flatexDEGIRO AG

Hello and welcome to the Fledex De Giro Q1 2023 analyst call. Please note this call is being recorded. For the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star 1 on your telephone keypad. I will now hand you over to CEO Frank Niehager to begin today's conference. Please go ahead.

Good morning everyone to our Q1 call. A warm welcome from Frankfurt. I'm here with my colleagues Mohamed Shahour and Achim Schreck. We like to start to run you through our presentation. Like always, I will start and set the agenda and then hand over to my colleague Mohamed to shift gears and drill down a bit more into details. So let me start with our most important project, which is our regulator BaFin project, where I'm happy to tell you that we are fully on track with the proceedings. Worthwhile to mention, we had a joint kickoff workshop beginning of this month together with BaFin Bundesbank and our special representative auditor. And we made great progress with respect to the credit risk mitigation situation with respect to the margin loan at the zero. Happy to share with you that the IT release, the fully automated patient has been released, delivered and deployed. and the process automation has been implemented. Everything has been properly documented and evidence has been delivered. In parallel, further automation of data has been started. We are quite happy with respect to testing as well. The regulator is also happy with the situation. We are fully on track with the most important project. Obviously, the other relevant findings are hardly worked on as well, and we expect them to be dealt with and finished within the next 12 to 18 months, which is, after such an audit, the normal course of business. So targeted timeline is unchanged, and we keep on focusing and as soon as possible we will come back with further information hopefully positive let me now move over to our governance happy to share with you that we're going to continue to enlarge both the management board as well as the supervisory board and happy to mention that we continue to focus on the enlargement and diversity which means the following it's on the agenda of our annual general meeting taking place in june that we propose to appoint britta lefeld as a further member of the supervisory board and if that successfully takes place We're going to see five supervisory board members. So if you recall, we started with three, now it's four. And after the annual general meeting, hopefully it's going to be five. And we're also happy to mention that two out of the five are women. So diversity is still a focus. And the same goes to the management board. We've enlarged from two to four beginning of this year, and we are continuing to focus on bringing Christiane Strubel as soon as regulator gives us green light into the management board as well, which would lead then to five members in the management board and five members at the supervisory board. I think this is clearly a sign that we're going to reflect our growth in the company and strengthen governance as you would expect us to do so let me now move over to the business highlights and happy to mention that as planned we rolled out for our very important ATP business the partnerships in Spain Portugal and Switzerland Italy will follow soon and we continue to focus in this respect On top, happy to mention that we started the partnership with Textown in Spain, and here we are talking about additional tech service for 250,000 Spanish clients. Further, I'm happy to share with you that we got awards again in the Netherlands from Cash Cow, in Germany from Brocaval, and in Portugal from Rankia, and here I would like to take the opportunity to thank our clients and to thank the participants for the trust in participating and helping us to be awarded those awards. And needless to say, we will continue to work hard to deliver quality and whatever is necessary to please our clients and make sure that we continue to be reflected in those contents. Let me now move over to margin loans and happy to share that we managed to increase one percent and this happened already in January and also will continue to be increased in July further we have done adjustments with respect to commissions at the zero and we've increased by one euro for use trades and local trades and that's going to be effective mid of next month. So all in all it's increase of monetization and it's also helping us to benefit from positive environment with respect to higher interest and we also in a challenging environment see an improved meant of trading activities, which obviously is still on a lower level, but has improved, especially compared to last quarter. And we also like to share with you that the higher marketing spend was only relevant for the first quarter. And as already indicated in our last call, after preliminary figures 2022, the marketing cost will decrease with respect to next quarter and continue to decrease and also important to know that we had several one-off cost in the first quarter which I know Mohammed will elaborate more about in detail soon further we are happy to see net cash inflows and last but not least We are also happy to share with you that our very important CET1 ratio, where minimum requirement for us would be 15%, has been increased to almost 20% now, so rock solid. And this all gives me a very comfortable feeling that we see a positive trend and that we will manage to deliver the guidance of this year. Let me now hand over to my colleague, Mohamed, to shift gears and drill down a bit more in detail. Mo, why don't you take over, please?

Thank you, Frank. Good morning, everyone, also from my side. Thanks for joining today's Q1 conference call. Let's immediately shift gears and step in into some KPIs and the development of the KPIs. Starting with the commercial performance, we managed in the first quarter to add 112,000 clients gross, which reflects actually over the last four quarters the highest number that we have achieved. Obviously driven on the one hand side by also a level and a certain level of seasonality. First quarter is usually a very attractive client acquisition quarter. given the fact that most of the clients are waiting their tax statements for a full year and then take the opportunity to onboard with new online brokerage businesses. Again, with a very high level of already brokered clients, it's an effect that we have seen over the recent 12 months more and more. that the number of first-time users, so to speak, is rather decreasing, whereas the number of already online brokerage clients coming from incumbents is increasing. On top of that, obviously, Q1 was also quite attractive, given the fact that the sentiment has been improved and has been improved, especially compared to Q4 2022. The higher spend in marketing in the first quarter, as indicated in end of February already, and as indicated, we expected to spend 40 to 50% of the annual budget in the first quarter. It happened exactly as we have indicated and had an effect on the gross customer additions. Another quite interesting, and I would say, quite satisfying KPI and KPI development is the assets under custody. We have recorded actually a historic record in our 17 year history with respect to assets under custody. surpassing the first time ever the 45 billion euros. We hope and we think that this reflects also the high level of loyalty of our clients, the high level of belief in what we do and what type of clients we win and add to our customer base, which was a significant growth compared to December 22. obviously driven also by normalizing markets and again seeing indices growing towards the positive end but still a challenging environment and still quite I would say not really hundred percent transparent environment and nevertheless we will come in a second to it to show also where this growth was coming from quite interesting movement The number of settled transactions also over the last 12 months, the highest number that we have achieved with 16.3 million transactions, absolutely in line with our expectation for Q1, lower than last year's first quarter. But I think fair to mention, if we think about Q1 2022, it was still a little bit, so to speak, tailwind of the 2021 environment. It was pre-war situation, pre-inflation situation. and thus rather biased to the positive end, Q1 2023 absolutely in line with what we expected as management. If we deep dive into the customer growth, as I mentioned, 112,000 gross customer ads with roughly 13,000 churn leaves us with flat 100,000 net new customers. the churn of 13 000 indicates a customer retention rate of 98 percent um on an annualized base which is absolutely uh in in our expectation i would even say a bit better than than we expect usually we expect an annualized churn of three to four percent uh after the first quarter we are at two percent on an annualized level which also indicates quite a significant and high loyalty um On top of that, last year was affected by, if you remember rightly, last year was affected by a couple of B2B divestments, a couple of geographic divestments with the Giro. This has been also now all cleaned out, so this number is literally now reflecting the organic, so to speak, the organic churn in the brokerage segment. We grew year-to-date by 4.2%, which is two times Our peer group, as we have indicated also with respect to our guidance, we assume to grow one and a half to two times our peer group. The first quarter was on the higher end compared to the peer group, which also is absolutely in line with what we as management expect for this year. Going to the development of the assets under custody. Two effects. The first effect is resulting from a slight cash increase, increase in cash position from 3.2 to 3.3 billion. The significant effect is coming obviously from the growth in securities under custody, so to speak, going from 36.2 billion, growing by more than 5 billion to 41.7 billion euros. which if you just take it on the level of securities, reflect roughly 16, 17 percent growth. This is coming partially from, as I mentioned earlier, from better sentiment since beginning of this year with respect to indices and stock price development on the one hand side. But on the other hand side, if we go to the next slide, we see that we still are enjoying significant cash inflow from new clients and existing clients. In the first quarter, we have 3.2 billion of gross cash inflows into our platform, which is absolutely fabulous. And I am here a little bit euphoric, to be honest, especially given the situation and the environment of the first quarter, with all the difficulties that we have seen across the globe, whether it was the SVB, or whether it was other banks in Europe, also the Credit Suisse discussion, to literally experience still a significant inflow into our platform of 3.2 billion gross. At the same time, we had 1.5 billion of outflows, leaving 1.7 billion of net cash inflows to our platform. Interesting point. 99% were actually traded into securities. So the vast majority of our cash position that was brought to our platform was immediately used by our clients to acquire securities, to buy securities. I think two important takeaways on that end. The first takeaway that we try to prove for quarters and for years by saying our clients are bringing deposits to our platform not because they are fixed income saving interest driven they bring money to our platform actually more or less out of only one reason which is firepower to acquire and to to buy securities and and assets and this is 100 reflected in the figures the second point is that despite the fact that we are not paying any interest on the deposits we still experience a significant number of cash inflows. Again, we're talking about 3.2 billion of cash inflows in the first three months, despite the fact of paying 0.0 interest rates on the deposits. The trading activity, quarter and quarter picked up on absolute terms and relative terms. An interesting point here to mention as well with this uptick of trading activity, Also, the relative distribution with respect to high revenue trades has increased. Q4 was at roughly 71% of high revenue trades, whereas Q1 2023 is now at 73%, which is also then we will see in two slides is reflected also on the commission per transaction, obviously, that has improved as well. If we look into the revenue splits, where's the revenue coming from? On the one hand side, obviously from commission incomes ending at 68 million euros. Quite interesting here, just an effect that I would like to highlight, to compare Q1 2023 to Q2 2022. Why? Because both quarters did literally the same number of trades, 16.2 versus 16.3 million transactions. However, we managed to increase the commission by 4 million euros. Why is that? Mainly driven by the fact that in September 2022, we had the adjustment of the handling fee with DeGiro from 50 cents to 1 euro, which increased also the commission per trade and thus reflects our strategy as management. What we always have said, we are able to control monetization and we will work towards improving the monetization. This was the step back in September 2022. But there have been also more steps. We have informed our clients mid-April that we will adjust also the fees for U.S. trades across all digital geographies and the local transactions for our key growth markets, each by one euro. Also here, the narrative is very clear. We are in a highly inflationary environment. We were coming in the past from a different high retail brokerage sentiment environment and tried to explain it as best as we can to our clients why we have to charge this little one euro now and have not seen any effects with respect to our trading figures due to the change of the fees. I will come in a second to a point to what we expect this change will lead. Interest income is obviously peaking at 27 million euros, resulting mainly out of two effects. The first effect, the yield on our ECB deposits that has increased over the recent now nine months. We had another increase during the first quarter in February, which is obviously not 100% reflected, but will be reflected in Q2, plus I think next week, in 10 days, we have the next ECB meeting, and we'll see to what these next meetings will lead. The second point is that the margin loans, as Frank has indicated, were adjusted, the yields on margin loans, so the cost for the margin loan has been adjusted, on the 1st of January, 2023. And the second adjustment will happen with effective date 1st of July, 2023. Given also here the fact that since the ECB, or let me put it the other way around, the ECB has increased over the recent nine months, the yields from zero to 300 or 350 basis points, deposit and lead rate, whereas we have only surpassed In that time, 200 basis points to our clients in average. Also here with a very clear narrative to our clients, with a very clear, we try to make it as clear as possible to our clients why we have to go through these steps. And so far, to be honest, despite the fact that we increased on the 1st of January the rates, since then the margin loan book, as you can see in the monthly statistics, is rather increasing. One point with respect to interest income and to the deposit structure and especially the asset structure and the use of deposits, we are still and we will continue to be on the absolute minimum of duration. Our interest rate duration is currently below 30 days. The vast majority of the deposits sits overnight with the Bundesbank ECB accounts. Residual part, 90% of that sits in the margin loans, the 900 million, roughly 1 billion, and a very small portion of roughly 250, 300 million in sovereign bonds that we need as collateral with our counterparties for our brokerage service is also relatively short-durated. So there is no reason to believe in any distress effects should clients ask for their deposits. But again, let me go back to slides back in mind. We see everything but clients withdrawing their cash. The commission for transaction, as indicated, has been improved. This is what we promised as management, that we will always have a close look towards monetization of our core business, of the brokerage business and the commissions. The Commission's increased from 319 q4 to 4 euros 17 in q1 Mainly driven one effect is obviously the higher Contribution of high revenue trades which which had a significant effect second the introduction of ETPs in Spain and Portugal and Switzerland And as indicated by Frank Italy will follow these products are high revenue products Thus they bias positively the Commission for trade The mentioned price adjustments make us believe that the full year commission per trade will be at 4.25 and levels of 4.25 euro, i.e. we expect to see continuous uptake in commission per income quarter by quarter. With respect to interest, I would like also to give a little indication that we also made clear in our written report yesterday evening. Given the adjustments on the margin loans and given obviously the expected potentials coming out of ECB, we believe that the average yield for the full year on our deposits will be at 4.5% for the full year. um coming to the to the uh to the middle part to the cost development um we had uh we had a cost development in the first quarter very much in line with our with our budget um and i would like to highlight three effects the first effect is the personnel expenses which included in the first quarter 3.3 million euro of a one-time inflation compensation that we made to our employees. Those of you who were Germany-based might know this. The German government has allowed for tax-incentivized one-off inflation payments to employees, which allowed us to pay our colleagues gross for net, so without any tax payments to the government. We believed as management in the first quarter that this is a very interesting and very positive sign also to our colleagues, to our employees, that we are here to support them, especially in a high inflationary period, and to make use of this governmental offer, which is, by the way, capped on a per-employee base, and we made use of this cap. So this is literally not only a one-time effect defined by management, but also a one-time effect defined by the government, by the German government, that we made use of. On top of that, we had the personnel expenses and the accounted personnel expenses, the effect of 10.6 million building up provisions. Where is this coming from? Very simply speaking, due to the fact that our share price since beginning of the year has increased by slightly 45%. A higher share price indicates, obviously, a higher option value. A higher option value requires building provisions, and this is what we did in line with the SARS program. Coming to the marketing part, the marketing expenses were at 17.2 million euro in the first quarter, driven obviously still by marketing campaigns, TV campaigns, brand awareness campaigns that we already have booked in the beginning of the first quarter. And as indicated, We told you two months ago in our guidance call for this year that we expect to spend the vast majority of our marketing budget in the first quarter. It has also obviously to do with, as I stated earlier, that it is the most attractive quarter with respect to client acquisition. Over the next nine months, we expect a marketing budget of 15 to 18 million euros in total for the next nine months. Again, here it will be not linearly distributed. But overall, we believe that this will absolutely normalize. We don't believe it. We will manage to normalize that budget. Again, here, this is something that we can control as management. And no surprises at all on that end. Last but not least, in the other expenses, there were a couple of expenses, like always in the beginning of the year, that pop up. One significant expense was, as also published, the 1.1 million euro fine. that we received resulting from the audit of last year that has also obviously a one-time effect on our cost development. Shifting finally to the EBITDA developments, the adjusted EBITDA for Q1 2023 at 30 million euros. Let me please clarify one point to avoid misunderstanding. The adjusted EBITDA, we have not changed in any way the adjustment. It's still only the adjustment with respect to stock appreciation rights. So we did not adjust for the 3.3 million one-off tax incentivized payments to our colleagues. We did not adjust for the 1.1 million Bafin payment. The adjustment has not been changed, will be not changed. It will always only consider the long-term incentive plan. As I said, €30 million of adjusted EBITDA. If we then think of and keep in mind the special effects that marketing was roughly €9 million, more than €9 million higher than Q4, and keep in mind the €3.3 million payment to colleagues. and the 1.1 million Baffin fine, you end up somewhere at around 13, 14 million of, I don't want to, I mean, let me call it special effects that will not be seen in the next quarters. The counted EBITDA, the drop from 57 to 19 is mainly driven by the ZARS development. Just to remind you, in Q4, we released 18 million euros because in Q4, the share price dropped significantly between 1st of October and 31st of December, whereas in the first quarter, we built more than 10 million. So the net effect just resulting from long-term incentive plan is roughly 30 million euros that obviously has to be accounted for. Summing all this up, With respect to our guidance, there is no reason to believe that there is any change needed. The adjustments, as I said, refer only to the ZARs. The cost management is in place and will kick in more and more over the next months. The lower marketing expenses, as promised, will also be seen over the next quarters. The increase in the fees and the interest rates will also have a very significant and positive effect. And maybe I'm a bit mean now to already answer a question that might be stated, why don't we touch our guidance? Why don't we adjust it, especially given the effects from commission and interest? I think two, three points here are important to highlight. for going forward, especially given the sentiment in the market, but it's still not very clear. It's not 100% clear where this year will go. We will continue with a strategy that is under-promise and over-deliver, point number one. Point number two is we know that Q2 and Q3 are historically very, very weak quarters compared to Q1 and Q4. So again, here, we don't believe that there is any need after three months of operational business to jump into the market and adjust guidances Let's continue to see how the next quarters, how the next three to six months develop, and we'll continue and hope for a better environment, for continuously improving environment. And if we believe there is a significant need and the necessity to adjust, we will let you definitely know about this fact. And in the end, we will continue to focus on what we can control as management. And number of trades, trades per client are things that we cannot control. So here we would like to get a little bit more transparency and transparency comes by time. So the more time we walk down the year, the higher the level of transparency. Last but not least, touching on our capital structure. In total, we are currently sitting at roughly 1.3 billion of risk-weighted assets. of which at due date as of 31st December 22, roughly 376 million were coming from the de jure margin loan where we were not able to apply our credit risk mitigation techniques. With a CET1 requirement of 15.6%, we have a CET requirement in absolute terms of 204 million euros. Our CET1 as of due date was at 261 million euros and in percentage terms 19.9%, so well above the requirements of 15.6 million, indicating, so to speak, a management buffer and capital surplus of 57 million euros. We would like to shift your eyes towards the potential from resolving the Baffin finding with respect to credit risk mitigation techniques. As Frank indicated, we are very happy that we have managed in time to finalize the development of our automatized credit risk mitigation system. We deployed the system in our latest release end of March. Q2 is going to be a very heavy testing phase and internal audit phase where we will make clear and the documentation is properly set up that the system is working properly and are hopefully then going to hand over to our special auditor over the summer period to sign it off. So we're still here on a very, very a positive way. The team did a fabulous job. Many thanks also in the name of the whole board for a brilliant job over the recent four months. In financial terms, what does it mean if we go back to credit risk mitigation techniques that we will obviously or that we will be able to decrease the vast majority of the 376 million additional risk-weighted assets from the margin loans? This translates, so to speak, in an effect of decreasing the CET requirement from 204 million to roughly, on a like-for-like basis, 145 million euros, which would result in a CET one ratio of 28%. Very, very well capitalized, very well positioned for future growth, and obviously, with respect to management buffering capital surplus, this would indicate 116 million of free capital. With respect to leverage ratio, you see it on the bottom right hand. There's absolutely no stress or no topics also given the potential growth throughout the next years. That's it from my side, from our side for now. Happy to hand over to the analysts and to open up the Q&A session. Thank you.