5th Feb 2014 14:25
LONDON (Alliance News) - Hargreaves Lansdown PLC shares were down sharply Wednesday afternoon after a strong rise in its first-half profits and revenues failed to meet the lofty expectations of the market and the Chief Executive warned that it faced a hit to short-term profits if interest rates remain so low.
Hargreaves Lansdown shares were Wednesday afternoon trading down 7.0% at 1,392.00 pence.
In a statement, the FTSE 100 stockbroker said it made a GBP104.1 million pretax profit for the six months ended December 31, 2013, compared with GBP93.7 million for the corresponding period last year, as revenue rose by GBP18.1 million to GBP158.4 million.
Assets under the stockbroker's administration were boosted by net business inflows of GBP2.80 billion, significantly higher than the GBP1.65 billion reported for the corresponding period in 2012, on the back of a wave of new clients amidst the high-profile floatation of Royal Mail PLC last Autumn. The Royal Mail deal contributed 27,000 of the stockbroker's 77,000 net new clients in the half year.
However, Shore Capital Stockbrokers analysts Owen Jones and Gary Greenwood said the results were shy of consensus estimates by about 4%.
"The shares have been very strong performers this year so far, rising by [about] 10% relative to the market, and this morning?s results appear to have missed consensus slightly, owing to net interest margins on cash holdings falling from their equivalent [for the corresponding period last year]," the analysts said in a note to clients.
Hargreaves Chief Executive Ian Gorham described the rise in pretax profit as "healthy", but said the big difference between old and current interest rates on cash holdings was the reason it lagged behind the 43% rise in assets under administration, which rose to GBP43.4 billion from GBP30.4 billion.
Hargreaves Lansdown, which has attracted retail investors as they flee traditional savings accounts because of low bank interest rates, is concerned about the impact of the low interest rate environment on its own profits.
"The last six months has continued to see the government lending money to banks on cheap terms and commensurately lower rates for savers as banks have slashed the interest rates paid to their loyal UK savers. This continuing scenario now makes equity investment even more attractive, as the yields available on equities and bonds far outstrip those available on cash," Gorham said in a statement.
"However, in the short term, in addition to reducing the interest rates payable to UK savers, it will also reduce revenue from cash margin across the savings and investment industry, including that received by Hargreaves Lansdown," he added.
Gorham warned that if interest rates stay at historic lows, profits will continue to be hurt, as the stockbroker's term deposits will be gradually replaced at significantly lower rates.
"If interest rates remain low, then a profit impact will continue to be felt as our term deposits will be gradually replaced at significantly lower rates. However, in due course the drag should cease as the effect of comparison with substantially higher rates obtained in the financial year 2012 and early 2013 washes through," Gorham said.
"Whilst we have had an excellent first half, the second half of our trading year is perennially the stronger half, including as it does the tax year end, which acts as a natural incentive for clients to use tax allowances. This year may turn out to be a little unusual, given the exceptional Royal Mail event that occurred in the first half of the year, but there is no doubt the second half of the year will again be key to our full year performance. January 2014 has delivered a positive start," Gorham said.
Meanwhile, Hargreaves Lansdown has been adjusting to new regulations governing commission and fees which resulted in the stockbroker in January telling investors it must seek about GBP3.5 billion in assets over the next three years in order to offset the impact of the changes.
The stockbroker in January slashed client charges in response to the new rules, which have already seen regulators ban the payment of commission to independent financial advisers, meaning fees are paid up-front. The new rules, known as the Retail Distribution Review, also put a greater focus on transparency, with platform charges set to be "unbundled" in April.
"Although our client recruitment and business volumes are encouraging we are mindful that the Retail Distribution Review is a change that may take time for retail investors to adjust to. Whilst we are pleased at the initial success of our transition, and we consider that long term it improves our model and the deal for investors, we shall monitor things carefully and adjust if necessary," Gorham said.
Hargreaves Lansdown declared a 7.0 pence interim dividend, up from last year's 6.3 pence.
By Samuel Agini; [email protected]; @samuelagini
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