MTS Bank First Deputy Chairman Eduard Issopov: Water cooled down for us, but it became quite cold for some others
Eduard Issopov
Photo: Press-office
MTS Bank, which went public in the spring of 2024, is planning to adapt its development strategy amid the inevitable contraction of the retail lending market pressured by the Central Bank's high key rate and macroprudential measures. The bank's updated business model through 2027 will focus on transactional services, increasing the share of non-credit income, accelerated development of daily banking and expanding the BNPL installment service. First Deputy Chairman of the MTS Bank's Management Board Eduard Issopov said in an interview with Interfax about the prospects of retail lending, business margins and capital needs.
Q.: The bank's business model is focused on retail lending, whose growth will slow amid a high key rate and tough regulation. The bank projected the increase in its retail loan portfolio in 2024 at over 20%. Do you maintain this forecast?
A.: The beginning of this year was strong for us, as we have laid good groundwork in the first half of the year, showing growth above the market, and taking into account these achievements, even amid a more complicated market situation, we are on course to achieve the growth forecasts that we gave to investors during the IPO.
Q.: You mean 20% growth in the loan portfolio?
A.: Yes. At the end of the third quarter, the loan portfolio of individuals rose 18.3% to 401 billion rubles from the beginning of the year, while non-targeted consumer loans saw a nearly 23% growth. And our operating income before provisions soared 20.5% year-on-year to 56 billion rubles. Why do we feel confident enough here? The answer is largely the same, as this is because we are working well with big data and with clients. Knowledge about the client is in many ways the quintessence of success.
Q.: And what are your expectations for the retail portfolio dynamics for 2025 and beyond?
A.: We see that we need an adaptation of the business model. We went through similar periods in 2008, 2012, 2014, and in the coronavirus-stricken year of 2020, when the halt in lending was quite serious, but it was followed by a rapid market recovery. This experience helps us even now.
What is everyone working on now? It is clear that it is already more difficult to earn a margin on the active side of the balance sheet, that is, in lending, so everyone is looking at the passive side, at commission products, at transactions for corporate or private clients, and at investment products. In other words, there is a shift from credit risk history to risk-free history, to transaction services, investment savings and commission products. Various comparisons are being made now, some say that a drought is in store for lending, others say that a train is crashing at full throttle.
We are already adapting our business model and it is bearing fruit. Unlike many banks, we have maintained growth in net profit for the three quarters of 2024, as MTS Bank posted it at around 12 billion rubles at the end of September 2024. We focused on daily banking and on transactional activity, including for legal entities. This is an organic story towards which we have been going for quite a long time. This is the set of functionality and offers that will allow the client to cover the spectrum of his daily needs. Another area of development is monetizing the client base and enhancing cross-selling for the entire range of product offerings for our clients. As part of the updated medium-term strategy, we see potential for net profit growth by 100%-150% by 2027, with a return on equity (ROE) of 20%-25% and potential for further growth of up to 30%.
Q.: When introducing macroprudential measures, the Central Bank has reiterated many times that the growth of risks in retail lending should be contained. Do you see a decline in the quality of loans issued?
A.: No, we do not see such a decline, because we were quite conservative in our approach to lending and did not apply many of the approaches that other banks employed. And I do not regret that we failed to do something for portfolio growth, because now the "water has cooled down" for us from 40 to 30 degrees, and it has become quite cold for some others. Against the backdrop of continued growth in the lending business, the cost of risk for the first nine months of 2024 reached 7.2%, down from 7.5% for the first nine months of 2023, thanks to a well-developed scoring system.
Q.: The bank will make up for the lower net interest margin under the tight sale and purchase agreement by increasing fee and commission income. What ratio of interest and fee and commission income in total operating income do you target for the next two years?
A.: Our net fee and commission income and other non-interest income added 30% year-on-year in the first nine months of the year thanks, among other things, to the development of our transaction business. The share of commissions in operating income will be high, it is part of our business model, but we have not yet publicly announced the exact benchmark.
Q.: MTS Bank is one of the leaders in terms of issue volume on the POS lending market. How will the tightening of regulation affect the dynamics of the POS loan portfolio next year?
A.: Every time there is some turbulence and the market is shaking, everyone says, listen, POS is going to fail now, there will be no goods, what POS is there. That was the case during the pandemic and after the special military operation started. Prices are going up, look, there are six months left. In the end, nothing like that happens, POS is resilient and it is recovering swiftly, retail needs to sell, and people need convenient access to various payment formats. For us, POS will largely be in the form of installment payments (BNPL). I would call it a transition to Daily Lending. Through integration with the operator's ecosystem and our own customer experience, we have already scored 80 million people and pre-approved over 40 million of them for BNPL limits. Next, you get away from having to enter into your own contracts with each partner, and you just put a Stretch Payment icon on their storefronts. This is now possible online and in our mobile app, and we are working on putting such an icon on payment terminals in stores, as well. This is essentially our path towards BNPL. As a result, the bank has both acquiring and credit limit in one button.
Q.: At what stage is the launch of BNPL?
A.: It is shifting to a commercial launch, which means we are already installing it for a number of our friendly partners who have a substantial retail chain. We believe in this story and have plans to scale it up in 2025.
Q.: And this is despite the fact that there is a bill in the State Duma right now that will regulate this area, too?
A.: The purpose of regulation is good. When you take a loan, you understand that you are taking a loan, but when you are buying goods in installments, you do not always pay attention to the conditions of banks. The Central Bank is in favor of transparency for customers in this segment, which it sought in consumer lending, and wants the customer's credit history to be appropriately reflected. This is hard to argue with, because installments should change as swiftly as other credit products. Additionally, it is sensible that those high-risk segments to whom banks will never approve a consumer loan are not lent through these products. Therefore, we fundamentally agree with what the Central Bank plans to regulate.
Q.: Are you satisfied with the 15,000-ruble purchase threshold stipulated in the law, above which data must be transferred to the credit bureau?
A.: It is small. We raised the limits on these products due to inflation and higher prices of goods. The product range may have remained the same, but prices are 50% higher.
Q.: What are your expectations for the net interest margin at the end of this year and next year specifically for the banking sector, what will happen to business margins?
A.: It is obvious that the growth of the key rate is affecting the banks, and on average, the margins in the industry are shrinking.
Q.: Bankers say that there will even be a positive effect of the higher key rate for a few months, because the revaluation of liabilities will not be as fast as the revaluation of assets upwards.
A.: This is true, this is what happened in 2022 when there was a key rate hike, and we had a positive effect from that, too. But this is a temporary effect, because after all, should inflationary pressure persist, it will all be "eaten up" after some time. This means that banks, on the one hand, earn on inflation, and on the other hand, I would say that it catches up with them.
Q.: With the enactment of the law on the possibility to transfer up to 30 million rubles from one account to another without commissions, the market of liabilities has become very competitive. How is the bank developing its deposit policy?
A.: Following the latest increase in the key rate and, apparently, another upcoming rise, we will try not to go long and are setting high rates on deposits for a period of six to nine months. This means that we do not have a classical curve, when the longer the money is held, the more expensive it is.
Q.: The bank has plans to increase the number of active clients to eight million. What figure are you aiming for in 2024? Can you estimate whether the base is growing at the expense of market clients or ecosystem clients?
A.: We have always led in terms of growth of the client base, which is provided by POS lending. The bank currently serves more than three million customers and we are planning to increase the number of active customers to 6.5 million - 8.5 million by 2027, but the nature of the increase in this base has slightly changed on the liability side rather than on the credit side. While the growth may slow down a bit, this is a qualitatively different customer base. This is because the POS client, who came to us, was transferred to other products as part of cross-selling, but not always, could repay the loan and leave. The client on the liabilities side is more loyal after all. There is higher loyalty, there is higher frequency, and there is higher activity from them there.
Q.: Are you preparing for the expected regulation of ecosystems?
A.: The regulation of ecosystems is probably more relevant for those banks that have their own ecosystems. However, our bank does not have an ecosystem within the banking group in the sense that we do not make substantial investments in various non-core projects to create marketplaces, courier delivery, cafes and so on. We are acting as a fintech platform for the operator ecosystem and focusing exclusively on financial services. This means that for us it is a kind of reverse situation. Therefore, we are getting, on the contrary, something positive from there in the form of points of contact with clients, in the form of clients, in the form of production synergies, IT platforms, and so on.
Q.: You say that this year the bank's business is expanding at a good pace, and do you have enough capital for this growth next year?
A.: Firstly, the IPO was helpful to us, and secondly, the subordinated loans. Still, capital is becoming quite an expensive item. We need to adapt our business model, which should also affect the capital. We are exploring securitization opportunities. The change in the active side of the balance sheet due to lower lending and higher share of securities, including government bonds, is a much more moderate burden. In other words, we have an action plan for capital optimization.
Q.: Do you mean that your plans provide for optimization, but do not envision raising new capital in any form?
A.: We have models, as soon as we need something, we will certainly start preparing for it. We are now planning all of our actions because we already have a reserve, relying on this reserve. Should we reach a certain point we will enter the market.
Q.: And do you mean subordinated loans or stocks when you talk about the market?
A.: We are always looking at various options, but there is no need to raise equity capital at this point.
Q.: Does the model that you are currently laying down envisage dividend payments based on 2024 performance, or is this still a debatable issue?
A.: Our dividend policy stipulates the share of payments at 25% to 50% of the net profit, and then everything depends on the dialogue on the budget model. When we finalize the budget, we will talk to the Board of Directors and shareholders about dividend payments.
Q.: The bank said that the funds raised during the IPO would be used to implement the growth strategy and further scaling of high-margin retail business, as well as M&A transaction. Should we expect any deals by the end of this year and in which segment?
A.: We always have something on the table, we are constantly looking into something, and this part of the agenda always exists. We have no right to announce something, because it is a potential deal. We are constantly evaluating some projects, it is either about portfolios or a particular party, and we probably know many of them. So yes, there is such a thing, but I cannot tell you anything specific.