In the third quarter of 2021 XTB reported PLN 104,3 million of consolidated net profit compared to PLN 68,4 million of profit a year earlier. Consolidated revenues reached PLN 200,0 million (Q3 2020: PLN 139,6 million), and operating costs PLN 84,8 million (Q3 2020: PLN 60,1 million). In this period, the Group acquired over 38 thousand new clients against 21 thousand a year earlier (increase by 82,1% y/y).
Revenues
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In the third quarter of 2021 XTB noted revenues increase by 43,3% y/y, i.e. from PLN 139,6 million to PLN 200,0 million. The significant factor determining the level of revenues was a constantly growing client base combined with their high transaction activity noted in the number of concluded transactions in lots and in the nominal value of the realized turnover. As a consequence the transaction volume in CFD instruments amounted to 1 044 thousand lots (III quarter 2020: 760 thousand lots) and a profitability per lot amounted to PLN 192 (III quarter 2020: PLN 184).
Looking at revenues in terms of the classes of instruments responsible for their creation, it can be seen that CFDs based on commodities dominated. Their share in the structure of revenues on financial instruments in the third quarter of 2021 reached 58,2% against 22,9% a year earlier. This is a consequence of the high interest of XTB clients in CFD instruments based on gold, silver and natural gas. The second most profitable class were CFD instruments based on indices. Their share in the structure of revenues in III quarter of 2021 reached 22,5% (III quarter 2020: 52,0%). The most profitable instruments among this asset class were CFDs based on the US 100 and US 500 indexes. Revenues of CFD based on currencies reached 15,7% of all revenues, compared to 20,1% a year earlier, where the most popular financial instruments in this class were based on the EURUSD currency pair.
XTB has a solid foundation in the form of constantly growing client base and the number of active clients. This is the key to the amount of recurring income in the future. From the beginning of the year, the Group reported another record in this area, acquiring 146 427 new clients compared to 73 612 a year earlier, which means an increase of 98,9%. This is the effect of continuing the optimized sales and marketing strategy, bigger penetration of already existing markets, successive introduction of new products to the offer and expansion into new geographic markets. Similarly to the number of new clients, the average number of active clients was also record high. It increased from 53 309 to 106 961, i.e. by 100,6% y/y.
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The priority of the Management Board is to further increase the client base, leading to strengthen the market position of XTB in the world. These activities will be supported by a number of initiatives, including introduced on 5th October 2020 a new offer for shares and ETFs (Exchange-Traded Funds) “0% commission” for monthly volumes up to EUR 100 000. This offer was received with enthusiasm by current and new XTB clients. The company aims to be the first choice and comprehensive solution for every investor. Over the past few years, XTB has done a great deal of work – from expanding the offer by around 3,9 thousand financial instruments (from 1 500 to 5 400 currently), to the continuous improvement of the web and mobile version of the award-winning xStation platform. Now with a free offer, XTB has opened the door wide to anyone interested in investing in both real stocks and ETFs. XTB currently allows client to invest in over 3 000 real stocks from 16 of the world’s largest stock exchanges, including New York Stock Exchange, London Stock Exchange, Spanish Bolsa de Madrid, German Börse Frankfurt and of course Warsaw Stock Exchange. Besides stocks, XTB offers over 270 ETFs, including commodities, real estate and bonds.
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The „0% commission” offer is supported by a marketing and advertising campaign with the participation of the new XTB brand ambassador – one of the best football manager on the world, José Mourinho. The new XTB ambassador is the coach who not only won championships in a record number of countries (Portugal, England, Italy and Spain), but is also one of only three coaches who have won the UEFA Champions League twice with two clubs.
The ambition of the Management Board for 2021 was to acquire at least 120 thousand new clients. This goal was achieved in July this year. The management board assumes that in the following periods it will be possible to acquire at least 30 000 new clients quarterly on average. In October 2021, the Group acquired a total of 13,0 thousand new clients.
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XTB places great importance on the geographical diversification of revenues. The country from which the Group derives more than 15% of revenues is Poland with the share of 32,1% in III quarter of 2021 (III quarter 2020: 34,5%). The share of other countries in the geographical structure of revenues does not exceed 15%. Due to the overall share in the Group’s revenue, Poland was set apart for presentation purposes as the Group’s largest revenue market.
The Group breaks down its revenues by geographic area according to the country of the XTB office in which the client was acquired.
XTB puts also strong emphasis on diversification of segment revenues. Therefore the Group develops institutional activities under X Open Hub brand, under which it provides liquidity and technology to other financial institutions. Revenues from this segment are subject to significant fluctuations from quarter to quarter, analogically to the retail segment, which is typical for the business model adopted by the Group.
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XTB’s business model includes high volatility of revenues depending on the period. Operating results are mainly affected by: (i) volatility on financial and commodity markets; (ii) the number of active clients; (iii) volume of concluded transactions on financial instruments; (iv) general market, geopolitical and economic conditions; (v) competition on the FX/CFD market and (vi) regulatory environment.
As a rule, the Group’s revenues are positively affected by higher activity of financial markets due to the fact that in such periods, a higher level of turnover is realized by the Group’s clients and higher profitability per lot. The periods of clear and long market trends are favourable for the Company and it is at such times that it achieves the highest revenues. Therefore, high activity of financial markets and commodities generally leads to an increased volume of trading on the Group’s trading platforms. On the other hand, the decrease in this activity and the related decrease in the transaction activity of the Group’s clients leads, as a rule, to a decrease in the Group’s operating income. Due to the above, operating income and the Group’s profitability may decrease in periods of low activity of financial and commodity markets. In addition, there may be a more predictable trend in which the market moves within a limited price range. This leads to market trends that can be predicted with a higher probability than in the case of larger directional movements on the markets, which creates favourable conditions for transactions concluded in a narrow range trading. In this case, a greater number of transactions that bring profits to clients is observed, which leads to a decrease in the Group’s result on market making.
The volatility and activity of markets results from a number of external factors, some of which are characteristic for the market, and some may be related to general macroeconomic conditions. It can significantly affect the revenues generated by the Group in the subsequent quarters. This is characteristic of the Group’s business model.
Expenses
The operating costs in the third quarter of 2021 amounted to PLN 84,8 million and were PLN 24,7 million higher compared to the comparable period (III quarter 2020: PLN 60,1 million). The most important y/y changes occurred in:
- – costs of salaries and employee benefits, an increase by PLN 11,2 million, mainly related to new employment;
- – marketing costs, an increase by PLN 6,9 million resulting mainly from higher expenditure on online marketing campaigns;
- – commission costs, an increase of PLN 3,1 million resulting from higher amounts paid to payment service providers through which clients deposit their funds in transaction accounts;
- – other external services, an increase by PLN 1,7 million as a result of mainly higher expenditure on: (i) IT systems and licenses (increase by PLN 1,2 million y/y); (ii) internet and telecommunications (increase by PLN 0,3 million y/y).
In q/q terms, operating costs increased by PLN 8,4 million, mainly due to higher by PLN 8,3 million costs of salaries and employee benefits, mainly due to the creation of provisions for variable remuneration components (bonuses) and employment growth.
Due to the dynamic Group development, the Management Board estimates that in 2021 the total costs of operating activities may be about a dozen percent higher than what we noticed in 2020. The priority of the Management Board is to further increase the client base and build a global brand. In the fourth quarter of this year, an increase in marketing expenditure is assumed compared to the level in the third quarter of this year.
The final level of operating costs will depend on the level of variable remuneration components paid to employees, the level of marketing expenditures, the dynamics of geographical expansion into new markets and the impact of any new regulations and other external factors on the level of revenues generated by the Group.
The value of variable remuneration components will be influenced by the results of the Group. The level of marketing expenditures depends on their impact on the Group’s results and profitability, the rate of foreign expansion and on clients responsiveness to the actions taken. The impact of a new product intervention on the Group’s revenues will determine, if necessary, a revision of the cost assumptions.
Dividend and capital requirements
The XTB dividend policy assumes recommendation by the Management Board to the General Meeting a dividend payment in the amount taking into account the level of net profit presented in the standalone annual financial report of the Company and a variety of factors relating to the Company, including prospects for further operations, future net profits, demand for cash, financial situation, the level of capital adequacy ratios, expansion plans, legal requirements in this area and KNF guidelines.
In particular, the Management Board, when submitting proposals for dividend payment, will be guided by the need to ensure an appropriate level of the Company’s capital adequacy ratios and the capital necessary for the development of the Group.
For example, the Polish Financial Supervision Authority, in its last Statement on dividend policy in 2021, published on December 16, 2020 recommended that the dividend in 2021 should be paid only by brokerage houses that have met, among others, the following criteria:
A. Dividend in the amount not exceeding 75% of the net profit for 2020:
I. for entities subject to capital adequacy standards pursuant to Regulation (EU) No 575/2013 of the European Parliament and the Council of the European Union of 26 June 2013 on prudential requirements for credit institutions and investment firms amending Regulation (EU) No 648/2012 (EU Official Journal of the EU L 176 of June 27, 2013, hereinafter referred to as: “Regulation 575/2013”) as of December 31, 2020:
• Common Equity Tier I ratio was at least 6%;
• Tier I capital ratio was at least 9%;
• the total capital ratio is at least 14%;
II. for entities not subject to capital adequacy standards pursuant to Regulation 575/2013 as at 31 December 2020, the ratio being the share of equity in total assets is at least 50%;
III. the last supervisory grade assigned in the BION process is 1 or 2;
IV. the entity in 2020 and until the date of approval of the financial report and adoption of the resolution on the distribution of profit for 2020 did not violate the provisions on capital requirements contained in Regulation 575/2013 and the Law of July 29, 2005 on trading in financial instruments (OJ, 2020, item 89) and the provisions on limits on large exposures, excluding breaches of limits relating to clients’ funds.
B. Dividend in the amount not exceeding 100% of the net profit for 2020:
I. meets all the criteria listed in A;
II. for entities subject to capital adequacy standards in accordance with Regulation 575/2013, the criteria referred to in point (a) And points I are met at the end of each quarter in 2020;
III. for entities not subject to capital adequacy standards in accordance with Regulation 575/2013, the criterion referred to in point (a) A point II is met at the end of each quarter in 2020.
On June 28, 2021, the Company received a supervisory grade (BION) of 2 [2,46] from the Polish Financial Supervision Authority. The assessment was given on December 31, 2020. Published by the Polish Financial Supervision Authority on May 22, 2018. Announcement on the position regarding the dividend policy in the medium-term, aimed at facilitating financial market entities supervised by the Polish Financial Supervision Authority in terms of financial planning related to the payment of dividends in the average indicates that the current supervisory assessment for XTB is in line with the criteria recommended by the Polish Financial Supervision Authority, which should allow the Company to potentially pay dividends for the current financial year in accordance with these criteria.
From June 26, 2021, XTB applies capital adequacy monitoring in accordance with Regulation (EU) 2019/2033 of the European Parliament and of the Council of November 27, 2019 on prudential requirements for investment firms and amending Regulations (EU) No. 1093/2010, (EU ) No. 575/2013, (EU) No. 600/2014 and (EU) No. 806/2014, hereinafter referred to as “IFR Regulation” It replaced, in the case of XTB, Regulation of the European Parliament and of the Council (EU) No. 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms, amending Regulation (EU) No. 648/201, hereinafter referred to as the “CRR Regulation”. Both regulations require maintaining an appropriate ratio of own funds to the risk incurred – in the case of the CRR Regulation, it’s measure was the total risk exposure, and the total capital ratio could not be lower than 8%, while in the case of the IFR Regulation, the total measure of the risk incurred is the highest of the values: (i) a fixed overhead requirement, (ii) a fixed minimum capital requirement, or (iii) a “K-factor” requirement related to customer risk, market risk and firm risk; in the case of the IFR Regulation, the ratio of total own funds cannot be lower than 100%.
In order to ensure comparability, the requirements from previous periods have been properly scaled; however, it should be noted that the value of the total risk exposure calculated in accordance with the CRR Regulation is calculated in a different way than the value of the capital requirement calculated in accordance with the IFR Regulation.
The chart below presents the value of the total capital ratio (CRR) in Q1-Q3 2021.
The chart below presents the value of the total capital ratio (IFR) in Q1-Q3 2021.
The total capital ratio informs about the ratio of own funds to risk-weighted assets, in other words, it shows whether the brokerage house is able to cover the minimum capital requirement for market, credit, operational and other risks with its own funds. At the end of the third quarter of this year, the total capital ratio in the Company was 126,9% (the equivalent under the CRR Regulation 10,2%).
It should be remembered that every year the PFSA publishes updated Positions on dividend policy applicable to brokerage houses when paying dividends for a given year. If the PFSA uses a simple scaling of the ratios in the future, the level of equity and capital requirements above which XTB could pay a dividend could be 175%. It should be noted, however, that the Commission may set the appropriate levels in a completely different way, taking into account the ongoing supervision over brokerage houses. If the criteria are left unchanged in future positions, the position of the PFSA will apply, stating that for entities not subject to capital adequacy standards in accordance with Regulation 575/2013 (CRR Regulation), the ratio being the share of equity in total assets as at 31 December of the previous year was at least 50%.
The Management Board maintains that its intention is to recommend to the General Meeting in the future to adopt resolutions on the payment of dividends, taking into account the factors indicated above, in the amount ranging from 50% to 100% of the Company’s standalone net profit for a given financial year. The unit net profit for the period of 9 months of 2021 amounted to PLN 167,9 million.
Cash and cash equivalents
In an environment of low interest rates, which discourages the maintenance of deposits in banks, XTB started to locate part of its cash in financial instruments with a risk weight of 0% (treasury bonds and bonds guaranteed by the State Treasury). As at 30.09.2021 the total amount of own cash and treasury bonds in the Group amounted to PLN 898,9 million, that includes PLN 754,6 million of own cash and PLN 144,3 million of treasury bonds.
