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Mobile TeleSystems PJSCÂ (MBT)
Q3Â 2019 Earnings Call
Nov 19, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Dear ladies and gentlemen, welcome to the Conference Call of Mobile TeleSystems PJSC. At our customers' request, this conference will be recorded. [Operator Instructions] After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
May I now hand you over to Polina Ugryumova, who will lead you through this conference. Please go ahead, madam.
Polina Ugryumova -- Director, Investor Relations
Welcome everybody to today's event to discuss MTS Third Quarter 2019 Financial and Operating Results. As usual, I must remind everyone that except for historical information, any comments made during this call may constitute forward-looking statements. Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This, in turn, implies certain risks and more thorough discussion of which are available in our Annual Report and Form 20-F or the materials we have distributed today.
MTS disavows any obligations to update any previously made forward-looking statements spoken on this conference call or make any adjustments to previously made statements to reflect changes in risks. You can find copies of the presentation and materials used in reference in this conference call on our Investor Relations website.
Today's presenters are Alexey Kornya, President and CEO; Vyacheslav Nikolaev, First Vice President for Customer Experience and Marketing; Inessa Galaktionova, our First Vice President for Telecommunications; and Andrey Kamensky, Vice President for Finance.
Now, I will hand it over to Alexey, to kick us off.
Alexey Kornya -- President and Chief Executive Officer
Welcome everyone, and thank you for joining us today. As usual, we will begin with Group highlights while Inessa and Andrey will then give a detailed business and financial update. Finally, I will wrap up before we take questions.
I'm happy to report that we successfully maintained our momentum in 2019 and delivered an overall solid set of results in third quarter. Total Group revenue was up 4.6% year-over-year until the quarter, reaching RUB134 billion. Revenue growth was supported by core operational performance in our largest markets, as well as a noticable contribution from MTS Bank. Additionally, we saw OIBDA growth accelerate to 5.9% in third quarter year-over-year to reach RUB62.8 billion. We also made good progress on our long-term strategic initiatives.
In connectivity, we continued investing in 4G network development and we launched the first 5G pilot zones in Russia with sub-6 gigahertz coverage. In entertainment, we appointed Igor Mishin as our new Vice President for Media. Igor brings to the team decades of industry experience, and I'm confident he is the right fit to lead our efforts in this area.
In FinTech, we further deepened our integration with MTS Bank at both in our organizational and product level. In B2B digital, we continue to wielding our nationalwide narrow-band Internet of Things network, which has now reached around 30,000 base stations with enabled functionality.
Finally, more recently in artificial intelligence, we were happy to be one of the six founding members and the only telecom operator to join the Russian Artificial Intelligence Alliance. Moving forward, this will be the prime -- premier industry association to join action aimed in simplifying the rollout of artificial intelligence technology in Russia.
With that, I will hand it over to Vyacheslav.
Vyacheslav Nikolaev -- First Vice President for Customer Experience and Market
Thank you, Alexey. In Q3, we continued to take steps to refresh our brand and enhance the user experience across the MTS ecosystem. Let me go over a few of the highlights. Few years ago, we launched our MTS cashback loyalty program and we are now focusing on rapidly expanding participation in line with our overall ecosystem strategy. We are seeing rapid progress. In Q3, we reached 4.2 million participants, and more recently in October, we passed a major milestone of 5 million registered users.
Our loyalty program is also a key enabler for us as we gain traction in data banking. In June, we launched cashback branded virtual debit and credit card products, and we are taking a digital-first approach to the consumer experience. In just a few clicks, the customer can apply for a virtual card, get approved and begin making purchases by Apple or Google Play. We are already seeing promising early results. And since the launch of our cashback cards, monthly issuance of virtual cards by the bank had more than doubled.
In Q3, we also continue to see growing adoption of our MyMTS app reaching over 19 million active users by the end of the quarter. MyMTS is our primary digital gateway for customer care, as well as a key ecosystem hub for cross-selling services. We're making good progress in driving penetration, which now is reaching a substantial share of our subscriber base.
Turning to entertainment, in Q3, we signed a 10-year branding agreement for a major new venue in Moscow, the MTS Live Arena. The new facility is planned to open its doors next year and we'll have a capacity of 11,500 people. From a product standpoint, this will be complementary to our live experiential services, including e-ticketing. This will also provide a flagship platform for brand positioning and product promotion for the 20 million residents of the Moscow Metro area.
Now, let me hand it over to Inessa for a business update.
Inessa Galaktionova -- First Vice President for Telecommunications
Thank you, Vyacheslav.
Let me begin with Russia. Country revenue in Q3 grew 2.4% year-over-year to RUB121.9 billion. This was driven by our core connectivity business, as well as a strong contribution from MTS Bank. We saw double-digit top-line growth year-over-year. OIBDA in Russia grew 3.2% year-over-year to RUB57.3 billion with margin slightly increasing to 47%. As expected, organic mobile service revenue growth accelerated in Q3, reflecting ongoing price adjustments in the industry, as well as easy comps as regulatory headwinds began to moderate. Overall, our core performance is somewhat better than we expected at the beginning of the year.
Looking ahead, we're seeing that growth rates in Q4, will likely be at least comparable with Q3 dynamics.
Turning now to retail. As we forecasted earlier, in Q2, we had seen a significant slowdown in the Russian mobile device market. Against a higher base from retail ramp up last year, in Q3 2019, we saw a 3.6% year-over-year decline in sales of handsets and accessories. For the year in total, we expect dynamics to be largely flat.
Given this environment, as well as the long-term trend toward lower churn, we continue to move toward -- in diversifying our SIM distribution channels. This is aimed to enable optimization of our retail network going forward. In Q3, we expanded SIM sales from multiple third-party channels, including our nationwide partnership [Indecipherable]. As we have seen early promising results, a good example is our partnership with [Indecipherable] of foot traffic into SIM cells even on day one of operation. We're also pushing new ads for consumer I/O devices such as smart switches.
Overall in Q3, net subscribers were up by around 0.7 million quarter-on-quarter, which we see as a significant achievement in competitive [Indecipherable] market. Strategically, we continue to focus on the traction high value consumers and in Q3 we saw promising metrics with a high percentage of new adds remaining active for at least two months. Year-over-year, the number of gross adds converted into two month subscribers increased by 10%.
Combined, these developments give us confidence in moving forward our own retail optimization. We confirm our earlier guidance of 200 to 300 store closure by the end of 2019. And depending on how market conditions evolve, we see room for further optimization. We are currently targeting up to 600 total closure by the end of 2020, including our activity this year. Finally, we continue to strengthen our customer relationship through convergence. Since we have been offering convergence tariffs nationwide in Russia, we're seeing healthy and steady growth in our [Indecipherable] base which today stands at about 1 million subscribers across mobile, fixed and satellite.
Moving to our international markets. Ukraine also saw solid performance with double-digit growth in both revenue and OIBDA of near 30%. In Armenia, revenue was down 1.9% year-over-year in the marketplace in tough competition and regulatory changes. OIBDA grew 1.7% driven by continued OpEx optimization. Finally in Belarus, which is not consolidated, will continue to enjoy a double-digit growth in revenue and high-single digits in the OIBDA.
Now I will pass it to Andrey.
Andrey Kamensky -- Vice President of Finance
Thank you, Inessa. Let me start with a few highlights from the bank. Then I will turn it back to the Group. MTS Bank continued to see rapid expansion in the third quarter, as we execute on our broader FinTech strategy. In the first nine months of 2019, net interest income rose nearly 20% year-over-year to RUB8.2 billion. This reflects steady ongoing growth in gross loans, which were up 49% year-over-year in Q3.
Taking a closer look at the breakdown of the bank's portfolio mix. The key growth driver was retail loans, which grew 85% year-over-year to reach RUB79.7 billion. This reflects our strategic focus on the consumer segment, where we are making significant progress in growing our customer base. At the end of the quarter, we reached about 2 million bank clients.
Coming back to the Group. Group net profit came in at RUB18.4 billion, largely flat year-over-year, when excluding the one-off provision in the third quarter of the previous year. Net profit was supported by strong operational performance, which was offset by a negative impact from higher interest expenses. While [Indecipherable] of this impact reflects high underlying financing costs, the majority is related to IFRS 9 reporting requirements regarding improved loan terms. In particular, there was a one-time recognition in the third quarter of 2019, figured by crossing the threshold for substantial debt modification. In addition, there was a high base effect due to the recording of improved loan terms in the year-ago quarter.
Turning to capex. Capital spending for the first nine months of the year totaled RUB61 billion, driven by continuing investments to improve network coverage and quality. Capex revenue ratio stood at healthy 16%. Excluding the SEC/DOJ payment, underlying free cash flow in the first nine months of the year increased by 67% to RUB67 billion versus the year-ago period. This was supported by strong cash generation in our core business.
In addition, there was a low base effect due to a relatively high acquisition activity in the nine months of the previous year. At the same time, we saw a net positive cash effect related to MTS Bank funding and lending activities. In nine months of this year, the total impact of MTS Bank and Group free cash flow amounted to around RUB10 billion.
Turning to the balance sheet. In Q3, we continued to take prudent steps to optimize our debt portfolio. In the reporting period, we issued RUB10 billion in exchange traded bonds with a maturity of seven years and the coupon rate of 7.9% interest rate. We also restructured credit facilities with Sberbank and VTB totaling RUB120 billion. Total Group debt at the end of the quarter stood at RUB376 billion with the weighted average interest rate decreasing to 7.8% from 8.1% in the second quarter. And we see potential for further improvement if macro trends continue toward the lower interest rate environment.
As an early indicator, we achieved a coupon rate of 6.85% in our most recent bond issuance in October with a four-year maturity, and we will continue to proactively seek timely opportunities in this direction.
Overall, our net debt to last 12 months adjusted OIBDA ratio stood at 1.6 at the end of the quarter, excluding the effect of IFRS 15 and 16, and we feel very comfortable operating the business at that level.
Now I will turn it back to Alexey for his closing remarks.
Alexey Kornya -- President and Chief Executive Officer
I am encouraged by our progress and achievements. Given our year-to-date performance, as well as improved visibility toward the full-year results, I feel confident in raising our 2019 guidance to 6%, 7% growth in revenue and 4% to 5% growth in OIBDA. I'm also happy to note that we have now completed our second dividend payment in 2019. This fulfills our commitment for the first calendar year, will follow our updated three-year dividend policy.
Finally, I also wanted to take this opportunity to thank our investors for their patience and feedback during the review of our equity capital market strategy in October. The MTS Board confirmed the continued stability of our current leasing structure on the New York and Moscow Stock Exchanges. We see this as the right fit in light of our new growth strategy with its focus on expanding our offerings into digital products and services. We will be sharing more about our updated strategy next week at our Investor Day in Moscow. We look forward to seeing some of you there.
Thank you, and let's open up the line for questions.
Polina Ugryumova -- Director, Investor Relations
Operator, we're now ready to take questions.
Questions and Answers:
Operator
Thank you very much. [Operator Instructions] The first question is from Cesar Tiron Bank of America Merrill Lynch. Your line is open.
Cesar Tiron -- Bank of America Merrill Lynch -- Analyst
Hi, good afternoon. Thanks for the call, and thanks for the opportunity to ask questions. I have three questions for you, if that's OK. One is on pricing on Russia, the other one on digital strategy, and then on distribution. So pricing in Russia, do you think it's possible to see an end of these unlimited data price plans, which have been around for about five quarters now?
Second on digital strategy, we've seen a very strong pick-up of the MyMTS app in Q3. Can you please discuss what drove this and also any progress you're making with online sales?
And then third on distribution, if we see less pressure from Tele2 in 2020, do you think it's realistic to assume that you will be able to close down a couple of more stores? Thank you so much.
Alexey Kornya -- President and Chief Executive Officer
Yeah. It's Alexey. I'll take the first one and then Vyacheslav will talk a little bit more on digital strategy and also on assumable distribution. As far as pricing is concerned, we see quite a stable situation in the market. We think that the market is not -- we wouldn't be overly optimistic. However, we don't see that the market goes into extremes of competition. So the environment is pretty much stable. Neither too much positive. We don't see much of the room for growth in pricing, but we don't see also that there is some really disruptive for activities there in the market.
And as far as unlimited tele plans are concerned, so far they're driving our ARPU quite strongly higher, and we see positive contribution from them in ARPU, and in the overall top-line performance. So whether the time comes into phasing out from unlimited tariff plans, I think it's a little bit too early. However, at certain stage of the market development, we might see such aspect.
Vyacheslav Nikolaev -- First Vice President for Customer Experience and Market
Okay. Regarding the digital strategy. On MyMTS, we are very happy with the current speed of getting new subscribers to MyMTS. But as we are making new developments in the application and including banking capabilities and some other features, we believe that the growth will continue at generally pretty much the same pace as the last couple of years. You've probably seen that it's a very steady improvement.
Regarding the e-commerce, I will pass it to Inessa.
Inessa Galaktionova -- First Vice President for Telecommunications
Yeah. I will just clarify, if understand the question correctly. This is about online sales of our shop, is that correct, yes?
Cesar Tiron -- Bank of America Merrill Lynch -- Analyst
Exactly.
Inessa Galaktionova -- First Vice President for Telecommunications
Okay. So yes, we're driving that activity year-on-year growth more than 7%, but it's actually a revenue of handsets. But definitely for that channel, we have more ambition targets. So we do expect double-digit growth of the channel in the coming year, because a lot of things -- we're actually making changes in that activity. On top of the handset sales, we do expect some good growth of our SIM cards via this channel. So right now, we're quite satisfied, but our ambition is much higher than we have results right now.
In terms of SIM distribution, actually the situation does not defer this quarter from the last quarter and etc. Yes, it is a competition on the market. As we mentioned, we are ready to optimize our retail chain as soon as we are happy with the quality of our sales and if the alternative channels, which we're developing is going to bring us good consumers. Right now, we are satisfied with the results. As you see our sub base year-on-year grew by 7,100 people. So we are comfortable in confirming our activity to close shops and our intention to close as I mentioned in my speech, in the coming year, up to 600 shops.
Cesar Tiron -- Bank of America Merrill Lynch -- Analyst
Thank you so much. Very helpful.
Inessa Galaktionova -- First Vice President for Telecommunications
Welcome.
Operator
The next question is from Ondrej Cabejsek, UBS. Your line is open.
Ondrej Cabejsek -- UBS -- Analyst
Hi, thank you. A couple of questions from me please. First, two on Ukraine. So you've accelerated quite significantly whereas your competitor has actually slowed down in the third quarter. Do you attribute this purely to the distribution effect you rolled out from network in the second quarter? What exactly do you attribute this to?
And then, if you could update us a bit on the sale of -- the potential sale of this operation, because the local authority gave approval for change in control?
Second question is, if you could just walk us through your thinking now around dividend progression, given the fact that you said earlier this year that you would not continue any sort of buybacks. Thank you.
Alexey Kornya -- President and Chief Executive Officer
It's Alexey. On Ukraine, I think -- the significant -- we are seeing that a lot of activities, which we initiated in the past, now are bringing results in the performance of our Ukrainian business unit. That includes the rollout of our network, that includes the strengthening of our distribution, that includes activities related to intensifying penetration of V&D tariffs and smart phone penetration into our customer base, and so on so forth. So the set of the activities, which we have been taking, including a competitive network rollout, so we are -- as far -- in terms of our network, we believe that -- the market are bringing the results. And now we see acceleration of growth in very strong performance in terms of top line in OIBDA in Ukraine and very much satisfied with that performance, and believe that this trend will -- has potential to continue and we will see strong fourth quarter results in Ukraine as well.
As far as the potential Ukrainian sale are concerned, there is nothing that we can tell you specific at this conference call today. We are -- our approach to geographical expansion is -- vice versus [Phonetic] opportunistic as we were seeing many times. So depending on the specific opportunities, we might consider both movements in the expansion or reducing our geographical footprint. However, we do confirm that there are certain talks about Ukraine [Indecipherable].
Dividend progression in the -- we stick to our dividend policy, which was announced some time ago. And we don't see -- right now, we don't see any indications or any reasons for changing, or we don't have any reasons to upgrade this at the current moment.
Ondrej Cabejsek -- UBS -- Analyst
But I was just thinking of there being an upgrade. But in terms of -- you had the floor over the past few years where the previous dividend policy always paid dividend right at the floor. I presume, one of the reasons was that there were pretty extensive buybacks going on. So now that you explicitly said, you don't plan on continuing the buybacks, do you see potential for paying above the dividend policy for it? That was my real question. Thank you.
Alexey Kornya -- President and Chief Executive Officer
So the question whether we are planning buybacks. Right now, there is nothing -- I cannot exclude that we will -- we can -- that is a part of our dividend policy we are seeing that we can meet the certain dividend payments, and there is something -- and there is some upside potential on that -- in the form of buybacks. However, at this point of time, we don't have any specific decisions for that.
Ondrej Cabejsek -- UBS -- Analyst
Thank you very much.
Operator
The next question is from Alexander Vengranovich, Renaissance Capital. Your line is now open.
Alexander Vengranovich -- Renaissance Capital -- Analyst
Yes, good afternoon. So two questions from my side. First one, is probably a bit specific, but will be great if you can help to answer it. So the question is on the impact of closing of the stores, so just -- can you help us to estimate actually the financial impact of each store closure on your results? And in particular, do you typically close the store when the rental agreement expires and you don't need to be in termination fee for the closure? And if that's true, sort of a -- kind of a monthly or quarterly savings you might currently envisage if you close each store, so that might be helpful just to get that kind of rough estimate of the impact?
And the second thing on the OIBDA number, which came pretty strong I think in the third quarter. So I understand that there is obviously some operating leverage behind, but if you can share some additional color on what really drove OIBDA improvement in the third quarter in Russia and the Ukraine outside of the revenue generation initiatives. Thank you.
Inessa Galaktionova -- First Vice President for Telecommunications
Andrey [Phonetic] thank you for the question. I'm Inessa. I will take the first one on retail optimization. So actually, I would like to say that when we say about retail optimization, well [Indecipherable] is not about just saving on the rental cost, we are actually trying to push the market itself and also our efforts and our aims from just pushing sales to retail customers, yeah? So we actually would like to move ourself and also to show the good example to the market that, it's not more on gaining some new customers rather than retaining our own. That's why we think that is, it will bring the whole market to a more healthy situation and not just the saving on the rental cost, yes?
And also, the second one, this is about [Indecipherable]. Yes. In case of that question, is it influencing the closure? Yes, of course, because this is the end of the year and we also need to take into account some rent timing. That's why in Q3, the results may be not so [Indecipherable] in terms of number of the shops were closed, but as we mentioned, we absolutely keep our obligation and our -- how to say, our efforts and works that we do commit, that we will close till the end of the year up to -- from 200 to 300 stores, as we promised.
Andrey Kamensky -- Vice President of Finance
And actually the question on OIBDA in the third quarter, I think the answer is actually, there is no specific or one-off effect there. OIBDA dynamic is a reflection of the strong performance on the revenue level. It was a very good quarter for us in Russia, both in the Ukraine. So actually, that is -- practically there is nothing on top of that.
Alexander Vengranovich -- Renaissance Capital -- Analyst
Okay, got it. Thank you.
Operator
The next question is from [Indecipherable]. Your line is now open.
Vyacheslav Degtyarev -- Goldman Sachs -- Analyst
Yes, thanks. Vyacheslav from Goldman Sachs. Can you elaborate on Q3 free cash flow dynamics? It looks like a very significant increase. How much of that is one-off driven and what do you expect for Q4 and going forward into 2020 at least in terms of the direction of the free cash flow progression?
And also secondly, hypothetically again on Ukraine, what could be proceeds used for in case you dispose Ukrainian business? If we are talking about potential buyback dividends, M&A and deleveraging, can you outline some of the priorities between those four opportunities? Thank you.
Andrey Kamensky -- Vice President of Finance
Thank you. So this is Andrey. Let me start with the free cash flow dynamic. Again this quarter was very good for us in free cash flow as well. As I said in my speech actually, you should take into account the effect of the Bank, because of course, the free cash flow of the Bank is a bit different than the free cash flow of the operational company like MTS. So if I talk about the third quarter itself, the effect of the Bank is around RUB10 billion. If I take it out, the rest is coming from our operational business, which is our retail network and operational business. So again, there is no specific one-off item there.
Alexey Kornya -- President and Chief Executive Officer
And the second question is really speculative. As I said, there is nothing specific we are ready to tell you at this moment. So there is no sense in speculating in on that.
Vyacheslav Degtyarev -- Goldman Sachs -- Analyst
Okay, thank you.
Operator
The next question is from Maria Sukhanova, BCS. Your line is now open.
Maria Sukhanova -- BCS -- Analyst
Hi. Yes, hello. I have a question on 5G. First, could you probably update us on what is the current stage of negotiations and discussions, and which structure will be used and [Indecipherable] developed in Russia? And second, is there any visibility on when we will see first spectrum auctions? Thank you.
Alexey Kornya -- President and Chief Executive Officer
Thank you. Alexey. On 5G, right now, the position of the government on how to distribute 5G spectrum is not finalized and all players in the market are in the discussion how we can join our forces in order to -- all four players in the market, how we can join our forces in order to accelerate the development of 5G in the country, including clearing up the spectrum from military use [Indecipherable] right now really want. We see that there are three bands, which really went for 5G discussion in -- at least in short term in Russia. This is 3.5, which is pretty much occupied by other use. So it's not freely -- not freely available, will not be freely available in the nearest future. 4.9, which is partially can be used in millimeter band in '25, '29 [Phonetic]. So these -- the position of the government -- the latter one is not clear as well.
So to summarize, I think that we'll probably by the end of the year, really next year, we'll see the position of the government, how they approach with the 5G spectrum. And at this time, we are actively consulting between all key players -- all players in the market and the government on how to help to encourage the development of 5G in the country.
Maria Sukhanova -- BCS -- Analyst
Okay, thank you.
Operator
The next question is from Ondrej Cabejsek, UBS. Your line is now open.
Ondrej Cabejsek -- UBS -- Analyst
Hi, thank you. Just a short follow-up on the unlimited tariffs for me, please. If you could disclose what percentage of the total base is on these today and what sort of usage you see on these numbers relative to the general base by which in fact, I'm asking, have you seen any pressure on the capex from these unlimited tariff so far? Thank you.
Vyacheslav Nikolaev -- First Vice President for Customer Experience and Market
It's Slav. I will answer that. On the percentage of subscriber base, I cannot give you the exact number, but very sure that it's below 20% of the base, definitely because its high ARPU tariffs and it's now growing very fast. At the same time, the usage depends very much on the region. But as usually, does not exceed 20 gigabytes and we actually see that people, when they subscribe to these tariffs, we see their usage going up, but not drastically. So it doesn't really damage the quality of our network. That's why we can keep this position that long. But I would -- second opinion of Alexey, that we think that the market will come at some point to the stage where these tariffs could be lifted.
Alexey Kornya -- President and Chief Executive Officer
And just to -- to add on Slav's comment, there are some tariff plans in our set of tariffs, which has a higher usage per customer than unlimited tariff plans.
Ondrej Cabejsek -- UBS -- Analyst
Thank you very much.
Operator
The next question is from Igor Goncharov from Gazprombank. Your line is now open.
Igor Goncharov -- Gazprombank -- Analyst
Yeah, thank you very much. One technical question. Can you please update us on your thinking toward the year based on your [Indecipherable] shares? They have been -- you have [Indecipherable] number of times, but it seems to be still limited progress on that, what are your plans on this? Thank you.
Vyacheslav Nikolaev -- First Vice President for Customer Experience and Market
I think actually the answer was the same as it used to be. Strategically, we believe that it will be higher, it would be good if we cancel them. But so far there is no immediate decision taken on this subject.
Igor Goncharov -- Gazprombank -- Analyst
Okay. And any timeline for this, because clearly one of the kind of consequence of this is that when you pay dividends to your mother company, those dividends are getting taxed and/or canceling those shares would be one of the ways to optimize this redundant taxation?
Vyacheslav Nikolaev -- First Vice President for Customer Experience and Market
Actually, I don't want to speculate on the future decisions. Again, I will repeat, so far there is no decision on that -- on this aspect, because in terms of the most critical issues I think for us, it was this year to identify our capital market strategy. We are still considering the effect -- the issue that we are raising. But so far there is no decision yet.
Igor Goncharov -- Gazprombank -- Analyst
Okay. Thank you very much.
Operator
At the moment, there are no further questions. [Operator Instructions] The next question is from Dilya Ibragimova at Citibank. Your line is now open.
Dilya Ibragimova -- Citibank -- Analyst
Hi, thank you very much for the opportunity. Just had a very quick question on MTS Bank. You mentioned that one of the drivers of the loan book growth is the cashback offers. I was just wondering if you could break down the growth or increase the loan portfolio, how much of that is coming from this cashback versus the -- or maybe there are other use cases that are driving that? And second, what you see as an acceptable cost of risk going forward?
And maybe third question, on the same topic, do you think that -- do you expect the loan book to continue growing at the same rate as we have seen so far, maybe in absolute terms rather than in percentage terms? Thanks.
Alexey Kornya -- President and Chief Executive Officer
Excuse me. Could you repeat the second question? We didn't get it quite.
Dilya Ibragimova -- Citibank -- Analyst
Yeah. What is acceptable cost of risk for you going forward, especially as we go into the environment where the rates are coming down overall on the market? Cost of risk, acceptable cost of risk. Thanks.
Alexey Kornya -- President and Chief Executive Officer
Okay. On [Indecipherable] cash book program is right now -- we are limited. Most of participants out of 5 million customers, which were up -- clients which are part of our loyalty program, cash book program are coming not from the Bank. So Bank is a minor contribution into that. As far as for cost of risk in the Bank, we show our cost of risk ratio in our NPLs, in our disclosure. We believe that we are at very conservative level at this point of time. We have very high coverage ratio as well in the sense, we -- for the next year, we continue to take a relatively conservative approach taking the stage of the market development. So we are taking -- not taking additional risks in expanding our portfolio. So we are even decreasing the risk which we're taking is the plan for the fourth quarter and going forward comparatively to the level of risks we've been taking last year for example.
Dilya Ibragimova -- Citibank -- Analyst
Thank you.
Operator
The next question is from Sergey Libin, Raiffeisen Bank. Your line is open.
Sergey Libin -- Raiffeisen Bank -- Analyst
Yeah. Hello, thank you. My question is also on MTS Bank and its impact on the free cash flow. So you said the Bank's impact is RUB10 billion. And I wanted to ask to give some breakdown of that. Is it kind of one-off situation or seasonal or is it recurring and probably what affect do you expect for the whole year? Hence maybe the dynamics for next year, the direction of that, that would be very helpful.
Andrey Kamensky -- Vice President of Finance
Okay. When I was talking about the impact of MTS Bank on the free cash flow actually if you look at the cash flow break down, you will see specific clients, which are about the bank deposits and loans. So when I was giving the number of RUB10 billion, it was actually the amount that you can see there. And of course, this is the reflection of the liquidity managed by the Bank. So this is the deposits, taken by the Bank from the Interbank market, for example. So again, this is the standard activity of the Bank and how the Bank managed its own liquidity. Therefore, while we consider the free cash flow impact, I would rather take it out and consider the free cash flow of operational business without this impact.
Sergey Libin -- Raiffeisen Bank -- Analyst
Okay, that's very helpful. Thank you.
Operator
As we have no further questions, I would like to hand back to the speakers.
Polina Ugryumova -- Director, Investor Relations
Ladies and gentlemen, thank you very much for listening. If you have any further questions, we welcome you to contact MTS Investor Relations at any time. A webcast of this discussion will be available soon on our website, if you wish to replay the call. In the meantime, we appreciate your interest and wish everybody a pleasant day. Thank you.
Operator
[Operator Closing Remarks]
Duration: 45 minutes
Call participants:
Polina Ugryumova -- Director, Investor Relations
Alexey Kornya -- President and Chief Executive Officer
Vyacheslav Nikolaev -- First Vice President for Customer Experience and Market
Inessa Galaktionova -- First Vice President for Telecommunications
Andrey Kamensky -- Vice President of Finance
Cesar Tiron -- Bank of America Merrill Lynch -- Analyst
Ondrej Cabejsek -- UBS -- Analyst
Alexander Vengranovich -- Renaissance Capital -- Analyst
Vyacheslav Degtyarev -- Goldman Sachs -- Analyst
Maria Sukhanova -- BCS -- Analyst
Igor Goncharov -- Gazprombank -- Analyst
Dilya Ibragimova -- Citibank -- Analyst
Sergey Libin -- Raiffeisen Bank -- Analyst
