TCS.L Regulatory News (TCS)

TCS GROUP HOLDING PLC

ANNOUNCES IFRS RESULTS FOR SECOND QUARTER AND FIRST HALF OF 2014

Moscow, Russia - 29 August 2014. TCS Group Holding PLC (TCS LI) (the "Group"), Russia's leading provider of online retail financial services, including "Tinkoff Credit Systems" Bank ("TCS Bank") and Tinkoff Online Insurance, today announces its interim condensed consolidated IFRS results for the second quarter and for the first six months ended 30 June 2014.

KEY FINANCIAL HIGHLIGHTS

2Q 2014

· Net interest income up by 4.1% q-o-q to RUB 7.8 bn (1Q 2014: RUB 7.4 bn)

· Profit before tax up 3.7 times q-o-q to RUB 1.8 bn (1Q 2014: RUB 0.5 bn)

· Net profit up 3.6 times q-o-q to RUB 1.3 bn (1Q 2014: RUB 0.4 bn)

· Net interest margin increased to 34.6% (1Q 2014: 32.8%)

· Cost of risk decreased to 18.7% (1Q 2014: 20.5%)

1H 2014

· Net interest income increased by 24.3% y-o-y to RUB 15.2 bn (1H 2013: RUB 12.2 bn)

· Profit before tax amounted to RUB 2.2 bn (1H 2013: RUB 3.2 bn)

· Net profit amounted to RUB 1.7 bn (1H 2013: RUB 2.5 bn)

· Net interest margin at 34.0% (1H 2013: 36.7%)

· Gross loans and advances to customers up by 9.5% YTD to RUB 91.3 bn (YE2013: RUB 83.4 bn)

· Share of non-performing loans (NPLs) at 12.4% (YE2013: 7%)

· Customer accounts amounted to RUB 42.1 bn (YE2013: RUB 43.2 bn)

· Total equity up by 8.2% YTD to RUB 22.2 bn (YE2013: RUB 20.6 bn)

KEY HIGHLIGHTS IN 1H AND POST 2Q 2014

· As of 1 August 2014, over 4.5 mln credit cards issued

· In 1H 2014, over 420,000 new active customers acquired

· In July 2014, TCS Bank was included in The Banker's Top 1000 World Banks' annual ranking and named the most profitable bank in Russia, ranking 3rd globally (based on 2013 financials)

· In June 2014, TCS Bank launched a mobile application for online payment of fines for traffic violations

· During June and July 2014, pre-IPO shareholders and management increased their holdings in TCS Group Holding PLC as previously announced 

· In April 2014, Tinkoff Online Insurance launched online sales through its website, and extended the offering of personal accident, property and travel insurance services to non-banking customers

· In February 2014, TCS Bank teamed up with Euroset, Russia's largest mobile phone retailer, to offer credit lines to prepaid bonus cards "Kukuruza" in Euroset stores

· In February 2014, TCS Bank launched "OneTwoTrip Tinkoff", a co-branded credit card for frequent travelers together with OneTwoTrip, Russia's leading online travel agency

Oliver Hughes, CEO of TCS Bank, commented: "I am pleased that the Bank has demonstrated a good set of results in a very challenging macroeconomic environment. The Group has delivered a robust net profit and net interest income growth compared to the first quarter of 2014. The improved profitability and cost of risk demonstrate the resilience of our business model, the effectiveness of our credit risk management systems, and our continued strategic focus on profitable business.

Risk management remains our primary focus, and we are continuing to carefully monitor our lending strategy while maintaining a robust underwriting policy and low approval rates. During the first half of 2014 we enhanced our portfolio monitoring and collections activities. We have kept very tight control of our cost base, and delivered significant savings in the second quarter, resulting in a substantial decrease in total operating expenses.

Despite the slowdown of the overall growth in the retail lending market, TCS Bank has continued to demonstrate a stable rate of portfolio growth owing to its flexible and scalable branchless business model. At the same time we have introduced innovative financial products and services to the market. We plan to launch new business lines in the second half of 2014.

In 2Q14, we started seeing results of the stricter underwriting and enhanced collections policies introduced by the management in the beginning of the year. We now expect that the cost of risk for the full year will not exceed the 1Q14 level. We are continuing to acquire new customers, however at a slower rate than in the previous years, and we therefore expect our net portfolio growth to remain flat this year. The Group will continue to focus on strict cost discipline and realising additional operating efficiency gains, as well as risk management measures in order to increase its net profit in the second half of 2014.

While maintaining robust asset quality and risk management, a priority for the Group will be to build further on our business development and to extend and optimise the product offering. We are confident that the inherent strength of TCS's business model, together with our excellent capital and liquidity positions, places us very favourably for a return to growth as soon as the cycle turns."

FINANCIAL AND OPERATIONAL REVIEW

In 2Q and 1H 2014, the number of new credit cards issued was 249 and 527 thousand respectively (2Q13: 390 thousand), while the volume of credit cards transactions in 1H14 was RUB 44.7 bn remaining flat compared to 1H13.

The Group generated solid results for the second quarter and for first six months of 2014 driven by stronger profitability compared to 1Q14.

In 1H14, the Group's gross interest income grew by 21% y-o-y, but remained relatively flat compared to the second half of last year, having increased by 3.4% from RUB 18.9 bn to RUB 19.5 bn resulting from the deliberate slowdown of the portfolio growth. In 1H14, gross yield decreased by 8% y-o-y and by 4.4% compared to 4Q13.

In the first six months of 2014 insurance operations contributed RUB 376 mn to non-interest revenue. This contribution relates mainly to the existing customer base, and the Group sees a potential upside as insurance was recently launched to non-banking customers.

In 1H14, the Group's net interest income increased by 24% y-o-y to RUB 15.2 bn compared to RUB 12.2 bn in 1H13 and by 4% compared to the second half of 2013. This has translated into a net interest margin before credit charge of above 30%, maintaining substantial profitability and meaningful loss absorption capacity. While cost of risk rose to 19.6% in 1H14 from 14.2% in 1H13, the Group was still able to generate a solid 14.9% risk-adjusted net interest margin after provisions for loan losses.

The Group focused on addressing the loan losses in 1H14. In 2Q14, the cost of risk decreased to 18.7% compared to 20.5% in 1Q14 which was still above the Group's historic trend. Loan loss provision expense amounted to RUB 8.5 bn in 1H14 which is nearly double the 1H13 level and 57% more than in the second half of 2013. This increase was driven by the overall increase in credit risk in Russian consumer lending due to general worsening of the Russian economy and pockets of overleveraged customers. The Group has been prioritizing risk management and collections and adopted a range of measures which resulted in the cost of risk decreasing by 1.8% q-o-q.

The Group's operating expenses declined by 11% q-o-q to RUB 2.4 bn in 2Q14 from RUB 2.7 bn in 1Q14 which was driven by decreased marketing costs, as well as cost-cutting measures introduced in a number of areas. In 1Q14, the Group launched a large one-off advertising campaign to raise brand awareness among mass-affluent consumers. In 1H14, the Group continued to issue new credit cards and invest in new products. As a result of decreased marketing and other expenses the Group cost-to-income ratio declined substantially in 2Q14 to 28% as compared to 33% in 1Q14. Overall, cost-to-income ratio declined from 39% in 1H13 to slightly above 30% in 1H14, demonstrating a robust operating leverage of TCS.

The Group's net profit for 1H14 amounted to RUB 1.7 bn. Following a challenging 1Q14 TCS was able to generate RUB 1.3 bn profit in 2Q14 which is in line with 2Q13 results. ROE has significantly improved to 24.1% in 2Q14 compared to 1Q14.

In 2Q14, the Group maintained a solid balance sheet with total assets decreasing by 6% to RUB 95 bn which was mainly due to the redemption of its USD 175 mn Eurobond. Some excess cash was deployed into highly liquid CBR repo-able debt securities in order to mitigate the negative carry effect. The Group maintained a high liquidity cushion with cash and securities accounting for 14.4% of total assets and 32.4% of customer accounts.

Due to revised approach to retaining non-performing loans on the balance sheet for in-house collection, the Group saw the share of NPLs (including loans in courts) in total gross loans increase to 12.4% from 7% at YE2013. The loan loss provisioning coverage ratio decreased commensurately to a still very conservative multiple of 1.5x of NPLs. Balance sheet provisioning for impairment of loans increased to RUB 16.7 bn compared to RUB 9.4 bn as of YE2013. These loan portfolio quality trends reflect higher credit risks currently observed in the broader Russian retail lending market with a weak mass market consumer, increased leverage of some areas of the Bank's portfolio and increased rates of default among previously good quality customers.

In 2Q14, the Group maintained approval rates in the range of 15%. As a result of this effort net loans remained flat during 1H14 having increased by 1% to RUB 74.6 bn compared to RUB 74 bn as of YE2013. Net loans share in total assets increased to 79%.

The Group increased the retention of overdue loans on its portfolio expecting a better recovery rate under the instalment loan repayments program and court enforcement collection strategies. The share of gross loans on the Group's balance sheet under the instalment program increased to 4.7% from 3.1% at YE2013, while the share of gross loans carried under the court enforcement strategies increased to 3.7% from 2.7%.

The Group's liabilities decreased in line with the assets by 9.5% to RUB 72.7 bn from RUB 80.3 bn as of 30 June 2014. Customer deposit volumes remained flat at RUB 42 bln and now account for 58% of total liabilities compared to 54% as of 1Q 2014. Despite the planned gradual reduction in the deposit book to manage over-liquidity the deposit portfolio has remained stable throughout the period and the Group expects to manage it as required.

The Group's debt securities in issue declined by 30% in 2Q14 due to the repayment of a USD 175 mn Eurobond. On 1 August 2014, the Group fully repaid a RUB 1 bn short term loan from CBR and has a RUB 3 bn loan from Sberbank which will be repaid in four instalments in 2Q-3Q 2015. The Group continues to enjoy a comfortable debt maturity profile amply covered by its liquidity with its next major repayment coming in September 2015 when the USD 250 mn Eurobond matures. The Group remains well funded to meet its liquidity obligations and does not require additional external funding.

The Group's capital position remains very strong with the statutory CBR N1.0 capital ratio of 19.5% at the end of 1H14, well above the minimum capital requirement of 13% set by debt covenants. N1.0 ratio increased from 15.8% at YE2013 as the Group retained its 2013 earnings and as the USD 175 mn of primary proceeds from the Group's IPO was injected into equity at the Bank level. In 1H14, the Group's equity grew by 8% to over RUB 22 bn as net earnings were reinvested into the business.

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The management team will host an investor and analyst conference call at 13.00 UK time (16.00 Moscow time, 08.00 U.S. Eastern Daylight Time), on Friday, 29 August 2014.

The IFRS report will be available on the TCS Bank website at https://www.tcsbank.ru/eng/investor-relations/results-and-reports/

To participate in the conference call, please use the following access details:

A live webcast of the presentation will be available at: http://event.on24.com/r.htm?e=832244&s=1&k=22C534F600982D607331B72D743ED410

Please register approximately 15 minutes prior to the start of the call.

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For enquiries:

About the Group

TCS Group Holding PLC is an innovative provider of online retail financial services operating in Russia through a high-tech branchless platform. In order to support its branchless platform, the Group has also developed a "smart courier" network covering almost 600 cities and towns in Russia which allows next day delivery to many customers.

Since its launch in 2007 by Mr Oleg Tinkov, a renowned Russian entrepreneur with a long track record of creating successful businesses, the Group has grown into a leader in the Russian credit card market, with the third largest credit card loan portfolio and a market share of 7% based on non-delinquent receivables (according to Central Bank of Russia (CBR) data, as of 1 July 2014). As of 1 August 2014, the Group has issued over 4.5 mln credit cards.

In addition to a market-leading credit card offering, the Group has developed a successful online retail deposits programme. The Group's other innovative lines of business include Tinkoff Online Insurance, which enables the Group to underwrite and sell its own innovative online insurance products, and Tinkoff Mobile Wallet, mobile payment solutions and financial services for Russian consumers.

As of 30 June 2014, the Group's total assets amounted to RUB 94.9 bn, net loans and advances to customers stood at RUB 74.6 bn and customer accounts (deposits) amounted to RUB 42.1 bn. In 1H 2014, the Group generated a net income of RUB 1.7 bn and net interest income of RUB 15.2 bn.

The Group is well capitalised with the total capital ratio and Tier 1 capital ratio of 26.5% and 21.4%, respectively, in accordance with Basel III methodology.

Forward-looking statements

Some of the information in this announcement may contain projections or other forward-looking statements regarding future events or the future financial performance of the Group and TCS Bank. You can identify forward looking statements by terms such as "expect", "believe", "anticipate", "estimate", "intend", "will", "could," "may" or "might", the negative of such terms or other similar expressions. The Group and TCS Bank wish to caution you that these statements are only predictions and that actual events or results may differ materially. The Group and TCS Bank do not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in projections or forward-looking statements of the Group and TCS Bank, including, among others, general economic conditions, the competitive environment, risks associated with operating in Russia, rapid technological and market change in the industries the Group operates in, as well as many other risks specifically related to the Group, TCS Bank and their respective operations.