October 04, 2018 - 3:41pm EST by
2018 2019
Price: 17.25 EPS 2 2.3
Shares Out. (in M): 183 P/E 9 7
Market Cap (in $M): 3,150 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Russia
  • Banks


The TCS Group is the publicly-listed holding company for Tinkoff Bank, an online bank/fintech firm which has grown from virtually nothing a decade ago to the second-largest credit card issuer in Russia today. Tinkoff, aka TCS, trades at 9x TTM earnings and 7.5x next year’s earnings. Tinkoff earns 40-50% ROEs, is well-capitalized with a T1 CAR of 16.5%, and pays out roughly 50% of its earnings in dividends. Because it has little meaningful competition, it’s growing at 20-25% a year despite the high payout ratio. Goldman Sachs, one of the underwriters for Tinkoff’s IPO in 2013, still owns 2% of the equity.

Almost everything you hear about Russia today is scary, bordering on hysterical. But instead of pundits and "thought leaders," we are guided by John Templeton, who liked to buy good businesses at great prices in places that made polite society gasp. Now that Russian trolls are being blamed for tanking the latest STAR WARS movie, we think investor sentiment on Russia has reached the point of maximum pessimism. But then maximum pessimism is what it takes for the world to offer up a compounding machine like Tinkoff at the same multiple as Office Depot.



What makes Tinkoff special

Oleg Tinkoff, a Russian entrepreneur with 47% ownership, 90% voting control of Tinkoff, founded Tinkoff Bank as a branchless bank in 2006. Since then, it has grown to become Russia’s second largest credit card issuer with 12% market share and 10.5 million issued cards. Building on its success in credit cards, Tinkoff then expanded into SME accounts and debit cards. Now it’s one of the world’s largest online-only banks by deposits.

The bank serves its customers either online, through the mail or through its call centers. It has leading in-house IT—60% of staff are in IT—and it has the most efficient mobile banking platform in Russia. Tinkoff has massive cost advantages over other banks because it has no physical branches and because it’s able to run off what’s basically a skeleton crew of employees relative to other banks. Administrative expenses are usually 20-30% of total opex in the rest of the industry. At Tinkoff, they’re 13%. Staff costs are 50% of opex at other banks. At Tinkoff, they’re 33%.

Tinkoff uses its low-cost provider status to draw customers by:


(1) spending multiples more of its opex on marketing and advertising than other banks, and

(2) offering services that its competitors can’t afford. For example, a twelve-month deposit would earn 7.22% at Tinkoff compared to 6.23% at VTB Bank or 5% at Sberbank.


As a result of attractive rates, popular products and a top-rated mobile platform, Tinkoff’s growth hasn’t been limited to credit cards. Its deposit base and its debit card business have also grown rapidly. Tinkoff now has over 3.5 million debit card customers, and deposits are 80% of liabilities, enabling Tinkoff to lower its funding costs versus bonds or other debt. Meanwhile the overall cost structure has also allowed Tinkoff to put up NIMs of 24% and incredible ROE figures.


During Russia’s recession from 2015-2016, Tinkoff had only one down quarter. It remained profitable even as oil, the keystone of the Russian economy, fell from $110 a barrel to $30 and even as Russia’s GDP effectively halved.

Throughout its history, Tinkoff has repeatedly achieved ROEs above 50%. But more importantly, it can continue earning high incremental ROEs. Now that Russia has exited its recession, Tinkoff’s loan growth is back around 25% a year, where it could stay for a long time.




In terms of Russia itself, the country is unique in the world today due to its underleverage. As a percentage of GDP, government debt and household debt are both extremely low. Household debt is 16% of GDP. Government debt is 17%. Only corporate debt is high at 50% of GDP. Meanwhile after decades of being underbanked, Russia is undergoing the “financialization” of its economy. Credit card receivables have grown rapidly—31% a year from 2007 to 2014. Over that time, Tinkoff’s credit card portfolio grew 96% a year.

To give you an idea of change taking place, even today 60% of payments in Russia are still made in cash. In fact, before 2003, there weren’t even any revolving credit cards in the country, and even now the majority of Russian consumers still don’t own a credit card. The market for credit cards here is wide-open, as a result.

Tinkoff, meanwhile, has used the shift to online banking to leapfrog most of Russia’s other banks in not just credit cards but online banking as a whole. Tinkoff, along with Sberbank, VTB 24 and Alfa Bank serve probably 85% of Russia’s online banking users. An oligopoly has formed in online banking, and the members are enjoying the benefits that come with it. Often rapid growth and technological change produce a free-for-all. But here the opposite is happening. Tech-savvy banks have experienced both massive secular growth and massive gains in share. In 2012, these four firms controlled just 41% of Russia’s credit card market. Now they control 71%.

Technological change either destroys monopolies or it creates them. Here, it's creating one. Why? Because most of Russia’s banks are essentially asleep, and these four firms, and really it’s only three firms because VTB is a second-tier player, have been leading the way digitally. But even within this oligopoly, which confers a key competitive advantage in its own right, Tinkoff is positioning itself in a unique, formidable way. Tinkoff’s story, up to this point, has mostly been about its meteoric growth in credit cards, which currently comprise 80% of income. But that part of the business doesn’t convey the depth of the opportunity here.


Tinkoff’s real potential: the financial supermarket

According to Tinkoff’s founder, Tinkoff’s future isn’t in expanding into mortgages or auto loans. Their ultimate aim is generate 90% of their profits from fees and commissions. Now of course who wouldn’t want that? But unlike others, Tinkoff is already executing on this vision via, their financial supermarket that’s a one-stop shop for all of their customers’ needs.

Customers will be able to pay their utility bills, reserve tables at restaurants, make mortgage payments, all without leaving the Tinkoff app. Customers already have access to a broad suite of products, some provided by Tinkoff, others provided by partners, and in the case of partner-provided products, Tinkoff significantly simplifies the paperwork and the administrative burden of signing up for them.




Studies of mobile app usage show that people use only a handful of apps regularly, and one of them is typically their mobile banking app. Frequent customer “dwell time” gives the banks owning those apps the ability to cross-sell other products. Frequent customer contact also gives them the ability to provide targeted offerings based on the customer’s profile, which increases conversions.

In this case, Tinkoff’s expansion beyond credit cards isn’t in a remote future. It’s already underway. has 5 million users. Meanwhile Tinkoff has grown fee and commission income rapidly, nearly doubling it in 2016 to $230 million. F + C income is currently 20% of income, and management says it will comprise 30% of income by the end of 2019.

Tinkoff has laid the groundwork for its plans in a very smart way. Most fintech firms don’t get their hands dirty by lending. They want the easy, low-risk fee income. Everybody does. But Tinkoff’s founder understood early on that to become a financial marketplace, his company needed not only breadth but also depth. In this case, the product which provides that depth is Tinkoff’s credit cards and, later, its debit cards.

This is a crucial concept. Imagine if Netflix had never gotten into the dirty, risky work of producing original content. Let’s say instead it was the greatest aggregator in the world of others’ content. Then it wouldn’t be that valuable because it wouldn’t be a service you absolutely had to have. My Roku already serves the same function. I can search for a movie and find it on any platform. I don’t need to be locked into Netflix. But what makes Netflix “must-have” is its original content. Then the breath of its other offerings solidifies its value to consumers. But make no mistake. First there must be depth in the form of that base offering of something necessary and unique. That’s the root off which everything else can grow.

The root off which Tinkoff grows is the strength of its credit cards and also increasingly its debit cards. These traditional banking products distinguish it from other fintech firms. Meanwhile, as a result of its startup culture and online-only cost advantage, Tinkoff distinguishes itself from Russia’s incumbent banks. By bridging two worlds, Tinkoff has placed itself in a unique competitive position from which it can grow and defend its wonderful returns on capital.

Equally significant, there’s a “land grab” element to the change taking place in Russia. The low-hanging fruit in the banks’ transition from offline to online is eliminating branches and employees. Innovations beyond that will be far harder and more incremental. This dynamic helps Tinkoff because, by going branchless first, it has led the innovation that offers the largest, most immediate benefits to customers. The window of opportunity on this will only stay open for so long, and when it closes, the opportunity to take share will close with it. As a result, it will be increasingly hard for the next up-and-comer to do to Tinkoff what Tinkoff has done to Russia’s legacy banks.

Tinkoff itself is aware of the time-sensitive opportunity it has, which is why it’s the biggest advertiser among all banks on Russian television.


The Russia Question

Investing in Russia carries more risk from the government than it does in a country like the US. But we think the fears about Russia are completely out of proportion to the actual risk. First of all, Tinkoff has little international business and thus is unlikely to be sanctioned by the US. Second, there is strong evidence that Vladimir Putin has billions of dollars trapped in offshore banks due to the Magnitsky Act, which Russia is obsessed with getting the US to repeal. Putin has the ability to make trouble for the US, but the US also has the ability to make trouble for him. The dynamic reminds me of a cartoon my dad loves where a man goes to the dentist, and as soon as the dentist sits down, the man grabs the dentist right where it counts and says, “We’re not going to hurt each other, are we?”

Ultimately Russia isn’t trying to restart the Cold War or resurrect the Soviet Union. Its aggressions are a continuation of what it’s always done: bluff masterfully in order to play a weak hand.



Over the next three years, Tinkoff’s loan growth will likely continue at 15-20% a year. Tinkoff is on pace to grow Fee + Commission income so that it will comprise 30% of income by 2019. We assume this upward trajectory continues and that in three years they grow F+C to at least 35% of income.

With those assumptions, we get to $3.3 EPS in three years.

We think that as tensions between Russia and the US normalize, and as Tinkoff cements its place in Russian online banking, a 12x earnings multiple is achievable. This is nowhere near what Tinkoff should actually trade at but nonetheless leaves room for the “Russian discount.”

This gets us a $40 stock in three years and a 36% IRR.





DISCLAIMER: This writeup represents the opinion of the author. Please do your own research.











I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


We don't look for catalysts and frankly prefer situations where there are no specific positive events on the horizon.

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