Tinkoff Pummeled as Card Business Model at Risk: Russia Credit

Investors punished Tinkoff Credit Systems, driving borrowing costs to an eight-month high, as Russian lawmakers’ plans to restrict charge cards fueled concern the lender’s business model is at risk.

The yield on Tinkoff’s 2018 dollar debt jumped 135 basis points on Nov. 15 and another seven today to 11.95 percent, the highest since March. The rate on a JPMorgan Chase & Co. index of emerging-market financial industry debt stood at 5.68 percent. Shares in TCS Group Holding Plc, which owns Tinkoff, sank as much as 47 percent on Nov. 15, less than four weeks after its initial public offering in London.

The bonds and shares of the branchless lender, whose largest shareholders include Goldman Sachs Group Inc., collapsed after Kommersant newspaper reported lawmakers sought to end distribution of credit cards by mail and courier. An author of the planned legislation said it contained a “technical error” and the deliveries could continue. The bill is part of a drive to further curb the pace of unsecured consumer lending, which slowed from 60 percent last year to 36 percent as of Oct. 1.

“If amendments are passed in the proposed version, this could destroy Tinkoff’s business,” Yulia Bushueva, who helps manage about $500 million in assets at Arbat Investment Services Ltd. in Moscow, said by e-mail on Nov. 15. “Investors were aware of the fact that the sector’s regulation is tightening, but didn’t expect such a development.”

Amending Legislation

Following the IPO, founder Oleg Tinkov holds 50.9 percent of the company and Goldman Sachs has 4.5 percent, TCS said in an Oct. 22 statement. Baring Vostok, Vostok Nafta and Horizon Capital hold 2.9 percent, 4.8 percent and 1.4 percent, respectively, it said.

State Duma Deputy Anatoly Aksakov, who helped write the bill, said there was an error in the draft and that the bill only applies to the unsolicited distribution of cards. The committee will review the draft this week, he said by phone.

The clause requiring customers pick up cards at fixed locations will probably “be amended,” Tinkoff, Russia’s third-biggest credit card lender, said in a statement Nov. 15.

While analysts at VTB Capital said they expect the bill to be tweaked before its second reading, in a “worst-case” scenario, Tinkoff may need to resort to distribution through agent banks for a fee, according to an e-mailed note Nov. 15.

‘Bold Bid’

The bank is modeled on Capital One Financial Corp., a U.S. pioneer of card distribution by direct mail, which Tinkov said he learned about while living in San Francisco. UralSib Financial Corp. called TCS a “monoline retail bank,” with 97 percent of its loan portfolio in credit cards, according to a report Oct. 8.

The government is making a “bold bid” to control lending growth, Ian McCall, who helps manage $107 million in emerging-market assets at Quesnell Capital SA in Geneva, said in an e-mailed comment on Nov. 15. McCall said he’s using the selloff of Tinkoff’s debt as an opportunity to buy. “I don’t think they want to kill the business off. Just reign it in.”

The IPO raised $1.1 billion with the stock priced at $17.50, the top of the range, according to a statement on Oct. 22. The shares closed 26 percent lower on Nov. 15 at $11.50.

Bubble ‘Fear’

Banks including Goldman Sachs, Morgan Stanley and Sberbank CIB managed the IPO, according to its prospectus. Spokesmen for the organizers declined to comment when reached by phone Nov 15.

The yield on Tinkoff’s peer ZAO Russian Standard Bank’s January 2024 dollar bond dropped four basis points, or 0.04 percentage point, to 11.83 percent at 9:15 p.m. in Moscow. Russian Standard is rated B2 at Moody’s Investors Service at B2, the same as TCS and five levels below investment grade.

Tinkoff’s stock jumped 16 percent to $13.30 in London today after closing 26 percent lower on Nov. 15.

The yield on Russia’s dollar bonds due March 2030 fell six basis points to 3.91 percent. The extra yield investors demand to hold Russia’s debt rather than U.S. Treasuries fell three basis points to 215, compared with 241 for Brazil, according to JPMorgan indexes.

Russia’s consumer-finance banks face an increase in bad loans in the unsecured retail-lending market, Moody’s said in September, citing Tinkoff among those with “heightened risks.” Bank lending to households rose 31 percent as of Oct. 1 from a year earlier, central bank data show.

“General sentiment toward risks in retail lending in Russia is worsening heavily,” Sergey Dergachev, who helps oversee about $9 billion as a money manager at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail on Nov. 15. “There’s some fear of something like a retail credit bubble.”

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