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Edited Transcript of SBER.MZ earnings conference call or presentation 31-Oct-19 2:00pm GMT

Q3 2019 Sberbank Rossii PAO Earnings Call (IFRS)

Moscow Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Sberbank Rossii PAO earnings conference call or presentation Thursday, October 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Vladimirovich Morozov

Sberbank of Russia - Deputy Chairman of the Executive Board & CFO

* Anastasia E. Belyanina

Sberbank of Russia - Head of IR

* Dzhangir Dzhangirov

Sberbank of Russia - Senior VP & Head of Risk

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Conference Call Participants

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* Alan Ramsey Webborn

Societe Generale Cross Asset Research - Equity Analyst

* Andrey Mikhailov

Sova Capital Limited, Research Division - Research Analyst

* Andrey Pavlov-Rusinov

Goldman Sachs Group Inc., Research Division - Research Analyst

* Andrzej Nowaczek

HSBC, Research Division - Analyst

* Elena Tsareva

BCS Financial Group, Research Division - Senior Banking Analyst

* Gabor Zoltan Kemeny

Autonomous Research LLP - Research Analyst

* Mikhail Shlemov

VTB Capital, Research Division - Equities Analyst

* Olga Veselova

BofA Merrill Lynch, Research Division - Equity Banking Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to Sberbank Group Third Quarter 2019 IFRS Results Call hosted by Sberbank management team. (Operator Instructions) I must advise you that this conference is being recorded today on the 31st of October 2019. I would now like to hand the conference over to Mrs. Anastasia Belyanina, Head of Investor Relations. Please go ahead.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [2]

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Thank you so much, and thanks, everybody, for joining us for this call. We are glad to have you with us for the next couple of hours or maybe shorter. We hope we will have a productive call, but I'm sure that you're well aware in that having just 2 months in front of us before the year ends, the character of this call will be much more technical. We'll cover the results and the outlook until the end of the year. We have our 2 traditional speakers with us, our CFO, Alexander Morozov; and now our Chief Risk Officer, Dzhangir Dzhangirov. With this, actually I shut up and hand it over to Alexander Morozov.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [3]

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Thank you very much, Anastasia. Say good afternoon, and good time of the day, everybody, and thank you for joining us today. By now I assume you have reviewed our third quarter results, and so I'm not going to take much of your time by going into details too much.

I'd like just to highlight some important developments for the period and after that, we'll pass to Q&A session, which should be more important and helpful for you, I assume.

So Sberbank Group earned RUB 156.1 billion in net profit for the third quarter 2019 after a one-off negative impact from the sale of DenizBank and [this is left] the noncash loss from DenizBank sale. As we discussed this topic extensively on our previous conference call. For the sake of the time, I'm not going to focus on that too much hence I prefer to skip it since I'm ready to answer your questions if you have some questions related to that numbers.

So what is important is a new number, in that respect. We share [most] for the first time is that the sale of DenizBank had a positive impact on our core equity Tier 1 ratio, 123 basis points, which is higher than the

(technical difficulty)

but I'm sure it doesn't disappoint you.

I think what's more important for you is that our net profit adjusted for this one-off amounted to RUB 230.8 billion, and [indiscernible] return on equity came at 22.4%, which is quite decent results for 9 months.

Before we start looking into financial metrics, I'd like you also to (inaudible) expansion of our active customer base. For the first time in our history, Sberbank crossed a very important threshold, and now we have 95 million active retail customers and 2.5 million active corporate customers, which is really tremendous numbers. This is very important evidence of growing client engagement and our DAU/MAU ratio is also growing steadily every month, hence we started to publish it starting from now, today's release.

Now I will address just topic by topic key components of our financial statement. So net interest income. Net interest income a little bit reduced, decreased by 1.5% year-on-year to RUB 353-roughly billion. The main drivers behind this. In terms of volume, retail lending remains very strong. It has increased by 5 percentage points in the first quarter and more than 13% year-to-date. So more than RUB 7.6 trillion, our loan portfolio.

What is important to see here is that the growth of our mortgage portfolio accelerated to more than 3% in the third quarter and 8% -- 8.1% year-to-date. And definitely as in previous years, we see that mortgage portfolio, specifically indiscernible retail lending definitely very sensitive to the reduction of prevailing interest rate environment. And performance of mortgage portfolio is benefiting out of it.

So [we stuck to the] discussion of mortgage lending and [to the role,] I think, in the fourth quarter, it will be very supportive for the whole year in terms of our bottom line result.

Consumer lending remains very strong altogether and increased 8% in the third quarter. Year-to-date it's more than 20% growth. And we are very satisfied with the quality of this growth. Definitely Dzhangir (inaudible) he will address it in more details. But for me, it's important to say now that quality of our retail portfolio, in general, is very, very acceptable, very good, but it's my opinion as a CFO of the bank. And on top of that, I'd like to say what shows a reduction and expected reduction of lending creates on the market, will definitely support that quality, at least on Sberbank side.

On the corporate side, our portfolio performance turned positive in the third quarter. And so we posted 1.7% growth quarter-to-quarter. As we see, new demand from customers and so this demand became more feasible and growth was spread currency-wise, which is also very much important for us. Our loan-to-deposit ratio in hard currency is improving hence we expect those improvements until the end of the year. So we'll [salvage] it, our structure of our working assets and idle assets will be indiscernible improved to support net interest income for a wider net interest margin.

Growth in small-to-medium enterprise lending also accelerated to 6 percentage points quarter-to-quarter basis, and simply reflects a fact of our high customer engagement. And so steps have been taken in that respect recently. And so the structure of our loan portfolio is fairly skewed toward -- to retail part, and retail now accounts for 36% of our total book.

As for funding, our retail deposits increased by 8.8% year-on-year basis in the third quarter and up 1.6% year-to-date. And corporate deposits and accounts grew even stronger by 18%, 18.1% to be precise in the third quarter and 16.2% year-to-date.

Now is a very important part of the discussion is net interest margin. I have to say that yes our margin inched down by 5 basis points in third quarter. And at the same time, anticipating a little bit further discussion, I'd like to confirm that we keep unchanged our full year guidance with regard to the net interest margin end of the year. This is very much important.

So margin in the third quarter suffered a little bit because of the following factors. First of all, we had a couple of one-offs related to corporate loan restructuring, and it was in the press and I'm sure you know those cases. Simply cannot and do not want to mention specific names. And it had definitely negative impact on the margin.

Secondly, we had some tailwinds from transition to IFRS 9, which was visible in Russian accounting standards [accounts.] And (inaudible) nevertheless, had less importance, but nevertheless still worth to mention. We continue the operations [and intubate] market for the future management, so support our regulatory required liquidity ratios, [assets here] also saw somewhat margin dilutive effect. Not substantial, but nevertheless, a couple of basis points.

And the very last point is that retail was down by some basis -- 10 basis points as we started to see some first implications from low market rates.

That was just one hand. On the other hand, on a positive note, lower interest rates drove our cost of funding down by 20 basis points on the back of increasing portion of current accounts and decline as a cost of retail liabilities roughly by 10 basis points.

Cost of corporate term deposits also shows an uptick of 10 basis points. However, term deposits still remain sustainably cheaper than our retail deposits as the difference is about 80 basis points.

The most important question now what to expect in the fourth quarter? First of all, as I have already mentioned, we expect further improvement of our quality of our working assets. I expect that loan-to-deposit ratio in foreign currency will improve to roughly 75-plus percent from less than 70%, less than 68%, 69%, what we have today. I expect further reduction of the cost of our ruble-denominated liabilities. We started our repricing. I would like to remind you what's the average indiscernible for pricing for our liabilities is roughly 5 months hence, average pricing period to follow. Our ruble-denominated assets is something like 25 months. And so we are benefiting out of [lower rates] and so we are positively exposed to the reduction of interest rates in the medium-term perspective, and to still be supportive for us.

Also, we started substantial evaluation and reduction, employee substantial reduction in terms of cost of liabilities of dollar-denominated liabilities. [And that to] year-end of more than USD 11 billion of quite expensive dollar-denominated liabilities from customers. First of all, retail customers will be priced downward. Hence this money was [contracted] to much higher rates 2, 3 years ago, hence now will be repriced, is very substantial positive effect on the margin. And plus, on top of that, in November, we are going to mature in due time 1 billion issued euro-denominated bonds. [All issues] have much higher yields when we have (inaudible) in the market.

So altogether, it gives me enough ground, enough certainty to say what's -- we have all the chances and definitely, we intend to do that, deliver our guidance for margin and to keep our guidance for margin full year unchanged. Probably this is the most important topic in our kind of -- my speech today, we fight for every basis point now and we see positive dynamic. Dynamic we follow on a monthly basis. We've not disclosed it, but on a monthly basis, we follow that. And it's tough interest rate environment. A lot of unexpected issues happens, but nevertheless, to the best of my knowledge as of today, it gives me enough arguments to maintain our guidance unchanged.

Fees and commission, next topic. Our net fees and commissions grew nicely in the third quarter plus 15.1 percentage points. So RUB 130 billion, and main drivers for behind is net fees from bank card business, specifically, this is -- this is a step to acquiring [corporations] and growth is more than 21% year-on-year.

And secondly, cash and settlements transactions, which were up by 11.5% in the third quarter, year-over-year basis.

Also, we saw remarkable growth of more than 31% in brokerage and investment business line. And overall contribution of net fees and commissions in total to operating income reached 25.6% in the third quarter. This is the highest in this cycle.

On OpEx side, OpEx grew by slightly less than 8%, 7.9% year-on-year basis in the third quarter. And cost-to-income ratio came in at 32.8% in the third quarter. OpEx growth was impacted by annual wage increase, which happened in July this year, while last year, it was done in October. Adjusted for this time difference impact, OpEx growth would not exceed 6% in third quarter 2019 and our cost-to-income ratio would improve to 32.2%.

Having said that, we'll be prepared to answer more of your questions in the Q&A session. Now I'd like to pass the floor over to Dzhangir Dzhangirov, our Chief Risk Officer. He'll comment on development of asset quality and cost of risk in the third quarter. Dzhangir, please?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [4]

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Good afternoon. Our combined cost of risk was at] 106 basis points in the third quarter 2019. Cost of risk in retail was 142 basis points and cost of risk in corporate was 86 basis points. Since the middle of 2018 until April, May this year, consumer loan market enjoyed lowered risk in Russia. In the same time, we see gradual deterioration in the quality of unsecured consumer lending in Russia. In recent months, the risk strategy of Sberbank has been adjusted for this new market reality.

On the corporate side, we don't see any significant shift in the quality of our main industries, we -- as always, we closely monitor our commercial real estate, it's FX part. This year, we continued to convert the loans in rubles where it's possible. In case we see deterioration in the quality of the loan, we'll provision this accordingly.

You might have a question what is going on with our thermal coal producers given that the price of thermal coal decreased by 1/3 from the beginning of this year. This portfolio is less than 2% of our corporate loan portfolio and it's mainly concentrated in blue chips. There are deterioration in some smaller clients, and we closely monitor those clients.

This quarter, for the first time, we included in our capital adequacy ratio according to IFRS standards, a macroprudential add-on. As of now, they account for 35 basis points. We expect that by the end of the year, this number will grow by 21 basis points, and this number will depend on the development of portfolio and on the changes of our IRB methodology. So it might be smaller or higher, but current estimation is 25 -- 21 basis points.

So that's all on my side and I'm also ready to answer your questions.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [5]

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As we're well now through the second half of the year, we will keep our full year guidance unchanged for our key financial targets. And specifically, I'd like to stress that our return on equity, over 20%, is on track. It's difficult to deliver 20% on banking now, but we managed to do it.

And at the same time, we have made some adjustments. So our market forecast, taking into account several rate cuts undertaken by the Central Bank of Russia in recent months. Hence you may find some macro update on Slide 26 (sic) [27] of our presentation, which is published on the site.

Before we move to our Q&A session, I'd like to invite all analysts to our Analyst Day, which will take place on 11th of December, please save the, date in Moscow. And the save the date notice will be sent to you shortly. We expect to see you here, and you will have on 11th of December, have more open discussions with regards to our outlook for year 2020 with regard to our M&A recent transactions. And so our ecosystem and developments of some of our key businesses, including insurance, asset management. And I hope what's -- new facts and arguments and [rationals] will be added to you -- to your models. So we are preparing that event 11th of December.

And now is just to focus on the year-end trends and on our actual results numbers hence I'm open to your questions. Thank you very much for your attention.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Elena Tsareva of BCS Global Markets.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [2]

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My first question. I understand that you don't want to comment next year guidance, but still we have the strategy which finish next year. And the remaining things that recently has changed a lot. So maybe you can just flag maybe any just positive or negative risks for delivering RUB 1 trillion net profit for the next year, if you may say some details.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [3]

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We do our best always to deliver our promises. Now is not an exception. I hope I answered your question.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [4]

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Yes. Just maybe a little bit a small question on consumer lending growth, which was a very, very strong third quarter. So you expect any slowdown of consumer lending given (inaudible) reduction? Or you still feel that you expect a growth to this one?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [5]

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We expect that this market will slow down, of course, given that [undoubtedly we actually] increased since the first of October this year. (inaudible) in September announced that our expectation is sometimes like 10%, and we are close to that number, 10% growth in (inaudible)

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Operator [6]

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Our next question comes from Alan Webborn of Société Générale.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [7]

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Firstly, could you walk us through the slightly differing trends in the cost of risk in the third quarter? We can see some slight deterioration in the -- in consumer loans. You have an improvement in credit cards and so on. Could you just talk us through a little bit the dynamics and what the drivers behind that is? And clearly, you look on track for your full year guidance, but could you just talk us through a little bit what's been going on in the quarter? That was the first question.

And then in terms of capital adequacy, thank you very much for Slide 26 in terms of it's clear what's happened between DenizBank and the negative impact of the regulatory changes. But clearly, they're somewhat less than the 60 bps that you were talking about in -- at the end of the second quarter. And I wonder what your view is in terms of the trend there for the remainder of the year. And if there's anything else that we don't yet know about that we should be worrying about, that was the second question.

And I guess, the third question on margin. I mean, clearly, when we saw Q2, we weren't expecting to see the net interest margin that we have seen in Q3. But I guess we were also not expecting to see the rate cuts or as many rate cuts as we have now seen and where we'll likely to be at the end of the year. So is your confidence about getting to a Q4 margin somewhere between 5.25% and 5.50%, clearly helped by what's happened in terms of the rate structure, and I guess, would you have struggled to get there without the benefit of rates falling and the impact on that in Q4?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [8]

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Okay. So on the retail cost of risk. So on the mortgage side, we see stable risk metrics. So we're quite happy with the performance of this portfolio.

On the consumer loans, as I said, we see certain change in the trend. So we see that the risk level bounced slightly up, and we adjusted our strategies for that.

On the credit card side, this portfolio accounts for less than RUB 800 billion in our assets, and this is slightly more than 10% of our retail loan portfolio. This portfolio -- this part is the riskiest part. Here, we see a certain correlation between the default and the exposure. In the event of deterioration, we see that the clients utilized the lines, and therefore, this portfolio reacted slightly more than cash loans. However, here, we also adjusted our risk strategies.

On the corporate side, in the second quarter, we enjoyed very low cost of risk, but this is due to one-off effect and we commented this on the last call.

And on the development of CET 1 ratio, given that we have now the new weight for the PTI, the new risk-weight for the PTI and given that we reached the cap for our economy on the consumer loans, we expect that risk weights -- risk-weighted (inaudible) will increase. As I said, this will account for approximately 21 basis point deterioration in CET 1 ratio. There might be certain improvements in CET 1 given that we applied for the new models in Central Bank in our IRB approach. We applied for floating criteria for specialized loans. And also, we applied for the new models in [PDM review.] Central Bank may give us approval in December this year, however -- and in that case, this will lead to improvement in CET 1. However, this might also move to year 2020.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [9]

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Okay. And so can I just ask, at the moment, you'd be expecting a further sort of 25-ish impact unless there are some further regulatory changes that would reduce that by year-end. Is that correct?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [10]

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Yes. On macroprudential side, yes.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [11]

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Okay. So but, say, going forward, so I think that, to be on the safe side on capital adequacy ratio and already it's not many years. We are going to start to pay [80%] payout ratio. Starting from the next year, we are on a very safe side alongside with the preparation and presentation of our strategy for the next period of development of the bank, we will prepare a new dividend policy and we will present it alongside this new strategy something like a year from now.

I think your last question is regards to the next net interest margin. I'd like to say a very important thing. We are going to start year 2020 with a substantially higher margin when we initially expected [when we present the] strategy 2020. This is very important. So I'd like to remind that in our initial strategy we expected net interest margin to fall within 3 years to the level roughly 4.75%. Hence, we are going to start at the level not less than 5.25%, which is really important.

And say, every 25 [indiscernible] 50 basis points in terms of [money] (inaudible) which impacted the bottom line. 100 basis points over the net interest margin accounts roughly to RUB 300 billion in terms of interest -- interest rates. So that's very substantial plan.

So from that perspective, yes, this year was very, very difficult for us. Very difficult hence changed methodology and implementation of IFRS 9 and Russian accounting standards. I mean very unpredictable change of dynamic of dollar -- dollar rates versus expectations. We -- all of us had [year-ago.] Very substantial dynamic difference from what was expected on ruble-denominated key rates from Russian central bank. [Never for the fact that] changed regulation [on their own,] effected substantially our [stated] and margin dynamic and [several] margin dynamic. But nevertheless, what is important? We see recovery of the margin now. We see underlying trends (inaudible) of one-offs effect, hence we are certain that we will start next year at a higher levels than we initially expected.

This is very much important. So going forward, net interest margin definitely will be subject to interest rate dynamic of the market since loan issuance volumes. But what we see now, we see recovery in demand on corporate side. We see very stable good demand to the retail side. We see further improvement of our asset structure, working asset structure, so more ruble-denominated where margins assets indiscernible loan-to-deposit ratio on currency, which is also supportive for the margin. We see cheaper funding, hence more current accounts and card accounts. So altogether, we see indiscernible little there, but nevertheless, it was supportive. So we keep our guidance full year unchanged. It's very tough. It's very difficult, very ambitious, but as usual, we do what we should do to achieve it.

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Operator [12]

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Our next question comes from Olga Veselova of Bank of America.

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Olga Veselova, BofA Merrill Lynch, Research Division - Equity Banking Analyst [13]

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I have several questions. My first question is about your impact from restructurings of refinery loans in the third quarter. Could you help us to look at this numbers without this impact? So what was the impact on NII, on provisions (inaudible) from restructurings of oil refineries? And also, these 3 factors on net interest margin -- so this is my second question. The 3 factors on net interest margin, which resulted in a 5 bp drop quarter-over-quarter in third quarter, how sustainable these factors are into 2020 in your view? And do you think overall more active policy rate cuts can help offset negative margin factors? Or the impact from lower policy rate cut might be not enough? And my third question is about fee income. What are your expectations about impact from fast payments system and legislation on banking roaming fees? And what part of this negative impact can be possibly offset by measures, which you take? And can you please specify these measures?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [14]

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Thank you very much. I would answer your first question [indiscernible] our visible reported margin calculable directly from our numbers presented. Results in a [restructuring] would be greater the third quarter than in the second quarter without restructuring, okay?

I think it's enough to answer, will not give precise numbers, but nevertheless, it's a very good estimate. In regards to trends in net interest margin going forward. Our sensitivity, 200 basis points parallel shift on a 1-year time horizon is roughly RUB 25 billion, RUB 26 billion. We are positively exposed to potential reduction of net -- of prevailing interest rate environment. So we believe that -- we -- slightly indiscernible economic forecast and this is reflected [in terms of] in our presentation. Hence, risk [amendment] in our forecast is also adjust, in my previous words with regards to the confirmation of our net interest margin guidance. [It was a year now] (inaudible) guidance, this year and next year.

I think that we start next year with quite decent level of (inaudible) hence, dynamic of the margin next year will be more or less in line with our expectations. We'll address this topic in more details on 11th of December, but I do not expect substantial -- I would not expect substantial drop of the margin, which would put that question in relation of our strategy next year. I think we have necessary ammunition [pocket] based on our -- on the current macroeconomic assumptions looking forward.

Having said that, at the same time, I have to admit that medium-term and longer-term perspective, all of us understand what margin will be on the -- will be compressed under serious pressure because it's -- so it's just a matter of time, but nevertheless, this compression, what's happening is fully under control or almost fully under control. We manage it.

Hence the same sort of answer is on your third question with regard to fee income. Yes, we see what's a growing pressure on fees and commission business, but nevertheless, we managed to deliver double-digit growth. And we are going to continue to do so. Definitely, we are working hard on some countermeasures, offering new products and services hence increasing activity for our customers and it is reflected in our active customers' numbers, which we presented for the first time. Now in our release that we are going to present now on a quarterly basis, our DAU/MAU and our active customer base numbers. So you ought to be able to track it. So that's part of the strategy of development of the ecosystem, when we start to earn more and more money from noncore banking products, but also from other financial services and nonfinancial services.

So the idea is to gradually replace part of our fees and commission income, which we have today earned from our core business, by additional fees and commissions from other financial services and nonfinancial services. So we are on the way, hence we will discuss it and just give you more numbers on the 11th of December. We invite our colleagues who are responsible for the developments of this indiscernible -- of our ecosystem, our [ecoplatform,] hence join this event. That's all I can say now. You know the not so, it's the breath of my colleagues and not to anticipate [so much,] wait a little bit.

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Olga Veselova, BofA Merrill Lynch, Research Division - Equity Banking Analyst [15]

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Sure. Can I just double check with regards to answer to the first question. So can I ask which of those 3 factors were one-offs? IFRS 9 was this one-off, can it be repeated? Restructuring on NIM, can it be repeated?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [16]

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No. With regards to IFRS 9, I'm certain that's now full effect already in. It's now stable. It has effect of a little bit higher-than-expected volatility of the margin in the first 2, 3 quarters. But now, it's done, it's stabilized. So I do not expect any additional effect out of this factor.

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Operator [17]

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Our next question comes from Mikhail Shlemov of VTB Capital.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [18]

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Actually, I have 2 questions, if I may. The first question is about the changing dynamic at the retail lending markets specifically in the consumer finance. You have earlier mentioned in your remarks that you expect some, part of the deteriorating risk profile, which you have seen on the customer side to be offset by the lower interest rates and the refinancing, which is coming through. So I wanted to check on whatever you think that you would be in a position to do the kind of a proactive refinancing of the lower interest rates on the borrowers in your books in terms of kind of restructuring? And what effect it would be -- would have if it would happen, for example, on the net interest margin, if you do so? Or if you would not go this way, what we should expect in terms of cost of risk dynamics into the 2020, just like direction wise. No specific numbers that are required, I would say.

And the second question is coming on the heels of the announcement, which you've made a couple of days ago regarding acquiring the significant stake in the Mail. Ru controlling shareholder. It's fairly interesting from the perspective that it seems like that in terms of your ecosystem strategy development. It started -- you did something new. So it's a first potential, not a cash in, but rather a cash out transaction. So I was wondering what bigger idea you had behind the change of behavior? And why you think it would help you to develop the current JV, which you have with them in all -- to [all] businesses?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [19]

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So the first question will be addressed by Dzhangir and the second I'll answer after that.

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [20]

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So there are no plans for proactive [restructuring that we have.] We think that we're in quite good position in terms of the quality of the portfolio, given that 76% of our portfolio is comprised of our payroll clients and pensioners. So there are no plans for proactive [restructurings] in the lowering interest rate market.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [21]

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Yes. So we definitely simulates different scenarios in the market and say, our best understanding now is incorporated in our view and unchanged guidance. I will put it in that way.

Answer to your second question. I'd like to say, first of all, that I hope all of us, we understand that as of now, we are constrained by the limitation set by non-disclosing agreement. Hence we cannot, say, give a lot of details and numbers and so on and so forth. But what is important to say, to comment now, we see a lot of synergies in this potential new business. That's first. Secondly, we are not going to becoming -- to become a majority shareholder. And we are going to be a decent shareholder, but without majority stake. It is important. And in that specific case, yes, this transaction is based on the cash out principles. But we should understand that MRG, Mail. Ru Group, is a public company. And it's a big difference versus direct investments of Sberbank into some companies where are not public, where IPO is only planned in some time in the future.

But what is important, we really see very interesting ideas and synergies of our cooperation with Mail. Ru. And so we'll definitely address this topic and give much more flavors in that respect when transaction is completed, settled. And anyway, on 11th of December, I'd like to hope that transaction is completed. At the end of this year, we'll address this topic. People responsible for ecosystem development in the Sberbank Group will join this event, 11th of December.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [22]

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Appreciate it. Just like one thing I wanted to follow-up with Dzhangir on what he was saying regarding the

(technical difficulty)

portfolio, which is -- will decline as you know well. Can you perhaps give us some flavor in what pockets of the client base or perhaps regional behavioral wise, whichever you think is best to describe, that we're actually seeing deterioration of the risk profile?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [23]

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We localized deterioration in the part of the portfolio where the indebtedness grew significantly in a short period of time. So this is the main criteria, I would say that affects the risk.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [24]

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So am I reading you right that you basically blame the competition for actually reaching out to your customers that and actually overextending the loans?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [25]

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What do you mean by that?

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [26]

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I mean, then just like the competing banks are actually providing extra credit to your borrowers. So this actually leads to deterioration of risk profile for pretty much everybody.

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [27]

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Yes, this is, of course, a problem for all market participants, I mean, even if you have

(technical difficulty)

[plays bogus here,] you are still not protected from other banks lending to the same customers. But as we understand, Central Bank now analyzes the situation. And then much of that -- they might propose some instrument that may help to control overall indebtedness of the clients.

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Operator [28]

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Our next question comes from Gabor Kemeny of Autonomous Research.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [29]

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Firstly, I'd like to ask about consumer lending. I think, earlier, you mentioned a 10% growth rate. Was this the growth you expected in consumer for 2020? I'm not sure I got this right. And more broadly, can you give us an early assessment of the CBR's new capital requirements? How these impacted the consumer lending market? I mean, have you changed your consumer loan pricing at all since the new rules took effect? And perhaps another detail, you gave us a payment to income ratio, 43% PTI on your previous call on consumer. Would you have an update on this number under the new CBR rules?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [30]

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So as I said, our Chairman of Central Bank announced that the growth will slow down to 10%, and our expectation is close to that. We're currently in the budget process. So we will be able to announce our expectations later.

To your -- with regard to the pricing, we take into account cost of capital in our models. So given that the risk weight increased, of course, this affects our lending strategy and including pricing.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [31]

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And in terms of the PTI and perhaps on the loan pricing, can you give us a sense of where do you price the cash loans now on average?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [32]

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The rates are now somewhere between 11.9% to 19.9%, and this rate will depend on whether that's a payroll account client or not payroll client. So we have to differ -- it depends on the size of the loan, et cetera. So I'd say, roughly, it's from 12% to 20%.

With regard to the PTI, so our PTI slightly increased this year. But again, as I said, 76% of our clients are either payroll or pensioners. So we have very good understanding of their stable income. And given that, we don't see this as a potential problem.

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Operator [33]

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Our next question comes from Andrey Pavlov-Rusinov of Goldman Sachs.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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I've got a couple of questions. First one is on corporate demand. Alexander, you mentioned, basically, that you see now improving demand there. Could you please elaborate a little bit on which sectors, this demand is coming from? And maybe is it -- do you expect any positive impact from the national projects implementation or anything else there? And my second question is with regards to your cost growth. Given that now, the fourth quarter will be past the one-off effects from the move of the IT personnel and also of the double indexations. Should we expect a slowdown in your cost growth, significant slowdown there? And also in light of inflation also being a lot lower than initially expected.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [35]

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Okay. I'll start with answering to your second question regards to the cost growth. Yes, we

(technical difficulty)

exceeds a little bit our initial plans, which we outlined in our strategy because of a number of reasons. And say we -- the main reason is the higher level of expenses related to IT transformation of the bank into the technological group, technological platform. So we are on the way in that respect. Hence we see very high competition on the labor markets for talents, data scientists, IT specialists and so on and so forth. So this is a very important components of higher-than-expected initially costs. But at the same time, we compensate higher costs and higher growth, of course, by high [turns.] And this is our investments to some extent into sustainability of our profitable 20% return on equity business.

So looking forward, until end of the year, as I have already mentioned, we expect some slowdown of reported

(technical difficulty)

OpEx year-on-year basis. And definitely, it correlates this slowdown of inflation in Russia. And looking forward, it may be also expect with some reduction of inflation will reduce structurally our costs. We focus what is important on cost-to-income ratio. So for -- so from that perspective, what is important to understand that's core business of the bank is driven, first of all, by our ability to raise additional revenues. The spread determines cost-to-income ratios.

As for our ecosystem on the construction [stations], the development stage where are we now, it requires higher costs. Hence cost-to-income ratio is not applicable very often in that respect. So what is important here in that part of our group is customer satisfaction and parameters like DAU and MAU, daily active customers and monthly active customers, in case of frequency and stickiness of our customer base, as we focus primarily on that promoting the new products, new services. Hence, we believe that we are on the right way, undertaking, again, all the necessary steps and examining on the zero-based budgeting basis, all our costs. And now we are in this process of the annual budgeting for the next year. So cost agenda, the cost reduction agenda is a super high priority for the top management of Sberbank. Hence we are not ready to cut necessary costs. So good costs, which are necessary for the development of the group, for the ecosystem, but at the same time, we, every day, every month, we find ways how to cut our own cost and unnecessary and how to increase our efficiency. That's why we continue to reduce our staff. That's why we continue to increase efficiency and productivity of all our offices. [I think] that's why we [had to take] many, many small but effective [merits] on a daily basis. And this is a process [versus a culture] of cost efficiency.

So I hope -- sorry, for what's a very long answer, but you touched a very sensitive point for me because what is important for us is to be as efficient as possible. And so to cut as much cost as possible. But at the same time, not to undermine the future development of the bank in order to assure that you, our -- the shareholders to continue to get higher-than-average return on equity on the investments today, tomorrow and after tomorrow. And it requires investments. We deliver our promise to get return on our equity more than 20% that we're doing today, that we're going to do even tomorrow.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [36]

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The second question. Well, the first one will be answered by Dzhangir Dzhangirov.

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [37]

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So we're a universal bank and our portfolio is diversified both across industries and products, and we will continue to work in different products and almost with all industries. I'd like to highlight residential real estate industry, where given the amendments to the law on shared equity development. Now there is much higher demand for the bank financing compared to what we had before. Now there is a very limited opportunity for the developers to fund their projects with the funding from consumers, and they now apply more and more to the banks. And here, we see a large opportunity for the growth until the end of this year and next year.

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Operator [38]

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Our next question comes from Andrzej Nowaczek of HSBC.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [39]

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I had one small follow-up on the margin outlook. You don't seem to expect any further rate cuts. On Slide 27, it says 6.5% until 2021. And at the same time, you say you are positively geared to falling rates. Does it mean that you actually do expect rates to fall further?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [40]

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On the Page 26 presented the best understanding of our [sense of] macro economic [shares.] We believe that, yes, we achieved a plateau level. So 6.5%. But I would not exclude completely what we amend this forecast when it presents our full year guidance for the next year. Everything is changing very fast nowadays and a lot still will depends on the inflation for this year.

On 13th of December, Central Bank of Russia will take [indiscernible] decision about the key rate and this decision will be based on the expected full year inflation and if this inflation is below 3 percentage points, which is not absolutely inevitable now -- impossible, sorry. I would not exclude another rate cut even this year. But definitely room for further rate cuts over the next 12 months is becoming more and more limited. That's our understanding. But I would not completely exclude it.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [41]

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Understand, understand. And my other question is on the risk weights. This convergence with CBR standards, how much more negative impact do you expect and when?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [42]

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I would say, initially, we indicated within 60 basis points, now 35 basis points already in, maximum 25 basis points more. But we assume it will be closer to maximum 20. So a little bit better than we expected. It will be fully reflected within next couple of quarters.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [43]

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Next couple of quarters, okay.

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Operator [44]

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Our next question comes from Andrey Mikhailov of Sova Capital.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [45]

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I have 3 questions. The first one is on premium [less] claims. This line is again positive and visibly positive in Q3. And I would be grateful if you could share your expectations for Q4 and maybe going forward.

And I'd also ask my other 2 questions. The other one is on dividends. And you mentioned that the new dividend policy will be presented late next year. So I would put my question this way. Is there a school of thought as Sberbank that would support increasing the dividend payout ratio to above 50% if your capital adequacy continues to grow very nicely as well? It was impacted by the DenizBank deal, but still, it's now very high above the 12.5% level on CET 1 ratio that you used to refer to earlier.

And my third question is on the P&L effect from the various ecosystem and tech projects, especially those that are not line-by-line consolidated in your IFRS accounts. And the specific question would be, what was the exact P&L effect from all these different projects in Q3?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [46]

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Okay. With regards to insurance and pension business, income grew by 14% in 9 months to RUB 90 billion. And so assets under management for wealth management amounted to RUB 1.4 trillion. So that's plus 15%. Hence we believe overall environment is very favorable for the development of the wealth management, and we expect further dynamic growth in respective segments as market rates to continue to go down.

As -- also, as we announced, Sberbank of Russia plans to improve security of life insurance policies and, say, make it as secure as deposits. So we assume what we should say, increase [indiscernible] respective products and so we expect [to embed] results next year. But I do not want to anticipate, as we are going to invite head of wealth manage and insurance and pension business, say, also part of this block. So we invited heads 11th of December on our Analyst Day and she will be able to answer these questions in more details.

I'll take your second question, with regard to dividends, I think it's now -- the only one thing I can do is to repeat the same. We have our dividend policy today, which we [provided] alongside as a part of the strategy until year 2020. And we will -- [the ongoing term] ended to change it. We will do it only alongside this approval of our new strategy for the next period of development of the group.

And now it's too early to speak about potential changes. We do not see, as of today, I do not see a possibility to discuss the topic about potential payouts increase. 50% is a very decent level for the company still on development stage, delivering 20% ROE. And so last topic was, sorry.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [47]

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Sorry, the last one was on the P&L effect from the ecosystem

(technical difficulty)

not line by line consolidated.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [48]

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This is Anastasia. Thank you for your questions. Yes, I will quickly follow-up because it's kind of very easy to answer. The -- these investments are being accounted according to equity method. And the impact is very negligible to P&L. So it's simply not feasible as of now.

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Operator [49]

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(Operator Instructions) There are no further questions at this time. We will now take questions from the Russian section of the call.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [50]

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Yes, before that, I'd like to thank all the participants of this quite extended conference call, and I'd like to hope that many of you will join our Analyst Day on 11th of December. So we invite all of you and we'll send you save-the-day notice very shortly. Thank you for [staying] with us. I hope that we haven't disappointed you today with our developments. And once again, I'd like to assure you that the management of the bank, executive team does everything what is necessary, what's possible -- what is -- everything what we should do to deliver our promises, to deliver decent results and return of equity at the level 20% and above. Thank you.

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Operator [51]

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Ladies and gentlemen, we're continuing the Q&A in Russian. (Operator Instructions) First question from (inaudible)

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Unidentified Analyst, [52]

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[Interpreted] Is there any plan to decrease the mortgage interest rate after the change in the key rate of the CBR?

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Unidentified Company Representative, [53]

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[Interpreted] Mr. (inaudible) I actually answered this question today. Even the Vedomosti paper wrote about it.

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Operator [54]

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The next question is from (inaudible) of Interfax.

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Unidentified Analyst, [55]

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[Interpreted] I have this question. Quite recently, Central Bank announced that in 2020, there will be some softening, regulatory softening for those banks which use the IRB approach, right, for some increasing ratios on, [indiscernible] default. Has Sberbank calculated any effect on capital adequacy from these effects? And will there be any effect? Or it will be negligible?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [56]

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[Interpreted] Hello, yes. This is Dzhangir Dzhangirov. You mean changes within Basel 3.5?

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Unidentified Analyst, [57]

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[Interpreted] Yes. That's what I mean. That's what they announced recently.

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [58]

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[Interpreted] Yes. So the Central Bank said that they would decrease the ratios and that the effect from that could be very sizable, but I would wait for specific changes because the implementation of Basel 3.5, it's also how -- what other changes. So I would look at that together in a compilation before giving full answer to that question.

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Operator [59]

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Thank you. As of now, there are no further questions in this conference. (Operator Instructions) Because there are no further questions, I pass the floor to our speakers for their final word.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [60]

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[Interpreted] Dear colleagues, thank you very much for being present at our call. We hope we covered the majority of your questions or all questions within this call and throughout the day. If you still have some questions that are left unanswered, you know the phone number of our press service and our IR service. So please call us. We will be ready and happy to provide additional comments. Thank you very much. Have a nice evening.

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Unidentified Company Representative, [61]

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Thank you.

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Unidentified Company Representative, [62]

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Thank you very much. Have a nice day.

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Operator [63]

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Dear, ladies and gentlemen, with that, this conference is over. Thank you very much for your participation. You can disconnect now.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]