Deutsche Boerse AG

XETRA:DB1

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse AG Analyst and Investor Conference Call regarding the Q1 2022 results. [Operator Instructions]

Let me now turn the floor over to Mr. Jan Strecker.

[Jan Strecker, executive]

Welcome, ladies and gentlemen, and thank you for joining us today to go through our first quarter 2022 results. With me are Theodor Weimer, Chief Executive Officer; and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you through the presentation, afterwards, we will be happy to take your questions. The presentation materials for this call has been sent out via e-mail and can also be downloaded from the Investor Relations section of our website. As usual, the conference call will be recorded and is available for replay afterwards.

With this, let me now hand over to you, Theodor.

[Theodor Weimer, executive]

Thank you, Jan. Welcome, ladies and gentlemen, from my side as well. As always, let's start today's call with a brief overview of the financial highlights and the key developments in the first quarter. Afterwards, Gregor, our CFO, will be presenting the financial results in greater detail.

In contrast to last year, our regular secular growth achievements and a contribution from M&A has been complemented by strong cyclical tailwinds. This has contributed to our net revenue growth of 24% to a record quarterly level of more than EUR 1 billion. Due to the operating leverage of our business model, the EBITDA increased by 32% during the first quarter.

Secular net revenue growth at 8% was slightly above our guidance. This was particularly driven by product innovation and financial derivatives, an increase of market share in commodities, the growing demand for ESG-related products at ISS and the continued trend towards outsourcing in the fund industry.

M&A contributed another 5% net revenue growth. This was mainly driven by the contribution of the remaining 2 months of ISS, which we started to consolidate in March last year. We also continued to implement our M&A strategy and have closed the acquisition of Kneip, a leading fund data manager in March this year. This will further strengthen our fund service business because we can now offer data management and regulatory reporting services to our existing client base.

The strong cyclical tailwinds resulted from higher volatility in almost all asset classes and accordingly, hedging needs of our clients increased significantly. This was very visible in commodities and equities, but fixed income and FX benefited as well. In total, cyclical net revenue growth amounted to 11%, which also includes the one-off effects from the [ register ] disposal and some benefits from the stronger U.S. dollar.

With a much more positive top line development compared to last year, we slightly increased the investments in growth and infrastructure. This is why on a constant currency basis, the organic operating cost increased by 5% in the quarter, but we also continued to increase productivity through our continuous improvement program. This helped offset most of the inflationary pressures.

Such a, quite frankly, strong start to the year. It is very likely from today's perspective, that we will exceed our full year guidance.

With that, let me now hand it over to you, Gregor.

[Gregor Pottmeyer, executive]

Thank you, Theodor. On Page 2, we show the first quarter results of the group in detail. While cyclically boosted net revenue, we saw a nice improvement of the operating leverage and an organic earnings growth of 30%. The result from financial investments includes around EUR 17 million from our investment in the Illuminate fintech fund. This is driven by the mark-to-market valuation of the fund, and the partial disposal of our holding of the fund. In addition, the line item includes a gain of around EUR 12 million from the sale of another stake in the U.S. derivatives exchange, FairX, to current base.

Depreciation includes a software impairment of around EUR 6 million on the buying agent services that were developed at Eurex. This is the result of the decision by the European Commission to remove the buying obligation from the CSDR regulation for an indefinite time.

The financial result includes a one-off gain of around EUR 4 million from an interest rate hedge. This is related to the senior bond we placed at the end of March. We secured an attractive interest rate level already in 2021, which reduces the effective yield of the pound to around 0.6%. The proceeds from the issue of the bond will be used to refinance the corporate bond maturing in October 2022.

On Slide 3, we give you an overview of the quarterly results in the new segment reporting structure. We have simplified our reporting structure by reducing the number of segments from 8 to 4 and applying a more product-driven approach.

The new segments are Data & Analytics, which comprises Qontigo and ISS; Trading & Clearing, which is Eurex, EEX, Xetra and 360T; Fund Services, which identical with Clearstream's Investment fund service business; and Security Services, which consists of core equity and fixed income custody and settlement business of Clearstream. We have also simplified the net revenue line items within the segments, but you still will find most details disclosed in the appendix of this presentation.

I'm now turning to the quarterly results of the segments, starting with Data & Analytics on Page 4. The segment performance was mainly driven by the continued outperformance of ISS compared to our expectations. On an organic and constant currency basis, ISS net revenue increased by around 19%. The ESG business was mainly driven by higher double-digit growth in ESG, analytics and corporate solutions. Government solutions also performed well. The index business saw a mix of tailwinds from Eurex exchange licenses and some headwinds from market valuation in ETF licenses. Analytics saw some headwinds from slightly-higher-point-in-time net revenue in the same period last year.

Let me turn to Slide 5 in the Trading & Clearing segment. The overall segment clearly benefited from higher volatility and increased hedging needs, particularly in commodities and financial derivatives. Financial derivatives were driven by equity and equity index related derivatives, with a 25% net revenue increase. Interest rate related products also performed well. They include interest rate derivatives and the OTC clearing with an overall net revenue increase of 21%.

The strongest growth rate in the segment was achieved by commodities. On the one hand, this was due to higher trading and hedging needs, especially in gas. On the other hand, the margin fees continued to increase in the quarter amounted to EUR 16 million.

Since hedging was the main driver for trading activity in the quarter, net revenue in cash equities did not grow quite as much as other parts of the segment, but still achieved a plus of 5%. Demand for our foreign exchange products, including swaps and forwards, was significantly higher compared to previous quarters and net revenue increased by 18%.

The Fund Services segment, which you can find on Page 6, continued its strong performance in the first quarter. Due to onboarding of new clients and portfolios, cyclical headwinds from market valuations in equities and bonds were overcompensated. As a result, we exceeded our organic growth target of around 10% despite cyclical headwinds.

To further complement the fund service offering, we acquired Kneip at the end of March. Kneip is a leader in fund data management and reporting solutions for the asset management industry. The acquisition is already closed and forms the basis for creating a leading fund data hub with significant cross-selling potential into our existing client base.

In addition, we announced a partnership with a global wealth management platform, FNZ, 2 weeks ago. Together, we will create a leading business intelligence solutions provider and help roll out funds distribution services into FNZ client bases in the U.K.

Our Security Services segment on Slide 7 benefited from the divestiture of REGIS-TR but also saw solid growth despite some market headwinds. The divestiture of Clearstream's 50% stakes in REGIS-TR to Iberclear resulted in a one-off proceed of around EUR 49 million, and at the same time, in a recurring decline of net revenue by around EUR 5 million per quarter. Headwinds from lower equity market valuations and the slight decline of retail participation were overcompensated by solid levels of fixed income issuance activity.

The net interest income started to develop more positively and amounted to around EUR 19 million. This is mainly because of increase in cash balances in the quarter. On April 1, we discontinued the cash handling fee on U.S. dollar balances after the first fed rate hike in March. This means that the potential further hikes will directly translate in higher net interest income. The current sensitivity is an increase of short-term interest rates by 100 basis points higher will expand the NII by around EUR 90 million on an annualized basis.

The last page of today's presentation shows our guidance for 2022 in the context of our midterm plan. Due to stronger-than-expected cyclical net revenue growth in the first quarter, we currently expect more than EUR 3.8 billion of net revenue and more than EUR 2.2 billion EBITDA. Previously, we had only committed ourselves to achieving something around these values for both KPIs.

Taking the first quarter into consideration and leaving our assumptions for the rest of the year unchanged, we would currently be looking at roughly EUR 70 million of additional net revenue for the full year. Since we are expecting the U.S. dollar to remain strong and since we continue to invest slightly more, the upside to the EBITDA guidance would be somewhat less than the EUR 70 million. But still, there are 9 months to go in the year where there could be both cyclical headwinds as well as tailwinds to the course we currently expect.

Headwind could, for instance, arise from a recession in Europe as a result of the war in Ukraine; or from a decline of volatility in volumes in the second half of the year, similar to the development in 2020. Tailwinds could arise if U.S. interest rates are increasing to 2% or more towards year-end, which is current the market expectation.

This concludes our presentation. We are now looking forward to your questions.

[Operator]

[Operator Instructions] And the first question comes from Andrew Coombs from Citi.

[Andrew Coombs, analyst]

I have just 3 questions, but perhaps I can do a very, very short one followed by the main question. The short factor one is, can you provide the AUA in Clearstream fund center or the fund distribution AUA. I couldn't see that in the appendix, so I would appreciate the figure on that.

And then the main question is just on the NII sensitivity. You talked about the revised charging in March, so now it should flow through. Previously, I think you said the 25 basis points is EUR 19 million. Does that still stand? And are there any offsets elsewhere? So for example, through the finance expense line or anywhere else that we should be aware of.

[Gregor Pottmeyer, executive]

Yes, Andrew, thanks for your question. Well the AUA fund center is roughly EUR 400 billion. With regard to the sensitivity of the NII having currently roughly some EUR 9 billion customer cash balances in U.S. dollar, so a rate increase by 1% translates into EUR 90 million. So that is the sensitivity you can take for your model.

[Andrew Coombs, analyst]

And there's no offset from any other changes in pricing or you don't have any floating rate debt issued, which is dollar sensitive? Anything on those lines?

[Gregor Pottmeyer, executive]

No, there are no compensating effects.

[Andrew Coombs, analyst]

Perfect. And just a follow-up on the first point, the 400, I think you said 400 now for the last 3 quarters. Was there no negative mark-to-market impact on that fund center AUA?

[Jan Strecker, executive]

Yes, Andrew, that's the rough number. So unfortunately, we don't have it readily available per month yet. We're working on that. So definitely, as you can see from the revenues, there was a little bit of a headwind from equity and fixed income valuations, but I think we've nicely offset this also through growth in terms of the client base and the funds that are covered.

[Operator]

Next up is Haley Tam from Credit Suisse.

[Haley Tam, analyst]

I wanted to ask about all the different components of secular growth, but I guess I will pick just one, therefore, to ask about. If I can ask you about the ESG data revenue growth, obviously, was very strong year-on-year, but has been broadly stable, I think, for the last 3 quarters. So I just wondered, can you help us understand how to think about this business? Is it like an annual subscription model that we should see the growth come through once a year? Or is there something else that's causing that stability?

[Gregor Pottmeyer, executive]

Yes, Haley, thanks for the question. So obviously, ESG is one of the key growth drivers for Deutsche Börse business. Today, it's 7% to 8% of the overall group net revenue. And it will continuously increase, obviously, over the next year. As we will see higher organic growth on that side, so in the first quarter, it was roughly 30% on a constant portfolio basis. So that's obviously higher than in the other business areas. And we expect that this trend will continue to happen in the future.

Secondly, we will continue to look for M&A in this area so that we also increase our bases here. So the secular drivers here are basically 2 components in ESG, it's our IFS business, obviously; and secondly, it's also our EEX business, what contributes a lot. So these are the 2 main drivers for this ESG cost.

[Haley Tam, analyst]

So if I can clarify, in the ISS ESG data revenue line, I think it was about EUR 50 million, EUR 51 million for the last 3 quarters. That's a stable number I should expect and really I should be looking at the EEX business for growth, is that the right interpretation?

[Gregor Pottmeyer, executive]

Yes. So if you're also focusing on the recurring element, so usually, in that kind of business in ISS, it's a recurring revenue. And so that, you should see sustainable and continued growth here.

With regard to EEX, obviously, there's also a trading component. So what we consider here is the [ green ] power, right? So what is -- and therefore, we have a clear classification. And here, we expect that this will also continue to grow on a secular basis. So today, it's more than 40% but it will increase over the next year. So there's a secular component, but definitely, there is also a current cyclical component as overall. There are also higher market volatility, but in principle, it's more a secular trend.

[Operator]

The next question comes from Arnaud Giblat from BNP Exane.

[Arnaud Giblat, analyst]

I've got a very quick follow-up and my main question, if I may. The follow-up first is cash equity yields have come off a bit this quarter versus previous quarters. I'm just wondering what's going on in the mix. Is that maybe a lower retail participation that's breaking a bit?

And my second question is with regards to the IFS and mostly the fund distribution. Do you see significant consolidation opportunities ahead? Could we envisage some larger transactions happening there? And more important, if there's any potential transaction, if there's any potential transaction into issues with the Competition Commission, I think we've been there before, but how should we think about that in terms of market definition?

[Theodor Weimer, executive]

Yes. Let me pick up the second question, the question on the consolidation on the ISS side and to be very clear and outspoken, right, there are no plans on our side to enter into any compensation gains which might arrive at the far horizon year. Because the -- there is such a strong organic growth that, a, we see no need; and b, we feel comfortable with our acquisition, which we have done right when we acquired. So let's be very clear here, we feel extremely well with what we have acquired so far.

[Jan Strecker, executive]

And on cash equity, Arnaud, it's basically the product mix. So what we've seen is a quite substantial decline actually in retail trading compared to the strong previous year and retail trading typically has a higher fee margin. So the product mix has changed, but nothing really structured.

[Operator]

The next question comes from Benjamin Goy from Deutsche Bank.

[Benjamin Goy, analyst]

Just wanted to check on your M&A firepower. Can you confirm what you're standing with the upper target? And would that mean that we should expect more, to say, meaning this EUR 200 million type acquisitions here and there? Or do you see there's more room to grow inorganically?

[Gregor Pottmeyer, executive]

Yes. Thanks, Benjamin. With regard to M&A firepower, I think you are aware that we are a strong cash flow generating business. So on a yearly basis, we roughly generate EUR 1.5 billion in cash flow. So let's say, EUR 600 million for dividends, let's say, EUR 200 million for CapEx, so it remains roughly EUR 700 million. So you can see that we generate very quickly on cash. And therefore, from a firepower, from a funding perspective, we see well positioned to do the transactions we would like to do.

From a rating perspective, we are also now back on track with regard to our debt levels. So obviously, with the strong Q1 and this year's expectation here, so we will come back to the accrete KPIs with the rating agency. So no restrictions from a firepower perspective with regard to M&A.

With regard to our M&A strategy, I think you are aware that roughly EUR 150 million are missing for our 2023 targets. So overall, we had roughly EUR 600 million, what we contributed is a 5% M&A contribution over the 4 years. Roughly EUR 450 million we have already delivered, missing EUR 150 million and that's potentially the level we definitely want to achieve. But currently, there is no big pressure. So if you find an attractive target and obviously, we will look at it and no pressure from that point of view.

[Operator]

The next question comes from Michael Werner from UBS.

[Michael Werner, analyst]

Just a question on the trading and clearing kind of the revenues per contract or the revenues per volume within equities and interest rate derivatives. We saw volumes up quite strongly in both. And surprisingly, also we did see a bit of an uptick as well in the yields on those products year-on-year. I was just wondering -- usually, we tend to see kind of the opposite, but just wondering what was going on in the mix here.

[Jan Strecker, executive]

No, Mike, at Eurex, typically, there are no significant volume rebates. So aside from market-making rebates, it's pretty much price list fees. But what we've seen and what also contributed to the secular growth in trading and clearing and Eurex is basically new product and then product innovation. So MSCI derivatives, dividend derivatives, volatility derivatives and so on, typically a higher price. So they help to bring up the RPC already for the last couple of quarters, at least modestly.

[Michael Werner, analyst]

And just perhaps a follow-up. With regards to the interest rate derivatives, in terms of the over-the-counter business, I'm just curious to hear how that progressed in the over-the-counter clearing, how that progressed in Q1.

[Jan Strecker, executive]

So the fact that we've bundled it now in interest rate derivatives doesn't mean it has not performed well. It has indeed performed extremely well. So it was the strongest quarter ever with close to EUR 19 million of net revenue.

[Operator]

The next question comes from Bruce Hamilton from Morgan Stanley.

[Bruce Hamilton, analyst]

Congratulations on the numbers. A quick one maybe on the M&A landscape. You've been quite clear, it sounds like on the IFS and your view that actually what you have there is growing very nicely, and you don't need to acquire further growth. So where is sort of the -- what are the most interesting areas as you kind of assess the landscape today? And has that changed at all? It sounds like ESG would still be a big focus, perhaps data as well. So I'm just interested in what you're seeing.

And then just to confirm on the net debt EBITDA, what you're saying is that you're now at sort of 1.75x as at the end of Q1, give or take. Just so I make sure I've understood.

[Theodor Weimer, executive]

Thank you, Bruce. From my side, let me firstly position our M&A strategy in the context of the current environment. First, you need to understand, right, if we are benefiting from strong tailwinds, then our operating model works perfectly. So our EBITDA margin goes up, right, which is probably nice for you and for us both.

On the other side, if we do M&A, there is a tendency that M&A has a negative effect on the EBITDA margin because it's very hard to find as profitable companies as we run our own company. And therefore, we run this smart balance, right, of we want to keep the high margins, but also we want to grow our business smartly forward, right?

But there is no need, no pressure from our side. We don't feel pressed in a situation like this where still, the valuations are pretty high. We don't think we should let ourselves get in a position that we feel pressed by the market or by anybody out there that we should go [ net ] towards the M&A route.

As a rule of thumb, until the year 2020, we have grown by M&A on average by 2% per year, 2%. Our target is now in the range of 5%, right? What we have started in 2020 until 2023, we want to grow by 5%. And we're actually exactly on the 5% as Gregor and I pointed out during our first part of the presentation. So we feel we are pretty well under way. There are concrete opportunities out there. We look at those and we have proven that we are in a position to do deals like we have done at Kneip.

And of course, the key areas we predominantly focused on the pre-trading and funds areas, right? That's what we have done so far, and that's what we will continue. And again, we are on a pretty good track already and we are not pressed. We are rather focused on the good opportunities to identify good opportunities. We are less constrained by the financial situation.

[Gregor Pottmeyer, executive]

And with regard to the financials, so what we agreed upon, it's like what you said. So the net debt-to-EBITDA is 1.75 as our target. And the other KPI is FFO net debt, free funds from operation, that's 50%. And so these other 2 KPIs, we agreed upon to come back at the end of the year with the rating agencies.

[Operator]

Next up is Kyle Voigt from KBW.

[Kyle Voigt, analyst]

So in Clearstream, settlement activity was down 17% year-on-year, but cash balances grew 13%. I'm wondering why you think there's such a divergence there? And does that imply that the balances may currently be slightly elevated as clients are parking cash here because they still have very few alternatives to get higher yields? And lastly, is it reasonable to assume that as rates continue to move higher, your clients may migrate some of those balances out of Clearstream for yield alternatives.

[Jan Strecker, executive]

Yes, Kyle. There's no direct immediate correlation. So indeed, the cash balances are driven by settlement but only by the ICSC settlements for the international settlement, not by the domestic ones. And therefore, the numbers might not quite match up.

What we've seen last time around, so when interest rates went down and when we introduced the cash handling fee, that balances actually went down. So question remains whether this is now a sign that balances are even structurally increasing, that needs to be seen. So apparently, clients are borrowing a little bit more about an explicit charge and not sort of an implicit cost.

So from that angle, it's a little bit early to predict, but we definitely wouldn't believe they would go down substantially. So either they remain stable driven by settlement activity or maybe they even trend slightly upwards as we have seen in March now.

[Operator]

And the next question comes from Philip Middleton from the Bank of America.

[Philip Middleton, analyst]

Yes. You booked some gains on your financial assets basically on the venture portfolio. I know there were some disposals in there, for which well done. But in general, this was a difficult quarter for venture investing. How come you -- it sounds like you've experienced positive mark-to-market. What's going on there? And how are you feeling about the next quarter or 2 in terms of valuation of these assets?

[Gregor Pottmeyer, executive]

Yes. Thanks, Philip, for the question. So obviously, to make some prediction on a quarterly basis is a little bit difficult. But what we see a continued increasing contribution out of our financial assets we invested. And so since beginning of when Theodor Weimer joined here, was one of his -- his first start to professionalize this year. And we have done very successful investments here over the last 3 years. And we see the benefits now.

And last year, we told you, but so far, over the last 3 years, you haven't seen anything in our P&L because all the gains were booked against our equity. And now we made for certain investments, we changed it specifically for the new ones because if you have made a decision that 3 years ago that you show it on a -- just in the balance sheet on an equity basis, then you can change it. So it has to be done in the first time.

And therefore, we decided now for different assets we acquired recently over the last 12 months that you see a fair valuation in our P&L. And we have single investment, where we have to make a decision. And we have also some portfolio investments. And this was the case now in Q1, it was Illuminate. So here, we do invest more in the fintech portfolio and not in a specific investment, and this is shown in our P&L.

So if they are positive, there's elements here, if there are disposals or even some ABCD, then you see this in our P&L and there are many others now where you could see potential impacts, and it really depends whether a transaction takes place, yes or no.

So for instance, our 360X business under the leadership of Carlo Kölzer, where we talk about nonfinancial assets, building platforms, market infrastructure plays based on blockchain technology. So if you would see here on transaction, here, you would also see then a P&L impact. So the general message is as we will continue to do successful investments here in that area, you will see continued positive contributions here in our P&L for that.

[Philip Middleton, analyst]

Okay. And you don't -- the overall environment still hasn't been particularly helpful. So you did well in Q1 for idiosyncratic reasons?

[Gregor Pottmeyer, executive]

No. There are obviously positive and a negative elements. And now as you have seen, Illuminate, obviously, there was a very positive element. There was another -- it was a participation, in fact, what we heard at Nodal, where current base made a transaction for very attractive pricing. And therefore, there's another USD 13 million positive impact here. So these were 2 main drivers for Q1. But over the next quarter, it could be different elements here, what will contribute. But it really depends on whether a transaction takes place, yes or no.

[Operator]

And the next question comes from Ian White from Autonomous Research.

[Ian White, analyst]

I had 1 follow-up and 1 substantial question, please. The follow-up is around, I think the final comment you made around guidance for this year. Can I just clarify, please? I heard the EUR 17 million in additional net revenue versus the previous guidance, less than that on EBITDA and assuming that U.S. rates go to 2% by year-end. Have I got that correctly, please? I just want to make sure I haven't misunderstood what you're saying there in terms of the assumptions underpinning the sort of tweak you've made to the guidance for FY '22.

And then my question really just to ask for a bit more detail on commodity trading. What are you seeing there in terms of the breadth of participation and counterparty growth in the first quarter? And could you say a bit about the challenges we're seeing in some energy markets around high collateral requirements for end users and how you see that developing over the coming quarters, please?

[Gregor Pottmeyer, executive]

Yes, so with regards to the questions, with regards to guidance. So when I mentioned the EUR 70 million, so that is the surplus we achieved in Q1 compared to our plan. So that's -- and obviously, when you -- the second comment you made, is there included a 2% fed fund rate at the end of the year? Obviously not because I talked about EUR 70 million in Q1. So if the fed rate would go up to 2%, obviously, would be abysmal upside potential if not included so far.

Your second question around the commodity business. Yes, obviously, it was another 40% net revenue increase, high market activity here in power and in gas, strong increase in pricing. And yes, indeed, there was a strong increase in our margins we asked for in our collaterals. And the good thing is that there were no surprises for the market participants. So the model work is designed and all the market participants were able to deliver the collateral.

But nevertheless, it's obviously a stressed situation at some peak times at ECC, so our clearing house for power and for gas. We had EUR 70 billion, 7-0 margin, and it's now reduced to closer to EUR 40 billion. But even the EUR 70 billion, so the market participants were able to deliver but definitely a stressed situation.

But we are in a good dialogue with also market participants. And so far, the model works. And everybody is highly interested that this market solution will also continue to happen so that you have a reasonable pricing, that you have a reasonable allocation of gas and power supply. And that's also strongly supported by our German government, but also from EU commission perspective. So that is, in principle, the target to let the market open and to have a clear price discovery process and the market-driven solution.

[Operator]

And the next question comes from Tobias Lukesch from Kepler Cheuvreux.

[Tobias Lukesch, analyst]

Two questions from my side if I may as well. I wanted some costs on one of -- your performance in the potential recessionary environment. On costs first, I mean, on the '22 development, I think you have some leeway especially compared to last year. And I was wondering now with the segments going to 4, I mean, could you give us maybe a bit of an indication how costs will develop segment-wise? Do you see 1 segment with especially stronger investment than the other one? Or are there some products where you think that this will be extended with regards to an overall view on the cost base?

And secondly, you mentioned that if we have a more troubled economy, that also Deutsche Börse, of course, would suffer. Maybe could you point out the product lines, which you have seen most at risk performing at the expected underlying levels?

[Gregor Pottmeyer, executive]

Yes, Tobias, with regards to the cost, obviously, it's good that we were able to show cost discipline in the first quarter. So it was a 5% cost growth on a constant portfolio and constant basis. I think that's a very clear signal to you and to our investors that we will continue to do prudent cost management. Obviously, the strong development in Q1 would give us some leeway. And obviously -- that's obviously good if we have that kind of leeway. But you will see also for the next 9 months, a prudent cost management from Deutsche Börse management here again.

With regards to your second question, that's a little bit of speculation, right? But nevertheless, you cannot rule out that the consequence of this Russia-Ukraine war crisis could be potentially a recession. And so there are some scenarios of, let's say, some 2% or even a little bit more reduction of GDP in Europe this year. So it's -- but it's more or less just a scenario planning. So it's not the base case scenario so far, but the base case is still a 2% to 3% GDP growth. So here we are, we are talking about some negative scenario.

And then it really depends on what really happened. What is the reason for a potential recession? Is the reason the shutdown of gas delivery out of Russia? And so that -- most probably more industry companies would be impacted by that. So -- and then there wouldn't be such a big impact on our side, but there could be also different scenarios.

So in principle, we just wanted to say, look, after the COVID development in 2020, so we had also a very strong Q1. And then we said, look, in the second half year, there could be potentially some cyclical headwinds. And unfortunately, we have seen that. So we just wanted to remind all of us, if there would be a stronger recession, obviously market activity would be reduced and also less volatility, so that we cannot rule out even if it's not our base case.

[Tobias Lukesch, analyst]

On the cost side, I take that there is no special investment news on any specific product line or set news, but it's normal across the board, right?

[Gregor Pottmeyer, executive]

No, if we see interesting opportunities, then we would have the freedom to invest here. But prudent cost management is important for Deutsche Börse.

[Operator]

And next up is Johannes Thormann from HSBC.

[Johannes Thormann, analyst]

Johannes Thormann, HSBC. Two questions for me. First of all, on Kneip, could you provide a bit more details, how you really want to target the synergies you're promising in the Fund Services business? And secondly, would it be fair to say that the annualized revenue contribution is above EUR 30 million for the next years?

And secondly, on Axioma, if we look at the year-on-year decline in revenues, is this FX-driven, which would surprise? Or what are the reasons for -- it looks like the current business performance of Axioma completely differs to the picture drawn by Stephan Leithner at the time of the deal.

[Gregor Pottmeyer, executive]

Yes, Johannes, very detailed questions, but fair enough. So Kneip, annualized cost is more in the range of EUR 20 million to EUR 25 million. So that's the number we expect on an annualized basis for this year. So it's not the EUR 30 million you mentioned. But obviously, this was a very strategic direction and decision for us. So we always told you that we have 2 strong legs in the investment fund service business. So the settlement and the custody leg. Secondly, we have now the funds distribution leg with the acquisition of specifically UBS Fondcenter and we missed the fund data leg.

So we have now a third leg, and that's exactly what we need now. So when we talk to customers, so we can offer now the full range of the value chain with regard to the fund service business. And therefore, we think there are synergies, by the way, that we obviously create additional services for our customers. So we can definitely do hear some cross-selling. And so there should be very positive elements out of that.

With regards to your second question, Axioma, yes, indeed, the performance is not as good as we have targeted when we made the acquisition. Still, there is some corona impact out of that. But more specifically, in Q1, if you take that comparison with Q1 last year, when in Q1 last year, we had a relatively high share of point-in-time revenue and therefore, on the IFRS numbers.

So you see here, not a very strong performance. If you would go like what others do more on a run rate perspective, right, and we are currently working on that model that we also show you some runway. So expect it for the next 12 months basically, then you would see double-digit growth on the Axioma side. So here, it's not as good as the offer because usually, in the past, there was a growth rate of 15% to 20%. So currently, we are not there. But the run rate concept would show a better performance with now the IFRS number.

[Operator]

And now we have Benjamin Bathurst from RBC Capital Markets on the line.

[Benjamin Bathurst, analyst]

Can I ask what was proportion of overall group revenues from recurring sources in Q1? And just sort of a follow up to that, do you have any updated view on prospects for growing that proportion in 2020 versus 2021 just in light of the strong cyclical contribution to revenue growth in Q1?

[Gregor Pottmeyer, executive]

Yes, exactly. So the number is 52% are recurring revenues. It's a little bit below the share we achieved last year, where about 55%. And the reason for that is that we have now more -- last year, we had cyclical headwinds, but now we have 1 cyclical tailwind. And that's the reason why the nonrecurring elements are cyclically driven higher.

But in principle, so over the next 2 to 3 years, so our expectation is that the recurring revenue number will increase out of stronger performance. We already talked about ESG products and the data analytics that usually have higher growth rates. So it should be over proportionately growth compared to the nonrecurring business. And secondly, also from an M&A perspective, we are more interested to invest in business with recurring revenues. And so these are the reasons for our expectation that the recurring revenue will increase for the next year.

[Operator]

The next question comes from Roland Pfänder from ODDO BHF.

[Roland Pfänder, analyst]

Two questions from my side. First of all, I would like to come back to the commodities business. Could you elaborate here a little bit more on the risk management? Do you need actually state guarantees to run this business? And did you model for extreme shocks and what would be the outcome in these scenarios? Secondly, you mentioned in the fund service business a partnership with FNZ. Could you maybe detail a little bit the business or market opportunity you are tapping here into?

[Gregor Pottmeyer, executive]

Yes. With regard to the commodities risk management, I think a little bit I already elaborated on that side. So we have obviously seen a strong increase of our margins, of our collaterals at our clearing house of the EEX. So it was, in the peak, roughly EUR 70 billion, and it's now in the range more to EUR 40 billion. And 2, 3 years ago, it was in the range of EUR 5 billion. And obviously, you have seen here, tremendous increase here to reflect a completely different market situation. But again, the good thing is that there were no surprises for all the market participants. So the risk models worked as designed. And there was -- and we didn't miss any margin calls here so far.

So far, no need for any state guarantees, right? So then the market was able to manage that. Obviously, we are also discussing some shock scenarios. So obviously, that's what we're also analyzing. But the outcome and the consequences really depends on the concrete scenarios. But in principle, as mentioned earlier, so when we talk with the German government and the [indiscernible], then we have a clear understanding that the market should be open as long as possible without government interference. So that is the basic idea. But nevertheless, we would be also prepared for different things.

Second question around FNZ. I think here, so in principle, there are different opportunities to grow our business. So customer can decide to purely connect to our platform. They can outsource the business, they can sell the business or they can do partner up with us. So FNZ decided to partner up with us here. And for us, it's a big opportunity to enter in the U.K. market where we are currently not present and so that we have a broader spectrum from a regional perspective and that we can attract more customers. So that's the main strategic reason to work together with FNZ.

[Operator]

The next question comes from Martin Price from Jefferies.

[Martin Price, analyst]

Sorry to go back to this, but I just wanted to clarify my understanding of the M&A strategy in the Fund Services space specifically. Just wasn't entirely clear to me with your response to Arnaud's question earlier rolling out larger M&A with relation to ISS or IFS fund services. In short, can I just clarify that if you were to do a deal in the fund services space, your current thinking is that it would probably be in the EUR 100 million or EUR 200 million range rather than anything larger?

[Gregor Pottmeyer, executive]

Yes, Martin, as already mentioned by Theodor, so there's no pressure from our side to do anything here, and you asked specifically in the fund services business. So usually, you have seen our transactions we did here in the past. So it was usually a EUR 20 million, EUR 30 million acquisition. And depending on the portfolio side of the bank, and even if we do not announce all the deals we do here, sometimes also customers are shy to be mentioned publicly here but we have a long and strong customer pipeline where customers are interested to work together with us.

And again, sometimes they decide to purely connect to our platforms, building a partnership. Sometimes they want to outsource business so that we take over also their people and then streamlining the processes or some partners are interested to sell the business to us. For all of these 3 options, we are very open. And we have a long customer pipeline in all of these 3 areas. So there is no need from our perspective to do other deals here.

[Jan Strecker, executive]

All right. There are no further questions on the call. Thank you very much for your participation today. If there's anything else, then please feel free to reach out directly to us, and have a good day.