IG Group surges on hopes for regulatory escape, solid final results

Spread betting and CFD broker IG Group grew annual profits more than expected even though as it bumped up spending on marketing to grow its customer base amid a widespread regulatory toughening.

For the new financial year, none of the recently announced regulatory changes have adversely impacted the business to date, IG said, and the current year has "started well", though the results of UK and European regulatory deliberations continues to hang over the industry's head.

But ahead the decision, which will affect regulation of non-professional clients, IG noted that 80% of its revenue excluding the US is derived from 9% of clients -- and that the majority of this 9% "have a recent trading history which would suggest they should pass the sufficient trading experience test" to be exempt.

It was perhaps this news, helped by profits that beat consensus forecasts, that sent IG shares rocketing 9% to 605p on Tuesday morning, their highest since December.

For the year to 31 May, net trading revenue rose 7.6% to £491.1m as numbers of clients making their first trades swelled 38% compared the the prior year, up 15% in the OTC leveraged business. This was short of the consensus forecast of £495m.

The strongest relative performance came in Europe, Middle East and Africa, where revenue was 17% ahead of the prior year, with the strongest jumps in Switzerland, Dubai and South Africa, but client numbers were up in all regions.

But with operating expenses increased 14%, of which marketing spend accounted for half the rise, PBT edged up 2.8% to £213.7m, but this was ahead of the consensus forecast of £212m.

Earnings per share rose 2.9% to 45.9p. Profits were eased slightly by a fall in the group's effective tax rate to 20.8%, from 21.0% in the prior year.

A final dividend of 22.88p per share was declared, meaning the full year dividend was 2.9% larger than last year's at 32.3p a share.

"It was an interesting and challenging year in terms of global news flow, especially in the political and regulatory sphere, but the year turned out to be one of the least volatile in financial markets for decades," said chief executive Peter Hetherington. "Against this backdrop I am pleased that IG once again delivered record revenue and profits."

After the industry came under elevated regulatory scrutiny during the year, he stressed that IG sought to only offer our products to an appropriate audience and consistently innovate to improve client outcomes, noting that IG's Limited Risk account, where clients can never lose more money than they have on their account, and their maximum risk per position is known, is now used in third of new trading accounts in the UK.

On the outlook, IG said it was taking measures to further differentiate itself within its core OTC leveraged derivatives trading environment and will continue to expand its geographic footprint.

"The nature and timing of potential regulatory changes in the UK and some other key markets for the group remain uncertain, and it is therefore difficult to predict what impact, if any, regulatory change may have on the group this financial year and beyond. Actions have been taken to manage costs to allow for investments to be made in strategic initiatives without a significant increase in the fixed cost base," it said.

Operating costs, excluding bonuses, are expected to remain at a similar level to last year.

House broker Numis acknowledged that it was "impossible to quantify" what the eventual outcome of the European Securities and Markets Authority regulation of the CFD industry but was reassured by the majority of important clients are compatible with professional status.

"An independent survey found that 15% of IG's clients would meet the wealth requirement for professional status. We see the
overlap between these two groups as inevitably being substantial which makes our previous estimates of revenue loss from regulation seem excessively conservative."

Furthermore, Numis noted that IG clients on average use portfolio leverage of 10x against the maximum leverage limit proposed (by the FCA) for non-professional clients of 50x.