TCS Group Holding PLC Holding PLC TCS Group 2016 Annual Report
TCS GROUP HOLDING PLC 2016 Contents
TCS Group is an innovative provider of online retail financial services in Russia operating through a high-tech branchless platform.
STRATEGIC REVIEW DIRECTORS’ REVIEW About us...... 02 Board of Directors...... 34 2016 highlights...... 04 Corporate governance and Chairman's statement...... 36 Our history...... 05 Management team...... 42 Founder’s statement...... 07 Business model...... 08 FINANCIALS...... F-1 Market context...... 10 Market position...... 11 GLOSSARY...... G-1 Strategy...... 12 What makes us different?...... 14 INVESTOR INFORMATION...... G-2 Chief Executive's strategic review...... 19 Our recent awards ...... 21 Chief Financial Officer's financial review...... 23 Risk review...... 26 Employees and corporate social responsibility...... 30
THE TCS Group (or the Group) is the name used in this document for TCS Certain statements and/or other information included in this Group Holding PLC and its group of companies operating under document may not be historical facts and may constitute “forward the Tinkoff brand in Russia. These include Tinkoff Bank and Tinkoff looking statements”. The words “believe”, “expect”, “anticipate”, Insurance. “intend”, “estimate”, “plan”, “forecast”, “project”, “will”, “may”, “should” and similar expressions may identify forward looking Summary of presentation of financial and other information statements but are not the exclusive means of identifying such LARGEST All financial information in this document is derived from the statements. consolidated financial statements of TCS Group Holding PLC and has Forward looking statements include statements concerning INDEPENDENT GLOBAL been prepared in accordance with International Financial Reporting our plans, expectations, projections, objectives, targets, goals, Standards as adopted by the European Union and the requirements strategies, future events, future revenues, operations or of Cyprus Companies Law, Cap 113, which are for the year ended 31 performance, capital expenditures, financing needs, our plans or DIRECT BANK December 2016 included in this document. A detailed description of intentions relating to the expansion or contraction of our business the presentation of financial and other information is set out as well as specific acquisitions and dispositions, our competitive after page 45 of this document. strengths and weaknesses, our plans or goals relating to forecasted Market data used in this document, including statistics in respect operations, reserves, financial position and future operations and of market share, have been extracted from official and industry development, our business strategy and the trends we anticipate in sources TCS Group Holding PLC believes to be reliable and is the industry and the political, economic, social and legal environment sourced where it appears. Such information, data and statistics may in which we operate, together with the assumptions underlying these be approximations or estimates. Some of the market data in this forward looking statements. We do not make any representation, document has been derived from official data of Russian government warranty or prediction that the results anticipated by such forward * According to a report by Frost & Sullivan (October, 2016), an international consulting firm. Frost & Sullivan analysed online agencies, including the CBRF, Rosstat and the FSFM. Data published looking statements will be achieved. and direct banks across the globe and compiled a comprehensive study and global ranking by number of customers. Tinkoff, by Russian federal, regional and local governments are substantially Nothing in this document constitutes an invitation to invest in as an unaffiliated and totally branchless bank, came out on top of this ranking in terms of number of customers. less complete or researched than those of Western countries. securities of TCS Group. 02 STRATEGIC REVIEW DIRECTORS’ REVIEW FINANCIALS 03 Full Cycle Day-to-Day Brokerage SME ... Banking 1 2 Platform 3 4
Point-of-Sale Internet Cash Loans Mortgages Retail Mobile and Personal online lending Acquiring Securities Internet banking manager Trading
Debit Cards
Deposits Insurance Pre-Paid Cards Travel Car Loans Quick Built-in CRM payments
Credit Cards Co-branded Mobile Applications Payroll projects Built-in • Tinkoff Platinum cards • Gibdd traffic fines accounting • ALL Airlines • OneTwoTrip • Card-to-card • All Games • Google Play • MoneyTalk mobile • WWF messenger • Planetacard • Tinkoff mobile bank • Ulmart
POS-and Built-in e-acquiring government relations
debit credit cards cards Marketplace banking and non-banking 1.8 mn 6.9mn services
The ecosystem built around customer needs through a unique online, branchless platform
TCS GROUP HOLDING PLC | ANNUAL REPORT 2016 04 STRATEGIC REVIEW DIRECTORS’ REVIEW FINANCIALS 05 Highlights Our history Proven track record of driving sustainable growth
2016Growth Profitability Net loan portfolio Highlights of TCS Group’s innovative development growth (RUBmn) • Gross loans up 19% to RUB120.4bn since YE2015 • FY2016 net income, a Group record at RUB11bn, • More than one million new active customers acquired with 4 consecutive quarters of record net income in 2016 and over 1.3mn new credit cards issued • ROAE of 42.5% for FY2016 • Launched a network of software development hubs • SME business developing rapidly, over • Growing contribution from non-credit- 2016 countrywide, the first in St Petersburg 50,000 SME customers acquired card business income streams • Joined the Russian blockchain consortium 102,912 • Customer accounts up at RUB124.6bn • Introduced a face recognition system for scoring Key events • Launched a new management long term incentive plan Credit quality • One of the first launching Apple Pay and Samsung Pay in Russia • Launched a network of software development • Ongoing focus on credit quality hubs countrywide, the first in St Petersburg • Acquired parts of Svyaznoy Bank’s credit card portfolios • NPLs (90d+) dropped to 10.2% at YE2016 • Joined the Russian blockchain consortium '15 • Became Russia’s second largest credit card provider 82,067 • Loan loss provision coverage stayed at 1.4x at YE2016 • Introduced a face recognition system for scoring • Launched a range of new business lines, transitioning • Launched a new management long term incentive plan to online financial marketplace Tinkoff.ru • Issued new co-branded cards Liquidity and capitalisation • Launched Tinkoff Investments, now accounting for around 25% of all new accounts • Total assets up by 25.6% over 2016 at RUB175.4bn, opened on the Moscow Exchange • New brand - Tinkoff Bank with cash and treasury portfolio up at RUB49.5bn • One of the first launching Apple Pay '14 • Launch of a series of co-branded cards 74,580 • Total equity up by 28.6% to RUB29.5bn at YE2016 and Samsung Pay in Russia • Launch of a number of mono mobile applications • 31 December 2016 CBRF N1 statutory capital • Credit rating agency upgrades ratio of 11.1% and Tier 1 up at 14.8% • TCS Group IPO on the London Stock Exchange Main Market • Treasury portfolio of RUB33.3bn of '13 • Launch of Tinkoff Insurance 73,962 highly liquid CBRF repoable bonds • Launch of cash loans
• Minority stakes sold to Baring Vostok and Horizon Credit cards Total Customer '12 • Launch of online POS loan programme 47,784 issued in 2016 assets accounts • Launch of mobile banking '11 • Launch of the mobile and telesales sub-channels of 21,359 Tinkoff Bank online customer acquisition platform
> • Launch of online acquisition channel for credit cards 1.3 175 125 '10 • Launch of “smart courier” service 9,643 mn RUBbn RUBbn
• Launch of the retail deposit programme '09 • First debit card issued 5,254 Net ROAE Strong N1.0 capital ratio profit for 2016 at the end of 2016 of • Minority stakes sold to Goldman Sachs and Vostok Nafta '08 • Launch of internet bank 4,117 11.0 42.5 11.1 '07 • First credit card issued 1,593 RUBbn % % '06 Tinkoff Credit Systems Bank was created by Oleg Tinkov
TCS GROUP HOLDING PLC | ANNUAL REPORT 2016 STRATEGIC REVIEW DIRECTORS’ REVIEW FINANCIALS 07 Founder’s statement
Dear Stakeholders, Net income RUBmn story, continued. We consolidated the It was good to see OAE%R existing plans and expanded them to It is my privilege to be writing to you to embrace a wider band of management. 2016 produce share with you my take on the year just n n 71 23 85 60 45 16 8.6 42.5 We launched their successor MLTIP gone, a year in which after navigating the 11,0 (Management Long Term Incentive Plan) record results for crisis we continued rolling out Tinkoff.ru, in March 2016 which at that time had our online financial supermarket. I wrote 51 senior management participating the Group; not a year ago that I felt it would be a huge in a pool of 4.1% of share capital. With success, that the timing felt instinctively the continuing dynamic growth of the just the full year right. It was good to see 2016 produce 5,8 Group and the remarkable continuity record results for the Group; not just 3,8 and cohesion of the management team 3,4 but every single the full year but every single quarter over this period confirming the merits 2,0 produced a Tinkoff-high net income 0.6 1,9 of share ownership plans generally and quarter produced result. So a stunning conclusion to our 0.3 of MLTIP as an incentive and retention first decade (which we celebrated with 0.01 (and increasingly a recruitment) tool, we a Tinkoff-high Russian brio), and a great launch-pad 1,1 recently announced plans to increase for our second decade; and it is to that I 200920082007 2010 2011 20132012 2014 20162015 the number of MLTIP participants to 69 net income result. would like to turn next. in 2017 and to over 80 going into 2018, business lines as part of Tinkoff.ru and to increase the size of the MLTIP pool So a stunning Last year, then, in my statement I exceeded expectations with increasingly to 5.6%. predicted a promising future for our positive contributions from all lines. My conclusion to our online financial supermarket, explaining conclusion: no longer can we sensibly be how it helps us exploit current market viewed as a single product bank. first decade (which conditions but more importantly tap Equity RUBmn into longer-term trends in retail financial So how do we achieve this? Naturally, services, Fintech and especially mobile. we leverage Tinkoff’s core capabilities- we celebrated with 29,5 In October 2016 I was pleased to product design, offline fulfilment, online Russian brio), and participate along with management in a marketing, user interface, analytics and multi-venue ‘Strategy Day’, engaging with data, funnel (debt) management and 22,9 many of our international stakeholders. customer service. Of course we have built a great launch-pad 20,5 20,9 In a variety of formats, we developed and update our online platform around for our second these themes, setting out where we ever-evolving customer needs. But the thought the Group could reach by final, vital component I want to mention is 2007–2016 CAGR: 53.0% decade YE2019. talent management.
9,1 I believe passionately there are huge We recruit through advertisements opportunities in retail finance in Russia, and job websites, through student for us especially. Upheavals in the forums, and social media. We headhunt, 3,8 1,3 Russian economic environment, the we target top IT graduates, winners 0.8 0.5 1,1 fallout from the crisis, the interventions of mathematics, physics and coding 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 of the regulator and the impact of new competitions, we scour all manner of technology are the catalysts of great online channels, unconventional media change and these changes present us too. But the point I want to make here is So without downplaying the contributions with a huge market opportunity to: that melding these talented individuals of many, many others in this and into a team, the Tinkoff team and part of previous years, I would like to end by • diversify and smoothe the cyclicality the unique Tinkoff culture, and retaining, expressing my particular thanks to the of our core credit card business; incentivising and motivating them is not core management team of Tinkoff Group by chance. My management team I view who have joined me, many from the very • add new sources of non- as my partners and I want them to share beginning of this remarkable story. I credit revenue; in the Group’s success. From the launch applaud their professionalism, dedication, of Tinkoff Credit Systems over ten years loyalty, creativity and skill. • create a ‘financial ecosystem’ ago I have been a supporter of share which captures an ever increasing based compensation and well placed to share of customers’ wallets. introduce it.
The investments made into the The Group set up way back two long- Tinkoff.ru brand and associated new term employee incentive plans; and business lines were made cautiously, leading up to our IPO (October 2013) and in any case minor compared to some 36 top managers participated Oleg Tinkov our total cost base, but have been in a share based pool of 2.71% (with Oleg Tinkov Founder and Controlling Shareholder transformational. We already have a further portion unawarded) of the Founder and Controlling Shareholder good visibility on many of these new Group’s share capital. Following the business lines; the growth of non-credit IPO, the Group’s success, and growth
TCS GROUP HOLDING PLC | ANNUAL REPORT 2016 08 STRATEGIC REVIEW DIRECTORS’ REVIEW FINANCIALS 09
Business1 1 1 1 1 1 model 1 1 1 1 1 1
Operating Robust data and Diversified provider High liquidity and Powerful Premium-level flexibility risk management of retail financial, well-balanced distribution service and brand
TCS Group has built an advanced TCS Group employs a highly scientific, insurance and funding base Tinkoff Bank offers remote access TCS Group is unusual among Russian platform that is highly suited for data-driven and conservative risk customer service through its award- retail financial services providers the Russian market and operating management approach, which quasi-financial Tinkoff Bank has established a robust winning Internet banking as well as in offering a premium-level service environment. The Bank’s platform underpins the success of the business liquidity risk management framework through mobile banking and high- to mass market and mass affluent is entirely branchless, with a low model. All aspects of the client life services that ensures it maintains sufficient volume call centres. Our use of direct customers. Our customers enjoy fixed cost base and high degree of cycle – from acquisition to services and liquidity, including a significant marketing channels has revolutionised convenient 24 hours a day, 7 days a operating flexibility. Cost efficiencies collections – are carefully monitored Originally the first purpose built cushion of liquid assets. TCS Group’s the way customers are acquired in week access to their accounts and are enhanced by the best-in-class and evaluated. We make loan approval credit card focused lender in Russia, funding strategy provides effective Russia. Distribution channels, which financial transaction services through centralised IT system. The low level of decisions based on a range of available Tinkoff Bank has evolved into a focused diversification in the sources and tenor include online (the Internet, mobile the combination of Tinkoff Bank’s free retail financial services penetration information, including credit bureau online financial supermarket living in of funding. The Group maintains strong services and telesales), direct mail and Internet, mobile and call centre service in Russia, the rapid growth of online data, a rigorous application verification the cloud, providing a full range of its relationships with market participants direct sales agents, allow TCS Group platforms. and mobile payments, and high process and proprietary scoring own retail financial services such as to promote effective diversification of to attract new customers right across margins and barriers to entry make models. retail lending, transactional, savings funding sources. the country. Supporting the branchless our business model attractive in terms products, insurance, SME, internet platform is a “smart courier” network of sustainable profitability, growth acquiring, mobile solutions as well which allows next day delivery. potential and competitive edge. as non-Tinkoff products through the full-cycle brokerage model where we started with mortgages and retail securities and have more to come soon. Tinkoff Bank continues to focus on the mass market segment, but also successfully works with the mass affluent segment offering a wide range of co-branded and premium credit cards.
Tinkoff Bank is an online financial supermarket offering customers the full range of financial, insurance and quasi-financial services. Through the platform www.tinkoff.ru we offer Tinkoff-branded products – credit cards, current accounts, deposits, cash loans, TCS Group is evolving rapidly into a unique online financial insurance and mobile solutions, as well as non-Tinkoff products through our full-cycle supermarket and will continue to expand the range of products brokerage model starting with mortgages, retail securities trading, non-Tinkoff insurance and other products coming soon. For small businesses, we offer current accounts, and improve the quality of its customer service. transactional services, salary projects and online merchant acquiring. We deliver premium services to mass market customers in Russia through a unique online, branchless platform.
TCS GROUP HOLDING PLC | ANNUAL REPORT 2016 10 STRATEGIC REVIEW DIRECTORS’ REVIEW FINANCIALS 11 Market context Market position
Credit card lending A leading credit card Tinkoff Black Average lender in Russia debit card is flying NPS Sector In 2016 the operating environment in Russia significantly At the same time despite the fact that credit card market improved and the consumer lending market continues its volumes hit a three-year low (RUB999bn based on CBRF 101 In 2016 Tinkoff Bank In 2016 we brought our current accounts product to a 57 Tinkoff Black recovery, supported by stronger oil prices, a rebounding form) in 2016, just a few participants managed to further grow managed to further improve new level of customer servicing and satisfaction with a Net 40 Smartphones Rouble and continued consumer deleveraging as the their loan books and even increase their market share by the its position on the market Promoter Score (NPS) approaching 60, which is much higher 39 Auto Insurance macroeconomic environment further improved and by year end and Tinkoff Bank is one of them. Together with the and cemented its position than smartphones which came next with a NPS of 40. As a the ongoing clean-up of the market. At the same time, the CBRF’s increasing efforts to regulate the market, expectations as the number 2 credit card result the current accounts portfolio doubled in 2016 and 39 OnlineShopping unsecured consumer lending market remained largely flat, are this sector should revive strongly as in Russia it is still player in Russia with its share allowed us to attract very different customer base from our 37 Laptop with some loan categories still shrinking. The competitive underdeveloped and underpenetrated relative to the most of the Russian credit card traditional typical credit card customer. These customers environment has been and still remains slow with many lenders developed economies as well as certain high growth emerging market at 10.3% (the second spend more money and use internet, mobile bank and other 35 Banking struggling to find the right distribution model and customer economies. largest non-delinquent credit services more frequently. They are the key target audience 34 Credit Cards value proposition in a market that has changed radically over card loan portfolio in Russia), for the Tinkoff.ru platform. 32 Supermarkets the last three years. thanks to tighter risk controls implemented in good time. Tinkoff Black: retail portfolio growing by 70-80% a year 31 Hotels Credit card market in Russia (RUBbn) Market dynamics in 2016 (RUBbn) 30 Online Games Tinkoff Bank credit card 50 1032 4 12 1 17 45 24 Airlines 999 21.4 market share (%) (as of 40 In 2016 the credit card YE2016) 23 Travelwebsites 10.3 35 lending sector in 16.8 59.1 8.3 30 21 Pharmacies Russia contracted by 7.2 7.5 25 20.8 6.7 Cellular Phone 5.8 20 21 Service 4.2 15