Swissquote Group Holding is Switzerland’s leading online bank and one of the most renowned banks there. It has also managed to develop at the international level through either partnerships or white-labels. While it is regulated as a bank (with all its constraints), we consider it more of a Fintech with up-to-date financial services. The company has indeed a long history of innovation and acquisition, which are made easier by a solid balance sheet (CET1 at 22.5% versus requirements at 11.2%).
We initiate coverage of Swissquote with a Buy recommendation and 29.7% upside. Swissquote is a Swiss bank mainly specialised in the offering of trading solutions for private clients as well as institutional clients. The company has also been leveraging its high quality multi-asset class trading platform either via partnerships or white-labels (for instance the white-label agreement between Swissquote and Postfinance in 2016, adding about 60,000 clients). These partnerships (or white-labels) also facilitate the Fintech’s development at the international level (the company shares fees with its partners but limits operational expenses).
With the exponential development of digital infrastructure (online or app-based solutions), competition has strongly intensified for trading platforms, putting pressure on trading fees. Low-cost players have emerged in Switzerland and at the international level while incumbent Swiss banks still own an important market share. However, Swissquote has managed to maintain a strong position via the offering of a high quality service at a reasonable price. Contrary to low-cost brokers, it offers indeed quite a wide range of asset classes (hence, an average client balance of CHF100,000 well above that of its low-cost competitors). It also offers lower tariffs versus other Swiss banks (such as UBS or Credit Suisse).
In order to remain competitive, the Swiss online bank has had a strong culture of organic growth (via R&D) as well as acquisitions. It has indeed launched, for instance, a FX platform (in 2008) that makes 30% of the total revenues today. More recently, it was the first Swiss bank to propose to its clients trading in cryptocurrencies (in 2017), whereas, since March 2019, it has been offering to its clients a secured custodian solution to hoard cryptocurrencies (which should attract ever more institutional investors). In March 2019, it finalised the acquisition of InternaxX that will allow it to get unrestricted access to the European market (increase the range of investment solutions it can offer to its European investors). With a common equity tier 1 ratio (CET1 ratio) at 22.5%, Swissquote has a lot of flexibility for growing (especially external growth). We estimate its current excess capital at about CHF100m (its CET1 ratio requirements stand at 11.2% but we estimate 15% as a more comfortable threshold).
Swissquote’s current AuCs amounted to CHF30.5bn at the end of July 2019. Management targets AuCs of CHF36bn in 2022, which is well within reach, in our opinion. It also targets a 90bp margin on assets, equivalent to CHF325m of revenues in 2022. We find this rather ambitious as the AuCs growth was exceptionally high in that half year (CHF23bn in December 2019) and we find it difficult to extrapolate this to 2022. In addition, decreasing rates throughout global currencies will weigh on net interest income, whereas fees/commissions or trading income remain volatile. We do not disclose the 2022 revenues forecasts but we guess a CHF300m target is more appropriate.
Given its history of innovation and growth, we believe Swissquote is well positioned to sail through the headwinds that the sector has to face. Indeed, offering quality enables it to limit the impact of margin compression on trading, while R&D enables it grow in tomorrow’s financial services (such as cryptocurrencies trading and custody or multi-currency credit cards).
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