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Edited Transcript of BSPB.MZ earnings conference call or presentation 27-Aug-19 1:00pm GMT

Half Year 2019 Bank Sankt-Peterburg PAO Earnings Call

Saint Petersburg Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank Sankt-Peterburg PAO earnings conference call or presentation Tuesday, August 27, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Konstantin Noskov

"Bank "Saint-Petersburg" Public Joint-Stock Company - VP & Head of Strategy

* Konstantin Yuryevich Balandin

"Bank "Saint-Petersburg" Public Joint-Stock Company - Deputy Chairman of the Management Board

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Conference Call Participants

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* Andrey Mikhailov

Sova Capital Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to BSPB Second Quarter 2019 IFRS Results Conference Call. I will now hand over to Konstantin Balandin, Deputy Chairman of the Management Board; Konstantin Noskov, Vice President, Head of Strategy; and Ruslan Vasilev, Deputy Head of IR. Sirs, please go ahead.

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Konstantin Yuryevich Balandin, "Bank "Saint-Petersburg" Public Joint-Stock Company - Deputy Chairman of the Management Board [2]

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Thanks a lot and good afternoon, ladies and gentlemen, and welcome to our 1H 2019 IFRS Results Conference Call. And as usual, I will pass you through the presentation, and then we'll have some time for Q&A session. So let's kick off.

And as usual, once again, I start with the highlights for the first half of 2019. And the most important stuff that happened to the bank is that our core banking revenues increased by 14% up to RUB 14.7 billion in the first half of the year, including all-time best quarterly results of RUB 7.7 billion in the second quarter alone. And the key driver behind that is net fee and commission income, which increased by 21% year-on-year up to RUB 3.3 billion for the first 6 months of the year.

What is also important is that we continue to see very nice growth in retail loans, which is 11% up year-to-date or 22% year-on-year and mostly in line with what we see throughout the system. And last but not least, we have seen now the major credit rating agencies upgrading the bank's rating throughout the summer by 1 notch so with a stable outlook.

So having said that, let's go deeper into the figures. And as you see from the upper part of this table, there's no major dynamics in our balance sheet. And our asset loan portfolio deposits total capital are more or less up or down 1% in the second quarter, and we are more or less 2% or 3% down in most of the figures year-to-date. So no major dynamics, and most of it is explained by ruble being stronger in the 1st of July compared to 1st of January.

So total assets as of 1st of July is RUB 657 billion. Gross loans is RUB 365 billion, customer deposits are almost RUB 400 billion, and total capital is RUB 92.6 billion.

We have posted RUB 5.3 billion of net interest income in the second quarter and 11 point -- and RUB 11 billion for the 6 months period, which is a 7% increase compared to what we had last year. Net fee and commission income is 1 point -- almost RUB 1.9 billion for the second quarter and RUB 3.3 billion for the 6 months period, which is 30% increase and 20% increase. And you can even find the figure of almost 40% increase in this line, which is the dynamics for the second quarter year-on-year. So we have seen a very nice growth in fees and commission income. And all in all, our revenues for the second quarter are RUB 7.9 billion and RUB 14.8 billion for the 6 months period.

We have also posted net income of RUB 2.2 billion for the second quarter alone. And if you transfer all of these figures into ratios, so net interest margin is flat year-on-year; it's 3.6% for the 6 months period. Cost/income ratio is 47% for the 6 months period and 43% for the second quarter alone. And ROAE is 9% and 11.5%, respectively.

Let's have a closer look at the figures for the half -- for the first half of the year, for the 6 months period. And down in the left, you may see the income structure. We have posted RUB 11 billion of net interest income, which is RUB 750 million extra compared to the first half of 2018. We have also added almost RUB 600 million of net fees and commission income, which is a very strong growth of 21% year-on-year, and we are around 0 in terms of net trading income. So more or less core banking revenues displaces trading in the revenue structure.

And on the right-hand side of this slide, you may see that total revenues -- combined revenue is up RUB 14.8 billion for the 6 months period, down by RUB 600 million compared to the first half of 2018. But considering we have almost RUB 2 billion less of trading income, this is a pretty strong performance from the bank. And operating expenses are slightly less than RUB 7 billion for the first half of the year, and we have also created RUB 3.2 billion of provisions, which is almost RUB 0.5 billion less than in the first half of 2018.

And let's turn the page and have a look at key ratios. Net interest margin is basically flat at the 3.6% area for almost the third row -- third year in a row. Cost/income is 47% but destined to improve towards the end of the year as revenues pick up and costs are more or less under control. And all in all, [they could get] net income for the first 6 months of the year is almost RUB 3.5 billion, and it corresponds roughly to 9.2% ROAE.

And let's turn the page and have a closer look on our figures on a quarterly basis. So for the second quarter alone, we have posted RUB 5.3 billion of net interest income, which is a 1% increase year-on-year. We have very impressive growth in net fee and commission income of almost 40% year-on-year. And all in all, we have added more than RUB 500 million of new net fees and commission income, and the total amount is close to RUB 1.9 billion.

And net trading income for the quarter is RUB 460 billion. And all in all, it outweighs most of the losses we have incurred in the first quarter.

And down on the right, you can see the revenues. So all in all, we have posted almost RUB 7.9 billion of revenues, which is a pretty decent result in the last 5 quarters horizon. Operating expenses are RUB 3.4 billion, which is lower both than the previous quarter and the second quarter of 2018. And provisions for the quarter, less than RUB 1.5 billion. So we continue to see improvement here as well.

And let's turn the page and see where the ratios are. Net interest margin is 3.5% for the quarter. Cost/income is a major improvement over the previous quarter, down to 43%, and we expect it to continue to go down further. And all in all, we have posted RUB 2.2 billion of net income. So we're back to RUB 2-plus billion of quarterly net income area, which we have enjoyed through most of the previous quarters as well. And our total ROAE is once again 11.5% for the second quarter of 2019.

And the next slide is about some details of what is going on about net interest margin. As I mentioned, our net interest margin as a whole is down to 3.5% in the second quarter, but we see different dynamics between core banking margin and trading margin in the quarter.

So core banking margin continues to improve for the 5 -- for the 5th quarter in a row and reaching an impressive level of 5.9%. So we see very nice dynamics on the core banking margin.

On the other hand, we see trading margin going down to negative territory for the first time in a couple of years. And mostly it's driven by trading assets, a trade drop, and this one is explained by changes in the currency mix and the asset being held in the trading portfolio. So we used to have primarily a ruble-nominated assets in the previous quarters. Now it's mostly FX-nominated, so average interest rates is obviously down. Other than that, we continue to see improvement of interest rates on the loan portfolio, up by 30 basis points in the second quarter to 9.7%. And we see -- on the other hand, we see a slower pace of repricing on the key source of funding for the bank, which is term retail deposits, whereas average interest rates is up by only 10 basis points. So all in all, it allows us to improve our core banking margin.

And the next slide is dedicated to a closer look at what is going on in fee and commission of our core business. And in the first half of the year, we have posted slightly more than RUB 2.3 billion of fees and commission from corporate business, which is RUB 340 million increase compared to the first half of 2018, primarily driven by increase in cash and settlement transactions commissions, where we added some RUB 230 million, and also driven by guarantees and other risk-associated products and customer FX transactions. So in both of these lines, we have added something like RUB 60 million year-on-year.

And we have also seen some very nice growth in retail fees and commission, where we have added RUB 300 million of new income, reaching 1 point -- almost RUB 1.6 billion of retail fees and commission, primarily driven by plastic cards and check settlements, where we have managed to add RUB 170 million of new fees and commission and by other fees and commission, where we have added almost RUB 250 million, and this one is mostly driven by insurance products being sold together with credit products to our retail customers.

And the next slide is to give you a better idea on how is the breakdown between core banking and trading business is doing in the second quarter. And what we see from this slide is that in the second quarter, we have posted the all-time best revenues in core banking of RUB 7.7 billion, which is almost RUB 1.1 billion more than a year ago. And once again, this is an all-time high, and we expect this positive dynamics to continue going forward.

On the other hand, we have posted almost 0 revenues on the trading part of our business. So let's say that the financials you see today are mostly independent of what the bank generates in trading business.

The key point of growth within our business, if you turn the page, we will see that key point of growth remains in retail banking. This is where we continue to see very nice dynamics of retail loan portfolio. Our mortgages increased by 16% year-on-year. And in the second quarter alone, we have added almost RUB 3.5 billion of new mortgages to our portfolio, which is a 5% increase in the quarter alone.

Our consumer loans are up by RUB 2 billion in the second quarter, which is a 9% growth in the quarter alone. And all in all, we have seen 33% growth year-on-year in consumer loans. And car loans are up by RUB 600 million in the second quarter alone, which is a 14% growth in the quarter. And what is also worth noting is down in the left, you may see that the quality of our loan portfolio remains pretty healthy and more or less unchanged compared to what we have seen in the previous periods.

What is also worth noting on this slide and we wanted to let you know is that there's quite important stuff going on apart from -- just absolute growth in retail loan portfolio is the bank is in the top 10 bank in Russia according to Digitalization ranking provided by Skolkovo and VR Bank earlier this year. So we're pretty happy with this achievement. And what is also important for us is that we have very actively issuing a Saint Petersburg resident ID card in all of our branches. This is a major project launched by local government earlier this year, and we are one of the 3 banks participating. This is a product with a very nice pickup rate, and we see a very nice growth coming out from this product.

And the next slide is dedicated to what is going on generally within our loan portfolio. Apart from retail -- retail growing nicely on the back of corporate portfolio being rather stable we see that the share of retail lending to individuals is above 27% as of 1st of July. And just to remind you, it has topped 25% as of 1st of January so the share of retail lending continues to grow, which is a major step forward on our path to diversify our loan portfolio exposures and a major step forward on the way to improve our net interest margin as well.

And back to the figures, our total loan book is RUB 365.7 billion as of 1st of July, down 2% compared to 1st of January. Most of it is explained by write-offs and ruble being strong as of 1st of July. We have written off RUB 4.1 billion in the first half of the year. And the -- if we take net effect of ruble being stronger, then we see some slight growth in the loan portfolio.

When it comes to the quality of the book, no major changes. Problem loans are down to 10.4% as of 1st of July, primarily due to write-offs, and we continue to see a consistent level of provision coverage of slightly below 10%. And in terms of cost of risk, cost of risk remained stable for the second quarter in a row, the level of 1.9%. More or less, we'll continue to see the same level we have seen in the first quarter and throughout 2018, and we continue to stick to our full year guidance of 1.7% to 1.9% area.

The next slide is dedicated to our balance sheet structure. No major changes here. If we have a look at the funding and the customer deposit structure on -- up on the right-hand side, then retail deposits are more or less stable during the first half of the year. We have seen some decline in corporate deposits, which is mostly seasonal because 1st of January was a seasonal inflow of deposits. So what it means is that retail deposits today represents 62% of total customer deposits, and we are still in a very comfortable position with regards to liquidity with loan-to-deposit ratio of 82%. And we are more or less in the same conservative position with regards to credit risk we are facing in the securities portfolio and interest rates we face in securities portfolio as well.

And when it comes to capital adequacy ratios, on the next slide, you may see that our total capital adequacy under Russian Accounting Standards -- regulatory standards as of 1st of July is 14.8%. Tier 1 capital adequacy is 10.4%. So we continue to remain comfortable and consistent on this high level of capital adequacy.

And one other issue I wanted to mention on this slide is to remind you that we have announced a share buyback at the end of July, and we're going to buy back 12 million of ordinary shares in the period starting September 6 at the price of RUB 53.5 per share. You can have all of the details on our website, and we expect that it will consume about 10 basis points out of our Tier 1 and total capital adequacy ratios, respectively.

And my final slide is to confirm all of the guidances that we have announced earlier this year. All of the -- we stick to all of the figures. We expect loan portfolio growth of 5% for full year. And with the kind of dynamics we're seeing in corporate lending in the third quarter, we are quite optimistic about reaching this target and probably being above this.

We see core banking margin target of 5.5% and 5.8% being very realistic, probably even pessimistic, but don't see any reason to revise it yet. But nevertheless, we are very positive that this target is achievable.

Cost of risk target is still in place, 170 basis points, 190 basis points is achievable. Cost growth, 5%. You have seen 4.2% cost growth in the first half of the year, so 5% is in place.

And finally, the targets for cost/income ratio and ROAE look a little bit more ambitious given that income was not very strong in the first quarter in particular. But still we see no reason to revise this target for the time being, and we stick to these targets as well.

Having said that, I'm concluding my portion of the presentation, and I have a special guest today. And you well know this guy, Mr. Konstantin Noskov, who is the Vice President and Head of Strategy of the bank. And we have announced earlier this year that we foresee some changes to our strategy, and we have launched the process of revising our strategies. So I'll pass the boat to Konstantin, and he will pass you through the major changes that we have done to our strategy. And afterwards, we will be available for Q&A session. Thank you.

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Konstantin Noskov, "Bank "Saint-Petersburg" Public Joint-Stock Company - VP & Head of Strategy [3]

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Thank you, Konstantin. Good afternoon. I would like to cover the changes to the strategy that we have made recently. First of all, I need to say that changing the strategy or amending it is the best practice on the market, and we just wanted to show you what changes we see in the environment, the new opportunities that the bank has, and we would like to mark several focus areas of our business and to set some ambitious goals.

So the new strategic goals that were set in this amendment are the following: To become the best private bank for corporates in the regions of operation; to become one of the leaders in terms of online sales and operations while remaining one of the most efficient digital classic Russian bank; the third goal is to become one of the leaders on the EXIM market; and the fourth goal, to become the bank of 2 capitals, which actually implies the increase of our business in Moscow.

I would like to elaborate on these goals. And first of all, let's start with the goal to be the best privately owned bank for corporates in the regions of operations. Actually, this goal is about quality. It implies how the customers or the companies on the market perceive the bank as a partner, which should be flexible, always ready to help, never let it down. And we mostly relate this goal to a large-share corporate business. Now we see on the market that the number of privately owned banks decreased, and the companies need a reliable privately owned bank who could take fast decision and could be -- and could give to the customers flexible solutions. So we are in the position actually to be among these probably very few privately owned quite big banks on the market. What is important is that the business model of the bank nowadays with the maximum proximity to the customers is our main competitive advantage in Saint Petersburg, and we have always followed this strategy. So now we think it is the time to fight for the customers using these competitive advantages.

It's rather difficult to assess whether we're successful in achieving this goal or not and to set the right metrics. It's more about, as I told, the feeling of the customer, the perception of the bank. But we decided that the metrics that we show, they are relevant in this situation. We will focus on NPS improvement because it actually shows what customers think about us. And the other thing is that the higher the quality of the bank, the more business we have. Therefore, a 20% increase in the number of large corporates, which are highly profitable for the bank, is an indicator that will show that the quality of the bank is going up.

The second aim is to be among the leaders in online sales and operations. The rationale behind this goal is the following: It is not just to be digital nowadays, but it's important to be efficient in digital transformation because all the banks are digital now. It's the new reality. We all say major parts of our relations with the bank are done through smartphones, and the goal for us is to increase the share of what we are doing online, sales, operations, decision taking, everything. And to invest reasonably, to have moderate costs is actually the top priority for us here. We are already the least branch-dependent bank among classical Russian banks, and we are among the leaders in client activities and sales in online channels.

So the metrics of this goal for us is to increase the automated credit decisions up to 90%; to increase online sales up to 90%; and of course, to focus on time-to-market, which is always needed to be decreased.

Let's turn the page to the third goal, which is to be among the leaders in EXIM services. We think that nowadays there is a good chance for us to gain from the current market situation. We have advanced EXIM operations infrastructure with good relationships with international banks. We have a high expertise in this area. And the penetration among the Northwest region customers is also rather high, 36% of the customers who are doing international business -- trading business -- have accounts with us.

Moreover, the bank is -- has quite a limited impact from geopolitics. Therefore, for many companies nowadays, we are, I'll say, a sort of a safe place where they can lead the international business.

The metrics in this goal, we would like to achieve 50% share of the companies involved in EXIM activities to be our customers; to have about 10% of the volumes of EXIM trade in the region; and as a main financial target, to double revenues from EXIM operations by 2022 from RUB 1.5 billion to RUB 3 billion. And this goal is in line with our transaction business strategy.

And the fourth goal is to be the bank of 2 capitals. I told it means that we increase our business in Moscow. Nowadays, about 25% of our activities in lending is in Moscow, and we understand that the size of Saint Petersburg market is relatively small. And if we have goals to increase our business, we need to start going somewhere out of the city. For example, the volume of the size of the markets of corporate loans in Saint Petersburg is about RUB 2 trillion. While in Moscow, it's closer to RUB 30 trillion. So much potential there. Therefore, we would like to increase our activities there.

The other important thing is business diversification. So not only one region. Of course, we have Kaliningrad and Novosibirsk, but the volumes are not that high there. What we have nowadays, why we can struggle for the higher market share and for big business in Moscow, we have good reputation there. We have a long-standing history. And today, we have a very competitive terms for services, even interest rates. So now we think is the time to be more active in Moscow. It relates more to large corporates what I'm saying about lending.

But the other important area of new business is small and medium enterprises transaction business. In Moscow, there are also much more companies with a bigger turnover than in Saint Petersburg. And currently, we have, we think, a rather good team, which can start doing this business and increase significantly the volumes. Our goal for 2022 is to increase the number of SMEs, the customers for our bank by more than 10,000. Currently, the figure is about 1,000 customers.

Speaking about volume of lending business, our metric is to achieve a 40% share in the bank's corporate loan portfolio. Today, it's a bit less than 30%. Actually, it means that Moscow loan portfolio should be doubled within the 3-year time.

Please turn the page, and I will tell you about the principal goals of the strategy of '18-'20, which we don't change. While working on the update of this strategy, we made an extended model so we can check whether the goals for 2020 could be achievable. And on these 3 charts, you see the dashed line which is dividing each chart into 2 parts, where on the left side, there is the goal in the current strategy; and on the right side, there is the goal on the extended strategy. In all these 3 charts, these figures are equal. So we think that the goals that we set 3 years ago for 2020 are realistic for the business scale, for ROAE, for transaction and business development.

The fourth goal that we had previously, which is the growth with market capitalization of the bank, we transformed into capital market strategy, which is indicated on the current slide. Why we did it? We'll actually give you 2 reasons. One of the reasons is investor feedback, who are saying that growth of market capitalization cannot be a principal strategic goal because it's sort of reflection of how the bank is pursued by the market, and the management cannot directly influence on it since there are lots of factors that are not on the management direct control.

And secondly, we would like to fix the bank's position on this capital management issue, which is wider than just the goal for market capitalization or share price growth. However, we have not lifted the share price growth target, but transformed it into the aim to achieve a higher price to book value, which is indicated here as the range between 0.6 and 0.8.

Also, we are declaring here in this capital management strategy that we don't have any plans for new share issuances and that the main source of our capital is the profit. We'll stick to our dividend policy and we intend to pay at least 20% on the IFRS net profit every year.

Now the important figure is our capital adequacy ratio, which is -- N1.2, which is 9.75%. It's a sort of line behind which -- a higher reach that the bank is ready to distribute capital to shareholders. There could be 2 ways of the distribution of the dividends and share buybacks. And of course, as we announced before, the bank intends to cancel all acquired shares that we acquired during [minimum] buybacks.

All in all, I covered the main issues of our strategy amendment. And now we are ready with Konstantin to answer your questions in relation both with [actual] results and the strategy changes. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Andrey Mikhailov, Sova Capital.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [2]

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I have 3 questions. First of all, on trading activities, what are your expectations for the rest of the year? And what's the results for July, if possible? And my second question is on the fair value instrument revaluation that you have in Q2. That was a negative. I presume it relates to some loans, probably corporate loans, and I would be grateful if you could discuss this in more detail. And my third question is quite a traditional one on yields, funding costs. And basically if I highlight that, what are your expectations for the second half and for 2020?

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Konstantin Yuryevich Balandin, "Bank "Saint-Petersburg" Public Joint-Stock Company - Deputy Chairman of the Management Board [3]

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Thanks a lot for your questions, Andrey. Nice to hear from you. Starting with trading activities. We see the situation improve and continues to improve. And all in all, I would say that like in previous years, we have targeted trading activities to account for something like 10% of revenues on average in the long-term. I would say this year, it's probably going to be 3% or 4% of revenues. So I would expect trading revenues of about RUB 1 billion for the full year.

And speaking about the second question, we have posted some losses from initial recognition at fair value of one of the loans. This was, let's say, a restructuring process for one of the problem loans. One of the transactions and the cost of restructuring resulted in this sort of accounting, and we have included it in the calculation of cost of risk. So if you have a look at our provision charge calculation and cost of risk calculation on the relevant slide, it is included in the 1.9 cost of risk calculation. So you are correct, this is a corporate loan. Please let me not dive further into details as regards to a particular borrower. But yes, this is corporate lending, and this is part of the cost of risk for the second quarter.

And speaking about what is going on with interest rate and with cost of funding in the third quarter and what are my expectations, I would say, yes, we continue -- we see that interest rates started to go down on deposits primarily. We see that some interest rates on loans started to go down as well. And as usual, I expect the interest rates on deposit side to go down faster, which we have seen in previous periods also. And I would expect that it should have a positive influence on net interest margin. So I would be conservative with noncore banking margin, in particular. I would be conservative to expect 6% core banking margin -- not to expect, sorry, 6% core banking margin for 2020, but let's say there are some signs to be optimistic.

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Operator [4]

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We have no further question. Dear speakers, back to you for the conclusion.

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Konstantin Yuryevich Balandin, "Bank "Saint-Petersburg" Public Joint-Stock Company - Deputy Chairman of the Management Board [5]

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Well, thanks a lot, everybody, for your time, for your attention and for questions. If you have further questions, please do not hesitate to contact our IR department. We will be happy to answer whether they relate to our financials or to our strategy update. Thanks a lot again and hope to see you next time in 3 months' period and thanks a lot and goodbye.

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Operator [6]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.