Good morning, everyone, welcome to the press conference call of Leonteq's half year 2019 results. All presentation materials, as well as the half year report, can be found in the investor relations section of our website. Here with me today are Chief Executive Officer, Lukas Ruflin, and Deputy CEO and Chief Financial Officer, Marco Amato. We will start the presentation with an overview of the highlights of the first half of 2019. We will then discuss the financial performance of H1 2019, continued by an update on our business and strategic priorities, before closing the presentation with a summary and outlook. The presentation will last about 45 minutes, after which we are happy to take your questions. It is now my pleasure to hand over to our CEO, Lukas Ruflin.
Thank you, Dominic. Dear ladies and gentlemen, dear shareholders, analysts, and media representatives. One year ago, we shared with you our plans regarding the journey we were embarking on as a company. A journey to overcome certain limitations we faced and to grow and transform Leonteq. In today's conference call, we will highlight to you the progress we have made through a clear and focused execution of our strategic priorities. We will also present to you how Leonteq performs financially and update you on how our business is developing. Let me start the presentation on page five of the slide decks with a few highlights from the first half 2019. I'm pleased to inform you that the solid track record we have established continues, and Leonteq delivered solid performance in a challenging market environment.
The first half of 2019 was characterized by high levels of market, economic, and political uncertainty that led to a reduction in client activity, especially during the first months of the year. This was followed by a recovery in equity markets as concerns about trade tensions between the U.S. and China eased, and the U.S. Federal Reserve signaled a shift away from monetary tightening. Against this backdrop, Leonteq experienced a subdued start to the year, which we also communicated to you in February at the time of announcing our full year 2018 results. Nevertheless, we were able to deliver solid performance during the first six months of 2019, with a net profit of around CHF 30 million.
We kept our cost discipline, which resulted in a relatively stable cost base, while at the same time continuing to hire new staff, mainly on the IT side, and we also continued to invest in our core initiatives. In our investment solutions business line, the outstanding volume of structured products issued by Leonteq and our platform partners grew by 16% to a new record level of CHF 13.8 billion. In our insurance and wealth planning solutions business line, our unit-linked products outstanding went up by 8% to slightly over 44,000 products, despite a strong decline in long-term interest in Switzerland. We further obtained an investment-grade rating from Fitch Ratings, who assigned us a rating of BBB- with a positive outlook, and from Japan Credit Rating Agency, JCR, who assigned us a rating of BBB+ with a stable outlook.
Obtaining these ratings only 12 years after Leonteq was founded is an important achievement and milestone in our development as a company and a further step in establishing Leonteq as a globally renowned platform. Last week, we announced that Leonteq was informed that Raiffeisen intends to fully retain its 29% stake in Leonteq as anchor shareholder. This significant commitment from Raiffeisen towards Leonteq underscores the importance of the cooperation for the two companies. Raiffeisen is one of our key issuance partners, and under this cooperation, Leonteq acts as the core technology and service provider for the manufacturing and distribution of Raiffeisen structured products. To date, we have more than CHF 4 billion Raiffeisen products outstanding on our platform. Moving on to slide six, I would like to update you on our strategic progress over the last 12 months.
One year ago, I highlighted to you a number of challenges Leonteq faced. In particular, I highlighted that we were faced with a continued decrease in margins while we were aiming at growing volumes in terms of platform assets and turnover. In order to create the basis for sustainable growth and address these limitations, we defined four strategic priorities. The first of these priorities was to reduce complexity by increasing efficiency, reducing functional overlaps, and clarifying roles and responsibilities within the company. This was achieved through combining our investment solutions and banking solutions business lines into one, which helped simplify the organization. We also implemented a more agile and systemic approach to project management through our new product organization. Today, dedicated IT resources work closely with the business and subject matter experts in order to execute within a focus team on our key strategic priorities.
The second priority was to reduce midterm the capital intensity of our structured products business. Here, our Smart Hedging Issuance Platform or in short, SHIP project aims to reduce hedging exposure by outsourcing in an automated manner the derivative component of the structured products to hedging counterparties. Today, we can confirm that SHIP works, and I will provide you more color on the progress achieved in the second part of my presentation. Our third priority was to grow our business through additional investments in innovation and technology, and we did so by expanding our product range and further improving our automation levels across all issuance partners. In particular, we added new functionalities and features to the white label platforms of EFG International, Raiffeisen, Commerzbank, and Crédit Agricole CIB. Also, we launched a new initiative in 2018 to fully transform the Leonteq structured products offering.
Finally, in February 2019, I told you that we were in late-stage discussions with potential new issuance partners. We can confirm to you today that we have made good progress in advancing such discussions. Our fourth priority was to strengthen our capital base to facilitate and support continued growth in business volumes. Throughout the first half of 2019, we continued the progress made in 2018. Accordingly, as of June 30, 2019, we maintained our strong capital position with a BIS total capital ratio of 21.3%. At the same time, our shareholders' equity increased by close to CHF 200 million in the last 12 months from around CHF 435 million to around CHF 630 million. This is an increase in shareholders' equity of close to 50%, and I'm certainly particularly proud of this one achievement.
Now I'd like to take a moment to expand my point on Leonteq's business transformation and go beyond the past 12 months. On slide seven, you can see Leonteq's overarching business model transformation during the last 12 years since foundation towards a globally renowned platform for structured products. The first four years of the company's existence, our main focus was on our client and service offering. Starting in 2012, we transitioned into phase two to focus on the partner model and scalability of our technology platform to position Leonteq as a platform business and as a white label service provider. Last year, finally, we transitioned into phase three, which is to become a globally renowned platform and marketplace for structured products. To sum up, we are convinced of our strategy.
We see good progress in terms of execution and transformation of our business, and we will continue to focus on our targets. Now I would like to invite our Deputy CEO and Chief Financial Officer, Marco Amato, to elaborate on the first half year 2019 results of Leonteq.
Thank you, Lukas. Good morning and also warm welcome to all participants on this call. Let's move into Leonteq's financial performance for the first half of 2019. When we presented our full-year 2018 results, we guided the capital markets that Leonteq had a subdued start to the year. January 2019, in particular, was characterized by market, economic, and political uncertainties in many parts of the world and decreased levels of client activity. On slide nine, we provide you today transparency what that meant in terms of numbers. As you can see on the chart, on the left-hand side, our economic revenues amounted to CHF 8.1 million in January 2019, which compares to CHF 26.1 million in January 2018. This means that we recorded a reduction in revenues of CHF 18 million in the first month of the year.
In the following months, we saw a steady rise in client demand and the normalization of our monthly top-line development. For the first half year 2019, total operating income totaled CHF 124.6 million, which is CHF 11.5 million lower compared to H1 2018. The group net profit came in at CHF 30.2 million, which compares to CHF 40.1 million in the prior year period. Given the slow start into the year and given the fact that the first half 2018 was a record first half year result in Leonteq's history, we are satisfied with the overall performance. Taking a closer look at our income statement, you can see on slide 10 that our financial results were solid despite the challenging start to the year. Our revenues are driven by three major elements.
The fee income, which results from issuing and distributing products, and the trading income resulting from hedging those products and refinancing activities. Finally, the net interest result. We saw a 17% decrease in net fee income year-on-year to CHF 120.9 million, which was a reflection of the subdued start in January 2019 and the increased competitive market environment. Our net trading result improved to CHF 7.5 million compared to negative CHF 3.7 million in the first half of 2018, thanks to positive hedging contribution and an improved treasury result. Moving further down the income statement, you can see that our cost line is under control. Total operating expenses were relatively stable at CHF 94.1 million, compared to CHF 95.7 million in the prior year. Looking at the individual cost line item, I would like to highlight the year-on-year change for other operating expenses and depreciation.
In the first half of 2019, we adopted IFRS 16, which regulates the recognition of leases. Under the new rules, rental costs are no longer recognized as other operating expenses. Instead, a right of use asset is recognized on the balance sheet and depreciated on a straight line basis over the lease term. In addition, the regular lease payments are deducted from the lease liability after applying the interest rate determined at the commencement or transition of the lease. In terms of numbers, this meant that on a H1 2018 to H1 2019 comparison, there is a shift from other operating expenses to the depreciation line item in the amount of CHF 5 million. With these factors in mind, I'm satisfied with our group net profit of CHF 30.2 million for the first half of 2019.
It is evident that Leonteq can produce solid performance even in a challenging market environment. Let's move on to two key performance indicators which drive our fee income, the turnover, and margin. On slide 11, we provide you a breakdown of turnover and fee income margin for both our own issued products, which you can see on the chart on the left-hand side, and the products issued by our banking partners, which are outlined in the chart on the right-hand side. Starting with Leonteq's own issued products for the first half of 2019, it can be seen that the ratings obtained from Fitch and JCR have unlocked a new demand with a 16% increase in turnover year-on-year.
On the other hand, we recorded a notable decline in our own fee income margin in H1 2019, which was driven by increased competition, a change in product mix, and a reduction of number of large ticket transactions. In terms of product mix, we saw an increase in demand for shorter-dated OTC and leveraged products with lower margins in the first half of 2019. In terms of large ticket transactions, we recorded a total of three large ticket transactions, which contributed CHF 5.1 million or 4% to the group's net fee income in the first half of 2019. This compares to a total of six transactions with a contribution of CHF 10.5 million in the prior year period in 2018.
On the partner business, we saw in line with management's guidance that the trend of decreasing margins continued on the back of an intensified competitive environment, regulatory changes, and change in cooperation mix of issuance partners. Moving on to page 12, you will see the composition of our balance sheet. Our balance sheet is driven by two factors. First, we issue Leonteq all structured products which are recognized on the liability side. To hedge these liabilities, we invest approximately half of the proceeds from own issuance into a conservative investment portfolio and the other half either into derivatives or trading equities and indices. Likewise, as a result of the issuance partner business, we hedge for our partners their structured product exposure by investing into either the underlying equity securities of the product or plain vanilla options.
Compared to end of 2018, total assets decreased by 10% to CHF 9.6 billion. This decrease in both assets and liabilities is primarily driven by a reduction in positive and negative replacement values of derivative financial instruments on the back of calmer equity markets and lower volatility. Let's now look in great detail at our investment portfolio on page 13. In line with the growth in own issued products, the investment portfolio increased by 22% to CHF 2.1 billion as of the end of June 2019, compared to CHF 1.8 billion as of the 31st of December 2018. The portfolio comprises predominantly bonds issued by governments and supernationals. 65% of the portfolio is invested in such instruments. Bonds issued by corporates account for 21%, and the remaining 14% are invested in financials.
What I would also like to highlight is that we introduced a new way to recognize newly purchased instruments. In the past, all bonds were designated as fair value, and changes in the mark-to-market were recorded in the income statement. Now, newly purchased debt instruments are measured at fair value through other comprehensive income. This means that all mark-to-market movements of the bonds are recognized directly in equity. Given the fact that we changed the accounting policy during the first half year, only 22% of the entire portfolio are currently measured at fair value through OCI. In future, this picture will change as maturing bonds under the old framework will be reinvested and measured under the new framework. On the two bottom charts, we provide you with additional transparency about the quality of our portfolio.
78% of the entire portfolio is invested in bonds with an AA rating or better. In terms of maturity, around one third of the portfolio is invested in bonds of two years or less, whereas another third has a three-year maturity, and the last one third has a maturity of more than three years. We also established a new currency branch to manage a portfolio of mainly U.S. dollar-denominated bonds, with U.S. dollar being the functional currency. This allocation represents a structural position in U.S. dollar, which reduces the sensitivity to U.S. dollar of our capital ratios. The U.S. dollar sensitivity of Leonteq's risk-weighted assets is the most significant currency exposure since the largest portion of structured products is issued in U.S. dollar. Our regulatory capital on page 14 shows that Leonteq maintained its strong capital position.
You can see on the left chart that our risk-weighted assets increased by 7% from CHF 2.8 billion in December 2018 to roughly CHF 3 billion in June 2019. This is mainly driven by higher market risk exposures as a result of a 16% growth in platform assets and related investment activities. Our total eligible capital amounted to CHF 633 million as of the end of June 2019. The BIS total capital ratio, which is calculated by the total capital divided by the risk-weighted assets, amounted to 21.3% as of the end of the first semester 2019, which is significantly above the FINMA requirement for securities dealer of 10.5%. Let me now conclude my presentation with a quick summary. Leonteq's half year 2019 results are evidence that we can deliver solid performance even in a difficult market environment.
At the same time, while keeping our cost base controlled, we are continuing to invest in our people and in key strategic initiatives. We also further strengthened our capital position and capitalized on the investment-grade ratings we obtained in the first half of 2019. Overall, we created a further basis for the achievement of our 2020 financial targets. With that, I hand back over to you, Lukas.
Thank you, Marco. When I started as CEO shortly over a year ago, we defined a set of strategic priorities to focus on as we work towards transforming Leonteq into a globally renowned platform and marketplace for structured products. I'd like to take some time now to give you a more detailed update on where we stand today with some of the major initiatives driving our transformation. Let's start on page 16 with Leonteq's digital marketplace initiative, which aims to transform the company structured products offering. Using the latest advances in technology, we want to provide our clients with a completely new investment experience by giving them external access to application, services, and market and product data that were previously only available internally with us at Leonteq. This new digital marketplace will provide digital access to one of the largest structured product universes.
Our clients and partners will benefit from efficient trading and execution, liquid secondary market, and risk management throughout the product life cycle. The first new modules of Leonteq's digital marketplace have been released to a limited number of clients in a beta phase of the initiative, and we expect to open up the new modules to a broader client base in due course. Moving on to page 17, I'm pleased to inform you that our Smart Hedging Issuance Platform project, SHIP, is making good progress. With SHIP, we aim to reduce hedging exposure by outsourcing in an automated manner the derivative component of the structured products to hedging counterparties. We have just recently connected the third hedging counterparty to SHIP, and we are in the process of onboarding four additional counterparties.
Today, I can confirm that SHIP works, and products such as autocallables and barrier with equity underlyings are available on the platform and available to be fully SHIPed. Let's now take a closer look at the SHIP activity on page 18. For the first time, we provide you here with the statistic of our SHIP platform with reference to the second quarter 2019. Today, SHIP covers approximately 40% of Leonteq's product universe, including autocallables and barrier reverse convertibles with underlying equity securities. Of this 40%, around 20% of trades receive at least one external quote, which is equivalent to around 8% of the total. Looking at the graph on this slide, it shows that in the second quarter of 2019, we recorded more than 600 transactions with a cumulative notional of CHF 300 million.
This data includes the total volume which ran through SHIP and which was hedged either by Leonteq or by one of the external counterparties. This is insofar relevant that, of course, Leonteq is also a SHIP counterparty and offer prices as well as our partner hedging banks do. This data as shown clearly shows a trend of an up peaking overall volume as time goes by, and it's a development we have also seen as July has started. Currently, still the majority of the SHIP transactions are hedged by Leonteq and not by one of the external hedge counterparties. Looking at the progress made so far, I'm confident that we are well on track with the SHIP project and that we will be fully operational by mid-2020, which you will remember was our guidance also in February of this year.
Let's now move to page 19 and to our third strategic priority, which was to invest in growth. This includes, of course, increasing revenue diversification. We have done this by increasing the level of automation and enhancing our white label platform for several issuance partners by adding additional functionalities and features. If you look at the left-hand graph, it shows our platform assets broken down by issuer. Our total platform assets increased by 16% to a record of CHF 13.8 billion. This was primarily driven by an increase in demand for new products issued by Leonteq and the strong equity market performance. The diversification of the source of our net fee income is also illustrated here on the right-hand side.
Our insurance and wealth planning solutions contributes around 1% to the group's net fee income, on the back of 11% on the back of unit-linked insurance policies with an average lifetime of 30 years plus. Additionally, the AMC business today contributes around 8% to our net fee income. AMC are an innovative solution for asset managers, which are designed to customize and implement an investment strategy. With our newly redesigned AMC Gateway, we offer greater flexibility, cost efficiency, and transparency for our clients. Since AMCs have no maturity and we generate recurring management fees on the volumes outstanding, this part of our business is very similar to an asset management business activity. Finally, our Leonteq own issue products accounted for 33% of net fee income, whereas our partner business generated 47% of fee income in the first half 2019.
If one was to compare the same statistics to our numbers about a year or 2 years ago, you would see that the type of fee income which we directly control ourselves, i.e., are not related on banks, partners, balance sheet issuance, has significantly increased. Clearly, this is another evidence that the business is strategically moving into the right direction. Before we close today's call, I'd like to wrap up by summarizing some key points and commenting on our outlook on page 21. In summary, Leonteq made important steps towards becoming a globally renowned counterparty for structured investment products. We had a solid performance in the first half of 2019, despite a challenging start into the year. We continued to execute on our key strategic initiatives over the past 12 months.
Today, SHIP is up and running, albeit with low volumes. Our digital marketplace is beginning to take shape. Overall, we continue to further lay the basis to reach our 2020 financial targets. I am confident that we are moving in the right direction, that we are focusing on the right initiatives that will shape the company's future and transform the business model towards a leading marketplace for structured investment products. I'd like to thank you for your attention.
With that, we open the Q&A session. The first question comes from the line of Mate Nemes with UBS. Please go ahead.
Yes, good morning. Thank you for the presentation. I have three questions, please. First, if you could comment on the turnover and margin patterns that you have seen in the past six-month period. I'm guessing that January, February was mainly the weaker period. I'm wondering if you've seen basically continuous improvement since then. If it's possible, could you also comment on perhaps the exit margins that you're seeing at the end of H1? Secondly, the second question is on NII and treasury income. We are seeing quite a substantial improvement there. I understand this is partly the result of the change in the investment portfolio. How sustainable do you see these revenue lines going into H2 and then next year? Thirdly, on OpEx, we are seeing indeed good cost control. H1 OpEx CHF 94 million.
I think you had a CHF 200 million, or you had a CHF 200 million guidance for the full year. If you could just perhaps elaborate on how we should think about cost in the second half if you are seeing an improvement in the external environment revenue run rates? Should we expect actually a tick-up in cost as well, or this is a run rate which is indicative for the second half of the year as well? Thank you.
Thank you very much for your questions, Mate. I will leave the answer to questions one and three to Marco. Maybe you take this on first, Marco.
Sure. Thanks, Mate. Good morning. First question on fee income and margin. I think, overall, H1 has been consistently lower in margin, so it's not only linked to January and February. Definitely January and February were worse compared to the other months, but I think that the overall picture looks very similar. As I mentioned during my presentation, it really goes back, first of all, to increased competition, secondly, the change in terms of product mix, and the third, obviously, the large tickets transactions, which in the past had quite an impact also on our margin, which we saw to the less extent in the first half year 2019.
Costs.
If I also take up the third question around cost. As you mentioned, cost guidance was for CHF 200 million for the full year. We ended up first half year at CHF 94.1. If you compare also in terms of FTE, you have seen that we have roughly 50 FTE more compared to the end of June 2018. This will definitely be an investment that will also materialize in terms of costs for the second half year. I would expect costs to rise a little bit in the second half year. We nevertheless maintain the CHF 200 million cost guidance, which will also be a function of our top line, obviously, depending on the second half year results for our top line.
I think Matthias, you have seen our management has some management flexibility when it comes to cost management. We maintain the CHF 200 million guidances Marco just said, but to the extent the top line would not be at the expected level, we would obviously do the necessary in order to get there. On to your question of treasury improvement, and particularly the question about sustainability. That is very sustainable, and if anything, I expect the treasury contributions to slightly increase simply for the reason that, as you correctly pointed out, we did certain strategic shifts of our treasury investments from government bonds into very highly rated, either supranationals or corporate or financial issuers. We go slowly about purchasing, and therefore, it's a continuous investment effort.
A bond we bought, for example, in June, would show a net interest income improvement for the company's balance sheet and P&L over the second half, more substantially than in the first half. What is very close to our heart is not to increase the risk exposure of the balance sheet, on the back of a significantly improved equity base to CHF 630 million. We have a little bit more possibilities to take other exposure than just government exposures. Highlight a few examples of switch trades we would have made. We sold, for example, German Bund Anleihe. German government bonds to KfW, which are, as a side comment, also guaranteed by Germany. We would have done a certain switch from a bond issued by the government of Switzerland into a bond issued by Nestlé, just to give you an indication.
We still have majority of our investments into the AAA government and supranational buckets, and certainly do not see the portfolio to go significantly different. The yield pickup, as you highlighted, is obviously there, and we expect that to continue if you compare the P&L on the net interest side to the previous years.
Very clear answers. Thank you very much. We have now a question that comes from the line of Michael Kunz with ZKB. Please proceed.
Yeah. Good morning. One question regarding the trading result. I would have expected that negatively, quite frankly, given the volatility decline in the current calendar year. Could you explain any specific movements or effects, why it came out with a positive sign? The second question, if this SHIP project is fully under sail by mid-2020, to what extent is your ability reduced that the trading result can kind of offset problems in the commission income when you put more derivatives outside? Yeah, that's it from my side.
Thank you very much, Mr. Kunz. Marco will answer the first part of the question, and I'll refer to the SHIP part.
Thank you, Mr. Kunz. I think on the trading result, I think we see really two effects, and we have also highlighted this as part of our Excel spreadsheet that we provided. One side, and I'll touch on what Lukas previously mentioned, our negative treasury carry has been significantly improved. If you look at the second half-year 2018, we had there a negative treasury carry of CHF 13.3 million compared to a negative CHF 2.3 million negative treasury carry in the first half-year of 2019.
On the other side, you're right, volatility came down the first half year, 2019, and we see that also that the hedging contribution have reduced from CHF 38 million in the second half year, 2018, to a still positive number of CHF 9.8 million. I think the overall combination of a improved negative treasury carry and a still positive contribution, even though lower than the second half year 2018, made it possible to achieve a positive result in the trading income.
On the question of the SHIP part, first of all, I wish we were at that luxury problem level already today. Of course, your observation in itself is to some extent correct. SHIP will ensure that our net fee income gets materialized on day one, and that the resulting balance sheet consumption and also trading exposure basically disappears to the extent we are not the hedging counterparty. That you can argue will decrease the positive side of trading income, but of course it will also decrease the potentially negative side of it.
I think what we are working towards as a management team is to be able to prove to the market and our stakeholders that our business is a marketplace, and that it is a scalable marketplace, and that the revenues are based on net fee income, and therefore, what I guess usually your profession would call more stable and predictable revenue type of income. Of course, there is always a flip side to it, and that's the one you highlight. We are very happy to have that flip side in the future.
Okay, thank you.
If I may add, Lukas, also be mindful that we are now ramping up this project. In terms of volumes, you should not expect now that a material number already is there for next year. If you look at the annualized Q2 number, we're talking about over CHF 1 billion in turnover, where the majority currently is hedged still by Leonteq. We aim that to be changed in the future, that the majority will be hedged by third parties. Even then, we are never talking about the entire volume from all products and all asset classes, so we'll focus first on a number of core products and core underlyings which Leonteq covers. That will also take a number of years then to really have significant impacts on the risk-weighted asset side.
Okay, thanks.
The next question comes from the line of Young-Sim Song with AWP. Please go ahead.
Yes, good morning. I would like to know if the 2020 financial targets are the same with the CHF 300 million operating income and cost-income ratio below 70%. Could you also give a bit of a guidance on outlook on this year regarding those measures? Second question would be regarding staff. Did the number of employees increase in the first half according your guidance for the year by 5%? How many employees did you hire? Last question, you decided to not pay a dividend for now. I would like to know, until when do you roughly expect this pause of the distribution? Thank you.
Thank you very much, Mrs. Song. On the outlook 2020, I can confirm that it's unchanged. On the outlook of the second half 2019, we do not provide an outlook for the second half. On the staff question, Marco?
I think on the staff question, I can answer that rather quickly. We had at year-end an FTE basis of 486 FTE. We are currently running it with 495 FTEs. We anticipate at year-end that we would increase staff base by roughly 5%. I think it's in line with what we have communicated to capital markets. We expect this number to probably slightly still increase in the second half year. This will be a very controlled increase in staff base.
On the dividend outlook, we maintain our guidance given at the February 2019 results announcement, which said for the foreseeable future, no dividends are payable. It's obviously always ultimately a shareholder's decision. As you know, for the 2019 AGM, which took place in March 2019, the suggestion by the board to shareholders was not to pay a dividend for the financial year 2018. That proposal was approved by shareholders. The board will, of course, when the time comes, assess its recommendation in the context of then prevailing, I guess, both markets, but also Leonteq's position, and will make a recommendation when time comes, which is usually around February of the year, so February 2020 to shareholders, and we leave the decision to them. We clearly, as a company, continue with our current guidance, which is for the foreseeable future, no dividend to be paid.
Thank you.
Okay, it seems we don't have any more questions.