LCH.Clearnet today announced its results for the year to 31 December 2004.
Financial highlights Organic growth in turnover of 4%* to €612.3m; As a result of post merger restructuring and business development costs, EBIT decreased by 13%1 to €86.1m.; Cost-to-income ratio** increased from 64.7% to 72.1%; Contracts cleared increased by 14%;
* Percentage changes are on an annualised basis compared to pro forma 12 months to 31 December 2003 and use the average exchange rate of £1 = €1.469 applied to both 2004 and 2003.
** Cost-to-income ratio is the ratio of administrative expenditure, excluding exceptional items, to gross profit (turnover less interest paid to clearing members plus interest on shareholders' funds) excluding clearing fee rebate.
Commenting on the group's performance, LCH.Clearnet's Chief Executive David Hardy said, "2004 saw an increase in turnover of 4% to €612.3m; the major driver was a 5% growth in clearing fee income to €265.3m, with advances both in the UK and Europe, despite significant tariff reductions in certain markets. The year also saw notable volume growth in its business areas, with clearing members registering 1,042 million contracts, a new record and a 14% increase over 2003.
I reported last year that LCH.Clearnet will progressively migrate to a common systems architecture by 2007 based around an enhanced version of Clearing 21® and the new Generic Clearing System (GCS) accessed through a common business portal. Given its applicability to our entire business it is essential that this new generation clearing platform is of the highest operational integrity, has high availability and the very best cross border disaster recovery befitting LCH.Clearnet's role at the heart of so many markets. This is complex technology and requires equally comprehensive testing before being allowed to enter service. Our view is that the testing regime will take some time to complete; this is a function both of its complexity and our resolve to ensure that the system meets the high standards demanded by the users of the multi asset class clearing operation it will support. This dedication to the right outcome costs money and resources but we will not compromise on our standards.
2004 was a year of building foundations for the group, improving our product offering and commencing the integration of the two underlying businesses. I believe the outlook for 2005 is positive as we further realise the benefits of the enlarged group. Our business is evolving significantly and it is clear that both the users of the European capital markets and the market authorities themselves would welcome further evolution. LCH.Clearnet is and will continue to be at the heart of all the developments in this area and will seek to deliver the very best infrastructure as demanded by its customers and stands ready to evolve further in this regard."
The purchase of Clearnet (now LCH.Clearnet SA) from the Euronext group took place only nine days before the end of the prior accounting period and therefore the financial results for 2003 essentially comprised the LCH (now LCH.Clearnet Limited) business. However, the balance sheet at 31 December 2003 did reflect the combined business. Due to the change of reporting date from 31 October to 31 December, the financial results for 2003 were for a 14-month period. These have been restated to give pro forma 12 month comparative figures. Percentage changes are reflected on an annualised basis to facilitate comparison of the results. Unless otherwise stated, percentage changes exclude the impact of exchange rate movement and are all in Euros.
Turnover from continuing operations increased by 4% to €612.3m. Income from cash and collateral margin and default fund balances was unchanged at €324.7m due to lower cash collateral balances being offset by significantly larger default fund balances.
Gross clearing fee income increased 5% to €265.3m. Clearing fees from RepoClear and Equities generated the largest percentage increases of 25% and 10% respectively. The Futures & Options business stream continued to generate the largest proportion of fees by value, and solid growth in volumes in Equities in UK compensated for a 25% reduction in headline fees from the beginning of the year.
Other income of €25.7m grew by 82%; significant drivers were higher recovery of settlement fees and levels of membership fees.
Interest paid to clearing members
Interest payments to clearing members increased slightly to €295.4m for the period. Interest on cash and collateral margins decreased by 10% to €238.8m for the period and interest payments on the default fund balances increased by 91% to €56.6m reflecting the increase in their average value against the prior period.
Overall administrative expenditure increased by 17% on prior year. Staff costs increased by 4%, against a decrease in average headcount of 1%, due to higher staff costs per head including a broadening of the scope of performance-related remuneration. Other administrative costs increased by 21%. This was in line with post-merger expectations, and largely driven by the IT costs resulting from running duplicate production environments necessitated by the development of new systems.
Earnings before interest and tax (EBIT)
The definition of EBIT used by LCH.Clearnet Group includes income generated from the reinvestment of clearing member margin and default fund balances but excludes interest income from shareholders' funds.
EBIT fell by 13% to €86.1m. Although clearing fees increased by 5%, higher administrative expenses of 17% contributed to an overall fall in reported performance.
The total tax charge on the profit for the period was at an effective rate of 33%, being higher than the UK corporate tax rate of 30%. The higher rate results primarily from the effect of overseas taxation and non-deductible expenses.