Credit cards and consumer lending are sectors strongly affected by trends in unemployment and consumer confidence. Russia’s Tinkoff Bank, majority owned by entrepreneur Oleg Tinkov, started out as a lean consumer lender in 2006 but has since added further business lines and is working on rolling out ambitious online brokerage plans.
Yet, given its revenue streams, Tinkoff can still be seen as a barometer of trends in the Russian economy – for better or for worse. Despite its diversification plans, the bank still caters for about 2 million customers using its mass-market credit card ‘Tinkoff Platinum’ – across different socio-demographic segments and geographies in Russia.
Oliver Hughes, chief executive officer at Tinkoff Bank, explains that therefore unemployment spikes do “immediately filter through into [Tinkoff’s] numbers and portfolio”.
The cost of risk
An analysis of Tinkoff’s internal numbers show that unemployment in Russia did rise by the end of 2013 due to the devaluation of the rouble, while official statistics did not show this. This caused a spike in the cost of risk (COR) for banks in the first quarter of 2014.
For Tinkoff, this meant COR highs of 20.5% in the first quarter of 2014. And while levels are still elevated now, Tinkoff’s COR has come down to more manageable levels – in the second quarter of 2015, Tinkoff’s COR was 16.6%, according to Mr Hughes.
The business reported mild profits of Rbs200m ($3.19m) in the first six months of 2015 and is predicting Rbs500m to Rbs1bn for the full year – a profit level that few Russian banks are likely to match.
“These are not the normal returns you'd expect Tinkoff to be making, but it is related to the 'double whammy' of the consumer lending crisis, exacerbated by the economic situation as well as the rouble collapse in December last year, which caused a huge spike in the cost of funding, and hit all banks,” says Mr Hughes.
Tinkoff had to repay the remaining $80.1m of its $250m September 2015 Eurobond this year, for which it grew its deposit book by 70% in the first six months of 2015. The bank also increased its loan base by 2% in the same period, with expectations of higher levels of growth for the rest of the year. And Tinkoff is growing inorganically: having bought two credit card portfolios from Svyaznoy Bank, it is considering other purchases using a ‘cherry-picking approach’.
Financial supermarket
While historically focused on the consumer mass market, Tinkoff’s model already comprises much more: it banks the mass affluent and affluent sector and has decided to branch out into debit cards and insurance. It is also in the process of building an online financial supermarket.
The debit card segment is one of the company's most evolved additional businesses – Tinkoff has so far issued almost 1 million debit cards – and those, together with the bank’s online merchant acquiring business, made up about 10% of its net revenue as of the end of the first six months of 2015. In the same period, Tinkoff’s insurance business, which was started in 2013, contributed about 5%.
The bank’s online financial supermarket ‘Tinkoff.ru’ is up and running and is continuously launching new offerings. In May this year, Tinkoff added the sale of mortgage products to its portfolio. Through its online platform, Tinkoff acts as broker, which means that it sells, originates and fulfils the product – all of these services are free of charge for the customer. The loan then gets underwritten onto the balance sheet of external mortgage providers, which pay Tinkoff commission, according to Mr Hughes.
“They are willing to take the risks [involved with underwriting] – we are not – and they have long, cheap funding, which is hard to come by at the moment,” he says. “We are a smart sales agent for them, which suits us.”
SME target
In July, Tinkoff started developing its platform for small and medium-sized enterprises (SMEs), which is expected to launch this year and will offer services such as current accounts to SMEs.
The vision of the online financial supermarket is a long-term project, which will be rolled out in stages over the next five years. Through Tinkoff.ru the bank offers its own products and those of its partners. In the near future this is expected to include car loans, the trading of equity and bond market instruments, as well as, over time, non-Tinkoff insurance products. All of this will contribute to a diversification of the bank and its revenues.
In five years’ time, this could mean that products unrelated to credit cards and lending could make up 25% to 30% of Tinkoff’s revenues, making the bank less of a barometer for the Russian economy – for its own good.
