Sberbank of Russia (SBER) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for being with us on our third quarter results call. We have prepared for you our presentation, the regular one, and then we will have the Q&A session. The first session will be for analysts and investors and second one for journalists. I have to flag that this conference is being recorded today on October 29, 2020. Before we start, I would like to go through some technical details for the call. So as you have noticed, we are using Zoom today and English and Russian lines are available by clicking the interpretation button. So please use, if needed. [Operator Instructions] And one more thing, as you all know, some information on the call may contain forward-looking statements regarding our future, events and performance, and actual results may differ materially from those expressed or implied in the statements made during the call due to known and unknown risks and uncertainties. For more information, please refer to the disclaimer statement at the second slide of our presentation. Thank you very much. And I would like to present our speakers today. We have Alexandra Buriko, our CFO. We have our Chief Risk Officer, Dzhangir Dzhangirov; and Head of Macroeconomic Center, Oleg Zamulin. And I open the floor and hand it over to Alexandra.

Thank you very much, Anastasia. Before we begin, I just want to say in Russian briefly, [Foreign Language] Now switching back to English. I'm very happy to welcome you to today's call. Let me briefly walk you through our set of results and discuss the key trends that we saw in the third quarter. In the third quarter, our bank earned a record profit in the group's history. Our profit amounted to RUB 271.4 billion and RUB 265.6 billion from continuing operations. Please also remember that last year's Q3 results were affected by noncash loss recognition of the DenizBank disposal. EPS reached RUB 11.55 per share, which demonstrates [ 7.7 ] increase year-on-year. That is EPS from continuing operations. And our ROE during Q3 amounted to 22.8% not including subordinated loan from Ministry of Finance. Return on assets was 3.2%. Let's look at the environment we are operating in. Oleg, over to you.

Thank you. Let me briefly discuss the current macroeconomic environment in which we are operating. Obviously, our economy is recovering from a big collapse, which happened in April and May. Unfortunately, as we see in statistics in September, this recovery has somewhat stalled. The major indicators in terms of industrial production have demonstrated negative growth. It's not clear quite yet, whether it's a temporary [ leap ] or a trend break, but we do hope that soon economy will continue -- we'll come back to its recovery despite the fact that we see a second wave of infections. Overall, however, Russia has suffered less than most other countries during this crisis. The IMF forecast is that the economy will contract by 4.1% this year. Our own estimates are actually that contraction will be even smaller, 3.8%. This is much smaller than in most other countries, as you can see on the middle graph. The only major economy that actually -- is experiencing growth this year is China. And this is happening despite the fact that the Russian government actually has spent less money on supportive economy in most other countries. So the Russian government managed to avoid a big crisis without major expenditures. Overall, we expect this year, the economy to collapse, as I said, by 3.8%. Next year, it will recover by about 3%. So it will not reach the 2019 level until 2022. In 2022, however, the pre-crisis level will be achieved. There are some headwinds on the way of recovery. First is the fiscal consolidation. Next year, the government budget deficit will be smaller than this year. So the government -- the county will get less support from the budget. The OPEC+ restrictions will continue. We will sell less oil to other countries than we did before the crisis. And of course, the world trade has also significantly fell by -- because of these events, and therefore, there will be less external [ event ]. There are some additional risks which may make the economy grow somewhat slower than in our baseline forecast. 2 of them are presented on this graph. The first one is the second wave of infections, which we are already observing. Currently, most countries are not introducing restrictions on the same degree that we saw in the spring, although we know that just yesterday, Germany and France have announced strict restrictions than before. But again, this restrictions are mild than the restrictions in April and May. Russian government is still hoping to avoid such restrictions in our Country. The second risk is a potential wave of bankruptcies. Many companies lost their incomes during the time of lockdown. And it's not clear yet whether this loss of income will result in a big wave of corporate bankruptcies and closures. Again, our data suggests that this risk is not very big, most likely most -- most companies will survive, but this is a risk that we have to monitor closely. Finally, we've updated our forecast. Despite the slowdown in the economy in September, we have upgraded our forecast for this year from negative 4.2% to negative 3.8% in terms of GDP. We also observed some excess of depreciation of the Russian ruble this year. So we changed our forecast for the exchange rate and upgraded forecast for inflation to 3.8 million this year. Thank you very much. That's all I have to say. I turn it back to Alexandra.

Thank you very much, Alex, for such a comprehensive overview. And let's go back now to Sber Q3 results. Let's start traditionally with our net interest income and NIM. NII increased by 16.2% year-on-year to RUB 411.3 billion in Q3. This growth was supported by the accelerating increase of our lending book year-on-year. The gross loans of the group reached $24.5 trillion, which is a 13% increase year-to-date and 7.4% quarter-on-quarter in nominal terms. The portfolio grew by approximately 5.7% quarter-on-quarter, excluding the effect of foreign exchange revaluation, which was quite significant during Q3. Both retail and corporate lending showed an equal solid performance of 7.4% for the quarter or 5.2% quarter-on-quarter for corporates, excluding the effect of ForEx [ revaluation ]. Our retail portfolio came close to $9 trillion, driven both by mortgage and consumer loan expansions. As for mortgages, 8.5% for Q3 on the back of subsidized mortgage programs and favorable market rates. And this for consumer lending, 6.9% increase for Q3 due to the demand recovery, somewhat lower rates and the bank's seasonal promos. The share of consumer loans issued in digital channels exceeded 70% already as of our third quarter. Our digital housing platform, DomClick continue to perform extremely well and tripled the traffic year-on-year. We reached over 10 million monthly users in September. Our market share in new mortgages origination exceeded 50%, which is the first time in the last 2 years. Based on these trends and on the back of the extension of the mortgage program, we have upgraded our outlook for the year for the sector and for Sberbank, respectively. Corporate loans will show 11% to 13% growth with their keeping the market share relatively stable. We expect the retail loans will grow by 14% to 16%, and we expect to outpace the sector because of acceleration both in mortgages and consumer loans, thanks to our high degree of digitalization. We updated our outlook for corporate deposit growth to a range of 13% to 15% with Sber outpacing the sector. And finally, retail deposits will increase by 10% to 12%, Sber to be in line with the sector. Now let's have a look at NIM. Our margin remained strong at 5.48% for Q3, driven mainly by the lower cost of funding and the reduction of deposit insurance rate. As you recall, the insurance rates declined from 15 to 10 basis points in comparison to previous year. NIM declined by 13 basis points from the previous quarter due to the elevated base of Q2 when we recognized the effect from the reduction of deposit insurance rates read, respectively, from the beginning of the year. Reduction of the deposit insurance rates added around 10 basis points to NIM in Q3. Funding costs continued to go down together with the [ Q rate ]. Combined cost of funding decreased approximately by 30 basis points quarter-on-quarter or if you look at annual numbers by 130 basis points. And cost of corporate and retail finding was approximately 10 basis points quarter-on-quarter each. Corporate loan rate was 30 basis points quarter-on-quarter, showing visible sensitivity to previous rate cuts due to a noticeable share of the floating rate loans. Yield on retail loans also decreased by around 10 basis points. State and public funding became significantly cheaper in Q3. And its [ cost ] decreased by over 100 basis points quarter-on-quarter following the reduction of the central Bank Rate. And ruble devaluation in Q3 also had a somewhat negative effect on NIM as our share of ForEx-denominated loans exceeded 25% in the total book. Overall, we expect NIM to gradually decline as we previously communicated due to the following key factors. The back book is still yielding higher and the natural loan repricing will continue. The pricing may be limited as further market rate cut looks uncertain. And so we expect that cost of funding will reprice, albeit slower. Weaker-than-expected RUB may lead to further inflation of our currency business with some negative effect on NIM. As you can see, we started to purchase some floating rate government bonds following the change in the Ministry of finance fundraising policy recently. We plan to ramp up this portfolio further. We believe that these instruments allow the bank to form a liquidity buffer with a little interest rate risk and will not create any negative pressure on our capital adequacy ratio. This strategy will replace gradually maturing [ paper ] with fixed rates. And this transaction may cause a somewhat dilutive effect to NIM, but the positive one to NII. The tailwinds from -- for net interest margin will come from our constructive view on the retail loan book growth optimization of both the deposit pricing and the structure. Therefore, we happily and confidently leave our outlook for NIM unchanged and believe that there may be some upside potential here. Now let's look at fees and commissions. Our net fees and commissions grew in Q3 by 13.6% year-on-year to RUB 147.7 billion on the back of recovery and transaction activity. The main drivers were operations at banking cards, which were up 14.5% in Q3 and settlement transactions, over 13% in Q3. In September, we offered the unique Sber Prime subscription to our nonbanking ecosystem services on our online platform. We implemented a secure solution for contactless payments in off line stores, Sber Pay Wallet for clients and Sber Pay for Internet acquiring. Now there is no need to disclose card details. The purchase amount is visible on the phone. On the back of stronger-than-expected Q3, we improved our outlook for fees and commission growth for the year to around 10%. Now let's have a short look -- short dive into our nonbanking part. In the third quarter, the group became a sole shareholder of Yandex.Money and sold our share in Yandex Smart. Sber also closed the deal on 72% acquisition in [ double GIS ] or 2GIS, a leading Russian digital maps and city guides company. And we have obtained control over Rambler group. That's our share increased to 55%. So we had a very rich quarter in terms of our nonbanking ecosystem in terms of transactions. We are very happy to say that our digital nonbanking services continue to show very impressive growth. Client traffic metrics, numbers of orders and revenue streams all show multiple growth, as you can see on this slide. Sber market grocery service has become the most geographically widespread and covers now 83 regions and 147 cities in the Russian federation. GMV showed a threefold growth and reached RUB 4.7 billion. And other players, Samokat, a dark store delivery service showed 20x growth year-on-year and came in at over RUB 2 billion in terms of GMV. Integration of the service -- of all the services continues, and the company works very closely with their logistics and [ spare device ]. Now let's turn to our operating expenses. The pandemic related efficiency enhancement program facilitated the slowdown of [ cost ] growth, as we promised during our previous discussion. Our OpEx grew by 4.8% year-on-year in Q3 and our staff cost grew by just 2.1% year-on-year on the back of leveling off the base effect from payroll indexation in Q3 of 2019. Thus our OpEx guidance and our cost-to-income ratio outlook remain unchanged for this year. Before I hand over to Dzhangir, I would like to comment very briefly on our takeover of [ Eurocement ] group in Q3. As we announced and disclosed in our financial statements, under the bad debt recovery procedures, we consolidated 100% of shares of the current company of Eurocement group, which is one of the largest players in the construction materials industry. The assets and liabilities of the group were classified as discontinued operations held for sale, as that is the way we view what and how we want to manage this group. The net assets of the group consolidated and included in Sber financials amounted to approximately RUB 79 billion. The recovery strategy suggests that we will sell the assets to a strategic investor. Now I would like to pass the floor to our Chief Risk Officer, Dzhangir Dzhangirov.

Thank you, Alexandra. Good afternoon, Sber colleagues. At present, we're at the beginning of the second wave with pandemic measures covering the world yet again. As noted by Oleg, Russia, our key market is coping with this economic downturn, somewhat better than most of the developing and even developed markets. And we're expecting our economy to shrink by 3.8% only in 2020. Before the second wave came to our life, we ran a stress test. And given that we have much upgraded medical infrastructure, work [ preparement ] of the company is much higher and we have much stronger and improved capital adequacy ratio, which grew from 14.5% to 15.4% from the beginning of this year. All this allow us to feel secure and ready for the challenges ahead. And I'd like also to note that in all scenarios that we have stressed we remain within approved risk appetite. I want to note that first wave was characterized with a high level of uncertainty and we had high level of restructurings. So we restructured RUB 2.4 trillion of legal entity loans and RUB 164 billion of private individual loans. And we are entering the second wave much better prepared, not only in terms of our infrastructure, but also with provisions that were conservatively built and with a comfortable capital buffer. So having said that, let me comment on Q3 numbers. So our nonperforming loans or the share of nonperforming loans decreased by [ 0.38 ] percentage point in Q3, mainly due to the increase of the working loan portfolio and with a quite constant NPL [ 90 plus ]. Total operation coverage of Stage 3 and [ POCI ] in loan portfolio at a more [indiscernible] decreased by 3.6 percentage points and totaled at 98.4%, mainly due to Eurocement consolidations, which was mentioned by Alexandra. So probably the most interesting thing is cost of risk. As you all know, in the first 6 months, we took a conservative approach, and we front-loaded significant provisions already even in Q1. I remind that RUB 44 billion of macroeconomic -- add-on macroeconomic provision was created already in Q1. And in Q3, our provisions were 143 basis points, which brought us together with the first 6 months -- brought us to 219 basis points in the year-to-date. So we do not change our guidance for cost of risk. It remains at [ 230 to 250 ] basis point interval. However, we expect the cost of risk for the year to be closer to the lower end of this interval. And last but not least, RWA density continue to improve in Q3. I remind that in the first quarter, it improved due to the new models in IRB. It brought us 3.6 percentage points. In the second quarter, we switched to the Basel 3.5 approach for IRB. It brought us another 5.8 percentage point. And in Q3, we continued with Basel 3.5 for standardized -- approach for assets under standardized approach and growth as 1 percentage point and another 0.7 percentage points are due to the cancellation of the macroeconomic add-on in consumer loans originated before 1st of September 2019. So all in all, from the beginning of the year, our RWA density improved by more than 10 percentage points, which due to the new models under IRB as well as due to the changes in regulation. We expect that in the next year we may benefit from the switch to standardized approach for operational risk. We're currently on the discussions with Central Bank. So -- but this will be seen not earlier than in the end of the first quarter next year. So I hand over back to Alexandra.

Thank you very much, Dzhangir. And we are moving towards the finish here. Before we do switch to Q&A, let me just make a couple of words about our capital. CET adequacy ratio amounted to 13.39% and was down by 139 basis points, just as expected compared to Q2, mainly on the back of record dividend that we distributed in October. While the total capital adequacy ratio stood at [ 14.22% ]. Starting from September, we have a perpetual subordinate debt in the amount of RUB 150 billion, which was assigned by Central Bank to Minfin. Now our Tier 1 capital adequacy ratio differs from CET 1 capital adequacy ratio and amounts to 13.84%. So to sum up, we have upgraded our loan and deposit growth and fees and commission outlook. And on the back of these changes, we have slightly improved our guidance on return on equity to low to mid-teens for the year. And finally, but very importantly, I would like to make an announcement that we will host our Investor Day on [ BR ] 21 to 23 strategy in -- on November 30 and December 1 in a virtual format. And I think -- and it is very exciting for us, and I hope it will be for you. We will have a live Q&A session. You will receive an invitation from our IR team very soon, and please stay tuned. With that, thank you very much, and we are ready to take your questions.

Thank you very much, Alexandra. We are ready to take questions.

Yes. The first question comes from Sam Goodacre, JPMorgan.

I've got a couple of questions, just to follow up with what you've said during the presentation. So firstly, when you talk about the RWA optimization from operational risk that we may expect in 2021. Could you just give us a bit more color on the extent and I suppose the process of discussions. And ultimately, could you give any guidance as to the expected impact on your RWA density. The second question is about deposit trends. And we've seen a continual rise in the share of site deposits within the mix, particularly in retail over the course of this year. So could you let us know if that is a sort of a cyclical trend given the current environment? Or is it a structural and sustainable trend? And ultimately, where should it go going forward? And then my third and final question is on Eurocement. Given that you are currently seeking a buyer, could you let us know where the sales process is at? And in the interim, if we ought to assume a kind of recurring RUB 6-ish billion quarterly impact from discontinued operations within the P&L. And given the NAV, as you've said, Alexandra of nearly RUB 80 billion, how can we think about pricing of this asset when that sales process concludes?

Okay. Starting with the operational risk RWAs. So currently, in Russia, we -- the only way to calculate operational risk is basic indicator approach, which is 15% of average operating income in last years. And it actually brings us a very high level of ROE if operational risk is more than RUB 3 trillion. So if you compare it the loan portfolio, of course, the loan portfolio that amount is much riskier than operational risk. Ad we were in constant discussions with Central Bank. Central Link announced SA approach in the end of last year. And by the end of this year, they should be ready to receive applications. And we will, of course, apply for this approach. It's going to be -- the result is going to be material. However, we're now still on the discussions with Central Bank. And in any case, our application will be validated by Central Bank team. So right now, I'd like not to announce any projection economy -- and projection of the economy for operational risks. However, we may be ready by the Investor Day.

Thank you very much, Dzhangir. I will take the follow into questions. The first 1 was on the deposits in the retail sector, if I remember correctly. As you recall, we expect quite a strong increase of retail deposits, 10% to 12%, and we believe that we will be in line with the sector. And of course, such dynamic is supported by the various state subsidy programs. That were disbursed during summer this year and some additional disbursements that we expect in -- before the end of this year that were announced by President. We believe, of course, that as we come out of the crisis, the kind of -- the situation will gradually change. However, we don't expect any drastic changes in the savings ratio in the near term. So we expect that our share in retail deposits will remain stable. And yes, some outflow into these instruments will continue. However, it will not make a significant impact on the liquidity or any other aspects of the bank. Moreover, we expect that we will be able to offer some interesting investment products to our clients that are moving in this direction. In terms of cost of funds, you saw that there was some repricing already in Q3. And if our macro forecast will come true and the Central Bank will move the [ Q ] rate down by 25 basis points then we believe that there is still some room for decreasing the cost of funding gradual. Now turning to your question on Eurocement. Yes, indeed, we do plan to sell the shares. That is what has been disclosed. And as this situation is quite young, and this happened quite recently, the sale process currently is at the starting stage, the recoverable amount, you can see on our financial statements. And the third quarter was seasonally quite good for Eurocement group. So it will be, we believe, positive results, but it will be impacted by the seasonality that is natural for this industry. Hopefully, this covers your question.

And will take our next question from Elena Tsareva BCS.

And congratulations with strong results. So my first question is about your cost of risk guidance. So given your left it unchanged, it assumes that cost of risk in fourth quarter should pick up to 30 to 50 roughly so at the level of second quarter. So what are the main negative expectation you see now for the cost of risk to go high from the current level in the fourth quarter. This is my first question.

Thank you very much for your questions. As we said before, now we have a second wave of pandemic, and there might be a second wave of restructuring -- restructurings and also second restructurings even for some companies and some private individuals. So we -- and additionally, we haven't yet seen the result of the holidays. So in October, the holidays expired for some of the clients, and we -- it's too early to point on the trade worthiness of those clients. So all in all, we continue to have a conservative outlook. And as I said before, we created RUB 44 billion rules of macroeconomic add-on in provisions. Today, as of 1st of October, this add-on is [ RUB 37 billion ] already. And right now, we do not see immediate reasons to release those provisions. We will come back to this -- to this macro add-on in the end of this year and each quarter next year. But right now, we don't see reasons to release it right away.

We take our next question from Mikhail Shlemov of VTB Capital.

Several questions from me, if I may. The first question is actually relating to the fee and commission income. Specifically to a very strong growth, which you have been posting in the Q3. If I remember correctly, you have been doing some changes to the fee structure in terms of the peer to P payments as a reaction to the introduction of the fast payment system network to your clients. Could you please elaborate what effect you have seen in terms of the client behavior in terms of P&L from those changes? The second question is actually to Dzhangir, and it relates to another big NPL, which was a headache in the past. And I'm specifically talking about the refineries in Antipinsky, which you're also taking over. So perhaps you can provide us an update what's going on there, whatever the situation requires any more provisioning? And where you are in terms of the disposal stage of this asset?

Indeed, we saw very strong growth in fees and commissions. And the main driver, of course, was increased consumer spend during the -- and we clearly benefited from the high degree of digitalization and high degree of presence in acquiring here. In terms of our new subscription model and that was introduced in June, it is still too early to make specific estimates. We see that some clients are currently switching to subscription. There is some interest. But I believe that the appropriate time to give you some guidance will be early next year when we have some time to evaluate client behavior over the longer term. So that is on the first part. And now if I may, I will ask Dzhangir to comment on your second question.

Okay. So on the refinery side, there are different deals. First, there is positive news on the tax legislation. So the new law was approved and will come force in the beginning of next year, and this will improve investment efficient for the refineries. However, at the same time, we see the negative trend in the market. So crack spreads are now on the low level and in the lowest level in the last several years. So the market for refineries is a poor condition today. So these are the news, as you understand, they are quite mixed. So we closely monitor each company, and we address the creditworthiness of provisions.

And we'll take our next question from Alan Webborn, Societe Generale.

Could you give us a little bit of an idea about what you mean by slowing growth in Q4? I mean clearly, you've given some sector updates in terms of sector growth, and we can see what growth was in -- up until the [ 9-month stage ]. We can draw a conclusion from that. But what are you expecting to see slowing in Q4? Is it going to be particularly mortgages because of the changes to the subsidized scheme or the maturity of that. Just give us an idea about how you feel the trends in terms of volumes are going to be to get you to your targets for the year-end. That was sort of -- that was the first question. The second question was on -- as you see things today, when do you think sort of low yields are going to sort of pan out? I mean do you -- and on the deposit side, do you need to have that 25 bp cut before you see any further repricing down of deposits? Or do you think there's still a little bit of room there to do something even if rates stay where they are? So that was the second question. And then the third question, I'd be interested on the nonbanking revenues, I mean, you come up with a sort of RUB 70 billion number most of the time. And I did wonder, given the life that we're all leading at the moment, why you haven't put that up a little bit in and what has the trend been across the summer in terms of those revenues? I'm sure you'll tell us more about that in at the end of November, but I'd be interested to hear your views on how that's been progressing across the summer since the end of lockdown.

Thank you very much. Excellent questions. Let's start with the first one on what we meant by the slight slowdown that you may expect in Q4. As Dzhangir already said, we see some potential headwind from the continuing pandemic and the rise in number of cases of COVID and potential quarantine measures, albeit we do not expect any drastic lockdowns as was confirmed today by the President. But there's still -- there will be probably less people going outside. And go into our -- yes, going to our branches, et cetera. So overall, if you look at the areas, we expect that mortgages will continue to grow strongly on the back of continuing state subsidy program. As you saw that we issued over RUB 200 billion of mortgages over the last 2 months, every month. However, at the same time, we expect that consumer lending may slow down a little bit. Not only due to the pandemic, but also due to the fact that some demand that came out of the previous lockdown was already satisfied during Q3. So there is some potential for slowdown there. And of course, there is some potential to see slowdown in fees and commissions and we already saw that over the last couple of weeks, the consumer spend is down year-on-year by 2% to 4%. And you know that we published our weekly research on our resources Sber Index. And you can see there, it suggests that in October already, we see some slowdown, especially in services. So that is the answer to the first question. Maybe just 1 add-on there that at the same time, there will be some seasonal growth that will potentially offset some of the negative trends. So we will see how we will come out kind of out of this mix. If now we move to your second question on the loan book and the cost of funds. Generally, it takes 9 to 15 months for the loan book to reprice with the exception of floating rate part that reprices automatically and some of the government authorities loans that even though are fixed rates but also follow suit and reprices more or less in line with the changes of Central Bank rate. So if we see another decline in the [ Q rate ] in Q4 we will expect that our loan book will continue to reprice gradually over the course of 2021 and maybe into the beginning of 2022, although we do not expect any drastic changes there as we previously discussed. Now if you look at the side of cost of funds, we believe that the major benefit from the decreases in Q rates that were implemented so far, we already received. And there is no more significant room for repricing further. However, is -- as you saw our guidance, we expect another reduction in [ Q rate ], and we expect that the cost of funds will follow suit, and we will have some savings on that side.

Ecosystem.

Thank you. And the final question was ecosystem and the growth of digital, as I mentioned during our presentation, we disposed the Yandex Market this year, and that was a very significant part of our nonbanking ecosystem and generated approximately half of the forecasted revenue. So our other players will we expect to replace it, and we still expect the RUB 70 billion target to be met. However, with this disposal, we are not able to upgrade the guidance here.

And we take our next question from Olga Veselova, Bank of America Merrill Lynch.

I have several. One is what will be basis for your calculation of dividends? Would you use reported net income? Or would you subtract payments on perpetual debt from net income when you will apply dividend payout ratio. So this is my first question. My second question is the bank's investments in OFZ. You do mention in the presentation, this is a liquidity buffer. And I appreciate that if this is the case, this may be a temporary measure, do you think that over time, you will reduce your share of securities and dispose these OFZ investments and that can give some support to your net interest margin possibly in 2021. So what are your thoughts on the securities management? And also, finally, I noticed that you increased the number of employees in subsidiaries by almost 5,000 people quarter-over-quarter. Was this just a redistribution of people from the bank to subsidiaries? Or this was something else, you actually hired added people. And then if yes, then, in which areas do you keep adding people?

Thank you very much for your questions. The first question was on dividends. As you know, we are timing the process of finalizing our strategy and preparing for the strategy day in 1 month's time. So we will be happy to address this question during the time of disclosure of our strategy. Now if we talk about our investments in OFZ. As I stated, it is -- we believe, is a unique opportunity. And the Ministry of Finance did not previously use the floating rate instruments to finance countries. So we would like to take this opportunity and ramp up our portfolio. It does not bear on the capital adequacy. And at the same time, we create a great liquidity buffer and generate minimal additional interest on that. So for us, we believe it's good any which way look at it. Whether or not we will dispose of it in the future, usually, we -- it is for us a [indiscernible] maturity investment, and we normally do not use a treasury book for trading. However, there could be some exceptions. But for now, we do not make any such plans. Yes. Dzhangir, do you want to add?

Yes. I mean it's not only the question of net interest margin, but also the risk weight. The risk weight for OFZ is 0. So from the total efficiency point of view, this investment we consider to be effective. Alexandra?

Thank you, Dzhangir. And your final question was on the headcount. As I mentioned, it was quite rich quarter in terms of acquisitions. We acquired 2GIS, and that was an add to the headcount. And our Sber Logistics company grew very well during the quarter. And it's employed additional couriers in line with the market demand. So that increase was connected purely to such factors. In terms of core business, we continue to look at our efficiencies and slowly optimizing our headcount.

And the next question comes from Andrey Pavlov-Rusinov, Goldman Sachs.

Congrats with strong results. I've got a couple of follow-up questions. First of all, maybe on the deposit cost front. Alexandra, you mentioned that basically, there is some room for the deposit cost to come down. Could you maybe elaborate a little bit on -- in case there is no changes to [ CBRC ] rate, and you don't really change your front deposit rates. Is there still some room in the back book for the deposit -- or average deposit costs to come down from the 3.4% for retail deposits, the rate you've shown for the third quarter? And my second question is on the mortgages outlook. Essentially, we start to hear that there may be some risks in the housing market that were a bit fueled by the subsidy program that actually, in some areas, the price growth is driven by the lower mortgages but also lower supply of the housing. So do you view this as a potential issue and especially maybe next year when the subsidy -- government subsidy program expires, and it may lead to some retreat in the housing prices. And also, in connection to that, would be great if you could share some of the metrics for mortgage portfolio, especially in LTV for the current lending and also LTVs for your existing back book.

The first 1 on the deposits and the cost of funding. As I already said, in case that there is no further decrease in the CBR rate. We do not see any sensible potential -- any significant potential to decrease the cost of funding, apart from maybe some structural changes, increase of share of current accounts that we are viewing at the moment versus term deposits and so on. You could see some changes, but they definitely will not be very significant unless we see some step down in [ Q ] rate. And if we now move to your second question on mortgages, we welcome the continuance of the state subsidy program. We believe it is very supportive for the economy overall. And of course, for further growth of our mortgage book. In case the program was discontinued in 2021, we do not expect any significant step back as we expect that the mortgage rates with all likelihood will remain quite low. And so the interest will continue to be there, and it will definitely support the demand. Now I will ask Dzhangir to comment on the metrics that you mentioned.

Yes. Indeed, we support the state support program. It actually allowed to double the issuance of the loans in the third quarter compared to the second quarter. And with regard to the LTV, it's actually quite stable on portfolio level and it's around [ 63%, 68% ]. So in case we feel [ overheating ] the market and the housing prices will, of course, add to that, and we'll tighten our retail [indiscernible].

And we'll take our next question from Gabor Kemeny from Autonomous.

I have a couple of questions. The first one is on…

We can hardly hear you.

Okay. Can you hear me now, please?

[Operator Instructions]

First question is on your net interest margin guidance, which you maintained at slightly above 5.3%, although you were comfortably above 5.3 as of the third quarter. So does this mean that you expect a significant erosion as we go into the fourth quarter? And if that's the case, how do you think about the outlook for 2021. What are your early thoughts? Second one is on the credit cards where I saw your NPL ratio increased quite significantly to 14%. Can you elaborate a bit on what's going on in that segment? And the final question is on the consumer capital requirement legislation -- regulation, which reduced the consumer capital requirement on the new lending, how do you see this impacting the market and Sberbank's appetite in the consumer and secured segment?.

Yes. Thank you very much for your questions. Indeed, I said that we are confident in our previous guidance, and there may be some upside to that even considering where we are in Q3. Why we didn't change the guidance? As we already mentioned, you're actively participating in the floating OFZ portfolio offering from [indiscernible] and we expect that this will continue in October and November. And it will have some erosion on our NIM. So despite the fact that there will be some minimal interest earned on that. You will see some reduction in net interest margin. And of course, the repricing of the loan book continues. It was somewhat delayed by quite a steep curve that we saw during the second quarter, and we managed to hold off some of the fixed loan repricing. However, eventually, it will come. And so while we are quite comfortable at the 5.3 plus guidance, we do not expect any significant changes to that, considering what we currently see with the OFZ portfolio and the continuous repricing of the loan book. I will ask Dzhangir to put the comment on NPL?

Yes, sure. Credit cards actually always react to the stress in the market worse than -- much worse than other products. This is because of the [ long way ] nature of exposure. So in the case of worsening of the macro, people with less creditworthiness they tend to utilize the credit limit in higher amounts. So this is the relationship we have in creditworthiness and exposure. So therefore, we see more significant effect on credit cards than on consumer loans and mortgages. And additionally, there was no holidays and change of the schedule in credit cards in April. Therefore, it also brought some additional effects of cards compared to consumer loans and mortgages.

And we take our next question from Simon Nellis, Citibank.

My question would be on the capital target that you have for the end of the year of 13% to 13.5%. You were already at 13.4%. Can you just walk us through your outlook? I mean why are you quite cautious on the capital? That will be my first question.

So we have some technical problems with pressing mute button. Thank you very much for your question. Indeed, we left the guidance unchanged mostly due to the recent ruble dollar foreign exchange rate volatility that we are currently observing. You know that our capital is quite sensitive to the ruble dollar exchange rate. So we just stayed on the conservative side there, even though we are quite comfortable with where we currently are.

Right. And can I just ask a follow-up question on the digital nonbanking services. Can you give us a figure of how much revenue was achieved in the 9 months? How close you are to getting to that RUB 70 billion target? And I was also hoping you might be able to give us an updated figure for how much you've actually invested into the ecosystem. I think at the end of last year, you said it was around 4.5% of equity, but you've made a number of new acquisitions. So where should that number be kind of at year-end?

Yes. Thank you very much for your questions. Right now, we are basically moving along quite well towards the target. And for 9 months, this figure is around RUB 50 billion. In terms of the investments, we made the disposal, as you remember, for RUB 40 billion and made some new acquisitions for quite significantly smaller amounts. And let's see what the fourth quarter will bring. So we will give you the number when we come towards the end of the year. For now, it is approximately the same as what we disclosed at the end of last year.

And we missed the question from Autonomous from Gabor on consumer capital requirements, which we want to follow up on.

Thank you, Anastasia. So actually, we see countercyclical measures by central banks. So now this year, the risk weight for consumer loans decreased. And as I said, in the third quarter, the macroeconomic add-ons for consumer loans originated before 1st of September 2019 were just canceled. So we expect that the forthcoming regulation will be balanced. We do not expect significant worsening whatsoever. But of course, if and when situation improves. Central Bank, we expect that Central Bank will impose back the macro add-ons.

Thank you very much. And we have one more question. We take the question from [ Jan Demir Wout ].

I just understand the magnitude of the repricing potential, especially on the long side of things. Could you tell us the difference between the -- perhaps the front book yield and the back book yield, just to get a sense of the potential there. And the other question is on cost income. And can you give us some color on the potential numbers, cost income number for next year in an environment where the margin is decreasing, and perhaps there is also some nominal cost growth. Yes, that's all for me.

Thank you very much for your questions. We have this mute/unmute button problem again. If you look at the retail book, the difference between the front and back book yield is just above 2%. So it's not a very significant dent in our net interest margin, considering the savings we made on cost of funding trends. And if you look further, as I said, the main impact is the [ usual ] decline in NIM due to significant purchases of OFZ that we started in September and will continue into Q4. However, the loan book will only gradually reprice in comparison was quite a significant impact that we already had from repricing of the floating rate part. Now if you look at our OpEx and cost-to-income ratio, I think you can see what we managed to achieve so far. Of course, there will be some increase as we come out of the crisis here and continue on with our investments, particularly our IT investments. However, our loan book will continue to grow, and we will earn additional interest income despite the decrease in net interest margin. So I think this is all I'm ready to give you so far. And the rest, we will disclose as part of our Strategy Day at the end of next month.

Thank you very much, and we take our next question from Andrey Mikhailov of Sova Capital.

I have 2 on 2 specific numbers in your Q3 accounts. The first 1 is the [ RUB 16 billion ] gain from other derivatives. It would be great if you could comment on a bit more on this, in particular, what drove it and maybe there are some specific products or investments that this is linked to? And second, there was an impairment loss on nonfinancial assets of around RUB 21 billion. And also would be grateful for your comments on what drove this and whether we should expect anything similar in the next few quarters?

Yes. Thank you very much. Let me start from my second question. We basically did an inspection of various investments in our intangible assets during Q3 and wrote down some of the amounts where we believe that they become technologically obsolete. You should not expect anything similar on the go-forward basis. It was a one-off thing. And we will do such kind of look back maybe every 2 to 3 years to kind of clean up and move forward. And if you move back to your question number one, we did not have any specific derivatives. It is part of our normal trading activity. We can check and give you some specific details later on. But there's not any specific one-off deal or anything like that. So it's just part of our business as usual.

Thank you very much. And we have one follow-up question from Olga Veselova, Bank of America Merrill Lynch.

Thank you for taking my follow-up questions. I actually wanted to follow-up on asset quality. Our payment holiday is still open for your customers, and I mean holidays offered by the bank, not under the state program. And can you remind us for what period did clients tend to take payment holidays. So when do you think this payment holidays will be largely over. And finally, also on this, can you give us updated share of volume of restructured loans in the bank?

Thank you very much for your follow-up questions. On the holidays, the most popular term for the rescheduling the payment was 6 months. However, whenever we saw that it's worth to making longer-term restructuring we made it, so 9-month, 12 months restructurings were also in the portfolio, but the most popular restructuring was 6 months. And with regard to the numbers, we have -- in our retail portfolio, we have 3.5% of the portfolio, which is restructured. And on the corporate side, we made 2.4 billion -- [ RUB 2.3 trillion ] restructurings during COVID crisis. So and on the total -- on the size of the restructured loan portfolio, let me come back in a couple of minutes.

I think we will follow-up, then we'll all go with you on this question because we have to switch off to the Russian line with our journalists. But before I do that, let me thank you, all participants of our analysts and investors for staying with us for this hour for the call. We hope it was useful. And 1 more time, let me flag the event that we're going to have at the end of November, on the 30th of November and first of December. Our Investor Day, we will present our next 3-year strategy. Thanks for that, Ian, we switch to Russian.