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Edited Transcript of VTBR.MZ earnings conference call or presentation 7-Nov-19 8:30am GMT

Q3 2019 Bank VTB PAO Earnings Call

Moscow Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank VTB PAO earnings conference call or presentation Thursday, November 7, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dmitriy Pianov

VTB Bank (public joint-stock company) - Member of Management Board

* Dmitry Y. Olyunin

VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board

* Leonid Vakeyev

VTB Bank (public joint-stock company) - MD, Head of IR

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Conference Call Participants

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* Andrew Keeley

Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst

* Andrey Klapko

Gazprombank (Joint Stock Company), Research Division - Senior Banking Analyst

* Andrey Mikhailov

Sova Capital Limited, Research Division - Research Analyst

* Andrey Pavlov-Rusinov

Goldman Sachs Group Inc., Research Division - Research Analyst

* Ivan Kachkovski

Renaissance Capital, Research Division - Research Analyst

* Tatiana Voronova;Thomson Reuters;Senior Correspondent

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Presentation

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Operator [1]

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[Interpreted] Ladies and gentlemen, I would like to welcome you at VTB Group's 9 Months 2019 and Third Quarter IFRS Results. I'm happy to hand the floor over to Mr. Leonid Vakeyev, Head of IR.

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Leonid Vakeyev, VTB Bank (public joint-stock company) - MD, Head of IR [2]

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[Interpreted] Good morning, everyone. Thank you for joining our call today. We're happy to present our third quarter and 9 months 2019 IFRS results. We have here Mr. Dmitry Olyunin, First Deputy President and Chairman of the Management Board; and Mr. Dmitriy Pianov, member of the Management Board. We have a single call today combining both market analysts and the media representatives. This call is being conducted in both Russian and English simultaneously. Those of you who have opted for either the Russian or the English language have connected to a dedicated line and is going to hear that particular language.

We're going to start with a quick financial highlights, then we'll take questions from the Russian line, then from the English line. Over to Mr. Olyunin.

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [3]

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[Interpreted] Okay. Mr. Olyunin taking the floor. Good morning, ladies and gentlemen. I'm happy to speak in Russian for the presentation part, and then I'll speak both in Russian and in English for the Q&A.

We have the honor today to present to you third quarter and 9 months 2019 IFRS results for VTB Group. I'm going to follow the slides, which have been disclosed to you, and I'm not going to read through the whole page, just highlight the key developments in our numbers for the third quarter and 9 months.

Let me start with our balance sheet first. Well, we are happy and glad to mark that the third quarter have reinforced the growing dynamics and particularly on the liability side as the previous quarters have proved we are much ahead of the market 3x in retail and a little bit less than 2x in legal entities. So that is the case as at the end of 9 months.

On the brand portfolio, we are on line with the market developments in retail. Taking the Russian perimeter only we are slightly ahead of the market, and we're particularly happy to mark that we're growing ahead of the market, thanks to mortgages as well as consumer loans, as you can see in the middle of the Page 1.

While small and medium enterprises have outpaced the rest of the corporate portfolio, which grew by 0.7% in total, while the SME segment demonstrated a 12% growth as you can see in the bottom left chart in the middle.

As at the end of 9 months, the loan portfolio share in our total portfolio exceeded 20% while the share in liabilities has exceeded 30%. So the share of liabilities has exceeded 80%, and in 9 months, it's 2 percentage points up.

Now over to the financial performance of the bank. In total, the third quarter has demonstrated a significant growth in efficiency and profitability as compared to the previous year. Though the net interest margin, the ROE and net interest income have not fully reflected our full year's ambition, however, the third quarter has boosted us quite well and the fourth quarter is going to be in line with the same trend, delivering high-quality results overall.

As you can see, our net interest margin has stabilized in the third quarter, and further reduction of the key rate by the Russian Central Bank is going to take the net interest margin closer to our target guidance as of the end of the full year. We see a very high credit risk profile across our portfolio, and I'm going to dwell upon that in more detail. So the cost of risk is 0.9% for the 9 months and 1 percentage points for the third quarter, in particular, which is ahead of our guidance again, and we're going to comment on our guidance looking forward down in the presentation.

Administrative costs have been our focus, as always. So for 9 months, we're ahead of the target. Please be reminded it's about 40% guidance, we have 43% so far. However, considering Q3 alone, the cost/income ratio is less than 38%, 37.8% to be precise.

Now all of these drivers combined, like stabilized net interest margin and improvement on the net interest income, we're ahead across 9 months, as you can see. So -- and general improvement across our metrics such as cost/income ratio, we get to the ROE of 13% at the end of the third quarter, as you can see on Page 2 bottom right. So we're getting back to our last year's development trend, and we reconfirm our guidance for the full year looking forward.

Now let us take you in more granularity across our financial model metrics and financial results, financial performance. Now let me say a few words about the structure and dynamics of interest income and expenses, that's Page 3 of the presentation. As explained earlier, the first half of the year demonstrated that the interest income across our assets was pretty much stable. However, on the liability side, thanks to activities of the Central Bank, our interest income has improved. You can see that across 9 months, it's 0.5% growth with most of the growth contributed by the first half of 2019.

In the third quarter 2019, the situation got stabilized, and the net interest margin in Q3 maintained on par with the second quarter of 2019, hence, the net interest income has started growing gradually. Please be reminded that all activities by the regulator enable us to expect that Q4 is going to produce positive surprise for us and good event for our net interest income growth, and that in turn, is set to drive the bank's overall performance for the full year.

Over to commission income, Page 4. We do have one-off events, which have somewhat reduced the commission income in the third quarter. You can see it's RUB 22 billion for Q3, slightly more than that, that's right chart on the page. But again, please be reminded we are growing ahead of the last year, mostly thanks to contributions from insurance products as well as settlement and cash transactions, as you can see in the top left corner, which is explained by our systemic effort across these products offered by VTB.

Now I would ask Mr. Pianov to say a few words about Q4 and explain that one-off slump, which is set to be adjusted in the fourth quarter. Mr. Pianov taking the floor.

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [4]

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[Interpreted] Okay. Ladies and gentlemen, on the commission income side, VTB Group is focused on improving 2 of its types of products. One is the loyalty program for its retailer customers. In fact, we are talking here about all sorts of bonuses and loyalty pay points that are accrued based on their spending. And the other set is bancassurance, as we sell insurance products in line with the banking products and, again, the target group is mostly retail customers.

Q4 -- sorry, Q2 and Q3 had a special situation because one of the best loyalty programs in the market is that run by VTB. That was revised in Q2, mostly in part related to expiration of the loyalty points and bonuses, so these changes entered into force as of the 1st of September 2019.

The behavior patterns of our customers in the recent months, which includes September, and that is part of Q3, has demonstrated extremely active monetization of those bonus points or the use -- the application of those bonus and loyalty points, so that explains the growth of our loyalty program in the third quarter.

Again, in the second quarter, apparently, had been rather optimistic. And then in Q3, having adjusted the program, the behavior patterns changed, which means extra liabilities on our side be accrued as they use up their bonus points.

Now as of today, the model fully reflects the behavior patterns of our customers, and we do not expect any further one-off deductions looking forward in the future quarters.

Now in terms of the other set of products I have referred to that affect the net commission income, as of the 1st of August, we introduced a new set of legal rules linking insurance and banking products. And in the first 2 months having done that, we haven't fully rolled out the insurance product sales and cross-sales, so that happened in October in full, so you would expect positive effect from that change coming from October onwards in Q4.

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [5]

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[Interpreted] Thank you, Mr. Pianov, and let me now comment on the cost of risk, Page 5. As you can see, our loan portfolio has increased somewhat, as explained earlier, while the cost of risk across that portfolio is much better than the original expectation. It stands at just 0.4% across 9 months, as you can see in the top left corner, which is explained by improved credit quality of our corporate clients.

Now for the individuals, it's somewhat up just 0.1 percentage points from 1.6% last year and to 1.7% as at the end of 9 months this year, that's again top left chart. That is explained by somewhat increased growth of mortgages -- of consumer loans as compared to mortgages. And the NPL share remains rather flat, as you can see in the red column. So legal entities are a key driver here as we have written off and readjusted certain loans and the generally improved quality of the corporate portfolio with more focus on the SME segment.

That is -- given that, the portfolio is up, provisions for loan impairments remained flat, as you can see in the bottom left corner. So in absolute terms, that's the same, but in relative terms, it's somewhat down, 6.4% to 6.1%.

Now loans by breakdown. As you can see, the bucket 1 to bucket 2, well, that's pretty much on par with our key competitors. We have often been criticized for lack of provisions. However, as of today, our levels of provisions are definitely on par with the rest of the market. This is a very important development for VTB, and we reinforce this message over. And again, the relatively low risk levels of this year does not reflect insufficient provisions. Quite the opposite, it has improved as compared to the previous year.

Over to Page 6 now to explain the staff and administrative costs. Please be reminded our target for this year is 14%, as you can see in the top right chart. And we have the contribution from recently consolidated banks, 4 percentage points of the total. 14% increase is just a simple addition of the extra cost -- sorry, my apologies, Mr. Pianov is correcting me, instead of 4, it's actually 6 percentage points. That is the growth contributed by the recently consolidated banks.

The remainder, the 8 percentage points, is related to growth in personnel across our chain to support ambitious growth plans that we have been implementing so far in terms of gaining the market share, for example. And then again, technological, IT costs, as we increase the digitalization levels of our business and integrate the newly -- integrate VTB24.

Now I would like to emphasize this message. In 9 months this year, the staff and administrative cost are up by 19%, as you can see in the top right-hand corner, which is still higher than the target guidance of 14%. And the cost/income ratio is still high. But again, on Q3, it's below 40%, as I explained in the introductory message. And given the high income base of Q4, which is to be expected and more stabilized cost side of the business, we would expect to hit the target levels for the full year.

Over to Page 7, 2019 guidance. To sum it up, VTB keeps growing at a fast pace. Volume terms -- I should have mentioned the market share, by the way. In Russia, our market share is growing across the board. Please be reminded it's 1 percentage points or 100% basis points for the private individual loans and 15% for the corporate portfolio, 40 basis points. And now 20% growth -- 20 basis points for the land portfolio in retail and that explains our good growth across-the-board, which meets our guidance, growing at market for the corporate portfolio and above market for the retail portfolio.

We did expect the growth of 5% for the full year corporate loan portfolio. Now we expect that at a little bit lower level, 3 or 4 percentage points in total.

Over to net interest margin, the middle part of the chart. We would expect about 3.4% across the bank pulling some more efficient. Q4, it's going to get up to 3.4% which is somewhat less than 3.5% announced earlier. While the cost of risk we guided 1.2%, now we confidently commit to 1%. And as explained previously, the cost/income ratio is 40%. We reconfirm that guidance.

All of the above allows us to hit about RUB 200 billion in net profit for VTB Group as you can see in the left-hand side. So that's the full year target, RUB 200 billion in total. These are the key messages we'd like to bring home to you.

And following the third quarter and 9 months of 2019, we believe that our results in the third quarter, the profit in that particular quarter and also should be taken into account all the drivers I have explained.

And the outlook for Q4 was higher income and profits, fully in line with the trend, allows us to be confident and commit into a RUB 200 billion in net income. So we are basing this judgment on the trends already observed in the third quarter. This explains our judgment and our outlook. These are the key messages, colleagues, and Mr. Pianov may have some words for you as well.

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [6]

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[Interpreted] Colleagues, I would kindly draw the attention of both analysts and media representatives to the fact that our modified -- so we have compared these numbers to the modified accounts -- adjusted accounts for 2019, given the changes in the group structure, and it's important for us to demonstrate the like-for-like developments. So please be reminded we have the modified accounts as part of the official filings, which is disclosed on the website. So it's under the auditor's disclosure statement, which explains the situation.

And now over to questions, which we'll start taking from the Russian line. Please be reminded we are waiting for questions from the Russian line. Once these are done, we'll proceed with the English line. So we are waiting for questions from the Russian line.

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Questions and Answers

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Unidentified Analyst, [1]

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[Interpreted] I have a few questions. First on the forecast of your margins. What would you expect in the following quarters? And please explain why you have reduced the net interest margin for the full year. The guidance you mentioned was 1.2%, now it's 1% so.

And one other question. What's the sensitivity of VTB's net interest margin? Should the key rate be reduced by 100 basis points?

And one other question relating to capital. Which changes has the Russian Central Bank introduced in capital adequacy for the next year? And whether you have clarity as to which corporate loans will be eligible for 6.5% reduced key rate? And when these changes will happen? And what would be the share of VTB's loan portfolio eligible again for the reduced key rate?

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Unidentified Company Representative, [2]

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[Interpreted] Thank you for your questions. Let me try handling those starting with the net interest margin. Our sensitivity to changes on the key rate side by 100 basis points or 1 percentage point would be about RUB 20 billion of net interest income across the full year. That answers your second question. Again, if it's -- so the net interest margin, which we guided from 3.5% and now it's 3.4%, we assume that across 9 months, it's 3%. And if we were to hit the original guidance of 3.5%, we would have needed massive improvement of the net interest margin in the fourth quarter, which is not supported by our model. We do expect a slight improvement in the fourth quarter driven, among other things, by the significant key rate cut by the Central Bank, which exceeded our expectation, frankly speaking. But given that Q4 is only limited in terms of duration, it would not suffice to hit 3.5% net interest margin.

Now considering what went not in line with the management's expectations, well, effectively 2 drivers. One is the effect from the key rate change by Central Bank last year and the transition towards milder monetary policy in terms of its timing.

And the other driver is the FX structure with the euro side of the liabilities, which defined the situation in 2019, again, differently as compared to the expectation because the euro interest rates, a particular sensitive element for the industry.

And one other driver, we are looking up to the leverage threshold ratio introduction, and we have moderated the consumer loan growth somewhat across our portfolio in order to hit the right balance between profitability on the one hand and the risk profile on the other. Because as you can see, our cost of risk is up by just 0.1%, which is explained by the fact we started introducing credit limits to those borrowers with particularly high leverage. This reduced the profit somewhat. But on the cost of risk side, this has produced the right effect, which we're proud of in -- as at the end of 2019's 9 months.

And one more thing, as of the 1st of January 2020, we do expect a new regulatory rules on corporate credit risk (inaudible). These are nicknamed investment category or investment grade, if you wish. And that is part of the corporate credit risk definition of Basel 3.5. Again, the changes are to kick in as of the 1st of January next year.

We have 2 rounds of discussions with the banking community, and that is not over yet. Another round is to take place before the end of the year. As of today, the definition of investment grade 1 or 2 has not been finalized, but our understanding is that it's Category 1 or Category 2 under Russian Accounting Standards with public debt or public equity for that [mention]. But the big unknown here is the requirements for daily trading volumes that will make way into the final definition of those grades. So until those definitions are fully developed, we would rather not comment on the particular share of our loan portfolio to be affected. Once the Central Bank's instruction with this definition has been disclosed, we'll be happy to comment on that as we disclose the full year results.

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Unidentified Analyst, [3]

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[Interpreted] Okay. And a quick follow-up. When calculating the dividend, the share, are you going to take into account the interim dividend for Class 1 shares which you approved at the recent shareholder meeting? Or was that a one-off, and do we just overlook that, and so that is a one-off effect?

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Unidentified Company Representative, [4]

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[Interpreted] In other words, that is not going to affect upward or downward the dividend to be calculated based on the net profit. So that's a very special situation under the Federal law, which is defined -- which is linked to situations of particular lengths.

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Operator [5]

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[Interpreted] Next question comes from Goldman Sachs, Andrey Pavlov.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [6]

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[Interpreted] I have a few questions. My first question is about your margins again and the outlook for Q4. Now it's 3.4% has been net interest margin full year guidance. According to my quick calculation, you will need, in order to hit 3.4% for the full year, you will need to see the growth by 30 or 40 basis points in Q4 alone. Can you comment on that? Why are you so optimistic about the growth? And what is going to allow that? Or are you going to reprice the deposits on the downside or take any other action?

Now my second question is related to your net profit guidance for the full year. Your Chairman recently commented on potential downside of a loan write-off. So question is, was your -- is your net profit going to be affected? And in relation to that, the effect to add some, one on -- one-off income such as the sale of Tele2 to Rostelecom.

And my third question is related to your privilege shares, dividends that have been approved. Now can you comment as to why you have decided to proceed with the dividends rather than buy the shares back, so that the dividends are not in the picture in the future? It is -- that's the active shareholders are no longer diluted.

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Leonid Vakeyev, VTB Bank (public joint-stock company) - MD, Head of IR [7]

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[Interpreted] Okay. Thank you for your 4 questions. Let Mr. Olyunin handle the first 3 and Mr. Pianov is going to handle the fourth one.

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [8]

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[Interpreted] Our net interest margin Q4 is going to be improved because of the reduced key rate, which already affected Q3 and is going to affect Q4. Please be reminded the Central Bank has reduced the key rate a number of times this year, and we do not exclude a further cut in the fourth quarter. And again, the cut that happened in Q3 is going to affect mostly Q4. We're going to see the full effect in Q4. That's the key driver.

And one more thing, the second question of yours, how this or that particular approach to restructuring the loans, so we would consider no effect on the net profit. There could be an effect on net profit next year, but again, since discussions are still ongoing, no particular approach to the situation have been decided upon.

The third question of yours, any one-off effect. The answer is, yes, we do affect in Tele2 sales into our net profit for the full year. Although the settlement is to happen next year, we still are going to reflect the result of that transaction in Q4 2019, as was the plan for the full year of 2019. We had planned for that situation. Now Mr. Pianov for the fourth question, why dividend, not buyback?

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [9]

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[Interpreted] Okay, let me explain how this works and the rationale behind our model. Please be reminded we have the Federal law to transfer loans in the form of a session. That provides -- that is backed by certain regulated charted capital. And according to the Federal law, the bank transferring loans is set to provide the charted capital as well, which would account for the adequacy for those loans as well. Now there was a meeting handled and it was decided that the most convenient way for the government as well as a way not to dilute the dividends looking forward was to transfer the charted capital in the form of dividend paid to Class 1 shares. These are extraordinary dividends and are related exclusively to the transfer of the loans. In no way is this transaction going to reduce the flow to the regular shareholders as part of the regular profit distribution exercise. This is a convenient tool, however, given that the government A has 100% shareholding, and hence, this money doesn't get elsewhere to other shareholders.

And in future, transfers of such loans will probably require some mechanism. Should we have opted for the buyback, well, the government would need to have that in the budget for once and then it would prevent us from repeating this transaction, and we have the first tranche of that chunk of the loan portfolio.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [10]

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[Interpreted] And a quick follow-up, if I may, regarding the one-off Tele2 transaction effect. Can you please clarify the particular scale of that effect in 2019? And another quick follow-up on the loan transfer. So does this mean we can see a further one-off dividend payments to Class 1 shares next year?

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Unidentified Company Representative, [11]

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[Interpreted] Okay. First question, we're going to account for the Tele2 transaction in Q4, and we're going to disclose that part based on the results of the first quarter. So let's keep you excited here. And we, of course, do not exclude the possibility to transfer some extra loans looking forward to the government endorsed dedicated orders to that effect.

And we are waiting for more questions from the Russian line.

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Operator [12]

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[Interpreted] Our next question comes from Andrey Klapko, Gazprom Bank.

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Andrey Klapko, Gazprombank (Joint Stock Company), Research Division - Senior Banking Analyst [13]

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[Interpreted] I have a quick question on the new regulations of the corporate risk. We have touched upon that. That's going to kick in as of the 1st of January. I understand the discussion is still ongoing. But still, the original design of investment class and investment grade definition as proposed by the Central Bank has a negative effect on your capital. But once the Central Bank of Russia has decided to tweak the ratios for nontraded securities, that's going to have an effect -- to have a positive effect on your portfolio. Can you come up with at least some early estimation of that effect?

And my other question relates to your retail risk. There is a slight increase on retail cost of risk in the third quarter 2019. How is that risk building up generally on the retail side of your business? And should we expect a further upside of the cost of risk looking forward before the end of 2019 and onwards in 2020?

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Leonid Vakeyev, VTB Bank (public joint-stock company) - MD, Head of IR [14]

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[Interpreted] Mr. Olyunin taking the first question and Mr. Pianov, the second one.

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [15]

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[Interpreted] So on your first question with the new regulations, indeed you're right, with the first draft of the Central Bank's instruction, we boldly announced in public had a neutral effect on our capital. But after the second round of discussions with the banking community, we observe a positive effect for VTB Group's portfolio. We do expect an improvement, but I think we have answered to that question previously, we would be happy to put a number on that as we disclose full year's results because it's still uncertain as to which definition will finally make way into the bylaw once adopted, but we expect a positive development if there is no further change in the next draft.

And again, Basel 3.5 does provide for the downward development and upward development for weight ratios across different categories. And the thing is certain negative effects could be delayed until a later point, and we do have an improvement with that balance in 2020. So that answers your first question. But again, before we put a number on that, we need to wait for the final definition to be devised. As to the cost of risk growth, your second question. Mr. Pianov taking the floor.

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [16]

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[Interpreted] There is a different mix between consumer loans and mortgages. We have somewhat curtailed the growth plans for consumer lends against the original plan given the high leverage customers.

But again, we have developments of the consumer loans at a faster pace in Q3 as compared to mortgages, which has contributed to the growth of the portfolio and the quality still remains exceptionally high. We do not expect any deterioration looking forward in this year. And as we give you the guidance for 2020, we'll be happy to comment on such plans. But 2019 is definitely exceeding the expectations on the quality of the retail portfolio. We are definitely going to plan for further upside in the provisions and more prudent. We need to be more prudent in providing provisions against the retail portfolio. But again, please be reminded there are no precursors, no markers that the quality of the retail side is deteriorating. That is my answer to your question.

So we're waiting for further questions from the Russian line.

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Operator [17]

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[Interpreted] Our next question comes from BCS Global Markets.

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Unidentified Analyst, [18]

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[Interpreted] I have 2 questions. One question relates to the portfolio acquisition. So is that going to affect your Q4 in terms of your NPL metrics, for example? And what's the overall effect from that transaction? What's the rationale behind the transaction?

And my other questions relates to your net capital. Like what's your capital adequacy ratio for 2020, and the guidance of 50% of net income distribution? A number of times, it was mentioned about liquidity to the bank and adding more capital, so would your current capital suffice to pay 50%?

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [19]

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[Interpreted] Thank you for your questions. It's Mr. Olyunin. I'm going to start with the second part of your question. Indeed, we test various ways to improve the bank's balance sheet. With the current situation, it's rather comfortable as at the beginning of the year, at the end of Q1, as we'll need to hit 11.5% capital adequacy ratio. But we're interested, of course, in diversifying our funding base, given the reduced profitability of traditional investment tools, professional investors as well as retail investors produced more entries towards subordinated securities and Tier 2 instruments.

We're going to test the market further. We have had 4 issues of subordinated bonds. And again, please be reminded we are talking here about not only institutional investors but also retail ones. We're going to have a first issue and potentially expand the program next year based on the results of the first issuing.

And now your question one, natural acquisition. Well, please be reminded we are going -- we are only disclosing the results of Q3 and the transaction you're talking about is going to happen in Q4. So to answer your question, we do not expect a negative effect on our performance. We expect improvement. Otherwise, we're holding the asset swap between us and a number of other creditors not only in natural but other loans as well.

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [20]

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[Interpreted] Given that we are talking about an asset swap here, (inaudible) made sure we have transferred some loans to our accounted party in the transaction. Well, the impact on our provisions have already been factored into our cost of risk guidance for the full year.

And in terms of the NPL, well, the loans acquired do not get into the nonperforming area automatically. The same way, should they fail to deliver in 90 days, so we don't expect any negative effect on the NPL ratio from the transaction in question.

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [21]

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[Interpreted] Each of the creditor was targeting to achieve a higher comfort level in working with the borrowers. So that was the full rationale behind the transaction. And as a creditor for a number of large businesses, I think the asset swap is only positive in that matter. So again, more details are to be disclosed based on the Q4 results as the situation develops across the fourth quarter, and we'll be happy to explain how our metrics improve based on that.

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Operator [22]

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[Interpreted] The next question comes Ivan Kachkovski, Renaissance Capital.

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Ivan Kachkovski, Renaissance Capital, Research Division - Research Analyst [23]

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[Interpreted] I have 2 questions. One -- both related to retail lending, and one is about the effect we see, and early estimate, if I may, from the new regulations on the consumer loans. So any effect for VTB or any effect for the industry at large? And any effect that you see in the fourth quarter?

And then the mortgage side. The rate cut from the Central Bank was more aggressive than you expected as you yourself have explained. So what's the effect on the mortgage rates within a year's time or maybe 2 years' time? And how would that impact the growth of mortgages for the industry and for VTB?

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [24]

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[Interpreted] Let me handle the retail consumer side, and then Mr. Pianov is going to handle mortgages.

So in the fourth quarter, the regulatory changes -- well, the fourth quarter is generally a very hot market for the full year, so we expect 20% growth in retail for the full year. And the regulatory effects -- well, let me start over. Actually, we started introducing limits for borrows with high leverage, and we started that as early as the first quarter and the regulatory changes imposing the limitations are the limits of -- has less of an effect for us. So in the future, we'd expect the growth ratio to -- the gross base to come down to 13%, and that is how the regulatory changes are going to affect the market. On the mortgages now, Mr. Pianov taking the floor.

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [25]

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[Interpreted] Yesterday, a representative of the Central Bank spoke at the Federation Council, the upper chamber of the Russian parliament. He has definitely explained how the situation develops once the inflation, consumer inflation ratio hits 4% and should no further risks kick in. The mortgage rates could come down 10%, and I think that's a very good estimate. Okay? Thank you.

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Operator [26]

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[Interpreted] The next question comes from [Anastasia Stulova], Interfax.

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Unidentified Participant, [27]

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[Interpreted] I have just a quick -- 2 quick follow-up questions. On Mechel and Eurocement, you had the asset or to be precise, are they matching in terms of size? Or are we talking about different amounts, like which signed has largely -- like did you or did you receive a large lag?

And my next follow up is on your net profit guidance of RUB 200 billion for the full year. That means in Q4, you are to produce RUB 72 billion of net profit. Now how much of that is going to be contributed by the Tele2 sale?

And one further question on the interim dividends. In the past, you mentioned that should the 9 months results be good, and they are good according to a judgment of interim dividends, would be raised as according to the agenda by some of your shareholders. Has this already happened? Or do you expect this to happen?

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Unidentified Company Representative, [28]

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[Interpreted] Okay. Thank you for your questions. If you're a shareholder, then obviously, of course, you can raise this question about interim regular dividends. So we're always happy to pay the dividends should that be in the interest of the bank and also the shareholders. Well, in those meetings where the question was raised, most of the participants reported the need to increase -- to improve the capital base and that's exactly why we decided to go ahead with the numbers discussed earlier. So potential discussion is a possibility, but we would expect the trend currently in place to remain looking forward. That's my quick answer to your third question.

Now your second question, Q4. Indeed, the net profit guidance, well, we'll need to deliver the RUB 72 billion you mentioned, but we would refrain from giving you a particular number for the Tele2 transaction. But generally speaking, the result of Q4 will be better.

And then Mechel and Eurocement, your first question. The parties involved have received matching and equivalent value for the loans. Thank you.

We're waiting for more questions from the Russian line.

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Operator [29]

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[Interpreted] Next question comes from the line of Tatiana Voronova at Thomson Reuters.

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Tatiana Voronova;Thomson Reuters;Senior Correspondent, [30]

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[Interpreted] I have a question on the transaction. We purchased 75% shareholding at [Mira Group]. Based on your disclosure, you have a multitier remuneration payment arrangement. Please explain what do you mean by second, third tier payments? And what is the option that the transaction provides for?

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Unidentified Company Representative, [31]

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[Interpreted] The answer is, Tatiana, unfortunately we have a confidentiality agreement for this particular transaction, so we cannot comment on the contractual commitments of the parties involved beyond what -- beyond the information that has been disclosed already.

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Tatiana Voronova;Thomson Reuters;Senior Correspondent, [32]

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[Interpreted] Okay. Then a quick follow-up. The original payment is RUB 90 million and the rest of that amount, is that cash or noncash?

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Unidentified Company Representative, [33]

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[Interpreted] Tatiana, that is unfortunately exactly the element of our contractual commitments that we have to remain confidential on.

Okay. We don't have any further questions in Russian, and we hand over to the English line. So we're going to wait for questions from the English line now.

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Operator [34]

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(Operator Instructions) We'll now take the first question from Andrew Keeley from Sberbank.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [35]

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Yes. I have a few questions. Apologies if you've been through a couple of these things. I was on the English line, so yes, you may have answered them.

Just first of all, can you comment a little bit on your capital position? And unless I'm missing something, I can't see any slide on your capital position in the presentation, and I can't see what your IFRS Tier 1 ratio is in the results either. So could you tell us, yes, why there isn't any title on capital and what your tier 1 ratio was at 9 months would be good?

And also, I think there's been some discussion in the media, I think some comments from Mr. Olyunin about looking at different capital instruments. And from what I can understand from the first part of the call, are you looking purely at some kind of Tier 2 subordinated instruments and not Tier 1 instruments? That's my first question and then I'll come to some others.

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [36]

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Okay. Thank you for your question. I'll take the second part and Mr. Pianov, the first one. You see, yes we are planning to issue capital instruments in form of bonds, the subordinated bonds this year and next year. The first try will be done this year, and it will be Tier 2 capital instruments. But we are starting, and we think it's very realistic, to issue also next year the Tier 1 instruments.

Specifically, we think that these instruments can be as well -- have an interest as well for institutional investors as for individuals. And as the rates in Russia are going down, more and more individual investors are going to the financial market and such kinds of high-yield instruments are very attractive to them. So we think that, yes, there is a window to go on the market and to try as well both kind of subordinated debt issuance. And Mr. Pianov?

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [37]

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Andrew, about capital position. We switch in our reporting on end of third quarter from Basel I, old Basel I capital adequacy ratio to a more relevant, in our opinion, N20 is the new Basel III related Russian regulation of Central Bank.

And in terms of N20, we are in good position in terms of 11.2% based on end of third quarter. In terms of old Basel I ratio, it's above 13% on this important date in terms of total capital and more than 11% in terms of Tier 1 capital in old worth of Basel I IFRS capital adequacy ratio.

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [38]

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Thank you. We will surely add this page, and it's a little bit miss from our side, so thank you. You'll have the next time a special slide for capital adequacy. Thank you. Next question please.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [39]

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Sorry, just to follow up. So in terms of Tier 1 instruments, are you talking about a preferred share instrument? Or can you give us any color as to what you're thinking there?

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [40]

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In terms of Tier 2, Tier 2 instruments, we are looking for issuing of subordinated bonds. In terms of Tier 1 capital for next year, we're expecting new perpetual bonds in Russian rubles.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [41]

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My second question is on your dividend outlook and these defense loans, and again, sorry if you have been through this.

I think there've been comments from your CEO about potential losses on defense loans. Obviously, it would be great if you could give us any clarity on -- or anything in terms of the kind of size of exposure or potential losses? Although, I don't think you will, but that would be good.

And secondly, this kind of 50% dividend payout, I mean, is it going to be impacted potentially by what happens with this dividend, with these defense loans as was suggested by the Deputy Finance Minister?

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [42]

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I will split the topic in 2 parts. First, it's about the dividends we have paid. They're related to transfer of loans, so there is no loss. We just transfer some loans that are indicated by the government decree to another bank. And so as our capital burden is less because we have transferred their [VE] then we transferred the capital which corresponds to [letter VE].

And on the last dividend payments, it was around RUB 3 billion that we have transferred, which corresponds to somehow RUB 37 billion of portfolio. It doesn't have direct impact -- no impact on P&L. It's not direct impact on capital adequacy as itself because we transfer [RVE] and capital together.

So here, we can have another transfer next year, but we are not very clear on it. So in any case, it will not impact neither the regular dividends flow, neither the P&L effect.

Then there is another part, which is the discussion how to lower the debt burden of some part of state enterprises linked to some defense sector. So yes, there is a discussion, and there is no clarity if the banks would be impacted. And if yes, how? So today, there's little too speculation to discuss about it. But we are thinking that if there is some inclusion of banks in that kind of restructuring or decrease of that, it will be -- we will find a way with the Ministry of Finance how to preserve the financial stability and the obligations we have towards our shareholders. So again, it's too early to discuss about it. And the scheme itself is not defined in a way which can give us any ground to make some projections. Thank you.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [43]

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Okay. That's helpful. And next question is on your asset quality in retail lending. Obviously, we can see that there was a -- I think a slight tick up in your retail cost of risk. I'm just wondering whether you can give any further comments on whether you're seeing any deterioration within the unsecured lending book. We've been hearing that from a few other banks. Would be good to get your thoughts on that.

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [44]

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Yes. We have addressed this question in Russian part, but no problem, we will, of course, give some additional clarity on it. So yes, it's some increase of cost of risk, but this increase, which is very slight is linked to business mix, because we have more growth of unsecured loans towards mortgage loans in third quarter especially. And no, we don't have any signs of deterioration of the quality product. They're products of our borrowers, retail borrowers, I mean.

And as I have said, we have had the exceptionally good year in terms of quality of retail borrowers, the behavior recoveries all that is linked on the risk, retail risk managements is above our expectations, and I would say globally, I think one of the best years in the retail history of Russia in terms of cost of risk. But let's see how it will be for the next years. We will -- when we will plan our activity for next year we will, of course, be conservative. And we cannot exclude some increase in the years to come. But again, this year we are fully comfortable about the months to come and again, the months that we have already leaving in the fourth quarter fully supporting that statement.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [45]

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And just final question. On your fee income, this increase in fee expenses for loyalty programs, is that a one-off in the third quarter? Or will there -- do you expect that there will be similar increases in subsequent quarters?

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [46]

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Andrew, I spoke about it in Russian part. It's one-off in third quarter. We have remeasured our utilization of bonuses and miles from our retail customer. It's one-off effect, yes. We have now better collaboration of our utilization model in loyalty program, and we don't expect such expenses in next quarter.

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Operator [47]

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We will now take our next question from Andrey Mikhailov from Sova Capital.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [48]

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I have a question on nonbanking businesses. In Q3, you posted a very visible increase in both total revenue and net revenue from other nonbanking businesses. And I would be grateful if you could comment on that, and in particular, on which businesses drove that increase?

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [49]

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It was our development business predominantly in house development. And some part, it's our grain ecosystem. Some part of net income from nonbanking activities comes from [Mira Group] from our grain ecosystem.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [50]

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Okay. And just a small clarification, how sustainable do you think it will be?

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [51]

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Very sustainable from grain ecosystem, less sustainable from development business level.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [52]

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Sorry. And then another follow-up from me. The grain part, how big was it in Q3?

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Dmitriy Pianov, VTB Bank (public joint-stock company) - Member of Management Board [53]

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Single digit in quarter result. In third quarter, it's about RUB 4 billion.

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Operator [54]

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As there are no further questions, I'll now turn the call back to your host for any additional or closing remarks.

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Leonid Vakeyev, VTB Bank (public joint-stock company) - MD, Head of IR [55]

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[Interpreted] Thank you very much, everyone, for being on the call and for your questions. As usual, your IR and PR teams at VTB are available and will be delighted to take any questions or request that you might have.

Next time you will hear from us in about 3 weeks, then we will be releasing our numbers, our IFRS numbers for October and 10 months. With that, we wish you a lovely day and goodbye. Thank you.

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Dmitry Y. Olyunin, VTB Bank (public joint-stock company) - First Deputy President & Chairman of the Management Board [56]

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Thank you all. (foreign language)

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Operator [57]

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That will conclude today's call. Thank you for your participation. You may now disconnect.

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