Sberbank of Russia (SBER) Earnings Call Transcript

Good afternoon, dear shareholders and investors of Sber. Dear viewers, we are delighted that you joined us for our Investor Day 2021. Today, we will summarize the results of the first year of Sber's 3-year strategy and discuss our prospects and future priorities. Herman Gref, our CEO, Chairman of the Executive Board, will be the first speaker. Next, Alexandra Buriko, Senior Vice President, Finance Director, Member of the Executive Board, will present the financial target for 2022. The presentation will take about 45 minutes. And after that, we will be happy to answer your questions live. We thank all those who have already registered for a video chat with us. All our guests can use a dedicated form on the Investor Day's website to ask their questions. Now about the technical part. Our conference is being recorded today on December 15, 2021. Its video recording and presentation will be available on our website at sberbank.com. Today's presentations will include forecasts, estimates and expectations concerning future results and events. These forecasts are influenced by risks that we do or do not know about. And as a result, they may vary significantly from actual results. The disclaimer information will be available in our presentation on our website. Before Mr. Gref starts his presentation, let us watch a short video about Sber. I think it will help us create the right spirit for the next couple of hours. [Presentation]

Our meeting takes place in a very remarkable year. Sber has recently turned 180 years old. And you may be thinking that I'm going to talk to you about our entire history, but there's no need to worry. Of course, we will focus on the results of the first year of implementing our strategy and look into the future. Having started life as the Savings Association in St. Petersburg, which was opened only 1 day a week, Sberbank has evolved into Sber, a high-tech company operating an ecosystem of financial and nonfinancial services. Today, our products are available online 24/7. Who would have thought that we could achieve this? Certainly, the bank's history is a history of generations, generations of clients and employees. And despite its old age of 180, Sber is getting younger both literally and figuratively speaking. We have both young clients and young employees. SberServices are used by more than 80% of people between 14 and 21 years old. This is one of the fastest-growing segments, which accounts for about 1/3 of the aggregated growth of our client base. They are the ones who will determine how Sber will look in the future. The age profile of our employees is changing, too. Millennials and Generation Z already comprise more than 60% of our team and we're doing our best to develop their potential, create flexible work formats, training programs and comfortable working conditions. What does being young mean for Sber? It means the ability to grow to gain momentum and to increase resilience in the course of development. Growth comes first. This year we demonstrated a 30% increase of our financial business in key markets. These are mortgage lending investments and savings services for small and medium enterprises and noncash payments. We also tripled the revenue of our nonfinancial businesses and we will reach RUB 200 billion this year. The second thing is a notable acceleration. We are in a very good shape. Growth accelerated not only in Sber's operations, but also in development of new products. For example, in the last 4 years our productivity has grown by 26% and the time to market for new products has become more than 7x shorter and it is only the introduction of technology that enables us to smoothly operate all our systems amid this rapid business growth. And the last thing, our business model has become increasingly resilient. This is evidenced by the changes of our returns, which are becoming less volatile. Another parameter demonstrating our growing resilience is capital adequacy. Since the crisis of 2014, 2015, our capital adequacy has grown by 5.4 percentage points. At the same time, we increased the amount of dividends paid to our shareholders. Speaking in more detail about this year, the external context turned out to be better than expected. The Russian economy is recovering rapidly. The GDP has already reached precrisis levels and contrary to last year's expectations, up until now, the economy has grown by 4.4%. Industrial and consumption growth was supported by the timely reduction of the key rate in 2020 and fiscal stimulus measures. The accelerated economic recovery contributed to strong growth in banking markets. The growth rate of retail lending will exceed 20% in 2021. Mortgage lending was the key driver, which resulted from preferential programs and lower interest rates. The largest companies were actively launching long-term investment projects. In the second half of the year, we saw acceleration in lending to the small business segment as well. This will enable the growth rate of our corporate loan portfolio by up to 12%. The economic growth and favorable conditions in commodity markets allowed companies to increase profits and exceed the precrisis levels by 20%. Profit of the banking system will also refresh its maximum and total over RUB 2 trillion. Sber's strategy envisages development in digital, nonfinancial markets, where we expected high growth rates. The largest area for us is e-commerce, where we see a lot of room for growth and a significant level of synergy with the financial business. In 2021, the turnover in the e-commerce market grew by about 30%, with food delivery being the fastest-growing segment. This market doubled in a year. Such a rapid development is associated with changes in client behavior and originally low level of digitalization. So we will continue to see strong growth in this particular segment in the future. Our performance in the first year of the strategy shows that the way we've chosen to go is definitely the right one. Let's look at some examples. Sber's products and services are used by an increasing number of people. The reach of our client base is 103 million people, which exceeds the 2023 target. The number of corporate clients is also close to the 2023 target totaling about 3 million. At the same time, the clients are changing too. More than half of them are already digital-only. That is they're served exclusively through digital channels. Of course, I'm talking primarily about the Sberbank Online application. In 2021, Sber was named the world's best digital retail bank by the Global Finance Magazine. The user base of our mobile application already exceeds 73 million people, which accounts for 60% of the adult population of Russia and it keeps growing. This year, 7 million more clients became its monthly users. Importantly, more than half of this audience use our application on a daily basis, which is one of the world's highest levels for financial applications. We are transforming communication with our clients not only in the digital world, but also in the physical world, trying to be there for them in a new way. With our new devices, we serve our clients even within their homes. SberBox TV box is the most popular device with about 500,000 units sold since its release. We also launched a device called SberBox Top. It allows users to watch movies, listen to music, play and communicate with others on the big screen. Our recent launches include the SaluteTV operating system and the smart SberBox time media speaker. Our devices provide clients with access to the entire range of Sber products and services through a single surface with voice command available. These include access to our Okko and Zvuk streaming services, ordering goods from the marketplace and financial transactions. In an effort to meet the needs of the clients, Sber provides essential items, delivers groceries and durable goods. The GMV of our e-comm services grew by more than 11x over the year. It is important to note that our companies operating in the e-commerce industry were growing significantly faster than the market and this allowed us to become #1 player in the e-grocery segment, which as I've already mentioned is the most promising. Of course, we still have a lot to do in the e-commerce market. Our SberMegaMarket marketplace is the youngest among its competitors. But at the same time it is the fastest growing. We see potential in connecting our e-commerce services to this Spasibo loyalty program. This increases the attractiveness of the marketplace compared to its competitors. This was enabled by our investment in technology. Platform V is our in-house development, our know-how. Migration to Platform V continues, and it is bringing its first results. To date, more than 60% of the IT landscape has reached its target state and business effects are already noticeable. For example, when creating new products, we will write 50% less code for a greater number of products. We have launched more than 1 million changes in the year. In the next 2 years, we will complete the migration to Platform V and increase our efficiency by moving away from parallel development. Today, we are also already seeing the market potential of our technological solutions. This year we started supplying technological components of our platform to several commercial players and to the state. Sberbank won an open tender and gained the right to become a supplier of [indiscernible], a government digital platform. Pilot government services developed on the platform have already been launched and are fully operational. Another popular high-tech product by Sber is the SberCloud service, which has the widest range of PaaS solutions in Russia. SberCloud reached a 15% market share and has become the #2 player in the IaaS and PaaS markets. We continue to develop our computing power and this year, we have inaugurated the Christofari Neo supercomputer. The aggregated capacity of our supercomputers exceeds 18 petaflops. We are building a community of external developers around our platform solutions. The number of developers exceeds 50,000. The results of 2021 will be our financial performance. This year our profit will total about RUB 1.2 trillion, with our return on equity exceeding 23%. We are on the threshold of 2022. We are in a good resource for shape and well prepared for all possible challenges. On the one hand, oil and gas prices are going up and the economy keeps growing. Most industries and our clients have a strong financial position and key digitalization trends persist. On the other hand, we expect some slowdown in lending amid the rising rates. Regulatory and macro shock risks are also growing. Regulation of ecosystems is a topic of hot debate worldwide and no clear solution has been developed yet. In Russia, both the Central Bank and the government are thinking about possible measures. It is important to note that in addition to restrictive measures discussed by the CBR, it is also proposed to support the competitiveness of national ecosystems to develop fair competition and Russian regulators are open to dialogue. A lot of discussion is taking place on public platforms in working groups and that enables meaningful communication with the regulator. There are some signals indicating that the global economy has accumulated many impellers. But wherever the black swan may come from, our economy is now resilient due to the current macroeconomic policy based on the floating exchange rate, the fiscal rule and the large amount of accumulated ForEx reserves. The facts show that the current crisis were less painful than those of 1998 and 2009, when the GDP contracted by more than 5 percentage points. All in all, we look into 2022 with cautious optimism and our economy will maintain its growth potential at around 2.5%. Banking markets continue to grow significantly. Among the positive changes in real disposable income, we expect a 10% to 12% increase in our retail and loan portfolio. and growing investments will support the dynamics of corporate portfolio at around 7% to 10%. Our internal priority will be to create the best offering for our clients. Here 2 fundamental points are of importance, the quality of the product itself and seamless integrated client experience. We have put special emphasis on performance monitoring. The #1 priority is to understand each client. On the one hand, all people are alike and we all have similar basic needs. These include food, recreation, education and health care. On the other hand each of us has different life situations that make these needs unique. So we are learning to predict and create an offering for clients based on their profiles. To understand the needs of our clients, we need to work efficiently with data and algorithms. We use them to build recommendation systems. We send our clients over 400 million targeted communications per month. We are planning to invest actively in this area next year. The second priority is to ensure the best offering for the client. For example this year we launched the most lucrative credit card for clients, expanded the range of investment savings products and insurance solutions. Our clients can make their payments using their voice or with a look. We are constantly testing new ideas and developing best practices in product areas. With this in mind, we developed the discovery space where teams work with various hypothesis. The Prime subscription is the third priority. It has already gained popularity with 4 million clients of Sber. This is a tenfold growth since the beginning of the year. We integrated our nonfinancial services with interesting offers of key financial products and SberPrime Plus subscribers can now deposit money at a higher interest rate and make commission-free payments. In the future Prime will become an integration hub of financial and nonfinancial services. We believe that it will significantly increase the penetration of our products on our client base, with a high reach understanding of client needs and the best offers. Our objective is to convert the bank's clients and the users of nonfinancial services into a single loyal customer base, the ecosystem base. For this purpose, Sber is developing integrating tools. SberID, which provides a universal seamless access to all of our services is an example. This year, the number of SberID users doubled to 30 million. Such unifying elements also include payments and this Spasibo loyalty program. Sber will pursue the outlined priorities with a special focus on performance monitoring. For us performance is a complex concept. The first thing is to recruit, retain and develop the best digital people. To do this, we will train our teams from graduation and rebuild our HR process. Secondly, we will develop our prioritization practices with more precise allocations of resources and time. Thirdly, we will keep expanding our work with AI processes, increasing the efficiency of each step we take. The culture of responsibility and results centered focus remains the core value for our entire team. Earlier this year we launched an efficiency improvement program with the main focus on digitalization and AI. The program is supposed to yield at least RUB 100 million over 3 years. Based on 2022 forecast, we decided that we can increase our return on equity ambition to above 20%. Moreover in 2023, we will perform better than we expected a year ago. Our concern is not only the success of our business, but also about the future of our country. This year, we have put an emphasis on ESG areas. We have approved our climate strategy and refined the 2023 targets. We will help reduce Scope 1 carbon emissions by 5% and Scope 2 carbon emissions by 15%. Our responsible financing portfolio will reach RUB 500 billion. We are setting an ambitious goal of making our operations carbon neutral by 2030. Strategy 2023 is a foundation of our long-term development, although we understand that we are building this foundation for the next team of top management. In 2017, we made the right decision to start transforming the ecosystem. And now many global banks have decided to follow in our footsteps. The chosen development vector will increase our competitiveness in a rapidly changing world and guarantee the growth of shareholder value for many years to come. Thank you all very much. Alexandra Buriko will tell you more about our financial performance and plans for 2022.

Good afternoon, everybody. As Mr. Gref has already said, I would like to talk to you about our financial plans for the next year. What will the start of 2022 be like for us? I think we will be in a great shape. We are meeting all our financial targets and will slightly outperform our latest forecast on a number of metrics, including margins. As you know, 2021 was an important year in terms of the results disclosure. We started publishing reporting by business segments to provide you with a toolkit for detailed analysis and assessment of our key business lines. I know that many of you are already using these analytics in your models and I think that it will become more and more relevant in the future. Therefore, I would like to structure my presentation from a segment standpoint. As you can see, all our business segments demonstrate double-digit income growth. Our core banking business remains the largest one. Let's start there. In the first 11 months of 2021, our loan portfolio grew by [ 13.6% ], and we managed to significantly improve its structure. Retail loans already account for more than 40% of the portfolio. Mortgage lending plays an important role here with a growth of over 25%. At the same time, consumer lending also demonstrates a growth of more than 20%. We significantly increased lending to small and medium enterprises. This loan portfolio grew by 39% since the beginning of the year and reached almost RUB 3 trillion. In terms of liabilities, we increased the share of current accounts to 39%. This was enabled by the growth of transactional activity, further penetration of cashless transactions as well as funds inflow into escrow accounts driven by high demand in the housing market. The share of escrow in total customer funds will double in 2021 and reach 5%. We simplified our deposit line and launched a flagship product named [indiscernible], which also offers our prime subscribers a better interest rate on deposit. For 2022, we forecast that corporate lending will somewhat slow down due to the increase of interest rates and the end of economic recovery growth in 2021. We expect corporate loans to grow in line with nominal GDP growth rate by 7% to 10% per annum. The growth will be mostly fueled by lending to small and medium enterprises, construction sector, agriculture and health care. Retail lending will also slow down after the strong performance in 2021. The growth rate in the sector will be 10% to 12% with our portfolio growing slightly faster. Mortgage lending will remain the main driver of the loan portfolio increase in the retail segment. In consumer lending we will continue developing new products. These are installment payments for goods, payday loans and preapproved credit potential. In 2021, we relaunched our credit card business. Our Sber cards are a very interesting product. They combine a long grace period with an option to differentiate the interest rate depending on categories of expenses. This product has already shown its relevance. The number of cards issued per month has more than doubled since it was launched. In the past 3 months, we issued 1.6 million cards and set a new record in November in terms of the increase of the utilized limit. SberCard will allow us to increase our share of the credit card market next year. We expect retail deposits to grow by 6% to 8% in 2022. Growing rates on term deposits will increase their attractiveness. Corporate deposits will grow faster by 11% to 13%, while we will show slightly better dynamics. In terms of margin, 2021 results significantly exceeded our forecast due to the key rate growth. We expect the rate to be further increased to 8.5% at this year's final meeting of the Bank of Russia. At the same time, inflation will begin to slow down in 2022, which will enable the CBR to start reducing the key rate closer to the end of the year. We expect inflation to reach the target level of 4% by 2023, which will result in the key rate lowering to about 5.25. What does this all mean for our margin? This year, net interest margin was supported by the change in loan portfolio structure in favor of more profitable segments and the significant share of assets at floating rates. Let me remind you that loans at floating rates already account for 46% of the ruble-denominated corporate portfolio. Until we see a reversal in rates, the yield on these assets will support the net interest margin. On the funding side, in the first half of the year the deposits repricing factor will have pressure on the net interest margin. In addition to that the shift in the market interest rate curve is not linear. The curve is now inverted, which is another negative factor for the margin. Overall, we forecast a slight decrease in the net interest margin to about 5.2% in 2022. The change in market conditions gives us a reason to review our forecast for 2023 as well. We now believe that the margin will remain around 5% on this horizon. Now let us move on to another important characteristic of the banking business, the asset quality. In 2021, our clients completed a cycle of recovery from the 2020 crisis. In addition to that, this summer, we successfully settled a number of major problem cases. This resulted in a significant improvement in the loan portfolio quality. The share of nonperforming loans in the portfolio decreased by 1.7 percentage points compared to the beginning of 2020. At the same time, the quality of Sber's corporate and retail portfolios remain substantially higher than in the Russian banking sector on average. The improvement in the credit quality has had a positive effect on the dynamics of provisions. The cost of risk fell sharply this year after elevated level of provisioning during the crisis period. Now the economy is completing its recovery cycle, which will result in the cost of risk getting closer to a more normalized level over the next few years to stand between 80 to 90 basis points. Now let us discuss our fintech services. The payments business is an important and fast-growing source of income and our clients' loyalty. The total volume of Sber's money transfers, payments and acquiring is growing at an outstripping pace and may reach RUB 60 trillion by the end of 2021. This is enabled by the high transactional activity of the population and the development of acquiring services in both digital and physical channels. We expect our share in the Internet acquiring market to grow by another 10 percentage points. This will be facilitated by further development of SberPay, a service for online payments and purchases without a plastic card. Cross-border payments and transfers will keep driving growth in the payment business. In the past 2 years, Sberbank steadily ranked among the top 3 in the global rating of largest acquirers compiled by the[ Nilson ] report. This year, we demonstrated the highest growth among the leaders of the rating in terms of the number of process transactions compared to the previous period. The payments business is the most important driver of our fee and commission income. In 2022, its strong performance will allow us to increase our net fee and commission income by around 12%. Now let's discuss our wealth management business. Our share in the client's wallet is growing due to our leading position in the asset management, life insurance and pension insurance markets. In 2021, we increased assets under management by 14% to RUB 2 trillion. The demand for investment products has grown actively due to low deposit interest rates at the beginning of the year as well as the active promotion of our mutual funds. This year we also launched smart ETFs. It is a customizable product depending on a client's risk appetite. Investments already account for 18% of our client savings and this share will reach about 23% by 2023. In terms of risk insurance, 2021 was marked by a number of achievements. We entered a new market in retail insurance, voluntary car insurance and Motor third-party liability insurance as well as voluntary health insurance. In voluntary car insurance, we are participating in partner programs and promoting our own products. This business is already demonstrating a fivefold increase in premiums quarter-on-quarter. Motor third-party liability insurance is our new product. Its sales doubled in the last quarter. 90% of car insurance policies are sold online, thanks to improved customer experience in our Sberbank online mobile applications. We have maintained the leading position in credit life insurance. We expect this trend to continue next year due to the demand for mortgages. Here, the demand for online solutions is high as well. Already 74% of mortgage life insurance sales are made online and this share continues to grow. We believe that our initiatives will allow us to multiply our share in the retail risk insurance market. Corporate insurance is a rather young segment, which went up 5x this year. We will continue expanding our corporate product line and offer advanced industry solutions and we will also develop the reinsurance business line. Now let's move on to the nonfinancial business. In 2020, we announced an ambitious goal to increase the revenue of nonfinancial services with a CAGR exceeding 100% by 2023. Already this year, it has become clear that digital nonfinancial markets are growing at an outstripping pace. And for 2021, we forecast a nearly threefold growth in revenue. All our key nonfinancial assets demonstrated a times growth in revenue in 2021, moreover we significantly improved our market positions. We strengthened our leadership in e-grocery. The GMV of SberMarket and Samokat account for more than 30% of this young and fast-growing market. We believe this segment will remain one of the most promising. High order frequency provides ample cross-selling opportunities. Our multi-category marketplace SberMegaMarket is becoming a full-fledged e-commerce player. The big challenge of last summer for us was the rapid growth problem when our logistics facilities were struggling to cope with the sharp increase in the number of orders. However, by September, October, we managed to achieve the target share of ideal orders. In November, during the seasonal sales, the GMV on the platform reached RUB 7 billion, which is more than double the growth compared to the previous month. This is a great example of the synergy between different businesses in our ecosystem. So the clients who drove about 15% of GMV during this period used our payment by installment service. We are already seeing that the e-commerce industry unfolds many synergies. These are credit products, payment solutions for our retail clients and merchants and our Spasibo loyalty program. Today, more than 53 million customers participate in our loyalty program. We integrated the Spasibo bonuses into our services, which has definitely given an additional momentum to the e-commerce industry. In the first 11 months of 2021 more than 10 billion bonuses were utilized within our ecosystem, primarily in e-commerce. This accounts for as much as about 20% of the total utilization under the loyalty program compared to less than 5% a year ago. We are planning to increase the product range and the number of categories in our marketplace organically as well as through M&A. We believe that e-commerce will remain in the investment phase until 2023 with the main focus on GMV growth. We expect it to double next year. while its margin will improve. Our next major segment is FoodTech & Mobility. We strengthened our leadership in the ready-to-eat food delivery sector, where we are represented by our flagship Service Delivery Club with [indiscernible] is already integrated into our marketplace and subscriptions. In terms of mobility, we will continue developing 2GIS geolocation services, which have already gone beyond navigation and ordinary advertising. The platform offers solutions for both small and large businesses to promote their product range and ads for apartment sale and rent by DomClick starting from this year. All these initiatives have allowed us to focus an almost twofold growth in segment revenue in 2022 along with improvements in the unit economics. This year has become an important milestone in the development of our strategy in the entertainment industry, which is represented by video and audio streaming platforms together with the game development segment. This business requires significant investment in content. At the same time, this vertical is important in attracting and retaining customers in our ecosystem. The attractiveness of these services is also seen in the utilization rate in our SberPrime subscription. SberPrime is changing our sales model and is becoming a single channel to promote various services. Our subscription program underwent a major change in 2021. We increased the number of services available to users and added financial products. We also created a subscription to the young people and expanded the sales channels and distribution instruments. At the end of November, we already had over 4 million active subscribers. The subscription enabled us to multiply the customer base of our nonfinancial business. Moreover, we see that the subscription increased the usage frequency on average by 20% and up to 40% for some products. But ultimately, the subscription increases the cross-sell revenue per customer and makes customers stay with us longer. These metrics together form the base for maximizing clients lifetime value in our ecosystem. A few words about our B2B services. This segment already demonstrates an EBITDA margin of over 20%. And we expect the growth to continue, driven mostly by our cloud solutions and cybersecurity products. I would like to end this segment discussion by reconfirming our goals for revenue from nonfinancial services. We expect a 100% CAGR over the 3 years of our strategy. And now let's look at the next focus area, operational efficiency. As you know, we look at the group's operating expenses in the context of the financial business and fast-growing nonfinancial services. For our financial business, we maintain our guidance to keep the cost-to-income ratio at the 2020 level of about 33%. The main cost growth driver would be high inflation, which we have already discussed. This year we launched an efficiency improvement program that is supposed to generate over RUB 100 billion in savings over 3 years. Our initiatives would yield over RUB 24 billion in savings in annual terms as soon as this year mainly from transition to digital processes and use of AI-based tools to reduce transaction time and improve customer experience. In terms of cost optimization, we have set the following priorities. We renounced headcount growth in the headquarters, manage our IT infrastructure expenses and reduce real estate costs by introducing flexible working schedules and optimizing the branch network. The share of nonfinancial services in our expense structure will continue to expand due to active investments in building up market positions. Customer acquisition will account for a significant part of these expenses. This will result in the group's operating expenses growth remaining in the 2021 level on a 2-year horizon. Afterwards, we expect an increase in efficiency and lower OpEx growth, thanks to the completion of migration of the bulk of transactions to the core Platform V. In addition, we plan to increase investments in developing our nonfinancial services and we have raised our forecast of investments as a percentage of equity to 10% by the end of 2023. In terms of capital management, the following factors should be taken into account. The risk-weighted assets density increased due to macro add-ons, mostly on consumer unsecured loans and credit cards. We intend to partially offset this factor by expanding the scope of the internal ratings-based approach and the introduction of new credit risk assessment models. To optimize our capital structure, we are planning to continue the 2021 practice of raising Tier 2 and additional Tier 1 capital instruments in the local market. In 2021, such instruments increased our total capital by more than RUB 60 billion. We forecast a slight decrease in the capital adequacy ratio to just over 13%, which is above our target level. Maintaining a high return on equity will allow us to stay in this comfort level and we will stick to the dividend policy that we approved last year, with a target dividend payout level of 50%. Thus we have increased our financial guidance for 2022 compared to our last year's estimates. We aim to reach the return on equity above 20% next year, and as Mr. Gref has already noted to maintain this level in 2023. With that my presentation is over and I invite you to join our Q&A session.

[Interpreted] And we continue. We will now have the Q&A session. We are joined by new speakers. Alexander Vedyakhin, our First Deputy Chairman of the Executive Board and Head of Risk Management Block. Senior Vice President, Dzhangir Dzhangirov. Thank you very much for those who registered to ask questions. We have a set of video questions from our investment analysts. We'll work with them first. And then I'll also take questions in parallel from our website. Let us start. Let us start with the questions, directed to Mr. Gref. We will have to let him go a little bit earlier due to his busy schedule, so we'll focus on them first, and then we'll cover other questions with other top managers. Simon, please, from Citibank. Floor is yours.

[Interpreted] Thanks very much for the presentation, it was very informative. And thanks for the opportunity to ask questions. You've updated us on a number of your successes in achieving your goals over the past year. But I'm sure it wasn't all smooth sailing. It would be quite interesting to hear from Mr. Gref what challenges you may have faced. What things didn't go quite as well as you expected? And how you overcame those difficulties? And I'd also be interested in hearing some more about the regulatory landscape changing, which Mr. Gref also alluded to in his presentation, what do you think -- what have you already done? And what do you think the bank will have to do to adapt to the changing regulatory outlook, especially concerning your nonfinancial businesses?

[Interpreted] Simon, thanks for your questions Mr. Gref?

[Interpreted] Yes. Thank you. You know, the year 2021 was rather successful. Frankly speaking, if you want me to name one serious challenge, something that we were unable to meet or overcome, it's hard to tell. There are issues with our brokerage, but I wouldn't call it an unsuccessful thing of 2021. Frankly, it was not within our focus, and we did not expect any breakthrough in that area in 2021. And during this year, we saw serious growth. And we actually formed the team with a little bit of postponement. So the year '22 and '23 will be the years in which we will restore our domination in these markets. So these are the things where we have just lack of satisfaction. It's the business where we could show better performance. I think that's the only thing. Credit cards, there was a bit of a slowdown there, but we were prepared for it. And we put the best product on the market. It's called Sber card. And with that, in the second half of the year, we ensured serious improvement in our positions. I think we issued more than 2 million, right, of new cards. And in general, I'm satisfied by the performance there and very good outlook for 2022. Generally, all our plans were realized in 2021. You know. I think that out of the challenges of the current market, I can name another one is a HR deficit, especially for digital staff. We -- we can't say we hadn't foreseen it, but it's actually very acute this year. It has become very serious. Initially, we invested a lot into joint programs with the universities we opened school '21, and we are also the biggest employer of digital staff on the market. But this year, we saw that due to the pandemic, there was credit demand for digitalization here for digital staff. Competition has become bigger here, and we couldn't have foreseen this growth of dynamics in remuneration for them as well. This is one thing that we couldn't have foreseen. Now financial businesses are growing rather well. You've seen all the figures. It was nice generally with the financial business. Migration to the new platform is going along the plan, about 60% of total services will be on our new platform by the 1st of January 2022. Most all businesses are migrating well. And I would say that somewhere, we're doing even more than we initially had thought. Some things are not being migrated in December because the peak loads in our system started to happen earlier from the second half of November. Usually, they were in December. But this year, they started in end of November, start of December, a very big surge in transactional activity, both for corporates and individuals. Part of the migrations were postponed until January because there will be a decline in the transactional activities at the start of January, so we'll finish the migration very well, even better than we expected. Overall, this year was successful for financial and nonfinancial businesses. Regulation of ecosystems is a hot topic today. And we find ourselves in a very constructive dialogue with the regulator. I hope that next year we'll find the solutions that will be acceptable for both parties. No problems with that, that I can see. Our main shareholder, the government, fully support our movement towards the ecosystem. Every supervisory board, we're looking at that in a very detailed manner or this path within our strategy. And I can say that the new composition of the Board has started to require a more complete report on our movement along this path. A couple of times, we had to remake the online reporting on our ecosystem. And right now, our directors are satisfied and they are very picky about this report and they demand a lot, and they're very serious about this transformation. So generally, it's all positive. We do not expect any unwelcome surprises except maybe for some macro shocks in the global economy that may happen or the geopolitical uncertainties that stay in the world in 2022.

[Interpreted] Thank you. Simon, thank you very much for your questions. Let us take the next question, and our next analyst, Samuel Goodacre from JPMorgan.

[Interpreted] That was a super interesting presentation. I had a question about the current level of geopolitical risk. Mr. Gref, obviously, your current tensions are weighing heavily on your share price and the broader Russian market. So I hope you could give us your view on the current sort of military tensions at the border with the Ukraine?

[Interpreted] It's very hard for me to answer such questions. I can only say about our vision from here, from Russia. The seriousness of Russian invasion of Ukraine is seen only from the United States of America. We do not see it from here from Russia, and we don't take it seriously. We see it as a very massive PR war. For now, I don't have any expectation that in this region, something serious like that could even happen at all. This is a very consecutive PR policy from the U.S. We're very surprised about that. They're doing this for a very long time, so hard. I don't know why it happens. It must be something behind it, but it's surely not the real situation. We're not feeling any tensions in Russia. And we're not expecting any deterioration of the situation from Russia's side. We'll see how it goes. And I think that may be part of some big global geopolitical game of big players, but we're not taking this as a serious risk that can materialize. What about the capability of Sber to sustain shocks? Well, if we compare it with 2014, for example, we have become more resilient in many positions. We're holding stress testing on a regular basis. The last one happened last week, and we reported the results of the stress test to our directors. As usual, there was a combination of unthinkable factors all together. And generally, we were able to absorb it and even the most unlikely scenarios, we can absorb those too. So everything even positioned by the central bank, it's so good. The capital adequacy is nice. If you look at the Tier 1 ratio, it was about 9% then, now it's 14%. Sensibility to the currency FX risks, we decreased it a lot. On the Russian market, we created even a whole range of instruments with a floating rate. So today, we are more resilient to interest rate risks and FX risks. Growth of the ruble exchange rate today relative to the U.S. dollar, I think the decrease of the trade by RUB 1 gives us a change of less than 0.5% to our capital adequacy. So we feel ourselves rather free I don't see any serious risks that could create any material problem for us. It's incomparable in any thing to 2014. Technologically, we're much more independent right now, and we are self-reliant technologically too. I'm looking into our future with very much assuredness.

[Interpreted] Next question comes from Olga Veselova, Bank of America Merrill Lynch.

[Interpreted] Thank you very much for your presentation. My question is how can the dialogue or the balance of forces can develop between the Central Bank, who wants to tie the regulation of the ecosystem to capital, and the Ministry of Finance, that wants to see higher dividend payments of state-owned banks? How to strike a balance between those? And second question, what can be the form of your expansion of the ecosystem abroad? What's your appetite for this external growth? And what regions can be the targets of this growth. Thank you.

[Interpreted] Thanks, Olga. Thank you very much for your question. I can say that the temperature of all discussions has fallen by much. It has become more constructive than during the start. There is more understanding between us. I am sure that we will find a normal healthy compromise that takes into account all interests. Previously, on the ecosystem market, we were the pioneers, everyone looked at us and thought of us as some strange people who are going God knows where, et cetera, et cetera. Today, we resolutely calmly basing on the examples of many global banks that are starting to build ecosystems. For example, the colleagues from JPMorgan asked the question, JPMorgan is the example of the bank that started building its ecosystem too. We made unprecedented investment into IT. We constructed our platform. And today, we can see that this is the way along which all big players are moving or starting to move. The players that want to be competitive on the long-term horizon. In this sense, I think that in 2022, we are going to agree on something to find this mutual understanding. As far as the expansion of the ecosystem abroad is concerned, we are not taking it seriously. There's a whole number of our businesses that have gone abroad and they are already providing services to foreign companies. This relates to our services in cybersecurity, mainly. A whole number of products are being provided in that area as SaaS, but that's not expansion of the ecosystem. Right now, we are focused on finishing the formation of the ecosystem here. So for the coming 2 years, will focus mainly on that. We're limiting the scope of what we are doing for now. But we have some of them were already sold. I mean, the businesses that were part of the ecosystem. Some of them will be made their way to the stock exchange, and we are working on the plans to do so. And so the focus for now is on the businesses that will make the bulk of the system. And the focus is on Russia. Still, we are looking at the CIS market, where very easily, especially the markets where we are already present, where we can rather easily repeat. We produce the services that we have here and will produce this success as well. In the future, I think that it is possible, but in the coming 2 years, the key sphere of our effort will be creation of the ecosystem here in Russia.

[Interpreted] Now we have a question from our website. It's about the distribution of capital. Do you see that it is possible to change the dividends payment mode? Maybe make it semiannual or quarterly?

[Interpreted] Right now, we're not thinking that it's possible. We are paying very, very much. I know that you always want more, but colleagues, please, let's think about all the interests. Frankly speaking, even annual payments for us is a very huge detriment to the capital. The amount that we are paid are becoming very, very sizable for us in terms of sustaining the level of liquidity and capital. So we will not change anything.

[Interpreted] We continue our discussion with analysts. Let's take our next question from Gabor Kemeny from Autonomous Research.

My first question is on e-commerce. What do you expect to be the key highlights of e-commerce development in 2022? And perhaps a related question to that. You showed us that Prime subscribers are growing quickly. Still, I mean the 4 million number here is compares with the 75 million of MAU you showed, so there still seems to be a massive room for cross-selling. How do you think about capturing the cross-selling opportunity to the ecosystem? That's the second question. And finally, coming back to the geopolitical risk. It would be interesting to hear your thoughts on contingency planning. I mean there are measures being discussed about possible disruptions to payment systems, cross-border payments. Obviously, a large part of this is politics, and you have little influence on it, but it would be interesting to hear your thoughts on what measures can you take to mitigate these risks.

[Interpreted] Thank you, Gabor. The first question about e-commerce, the main highlights, please. I'm not going to give you the figures. You have them already, and we will be sticking to our strategy religiously. As for the key goals for next year, I would say that. It will be creating a structural creation of our marketplace. Here, we are planning at the beginning of the year to conduct the big reorganization of all our businesses and unite them under this single roof, so to speak. It will be a big challenge. It will be this big transformational endeavor. Secondly, we will be radically improving customer experience across the board, digital customer experience and offline customer experience as well. We already have experience like this. Back in the days, we did this with Yandex marketing. And in parallel, there was this creation of the digital infrastructure and off-line infrastructure without any significant drop in quality. You can't really do it without any detriment to quality at all because we are talking about several fold exponential, explosive growth and the rebus side of it is worsening customer experience. And we have to deal with a lot of customer complaints. So next year, the 2 key goals with all the financial results, the financial targets will be the structural transformation of our e-comm and the radical improvement of our customer experience. Of course, this will involve the creation of the entirety of the logistical chain because there, we are slightly behind our competitors. The second question was about cross-selling and Prime. We are basically doing 2 things simultaneously. First, we are learning to formal subscription to sell it to incentivize the customer as well as our employees, to use the subscription. And we are also, at the same time, trying to create this seamless customer experience. 2021 was, in this regard, an experimental year because we were doing all of these things at the same time. As for the customer experience, we fixed it only at the end of the year. And we still have certain gaps. We hope that in the first half year 2022, we will finalize this. But still, we've made a lot of progress in all of these 3 basic areas. Another challenge, of course, is the back the tower experience. The tower customers do not have a clear understanding of what this subscription is. We were among the path to enter the market with index some other players. We brought this practice, this experience to the market. And now we see other market players joining in and following in our footsteps. So at the moment, the Russian consumer and the Russian user does not really know how to benefit the most from such subscriptions. So it's still ongoing, but I think that this year and maybe next year, will be spent on raising this awareness and making sure our customer understands all the benefits. And each time the customer gets this benefits at the end of the month, we'll also collect this information on how much the customer has saved with the subscription and what the benefit was. I think this explosive growth and maximum upsell will only be possible starting from 2023, not earlier. 2022, I think, will be spent on teaching people how to use this tool properly and how to make the most of it. And lots of people, especially older people, they've had this negative experience from the soviet days, from the '90s, where subscription is associated with these sales of poor quality products in a bundle. So the idea of a bundle is often associated with attempts to sell to you something that is of poor quality, that's something that you don't really need. So there is a certain mental barrier when customers see that within the subscription, each and every component, each and every product or service is actually useful and beneficial for them, then people start using it more actively, of course. They are more motivated. And we see the big difference between the use of products between the beginning of the year and the end of the year, but this takes time, of course. As for Plan B, we do have Plan B, of course. It's quite a detailed plan at that. And infrastructure-wise, I can say that, today, we are quite independent compared with ourselves and the banking system at large. We are pretty much ready for any contingency, any adverse scenario, and we will be able to ensure continuous operation of all our services.

[Interpreted] I would like to add a quick comment to the first part to what you said, Mr. Gref. When we're talking about Prime, we are, of course, very much -- very closely monitoring how our customers' income has changed, how it differs between before Prime subscription and after. Yes, the amount of subscribers may not be growing as fast as we would like, but the operational income after the subscription is activated across all services, is increased by 20% to 40%. That is after the subscription is activated across different vintages of customers. And another quick comment about e-comm and other important highlight our competitive advantages, this loyalty program that we have been integrating very actively. And thanks to the activation of this program, we have already exceeded the RUB 100 billion in GMV in our e-comm business. This is a big milestone for us and further development of the loyalty program and its further integration across our services will, of course, be yielding a big positive effect according to our estimates.

[Interpreted] Thank you very much. I think that is a good insight, good information for the market that we have hit this milestone. Gabor, Thank you for your questions. Let's...

[Interpreted] Sorry, just one more thing. Regarding e-comm, we are starting from a low point, low base, but in our disclosure over 9 months, sorry, I'm not seeing anything. Oh no, it's back. So it was RUB 60 billion, and we are currently closing at RUB 100 billion. So the growth is there. The positive dynamic is there. As for the ecosystem, the other day, we accept the development of our network. I have this quarterly dialogue with heads of all blocks. And before that, we were trying to get rid of lines in our branches. I thought that it was an embarrassment. Now our focus has shifted on back on maintaining our offline customer traffic because upsell happens best after physical personal contact with the customer. And we see that this year, we were able to maintain the customer traffic at the same level that we had in 2020. But we've had a 15% drop in customer traffic related to financial services. It was 25% last year. This year, it's 15%, so 15% of customer traffic is the customers that come to our branches for nonfinancial services. Look seeing growth in a number of services, multiple services, including spare logistics best parcel delivery and e-com delivery. Overall, we have observed a great bounce back. And we have seen that our direction towards the creation of the ecosystem is the right one. This year, we have finished piloting some of our key formats because the entire branch network had to be reformatted to adjust it to the new sales model, and the sales model that includes nonfinancial services, among other things. So next year, we will not be spending time on this. We have an option of light reformatting with low capital -- lower capital investment to address down and work to this new sales model. And we'll also be creating fully entirely new flagship formats where you can get advice on all of our products and services, both physical and nonphysical. Just my 2 cents, a couple of figures. 1 million parcels a month, plus our usual customer traffic, 1 million. This means a significant amount of new visits. So the amount of time that is spent on contact is short, but every second counts, because we are talking about plus 1 million seconds or minus 1 million seconds. We're basically spending that with a timer. And we need to pack in that time cross sales as well. We have, say, 15 seconds for selling certain products and cross-sell. And such sales can be comparable with sales of our other financial and nonfinancial services. We will have 16 big flagships to cover pretty much all the million-plus population cities. Also the entity of our financial service is basically located here. So the physical area that we need. It's not that big. 15 to 20 square meters should be enough. And there is one big Russian city. I'm not going to name it just yet. We plan that to regroup our network in a way that it is optimal, not just for financial products, but also for selling our nonfinancial products and services. And this way, through the recombination of this branch network, I basically think they are not longer branches, but our points of sale. This way we want to become the leaders in the regional market. And once we've done that, we will scale is up on the federal level.

[Interpreted] Thank you, Alexandra. You've created an intrigue. And I hope very soon when we disclose our results, we will talk more about this experiment. Next question about our friendship with the company called VK and our sale of shares in MFT and the future of O2O. Mr. Gref, would you take this one, please?

[Interpreted] Our friendship, you say? We're friends. We will continue to be friends. I've already met the new head of the company. We know him very well, Vladimir Kirienko. We know him from his pros telecom days. He's a very skilled and very advanced manager, and I think they've made the right choice. I find that he clearly understands his priorities. He knows what he's interested in and what the interests of the company are. We have agreed on a certain road map with him. In the next month or a month and a half, we will have to work very hard together to resolve certain issues that persist in our joint businesses and also to expand our collaboration or partnership. We've always had good relations with the mail with VK, and we will be building up on this. So far, everything is quite positive. We had this long-term tradition, long-term this long history of work with Vladimir, and I expect the same great results with O2O and between our 2 companies. I'm sorry, what was next one?

[Interpreted] I'm sorry, what was next one? No. No. You answered the question.

[Interpreted] Oh, the future of O2O. Of course, there are lots of unresolved issues as of now, so we are currently discussing it, coordinating it. And as soon as we've reached any agreements, as soon as we have decided something. We will definitely let you know right away. We are in dialogue. Our teams are in contact almost daily. Alexandra is still on the Board in VK. So I am largely positive and optimistic about this.

[Interpreted] Next question from our analysts. Andrzej Nowaczek, HSBC.

I'd like to follow-up on what was just discussed a couple of minutes ago. In this era of increasing digitalization, you still maintain a vast network of branches and a headcount of around 300,000. A year ago, when you launched the 2023 strategy, there was no mention of a need for restructuring. Has the thinking on this changed recently? And how many employees and how many branches do you expect to have in 2 years' time? Thank you.

[Interpreted] Thank you for your question. The answer is I do not know. And I do not really have any plans about this. Previously, we were trying to shrink our network and close unprofitable branches. We currently no longer have this goal. At the moment, we pretty much don't have any unprofitable branches. They are all making profits. And our goal is to maximize the benefit that we get in offline and online to maximize our advantage. We have disadvantage as opposed to other companies is that we are great in digital on APA with any other advanced company. That is digital from inception. But as opposed to off-line companies, we are better than any off-line company in digital. I think this is a very big competitive edge of ours, and we will be making use of it. So as I said, it's not only that we are not trying to shrink our branch network. We are trying to do completely different. We're trying to figure out the new configuration of our branch network, and we will probably have to spend 1 or 2 years to figure it out, maybe the branches, some of the branches will have to be relocated. Their quality will have to be upgraded. It is possible that we will reduce the range of our branches, but it's not like we have an objective, a plan to radically decrease our physical presence, our off-line presence. The goal is now to maintain our off-line presence, to use this off-line presence to radically increase our competitiveness in online?

[Interpreted] Mr. Gref, the topic of branch network is my favorite one. Andrzej, the sales network block is a separate structural division of ours, which has a hard P&L with all the other subdivisions. This is a profitable internal structural division, which selects the exactly right products to put them on the shelves and to make profit. They have their own costs and their own profit and they are making profit. So this equation, it results in a plus sign. And they are, of course, motivated to increase their margins. So everything is perfectly fine there. We did this maneuver in exactly right time. Still, it took us, I think, 2 years to communicate this feeling of responsibility across the network to make sure they understand that are responsible for their P&L. And I said, your fate is in your hands. And unless you are effective, we'll have to start closing you. And if you fight for your existence, if you sell as many products as possible and to make profit with those, then you'll be able to maintain your position. The transformation has been successful so far and then they are successfully and effectively selling products. Thank you very much.

[Interpreted] One last question. Mikhail Butkov, Goldman Sachs for Mr. Gref. And just in case, we are here until 6:00 p.m. Mikhail, we're ready for your question.