IG facing a battle to stay out in front for financial spread betting sector

IG facing a battle to stay out in front for financial spread betting sector

Friday, July 22, 2016 Posted by Andy McCarron
Spread firms Plus500, Markets.com and others are snapping at IG's heels

The latest financial results from UK-listed CFD and spread-betting provider IG Group provide an update on the state of play for the financial trading sector after more than a year of regulatory upheaval and intense merger activity.

The market leader in the UK has played the role of bystander as the sector has been convulsed by events largely concerning the future of competitor Plus500. The onboarding scandal that engulfed the latter company in May last year led to an opportunistic – and in the end unsuccessful - £460m bid from Playtech which itself only became involved in the sector via the TradeFX acquisition in April 2015.

Recent trading figures from Plus500 suggest the company’s own business is back in rude health after having been given a clean bill of health by the Financial Conduct Authority (FCA) late last year. In a post-EU referendum result stock exchange statement, the company said it had achieved a record 17,000 sign-ups and its most ever new customers (1,600) on the Friday after the leave vote.

Now IG has provided further detail on the health of the retail financial trading sector globally. In the year to May, net revenue on an underlying basis rose 14% to £456.3m while pre-tax profit rose nearly 8% to £208m. In terms of revenues per product, trading on equity indices contributed 50% of all revenues, forex was worth 17% and share trading accounted for 15%. Binaries, which have recently been the subject of a change of regulatory overseer in the UK the past year from the Gambling Commission to the FCA, were worth 11% of IG’s total net revenues.

The UK (including Ireland) remains IG’s prime market, with revenues totalling £231.1m or almost 51% of the total while Europe chipped in £98.6m, Australia £64m and the rest of the world £62.6m.

IG maintains a strong market leadership in the UK, at 44% in CFDs and 29% in spread-betting according to research from Investment Trends, with active customer numbers rising 7% to 65,500 in 2016 and revenue per client up 2.1% to £3,585. Active client numbers for Europe rose 18% to 35,000 while average revenue rose 3.4% to £2,812.

Still, the pressure of keeping ahead of the competition are clear. Marketing costs rose 30% to £49.7m, reflecting the heightened competition from the likes of Plus500, Markets.com and others. Meanwhile, the company said it had also moved to address attrition levels among staff in the London office where it said it had raised salary levels in order to retain those with the “scarce skills we require to prosper” and avoid seeing them poached by competitors.

On the increased marketing spend, chief executive Peter Hetherington spoke in the analyst conference call that accompanied the results about how the company was well down the road of improving its effectiveness. “We believe our online marketing continues to improve and it’s moved entirely from being an art to being a science,” he said. “It’s now a test alone process with a feedback loop.”

In line with the revenue per active customer number being much higher than it is with online gambling, the cost per acquisition is also markedly higher at around £1,500. However, IG says that it averages a four-month payback on each acquisition.

Hetherington pointed out, though, that increases in marketing spend necessarily meant the payback time was longer. “We’re increasing costs and diluting margins in the short-term through marketing spend in order to drive long-term growth and shareholder value,” he said. “We expect costs to continue to grow, if the payback remains compelling, and that’s the key point.”

He added that IG remained flexible, saying that spend would vary according to market conditions and volatility. In common with all retail financial traders, IG benefits when the global financial markets are in flux. Hence, as with Plus500, the company benefitted from the turbulence that accompanied the referendum vote.

Talking of the Leave vote, Hetherington noted that should the UK’s financial services sector lose its ‘passporting’ capability into the EU, the company would look to remodel one of its continental offices into a fully-fledged subsidiary.

However, this is unlikely to be in France. Giving an update on the regulatory situation there, IG noted that the French financial authorities (the AMF) had stated their intention earlier this year to ban the “electronic” marketing of financial derivative products to retail customers. Hetherington said there was every indication that the proposal would become law before Christmas. “We’re waiting for the law to be finalised before confirming our response, but we’re investigating possible actions to alleviate any impact.” He went on to add that France accounted for 5% of total group revenues.

Totally Gaming Says: While analysts have pointed out that though France was a relatively minor market, the fear of “regulatory contagion” must be a concern. Should the UK suffer a hard exit from the UK, the ability of the financial trading sector to influence events across the continent would also necessarily diminish.

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