Singapore Exchange Ltd

SGX:S68

Earnings Call Transcript 2019-Q1

[Lay Chew Chng, executive]

Hi, good evening to everyone here and to those on the webcast. Thank you for taking time to attend our first quarter financial year 2019 results briefing.

As usual, I'll start off with, we have a presentation on the financial performance for the quarter. Boon Chye, our CEO, will then present a business update.

I'm pleased to report that SGX has reported a creditable financial performance for the first quarter. Top line revenue increased by 2% to $209 million year-on-year, and net profit at $91 million was comparable to the same quarter a year ago.

This past quarter was characterized by escalating trade tensions, rising U.S. interest rates, concerns about the potential slowdown in the economic growth. All of these led to higher volatility in Asian equity and FX markets.

Against this environment, our Derivative business recorded strong growth in volumes. Volumes increased 17% to 54 million contracts. Total traded securities' traded value declined 8% to $68 billion. This follows a pullback in our securities market amid general weakness in emerging markets.

Expenses was up 4% to $102 million. Earnings per share at $0.085 for the quarter, and the board has declared an interim dividend of $0.075 per share, an increase of $0.025 from a year ago.

This slide shows the quarterly trend for revenue, expenses, operating profit and the net profit for the past 5 quarters. In the previous slide, I highlighted the variances compared to a year ago. I'll now talk a little bit about the quarter-on-quarter movements.

Revenue declined by $4 million or 2% to $209 million. Our Derivative business grew revenue by $12 million or 14% quarter-on-quarter. This was partly offset by lower revenues from the Equities and Fixed Income business. Market Data and Connectivity revenue was comparable quarter-on-quarter. Expenses declined by 11% from $115 million to $102 million this quarter.

The fourth quarter typically has seasonally higher expenses, and the first quarter has really seen reductions in staff costs, technology expenses, professional fees and other discretionary costs. Operating profit increased 8% quarter-on-quarter to $106 million, and net profit grew 9% to $91 million.

This waterfall chart shows the quarterly revenue movement on a year-on-year basis. Boon Chye will review each of our 3 main businesses in more detail later on.

As mentioned earlier, our top line revenue was up 2% to $209 million. Derivative business earned a record revenue of $98 million, 21% higher than a year ago. I mentioned earlier that total traded volumes of derivative contracts had risen 17%. The blended average fee per contract was lower. That was mainly due to a change in the mix of derivative contracts traded.

Increased demand from our clients for risk management solutions has led to a higher open interest and collateral margin balances. This together with rising rates, have resulted in higher collateral management income.

Derivatives now accounts for 47% of total revenues, up from 39% a year ago. Our Equities and Fixed Income business earned revenues of $86 million, a decrease of 13%, and accounted for 41% of our total revenues.

Let me go through the 3 main business lines within the Equity and Fixed Income business. The first is Issuer Services, the revenues declined $3 million. There were fewer new bond listings on our exchange, and there was a decline in equity listing fees as well as corporate action revenue. Securities Trading and Clearing revenue, that decreased by 8% to $47 million. It's in line with the decline in the SDAV and the total traded value. Average clearing fee was just marginally lower at 2.66 basis points.

Post Trade Services revenue declined by 24% to $20 million. There are 3 main business reasons for this. The first is that contract processing revenue has ceased now that all the brokers have migrated to their own post-trade systems. I mean, we had mentioned this before in previous results briefings. Secondly, there was a decline in the subsequent settlement fee revenues as volumes fell, broadly in line with the decline in our SDAV and total traded volumes.

Thirdly, we have a DVP guarantee fees, and we have repriced these downwards starting from April of this year. So all of these 3 reasons have contributed to the decline in Post Trade Services revenue.

Our Market Data and Connectivity business, that accounts for 12% of our total revenues. That registered a 2% increase in revenues to $25 million.

This next slide talks about our expenses. I mentioned earlier, it increased by 4% to $102 million. This was largely due to higher staff costs, technology expenses and professional fees. With a 4% increase, we continue to be disciplined in terms of our expenditure.

Total staff cost had increased by 4%, and that's made up of 2 components. Fixed staff cost increased by 11%, mainly due to our annual salary increment as well as an increase in our headcount. Our headcount now stands, in terms of average for the quarter, at 815. That's an increase of 25 from the same quarter a year ago.

Technology expenses is up marginally by 3% to $31 million. As we implement new systems, the cost of depreciation and the systems maintenance has added to the expense line. However, all of these new systems have been implemented, a part of our investments towards growing our businesses as well as pursuing our multi-asset strategy.

Processing and royalties, that declined 10% to $11 million. Two reasons. One, we had given out less cash incentives in our businesses as well as the cessation of contract processing has allowed us to reduce some of our processing costs.

Lastly, I just want to mention that professional fees increased by $1 million to $3 million, and that's due to higher consultancy and legal fees to support some of our corporate initiatives.

This is my final slide. It shows the trend of our key performance indicators for the past 5 quarters. Operating profit margin at 51%, ROE at 39%, both are up quarter-on-quarter. And as I mentioned earlier, the directors has declared a dividend of $0.075 per share for the quarter.

That's all I have for now. Thank you. I now pass it to Boon Chye.

[Boon Chye Loh, executive]

Thank you, Chng, and a very good evening, everyone, for joining us for this briefing and for those on the webcast.

Our first quarter FY '19 results demonstrate the strength of our multi-asset strategy. The heightened volatility, coupled with the emerging market weakness, was reflected in a very strong derivatives market performance and a comparable securities market performance with the region.

The Derivatives revenue, as you heard from Chng, reached a record high of $98 million, a 21% increase year-over-year. Our Derivatives business was also recognized for the product innovation and providing investor access to the Asia markets. For that, for the quarter, we were given 4 awards: Derivatives Exchange of the Year, Exchange of the Year, Asia Pac Derivatives Exchange of the Year, and the Asia's Best FX Exchange and Clearinghouse. And for that particular award, it was really for the introduction of the FlexC FX Future, which we launched in August of this year that will provide OTC participants in the FX market the ability to customize expiry dates and yet have the ability to send that to the exchange for clearing.

Market Data and Connectivity continues to be a solid contributor with steady growth. While the Equities and Fixed Income business saw a 13% decline in revenue, we will continue with our efforts to deepen the securities market through product launches and collaborations with global partners.

So let me now give you the segmental business highlights amongst the 3 businesses. So starting off with the Equities and Fixed Income, in Issuer Services.

There were 6 equity listing comparable year-over-year. Funds raised was lower. If you recall, in the first quarter a year ago, we had the listing of the NetLink NBN Trust. The listing -- our pipeline for listings remained healthy with interest from local and international companies across the key sectors of real estate, health care, mineral, oil and gas, and also the technology sector. We're continuing to widen our partnerships and networks in order to strengthen the capital markets ecosystem. And in that, we will provide various pathways for companies seeking funding for growth. So for example, we partner up with Third500. This is the Singapore-based affiliate of U.S. investment bank, Healthios Capital Markets. This will help U.S. late-stage venture-backed companies tap the capital markets in Asia.

In the fixed income listing, a total of 247 bond listings. We maintained our position as the leading international bond listing venue in Asia. We have close to 40% market share for listed G3 Asia bonds, and more than 80% of the listed bonds are by foreign issuer.

We also welcome Asia's first infrastructure project finance securitization note. It was listed on the exchange. This actually widened institutional investor access to infrastructure debt in Asia Pacific and the Middle East.

In Securities Trading and Clearing, SDAV declined 8%. That's amidst the volatile emerging markets and global markets condition. We saw, however, a boost in higher trading in the other products category. In particular, the total value traded in the category increased by 12% year-over-year, close to almost $6.5 billion. And that's due to the strong performance of daily leverage certificate. If you recall, we launched that in July of 2017. And since its launch, we have seen a traded value of, cumulatively, $3.5 billion. And to add to that, in the coming months, we will be launching a product suite on DLCs based on underlying component stocks of Singapore and Hong Kong. This will be on single stocks DLC.

Also, for the quarter, we listed the Sing dollar investment-grade corporate bond ETF by Nikko Asset Management, the first ETFs that really offers investor easy access to a basket of Sing dollar-denominated investment-grade corporate bonds in affordable units.

Since its launch in August, it has garnered close to SGD 300 million of AUM. We continue to engage retail investors in collaboration with industry partners. So we partnered up with DBS to launch a 3-year program, FLY, F-L-Y, with DBS and SGX. FLY stands for Financial Literacy for You. And this will equip DBS depositors with knowledge and resources to get started in investing. Also, launched and organized an inaugural SGX ETF fair to build awareness in the ETF market.

In the Post Trade Services, you heard from Chng, lower revenue largely due to a decline in the securities settlement revenue, which is in line with the decline in market activity. However, we are now geared to explore new revenue opportunities for our Post Trade business going forward. That's because Phase 2 of the post-trade system will be launched at the end of this year. The new or Phase 2 Post Trade offers greater settlement efficiency. And it will position the CDP to provide new and enhanced services for brokers and investors.

In particular, we'd be offering broker-linked balances that will allow brokers to see holdings of their clients and allow them to customize individual services for their clients. We will also enhance the securities borrowing and lending program. And we'll also have FX conversion services for investors to receive payments of dividends in various currency. Clearly, that will encourage electronic payments and reduce FX conversion and transfer costs for investors.

The second business line, in Derivatives, let me start off with the overall Derivatives business. So on the back of a higher volatility in Asian equity and FX markets, record revenues there, $98 million, up 21% year-over-year. The listed equity index derivatives saw volume up by 21%. And in FX, the year-on-year increase in volume was up 75% to 5 million contracts.

And also, we launched the MSCI net total return product suite slightly over a year ago, and that's beginning to gain traction through active marketing that is attracting global investors into this product suite. And the total notional open interest grew from a very low base to now over USD 20 billion within the past year. And we'll continue our efforts in marketing, and we'll open a New York and San Francisco office in the next month.

So increasing volatility will drive volumes in our existing derivatives products. Coupled with growing MSCI NTR product adoption and new product launches, these will all translate into higher collateral balances. Assuming current market condition persists, we could see our net profits in the Derivatives business increase by at least double digit. And clearly, we wish for the current market conditions to increase and our efforts in launching new services, greater adoption of some of our NTR suite and, obviously, our marketing effort through the various offices.

So now let me break down within the Derivatives business the equity part of the equation, equity index derivatives.

Revenue, up 18% to $48 million, with promising growth in our NTR product suite. It was higher trading volume across most of our key contracts. In particular, stronger institutional interest in Asia following its inclusion in MSCI. It is also a reflection of the importance of the China market.

And growing volatility has led to increased demand for risk management tools. So if you remember just last week, 11 and 12 of October, with a global selloff in equity markets. In those 2 days, we saw sharp spikes in trading activity. In the securities market, SDAV was up over 50%. And in the Derivatives DAV, that was up almost 100%.

In the FX business, very good growth, up 75% in volume year-over-year to now 5 million contracts. FX in the last financial year, in FY 2018, contributed to roughly about 9% of the total Derivatives revenue, and -- sorry, contributing 9% of the total Derivatives revenue in this quarter, up 5% -- from 5% in the whole of FY 2018.

I spoke briefly earlier, we have launched the FlexC FX Futures in the August. This is really to cater to the needs of the OTC clients, and this will complement our listed FX derivatives. What exactly is FlexC FX Futures? This will allow the trading days to be able to hedge the expiry of their forward contracts, and they could customize based on the fixing that they'll see in the next 100 days and send those to the clearinghouse and SGX for clearing. So you got flexibility via the OTC market, yet you get the confidence of clearing through the SGX clearinghouse.

Also, in the Commodities business, we've launched the TITAN OTC Pro. This will further entrench our Commodity business. What it does is it will allow or it provides a broker-centric workplace solutions with pre-execution check that is new in the OTC market, and it also enables straight-through processing from execution to clearing. It was launched in August with a focus on thermal coal and OTC rubber.

Over the course of the financial year, we'll be launching more asset classes, including petrochem, coking coal, iron ore and also have features on the platform to develop a conducive ecosystem for participation.

In the last business lines, Market Data and Connectivity, steady growth. Market Data revenue was comparable to last year. However, the Connectivity business continues to expand with higher derivatives API subscriptions and continued growth of colocation services business.

And we have also added presence in London to expand our Index H business and now have the ability from London to on-board clients based in Europe. Since then, we have seen the good interest, in terms of our custom index services, from banks and product issuers. This is really translating our success in Asia into now early success in Europe in terms of takeup rate.

Let me now to round off with our outlook looking ahead. We see continued market volatility. There could be further interest rate hikes. There is potentially a market better between [ the boos and the best ] on where should equity valuation be, and coupled with trade wars, heightened geopolitical risk and the possibility of emerging markets at an inflection point. All this, potentially, if they come true, could lead to demand for risk management and investment tools and also a greater adoption of hedging tools.

In that regard, we will continue to develop new products and services to meet clients' need. I mentioned DLC. For now, 10 single stocks across Singapore and Hong Kong that we will launch. In the derivatives market, you have heard our announcement that we'll now even enhance the iron ore product offering with a 65% grade from the popular 62% that's currently traded on our exchange. We will further cement our multi-asset strategy, which you saw the benefits of that in the first quarter of this financial year. Volatility did lead to some decline of the securities market. And if you look at it quarter-on-quarter, the decline in securities' daily average value was across the region and across most other markets.

However, this business benefited from the volatility, and you saw the results. And with that, as I mentioned, even in a steady growth of our Market Data and Connectivity, there was greater adoption of API subscription and also colocation services.

We are built on that. We made 2 strategic investments. One, in Trumid, which operates a corporate bond trading platform. It will allow us to broaden the -- our Bond Pro participants across the U.S. market, giving them access to U.S. bonds. And we will leverage on Trumid's participant base to access our Asian G3 platform.

Freightos, similarly, we made a strategic investment. It operates a digital marketplace in the international shipping industry. We will explore with Freightos the development of risk management tools and services, beginning with the enhancement of the Freightos Baltic container freight index.

So with that, I conclude my presentation and invite my colleagues to join me for the Q&A. Thank you very much for your attention.

[Boon Chye Loh, executive]

Any questions? Yes? Do we have a microphone? Somebody in front.

[Rikin Shah, analyst]

Rikin from Crédit Suisse. So my question is on post -- the new post-trade system. So once it is launched by the end of this year, what kind of revenue opportunity would it be able to create? Would it be able to plug the gap of, roughly, I think, $15 million, which was lost because of migration to this trade system?

[Boon Chye Loh, executive]

Well, we've seen the impact of the full $15 million. It will depend of the takeup of the new services. But I'll let Sutat elaborate on the new services that potentially are revenue opportunity.

[Sutat Chew, executive]

So whilst the new Post Trade system that will go live, we expect it December, it's largely about regulatory compliance and providing greater efficiency for the market. There are some new enhanced services that will be introduced around that period of time as well, that includes brokering balances for the retail brokers. And some of the new services that we have planned to introduce include FX services for dividends as well as it enhanced our borrowing processes. These revenues will take time to build up, so can't actually give you a guidance immediately on how much of the $15 million will exactly be replaced at a point in time.

[Boon Chye Loh, executive]

More importantly, we now have features of the new Post Trade to do that. So it just set us up to offer those services that are also important for investors into our market.

[Rikin Shah, analyst]

Sure. So not requiring any particular guidance for what kind of revenue it could generate in the next 1 year, but over a longer term, just wanted to understand what kind of potential or the potential revenues could be generated over, maybe, say, 2, 3 years once there is enough takeup?

[Sutat Chew, executive]

Clearly, from a management point of view, our interest is to look to introduce new services that will be useful for the different stakeholders and investors, and certainly not just look at replacement revenues but to grow the overall pie. And that includes growing volumes that will, of course, increase the Post Trade usage in our market.

[Rikin Shah, analyst]

And one more follow-up question, on the Derivatives. It seems like the income from the collateral management was one of the reasons why the Derivative revenues were also higher. And if I understand rightly, it was due to active management of the collaterals. So how should we think about it going forward? With the higher interest rates, is it more sustainable?

[Boon Chye Loh, executive]

Well, I think we got to start out with, first of all, higher open interest. So on our monthly stats, you see the volumes, open interest. And how do you achieve higher open interest? You really need more associated related hedging products for participants. So we introduced in July, which is why we keep talking about in every quarterly results in NTR, net total return. But more importantly, the market has also changed because, from a listed equity index derivatives, which still has good adoption, investors are also now requiring, which they had done historically, on OTC, net total return, or maybe it was even only price return. Now I can do net total return, which includes reinvestment of dividends, net of tax, and those have been OTC transactions we now have the ability to clear. And once you do that, you attract OI, which from very low base to now more than $20 billion in notional position, which translates into some collateral margin with us. And you can have your own view around where you think rates will go. But we're very focused on providing investment hedging tools, growing volume and growing open interest that will lead to increased collateral margin balances.

[Unknown Executive]

And maybe if I could add. There's a lot of information in Boon Chye's last slide, which if you just take a moment to unpack, right, if you believe that the environment we saw in the last quarter, which is dollar-high -- dollar rates higher, EM risk up and a little bit of outflow, you unpack that, there's at least 4 important factors that lead you to think that this is the natural place where a highly capitalized CCP should be. Number one, risk is up, vol is up, so margins are up, right? The amount of money you have to place to secure a trade is up. Secondly, you've got more people flying to quality because they need to manage either their longs or shorts or intraday positions. So more positions. Thirdly, the dollar is stronger, right? So that's the base collateral currency in which we operate in. And of course, the yield curve has been moving up. A year ago, 1-week LIBOR to 1-year LIBOR was maybe, I don't know, [ 1 20 ], [ 1 80 ]. Whereas where we are today, it's [ 2 20 ], [ 2 90 ]. So the curve is steepening and rates are moving up. The compound impact of all these 4 factors is where demand for our risk management services is high. And this is the sort of result that you're seeing in the last quarter.

[Boon Chye Loh, executive]

One over there.

[Unknown Analyst]

[ Brendan ] from [ Travel News Asia ]. Could I just get an update on the SGX Nifty contracts as well as the Bursa Malaysia and SGX trading link, if there are any?

[Boon Chye Loh, executive]

As previously updated, both exchanges have paused arbitration. Both exchanges are in discussion with a market consultation on what a proposed collaboration that would allow continued trading activity of the offshore market, so as not to disrupt hedging and investment needs and access into capital markets. No further update at this point in time.

[Unknown Analyst]

For the Bursa Malaysia and SGX one?

[Boon Chye Loh, executive]

Well, as you may have heard from our AGM, which we have conducted in September, similar question. The link across any market, any country for capital markets is always beneficial. Our counterpart in Bursa has expressed that this is useful and maybe this should be adopted across ASEAN, and we'll continue to work to see how we can implement that. There is no active discussion at this point in time. But we remain committed to have a trading link that could benefit market participants.

Any question from...

[Unknown Executive]

Question from York Pun, HSBC Hong Kong. Can you please shed some light on the -- on your pipeline for dual-class structure shares listings?

[Sutat Chew, executive]

So I think when we look at the IPO market, we are still very pleased that the mandates will continue to remain strong, and that includes for regular listings as well as the interest for dual-class listings, which is regional and companies that are of billion-dollar sizes. Having said that, I think what's important and we've seen across the Asian markets has been capital raising has been a little bit challenging of late because of investor appetite. So as to when the dues will come into the market, that remains to be seen. But the pipeline is strong, the mandates are there, and that includes both regular listings as well as dual-class in the key sectors that we have worked on.

[Unknown Executive]

Also, on listings, a question from Business Times. Do you see the need for further reforms to attract more listings on SGX?

[Boon Chye Loh, executive]

Maybe to -- we start off with, let's say, a quick update on the things that were done in terms of a regulation, but I don't think it's a question of more reforms. At the end of the day, you want the ability to offer issuers different pathways for fundraising, and you want to continue to work the ecosystem on investors, the retail side of the equation, too, and also working with listed companies in terms of their marketing outreach with SGX on a yearly basis, conducts about 15 of this with our listed companies. And the ability to do that collectively also draws focus onto our exchange.

Lay Chng, anything? Any other question? Okay, if not, it's a Friday evening. I appreciate all of you joining and have a good weekend. Thank you for your participation and attention. Thank you.

[Lay Chew Chng, executive]

Thank you.