London Capital Group reports H1 2012 Results: institutional forex revenue stable but margins eroded

As experienced across the board by most brokers 2012 so far is not only low on Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders Read this Term but the increased competitiveness on spreads and commissions is also biting into the providers' profitability. LCG reports 25% reduction in its profitability from pretty much same revenues level as the year before. Similar result was reported by FXCM for its Q2 2012 however it was partially offset with smaller decrease in volumes than with profitability.

London Capital Group Holdings plc, a leading online financial services company, announces interim results for the six months ended 30 June 2012.

Institutional Foreign Exchange

Although Global FX market volumes were reported to be lower in the first half of 2012 compared to the same period last year the institutional foreign exchange business has seen revenues remain stable compared to 2011. Over the past 18 months we have seen margins eroded due to the increased competition in the market, resulting in the division returning a 25% reduction in gross profit to 24% (2011: 32%) compared to the same period last year. During the second half of the year the division is focusing on increasing revenue through wider product and platform offerings.

Financial Highlights:

• Revenue stable at £18.41 million (H1'11: £18.34 million)
• Adjusted profit before tax* £2.05 million (H1'11: £3.01 million), reflecting lack of market volatility
• Profit before tax of £0.15 million (H1'11: £2.69million) following recognition of additional provision for FOS claims of £1.9m
• Company pursuing a settlement strategy with respect to outstanding FOS claims
• Net cash and short term receivables up £3.06 million to £25.54 million (H1'11: £22.48 million)
• Interim dividend 1.0p (H1'11: 1.3p)

Operational Highlights:

• Robust UK financial spread betting and CFD performance
• Net revenue per active client up 20% on H1'11 to £970 (H2'11: £807)
• Divisional revenue up 12% to £12.8m
• Client acquisition up 11% on H2'11 and 4% on H1'11
• Six new White Label clients gained, including Selftrade, Victor Chandler and Goodbody Stock Brokers Stock Brokers A stock broker is a company, individual, or entity that is authorized to buy and sell stocks or other financial instruments. Brokers’ main function includes buying and selling orders on a trader’s behalf. Through innovation and a byproduct of us residing with the technology era, more and more traders are beginning to open brokerage accounts with online brokers.In the past, many brokers accrued money through charging a commission on every trade but as competition has strengthened and technology h A stock broker is a company, individual, or entity that is authorized to buy and sell stocks or other financial instruments. Brokers’ main function includes buying and selling orders on a trader’s behalf. Through innovation and a byproduct of us residing with the technology era, more and more traders are beginning to open brokerage accounts with online brokers.In the past, many brokers accrued money through charging a commission on every trade but as competition has strengthened and technology h Read this Term

• Institutional FX
  • Consistent divisional revenue of £4.35 million (H1'11: £4.41 million)
  • 26% decrease in operating profit due to margin pressure from competitive environment

Commenting on the results, Simon Denham, Chief Executive, said:

"The business operated against a backdrop of difficult market conditions in the first half of the year. Notwithstanding a lack of market volatility, our core spread betting and CFD business has performed well and, in line with our growth strategy, we have signed a number of significant new White Label partnerships and continue to see growth opportunities in this market. We believe that our settlement strategy in relation to the outstanding FOS claims will reach a satisfactory resolution. We remain very well capitalised, with a strong cash position, and are encouraged by the medium-term prospects for the Group."

Chairman's statement:

It gives me great pleasure to be delivering my first statement as Chairman of London Capital Group. I would like to thank my predecessor Richard Davey for his significant contribution to the business over the last five years as Chairman.

The first half of 2012 has shown mixed results for the Group's divisions. Whilst our core business, the UK Financial Spread betting (UK FSB) division, has demonstrated growth in both revenues and client acquisition over the last year, the institutional businesses and our overseas businesses have not performed as well as expected. Total revenue for the Group amounted to £18.4m (2011: £18.3m) and adjusted profit before tax totalled £2.05m (2011: £3.01m).

The contribution from our institutional broking and institutional foreign exchange businesses was down by £0.7m as volumes fell throughout the industry. ProSpreads, the Direct Market Access (DMA) financial spread betting business in Gibraltar, experienced a fall in volumes and volatility returning a net loss of £0.4m (2011: profit of £0.04m). As noted in our earlier trading statement the Group is currently restructuring this business to create greater efficiencies to ensure its future profitability.

Positively, the UK FSB division has successfully launched a number of new White Label partnerships including Selftrade, Goodbody Stockbrokers and a number of White Label partners gained from the Group's former competitor Worldspreads.

Encouragingly, the UK CFD business launched in 2010 has increased both revenue and volumes by five fold. Whilst the Australian CFD business has yet to establish itself we have seen signs of growing trade volumes and client numbers. The division generated a loss of £0.3m for the period (2011: £0.3m). The Board expects the business to be operating at a profitable level in the next 12 months.

As previously disclosed, the company received a judgement from the Financial Ombudsman Service ("FOS") that clients previously not determined to be under the protection of FOS would be considered for compensation. This led to the Company recognising £1.9m of the previously disclosed £3.3m contingent liability as a provision in the period. The charge has been recognised as an exceptional item in the income statement. After two years of defending the claims the Company has recently begun pursuing a settlement strategy with the complainants. We are pleased to report that 25% of the outstanding complainants have agreed to the proposed settlement, which equates to £0.75m of the outstanding liability. A further announcement will be made in due course once the outcome of the settlement is known.

Overall the Group continues to trade well given the present market conditions and is well capitalised. The company's strategy continues to be a strong focus on improving its core businesses, including developing its successful white label programme and to increase the quality and breadth of its international operations.

Based on the performance of the Group, the Board is recommending an interim dividend of 1.0p a share (2011: 1.3p) representing 26% of adjusted profit before tax and a total cost of £0.5m (2011: £0.7m). This will be paid on 28 September 2012 to shareholders on the register at the close of business on 7 September 2012.