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

Q2 2019 Sberbank Rossii PAO Earnings Call (IFRS)

Moscow Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Sberbank Rossii PAO earnings conference call or presentation Wednesday, July 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

* Lev Aronovich Khasis

Sberbank of Russia - First Deputy Chairman of the Executive Board & COO

* Maxim Grishakov

Yandex N.V. - CEO of Yandex.Market

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Conference Call Participants

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* 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

* Neri Tollardo

Morgan Stanley, Research Division - Analyst

* Samuel Magnum Goodacre

JPMorgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks

* Simon Nellis

Citigroup Inc, Research Division - MD and Director

* Tatiana Chernyavskaya

VTB Capital, Research Division - Strategist

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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 2Q 2019 IFRS Call hosted by Sberbank management team. (Operator Instructions)

I would 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. Thank you, everyone, and good afternoon. Thank you for taking time to stay with us for the next 2 hours. We have prepared a very interesting call for all of you, as we hope so. Let me introduce our speakers. We have our traditional speakers with us, our CFO, Alexander Morozov; we have our Chief Risk Officer, Dzhangir Dzhangirov with us. And today, we have a chance to have direct contact with our first Deputy Chairman, Lev Khasis, who will address all questions that you have and briefly introduce some messages on recent transactions and development of our ecosystem. Then we will have our traditional Q&A session. And I suggest we'll start with the questions related to ecosystem and our transactions, so please prepare them at first.

Thank you, and let's have an efficient call. I'll pass the floor 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, Anastasia, and good afternoon and thank you for joining us, everybody. By now you may have reviewed our second quarter results, and I don't want to take much of your time by going into details. Let me highlight some important developments for the reported period and address our full year outlook.

Sberbank Group earned a net profit of RUB 250 billion in the second quarter and delivered return on equity of nearly 25%, 24.9% to be precise. Let me focus on a few main drivers behind this.

First of all, the main contributor is net interest income, which increased by 1.2% year-on-year basis to the level of RUB 353 billion.

A few aspects. First of all, retail lending. Retail lending remains very strong and it increased by 4.2% in second quarter and 7.8% year-to-date to RUB 7.3 trillion. And in that respect, we view strength is very sustainable, specifically on the back of lower interest rate environment. And expect Sberbank to keep growing in the 15% to 18% range, so fully in line with our sector guidance and maybe even slightly faster than that.

Our mortgage portfolio increased by 2.5% in second quarter and nearly 5% year-to-date. Around quarter 4, our mortgages were originated through our digital e-commerce platform, DomClick. As of now, access to the platform is available for Sberbank Online, and the seamless plug-in makes client experience even more convenient and increase more demand for supplementary service. First of all, it concerns secure payments and property appraisal, and I'd like to mention that penetration of our services in mortgage reached already 90% to 94%, respectively, which is not a bad level at all. Early this year, we added the commercial real estate segment to the platform and now already more than 60,000 listings are already placed on our platform only in second quarter.

Consumer lending. Consumer lending growth outpaced mortgages, and it was up by 6.7% in second quarter and 11.4% year-to-date. 50%, 50% of all our consumer loans were issued online.

Corporate side. On the corporate portfolio, performance was a little bit weird. And largely, it was due to limited demands -- limited quality demand, better to say, from large corporate segment. Our overall corporate portfolio contracted by 3.4% in the second quarter and 6.7% year-to-date to RUB 13.4 billion. But having said that, I'd like to underline that, at the same time, we saw 5% quarter-to-quarter growth in our preferred area in lending to small/medium enterprises, which was supported by a number of our initiatives, including the launch of one of -- of online lending for small businesses and our pre-approved offerings.

So as I mentioned a number times during our meetings and conference calls, small/medium enterprise and medium-sized corporates was our main focus for corporate lending for the time being. They bring us better diversification and higher margin, and at the end of the day, we see a better return on risk-weighted assets in these specific segments as of now. So this segment's growth is -- [goes] fully in line with our initial expectations and even better than that.

The amount of the (inaudible) trends on corporate side, we have showed a further shift away from dollars into ruble among corporate customers, and it was also very positive for the yields. For the first half of year 2019, the share of ruble-denominated loans increased from 75.5% to 77.6%, so more than 2 percentage points. In retrospect, our guidance is following from being healthy for the year. We adjust our view for corporate lending downward a little bit for the sector as well as for our franchise. We believe that corporate lending could be more positive going forward in our case, and we will deliver results according to expectations of the market and more or less in line with the market.

On the funding side. Retail deposits grew by 2.5% year-on-year in second quarter and 1.3% year-to-date. Corporate deposits and accounts increased by 1.2% year-on-year in second quarter and nearly 10% year-to-date. And so guidance in this respect remains unchanged.

Net interest margin. Our net interest margin recovered from the bottom in the first quarter as we discussed with you already, and now it's improved by 19 basis points in second quarter, so in line with our initial expectations. The main drivers were rising corporate yields, plus 60 basis points; and some improvements in retail yields, plus 20 basis points. At the same time, cost of funding showed 20 basis points increase above in the second quarter, and it was mainly driven by retail, while corporate term deposits remained flat.

Same time having said that, I do not expect extension of strength on the back of the falling interest rates. And vice versa, I would expect that the cost of my retail liabilities will also go down gradually but sustainably. The rebalancing of our loan portfolio towards retail and small, medium enterprise, given the additional support for the strength, and I'd like to mention that retail loans now accounts for more than 35% of the total portfolio, and the share of retail loans will continue to increase with a positive effect on margin. However, we have to revisit our outlook on net interest margin due to a number of factors.

First and foremost, it was due to the dynamics of interest rates globally. As you will remember, a year ago, all of us, we were expecting the U.S. dollar rates to go upwards but rates reversed down in mid-spring. As you remember, we have always [slug it out], but we are positively exposed to the U.S. dollar's rate increase. And vice versa, we are negatively exposed to the reduction of U.S. rates.

Now we have to take this into account in our new net interest margin forecast.

Second reason, we started offering loans at [slowish] increase to handle interest rate risk. At the same time, we added some [cash] elements to meet corporate customers' demand.

Given that the hedge -- given the fact that the hedge transaction is not recognized as part of interest income but recognized and shown as part of trading income, which technically, a little bit affect NIM calculation. But on the bottom line, it gives us practically the same result.

Fourth reason, increased activity on [intrabank] market for liquidity management partly because of regulatory requirements for liquidity ratios. And it was well justified by capital allocation [operational]. At the same time, it was marginally a little bit margin dilutive, but you have to keep it in mind.

And finally but also a very important factor is the effect of the [devolatilization] of portfolio, which keeps pace, and so our loan-to-deposit ratio for dollars coming down to 63%. This part also contributed to the contraction of net interest margin. All in all, we now assume that our NIM will remain on a recovery path until the year ends. However, I have to adjust our outlook to capture this impact, as I mentioned, surplus and restate our NIM expectations to the level 5.25% to 5.5% range by the end of the year-end. It's small, but nevertheless, I assume, acceptable and absolutely explainable change. And it will not affect our full year guidance with regards to our overall profitability, and it will not affect our medium-term guidance with regard to our profitability for the next year. I would say even more than that that we are -- we start next year with a margin slightly more supportive for the next year result than we initially assumed.

Fees and commissions. Net fees and commission grew by 4.2% year-on-year to deliver RUB 116.7 billion in the second quarter. But please note that there are several effects which should be taken into account to understand the underlying trends, and I'd like to mention them.

First of all, we had some one-off effects in the documentary business line in second quarter last year. So it was one positive one-off, and it elevated quite substantially compared to base. Excluding this one-off effect, which happened a year ago, I would say that total net fees would have grown more than 8 percentage points year-on-year basis in second quarter.

Second point I'd like to draw your attention to is that we had an impact on our bank card business from a change in methodology of accounting for income from portfolio-based to per-transaction accounting. The impact will level out in the second half of 2019, so it's temporary effect and, if adjusted for this factor, net fees from our bank card business since the first half 2019 would have grown by nearly 20% on a year-on-year basis versus 15% that is stated in the reporting now. So once again, it's a temporary difference. On a full year horizon, it will be fully offset. Taking into account the management focus, the growth in our net fees and commissions the first half 2019 would have been practically 11% year-on-year basis.

We have continued to work on cashless initiatives and part of them are following. Transport acquiring coverage has been extended to 80 cities. Payments with Sberbank infrastructure can now be processed in all state service centers of Moscow and is available in 15 other cities. The number of our digital retail customers increased by 1.5 million to 66.3 million. And what is important about it is almost 40% of our monthly users make transactions daily. So the ratio DAU/MAU is nearly 40%, plus 5 percentage points in second quarter.

We have enhanced our digital experience of our customers and the efficiency of our operations. 30% of all clients request Sberbank Online and our processes through our chatbots. 42% of all applications at Sberbank call center are hosted by interactive voice response, IVR.

On the corporate segment, the number of customers that use nonfinancial service increased to 490,000 in second quarter. As you know, largely focused on client acquisition and corporate segments, we decided to revise our outlook on fees to low teens for full year. It addressed our old trends and some of our best understanding of the remaining trends until the year end. But still, it's double digit, and we are committed to deliver double-digit growth on fees and commissions with a really very good quality and good perspective for the next year.

OpEx. On OpEx side, just we see grew -- growth by practically 11%, 11.1% to be precise, year-on-year, and 7.7% for the first half 2019, but we have to keep in mind that growth was due to the reshuffling of IT staff. We changed our methodology a year ago. Starting from 1st of July 2018, we moved our expenses, which were previously showed as CapEx expense related to IT developments. We moved that into OpEx and we did intentionally discuss a number of times. So what was -- it was [vacation] expense from CapEx to OpEx contributed substantially to our overall growth.

The second reason for the growth of OpEx in the second quarter and first half 2019 was the key increase from 1st of January this year. And if we adjust for these 2 factors, OpEx growth would not exceed 4.5% on a year-on-year basis for 6 months 2019. And cost-to-income ratio came in at 34.6% in second quarter 2019. So a combination of IT cost reclassification and slow operating income growth lead to the revision of our cost-to-income ratio guidance and outlook to more stable year-on-year dynamics. So we do not -- having said that I'd like to underline that we will continue our efforts to further increase our efficiency. And efficiency increase is something we promised and something which will be delivered, but it will take a little bit more time to more and more to [stably reduce] cost-to-income ratio because of slower operating income, and part of which is a one-off effect related to the deconsolidation of DenizBank and reduction of our working capital as a result.

Cost of risk. Combined cost of risk was moderate at, say, 14 basis points, and it was affected by the recovery of provisions created against Agrokor debt as this restructuring is now fully completed and reflected in our reporting. Run rate excluding Agrokor debt would be 80 basis points in second quarter. And on the back of this development, we have adjusted our cost of risk outlook to a more moderate 100 to 110 basis points. And our CRO, Dzhangir Dzhangirov, will provide you some more comments on that subject and address it in more details.

A few words on DenizBank. We are happy to announce that the deal closing today and it is closed, and it is already settled. It is really important. It is already settled also today. You have probably already seen our special press release with this [latest] details and we're now happy to give more details and answer questions in our Q&A session. Just a few words.

We sold it at a very decent multiple of 1. One capital of DenizBank Equity Capital issued RUB 171.7 billion for our stake. As I already mentioned, the settlement has already been completed today, this afternoon, and there were 4 main financial implications. Under the Russian Accounting Standards, we booked a profit in the almost RUB 22.7 billion and income tax payable in the amount RUB 4.5 billion. Under IFRS accounting the deal will lead to an increase of the net assets for the group in the amount of RUB 11.7 billion. At the same time, for the P&L, the profit and loss, the effect will be slightly negative and RUB 70 billion including accumulated profit of DenizBank since the beginning of this year, around RUB 5 billion.

It's because -- primarily because of [reciting] through profit and loss of the accumulated currency translation difference, which was booked in other comprehensive income and reflected Turkish lira depreciation versus Russian rubles by [36%] over the last 7 years since the acquisition of DenizBank. Please note that this is a noncash loss. This is very important. Once again, our net assets of the group increased as a result of this transaction under IFRS accounting by more than RUB 11.7 billion, which is really important and very positive.

Overall reduction of risk-weighted assets as a result of this transaction is 9.5% or practically RUB 3 trillion, and it translates into a positive effect on core equity tier 1 capital adequacy ratio of 120 basis points. More than we promised, and it's very, very supportive of our capital creation.

On the back of this development, we have raised our guidance on the core equity tier 1 capital adequacy ratio to 13%. And that's a conservative estimate by (inaudible), we see some pressure on the ratio that will come from the introduction of additional add-ons from market prudential regulations set by Russian Central Bank, and Dzhangir Dzhangirov, the CRO of the bank, will update you accordingly, will give you more flavor on that.

Last but not least, before I pass the floor to Dzhangir, I'd like to once again confirm our guidance with regards to ROE, and this is our commitment that ROE will be full year round to the level definitely above 20%. We secure very safe and very good economic value added to our shareholders, which I underlined many times is our first priority and our biggest commitment.

Having said that, I pass the floor to Dzhangir, and we'll be ready to answer your additional questions in Q&A section of our conference call. Dzhangir, please?

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

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Good afternoon, everyone. So our cost of risk for the second quarter of this year is 14 basis points, such a low number is, of course, explained by one-off effect of Agrokor. Had Agrokor not happened in the second quarter, our run rate, our cost of risk rate would have been close to 80 basis points, as was mentioned by Alexander, and for the first 6 months of the year, it would have been closer to 90 basis points.

On the RWA side, I'll level set our message. As you know, since 2016, the Central Bank of Russia started to impose macroprudential add-ons. At that time, in 2016, add-ons were applied only for fixed nominated corporate loans, and they were pretty small, like 10% of the notional. But since then, we have seen significant extension of the macroprudential requirements for other asset classes as well as we've seen increase in the rates of the add-ons themselves.

As of now, macroprudential add-ons are applied for mortgages, unsecured retail loans, credit cards, [FX denominated] corporate loans. And as of now, the add-ons themselves are also much higher than they were, and Central Bank continued to increase the rates this year for unsecured loans and credit cards.

In 2016 and since then, we decided not to include macroprudential add-ons in our IFRS capital adequacy ratio since this was mentioned on discretion. However, since macroprudential requirements affect our capital adequacy ratios according to Russian Accounting Standards, we decided to converge IFRS and Russian Accounting Standards for capital, which means, of course, the increase of the RWA in IFRS and decrease of CET1 in IFRS.

So the way macroprudential requirements, macroprudential add-ons are applied to IRB banks, including us, is different from the way they are applied to standardized banks. For most of the asset classes, for all asset classes, except mortgages, we use so-called limited approach. Limited approach means that, up until the macroprudential requirements are less than 27.5% of the total RWE, they are not applied. And when the macroprudential requirements increase to 27.5%, they start to be applied until 27.5% economy is reached according to IRB RWA.

For mortgages, the way macroprudential requirements are applied is different. There, we use so-called proportional approach, which assumes that the add-ons that standardized banks use are proportionately applied to the weight -- to the average weights where they are not applied. Practically, this means that for mortgages with LTV higher than 80%, we applied -- we apply twice as much coefficient as we apply for mortgages with LTV less than 80%.

All in all, we expect that, in the end of this year, the total effect on our CET1 ratio will be close to 60 basis points.

That's all from my side. Thank you very much.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [5]

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Thank you, Dzhangir. And now I hand over to Mr. Lev Khasis.

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Lev Aronovich Khasis, Sberbank of Russia - First Deputy Chairman of the Executive Board & COO [6]

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Good afternoon. Today is really a very important day for us. And let me start with a couple of words about the DenizBank transaction as our international business is a part of my responsibility.

As you know, we entered the Turkish market about 7 years ago. And since then, we have grown the business significantly. The number of clients doubled and DenizBank increased its assets by 3.5x. Nevertheless, due to sanctions, which imposed lots of limitations, and as you know, we gradually adjusted our international strategy, we decided to optimize our international presence and entered into the deal with Emirates National Bank of Dubai. It was a long license process because of procedures, such as getting approvals from multiple officials -- multiple official borders in several countries. And today, we're very happy and very glad to finalize the transaction.

So now let me talk about other important topics. I will begin by reminding you of our recent news, and then I will add some more color to Sberbank's ecosystem building.

The first half of this year, especially the previous couple of months, were very [rate] intensive. We managed to enhance our focus in the lifestyle area through several acquisitions and initiatives.

Let me start with the most significant ones. Last week, as you know, we entered into a new strategic partnership by signing a nonbinding agreement about the creation of a joint venture with Mail.ru Group in their O2O industry, including food delivery, restaurant services and ride hailing. And it was announced Mail.ru will contribute to the joint venture 100% of Delivery Club, the national leader in its industry, 75-plus percent of Citymobil, where Mail.ru will expand its current ownership to 75-plus percent using its own funds, and investments of RUB 7.7 billion and further another up to RUB 5.1 billion subject to KPI performance.

From our side, Sberbank will contribute to the JV our 35% of Foodplex, the leading player in restaurant services as well as cash in amount from RUB 38 billion with an option to increase the investment by another RUB 13 billion subject to KPI performance. And don't forget that Foodplex currently is our JV with Rambler, and Rambler owns another 30% of it. The completion of this transaction, which expected to happen by the year-end, will be -- will give us an absolutely unique position as the only company having large JVs in different industries with all 3 major Russian Internet holdings: Yandex, Mail.ru and Rambler.

Also as you know, we have partnerships and JVs with other big and successful companies, including AFK Sistema, Gazprombank and some others. We believe that long-term partnerships are one of the best strategies of developing a multi-industrial ecosystem.

A few weeks ago, we announced the enlargement of our strategic partnership with Rambler in order to build their leader in the digital media and VOD, video-on-demand, market. We are buying about 46% of the company, which holds all the digital assets of Rambler. The company has the leading position in the Russian digital media industry with about 56 million monthly active users.

Part of the assets of Rambler is Okko, one of the largest and fastest-growing VOD services, which will be the key asset in the development of the rapidly growing and underpenetrated digital entertainment market. We achieved, I just cannot avoid this subject, talking about Yandex. Market.

We achieved really great progress in growing our mutual e-commerce business with Yandex. I think you saw recent reports and you saw the numbers. Our mutual marketplace, beru.ru, is developing its capabilities and audience very fast, ahead of our expectations. And we are completely happy with both the results and the integration into Sberbank's ecosystem.

Just recently, just about a couple of weeks ago, users of Beru got 3 unique features from Sberbank's ecosystem. Sber ID, now they can log in using their Sber ID, instant credit from Sberbank for purchases above RUB 5,000 and the option to use Spasibo points to pay for their orders. Spasibo, as you know, is our loyalty program.

A couple of words about other initiatives. We added a job classified business, Rabota.ru. And by the way, Rabota is a fantastic brand, and in Russian means both work and job, and I believe this service will help a lot our retail clients and our corporate clients. Our biometric services were enhanced through Speech Technology Center, a world-class technology provider for voice recognition and voice-to-text services. And last but not least, we've built SberLogistics to ensure high-quality delivery services for our clients, leveraging our existing network of branches.

With all of these steps, we expect -- I think it's important for you to know that almost all necessary major acquisitions have been completed with only some minor niche investments to be executed in the near future, definitely, unless a unique opportunity arises. One else very important message I'd like to share with you. Don't forget about our preference is to enter into our major deals with mainly -- or if we're talking about large deals, only cash and investments. That means these funds are invested for business development not for cash out. And in the next 1 and, in many cases, 2 years, we do not expect that they will need any additional significant capital injection.

And definitely, our #1 priority now for the next 12 to 18 months is the integration of our existing and recently acquired services, both those acquired and those originated in-house in our ecosystem using common technology elements, like Sber ID and others. And so today, we have already integrated Sber ID into 15 subsidiaries and partners' companies of our ecosystem, and we'll keep working on further expansion of our common technology elements.

Another area of our focus, and we believe that it will be a very successful model, is to build a very attractive range of individual bundled offers that are structured on the back of individual preferences and needs of our retail and corporate clients.

I hope my short information was useful, and let me assure that we will keep you updated on further developments of our ecosystem. And thank you very much, I will be happy to answer questions through our Q&A section. Thank you.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [7]

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Thank you very much. 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) We'll take our first question from Sam Goodacre from JPMorgan.

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Samuel Magnum Goodacre, JPMorgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [2]

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I've got a few questions, but I thought I'd -- as you asked, Anastasia, focus on the ecosystem whilst we've got Lev Khasis with us. So actually, what I'd be really interested to know is the very strategy of choosing your partnership and what that decision comes down to. I think it's very clear that you are tending to partner and -- partner with and make acquisitions of challengers rather than necessarily the dominant market leader in each sort of vertical that you enter. So could you give us a bit of color as to why you are choosing that strategy? And -- but why not partnering with clear market leaders in that sense?

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Lev Aronovich Khasis, Sberbank of Russia - First Deputy Chairman of the Executive Board & COO [3]

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Thank you. First of all, when it is economically reasonable, we prefer to deal with market leaders. And Rambler, in the area of digital media, is a clear market leader. Delivery Club is a clear market leader in its industry as well. So you see, we choose to deal with market leaders when it is economically reasonable.

In other situations, we prefer to enter a business which has a big potential for growth but we believe that it's easier to develop it from its current stage than to pay a huge premium for the market leadership. And also as I said, we prefer invest money, which will be used for development than to pay cash out and then to take the full responsibility for the business.

Also we believe that many of our large companies like Yandex. Market, like Rambler and like our joint venture with Mail potentially can be independently publicly listed. And we prefer not to have control for them -- under them to avoid any poisoning with our current sanction restrictions. So taking into consideration all of these elements, we believe that our strategy is smart and reasonable.

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Samuel Magnum Goodacre, JPMorgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [4]

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The follow-up I had then is I'm interested in the term that you often use, which is co-opetition, because obviously you, as far as I understand, have an exclusive deal in any particular JV, but we have indeed seen you almost compete head-to-head with JV partners in businesses outside of that JV. So could you tell us how that basically is working out and if there has been any impact on existing JV relationships from new partnerships you have announced?

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Lev Aronovich Khasis, Sberbank of Russia - First Deputy Chairman of the Executive Board & COO [5]

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Okay. I'm happy to share. For example, with Yandex, we have a noncompete agreement that we, together, will not develop any pure e-commerce business outside our joint venture, Yandex. Market. But both of us, Yandex and ourselves, we can develop our own businesses or businesses with other partners in the area of, for example, food delivery or mobility. And the same situation with our joint venture with Mail.ru. We agreed that we, together, will develop O2O business model, which includes food delivery, express delivery from stores and taxi, but we cannot do together the exact competing business with -- which would be in competition with Yandex.

And also don't forget that we have a very successful joint venture with Yandex in the area of financial services called Yandex. Money. And again, in this company, we also have a noncompete agreement which allows us to be fully concentrated together with Yandex developing financial services for Yandex clients through Yandex. Money. So same for Rambler. We develop with Yandex -- or, sorry, with Rambler, VOD services, and we are not going to develop this business with either Mail or Yandex.

So it's very clear. And we believe that it's a smart strategy because it allows us to cherry-pick the best options from each of 3 biggest Internet holdings in the country and maximize the penetration of great services to our clients and to our ecosystem. And as I said, we strongly believe in bundles, which will allow us to propose to our customers a unique, seamless, [in turn], services in different -- to fulfill different needs of them.

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Samuel Magnum Goodacre, JPMorgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [6]

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Okay. And my third and final question about the ecosystem is related more to targets. I think you've been very clear that the current investments you've made, you don't anticipate any further cash injections necessarily. But what about the actual contribution to your earnings and how we can think about your targets? And together with that, perhaps you could provide some more color on the last comment you made related to potential exit. Is this ultimately about perhaps a mid-term profit contribution for Sberbank or rather a gain on exit via IPO or similar?

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Lev Aronovich Khasis, Sberbank of Russia - First Deputy Chairman of the Executive Board & COO [7]

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As I said, we believe that, at least within 1 year, in many cases even for a longer period of time, our large investments, large companies doesn't need additional capital injection.

For example, as you know, we invested about RUB 30 billion in our JV with Yandex. So far, the company, growing very rapidly, burned only about RUB 5 billion or less. So we have lots of cash in the company to fulfill its growth. And also all cooperation of such joint ventures with us is based on commercial basis, and we're going to get additional commission and additional risk-free income for us using our client base to provide leads and to provide the things to sell these services.

As for exit, I don't think we are looking for a short-term exit or even a midterm exit. We believe that maybe the company will be public, and I guess all 3 large joint ventures are potentially very attractive to be public within the next 3 to 5 years. But I think we can keep our large but minority share in these companies and keep them members of our ecosystem to create additional stickiness for our additional attractiveness for our customers.

So I believe that public markets can provide fair valuation of this business in the future. And you see a few examples with very high valuation of digital businesses like the latest IPO of HeadHunter and the potential IPO of Yandex. Taxi, I believe, it could be successful. So we're really very optimistic about the potential market valuation of these very interesting and very fast-growing businesses.

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Operator [8]

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We take our next question from Neri Tollardo from Morgan Stanley.

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Neri Tollardo, Morgan Stanley, Research Division - Analyst [9]

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I've got 2 follow-up questions on Yandex and on Mail JV. One would be, again, a follow-up on an earlier question about having JV partners that are effectively competitors. Does it not make it, whether awkward or a conflict of interest in some ways, the fact that, for example, you're collaborating with Mail on some businesses that are then competing with Yandex and then you have a JV with Yandex that -- for businesses that are competing with Mail? I mean how do the -- how do you approach that potential conflict of interest?

And the second question is on the recent development on the recent law proposal to limit foreign ownership in some of the Internet companies and whether that would in any way change your approach to how you build your ecosystem through these JVs and partnerships.

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Lev Aronovich Khasis, Sberbank of Russia - First Deputy Chairman of the Executive Board & COO [10]

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I think we use very often this term co-opetition. We really believe that it works, and we see it works in many directions. For example, we have a couple of JVs with AFK Sistema, but, at the same time, we are competing with AFK Sistema. They have MTS and we have [Demobile], which is a virtual mobile operator, and we don't see any problem with that. And I think we are, long term, in competition with Yandex for some other services like Yandex.(inaudible) versus DomClick. Both are moving in the classified business for real estate or e-sales projects or, for example, we are already in restaurant services with FoodPlex and Yandex.(inaudible) develops its business in the same industry.

And they did it without Sberbank for many, many projects, and we have nothing against it, it's normal. So why should we limit ourselves to build services which are so necessary for our plans? And I believe that we will fully follow all of the limitations we have with Yandex and with our other partners about noncompetition. And at the same time, it's normal think that in some other areas we will compete. So again, I don't see any contradiction in the idea of doing business together and competing in other business against each other. Just it should be fair competition, and we always support that fair competition as a great thing for the market.

Talking about the latest draft of the new legislation, really I have no comments about it because, for all of us, it was a bit of surprise. And we saw some comments even from the government. So we don't know what will be the fate of this draft of the law. So I just cannot comment it. Sorry for that. I have huge level of interest about the results of it, but I can only guess, same as you.

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Operator [11]

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We take our next question from Simon Nellis from Citibank.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [12]

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A very interesting discussion on the ecosystem. I might just have one last question on that. Can you give us an idea of actually how much money you've invested into all the ecosystem investments so far? I mean we have an idea about Yandex. We know about Mail.ru, but there's a number of other joint ventures and ventures. And I think you had a target of achieving RUB 70 billion of revenues by next year from these businesses. Are you on track to delivering that? That would be very useful.

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Lev Aronovich Khasis, Sberbank of Russia - First Deputy Chairman of the Executive Board & COO [13]

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I remember before the latest announced -- announcement of our potential future transaction with Mail, we calculated that the total investments of Sberbank in all of our nonbanking ecosystem were equal approximately 3% of our net profit for the previous 3 years. So really, from this perspective, our investments are very accurate and very disciplined. So we are very much cautious about spending our shareholders' money through some of these initiatives.

So I guess all together, we are talking about a completely reasonable amount of number. So it's about plus/minus USD 1 billion, excluding the future transaction with Mail. So -- but really, on the -- if you compare it with our results, you can see that lots of other companies are much more aggressive in building of their future than Sberbank.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [14]

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So $1 billion, that would include everything except for this venture with Mail, roughly?

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Lev Aronovich Khasis, Sberbank of Russia - First Deputy Chairman of the Executive Board & COO [15]

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Roughly. So please excuse for my rough, but it can be $1 point-something billion. But it's not too [big].

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [16]

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And in terms of revenue that you'd expect so far from these investments, I mean are you on track to hitting the RUB 70 billion target next year?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [17]

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Our -- yes. Our main goal is to grow this business from point of view operations and audience because, in many digital industries, the rule the winner takes it all works very well. So our goal is very simple in the industries where we already are the market leader, to increase the distance ahead of the #2 player, and when we are not yet the market leader, try to be a very successful successor of the leading player.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [18]

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Okay. And if I could ask one more question directed to the other participants so they don't feel left out. On the 60 basis point impact on capital ratio from the macroprudential measures that you're now going to converge with IFRS, I guess that will -- that impact will increase over time, right? It's on new lending that these macroprudential measures affect, especially the most recent ones on consumer lending. So I mean if you had to apply those measures to your entire portfolio, what would the fully loaded impact be? And over what time period will that kind of hit the capital ratio?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [19]

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Okay. So thank you very much for that question. On the consumer lending side, we actually calculated this number, and our total RWA increase, if those requirements were imposed before, our total effect on RWA would have been almost RUB 1 trillion. So that's a lot. But this number, although it's quite high, it wouldn't be achieved because we are going to change our strategy as we take into account the cost of capital. And with higher impact on the RWA, we will -- whenever we see a high impact on RWA, we will, of course, require more NPV, so -- which means that less cost of risk or a higher rate or whatever. And so we do not expect this RUB 1 trillion to happen in the future.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [20]

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And...

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [21]

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And with -- yes. Pardon? Yes.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [22]

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No. I was going to ask, I mean other than consumer loans, is there also a phased-in impact for other exposures or...

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

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Yes. For FX-denominated corporate loans, we do not expect a significant further increase of the impact because we have this so-called limited approach and currently we didn't achieve this 27.5% economy. And we are not going to increase our FX-denominated loans' share in the portfolio. So basically, the effect will be negligible.

For mortgages, since the macroprudential, this proportional approach started to be applied through the beginning of this year, we actually differentiated the rates between above 80% LTV loans and below 80% LTV loans. So it's a -- the differentiation was just 0.2 percentage point, and it's already led to the decrease of the share of over 80% LTV loans from close to 50% to 43%.

And as I said, we are going to take this into account, and we will probably further increase the differentiation. And the proportional approach actually means that we applied twice as much rate as we applied for below 80%. But in our case, the economy of IRB is quite significant, so we still have significant advantage here compared to the standardized approach.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [24]

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I was going to ask actually if there's any further optimization you can do from IRB or other effects that can offset some of this impact.

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

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Yes. We applied to Central Bank of Russia with a set of new applications on corporate and the retail side. Our experience -- our previous experience shows that our applications, if they are approved by Central Bank, they are quite often approved with certain adjustments and corrections and certain add-ons. So I cannot really share the effect. However, these applications would not fully offset macroprudential effect, that's for sure because macroprudential effect is much larger.

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Operator [26]

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We take our next question from Andrzej Nowaczek from HSBC.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [27]

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I have 2 questions, one for Dzhangir Dzhangirov and one for Lev Khasis. I'll start with e-commerce. It's just an open question. How can your e-commerce experience with Yandex help you in a Mail partnership? There must have been some lessons learned, some management know-how gained. Is this experience going to make this last venture, the Mail venture, achieving its objectives faster, for example?

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Lev Aronovich Khasis, Sberbank of Russia - First Deputy Chairman of the Executive Board & COO [28]

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Definitely, we extracted a lot of lessons from any of our activities. Doesn't matter if it's activity with Yandex or with somebody else. And when we discussed parameters of a potential deal with Mail, we were much more detailed in all issues related to integration of a potential joint venture in our ecosystem. So for example, we spent about 9 months to implement their ideas, Spasibo and instant financing from Sberbank to sellers of Yandex. Market. So I believe that such common elements of our ecosystem will be implemented into the services we are talking about with Mail.ru maybe even before the closing of the transaction.

So it means from day 1, they will be integrated into our ecosystem. And also as I said about bundling, we believe that we will go to market with some subscription models, including several of our services, which will include different services from different partnerships. And again, we believe that our customers will just enjoy the variation of the services and the quality of them. Thank you.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [29]

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And the other question is on the retail cost of risk, this increased in the last couple of quarters. And it is happening specifically in the unsecured loan segment. Is it something temporary? Or do you think the cycle may be turning? And when you assess this, what metrics do you look at?

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Maxim Grishakov, Yandex N.V. - CEO of Yandex.Market [30]

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Yes. So the increase in the cost of risk in the first quarter was due to the change in methodology. So we changed our PD last time, although, and we also changed the way we recognize stage 2 for credit cards, so this effect was a methodological [net lift]. The second quarter effect is actually due to the fact that, in the end of last year, we started to land more in credit cards in higher-margin segments. And these higher-margin segments lead to a higher risk. We also see a certain saturation in the market in terms of PTI. So we think that, both in unsecured loans and the credit cards, the current levels are already close to maximum. And this may only decrease because of the new regulations that's imposed by Central Bank, which will come in force on 1st of October. So this number, given that we slightly adjusted our risk strategies, we expect that it shall slightly go down in the third and fourth quarter. But definitely, we do not expect a significant increase.

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Operator [31]

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(Operator Instructions) We take our next question from Mikhail Shlemov from ZTB (sic) [VTB] Capital.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [32]

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The first question, I wanted to ask about the ecosystem investments. Given that you already made quite a number of them, including, of course, the big landmark with the 3 big Internet conglomerates but also much smaller ones. Perhaps you can share at what are the metrics in terms of the return on the allocated capital you are looking at, and whatever how you are assessing especially with the early investments, or whatever you would be willing to commit more capital to scale up the business or not. The second question is also referring to the ecosystem and specifically, one of the earlier investments, which is Yandex. Money. You've talked about the noncompete, which you have with Yandex regarding this JV. Could you provide a little bit more detail how constrained Yandex is in reality in terms of it choosing the other financial partners according to your noncompete.

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Maxim Grishakov, Yandex N.V. - CEO of Yandex.Market [33]

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Okay. First of all, again, talking about co-opetition, I think it's a working model. And for example, Yandex already included Beru in their bundle called Yandex Plus. And we're completely fine with that because it helps our mutual business to collect additional customers and to increase sales. And Yandex is free to work with any providers of financial services. And as you know, they recently introduced joint credit cards with Tinkoff called Yandex Plus Tinkoff. So the limitations are that we cannot invest in other digital wallets in the country and accept Yandex. Money. And this is our joint venture with them. And they cannot invest in majority stakes of competitive entities. So this is the only limitations, but all the rest, they can do whatever they want. And we believe that it's normal to give each of the company, except the agreed framework, full freedom in order to develop their business. And when we do something together, we are doing very friendly and with full effort to achieve results. So this is why both companies, Yandex. Money and Yandex. Market, are very successful companies with fast-growing business, double digits or -- in the case of Yandex. Market, in triple digit of percentage annual growth. So we're quite happy to keep developing our mutual business with Yandex. We respect a lot this company, and we're going happy to find additional areas where we can do something specific together with them.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [34]

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And if you could just talk a little bit about the financial criteria or the IRR, which you are looking to achieve in terms of the investment which are basically being poured into the ecosystem.

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Maxim Grishakov, Yandex N.V. - CEO of Yandex.Market [35]

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Sometimes, new businesses are profitable from day 1. And we have a few of them, which are very profitable. For example, Yandex. Money is a very profitable business. And another example, which came -- just came to my mind is our Sberbank AST, which is a leading e-auction platform for the B2B market. Very profitable digital company with very good results, paying dividends. But in some other cases, we see that growing digital business is a long story. Recently, Yandex announced that they have profitable business in Taxi. But as far as I remember, they spent about 6 or 7 years until this business reached maturity, and they are able now to extract the profitability. So I believe that it's fine than some of our businesses, which in the next 2, 3 years will be targeting to gain the market share worlds of customers. And in many cases, I believe it will generate a lot of value in the future. But for example, talking about these 3 businesses where we are large investors, we are okay if they won't generate immediate profit within the next 2 to 3 years.

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Operator [36]

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We take our...

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [37]

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I find -- okay. Sorry, if my -- thank you, it's Alexander. [Michael], thank you for your question. I'd like to add a couple of words answering your last question. We see what's in -- a number of cases where the [factor] builds a market built from scratch. Or we have -- using our capacity, our customers' success have now scaled they may substantially change the market and say [most likeably ocean]. So that's like construction stage as of now. But internally within the bank, we use our cost of capital for all our projects, which we imply in our projects 20%. Let's say cost of our internal capital [which used]. And then it's about, say just a business plan, which is number of cases requires just a short or a longer time to deliver, that necessary, (inaudible). As (inaudible) very friendly. In a number of cases, the winner takes it all. We understand it very much. We see it in most cases. And -- or we are not (inaudible) to spend our money and our time for peanuts. We -- for we play a big game. And we expect really big and serious results. And so we are not in a hurry. I hope, you're knowing me for quite a while, you take it seriously.

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Operator [38]

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We take our next question from Gabor Kemeny from Autonomous Research.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [39]

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A follow-up on the ecosystem discussion. What -- approximately what are the capital requirements currently on your investments in these ecosystem companies? And I also understand there was a CBR indication that they would consider tightening the capital requirements on nonfinancial investments. Can you comment on that?

The other question is on NII. How do you think about net interest income growth going forward? It sounds like you turned a bit more cautious on margins and there's a clear intention from the regulator to reduce consumer lending growth. I'd be interested on your thoughts on that.

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [40]

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As for the first question, since these are nonfinancial investments in nonfinancial companies or not in the financial institutions, this is considered to be RWA and not capital reduction. And RWA weight here is 400%.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [41]

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I'll say here, I hope it's helpful. And I'll say the second part of your question in regard to net interest income, we have witnessed definitely some weakening of our net interest income as a result of net interest margin in the first half of the year, but we mentioned it already. That's not -- and now we are on the way for recovery. And so I expect this trend for recovery will be continued in the third and the fourth quarter. But being on the safe side, on the conservative side and taking into account already existing -- already achieved numbers and the dynamic in the first half of the year, we decided a little bit amount downwards our net interest margin guidance very slightly to 5.35% to 5.45%. And so looking forward, I think that this -- our initial strategy for this year assumes that we would have something like 5.5% all over the year, at the same time, with greater reduction in the second half of the year. So now we see a completely different set. So yes, the margin for this year is a little bit lower than we expected at the beginning, let's say, in November, December last year, but the trend is different. Instead of a reduction of NIM towards the year-end, we see some improvements of the margin towards the year-end. That's my expectation as of now, which gives me higher initial base from my business model for the year 2020. So I think it is -- as I mentioned in my report, I think it is supportive for our numbers for year 2020. That's how I see it.

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [42]

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A small comment from my side. I -- current risk weight is 400%, but we're in discussion with Central Bank to decrease this number to 250%. As you know, Central Bank of Russia published a Basel 3.5 document for Russian banks, and that is from January 1, 2020, we might have lower -- a lower level of 250%.

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Operator [43]

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Next question comes from Andrey Pavlov-Rusinov from Goldman Sachs.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [44]

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I've got a couple of questions. First of all, just a follow-up on the margin dynamics. Could you please shed a bit more light on your corporate loan yield outlook? Essentially, we have seen a very strong result in the second quarter. And do you have anything -- do you expect any more positive trends here in the third quarter or from your bad book repricing with the lagged effect of the actions you took earlier this year when rates were higher? Or essentially, from now on, we should expect some decline in corporate yields given the Central Bank started cutting rate and more of your lending now is on floating rates? That's the first question.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [45]

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Okay. As I mentioned, we mainly focus on accelerated development of our lending towards small- and medium-sized businesses and ruble-denominated loans unless the margin is higher and risk is more diversified so it's more attractive for us.

In the first half of the year, we saw some decline on corporate portfolio, but this decline was practically 100% due to decline in dollar-denominated lending to big customers -- super big customers, super big-ticket CIB. And so from that perspective, yes, apparently it's a reduction of the portfolio. But on the backside, it's a better diversification, a better quality book, higher margin remaining book and so on. So looking forward, I think that we should expect further expansion of our net interest asset-side margin from corporate lending. Taking into account what's cost of our funding, cost of our liabilities will also go down, and it's already on the way. I expect that some possible large reduction of average loan yields. Nevertheless, it will be fully offset by much more serious reduction of our payable rates. And so overall, it will be -- it will have positive contribution to overall net interest income.

So second half of the year, we really expect to see more solid and firm growth rates on all our portfolios, including corporate and [CTO], as we expect a more solid asset side margin and we expect overall continuation of the trend of interest margin and net interest income recovery.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [46]

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That's very helpful. My second question is with regards to your OpEx outlook for second half of this year. Essentially, we will have seen your cost growth was quite elevated in the first half of the year for the reasons of the move of personnel from -- some personnel expenses from CapEx to OpEx. But given that it should essentially be done for the first half of the year and wouldn't affect the second half, should we expect cost growth being closer with inflation for the second half of the year? Or there would -- would there be any other factors driving it up?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [47]

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We -- every year, in July or a little bit later than that, we, a little bit, say, change the salary of our employees equating to inflation. So that will also affect our second half of the year this year. Last year, we did it a little bit later in October, from 1st of October. So third quarter, we'll be still -- I mean OpEx growth will be still a little bit higher than inflation. But for fourth quarter when we compare apples-to-apples, I think, yes, OpEx growth will be much more moderate.

On the balance, if we did that and exclude already mentioned effects, so the fact that 2 or 3 effects with a reclassification of CapEx to OpEx and the key growth from 1st of January and some slight change in foreign exchange rate year-to-year, we end up the year with OpEx growth full year somewhere between 4% and 5%, so in line with inflation. But we have some temporary difference in the condition of our OpEx. We change methodology gradually year after year so to recognize our OpEx expenses more evenly. And so you should expect less pressure on our OpEx charge in the fourth quarter. And from that perspective, as I mentioned already, full year out, it will be very comparable with inflation growth.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [48]

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And my last question is for Dzhangir. Basically, the Central Bank announced, as part of this Basel III rule that could come into force next year, it announced quite a substantial decrease in risk weights for corporate lending to kind of investment-grade corporates from 100% to 65% potentially. Have you already looked at that? And could you give us some thoughts about what could potential effect be on your side if the IRB approach would allow you to incorporate this?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [49]

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Thank you very much for this question, Andrey. Unfortunately, since we're a big bank, Basel 3.5 will not have that significant effect on us as for standardized banks. Central Bank of Russia implements Basel 3.5 mostly for standardized, not for IRB. We are in constant discussions with Central Bank since, in our opinion, this should be done in parallel. So the measure that you mentioned, which is a decrease from 100% to 65%, will have very small effect on us since, in our case, most of the corporate loan portfolio is already on IRB.

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

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Yes. I'm sorry. I just saw the post of Interfax, and it's a bit a misinterpretation of what I said. I said that our investments in our nonbanking ecosystem within last 3 years, not in 2019, within last 3 years, were approximately about 3% of the net profit for the same period of time, not, like you said, that only 2019, for 3 years investments equal more or less our -- 3% of our net profit for the same period of time.

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Operator [51]

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We take our next question from Neri Tollardo from Morgan Stanley.

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Neri Tollardo, Morgan Stanley, Research Division - Analyst [52]

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I have a few follow-up questions on the financial results, and with the first one that I would like to start with is PTI, the recently implemented legislation. If you can give us an idea of what's the average PTI for your retail portfolios? And maybe if you can comfort us a bit because we're hearing big numbers as customers on average having 50%, 60% PTI, which sounds very elevated if you're paying that much of your income out in interest-related expenses. So any detail on your portfolio and how comfortable you are with those levels would be great.

And the second question is on DenizBank, whether you plan to adjust your net income for the year when it comes to paying the dividend for the RUB 70 billion loss and whether that RUB 70 billion loss is tax-deductible or after-tax?

And the next question is on 2020. And of course, you haven't given guidance yet, but as part of your strategy, you are targeting RUB 1 trillion of net income in 2020. Given how much has changed on the interest margin side, on the cost side, on the cost of risk side, are you still comfortable with that target? Or do you see any upside or downside risks to it?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [53]

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Thank you for your questions. On the PTI side, the current average PTI in our retail portfolio is close to 43%. But this is according to our internal models how we calculate the income. Yes. Unfortunately, although we had the discussions with Central Bank, Central Bank does not allow to use internal models. So we'll have to use the -- either official income of credit individual or the average income in the region. And that will lead to a certain increase in PTI according to the Central Bank of Russia methodology.

But as I said before, since we have this new regulation, we will definitely change our statuses, and we will look at NPVs, including short of capital. Still, we are in slightly advantageous position to other banks which are mostly on standardized because we have this 27.5% limited -- the approach, which helps us to have a 27.5% reduction in RWA.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [54]

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So from my side, I have 2 questions with regard to the implication of DenizBank on our full year profits. Yes, it will have an implication our net profit after-tax. So RUB 70 billion is not tax-deductible, which is a number after-tax, and we are not going to change anything in our dividend policy, which was approved as part of our strategy. So we are going to pay dividends out of our base net profit after-tax without any adjustments. I think it's fair and we are going to change this approach.

With regards to our strategic targets, and while we promised a superior return on equity, some odd 20%, and respective numbers to be calculated out of our provided ratios, I mentioned during my part of the presentation that we now confirm all our promises which were done during our presentation of strategy in London in December 2017. So you may expect it.

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Operator [55]

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The next question comes from Elena Tsareva from DSC Global Markets (sic) [BCS Global Markets].

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [56]

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My question's firstly on ecosystem buildup. So if you have any road map, how do you want to proceed with your new acquisitions, partnerships going forward or you have opportunistic approach built in your ecosystem? And if you have any like limitations in terms of an amount of capital, like a percentage of capital you can allocate in absolute terms for ecosystem? And also on contrary, if there any like preconditions for like exiting the JVs in case you are not very satisfied with the results? This is like a first set of questions from my side.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [57]

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Okay. Thank you for your question. I just would like one more time to stress that we believe that our main major acquisitions have been already completed. And we believe that there are only some minor and niche acquisitions going to be in the nearest future unless something extremely unique arises and all of our joint ventures fully funded with the money we either already invested with them or going to invest. So because all of them are, I mean large investments and large companies are built on cash-in model, they have plenty of funds for successful growth within the next 12, 24 months. And we believe that we will definitely help them with our partners. And as I said, we are proud to have all 3 major Russian Internet holdings as our strategic partners in specific areas. And together, we will do all the best to grow the business.

So as for clauses, we feel that we are a strategic investor. And with all 3 companies, we have rights of either partner to initiate, when it is the right moment, a public offer, and we definitely believe that all 3 partnerships potentially could be a successful public business. So what was the last question?

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [58]

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(inaudible)

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [59]

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Okay. You can calculate the amounts we already announced in our public statements. And you see all of the digits. We said that our investments, for example, in Mail.ru will be highly dependent on the performances of the business. And it will vary from RUB 38 billion, I think, to RUB 52 billion, depends on the conditions. But you can find all of the numbers in the press releases -- I mean the exact digits because maybe I gave you some just preliminary -- just approximate digits.

Also talking about Rambler, we are at the final stage of the close of the transaction. I believe that we will close the transaction until the end of the summer. And as for our joint venture with Mail, due diligence is ahead of us, and we believe that the deal will be closed before the year-end.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [60]

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Just the next question on the cost of risks. So assuming your change to guidance on cost of risk to 100 to 110 bps for the full year, it looks like, given the first half cost of risk was 0.5 and even adjust for Agrokor release, it could be higher still. It looks like you expect higher than your first half normalized level of cost of risk for the second half of the year. So what do you expect in terms of what could be the higher cost of risk on retail side or you're expecting some worsening of corporate side? And what are the reasons for this?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [61]

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Thank you for your question. So we -- in previous years, we have seen an increase in the provisions in the third quarter. So this happened in 2018 and this happened in 2017. And this is kind of seasonal effect that negative migrations are concentrated into the third quarter. So this is the first thing, just seasonal effect across the whole portfolio.

The second thing that I'd like to mention is that we may have certain deterioration in certain loans for -- in FX-denominated commercial real estate portfolio. So now we see that some of the loans that were restructured in the years 2015 and '16, they are getting better and better, and we move them to green or yellow zones in our -- according to our methodology. But some, unfortunately, are moved to -- some of them, unfortunately, have been moved to red and black zones, and we think that there is further potential for negative migrations in FX-denominated commercial real estate. So that's why our guidance and cost of risk is 100 to 110 basis point area.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [62]

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And maybe just a last question on your fee and commission income potential. So given all the rhetoric about acquiring fees, which seemed to be too high for some retailers and other businesses, and actually, this first payment system development on the -- from the Central Bank side, so do you expect any like pressure from all these initiatives on your potential in fee and commission?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [63]

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Among the guidance announced today includes our best estimate of all factors which may affect our business model this year. As for medium-term perspective, I mentioned that we confirm our commitment to deliver our promises announced in our presentation that presented our strategy of 2020.

As for more specific details, I'd like to refrain now a little bit and, say, turn back to that on our Analyst Day when we present our vision for the next year. We traditionally hold this Analyst Day in December.

As of now, we are in close communication and discussion with Russian Central Bank. And we hope that, at the end of the day, all the necessary compromises will be achieved, will be found. So we continue with discussions with a definitely open face, and that's all I can say as of now. I hope it's helpful because what is important for you at the end of the day is what's -- it will not -- our guidance for this year is already -- it includes our best estimate of all the initiatives on the table. And our guidance for 2020 is confirmed according to our strategy, which was presented 2.5 years -- 1.5 years ago.

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Operator [64]

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We take our next question Tatiana Chernyavskaya from VTB Capital.

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Tatiana Chernyavskaya, VTB Capital, Research Division - Strategist [65]

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First of all, congratulations on good results. Actually, I have 2 questions. The first one is regarding your corporate loan portfolio. Just to understand how the interest rate margin will be performing in the falling interest rate environment going forward. Probably you can give me some color which part of your outstanding corporate loan portfolio is fixed rate -- is provided at fixed terms and which part of your portfolio is provided at floating rates, and maybe you see higher appetite for floating loans from your corporate clients now? That would be helpful.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [66]

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Okay. If you asked me about the share of floating -- of corporate loans originated at the floating rate, it's more or less 10% now. But this part is -- will continue to grow. It is important. And as for the margin, I already addressed that topic in one of my previous answers. So we expect that second half of the year will have much more positive growth on corporate side. So it will be positive, positive numbers full year around. And I expect a very much supportive asset side margin on corporate lending, and that will be driven primarily by the composition of our corporate portfolio focused on ruble-denominated loans. And I think overall net effect will be much more sensitive.

At for capital sensitivity, I'd like to say that growth of risk-weighted assets by RUB 100,000 has an implication on our group-level IFRS, not very big, around 3, 4 basis points. And as for NII sensitivity in rubles for Sberbank's book on the horizon of 1 year, plus/minus 100 basis points per move in Sberbank rates. That's about RUB 20 billion, RUB 22 billion to net interest income. So now we are taking into account on the fixed part a further reduction of rates (inaudible) rates on the markets. We expect positive effects on our margins from that side as well, at least of the ruble-denominated part of our portfolio.

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Tatiana Chernyavskaya, VTB Capital, Research Division - Strategist [67]

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That's really helpful. And my second question is regarding DenizBank deal settlement. Maybe you can give us some details how it was settled with Emirates? In press release, there was a number that Sberbank used to get around $5 billion of cash flow. Do I understand correctly that it's a cash inflow or direct [effective] inflow on the balance sheet or maybe a bit more complex structure?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [68]

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It includes payments for shares and return of all sorts of our senior and subordinated financing provided to DenizBank over a period of holding by Sberbank. So risk payments are structured in some stages, and the first part of this settlement was completed today -- earlier today. So we got full payments for our shares. And we got 50% of all payments for subordinated loans. So I think that we agreed with the borrower upon a time schedule of the remaining payments, so it will be done in line with that schedule. The full amount is $5 billion, yes.

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Operator [69]

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We take our next question from Sam Goodacre from JPMorgan.

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Samuel Magnum Goodacre, JPMorgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [70]

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Just a very quick clarification on the net premiums related to your insurance and pension fund operations. We've seen another quarter of effectively 0 net premiums. Back in the first quarter, you did explain that as related to a new regulation or a change in regulation, but that you did expect the contribution from the insurance business to reaccelerate in the future. Could you help us understand when we can expect to see further net insurance business income effectively flowing through your revenues?

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [71]

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Sam, it's Anastasia. I will address your question on current numbers of insurance and pension fund business that we have in the P&L. So it would make sense to look at the combined result that is filtered through 2 lines. One is interest income that we earned on our investments, and the second is the net result of payments versus claims that we show separately. So if you combine it all together, then this business seems to be very profitable. And we disclosed this number in our press release today in the morning that the growth of this combined income in the first half of this year amounted to 14%.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [72]

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Looking forward here, we are quite optimistic. So we seriously enhanced our team on pension fund business, and we enhanced our processes and procedures. So we look forward with quite a lot of optimism.

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Operator [73]

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We take our next question from Mikhail Shlemov from ZTB (sic) [VBT] Capital.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [74]

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A couple of more questions from me. The first question is actually on DenizBank sale, actually congratulations for getting this deal done, has been a long way through. Regarding this $5 billion of liquidity, which you will get from the deal, it's actually a fairly big amount of money. To what lines of business you think you would be allocating those?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [75]

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In terms of liquidity, if you just follow now all our liquidity pool and will be managed as liquidity. In terms of capital, I mentioned already it will have positive impact on our capital efficiency ratio of 120 basis points. And no specific use for these proceeds is anticipated, so just a pool of funds.

We are not going to change in our dividend policy. We are going to be stick to that. So as it was a number of times repeated, we are going, unless something really terrible in the world like (inaudible) happens, we are going to pay 50% next year out of our profit of year 2018. And so it was repeated a number of times by the CEO of the bank, Mr. Gref. So that's all I can repeat now. Do not expect something special in that respect. We believe that we will deliver and achieve -- deliver our promise and achieve the necessary growth capital appreciation I indicated in our dividend policy. But after that, we will announce our dividend policy as it will be presented to our shareholders alongside with a new version, updated version of our Strategy '21-'23 in due time

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [76]

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The second question is actually for Dzhangir regarding the PTI. Thank you very much for sharing this 43% PTI according to your models, which you have currently on the retail loans. Perhaps you can give us a sense how this number would change if you would apply the CBR methodology, which you are discussing, and would we -- the impact they have on your approval rates if you would apply the proposed methodology, let's say, from tomorrow without making any changes?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk [77]

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It's -- the 43% number, we got, as last said, according to our internal models. And we, of course, have the indication how this number will change had the CBR methodology had been applied already in the past. But we are not going to have the same constitution of the portfolio in the future.

Additionally, I'd like to say here that we are still in discussions with Central Bank on application of internal models. So we were unsuccessful yet, but we still hope that there will be a -- it will be allowed, at least for the bank.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [78]

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And probably the last question is actually on fee growth guidance. I wonder to what extent the updated guidance includes the possible effect from the pretty much forcing the Sberbank to enter the fast payment system and whatever you think would be the long-term effect on your fee margin?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [79]

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We included into our guidance our best estimate and best understanding of the implication of the recent initiatives and market situation with regards to implication for this year. So it's already in.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [80]

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And can you quantify how you estimate the impact from the fast payment system?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [81]

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No, because there are a lot of uncertainties behind, say, a lot of things we still discuss with Russian Central Bank, the authority. So we are not going to disclose details of what's very productive and for our discussion. But what is important for you is the bottom line, and we commit to that bottom line.

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Operator [82]

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There are no further questions in English. We will now move to Russian.

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Unidentified Company Representative [83]

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[Interpreted] Ladies and gentlemen, we continue the Q&A session for Russian. (Operator Instructions) A question from (inaudible).

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Unidentified Analyst [84]

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[Interpreted] It's from (inaudible), [Anna]. You have mentioned that this -- about RUB 70 billion that will affect the net profit forecasts for the bank. What did you mean by that? Do you mean the results -- I mean the results on -- of the DenizBank sale?

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Unidentified Company Representative [85]

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[Interpreted] Anna, good evening. We never make net profit forecasts. We do make our guidance, our forecasts that is in our presentation only for the ROE and for the CAR and other financial metrics in respective terms -- in relative terms. We made all the adjustments in this perspective. They're all reflected in our new vision. Now obviously, this result of the sale is reflected in these indicators.

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Unidentified Analyst [86]

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[Interpreted] And second question related to dividend policy is that you mentioned several times that despite the fact -- this fact, the dividend policy will not change. But I'd like to ask -- perhaps there will be some question of intermediary dividend payout, the dividend policy that is working right now does not provide the opportunity to payout dividends intermittently. The dividend policy will be updated with the presentation of the new strategy of the bank for 2020-2021. And when this presentation is going to take place? Could you please tell me?

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Unidentified Company Representative [87]

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[Interpreted] As soon as we know the date, we will announce about that, of course. Currently, we do not know the specific date. As you know, we are going to work in line with our strategy for 2020. But in the end of 2020 or the start of 2021, the bank will present its strategy for the next 3 years.

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Operator [88]

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Yevgeny (inaudible) from RBC.

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Unidentified Analyst [89]

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[Interpreted] Hello. Do you hear me?

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Unidentified Company Representative [90]

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[Interpreted] Yes, we hear you all right.

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Unidentified Analyst [91]

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[Interpreted] So just a follow-up question on the DenizBank situation. All these transactions of $5 billion, when are they going to be reflected in the reporting?

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Unidentified Company Representative [92]

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[Interpreted] DenizBank transaction is going to be reflected in the reporting in the third quarter. So this $5 billion from subordinated loan sales and share sales going to be reflected in the [first] quarter reporting, yes, in the Q3 reporting, yes.

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Operator [93]

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[Interpreted] (inaudible) from (inaudible).

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Unidentified Analyst [94]

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I would like to know about DenizBank. What is going to be done with the loans and deposits of the customers? They were sold or they were given to the new owner together with the bank?

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Lev Aronovich Khasis, Sberbank of Russia - First Deputy Chairman of the Executive Board & COO [95]

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[Interpreted] This is Lev Khasis speaking. We have sold successful business, and this business continues to work as usual, delivering on all the commitments and obligations in terms of their depositors and following all the regulations. So the deposits and the loans and other commitments and obligations are going to be -- are transferred to a new owner, Emirates National Bank of Dubai. The same goes for the assets. Yes, obviously, all the assets and liabilities as they were in this bank remain there, of course. Now obviously, and I've said about -- talked about that, we left the bank in the -- and it's in greater shape now than it used to be before. There was a double-fold increase of the customer acquisition. There was a 3.5-fold increase in terms of the assets. So we think that the new owner has a very good new asset. I hope I answered your question.

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Operator [96]

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[Interpreted] (inaudible) from Interfax.

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Unidentified Analyst [97]

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[Interpreted] I have a question. Recently, the Central Bank announced about the initiative that the Central Bank is going to reform the deposit insurance system and expanding it to more legal entities. Was it discussed with Sberbank or some experts' working group discussions? And what is the opinion of Sberbank? Because there might be the increase of the insurance premiums, and Sberbank is going to increase its cash flow for the national system for insurance deposits.

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Unidentified Company Representative [98]

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[Interpreted] Thank you for the question, but it has no relation whatsoever to the results of the second quarter, neither it is related to the transactions that we have discussed today. So I would like to ask -- to answer this question on our special sessions. You know that, during our Q&A sessions for the financial reporting, we provide information only on the major developments for the transactions and only on the financial results.

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Operator [99]

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[Interpreted] Next question for [Tatiana] (inaudible) Thompson Reuters.

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Unidentified Analyst [100]

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[Interpreted] Do you hear me?

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Unidentified Company Representative [101]

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[Interpreted] Yes, please [Tatiana]

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Unidentified Analyst [102]

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Yes, I have 2 questions. The first question is how exactly will Sberbank allocate and distribute the money that it will get from Denizbank sale? I'm not only talking about the money that you will get from the sale but the liquidity that is going to be delivered by the buy-out of the subordinated loans of Denizbank. And you've stated that in your official message. So we if you take the period up to the end of 2019, where will Sberbank allocate a part of this capital, at least a part of these funds that it will receive? And the second question, (inaudible) this to (inaudible) correctly. Does Sberbank have noncompete agreements with all Internet companies with which it announced the partnerships recently?

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Unidentified Company Representative [103]

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[Interpreted] Well, the funds that the bank is going to receive from the sales of the bank -- of Denizbank will be sent to loans for our customers buying our securities as far as the [final] limits and restrictions that we have. It is in line with the charter of the bank. There will be no special purpose use for these funds. It will be used in accordance with the charter.

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Lev Aronovich Khasis, Sberbank of Russia - First Deputy Chairman of the Executive Board & COO [104]

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[Interpreted] This is Lev Khasis speaking now.

Good afternoon to you, too. Talking about Yandex and Mail. Ru, yes, we have in our agreements the noncompete provision, meaning the business that we do together, we are not going to do it -- to do this business separately, and that goes for each party. And this is normal. I mean we unite our efforts to do something together, talking about Rambler. It's something that we have a joint venture with Rambler. But it's just that we have become an equal partner and the big partner in Rambler company. And in this relation, if we do not have a joint venture with them. It's just that, together with [Alexander Mamut], we are equal and largest shareholders of this company. We do not have this kind of a legal noncompete provision. But of course, we will try to make sure that we develop our joint businesses together, and we'll put the maximum effort in that.

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Unidentified Analyst [105]

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[Interpreted] And just a follow-up question. Perhaps a question to Alexander then. A part of these funds, can it be spent on some new acquisitions and purchases?

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Unidentified Company Representative [106]

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[Interpreted] So I think I will respond to this question. I think I actually answered this question, like 2 or 3 times already. We expect that -- largely, we have formed and created the structure and purchased all the elements that are needed to build a product range for our ecosystem. And currently, our major focus is going to be on integration of these elements into the ecosystem, by going to create the user-friendly products and services for our customers. And there's a great room for improvement here, great -- a lot of work to be done. I mean some of the acquisitions, there will be some small investments for some niche companies. I mean we do not rule out the possibility that there will be some unique opportunity to jump into some business, but we don't see it now, at least. And all our large investments were done. And we have created this cash-in structure. So the money was not paid to someone, but it was invested in the businesses to make sure the business is developed. With Mail. Ru, it's not only we -- we're not the only one who [make us] cash in. The Mail. Ru is cashing in to make sure that the company develops in the next few years. And in midterm, we do not see any major needs for funding for -- like big investments. But obviously, we see Sberbank is actually developing technologies. You know that we have gained some major skills in cybersecurity and AI. We're actively developing our cloud business. It is becoming quite, quite a priority for us, and I can see there are -- that many questions on this call that were related to the ecosystem. And I will perhaps sometimes visit these conference calls to make some updates for some services and some figures to make sure you understand what is actually happening in our ecosystem development situation. Thank you.

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Operator [107]

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There are no questions. I'd like to give the floor to the speakers for their closing remarks.

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Unidentified Company Representative [108]

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Thank you. I'd like to thank all the participants of our call. We hope we didn't disappoint you. We're looking forward to the comp call in the third quarter of this year. Have a nice evening.

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Operator [109]

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Ladies and gentlemen, we are closing the conference call. Thank you for your participation.