Euroclear group CEO
"Business income growth reached 6% to €1,145 million, which is above secular through-the-cycle levels. We are very pleased with these levels of organic growth for a mature business like Euroclear."
Q. Before we talk about Euroclear’s performance, can you share your perspective on COVID-19 and its impact on both the business as well as the broader financial markets?
Lieve Mostrey. The global economy and health system is currently facing unprecedented challenges and uncertainty dealing with COVID-19.
The situation is very dynamic and is currently having a significant impact on the behaviour of financial markets and their participants across the world. The human aspects of this crisis are especially troubling.
During this time, our key priorities are the welfare and wellbeing of our colleagues, while continuing to safeguard both our clients’ and Euroclear’s assets.
We are monitoring the situation very closely and carefully assessing any potential impact on our business. Despite the exceptional volumes being processed across the financial markets, Euroclear is performing well. All services are up and running as normal, and we have remained open for capital market activity throughout. Meanwhile, I am encouraged that the financial market community has continued to work together to support clients.
We have a strong balance sheet and a AA/AA+ rating. Our disciplined risk management, limited leverage and prudent liquidity position means we are well positioned to safeguard our clients’ assets during this period of uncertainty.
Q. Euroclear continued to deliver growing financial results in 2019; how would you describe the group’s performance?
LM. I’m very pleased with how Euroclear performed, both operationally and financially, with our key business metrics again demonstrating our attractiveness to customers and illustrating our systemically-important role at the centre of global financial markets.
In total, the Euroclear group settled 239 million transactions, up 3.9% compared to 2018, which is the equivalent of €837 trillion being transacted through our platforms. That’s equivalent to ten times global economic output. Assets under custody reached a record €31.4 trillion at year end, while average collateral outstanding grew 6% to reach €1.3 trillion.
Revenues (comprising Business Income and Interest, Banking and Other Income) increased by 8% year-on-year to €1,435 million as we benefited from the consistent implementation of our strategy and captured the benefit of positive market conditions.
Business income growth reached 6% to €1,145 million, which is above secular through-the-cycle levels. We are very pleased with these levels of organic growth for a mature business like Euroclear. It demonstrates the effectiveness of our strategy to grow such high-quality fee earnings.
We also benefited from increased net interest earnings, up 13% to €290 million, predominantly due to higher US interest rates in the first half of the year. Following the US Federal Reserve’s decision to lower interest rates, the interest rate environment weakened in the second half 2019. The interest rate environment has, of course, since been further impacted by the response to the current Coronavirus crisis.
In addition, we continued to balance our investments in business initiatives, including compliance with the Central Security Depository (CSD) Regulation and the ongoing transformation of our technology divisions, while closely managing operating expenses. Our focus on costs combined with business income growth enabled us to deliver a business income operating margin of 28.4%, up four percentage points, which is progressing ahead of our plans towards our targeted low to mid-thirties level by 2023. The group’s EBITDA margin increased by five percentage points to 49.4%.
Given the sustained revenue growth and close management of costs, Euroclear delivered operating profit of €616 million, an increase of 20% compared to the prior year. Net profit rose 34% to €431 million.
Q. Euroclear also reached some important milestones in its regulatory compliance. What does this mean for customers?
LM. Indeed, six out of seven group operating entities, including Euroclear Bank, the group’s International CSD, have now been granted CSD licenses from their respective competent authorities. This is hugely significant and reflects our strengths as an organisation.
Safety and robustness, alongside efficiency and access to liquidity, are the pre-eminent reasons why customers use us as their financial market infrastructure. We continue to invest in these aspects – including with regards to evolving cyber threats. Nevertheless, regulatory approval under CSDR provides a hallmark of quality that only a limited number of European CSDs have achieved so far.
Reaching these milestones also allows us to turn our resources towards other initiatives that enhance the value we provide to customers, such as modernising our technology and innovations that grow and reshape our network.
Q. Can you tell me more about your planned investments to enhance value for customers?
LM. One of our key areas of strategic focus over a number of years is providing a hub of liquidity toinvestors around the world, whether by making markets ‘Euroclearable’, through collateral management solutions or insights from new liquidity data solutions. These initiatives, which remain a central focus for the group, have supported financial markets’ evolving needs and underpinned our business income growth.
Since 2016, we have connected three of our domesticEuropean CSDs to the European Central Bank’s Target2-Securities (T2S) platform, providing access to Eurozone securities with central bank money settlement. We recently announced that we will connect Euroclear Bank to T2S, an innovative step that would give global investors the choice between euro settlement in commercial or central bank money.
Euroclear would therefore create a single pool of collateral liquidity across multiple currencies and market jurisdictions, which supports the European Union’s long-standing ambitions to increase efficiency and reduce fragmentation across its financial markets.
At the same time, we have embarked on the modernisation of our technology, with significant investments in new technologies, cyber security, optimising our ways of working and exploring innovation. We anticipate that these investments will also facilitate efficiency gains across different areas of the business in the coming years. This sustained investment has helped to minimise operational risk and build a more resilient business allowing us to support our customers and colleagues through this difficult time.
Finally, we are also investing in a solution to offset the impact of Brexit on the settlement of Irish securities which currently are processed by Euroclear UK & Ireland. Having worked closely with authorities and financial market participants in Ireland we are pleased to be able to develop a solution through Euroclear Bank.
Q. As we enter a new decade, how do you see the role of financial market infrastructure evolving?
LM. 2019 was a year when purpose, not just profit, became a central theme for businesses worldwide. With a position at the centre of the financial markets, Euroclear has important responsibilities that help enable the global economy to function better.
In its report into the impact of Euroclearability, PwC found that emerging market sovereign issuer borrowing costs for primary issuance reduced by 28 basis points simply by being connected to Euroclear. They found that this money could instead be invested in other areas, such as schools and hospitals, making a real impact for the people that most need it in our global society.
We share such broader societal concerns with many other players within the financial industry, and it’s important that the sector takes steps to build trust in the post-financial crisis world. As such, for a number of years, we have been actively engaged in promoting ethical practices in financial industry by supporting the Ethics and Trust in Finance Prize for people under the age of 35. We are especially proud that a Euroclear employee received a Special Commendation of the Jury in the 2019 edition.
We are encouraged by the continued growth of the ESG financial sector, with green bond issuance reaching record levels. However, the sector faces challenges to ensure that coherent industry standards are implemented, to avoid concerns from both issuers and investors about greenwashing. As an infrastructure at the centre of the financial market ecosystem, we are actively exploring how to help overcome such concerns.
Q. Do you have any closing thoughts?
LM. Euroclear has been closely monitoring the COVID-19 situation over the past weeks. I would like to say thank you to my colleagues, not only for their continued dedication over the last year but also adapting quickly to the changing demands of the job during a period of increased uncertainty for our industry and our company. The human price to pay in such a crisis has been high. In this context, we can be proud of how our workforce is embracing the ongoing evolution of our business and contributing to the resilience of our model.
I would also like to thank our partners. We remain grateful to our clients for entrusting their business with Euroclear, to suppliers for their contribution and to our regulators as we strive towards our shared goal of making financial markets a safer place, especially during this current period of global uncertainty. Our focus is on helping you and ensuring continuity of our services as a financial market infrastructure.
Finally, I would like to thank our shareholders and bondholders for their continued support of our business and strategic vision.