Sovereign crisis boosts IG Group profits

July 21, 2010Andy No Comments »

IG Group, Britain’s biggest spread betting and CFD firm have reported a marked improvement in sales through its wholly-owned subsidiaries IG Index and IG Markets brands after volatile markets during the European sovereign debt crisis encouraged customers to trade more.

However, IG Group cautioned that new limits on trading with borrowed money in Japan could potentially wipe out up to 20 percent of its revenues there. The group re-positioned FXOnline in Japan following its acquisition of the business in September 2008, but the division’s success is expected to hit a spanner by new regulatory restrictions on leverage which will be implemented on 1 August.

IG Group chief executive Tim Howkins said during its preliminary results statement this morning: ‘There remains much to be done in Japan, where we face a challenging competitive and regulatory environment. The first of a number of leverage restrictions comes into force at the beginning of August and it is inevitable that this will have an immediate adverse impact on our revenues. We are doing what we can to mitigate this impact.’ ‘My guess is that once clients have got used to it it’s probably something like a 20 percent impact on revenues, that sort of number,’ he added. Japan accounted for 8 percent of total revenues of 298.6 million pounds last year.

The Group announced that profit before taxation was up 25% to £157.6m (2009: £125.9m). Trading revenue was up 16% in the year ending 31 May 2010, increasing from £257.1m in 2009 to £298.6m. The group’s Australian operations posted the strongest sales growth, expanding by 63 percent, followed by mainland Europe on 57 percent. The UK, IG’s biggest market with 56 percent of sales, grew by a more modest 18 percent. A recovery in the UK, where traders had been put off spread betting after the collapse in banking stocks during the financial crisis, helped group revenue in the year to the end of May rise from £270m to £304m. The number of clients dealing in IG’s financial products rose by 10 per cent to more than 120,000 during the period.

Highlights

* Full year adjusted pretax profit 157.6 mln stg, up 25 pct
* Total dividend 18.5 pence per share, up 23.3 pct
* Leverage limits to cut Japan revenues by 20 pct – CEO
* Plans to open office in Netherlands or Canada – CEO

‘Generally speaking we’ve done pretty well (in downturns),’ chief executive Tim Howkins told Reuters. ‘I think our client base is sufficiently affluent, they’re certainly not the first people to feel the pinch of recession.’

IG Group’s focus is on expanding the business into new markets, having opened offices in China, Portugal and Sweden in the last year. IG plans to continue with its international expansion by opening an office in the Netherlands or Canada in the next year, Howkins said, with Brazil a more distant contender.

The company said it was confident about the current year, with jittery market conditions which boosted betting activity at the height of the sovereign debt crisis in May spilling over into June.

Comments: It is interesting to note that IG Group signalled that it would sit on its near-£200m cash pile for at least a year. Tim Howkins was quoted as saying ‘It’s helpful to have a large cash pile … We’re just going to let it build up. There’s a huge advantage in the current regulatory environment of having high levels of capital and liquidity’.

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