Russia’s top online lender Tinkoff Bank is mulling expanding into Europe after pulling away from a peloton of Russian consumer lenders endangered by rising bad loans and a lack of capital.

The London-listed virtual lender, which is controlled by serial entrepreneur and cycling fanatic Oleg Tinkov, posted record profits of RUB1.9bn ($30mn) in the first quarter and is on course for annual profits of RUB7bn-8bn.

Tinkoff’s ascent comes as its rivals fall by the wayside and as Russia struggles to emerge from a two-year recession caused by a slump in commodity prices and sanctions imposed over the Kremlin’s meddling in Ukraine. Now, the branchless lender is expanding its domestic offering while mulling an expansion overseas.

“The idea of Tinkoff going international has been floating around for a long time,” chief executive Oliver Hughes tells bne IntelliNews in a Moscow interview. “While we keep an eye on what’s going in big markets like Brazil and India, we tend towards cementing our current thinking – that there is loads to do in Russia. We are expanding the product line and we are going deeper into different Russian segments – there’s less competition here so it’s all to be played for during the next three to five years.”

Tinkoff’s sponsorship of a professional cycling team and its involvement in the Tour de France has raised the brand’s profile across the continent. Controlling shareholder Tinkov said the lender is exiting the sport after star Alberto Contador failed to secure the ultimate prize in Paris, but may return as part of an expansion into Europe.

“We’re the biggest digital bank in the world with 5mn clients and so maybe we’ll expand out of Russia and into Europe,” Tinkov wrote on July 26 in a blog post after the Tour de France ended. “Then we’d have more marketing visibility and cycling would be a great way of getting it.”

Englishman Hughes, 46, is the straight-man to the brash and eccentric Tinkov, who likes to trash talk on social media almost as much as US presidential candidate Donald Trump. 

Bred in Lancaster, Northern England, Hughes studied international studies at university as well as Russian and French. He opted to learn Russian so he could read primary sources for his dissertation on Peter the Great’s religious reforms. “It was where all the seismic changes were taking place [during Peter’s reign],” says Hughes, who sees some parallels with the Russian ruler and his current boss. “It was the focal point of the battle between the Europeanisers and the old traditionalist believers.”

In London, he worked for Visa International on the IT side until 2000 when management got wind of his Russian language ability. Hughes was dispatched to Moscow to build a local business from scratch after Visa had lost all of its business following the 1998 Russia default.

After seven years at Visa in Moscow and latterly as head of its rep office, Hughes met with Tinkov to pitch for his business. “Oleg asked me to move over and head up the business for him and I said okay,” said Hughes. “I didn’t need to think long, because you don’t get opportunities like that every day. Remote banking seemed like a good model because there was no online at that time."

Hughes said he has never regretted his decision to leave the corporate world to work for what was then a startup and the “strong, colourful and high octane” Tinkov.

“He swings from being a kupets – a Russian 19th century merchant – to a highly Westernized and sophisticated entrepreneur, and the swings can happen from second to second,” explains Hughes. “He never sleeps and he has demonic energy that galvanizes people around him into doing stuff and he always has ideas that actually turn into projects.”

While bne IntelliNews conducted the interview, Tinkov was away for three weeks on the Tour de France and the staff remarked at how much more sedate the office was. Apart from Tinkov, everyone sits in an open-plan layout with the surrounding walls plastered in striking Japanese anime murals.

Tinkoff has weathered the recession better than other consumer specialists, in part because its branch-free business model allows it to keep costs down. The bank also took the prescient step to avoid the mad rush to ramp up client leverage in the boom years prior to 2014. It actually started to cut approval rates as far back as Autumn 2012.

“We tightened up our underwriting a lot earlier than the rest of the market,” Hughes says. “We use all sorts of data and we get triggers from the credit bureau, for example, or triggers from online behaviour like search that allows us to take action a lot earlier.”

The lender has gradually hiked its approval rates to 25% from 15% in mid-2014 as the economy improved, while the loan growth rate now stands at about 15-20%.  Its share of non-performing loans dropped to 11.3% in the first quarter from 12.4% at the end of last year, while the cost of risk slid significantly to 10.4% from 17.9% over the same period.

Opportunist acquisitions

Still, not all of the analyst community is convinced now is the right time to be increasing lending and doubling income targets. “The retail segment is still not completely out of the woods, and the higher approval rates imply higher risks for the bank going forward,” says Natalia Berezina, banking analyst at Uralsib Capital.  

Part of that loan growth comes the “opportunistic” acquisition of four portfolios from rival Svyaznoy, a top 150 lender which was shut down after a serious breach of regulatory capital levels. “We called it financial euthanasia for Svyaznoy,”  Hughes says of Tinkoff's role in the winding down of Svyaznoy. “A very good model for helping banks to exit the market.”

Tinkoff remains acquisitive and has funding for other portfolio deals, such as cash loans or credit cards, if the price is right.

Despite the purge of deadwood banks by the Central Bank of Russia (CBR), Hughes says the clean-up hasn’t gone far enough. He is critical of the bailout scheme whereby “systemically important lenders” have brazenly used funds earmarked to rescue smaller banks to shore up their own capital.  

Hughes predicts there will be more consolidation in the sector as the CBR pressures weak players to recapitalise or sell up. Uniastrum Bank is set to merge with troubled consumer specialist Orient Express. In another potential deal, it was reported billionaire Viktor Vekselberg may take control of a bank controlled by fellow oligarch Mikhail Prokhorov. Russian Standard, another specialist consumer lender, has sought another debt restructuring from its bondholders after being bailed out twice.

“There are still a lot of banks out there not in good shape,” says Hughes. “But I don’t expect any banking collapses because the weak players have been through the worst – assuming that the crisis is coming to an end and the peak of the banking crisis is behind us.”

Financial supermarket

Tinkoff is looking to move beyond simply issuing credit cards via the recent launch of a financial supermarket site, which will sell their own products alongside those of other lenders, including mortgages, car loans and trading services. A travel broker may be set up and a platform for small and medium-sized enterprises is being added to service a sector that is largely overlooked by Russia’s bigger lenders.

Over the next five years, Hughes doesn’t expect that Tinkoff’s main competition will come from the mobile providers. He believes the biggest competitive threat will come from traditional players such as Sberbank and Alfa Bank, as well as new entrants from the online world if they can work out how to do both payments and consumer lending.

The US payment system ApplePay is set to start working in Russia by the end of this year and is talking to a host of Russian banks about possible cooperation. The system enables card-free and wallet-free payments from your smartphone. According to Apple CEO Tim Cook, ApplePay now accounts for 75% of all contactless payments made in the US.

Hughes declines to say if Tinkoff is one of the banks in talks with ApplePay or which mobile handset providers it is discussing potential alliances. “We talk to all of them regularly and we have done some projects, which have produced some results, but nothing has really moved the needle yet,” he says. “Given our distribution platform and our huge customer base and volume, it means we are an interesting partner for one of these players.”

Despite Tinkoff’s current success, some equity investors in its $1.1bn IPO in 2013 still have a bad taste in their mouth. Proceeds from the listing, which was priced at the top of its range at $17.50 a share, mostly went to Tinkov and key shareholders Goldman Sachs, Baring Vostok and Horizon Capital.

Shortly after the IPO, the stock flopped as brokerages issued reports claiming it was way over-valued. Sanctions in 2014 and the recession exacerbated the negative sentiment in its name. While the stock has surged 146% over the past year to $5.96 a share, that only values the company at $1.09bn – well below its $3.2bn valuation of three years ago.

Hughes hopes that people’s allergy to Russia is easing somewhat and the investor universe is expanding. “There are old names coming back into our story, new names coming back in and lots of people on the sidelines looking to see what happens,” he says. “They want to know that quarter one wasn’t a blip.”