Leonteq profits take a hit, chooses Portugal for nearshoring

The Swiss firm has reported in its half-year results a substantial growth in net fee income of 76% to CHF213m as well as a CHF-107.1m negative net trading result. The latter came because of hedging-related losses driven by oil price shock and cancellation of dividend payments, and an increase in hedging-related costs.

Leonteq recorded a significant increase in hedging-related costs as market risk exposures changed rapidly in an increasingly illiquid hedging market. These were only partially offset by positive hedging contributions from Leonteq’s structural long volatility position. Total operating income stood at CHF103.5m in the first half of 2020, compared to CHF124.6m in the first half of 2019.

In addition, Leonteq reported an increase in total operating expenses rose of five percent to CHF98.7m ‘despite significant hiring and investments in key initiatives’.

‘While the bottom-line result is disappointing (…) our results for the first half of 2020 prove that Leonteq can weather the storm in real periods of market stress and safeguard its profitability,’ stated Lukas Ruflin (pictured), chief executive officer of Leonteq.

Segment results

Despite the challenging environment, Leonteq recorded strong client activity with a high amount of secondary market transactions particularly driven by the Covid-19 situation – this amounted to a record 114,480 client transactions in the first half of 2020, up 53% from the same period in 2019.

Fee income margin increased to 129 basis points compared to 71 basis points in the first half of 2019 on the back of the market turmoil and increased volatility. Turnover increased to CHF15.4 billion in the first half of 2020 compared to CHF15 billion in H1 19.

The firm’s Insurance & Wealth Planning Solutions business line generated a 53% increase in total operating income to CHF24.7m in the first half of 2020 mainly driven by positive contribution from hedging activities. The number of outstanding policies serviced on the platform increased by 5% to 49,746 policies as of 30 June 2020.

Leonteq reported double-digit growth in all its regional operations. In its home market of Switzerland, net fee income increased by 56% to CHF82m in the first half of 2020 while the business in Europe grew by 105% to CHF113.2m and the Asia region saw a 34% increase in net fee income year on year to CHF17.8m.

Business growth

As part of its regional growth strategy, Leonteq continued the implementation of its planned expansion in Europe and the Middle East, and it expects to receive regulatory approval for the opening of new offices in Milan and Dubai in the second half of 2020.

The Swiss firm has selected Lisbon as the location of choice to generate savings and facilitate future growth in ‘a more cost-efficient way’.

Phase 1 of the nearshoring operations will consist of establishing a serviced office set-up. This is expected to be completed by the end of the fourth quarter of 2020. A small number of external IT development specialists, as well as other personnel in shared services functions, will be employed during this process.

In Phase 2, starting in the first quarter of 2021, Leonteq plans to establish an office with up to 100 designated roles along the entire value chain. Phase 2 will be operational by the end of 2022.

Strategic progress

In the first half of 2020, Leonteq delivered on some of its ‘key strategic initiatives defined in mid-2018 in order to transform its business model with a focus on enhancing scalability and generating further growth, as well as renewing the investment experience for clients and partners through the increased digitisation of its offering’.

This include the launch of its Smart Hedging Issuance Platform (Ship), a platform designed to reduce Leonteq’s hedging exposure by offering its issuance partners the opportunity to enter into hedging transactions with external hedging partners.

A total of seven investment banks are now connected to the platform, five of which are already executing trades. Leonteq has also extended its capabilities to enter into back-to-back hedging transactions on a bespoke basis.

In addition, the Swiss firm has increased its offering of products manufactured outside of the Leonteq platform by adding a total of 15 third-party issuers to its multi-issuer platform. The firm has also established direct connectivity between its Lynqs digital platform and Barclays’ electronic trading platform.

Barclays becomes the first third-party issuer on Leonteq’s automated multi-issuer platform and will be available for clients located in Switzerland as well as in select key markets in Europe and Asia.

In the first half of 2020, a total notional volume of CHF895m, or approximately 6% of total turnover, was directly hedged by an external counterparty, compared to CHF182m, or approximately 1%, in the same period last year.

White label

Leonteq has also expanded its network of white-labelling issuers in H1 20 with the addition of Basler Kantonalbank and Rand Merchant Bank, a division of FirstRand Bank, as well as a cooperation with PostFinance.

Other developments in H1 20 include new features to its Lynqs platform such as lifecycle and portfolio management, a new mobile app that gives clients access to all the features of Lynqs, the extension of the underlying universe for actively managed certificates, and the addition of new payoffs across all asset classes.

In addition, Leonteq has improved its local footprint in Europe through the offering of listed products issued by EFG International on the Italian stock exchange, EuroTLX, and has defined its target markets and client segmentation for Asia.

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