Spread betters Plus500 (PLUS) and IG Group (IGG) reported an increase in active client numbers and trading activity during the run-up to the referendum and the immediate aftermath. But this pick-up in activity was shortlived as market volatility died down and defensive measures were introduced to increase clients’ trading margins. The sector soon hit a wall: the Financial Conduct Authority’s proposals for tougher restrictions on spread betting and contracts for difference (CFD) providers include limiting the amount of leverage investors are able to trade with.
The sector soon hit a wall: the Financial Conduct Authority's proposals for tougher restrictions on spread betting and contracts for difference (CFD) providers included limiting the amount of leverage retail investors are able to trade with. The announcement caused heavy falls in share price for these companies, which have yet to recover.
Regulation is also holding back the shares of subprime lender International Personal Finance (IPF). In December the Polish justice ministry proposed a further reduction in non-interest charges. The initial total-cost-of-credit legislation came into effect in March last year, which management aimed to mitigate by launching a new product range including credit with longer repayment times.
Any tightening domestic demand for consumer credit would hit a number of these players. Provident Financial (PFG) has experienced rapid growth in its loan book during the past during recent years, while newer listings Morses Club (MCL) and Non-Standard Finance (NSF) have entered this highly fragmented market hoping to take advantage of consolidation opportunities. The danger comes if higher inflation this year squeezes household incomes and results in more borrowers defaulting on their repayments.
Consolidation was a feature for some of the larger financial services companies last year. Following Tullett Prebon's acquisition of Icap's global voice broking business, the newly renamed TP Icap (TCAP) is on the lookout for more bolt-ons to diversify geographically and by product mix. Meanwhile Icap has rebranded as Nex Group (NXG), planning to hone its post-trade risk and information services.
Yet the sector's biggest M&A deal announced during 2016 is due to complete this year, as the London Stock Exchange Group (LSE) merges with Deutsche Börse. That deal is still awaiting clearance from competition regulators, but LSE forecasts €450m (£394m) in annual cost savings three years after completion of the tie-up, plus cross-selling opportunities.
| Price (p) | Market value (£m) | PE (x) | Yield (%) | 1-year change (%) | Last IC view | |
| 3i Group | 717 | 6,975 | 9.7 | 3.4 | 68.3 | Hold, 616p, 14 Nov 2016 |
| Allied Minds | 410 | 958 | NA | 0.0 | 39.0 | Hold, 385p, 30 Aug 2016 |
| Close Brothers | 1,437 | 2,157 | 11.2 | 4.0 | 13.2 | Buy, 1,387p, 27 Sep 2016 |
| CMC Markets | 120 | 344 | 9.2 | 4.7 | NA | Buy, 194.3p, 24 Nov 2016 |
| IG Group | 535 | 1,962 | 11.9 | 5.9 | -28.1 | Hold, 524.5p, 25 Jan 2017 |
| Intermediate Capital | 701 | 2,034 | 14.8 | 3.6 | 22.5 | Buy, 670p, 15 Nov 2016 |
| Int'l Personal Finance | 172 | 382 | 5.2 | 7.2 | -29.6 | Sell, 176p, 12 Dec 2016 |
| Investec | 574 | 3,772 | 13.8 | 3.8 | 38.4 | Hold, 521p, 21 Nov 2016 |
| IP Group | 183 | 1,035 | NA | 0.0 | 1.7 | Hold, 169.5p, 12 Aug 2016 |
| London Stock Exchange | 2,953 | 10,345 | 22.8 | 1.3 | 21.2 | Hold, 2,766p, 08 Aug 2016 |
| Nex Group | 517 | 1,961 | 20.6 | 4.2 | 15.2 | Hold, 498p, 16 Nov 2016 |
| Paragon | 408 | 1,134 | 10.1 | 3.3 | 35.2 | Buy, 371.7p, 234 Nov 2016 |
| Provident Financial | 2,851 | 4,213 | 17.5 | 4.4 | -1.8 | Buy, 3,026p, 08 Sept 2016 |
| Saga | 191 | 2,131 | 14 | 4.0 | -4.8 | Hold, 222.8p, 21 Sep 2016 |
| TP ICAP | 443 | 2,456 | 12.5 | 3.8 | 38.1 | Buy, 437p, 25 Jan 2016 |
Favourites: Inflation is a risk to all financial services companies offering consumer credit, but we continue to back Close Brothers (CBG) which provides motor, retail and invoice finance among other lending. Despite increased competition among alternative lenders, the group has a good record of delivering growth through the cycle.
Outsiders: Sell tip IPF received more bad news at the start of the year: a £20m tax charge from the Polish authorities. Management intends to appeal against the decision. The proposed tightening of the cost-of-credit legislation is also concerning, given that the Poland-Lithuania business accounted for almost 70 per cent of pre-tax profits at the half-year stage. The shares are down more than a third on our April sell recommendation, which we see no reason to call time on yet.
