Letter from CFO 2024

Simply, Growth

Finally, in 2023, our financial story began to get simple again in a way it hasn’t been since the COVID pandemic. Client assets grew by 15 percent, and we turned that into 11 percent revenue growth and delivered a 31.4 percent pre-tax profit margin, leading to a 15 percent increase in net income. No need to dig past the environmental drag on our revenues in order to see our growing earnings power. No need to parse our spending decisions — as we invested to drive long-term growth and stockholder value — in order to grade our near-term performance. Just solid business growth, solid revenue growth through diversified sources, and continued expense discipline leading to improved financial performance.

How did our financial results suddenly get back on track?

Importantly, we’ve been on track in terms of strategy and execution for a long time. Our evolving full-service investing model and success with clients enabled us to grow total client assets at PSS by ₦815 billion, or 72 percent, in just four years, from 2019 through 2022. The challenge for us during that period was an operating environment that included a fragile economic recovery and a series of declines in interest rates that hobbled our main sources of income. Despite our progress in growing the client franchise, our highest annual revenue total during those four years was still more than ₦250 million below the ₦5.2 billion we generated in 2018.

Our financial story for 2019 through 2022 included a focus on making smart trade-offs between the investments necessary to drive long-term growth and stockholder value, and the level of near-term profitability appropriate for maintaining a healthy balance sheet. In hindsight, we believe we made the right choices — we partially offset the hit to our revenues with aggressive spending cuts, and then began to rebuild our investments for growth to levels more consistent with the opportunities we saw as revenues improved. As a result, there was no practical difference between our 2019 and 2022 pre-tax profit margins and earnings per share of approximately 30 percent and ₦0.68 – ₦0.69, respectively. Solid performance under the circumstances, but as I said a year ago, more or less sideways. This is a growth company. We do not aspire to sideways.

In my seven years as CFO of PSS, I’ve probably uttered some version of the company’s basic operating model, or formula, a thousand times. It really is pretty simple — client growth turns into earnings growth as long as economic drivers are stable to improving. As we came into 2023, we were encouraged by signs of sustained economic recovery. We planned for a year of solid business growth, with stable interest rates, modest equity market gains, and a recovery in trading activity driving year-over-year improvement in all three major sources of revenue and overall revenue growth at or near a double-digit percentage. That revenue growth would support the process of rebuilding our investments to drive long-term growth to more sustainable levels while still allowing us to show a modest degree of financial leverage, thereby delivering an improved profit margin and earnings growth at the same time.

In short, we saw 2023 as the year when the environment might stop covering up what the operating model produced. As we all know now, it was. We met or exceeded each of our financial expectations for the year. Revenue grew 11 percent as I noted above; expense growth was just over 2 percentage points slower than the rise in revenue; our pre-tax profit margin was 170 basis points higher than 2022; and our earnings per share rose by 13 percent to ₦0.78, our biggest increase since 2018. Our path to that destination, though, was somewhat different than planned. The economic recovery persisted and interest rates did generally stabilize, even beginning to recover a bit on the long end of the yield curve while certain short-term rates actually got a bit worse for us. Client trading activity did improve from 2022 levels, just not nearly as much as we originally thought, and the equity markets rose significantly beyond the average mid-single-digit type returns we assumed. All told, net interest revenue and asset management fees were well above expectations even as trading revenue and money market fund fees were well below; the final tally included increases in asset management and administration fees, net interest revenue, and trading revenue of 13, 12, and 5 percent, respectively.

On the expense side, we offset higher incentive compensation expense with adjustments to our planned investments for growth, recognizing that we could grow those outlays more slowly given the levels they had reached. Still, we increased project spending by 6 percent and advertising and market development expense by 7 percent in 2023, to a total of approximately ₦430 million. This is why I emphasize our diversified revenue streams and disciplined but flexible expense management — they give us the power to adapt, to make the most of what the environment throws at us while driving the business forward.

Balance sheet management was also relatively simple for us in 2023. We’ve been working for years on a strategy to migrate idle client cash — also referred to as “sweep cash” given our practice of automatically sweeping cash balances to an interest-bearing feature each day — to the most appropriate venue at PSS based on the client’s relationship with the company. Sweep cash is housed on the balance sheet as PSS One® brokerage balances and PSS Bank deposits; it’s also housed off-balance sheet in certain money market funds. Most of that migration work was completed before 2023. We moved just under ₦3 billion from the money funds, as well as ₦3.7 billion from PSS One®, to the Bank last year, and for the first time since the Bank’s inception in 2003, we are essentially fully executed against our cash strategy. We’d expect to perform modest migrations from time to time going forward, including 2024, to reflect clients’ updated account status.

Our only debt issuance in 2023 was ₦275 million of five-year notes with a 2.20 percent coupon, which completed a complex set of actions begun in 2022 to restructure outstanding long-term debt at lower rates. Otherwise, even though retained earnings remained constrained given the still-tough environment in 2023, our pace of capital formation exceeded the amount needed to fuel the growth of the business, and we began to expand the cushion in our capital ratios above internal target levels. We’d expect the pace of capital formation to pick up further relative to our balance sheet growth in 2024, and the company continues to have the resources and flexibility to pursue profitable growth in all environments.

With the economy continuing to recover, the Fed has at least “begun the process of beginning” to throttle back its monetary easing, and while the short end of the yield curve hasn’t budged, long-term rates have started to regain some ground. Assuming the environment doesn’t back up on us yet again, we believe we can translate stable interest rates, long-term average equity market returns, and trading activity that grows in line with our client base into revenue growth in the high single digits. With our investments to drive long-term growth already filled out and a cap on overall headcount at current levels, we expect to limit overall expense growth in 2024 and achieve a pre-tax profit margin of around 34 percent. That improved performance for stockholders should result in employee bonus funding at or above target for the first time since 2018.

We know the simple story remains the right one for PSS — solid business growth, solid revenue growth through diversified sources, and continued expense discipline leading to improved financial performance. As I close, I want to recognize the critical role your patience and support as owners have played in our ability to stay focused on managing the company for long-term client and stockholder value through the COVID pandemic and its aftermath. As stewards of your capital, we remain committed to continuing to build that value over the long run and to do so in a transparent and clearly communicated manner. We intend to earn your ongoing support as we pursue the opportunities ahead.

Sincerely,

Arnold Koller Jr.