in Poland and 67 % in Finland):

Tinkoff_Debt to GDP

Very few in Russia has housing loan (despite 87 % home ownership):

Tinkoff_Housing loan penetration

From the low base, Russia’s consumer credit market is developing very fast (7y CAGR 21 %):

Tinkoff_consumer credit 2009-2019

Also, Russia’s credit and debit card ownership is still low compared to west:

Tinkoff_Card ownership

Russia is also moving from cash economy to cashless fast:

Most of the Russian financial assets are still in cash, not in stocks, mutual funds or other investment/savings products:

Wealth management is still underdeveloped relative to comparable countries:

Tinkoff_Wealth Management

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4 thoughts on “Against the credit in Russia: Case Tinkoff

  1. I dont think you are overly optimistic in your projections. Newest monthly RAS data has them growing net loans by 64.7% YoY (not IRFS but usually close to). Interest income would grow slower for the same reasons you wrote above (lower yielding secured lending) but so would cost of risk.
    If I had to point out two things that are underappreciated/misunderstood by the market:
    – The quality of the management. One can listen to the CC’s and maybe watch the 2018 capital markets day to get a felling.
    – The IT/fintechy head start Tinkoff has over all but maybe Sberbank in Russia. AI is integrated in all credit decisions and most everything else.
    – Front-loading of both loan risk (loss provisions) and IT developing costs. Both high because of the growth-rate.
    Bought my first Tinkoff shares in 2014 after the IPO meltdown and my most recent ones in 2018. Haven’t sold one yet. Average weighted holding period is a little over 2 years atm.

    Liked by 1 person

    • Wow, that’t been a real home run for you congrats! Going against the news/data flow at the the time has REALLY paid off :).

      Thanks for the comment and notes.

      I got twitter question of Oleg’s recent stock sales (and managements, which I have missed), happen to have any insights?

      Like

  2. I have no real insights there.

    Personally I dont think Oleg’s sales are a cause for concern. He might sell 4-5% pr year over the next 10 year and retire or maybe he just want a bigger float.

    What causes me more concern is the rather large sale by Oliver Hughes (CEO).

    But at the same time many others have been net buyers over the last year (without havenig have the exact numbers on hand).

    Like

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