TCS Group Holding PLC IFRS FY14 Financial Results

TCS Group Holding PLC Announces FY 2014 IFRS Results

Moscow, Russia - 4 March 2015. TCS Group Holding PLC (TCS LI) (the 'Group'), Russia's leading provider of online retail financial services, including Tinkoff Bank and Tinkoff Insurance, today announces its audited IFRS results for the full 2014 year ended 31 December 2014.

FY 2014 KEY FINANCIAL HIGHLIGHTS

· Net interest income increased by 15% y-o-y to RUB 30.8 bn (FY13: RUB 26.9 bn)

· Profit before tax amounted to RUB 4.9 bn (FY13: RUB 7.5 bn)

· Net profit totaled RUB 3.4 bn (FY13: RUB 5.8 bn)

· Net interest margin at 34.8% (FY13: 36.4%)

· Gross loans and advances to customers up by 12.8% y-o-y to RUB 93.9 bn (FY13: RUB 83.4 bn)

· Share of non-performing loans (NPLs) at 14.5% (FY13: 7%)

· Customer accounts increased by 0.4% y-o-y to RUB 43.4 bn (FY13: RUB 43.2 bn)

· Robust return on equity of 15.7%

· Cost of risk well-managed at 17.6%, below the previously communicated guidance

· Strong capitalisation with CBR N1 capital adequacy ratio at 15.5%

KEY HIGHLIGHTS FOR FY14 AND POST 2014

· In 2014, Tinkoff Bank launched an array of cobranded credit cards in partnership with leading retail players in Russia: OneTwoTrip, eBay, Afimall, Kanobu

· In autumn 2014, Tinkoff Bank piloted a payroll programme which is now ready for mass roll-out

· In 2014, as part of it mobile payment services development, Tinkoff Bank launched a series of mono mobile apps, including 'Traffic Fines' and 'Any-card-to-any-card money transfers'

· In 2014, Tinkoff Insurance rolled out motor insurance to complement its wide range of insurance products

· In autumn 2014, Tinkoff Bank was the first among Russian banks to implement the Real-Time Voice Authentication System in its call centre, considerably reducing verification time

· In December 2014, The Group paid a cash dividend of RUB 3 bn to its shareholders

· In January 2015, Tinkoff launched a cobranded debit card with OneTwoTrip, one of the leading Russian online travel agencies

· From January 2015, Tinkoff Credit Systems Bank and Tinkoff Online Insurance were renamed as Tinkoff Bank and Tinkoff Insurance respectively

· In February 2015, Tinkoff Bank launched a brand new internet bank and mobile bank application

· As of 1 March 2015, a total of 5 mln credit cards were issued

· In 2014, over 560,000 new active customers acquired

· The Tinkoff mobile bank app won a number of awards (recognized best in Russia in 2014 by Deloitte, iOS app named best by functionality by Frank Research Group in 2014)

Oliver Hughes, CEO of Tinkoff Bank, commented: 'We are pleased with our results for 2014, which was an extremely challenging year for the Russian retail banking industry. The bank's management has responded to slowing sector growth in the beginning of the year by initiating cost saving initiatives to counter the sharp deterioration of the market environment, and took specific steps throughout the year to enable the bank to deliver strong results, proving the robustness of our strategy and flexibility of our business model.

Our net profit for the year totalled RUB 3.4 bn, reaching the higher end of the guidance provided last year. With a return on equity at 15.7%, Tinkoff Bank remains one the most profitable Russian banks. We have built a significant liquidity cushion and have been successful in managing our deposit portfolio, which remained stable even throughout the volatile periods.

In 2014, our primary focus was on risk management and the quality of our loan portfolio, with cost of risk going down consistently throughout the year to 15.1% in 4Q14 following a spike in 1Q14 at 20.5%. While deliberately decelerating loan growth and bringing the approval rate down to 15%, we continued to acquire new high-quality low-risk clients, growing our loan portfolio by 12.8% and acquiring over 560,000 new active customers over the year. We have cut operating expenses and discontinued expensive acquisition channels, keeping only the most efficient ones.

Despite the weakening market environment and slower loan portfolio expansion, we have not laid aside our development goals and have used this momentum to build on new business opportunities and continue to launch new products. In 2014, we released four co-branded products together with major Russian and international online retailers, with all-new internet banking and mobile banking services launched just a couple of weeks ago.

Finally, in early 2015, the Group's major entity was renamed Tinkoff Bank, which reflects our long-term strategy of becoming a universal supplier of online retail financial services, with loan products remaining its core. Our strong 2014 results prove the efficiency of the Group's business model and its ability to quickly respond to the changing market environment, which is a major competitive edge for the Group.'

FINANCIAL AND OPERATIONAL REVIEW

In 4Q14 and FY14, the number of new credit cards issued was 259 thousand and 1,023 thousand respectively, while the volume of credit card transactions in FY14 was RUB 93.3 bn remaining flat compared to FY13.

The Group demonstrated strong results with robust profitability for the year 2014 despite the challenging economic environment. Throughout the year 2014 the Group stayed focused on managing risk, improving portfolio quality, enhancing collections and increasing operating efficiency, while still looking toward future growth with new market initiatives.

In 2014, the Group's gross interest income grew by almost 12% compared to 2013 to RUB 39.1 bn. Gross yield for the year 2014 decreased by 7 percentage points y-o-y mainly as a result of retention of NPLs on the Group's balance.

Average cost of borrowing for the Group declined to 10.9% in 2014 from 12.4% in 2013 as the Group continued the roll-off of more expensive early-stage debt from the balance sheet. As a result, interest expense in 4Q14 decreased to RUB 1.9 bn from RUB 2 bn in 3Q14.

Net interest income for FY14 grew by 15% y-o-y to RUB 30.8 bn compared to RUB 26.9 bn in 2013 with a net interest margin before credit charge of 34.8%, maintaining substantial profitability and meaningful loss absorption capacity for the Group. Despite the increase in the COR across Russia's consumer lending market, the Group generated a solid 16.9% risk-adjusted NIM after provision for loan losses.

In 2014, loan losses were a key area of focus for the Group. After peaking at 20.5% in 1Q14, cost of risk fell to 15.2% in 4Q14 while still above the Group's long-term trend line. COR for the year 2014 stabilized at a well-managed level of 17.6%, which is below the previously communicated guidance of 19-21%. Loan loss provision increased by 62% y-o-y to RUB 15.8 bn, which was driven by the overall growth in credit risk in the Russian consumer lending sector due to the general worsening of the Russian economy. Risk management and collections has remained a priority for the Group to ensure that the COR is well-managed in subsequent quarters and to mitigate any further deterioration in the Russia's consumer lending market.

The Group maintains strong operating efficiency: operating expenses in 2014 remained flat y-o-y. The Group implemented significant cost-savings in 2014, while still attracting new customers (over 560,000 in 2014) and launching new products to the market. The Group's acquisition machine remained fully intact and ready to rev up once the significant growth opportunity returns to the market. As a result of cost-savings, the Group's cost-to-income ratio declined substantially in 2014 to 29.6% compared to 35.6% in 2013.

Insurance operations contributed almost RUB 0.8 bn to non-interest revenue in 2014. This contribution relates mostly to the Group's existing customer base with potential upside as in 2014 the Group launched insurance sales to the open market, including motor insurance.

In 2014, the Group generated a solid net profit of RUB 3.4 bn, thus meeting the higher end of the outlook given in November 2014 (RUB 2.9-3.4 bn). This result includes an FX loss of RUB 1.1 bn for 2014. Strong profitability resulted in a robust ROE at 15.7% for the year 2014.

In 2014, the Group's total assets increased by 9.9% y-o-y to RUB 108.8 bn (YE13 - RUB 99 bn). In 2014, the Group deployed some excess cash into highly liquid CBR repo-able debt securities to decrease negative carry on its borrowings. Year-end cash balances represent 10% of assets and 25% of customer accounts.

Gross loans increased by 12.8% y-o-y to RUB 94 bn, representing a deliberate slowing down of the Group's loan portfolio expansion and significant tightening of approval rates to address the current credit risk environment.

In 2014, the Group significantly tightened its underwriting criteria, and this strategy resulted in positive developments in the loan portfolio quality: the bucket of loans that are 90 to 180 days delinquent reduced to 4.1% in 3Q14 and remained at the same level in 4Q14. This is a result of the Group's tight underwriting and enhanced collection process, which is bringing better vintages into the Group's portfolio that are diluting the older, riskier vintages.

Due to the revised approach of retaining overdue and non-performing loans on the balance sheet for in-house collection which secures better recovery rates, the share of non-performing loans (NPLs, including loans in courts) in total gross loans grew to 14.5% in 2014 from 7% at YE2013. The loan loss provisioning coverage ratio stayed at 1.4x NPLs. Balance sheet provisioning for impairment of loans grew to RUB 19.3 bn compared to RUB 9.4 bn as of YE2013 as a result of the conservative provisioning policy that the Group maintains.

In 2014, the Group continued to maintain a low approval rate at 15%. As a result of this effort net loans remained flat in 2014, with the share of net loans in the Group's total assets having decreased to 68.5%.

In 4Q14, the Group's liabilities increased by 20% to RUB 87.8 bn from RUB 73.1 bn in 3Q14. Customer deposit volumes increased to RUB 43.4 bn and now account for 49% of total liabilities. Deposit portfolio proved stable throughout the period, and the Group can manage it up and down as required.

The book value of the Group's debt securities increased due to the currency revaluation of the Eurobond. On the asset side this corresponds to the increase in the value of dollar-ruble swaps that the Group holds to hedge the currency balance sheet position. The Group remains well funded to meet its liquidity obligations and does not require additional external funding to meet its business plan objectives.

At the end of 2014, the Group maintained a robust capital position, with the statutory CBR N1 total capital ratio at 15.5%. N1 ratio decreased by 100 bps from 16.5% at 9M14 mainly due to the dividend payment in December 2014. In 2014, the Group's equity grew by 2% to RUB 21 bn.

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The management team will host an investor and analyst conference call at 14.00 UK time (17.00 Moscow time, 09.00 U.S. Eastern Daylight Time), on Wednesday, 4 March 2015.

The IFRS report will be available on the Tinkoff Bank website at  

To participate in the conference call, please use the following access details:

A live webcast of the presentation will be available at: https://pgi.webcasts.com/starthere.jsp?ei=1055558

Presentation will also be available at Tinkoff Bank website before the start of the call at:

https://www.tinkoff.ru/eng/investor-relations/results-and-reports/

Please register approximately 10 minutes prior to the start of the call.

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About the Group

TCS Group Holding PLC is an innovative provider of online retail financial services operating in Russia through a high-tech branchless platform. In order to support its branchless platform, the Group has also developed a "smart courier" network covering almost 600 cities and towns in Russia which allows next day delivery to many customers.

Since its launch in 2007 by Mr Oleg Tinkov, a renowned Russian entrepreneur with a long track record of creating successful businesses, the Group has grown into a leader in the Russian credit card market. As of 1 March 2015, the Group has issued 5 mln credit cards.

In addition to a market-leading credit card offering, the Group has developed a successful online retail deposits programme. The Group's other innovative lines of business include Tinkoff Online Insurance, which enables the Group to underwrite and sell its own innovative online insurance products, and Tinkoff Mobile Wallet, mobile payment solutions and financial services for Russian consumers.

As of 31 December 2014, the Group's total assets amounted to RUB 108.8 bn, net loans and advances to customers stood at RUB 74.6 bn and customer accounts (deposits) amounted to RUB 43.4 bn. In 2014, the Group generated a net profit of RUB 3.4 bn and net interest income of RUB 30.8 bn.

The Group is well capitalised with the total capital ratio and Tier 1 capital ratio of 21.8%and 15.9%, respectively, in accordance with Basel III methodology.

Forward-looking statements

Some of the information in this announcement may contain projections or other forward-looking statements regarding future events or the future financial performance of the Group and Tinkoff Bank. You can identify forward looking statements by terms such as "expect", "believe", "anticipate", "estimate", "intend", "will", "could," "may" or "might", the negative of such terms or other similar expressions. The Group and Tinkoff Bank wish to caution you that these statements are only predictions and that actual events or results may differ materially. The Group and Tinkoff Bank do not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in projections or forward-looking statements of the Group and Tinkoff Bank, including, among others, general economic conditions, the competitive environment, risks associated with operating in Russia, rapid technological and market change in the industries the Group operates in, as well as many other risks specifically related to the Group, Tinkoff Bank and their respective operations.