Swissquote at a market season crossroads
Macro and market shocks, whether internal or external, have acted more and more as value drivers. One illustration of this phenomenon is the relatively recent “return to the light” for the European banks’ profitability through their net interest margin recovery from the ashes of the 2014 ECB QE. Another illustration is the post-pandemic return to trading normalcy, heavily felt by cash-equities-focused market venues such as Euronext NV.
Swissquote, a Swiss non-traditional online bank focused on investment products from brokerage to crypto trading, could well be the exception to this rule, displaying a performance seemingly uncorrelated from the macroeconomic environment.
An all-weather business model with a natural hedge
Swissquote’s exception is apparent in its share price performance. The Swiss fintech/neobank’s share price has been multiplied by 13x since 2017 and has comfortably outperformed its peers in the brokerage and investment industry.
The main explanation behind this outperformance lies in Swissquote’s naturally hedged business model: contrary to its peers, Swissquote is not a broker but an online bank focused on offering a premium and diversified investment platform to a wealthy clientele largely based in Switzerland.
This difference has two main implications for Swissquote: i) being a bank, Swissquote holds its client cash deposits directly on its balance sheet and can invest this liquidity in the short-term money market or other bond and loan instruments, thus earning interest income, whereas its competitors tend to rely on external custodian banks to hold clients’ funds directly, ii) Swissquote’s customer base is less volatile than that of its peers with a superior retention of clients’ assets independently of the market environment.
NII windfall
As indicated by the chart above showing the trend in Swissquote’s net interest income since 2013 and the contribution of interest income relative to the bank’s revenue, prior to 2022 non-transactional revenue, which encompasses interest income, custody fees, management fees and referral fees, played a minimal role in Swissquote’s revenue generation, as cash deposits yielded low interest margins for Swissquote given the relatively high proportion of cash deposits denominated in CHF (around 60% of the cash deposit mix over the long-term) and the SNB's negative interest rate monetary policy implemented from 2015 to 2022.
This situation changed in 2022 as the central banks, including the SNB, exited their ultra-easy monetary policies in order to deal with the post-pandemic and Ukraine-war-related inflation. Monetary policy normalization (the SNB policy rate jumped from a negative 75bp to a positive 175bp at the peak of the tightening cycle in 2023) coincided with clients continued to provide inflows for Swissquote, growing their deposits in anticipation of a future positioning in declining 2022 markets. Uncertainty then prevailed for a number of quarters, as did elevated yields, meaning that Swissquote’s interest income jumped from CHF16m in 2021, to CHF74m in 2022 and CHF213m in 2023, all on the back of rising interest rates and rising cash deposits (cash deposits increased from CHF8.2bn in 2021 to CHF9.2bn in 2022 before slightly declining to CHF8.6bn in 2023).
This natural hedge, wherein Swissquote’s revenue decline from lower trading activity is counterbalanced by an increase in the interest margin on growing clients’ cash deposits, creates a strong floor to Swissquote’s valuation compared to its peers which lack the anchor provided by interest margin on their clients’ assets and their retention.
Lasting long-term growth drivers
In addition to being naturally hedged against the macro environment, Swissquote’s value creation is underpinned by strong fundamental growth drivers which will help the Swiss bank to generate capital and attain its guidance of CHF350m in pre-tax profit and an above-50% pre-tax margin.
Swissquote’s long-term growth drivers include i) sustained and elevated customer account growth, ii) elevated and growing deposits per account, iii) an increasingly diversified products offering, ranging from traditional brokerage products to cryptos (including staking), FX, CFDs, structured products and Lombard loans and iv) the enhancement of this product offering through continued investment in Swissquote’s investment platform, improving the user experience and quality of services.
Although net new money, which encompasses clients’ net inflows, normalized from a record CHF9.6bn in 2021 to CHF5bn in 2023, Swissquote’s management is confident that net new money will average CHF7bn per year in 2024-2025, which is well above the pre-pandemic pace. The megatrends supportive of this guidance are numerous and include global excess liquidity trends, global wealth trends, Switzerland's financial industry safe haven status, the growing need for a more customized investing experience and direct control over this experience.
Swissquote thus looks positioned for growth, helped by its all-weather business. The question now remains whether there are warmer climates for Swissquote’s growth, now that the current macroeconomic environment is again returning to 2022 levels of uncertainty.
Navigating the emerging market season scenarios: the Good
Despite our observation that Swissquote has the potential to grow its revenue in many market and macroeconomic environments, one scenario which looks particularly rosy for Swissquote would be one where market volatility returns to more historical levels, supporting trading volumes, while the macroeconomic environment uncertainty remains contained with central banks performing a progressive policy pivot with gradual rate cuts, leaving Swissquote with both an increase in fee revenue and still-elevated interest income, both sublimated by above-average customer assets’ growth on the back of a fast client repositioning.
The H1-24 results look to reinforce this scenario as the base case, wherein considerable growth in revenue is supported by higher fee income on the back of stronger client activity and higher volatility.
Navigating the emerging market season scenarios: the (not so) Bad
A less-rosy macroeconomic outlook in which possible economic (or geopolitical) and market shocks potentially lead to a rapid sell-off in markets (or even a market crash as happened with the emergence of COVID and the Ukraine war), could be followed by strong post-shock growth in client activity, fast repositioning and above-average client assets’ growth as has happened in the post-pandemic era. Such a situation would likely lead to a decline in interest income as the central banks aggressively cut interest rates. Swissquote’s revenue growth would likely be undermined in the short-term as transaction-based revenue growth could come with a lag, but the situation would remain favourable as markets progressively recover from the shock.
Navigating the emerging market season scenarios: the (potentially) ugly
One scenario which would ultimately affect more negatively Swissquote’s growth would be one where the macroeconomic environment sees only a slow deterioration, leading to a gradual market decline and a slow monetary response from the central banks. In this scenario, growth in client assets would remain subdued as the need for fast repositioning in a continually declining market would remain limited as well as client appetite. Interest income would gradually come down, putting more pressure on Swissquote’s revenue growth.
Even in this last scenario, we believe Swissquote’s ability to grow relative to its peers will remain intact, as this scenario constitutes a more painful situation for its peers or the rest of the financial sector, including the traditional banks.
All-weather protection comes at a price
Swissquote’s all-weather business model comes at a price (slight downside), as the broker is relatively fairly valued compared to its peers even when we integrate multiple premiums linked to its particular business model and positioning. As indicated, there are however only a few losing environments for Swissquote, which should continue to benefit from strong asset inflows and high asset margins in the near future, giving the bank strong odds of reaching its 2025 guidance.
