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FTSE 350: Financials under a regulatory cosh

This smorgasbord of companies face pressure from European regulators, as well as a lack of market volatility
January 25, 2018

Like the UK’s banks and life assurers, the FTSE 350’s general financial companies enter 2018 with a degree of caution. With London as a global financial heavyweight, the ability of the government to secure effective passporting rights – or some equivalent – will determine how easy and/or inexpensive it will be for financial services groups to sell products into European markets, as well as how much of a headache regulatory differences could be.

There is one group in this year’s list that thrives on regulatory changes and complexity – Sanne Group (SNN). The compliance specialist has already reported an uptick in business in Luxembourg and Dublin from businesses looking to hedge against the outcome of Brexit negotiations. With a good geographical spread – it has units in North America, Asia Pacific, EMEA and Mauritius – the group is well placed to take advantage of the increased compliance burden via European legislation such as Mifid II, as well as the more immature financial services outsourcing market in the US.  

Yet even aside from Brexit-related uncertainty, regulation is proving to be a headache for other financial services companies. The Financial Conduct Authority’s (FCA) decision to tighten restrictions around the sale of contracts for difference (CFDs) blind-sided investors in spread-betting specialists such as IG Group (IGG). IG’s shares have since recovered the heavy losses suffered following that announcement in November 2016. However, the regulator is yet to deliver its final proposals, waiting for the European Securities and Markets Authority to publish the findings of its review on whether to intervene in the market.

Some of the challenges faced by the FTSE 350’s general financials are more idiosyncratic. There were several constituents forced to issue profit warnings last year. The highest-profile of these was Provident Financial (PFG), where the core issue was the poor execution of its decision to reduce its doorstep lending business and switch to employing its collection agents on a full-time basis rather than allowing them to be self-employed. On that front, the sub-prime lender enters 2018 with some good news – home credit customer numbers had started to pick up again during the final quarter of last year. However, customer bookings have begun to slow at former growth driver Vanquis Bank, which also remains in discussions with the FCA over the sale of repayment option plans.

Saga (SAGA) has also been weighed down by – albeit less drastically – operational difficulties. The announcement that it would be increasing its marketing spend by £10m from this year, together with cost savings of the same amount, was taken against the backdrop of tough trading in its travel and home insurance businesses. Investment will include price competitiveness in its insurance broking business and digitalisation of its broker model. That spend may indeed help lift sales this year, but may come at the expense of margins.

One bugbear that no amount of management action can resolve is the historically low level of market volatility. In September, the Vix – a measure of expectations of future market volatility – registered its lowest level in more than a decade. There has been little increase in the index so far this year. That’s not good news for trading specialists such as Nex Group (NXG) – formerly Icap – and TP Icap (TCAP). For example, a lack of volatility in euro-denominated interest rates reduced demand for the former’s basis risk mitigation service during the first half of the year. For TP Icap, subdued market movements also weighed on sales during the third quarter; revenue for its core global broking business was just 1 per cent higher at constant currency.

To make revenue more predictable both groups have been investing in their data services. Demand is increasing – portfolio services business Nex Optimisation grew sales 12 per cent during the first half, management is focusing investment in the business in the hope of gaining more business via its regulatory reporting operations following the introduction of Mifid II. Likewise, London Stock Exchange Group (LSE) is focusing on growing its information and post-trade services, which have led the way in terms of revenue growth.

  
CompanyPrice (p)Market value (£m)PE ratioYield (%)1-year change (%)Last IC view
3I Group9509,24211.12.831.7Hold, 916.5p, 20 Nov 2017
IG Group Holdings7572,78316.34.340.7Hold, 621p, 20 Jul 2017
Intermediate Capital Gp.1,1343,29124.02.559.9Buy, 1,006p, 14 Nov 2017
Investec5393,61012.94.4-5.0Hold, 503.5p, 17 Nov 2017
IP Group1351,427NA0.0-22.6Hold, 137.7p, 20 Jul 2017
London Stock Ex.Group3,68912,79129.51.225.2Hold, 3,738p, 02 Nov 2017
Nex Group6142,33217.36.319.6Hold, 583.5p, 20 Nov 2017
Provident Financial6991,0363.919.3-75.4Sell, 670p, 17 Jan 2018
Saga1211,3598.67.3-36.5Hold, 136p, 06 Dec 2017
Sanne Group7451,05442.31.422.4Hold, 778p, 11 Sep 2017
TP Icap2531,314NA0.0NABuy, 488p, 07 Nov 2017