flatexDEGIRO AG

Hello and welcome to the FlatX DeGiro Preliminary Results Half Year 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 Niehage to begin today's conference. Please go ahead, sir.

Good morning everyone, this is Frank Niehage, a warm welcome to our half-year preliminary results 2023. A warm welcome here from Tegernsee, where we celebrate the 10th anniversary with Borussia Mönchengladbach. The team is here in the training camp. Present are my colleagues out of the management board, which is Dr. Benon Janos, Stefan Simmer, Mohamed Charoua and myself, and obviously our head of IR, Achim Schreck. Warm, warm welcome from Tegernsee. We are happy to talk today about very robust numbers. And before we go into details, a personal note. We also had to announce today that unfortunately, Mohamed Charoua has decided on his own to leave the firm by end of this year. As we are professionals, we like to focus on the firm's results first. And then Mo will give you a bit more details at the end of this call about his personal motivation, which I regret on one hand side, but I have to respect. And you will see on the personal side why there is reasons that he has to leave us. However, let's please start with the firm first. Let's start with our highlights first. I will always start as usual and then hand over to Mo and he will shift gears and drill down into commercial and financial aspects more in detail. I'm happy to confirm our guidance in a very challenging environment. Needless to say, the geopolitical situation in Europe, the interest rate hikes, the high inflation will have and do have an impact on our business. We confirm guidance and we also have a very positive outlook for the second half due to the measures taken and we will go into more detail very soon. I will also start with the regulatory environment and let me spend a short moment on what's going on with respect to our German BaFin regulator and then I will talk thereafter about the European level PFOF, which will have a severe impact on our industry as well. Let me start with the well-known aspect of BaFin. We are very positive that we have fully automated the process and developed and implemented with respect to the credit risk mitigation techniques. And that was hard work, but we were very close with BaFin and our special auditor. And we have handed over all the relevant information. So from our side, the work is done, which is very good news. And the process runs and is implemented. Now it's up to the commissioner to take his samples and review everything and report it back to BaFin. We are very positive in respect that by end of September, we will get a feedback on this and hope then that after that be able and allowed to apply the credit risk mitigation again, as we temporarily were not allowed. Obviously, we continue to aim on other findings and work on this, what's relevant with respect to hiring new people and implement new processes, and to run that project has been done, so it's up and running. And allow me to mention after an audit, it's normal cost of business and over 12 to 24 months to work on those findings that improve. And that's what we are doing. You're already aware of the positive news with respect to the SREP. Our capital requirement was lowered by 75 basis points. Again, the first step in the right direction. In general, we will continue to improve wherever possible this overall situation. So that's the positive news on our German situation. Let me move over to the EU level. Again, from my point of view, positive news. Why is that? A PFOB ban to me is strengthening the single market view. The single market requires fair rules for all of us, which in the past and up to now is not the case. In some countries like the Netherlands, the UK, you are not allowed to receive a payment for order flow, and in others you are. So in my opinion, the EU moves into the right direction and will have the same rules for all of us. Like always, there is a transition period from January 2020. 24 until 2026, where member states have the possibility to have a different situation. However, this has no impact to us and for us because over 99% of our revenues, as we always said, are independent of any payment for order flow. So this is good news for our industry, in my opinion, in general. It's good news for us. And it's a good news for our clients. Why is that? As that has no impact, we will not have to increase prices, for instance, on the 4,500 ETF and saving plans like it is discussed here and there in the media. And we will continue, especially in Germany for over 20 years with our price model at flat X, 5,090 per trade. We never touched that and we will not touch that. And therefore, again, news into the right direction. Obviously, the retail investment strategy, we will continue to watch and report when there is any changes or impact on our industry. So this goes to the regulatory environment. Now I'd like to repeat and mention again governance, as we always said. We will improve and develop our governance, and at the annual general meeting, as you are fully aware of, Britta Lehfeldt was appointed, so now it's five supervisory board members, and we are happy that we are even more diverse than before, and we are all looking forward to work together with Britta Lehfeldt successfully, as we already started in the bank, and as now the general assembly at the annual general meeting has positively voted for. So again, we develop as always said into the right direction with respect to governance. Obviously, let me also highlight the few business aspects. Obviously, we improved our relationship with the ETP partners and are very happy and proud The JP Morgan is our new platinum partner. The work is great and we are happy for that partnership and everything is on track and works well. A long, long time ago we mentioned that we work on a digital wealth product and we are happy now that our partnership with Whitebox, who we knew from the B2B side for many, many years, is now live on the B2C platform. site as well and Fletex Wealth has started and taken off this month. We are targeting here potential new clients who do not decide themselves but rather want to go for a managed strategy and we hope that the dormant clients who are not trading at all for a long, long time instead of doing nothing might rather have an alternative when they look at the potential offering of that wealth management product. So we wish good luck for this, and I move ahead with adjustments. We did, at Ejiro especially, we increased the rate on our loan product, obviously, over The last month's interest rates were increased, so we adjusted here as well with respect to our credit product and improved. And we did a bit on the commissions with respect to U.S. trades and local trades. This all in all will have a big impact in the second half, and we are looking forward to that. Again, in Spain, we were awarded Best Stock Broker. with Renkia for the seventh consecutive time so again a great tradition we try to continue with and again positive highlights so far and we will promise to work on it more hard and bring up more of this in the future. So in general this is the beginning Now we will shift gears, and I will hand over to Mo. Like always, Mo, the floor is yours.

Please. Good morning, everyone. Thank you for joining today's call. As Frank said, let me first please run you through the financial deep dive of the first half here, and then I'm asking for five minutes to give a little private notes on the announcement of this morning. If we jump into the commercial performance of the company, we have to admit that under the given circumstances and under the given environment, we've continued to manage our customer growth very, very well. We have increased the number of customer accounts in the first half by 186,000 clients with an annualized retention rate of 98.1%, which equals a churn rate of 2%. The net growth was 162,000 accounts. As you remember, we have forecasted this year one and a half growth, a customer account growth of one and a half to two times our European peers. Actually, the account growth in the first half was 2.1 times the relative growth of our peer average. The relative share of customer accounts growth per month is following seasonal patterns. We are showing on slide 11 what the seasonal pattern looked like in the years 2016 until 2019 to just actually adjust for the COVID years and the new stock years. And what we see is literally that we are very much in line with what we have seen historically with respect to seasonality. Strong customer growth in the first quarter, which usually drops in the second quarter. And then in the third and fourth quarter, it usually picks up again. So absolutely in line with respect to seasonality, also in terms of absolute number in line with our forecasted numbers. The second important point, or actually not the second important point, for us with respect to customer growth, the most important point is the development of the assets under custody. We are looking back to three, four years where customer growth, the absolute number of customers was usually the most important thing. We actually see here the importance to highlight what the assets under custody development looks like. As of June the 30th, we have reached an all-time record of 47.8 billion euros in assets under custody, which are split in 44.2 billion securities and 3.5 billion in cash. So what we see is actually two things. The first thing that we see is that our net cash inflows are still positive, now with 2.9 billion in the first half. We had in total roughly $6 billion of cash inflow, $3 billion of cash outflow. So the delta of it, the $2.9 billion is the net cash inflow. Quite interesting to see. We are again and again highlighting we are not a saving bank. We are a transactional bank. We are an online broker. And the evidence for that is that 91% of the net cash inflows of $3 billion were invested into securities by the clients. So the actual growth in cash was only 0.3 billion out of a total 3 billion net cash inflow. Coming to the trading activity, the trading activity dropped compared to Q1. I just mentioned it. It has also to do with seasonality effects. Q2, as I already mentioned in our first quarter call, is expected to show lower transaction activity, first given because of, in general, less trading days, but second also because Q2 historically has been the weakest quarter in terms of transaction activity. We are absolutely in line with the trading activity of our, let me call it, most admired peers, Nordnet and Avanza. Also there you can see the drops between Q1 and Q2. So the patterns follows, the zero patterns follows absolutely a market pattern and is with no respect idiosyncratic or, because I'm highlighting this point because as you remember, very often we've been challenged with respect to the quality of growth. And if the quality was worse than our peers quality, we would have to see a literally stronger drops in activity, but it's absolutely in line It confirms at least that the quality is as good as with our peers. I just touched on this point. Activity follows seasonal patterns. So in the history, if we look back, usually 26% of all transactions happen in the first quarter. 23% of all transactions of the year happen in the second quarter. This is exactly what I mentioned. It is historically the weakest quarter. Our first quarter was slightly stronger than in the past. The second quarter is absolutely in line with historical seasonal patterns. So we feel pretty good with respect to the residual six months of this year and our forecasts and guidance that we will come to in a moment. If we come to the commercial aspects, I mean, most of you have read them, obviously, and see them. The adjusted revenues grew by 8% quarter, so year-on-year, sorry, quarter-on-quarter. They dropped by 8%, mainly due to the fact that Q1 versus Q2, we are missing 3 million transactions that were done in the first quarter but did not happen in the second quarter, and 3 million transactions with... with four euros of revenue per trade, or actually a little bit more than four euros, but to use it for the mathematical calculation, we're talking about actually 12 million of revenue drop. The drop is not as heavy as the 12 million, it's only seven million euros, and the reason for that is obviously the improved, significantly improved monetization on the one hand side. On the other hand side also, and to a much bigger effect also the increasing interest rates for the deposits in the second quarter compared to the first quarter. The commission income is much more in line with what I just discussed or what I just mentioned, the drop of roughly 12, 13 million euros. This is what explains the drop from Q1 to Q2. The similar drop is also between Q2 to Q2 because also in Q2 2023, Two, we were at 16.2 million transactions, so also a delta of 3 million. The interest income is record high, obviously driven by two mechanisms. The first one, as I said, is the deposit facilities that are enjoying month by month more and more interest gearing, so to speak. And on the other hand side, Frank mentioned it, at the 1st of July, it's not reflected obviously in Q2, But as of the 1st of July, we have increased the marginal loan interest rates with the GRO that will also have a significant impact on the second half interest income. The commission for trade is still relatively flat in this range of roughly four euros with a little bit of uptake towards four euros, 17 and Q1, 2023. The drop from Q1 to Q2 is mainly explained by the drop in transactions. 3 million less in transactions equals also significant drop in high revenue transactions. That's point number one. And point number two is that there are some account fees that are charged in the first quarter that also fall out in the second quarter. But if we look in the second quarter and take more monthly perspectives, June, which was the first full month with the newly implemented fees on the DeGiro side, did a commission per transaction of north of €4.20. So we are now absolutely in line with what we expect going forward for the second half. And obviously also the April month, which was a super weak month, had a dilutive effect also on the Q2 commission per trade. So as of now, Q3 will be, so to speak, the quarter to confirm the price increases on both ends, interest income as well as commission income. And as I said, June has already provided us some transparency with respect to commission per trade and interest income. We had last year, sorry, no, in the last call, not last year, we had a discussion about the elasticity after price increases, and I know that some of the covering sell-side analysts have questioned and have challenged the elasticity that results from price increases with DeGiro, and let's say at least build a correlation between price increases and transaction activity. And to clean up this myth, we are providing this slide that shows literally the indexed trading of U.S. stocks at Flatex and DeGiro beginning in the first calendar week of 2022. So what we are showing is literally that we indexed for the brand Flatex and for the brand DeGiro the number of transactions in the first calendar week of 2022 and have sketched, so to speak, both graphs until the most recent week and the development of the trade in U.S. stocks. Why U.S. stocks? Because we mainly changed our pricing at Dechiro with respect to U.S. stocks. And the evidence that we want to bring to you is that the changes in fees with Dechiro did not affect the transaction activity on the Dechiro side. Since we didn't do anything on the Flatex side, it's the perfect benchmark for the activity development. And as you can literally see, both graphs are developing literally at exactly the same magnitude. Actually, over the recent weeks, the DeGiro graph is above the Flatex graph, which means that actually the activity, the index activity at DeGiro is higher than at Flatex. What we did is, over the recent 18 months, first we increased the FX fee from 0.1% to 0.25% at DeGiro with no changes at Flatex. In September 22, we increased at DeGiro the handling fee from 50 cents to 1 euro with no changes at Flatex. And in mid-May 2023, we changed the US commission from zero to one euro with no fee change at Flatex. And what we see is actually a parallel development of our trading activity. So again, the drop in activity is not an idiosyncratic result. It's literally market-driven and defined by the environment in which all mature online brokers have to operate. Actually, on the loan side, it's a little bit different and actually positively surprising us. We did the same thing also for margin loan changes. The blue line is, again, the Giro. The orange line is the FlatEx. What we did with the Giro is, as you know, already last year, so at the beginning of this year, on the 1st of Jan, we increased the margin loan rates for the Hero clients, and we did so on the 1st of July again. And we indexed as well the usage of margin loans at Flatex and Digiro. And what we see is even before, or let me put it the other way around. Funnily, since we increased the margin rates for Digiro, the volumes have picked up. And also here again, the volumes with Digiro have increased, are back literally to a level where we were in 2022. and with Fletix, we are still 10 percentage points down in terms of volume. Long story short, what we want to show you here is that there is no significant statistical significant elasticity on the volumes of the GRO loan amount given that we have changed the rate at the GRO and did not change the rate at Fletix.