E 2018E 2019E CAGR E

Transcription

1 Equity Research Inquire FinTech Group Hybrid thinking! FinTech Group is a financial technology company offering IT solutions (B2B) and banking services with its full-licenced bank (mainly B2C) under one roof. This is a key competitive advantage as it allows the control of its entire value chain and leveraging its own technology to external customers. Its cash cow is the fast growing retail online broker flatex, accounting for the vast majority of our projected 35% EPS CAGR until On the back of a) a beneficial environment for growth at flatex; b) reduced complexity in the corporate structure and c) a cheap valuation at 11.3x 2018E earnings, we initiate with Buy and a target of 22. flatex trading at a discount! flatex is a fast-growing online broker in the German and Austrian market which offers a home for active traders. Its relatively low fix cost base allows flatex to attack incumbent players in the DACH region with discount trading fees. We expect c. 15% client growth to continue in the years to come as a) current market consolidation in the German online brokerage market makes some heavy traders homeless and b) its strong brand in combination with low trading fees makes it an attractive home for frequent traders. Consequently, we expect revenue CAGR of 11.4% for 2016 to 2019E. Given its strong market position, we expect FinTech Group to play an active role in market consolidation: Either as a consolidator or as a takeover candidate. 16 May 2017 Buy (Initiation) TP 22 CP 17 (Closing 12 May 2017) Key information Expected performance 29.4% Volatility (60d, realized) 26.0% 1M / 3M performance 15.6% / 16.4% Bloomberg / Reuters: FTK GY, FTKG.DE Market cap ( m) 286 EV ( m) 242 Shares outstanding (m) 16.8 Free float 43.1% Dly trading vol (last 3-mth) ( m) 0.2 Source: Commerzbank Research Changes in estimates m Sales EBITA EPS Source: Commerzbank Research Relative and absolute performance (12M) Strong earnings growth ahead We expect a rising number of trades driven by continuous client growth at flatex, a further optimization of bank s loan book, some client wins at FinTech s technology platform in combination with relatively stable cost base, to result in an EPS CAGR of 35.4% from 2016 to 2019 impressive for stock trading at 11.3x 2018E earnings. FinTech Group: trading at a discount! It seems that market participants have forgotten to buy the stock. Yes, we acknowledge that the liquidity of the stock is low, there is little sell-side coverage, the track record of clean EPS due to corporate legacy is short; however, a ~40% discount to the relevant online brokerage peers is extensive. With reduced complexity in its corporate structure going forward, a potential listing in the Prime Standard of Deutsche Börse, continuous strong earnings growth, the management team full of stock options and the potential for a higher free float going forward, we expect this discount to diminish over time, resulting in a re-rating of the stock. Given 30% upside to our target of 22, we initiate with Buy. Key financial and valuation metrics Year-end Dec E 2018E 2019E CAGR E Sales rep. ( m) % EBITDA adj. ( m) % EBITDA rep. ( m) % EBITA adj. ( m) % EBITA margin 18.8% 10.1% 21.5% 28.3% 31.5% 34.1% EBITA rep. ( m) FCF pre-div ( m) 22.9 (99.8) (161) n.a. FCF yield 24.6% (49.3%) (61.3%) 247.5% 58.1% 37.7% EPS rep. ( ) (0.58) (0.11) % EPS adj. ( ) % EV/Sales (x) EV/EBITDA (x) EV/EBITA (x) P/E (x) Div yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Net debt ( m) 0.0 (24.8) (2.7) (20.3) (44.2) (73.6) Net debt/ebitda (x) 0.0 (2.5) (0.1) (0.6) (1.0) (1.4) Sources: Company data, Commerzbank Research For important disclosure information please see pages 23 and 25. research.commerzbank.com / Bloomberg: CBKR / Research APP available Source: Bloomberg Company events Date Event 5 July 2017 AGM Sources: Bloomberg, Company data, Commerzbank Research Shareholder structure Major shareholders Stake GFBK 40.1% Heliad 16.8% Free float 43.1% Sources: Bloomberg, Company data, Commerzbank Research Commerzbank Financial Services research: Analyst Christoph Blieffert christoph.blieffert@commerzbank.com

2 Value Growth Segmental split Regional split ROE analysis Value E 2018E 2019E EPS P/E (x) BVPS ( ) P/B (x) EV/EBIT Dividend per share ( ) Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Buyback volume per share ( ) Total yield (dividend + buyback) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Net debt / EBITDA 0.0 (2.5) (0.1) (0.6) (1.0) (1.4) Growth E 2018E 2019E Sales growth y/y n.a % 26.3% 12.2% 12.5% 9.4% EBITDA growth y/y n.a % 154.6% 42.1% 24.7% 18.8% EBITA growth y/y n.a % 170.5% 47.1% 25.4% 18.5% EPS growth y/y n.a. (24.3%) 131.1% 58.3% 30.3% 20.5% Capital employed growth n.a % (26.9%) 3.5% 3.0% 1.9% Capex/depreciation 81.9% 147.1% 178.2% 129.8% 123.0% 109.0% Capex/sales 1.9% 4.9% 9.7% 7.7% 7.8% 7.6% Cash flow E 2018E 2019E OCFPS ( ) 1.72 (3.24) (9.04) P/OCF (x) 4.0 (3.9) (1.7) FCFPS ( ) 1.70 (6.29) (9.58) FCF yield 24.6 % (49.3 %) (61.3 %) % 58.1 % 37.7 % Capex/sales 1.9% 4.9% 9.7% 7.7% 7.8% 7.6% DPS/FCFPS 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Cash flow from operations ( m) 23.2 (51.5) (152) Cash flow from investing ( m) (0.3) (4.8) (9.2) (8.2) (9.4) (10.0) Cash flow from financing ( m) (0.9) (2.8) FCF 22.9 (99.8) (161) Net debt 0.0 (24.8) (2.7) (20.3) (44.2) (73.6) ROIC analysis E 2018E 2019E Sales Tax retention rate (1-tax rate) 68.0% 68.0% 68.0% 68.0% 68.0% 68.0% EBITA margin (EBITA/sales) 18.8% 10.1% 21.5% 28.3% 31.5% 34.1% Capital turnover (sales/avg. IC) (x) ROIC n.a. 15.3% 27.1% 46.4% 56.4% 65.3% WACC 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% ROIC-WACC (7.5%) 7.8% 19.6% 38.9% 48.9% 57.8% Invested capital Value added on invested capital ( m) (0.3) EV/OpIC (x) ROE analysis E 2018E 2019E Net profit margin (net profit/sales) 32.6% 6.1% 17.0% 18.1% 21.0% 23.1% Asset turnover (sales/total avg assets) (x) Leverage (total avg assets vs equity) (x) ROE n.a. 6.7% 18.3% 19.3% 20.6% 20.2% COE 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% ROE-COE (7.5%) (0.8%) 10.8% 11.8% 13.1% 12.7% (ROE-COE) * avg. equity ( m) (1.9) (0.5) Company data E 2018E 2019E Share price Equity value Enterprise value Share price High n.a. n.a. n.a. Share price Low n.a. n.a. n.a. Source: Commerzbank Research 2 16 May 2017

3 Investment case The online brokerage maverick FinTech Group is a financial technology company offering IT solutions (B2B) and banking services (mainly B2C) under one roof including a core banking system. This is a key competitive advantage as it allows FinTech Group to efficiently control its value chain and leveraging its own platform by providing its technology and banking services to extern customers. Its cash cow is the retail online broker flatex, one of the leading online brokers in the German and Austrian market, currently attacking market incumbents with a discount pricing strategy. This strategy resulted in c. 15% client growth in the last two years and we expect this to continue. FinTech s online brokerage activities are its most important asset and account for 65% of revenues. Moreover, FinTech Group also provides IT solutions for banks and financial companies via its subsidiaries XCOM and FinTech Group Bank (former biw). Phase I: Reducing internal complexity to be completed in 2017 FinTech Group s corporate structure has been somewhat of a mess in the past due to corporate legacy. However, with its efficiency strategy 5 to 2, the company has implemented the right measures to reduce internal complexity: The number of operating entities is to be reduced to two: 1) FinTech Group AG, which includes the technology entity XCOM; and 2) FinTech Group Bank, which consists of FinTech s banking activities, including the online brokerage brands flatex and ViTrade. Besides higher visibility, this reorganisation results in cost savings in the low single-digit million. Phase II: Growing the flatex business still ongoing We expect flatex to benefit from ongoing consolidation in the German online brokerage market: clients whose trading provider is being taken over might reconsider their business relationship and switch to a low cost provider such as flatex and its discount pricing strategy in combination with a strong brand should result in a continuing inflow of new clients who want to substantially reduce their trading costs. We forecast net commission income to grow at a CAGR of 10% from 2016 to Phase III: benefitting from market consolidation European consolidation has just started Although European expansion looks relatively easy on paper, the major European online brokerage markets are dominated by local players. The relatively easy client wins of recent years are unlikely to be repeated in the future as c.60% of investors already make their own investment decisions rather than relying on bank advice, so the online brokerage market should enter a phase of consolidation. This is good news for FinTech Group: the company could actively participate in consolidation via international expansion or it could become a takeover target itself. Management highly incentivised With 924k of stock options which can be exercised at a share price of 7.30 and additional 164k whose strike price has not been reached yet, FinTech s management team is highly incentivised to deliver on operational performance which is the prerequisite for a substantially higher share price in our view. Strong earnings growth ahead Driven by: a rising client base at flatex and ViTrade, which should result in a rising number of trades in the years to come; further optimisation of its loan book, resulting in higher net interest income; and a relatively stable cost base, the company s high operating leverage leads us to forecast an EPS CAGR of 35% from As a consequence, we forecast EPS to increase from 0.73 in 2016 to 1.80 in Valuation is too cheap: it seems that market participants have forgotten to buy it We acknowledge that there is low liquidity in FinTech s shares and only a short track record of clean EPS which results in a discount to peer group multiples, but we believe a 40-50% discount to peers is too high. With reduced complexity in its corporate structure going forward, continuous earnings growth and the potential for a higher free float, we expect this discount to diminish over time, resulting in a re-rating of the stock. Given 30% upside to our target of 22, we initiate with Buy. 16 May

4 Investment case at a glance CHART 1: Rising EPS driven by CHART 2: a rising number of clients at flatex CHART 3: and a growing number of trades CHART 4: supported by its discount pricing strategy CHART 5: Low cost base is a key competitive advantage CHART 6: Stock is a bargain: huge discount to peer group Source: Commerzbank Research Source: Commerzbank Research, Bloomberg Table of contents 4 16 May 2017

5 Valuation We value FinTech Group using a DCF model supported by relative P/E multiples from: a) other online banks/brokers; and b) IT service companies. We use a WACC of 10.50% and a long-term growth rate of 2%, which we consider conservative assumptions. We compute an enterprise value of 369m to which we add FinTech Group s net cash position of 3m (including provisions; Commerzbank estimate) at year-end Dividing the equity value by the number of diluted shares leads to a fundamental fair value of 22 per share. Our target price of 22 leaves 30% upside, and we initiate with Buy. TABLE 1: DCF valuation FinTech Group m E 2018E 2019E 2020E 2021E EBITDA Notional tax Capex NOPAT Discounted NOPAT PV of cash flows 99 Terminal value 268 Enterprise value 367 Net debt/(cash) -3 Equity value 369 NOS 16.8 Value per share ( ) 22.0 Target price ( ) 22.0 Implied 2018E P/E ratio 14.7 Current price ( ) 16.8 Upside/downside 30% Source: Commerzbank Research Our target price implies a 2018E P/E multiple of 14.7x. Currently, FinTech trades at a significant discount to online banks/brokers and to IT companies servicing banks and companies involved in the financial industry. We acknowledge that the free float in the stock is low, sell-side coverage is low and the company s earnings statements have been impacted by many one-off effects, making an analysis challenging, but flatex is a growing and highly profitable asset that is worth owning in our view. We believe this huge discount to peers is unjustified and we expect FinTech Group to re-rate over time. CHART 7: FinTech Group: peer group overview P/E comparison CHART 8: FinTech Group vs. online brokerage peers: already cheaper for longer Source: Commerzbank Research, Bloomberg Source: Commerzbank Research, Bloomberg 16 May

6 The largest risk to our estimates is a substantial drop in customers trading activity or a price war in trading fees with one of the incumbent players, which would limit FinTech s growth opportunities. However, given the unfavourable cost bases of many competitors, their ability to cut trading fees is very limited, making the second threat rather unlikely. Nevertheless, a default in the bank s bond/loan portfolio could result in an impairment, which would negatively impact its earnings and capital ratio; higher capital requirements could result in additional capital injections from FinTech Group into its bank. There is no disclosure on biw s core capital, leverage ratio and risk profile of FinTech s investment portfolio. Peer group comparison Online brokerage Avanza Avanza is a Sweden-based company engaged in the financial services sector. It provides online services to private customers, including high net-worth individuals (HNWI) and day traders, as well as to corporate customers. The company posted a total income of SEK 919m and an operating profit of SEK 465m in It has c. 571 thousand customers with a total savings capital of SEK 231bn at 2016 year end. BinckBank BinckBank is an online bank for investors and savers. The company has a leading brokerage position in the Netherlands and Belgium and is ranked third in France. It provides services for private customers, companies/legal entities, and independent asset managers. BinckBank has offices in the Netherlands, Belgium, France, Italy, and Spain, and offers its services under the brands Binck and Alex. The company generated total income of 147.7m and net income of 30.5m in Charles Schwab Corp The Charles Schwab Corporation is a savings and loan holding company. The Company engages in wealth management, securities brokerage, banking, money management and financial advisory services. It generated net revenue of 7.5bn and pre-tax income 3.0bn in The company managed 2.8trn of client assets in over ten million active brokerage accounts at year-end Comdirect bank The comdirect group is a leading direct bank and the market leader in online securities business for modern investors, offering brokerage, banking and advice. Established in 1994, the company earlier focused on online brokerage but is now a full-service bank with more than two million private customers. In 2015, the company executed 23.5m trades and had total assets under custody of 65bn at year end. It generated a pre-tax income of 90.6m in that year. E*TRADE Financial Corporation E*Trade provides online brokerage and related products and services primarily to individual retail investors under the brand E*TRADE Financial. The company also provides investor-focused banking products, primarily sweep deposits, to retail investors. It serves customers through its digital platforms and network of industry-licensed customer service representatives and Financial Consultants, over the phone and by . At year-end 2016, the company managed 3.5m brokerage accounts with $276bn brokerage customer assets. It generated net revenue of $1,941m and net income of $552m in Interactive Brokers Group, Inc. Interactive Brokers Group, Inc. is an automated global electronic broker and market maker. It specialises in routing orders, and executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on over 120 electronic exchanges and in market centres around the world. It also offers custody, prime brokerage, securities and margin lending services to customers. The company generated net revenue of $1,396m in It operated 385k client accounts as at 31 December Swissquote Group - Swissquote is a provider of online financial and trading services in Switzerland. In 2016, the company posted net revenue of CHF 150.2m and operating profit of CHF 23.2m. The company managed 303k accounts with total assets under custody of CHF 17.9bn at year-end Swissquote also provides stock brokerage services to selfdirected investors and asset managers; custodian services against fees and foreign exchange; margin loans to customers against pledging of assets; fiduciary placements on behalf and at the 6 16 May 2017

7 risk of clients against commission fees; and services to corporations for the management of their stock option programmes, among others. TD Ameritrade TD Ameritrade Holding Corporation is a provider of securities brokerage services and related technology-based financial services. The company provides its services to retail investors, traders and independent registered investment advisors. In 2016, the company recorded net revenue of $3.3bn and a total operating income of $1.3bn. The company executed c. 117m trades in c. 7m accounts in TABLE 2: Peer group: Online brokers/banks Curr ency Price Mkt Cap P/E Dividend yield (lcy) (lcy m) 2017E 2018E 2019E 2017E 2018E Comdirect Bank AG EUR 9.7 1, Charles Schwab Corporation USD , Swissquote Group Holding SA CHF TD Ameritrade Holding Corp USD , Avanza Bank Holding AB SEK , BinckBank NV EUR E Trade USD , Interactive Brokers USD , Average FinTech Group Discount of FinTech to peer group -30.4% -40.3% -43.1% Source: Commerzbank Research, Bloomberg. Note: share prices as at 12 May 2017 IT services GFT Technologies GFT Technologies SE (GFT SE) is a Germany-based company engaged in the design, delivery and maintenance of customised Information Technology solutions. The company generated revenues of c. 423m and profit before taxes of c. 33m in The company also designs business models to optimise and mobilise banking processes for the financial sector; sources IT specialists and consultancy services for companies in various sectors; and manages external Information Technology service providers for its clients. Fidelity National Information Services Fidelity National Information Services Inc. is a global leader in financial services technology, with a focus on retail and institutional banking, payments, asset and wealth management, risk and compliance, consulting and outsourcing solutions. In 2016, it generated net revenue of $9.2bn and an adjusted EBITDA of $2.9bn. Fidessa Fidessa, a UK-based company, provides trading, investment and information solutions for the financial community of buy-side and sell-side professionals, from global institutions and investment banks to boutique brokers and niche hedge funds. In 2016 Fidessa achieved revenue of 331.9m and profit before tax of 48.8m. SS&C SS&C Technologies Holdings, Inc. is a provider of mission-critical, sophisticated software products and software-enabled services that allow financial services providers to automate complex business processes and effectively manage their information processing requirements. In 2015, the company generated revenues of $1bn with an operating income of $64.7m. Temenos Temenos Group is a software provider, partnering with banks and other financial institutions. More than 2,000 firms globally, including 38 of the top 50 banks, use Temenos for processing their daily transactions. In 2016, the company had non-ifrs group revenues of $635.1m and an EBIT of $186.5m. 16 May

8 TABLE 3: Peer group: IT service companies Currency Price Mkt Cap P/E EV/EBITDA Dividend yield (lcy) (lcy m) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E Temenos Group AG CHF 89 6, Fidessa Group Plc GBp 2, Fidelity National Information Services Inc USD 83 27, SS&C Technologies Holdings, Inc. USD 37 7, GFT Technologies SE EUR Average Discount of FinTech to peer group -46% -54% -59% Source: Commerzbank, Research, Bloomberg. Note: share prices as at 12 May May 2017

9 FinTech Group at a glance Structured as a holding company, FinTech Group is a leading German provider of innovative financial technology. After streamlining its organisational structure, the group will consist of two divisions: a financial service and a tech entity: FinTech Group AG: XCOM AG, the IT systems provider, will be merged into FinTech Group AG. This will pool the technological expertise of the group, which should consequently strengthen the service to existing customers with long-term contracts, the acquisition of new mandates, and the innovative power of the company. FinTech Group Bank: It will include the former biw AG. FinTech s online brokerage platforms flatex and ViTrade will be merged into this entity. The bank already provides all account services, regulatory duties, its liability umbrella, and the core banking system for flatex and ViTrade. flatex and ViTrade retain their brands and are the two main B2C platforms. We expect FinTech Group Bank to contribute 84% to group revenues and 75% to group EBITDA. CHART 9: FinTech Group: at a glance CHART 10: FinTech Group: revenue spilt CHART 11: FinTech Group: gross profit split CHART 12: FinTech Group: EBITDA spilt 16 May

10 FinTech Group: on EPS growth track We expect continuously rising earnings at FinTech Group, with 2017 EPS of 1.15, compared to company guidance of 1.0, and 2018 EPS of Our EPS CAGR forecast is 35.4% for We expect FinTech to achieve its mid-term EBITDA target in 2019: our EBITDA forecast is 54m for that year. Main earnings driver are: Rising commission income: We expect a 13% CAGR for the number of retail clients and higher commission income, at a CAGR of 8.9% up to Higher net interest income: We forecast modest growth of the investment portfolio and further optimisation of the investment strategy, resulting in an NII CAGR of 35.5% ( ). Relatively stable operating expenses: We assume only modest growth in operating expenses from 64.4m in 2016 to 77.2m in 2019 which reflects a CAGR of 6.3% Losses from discontinued operations are reduced to zero after the disposal of Aktionärsbank to Obotricia Capital. As FinTech Group already owns 98% of XCOM, minorities no longer apply for FinTech Group in We apply a tax rate of 30% for the group. In order to access the operating performance of the company, we make the following adjustments to 2015 and 2016 reported earnings: We adjust 2015 reported profit to shareholders by c. 10m to reflect a book gain from the sale of its CFD book to Commerzbank. We adjust 2016 reported profit to shareholders by 5m. This arises from: a) a 3m positive contribution from the treasury portfolio resulting from write-up on a Heta bond as well as the realisation of unrealised gains; and b) 2m from a potential reversal of provisions May 2017

11 TABLE 4: FinTech Group: earnings forecasts until 2019 m E 2018E 2019E E 2018E 2019E CAGR 16-19E Provision of services % 10.0% 10.0% 10.0% 10.0% Commission income % 9.5% 9.2% 7.8% 8.9% Interest income % 47.7% 41.4% 19.2% 35.5% Other operating income % 5.0% 5.0% 3.0% 4.3% Revenues % 12.2% 12.5% 9.4% 11.4% Raw materials and consumables used % -5.0% 6.7% 3.3% 1.6% Personnel expenses % 2.2% 11.5% 4.0% 5.8% Marketing expenses % 31.6% -10.5% -6.1% Other administrative expenses % 34.5% 5.0% 6.0% 14.4% EBITDA % 18.9% 24.7% 18.8% 20.8% Depreciation and amortization % 22.5% 21.0% 20.0% 21.2% EBIT % 18.2% 25.4% 18.5% 20.7% Financial results % 103.9% -28.0% -10.0% 9.7% EBT % 13.9% 30.3% 20.0% 21.2% Income tax expenses % 109.5% 30.3% 18.8% 48.0% Earnings from continuing operations % -4.7% 30.3% 20.5% 14.3% Earnings from discontinued operations % Earnings from continuing operations % 56.9% 30.3% 20.5% 35.0% Minorities % Profit attributable to shareholders % 129.4% 30.3% 20.5% 53.3% Adjustments % Adj. profit to shareholders % 58.3% 30.3% 20.5% 35.4% EPS ( ) % 124.8% 30.1% 20.5% 52.2% Adj. EPS ( ) % 58.3% 30.3% 20.5% 35.4% Consensus EPS ( ) n/a 234.1% 6.7% 19.2% Adj. EPS CBK vs. consensus estimates 2.7% 12.1% Key performance matrix Transactions executed, m % 9.0% 6.7% 5.7% 7.1% Number of retail customers, k % 17.0% 13.0% 9.0% 13.0% Transactions per customer % -6.9% -5.6% -3.0% -5.2%. 16 May

12 FinTech Group Bank AG FinTech Group Bank AG bundles FinTech Group s B2B and B2C banking activities. Online brokerage: flatex and ViTrade (84% of revenues) - flatex: flatex is an online broker specialising in securities transactions under the flatex brand. It targets active, well-informed traders acting and investing independently. It covers all security types, all German and many international stock exchanges, off-the-floor trading, and both CFDs and FX trading (currency trading). The focus is on clients with c. 45 transactions per year. - ViTrade: ViTrade is an online broker with a focus on heavy-traders (>100 trades per month). Banking services: FinTech Group Bank (former: biw) AG has a German banking licence and offers a range of white label banking services. Its most important business activity is transaction processing for its internal customers, flatex and ViTrade, and it had c. 9m trades in The entity is involved in other business activities whose EBITDA contribution is either very low or has an optional value. White label banking services (5% of revenues) - Cooperation with Rocket Internet: FinTech Group Bank set up a fully digital banking and credit business for Rocket Internet. - Processing of stock option plans: FinTech Group Bank processes and manages stock option plans for Equatex, a leading administrator of option plans for blue chip companies. - Deposit gathering: FinTech Group Bank provides Deutsche Pfandbriefbank with white label banking services for deposit gathering in the German market via pbbdirekt. Management expects shortly the acquisition of additional clients in this business segment. Credit and treasury: FinTech Group Bank invests the deposit base of flatex and ViTrade to generate net interest income. It generated 7.8m (11% of revenues) in 2016 and we expect this income source to increase to 16.3m in 2018, driven by various optimisation measures and a growing deposit base. CHART 13: FinTech Group Bank AG at a glance May 2017

13 Online brokerage: flatex a home for active traders What is the competitive environment? flatex is one of the leading online brokers for private clients in Germany and together with ViTrade is FinTech Group Bank s main revenue contributor. The company mainly competes against captive brokers such as comdirect bank, 81.2% owned by Commerzbank, ING-Diba part of ING group, Maxblue, 100%-owned by Deutsche Bank, Consors bank, a subsidiary of BNP Paribas, which includes the former DAB bank, and S Broker, which is part of Deka Bank, owned by the German Savings Banks. After the acquisition of OnVista Bank by comdirect, flatex and IB interactive broker are the only major discount brokers in the German market. While the competition mainly follows a multi-pillar strategy, which includes the sale of multiple banking products, flatex and ViTrade follow a pure online brokerage strategy with a focus on heavy traders. CHART 14: Number of executed trades flatex in third position : Note: Maxblue and CortalConsors do not disclose executed trades. Trades of DAB Bank are annualised and adjusted for seasonal patterns data, in million trades. What is flatex s target client group? flatex is the home for heavy-traders. Given its high order activity, this client group is particularly price sensitive. For many competitors, commission income from trading activity remains an important income source, but trading activity is much lower as they offer less sophisticated trading services for the German mass retail customer. Market share gains are difficult to achieve for flatex given: a) the total number of heavy traders is somewhat limited; and b) online banks are aggressively marketing their brokerage offering among the existing client base. Given the low marginal costs of an additional custody account, any additional trade counts for the incumbent banks. This strategy is very hard for flatex to replicate, given customer acquisitions costs of per new client, which has to be amortised in year one after acquisition. 16 May

14 CHART 15: flatex: strong focus on heavy traders: trades per account Source: Commerzbank Research, 2015 data What is the pricing strategy? Flatex competes for market share with a discount pricing strategy, which is unique in the German market. It charges a flat fee of 5 plus third party fees for trades at Xetra or German stock exchanges, 5.90 for OTC trades and 9.90 for US trades. Competitors usually charge on average 25bp on the order volumes with a minimum fee in the range of 9-10 per trade. While the product offer is virtually the same among the top online banks/brokers in the market, pricing is a key differentiating factor among heavy traders. CHART 16: flatex a discount strategy to gain market share: minimum fee per trade Despite its comparatively low marketing budget and thanks to its relatively low fee structure, flatex has been able to defend a market share of c. 20% of the peer group total in a highly competitive market environment May 2017

15 CHART 17: Stable market share among the top 5 players in German online brokerage. Note: No data available for Maxblue. Based on number of trades Why can flatex offer discount fees? flatex is cost leader in the industry in our view. Total costs per trade amounted to c. 3.1 in The company generates the lowest indirect costs per trade (personnel expenses and administrative expenses) given its overall lean cost structure. As flatex s customers have an incentive to use OTC trading platforms for execution, the direct costs, which include the fees paid to the relevant stock exchange, are below average as well. CHART 18: Direct and indirect costs per trade : Note: we allocate operating expenses as a % of brokerage related fees to total income. We use the latest annual public data available. For FinTech Group s indirect costs, we assume 7.5m of operating costs, which is the 2016 cost base of TP & white-label banking services and 9.8m of losses from consolidation, which we consider as IT costs for XCOM s trading system (intercompany). FinTech s low cost per trade is its key competitive advantage and facilitates its discount offering in the brokerage market. Despite its low trading fees, FinTech is one of the most profitable players in the German brokerage market: We calculate 2.9 per executed trade. 16 May

16 CHART 19: Total income and costs per trade CHART 20: Total income per trade. Latest annual data available data. We assume 7.5m of operating costs for FinTech which is the 2016 cost base of TP & white-label banking services. Consolidation pressure in the online brokerage industry is rising Consolidation pressure in the online bank/brokerage industry is rising driven by: a) falling net interest income on the back of a declining interest rate environment, which includes limited repricing potential for deposits alongside continuous asset yield pressure; and b) rising costs mainly driven by additional regulatory requirements and IT investments. For example, Cortal Consors, owned by BNP Paribas, announced the acquisition of DAB bank in In December 2016, comdirect bought OnVista Bank, which was loss-making in We believe flatex is in a good strategic position given a) its low cost base resulting in relatively low costs per trade and b) its own IT infrastructure which allows a fast adaption to changing market conditions. What are the implications for FinTech Group? Potential takeover target: FinTech Group, with its online broker flatex, is the only remaining independent market participant and could become a takeover target as well Growing customer base: FinTech is trying to make use of friction losses resulting from client migration during integration of the takeover target. For some clients, a forced portfolio transfer from one broker to another is an inflection point: a portfolio transfer to a third party that offers even more beneficial trading fees is not unlikely. We estimate that from 12k of new registered clients at flatex in Q1 17, 4-5k are former DAB bank clients which did not want to accept the Cortal Consors pricing model. From FinTech s perspective, the customer needs to be breakeven after one year at the latest, which results in a maximum marketing budget of c Net commission income: flatex is the main revenue source Net commission income is the major revenue source at FinTech Group, accounting for 67% of total revenues in We estimate that 95% of commission income derives from FinTech s transaction processing activities, which include flatex, ViTrade (B2C) and for third parties (B2B). mwb fairtrade is the main customer in third party processing. FinTech s B2C activities contribute c. 85% to executed trades, while third-party processing accounts for c. 15%. We assume that B2C trades have significantly higher profitability than B2B trades May 2017

17 CHART 21: Commission income breakdown CHART 22: Breakdown of transactions executed Source: Commerzbank Research estimates. : Note: ViTrade trades are a Commerzbank Research estimate only. We forecast a continuous increase in commission income from 64m in 2016 to 82.6m in 2019 a CAGR of 8.9%. This increase is driven by two factors: Client growth: We expect continuous client growth at flatex driven by: a) clients looking for trading platforms with relatively low costs; and b) disruption in the German online brokerage market as a consequence of continuing consolidation. Some clients might be tempted to switch their trading platform. Relatively stable trades per account: We include slightly declining trades per account in our forecast as: a) continuous client growth might dilute the number of heavy traders going forward; and b) we expect volatility in equity markets to normalise going forward vs. high volatility in 2016 with two major unexpected volatility events (Brexit, Trump election), resulting in overall lower trading activity. CHART 23: Rising net commission income driven by... ( m) CHART 24: increasing number of trades (in million trades) 16 May

18 CHART 25: supported by a continuously rising number of clients at flatex CHART 26: and relatively stable trading activity per account In contrast to major competitors such as DAB Bank, ING diba, maxblue and comdirect bank, which have expanded their product portfolio horizontally into a full-service bank, FinTech Group follows a different strategy. The focus is on expanding the value chain vertically: FinTech Group established a 50%/50% joint venture with Morgan Stanley, in which flatex distributes structured products launched by Morgan Stanley under the flatex brand. We estimate that FinTech Group receives fees in excess of the average 5.90 for every trade in Morgan Stanley products. We also assume that FinTech Group receives asset under management fees in the range of 1%-2%, which would result in 2m- 3m of net commission income in Net interest income at FinTech Group Bank At 8%, net interest income is an important and growing revenue driver as we expect the company to further optimise its investment strategy. Similar to its major competitors, flatex faces a deposit overhang, which is a significant challenge in times of negative interest rates. Based on a deposit base of 1.3bn at flatex and ViTrade, we estimate interest expenses of 1.3m as unused deposits need to be invested at negative interest rates at the ECB ( 415m at year-end 2015). In order to avoid penalty interest at the ECB, flatex has launched several initiatives to invest its deposit overhang. CHART 27: Investment portfolio of FinTech Group Bank 2017 estimates Source: Commerzbank Research estimates Treasury book: flatex invests deposits in a bond portfolio with a low risk profile. We estimate an invested amount of 515m in 2016 with an average yield of 32bp. Receivables to ECB: Excess deposits are held at the ECB and generate a negative 40bp yield. Interest expenses are recognised in FinTech Group s financial result. We expect this May 2017

19 amount to be significantly reduced in 2016 as the regulator no longer obliges FinTech Group Bank to deposit excess cash at the ECB after its successful capital strengthening. Loan book: In order to increase its net interest income, FinTech Group offers its flatex customers a lombard loan at relatively attractive rates: 3.9% is a discount offer relative to the competition. Clients with a securities portfolio that matches flatex s scoring requirements (the offer is basically limited to highly liquid blue chips) are allowed to draw a credit volume that corresponds to a loan-to-value of 25% up to a maximum amount of 50k. In contrast to the competition, clients have no obligation to use this credit line to buy additional stocks it may also be used for private consumption. We also understand that the company further optimises its asset yield by investing in factoring and higher-yielding senior unsecured bonds (likelihood of potential asset impairments rising as well). CHART 28: flatex discount offer for lombard loans Source: Commerzbank Research Negative deposit rates: Since mid-march 2017, flatex has charged customers 40bp on their deposits. We estimate that the chargeable deposit base is c. 900m. We expect interest income to rise in the years to come, mainly driven by: a) a 40bp charge on deposits (FinTech has decided to pass the ECB s negative interest rates through to its customers; and b) higher penetration of lombard loans (we expect volumes to increase by 90m and 70m in 2017 and 2018 respectively). 16 May

20 TABLE 5: Interest income breakdown m E 2018E Interest-bearing assets Receivables to ECB Other cash balance Treasury book Loan book Customers liquidity = deposits 947 1, ,096 Total interest-bearing assets 947 1,294 1,423 1,565 Yield (%) Receivables to ECB -0.31% -0.40% -0.40% -0.40% Cash 0.05% 0.05% 0.05% 0.05% Treasury book 0.35% 0.32% 0.30% 0.25% Loan book 4.00% 4.00% 4.00% 4.00% Customers liquidity 0.40% 0.40% 0.40% Interest income, m Treasury book Loan book Cash balance Customers liquidity One-off effect Total interest income Source: Commerzbank Research estimates FinTech Group AG: the technological backbone XCOM: The technological backbone of FinTech Group AG This division includes XCOM, which is the technological backbone of the company. It offers banks and financial services a full software solution to run a bank/online bank, and individual software components for transactions processing, payments, trading including its OTC trading platform LOX and other IT services. XCOM contracts usually have a maturity of five to ten years, which results in good visibility of earnings. CHART 29: XCOM at a glance Source: company data, Commerzbank Research May 2017

21 Banking/E-banking software is the main revenue contributor Banking/E-banking business segment: XCOM AG provides banking and e-banking components that allow the running of a banking business. These services are sold in the market under the product names Tradix, Tristan and WebFiliale. It provides, among other tools, secure and standardised data communication and deployment as well as tools payment processing, deposit administration and trading systems. Major clients are a) FinTech Group Bank XCOM provides the entire banking infrastructure including the trading system for Flatex and ViTrade; b) Obotritia, which is the new owner of Aktionärsbank, and c) Deutsche Pfandbriefbank. Trading business: XCOM offers its trading system HTX to customers to optimise their trading and settlement activities. The main customers using HTX are flatex, ViTrade and mwb fairtrade (third-party costumer). XCOM has also launched L.O.X., a limit monitoring system for the OTC limit order trade with issuers such as Deutsche Bank and Commerzbank. Payment business: XCOM is a provider of payment solutions and offers a wide range of services which includes: a) the settlement of retail payments; and b) mobile payments by smartphone in commerce, in online stores and among friends and acquaintances. The main customers are Deutsche Post Renten Service and Berenberg, as well as Flatex and ViTrade. IT services business: XCOM s IT service business includes the provision of the relevant infrastructure for data centres, server rooms and buildings. Major customers are Postbank and bank-verlag. This part of the business is no longer one of management s strategic focuses and we expect revenues to shrink over time. CHART 30: Revenue breakdown per segment Source: Commerzbank Research estimates, annual report XCOM, 2015 For the years to come, we forecast rising revenues, driven by: a) the acquisition of one additional client for e-banking software with a revenue contribution of c. 1m- 1.5m; 1-2 new clients for payment solutions with a revenue potential of up to 1m each; and c) 1-2 new users of the company s trading software with a contract value of c. 500k per new user. We expect XCOM to reach a 25% EBITDA margin in May

22 CHART 31: Revenue and EBITDA forecast for XCOM Source: Commerzbank Research estimates, XCOM annual report. Note: c. 60% of revenues are intercompany. Management highly incentivised TABLE 6: FinTech Group stock option plan Stock option plan FinTech Group currently has five different stock option plans in place to connect the interests of shareholders and management, and to make the team s total compensation competitive. The first stock option plan was launched in 2014, with subscription rights being issued pursuant thereto for the first time in Each subscription right issued pursuant to the share option plan gives the holder the right to acquire one no-par value bearer share of the FinTech Group in return for payment of the subscription price stipulated upon issue. The subscription price is determined on the basis of the average closing price for the share over a fixed period of time preceding the adoption of the corresponding resolution by the Annual General Meeting, less a discount. The term of the subscription rights is six years from the issue date; they may only be exercised upon the expiration of a waiting period (vesting period) of four years and within predefined time slots. The majority of options were granted with the first incentive plan issued in January The issuance price was at 8.60 per share the options are in the money when the share price of FinTech Group exceeds the threshold of (100% stock price performance) within two years of the launch of the programme; this condition has been fulfilled. Except for stock option plan IV, all remaining plans are out of the money and will expire in H unless FinTech s share price exceeds at least the threshold of 22.80, which is the next hurdle. Issued on Number of stock options Price at subscription Strike In the money Value of option at 15 share price Value of stock options I , yes 6.4 5,913,600 II , no 0 0 III , no 0 0 IV , yes ,000 V , no 0 0 Total 1,088,000 5,965, May 2017

23 Reference to first page of disclaimer FinTec Group price chart Source: Commerzbank Research Distribution of ratings: Number of recommendations from Commerzbank Research, at the end of Q (37.0%) Buy 12 (16.7%) 89 (45.6%) Hold 10 (11.2%) 34 (17.4%) Sell/Reduce 5 (14.7%) Source: Commerzbank Research thereof recommendations for issuers to which investment banking services were provided during the preceding twelve months In accordance with ESMA MAR requirements this report was completed 16/05/ :39 CEST and disseminated 16/05/ :44 CEST. In respect to Article 4 of ESMA MAR, for an overview of recommendations made in the previous 12 months on any instrument or issuer covered in this report as well as an overview of all recommendations made by the producer(s) of this report in the previous 12 months, please follow this link: This document has been created and published by the Research department within the Corporate Clients division of Commerzbank AG, Frankfurt/Main or Commerzbank s branch offices mentioned in the document. Commerzbank AG is a provisionally registered swap dealer with the CFTC. If this report includes an analysis of one or more equity securities, please note that the author(s) certify that (a) the views expressed in this report accurately reflect their personal views; and (b) no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views expressed by them contained in this document. The research analyst(s) named on this report are not registered / qualified as research analysts with FINRA. Such research analyst(s) may not be associated persons of Commerz Markets LLC and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. It has not been determined in advance whether and in what intervals this document will be updated. Unless otherwise stated current prices refer to the most recent trading day s closing price or spread which may fluctuate. Conflicts of interest Disclosures of potential conflicts of interest relating to Commerzbank AG, its affiliates, subsidiaries (together Commerzbank ) and its relevant employees with respect to the issuers, financial instruments and/or securities forming the subject of this document valid as of the end of the month prior to publication of this document*: Please refer to the following link for disclosures on companies included in compendium reports or disclosures on any company covered by Commerzbank analysts: * Updating this information may take up to ten days after month end. Ratings and definitions Commerzbank Research fundamental equity analysts rate the shares of the companies they cover on total return basis using a twelve-month horizon. Stocks showing implied total return potential of more than 20% are rated Buy. Stocks showing implied total return of more than 0% but less than 20% are rated Hold. Stocks showing implied downside on a total return basis (<0%) are rated Reduce. Summary of the equity rating system: Buy: +20 % Hold: 0-20% Reduce: <0% For more information please refer to: Explanation of valuation parameters and risk assessment Unless otherwise stated in the text of the financial analysis/investment research, target prices in the publication are based on either a discounted cash flow valuation and/or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst's views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company s products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, from changes in social values. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, political and social conditions. Disclaimer This document is for information purposes only and does not take into account specific circumstances of any recipient. The information contained herein does not constitute the provision of investment advice. It is not intended to be and should not be construed as a recommendation, offer or solicitation to acquire, or dispose of, any of the financial instruments and/or securities mentioned in this document and will not form the basis or a part of any contract or commitment whatsoever. 16 May