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Edited Transcript of CBOM.MZ earnings conference call or presentation 18-Mar-20 2:00pm GMT

Full Year 2019 Moskovskiy Kreditnyi Bank PAO Earnings Call

MOSCOW Mar 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Moskovskiy Kreditnyi Bank PAO earnings conference call or presentation Wednesday, March 18, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric de Beauchamp

Credit Bank of Moscow (public joint-stock company) - SVP of IR

* Mikhail Pavlov

Credit Bank of Moscow (public joint-stock company) - CFO

* Vladimir Alexandrovich Chubar

Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board

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Conference Call Participants

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* Andrey Igorevich Akimov

Gazprombank (Joint-stock Company) - Chairman of Management Board & Deputy Chairman of the Board of Directors

* Ekaterina Sidorova

Sberbank CIB Investment Research - Senior Credit Analyst

* Nikolai Krassimirov Dimitrov

Morgan Stanley, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Credit Bank of Moscow FY 2019 Financial and Business Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Eric de Beauchamp, Senior Vice President. Please go ahead, sir.

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Eric de Beauchamp, Credit Bank of Moscow (public joint-stock company) - SVP of IR [2]

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Thank you very much. Good afternoon, ladies and gentlemen. We are pleased to welcome you to the webcast dedicated to the full year financial and business results of Credit Bank of Moscow. In the course of our presentation today, our CEO, Vladimir Chubar, will give an update on the key business highlights of the reporting period; and Mikhail Pavlov, our CFO, will present the financial performance of the bank more in details. Our presentation will be followed by a Q&A session.

Now I turn the floor over to our first speaker. So please, Vladimir, go ahead.

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [3]

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Thank you, Eric. Good afternoon, ladies and gentlemen. It's my pleasure to host our full year 2019 results call today.

Commenting on the macro environment, I should admit that like the current turmoil and uncertainty, we are undergoing in 2019, we enjoyed relative stability of the macro on the ground, with strong Russia's fundamentals and continued GDP growth. CBR's monetary easing policy throughout 2019 was positively affecting business growth levels, though further improvements will be quite challenging.

Increased regulatory attention to particular business segments and step-ups in risk weights for particular categories of loans fairly controlled bank and sector stability. In our view -- so they're translated into certain challenges for some sector players.

Performance of our bank in 2019 in terms of scale of business and product offering improved through all business lines, which is briefly detailed on Slide #2.

Corporate loan book expanded by 12% in 2019, with stronger existing relationships and with new high-quality business and our physical coverage expanded to St. Petersburg region. We successfully arranged for a strong basis for further business growth in real estate sector. Dedicated ecosystem of products was developed to ensure that each and every client needs are satisfied. We are getting more active in SME segment and see certain growth potential here. Digitalization of our products and internal processes is underway with the new online products offered to our clients in 2019 and efficiency being improved.

In retail business, we increased our deposit base by 30% and loan grew by 14%. We also focus on appealing digital solutions for our clients, so a new improved package of digital services was introduced last year. Digital sales of our products increased by 170% and exceeded 36% of total sales. Another innovation of 2019 in retail business was launch of new private banking brand, in line with the client base growth by 33%.

Our investment banking activities delivered strong performance evidenced by over 2x revenue growth in the last 4 years to RUB 82 billion. We established strong foothold in the local debt capital markets as a top 4 bond issues arranger, having supported 80 bond issues in 2019.

We have also expanded the scale of our product offering to the CIS region and worked on digitalization of our IB services, introducing the fixed online platforms. In terms of international capital markets, 2019 was especially productive. We ensured strong regulatory capital positions where SPO on Moscow Exchange for almost RUB 15 billion, followed by redemption of USD 150 million Tier 1 and Tier 2 Eurobonds.

We also diversified and extended the tenure of our funding profile with 2 senior Eurobond issues for USD 0.5 billion and EUR 0.5 billion and 2 syndicated credit facilities for $0.5 billion and CNY 2 billion. Both of them were debut transactions for our bank.

On the ratings front, 2019 was a real success with an upgrade to BB by Fitch and another upgrade to A by Expert Russian Rating Agency, both on the back of a better risk profile evaluation. And last year, we also got the Chinese national scale AA+ rating.

Now let's move to a summary of our key financial results for 2019 on Slide #3. While Mikhail will provide a detailed description of the key drivers behind our performance indicators, I will focus here on a summary of key results. Profit for last year was RUB 12 billion as compared to RUB 27 billion in 2018 for a few reasons, including stronger ruble, as already repeatedly detailed during 2019 and lower net interest income while maintaining risk metrics at the level of 2018.

Return on assets and return on equity are weaker than in 2018, with 0.5% and almost 8%, respectively, affected by lower operation result. Net interest margin has improved to 2.2% versus previous quarter's results, in line with our guidance, as a result of our asset and liabilities repricing initiatives. Fourth quarter was in line with the third quarter, as you may see. Lower net interest margin versus sector average are due to strong competition in our key client niche, higher funding costs versus state-owned banks and our focus on highly liquid low-risk asset composition. Nevertheless, retail loans yield of almost 16% and the corporate loans yield of 8%, a bit more than 8% as well as loan book quality are very solid sector wise.

Total assets grew by 13%, RUB 2.4 trillion. One of the growth drivers was loan book expansion by 12% to almost RUB 830 billion. Loan portfolio quality had been quite stable since the first half of 2019 when one large borrower was moved to stage 3 buckets with relevant provisioning actions.

NPL ratio reached 3.6% in 2019 versus 1.6% in 2018, while cost of risk has remained stable at 1%. Bank's equity increased by 10% to RUB 210 billion in 2019, following SPO in the fourth quarter, bringing our core Tier 1 ratio to 11.9%, which is 1.2 points higher than in 2018.

I would like to take a few more minutes to briefly guide you through our achievements in ESG initiatives implementation in 2019. Please turn to Slide #4. As part of our transparency improvement and in the interest of our stakeholders, last year, we issued a dedicated sustainability report, which is now to be published annually. Targeting similar transparency goals, we became the first Russian bank to receive ESG rating, which highlights our commitment to being more socially and environmentally friendly.

To conclude my speech, I can't but mention the current situation circumstances. We hope that you and your loved ones are safe. The health and safety of our clients, investors, employees and community across the world is our highest priority. We take the recent developments very seriously and are operating in line with the advice from the World Health Organization.

Following Russian authorities' various orders and recommendations, we organized distant access for our employees who can work from home, and we do care of the safety of those employees who are physically present in the office. The bank guarantees, of course, full payments of salaries and health care for those who are in quarantine for preventive measures. As of today, thanks to all these measures, not a single employee of the bank was contaminated by the virus. We continue to give service to all our clients in a timely manner. Please rest assured that we are continuing to monitor the situation and to take all necessary precautions.

Now I want to pass the floor to Mikhail for further detail on the financial performance of the bank. Mikhail, please go ahead.

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Mikhail Pavlov, Credit Bank of Moscow (public joint-stock company) - CFO [4]

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Thank you, Vladimir. And good afternoon, everybody. I would like to draw your attention to Slide #5 with a detailed overview of the bank's financial results.

The diagram on the left reflects some negative dynamic of operating income for the period. Total operating income was down by 33% at RUB 36.3 billion year-on-year, caused by a decline of 6.5% of the net interest income and a loss of RUB 13 billion of currency revaluation, including RUB 4.4 billion of perpetual Eurobond, which are reflected in the equity due to the accounting principles.

Net interest income was also negatively affected by assets and liabilities repricing in the first half 2019, with recovery in the second half of the year. Net fee and commission income decreased by 6.6% year-on-year. Increased expense of the loyalty program for credit card holders and the decrease of revenue from cash handling and from settlement operations mainly negatively affected the net fee and commission income during 2019.

On the upper right diagram, we can see that operating expenses grew by 10%. The main driver was salaries and employment benefits, which increased by 16.3% to RUB 14 billion due to the growth of personnel and remuneration, including bonuses. Administrative expenses decreased by 15% to RUB 5 billion, which was mainly the result of efficient cost optimization and implementation of IFRS 16. Cost-to-income ratio amounted 51.6% for the reporting period, which mainly reflects a decline of the operating income.

On the bottom left diagram, we see that adjusted net income is RUB 17.3 billion, decreased by 22% year-on-year. The adjustment in the amount of RUB 5.3 billion includes a fixed revaluation, tax effect and redemption effect on perpetual debt issued.

Now let's move to Slide #6 with the breakdown of the bank's total assets. Total assets demonstrate stable organic growth year-on-year. 66% of total assets are represented by highly liquid assets. 71% of securities portfolio are represented by top-tier highly liquid investment-grade debt securities and serve as a part of the bank liquidity buffer. As for now, the total amount of additional unused liquidity sources comprised a very significant buffer of roughly RUB 686 billion, which companies added sales in the left-hand pie chart. These namely are unpledged securities, which the bank received under reverse REPO transactions and owned securities, the one in CBR Lombard List.

As the main part of the balance sheet, deposits in credit institutions, it's worth to mention that 71% of them have maturity less than 1 month and more than 90% of securities that serve as collateral on the reverse REPO agreements have an investment grade.

Now I suggest turning to Slide #7 on the loan portfolio. As evidenced on the left-hand side of the slide, drivers for the loan book growth for 12% in the reporting period grew both corporate and retail loans. Corporate loans expanded by 12% from a year start to RUB 719 billion, while retail loans increased by 14% to RUB 110 billion. Both trends are in line with our expectations, and this growth is sourced from our target top-quality segments.

Breakdown of the loan book by industries is presented on the right-hand side. Our concentration on crude oil and petroleum sector is rather stable in 2019. Crude oil production and trading share is 34%, and petroleum trading is 14%. Input of the rest sector remained relatively static.

Retail loan book breakdown traditionally evidence, our focus on cash loans making 75% of total retail loans, while the second largest contributor is mortgages, totaling 22% of retail loan book.

Now I will take a few more minutes to discuss loan portfolio quality on Slide #8. As shown on the upper diagram, the impairment allowance provides a sufficient NPL coverage of 137%. This ratio reduced in 2019, mostly due to the reclassification of NPL of one large corporate loan from the oil refinery sector, which was also the main reason of increasing of the NPL level from RUB 8 billion to RUB 26 billion since the beginning of the year. The NPL level amounts 3.6% on the same level for retail and corporate loan portfolio. Retail portfolio NPL ratio demonstrated a continuing downward trend year-on-year, decreased to 3.6%, which mainly resulted from the improvements of mortgage loan NPL that decreased to the level of 1.8%.

Cost of risk dynamics are presented on the bottom left diagram. As of December, the cost of risk ratio of the loan portfolio is one -- is on the same level of 1% in 2019. Retail cost of risk ratio went up to 3.9% due to remeasurement of the loss allowance. Corporate cost of risk decreased from 1.1% to 0.6%, mainly due to the loan portfolio growth and provisions recovery on a large corporate. The decision for recovery was taken up the proper assessment of high-quality collateral.

The portfolio risk metrics is under control. As described on the bottom right diagram, gross loan portfolio increased by 12% during the year, while coverage by impairment allowance slightly decreased to 4.9%, being a sufficient level given loan portfolio solid quality.

Now I suggest turning to Slide #9, where loan portfolio classification in accordance with IFRS 9 is provided. The dynamics evidences the improvement of corporate loan portfolio growth year-on-year. The share of stage 1 loans increased from 89% as of December 2018 to 92% as of December 2019. At the same time, the share of Stage 3 launch, being the most risky segment, increased from 2% to 4.3% due to manageable loan transferred to soft bucket and the impairment allowance provides a sufficient coverage of 70%.

Let's now move to Slide #10, which illustrates the funding structure of the bank. Total liabilities reflects moderate growth of 13% since the beginning of the year. In the reporting period, the bank improved its funding base by attracting more retail deposits, demonstrating the sector bank's reputation on the retail market. The retail deposit base, which accounts for 22% of total liabilities, increased by 30%. The bond issued increased to RUB 169 billion, reflecting the 2-year bonds issuance of the first quarter of the year.

Debt repayment schedule is comfortable for the bank, with the bulk of wholesale funding due from 2024. Deposits by credit institutions were mainly represented by repo transactions, 93%, which is represented by around 30% share of total liabilities.

Now just turning to the final slide, #11, on the bank's capital position. IFRS capital development are depicted on the upper diagram. IFRS total capital increased by 1.85% to RUB 303 billion. On the bottom right graph, the dynamic of Russian accounting standards capital ratio is shown. Regulatory minimums, including buffers applicable for systematically important banks are by far our top, with common equity Tier 1 ratio reaching 9.9%, then additional Tier 1 ratio, 12.6% and total equity ratio, which is actually 19.5% as of the latest date.

These were the main highlights of the bank's financial and business results for 2019. Thank you so much for your attention. And now let's move to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Nik Dimitrov from Morgan Stanley.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [2]

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A couple of questions. So I was looking at your corporate loan book breakdown and your oil and gas exposure is almost 50%. Can you just walk us through how comfortable you feel with that exposure, considering where oil prices are currently? And if you've done stress testing in terms of how well do you think asset quality is going to hold at the current -- or if the current depressed oil prices continue to stay at this level for quite a while? So that's the first question.

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [3]

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Nik, thank you for the call. Thank you for your question. We -- of course, this is one of the first steps we did. We tried to figure out what are the real risks with the current circumstances, with the current oil prices in our oil and gas sector. The good thing to say that the majority of our counterparties here are not so dependent on the real oil prices. So there is no guys who are just taking oil from the earth and selling. So the majority of our customers, big Russian corporates, and they are just solid guys like [a bunch of] companies, which are also benefiting now from the increase of the ruble exchange rate. The second group is the traders -- are the traders. So the traders are also much more linked to the margin.

Of course, the margin can be squeezed a bit at the current moment, but at the same time, just the question of their profitability but not a question of our risk on them. Of course, the guys who's working in the area of the refineries under higher risk than the first 2 groups. But here, we did some work. We had just one example, which is still our NPL Antipinsky oil refinery, which is, I think, another case. It's not about the oil prices, it's much more about the current situation with this plan, with this refinery and the decisions which will be made, we hope, by the key shareholder and the group of the creditors. So just answering your question in simple words, there is no major risk. Of course, it's really a bit bothering us, the currency situation, but we do not expect any losses from this group of customers, even with the current oil prices.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [4]

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And then can you give us the exposure to refineries from the oil and gas exposure?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [5]

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So currently, it's about RUB 15 billion. So RUB 11 billon is still the -- our Antipinsky and other small guys, smaller guys. But they are like in a good position in terms of their financials. I even want to answer your question in a bit like wider way about their companies and the businesses which are under even higher pressure because of the virus, because of all these current limitations governments are making. I mean of course, the entertainment sector, airlines and others, it's good to say that it's just about RUB 10 billion in these sectors. And one company is huge here. It's almost fully provisioned, we do not expect any other losses from this airline. So it's -- there is no reaction in capital.

Another company, which is also quite -- I mean like big for us, it's about RUB 4.0 billion. It's the loan to the former shareholders of the BIN Bank. I mean BIN Group. It's currently Safmar. So we are pledged here with this loan. We are pledged with the hotel in Moscow. Of course, it can be some pressure on the operational results of this hotel, but we are not -- of course, we are not in a position that we're expecting repayment from the operational work of this hotel. Of course, it's much more the holding loans. So we do believe that the current situation with the holding company is good enough to repay the loan, which will be, I think, end of this year. There is no other airlines. There is no other -- there's no touristic companies or entertainment companies like, for example, trading centers, et cetera, et cetera. So all of them are fine. You know that -- we were -- we were involved, of course, in a more deeper way before some years ago in retail sector. So at the moment, it's just a minor amount and minor share in our loan book. So there is no risk here.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [6]

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I'm sorry, the RUB 10 billion loans includes what sectors, entertainment and...

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [7]

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It's all there -- it's all the sectors. Yes, it's all the sectors, which are suffering at the moment from the virus. Not from the oil prices, but from the virus, from the quarantine, from the limitation of the people can go to different places. And we had some loan to the cinema in Moscow. So we -- it was repaid last year. So there is no risk on this area as well. So we're quite comfortable with the, let's say, virus risk in terms of the loan book.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [8]

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Got it. Okay. Glad to hear that. Your FX exposure, can you give us some comments on your FX exposure? And if you can, again, remind us your capital sensitivity to the change in the FX.

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [9]

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Of course, I hear the question. I was expecting this question, of course. So look, in terms of our fixed assets, which are -- I mean the assets which are nominated in the ForEx -- in the foreign currencies, I can say that every -- we just count it like to make it more simple, every RUB 35 in terms of exchange rate, decreasing our N1.1 ratio by 1%. So let's say, every ruble is like 0.3%, a bit less than 0.3%. This is the current sensitivity. Of course, we try now to talk -- we started to talk with some of our borrowers whose loans are nominated in foreign currency, just asking them, guys, what do you think, like if you want to just maybe to change the currency to ruble, et cetera? So -- but at the moment, we are in a much better position than we were in the 2014 when the big part of our ForEx loans were just given to the companies, which almost doesn't have any -- almost don't have any foreign exchange, foreign currencies -- sorry, foreign currencies income, foreign currencies revenues.

So at the moment, let's say, more than 90% of the borrowers which loans are nominated in U.S. dollars or in euros, they have full coverage of their loans in terms of their foreign currencies revenues. So here is really no risk. Of course, the question about our capital position about N1.1 sensitivity, this is like kind of an important one. So we're, of course, looking at this. We're, of course, looking at the exchange rate. But at the moment, we are comfortable. Of course, we think that there might be some measures from the CBR, of course. We saw them in 2014. We saw them in 2008 as well when there was a big challenge for the -- like world banking system and there were some measures, of course. But even without them, so we are comfortable with the current exchange rate. We don't see a risk that we will go to some, let's say, extreme levels of N1.1.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [10]

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And so to make sure that I get in correctly. Is that for (inaudible). I'm breaking up...

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [11]

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Nikolai, your line is very bad. I don't hear like...

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [12]

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Sorry, I'll try this. I just want to make sure that I got it correctly. So the sensitivity of your capital, common equity Tier 1 or N1.1 ratio, you said for...

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [13]

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Yes.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [14]

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It's (inaudible) of RUB 1 is -- the effect is 30 basis points, 0.3%?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [15]

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No, it's 3. Yes, I said 0.3 -- 0.03. It's 3 basis points.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [16]

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Okay. Okay, that makes sense. Okay, okay. Because that was -- okay. And one last question...

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [17]

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Yes, now I see that, yes. It's different. So it's 3 basis points, yes. Yes, please.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [18]

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Okay. So I was looking at Q4 on a stand-alone basis. And obviously, Q4 was particularly challenging. And when I kind of look at where -- or the moving parts that kind of defers the bottom line, obviously, cost of risk spiked versus the prior quarter where you actually leased reserves, right? Can you just give us some color in terms of what is the spike in the cost of risk? Or should we look at this as more of a normalization, considering the fact that the prior quarter Q3 was fairly benign?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [19]

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It's a good question. Thank you very much. Yes, the major change was, once again, because of this Antipinsky refinery, because in the current circumstances, with the current, let's say, oil price as well and with a much, let's say, deeper analysis, which was done in comparison to the third quarter, we decided that we should make higher provisions because, yes, it was a bit more positive in the third quarter because we -- let's say, we did some kind of model for the company. We try to figure out about this. But at this very moment, we, together with our auditors, of course, it was also one of their recommendations that we should be more careful with the current situation with this company and we made higher provisions. So the main move in provisions was because of this company.

And in terms of other material things in the fourth quarter, of course, there was some -- another company which is working in a retail of electronic devices. It also started to be -- to feel not so well just some time ago. So we also decided to make higher provisions to be more like on a conservative side. Of course, some of these decisions, not only for these borrowers but for some other smaller borrowers, we also made using the current situation. So somehow try to predict how -- what are the effect which will be on these guys.

In terms of other figures of the fourth quarter, it's just good to say that, yes, in terms of the net interest income, it's in line with the third quarter, so it really was just a good achievement of my team. And of course, usually, our perpetual made negative result, which, with the current exchange rate, of course, in terms of P&L of the first quarter, if it will be closing today, will be very positive. And I mean like for the P&L as it is, and -- but it's -- we discussed it, seems to me, many times on the previous calls.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [20]

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Got it. Okay. And the current -- this is the last thing, then [I'm going to pass.] The current coverage for the Antipinsky exposure is what?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [21]

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I will pass this question to Mikhail, if you have the provision level for the all Antipinsky loan.

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Mikhail Pavlov, Credit Bank of Moscow (public joint-stock company) - CFO [22]

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Well, let me check it, just a sec.

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [23]

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It should be something like 65%, if I'm not mistaken, because yes it was about RUB 40 million, and we added about RUB 2-something billion. It should be something around 60% to 65% at the moment.

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Operator [24]

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(Operator Instructions) And we take our next question from Andrey Akimov from Gazprombank.

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Andrey Igorevich Akimov, Gazprombank (Joint-stock Company) - Chairman of Management Board & Deputy Chairman of the Board of Directors [25]

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My question is about your interest rate expectations. Now we've got a pretty big gap between the key rate and the [opposite] yield. In this environment, are you planning to raise the rate for deposits or loans in the near term? That's the first question.

And the second one is about your FX exposure. It seems to be positively exposed to the ruble depreciation. Are you sort of expecting a positive effect on the FX revaluation line this year?

And how does it match against the possible cost of risk increase due to the fixed revaluation? What will be the net effect?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [26]

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Yes. Look, I will start with the first one, and after this, I will ask you to repeat once again the second because I didn't hear it well. So in terms of our expectations, look, there is huge discussion now in between like the bankers and other people who are linked to the, let's say, financial sector about what will be the decision of the Central Bank in a couple of days. And of course, the spread between the current rates in the market, I mean like the rates which we see in terms of [opposite], of course, it's a bit big. But my position is that trying to forecast this, it's just really the -- like in Russia, we are saying (foreign language), I don't know how to translate it, but it's like trying to find something in a very dark room.

I think that there is 2 ways for the CBR, of course. One is just to continue what they started to do in the last year and the beginning of this year, of course, and try to keep -- try to keep the rate at the same level, just showing that we are really strong in terms of like supporting the Russian economy from other sources. But I think that, of course, the second decision is -- also can be done. Me, personally, I'm more like to the, let's say, group of the analysts I just saw today, their kind of consensus. So consensus, much more, just it will be neutral, so people are thinking this way. I'm also like, personally, hear that's most likely to be like this. But it's just not easy to predict what they will do. And the second question just was -- could you repeat it, please?

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Andrey Igorevich Akimov, Gazprombank (Joint-stock Company) - Chairman of Management Board & Deputy Chairman of the Board of Directors [27]

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Yes, sure. The question is what -- I couldn't say your expectations is the net effect from the ruble depreciation. I mean on the line of cost of risk and on the lines of FX revaluation.

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [28]

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I see.

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Andrey Igorevich Akimov, Gazprombank (Joint-stock Company) - Chairman of Management Board & Deputy Chairman of the Board of Directors [29]

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Was it your expectation?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [30]

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Look, I tried to answer this question to Nikolai, he just asked also about this. It's like -- it's much more about the quality of the -- yes, some issues with this. But anyway, I think that there will be no material effect. Of course, technically, it will be higher because the natural ruble equivalent of the loan is higher. So it will be some effect because of this. But at the same time, of course, in terms of, let's say, foreign currencies, income foreign currencies, interest payments, it's also a little bit higher. So somehow it should be mitigated. So as I said, I'm just going to repeat, we do not expect any, let's say, material losses or material increase of cost of risk in this group of the borrowers, I mean the borrowers in -- with the ForEx -- with the foreign currencies loans.

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Andrey Igorevich Akimov, Gazprombank (Joint-stock Company) - Chairman of Management Board & Deputy Chairman of the Board of Directors [31]

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Okay. And for example, should the key rate be up, like 100 bps towards the end of the year? Do you have like sensitivity to the key rate lift on your margin or your net interest income?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [32]

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Yes, look, the sensitivity is not so big. So I do not remember just exact figures, but just in my mind that it's not so material. So if it's like 100 basis points, it's not material for the net interest income because we're also mitigating this risk naturally on the balance sheet, and so we can reprice our assets as well, et cetera, et cetera. So like, in general, no. Of course, if it will be like something like, I don't know, 5% higher, of course, you never know, it will be the same as we had in 2014 when there was, really, a turmoil in the market because of this. I don't expect something like this. Even if Central Bank will decide that they will increase the rate, it will be something like close to neutral.

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Operator [33]

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And we take our next question from Ekaterina Sidorova from Sberbank.

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Ekaterina Sidorova, Sberbank CIB Investment Research - Senior Credit Analyst [34]

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My first question is about operating expenses. As far as I can see, operating expenses, most sellers administrative expenses were high in fourth quarter. So could you tell us if this is a kind of a seasonal spike in expenses? And what level of cost of income are you targeting for this year?

And in terms of any contingency planning, depending on how the situation will develop, to what extent your operating expenses are flexible?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [35]

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Thank you for the question. I -- if I understood your question correctly, it's just about, yes, much more about operating expenses. Look, of course, the last year was a bit challenging in terms of their salaries in the banking sector. So one of the reasons why there was this kind of increase is because of their, let's say, not big competition, but some competition between the banks for the good employees. Of course, there was also the increase in terms of the new offices, which we were opening last year in Moscow and other regions. And of course, because of this, there was also kind of increase in the fourth quarter. For this year, we are not expecting some material increase in comparison to last year because we don't see that it will happen.

Of course, if there will be a natural growth of the business in terms of the new branches, there will be some increase, but not material. I think another reason for the fourth quarter, because it was also their reserves -- the reserves for the potential bonuses, which should be paid. And that was also the reason for this. Mikhail, if you can add something.

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Mikhail Pavlov, Credit Bank of Moscow (public joint-stock company) - CFO [36]

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Yes, I can add a bit that IFRS 16 also made some additional pressure on these expenses as well. Because with -- last year, all Russian banks, we transferred to IFRS 16. It was around RUB 0.9 billion additional expenses and depreciation.

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Ekaterina Sidorova, Sberbank CIB Investment Research - Senior Credit Analyst [37]

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Okay. And my next question is in terms of liquidity. How are you navigating through the recent market turmoil? Have you seen any deposit outflow so far, including from the large corporate clients from there, or not?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [38]

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Yes, good question. In terms of liquidity, we also showed in our presentation what are the surplus, like of potential liquidity we have on our balance sheet, which is more than 1/4 of our balance sheet. In terms of the current situation, what we see, there is no panic, no deposit outflows, both in the corporate and in the retail sector. So it started to be stable. In the retail sector, just it's stable, so there is no growth, no outflows in general. And on the corporate side, especially in the -- as you said, in the big corporates group, it's also kind of stable. We don't see any outflows. And it's good to say that there is no material time repayment of the deposits like midterm horizon from the bigger group of the depositors. So we are quite comfortable this way.

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Ekaterina Sidorova, Sberbank CIB Investment Research - Senior Credit Analyst [39]

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And my final question, about dividends. So we witnessed that public banks are suspending dividend payments and these requirements. So if you can share any views from the managements on this, it will be...

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [40]

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That's a good question because, yes, it's a decision of the shareholders by the recommendation of our Supervisory Board. But my position that in the current circumstances, the capital is the key, the capital is the fundamentals. And of course, the -- my recommendation will be just to keep money with the bank and not to pay them. I hope -- I think that my recommendation will be seriously discussed and we'll see. But anyway, I think it's just not a good time to talk about dividends in our circumstances because we don't have any, let's say, pressure like -- being like government bank, et cetera. So we are flexible in this way.

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Operator [41]

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And our next question comes from [Albert Varketin] from Commerzbank.

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Unidentified Analyst, [42]

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I'm a little bit lost and struggling to reconcile the numbers on the loan portfolio. I think on Slide #8 or 9, the loan portfolio substantially deviates from your auditor's report, which has been published today on your website. Could you explain what am I missing or where am I wrong? Yes, that's the slide. Unfortunately, I cannot hear you.

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [43]

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Yes, look, are we talking about the Slide #9?

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Unidentified Analyst, [44]

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Yes, exactly.

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [45]

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And could you please repeat on...

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Unidentified Analyst, [46]

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Apologies. On the right-hand side, there are the stage 1, 2, 3 and POCI. And summing those totals up, it's deviating substantially from the note #14 in your auditor's report. What is the reason for that?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [47]

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We should look at this. Maybe just it's a technical mistake, if it's really a mistake. I think that my colleagues should check this, and yes, just can come back to you offline. Because if we just will start now to look at different pages, I think it just will take a lot of time.

Yes, if we take, of course, the auditor's report and which was signed, of course, this is the key. So that is right. Yes, sometimes...

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Unidentified Analyst, [48]

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Just a different point of view that I'm struggling to reconcile this.

And the second to the last question is though you report on the stages, you still stick, when talking about the asset quality, to the NPL plus 90 days number. Is there a reason for that? Or is this simply the number or the definition you are using generally?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [49]

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So you mean that -- why we are talking about NPLs, but not about the stages in like...

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Unidentified Analyst, [50]

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Right. Right.

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [51]

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I think we just used to talk about NPLs. And I should say that the main group of the questions we have about NPLs, of course, stage is important. Yes, maybe -- yes, it's just a good comment, I think, that we should take more time talking about the stages migration and the coverage value. Good point.

Good point.

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Unidentified Analyst, [52]

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And the presentation you have here on -- what you presented, is this going to be available? Or are you going to send it around by email?

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [53]

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Colleagues? I think we can do it just on the request.

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Unidentified Company Representative, [54]

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(inaudible)

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Unidentified Analyst, [55]

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Sorry, I didn't get that.

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Unidentified Company Representative, [56]

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It's available in our website and CBM's website.

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Unidentified Analyst, [57]

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As of today, not. I tried to be -- to download it from your site a couple of times. I think there's only the updated third quarter '19 copies on the website.

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Unidentified Company Representative, [58]

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Okay. We can contact IR team, I will send it to you, okay?

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Operator [59]

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Ladies and gentlemen, I would like to turn the conference over to our host for any closing or additional remarks.

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Vladimir Alexandrovich Chubar, Credit Bank of Moscow (public joint-stock company) - Chairman of the Management Board & Member of the Supervisory Board [60]

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Dear colleagues and investors and everybody who's interested in this call. Of course, thank you so much for being with us today. Thank you for the questions. Thank you for listening. And of course, the key now is the virus, this kind of infection. And just my words should be around this, of course. And just wish you all the best, be healthy. Just don't forget to wash your hands. This is the reminder, which are very usual now and I hear it many times also during today from my colleagues, from my family. So of course, we all are, at the moment, trying to fix it, trying to stop it. It's important. And just be healthy and just take care of you, take care of your friends, relatives and all the best.

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Operator [61]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.