Japanese leverage limits hit IG first half figures
Leverage restrictions in Japan see IG Group report significant first half loss.
Spread betting firm IG Group has suffered a major first half loss following changes in leverage limits in Japan.
The owners of the IG Index brand saw a first half loss of around £80m in the six months ended 30 November 2010 compared to a gain of £50m for the same period a year earlier. This was due to charges, amounting to £123m, against earnings for impairment of goodwill and customer relations in Japan due to restrictions on leverage following its £112m acquisition for a controlling 87.5% stake in FXOnline in September 2008.
New leverage limits for forex, equity indices and other asset classes were introduced in Japan last year with further restrictions due later this year. From 1 August 2010, leverage on FX was restricted to 50 times, while a limit of 10 times was introduced on equity indices at the start of this year. IG has previously offered 100 times leverage. The company said this had an adverse impact on volumes across the Japanese forex industry and resulted in a sharp fall in its Japanese revenue.
Tim Howkins, CEO of IG Group said the company’s Japanese business was continuing to operate in an “increasingly difficult regulatory environment”, with progressive leverage limits being introduced on trading in forex, equity indices, equities and other asset classes.
“As a consequence, we have already seen a substantial reduction in our volumes on equity index trading. Overall we anticipate that the run-rate of revenue in Japan will now be roughly half what it was prior to the introduction of the first leverage restriction in August,” he said. “There is one further scheduled leverage restriction to come into effect on 1 August 2011, when forex will be reduced to a maximum of 25 times leverage. We anticipate a further fall in revenue at that time,” Howkins added.
In the light of the significant adverse impact of these regulatory changes Howkins said the business had performed an impairment review based on a forecast which assumed the continuation of its Japanese business’s cost-base, “but with an assumption of reduced revenue”.
These assumptions resulted in the impairment of £123m in respect of goodwill and £20.1m in respect of the customer relationships. “These exceptional charges have no impact on the group’s cash flow, regulatory capital position or distributable reserves but as a result of the impairment of the Japanese business the group incurred a statutory loss before tax for the period of £69.1m,” he said.
Since the period end we have begun work on a plan to significantly reduce our Japanese cost base. These cost reductions should ensure continuing profitability of this business, albeit at much lower margins than the rest of the Group. The future for the forex and CFD industry in Japan is uncertain and it is possible that the competitive landscape will shift significantly,” the chief executive added.
Overall, IG Group’s net trading revenue for the period was up 9% to £156.7m with EBITDA up 7% at £86.5m. Its sports business, extrabet.com, achieved revenue of £3.7m, an increase of 25%, benefiting from last year’s football World Cup.