HL posts higher AUA but sees margin squeeze

Hargreaves Lansdown grew assets under administration at a swifter pace for the year ended 30 June, but it felt further pressure on margins.

HL posts higher AUA but sees margin squeeze
3 minutes

The UK direct-to-consumer platform saw assets under administration climb 28% from £61.7bn to £79.2bn by the close of the period. The year prior, AUA only grew by 12%.

Net new business reached £6.9bn versus £6bn the previous year, which the group noted was a strong performance given first half flows were “held back” during a period of low investor confidence following the EU referendum.

HL net new business flows rebounded “to new highs” over the second half of the year, helped along by the launch of Neil Woodford’s new equity income fund and other HL funds and ISA products drumming up excitement in the market.

However, the net revenue margin earned from funds on its platform, HL’s largest client asset class, accounting for 57% of AUA, dipped from 44 basis points in 2016 to 41bps in 2017.

The same was true for its own HL funds, which saw net revenue margin decrease from 75bps to 73bps.

The firm said the reduction was expected because of the previously flagged transition phase of the Retail Distribution Review (RDR), preventing HL from collecting renewal income from funds held by clients after 1 April 2016.

And it said it expects fund margins to remain at similar levels over the next 12 months.

HL did enjoy slightly higher net revenue margin on its shares division of 33bps (from 30bps) but noted that caps on management fees would likely send margins back down to 30bps for the next financial year.

The move down in revenue margin was a worrying sign for equity analysts at Citi Research and one of the primary reasons they recommend the stock as a “sell”.

The Citi Research team argued that given HL’s weaker revenue growth relative to AUA growth, “the stickiness of AUA”, increased competition from players like Vanguard and potential impact from the FCA’s Investment Platform Market Study were reasons to be “watchful”.

In addition to the predicted “lower stockbroking and cash margins”, the group will not have elections in the US or UK nor a Brexit-type event to help trading volumes, the analysts pointed out.     

Although HL has ambitions to expand its market share in the highly saturated investments and savings industry, with a PE ratio 28x greater than its FY17 earnings, “it needs to deliver on this ambition”, the Citi Research team added.

Despite the increased pressure on margins, the UK D2C platform saw an increase in profit before tax of 21% to £265.8m.

The group did lift its ordinary dividend by 20% to 29p per share.

New chief executive Chris Hill admitted that the firm would continue to have to navigate an uncertain political environment and long-term changes in demographics trends.

“Global politics are unsettled, our position with Europe in a state of flux and markets continue to be uncertain,” he said.

“Unfortunately, this state of affairs is set to continue for a while yet.

“At the same time, society is going through long-term changes in demographics meaning that people are older for longer. Pension arrangements are moving from defined benefit to defined contribution where individuals must take responsibility for managing their financial future, and over a longer period.”

He added: “Our purpose is to empower people to save and invest with confidence.

“We achieve this by continuing to place our clients at the centre of what we do: offering them great value, incredible service, making it easy and efficient for them to manage their savings and investments in a secure environment, and establishing a lifelong relationship with them as a partner.” 

MORE ARTICLES ON