In its recent earnings announcement, iFAST reported a net profit jump of 917% in 2023 Q4, or 340% in the full year 2023!
After reporting such jumps in profits, iFAST’s share price also jumped to a 2-year high, by 5% to SGD 8.34 on 22 Feb 2024 (although it subsequently dropped by 12% in a week’s time, to SGD 7.33 on 27 Feb 2024).
So what happened? Was such a significant jump in financial results a good sign for its business? Or was it already expected?
Let’s examine this in this article, discussing the key drivers for iFAST’s long term business prospects.
Existing core platform business in Singapore, Hong Kong and Malaysia
New Hong Kong e-pension division
New digital banking operations in the UK (iFAST Global Bank)
Existing loss-making China operations
iFAST’s overall capital allocation
New Hong Kong E-Pension Division
Per the headlines in many of the news articles, iFAST’s profit after tax jumped by 340% y/y (to SGD 28.3m) in 2023. Impressive, right?
However, its profit before tax (PBT) jumped by a much lower rate, at 122% y/y (or by SGD 20.8m, to SGD 37.8m). This jump is more representative of iFAST’s underlying growth, because the jump in profit after tax was distorted by a one-off impairment loss related to an associate in 2022 (of SGD 5.2m, for iFAST’s India operations), which depressed its net profit after tax in 2022.
The majority of the increase in PBT in 2023 (of SGD 20.8m) was due to the increase in PBT for Hong Kong, of SGD 15.7m, so let’s talk about that first.
The jump in Hong Kong PBT was actually due to the initial contributions from the e-Pension division (which executed well in 2023), which management had already guided previously.
iFAST did perform better than its previous target, achieving net revenue of HKD 306m (higher than target by 9%, or HKD 26m), and PBT of HKD 139m (higher than target by 39%, or HKD 39m), per screenshot below.
However, for 2024 and 2025, the management actually revised down its gross and net revenue targets, by between 23% to 28% (or HKD 250m to HKD 400m a year), “given that the tough financial market conditions in Hong Kong have reduced business volumes for the wealth management business, and given some timing delays for the ePension division.”
The silver lining is that, due to lower costs, the PBT targets for 2024 and 2025 had been maintained, at HKD 250m and HKD 500m respectively, which was 1.8x and 3.6x the 2023 PBT respectively.
So, overall, it’s good that the Hong Kong e-Pension execution has been going well overall, and the (maintained) targeted profits for 2024-2025, if achieved, would continue to drive a strong growth for iFAST’s overall profits, with a targeted increase of HKD 361m (~SGD 62m) in 2 years’ time, which was much higher than its existing PBT of SGD 37m in 2023.
Core Platform Business (Excluding Hong Kong)
Now that we have talked about Hong Kong’s overall business performance, let’s see how well did iFAST’s core business actually grow, without that boost from the Hong Kong e-pension contributions.
In terms of net revenue, core platform business (excluding HK) grew reasonably well overall, by 13%, to SGD 97m. In particular:
Singapore grew by 15% (to SGD 81m);
Malaysia grew by 2% (to SGD 14m);
China decreased by 14% (to SGD 2m).
In terms of PBT, core platform business (excluding HK) grew by 62%, to SGD 23m, but that’s relative to a low base in 2022 (of SGD 14m, which decreased y/y/ by 49%), and still lower than the SGD 28m PBT achieved in 2021 (although slightly higher than the SGD 20m achieved in 2020). In particular:
Singapore grew by 52% (to SGD 25m);
Malaysia grew by 3% (to SGD 4m);
China losses grew by 1% (to SGD 7m of losses).
However, these are short term financials. As we have discussed many times before, the revenues and profits for the core platform business are affected by fluctuations in assets under administration (AUA) caused by the market conditions, which are outside of the company’s control.
Thus, we should focus more on the long term drivers below, which progressed reasonably well in 2023:
Number of investment products grew well, by 24% (to 21k);
Number of B2B financial advisory companies, financial institutions and banks grew well, by 13% (to 680);
Number of B2B wealth advisors grew okay, by 5% (to 12.8k);
Customer accounts grew by 8% to 843k, a slowdown from the 31%, 26% and 13% in the previous three years, albeit still growing, supported by new offerings (like iGM Singapore debit card services, and launch of USD Auto Sweep in Singapore in July 2023, etc);
Net inflow was SGD 1,957m, a 8% decrease from the SGD 2,125m a year ago. However, after excluding the transfer out of stocks AUA from an institutional customer (of SGD 450m), net inflow actually grew 13% y/y, so that’s still good.
The developments above, together with the changes in market conditions, resulted in AUA growing y/y by 14% (or SGD 2.4b), to SGD 19.8b in 2023 (with the net inflow of SGD 2.0b supporting most of the increase).
On AUA, previously in 2018, iFAST set a 10-year target to achieve an AUA of SGD 100b by 2028. Now, its latest three-year plan is targeting the same SGD 100b AUA to be achieved potentially later, by 2028-2030 instead.
If the target is achieved in 2030, that would imply a high 7-year CAGR of 26%, from the SGD 20b AUA in 2023.
UK Banking Operation (iFAST Global Bank)
Bank customer deposits grew well, by 53% q/q, or 258% y/y, to GBP 214m (or SGD 359m).
This led to an interest income of SGD 8.9m (and total revenue of SGD 12.3m) in 2023, with net interest income at SGD 2.7m (~1% of deposits).
So, the deposit has been growing well, and management were still expecting the bank to achieve breakeven by 2024 Q4 and then profitability from 2025 onwards, so that’s good.
However, as we have discussed previously, if iFAST is now mainly earning/ targeting a NIM of just 1% (or 1.5% based on previous target), due to its conservative approach on deploying those deposits, it’s unclear if the ROE for the banking operations would be high enough (unless it can also generate and profit from significant amount of non-interest income).
For context, in 2023, its non-interest income was SGD 9.6m (= SGD 12.3 total net revenue, minus SGD 2.7m net interest income), which was less than half of its operating expenses of SGD 20.9m (= SGD 12.3m total net revenue, minus the SGD 8.6m loss before taxes).
If and when the non-interest income grows to a high enough level to just offset operating expenses, with a NIM of 1.0%, which translates to a (pre-tax) ROA of 1.0% (since non-interest income and operating expenses net off each other, resulting in PBT equalling net interest income), iFAST would still need a high equity multiplier of 1,500% to achieve a (pre-tax) ROE of 15% (= 1,500% x 1.0%).
For reference, OCBC Singapore and DBS Singapore had an equity multiplier of 1,047% and 1,191% respectively in 2023.
On this topic, iFAST’s presentation mentioned that “iFAST Global Bank intends to maintain capital and liquidity ratios that are well above minimum regulatory requirements. Despite this, in the years ahead we expect the Group as a whole to be able to target for very healthy levels of return on equity as the revenues derived from the core platform business and the ePension division are essentially fee based income.”
Given that iFAST intends to reinvest quite some capital (from the non-banking business) back to the banking business, it’s very important to monitor what level of ROC can iFAST achieve for its banking business, and whether the spillover benefits to its non-banking business (e.g. with more banking customers putting deposits with iFAST, they might end up using other wealth management offerings by iFAST) are significant enough, for iFAST to improve its overall ROC back to a healthy high level.
We have previously enquired iFAST on this privately, and their response in August 2023 was “The iGB does have a targeted internal ROE [which is not disclosed to the public yet], which is inclusive of the growth in NIM and commission and fee income which we expect to come through in 2024 and beyond barring any unforeseen circumstances and also depending on ongoing business volumes. You are also right in identifying that the capital needs to be invested in the bank to enable balance sheet growth whilst maintaining capital ratios, and the NIM of 1.5% is a minimum target.”
China Operations
For China, consistent with the management’s cautious approach to slow it down and focus on cost control in view of the tough environment, revenue decreased by 14% to SGD 1.5m, while net loss was controlled at a similar level (SGD 7.2m).
The management expected the impact of cost control measures would show up more in 2024.
Capital Allocation
The overall ROE reported by the company was low, at 12% in 2023 (which was much lower than the 22% and 26% in 2020 and 2021).
Our calculated pre-tax ROCE, which excludes “other income” earned (like gain on derecognition of associate, government grant (which had come down significantly in 2023, relative to the past 3 years), and gain on investments in financial assets), was about 11% in 2023, so still low.
We would have to see if iFAST can bring its ROC back to healthy high levels, like those in 2020 and 2021, before it invested a lot more in its platform and started the UK bank operations.
On the deployment of capital, it did not do much share buybacks, like in the past. It mainly reinvested its cash flows on capex, and distributed some out as dividends (with ~50% payout ratio in 2023).
The total dividend per share in 2023 was SGD 0.096. Relative to the share price of ~SGD 7.33 on 27 Feb 2024, the dividend yield was ~1.3%.
Valuation
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Conclusion of iFAST 2023 Earnings
So what do you think about iFAST? Do you have any questions about our analysis of iFAST 2023 Earnings above? Let us know in the comments below!
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