Leonteq AG (LEON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Leonteq Full Year 2019 Results Conference Call. I am Sandra, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Dominik Ruggli, Head of Investor Relations and Communication Leonteq. Please go ahead.

Good morning, everyone, and welcome to the press conference of Leonteq's Full Year 2019 Results. The presentation material can be found in the Investor Relations section of our website since 7:00 a.m. of this morning. Today, we also published our entire annual report, including the audited consolidated financial statements and the compensation report for 2019. A replay of this press conference will be available today in the afternoon. Here with me today are Chief Executive Officer, Lukas Ruflin; and Deputy CEO and Chief Financial Officer, Marco Amato. Lukas will start the presentation with an overview of our ongoing business transformation over the past 24 months and provide you with an update on the progress of Leonteq's key strategic initiatives. Marco Amato will then take over and discuss the financial performance of the full year 2019. Lukas will then conclude today's presentation with a brief summary and outlook of Leonteq's positions, stepping into the coming years. The presentation will last about 45 minutes, after which, we are happy to take your questions. It's now my pleasure to give our CEO, Lukas Ruflin, the floor.

Thank you, Dominik. Good morning, ladies and gentlemen, dear shareholders, analysts and media representatives. I'm here in front of you today to share Leonteq's journey of the past 2 years. If you recall, in 2018, 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 our business. At today's press conference, we will highlight to you the progress we have made through a clear and focused execution of our strategic priorities. We will, of course, also update you on how business is transforming and present to you how Leonteq performed financially during these 2 years, and in particular, 2019. Let me start the presentation on Page 4, by showing you our 24 months progress and how we have reestablished a solid financial track record throughout 2018 and '19. As you can see illustrated in the top left chart, our revenue base increased on a half yearly basis in 2019 compared to 2016 and 2017. On a full year basis, this means that our annual revenue base has increased from CHF 217 (sic) [207] million to CHF 215 million range in 2016 and '17 to CHF 256 million to CHF 282 million revenue range in 2018 and '19. Looking at our profitability, shown in the top right-hand chart, we have demonstrated our resilience also in difficult market environments over the past 4 half years. As I said 1 year ago, there will always be better half years and half years with reduced earnings, but our focus is clearly to manage Leonteq as a profitable business and to contain in that regard our cost basis. This focus has also had a strong effect on our shareholders' equity, which increased by close to 60% to CHF 663 million at year-end 2019 compared to year-end 2017. Along with our solid financial track record, we have transformed as a company on many fronts over this time. I'd like to highlight a few of these accomplishments on Page 5. Firstly, our newly installed leadership team has extensive experience in the financial service sector and has successfully managed the company's turnaround over the past years. We have also improved our corporate governance framework and strengthened independence, skills and diversity of our Board of Directors and its committees. In this context, Leonteq announced today that Leonteq's Vice Chairman, Hans Isler, will not stand for reelection at the Annual General Meeting in March 2020. And Leonteq also announced that the Board of Directors has proposed that Philippe Weber as new member of the Board for election at the 2020 AGM, which will take place at the end of March. Philippe Weber is Chairman and Managing Partner at Niederer Kraft Frey in Zurich. And subject to his election, the Board intends to appoint him as Leonteq's new Vice Chairman. It goes without saying that Hans Isler has been an outstanding very important contributor to Leonteq's progress and development in the last 8 years. Hans joined Leonteq's Board in summer of 2012, and his step is, in terms of the long-term independence of the Board to be seen, as you know, in particular, in the -- with regards to U.S. representatives and proxy vote shareholdings, Board members who are considered independent lose their independence after maximum period of 9 years. And Hans, thereby was now slightly above 8 years, and he's stepped in that regard, as said has that background. And we at Leonteq are very grateful to his outstanding contributions in the last 8 years. As our company has grown, we have addressed in pending constraints and scalability of capital, platform and partners in order to transform our business model and position Leonteq as a globally recognized counterparty for structured investment products. Despite the challenging market environment, increased competitive landscape and targeted investments made by us, as I said before, we have established a solid and profitable performance. I mentioned it before, we have also strengthened our capital basis by 59% to CHF 663 million at the end of '19 compared to 2 years ago. Of course, this is also a function of our shareholder's support, which was very clearly and strongly demonstrated in summer 2018, when we did the rights issue, that had the pickup of the shareholder rights in excess of 99%. Over the same period of 24 months, the deferred fee income increased by 133% to CHF 107 million. This amount reflects revenues which we have already generated, but which, in line with our prudent accounting approach, we only recognize in future periods but, of course, is our revenues generated. And we believe it is an important line item to look at in addition to our shareholders' equity, when you assess the company's capital and solidity standing. In 2019, we also obtained 2 investment-grade ratings from a Fitch ratings, who assigned us a rating of BBB- with positive outlook. And B from JCR, Japan Credit Rating, who assigned us a rating of BBB+ with a stable outlook, underlying Leonteq's position as a globally recognized counterparty for structured investment products. We also defined in 2019, our corporate culture and strengthened the framework with the new mission statement and corporate values. These achievements have been vital to Leonteq's transformation and lay an important basis, we believe, for our further developments in the coming years. On to the next slide. Our business scalability has 4 key impact areas: scalability of platform, scalability of issuance, scalability of hedging, scalability of distribution. I'd like to briefly spend some time on each one of them. Platform scalability is, of course, the starting point for further business growth for Leonteq and accordingly, will continue to center around the enablement of rapid and low-cost securitization through automation by continuing to upgrade our platform by using the latest technology. We have progressed with leading hard and soft ware providers in that regard. So to eventually make our entire white label service offering, for example, available on the cloud, it's very important to some of our partners, who as you know, are often among too-big-to-fail institutions in their respective countries and who obviously have very stringent contingency plan requirements and something we obviously want to proactively support them with. Issuance scalability. We are making efforts in that regard. As we are expanding our issuance model by enhancing cooperation with existing platform partners. We absolutely aim to increase the number of white-label issuance partners in the foreseeable future. And finally, we have opened up, in 2019, our platform to third party issuers, which is enhancing our multi-issuer offering even further, very comparable to a typical brokerage model. On the hedging scalability, as you all have heard of us before, the implementation of our smart hedging issuance platform, in short SHIP, is absolutely crucial with regards to our targets to reduce our own volume of hedging exposure. I'll refer to that a bit later, but we are pleased about the progress. The fourth scalable pillar is the distribution part where we target to service banks and asset managers to distribute into their own and captive channels. To do this, we have developed our new digital marketplace, which we call LynQs. Through all of these measures, we are essentially addressing the reality of our industry, which is that we are active in a business, which is more and more becoming a volume-driven market. And as you have seen with many other industries before, higher volume is a reflection of maybe, in general, the bigger markets, but usually go hand-in-hand with increased pressures on margin on the need for the market participants on the provider side to automate and to differentiate in the long term about -- on costs and cost management. We believe it is an opportunity for us, this market environment, but it's very clearly a necessity for us to continue investing. If I can now draw your attention to Slide 7, where I'd like to detail -- in more detail the markets. The left-hand chart shows that the global wealth showed by many statistics has continued to grow during the last 2 years. Our progress in terms of growth has been quite impressive with a 12% increase of wealth globally since 2016. Of course, this has been tremendously helped, particularly last year, by generally benign market environment, and to some extent, support from global central banks. It's obviously something which, in a given year, can also reduce, but I think the tendency there is clear. What we are also seeing is that market turnover on structured products is increasing in Switzerland. We show you the Swiss statistics, because it's one of the best researched. We also have data available from the Swiss National Bank, which obviously get central seeding data from all the custodians in Switzerland. And again, we see a decent growth there. What, however, is not said on any of the slides is that the provider of structured products, in the context of what I've just described before, are seeing a more severe market environment. It's something which we have expected for the last 2 years and which we have highlighted to you already in 2018. If you turn now to the next, Page 8, you will see our illustrated equation for creating long-term shareholder value and sustainable growth in this sort of market environment. We have defined 3 areas, which will help us to reach it. First, we will enhance our scalability on all levels mentioned before, which essentially addresses the development of the structured products business into a volume-driven market environment and should hopefully result for us in a growing revenue base. Secondly, we will continue being very focused on improving our profitability through investing in key projects while optimizing our cost base, thereby positioning Leonteq as a leading marketplace for investment solutions, which should hopefully result in growing net profit. And thirdly, by continuing to strengthen our absolute capital base, we will position ourselves unquestionably such that with regard to any counterparty we face with the client, the partner or a hedging counterparty, we are, in every regard, a very serious counterparty they would be delighted to do business with. My colleague, Marco Amato, will later show to you a change in the Swiss regulatory regime with regard to security terms. Our minimum capital expectations by regulators have changed significantly since the beginning of the year. We are now subject to a minimum capital level of CHF 20 million that compares to shareholders' equity of CHF 663 million. Despite all of this, we will continue to increase our absolute capital levels in the context of the necessity, as I just said, to become unquestionably a counterparty of choice for any of our clients. I'd like now to spend a few minutes on updating you on key initiatives, where, in aggregate, in the last 2 years, we have spent about CHF 40 million in terms of hard cash investments. On Page 10, you can see our marketplace for structured investment solutions as it's taking shape. Throughout 2019, this digital marketplace developed into what today we call LynQs and provides Leonteq's clients digital access to one of the largest structured product universe's available. This is represented in the sense of the graphic. LynQs was developed by Leonteq in-house to serve as a one-stop shop and provides Leonteq's clients external access to applications, services and market and product data that were previously only available internally. Our clients can choose from a variety of issuers on our platform, which are represented on the left-hand side of the slide. Those are our sell-side partners, which we can offer services along the entire value chain from issuance to distribution to life-cycle management of their own white-labeled products. Importantly, as I said before, we further opened up our offering for third-party issuers sell team at the time. This is a very big service extension for our clients. Until the beginning of 2019, we could offer any credit party, counterparty risk to a client, who wanted to buy a structured product. Today, a client can choose from a selection of 23 counterparties. On top of the slide, in the gray area, you see how SHIP is connected to LynQs by providing best option prices for selected number of products and issuers. Further development of this marketplace will continue to open up new opportunities for us, our partners and our clients. And again, if you just go back to the slide, please. 2019, probably in the future when we look back, will be the year of transformation for Leonteq. I mentioned the white-labeling issuance partner, which have more than doubled in terms of numbers. We, today, have on the SHIP side, not just the opportunity to deliver for the future, but the proof that SHIP works. I'll come to that later. And if you just look on the right-hand side, and you imagine you are on the buy side, so you are representative of a private bank. Through LynQs, through the Leonteq automated one-stop shop, you essentially can pick and choose from the issuer of your choice. And via Leonteq, we'll give you the comfort that you will get the best option in the price, not because Leonteq has the best price, but because we will ask the market, and you then choose the options of your choice. On to the next slide, 11. Scalability is a big word. Many people use it, but how do you measure it? Hindsight, it's not that difficult. You actually look at the few key numerics. And we saw it for the first time. Relevant to show you some of the in-house management tracking statistics we look at very closely. First of all, the number of products we issue. It's obviously a very good and direct linkage to the client activity. And what we see here is that on average, the number of products issued has increased by 21% each single year. Turnover, again a good metric, has increased by 13% on average per year and reached a new record of just above CHF 30 billion in '19. In 2019, we performed roughly 164,000 transactions compared to only 67,000 in 2016. It might not sound such a large number, but I assure you, processing hundreds of thousands more transactions on our platform, and we talk here about often complex products, requires an entirely different IT and operating system than we had in 2016. The way we have invested in the last few years, I feel very confident that the numbers could easily double, triple. And with our current platform, we could stomach such further growth. That's obviously absolutely critical if we assume margin continues to decrease. And as a result, in order to increase the absolute revenue base, you, therefore, must increase the number of transactions. Finally, our platform assets, which is a certain indicator for future activity, have also solidly increased over the years, reaching a new record of CHF 15 billion at the end of '19. As I said, this was all only possible through scaling our platform and implementing state-of-the-art infrastructure in the development environment in-house that allows for the management of in-house and third-party solutions in a fast and resilient way. We have added the cloud solutions to our offering, which today already improves flexibility of our infrastructure capacity. And of course, we have made significant project -- progress on SHIP, which you can see in more detail on the next page. SHIP as a recollection stands for Smart Hedging Issuance Platform, which is designed to reduce hedging exposure by offering Lenonteq's issuance partners the opportunity to enter into hedging transactions for their issued products with external hedging partners. Before I spoke briefly about the appeal of SHIP to the buy side, so a private bank, who wants to pick a certain issuer, but once they have the comfort that they get best price on the option element, what we talk here about is that SHIP, of course, also brings a lot of advantages to our white-label partners. Concretely, as an example, Raiffeisen until about 2 months ago, whenever they issued a structure of products, had only the choice to hedge with Leonteq. Today, as we are speaking, Raiffeisen has on any hedge it does, as long as the underlying payoff is already on the SHIP platform, the choice to transact with Leonteq, but also the alternative to transact with another SHIP hedging counterparty. We commenced development in 2018. We immediately declared SHIP the -- by far highest priority project of the firm. And accordingly, I'm not entirely surprised to be able to say today that we have made good progress since then. What we simply did not know in 2018 was whether SHIP, from a technology point of view, would work. It is, again, a quite complex technology project in terms of execution. You have to imagine that the client, who needs best option price, one-step best option price within a matter of seconds. So it's not just about getting a price from a hedging counterparty, say a U.S. investment bank, but it's about getting the price instantly. And we thought, for many reasons, it was possible, but as you all know, visions are not -- never reality. Today, I can tell you the vision is reality, SHIP works. We have, by now, tested the platform well. And we have 6 leading investment banks connected to the platform and actively contributing quotes. Whenever we onboard the counterparty, we put them for a certain period in a data testing mode. Simply because when we go live, we do not want to have breakage in terms of OTC confirmations. SHIP is not just about getting a good price, but it's obviously about the entire value chain of the product. So once hedged, you need a proper back-office function, OTC confirmation, that's fully automated. And of course, eventually, the client might want to sell back the underlying structures products, so you need a well-functioning secondary market activity. So again, we put new counterparties into a beta testing mode. Three of them are out of this mode and fully live. Three are in the beta testing mode. They are daily providing quotes, but we are not yet, if you want, actively trading with them until that test phase is over. We, however, expect that now to be a matter in some instances of weeks, another instance of a couple of months until the 6 counterparties are fully up and live. In addition, we have Leonteq as a hedging counterparty on SHIP. And with then 7 counterparties fully live, we will be able to declare Leonteq that SHIP is now fully up and running. Time line will bring us closer to summer. That's in line with the time line we have guided you on during the last 2 years. Importantly, in 2019, and you would not see that in the SHIP statistics per se, but it's obviously very critical for our future development. We have now also enabled issuance partners, notably a Raiffeisen, to become a direct SHIP counterparty. In December, we had the first trade where Raiffeisen entered into a SHIP transaction, did not hedge with Leonteq, and the OTC transaction and settlement happens directly between Raiffeisen and the third-party hedging company. This is very important for Leonteq, because that was the first time in our history that we enabled the structured product issuance for a partner, but we did not use our balance sheet in between. And clearly, we will see much more of these transactions in the future. The bottom-right chart shows you the progress SHIP has made throughout '19, with both turnover, number of trades doubling from the first to the second half of the year. In the full year '19, we recorded more than 2,600 transactions with a notional volume of approximately CHF 1 billion. The majority of the trades were still hedged by Leonteq as a function of Leonteq quoting the best option price for the respective transactions. And sometimes I'm asked whether that's a problem, the answer is absolutely not. Management has been focused in the last 18 months on getting SHIP up and running. Leonteq can very easily increase the number of SHIP transaction not hedged by Leonteq. That's a direct function of Leonteq's competitiveness on the trading side. So I could today decide that tomorrow, all our SHIP transactions are no longer hedged by Leonteq. You'll decrease the pricing competitiveness after the Leonteq options, and you will, base the way that SHIP works. We will always 100% of the trades hedged by third counter-party, who shows the best price. It's, however, for us important in this early stage of the life of SHIP that we show to clients that SHIP generally also brings an added value to them. So for certain transformation period, Leonteq on purpose is also quite aggressive on the SHIP platform because, of course, you do not want to leave people the impression that SHIP, even though it's now a competitive marketplace, leads to less good pricing for clients. We also want to ensure that our SHIP hedging counterparties understand that there will only win a SHIP trade if they are very sharp on the pricing side. So in summary, I'm happy to reconfirm what we communicated earlier, which is that SHIP will be fully operational by mid-2020. Moving on to Slide 13, I'd like to take a moment to underline Leonteq's local commitments to our clients. We are servicing, as you know, our clients along the entire life cycle of structured products, and we are geographically present where our clients are located. So far, we have a footprint in Europe and Asia. But we have, out of those local offerings, of course, certain regional growth, which we can cover from ancillary offices. So for example, we have a business in Italy, which has been nice and good progress in the last 18 months. We have covered that business out of the U.K., which was until recently very easy to do, will be less so in the future. And we have obviously also had a certain activity in the Middle East. In view of some microeconomic changes, particularly Brexit in the U.K., but also in view of the good growth we have seen of our business in those locations, we have decided to open 2 new offices in both Milan and Dubai in the course of the year. We will accordingly expand our European onshore offering and also open up a presence in the Middle East. Of course, this is all subject to regulatory approvals. And in terms of future reporting, for the time being, we would include Middle East under Asia. Once Middle East would be out of the new start-up mode, we would possibly reconsider showing it separately, but in transparency, for now, we would show it within Asia. Finally, we also have, as you know, reality in Switzerland, which is facing as a constraint our clients every day, and that's the low interest rate environment. We had now for 10 years, either 0 or negative interest rates in Switzerland. And in particular, in the long-term savings plan area, which we cover through our insurance and Wealth Planning Solutions division, we are working on what we believe to be a very innovative new concept, which we believe would allow clients to address the low interest rate which clients face. 2018, we sized up the UPS. We had mentioned to you that we are reassessing all our options. We have reassessed all our options. We are very positive about the future prospects of this business. And as I said, we have a certain -- a new product offering, which we will try to test in the market. We select the clients in the coming months. And as if and when we see that, again, addition could become reality, we would update you a bit more, probably the first time in the first half 2020. With that, I would like to ask our CFO to join, Marco?

Thank you, Lukas. Also good morning, and warm welcome to all participants from my side. I'm pleased to present to you Leonteq's financial performance for 2019. Starting on Page 15, I would like to give you a brief overview of our financial highlights for 2019. Following a subdued start to the year, we had a solid performance with a net profit of CHF 62.7 million in 2019 amidst the challenging market environment. This compares with the record results of CHF 91.5 million that Leonteq achieved in 2018. Our earnings per share was CHF 3.35, which was down from CHF 5.40 in 2018. Total operating income amounted to CHF 256.2 million. This was driven by a relatively stable net fee income of CHF 264.9 million and the absence of contributions from hedging activities. We maintained a disciplined cost management with a cost base at CHF 191.1 million, despite making investments in headcount growth and key strategic initiatives throughout the year. We also maintained a strong capital position with a total BIS eligible capital of CHF 648.1 million and the total capital ratio of 21.1%. Furthermore, the Board of Directors has decided to initiate a new phase of conservative dividend policy. For the financial year 2019, we will propose to shareholders a total distribution of CHF 0.50 per share. Let me now elaborate more now at top line on the next page of the presentation. Leonteq's total operating income was mainly driven by 2 line items. First, we have the net fee income, which results from issuing and distributing structured products. This is displayed as orange bar chart on the graph on Page 16. Then there is the net trading result, which derives from hedging structured products and our refinancing activities. This is marked as the dark gray bar chart. Let's now look at how these 2 items performed in the first and second half of 2019 compared to the prior year. As already mentioned during our half year 2019 announcement, Leonteq experienced a subdued start to 2019. Economic revenues saw a sharp decline to CHF 8.1 million in January 2019 compared to CHF 26.1 million in January 2018. The months following January 2019 saw a recovery in client demand, and overall, we were able to deliver a solid performance during the first 6 months of 2019. In the second half year 2019, we were able to grow Leonteq's net fee income by 14% to CHF 144 million compared to the second half of 2018. This was driven by 2 effects. First, we saw an increase of 19% in turnover in our Investment Solutions business line, which we -- compensated for the decrease in margin to 80 bps. Second, also our Insurance & Wealth Planning Solutions segment had a positive contribution year-over-year, which was primarily driven by a one-off effect of CHF 9.7 million. On the trading income line, we distinguished the contribution from hedging activities on the one hand and the contribution from the treasury results. As you know, our hedging strategy is to hold a structurally long volatility position. Especially in market shock scenarios, we tend to earn positive trading income, which we consider as a natural hedge to our client revenues. This was the case for the second half of 2018 where trading income amounted to CHF 25 million. Now in the second half of 2019, market volatility was reduced, and there was no major equity market disruptions leading to a CHF 13 million negative contribution from hedging activity in the second half of 2019, compared to a positive contribution of CHF 38 million in the prior year period. Analyzing the second element, the treasury result, Leonteq recorded an improvement of CHF 15.5 million from its investment activities in H2, 2019. As a result of negative hedging and positive treasury results, the net trading result was negative CHF 11 million in the second half of 2019, compared to a positive result of CHF 35 million in the same period in 2018. Moving on to Page 17, let's look at Leonteq's cost base. Despite that as mentioned by Lukas, significant investments of approximately CHF 40 million into key initiatives such as LynQs, the SHIP platform, but also our AMC Gateway, Leonteq has continued to maintain a stable cost base over the past 2 years. Total operating expenses amounted to CHF 94 million in H1 and CHF 97 million in H2 2019. For the full year, our cost base increased only by 1% to CHF 191 million, and we were able to be below our guidance of CHF 200 million for the full year. The introduction of IFRS 16 leases resulted in a decrease of Leonteq's operating expenses of CHF 10.7 million, but caused increase in depreciation in the amount of CHF 9.6 million. In order to further optimize our cost base, we have also started to assess options to near-shore certain processes and functions also in light of future growth. Let's look at Page 18. Over the past years, Leonteq has built up a strong shareholders' equity with the successful completion of the capital increase in August 2018, obtaining net proceeds of CHF 118 million and retained earnings amounting to CHF 154 million from 2018 and 2019 retained earnings. Our shareholders' equity totaled CHF 662.5 million at the end of 2019, which is an increase of 58% compared to end of 2017. During the same period, we also built up our deferred fee income, which totaled CHF 107 million at the end of 2019 compared to CHF 46 million at the end of 2017. These combined effects have allowed us to attain a total of CHF 769 million. On the back of this, and in consideration of the strategic process achieved over the last 2 years, the Board of Directors has decided to launch a new phase of conservative dividend policy. As mentioned, for the financial year 2019, Leonteq will propose to its shareholders a total distribution of CHF 0.50 per share. In line with the new company law in Switzerland, which is effective as of January 2020, the distribution will be paid in equal amounts of the retained earnings and reserves from capital distribution -- contribution. Looking now at Page 19, you will see the composition of our balance sheet. Our balance sheet is driven by 2 factors. First, we issued Leonteq's own structured products, which are recognized on the liability side. To hedge these liabilities, we invest approximately half of the proceeds from the own issuance into a conservative investment portfolio at -- and the other half into hedging derivative positions, such as equities and indices. Likewise, as a result of the issuance partner business, we mostly hedge for our partners, their structured product exposure, by purchasing it to either the underlying securities of the products or options. In 2019, our total assets decreased by 15% to CHF 9.1 billion. The decrease in both assets and liabilities was primarily driven by a reduction in positive and negative replacement values of the Raiffeisen financial instruments coming out of calmer equity markets. Sum up, we have a solid balance sheet with a low-risk profile and a leverage ratio of 7.4%. Our regulatory capital on Page 20 shows that Leonteq maintained its strong capital position. You can see on the left chart that our platform assets increased significantly by 24% from CHF 11.9 billion in December 2018 to CHF 14.7 billion in December 2019. In turn, our risk-weighted assets also increased, but only by 10%, from CHF 2.8 billion to CHF 3.1 billion between December 2018 and December 2019. As a result of our strong capital position with total PA's eligible capital of CHF 648 million, we reported a total capital ratio of 21.1% at year-end. As I wrap up the discussion of Leonteq's financial performance, let me give you a brief update on Leonteq's financial targets for 2020 on Page 21. In light of the continued challenging trading environment, particularly with regards to market volatility, we expect to achieve total operating income in the range of CHF 270 million to CHF 300 million for 2020. The main drivers for the target -- targeted revenue growth will be LynQs, third-party issuers, fund derivatives, actively managed certificates, the European Issuance Program as well as Leonteq's SeDex listing. Furthermore, we expect total operating expenses of approximately CHF 200 million for the year 2020, similar to the last year. I would like to conclude my presentation with a regulatory update on Slide 22, which Lukas already anticipated. As of January -- as of 1st of January 2020, new capital framework applies to Leonteq as a result of the Financial Institution Act that entered into force. This act essentially regulates the licensing requirements for certain financial institutions, including security dealers, which are now newly abled as securities firms. For the application of capital requirements, the new regime distinguishes between account holding and non-account holding securities firms. Securities firms, which do not hold accounts for clients, are no longer subject to the Capital Adequacy Ordinance, but must permanently hold capital of at least 1/4 of the fixed cost of the last annual financial statements, but no more than CHF 20 million. Leonteq does not hold client accounts and thus falls on this new regulatory regime. In this context, I would like to point out that since our inception in 2007, we have operated under securities dealers license and have significantly exceeded the capital requirements for each reporting year in the past. Since the 1st of January 2020, Leonteq is operating as a securities firm and adheres to the new capital framework, and so we will report capital figures under the new framework for the first time when we announce our half year results 2020. With regards to our capital planning in the future, Leonteq will continue to operate under the existing risk management framework. At the same time, we'll continue to reinforce our capital base, and we'll pursue a conservative dividend policy for the foreseeable future. With that, I would hand back to Lukas.

Thank you, Marco. Let me conclude today's presentation with a brief summary and outlook on Page 25 (sic) [24]. Leonteq's full year 2019 results are evidence that we can deliver solid performance also in the context of a difficult market environment and increased competitive landscape. Over the past years, we have increased our annual revenue base from roughly CHF 207 million/CHF 215 million to CHF 260 million to CHF 280 million during the last 2 years. This increased the sum of our shareholders' equity and deferred income to approximately CHF 770 million at the end of 2019. That compares to CHF 10 million we had when we started the business 13 years ago. We have reinitiated a new dividend phase, clearly a conservative one. And accordingly, the Board of Directors will propose a payment of CHF 0.50 per share at the AGM taking place at the end of March. With regards to our outlook. We expect SHIP to be fully operational by mid of this year. We are planning to open 2 new offices in the course of 2020 in Milan and Dubai. We target, for 2020, a total operating income of between CHF 270 million to CHF 300 million. That's a reduction from our previous guidance of approximately CHF 300 million. And we expect approximately CHF 200 million in total operating expenses, very much in line with what we expected before. So of course, as we have revised the range of the revenue guidance, the cost income ratio, which you get by dividing total costs by total expected revenues, is also now more variable than it was before. We will continue to focus on our cost management, and we are considering options to nearshore certain processes and functions to further optimize our cost base. Lastly, we will retain our priority of strengthening our absolute capital base and investing into future opportunities. Conclusion, I'm pleased to be able to say that Leonteq has never stood stronger, and we feel that we are well positioned for the future. Thank you very much for your attention. Monique?

This is Daniel Regli from Octavian. I have a couple of questions. First, maybe if you, Marco, could again explain me a little bit the moving parts on the trading income line, particularly, let's say, the difference between the investment solutions, trading income, which was obviously very negative with minus CHF 21 million in H2, and the trading income in Insurance & Wealth Planning Solutions. And how shall we think about this going forward? I think I recall or remember that you once said you have reduced your volatility exposure in your trading book. Now you have at least in Investment Solutions quite a strongly negative trading result. Can you just explain how it came there? And how shall we think about this going forward into 2020? And particularly, with regards to your 2020 targets, what were your assumptions when you're giving this range? I think the moving part between CHF 270 million and CHF 300 million is probably the trading income. And then the second question is about the capital and dividend policy. Obviously, now the previous capital regime is more or less obsolete. How shall we think about your capital? And what is your ideal capital going forward? And what is then triggering further dividend payments or maybe restricting further dividend payments? And then the third question is about -- the third question is on SHIP. If you just could give me an indication what are now the key bottlenecks for increasing the turnover on SHIP? Is it the number of issuance partners, which are willing to allow their product for SHIP? Obviously, now you have quite a decent number of hedging partners, but what needs to happen now that the turnover increases on SHIP, respectively, what could happen that it will not increase? Yes. And then the fourth question is about third-party issuance. What is there -- the difference between the models, how you deal with this third-party issuers versus your partner -- or issuance partners? I think I'll leave it. Yes.

Thanks, Dan. I'll probably take the first question regarding trading, and then hand over to Lukas for the capital question, SHIP, and if you want to take also the third-party issuer question. So thanks for the question, Daniel. I think on the trading side, as we always stated, we have a structurally long volatility position in our book that is specifically true for our Investment Solutions division. We have seen a negative contribution from hedging contribution in the second half year 2019, which even though was not significantly worse than what we have seen in H1 2017. So I would say, given the low volatility environment in the second half year of 2019, I would say the result doesn't surprise us. You correctly stated that we have obviously 2 different divisions. One is the Investment Solutions, where we have a structurally longwall vision. With regards to trading results in the IWPS space, that's obviously more linked to interest rates and some opportunities that we haven't anticipated there. As such, we had a positive contribution from the trading results in the IWPS space. With regard to 2020 targets, as mentioned, we have specified targets from previously approximately CHF 300 million to -- CHF 270 million to CHF 300 million. And the reason is exactly the trading result and the market volatility environment, which we have seen in the second half year 2019 and which we continue to see, especially now in January, February, with good environment for equity markets but a low volatility environment. So anticipating that this could continue for the year 2020, we have been more specific and say, if we continue to have such an environment, we might not make a lot of money on the trading side. It might be even nil, it might be even slightly negative. And as such, we would anticipate a top line of rather CHF 270 million to CHF 300 million. Should the environment be more favorable for our trading environment or for our trading books, we could still see the CHF 300 million as realistic, our targets for the year 2020.

If I could maybe just add to the -- to what Marco said, and to your question, how do you need to think about this volatility position. First of all, we don't get this position by coincidence. Clients, when they typically sell our structure -- buy from our structured products are selling to us volatility. We could obviously then go and sell it into the market. Ultimately, the position is mainly on the books, because we have now seen in the last 13 years that whenever volatility is very high, client activity decreases. Might have short-term effects, of course, you say the big crisis, then you have short term, a lot of activity, but then it comes down. So this long volatility position, structurally speaking, the hedging is an environment where clients will be much less active. We have shown you clearly in the second half '18 that it works, but it comes at the price. And the price is that when markets are like last year, you essentially have a position with hindsight benefit you should never have had. But to take an analogy, we could have said our equity, say, average CHF 650 million of the year, we should have put in MSI Index, and we would have had 20% return on the equity. Hindsight, it's obviously easy to say that. We feel comfortable with that position. However, knowing, and that's something investors need to understand, if you have a 2020, which on the volatility side is like 2019, and we had many phases where volatility was at historic low, you will structurally lose money on that position. It will be offset by increased client activity. So it's not necessarily only bad news for us, but it explains the range, as Marco said. Now with regard to your second question, I was expecting that question to come as the first, and I'm pleased to see that it wasn't the first. It's a very good question, and I guess it's in the context of this new regulatory regime and obvious one to ask. What would trigger us or the Board to become a little bit more proactive and change the dividend policy? Let me first start by saying, we have already come with positive news. We had communicated that for the foreseeable future, we do not see any dividend at all. And that policy has been changed to a conservative dividend stance. But in some way, that's the beginning, hopefully, of a certain journey. And I hope it is seen by our shareholders as a shareholder-friendly journey. As I said before, we are not, as Leonteq, completely working in a vacuum. We are working with the largest counterparties in the financial industry you can think of, whether it's on the hedging side, whether it's on the client side. As you know, we do not bank with end clients. We do business with intermediaries, but these are the world's largest asset managers, private banks, pension funds, insurance companies. And for them, a very solid counterparty in absolute terms is very important. And our journey to continue strengthening, therefore, our equity base, has to have absolute priority. We also, since a year, are now rated by 2 rating agencies. And of course, for them, solidity of capital and also the absolute capital basis is an important factor when it comes to consideration of a rating. Finally, the highest that -- could we have in the deferment, the one we must always worry the most about is the fact that clients trusted us with their savings. And from a client's point of view, you just need to be sure that Leonteq will always be very safe. It is a conservative approach. We recognize that, but it's very much in line with the traditions of Switzerland. Take any of the long-standing private banking partnerships, as a general rule, these institutions are all well, maybe over capitalized, but in the long run, it has served them very well. And that's helping the strategy Leonteq will continue. We started with 10 million shareholders' equity in 2007. We saw the financial crisis coming. And if -- we didn't see it coming, but when it came, we saw the effects it can have. And we know how important it is to save in good times for more volatile times, and that conservative management and Board approach will continue. What could trigger nevertheless maybe one day, in our portfolio, I would say, first, even more strengthened absolute equity basis than we have today. And secondly, certainly also focus on the strategic projects, including in particular, SHIP. You obviously should always look at the absolute capital base in the context of our risk profile on the balance sheet and to the extent we do less trades, spending our balance sheet for those trades. To that extent, we also need less equity. But I'd , nevertheless, like to say it's the beginning of a new journey, and it's a clear message to shareholders that we will continue pursuing a dividend -- a conservative dividend policy. So please do not factor in now some dividends ratios, which we wouldn't see as a poor management. SHIP, what is the bottleneck? I would say, only one thing, and that's time. Half a year ago, I would have said final proof of technology working, but for me, that proof is behind us. It's now time. It's getting the 3 additional beta testing SHIP counterparties onboard. And it's like in time, make sure that all the market participants show the sort of competitive prices we expect them to see. It's something we see as a very gradually improving picture. So I believe more or less, I would almost say every week, but maybe given some weekly volatility, I should say, every month. But every month, we see progress. And every month, we see the progress being at least at our expectations, if not above. We'll give you an update in 6 months and can then tell you what the first half year was. What is the difference as the final question about third-party issuers and our white-label partners? In terms of Leonteq's service, there is a big difference, because white-label partners are enabled by Leonteq. They would outsource to us part of the full value chain of issuing, sampling, trading and market-making structure products, whereas a third-party issuer essentially connects to the platform, but does everything by himself. For clients, to the extent we onboard solid third-party issuers, who are at our labels and standards in terms of the servicing, ideally, there is no difference. That's obviously very much in line with our vision to make Leonteq a one-stop shop and the central marketplace for our clients when it comes to structured product services.

About your 2 offices opening, I guess, it's a mix of both, but maybe I would like to have some kind of color. Are you more following your existing clients or are you conquering new markets?

I thank you for the question. It's definitely more of the second part. We are -- we believe we have a big market opportunity in these markets to the extent we are local. In Italy, I think proximity to clients is a very good thing. That generally, obviously, drove all the markets, but I think Italy infrastructure product markets, when it comes to sales and payoffs to certain clients' behavior, is a bit particular and it's certainly local. You are local also when it comes to being day-to-day in touch with the large distribution houses. In terms of Dubai, we are not just opening office, but we are already now working on the Sharia compliant offering, and that would open entirely new distribution channels. We, however, go into these markets with the comfort of knowing that our current client base would probably offset the increased investments we have to do in order to become local.

Okay. There's no more -- there's one more question in the room, and then we move on to the participants on the phone.

Guido Versondert from Independent Credit View. One question concerning SHIP please. Going beyond the 3 banks currently in the better period, what are your aspirations, your plans for attracting even more counterparties, also with a view to enabling more diversity and diversification opportunities for your clients? And the second question, with regard to Page 19, the liability side of your balance sheet. Could you briefly comment on how you manage the liquidity requirements that go with the CHF 2.9 billion in derivatives liabilities?

Thank you. I'll take the first question and pass on to Marco for the balance sheet-related question. It's a very good question. We need to find as, Leonteq, as the provider of the SHIP marketplace, the right balance between getting good prices, but also ensuring that the market participants consider this an attractive market to be present. So we have communicated from the very beginning that we would see 8 -- up to 8 counterparties on SHIP, plus in addition, Leonteq. The interest is higher than that. It took a bit of time to convince people, but these are very clear and transparent to potential markets' participants at the beginning that it's a pre-investment into something a bit unknown, but it would come at the benefit of a certain market, but disciplined protection once we have filled up the position. So essentially, once we have 8 positions, we would probably not add on additional counterparties. And as they brought us, for example, hedging possibilities in a market where we wouldn't have access through the existing 8 counterparties. So I just take an example. We would have a counterparty, who hedged for specific in-house reasons and angle to hedge specific markets. In Asia, you would probably take them on for that specific market, but not necessarily for the entire marketplace. And again, it's driven by our belief, but also understanding that SHIP must not only be attractive for our buy-side clients, but also for our sell-side SHIP hedging counterparty. They all need to be able to make a decent revenue stream out of that marketplace in order to invest, et cetera. Marco?

With regards to the pension item, you obviously know that our net defined pension liability is a function of basically FT, the conversion rate, the provider of the pension side, and we have seen a sharp decrease.

Sorry, not pension, the liquidity requirement that goes with the negative market value of your derivatives? That is the question. How do you manage these liquidity requirements? The CHF 2.9 billion you show on the liability side, you would need to post collateral.

Yes.

And when we look at the assets, how much of these assets are earmarked as collateral for liabilities, negative market values?