Rising rates on cash boost profits at Hargreaves

A quick glance at Hargreaves Lansdown’s (HL.) interim results reveals an excellent six months of trading. Revenue increased by a fifth to £350mn, while profit before tax leapt by 31 per cent to £198mn. 

It is important to locate where the growth is coming from, though. Retail investors don’t like turbulence, and Hargeaves said confidence hit a record low in the period. As a result, customers increased cash levels in their investment accounts.

With interest rates on the rise, this was good news for Hargreaves. Revenue on cash, which refers to net interest earned on cash held in investment accounts, rocketed from £11.3mn to £121.6mn year on year.

By contrast, revenue on funds decreased by 11 per cent to £118mn and revenue on shares decreased by 31 per cent to £70.2mn, which “was at the low end” of the expected range. Total deal volumes (including automated deals such as dividend reinvestment) decreased by a quarter to 4mn.

In the short term, this isn’t a problem – Hargreaves is making good returns from nervous customers holding cash in investment accounts. However, recently there has been a surge of money into low-margin savings products, which could threaten profitability in the longer term (£1.7bn flowed into the group’s Active Savings service between July and December, which accounted for almost all the group’s net new business).

Then there’s the customer base. While client numbers did edge up in the period, growth has slowed significantly. Meanwhile, total assets under administration have fallen by 10 per cent year on year to £127bn. This trend may well reverse as economic conditions become less volatile, by which time Hargreaves should have plenty of cash assets on its platform. For now, though, we remain cautious. Hold. 

Last IC View: Hold, 873p, 5 Aug 2022