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IG Group profits surge as offices abroad planned to offset regulation
IG Group grew profits 29% to record levels in the first half of its financial year even while the online trading provider made changes to protect the business from regulatory changes and Brexit, including planning new offices in Germany and the US.
In the six months to 30 November, the FTSE 250 group generated a net trading revenue of £268.4m, an increase of 10% year-on-year. Growth was almost entirely from the first quarter, with the second three months roughly flat on the prior year.
The UK saw a 11% fall in client numbers, which IG put down to attrition of the many new clients who joined to bet on the Brexit referendum and US election the previous year. Also, the number of new over the counter (OTC) leveraged clients who traded for the first time in the period of 18,027 was lower than in previous periods due to the introduction of a new appropriateness test for prospective clients together with increased wealth hurdles, and a lower level of advertising and marketing.
Group profit before tax rose 29% to £136.2m as operating costs, excluding bonuses, were cut 7% to £117.6m and the margin expanded 7.7 percentage points to 50.7%.
Diluted earnings per share grew 30% to 29.3p and, with £139m cash generated in the period, a dividend of 9.69p was declared, as part of the policy to pay out 30% of the previous year's full year divi.
"The group is taking action to mitigate the potential financial impact of regulatory change, and to position the business so that it will continue to deliver for all of its stakeholders under a more restrictive regulatory environment," said chief executive Peter Hetherington.
Since the second half of IG's financial year began, the European financial watchdog laid down new rules for the industry where retail investors will be banned from trading binary options and will face leverage limits on forex trades, among a raft of new restrictions to be placed on CFD trading. The European Securities & Markets Authority set out proposals by which it might restrict the marketing, distribution and sale of CFDs, including rolling spot forex, to retail clients.
Hetherington's reaction is that the ESMA proposals are "disproportionate" in their focus on leverage, which he said has "caused consternation amongst our large number of retail clients, many of whom have traded for years and wish to continue using our product as they do today".
IG's response to this and the growing regulatory pressure in recent years is to develop new products and services and expand into new geographies.
Last November, IG launched an online process to allows clients to request to be categorised as an elective professional, a category that generated over 25% of UK and EU revenue in the second quarter. The company believes clients who generate well over half of its current UK and EU revenue are both eligible and will elect to be categorised as professional if the products they can trade and the leverage they can utilise diverges from that available to retail clients.
Business development has included a new multi-lateral trading facility for the European market where on-exchange dwarfs the OTC market and IG believes there is a "significant opportunity" in offering limited-risk products, which will be suitable for less experienced clients.
An application has also been filed to establish a subsidiary in Chicago to address the potential in the US OTC forex market, and another filed to establish a subsidiary in Dusseldorf to act as a regional hub for the well-established EU business in a response to the UK's decision to leave the EU, with the office combining the existing German sales office with key management and control positions.
Also looking forward, the second half has begun in robust fashion, with revenue so far running around 25% higher than in the same period last year, though operating costs in the second half are expected to be higher than in the first half though for the full year are expected to remain flat.