NEX Group Reports Profit Lift as CME Deal Looms

NEX Group’s full year results for year ending March 31 indicate healthy growth at the firm as it continues to close in on a sale to CME Groupwhich was last week approved by NEX shareholders.

For the year ended 31 March 2018, the group reported revenue of £591 million, an increase of 9% on the prior year both on a reported and on a constant currency basis. On a constant currency basis, revenue from NEX Markets was up 6% and from NEX Optimisation up 7%. 

During the year, NEX says its trading performance benefited from episodic increases in FX volatility, including Asian currency pairs and an increase in trading activity in EU repos. The revenue performance also benefited from progression with the China Foreign Exchange Trade System (CFETS) contract, as well as an increase in demand for post trade services such as risk reduction and regulatory reporting solutions. This was partly offset by a decrease in revenue in some government bonds and a subdued performance in the basis risk mitigation services, Reset, which continues to be affected by low short-dated interest rate volatility in Europe. 

The Group reported an operating profit of £147 million, a decrease of 4% on the prior year, and a trading operating profit of £147 million, a decrease of 3% on the prior year. Excluding one-off transformation programme costs in the current year and the one-off items in the prior year, trading operating profit was up £13 million (9%). 

The Group’s continuing operations reported a profit before tax (PBT) of £125 million (2016/17: £122 million), 2% up on the prior year, and a trading PBT of £127 million (2016/17: £121 million), 5% up on the prior year.

The firm says its transformation programme, the announcement of which was widely seen as a profit warning last year, is on track to achieve £50 million in annualised cost savings, up £10 million from initial estimates. The cost of achieve these savings is a one-off £19 million – NEX says that in the financial year just passed it achieved £15 million in annualised savings at a one-off cost of £13 million.

The FX business of NEX Markets – EBS – reports £151 million in revenue for FY 17-18, up 4% on the previous year. The Brokertec business reported flat revenues at £155 million and revenue from the CFETS contract was £20 million, compared to £13 million the previous year.

NEX says that NDF volume on EBS grew by 25% last year, thanks in part to the addition of non-bank market makers to the product offering. The firm also reports “growing interest” in EBS Direct, but no numbers, and says average daily volume in FX forwards grew to more than $10 billion per day traded. EBS Fix, its Fix volumes matching engine saw ADV of $2 billion per day – a 25% increase on the previous year.

NEX Optimisation revenue increased by 8% on a reported basis to £260 million from £240 million and by 7% on a constant currency basis, driven by increased demand for compression, reconciliation and regulatory reporting solutions. The trading operating profit fell to £64 million (2016/17: £72 million). 

The firm says, “Following the deterioration in the trading operating profit margin in the first half of the year, swift action was taken to ensure a significant improvement in the division’s ongoing profitability and the trading operating profit margin recovered from 21% in the first half of the year to 28% in the second half. As a result, NEX Optimisation expects to reach its operating profit margin aspiration of more than 40% by the end of the year ending 31 March 2021, a year later than planned.”

Michael Spencer, CEO of NEX Group says, “Over the past year we have seen the continued growth of trading activity in emerging markets, increased demand for regulatory solutions and data analytics from the implementation of MiFID II, and the growing role of non-banks in our client base. In February, financial markets received a long awaited and much welcomed jolt of activity as volatility returned. Whilst it was short lived, the underlying level of market volatility is higher today than it was a year ago due to a sustained shift out of emerging market currencies into the US dollar and we have benefited from this. 

“We had some notable and very hard-won developments in the second half of the year. NEX Markets has delivered a 40% margin, NEX Optimisation recovered back to a 28% margin as promised, we saw a rebound in European repo trading and have been achieving continual record trading days in US repo,” he adds. “These are all important developments.”

Speaking on the impending CME purchase of NEX Group, Spencer says, “CME is the best buyer of NEX. Scale matters in this industry and bringing these companies together creates exciting revenue, technology and synergy opportunities. Once complete, this will be a truly industry-defining transaction and one which will bring huge benefits to our clients, the market, and to the City of London through CME’s commitment to maintain London as its European headquarters. As Britain continues its path to leave the EU, commitments like this matter.”

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Colin Lambert

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