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Results of operations

Report on expected developments – future development of results of operations

Given its diversified business model and multiple sources of revenue, Deutsche Börse Group continues to consider itself very well positioned and expects to see a positive trend in its results of operations over the medium and long term. This expectation is based on, among other things, the growth opportunities that the company intends to exploit over the same period. The Group expects net revenue to increase further in the forecast period. This assumption is based on two main factors. Firstly, a further slight increase in economic growth could improve investor confidence, and motivate US investors to return to European markets. Against the background of the UK’s exit from the EU, the general elections to be held in a series of European countries, and the development of US policies, we anticipate elevated stock market volatility in 2017, at least temporarily. Both of these factors, i.e. returning US investors and elevated equity market volatility, would have positive effects on trading volumes in equities and equity index derivatives. Moreover, market speculation on interest rate developments in the US and Europe may boost trading activity in interest rate derivatives at Eurex derivatives exchange – whilst higher, or increasing US interest rates could lead to a further increase in net interest income from the banking business in 2017. Secondly, the Group expects a further increase of the contribution from its structural growth initiatives as well as from new growth opportunities being explored within the scope of its “Accelerate” growth programme launched in 2015 (for details, please refer to the report on opportunities).

Depending on developments in the operating environment, the impact of both cyclical and structural growth drivers and the success of new products and functionalities, Deutsche Börse Group expects net revenue to increase by approximately 5 per cent to 10 per cent during the forecast period. Net revenue growth expected during the forecast period is based on net revenue of around €2,389 million achieved in 2016.

Even if, contrary to expectations, the operating environment turns out to be worse than described above, and clients were to scale back their business activities, particularly in the Group’s business divisions which depend upon trading, Deutsche Börse Group believes it is in a position to continue to do business profitably thanks to its successful business model and its cost discipline.

Within the scope of its “Accelerate” growth strategy, in 2015 Deutsche Börse Group introduced principles for managing operating costs. The core element of these principles is to ensure the scalability of the Group’s business model. To this end, the Group continuously manages operating costs adjusted for non-recurring effects relative to the development of net revenue. Accordingly, the lower end of the net revenue growth range during the forecast period and the following years, of approximately 5 per cent, would imply stable operating costs compared to the previous year. If net revenue reaches the upper end of the growth range, at around 10 per cent, operating costs would be permitted to rise by up to 5 per cent per annum during the period under review and the following years – for instance, for the purpose of increasing investment in growth initiatives. Operating costs expected during the forecast period are based on adjusted operating costs of €1,174.2 million in 2016.

Essentially, the Group achieves the necessary flexibility in managing operating costs through two different initiatives designed to enhance operating efficiency. Firstly, the Group has implemented a continuous process to improve operating efficiency by focusing even more on client needs in order to further enhance quality and efficiency of the services offered. At the same time, Group-internal processes are simplified, generating costs savings. Secondly, the Group resolved a series of structural cost reduction measures during the reporting period, and has already commenced implementation. For instance, we started to reduce the number of external service providers. This included the shift of tasks from external to internal staff, or the hiring of external service providers as internal staff. As at the publication date of this combined management report, the company expects that operating costs will be affected by non-recurring effects of some €80 million. The majority of these is due to mergers and acquistions (excluding performance-related components) but also due to efficiency measures and costs incurred in connection with criminal proceedings against Clearstream Banking S.A. in the US.

Given the expected increase in net revenue of approximately 5 to 10 per cent, with operating costs rising by between 0 and 5 per cent as a result, the Group anticipates a growth rate of between approximately 10 and 15 per cent (excluding non-recurring effects) for net profit for the period attributable to Deutsche Börse AG shareholders during the forecast period. This assumption is based on an adjusted figure of €810.8 million for 2016.

With regard to the cyclical environment and structural growth initiatives, Deutsche Börse AG’s expected business development is based on the same factors that influence the expected business development of Deutsche Börse Group as a whole. These are described in this report on expected developments. For 2017, the company expects sales revenue to be above the 2016 level (2016: €1,300.2 million) and to rise by approximately 5 to 10 per cent depending on how the factors described above develop.

Given the expected increase in sales revenue of approximately 5 to 10 per cent, with operating costs rising by between 0 and 5 per cent as a result, the Group anticipates a growth rate of between approximately 10 and 15 per cent (excluding non-recurring effects) for adjusted net profit for the period attributable to Deutsche Börse AG shareholders (2016: €553.2 million) for the forecast period.

Eurex segment

In the past year, cyclical factors (see the “Future development of results of operations” section for details) led to an overall rise in derivatives trading volumes. Higher stock market volatility since the end of 2014 resulted in a significant rise in trading volumes, especially in equity index derivatives. Deutsche Börse Group believes that structural growth factors will remain the dominant feature over the long term, and that they will positively influence trading volumes in all product segments (see the report on opportunities for further details). In the short term, a positive economic environment would result in increasing trading volumes, in particular for equity index derivatives – whilst the present direction of monetary policy, especially in the US, would have positive effects on interest rate derivatives trading.

Eurex will continue to invest systematically in expanding its product offering in the forecast period in order to take advantage of structural factors, such as regulation or changing customer needs. The focus of our efforts will be on the acquisition of new business, which is currently not settled through an exchange or clearing house. We are expecting positive developments along these lines due to regulatory requirements determining that OTC derivative transactions must be settled via central counterparties. This requirement has entered into force during 2016. Consequently, the Group expects this initiative to deliver additional net revenue for the first time in the 2017 financial year, and significant net revenue in the medium to long term. Looking at the once again very positive development of EEX group’s trading volumes during the year under review and the continued positive market environment for trading in power and gas products, the Group expects further structural growth in business activity during the forecast period, e.g. by gaining additional market share at the expense of OTC energy markets. Moreover, the Group expects rising demand for multi-bank platforms to further boost business activity at the foreign-exchange (FX) platform 360T®. In addition, we plan to include clearing services in the value chain of fully electronic FX trading during the 2017 financial year, in order to realise the revenue synergies projected in the context of this acquisition.

Xetra segment

As in the past, net revenue in the Xetra cash market segment will continue to depend heavily on stock market cyclicality and volatility. Trading volumes could rise during the forecast period, driven by a gradual improvement in economic growth as well as a rise in investor confidence. Furthermore, the company expects stock market volatility to increase, at least temporarily, making further positive contribution to business development.

As well as enhancing its cash market offering, the company will continue to closely track changes in the competitive environment for the European cash markets. As in the past, it considers itself well positioned to retain its status as the market leader for trading German blue chips and to offer its customers across the globe an attractive range of products and services for cash trading in German and European equities, and for equities clearing. However, the stronger competition in the cash market means that further shifts in the market shares of all competitors cannot be ruled out.

Clearstream segment

The Clearstream segment’s main net revenue driver is the settlement and custody of international bonds – a business that is much more stable than the trading business and only subject to less significant capital market fluctuations. The Group anticipates a structurally driven increase in demand for collateral and liquidity management services due to regulatory requirements. In the medium to long term, Clearstream expects its attractive collateral and liquidity management and its strong position in the TARGET2-Securitites (T2S) network to result in increased business activity and hence in significant additional net revenue. As Clearstream did not migrate to T2S until February 2017, the Group anticipates only a moderate contribution to net revenue for 2017. Another factor to impact Clearstream’s business in the forecast period will be central bank monetary policy, as it has been in the past. Transaction activity is expected to increase in the medium term, as a result of the ECB’s ongoing commitment (at least for 2017) to the programme for purchasing government and corporate bonds. At the same time, however, the continuation of the programme could have a dampening effect on securities issuance and liquidity management. If, contrary to expectations, monetary policy becomes more restrictive, this would have positive consequences for securities issuance, the use of collateral and liquidity management services, as well as for net interest income in the banking business. As a significant portion of customer balances are denominated in US dollars, the turnaround in US interest rate policy – initiated at the end of 2015 and continued in December of 2016 – will cause a rise in net interest income in 2017, at steady cash balance levels.

With regard to its customer structure, the company continues to expect that consolidation in the financial sector will persist and that customers in Clearstream’s domestic and international business will merge. These larger customers would benefit from greater discounts, which would lead to a decline in average fees. Although Deutsche Börse faces especially intense competition in the settlement and custody of international bonds, the company does not expect this to have a major impact on its net revenue or to result in a loss of market share during the forecast period.

Market Data + Services segment

This segment aims to accelerate expansion of Deutsche Börse’s technology leadership and expertise in the area of market data by pooling all relevant resources within the company in a dedicated, market-driven business unit. The goal is to open up untapped growth opportunities in the medium to long term.

The company anticipates that net revenue in the Market Data + Services segment will increase slightly during the forecast period. This expectation is based on the continuous expansion of the product range in all areas and greater marketing of these products in growth regions. The Group’s index business is set to benefit from this development in particular. Moreover, the Group considers the significant structural growth in the market for passively managed assets as an additional growth driver that is expected to further strengthen demand for index licences for exchange-traded funds. In addition to distributing index licences, the Group also benefits from the growing investment volumes in these products. In light of this, the Group believes it is well placed to increasingly extend the positioning of its globally focused range of indices to the Asian market as well.


Changes in pricing models

Deutsche Börse anticipates sustained price pressure in some of its business areas during the forecast period. The company’s objective is to cushion this price pressure by continually improving its products and services and by offering selective incentives for price-elastic business.

Over the long term, the average net revenue per unit (e.g. trading or clearing fees per transaction, or fees for custody services) is expected to decline slightly in all areas of the Group. This is a result of laddered pricing models that lead to a decline in income per unit as customers’ business activities increase.