In the first half of 2021 XTB reported a consolidated net profit of PLN 65,0 million compared to PLN 293,5 million a year earlier. Consolidated revenue amounted to PLN 242,0 million (H1 2020: PLN 518,2 million) and operating expenses amounted to PLN 163,3 million (H1 2020: PLN 138,3 million). In this period the Group noted a record number of new clients i.e. 108k compared to 52k a year earlier (an increase of 105,7% y/y).

Revenues

In the first half of 2021, the Group’s revenues decreased by 53,3% y/y, from PLN 518,2 million to PLN 242,0 million. This was due to the lower profitability per lot by PLN 199, which amounted to PLN 122 (H1 2020: PLN 321). This decrease is mainly due to: (i) low volatility in the financial and commodity markets in the second quarter of 2021 and (ii) the high base effect from the first half of 2020, when the markets experienced above-average volatility caused, among others, by the global COVID-19 pandemic.

After a good first quarter of 2021, when the Group generated PLN 186,7 million in operating revenues, the second quarter (April and May) brought low volatility on the financial and commodity markets, which translated into a decline in revenues and profitability per lot. Along with lower volatility, the transaction activity of clients also decreased. There was a more predictable trend with the market moving within a limited price range. This led to market trends that were more likely to be predicted than in the case of greater market volatility, which created favourable conditions for range trading. In this case, XTB recorded
a greater number of profitable transactions, which led to a decrease in XTB’s market making result. As a consequence, the profitability per lot amounted to PLN 63 and reached the lowest level in the last 5 years. Since XTB’s presence on the WSE,
a lower level was recorded only in the second quarter of 2016 – PLN 59, which only confirms the exceptional nature of the last quarter.

From the point of view of the conditions in the financial markets in the first half of this year it is worth noting that this was the period in which the upward trend in the cryptocurrency market continued until mid-May. This market is characterized by the fact that clients investing in CFDs on cryptocurrencies are willing to hold their open positions much longer and not close profits in a short time, as in the case with other instruments. Such market characteristics had a negative impact on the Group’s revenues (PLN 46,6 million loss on CFDs on cryptocurrencies in the first half of 2021). As a consequence, in mid-May this year XTB has decided to change the business model for CFD instruments based on cryptocurrencies, i.e. fully securing the market position on cryptocurrencies. Currently, the entire open position of the Company on these instruments is covered in hedging transactions with liquidity providers. The company plans to maintain this model indefinitely. The negative result from CFDs on cryptocurrencies can be attributed to the period when the market making model was still used, and the cryptocurrency markets continued to grow dynamically. When there is a correction in these markets in the second half of May, the market position of XTB was almost completely reduced.

Looking at the stock and index markets in the second quarter of this year. it should be noted that they were characterized by much lower volatility than in the previous quarter. The DAX index in April and May unsuccessfully tried to break above the record levels, which was only achieved at the beginning of June. Additionally, the entire range of movement of this instrument in the second quarter closed to around 800 points. Price changes were much more pronounced in the case of instruments based on US indices, which translated into an increase in revenues in this group q/q, but to a much lesser extent than a decrease in revenues on the DE30 instrument.

The group also reported a decrease in revenues on CFD instruments based on oil and precious metals. During the period, these instruments recorded upward trends, but it was largely due to long positions concluded by XTB clients. Additionally, in the case of oil-based instruments, the extent of price movement was lower than in the previous quarter.

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. In the H1 of 2021 the Group reported a new record in the number of new clients amounting to 107 854 compared to 52 434 a year earlier i.e. an increase by 105,7%. 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 number of active clients was also record high. The number of active clients increased from 52 084 to 105 005, i.e. by 101,6% y/y.

The increase in the number of active clients translates into an increase in the volume of their turnover, measured both by the number of contracts concluded in lots and the nominal value of the turnover. As a consequence, trading in derivative instruments amounted to PLN 1 986,7k lots (H1 2020: 1 613,9k lots) and was higher by 372,8k lots y/y.

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 great 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 3,8k financial instruments (from 1 500 to 5 300 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 clients to invest in over 2 900 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.

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 managers in 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 Company expects on the effectiveness of the new offer for shares and ETFs as well as the campaign with José Mourinho. In particular, the ambition of the Management Board is to acquire in 2021 at least 120 thousand new clients, that is an average 30 thousand new clients quarterly. The Management Board assumes that in the next quarter, the growth of new clients will approach the aforementioned assumptions due to the holiday season. In July 2021, the Group acquired a total of 12.7k new clients.

XTB puts also strong emphasis on diversification of segment revenues. Therefore the Group develops institutional activities under X Open Hub (XOH) brand, under which it provides liquidity and technology to other financial institutions, including brokerage houses. 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.

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 at such times it achieves the highest revenues. Therefore, high activity of financial and commodities markets 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 for the Group’s business model.

Expenses

In the H1 of 2021 operating expenses amounted to PLN 163,3 million and were higher by PLN 25,0 million in relation to the same period a year earlier (H1 2020: PLN 138,3 million). The most significant changes occurred in:

•  marketing costs, an increase of PLN 19,1 million mainly due to higher expenditures on marketing online campaigns;

• commission expenses, an increase of PLN 7,3 million as a result of larger amounts paid to payment service providers through which clients deposit their funds on transaction accounts;

• other external services, an increase by PLN 5,7 million as a result of mainly higher expenditure on: (i) IT systems and licenses (increase by PLN 2,5 million y/y); (ii) legal and advisory services (increase by PLN 1,2 million y/y) and (iii) IT support services (increase by PLN 0,9 million y/y);

•  costs of salaries and employee benefits, a decrease of PLN 7,0 million mainly due to lower provisions established for variable components of remuneration (bonuses) and an increase in employment;

In q/q terms, operating costs decreased by PLN 10,5 million, mainly due to lower marketing expenditure by PLN 8,0 million and lower costs of salaries and employee benefits by PLN 3,1 million, mainly due to the release of provisions for variable components salaries (bonuses) and commission costs lower by PLN 1,6 million, resulting from lower amounts paid to payment service providers through which clients deposit their funds in transaction accounts, and higher costs of other external services by PLN 1,5 million.

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. As a consequence of the implemented activities marketing expenditures may increase by over 20% compared to the previous 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 potential product interventions 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 the first half of 2021.

The chart below presents the value of the total capital ratio (IFR) in the first half of 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 first half of this year. the total capital ratio in the Company was 155,3% (the equivalent under the CRR Regulation 12,4%).

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 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 first half of 2021 amounted to PLN 62,0 million.

Cash

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 30.06.2021 the total amount of own cash and treasury bonds in the Group amounted to PLN 768,0 million, that includes PLN 621,8 million of own cash and PLN 146,2 million of treasury bonds.