H1-23: NII tailwinds persist; 2023 guidance upgraded
H1-23: NII tailwinds persist; 2023 guidance upgradedEARNINGS/SALES RELEASES
Swissquote realized a good H1-23, continuing to reap the benefits of higher rates on its liquidity and investment portfolio, more than offsetting the decline observed in transaction volumes linked to fading market volatility and an uncertain economic environment. The management upgraded both its 2023 revenue and pre-tax profit guidance on the back of the higher margins anticipated on its client assets. In our view the bank looks well positioned to contend with any challenges ahead.
FACT
Operating income: CHF265m (+32% yoy, 4% above our estimates and 2% above consensus).
• Net fee and commission income: CHF81m (-19% yoy).
• Net interest income (NII): CHF103m vs CHF15m in H1-22.
• Net trading income: CHF81m (-4% yoy).
Opex: CHF138m (+30% yoy and 5% above our estimates).
Net result from JV: CHF2.3m loss (vs CHF2.9m loss in H1-22).
Pre-tax result: CHF125m (+38% yoy, 3% above our estimates and 9% below the consensus). Pre-tax profit margin at 47% vs 45% in H1-22. This was above the management’s 2023 target (46.5%).
Client assets reached CHF56.9bn (vs CHF52.2bn in FY-22). The number of client accounts rose by 6.4% yoy to 555k accounts.
Net new money: CHF3bn vs CHF2.7bn in H2-22 and CHF5bn in H1-22.
The management upgraded both its revenue and pre-tax result targets for 2023 on the back of an upgraded outlook on NII, forecasting CHF530m of revenue (vs CHF495m) and a CHF250m pre-tax result (vs CHF230m) thus leading to a 47% pre-tax profit margin.
Management 2025 targets were kept unchanged: a CHF750m revenue, a CHF350m pretax result (47.5% pretax margin) and CHF7bn net new money per year.
ANALYSIS
Swissquote realized a good H1-23, continuing to reap the benefits of higher rates on its liquidity and investment portfolio, more than offsetting the decline observed in transaction volumes linked to fading market volatility and an uncertain economic environment. The management upgraded both its 2023 revenue and pre-tax profit guidance on the back of the higher margins anticipated on its client assets thanks to the elevated interest rate levels foreseen. All the 2025 targets were maintained. The group continues to look fit for any coming environment, with non-transaction revenue coming notably from higher interest margins and a positive impact from market volatility on fee and trading income acting as mutual hedges.
Revenue came in above the guidance with much of the growth coming from the very high NII. This was mainly due to the continued general increase in interest rates observed across all major currencies (CHF, USD, EUR) but also from the continued rise in client cash deposits (CHF9.4bn vs CHF9.2bn at the end of 2022) coming from the combination of new money and continued customer cautiousness. Another tailwind on NII came from the fact that the group invested a larger part of these deposits in loans and investment securities, anticipating the maturities of its portfolio, thus increasing the yield generated. Part of the rationale for this came from the fact that the management expected policy rates hikes to be close to their highs in developed economies, rendering duration more attractive than in 2022. The management expects higher interest rates to continue to draw NII higher in 2023, leading to a considerable increase in the margin on assets forecasted (94bp vs 87bp guided in 2022, with higher interest margin on deposits being solely responsible for the rise in margins).
The management was confident in its interest margin outlook which should more than compensate for the low-volatility recorded in the market over H1-23 as well as the high uncertainty surrounding the economic outlook, which led to continued cautiousness in client positioning. Should volatility return in H2-23 and 2024, transaction volume will likely benefit from this shift in the market environment which could play out in favour of Swissquote’s fee income generation and the group achieving its 2025 revenue target. Cryptos are another source of potential tailwinds which could emerge in the coming environment, with interest returning to this market, as the industry experiences short but abrupt cycles and as the current “crypto winter” is about to celebrate its two-year anniversary at the end of the year. On the other hand, a shadow overhanging the group’s NII tailwind which has so far not shown its presence is a possible increase in the pass-through rate, the proportion of policy rate hikes returned to depositors as remuneration on the cash held in their accounts, which could occur as competitive pressure emerges and a fight for deposits begins among banks and other financial institutions.
Opex growth, although quite substantial, was due largely to the rise in staff headcount (+7% yoy), higher variable remuneration (CHF9.7m vs CHF3.1m for H1-22), higher marketing expenses (+21% yoy) and investments in growth. The management indicated that the group remained committed to investing in technology as it remains a critical element in improving services for customers and attracting new business and fresh money, thus sticking to future pre-tax margin improvement instead of the current pre-tax margin maximization.
All in all, the H1 was an illustration of how Swissquote’s business model remains one of economies-of-scale, leaving the online bank and broker well positioned to contend with the potentially uncertain coming market environment.
IMPACT
The results were slightly above our estimates. Given the upgraded 2023 guidance, we may review upward our forecasts.
Swissquote Group Holding is engaged in the provision of Online Financial Services. Co. provides online securities trading services (including custody services) and quantitative asset management services (ePrivate Banking among others) to self-directed private investors, independent asset managers, investment funds, and third party financial institutions. Co. provides access to over-the-counter FX markets through in-house technology platform to retail customers, money managers, and third-party financial institutions. In addition, Co. operates an online bank that accepts deposits in the form of current accounts and saving accounts from its customers.
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