Kaspi.kz AO (KSPI) 2022 Q1 法說會逐字稿

We're ready.

So thanks very much, Harry. Good afternoon or good morning to everyone. Welcome to our first-quarter 2022 results call. As usual, we have our full team on the call: Mikheil Lomtadze, CEO and Co-Founder; Yuri Didenko, Tengiz Mosidze, Deputy CEOs; myself, David Ferguson.

We'll take up the usual format. Mikheil will run you through the key strategic developments. I'll run you through the key financials. And then the whole team is available for Q&A. So on that note, I will hand over to Mikheil. Mikheil, please go ahead.

Hello, everyone. So we will be presenting out the 1Q 2022 numbers. So our team has really executed strongly despite the challenging environment. If you go through some of the highlights, my section in general would be, as David suggested, always picking up on the important strategic developments as well. So on the payments side, payments continued to grow extremely strongly; revenue generating TPV plus 60%; revenue 59%; and net income 73% on the payments side. And our bottom line growing faster than revenue on the payments side because of the enormous network effect and operating leverage for this business.

In the marketplace, we have grown 50% on the GMV. Starting from this quarter, we are reporting in the GMV in some of the KPIs travel business as travel has become a very important part of our business very fast. And I will have a couple of slides about this. We have it through the presentation. Revenue, plus 40% in the marketplace; net income, 39% growth year over year.

In the fintech, plus 21% on TFV; revenue, 43%; net income, 39%. And on the fintech side, we have this sort of standard playbook how we manage this business when we have the challenging times or visibility on the macro side. So we basically just reduce the origination, but we can ramp up it quickly. You have actually seen this multiple times during the COVID, especially, for example, what we have done. So we know this business really well; we know exactly what needs to be done.

On the consolidated side of things, we have remarkable transaction growth; 63% transaction growth per active consumer. Transaction is one of the most important, not only KPIs, but also this is how we make money, right? So we make payment fees, seller fees, and we make also interest when we fund the purchases. So transactions itself are extremely important for us, and it's a very important number. And revenues have grown 49% -- 45%, very strong growth on the revenue side; and the net income is up 49%. Again, growing faster just because of operating leverage in our business.

So here are some of the transaction KPIs. So the transactions have grown 63% now in the 1Q. We have over 53 transactions a month per consumer. So that's extremely encouraging. I mean, you basically see that we constantly drive that number. Our mobile app is used on a daily basis, and we will soon cross almost two transactions a day per consumer. And that's one of the highest transactional models in any comparable business in any other market.

DAU to MAU, that basically follows the transaction. So now 63%, which means over 6 -- more than 6 month -- out of 10 monthly users, 6 users are coming daily to our apps. So our app, extremely important for our users, and shows this remarkable engagement. The DAU is growing 34%, very good growth; and the MAU, 14%. And again, if you look at our business model, we build the user base, then we grow the engagement. And we also grow the transactions or the business around the user. So we have multiple levels of growth, and all of them continue growing nicely, but, most importantly, transactions where -- which we basically monetize directly or indirectly.

So here you have, in action, our strategy, which we have launched in 2020, when we basically said that the merchants are our important priority. And we have grown the merchants now to merchants and merchant stores to 292,000, which is 233% growth year over year. So the merchants, again, extremely important. A couple of years ago, we have been a consumer-driven business, and now we are both consumer- and a merchant-driven business. And our foundation, again, as we have done with the consumers, it's to grow the merchant base, then we grow engagement with the merchants, delivering additional services, and basically drive the business around the merchants. So again, sort of three-step strategy: acquire, engage, monetize. And here, you have this in action, and we continue growing merchants. And we are very bullish, and that remains our priority for this year.

Here, you have another trend around the merchants. So as we onboard the merchants, the payments is the step number one with the merchants; pretty much the same as with the consumers. So we are onboarding merchants very strongly, and we are also building the network of the payments on the foundation of those merchants. So our POS devices in the 1Q now cross 300,000 POS devices. And again, we have here our year-over-year comparison. But if you take 2020, this business was virtually nonexistent. And now, 85% of all the transactions are done through our proprietary network, and only 15% is done through third-party acquiring networks or devices. So extremely important trend.

And we will continue building up the network of devices, which, again, enable us to control the entire value chain and interaction from a consumer and the merchant, when a consumer goes to the merchant and transacts with our Super App. And therefore, we control the entire value chain and economics of this business, and continues to monetize also indirectly by providing different services for merchants and consumers on the back of data, which we acquired during those transactions.

Last year, we have launched e-Grocery business, jointly, with the largest food retailer, Magnum. So growth has been extremely high. Again, I just would like to reinforce this is only one city, and we are just scratching the surface with this opportunity. We are talking about the total food retail market around -- depending on estimate, but $12 billion. And here, we are launching this disruption, jointly, with a major retailer.

The grocery GMV has grown almost 23 times, and the purchases have grown 23 times. The average ticket is about $18, so it just tells you that this is not just engagement. Actually, it's a very solid economics because the ticket is a good size. And the consumers that are generating this growth have grown 10 times, and only 56,000 of them in the 1Q. So growing extremely rapidly. We are planning to enter another city during the year -- actually quite soon. And we are planning to add another dark store in Almaty, which is the biggest city in Kazakhstan.

And this business is ready to scale, so we are just focused on the growth, really. And consumer feedback has been incredible. Retention rates are huge if you just take numbers into perspective. The number of active consumers has grown only 10 times, but, actually, purchases have grown 23 times. So this just tells you that every consumers retained are just transacting more and more as soon as -- from the moment when they joined our platform. And we are also constantly increasing the number of SKUs, which are delivered to the consumers.

And we are also speeding up the delivery. So most of the deliveries are actually done very, very fast and within the day. So that's important opportunity for us for the year. And the take rate is also very healthy when the marketplace [is at] 3.2%. And on top of it, there is a cost we paid, transactional fee of [0.95%]. So very good business for us, and top priority for the next couple of years.

Another business which we have developed and started to grow last year is B2B payments. Now that business is, again, an indication of how we are extremely building our businesses. Some innovations are coming just because we believe we can just launch completely new business, like travel, for example, and then start growing really fast. But there are some use cases which are coming from our existing consumers or merchants, when we see that they are using our existing products for their own needs, and then we start developing the targeted products for them, and we intensify the growth. So this is an example when actually some of our B2B transactions have been used by micro-merchants, wholesalers. They really love the idea of instantly getting paid and seamlessly getting paid.

So as a result, we took this use case last year and segmented out this business and started to develop highly tailored products for wholesalers basically. And the idea of this business is quite simple. Wholesalers would have their invoices; this should be done through our Kaspi Pay Solution. And then the convenience store, which they deliver the goods, for example, they will scan those invoices and immediately pay them to the wholesalers. So very fast-growing business.

The take rate, 0.9%, on those significant volumes, where growth is almost 10 times. And we just started last year, but is already a significant part of our revenue generating TPV. With these growth rates, we have achieved 2% of revenue generating TPV in the 1Q, and we are just starting to grow. This business opportunity is huge, and we are onboarding more wholesalers and also the merchants that are acquiring goods from them.

Another opportunity, what we are doing is we are building the last mile delivery network. So Postomats was also launched last year. Actually, in April, we already have thousands of them. The Postomats are already almost 9% of our delivered orders on our e-commerce side. And again, this is roughly about 20% to 30% cheaper to operate than actual delivery by courier. But from consumer experience, it shows a remarkable net promoter score, very high-quality positive feedback, just because consumers don't really have to interact with anyone; they could conveniently pick up their items on their way home.

So we are on the track to deliver around 3,000 lockers during this year. And that will be a game changer, both in terms of delivery economics, but also the value that we can create for merchants that are joining our delivery Smart Logistics Platform and also consumers that can conveniently pick up items.

We have been also driving travel. So you know that travel will launch -- basically in 2020, nonexistent business for us. So we have acquired a small company as a platform. We [then quickly] integrated -- within three months, integrated with our Super App. And now, the GMV of Kaspi Travel is 9% of the total GMV of our marketplace. And we have enabled 2.1 million purchases in the 1Q. The GMV has grown over five times to 37 billion. So that's a very significant business for us.

And we both enable airline tickets and railway ticket sales. And we are now the largest player on the market, and that has become such a significant business for our marketplace. We will be reporting this as a part of the GMV going forward. And we will be providing more details on the travel itself, very exciting business opportunity, a lot of growth. We see the growth from airline and the railway tickets, but we also have a couple of business ideas how we expand the services around the travel. So very exciting opportunity for us in the market side and part of our marketplace business.

We have also launched, together with the state bodies, with the Ministry of Digitalization and their subsidiaries, we worked really hard to enable Kazakhstan citizens to access their documents through our Super App. Now that basically has been a remarkable success. We just launched it several weeks ago. Consumers can access ID card, marriage certificate, driver's license, and so on and so forth. So basically, all your documents will be digitally accessed through the Super App already. The airlines are accepting the ID card from our app when the consumers are boarding the planes inside the country. So very, very exciting product which -- and a service done jointly with the government which basically enables people not to carry paper documents anymore together with them.

And if we look at the adoption of this service, it has been remarkable. Again, if you calculate the unique users across all the services, then over 1.5 million users have accessed the service during the first weeks from the launch. And again, the government services, the mission here is just to give access to the regular citizens to a lot of government services seamlessly online, so now people can access their digital documents, people can register their car, get their vaccination certificate. There are other services around businesses, like people can register business.

So there is a very, very broad range of services accessible through the government services, and we will continue developing those. They are extremely relevant for our Super App. They are extremely relevant for the users. This is increasing their engagement as well. And also extremely important for the country, as the company like Kaspi.kz doing these services, enabling distribution for government services to regular citizens. So very exciting product; we will continue developing. This is one of the latest additions to our product sheet on the government services side.

Okay. So David, so back to you.

So thank you, Mikheil. I'll run through now the performance of each of the three respective platforms and then the 2022 full-year financial guidance. So starting on the payments platform. We have always talked about payments platform as the engine of the Kaspi Super App. And what you see here is that even in the context of increased macro volatility, the underlying drivers of our business, payments platform remain very, very strong, namely merchants, up 252% year on year to 292,000. And that is, again, ongoing stronger execution of the strategy Mikheil talked about, the roll out principally of Kaspi Pay.

Despite the fact that the payments platform is our relatively most mature platform, again, here, you see still a very solid growth in the number of consumers, up 23% year on year to 10 million. And that is actually very consistent. Both of these trends are consistent with what you are seeing in the second half of last year.

If we then think about what that means from a volume perspective, here, too, a similar message; that message that we communicated in the second half of last year. Strong growth in total payment volumes, funds flowing in to the ecosystem, up 46% year on year. But more importantly, this is now the third quarter where RTPV monetized volumes are growing at a materially faster rate than TPV. This hasn't happened by accident. This is a result of the strategy to onboard merchants to roll out Kaspi Pay. And as long there's growth in new merchants, the platform remains strong. And given that there's a period from a merchant signing to sort of migrating their volumes over to our ecosystem, RTPV should also remain very, very strong going forward in the first quarter, up 60% year on year.

Here, you see the breakdown of revenue generating payment volumes. As discussed, the bulk of the growth in RTPV is being driven, and its outlook is dependent, on success of the rollout of B2C or Kaspi Pay payments. What you also see here is the growing share of P2P payments. And whilst you might initially be dismissive and say, well, 2% doesn't sound like a big number, if you think about that in the context of their RTPV base of KZT3.6 trillion, it is a substantial number, and it's a number that's growing very quickly, on one hand. And again, on the other hand, this can just be the start of B2B, in that it can enable us to develop all that merchant-specific products going forward.

Interest-free balances, again, another good lead indicator for health of this ecosystem. So this is people moving funds to Kaspi, with [a view to] transacting with Kaspi, up 44% year on year, a very, very decent number and almost no slowdown perhaps the second part of last year. Again, in the ecosystem, we'll expand in subsequent quarters.

And [net net] for our payments business, what you see is that strong RTPV growth translated into strong revenue growth. And then the combination of lower sales and marketing activity in the quarter, tight cost control, and the ongoing benefits of shifting payments to or from third parties to our own proprietary payment network [through a] decent margin progression in the quarter, 62% net income margin, up from 57%, with net income growth of 73% ahead of revenue.

As we go into subsequent quarters, it would be fair to say that you won't see the same level of benefit. A lot of that sort of eliminating of third-party costs has now played out (technical difficulty) in Q2 and going forward. But in the first quarter, clearly, the payments division had a very, very strong standout performance, and its outlook is equally strong going forward.

So moving on to marketplace. The marketplace looks -- again, despite all the macro volatility and geopolitical newsflow, continue to also produce very, very robust numbers. And what you see here is, again, evidence that the strategy is translating into the numbers, having focused on dramatically accelerating payments merchants since the second half of the last year. [En masse], that translates into very, very strong growth in marketplace merchants, and growth of 346% year on year to 163,000 merchants. That is actually a material acceleration number and rates that we are seeing in the fourth quarter of this year.

More merchants, more SKUs, attract more consumers, and will translate into more transactions in GMV growth over the medium term. And again, you see that playing out, consumer growth up 50% year on year to 5 million consumers. Still some tad way to go in terms of cross penetration of the user base with marketplace, but very, very healthy numbers to date.

Now one of the things we have also talked about on the strategy last year and this year, as we add more merchants, what we are trying to do is increase our relevance so that you can purchase -- consumers can purchase all their regular day-to-day transactions purchases, [do it] through Kaspi. That typically means low price points. And so what you have seen, and you will continue to see, is the number of purchases grows at a faster rate of 102% than GMV. GMV is diluted by lower ticket sizes. That's a strategic decision. But with growth in purchases of 102% year on year, or 21 million purchases, our relevance to our user base is only increasing.

Marketplace take rate is impacted by a couple of factors. It's impacted by, number one, lower promotional activities, to some extent in January, but particularly in March. So lower promotional activity [mutes] both GMV growth and it mutes take rate. Merchants pay higher take rate, [participate] in marketing campaigns, number one; growth in supermarkets, number two; and growth in travel, number three. Those three things all combined, a lot of marketplace take rates year on year, 7.5% down from 8%. But I'd also expect marketing activity to gradually ramp up again, particularly in the second half of the year. And so that will have positive implications both for GMV growth and for take rate later on during the course of the year.

The other point just to make on this slide, and Mikheil touched on it earlier, following the success of the Kaspi Travel, which we have taken really from startup to the number one online travel operator in the country today, our marketplace business now comprises three material segments: m-Commerce, e-Commerce, and Kaspi Travel. All fast-growing, especially Kaspi Travel, and a more diverse, more relevant overall proposition to our consumers.

Breaking it down, this is the first time also that we broke out take rate by the respective components, m-Commerce, e-Commerce, and Travel. What you see here is the point that I made earlier, that purchases up 89% year on year are at a faster rate than GMV, up 66% year on year. So there is some take rate dilution there in m-Commerce. But still, both numbers are very, very, very strong. You see that the m-Commerce take rate is 7.4%, muted in part by the absence of promotional campaigns and growth in the supermarket vertical.

Looking at e-Commerce, the trend is more pronounced, i.e., number of purchases up 71%, but GMV up 14%. So here, you should bear in mind the e-Commerce ticket sizes are higher than m-Commerce ticket sizes, and they are therefore more promo sensitive, so that is one factor. But also, the factor again that it is particularly e-Commerce where we are adding more SKUs, a lot of price points. Both of those factors will play that part of higher promotional activity, but also ensure that GMV growth accelerates as we go into the second half of the year. Going to see the take rates here split out for e-Commerce, and I would just say here that the take rate is higher for e-Commerce, and that just reflects higher value items versus m-Commerce.

The point about adding more SKUs and having a dilutive impact on ticket sizes and GMV growth, here is the dramatic progress we have made as it relates to e-Commerce specifically. And you can see, again, strategic objective is dramatically increase the number of merchants, number one, to dramatically increase the number of SKUs, number two, with a view to adding more consumers in both transactions consumer. And here you see a number of SKUs of 2.4 times year on year to 1.6 million.

There are other parts of the marketplace strategy. One, adding more merchants and SKUs. I know that is adding free delivery, now available to 95% of consumers, free for the consumer; 53% of orders delivered within two days or less. And you can see that consumers are taking up this product proposition with great enthusiasm. Number of orders delivered up 107% year on year to 2.3 million.

Kaspi Travel, what we now include in marketplace GMV, very, very strong growth, additive to overall marketplace GMV growth. But a similar trend, slightly different reasons, i.e. GMV growing 5.1 times, number of tickets sold growing 8.9 times. And that is -- the reason is the rapid growth in domestic rail bookings, which is a lower ticket size item, but the offset being is also higher take rates. And you see here the Kaspi Travel take rate has moved up year on year to 3.5%. So very, very healthy take rate.

All combined, what you see here is strong revenue growth, up 40% year on year, with broadly stable profitability. So the combination of tight cost control and lower marketing activity has broadly offset investments in free delivery, which we have ramped up substantially over the last 12 months.

So finally, moving on to the fintech platform. The messaging here is the same, a lot of macro volatility, particularly with regard to FX. But actually, in terms of our consumer behavior, you see that very little has changed versus the fourth quarter of last year. So deposit customers, deposit base, growing very, very healthily, up 32% year on year. And a broad similar rate of growth in loan customers, up 39% year on year to 5 million.

What Mikheil talked about earlier is the playbook. During periods of increased volatility, we take a more conservative approach to origination. So in practice, how that manifests itself is in lower average, equal in two ways. One, lower average ticket sizes; and two, a shift to Buy Now Pay Later, which in itself is lower ticket size. And so here, you see that low origination of -- origination continues to grow albeit at a lower rate, plus 21% year on year.

And you can look back in our presentations from 2020, during the much more severe economic shock, and you can see both how quickly we scaled down TFV, and, again, later on in the year, how quickly we were able to ramp it up. Conversion trends 2.2 times, and that suggests the consumer is healthy in terms of borrowing, repaying, borrowing, repaying. A pattern actually consistent with pretty much what you saw throughout last year.

The merchant dipped previously. So lower origination takes a couple of forms. It takes the form of lower ticket size, number one; and it takes the form of a shift to Buy Now Pay Later. Buy Now Pay Later is low yielding, so you will see that play out over the course of the year. But the nature of the Buy Now Pay Later product, i.e. small ticket, short duration means that it is also lower risk. That helps us maintain low cost of risk even in the context of a more challenging economic environment and limited macro visibility.

Here, if you look at the loan portfolio, the loan portfolio growth of 67% year on year, it's important to look at that in the context of higher origination in the second half of last year. Low origination in the first quarter of this year will impact net portfolio growth as this year progresses. Savings, again, to my point earlier around some of the news flow around economic FX, particularly volatility, you see our deposit base continues to grow at a nice rate. Our loan to deposit ratio has now normalized from low levels during COVID, and we see that level around 88%, that sort of region as being optimal going forward. Shift to Buy Now Pay Later last year, and, again, this year, does manifest itself in lower yield. And that is consistent with the guidance that we provided to the market at the end of February.

So in terms of credit quality, we specifically stated that we see high levels of credit quality. If you look here at things like first payment, second payment default, delinquency rates, what you see is still very, very low levels of default delinquency. Yes, it is higher than in 2020. We flagged that before 2020. It was a year where there is an extremely low level -- there was a trade-off, very low level of origination albeit to the highest quality of users. But the trends we see here are consistent with long-standing trends, and that includes also a normal seasonal increased uptick in Q1 following the Christmas -- holiday period. And it's a similar message on loss rate vintages and collection vintages. The long-term trend, mainly it was improving our origination capabilities, better collection capabilities we can use to play out here.

As a result, underlying credit cost of risk has improved year on year. So again, this is on the back of us getting better origination, better collection, albeit macro provisioning has gone up 1.7%. And that is -- macro provisioning is simply more cautious GDP assumptions for 2022. But by the end of 2022, those GDP assumptions are amortized out and you're left with your underlying risk.

NPL ratios remain broadly similar. Again, I talked about a normal uptick in the first quarter, seeing seasonality. And what I would stress here is that what we don't see is any sort of real material impact either related to the civil unrest in January or the effects from the Russia-Ukraine war in March, and continues to see normal consumer [and credit] behavior. We will continue to take a cautious approach through origination over the next quarter, as implied by our guidance. We would also expect to be able to gradually ramp up origination as we move into the second half of the year, and that would be consistent with maintaining low cost of risk for the year.

So overall, for the fintech platform, strong revenue growth. This is on the back of the strong origination in the second half of 2021. That translates into strong net income growth. And there are mixed factors in there. On the positive, again, you have tight cost control and low marketing activity that's being across the entire business, albeit slightly offset by the ramp up in macro provisioning and low yield. But overall, in the context of a challenging macro environment, the most macro sensitive part of our business continues to post very, very robust numbers, and numbers that remain consistent with our guidance that we provided to you in February.

So to wrap things all up, overall, a strong quarter revenue growth, up 45% year on year, dropping through to bottom-line; gearing margins up from 43% to 44.3%, 49% year on year growth. The message is the same, as I've said several times previously: tight cost control, low sales and marketing activity, combined with the elimination effect part of processing the payments business particularly. Overall, delivers very, very robust bottom-line growth.

In terms of the 2022 guidance, this is the guidance that we provided to you in February, excluding, at that point, Kaspi Travel is not part of marketplace GMV. When we gave that guidance, we have built in -- the Russia-Ukraine conflict [have commenced], we have built in conservative planning assumptions of full year. That guidance, we are happy to reiterate today. Going forward, we will guide including Kaspi Travel. That is the only difference between these two slides. In the interest of transparency, I would provide it both today. But going forward, as the business is being operated, the guidance will include Kaspi Travel. At this stage, we are very happy to reiterate our guidance of 20% to 30% year-on-year growth, and that is even taking into account very limited macro visibility and high volatility that we see today.

So on that note, I will pause. I will ask Harry to open the floor to Q&A. And the full team are available to answer your questions. So, Harry, over to you.

Thank you, David. (Operator Instructions) [Mikhail Bucco].

Yes. Good day. Thank you very much for the presentation. A couple of quick questions. So firstly, how did your acceptance rates for new loans have changed since the macro challenges have begun? And when can you roll them back to previous levels again?

The second question is a little bit similar. So you mentioned that you scaled down the investments into their marketing -- in the marketplace. What metrics will you do to consider that you now can invest more and increase the investments in the marketplace? And finally, that is almost one more month of the second quarter. So can you provide any indications of changes in the underlying asset quality trends? Is there any deterioration or it remains stable? Thank you.

So thanks for your questions, Mikhail. I'll pass those questions on to Mikheil for him to give his view.

Sure. Okay. So on the loans -- on the loan approval rates, I understand, was the first question. I mean, in general, for the new consumers, again, the way we always do that is that we work -- as David explained, that we work on the number of consumers. So we basically are reducing the ticket size rather than not approving the consumer. So our approval rates in general are quite solid. We are reducing the origination. We are reducing the amounts.

And the one thing I can also say that, in general, if you think about this year or the medium-term visibility, the demand for our products has not been that high in our history. So the demand is there. So it's just we are mindful about the visibility. We are mindful about making sure that we perform according to our mission, improving people's lives, which means we are not driven by the short-term performance. So we build those changes pretty much every time when we have -- when we see that consumers are not as confident as usual in terms of their spendings. So I would say this is our managed decisions, which we take in those type of circumstances.

The second question was the marketing. Sorry, I have to clarify. What we call here is the promotional activity. And the promotional activity means running the marketing campaigns on the marketplace, which are promotional campaigns for selling the items. So that's not the usual marketing investment that you would say, right? It's just the promotional campaigns. And we slowed down the promotional campaigns in January, because of the January events obviously, and then we have slowed down the marketing communication in March as well.

And partially, the reason for it was also the fact that you have a lot of merchants, this fluctuation of the pricing from their items. So the merchants themselves, they were a bit adjusting to the environment. So the March was basically just the kind of month when you don't really want to run the promotional campaigns because the prices have been changing up and down during the March quite frequently.

So that's -- we [weren't] talking about marketing investment. We are actually talking about running promotional campaigns together with the merchants and for the merchants to increase their sales. And on top of it, in March, some of the merchants did experience some shortage of the items and things like that just because the distribution networks have been also impacted and traditional routes of delivery guidance have been impacted during March. Now in April, we see a pickup. And as David explained, we are resuming the promotional activity. We are helping merchants to grow their sales.

Asset quality. Again, asset quality, we are extremely experiencing our guidance. As we said, it's standing for the year, and we don't see any deterioration in the asset quality. And again, the asset quality -- as a result of things which we have described, the asset quality cannot just take the standalone basis. So we actually do manage our asset quality, which means we take the right decisions in the right time. And therefore, the asset quality is there, and we don't see any deterioration in April, if the question was about April. But then we'll also stand by our guidance for the year.

Thank you very much. Very clear. Thank you.

Gabor Kemeny.

Yes, thank you. Hi, everyone. Another question on asset quality from me. You are showing in the presentation that, in the loss rate vintages, loss rates have been increasing on the new origination. Now I understand you manage the asset quality very proactively. We have the [cutting of approvals], the amounts, but my question is how confident are you about reaccelerating new lending in this environment when the risks seem to have increased?

And another question on asset quality is on the macro overlay provisions which are created in Q1, and I understand you expect these to reverse in the next few quarters. Can you talk a little bit about the assumptions here? Why do you exactly assume that they would reverse? Why did you create those provisions there in the first place? And just the final question on the e-Grocery markets. Can you help us size the addressable market in here? I think you mentioned the 12 billion figure, but I wasn't sure about what that referred to. Thank you.

Okay, Gabor. So thank you for your questions. I'll ask again Mikheil to continue on the asset quality question and the supermarket opportunity question. I'll just take the macro provision. So effectively, it's GDP. And we take assumptions for a number of different forecasts: Economist Intelligent Unit, Ministry of Finance, and so on. And it just reflects real-time what they are forecasting. Those forecasts are also publicly available. I can help you source the numbers offline, but it's a relatively mechanical gross estimate. Therefore, really, what is important is the underlying real-time sort of credit risk quality, which is what actually has improved year on year.

Okay. David, can you pull out the slide with the -- I think Gabor was referring to it. Not vintages, the previous one. Great, thank you. Okay. So first of all, there are two comments in general. Number one comment, there is always a seasonality on the credit quality in the 1Q against 4Q. The first few, usually, it's -- the repurchases are a bit higher historically. And the main reason for it is because there are a bunch of holidays. And then the discipline of payments during the holiday times is just a bit worse, but it doesn't mean that people are getting delinquent because we do have a process. We work with our consumers, so the consumers get back on track quite quickly. So that's number one.

Number two, what David actually said. You shouldn't be benchmarking credit quality against 2020. Because in 2020, in the second quarter and the third quarter, we have pretty much no origination. This was completely minimal. And just because of the COVID restrictions, people were at home, they didn't really have to buy anything, and they shouldn't be getting loans because there is no purchases behind those. And as a result, we basically had a super minimal origination, and only to the highest quality of consumers, when we have the confidence that this money was actually needed, being used, and, specifically, people actually could spend it.

So that basically is -- there are two points about the vintages. So the vintages are -- I wouldn't call them that the risk is picking up. There is natural seasonality, and that is back on track in terms of the volumes, and, therefore, you cannot have like -- if you look at the 2Q, we have the second payment default close to zero. This is not normal. But thinking about second payment default, about 0.5, that's as good as it can get. And we are just normalizing post-COVID. And we don't see material impact from neither January events or from the March. So we are quite confident in the credit risk.

In terms of the food market, I mean, the food market, there are different estimates. Our estimate is roughly about in excess of $12 billion and more. And that's the $12 billion size of the food retail. And this is both organized and disorganized. And we do believe that that's a huge market. Usually, based on our estimates, roughly the household is spending around 20% to 30% of their budget on the food and related purchases. And this is an opportunity for us just because we enable the purchases straight from the app delivered to your door. We have this incredible retention rates when consumers don't leave the app. Once they do, basically, multiple purchases, they get used to it, they repeat those purchases. So it's a really exciting opportunity. It's huge.

And when we are talking about the travel, we said the travel airlines roughly was a $1 billion opportunity. And here, we are talking 10, 15 times bigger opportunity in food retail. So the total market is huge. We just need to execute and make sure that the consumer experience remains incredible and high quality as we scale our business, which [grows] extremely rapidly. We just need to make sure that we maintain the high-quality service, and that's our number one priority.

Thank you, Mikheil. And that is $12 billion --

Yes.

-- for the current market size, without taking into account future growth?

Yes, correct.

Got it. And just on David's point, on the GDP revision. So the negative GDP revisions basically required you to set aside these provisions which you expect to reverse based on your underlying asset quality trends you see. Is this correct?

Yeah. It has nothing to do with asset quality. It's just the GDP growth assumptions, which would take public sources as given. And if you actually take our previous presentations during COVID times, we did exactly the same. And we reported market provisions and we amortize those market provisions over the course of the year. It was exactly the same exercise we went through during the COVID lockdowns.

That's very clear. Thank you.

Thanks.

Just Gabor, to add on to your question around here, being the origination. It's just to manage expectations. If you look at the acceleration that's implied by the guidance, this is not going to happen overnight. And it is going to be weighted, not to Q2, but towards the second half of the year. So it will be gradual, and it will be second half weighted. So you should just bear that in mind.

Okay. Thank you.

Sergey Dubin.

Hi, Sergey. You might be on mute. We can't hear you.

Sergey, please ensure that your line is unmuted locally and then proceed with your question. It appears we are having issues connecting with Sergey's audio. So we'll just move on to our next question from [Sam Griffith]. Sam, your line will be open now if you'd like to proceed with your question.

Yeah. Hi, gents. Thanks for taking my questions. The first one is on cost of funds. Can you talk a little bit about what you're seeing there? Is this a period where you really need to start being more defensive and maybe wage rate is more than you otherwise would need in a more benign environment? Some comments there would be helpful. And then additionally to that, why are term deposits so high in the funding mix if customers aren't using the Kaspi ecosystem for yield? Wouldn't we expect higher [Kaspi] in our funding mix?

And then the next question, can you talk a little bit about the challenges that you see in migrating merchants from m-Commerce to e-Commerce? Migrating from payments to m-Commerce makes a lot of sense. I guess, it's relatively easy to do. But other challenges migrating them from m-Commerce to e-Commerce. Thank you.

Thanks for your question, Sam. I think maybe I'll pass all three of those to Mikheil.

Yeah, sure. So on cost of funds, this is a very good question. So basically, we have already [done so]. So our guidance actually incorporates us increasing the rates on the deposits. So we have -- the deposit rates are kept in Kazakhstan by the Deposit Insurance Fund. And they have increased the maximum rate. It can charge to 13%, and before that it was 10%. And we have increased this to 13% already. That was done in March, I think. So that's number one on the cost of funds.

In general, I would say that we have -- we are now on fintech side of the things. We have a huge demand on the lending side. So that basically means that our growth is actually -- we could grow faster if we would have the ability to raise more deposits. But the way that we run our business is that we don't -- we are not -- we think it's not appropriate to go for capital markets and raise US dollar, or the foreign currency-nominated funding, because our business is in tenge. So therefore, we basically are just focused on internal market, and we are competing very successfully with other players for the consumer settings. And that's our important priority for this year.

The second question was about the term deposits. Now the term deposits are high. In general, the way that -- we build these high-quality products for our consumers, and consumers can actually move money seamlessly between their current accounts and deposits. So consumer behavior that you have in general means people have what we call their daily needs account, which is the Kaspi Gold, where they can spend the money for their immediate purchases. But they can fund deposit seamlessly through the app.

And as a result, term deposits are quite -- it's just the product where consumers are accumulating for some medium-term purchases. So both products are very high quality, and consumers love it. But there's the difference. So it's not like people keep all the money on the interest rate accounts. They keep some on the interest rate accounts for immediate spending, and then they keep the rest on their deposits where they fund their medium-term purchases, which are higher ticket, let's say car or maybe apartment, in the future. So that would be the difference, and that's why the term deposits are usually quite high.

On the merchants, and migrating the merchants. Now, basically, what you actually have is the merchants are onboarded for payments. Everybody accepts the payments, right? So then the mobile commerce -- virtually, most of the merchants that accept payments actually would like to sell to get in our platform, get listed as a merchant, but also sell with Buy Now Pay Later products.

When we talk about e-Commerce, e-Commerce -- the difference between e-Commerce and the mobile commerce, from the merchant's perspective, number one, you need to have items which you can list. For example, if you are a barbershop, you are not fit for the e-Commerce, right? You are fit for a mobile commerce. But if you are a shop which is selling actual items, sort of either electronics or garden or things like that, then -- for home, the furniture, then those are the type of merchants which are meant to get on the e-Commerce.

Now e-Commerce is -- if at mobile commerce, you are listing yourself as a business, e-Commerce, you are listing your items, which you sell. And there is a little bit more work to be done because you need to list the items, you need to monitor the pricing, launching marketing campaigns looks a bit different. If in mobile commerce, you are launching marketing campaign for your entire store, in e-Commerce, you're launching marketing campaign and the promotional campaign for specific items.

So the conversion, not 100% of m-Commerce merchants are fit for e-Commerce. But e-Commerce itself, even though it's a bit difficult, you know there is -- or it's a bit more time-consuming for merchants to join because of assortment management tools. We are constantly developing those tools to increase the speed to listing, speed to sale. And also the delivery helps a lot. And now customers are incredibly well received by the merchants.

So as we develop the new tools for the merchants, I think the merchants will be increasingly moving to e-Commerce. And it will be basically catching up. So first -- fastest growth is payments. Then the m-Commerce is catching up with the payments. And then e-Commerce is catching up with m-Commerce. Not 100% of m-Commerce will be on e-Commerce, but anyone who can actually sell the item will be on e-Commerce. And the net promoter score of those merchants is really high. We actually have a huge demand for the e-Commerce platform. And we are -- within the next -- basically shortly, we are rolling out a fully redesigned onboarding cabinet for e-Commerce to enable merchants to faster onboard. So yeah, e-Commerce has a very strong demand from the merchants.

Thanks, Mikheil. Can I stick a couple of quick follow-ups in there?

Go ahead.

The term deposits were at 13%. Were they at 10% before this rate -- this hike?

I don't recall the exact numbers. Do we have them in the presentation? In general, we don't really --

[Yeah. 10% and 13%, yes].

Okay, great. And roughly speaking, how many merchants do you think that you have now on your platform can eventually migrate to e-Commerce?

The way we evaluate the merchants is we do almost the same kind of risk of quality metrics for the merchants to onboard them. So the way basically it works, in our case, if you have merchants on e-Commerce, you will get an offer to onboard on e-Commerce, right? So that's the preferred route for us. And for that, we'll score you for the volumes, we'll score you for the quality. We'll score you actually for the credit risk, because we want to fund your business in the future. So out of, let's say, 100 merchants that you have on m-Commerce, roughly about 50% to 60% of those merchants would be qualified for e-Commerce. But qualified for e-Commerce and actually getting onboarded by us, it just takes a bit of a time because the merchants need to learn all the tools, and they have to get comfortable with managing their assortment pricing the real time.

The difference of our business from other e-commerce platforms is that we are working with a huge number of merchants, and most of those merchants are off-line merchants. So it's not like they have experience of working with other e-commerce players. For us, we are basically their number one -- sort of their first entry to the e-commerce world. And that's a very, very important point. Because as we educate those merchants, as we are sort of first one to teach them our tools, then the switching cost of those merchants are much higher than they would be sort of e-commerce merchants, working with multiple platforms, and so on and so forth. And so the retention rates are also extremely high.

And so it will take time, and the e-Commerce will be catching up. We already see this year that we are onboarding e-Commerce, at least two times [fast] more merchants than last year. And on top of it, the merchants are also learning. We also see a lot of merchants -- some merchants that have been selling smart phones, now they are selling home and garden equipment.

So it's really exciting actually to see how we help merchants to grow, but that will be the numbers. So around two-third of the merchants, 50%, 60% of the merchants would qualify for e-Commerce. I'm talking now, because we are onboarding a lot of [marketing merchants] as we speak.

That's great. Thank you.

Simon Nellis.

Hi. Thanks very much. Hi, Mikheil, David. Thanks for the opportunity. I was hoping you could maybe just elaborate a bit more on e-Grocery, just on the partnership part of the terms. Do you have exclusivity? Why did you choose them? Also, just on the economics, if you can elaborate on what kind of costs are involved for you, what kind of profit margins you might expect going forward. Yeah, that would be helpful. It sounds like an exciting new venture, and good to see it's growing rapidly.

And then second question would just be on -- could you give us an update on any regulatory initiatives? I know there was talk about a new bankruptcy law. Has that gone into effect? Do you see any impacts there? There were some talk about potential rate caps on the consumer loans. What's the latest on that? Yeah, any regulatory issues you think worth highlighting. Thanks.

Thanks, Simon. So questions on e-Grocery and regulation I think for Mikheil.

Yeah.

Sure. So basically, we have -- we work with multiple grocery companies on the supermarket side of things. But then in last year, we have actually realized -- and now our team has done an incredible job -- we have actually realized that it takes a lot of time to convince any leading off-line retailer to be comfortable with e-commerce concept because they are usually defensive. They are usually -- love building stores rather than using the technology to basically sell more. So they are in the store business.

So we have decided that -- considering how much effort it actually takes from us, we have decided to select, simply, number one -- the Magnum is by far the number one food retailer in the country, basically, I don't know, multiple times bigger market share. And we have decided we would focus on Magnum for the size of it, the brand which consumers know and like, and we would enable our technology to show them that, actually, e-Grocery can bring them sales. It can be also profitable, and operation is super efficient.

So as a result of the business model that we have with Magnum as a standalone partner is that we have a dedicated section for Magnum in our app. The Kaspi team is managing consumer experience. Kaspi team is bringing sales. The Kaspi team is helping defining assortment. And Kaspi team is helping define the pricing. Magnum, as our strategic partner, is responsible for operating the dark store. It's actually quite a big dark store. It's almost like a hypermarket size. It's about 7,000 to 10,000 square meters, depending on the location. I mean, that's the business model we have -- we are building.

They are responsible for maintaining -- so for buying the SKUs or the assortment which we have defined together, storing it in a dark store, and delivering this assortment to the door. So that's the operational responsibility of our partner. And again, technology and marketing, driving sales, consumer experience, pricing assortment is done by Kaspi, or with a significant involvement of the Kaspi team. So Magnum has its own margin, and we are getting paid a take rate of around 3.5% from every purchase. So that's the basic economics, very simple unit -- very simple economics of that business. So that's on the e-Grocery side.

On the regulatory side, yes, the bankruptcy law being discussed, and there is a very productive discussion with everyone participating, both from the regulator and from the government bodies. Clearly, there is a need for bankruptcy law just because, first of -- I mean, you cannot keep accumulating consumers which are not able -- as a country, I mean, or as a financial sector. And we are not talking about only financial debt, right? We are talking utility bill debt, we are talking about tax, we are talking about any other debt or liability that consumers could accumulate. And there is no [bad] consumer. There is no way out for these people or for those -- sometimes, these are businesses, as a matter of fact. But we are discussing only consumers.

So the balance is -- I think there is a balancing discussion, which means there should be the right -- there should be a very transparent criteria for a consumer to go into the bankruptcy. There should be a very transparent criteria how consumer can behave during the bankruptcy. For example, consumer, to enter the bankruptcy, to ensure there is no cash on the accounts, there is no property. I mean, the consumer is genuinely looking for a bankruptcy procedure. And then when the consumer goes into the bankruptcy, there should be also evident consequences of this bankruptcy. For example, you cannot take any other debt, you cannot travel, you cannot acquire real estate or acquire a car, because you actually went into bankruptcy in the first place because you have nothing to pay your debts off.

So this is all being discussed, and I think everybody understands the role of this bankruptcy law. And in my personal opinion, the bankruptcy law is needed because it doesn't exist in the country, and there's a segment of consumers which actually is accumulating debt without any possibility to repay. But the bankruptcy law, clearly, is not a law to avoid any financial responsibilities, right? So the bankruptcy law is needed, but there is a balance to be found. And I think everyone is on the same page at the moment as we discuss it. We are also actively participating in this, as many other players.

Are there any other regulatory initiatives that might impact the business?

Well, there have been very general -- for example, from the -- if I'm not mistaken, from July 1, there will be -- you cannot charge any penalties, fees, and interest, and charges on the consumer's billing point more than 90 days. So that is I think from July 1. I'm not sure. The reason why I don't follow this is very simple. It's just because --

Because you don't do it.

We don't do it. Exactly.

Yeah.

And I think this change works very well with the bankruptcy law because the person cannot pay as opposed to charging interest. This is not correct. So there was a lot of going back and forth, but, finally, the right decision has been made by the regulator to stop accruing after 90 days. So that's, for example, change coming from July 1. And internally, there is always discussion about what else, whether there is a -- do we have a consumer debt bubble or we don't have it. So there is a discussion about this, which is -- I mean, every call, Simon, you're asking this question. So there is always the kind of discussion.

The one thing which we are trying to communicate and make sure is that, before, in general, is coming up with a strategy. I think it's important too, that the country, the financial set that defines the kind of criteria, what does it mean. Do we have a risk from a mortgage or do we have a risk from a consumer finance. And if we have a risk, we need the kind of -- how should I say it -- the indicators for the country. And there are no indicators at the moment.

So the focus on our side, talking to our colleagues and also talking to regulator, has been that there should be defined criteria according to which the environment is evaluated, and then the actions are taken. And it shouldn't be the situation where in interest of the specific players and a specific regulation is directed. And I think in today's environment, and in today's context, I think that's highly relevant, and there is always -- at the moment, there is discussion like it can define -- let's define the criteria, which will help all of us to understand where are we on the curve of the credit risk on any financial product section, not just the consumers.

Great. Very helpful. I'll probably ask you the same question next time though. Sorry.

No, no, no. Go ahead. I think it's important to check.

Thanks very much.

Thank you, Simon.

[Stefan Groushka].

Yeah. Hi. Well, first of all, congratulations on the good results in this difficult quarter. It's very impressive. I wanted to ask you about, A, of a buyback. I understand you have $100 million, which you're buying back. I just wondered how much of this has been already spent, how much did you buy, whatever you can say about this, and potentially about the price that you bought it.

The second thing is about dividend. Actually, interestingly, when I first saw some publication, you are saying something about your dividend a few weeks ago, which I'm not sure is correct, but maybe you could say where you stand with this. And the third question is about the US listing. You are guiding, I think, for the second half of this year as a kind of soft target. Maybe you could say, given all what's happening, if it is still realistic or if there's any change to it. Thank you.

So, Stefan, maybe I'll start on your questions. So firstly, with regard to the buyback, so that's being announced today, up to $100 million. So we haven't bought anything yet. It's been approved by the Board of Directors, and I think you can expect it to start imminently. And there will be disclosure when that is the case, and then, thereafter, it will be regular disclosure around the amount and purchase price of [it which] we bought at.

We have chosen that amount. A good question is why isn't it a higher amount. Well, simply, because that will allow us to be -- given the liquidity of stock, that is a realistic amount that will allow us to be a material player in the market over the next three months. It will take us through into the summer.

And then that leads on to your second question around dividend. We have chosen to start with a buyback, taking into account the valuation of the stocks. So we've got a preference for returning cash value buybacks as opposed to via a dividend. The business continues to generate cash, which I guess you were alluding to. This will take us through into the summer. And then in the summer, everything will be on the table again for discussion, and we will [decide] and make an announcement at that point. But at today's point, the message is we are starting the buyback.

And then on the US listing, I would simply say that, as a company, we are completely ready to be listed in the US. So it would be subject to market conditions. Clearly, the market condition is not conducive to that today. Long term, the objective hasn't changed. We believe that the most appropriate home for Kaspi as a public company is in the US. When market conditions are right, we would look to do that. But at this point in time, it's hard to be any more specific than that.

Okay, thank you.

Ronak Gadhia.

Thank you. Thanks for the presentation and taking all our questions. Two questions, which are -- it's more of follow-ups. Firstly, just going back to the discussion on deposits. On a Q-and-Q basis, deposits declined. Could you just elaborate maybe why that is? Is it just because you have been conservative because there is not that much opportunity to grow the loan book, or you're being conservative? Or are there other reasons for why the deposit [credits are] a bit weak during the quarter?

And then just looking at your marketplace platform, so when I look at the overall net income margin -- so not the adjusted, but just the overall margin -- the margin seems to have dropped to around 55% from an average of around 66% -- let's call it 65.5% -- in the last three quarters of 2021. So could you just maybe help me understand why there was such a significant drop? And what should we expect going forward, given the increasing contribution from Kaspi Travel and e-Grocery? Thank you.

So I'll take the second question, Ronak, and I'll pass the first to Mikheil. But I would simply say maybe it's not quite the right way to look at it. When you think about the seasonality in the business, Q1 is the sort of least important from a revenue perspective. Given the gearing in the business, that will be the lowest margin. And on the other side of the equation, Q4 is the most important from a revenue perspective. And so in usual terms, you would expect it to be the highest margin.

So I wouldn't necessarily look at it the way you are looking at it. And I certainly wouldn't compare Q1 profitability with Q4 profitability. And I suggest the answer to your question is really just probably seasonality rather than any specific change in the (technical difficulty) of the business.

Okay. So the question here is about the deposits in the marketplace margin, or just -- ?

Just the deposits. When I look at the overall deposits here in the balance sheet, it seemed to decline slightly.

Yeah. I mean, the one thing I should -- in general, when we are talking about term deposits, there were a couple of things that were going on from the autumn of last year towards first quarter of this year. First of all, there was a program which allowed Kazakhstan citizens to withdraw their pension funds and buy real estate. So as a result, whoever was actually using the money to buy that, or accumulating money to buy the real estate, they were using this money for that significant decision in their lives. So that was putting the drag on the deposit growth in general -- I mean, term deposits and the high-ticket deposits, not deposits of couple of thousand dollars. So that's number one.

And then the currency fluctuations. What we have seen multiple times before, as soon as there is a fluctuation in the currency, then consumers are actually preferring to take the money and buy something, either, again, cars and real estate. And that was going on in March. So that basically are the trends which sort of impacted the deposit trends overall, and the sector as well, I mean, the market of deposits.

The program for real estate acquisition was ramped up by the end of the 1Q. So we will see consumers again accumulating. In general, I would say that there is a strong demand for our products, and, therefore, deposits is important. We don't have any limitation on the demand side. So we are, at the moment, are focused on deposit products very substantially. That's why we also increased the interest rate alongside with increasing rate for the cap of the deposits, which happened in March, I think. Yeah. So that's basically on deposits.

In the marketplace platform, I would also say that we are focused on the growth. In general, I think our marketplace is probably one of the highest margin marketplaces in the world. So when we are dropping from [60%-plus] to around [60%], I wouldn't call it a significant drop. And in general, I don't think also that we can reasonably expect our marketplace to continue increasing its net profit margin endlessly, right? This is still a business which we operate. It has its operating costs.

And therefore, we do provide guidance on the marketplace marginality, and that guidance have been updated also with the travel side of things. And yeah, so we will be -- we are focused still on the growth. We are not managing the margin, but it just happens. I think it's one of the highest margins in the world [among] marketplaces.

Thanks. Thank you.

Simon Nellis, Citi.

I was hoping I could just ask one more follow-up question actually on e-Commerce. Can you give us a bit of an update on the competitive environment? I've seen in the banking sector that some of the Russian banks have been exiting or divesting. Are you seeing similar things with Russian players in the e-Commerce side? And just where your position is, that would be helpful. And also just on e-Grocery, is the GMV from e-Grocery currently included in the marketplace GMV numbers? It's not clear to me if they are.

Okay. So on the e-Commerce side of things, Simon, you actually made a very good point. I completely forgot to mention that deposit trends and the consumer confidence has been also shaken up by Russian banks having been sanctioned, right? So people cannot withdraw their money. This is going back to the previous question about deposit trends. People cannot withdraw their money from those banks, so there is also some discussions about it. The consumer confidence has been challenged dramatically. And those banks were -- one of them was second or third by size. So I guess we are not talking about the small bank.

And usually, what happens with the consumers, consumers take the money first from the bank, they keep them at home, they get confident, and then they decide where they want to place the money. And considering the top of mind of our brand and the quality of our products, we believe that we will be that beneficiary of this redistribution. So that's about -- this is one fact which I completely missed. So thanks a lot for reminding.

On the e-Commerce side of things, I mean, competitive environment. We haven't really seen -- we didn't see a significant impact before, even though there was a lot of discussions about different players ramping up their business. But we're going to see their numbers flowing through. And at that moment, that's basically where we are today. I think they reduced their activity even further, so we don't really see any significant competitive threats.

And the grocery numbers, they are small. So that's -- they are included in the marketplace. But we will do the same thing as we have done with the grocery, which means -- sorry, with the travel, which means once they become material size of our GMV, then we will be putting more details about grocery business. So at the moment, they are part of the marketplace, and we just show the GMV and the take rate.

Okay, thank you.

Thank you.

I'm afraid we have no more time for any further questions. So I'll hand back to David to make any final closing remarks.

Great. So thank you, Harry. Thanks, everyone. We've been going for 1.5 hours, so we'll wrap things up now. If you do have follow-up questions, then happy to take that off-line. But thank you for your time today, and please keep in touch, and speak to you in three months' time. Thanks a lot.

Thank you. Take care. Bye.