This report is published by Research Dynamics, an independent research boutique


Operating revenue above the CHF 200mn mark

Record high results as revenue surpassed the CHF 200mn mark for the first time

The company posted an impressive set of result for the full year 2018 thus achieving its earlier targets as already published end of January. Operating revenue increased by 16.2% y/y to CHF 225.4mn (CHF 193.9mn in 2017). Adjusted for unexpected (market-driven) events of CHF 1.4mn and negative interest rates of CHF 9.0mn, net operating revenue as reported increased by 14.3% y/y to CHF 214.5mn (CHF 187.8mn in 2017). The growth was driven by robust performance across all business divisions and was supported by increased volatility across financial markets during the full year 2018. Net fee and commission income grew 16.8% y/y to CHF 99.5mn (CHF 85.2mn in 2017) and net interest income reported has almost doubled from CHF 12.2mn in 2017 to CHF 24.1mn. Net trading income also increased by 10.0% y/y to CHF 99.3mn, mainly due to an increase in eForex income of 7.7% y/y to CHF 71.8mn (CHF 66.7mn in 2017), partially offset by a decline in security trading income by 6.5% y/y to CHF 20.9mn (CHF 22.3mn in 2017).

Operating expenses increased to CHF 160.8mn (13.2% y/y) in absolute terms, primarily due to high investment in technology, marketing and employees. However, as percentage of the net operating revenue it, decreased by 70bps to 74.9% (75.6% in 2017), indicating efficiency gains. Employee -related expenses rose to CHF 73.2mn (+13.3% y/y) while marketing expenses increased to CHF 22.7mn (+11.1% y/y). However, both employee (34.1%) and marketing (10.6%) expenses decreased 30bps each in terms of percentage of net operating revenue. The pre-tax profit jumped to CHF 53.8mn (+17.4% y/y) and corresponding margin improved 70bps to 25.1%. Net profit rose by 13.8% y/y to CHF 44.6mn and the corresponding margin was almost flat at 20.8% vs 20.9% in 2017. The net new money inflow grew 14.8% y/y to CHF 3,115mn. Out of this, 42.8% came from APAC & the Americas regions, followed by Switzerland (36.6%), Europe (15.1%) and MEA (5.6%). The rise in net new money from Switzerland has increased the total cash exposed to negative interest rates. Despite the growth in net new money, total client assets decreased by 1.2% y/y to CHF 23.8bn, reflecting negative market conditions in the second half of the year, due to which saving client assets decreased to CHF 306.3k (CHF 600.6k in 2017), along with Robo-Advisory (ePB) assets, which decreased 5.6% y/y to CHF 191.7mn. Assets in trading accounts remained almost flat y/y at CHF 23.0mn (-0.1% y/y). Within client asstes, eForex increased 11.0% y/y to CHF 365.2k partially offseting the decline.

The total number of accounts grew 6.4% y/y to 329,100, reflecting increased Robo-advisory accounts, which grew 43.9% y/y to 2,732. The number of eForex accounts grew by 15.4% y/y to 47,972 and the number of trading accounts also increased by 8.3% y/y to 256,565. All accounts witnessed significant growth, except savings accounts which decreased by 24.6% y/y to 21,831. In addition, total equity increased by 19.3% y/y to CHF 352.2mn (CHF 295.1mn in 2017), bringing the capital ratio to a very strong level of 29%. However, EUR 27.7mn are scheduled to be paid out for the purchase of Luxembourg-based Internaxx Bank during 1H19 from the total shareholder's equity of Swissquote, which, together with the expected dividend pay-out of CHF 1.00 per share would reduce the pro-forma capital ratio to 22.7%.

Sustained investments in technology and geographical expansion to drive growth

Swissquote is continuously focussing on innovation and technological advancement as part of its strategy. In 2018, operating expenses increased primarily due to persistently high investments into technology. During the year, Swissquote expanded its investment universe to include cryptocurrencies as an additional optional asset class within its Robo-Advisory platform. In addition, the company launched a multi-currency credit card which enables the holder to make transactions in 12 different currencies without any additional fee. The company founded a subsidiary named Swissquote Pte Ltd. in Singapore in order to get better and more direct access to the Asian markets. Thus for 2019, the company plans to invest around CHF 5mn to set-up its Singapore operations. We believe the investment into technology and the continued introduction of new and user-friendly products along with geographical expansion (Europe through Internaxx and Asia through Singapore) should result in further sustainable growth for the company.

Current valuation level offers a good entry opportunity

We believe the negative response from the market after management's cautious commentary regarding FY2019 results is a knee-jerk reaction and the correction reflects investors' disappointment. We believe, the current price level provides an attractive entry point for long term investors. We have reduced our target price, incorporating management commentary on the slow start to the year and other long term risks, and have arrived at a fair value of CHF 64.0 per share (CHF 82.2 earlier) providing an attractive upside from the current trading levels.