Sberbank of Russia (SBER) Earnings Call Transcript & Summary

Good morning to investors, dear shareholders, dear analysts. Thank you very much for coming to this call today, we are beginning the call that is dedicated to Sber's performance in the first quarter of 2023. The call will be started by a presentation by the Vice President and Director of the Finance Department of Sber, Taras Skvortsov. We're going to have a Q&A session after that. We are using SberJazz platform today. We're going to use the question line for those who want to ask questions. If you want to ask a question, you can use a webchat. Before we pass it over to the main part, let me draw your attention to certain compliance procedures. This call is going to be recorded, the 18th of May 2023. Projections, expectations of management may be voiced during the call that may fall different from the actual values in the future. To be fully aware of the risks, please familiarize yourselves with the second slide of this presentation that fully sets out those risks.

Thank you. Good afternoon, dear analysts, journalists and everyone who is interested in the investment story of Sber. We continue to be transparent to you by regularly disclosing our results and sharing our forecast. In the first quarter, the positive dynamics of client engagement continued the number of active monthly users of Sberbank online increased by 1 million to 79.6 million people with daily users exceeding 41.3 million. Our SberSpasibo loyalty program is already used by more than 69 million clients and growth by 3.2 million over the quarter. And Sber ID is one of the key integration elements enabling single sign-in for various applications and services and now they tally 160. That is used by over 60 million of our clients. Intervening parties claiming the floor. [Technical Difficulty]. Okay. If we heard them, we are launching into the presentation. Thank you very much for the wait. There's been a small technical glitch. Hopefully, we are being heard right now. We're going to set out our performance and projections. The Vice President and the Head of the Finance Department of Sber is going to be delivering the presentation, Mr. Taras Skvortsov. A Q&A session will follow. Now before we pass over to the main part, please note our compliance procedures. This call is being recorded today on the 18th of May. And over the call, we may voice projections but may fall short all along in the actual performance figures in the future. Now to be fully aware of the risks, please familiarize with yourself with the disclaimer on the second slide. Passing over to the main part. Taras Skvortsov, you have the floor.

Thank you, Anastasia. Hopefully, we are being heard right now. Right. Good afternoon, dear analysts, journalists, shareholders and anyone interested in Sber's investment story. We continue to be transparent to you by regularly disclosing our results, sharing our forecasts. On the performance track in the first quarter, the positive dynamics of client engagement continued and the number of active monthly users of Sberbank online now increased by 1 million to 79.6 million with daily users now exceeding 41.3 million. Our SberSpasibo loyalty program is already used by over 69 million clients, a growth by 3.2 million over the quarter. And SberID has one of the key integration elements, enabling single sign-in for various applications and services and they now tally 160. That is used by over 60 million of our clients. These client metrics translated into strong financial results for Sber. In the first quarter of this year Sber earned a net profit of RUB 357 billion for the group, which makes for a 25% return on equity. This allowed us to increase the equity by 5.8% to RUB 6 trillion. Now diving to the factors of this performance. We should mention the operating income at RUB 733 billion for the first 3 months, a significant growth versus last year. That includes a net interest income growth at double-digit rate of RUB 563 billion. Fees and commissions income amounted to RUB 171 billion, excluding the extremely volatile element income from foreign exchange transactions, commissions performed better than forecast over 14% year-on-year. Bank card transactions and card management services have remained the core drivers 3/4 of Sber's income structure consists of interest income. That depends on 2 key parameters, the interest margin level and the dynamics of the loan portfolio. Net interest margin for the first quarter was 5.78%, a very high level indeed, that is significantly above 2022 levels. At the same time, the cost of funding remained stable in the first quarter at 4.1% due to the exceeding performance by demand accounts, both on the part of legal entities, individuals. The return on our loan portfolio for the quarter stood at 9.2%. It was supported by the high dynamic in the loans to small and medium businesses and retail lending. The share of retail loans in the portfolio exceeded 40%, including mortgage loans in the first quarter that increased by 4.7% to RUB 7.2 (sic) [ RUB 7.9 ] trillion. Now despite a certain increase in the rates, we have seen good quality demand for mortgage loans for purchasing both primary and secondary market properties. About 30% of the portfolio of mortgages is supported by the government. The consumer loan and credit card portfolio exceeded RUB 5 trillion in the first quarter, increasing by 3.1% and 6.7%, respectively, during the first 3 months. The main driver of the corporate loan portfolio was financing the housing construction, which grew over 5% since the start of the year to RUB 3.2 trillion. Costs are still 6% over the quarter was the growth of small and medium businesses. That's in excess of RUB 4.7 trillion. Overall, Sber's assets increased by 4.7% in the first 3 months. That was a very high and balanced growth. This is a very important factor that ensures not only our current but also future results and allows us to seriously improve the forecast for the entire year, and I will dwell on that in detail later. Client funds also showed positive dynamics in the first quarter. Traditionally, this quarter, we saw a seasonal slowdown in the growth of retail deposits after an uptick in December. And in 2022, that was a record. Therefore, we note a fairly positive increase in deposits in February and March by 2.5% and 1.7%, respectively. This dynamic for the key items allowed us to increase the market share in priority markets in mortgages by 0.5 percentage points to 54.3% and consumer lending by 0.6 percentage points to 38.2%, in credit cards by 1 percentage points to 47.4% and then lending to small and medium businesses in January through February gave us a growth by 0.3 percentage points to 46.1%. Sber has always given special importance to the efficiency of its expenses in 2022 and in the first quarter. Thanks to the implementation of life scale optimization program. We managed to reduce the cost income to 24.8%. Thus, all of its spending, remuneration, real estate, business expenses, procurement of IT equipment, software depreciation and all other expenses in the first quarter Sber spent under 1/4 of income. Without high efficiency, it is impossible to achieve record-breaking levels for profit and profitability. Cost of risk in the first quarter fully met our expectations and amounted to 1.1%. The higher level of provisioning -- loan loss provisioning for the retail portfolio is accounted by 2 factors: seasonality and Sber's proactive position to increase market shares in higher-margin segments. At the same time, the quality of the loan portfolio remained consistently high. The share of the third stage loan continued to decline and amounted to 38 -- 3.8%, while provision coverage for these loans increased to 145%. Against the backdrop of high profit, we managed to increase capital adequacy. It increased by 0.4 percentage points to 15.1% in terms of the core capital. Having said that, the group's capital adequacy ratio N20.0, which is a key one for us right now, increased by 0.3 percentage points to 14.5%. We can talk about our product launches, and we did not use any leniency from the regulator. And in the first quarter, our profit came from the regular activities without any one-off effects. We must talk about our new product launches. In the first quarter, we introduced new smart devices to the market and TVs and speakers. We also made a breakthrough in development of solutions in AI. Our generative model, Kandinsky 2.1 has become one of the fastest-growing services in the world. Today, it is used by more than 5 million people. In April we released our own version of GigaChat, multimodal neural network. It is already available to user in testing mode. Further on, I would like to pass over perhaps the most interesting part of this talk and the forecast for 2023. Given the scale of Sber's activities, our performance is significantly impacted by economic situation in Russia. Given the latest statistics, we improved our forecast for the growth of the Russian economy as a whole for the year to about 1%. Economic activity is recovering faster due to a revival of domestic demand against the backdrop of our improvement in consumer sentiments. According to SberIndex, consumption grows by 10% year-on-year. That's in nominal terms and 6% in real terms. The main drivers are nonfood products, a growth of 11% year-on-year in April. And services, including cafes and restaurants, that's plus 13% year-on-year. The construction sector, manufacturing industry, processing, transport and a number of other industries have performed quite well. We also improved the growth forecast of banking segments as especially true for the retail deposit and lending segments. Moreover, in the Retail segment, we plan to grow faster than the market. Based on this forecast, we are also improving the forecast for our financial performance. As the forecast for the net interest margin in general for the year improved to about 5.5%. After a very first -- strong first quarter, we also increased the forecast for the net fees and commission income to the range for -- from 10% to 12%. The main growth drivers will remain the bank card transactions and transactions business as a whole. Our spending will continue to grow at a rate lower than the revenue dynamics that allows us to improve the forecast the cost-income ratio to about 30%. Yes, we confirm our forecast for cost of risk at the level of 100, 130 basis points due to the higher dynamic of the loan portfolio and the weakening of the ruble. Since the beginning of the year, we revised the forecast for core capital adequacy at the end of 2023 to a level of about 14%. And the good dynamics of the core business in conjunction with the increase in efficiency allows us to improve the forecast for return on equity by 2 percentage points at once. That's above 22%. And that concludes my presentation and I will be happy to take questions right now.

Thank you very much, Taras. We are now getting questions from the chat and my report to the analysts, if you are not able to put your questions on, please write to us in the chat, and we're going to fill those questions there. The first question relates to the profit tax. Why the excessively high profit tax in the first quarter?

Yes. Thank you very much for the question. Well, the effective rate of the profit tax has been changing quarter-to-quarter, it does change quarter-to-quarter. And the deviation from the expectation of [ 20% ] is not that much. It is a peculiarity of the tax law for various types of income and spending, different trade supply. And a part of certain spending is not factored into the calculation of the profit tax. So this is the story of the first quarter only. Going forward, the effective rate will normalize to the historic rates of what they were.

Next question, Elena Tsareva BKS (sic) [ BCS ]. What is your take on the dynamic of the net interest margin in the next quarters given the certain increases in the deposit rates, do you see that? And would you see a weaker dynamic in the deposits?

As I've said, in my talk, we do not see a weak dynamic of the deposits from individuals. We are actually improving the projection here. So the answer here is definitely no. As for the margin dynamic, in light of our forecast, in the next quarters, we are seeing a slight decrease in the margin that will primarily be affected by the decisions made historically, that's higher provisioning. And the dividend payouts in May that will bring the margin down a little bit. But then there are many positive factors -- enough of positive factors. That's our active position on the lending, retail lending and SME lending. So we do not expect a significant decrease in the margin that is reflected in our year -- whole year projection. Yes, if you need any clarification, please use the chat. We're going to answer that.

Yes, let's take the next question [indiscernible]. I'm going to read one by one. Why the shrinking of the active retail clients?

Well, in the first quarter, we slightly calculated the methodology of calculation. And this indicator in the report, it is visually lower. But if you look at the actual numbers, there has not been a decrease in the client base. It actually has been increasing in retail as well as elsewhere.

Okay. How many tranches of cheap mortgages have been disbursed? And what are you going to do with it?

Well, this is a very small share of this product that we have in the portfolio. And we do not expect to do anything with it. These are the mortgages that we issued. It's going to -- those mortgages are going to be performing. We had not been an active participant in this kind of lending. We have always been trying to focus on the market environment and the government support program.

Next question. What is the cost -- what was the price at which you sold the Kazakhstan Bank?

Well, actually, this question was told already when we disclosed the report. We do not disclose the details, but the price made us quite happy.

The next question. What will be the influence of dividends on the capital adequacy?

In light of the amount, RUB 565 billion, the influence will be at about 1.5%. This is going to be seen tomorrow -- as early as tomorrow. Thank you very much. The payout is going to be -- is planned over the next months, in May and in June, that's going to be the last payout.

Yes. [indiscernible]. Corporate loans grew 4.6% and since the beginning of the year, but that would be a good expectation to see a 20% growth for the year. Your projection right now is a little bit below what we get arithmetically.

Yes, indeed, in the first quarter, we have seen a dynamic that really exceeded our expectation, and that's the reason why we inject up the projection for the year entirely, but we do not expect 20% for the year because going forward, the dynamic of the first quarter might abate a little bit.

Yes, could you dwell a little bit longer on the corporate demand. What industries require financing more? What industries feature more prominent risks perhaps?

Well, I touched upon that in some part. Private residences have been growing at a healthy pace. Lending to SMEs has been growing. As for the industry structure, our portfolio covers pretty much the length and breadth of the Russian economy. So the key industries; oil and gas, metallurgy and machine building, agro, transportation, they all contribute to the growth, and we cannot say that some of them is really making up the day for everyone else. This is a balanced growth, actually, because that really allows us -- and that really allows us to diversify our risks in the business.

Passing over to the retail lending. And again, a question from [ Elena Tsareva, BKS (sic) BCS. Are you seeing a slowdown in retail loan disbursements. What is the dynamic in the new mortgages? How are the real estate market affecting prices affecting the demand. Are you seeing a price pressure?

Yes. So for the mortgages in the past months, the rates in the market have ticked up a little bit. But over the past couple of months, and you have seen that in our real -- regular reporting, we have seen very high disbursements and the healthy growth of the portfolio. So right now, the higher rates have not really dramatically affected the dynamic. We have disbursed a lot of mortgages because we have seen a good quality, healthy demand.

Yes, staying on the retail lending and mortgages, [ Svetlana Aslanova ] is asking the question. What risks of nonperformance are you seeing in the mortgages portfolio, how high is the demand versus the approval rate? What about those 80% and 90%? And how high is the demand for the loans at market rates as opposed to preferential rates.

Well, I have mentioned that the government-supported loans are about 30%, everything else is market rates mortgages. And so the parameters for the approvals, LTVs, et cetera, they are pretty much the same that we had seen before the crisis. We have not really seen much change in the consumer behavior and our models in this sense are performing quite well. Yes. And going back to our performance -- our own performance. We have been disbursing record amounts month-on-month -- and that really confirms the fact that it has been a very healthy demand. There's continuous talk mooted around that prices in the retail market have been going down for individuals. But we monitor the risks continuously. We factor those analyses in the approvals and we think that the risks are quite low under any scenario. We think we're going to be doing the business with confidence.

Yes. [indiscernible] is asking a question in the chat. Good afternoon, Have you reviewed the projection for the profit? For 2022, can the profit hit higher levels and precrisis levels.

Yes, obviously. We have reviewed the forecast for the profit. And you see that in our slide. ROE was increased to 25% by 2 percentage points at once. If you recalculate that figure through our equity volume. It would be quite apparent that we have a very high probability to exceed the precrisis level of net profit this year.

Yes, very good projection. Let's take the next question from the chat. How much are you lending in yuan, in renminbi? How much have you boosted the portfolio and what share of the corporate loan portfolio accounted for renminbi. And how much did it change since the start of the year.

Our portfolio in renminbi comprises 2 parts that's the new deals, and this has been a developing market. We have not really seen a very dramatic volume here. And the second is the conversion of the loans that had been issued in dollars and euros to yuan. And here, clients are showing much more demand, but the absolute volume of the portfolio I cannot disclose right now, I'm not in a position to do so.

Yes, that's entirely so. Next question came from the analyst [indiscernible]. How do you explain the historically high cost of risk in the retail sector following the first quarter of 2023, where do you see the normalized risk level in the current environment?

Yes. Thank you very much for the question. As for the first quarter, the main factor is, obviously, the seasonality. The cost of risk in this sector is historically high in the first quarter versus other quarters. And also, we are entering segments that are higher in terms of margin and higher margins imply higher risks. So the average here is, yes, above the precrisis levels, but this is entirely in line with our forecast. And that's why we maintained our overall guidance for the cost of risk for the year intact.

We had a whole chunk of questions dedicated to net interest margin and yields and it goes to funds. Now let's start with the assets. What is going to support the income on the active operations in the next quarters, would you say that there may be higher yields on the loans, securities, et cetera?