TCS : IFRS 3Q2020 Investor and Analyst Call Transcript

Q3 2020 Earnings Call

Company Participants

• Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors
• Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board
• Sergei Pirogov, Head of Corporate Finance, Member of the Board of Directors

Presentation

Operator

Good day, and welcome to the TCS Group Third Quarter and Nine Months 2020 IFRS Financial Results Conference Call. Our speakers today are Oliver Hughes, CEO; Ilya Pisemsky, CFO; and Sergei Pirogov, Head of Corporate Finance.

At this time, I would like to turn the conference over to Oliver Hughes, CEO. Please go ahead, sir.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Thank you, Sergei, and good afternoon to everybody. I'm very happy to report Tinkoff's strong third quarter operational and financial results. We delivered a record quarterly net profit of RUB12.6 billion, representing growth of 30%

year-on-year and then ROE of 45%. We reached several milestones this quarter, surpassing 12[ph] and becoming Russia's third largest retail bank by number of active customers. This makes us the largest non-state owned bank by active customer base and we're now setting our sights on the number two spot.

As we unlock the potential of our ecosystem strategy, engagement with each customer grows noticeably. We will soon reach 1.4 products per customer from 1.3 at the beginning of the year despite the fast pace of growth of the customer base. More than 30% of customers now have two or more products with Tinkoff, up from 24% at the beginning of the year.

Each cohort of customers take less and less time to use more of our products and services. These operational and financial results delivered in spite of the challenges brought by the COVID pandemic. There was even more confidence in our medium term target to surpass 20 million customers, whilst continuing to significantly grow our bottom line.

Our technology platforms, data analytics and artificial intelligence capability will be instrumental in helping us to reach those goals and that too while we recently decided to create a separate unit within Tinkoff, whose sole focus is the development of AI technologies, including hiring new talent and giving more freedom to create innovative solutions.

Let me take you through some of our operational and financial highlights, before giving you an update on the current COVID situation. Tinkoff Black is powering on and is our main source of new customers. In the third quarter, Tinkoff Black's growth accelerated. We opened 1.4 million new accounts, up from 1.2 million in the second quarter and 1 million in the first quarter. This inflow of new customers, coupled with the normalisation in the situation of the first wave of COVID, now that our debit card TPV reached a record RUB640 billion, up 43% year-on-year. Total current account balances also grew to over RUB300 billion as well as the locomotive a custom acquisition, this rich and viral product has de facto transformed into a high-retention loyalty program for our ecosystem. Our recent banking market survey conducted by Romir gave Tinkoff an NPS of 26% and a share of loyal customers of 50%, making us the absolute leader among Russian banks, 3 times higher than the next nearest player.

Tinkoff Investments continues to lead the way in the high-potential Russian brokerage market. As of the end of the third quarter, our customer base had reached 2.4 million, now assets under custody have reached over RUB220 billion, having more than quadrupled since the beginning of the year. In September, we surpassed RUB1 trillion of trading volumes, reaching almost RUB3 trillion for the quarter.

All this contributed to quarterly revenue of RUB2.2 billion for Tinkoff Investments, up almost 40% quarter-on-quarter. Our product offering continues to evolve at a place -- a pace. Just by way of example, our asset manager, Tinkoff Capital, launched Russia's first ETF that tracks at NASDAQ-100 Technology Sector Index.

Despite our leading position in this market, we're still at the beginning of what is a secular shift towards brokerage and wealth management in Russia. Our relentless focus on UX, navigability, functionality, investor education and engagement will allow us to capture this space. Tinkoff business, our transactional SME offering also had a very strong third quarter. We added 30,000 new customers to the existing customer base of almost 600,000. Very importantly, under that headline number, we continue to increase the share of higher NPV customers and to make inroads in the medium-sized business segment.

Our competitive advantage has strengthened throughout the year. Our ability to help SMEs migrate to online payments through their accounting and tax reporting fully online through our cloud software, build websites, set up electronic document processes, set up delivery services with partners and much more have been highly relevant to a sector that has been particularly affected by the COVID pandemic. This is translating into solid F&C income growth with the third quarter showing of RUB3.1 billion, up 26% year-over-year.

Our efforts were noticed even outside of Russia as Tinkoff business recently took silver in Europe's SME Bank of the Year category at the Global SME Finance Awards for 2020. Tinkoff acquiring, our online C2B payments business, has been riding the wave of e-commerce and digital payments growth. Our TPV in the third quarter grew 30% year-on-year to RUB126 billion leading to 30% year-on-year acquiring commission growth to over RUB2 billion. We believe the financial performance of this business line will improve further as the restrictions on interchange rates that were implemented earlier this year were listed at the end of September.

Overall, our non-credit businesses, reached a record high of 41% of total revenue up from 33% a year earlier. Our credit businesses returned to growth in the third quarter after a short pause

in the second quarter with our gross loan book growing 6% quarter-on-quarter. Our decision to increase lending was made based on positive incoming asset quality data, which allowed us to gradually unwind approval rates and grow the number of NPV positive disbursements.

This was particularly evident in the car loan segment, which exhibited very strong growth in the third quarter. Despite this growth, we maintained certain filters and criteria that shield our portfolio from the segment's experience in the most economic stress and remain poised to respond quickly to any changes in the external environment. We're very comfortable with the quality of our portfolio as demonstrated by the share of restructured loans, which has now fallen to 1.1% of the total book from 4.5% at the end of July. Ilya will provide more details on this later.

The successful growth of these business lines is inextricably linked, so the growing popularity and functionality of our SuperApp, the highest-ranked of its kind in Russia and perhaps in Europe as well. As a matter of fact, Tinkoff' SuperApp took first place in the global Digital Communication Awards 2020 for Disruptive Communications. The jury made its decision on the SuperApp strategy, innovation, creativity, implementation and effectiveness. Our daily active users have reached 2.5 million and monthly active users is over 7.6 million.

We continue to add new e-commerce use cases and we recently added a financial messenger that allows customers to share bookings, send tickets, split bills, create group chats and much more. Our integrated new categories into the app, we drive engagement, retention and ultimately, the lifetime value of customers. We further increased customer engagements and retention, two days ago, we launched Tinkoff Pro, our subscription offering that gives customers all kinds of benefits within the Tinkoff ecosystem including financial, insurance, transactional and lifestyle offerings. For just only just RUB99 per month, customers will get higher interest rates on their deposits, discounts on Tinkoff Mobile, reduced cost, more attractive FX conversion rates, higher cashback offers for more categories, including Tinkoff's lifestyle services, Tinkoff Insurance and Tinkoff travel, discounted offers for partner streaming services and much more. We have high hopes that this very comprehensive offering will help us acquire even more customers, engage more -- and engage more with our current loyal customer base.

Some of you might be wondering whether we're seeing any impact of the second wave of COVID. Please refer here to Slides 3 and 4 in the presentation. The good news is that because we've continued to grow the customer base in all our business lines throughout the year, overall transactional activity is significantly in both February levels. However, the pace of growth has somewhat slowed in the last few weeks as consumers and businesses take precautions in the face of the second wave. To be more specific, our online card transaction volumes are 60% higher and offline card transaction volumes are 40% higher than in February. But there are some signs of the pace of growth mainly in offline has slowed a bit over the last few weeks. Our online merchant acquiring volumes are 45% higher than in February and so far, we are not seeing indications of a slowdown. Our SME customers turnover is 20% higher than in February, although, there are some signs business slowing a little. Our retail brokerage transaction volumes are 230% higher than in February and here we're confident there will be no slowdown.

On the asset quality side, we currently see no change in the high frequency metrics that we monitor on a daily basis, although, as I mentioned earlier, we continue to exercise caution. As things currently stand, there are no government plans to re-impose lockdown, well, some extra measures are being implemented. For example, Mayor's -- sorry, Moscow's Mayor recently announced that it will impose some limits on restaurants, entertainment venues and public

events. These are limited. However, we're always mindful of potential adverse economic scenarios and we're well equipped to deal with this, should it come. We have a digital customer acquisition servicing model, which allows us to grow the customer base on the end scenario. We have a high flexible, cost structure and experienced team that will steer Tinkoff through it pre-crisis, and diversified business, a strong liquidity buffers, ample provisioning, taken earlier this year through macro-factored adjustments and capital buffers of the highest that have been for two years.

With that, I'll hand over to Ilya to take you through our third quarter results in more detail.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Thank you, Oliver...

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Over to you, Ilya.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

All right. All right. Hello, everybody. I'll start on Slide 9, cover the balance sheet and in the third quarter of 2020 group, assets grew by 8.4% quarter-on-quarter. Our credit portfolio returned to growth reaching to RUB346 billion from RUB324 billion in second quarter. And because of the contribution from the investment portfolio, which grew on the back of the in flow of current accounts. Our assets traction did not change much from the previous quarter with the loan portfolio representing slightly less than a half of total assets and the liquidity balance of cash and securities representing 43% and the assets grew due to the revaluation of dollar and euro denominated security deposits with payment systems.

Moving to Slide 10, in the third quarter, our gross loan book grew 5.5% quarter-on-quarter and 12.9% year-on-year after relatively flat growth half of the year due to the COVID pandemic. This growth is the result of an increase in the credit card portfolio and solid growth in home equity, car and point of sale loans. The share of credit card in the net loan portfolio declined to 60% and the net loan portfolio grew by 6.8% quarter-on-quarter and that has improved to pre- COVID levels.

More granular information on the loan sub-portfolios can be seen later on Slide 20 and 21. While the leading indicators of relief started to improve already towards the end of the second quarter, the lagging indicators are yet to catch up and explaining the increase, now -- NPL ratio to 11.1, driven mostly by the growth of our portfolio in court. The percentage of loans that are 90 to 180 days overdue, fell to 4% of the gross portfolio compared to 4.3 in the second quarter. Many of our clients were getting decent in the form of short-term payment holidays in second quarter and third quarter as well.

The NPL coverage went down to 153% because of the improvement that we see in the recovery of stages 2 and 3 loans and on the next slide, Slide 11, shows this in more detail. Stage 2 provisioning went down from 44 -- 46 -- sorry to 44%, while the total balance of stage 2 loans reduced from 8.8% to 6.6% of the gross loan. Stage 3 provisioning went down from 71% to 69%, while the total balance of stage 3 loans increased from 7.6 to 13.1 of the gross loan portfolio and stage 1 normal loan provisions require highly at 6.3%, especially as we maintained most of the macro factor adjustments taken in the first quarter of the year.

Slide 12 shows some ongoing statistics on the restructuring programs. You may recall from earlier presentations that we often -- we offer three main kinds of program. The first is one set out in Federal Law 106, which gives payment holidays of six months to customers with over

30% decline in income and which cuts the allowed interest rate over the said period. Eligibility

for this program is quite stringent, which has made our proprietary programs suitable to many of our customers, taking from after three months or one month temporary relief program and eligibility criteria for our own programs is less stringent and the programs are more flexible for both the customers and for us.

So far in the period between March 20 and October 31st, we gave one-month temporary relief to over 128,000 accounts that gave restructuring programs up to three months to over 159,000 accounts and gave restructuring programs based on the Federal Law 106 to 3.9000 accounts.

Right now, the number of customers without stringent programs is significantly lower as you can gather from that slide. This is because the inflow of customer requests for payment holidays has dried out. Many customers have returned to current status and because we are gradually returning the program to a pre-COVID status, where only rare case of restructuring occurred. The total size of our restructuring portfolio at the end of October was RUB4.6 billion or approximately 1.1% of the portfolio, down from 6% as of May. Most of these restructured loans are currently classified one, although with higher provisioning rates than current loan. The Groups' funding records you can see on Slide 13. In the third quarter, the total funding base increased 9.3% quarter-on-quarter and 45.7% year-on-year. The growth mostly came from individual customer current accounts, which increased by over RUB30 billion or by 11.9% quarter-on-quarter and these customer accounts increased over RUB10billion or 21% quarter- on-quarter after second half slow down as we continue to actively acquire new customers. Individual Term deposits reduced a bit as our customers are less inclined to put their money on hold for a year. I think the trade that have fallen significantly over the recent periods.

On Slide 14 you can see shareholders' equity increased by 7.8% quarter-on-quarter to RUB116 billion and the RUB0.5 billion on the back of strong quarterly profit. Our Basel III core ratio improved to almost 20%, our Basel III CET1 ratio went up to 16.4%. At the bank level, except the -- risk weighted assets decreased meaningfully to RUB884 billion due to a Central Bank of Russia reduction in risk weight prior to certain unsecured loans. These led to further increase in our Tier 3 capital ratios, the N1.0 and the N1.1 ratio through to 13.9% and 10.8% respectively. At the N1.1 level, we now have a very sizable 308 basis point buffer for the minimum requirement.

Now, I'll comment on our profit and loss statement beginning on Slide 16. Compared to third quarter of 2019, our revenue grew by 12% to RUB48.8 billion with the share of income from non-credit sources growing from 32% a year ago to a record high 41% as our non-credit businesses showed solid growth across almost every segment and credit revenue of growth slowed recently. We expect this trend to continue in the fourth quarter of the year and into 2021 as well.

Our next slide is on cost management, where you can see the rapid growth in acquisition cost after two quarters of cost-preservation. Our business model allows to reduce increased cost very rapidly depending on the market conditions and now we see this as the appropriate moment to spend more. The result acquisition cost as a percentage of focus are back to pre- COVID levels and our cost to income ratio increased accordingly to 38.2%. Still, you can see that our cost structure is very lean, taking into account the number of different businesses that we developed simultaneously.

Going back to the credit expenses on Slide 18, you can see that interest income grew by 3% year-on-year to RUB30.2 billion in third quarter. This moderate growth rate also did slow down in the loan book, due to the pandemic and so the increase in their expectation of the book into lower-yielding credit product with otherwise comparable net portfolio return. Gross interest yield on the credit portfolio had

A quarter-on-quarter debt reduction to 26.8% after having been quite resilient in the first half of the year when the portfolio did not grow. As we grow through the first half, you have seen

this reduction earlier and not as a one-off shut down. The 610 basis points quarter-on-quarter reduction in yield and quarterly interest received is mainly attributable to this impact.

First, the improvement increased risk as we charged lower penalties for delinquent loans compared to the first and second quarter. This improvement accounts for a spontaneous 110 basis points quarter-on-quarter reductions in both gross yield and cost of risk. Second, the higher pace of growth in lower yielding product and the credit card portfolio yield itself to intend lower and this account approximately 450 basis points of the yield reduction. Third, the specific design of some of factor growing products such as program for car loans and point of sale loans where we are paying front-loaded commissions to dealerships and merchants, which have a negative impact on the effective interest rate. This accounted for approximately 50 basis points of the yield reduction.

And looking forward to the fourth quarter and to 2021, I do not anticipate such sharp decreases in yield going forward. So basically the trajectory of the yield reduction will flatten out and there should be a more moderate reduction of gross yield of around 40 to 70 basis points per quarter.

Interest expense, the same slide, which is somehow linked to third quarter, down 5% year-on- year to RUB5.3 billion, while cost of borrowing declined to 3.9% on a blended basis, thus providing support to the net interest margin.

And on slide 19, you can see that third quarter net interest income grew by 4% year-on-year to RUB24.4 billion. So we are seeing net interest margin decline to 16.2%, but our risk adjusted net interest margin improved to 11.8% as the reduction in the gross yield explained earlier was more than offset by improvement in cost of risk, which was 6.5% in the third quarter, down from 12.5% in the second quarter. This improvement was largely due to the biased proportion of forward out of the restructuring problem back into current statistics.

The next two slides will give you more granular information about the unsecured and collateralized life parts of the loan book, including gross yield and cost of risk. Slide 20 shows the more unsecured loan book, where credit card and term loans and Slide 21 shows smaller but faster growing collateralized part. You can see that both our collateralized and secured portfolios recovered from the impacts of the COVID pandemic in a similar manner giving us more room to increase our lending in the future.

Our fee and commission income units strong growth in third quarter slower in first half of the year due to the pandemic and this increased 39% year-on-year to RUB13 billion and our investments in medium-sized and private account business and acquiring also contributes, as you can see on Slide 22. The Tinkoff Insurance premiums grew 7% year-on-year, but have been flattish in recent quarters due to the pandemic crisis. Tinkoff Insurance is dependant on the lending volume, which was lower this year and car insurance is correlated with new prior sales, which dropped 27% year-on-year in the second quarter.

Furthermore, we are tightening our underwriting policies under our program and especially for premium insurance programs. Still, the insurance business remains above the breakeven both in auto and non-office segment. Our current account business continues to drive number of customers, balances and transaction volumes, you can see on Slide 23. At the end of the third quarter, we stood at 7.7 million current account customers with over RUB300 billion of balances.

The continued growth of customers and balances allowed us to build and reach RUB3.1 billion of fee income, which is reported net of current back up we return to our customer. The current account business is breaking even taking into account the positive margin contribution from the deployment of cash into the treasury portfolio and then into the short-term portfolio of the credit in our credit book.

Our SME business is now developing at a pre-crisis base, which can be seen in our Slide 24, bringing us new customers, which in turn increases transactional volumes. As of the end of nine months we are approaching 600,000 customers and RUB70 billion of balances on SME current accounts. We earned RUB3.1 billion in fees in the third quarter of the year in addition to treasury.

On Slide 25, we give some operational statistics on Tinkoff and net investments, the fastest growing business line, which is far from slowing down with almost 2.4 million customers and transactional volumes approaching RUB3 billion, which is a tenfold growth over year. The assets under custody have grown to over RUB221 billion, our revenues from this business line grew 8 times year-on-year and comprised almost RUB2.2 billion in third quarter. This business contribution to Group is up is becoming more and more visible on the top line and more importantly in bottom line as this business segment has relatively low momentum unit costs.

If you could please turn to Slide 26, you will see that acquiring is the business line, which is benefiting from the accelerated transition to e-commerce. Our Internet acquiring business is the third largest in Russia, processing more than 126 billion in the third quarter, which is a 30% growth year-on-year. Acquiring generated RUB2 billion of fee and commission income in the third quarter, but it's also an important part of value proposition to many of our SME customers.

This business works both with large aggregators as well as in regional merchants and roughly, if you just split. Our gross acquiring commission is stable at 1.6%. Overall, we were able to show record quarterly profit of RUB12.6 billion up 30% year-on-year bringing the total for the first nine months of 2020 to RUB31.9 billion, up 27% year-on-year. This is a remarkable result given all that 2020 had to offer.

Our exceptional profitability, coupled with adequate capitalization allows us to distribute 30% of the quarterly Group profit in the form of dividends, while according with our dividend policy. Our return on equity grew quarterly basis after a dip in the third quarter and now over 40%, both quarterly and for the nine months of the year. Our return on assets followed a similar path and in the third quarter was over 7%.

There is a detailed statistics on return on assets in the appendix to this presentation on Page 13, which helps to understand why gross yield and net interest margin was necessarily the most important metrics for successful interest company.

And with that, I give the mike back to Oliver.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Thanks a lot, Ilya. The third quarter was another great quarter for Tinkoff proving that our growth, product innovation, monetisation engines continue to run at full speed. Despite the second wave of COVID, we're confident in our ability to deliver solid operational and financial results in the coming quarters and in the medium to long-term.

The wider management team, including myself and Ilya, are fired up to deliver on the commitment we've made to investors to reach 20 million customers by the end of 2023, while continuing to grow engagement under the course profitability. We will provide more detail on this during our Strategy Day, which we had to postpone earlier this year but now plan to bring back in the quarter of 2021, details to follow.

As an expression of this confidence, we are recommending a dividend of $0.25 per share for the third quarter. We're also upgrading our 2020 guidance as follows. Firstly, we expect our net loan portfolio growth to be in the 10% area. Secondly, we expect cost of risk to be 10 to 12 -- sorry 10% to 11%, guidance was previously in the 12% area. Thirdly, we expect cost of borrowing to be in the 4% area, the guidance was previously in the 5% area. And lastly, we expect net income to be at least RUB42 billion, guidance was previously RUB30 billion to RUB35 billion. You might remember that this net income guidance, earlier it was RUB32 billion, was the guidance that we originally gave you at the start of this year. We got there in the end, thanks to the amazing efforts of the entire Tinkoff team.

With that, we'll hand it over to Q&A. Thanks for your attention.

Questions And Answers

Operator

Thank you. (Operator Instructions) Our first question comes from Mikhail Shlemov from VTB Capital. Please go ahead.

Mikhail Shlemov, Analyst

Good evening, gentlemen. Thank you very much for the presentation, and congratulations on the great results. Several questions from me please. The first one, I want to start with the risk- adjusted margins. Ilya has mentioned in his part of the presentation that despite the gross yields going down specifically in the credit cards and some sort of the cash loans, the risk- adjusted margin has actually bounced back fairly nicely. I wonder whatever level of a normalised risk-adjusted margin you are thinking about as this has been obviously quite volatile over the course of the last full quarter. That's my first question.

The second question relates to the announcement, which Oliver has made in his opening remarks about the introduction of a subscription model for the customers, I wonder -- I know that it has been a very recent development probably just like couple of days of age. However, we would probably appreciate your fit, how you think it's going to impact unit economics? How you look at your customers' lifetime customer value and whatever kind of a effect we should see on the fee growth dynamics up from that side? And probably, last but not the least, there has been some interesting headline that, at Germany, a start of Vivid Money, which you have seeded actually with your ex-colleague of yours has actually raised external funding. I was wondering if this will be -- still going to be fully consolidated in the fourth quarter financials or it's actually becoming an independent company right now? Thank you.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Thanks very much, Mikhail. So Ilya will take the first question, I'll do the second question on Tinkoff Pro and then Sergei Pirogov will take the third question, probably.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Yeah. Well, hi. We are not specifically target our adjusted net interest margin, because it's a composition of several things, which may not necessarily go in the directions we want for all sorts of reasons but I'll try to answer your question that we -- probably over next few years should be in some kind of a corridor of approximately 8% to maybe 11%, something like that.

So basically in there, our growth yield is gradually going down, there was a step reduction this quarter, which was anticipated as the growth yield went on quite strongly in the previous two quarters. So -- but its reduction is not going to be that steep in the future. It will definitely be trajectory for a little change in term of lot itself. Cost of funds is also going down but again, it's difficult to give a long view on the rate but definitely in the upcoming two quarters, it's not going to increase, more likely go down a bit more and cost of risk right now normalising and right now, already the below 10%. So we taking on everything into account I guess, I'm still counting in the area of 8% to 11%.

It looks like a reasonable assumption but again, it's not necessarily what we want to target. We go down in every -- just goes down in every product and they are all have a different life and different trajectory of growth and then as we -- and we target bottom line through the NPV approach and there are obviously other things to take into -- to keep in mind there, especially cost of acquisition. Hope it helps.

Mikhail Shlemov, Analyst

Thank you. I'll have...

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Thanks. So -- sorry, Mikhail. Thanks. So on Tinkoff Pro, as you say, Mikhail, this is a very, very fresh initiative that we announced it yesterday or the day before -- day before yesterday, so basically, what it is, this is a subscription service where we package together different services from Tinkoff but also external providers so there are some -- there's interesting content from streaming providers for example, which our customers will get huge volume from so they're basically prices that they wouldn't be able to get on the market themselves all built into this RUB199 per month.

We think that we could get up to a 15%, 20% penetration into our existing customer base and so on the one hand, you have the things that we're subsidizing and there may be a reduction -- a slight reduction in the free flow that we get from some of those business lines as we offer better rates to existing customers through this subscription package, but on the other hand they will be taking up all the services and all that's bundled into it is something RUB99 and if we have 15% to 20% penetration over the next, well, my colleagues are saying, the next year, I mean, that was pretty ambitious, but let's say, a year to -- so just to be on the safe side. Then this obviously extends the lifetime value, so it doesn't just increase the number of services that they are using within Tinkoff and our partners but they're also will be-- is going to stay with us along this crisis that the -- and customer stickiness that we talked about are quite a lot. So this

increases our ability to cross-sell them among the services to reach our limits and monetise them in other ways.

So, we have high hopes for Tinkoff Pro. We're the first financial institution to do this in this way in Russia and it's obviously something that you see coming from online providers of various types. We want to try it and therefore we think this is something, which could really drive customer retention, extend lifetime value, customer engagement, getting them into all sorts of different products and services and in turn have more, so that we can sell them all this stuff. And so, we think this is an interesting development, but obviously very early days, we'll keep you up to date just as this thing evolves and we can give you some numbers.

Sergei...

Mikhail Shlemov, Analyst

Oliver, thank...

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Can you tell us a bit about Vivid -- Yeah, sorry, go on Mikhail.

Mikhail Shlemov, Analyst

Oliver, yeah. Thank you very much for this. Just like a quick follow-up on Tinkoff Pro. Previously, we have discussed many times just like the potential monetisation of a Tinkoff Black product, which is close currently to breakeven has been always years out as you're still pumping up the client acquisition. Should we think that the Tinkoff Pro is actually a first step to properly monetise Tinkoff Black as well in addition to the client retention, which you were talking about?

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Not directly. So Tinkoff Black is the way that we bring customers into the ecosystem on a very rich product, so obviously we've talked about that many times, yeah. So Tinkoff Pro, so -- if you think about it, as customer comes into the mobile app, they onboard it increasingly through mobile as opposed to just through the web. They will get the option to open a Tinkoff Pro package as part of the onboarding process.

So it doesn't monetise and close as Tinkoff Black customers but it means that they immediately have a suite of services that they can get access to within the Tinkoff ecosystem. So I mean, if you go on monetizing the Tinkoff Black business line then okay, it is monetisation, but well, that's not what it's about. It's about putting -- giving people the opportunity to open other

products and services through which we will monetise them immediately or earlier in the lifetime with Tinkoff.

Mikhail Shlemov, Analyst

Okay, that's helpful.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Sergei, over to you.

Sergei Pirogov, Head of Corporate Finance, Member of the Board of Directors

Yeah, thanks. Hi, Mikhail, on your question with respect to Vivid Money. As you know, Vivid Money is a European fintech, a start-up founded by our ex-colleagues, Artem Yamanov and Alexander Emeshev. They are focused exclusively on Western Europe and it's now been designed to be part of the Tinkoff group as such. So TCS has the opportunity to participate in the seed round of Vivid Money and we, of course, wish Vivid a lot of luck in penetrating the Western European market with their product focused on current accounts and fully charged combination of daily banking with retail investments. They have a lot of ideas to be implemented in the next few quarters.

We don't have plans to deviate from our small bet approach to projects like this. For us, it's one of the small bets because we don't think we are qualified to take on risks associated with businesses like that in full scale. So we have no immediate plans to increase our share in the project and moreover, just couple of weeks ago, we did successfully close the Series A round, extracting one of the prominent fintech investors from Silicon Valley. So they're likely to continue implementing their project like this. So, it bought consolidation, I don't think that anything is going to change accounting-wise between Vivid Money and the TCS Group Holding.

Mikhail Shlemov, Analyst

Sergei, thank you very much for this. Am I understanding this right where just like if we assume that after the seed round, TCS was a majority investor in Vivid Money it would stay the same after the round A?

Sergei Pirogov, Head of Corporate Finance, Member of the Board of Directors

Mikhail, round after round, we are going to get watered down as you can imagine, while the value of our investment is likely to grow, like their Series A round was well, has million grow, post money, which means that TCS's sort of share went up. I mean the value of our investment into this project went up by approximately 2.5 times. So yeah, we'll continue to have a sizable stake, but it is quite likely that we'll be diluted over time.

Mikhail Shlemov, Analyst

Okay, that's helpful. Thank you very much.

Operator

Elena Tsareva BCS Global Markets. Please go ahead.

Elena Tsareva, Analyst

Good afternoon. Thank you very much for the call and presentation, and congratulations with record results, very impressive. My first question is about contribution of fee and commission to the revenues, which is now 41%, also record level and do you -- just could you please give some color if the share can exceed 50%, like, for example, in one-year horizon and what kind of business lines, you think will be contributing more to this fee and commission share of revenue growth?

And also into this question, now we see competition rising and some fintech players or IT players, tech players and mobile players are also increasing their focus on brokerage business, do we see and expect to see margin for example for the brokerage business in your part or you see no credit at all from the kind of the position that we -- one part of the question. First question.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Sure. Thanks, Elena, hi.

Elena Tsareva, Analyst

Hi.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

So we -- so the first part of the question was do you think -- do we think our fee and commissions income could grow to 50% of total revenue? Potentially, it could, so, we -- no, we don't give specific guidance on that because, while we have a view, we don't set it as a target. And obviously, it's very much a function as to what's happening in the lending business, which to a certain extent is a function of what's happening in the external environment and so lending has been a little bit slower this year than it has been in previous years, well, quite a lot slower, so we're guiding to tend growth throughout the year, but there are no much reasons for that.

So if we assume that we have -- we'll resume and quicker growth next year in terms of our lending business, then low the income that we get from the non-credit business lines is growing quicker than the income that we get from the credit business lines and they still may not take us to 50% let's say in the next two or three years. So that's not our guidance but it's just me kind of thinking aloud here.

But could it get to 50%? Yeah, it could. In terms of which business lines contribute most to that, it's obviously Tinkoff Black. It's -- and on the current account business in general, so Mikhail, in the previous question was asking about Tinkoff Pro and how we think about how we could monetise Tinkoff Black customers and over time maybe that's one of the ways. In SME, which is going very well this year despite some of the challenges and we're making big inroads into medium-sized business much as in small business and micro business, which where we traditionally been.

Obviously the brokerage business, which are quite similar, acquiring, we see huge opportunities and on potentially other stuff as well, which we have in the works. So if we come back to the brokerage business, there are -- there is obviously interest you'd expect it to be, because this is obviously a booming market, where you're getting whole racks of new segments of investors coming in with a very different sets of requirements, technology-driven, so they obviously investor mobile apps, more then have been going to branches with brokers in suits and whatever. But it seems to be the case that there are three or four brokers that are leading this, so the other guys who have the technology, the brand and the capital to invest in this, because it requires quite a lot of investment. And so, we don't seem to be any -- let's say, smaller startups and outside of banks who are making any inroads.

Certainly, a few interesting things happening in the market but the guys who are leading the charge are the Tinkoff's Bank, B2B, maybe BCS are -- all start to picking up in terms of volume, as well. So that's where the battle line seems to be drawn and then it comes down to your ability to acquire customers but that then breaks down further into how you work with the external market in order to bring new to broker customers in but also working with the existing customer base in the adjacent businesses through the ecosystem.

Your product range, your interface and obviously your execution of the back end insurance economics, but I think what was implied in your question was also, do we expect to see in Russia what we've seen in other markets where you see commission and fee trading things and things like that, it's too early to say. I don't think any of the brokers are planning on that at the moment. We'll see, but if that -- if the market does go in that direction, then, we expect this to be net beneficiaries from that, to be honest with you. We're already growing very quickly, but we don't grow extremely quickly but we need to make -- to conjecture on that.

Elena Tsareva, Analyst

Thank you very much, Oliver. Maybe, and mostly work or in terms of competition brokerage to likely in through of MTS and through Yandex suite are going to step into fintech finances here but overall trend is just to show the account...

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Sure.

Elena Tsareva, Analyst

Is very helpful. And just maybe a follow up to this question. So I understand, you do not expect deterioration of fee and commission business lines into the fourth quarter of this year from all the restrictions in our craft and like second wave of COVID, so I understand, not much negative impact on fee commission from this side, right?

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

No, we're all same.

Elena Tsareva, Analyst

Okay, thank you very much. And just maybe a bit on like cross-sell to what we're doing now. If you just can provide a little bit more color whether cross-sell is like mostly attributed to one particular specific growing business like on products like brokerage or it's like widespread across like businesses lines -- business lines you have? And maybe some kind of...

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Sure, so we have some arterial routes, which we referred to in the past and there is actually information on this in the presentation materials, in this investor presentation and other stuff on the site. So we have Tinkoff Black as a feeder into SME, into our personal loans and home equity, into credit cards obviously, into Tinkoff Investments. Although Tinkoff Investments was actually drawing on the market more and more, so over 30% of customers coming into Tinkoff Investments' platform are actually coming from outside the Tinkoff ecosystem.

And I'm not sure it's growing over time. So Tinkoff Black is a big feeder. We have point of sale loans, which is actually on a standalone basis, now a profitable business line. But that also feeds into credit cards and into our personal loans and actually the first signs of that feeding into the debit card business, Tinkoff Black as well and not something we really want to see, but -- and then various of the other business lines. So I won't go through all of them, but all of them are beginning to fit into other business lines and so this is now a two-way process that we return to SME. Initially, with get some new customers coming from Tinkoff Black customer base and obviously, the other way as well -- as well it is coming from the open market.

So we -- over the last three or four years, we've really been learning how to cross sell when we started with the obvious cross-sell business lines. Now we're -- and now we're going deeper. So

for example, Tinkoff Mobile is cross-selling across all sorts of different business lines within the ecosystem.

And here, it comes down to the next layer, which is next level of detail, which is how we actually do them and we have all sorts of different ways of cross-selling and we do this through the mobile app, we do it through all the communication channels, digital channels within the ecosystem. We can actually do it by calling, sort of calls, but also a very large channel, which has developed over the last basically 18 months or so as our representatives, which has now turned into the cross-sell channel as well. And it's something we're driving further. So we've communicated our medium to long-term target so by 2023, we have the 20 million customer base and we think we'll have 1.7, 1.8 revenue-bearing products to our customer, who are active customer by that time and we think we can get it up to two products per customer as well in a slightly longer period.

Elena Tsareva, Analyst

Thank you very much for very detailed answer. Much appreciate -- thank you.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Thank you.

Operator

Andrey Pavlov-Rusinov from Goldman Sachs. Please go ahead.

Andrey Pavlov-Rusinov, Analyst

Good afternoon, gentlemen. Thanks for the hosting the call, and congrats with the strong result. It's also a great feeling to again be on your standalone call and discuss your standalone strategy. So basically, the first question I have is on your loan growth. Essentially, the third quarter was on some revival of lending activities, and basically, if you can elaborate little bit on how you think this trend will go into the fourth quarter and maybe also early next year should the COVID negative factors will be hopefully behind us, so you've been a bit more active in cash

• sorry, in car loans rather than at the home equity loans. So is your thinking there changing somehow? And also if the credit cards growth in the third quarter is reasonable level to expect going forward or could you accelerate there? And I've got a couple of small questions, maybe I'll ask them afterwards.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Ilya, do you want to kick-off and then, I'll add if necessary?

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Right. We have resumed our active growth of the loan portfolio. Unfortunately, even in our quite agile business model, you cannot just turn on, turn off the ignition, and in four seconds go to 100 miles per hour. This machine well, has to warm up a little bit, which we did through the summer and I think in the autumn, we are getting sort of the cruiser speed, they can use a car analogy. We obviously want to grow faster, we have capital buffers for that, we have acquisition channels for that and in unit economics stacks-up, so we'll definitely try to increase our issuance. Of course, we are looking with now -- we are looking for product precipitation out of our windshield, so if there will be a sort of the second wave of the pandemic, we will become become stronger and government will decide to whether to make another shutdown and it's probably where we'll have to reduce our lending activity for a time, but we do not expect that so we've seen that there -- that our status quo with some limitations.

We will continue, but certainly, I do not expect that the lockdown as it was in April and first half of May. So all right, we will try to intensify the growth of our portfolio, it's easier to do in a younger, smaller segment and it's more difficult to do in the credit card portfolio because our products having said conjecture of many actions because of its size and secondly, because it's the client behavior is gradually changing within the credit card portfolio with people transacting more and therefore equipment rate on the portfolio is growing every year.

But nevertheless, we are issuing credit cards at -- right now at the pre-COVID levels and are always looking for the ways to increase issuance, but I guess for the immediate future, you sort of for the fourth quarter of the year and you see it from our guidance, you should assume that we will probably be growing in a similar manner that we do in the third quarter.

Going forward, we were not giving guidance for 2021 but again, if they agree the status quo with the pandemic, we will try to issue more and accelerate from what we have right now, we'll see. Car loans actually grew faster than home equity loans through -- there is no sort of specific sort of idea behind this, it's not that we will try to slow down home equity and accelerate car lending. These are two separate business units with a different channels to distribute loans and it looks like right now our current loan business is sort of growth champion but only developing very, very good at regional car centers, car dealerships, but it's also well online quite successfully and grows in the online space as well and in the car selling aggregators. But it's -- well, it does not any helping side a little bit with the growth in our segment or the absence of.

Andrey Pavlov-Rusinov, Analyst

Thank you.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

I think I've answered your question, right?

Andrey Pavlov-Rusinov, Analyst

Yeah, that's pretty helpful. So just a couple of other small questions. First of all on the interchange fee, essentially, it was good to see quite a strong rebound in the third quarter, so was this driven by your kind of less spending on promos for your clients in Tinkoff Black or were there any other reasons and is it sustainable level?

And also, the second question is on insurance loss ratio, it's quite low for the second consecutive quarter, so is it also a sustainable level going forward?

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Ilya, do you want to go ahead first and I'll take insurance, the second?

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Yeah, sure. So on the interchange, there are two things going on. First, there is growth in transacting volumes as which typically they are back to the pre-crisis levels and are growing, but they are growing -- they have grown on a per unit basis from the second quarter obviously because the situation is improving, it is also growing, because we have more and more customers. But moreover, there is another specific reason is that in the second -- well in the second quarter the interchange was supreme because there was a certain measures taken by the government, by the Central Bank to reduce it during the pandemic and right now they leave this because of -- and has been taking off, which immediately led to the increase in the transaction.

So, I don't know if it helps. So there were restrictive -- some restrictive measures and they were in.

Andrey Pavlov-Rusinov, Analyst

And then they're supposed to...

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

And on the...

Andrey Pavlov-Rusinov, Analyst

Probably kick-in from the first quarter as this condensed rate statement of our initial acquiring commissions or it's something else?

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

No, from the 1st of October. Yeah, so we reinstated...

Andrey Pavlov-Rusinov, Analyst

All right.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

For the rest of the year a temporary reduction in interchange, which ended on 30th September.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Yeah. But the question was, should we expect this growth forward? And yes, because of these restrictions are lifted.

Andrey Pavlov-Rusinov, Analyst

Okay. So it could then actually rebound even more in the first quarter?

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Yeah.

Andrey Pavlov-Rusinov, Analyst

Okay.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

On the insurance side, we have done a -- an unusual second quarter, I would say, obviously because people were ensuring their cars but weren't drive for much of the second quarter. And so, that explains the loss ratio decline. In the third quarter, people started driving again and well, we have been busy tightening upon all of our models and underwriting on the insurance side. So there's quite a lot to try and scale up in 2019 and some of it was successful, some of it was less successful, especially on the SOGAZ, the mandatory insurance site. So we still did a further volume, below quite a lot less than last year on the SOGAZ side but we used the data

that we collected in 2019 in order to refine the models in 2020. So we're doing lesser volume but much better quality based on the information we collected last year.

So this basically has taken us to a place where we now are -- we're consistently writing profitable business in the non-captive insurance business versus almost SOGAZ and Casco. Predominantly, although we have some other products as well, including travel insurance and we're slowly, slowly but steadily scaling that up, so a NPV positive insurance business sounds fair, the name of the game. So there's nothing exciting happening there yet, but we know we'd like this business long-term and we're still looking for the key.

Andrey Pavlov-Rusinov, Analyst

Thanks, Oliver, that's very helpful.

Operator

Gabor Kemeny, Autonomous Research. Please go ahead.

Gabor Kemeny, Analyst

Hello. I'd like to follow up on the asset quality at first and your thoughts about the trend going into 2021. I mean, under your base line macro assumptions, which I understand don't assume a severe effect second lockdown and also given the fact that you have a reasonably low share of restructured loans, which I think means that you have a decent visibility on asset quality, how do you think about the provision outlook going into next year? Since you mentioned that it started to normalise in the third quarter, I wondered whether we could consider this a kind of reasonable assumption for '21.

And secondly, coming back to the brokerage business, can you help us steer the growth opportunity here in terms of the revenues from -- coming from retail brokerage? And also if you could talk a bit about what competitive edge you have which makes you a -- what incentives do you provide to clients, which has helped you become a market leader here?

Thank you.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Sure. Ilya, do you want to do the first one? I'll do the second.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Right. Well, without giving guidance for this -- for the next year, it's a bit premature, especially with where we are moving around all of the place. Right now, we see that at least for the foreseeable few months, we should expect similar quality of our incoming applications and

similar quality of our existing portfolio and you are absolutely right, we -- the sort of -- how to phrase it? Experiment with the significant payment release to our customers, it seems to be almost over. It was definitely a successful experiment and we preserved a lot of our customers from being delinquent as they are right now back into the normal paying status. And right now, we will have some on the 1% of our loans in the program and it's actually tailing off.

We see that basically the leading indicators are quite encouraging right now for the risk. So we -

• but with the result portion, we think that -- that's -- basically, it's going to -- we see it in a more optimistic color than even I don't know few months ago. But again, it's difficult to give and I don't want to give any specific guidance for the next year.

Gabor Kemeny, Analyst

Thanks.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

So if move on to Tinkoff Investment -- so we are the leading brokerage platform in Russia by far. I think we're about 40% or maybe more of new brokerage accounts are opened through Tinkoff and this is all through the mobile app. We currently have 3 million accounts opened and we are the leader by number of active accounts on a monthly basis.

In terms of assets under custody, we're not the biggest player but here we're growing very quickly and I said it in my presentation, if I'm not getting the number wrong, I think we've grown our balance sheet by 5 times this year, 4 or 5 times and we continue to do so and the trading volumes have absolutely skyrocketed. So it was RUB3 trillion in the third quarter, if I recall the number, again, that's all in the presentation.

So why and what was enabled us to do this? First of all, we were the first in the market to come out with the mobile app and how the intuitive easy to use app, which basically democratized investments. We -- we're the first to come out with loads of features, so first of all is onboarding, secondly, so it makes basically mobile onboarding in a very easy process in a couple of clicks and you can stop -- it can stop investing.

The second thing is funding new account from a card, we were the first to do that. Obviously, other players are following suit because it's an obvious thing to do, but before nobody did it. The third thing is the product range that we offer basically on virtual shelves in the mobile app and present it in a very intuitive way.

The next thing was T+0 trading, so basically, you don't -- send the money off from your accounts and wait for three days as you do with many brokers or the beginning to speed up a little bit but they used to be pretty awful, you then make a purchase or a sale and off you go, it's in your brokerage account. We had -- we were first in Russia to do robo advising, which we were -- are based on our algorithms developing extensively and we split our target audience into three different categories.

So we have, let's say, not tough in retail investors, so then we have a suite of different services including robo advising and we have more high frequency traders. So then we have a virtual terminal, we have all of the features you'd expect to be in terms of research materials, in terms of tight profit stop loss. So now we're loosening a little bit of this, if you guys know all of this, and we have a social network called Pulse, which, if I'm not mistaken, has now over 300,000 or maybe more and growing very quickly and it's where our investment moratorium have also exchanged all sorts of investment ideas and column news and shared research and whatever else and lots of little stuff.

In terms of the higher-frequency traders, we're also starting to getting to let's say light-touch wealth management solutions for more wealthy holdings and here we have online personal managers and under a different suite of products and services that we're rolling out quite quickly. And we've also been doing, as mentioned earlier, lots of stuff on the execution side as well, which will be coming on stream over the next year or so.

So there's tons of stuff that drives us, but really it's about UX, it's about product, it's about speed, it's about convenience and just right information. So, right now in the market there are about 5 million maybe a few more active brokerage accounts. A couple of years ago, it was less than 0.5 million and I think the consensus in the market is that this could reach to 20 million active brokerage accounts over the next few years and we're going to be riding that wave and obviously, taking a little bit large share about 20 million as we continue to innovate our interface and work on customer experience, maintain a very high service and continue to segment for various different product offerings.

Gabor Kemeny, Analyst

That's useful color. Thanks very much.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Thanks.

Operator

Andrew Keeley, Sberbank. Please go ahead.

Andrew Keeley, Analyst

Hi, good afternoon, and thank you for the call. I want to come back to the topic of the loan yields coming down so strongly in the third quarter, which I think came as quite a surprise. And Ilya, it's very healthy, you basically kind of break down three factors, which would be good just to kind of dig into a little bit more. So from what I can recall, you said, of the kind of 310 bps decline and about 110 bps, which was due to generally kind of better credit quality, hence kind

of lower delinquency fees, which also obviously negatively impacts the cost of risk. I'm trying to understand there whether there's any kind of one-off kind of impact in terms of these kind of lower delinquency fees, whether that relates to kind of post-payment holidays, et cetera, lower restructurings. Just any additional kind of thoughts there?

Then you basically said there was about 150 bps due to the kind of -- the change in the mix, which obviously also positively impacts the cost of risk -- mentioned credit card yields coming down. So I wonder whether you can just comment on what is driving that, is that just -- is that kind of the click process or lower interest rate environment in the market, what's contributing there?

And then, you said, 50 bps in terms of I think kind of the car loan, very strong car loan growth kind of front-loading fees to dealers. So should we expect that kind of thing going forward, I mean if you are going to continue with very strong car loan growth relative to the rest of the loan book? And I guess, just trying to kind of put it all together, I mean, how kind of confident are you in this kind of 40 to 70 bps decline per quarter, because obviously as you point out rightly though, we had a couple of quarters with pretty flat loan yields. But then, this is a pretty big drop in one quarter and I'm just trying to kind of get a bit more understanding on that. Thank you.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Well, yeah. Great questions. I'll probably start with the last one on how comfortable am I in the constant rate of the yield going down. Obviously not -- because well, a year ago, I was saying that the yield would be going, ticking down approximately 1%, 100 basis points a quarter, but it stood around 30% for much longer, right. And there was sort of specific reasons for that, which we all know. And right now -- and then, I started signaling on our previous calls that, for example, in August, I was saying that it's going to go down and it is going to compensate for being flat for a couple of quarters, which it actually did.

So when I'm saying 40 to 70 basis points, I'm -- and that's sort of a longer trajectory not for one quarter, not for two quarters but probably for I don't know five, six quarters. And therefore, within that timeframe, there could be also a couple of deviations up and down.

Now going to go to your earlier questions in the sort of again in the reverse order because that --so the one about the car loan portfolio and the point of sale loans, that's easier to answer. That I see as the more one-off, so basically, when it was a lower growth and then it's kind of accelerated faster in the absence of growth in such but significant growth in other segments, then it's kind of showed itself, but if we will -- I don't think -- I don't expect that, for example, a car loans have to grow in 20% in this quarter, then we will accelerate even more so when the lending in the segment for that gets to a normalized pace, then all these specific costs, they kind of level each other out. And therefore, we shouldn't expect these kind of significant expectations in the future. So I would call it more of a one-off.

Then the next one was -- remind me about the situation within the credit card portfolio, right?

So...

Andrew Keeley, Analyst

With channel mix.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Yeah, channel mix changing and then -- and that's on the easy part of the equation, right. But the credit card portfolio is not homogeneous and the channels is that for the -- drive its internal forces in this sort of portfolio, they drive it to higher transaction rate, more people in the grace periods, our lower cost of risk, so it's sort of -- and obviously, the infrastructure and how people use credit cards is changing over time and this internal force over time of course lead -- drag sort of the yield in the credit card portfolio down slowly but steadily. There's definitely going to be a certain slow, so that's -- but again, it's -- right now, it's a slow but continuous process, which kind of showed itself in this quarter obviously. It's always been the case, but in this quarter, the step change in yield just basically need a more deeper and explanations from the management, obviously, that's why I kind of emphasize that as well. So that's not a one-off, but again the rate of this change should be steep.

And then, the improvement -- the fast improvement that we saw in this quarter, which also sort of -- that's what's kind of a magical exercise for us. So I just asked my team just to model what would be our gross yield and cost of risk if sort of the gross yield, the income that we would accrue and additional charge to cost of risk that we would accrue if the situation in the loan portfolio would be same as it used to be in the second quarter, right, where on the cost of risk was much higher and that gave me slightly over 100 basis points of additional gross yield and additional cost of risk. And that's an academic exercise and it's sort of difficult to model this into the future.

We do not expect -- again, we do not expect this such sort of sharp changes in asset quality in every quarter, right. So, unfortunately, we know that during the crisis times they happen but in the normal course of business, we do not expect them and we sort of expect a more continuity of these numbers into the future. And therefore, that shouldn't be sort of similar effect in the next quarters, it's more of a one-off, I think.

I hope it helps, maybe some additional color, if you should steer me in any direction.

Andrew Keeley, Analyst

Yeah, and that's really helpful. Yeah, okay, I don't really have anything more on that. Okay, I want to ask a question on your customer acquisition costs, which is quite a bit in the third quarter. And I'm just -- I mean like, it's obviously, been a function of growth kind of recovering and just generally very strong growth across many different lines of the business, I'm just wondering whether you can give any kind of color on how you see the outlook on that line. I mean is this kind of RUB5 billion-plus, is this a kind of new normal that we should think about kind of going forward at the moment on the customer acquisition costs? Thank you.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Well, yeah. This growth in customer acquisition cost came almost fully in the increase of our acquisition effort, so it's all kind of by salary to people involved in the acquisition process. It's buying leads from aggregators, paying partners. So it's all sort of there distributed into the unit economics. And the increase sort of seems like a sharp one, but if you would go -- in our presentation with quarters, but we have significantly sort of beefed up our acquisition practices in several segments, apart from just credit cards -- from just credit products. So basically, we sell more products right now on a monthly or quarterly basis than we used to even a year ago. So obvious -- and that, in a sense, yes, it's a new normal where we want to spend more on customer acquisition. Yes, because we see it and we can trace that this customer acquisition pays off.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Just to add, maybe...

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

You can have a thinking -- sorry, maybe I would add just more. Another thing to look at that operating efficiency, though, we had a -- we have a sudden spike in this third quarter, again on a short five-quarter scale, but if you'd sort of build this a bit into the parts, you will see that this 38% is actually a quite low number for us. We -- two years ago, we were over 40% and then the dreaming of getting under 40%. So it's still a very, very good number in terms of our cost management, which actually commemorates our ability to scale in this. And other thing I would have to add that in the fourth quarter, we will have and already have certain increase in TV advertisements, that's seasonal. So that's definitely fourth quarter of the year is not the time to cut down on acquisition costs, bear it in mind. Sorry, Oliver.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

No, you added TV, so that fine. We're certainly going to be growing more quarter-on-quarter. So into the future going into next year doing more acquisitions. So, as you say, that is the new normal and certainly that is supported by more TV and other advertising costs.

Andrew Keeley, Analyst

Okay, thank you so much. That's really helpful. Thank you.

Operator

Andrey Klapko, Gazprombank. Please go ahead.

Andrey Klapko, Analyst

Hi, gentlemen. I share everyone's excitement about your results. Two clarification questions from my side. The first one is that it just really was extraordinary on the provision side due to the -- partly the macro factor write-back. So as far as I understand, it's still more than RUB4 billion of this macro factor on your income credit, are you expecting it to be lower until the year-end, given the situation will be as it's now or how soon are you expecting this macro factor to be fully reverted?

And the second question is about your loans in courts given a bit of accrual. On this category, could you remind us please the recovery expected to recover ratio on this line and how it stands against the provisioning. So after the courts, will it be like a zero impact on the provision or it will be a write-back or accrual? Thanks.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Okay, I'll probably -- I'll answer these questions. So well, you can see the numbers that are in our note in the footnote of our financial statements, which shows not specifically a macro factor but additional reserves and through, it was about RUB6 billion in the third quarter and it was solely macro factor but then, it's -- this number is used to RUB5.5 billion in second quarter and now it's -- it reduced a little bit more to RUB5.4 billion, but it's -- right now, it's not only a macro factor, which we agreed originally, it's also -- in the second quarter there was a additional reserves created for restructured loans, apart from macro factor. So the macro factor reduced to RUB4.8 billion, but then there was a RUB700 million of additional reserves for restructuring, right? So that's -- so basically, that is why despite the fact that we reduced our macro factor by RUB1 billion in second quarter, the total sort of additional reserves still were RUB5.5 billion.

So in the third quarter, another layer of complexity added to that. I'm sorry, it's a growth of the portfolio. So while we are reducing the macro factor, it's approximately RUB300 million of reduction in macro factor, but at the same time, as the portfolio has grown, we added -- the macro factor sort of added RUB200 million because of that growth. So net change in macro factor was complete just RUB100 million. And then, there was a -- some smaller change -- some small change in additional provisions for restructure. The restructure has reduced and right now, it's only RUB200 million of additional loan loss provisions for the restructured loans and that -- in the fourth quarter that would probably go to zero together with the restructured portfolio.

So the macro factors that we would -- so we do not have any kind of specific idea to kill the macro factor or bring it to 100% obviously to zero in ruble terms. We will look on the underlying assumptions sort of variables in this macro factor, we see how they correlate with the cost of risk and adjust accordingly. So put it in simple words, no, we do not have any specific idea of reducing macro factors just because we want it.

Hope it helps. Please remind me the second...

Andrey Klapko, Analyst

Yeah, sure.

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Part of your question.

Andrey Klapko, Analyst

About the loan in courts. So how that provisions and how it stands against the expected recovery ratio?

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Okay. So the loan in courts, they are provisioned as obviously as an asset based on lifetime recovery and it's and I guess in the financial statements, it's something like 15% recoveries, something like that. So I think they are provisions something like 85%, but then, I'm not 100% sure about this, but something like that.

Andrey Klapko, Analyst

So in a nutshell, I mean, you're expecting -- after the course, are you expecting some movements on the provision side on this category particularly, or it will be a zero impact?

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

The -- expecting the change in the provisions in the loans in court because of what?

Andrey Klapko, Analyst

After the court decisions, I mean when the recovery actually happens?

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

Well, the recovery happens not because of the court decision, the recovery happens through the work of bailiff. And that's a quite a complicated issue because when the court decides on something positively, the case goes to bailiff and you can imagine that the bailiff somewhere in the region is getting hundreds of court's decisions and he has to basically to go and somehow get money from the unfortunate borrowers who looked at cases. And it obviously takes time,

so it's a very long process, it might -- it definitely takes longer than the year. We made it to be about two to three years when there is still a chance for recovery from a loan through the work of a bailiff.

And we can say that maybe that we can get enough -- where we can expect the portfolio recovery of approximately 10% in every year -- of this year, which sort of -- as you take it on the effective rate, it's for current financial statements is obviously lower. And there is a certain fine, how you help and how you work with bailiffs, so you increase your recoverability of your sort of

• of these kind of assets, right. It's not an easy work, there is a lot of mass involved and a lot of physical negotiations with this system involved as well. So we obviously work on the sort of increase, we're always trying to increase the recoverability of this asset, but it's a slow and steady process.

Andrey Klapko, Analyst

Okay, got you. Thanks a lot.

Operator

And we will now take our last question today from Andrzej Nowaczek from HSBC. Please go ahead.

Andrzej Nowaczek, Analyst

Thank you. I'll be quick because most of my questions have been answered or perhaps you could just remind us what the rates on your main loan products are currently? And if there are any significant back book, front book differences at this stage?

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

I think the question was about the rate, the yield now for our specific product, right?

Andrzej Nowaczek, Analyst

If you can disclose the...

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

I didn't understand.

Andrzej Nowaczek, Analyst

Yes, the rate yield in the product...

Sergei Pirogov, Head of Corporate Finance, Member of the Board of Directors

Yeah, yeah. Absolutely, yes.

Andrzej Nowaczek, Analyst

And then also address in light of interest rate changes in recent quarters if there's been any difference accumulated between the back book and front book?

Ilya Pisemsky, Chief Financial Officer, Deputy Chairman of the Management Board

So if you take gross yield, it's about 34% something like that on average on credit cards. There was no government loans, cash loans, it's something like 18% to 19%. Point of sale loans, somewhere in the similar area, maybe even higher. So basically they maybe about 22%, something like that, 23%. When we talk about the outer loans, then it's approximately 14.5% on average gross yield before the insurance, obviously. And the -- if we take the home equity loans, then it's even less, it's about -- right now, about 13% to 14%, something like 13.5% on average. These are the yield and obviously for some of these product, also there is an insurance premium, which sits in the insurance yield.

Andrzej Nowaczek, Analyst

Okay, thank you very much.

Oliver Hughes, Chief Executive Officer, Chairman of the Management Board, Member of the Board of Directors

Well, in that case, yeah. Thank you very much indeed to everybody for your participation, for your questions and your support. Have a good evening.

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.