21 October 2022

Alpha FX Group plc

("Alpha FX" or the "Group")

Trading Update

Alpha FX Group plc (AIM:AFX), a leading provider of FX risk management, accounts and payments solutions dedicated to global corporates and institutions, is pleased to announce a trading update for the year ending December 2022.

Key Highlights

Overview

Following our interim report, revenue has continued to grow in line with upgraded expectations, with the Group producing consistent month-on-month growth against the prior year. Additionally, the Group has benefited from additional income as a result of the rising interest rate environment. This interest is being generated against sterling, euro and dollar denominated client funds that are held overnight and off balance sheet as part of the Group's safeguarding arrangements for its Alternative Banking solution. This additional interest income is expected to contribute circa £6m between the end of August and December 2022 and therefore result in profits for the year being materially ahead of expectations. Importantly, this number is a high-level estimate, and could vary according to three key variables: 1. the absolute balance we have which can move significantly from day-to-day, 2. the mix of currency balances we hold, and 3. the interest rate environment.

Whilst this is a positive boost for the Group and a natural by-product of our accounts solution, we are mindful that it is an uncontrollable income stream for the business and, if we return to a low interest rate environment, a potentially transitory one. We have therefore chosen to recognise this as 'other operating income', not revenue.

Our accelerated investment in the Alternative Banking division (outlined in our interim report) also continues in earnest, and since the additional income from interest rates is not required to support this, these funds will now serve to put us in an even stronger capital position and support our clients with competitive hedging facilities as we expand globally.¹

FX Risk Management Market Conditions

The recent volatility has not brought forward any material revenues and trading has followed a consistent pattern of growth to the prior year. This is because our ethos is to encourage clients to adopt a formalised and structured approach to currency risk management, rather than hedging disproportionately and speculatively in response to isolated macro-conditions. This is why you will never find Alpha participating in, or publishing, market forecasts or commentaries.

All of our clients buy and sell currency for a commercial purpose and the majority are cash flow hedging. Currency volatility therefore does not materially change the overall amount they will need to transact. For example, a client that needs to purchase $10 million over the next 12 months does not then need to purchase $15 million because the exchange rate has changed. If we were therefore to encourage clients to hedge disproportionately due to market conditions, it would simply be subtracting from what they would be hedging in the future, whilst increasing their concentration to a particular exchange rate. If this exchange rate goes on to move against them, this would negatively impact their pricing and purchasing power within their competitive landscape and potentially leave them exposed to large margin calls. In the medium-to-long run, this approach to managing currency is therefore almost certain to be suboptimal for clients, and bad for any business that wishes to retain their trust and confidence.

Ultimately, our approach to currency risk management is tried and tested, in the long-term interest of our clients, and validated by fourteen years of consistent industry-leading growth, delivered across both steady and volatile market conditions.

FX Risk Management Credit Environment

There has been a particular focus on hedging within this trading update, predominantly because we have just witnessed extreme levels of volatility. However, it is important to note the Group's service offering has evolved considerably over the years to much more than hedging. We are also sector agnostic and therefore highly diversified across our marketplaces and continue to publish our sector concentration and top 20 client exposures on our website biannually at alphafx.co.uk/investors/corporate-governance.

As detailed in our interim report, we provide credit facilities against the hedging instruments we offer and naturally expect client defaults to increase in more challenging macro environments like this, the number of defaults will also increase in absolute terms as a by-product of underwriting more facilities as our business grows. Importantly however, such losses are factored into our expectations each year and are ultimately inherent in any business that extends credit. To date, there has been no significant change in client default rates compared to our original expectations set at the start of the year.

Further mitigation comes from the fact that, although we provide our clients with credit facilities for hedging, our terms and conditions ensure all future client trades are at our discretion. We can therefore react quickly to changes in the macro environment or individual client profiles by refusing future trades, thereby capping our exposure to past trades only. This reduces our risk exposure and poses significantly less risk than providing committed credit facilities. In addition, unlike a typical lending/borrowing facility we are only exposed to the deviation in MTM value of the FX contract (which could be in or out of the money) and not the notional value of the trade.

As macroeconomic headwinds continue to build, we remain mindful that businesses across the world will face long-term economic challenges. It is however testament to the strength of our credit underwriting team and systems, that credit defaults continue to fall in line with our expectations at the start of this year.

Morgan Tillbrook, Founder and CEO of Alpha FX commented:

"I am pleased that we have continued to deliver on our upgraded revenue expectations, highlighting our robust business model during a period of macro volatility, with both our divisions continuing to perform strongly into H2.

"Our tried and tested strategy in FX Risk Management continues to be successful within the current macroeconomic conditions, and we remain committed to ensuring our clients are advised appropriately whilst continuing to manage our own risk profile. At the same time, we have continued to grow the number of  our Alternative Banking customers in response to the significant market demand.

"I remain highly excited about the opportunities in front of us and look forward to delivering on a strong end to the year."

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¹As we expand our FX forward book, the amount of cash required for collateral will also increase. The step change in the size of clients we are supporting (and therefore the size of trades we place) is also increasing the proportion of free cash we need to support this. It is therefore important we have sufficient cash set aside to capitalise on all the opportunities in front us and provide attractive terms versus our competitors.

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Notes to Editors

Alpha is a high-tech, high-touch provider of enhanced financial solutions dedicated to corporates and institutions operating internationally. Working with clients across 50+ countries, we blend intelligent human capabilities with new technologies to solve complex problems across three key areas: FX risk management, global accounts and mass payments.

Key to our success is our team - nearly 300 people based across seven global offices, brought together by a high-performance culture and a partnership structure that empowers them to act as owners of our business.

Despite being an established business listed on the London Stock Exchange, we remain relentlessly focused on maintaining the same level of operational agility and client focus we had when we first started in 2009. This dynamic, combined with the passion of our people, have enabled us to make a substantial and enduring difference to our clients, and deliver a growth story to match.