Sberbank of Russia (OTCPK:SBRCY) Q4 2019 Earnings Conference Call February 27, 2020 9:00 AM ET
Company Participants
Anastasia Belyanina – Managing Director and Head of Investor Relations
Herman Gref – Chairman and Chief Executive Officer
Alexander Vedyakhin – First Deputy Chairman
Bella Zlatkis – Deputy Chairman
David Rafalovsky – Executive Vice President and Chief Technology Officer
Alexander Morozov – Deputy Chairman and Chief Financial Officer
Alexandra Buriko – Senior Vice President
Alexey Bogatov – Senior Manager and Head of Integrated Risk Management
Conference Call Participants
Olga Veselova – Bank of America Merrill Lynch
Andrey Pavlov-Rusinov – Goldman Sachs
Elena Tsareva – BCS Global Markets
Gabor Kemeny – Autonomous Research
Andrey Mikhailov – Sova Capital Limited
Andrew Keeley – Sberbank CIB Investment Research
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Sberbank 2019 IFRS Results Call hosted by Sberbank management team. There will be a presentation followed by a Q&A session for analysts and investors first and a Q&A session for journalists afterwards. [Operator Instructions] I must advise you that this conference is being recorded today, February 27, 2020.
I would now like to hand the conference over to Ms. Anastasia Belyanina, Head of Investor Relations. Please go ahead.
Anastasia Belyanina
Thank you, operator. Thank you very much. Thank you, everybody, for staying with us and taking the time to join us for this results call dedicated to our financial results 2019. We have today a very senior team with us. We’re headed by our CEO, Mr. Herman Gref. We have our First Deputy Chairman, Alexander Vedyakhin. We have Deputy Chairman of the Board, Bella Zlatkis. We have CTO of the Sberbank Group, Executive Vice President, Head of Block T, David Rafalovsky. We have our regular speaker, our CFO, Alexander Morozov and Senior Vice President, Alexandra Buriko. And we have Alexey Bogatov, Senior Manager and Head of Integrated Risk Management with us. So you see, we have a lot of speakers, and I’m sure the call will be very interesting.
But before we begin, I would like as usual draw your attention to the fact that some information on the call may contain forward-looking statements regarding future events and performance, and actual results may differ materially from those expressed or implied in the statements made during the call.
Please, for more information, refer to the disclaimer, which is on the second slide of our presentation. So with this, we start with a short overview of our results from our CEO, Mr. Herman Gref. Then, we’ll have a short Q&A session with our CFO. And then we move to the regular Q&A session with other speakers. Thank you very much, and I wish all of us a very interesting call.
I pass the floor to our CEO, Mr. Herman Gref.
Herman Gref
Good afternoon, ladies and gentlemen, good afternoon, my dear shareholders. Thank you for taking the time and for joining us on the full-year results conference call. And I would like to start with a few words about the macroeconomic situation. Before we drive into Sberbank 2019 business, let me briefly recap a few trends. And the first is that the Russian economy proves to be pretty resilient in spite of the overseas headwinds related to trade conflicts.
The CBR renewed its easing cycle as inflation remains well below the targeted 4% level. The regulatory environment became tougher due to macro prudential measures across a bunch of credit segments. And generally, what we faced, the macroeconomic situation was not bad, but we didn’t see economic growth. And in the same period of time, we had a few new regulatory initiatives, which created a lot of new challenges for Sberbank and for the whole banking sector.
Let me provide you through our financial results and business highlights. As you saw in the morning, we earned a net profit of RUB 845 billion and RUB 914.8 billion net proceeds from continuing operations. The difference is due, as you know, to the DenizBank sale. Our EPS was up by 1% year-to-year to RUB 38.55 per share, and EPS from continuing operation increased by 9.6% year-to-year to RUB 41.8 per share.
We achieved ROE on 20.5%. And again, if adjusted to one-off, ROE came in at 22.2%. I think it’s a good result. Our Common Equity Tier 1 capital adequacy ratio reached 13.4%, which is in line with our outlook and allowed us to propose an increase of dividend payment towards our targeted 50% level, and it would be our initiative to our Board of Directors and I hope that our directors will support us. This is in line with our dividend policy.
We met all our guidance metrics for 2019. It’s a little bit boring, I think, yes, that we have delivered everything what we promised. I would like to mention the following three business highlights. Firstly, and what is really crucially important for us, we launched our new technological platform, which totally overhauled service production. It enables our product teams to release new services with a much lower time to market. And I said that we need to create a new tradition to invite our CTO, David Rafalovsky, to our conference call because I think he is a crucially important person for a technological company.
And I think that what we face now at Sberbank, it’s not only bank, it’s a technological company. And secondly, we defined the framework of our ecosystem and its key areas. We formed partnerships with leading Russian tech companies. And finally, we closed the sale of DenizBank. I will cover the first two topics in more detail in my speech. And the last point has already been covered.
Let me walk through the main achievements of our strategic priorities. First one was the client experience. Our active client base continued to grow during the whole year. The number of active retail clients increased by 3 million to 96.2 million with each second new client aged 14 to 20 years old. It’s also very important issue for our bank. We try to catch more and more clients from the young generation, and we have done it.
The number of active corporate clients reached 2.6 million, mainly due to SMEs. We launched a number of solutions for self-employing clients. And I would like to thank my colleagues from corporate business because the result is very good, every two out of three self-employed people becomes Sberbank clients. We’ve continually improved the online user experience in our channels. Our Sberbank Online app is ranked in the top three by number of downloads in the app store, and the number of its daily users has exceeded 24 million. 56% of all our consumer loans were produced online last year, 56%. It’s a good number also.
We launched a cross-border money transfer to 10 countries from our app. Our digital housing platform, DomClick, offers a variety of real estate services. Now it’s the largest database by the number of listings on the secondary residential property market, over 2 million listings, produced every fourth Sberbank mortgage in Russia and every second in Moscow through this online platform.
On the corporate front, we prioritized lending to SME and micro clients. Our loan book in this segment exceeded RUB 1.6 trillion, with a growth of 20% year-on-year. We issued over 1 million smart loans to small businesses. You remember that we call the smart loans as our own automatical process – credit process for the SME.
For 2020, we set to approve 40% of all credit applications to small – as I said – excuse me, for 2020, we set to approve 80% of all credit applications to small businesses in less than 60 minutes as a target, 80% in 60 minutes, less than 60 minutes. Last year, I flagged to you that we launched our all AI-based 7-minute loans. And today, it already accounts for 15% of production of the standardized loans to large and medium-sized corporate clients. And I could say that the size of the credit is RUB 2 billion. It’s a good size. It’s not only SME, RUB 2 billion, it’s middle-sized corporation and the big corporation.
In 2019, Sberbank took a landing position in the transformation of the residential property construction market. We proposed a school-based financing solution to developers. As a result, our market share is now over 40%. We view client engagement as one of the key metrics of success in the road through our disruptive technologies. And we are proud to report that the monthly audience of our online app is 54 million users. At the same time, we welcome 47 million clients monthly in our branches. But as you can see, we overcame the border. Now we have more MAU active clients than in our physical branches.
It is the substantial traffic which made us rethink the role of our branch network. We have converted it into a hub for clients to upgrade their digital skills and a front office to promote our ecosystem products. And now I would like to say a few words about our ecosystem. We made several additions to our ecosystem in 2019. We started cooperation with two leading tech companies, Mail.Ru Group and Rambler. We acquired job classified Rabota.ru, Center of Speech Technologies and developed internally Sber Okko, SberDevices and SberLogistics.
This strengthened our position in a number of areas, including transportation, food delivery, lifestyle, entertainment and media to name a few. The entire investment in our ecosystem in 2018 was approximately RUB 80 billion. The total investment in the non-banking cases since the start of our ecosystem and including companies created organically amounted to RUB 125 billion. It’s less than 3% of our equity capital.
For 2019, these companies generated around RUB 1 billion in revenues or 100% growth year-on-year or rather share attributable to Sberbank was over RUB 35 billion. For 2020, we’re on track to meet RUB 70 billion target in revenue attributable to Sberbank. We have started the integration of our ecosystem services to ensure a seamless client experience. This we’ve achieved through enablers on our new technological platforms such as SberID, SberData, SberAI, SberSecurity and others.
As of now over 84 services in the ecosystem are accessible – excuse me, 48 – excuse me on my German, because in Germany, we read the numbers from the back. I speak about 48 services of the ecosystem are accessible through SberID. This unified login is used by more than 6 million clients. Since we are building an open ecosystem, SberID and some other enablers will be available through third quarter.
A few words about technological leadership. In 2019, we launched our new technological platform. As I mentioned, it’s crucially important for our business. And it’s a key point for our transformation into a technological company. We started the gradual integration of our product lines to new platform. And the major part of the transition will be completed by 2022. The new platform requires 50% less code in product development, hundreds of teams are able to run parallel programming. But I could say it’s not hundreds of teams, it’s thousands of teams.
Now we have more than 2,500 teams, which are working this – in the same time in parallel. As long as the transition is underway, we have to keep both systems ongoing to ensure the security, reliability and accuracy of client data as well as smooth operations. Of course, this has an impact on our IT budget, which will remain for the time being. But we believe that IT transformation is vital to our future. And the investment incurred and – at this stage would be helpful for Sberbank’s competitive strength. Every ruble invested in IT now will result in future revenue generation.
We have formed an integration development environment SberWorks that supplies product teams with services and tools for efficient work on every stage of product development. Cloud IT architecture is the basis of our technological transformation. Last year, we created our private cloud, which increased the productivity of infrastructure utilization fourfold. It means four times. At the same time, what I said that we invest a lot of money in IT, but in the same time, the new application, the new platform saves us a lot of money according to investments in hardware.
We also set up subsidiaries, SberCloud, to provide cloud solutions to our clients. One of the key elements of the Sberbank cloud technology is AI cloud. It is based on the supercomputer Christofari, which was ranked top 29 globally and offers products for data scientists and data engineers that provide a complete ML-model work cycle. Christofari improves the efficiency of solutions in the area of speech and text recognition, computer vision, NLP and automated machine learning.
I want to highlight the significant effect from AI implementation that amounted to RUB 42 billion in 2019. It was achieved through the scoring, lending processes, customization of our products offering, cognitive technologies, active balance sheet management and other areas.
Even though it’s a recent development, I would like to use this opportunity to flag that in February 2020, Sberbank released its fourth in-house developed device, the Okko Smartbooks, a smart TV device with voice recognition function based on AI.
And I can see that it was a big success because our first size product was pretty small, a few thousands of these devices. And we understood that the sales volume is enough for approximately two months, but all these devices were sold in one day, in 12 hours through our e-commerce market, Beru.
Now we have a deficit. And we say that it was a mistake from ourselves. But now we see that it was a clever strategy like Apple. We predicted that it would be a lot of interest for this device and we provide a little bit less than the market needing it. It goes without saying that cybersecurity is one of our top priority. And we invest also a lot of our efforts and a lot of our technology to provide the best cybersecurity solutions to our clients.
Team, becoming digital and developing an ecosystem would not be possible without the commitment of our brilliant team. Today, we have the best experts on the market. Last year, we completed the Agile transformation across all business and support lines. Now we have 100% of our headquarter in Agile.
Our corporate accelerator got traction, and we realized its positive impact on our corporate culture. It helps the team to develop soft skills, stay open, be creative and innovative. And we launched a new round last year. We developed boot camp for IT new comers to ensure their seamless integration to the Sberbank’s team.
And I think next visit of our shareholders, the experts, we will organize in the boot camp because I’m very proud that we have done it. It saves a lot of money and improves dramatically the quality of coding because in three, four months, we can see the quality of each engineer which started in boot camp and the adaptation period of time now is 3x, 4x shorter than before. And it saves us a lot of money, what is also important that we also replicated our success of School 21 by opening another one in Kazan to nurture the best programmers and IT specialists on the market.
2020, now a few words about the future. The outlook for the year with ROE over 20% is intact. We keep working hard to deliver on our strategy and the work on the strategy beyond 2020 is already in progress. Also, we have defined the climate change challenge as a main focus to Sberbank’s sustainable growth and plan to properly integrate ESG targets into our business model.
Finally, I would like to thank you, our investors and shareholders, for your commitment and trust in Sberbank’s team, our strategy and our vision. We continually strive to meet and even exceed your expectations. Your trust encourages us. Thank you for your attention, and I will be pleased to take the Q&A and answer during the next 30 minutes.
Anastasia Belyanina
30 minutes. Thank you so much. Please open the line for the questions.
Question-and-Answer Session
Operator
[Operator Instructions] We will now take our first question from Olga Veselova from Bank of America. Please go ahead.
Olga Veselova
Good afternoon. Thank you. I have two questions. My first question is about the change in ownership, which long-term implications do you see from this change in ownership? And I believe it might be easy to say there are no near-term implications. But for the Central Bank, removal of conflict of interest was one of meaningful arguments to make this deal? So what do you think the regulator will do differently in future?
As a part of this question, can I also ask you, do you think that the bank will become subject of tight rules on dividend payments by state-owned enterprises? Or the dividend payments will continue to be driven by own dividend strategy rather than additional potential external requirements in future years? So this is my first question.
And my second question is about fees. We started to see more regulation of fees in Russia, different types of regulations. What is your sense on the pace and magnitude of this regulation in the next several years? Thank you.
Herman Gref
Thank you very much for your question. It is a big deal for all of us. And frankly speaking, we spent now a lot of time on that because all executive process will be executed by ourselves. And what we are expecting, I think that the deal will help to resolve the existing conflict of interest by Central Bank. I think it’s – generally, it’s good for us.
During our digital transformation, we faced a lot of contradictions with our regulator. And sometimes it’s – they feel not so comfortable themselves. And we are also because it brings a lot of contradictions with – between two functions.
And I think that if you look at the general interest that the – governmental interest, much more at the same line like with private investors interest. And what we see that the government will do everything to support the same line in our strategy, delivering at the same line to support independent Board members and minority investors – minor investor.
Now we speak about opportunities, how we can make more for our minor investors, for minorities to give them more opportunities to understand all process, all the numbers inside the company and give them more information and more influence on our strategy and our policy. And it’s our goal. We would like to be more – most transparent company in the world and all our – my conversations with the government has the same view.
And I think that generally, it would be – for a few months, it would be maybe not so easy for our management team but because we have a lot of growth in this period of time, we need to deliver our strategy, we need to develop new strategy, and we support a lot of our ecosystem, the companies around our ecosystem, we support our government in digital transformation. And the same time, we have this process, this – with transition of our share.
But I think that generally I’m very positive with that. And I cannot predict that the share of our regulator will be changed dramatically. I do not – I can’t predict that it can cause some of the changes in our – in the share of our regulator.
About regulation of the fees, we have a different opinion on that. I think that our opinion is that we need to bring more competition into the market. And it’s really hard to compete with the regulator or with the state.
And a lot of state in the market can kill the competition, can kill the progress. And this is my main – and it’s our – strictly, I can speak on behalf of my team. It’s our worry what country this aggressive regulation and, not only regulation, also we see that the Central Bank with system of flat payments try to expand their business activities. And I think it’s not a good issue.
The reason for that is Sberbank monopoly. What I say that it’s a lot of different types of monopolies, its natural monopolies, its monopolies – different types of monopolies, particularly technological monopoly. And I think that the technological monopoly is not bad because this is the reason why we invest so hardly in our R&D, and we try to invent new technologies to create for a short period of time monopoly to receive our money back.
If you look at the worldwide market, for example, Apple was a monopoly for a few years with smartphones. But after 10 years now, we see that their market share is less than 15%. If you look at 5G technology, now the – only one company in the world has know-how on this technology. We can say that this company owns 100% market share in 5G in the world.
But for how long this monopoly can be – survive. I think it’s not longer than two, three years. But it’s a good stimulus for everybody to invest also in the same technology or invent the new technologies to be this type of monopoly. It’s not bad for the economy. And we try to bring to the market, the new standard and to bring the whole market into the new level.
And I think if you look at the Sberbank impact in the market, we transformed financial markets in the country. And now we’re one of the most developed in financial many countries in the world. And I think it’s not bad. And this is the debate between our and our – between ourselves and our regulator.
But I think that it’s normal for this study for – development study for our markets and our understanding how could we organize the regulation and the roles of public player and the private player, and I hope that we can find a good solution for everybody in further market – for the market, and I’m the optimist.
Anastasia Belyanina
Thank you very much. I hope we are ready for the next question.
Herman Gref
About the dividends, what I said that – and the government has the same goals like you guys. I think that it would be hard for the management team to fight with both of you to bring our ideas of investment, of level of capital adequacy ratio. And I think also, it’s not bad. It’s a normal conversation between the shareholders and management.
And frankly speaking, I’m not – I don’t think that it could bring some dramatical changes because the government is interested on the dividend payment, but they’re also interested in the long-term shape of the company. And I think that we will find also the compromises for – within the shareholders’ interest and the long life of our company. What’s my responsibility, I would like to bring this company to the new shape to be alive for the next 178 years, and we look at this horizon.
Olga Veselova
Appreciate. Thank you.
Anastasia Belyanina
Thank you. We are ready for the next question.
Operator
Thank you. We will now take our next question from Andrey Pavlov-Rusinov from Goldman Sachs. Please go ahead.
Andrey Pavlov-Rusinov
Thank you very much for this opportunity and obviously congratulations with the results. I’ve got a question on your IT strategy. We have seen a lot of progress, obviously, that you have achieved over the years in developing Sberbank’s digital capabilities.
And of course, the digital app is big leap forward and helps you to keep your client base engaged. And obviously, it’s very crucial for you to keep investing further to stay competitive. But at the same time, as you mentioned, you’re, at the moment, running two big IT platforms in parallel and it would be extremely helpful for us to understand when you could actually complete the migration and start extracting efficiencies from running the single one. Whether it could be in a year or two or three years from now, it will be very, very kind of crucial for us to understand.
So generally, any broad idea of the trade-off you’re facing between, first of all, running this IT investment cycle and, at the same time, making sure that your ROEs do not drop significantly in – meanwhile in that process, would be very much appreciated.
Herman Gref
Thank you very much for your question. I would like to answer generally, but David is here, and you can put specific question to him and he can explain to you all the details. You’re right, because now we are on two legs. But one leg is not healthy enough. And 50% of our – more than 50% of our systems now placed in the old infrastructure and the old architecture. And our role is in our IT landscape migration to the new platform, so that in the end to 2021, we need to remove 80% of our old systems and migrate to the new platform with 80% of our services.
By the end of 2021, it means two years. And it’s a very difficult period of time because we need to divide our capabilities on two parts for two platforms. And we had a lot of discussions what does it mean, the definition of them, what does it mean, the migration. We say the migration is done when the old record ASCII automatical systems will be cut, switched off from the system. And now we would like to work hardly to – but it’s a subject for our new strategy, 2023.
We would like to deliver this 80% services. The last 90% is not so crucially important for us. And I do know – I can’t promise you that it would be done in one or in two years because the question is about this 80%. The 20% is not the subject for my headache now. Maybe in 1, 1.5 years, we can create a precise plan for the next – for the last 20%. But in two years I hope that it will be done completely with 80%. And also, it does mean that we will invest less money in IT.
I think we will invest the same amount of money, maybe more, but not less. Because we’ve raised this money. When we say that we’re investing money in the old platform, it’s not investment, it’s cost. But we can create much more healthy IT investments, if you can save a lot of money with stopping the investment in the old platform, and we will jump into the new one. And I’m not sure that I can tell you about the numbers. But maybe David can say how much money we can save with this migration to the new platform.
David Rafalovsky
Hello, everyone. Just want to add a few specific points, probably going to be helpful. We already see significant efficiency gains from new platform, although both of our businesses are in process for migration. So just the case in point, last month, we saw 89% of new capacity in our data centers deployed in our cloud infrastructure. And it’s a dramatically more efficient deployment model than our traditional legacy based footprint. As Mr. Gref has described, we see 2021 as a peak investment in our two legs and from 2022 onwards, we will be kind of a dramatically different composition of R&D investment and the grand total is unlikely to change considering our technological ambition, but investments in migration and old legacy infrastructure will be insignificant overall.
Andrey Pavlov-Rusinov
Thank you. That’s very helpful.
Anastasia Belyanina
We are ready to take next question.
Operator
Next question comes from Elena Tsareva from BCS Global Markets.
Elena Tsareva
[Foreign Language]
Herman Gref
Thank you very much for your question, Elena. We have prepared some stress scenarios. And I think that now a little bit too early, and I don’t have enough data to recognize what kind of scenarios will be more real. But if you say about Sberbank directly, I think that we can be heard by this situation through our clients and through the global markets where the pain is full from the situation in global markets from our clients. And now I think it’s unpredictable. It depends from the time how long the distribution will be, uncertain, and how long do you find the new medicaments against this coronavirus.
And we spoke yesterday with our government to say that we are ready to give the grant for Russian scientific institutions to support them to find solution for this problem. And now we’re in conversations with – to our ministries to understand how we can help and support on this problem. And I know that the government now will try to develop – developing this type of plan B. The risk plan, risk scenarios and we’ve said also, if you need our support, for example, if you need some AI tools for that, we have facial recognition technologies for the faces in masks.
And we try to understand what our colleagues in China are doing, and we try to do the same trying our own solutions for that, but it would be better if we could have like an order from the government, in which cases they need our participation, our support. But these two lines, we try to understand our risks, and we try to support the research institutes and we try to develop our AI kit for that. This is the three lines in which we are working now. I’m not sure that it’s enough, but the situation is now very volatile and unpredictable. Thank you very much for your question.
Elena Tsareva
Thank you very much for detailed answer. And if I may ask another question. So by the end of fourth quarter 2019, so Sberbank currently has around six million users in like an ecosystem from, I suppose, Sberbank ID. And are you satisfied with the current speed of system development? Does it go with the plan? And actually, do you see any regulatory risk for the ecosystem development for the banks given like recent [indiscernible] by the Central Bank?
Herman Gref
More or less I’m satisfied with developing our ecosystem now. We understand conceptually what does it mean ecosystem and what’s the difference between ecosystem and holding company. And what we can say that now we are maybe not 100% ecosystem, but we are in the progress. And by the end of this year, I think the existing companies in our ecosystem will be connected with all these elements, which I called you before. And I think that we have a good model for building ecosystem. We have a good team there here is [Andre Wienen], CEO [for the X] and he can answer your specific question about the ecosystem, but more or less I’m satisfied with that.
Last year, it was very difficult for us. At the beginning of the year, we tried to find a lot of answers on our questions, how we can unify, how we can connect all the services and how we can find the right model for corporate governance and these companies. But now we have a cool tool for that. And I think that what is more important than the rest of the equation, this is our platform. Now, we understand that it’s two levels of connections. The first one, this is the business level.
The second one, this is the technological level. And for technological level, you need advanced technological platform. Without this type of platform, it’s impossible to build ecosystem. And in our case, I think that Sberbank now has a very good, very advanced platform, and we are only one company in the country which have this kind of platform. We can speak about Yandex also, but Yandex has much less elements in their platform than Sberbank. Their platform is specific and local. They are not so comprehensive and universal.
And what we see that our technological competencies also very important for the ecosystem because if you buy start-ups, we need – sometimes we need to remove 100% of the technologies to our – we put our platform inside the start-ups. We need to redesign the business models, and we need to teach the engineers and it gives us a completely different result.
As I mentioned, for example, Rabota.ru, this is the job classified business. This is a good example. And I think that in two years, you can see how powerful would be these brands and how fast will be growth of this company. But we are doing good in I told you redesigning everything inside the company. And same situation with SberMarket, Sber Solutions, SberFood. And we give them not only our technological capabilities, not only all these services like Sber ID unified services, Sber ID and the rest. We give them also – many of them, we give also our brand. And the strength of the brand is also very important in their business.
And I think that now I feel much more comfortable than one-year ago. And if you look at the regulator, I don’t want to dramatize the situation because all regulators, they are conservative. It’s really one for each regulator in the world. Sometimes, they are worried about the power of the company if the company is so big like Sberbank and so technologically risky. But I think that we would like to be very positive and very open and transparent for them. And we will build an open ecosystem, and it will create a lot of opportunities not only for Sberbank, but for our partners.
And now we speak, maybe we can sell also elements of our platform for some of the small banks. I’m not sure that we can sell it for our biggest competitors. But for some of the small banks, we can sell elements of our platform. I hope that we can find solutions in this way because it’s a new problem, and nobody have faced this type of problems in their practical life.
And I think that what I say about the Smart Box, for example, Okko. They are only one bank in the world who delivered this type of and produced this type of devices. And sometimes, it brings regulator and a few of our partners into the strange-feeling situation. They say, “Wow, you guys still tell us where is banking combine the Smart Box for streaming TV and general TV and broadband?” I say that, ” Excuse me, if we have everything for that, we have AI, we have brilliant NLP platform, the best in the market, and we have a good cinema-streaming business, and we have everything.” It’s not such a big problem for us to connect our technologies into one box and to create something new which is very relevant for this market.
And we are better than Apple TV. I promote our Okko books with the price 10 times less. We are better than Apple TV, and I’m proud for that. And I think that – and it doesn’t take a lot of money from our side because we reuse technologies which we paid for Sberbank. And as the case, we understand that in this B2C business, it’s very difficult to be that player. We will receive a lot of criticism from our clients, and we will improve technologies in the Smart Box. And we can use these technologies after that in our banking business because in cloud, it’s the same platform. It’s NLP platform, which we use for everybody in our ecosystem and for the bank. And this is the ecosystem or platform effect. And I hope that you understand, and I think it’s – you can see sometimes, the people say that, Sberbank is very good developed and you’re a good skilled company. I say, no, no please we are in the beginning of our journey. And now we receive a lot of good things, a lot of good people, good technologies, which can bring us new opportunity, business opportunity and we can bring also good value for our shareholders. Thank you for your question.
Elena Tsareva
This is very useful. Thank you very much.
Anastasia Belyanina
Thank you. I think we have just a couple of minutes left to ask the last question to our CEO, and we have to let him go. So please, we are ready for the last question.
Operator
We can now take our next question from Gabor Kemeny from Autonomous Research. Please go ahead.
Gabor Kemeny
Hi. Thanks for taking my question. I have one on ESG, which I believe is impacting a growing number of your shareholders. How do you assess your progress so far to mitigate climate risk? And what actions are you taking to moderate climate risk? And how do you factor this into Sberbank’s business objectives? I’m thinking particularly about the financing of carbon-related industries? Thank you.
Herman Gref
Thank you very much for your question. Many years, we are working on that. We have a special department, which is responsible for this green financing technology. But what I can say also, we are in the beginning of this track. And maybe two weeks ago, we had a board meeting and we approved the strategy. We would like to develop many different lines in this ESG area.
And I hope that we can – I don’t want to spend a lot of your time on that because we are the – as a concept, we are beginners. And I hope that towards the end of this year, we will present to you our understanding and the plan, what we would like to do in the next few years to begin this ESG concept to the new level.
Gabor Kemeny
Understood. Thank you.
Herman Gref
Yes. I would like to say thank you very much to all of you. And secondly, I would like to say thank you for your trust to our team and to our organization. And what I can say thank you and I also have the same trust on my team and my organization because it’s the best organization in this country, and I think we have a brilliant team. And if you have trust in this company, you need to invest money, please don’t hesitate investing in Sberbank. Thank you very much.
Anastasia Belyanina
Thank you very much, and we switch to the regular Q&A session, and we are ready to take the next question. Operator, we are ready to take next questions.
Operator
We will now take our next question from Andrey Mikhailov from Sova Capital. Please go ahead.
Andrey Mikhailov
Hi. Good evening. Thank you very much for represent question. My question is on mortgages. They grew at a much lower pace in 2019 versus non-mortgage consumers loans. And my question would be how do you expect this segment to grow in 2020, given that there are a few conflicting trends, lower-rate stimulate demand, but at the same time, the coronavirus may hinder demand? And on top of that, lower rates means that mortgages are less profitable for Sberbank. So how do you look at this particular segment now? Thank you.
Anastasia Belyanina
Thank you for your question and this – the question will be answered by our First Deputy Chairman, Alexander Vedyakhin.
Alexander Vedyakhin
Thank you very much. Good question. So first of all, we think that the market of mortgage will grow and we will grow as well. And so we are really positive on this market. So about margin sense, about interest ratios, yes, actually, the decreasing of interest ratio can have some effect on our margins on one hand side. But on another hand side, we have to take into account that the interest rates on the positive side, I mean on the deposits, going down. So it means that we will try to keep our margin as good as we can. So – and about coronavirus for the mortgage market, I think that, fortunately for Russia, it is not applicable.
Alexander Morozov
From my side as CFO of the bank, I can add couple of words. We have very high sensitivity of the demand for mortgages as it gets the interest rate applicable. So we expect that in terms of net interest, some reduction, some compression of the asset side margin. We will be more than offset by the volume bigger than the expected expense. But anyway, we have not [indiscernible] to amend our guidance, which we published in December.
So we believe that as of now, all our assumptions and our guidance announced during the Analyst Day are still the same based on that. So our guidance, as usual, when we present our semiannual results, but I hope that coronavirus by the time will be over.
Andrey Mikhailov
Thank you very much for this. Thank you.
Anastasia Belyanina
I think, we already promising – can we take a next question please.
Operator
Next question is from Olga Veselova from Bank of America.
Olga Veselova
Thank you. I have several questions. My first question is about the planned changes in regulation of capital, and there are several questions on this one. One is when is the increase of minimum capital requirements on the Russian – that will be implemented in your view?
And the second is can you please clarify your – I think it’s Slide 27, the bank’s potential to optimize risk-weighted assets further due to the IRB enhancements? And what part of the assets can be moved under IRB versus your previously announced 65% of total assets?
And finally, do you think that obligatory implementation of IRB for the systematically important banks will matter for the portion of assets which Sberbank will move to IRB? Or it almost doesn’t matter for you? It’s not about this portion. It’s about being there or not being there. So this is a really big question, but it’s all about the same.
The second question which I had is can you disclose for us the level of fees from utility payments. And do you think the – what’s the probability of more regulation of fees on utility payments? And you’ve implemented when it can be – the regulation can be implemented? Thank you.
Anastasia Belyanina
Thank you, Olga. The first question on the add-ons will be answered and the market prudential measures by our Deputy CRO, Alexey Bogatov.
Alexey Bogatov
Thank you. So we have a respective slide on that in the presentation deck, I think in Slide 28. So basically, we have managed to approve with the Central Bank the amendment to our IRB application, which is already approved and will be effective by the end of the first quarter, which would reduce further significantly our risk-weighted assets density.
Also on top of that, we are now in the discussion process with the Central Bank with regards to the implementation of the so-called Basel 3.5, which they have implemented already for the standardized approach. However, the IRB approach is still pending.
So we expect the Central Bank to approve this Basel 3.5 for IRB by the middle of this year. In case this happens, and we will work hard on that happen. We remain positive that we will achieve our targeted level of the risk-weighted assets density as described already before.
Olga Veselova
Do you think that the increase of minimum Tier 1 requirement will be implemented and when?
Alexander Morozov
With regards to the additional – on systemically important banks…
Olga Veselova
Yes.
Alexander Morozov
The decision is not yet taken. We assume in a tough discussion with the Russian Central Bank yesterday similar topic. Same question was addressed on the conference call of another systemically important bank, VTB. So we have a very similar position. And we believe that as of now, we’re on no good grounds for further increase of the – with add-on for systemically important banks. And we believe that our joint position will be taken into account by Russian Central Bank when we discuss that topic.
Olga Veselova
Thank you.
Alexander Vedyakhin
So about utility payments, actually, now we have only some ideas of a draft of the law for the fees of future payments regulation. So it means that there is no any serious ground for analysis, I mean for decrease of fees and commissions. And because of this, you can see our guidance for the net fees and commission growth is 10% plus, and they keep consistent on this.
Anastasia Belyanina
Thank you. And we are ready to take next question.
Operator
Next question comes from Gabor Kemeny from Autonomous Research. Please go ahead.
Gabor Kemeny
Hi, again. I have a couple of questions on consumer lending, please. On the previous call, you were guiding towards a slowdown in consumer loan growth. You expected it to come down to 10% to 12%, I believe. In 2020, you are growing much more quickly in this segment. I think you were growing at double that base.
So first question is if you do see some decent quality, good quality demand, is there a chance that your growth could be more rapid than what you expected earlier in 2020? And how do you see – how do you – how does this reconcile with the CBR’s intention to mitigate the risks in this segment? And the other question, again, on consumer lending, how much further capital impact would you expect from moving to higher risk weights in new consumer loan originations?
Alexander Morozov
Gabor, thank you very much. So I will start with answering your first question about the consumer loan growth. So yes, you’re right. We see some good demand for the consumer loans in the beginning of 2020, but it’s quite seasonally, we can say. And because of this, we have our guidelines in amount of from 12% to 14% of retail loan growth this year. So – and I think we will be in this range. So about capital and risks, I would like to ask Alexey Bogatov to answer the question.
Alexey Bogatov
Thank you. As you know, from the middle of this year, we have implemented market prudential regulation also for our IFRS statements, meaning that we have replicated the regulatory capital add-ons as requested by the Central Bank in the Russian accounting standards into the IFRS. And we have been guiding that by the end of this year, this would mean around 60 basis points loss in the CET1 terms.
And actually, we have reached it at the level of 62, so we ended more or less exactly as we planned. And in terms of the unsecured lending, obviously, this has a much bigger effect on the unsecured lending piece.
And we are working hard with the Central Bank also to optimize our models with regards to the IRB because this gives us the opportunity to be more efficient than the rest of the market, which is not yet on the IRB. So the only bank, which is IRB Russia, is [indiscernible] still. Thank you.
Gabor Kemeny
Okay. Understood. And then quick follow-up on capital please. Can you confirm what is your internal CET1 ratio target now? Is it now 14%?
Alexander Morozov
We have unchanged. So our capital policy that was stipulated in our Strategy 2020 and new approach to what’s capital targets and some upgrades potential to another policies will be part of our a new Strategy 2019, which will be presented close to the end of this year, as of now no changes.
Gabor Kemeny
Okay. Thank you.
Anastasia Belyanina
Thank you. Yes, we are ready to take next question.
Operator
We can now take our next question from Elena Tsareva from BCS Global Markets. Please go ahead.
Elena Tsareva
Good evening. So my question is on your Central Bank key rate forecast. So I see that for 2020, you changed your forecast and actually not expect cut to 5.5%. But going forward 2021, you see the trend change with tightening of monetary policies. So it feels a bit it contradicts to most economists to use what can see in the market. So what is like the main assumption behind this tightening of monetary policy by the Central Bank? And actually, it should be beneficial for your margin this strong of the monetary policy. This is my first question.
Alexander Morozov
We updated just our forecast with regards to the key rates for year 2020, taking into account actual developments, what’s going on in the market. As for year 2021, 2022, we simply didn’t amend our forecast from our previous conference call in our presentation. It will be done along in line with the presentation of our new strategy or in the middle of the year when we present our second quarter results as usual.
So as you know, we are positively sensitive to the potential – to the existing and further potential reduction of the key rate on a short- and medium-term horizon. And we will benefit this year in terms of our net interest margin and net interest income from that reduction. So it’s a non-use from our side.
Elena Tsareva
Understood. Thank you. And just a quick question on cost of risk and retail. So it was quite a strong decline of cost of risk in the fourth quarter. So do you see this trend to continue? This is like more seasonality in fourth quarter for such strong decline of cost of risk?
Alexey Bogatov
Thank you for that question. So the cost of risk of the last quarter has been driven by two major factors. One factor is regular seasonality, and you can compare it year-on-year also in our presentation for the previous year. And the second reason for that lower cost of risk was that we have implemented the early repayment model also for the retail segment. Just to remind you, this model has been already implemented in the non-retail segment. But from the Q4, this is also being used for the retail segment.
Elena Tsareva
Understood. Many thanks.
Operator
We can now take our next question from Andrew Keeley from Sberbank. Please go ahead.
Andrew Keeley
Hi. Good afternoon. I’ve got a question on your retail deposits. It looks like you lost a bit of market share last year and – which has been a bit of a trend in recent years. And I’m just wondering does this bother you at all? And are you at the stage where you think there’s any pressure to price your retail deposits kind of closer to the market to basically support your market share? Thank you.
Alexander Morozov
We always keep in mind the balance between our assets and liabilities. And if you look at our loan-to-deposit ratio, it’s very safe level below 100%, practically no dramatic change versus the previous reporting a little bit. But with regards to the balance on currency-denominated assets and liabilities, so now we use back away our liabilities denominated in dollars and euros. But on top of that, we follow our very conservative strategy when we went on our own, and we gradually pay all our external obligations and debt, so our core deposits, so deposits from retail. We feel also pretty comfortable in that respect. We see no reason to change our guidance or to be worried about it.
Andrew Keeley
Thank you, Alexander. And second question is on your loan yields. Can you give us a bit of color as to why there was such a nice pickup in the retail loan yields in the fourth quarter? I mean was that kind of purely down to mix effects? Or are there kind of some other factors in there? And on the corporate loan yields, I guess, I’m not sure whether you can remind me whether that was any kind of one-off factors in the second quarter which boosted yields. But we’ve seen a couple of quarters of decline there. Given the changes in your expectations about the key rate, how does that make you think about the kind of corporate loan yield progression this year? Do you think that the loan yields will keep on kind of gradually ticking down through this year at a similar rate to what we’ve seen in the fourth quarter? Thank you.
Alexander Morozov
Analyzing developments of our margin and our yields and asset side and liability, we have to keep in mind that we put in analysis some accelerated growth of retail loans, first of all. And tax rate growth of consumer loans seasonally in the fourth quarter was the main reason behind the growth of yields on assets in the fourth quarter. We also put now in place [indiscernible] of ruble-denominated assets where yield is higher.
The same time, having said that, we undertook a lot of efforts to use, utilize our excess of [indiscernible] facility, which helped ourselves to improve our net interest margin in the fourth quarter. Looking forward, yes, we may expect bigger pressure on asset side, yields both on corporates and retail as well. But at the same time, it will be offset by the faster reduction of cost of liabilities.
And with regard to net interest margin, we, as of now, see development absolutely in line with our expectations, which we presented in detail on our Analyst Day. So margin development feeds our expectation. It is a bit back at the beginning of the year, I would say in that way.
Andrew Keeley
Okay. Thank you. And final question is on your cost of risk. I think that was probably an area in the fourth quarter numbers that beat consensus quite strongly. Is there anything that given that, that makes you kind of think that the guidance that you’ve given for this year is really on the conservative side, looking at the cost of risk you’ve posted for the last couple of years, and even adjusting for things like some recoveries on Agrokor? Or do you feel that still that 100, 110 bps is good guidance?
Alexey Bogatov
As you can see from the past, we are always conservative on our cost of risk, so both in terms of the guidance and in terms of benchmarking to the market, and we remain to be conservative on that side. You’re right, this year, cost of risk has been impacted by the recovery in the Agrokor and some other recoveries and generally better-than-expected performance on the corporate side.
We were also very successful, I would say, in managing the growing concerns in the personal lending, where we proactively have managed to spot the segment that was going outside of the expected performance in terms of risk. That was the case for the whole market, including us. But if you compare us to the market, I think we were the first to spot this development and to make necessary adjustments to the risk strategies, respectively curbing the growth of the risk cost. Having said that, it is a conservative guidance, but we stick to that for the time being.
Alexander Morozov
Once again, I cannot repeat what we normally return and potentially revise our full-year guidance when we present second quarter results, so when we have six months’ development. Now it’s too early to speak about that.
Andrew Keeley
Understood. Thank you very much.
Alexander Morozov
Yes. Okay.
Operator
There are no further English questions at this time/
Anastasia Belyanina
Thank you. Now we can switch to Russian line.
Operator
Ladies and gentlemen, we will continue the Q&A session in Russian. [Operator Instructions]
Unidentified Analyst
Hello, I have a question related to the economic effect that was insured by AI, RUB 2 billion effect. Can you say what do you mean under the effect is that net income? Or is it some other sort of revenue from the service that you added AI to? And what are these exact services? Can you list and can you just name them, technologies products, that give you economic effect? Thank you.
Alexander Morozov
Thank you very much for your question. This additional income that was insured by AI in 2019 composes from several segments. First is higher income, lower costs and – yes, and lower costs, let’s put it that way. So these are two areas. Higher income, thanks to personalization for the customers, more targeted offers, more accurate and adequate loans issued and therefore a better approach to risk management. So yes, maybe these are the main pillars.
Unidentified Analyst
Sorry, if I may ask additional question. The products that you sell with speech recognition, can they be – did they drive this growth of – this economic effect growth?
Alexander Morozov
In a nutshell, yes. Thank you. And next question please.
Operator
[Indiscernible].
Unidentified Analyst
Good afternoon, colleagues. The question is, in the current economic situation, do you see the risks of achieving RUB 1 trillion net profit target level. Thank you.
Alexander Morozov
I would like to point your attention to the fact that we have never told you the exact figure. None of our – not in our – during our London session, investor session, not for our analyst sessions. ROE 20% plus, and ROE this year will be at 20% plus. We confirm that. As per our financial goals related to the strategy, as we have told at the start of the call, we can confirm that we see no ground to revise the achievement of our goals that we have stated in our strategy. Does that answer your question? Yes.
Unidentified Analyst
Hello. Two questions, first related to the RWAs. Today, the information was disclosed that you have received the permission from the CBR that you can use this new model for the RWAs. How much capital can – will it save? And the second question is that by the end of the year, you plan to publish this strategy. Will the main shareholder change influence this strategy in any way? Thank you.
Alexander Morozov
I’d like to start with the second question. The preparation of the new strategy has been started. It is going in line with the plan. And by the end of the year, we will present the strategy for the next three years. And as we have said before, our new owner has fully supported the goals in our strategy and fully supports our development track.
It has been said before many times in interviews and comments. And it was told by the officers working in our company and in our new potential shareholder. As for the first question, Alexey Bogatov will tell you about that in detail.
I’d like to say that moving to IRB approach, we have moved some of the assets to this approach, yet some of the assets still have to be migrated this year. And the application was already filed to the Central Bank, yet last year, we sent an application to the Central Bank that included the change in terms of the approach for the mortgage and other targeted loans that will help us to drive down the RWAs to a significant amount, like RUB 1 trillion of RWAs. So question answered?
Unidentified Analyst
Okay. Thank you.
Operator
Now I’ll let [indiscernible].
Unidentified Analyst
Good afternoon. I have a question related to the initiative of the Central Bank. In January, in their report, they said that they suggested the change in terms of the requirements for the system-wide banks, including changing the CAR ratios for two largest banks, including VTB and Sberbank. What do you think about this initiative? Thank you.
Alexander Morozov
We have answered this question already. In a nutshell, we are negative about this initiative. If you talk about details, then I would say that we have a lot of ideas that support this position, but we would like to complete the conversation and the negotiation with the Central Bank. We’re still in the negotiation.
Currently, the regulation from the Central Bank ensures the CAR on a proper level. Including the weight that the Central Bank uses for different assets is very strict. It’s the most strict in the world currently. So this approach to CAR is the strictest in the world. And obviously, that needs a very close inspection.
If this regulation – if they want to make this regulation harder, we need to understand the implications, the ramifications of that. This is an initiative of the Central Bank. We’re on the stage of negotiations. We are discussing that issue. And currently, the discussions are being held by professionals, yet – and no decisions have been made yet. Thank you.
Unidentified Analyst
Thank you for the answer.
Operator
There are no more questions. Thank you very much to all participants for these 1.5 hours. I hope it was a constructive and instructive meeting. We’ll meet you next time in the next quarter. Thank you very much and this adjourns today’s conference. You can switch off your phones. Thank you.
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