IG Group Holdings PLC

LSE:IGG

Earnings Call Transcript 2020-Q4

[June Yee Felix, CEO & Executive Director]

Good morning. A warm welcome to our FY 2020 results presentation. Unfortunately, COVID-19 means we can't meet you all today, but we appreciate you joining us remotely and look forward to answering all your questions. I'm June Felix, CEO; and with me is Charlie Rozes, our new CFO, who has just started at IG last month. Charlie is one of a number of senior appointments with global expertise that we've hired this year to strengthen our team. I'm delighted to welcome Charlie to his first IG results presentation, which we will deliver together today. This is the first time we have shown our results in our new Group brand, which we launched in June. We're also joined by Bridget Messer, IG's Chief Commercial Officer; and Jon Noble, IG's Chief Operating Officer. I will start with my reflections on the FY '20 year before turning to the performance highlights, which show the building momentum in our growth strategy. I'll then outline our response to COVID-19, showing our business resilience and our strong focus on clients and most importantly, ensuring the safety of our people and their families. Charlie will then cover our financial performance in more depth. Finally, I'll then update on our strategic progress and outlook before giving some final thoughts. Charlie, Bridget, Jon and I will then take your questions. FY '20 marks the first year of our 3-year growth strategy outlined in May last year when we set some clear medium-term financial targets. Revenue growth in our core markets at around 3% to 5% per annum over the medium term and to increase revenues from our portfolio of Significant Opportunities by GBP 100 million to around GBP 160 million in FY '22. The team and I are focused on execution. We have demonstrated this over the past year with the business now being stronger and better positioned than ever before. From a CEO perspective, I'd like to share the following 3 key messages today around: One, our outstanding performance in FY '20 positions us well to deliver on our growth strategy and meet our medium-term strategic targets; two, our ability to respond to extreme challenges like COVID-19 shows the resilience of our people, our systems and our business model; three, our financial strength, size and global scale will allow us to deliver returns for our shareholders while also investing to become a more diversified and sustainable business over the long term. At our half year results in January, we demonstrated a growing base of new clients and strong performance in our Significant Opportunities portfolio. This momentum continued through Q3. We saw good underlying growth in Q1 to Q3, which was boosted further by our Q4 revenue, which was 86% higher than in Q3. As a result of this combined progress, we delivered in FY 2020 net trading revenue up 36%, profit before tax up 52%, basic earnings per share up 52%. And as guided, total dividend per share, 43.2p. These results provide further positive evidence of the rationale underlying our strategy to leverage our strengths in our core business and to expand growth through a diversified portfolio of Significant Opportunities. It's been a very encouraging first year in the execution of our strategy, with progress achieved against our strategic initiatives. The company has navigated through the pandemic so far, which continues to shape the way we all live our lives at this time. I'm proud of our actions as a responsible company in the fight against the impact of COVID-19. We are playing a positive role supporting the global communities we are part of and helping them build for the future. We've shown that desire to help those most affected through a combination of employee-led initiatives to support local charities around the world and through IG's GBP 5 million Brighter Future Fund. These initiatives mirror our expanding ESG agenda agreed with the wishes of our people last year. The impact of COVID-19 and related extreme market volatility demonstrates the resilience of our platform, the expertise of our people and the strength of our business model. Our model of internalizing or netting client flows and hedging the residual risk in each market remains unchanged as does our Board-approved market risk limits. These both served IG and its clients very well through this volatile period. One of our key differentiators remains that our business model is aligned with the interest of our clients. Our revenues do not benefit from clients' trading losses nor are they exposed to clients' trading profits. Our execution always favors the client. We successfully managed our risk throughout the sustained market volatility and unprecedented client activity in Q4. IG has not had a loss-making day since 2015. The robust management of our capital, funding and liquidity are anticipated to remain very strong, supported by our strong balance sheet. We implemented our comprehensive business continuity plan in response to the virus, placing the safety of our people and their families as our top priority. Our significant long-term investment in communications, technology and operations infrastructure meant that all our people, including our dealing teams, could quickly transition to working from home when the global lockdown started. This achievement is not to be underestimated. Our teams showed their agility, expertise and client focus, delivering the best possible client service around the world 24 hours a day. While remote working, in Q4, our teams also managed incredible trading volumes, record levels of new client accounts opened and large numbers of client queries because of the market backdrop. To help visualize the scale of the challenge that our teams overcame, let me share some client statistics for Q4. Account applications were 181% higher than Q3. Client interactions were 100% higher than Q3. Client payment transactions were 85% higher than Q3. March was our biggest month ever. April was our second biggest. As you can see from the chart, previous spikes of daily client trading around the 2016 U.S. presidential election and the 2018 cryptocurrency boom were, in relative terms, briefer spikes of intense activity. The huge spike of daily client trading seen in Q4 dwarfed towards those periods, and it was sustained throughout the quarter. The sheer quantum of these trading volumes and applications shows why we continue to invest in our technology and operations infrastructure to deliver the scalability and resilience in keeping with our growth opportunities. This will help ensure we continue to deliver to our clients the best possible trading experience now and in the years to come. Charlie will provide more color shortly around cost guidance for FY '21. Our Q4 revenue performance reflects the increase in client activity from both existing and new clients. Here's further evidence of our strong performance in Q4, a GBP 259.5 million record revenue, 86% higher than Q3. Nearly 200,000 unique clients trading, up 39% on Q3. Over 51,000 new clients onboarded, up 204% on Q3. Nearly GBP 2 billion of client money balance at the end of the year, up 31% on the end of Q3. The size and quality of our client base has always been one of IG's key strengths, so let's focus on the clients acquired in the final quarter. 53% of the FY '20 new clients were onboarded in Q4, 35,300 new OTC leveraged clients, 17,900 new stock trading clients. As you can see from the chart, our core markets benefited most from the step-up in client acquisition during Q4. Our investments in brand marketing and search engine optimization enabled us to capture the Q4 client demand in a very cost-efficient manner. As always, we applied our strict onboarding standards for all of our new clients based on wealth hurdles and appropriateness tests. We remain very targeted and selective about the new clients we bring on to our platform. Unsurprisingly, given the rigorous nature of our client selection, the demographics of these new clients are encouragingly very similar to our existing client base. It's too early to say what portion of these new clients might over time behave like our current clients. The attrition rate is slightly higher than historic client cohorts, which is not unexpected given the extraordinary levels of volatility. We will monitor this new cohort of clients over the coming months to see how they trade under more normalized circumstances. We'll be working to retain as many of them as possible. Given our strong client focus and the longevity of our client relationships, we are confident that this Q4 client cohort will add to the size and quality of our client base over the longer term. I'll now hand over to Charlie to take you through our financial performance, which underpins my confidence in the prospects for our business.

[Charles Arthur Rozes, CFO & Executive Director]

Thank you, June, and good morning, everyone. I joined IG on June 1, and I'm delighted to have joined the company and, of course, to be here today presenting a record set of results. I had hoped to meet some of you in person this morning but look forward to doing that as soon as possible. I'm now going to take you through our financial results for FY '20 and the financial position at the end of the year. This slide summarizes the overall components of IG's record performance in FY '20. As reported in our pre-close announcement on June 4, net trading revenue was GBP 649 million, which was 36% higher than in FY '19 following the period of heightened market volatility that we experienced in Q4. Total operating costs increased by GBP 69 million or 24% year-on-year. This increase, which I'll discuss in more detail shortly, includes 3 key elements: First, a GBP 35 million increase in spend on prospect acquisition, development of the new brand and accelerating growth in the significant opportunities. Of this increase, about half was focused specifically on the Significant Opportunities portfolio, including the relaunch of the Japan brand and the launch of Spectrum. Second, an increase in certain revenue-related expenses arising as a consequence of the very high volumes in Q4. And third, an increase in variable remuneration due to a higher level of headcount and outperformance of the group against its internal targets. We realized a small gain on the sale of some domain name assets that had previously been written off in full. The tax charge for the year was GBP 55.5 million, resulting in an effective tax rate of 18.8%. Profit for the year of GBP 240.4 million represented a 52% increase on the prior year and equated to a basic earnings per share of 65.3p. As previously indicated, we've maintained the dividend at 43.2p per share with a 1.5x cover, which is encouraging to see. Turning now to the detail of our revenue performance. Revenue increased significantly across all markets and products in FY '20. Revenue in our core markets increased 29%, largely driven by growth in OTC leveraged revenue across all geographies and also including good growth in our stock trading and investments business. Within the Significant Opportunities portfolio, we added GBP 50 million of revenue, which is an 85% increase on the prior year. This revenue performance was boosted by the Q4 trading conditions. I would estimate that approximately GBP 15 million to GBP 20 million of the GBP 50 million increase was attributable to the heightened Q4 volatility. Taking that to one side, we nonetheless generated growth in line with our FY '22 goals. And as a reminder, our medium-term target is to grow the revenue from this portfolio by around GBP 100 million by the end of FY '22. Across the core markets and Significant Opportunities, OTC leveraged products continue to generate the majority of the group's revenue and represented 95% of total revenue in FY '20. This slide shows our OTC leveraged revenue bridge, which analyzes the drivers of revenue over the last 2 financial years. Working from the left-hand side, the step-down in revenue from FY '18 to FY '19 is made up of 2 key factors: First, a degree of normalization in trading activity following the elevated levels of interest in cryptocurrencies in 2018; and second, the impact of the ESMA product intervention measures, which came into force in August 2018. Meanwhile, net client attrition during the FY '18 to FY '19 period was offset by revenue from new clients onboarded. In FY '20, however, we saw an increase in trading activity from existing clients, contributing an additional GBP 68 million of revenue, a lower level of net client attrition and additional revenue of GBP 125 million or 20% of the total OTC leveraged revenue generated by new clients. This represented 71,000 first trades, with over half of those in Q4. This is undoubtedly a strong full year performance delivered in exceptional circumstances. But in order to understand the underlying performance of the business overall, I now want to focus on the period prior to Q4. Staying with OTC leveraged revenue, as this is the bellwether for the group as a whole, this slide shows the revenue and number of active clients during the first 3 quarters of FY '20 compared with the same Q1 to Q3 period in FY '19. As we've said before, we believe that sustainably increasing the number of active clients is the key to long-term growth. And prior to Q4, both OTC leveraged revenue and active clients were already up across the group at 9% and 11%, respectively. In our core markets, revenue was up 3% in Q1 to Q3 FY '20 compared with the same period in FY '19, which is in line with our medium-term growth targets. Within core markets, we're also encouraged by the performance in the ESMA region, where revenue and average client numbers only reduced slightly against a tough FY '19 comparable. Remember that Q1 of FY '19 contained 2 months of trading prior to the ESMA product interventions in August that financial year. For this segment, which I've shown in Appendix 1, if we compare the first 3 quarters of FY '20 to the Q2 to Q4 period of FY '19, which represents the period after the leverage restrictions were imposed, ESMA revenue actually increased by 8%, and active clients were up by 7% on a more like-for-like basis. The retail client base in ESMA saw a particularly strong recovery during the period as the region returned to growth. The OTC leveraged core markets in other regions also performed well, with revenue up 10% and active clients up 7%. In the Significant Opportunities portfolio, again, even before the boost from Q4, we made very good progress, increasing revenue by 72% and more than doubled the number of active clients. Hopefully, this demonstrates for you the underlying momentum across the business, which we believe reflects improved year-over-year performance set against a more normalized trading environment and puts us on track to deliver against our medium-term financial target. Moving on to the cost base. Operating expenses, excluding variable remuneration, were up 19% in the year or GBP 49 million, the components of which are set out on this slide. This comprised GBP 35 million of underlying cost growth and a further GBP 14 million from 2 other drivers in the year. Our investment in prospect acquisition grew by around GBP 15 million to support the launch of new initiatives and enhance our local brand presence. Sales and client management costs increased by GBP 6 million due to the additional headcount for the group's strategic growth initiatives as well as higher volumes of card payment transactions in Q4. The implementation of IFRS 16 during the year changes the accounting presentation of our operating leases. As a result, we show a reduction in premises costs. However, this is offset by a corresponding increase in depreciation and amortization. We saw an increase in regulatory fees mainly here in the U.K., and the remaining cost increases across the group's expense base largely reflected inflation. In addition to the underlying cost growth, we also saw an increase of GBP 9 million in the provision for bad debts relating to client activity in Q4 and the GBP 5 million charitable donation that June previously described. Looking ahead now for FY '21, we expect the underlying cost base to grow overall by around 3% as a result of inflationary type increases. But we will also make an investment of around GBP 10 million to support the next stage of development of the Significant Opportunities portfolio and to also further enhance resilience and scalability in our global technology and operations infrastructure. Also looking ahead, for variable remuneration in FY '21, at this time, I'd suggest you look at a midpoint between the variable remuneration paid in FY '19 and FY '20. And coming to my last slide, June described earlier the differentiators of our business model. We began the year in a strong financial position with excellent liquidity. This allowed us to continue to support our clients' trading throughout a period of unprecedented volatility in the financial markets without us taking on additional risk. At the end of the financial year, we further enhanced the strength of our financial position. IG's business model is highly cash-generative, and we increased our own funds by over GBP 110 million to GBP 832.5 million at the period end. In addition, available liquidity increased by almost GBP 130 million to over GBP 500 million. And lastly, our regulatory capital headroom increased to over GBP 270 million. Despite the ongoing uncertainty and pressures in many financial markets, the fundamental financial strength of IG served us very well over the past year and leaves us very well positioned for the year ahead, and this is one of several reasons why clients choose IG. Thank you. I'll now hand back over to June to take you through our strategic update.

[June Yee Felix, CEO & Executive Director]

Thanks, Charlie. I'll take you through our strategic update covering 3 things: one, our core markets; two, our portfolio of Significant Opportunities; and three, our full year 2021 outlook. In our strategy update last year, we defined our core as our largest established markets, where we already had a prominent presence and a significant share in OTC leveraged trading. Our medium-term target for our core is to achieve an annual growth rate of around 3% to 5% over the medium term. The strength of our core provides the foundation to continue IG's evolution as a broader, more diversified and global platform. This is shown by our core markets delivering underlying revenue and client growth prior to the sharp revenue increase from extraordinary trading activity and record client acquisition in Q4. This provides a strong start to hitting our medium-term growth targets. We've always said the longevity of our client relationships is a very important factor. In FY '20, 55% of our OTC leveraged revenue was generated from clients who have been with IG for over 3 years. Our existing clients were extremely active in their trading during the heightened market volatility in Q4. We've improved our stock trading offering in selected markets, refreshing the pricing to be more attractive to the active stock trader. This improved offering has delivered rapid early results with a growth in both clients and revenue. We believe that stock trading adds to the already compelling client proposition that IG delivers to its clients, offering them the opportunity to deepen their relationship with IG by taking additional products and services. Looking across the core markets, in Q1 to Q3, there was a consistent increase in both revenue and active clients wanting to trade. In the ESMA region, there was a significant recovery in the retail client base, with revenue up 26%, driven by an 8% increase in the number of active clients. This result shows that having navigated the ESMA product intervention, there's still demand for our product post-ESMA, and we are back to growth. In EMEA, excluding the European Union, there was a 14% growth in revenue and a 6% growth in active clients. In Australia, there was a 10% increase in revenue and an 8% growth in active clients. In Singapore, there was an 8% increase in revenue and a 7% growth in active clients. As we've always said, it's the size and quality of our client base that drives long-term value. We have demonstrated in our core markets that we can navigate regulatory change because we put the client first and we work closely with regulators. We can also grow our client base when market conditions are favorable. Let's now turn to our Significant Opportunities portfolio. In May 2019, we targeted an increase in revenues from our portfolio of Significant Opportunities by GBP 100 million to around GBP 160 million by the end of FY '22. We've applied 4 growth levers to drive progress and to achieve strategic and financial targets: One, expanded distribution channels. We are creating corporate partnerships that accelerate and expand our market penetration. Two, a global firm with more local focus. We are broadening our global network, developing products and marketing to better meet local needs. Three, segmented target markets. We're continuing to customize our offering for our 3 key client segments, professional, retail and institutional, to ensure it meets their needs. Four, multi-product. Product innovation is ingrained into IG's 46-year history, and we're continuing to expand our unique multi-product range. As always, we will continue to engage with regulators in all markets as we design and launch new products. By deploying all 4 growth levers, our Significant Opportunities portfolio is on track. Our Significant Opportunities portfolio consists of growth initiatives to expand and diversify our business. As we've said before, they are at different stages of development and execution. We remain very excited by the growth and momentum that has been achieved in FY '20. Our portfolio of Significant Opportunities was already making strong progress towards hitting our FY '22 revenue targets in Q1 to Q3 before the boost provided by the high client trading activity seen in Q4. The Japanese market offers IG huge growth potential with a retail FX revenue pool of around GBP 1 billion and over 2 million traders. We've introduced new localized and innovative products. We've invested in our marketing through an extensive brand campaign and as you will remember, our use of a local brand ambassador. IG in Japan saw a 90% growth in active clients in Q1 to Q3 versus a year ago. We're advancing discussions with potential corporate partners. In Emerging Markets, across places where we do not have a physical presence, our brand and reputation positions us as an innovative and high-quality firm. IG is benefiting from increasing wealth, financial sophistication and digital confidence, which is driving growth. In FY '20, IG launched a new client-facing subsidiary, IG International. We saw this business grow its active client base by 37% as more clients found IG through self-directed search. In Greater China, the size of the market continues to present a real growth opportunity for our business. We continue to explore opportunities and are closely monitoring developments in the Greater China area. Hong Kong today has around 500,000 professional investors and a GBP 1 billion market in products similar to those we offer in other parts of the world. Our CEO for Greater China has further strengthened her local leadership team. We are advancing discussions with corporate partners to potentially serve the professional investor market in the region. In the U.S., we have steadily integrated our 3 businesses over the last 12 months, IG US, DailyFx and Nadex, under new leadership. We offer a compelling proposition for the 110,000 FX traders. IG's OTC FX business has continued to add new clients throughout the year, with the rate of acquisition increasing in Q4 FY '20. Our DailyFX website reached over 27 million unique global visitors in 2020, a 71% increase year-on-year. It has proven to be an important acquisition channel for IG in the U.S. and globally. Our Institutional business targets the underserved 8,000 smaller hedge funds and family office clients. We launched IG Prime in March 2020 to provide these clients access to our broad range of highly competitive synthetic trading products and superior client service. The addition of new dedicated salespeople has resulted in a strong increase in our Institutional client base. We will broaden IG Prime's client offering with additional product capability. Spectrum, IG's pan-European multilateral trading facility, was launched in October 2019. We believe Spectrum can take a meaningful share of the GBP 1 billion Exchange Traded Derivatives market in the European Union. In the last 8 months of FY '20, 150 million securitized derivatives contracts have been traded on Spectrum. I'm pleased to update you that as of earlier this week, we have now reached 200 million contracts. Discussions are ongoing with a number of Tier 1 European banks who have expressed a firm interest in issuing additional products on Spectrum. We are integrating an additional broker on Spectrum, which will expand our reach in Europe. It's been just over 12 months since the launch of our new strategy. I am delighted with the excellent progress we have made across our Significant Opportunities portfolio. As we consider the outlook for FY '21, we see a number of important considerations for the journey ahead. We anticipate a reversion to more normalized levels of volatility in FY '21. Current trading has continued to reflect elevated levels of volatility, but this has moderated versus the peak seen in March. Our capital funding and liquidity remain very strong. As Charlie discussed, we expect to invest an additional GBP 10 million to support in the development of our Significant Opportunities portfolio and to further enhance resilience and scalability of our technology and operations infrastructure. I remain very optimistic about our future and excited about the strategic progress we've made to date. We have demonstrated underlying growth in our core independent of market volatility even before the exceptional performance delivered in Q4. We've driven progress across our Significant Opportunity portfolio. We've shown today clear evidence we can and will deliver sustainable growth, a more diversified global business and attractive shareholder returns. In summary, it's been a successful first year in our 3-year growth strategy. We conclude FY '20 well on track to achieve our medium-term growth targets. We are confident in achieving the goals we have set. In closing, I want to emphasize 3 key factors that give me confidence in our growth ambition: One, IG has always been client-focused, which has delivered exceptionally high client loyalty. Our clients make our business. We have continually evolved and developed around our clients' needs through innovation, offering new products and services. Our strategy builds on these existing strengths. Two, our robust risk management, differentiated business model and our strategy have withstood many challenges, including COVID-19 and ESMA product intervention in FY '19. This demonstrates strong resilience and an ability to navigate challenges, rebound and grow. Three, our financial strength, as detailed by Charlie earlier, shows that we have the wherewithal to invest for growth and at the same time, deliver attractive shareholder returns. We enter FY '21 as a business with a clear strategy, real momentum, improved capabilities and a proven ability to successfully execute. Thank you for your time, and we are happy to take your questions now.

[Operator]

[Operator Instructions] Your first telephone question today is from Richard Taylor from Barclays.

[Richard Michael Taylor, Analyst]

It was a quick question for Charlie, please. Very keen to hear your early thoughts and observations of the business, Charlie, strengths, areas of improvement and an overall view of the cost base.

[Charles Arthur Rozes, CFO & Executive Director]

Sure. Thanks for that. It's only been a couple of weeks since I've arrived. I guess I would normally have said I'd be getting my feet under the desk, but there hasn't been a desk to get my feet under, thanks to lockdown. So that's been interesting. But I think it's early days, but I think it's all very good. I like what I see. I mean let me help by just telling you kind of why I joined IG maybe in the first place. I mean as I looked at the company, I saw one that simply has outstanding leadership and absolutely terrific people. I think the real culture of innovation, a solid Board of directors, great brand, great clients, terrific risk management. So I mean, for me, looking at it, it was, frankly, outstanding in every respect. And since I've been here over the last just these few weeks, all of that has held up. So I feel quite good. I think in terms of costs, I mean, for me -- and this is just maybe some of my personal philosophies. I think it is a fundamental, and it is something that is largely within our control. I suppose in some ways, I view it similar to capital, and that's a question of how best to deploy it and where to deploy those cost resources across the company and with all the opportunities that we have. Most costs, I think, are really client-driven. They're in response to things clients ask us to do, and we should look to be as efficient as we can with those. And of course, we have overheads like any company does. And those 2, I think we should watch quite carefully. We have the reality, of course, in the business that we're in that revenues will move -- could move around quickly and oftentimes move around faster than costs. But we'll take a view on revenue over time and try to keep the cost base within that. So I hope that helps.

[Operator]

Next question is from the line of Ben Bathurst from RBC CM.

[Benjamin Edward Bathurst, Research Analyst]

I've got a couple of questions. First one, just on costs. You mentioned, Charlie, investment to support growth. I just wondered, to what extent should we sort of see the guided increase in 2021 operating expenses as linked to maximizing the opportunity that's being presented by the new client cohort that's been attracted in Q4? Or maybe to put that another way, do you think you'd still be guiding to 3% expense growth next year if those -- that sort of bumper crop of new clients wasn't there? And then just secondly, on the GBP 10 million investment for Significant Ops for FY '21, is that a one-off? Or should we expect similar levels of investment each year going forward from here?

[Charles Arthur Rozes, CFO & Executive Director]

Thanks for that. In terms of costs in supporting growth, I mean, again, as I am getting to grips with the cost base of the company, as I look across it, that underlying rate, increasing that by around 3%, I think that's something that we would see just generally going forward. I think we would see that, frankly, with or without a so-called Q4 client cohort. In terms of the incremental GBP 10 million that we'll spend, I think remember that, that actually is 2 things. I mean some of it is the planned spend on Significant Opportunities. So that was something that we had intended to do already. And then there's also expense in there for improving the platform. We think we have a terrific platform. It's great in many ways, and we're going to look to make it even better. So some of that spend in there is actually specific to that, not just Significant Opportunities.

[Benjamin Edward Bathurst, Research Analyst]

Can I just clarify? Is it to be considered a recurring extra GBP 10 million that we should put in our models for every year going forward? Or is it just for FY '21?

[Charles Arthur Rozes, CFO & Executive Director]

I'll just give the guidance for this year. And then as we go through the year, I'll give you updates on how we progress and how we execute for '22 and beyond.

[Operator]

[Operator Instructions] Next question is from the line of Vivek Raja from Shore Capital.

[Vivek Raja, Analyst]

I had a couple of questions, please. The first one is about capital, the next one is about income and just the last one is just to check on cost. So let me do the first one, the costs first given that's continuing the previous question. Charlie, just to check, the -- when you talk about the inflation of 3% on the underlying cost base, that's on the cost base of GBP 295 million, right, ex the GBP 5 million for charity and the bad debt. Is that right?

[Charles Arthur Rozes, CFO & Executive Director]

That's correct.

[Vivek Raja, Analyst]

Okay. Great. Next question on income. So I know last year, you provided this slide about net revenues as a proportion of your sort of gross client income. And you'd said 74% and that, that was something that was fairly stable year in, year out based on the same parameters of your business model. I just wondered if you could tell us what that ratio, 74% in 2019, what that came out in 2020? And then the last question on dividends or potential capital return. So you've got GBP 274 million of capital above regulatory requirements so it's gone up nearly GBP 100 million on the position at the end of 2019. I'm wondering what you're going to -- what your intentions with that capital are. Is it investment? Is there scope for special dividend?

[Charles Arthur Rozes, CFO & Executive Director]

Yes. So let me just start off with income. The model that we employ around this, I mean, has remained unchanged throughout the year. And frankly, I think it served us quite well. When you look at the Q1 to Q3 period, we were right in line with historical averages so I think we're quite pleased with that. I think Q4, obviously, given the extraordinary conditions, extraordinary volatility, we had that ebb off a bit. But really, I think we're happy with where we've landed there. So yes, I'm not sure I'd add anything more to that really right now. And then on cost, in terms -- well, I answered your question on cost, the inflationary piece. And then on capital, in terms of how to think about that, I mean, we choose to maintain a strong buffer around capital. And I think in uncertain times, I think that is serving us well. And I would also say that things are more uncertain than usual. Having a strong balance sheet in a market like this I think is essential, especially in the financial sector and especially now. A strong capital position like we have is actually one of the reasons why clients choose to come to IG, particularly professional and institutional clients. So it is quite important to them. I think the risk management model that we employ, I think the prudence that we've employed have served us well. And I think we'll bank that prudence, so to speak, right now and stay where we are. So I think IG has always run a conservative balance sheet and will continue to do so, but it is something that I'll monitor and watch closely as we go forward.

[Vivek Raja, Analyst]

Okay. So just to clarify, no potential for a special dividend that you're signaling today. And just following up your question on the income retention. I appreciate what you said in Q1 to Q3, very much in line with sort of historic patterns, already tracking that 74% that you've done historically. Just interested in why that's come off in Q4. Because I would would've assumed that with the spike in volumes, you get greater propensity for internalization. So presumably as a portion of overall volumes, the hedging cost goes down. So I'm surprised to see that come off in Q4. Just wondering if you could explain that.

[Charles Arthur Rozes, CFO & Executive Director]

Yes. So I think when you have conditions like you see in that quarter, it is more difficult for us to internalize, and that's really a function of the very high volatility. And you also see concentrated flow when you'll see a lot of people moving all in the same direction. I think the other thing, too, that you'll see in markets like in Q4 is you will see lower levels of liquidity, you'll see higher spreads, and then that's just naturally more expensive for us in those instances. So that's really it in terms of explaining the fourth quarter so...

[Operator]

Okay. We are now going to go take some questions from the web.

[Liz Scorer, Head of Investor Relations]

Okay. So the first web question we have is, last year, you presented a slide on revenue composition showing client losses, profits and hedging profits and losses. Can you give some insight into the figures in FY '20? That's from Jon Goslin.

[Charles Arthur Rozes, CFO & Executive Director]

Yes. Yes. I mean I think we just covered that, I mean, in terms of helping give you some insight as to our hedge activity in the fourth quarter and over the course of FY '20. So I'm not sure there's much more to add with that. I think the risk model that we employ has served us very well. It served us throughout FY '20, including the fourth quarter period so...

[Liz Scorer, Head of Investor Relations]

Thank you. And the next question is, what was the highest broker margin posted? How has unprecedented activity influenced views of own funds available for liquidity and then the ability to distribute excess capital to shareholders?

[Charles Arthur Rozes, CFO & Executive Director]

Sure. I'll take that. If you go actually into the appendix, we give the trended chart on broker margin. The all-time high that the company has seen was in FY '19. That was GBP 456 million. If I break down FY '20, again, as it says there, the peak was GBP 381 million. The average was GBP 316 million, and the year-end position was about GBP 324 million. So again, I think that's pretty clear in the appendix. In terms of -- what was the question again? Availability and ability to distribute excess capital to shareholders, yes. I mean I think we're in a very good place in terms of liquidity. I don't see what we have around broker margin as interfering with that or distracting from our ability to pay out excess capital. So I don't see one impacting the other. I don't see it as being a constraint or a binding constraint on our growth.

[Liz Scorer, Head of Investor Relations]

Thank you. The next question is from Paul McGinnis. Could you please give us some more detail on the elevated bad debt charge in Q4? For example, was it skewed to a small number of large instances or more widely spread? And if so, why?

[Charles Arthur Rozes, CFO & Executive Director]

Yes. So the bad debt charge that we saw in the year is isolated on the waterfall chart. About GBP 9 million of that I would consider to be a little bit more one-off. I wouldn't consider that to be part of underlying. That wasn't anything pointing to perhaps wider issues in the client base. I don't think our credit risk profile has really shifted year-over-year. What we did have, though, in the fourth quarter were some concentrated positions with a very small number of professional clients for which we went ahead and took some provisions for. So that's all that was. But again, it wasn't anything where, as a result of some of our Q4 activity, that we've changed the risk profile of the group. If you look at it over time, I mean, most of our bad debts tend to arise off of existing clients, not on new clients. Most new clients will be trading on limited risk products, therefore, limiting that credit risk exposure, at least in the early days of their life cycle.

[Liz Scorer, Head of Investor Relations]

Thank you. And finally, on the web, what's the latest status of your discussions with the Australian regulator? And are there any expectations around when we may hear from them on their final decisions? Asked by Rahim.

[June Yee Felix, CEO & Executive Director]

Thanks so much. Thanks, Liz. We hear from the -- we talk to the regulators on a regular basis, and we've been actively working with them to understand when that might come out. There is no indication as to the exact timing. As you can imagine, they're quite busy on broader issues at the moment. But there is a view that, that will come out in the next medium term. As soon as we hear, we will certainly make the appropriate announcements. We're very well prepared. We've actually put in place all of the same types of provisions that we did in terms of addressing ESMA, which is all the systems, the people, the programs. So very well prepared to address that and navigate that, as we did ESMA.

[Liz Scorer, Head of Investor Relations]

Thanks, June. So that's all the questions on the web.

[Operator]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to June Felix for any closing remarks. Please go ahead.

[June Yee Felix, CEO & Executive Director]

Thank you, everyone, for joining us today. It was great that you could listen to our outstanding results for the year and very much appreciate the engagement that you've had so far. Look forward to meeting some of you over the course of the next couple of days. Please reach out to us if you have any further questions. As I said at the beginning, we are very, very optimistic about everything we see. We've rebounded from changes in the market environment, addressed COVID as well as ESMA product interventions and are back to growth, and we look forward to talking to you again.