Interest rates supercharge AJ Bell

In some ways the investment platforms were the double winners from the financial repression that investors have seen since 2010. On the one hand, more investors started 'do-it-yourself' investment accounts at the point when low interest rates left equities as one of the few ways to earn a decent income on invested cash. On the other hand, rising interest rates and more investors liquidating into cash meant that AJ Bell (AJB) made a killing in the half on the money it earns from unused account balances.

For example, in these results, during which the average Bank of England base rate rose from 2.25 to 4.25 per cent, the company’s recurring ad valorem revenue surged by 78 per cent to £75.4mn – which would not have been possible based on the volume of fund inflows, alone. The change in the mix of fees was noticeable, with the 29 per cent reduction in transaction fees to £12.9mn – which the company earns from individual share transactions – pointing to lower investor confidence in equities and the market more generally. Still, the revenue for the half increased by 50 per cent to 29 basis points, with rising interest rates being main factor behind this.

Overall, assets under administration ended the half at £73.8bn (2022: £74.1bn) with the slight reduction down to lower inflows for the platform business of £4.4bn – where investor belt-tightening and better cash interest deals clearly had an impact. The scale of AJ Bell’s interest income is all the more impressive if you consider that the company did not try and hold back from capital investment, or keep its administration expenses nailed down. Partly caused by the effects on inflation on staff costs, these surged by 26 per cent to £62mn, as the company spent more on distribution and technology and signalled that its higher rate of investment in the business would continue this year. This also reflects AJ Bell’s very rapid cash flow conversion cycle which allows higher capital spending without generally straining the balance sheet.

Management’s own outlook sounded cautious, with the expectation that margins will compress slightly as we move through the year and into 2024. The company expects that investors will move unused account balances to take advantage of rising rates – a trend that all balance holders in the finance sector are experiencing.

AJ Bell’s shares have fallen back slightly after a reasonable 12-month run and are now rated at forward consensus price/earnings ratio of 19 for 2024. With the outlook moderating, that does not yet suggest value. Hold.

Last IC View: Hold, 368p, 1 Dec 2022