For the boss of the online broker flatexDEGIRO, Frank Niehage, it was rock solid this week: The banking supervisory authority criticized organizational deficiencies, the targeted result is more distant, the price collapsed by more than 30 percent. Niehage is combative.
FOCUS online: BaFin is just around the corner, the price is under pressure, what’s going on at flatexDEGIRO?
Frank Niehage: During an audit, BaFin identified deficiencies, primarily in connection with internal processes, their documentation and organizational structures. We have already taken steps to remedy these deficiencies. These include personnel changes, such as the appointment of a new Chief Risk Officer at flatexDEGIRO Bank AG in October and changes in management in the relevant areas. We continue to work closely with BaFin to eliminate all deficiencies in a timely manner. My confidence that we will be able to do this successfully is also shown by the fact that I personally bought flatexDEGIRO shares for 250,000 euros at the beginning of the week.
In this context, you have already increased the capital in the group’s own bank. Why was this necessary and is it enough?
Niehage: The complaints mean that we have to hold more capital at the bank temporarily. We also have this capital within the group, it was simply relocated accordingly. However, there is no additional capital requirement. It is also important for me to clarify that the Bafin objections relate exclusively to formal and organizational points that have no impact on the solvency of the group. There were no negative findings from the audit regarding our earnings, financial and asset situation.
The party seems to be over for the world’s leading technology companies. Twitter, Meta, Amazon and Co. are laying off thousands of employees, and online brokers such as Robinhood and Trade Republic are also kicking out large parts of the workforce. What’s happening here?
Niehage: After the two boom years of 2020 and 2021, normality is returning. The mantra “growth at any price” is followed by the disillusionment that at some point a company has to earn money operationally in order to survive. Excessive expansion fantasies take revenge, as do unsound business models that are not sustainable without venture capital financing.
A topic for you too?
Niehage: On the contrary. We have always relied on profitable growth, are completely free of financial debt and are generating decent profits even in the current difficult environment. That is why we can use a sense of proportion to further expand our workforce and prepare ourselves for further growth in the years to come.
The crypto exchange FTX crashes and wreaks havoc on the crypto market. The Bitcoin price temporarily collapsed in 2022 from 42,000 to below 16,000 euros. How bad is the crash for neo-brokers in Europe?
Niehage: It’s a brutal burglary. And the collateral damage from the FTX collapse will still be painful for some market participants. For neo-brokers who have relied on these supposedly cool products in the past two years, the problems of an already difficult stock market year 2022 are getting worse. We see it as confirmation that we were cautious with crypto transactions. The crypto crash does not affect us at all. On the contrary, we are gaining numerous customers from smaller competitors. Because solid, broad market platforms like ours are clearly gaining strength in this market correction.
Do you expect collapses in neo-brokers?
Niehage: The past few years have been paradise for online brokers. The stock market boom, the dream of zero interest, meme stock hype, crypto gambles and the gamefication of the financial world have lured millions of new investors to the stock exchanges and brokers. The good thing is that there has been growing participation by private investors in the capital market. At the same time, however, it is dangerous that gambling – for example with crypto products – has been exaggerated and inexperienced investors have been lured into tricky structures. In the boom, only one thing counted: as fast, risky and cheap as possible. Now it is over.
Online brokers, who were already unprofitable during the boom, will hardly exist in a normalized environment. Especially if the EU will ban “back-to-back” financing via reimbursements, the so-called payment for order flow, to protect private investors. And as far as Bitcoin is concerned: customers at flatex can very well participate in the performance, even with around 30 different crypto currencies, but without the custody risks that we are now seeing with FTX.
In the crisis year 2022 you gain 1000 new customers every day, you said. Is that still true?
Niehage: No, that’s not entirely true. In fact, we even win well over 1,000 customers a day. After nine months, there were already almost 400,000 new customers throughout Europe. That is indeed a remarkably high number in such a difficult year. Our business is expanding. We clearly outperform the most important competitors and have been the fastest growing pan-European online broker for some time. Mathematically, we are currently gaining two to three new customers every trading minute, processing over 350 transactions and thus booking almost one million euros in transaction volume in shares and ETFs. In addition to our core markets in Germany, Austria and the Netherlands, we are currently growing particularly strongly in France, Spain, Portugal and Italy, but also in England and Ireland. Since the end of 2019, we have increased our customer base more than sixfold from less than 400,000 to around 2.4 million.
Europe’s largest online broker sounds good. But can the business figures keep up with the growth in customers?
Niehage: Although the activity of many investors will of course decrease significantly in 2022, we increased our EBITDA by 52.2 percent to EUR 126.7 million in the first nine months of 2022, which corresponds to an EBITDA margin of 42.0 percent. We have demonstrated our ability to maintain revenue per transaction well above €5 while delivering industry leading growth rates. Strong net inflows of 5 billion euros in just nine months and a customer retention rate of over 98 percent demonstrate the high quality of customers. Incidentally, higher interest rates also help us to increase earnings. It pays off that we are one of the few online brokers in Europe with a full banking license. However, we will continue to approach all of this conservatively, continue to strengthen and reinvest our equity.
What will change in compliance and organizational issues?
Niehage: We are growing at breakneck speed and have to adjust our internal structures and let them grow with us. The German supervisory authority no longer sees us as just a “small and non-complex” institution. As a result, the regulations are now also becoming more complex and demanding. With Matthias Heinrich, we have therefore appointed a new, strong Chief Risk Officer with 30 years of operational experience in the European banking sector to the board of flatexDEGIRO Bank. And as far as regulators and capital adequacy requirements go, like comparable institutions, they are actually getting stricter. Where mistakes have been made, we are in good discussions with the Bafin, because they not only warn about individual mistakes of the past, but they rightly oblige us to adapt to the top league of the financial system. We will do the same.
This includes adapting internal structures and processes, but also further strengthening general corporate governance. These are very clear priorities that we are working through systematically. As of January 1, 2023, we will expand the Group Executive Board from two to four members. The two new colleagues are long-standing managers of ours who previously earned their spurs at Goldman Sachs. And as soon as all regulatory requirements have been met, another board member will join the executive committee. In addition, in recent weeks we have further strengthened the equity at flatexDEGIRO Bank AG with group funds of EUR 50 million.
The growth is becoming more uncomfortable…
Niehage: …these are normal side effects of our success. Whether Frankfurt online broker or Frankfurt Eintracht, if you get promoted to the Champions League, then you will be looked at more closely and have to play according to the rules of the big players. We have indeed become one of the leading European financial companies – and a particularly fast-growing one at that. The fact that the Bafin is now criticizing specific processes at our company, sometimes showing us a yellow card, is certainly not nice. However, we take this very seriously and have already initiated appropriate measures. Growing pains like these are part of growing, but they also need to be treated. A mistake is never good. But recognizing and eliminating organizational and procedural deficits at an early stage, even before actual damage occurs, is something I consider positive. You learn from mistakes and we will ensure that we don’t make the same mistake twice.
Your share price has collapsed. What is your stock market forecast for 2023?
Niehage: We are fast-growing, highly profitable, technological leaders and excellently positioned with a strong, pan-European customer base. In this respect, I am also convinced of the inherent strength of our company and thus of the flatexDEGIRO share. However, our stock also strongly reflects general market sentiment and industry expectations. High inflation, rising interest rates, fears of recession and geopolitical risks weigh on the general mood on the capital markets in winter too.
But in November you saw how quickly something like this can turn around. Even slightly positive interest rate signals from the USA have caused prices to jump by 20 to 30 percent very quickly, especially for technology stocks. As soon as these external obstacles weaken, or perhaps even disappear completely, this will not only have a positive effect on our share, but on the stock market as a whole. We then also benefit from this operationally.
The market environment is still challenging, but: in the medium and longer term the market will pick up again and the year 2023 may surprise us all positively. And one thing is certain: the meanwhile higher interest rates alone will bring us over 40 million additional pre-tax earnings at flatexDEGIRO in the coming year. That’s a good start to the new year.
The interview was conducted by Oliver Stock / WirtschaftsKurier
*The contribution “flatexDEGIRO boss after the price drop: “I bought more”” is published by WirtschaftsKurier. Contact the person responsible here.
