Freedom Holding Corp. — FY2023 Form 10-K
Period: Fiscal year ended March 31, 2023; comparisons are with recast fiscal 2022 figures. This is an annual report, not a standalone 2022 fourth-quarter filing. Unless stated otherwise, amounts are U.S. dollars.
Business context and reporting period
Freedom Holding is a financial-services holding company operating brokerage, banking, insurance, investment-banking and payment businesses. Its main markets include Kazakhstan and Europe. It reported 3,689 employees, 126 offices and approximately 370,000 brokerage accounts at year-end. The Russian subsidiaries were divested in February 2023 and are presented as discontinued operations. Comparative periods were recast to include insurance companies acquired from the controlling shareholder under common-control accounting.
Financial results and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net revenue | $795.7 million | $689.8 million |
| Net income from continuing operations | $193.2 million | $325.1 million |
| Net income, including discontinued operations | $205.6 million | $220.9 million |
| Basic earnings per share | $3.50 | $3.84 |
| Cash used in operating activities | $951.7 million | $406.4 million |
| Cash used in investing activities | $1.46 billion | $146.3 million |
| Cash provided by financing activities | $2.13 billion | $618.5 million |
Revenue grew 15%, while total net income fell 7%. Continuing-operations net margin was approximately 24.3%, versus 47.1% in FY2022, calculated using reported continuing income and revenue. Fee and commission income declined 2% to $327.2 million, including a 10% decline in brokerage services. Interest income rose 142% to $294.7 million; net interest income increased to $85.7 million from $44.7 million. Net trading gains fell 54% to $71.1 million. Foreign-exchange gains were $52.2 million, while derivatives recorded a $64.8 million loss.
Total expenses increased 72% to $559.8 million. Notable increases included interest expense, up 172% to $208.9 million, and impairment provisions, up to $29.1 million from $2.5 million. Net income from discontinued Russian operations was $12.4 million, after a $104.2 million loss in FY2022; the disposal generated a reported loss of $51.5 million in the discontinued-operations cash-flow disclosure.
At March 31, 2023, total assets were $5.08 billion and total liabilities were $4.31 billion. Cash and cash equivalents were $581.4 million, with a further $445.5 million of restricted cash; trading securities were $2.41 billion. Net liquid assets, as defined by the company, were $1.85 billion. Repurchase-agreement obligations were $1.52 billion, customer liabilities $1.93 billion, and issued debt securities $60.0 million. Equity was $770.7 million. Operating and investing cash outflows chiefly reflected growth in trading securities and customer loans; financing inflows included $1.01 billion of bank deposits and repurchase financing.
Material changes and unusual items
- Assets rose from $3.23 billion to $5.08 billion, alongside substantial growth in the bank loan portfolio and trading securities. Loans issued increased to $826.3 million from $92.4 million.
- Central Asia and Eastern Europe generated $566.1 million of revenue, 71% of the total; Europe generated $216.5 million, 27%. Europe revenue declined 53%, primarily amid lower FST Belize-related brokerage activity and lower trading gains.
- The company recorded a $73.4 million realized loss on the sale of SPB Exchange shares. A $65.3 million realized currency-swap loss at Freedom Bank KZ was a major component of the derivatives loss.
- Freedom Bank KZ incurred approximately $3 million in losses from a MultiInvest card transaction-processing failure. Impairment provisions also included a one-off allowance related to restricted Ukrainian-bank funds and exposures.
- Acquisitions included insurance businesses, London-Almaty, Ticketon, Paybox and LD Micro. The proposed Maxim Group acquisition, announced at approximately $400 million including deferred payments and retention bonuses, remained subject to conditions and regulatory approvals.
Outlook, risks and contingencies
Management expects to continue expansion through acquisitions and organic growth, with fiscal 2024 growth efforts anticipated on a scale similar to FY2023. It stated that available cash, expected operating cash flows, trading returns and potential access to capital should meet present and anticipated financing needs. The filing gives no numerical revenue or earnings guidance. The company does not expect to pay common-stock dividends in the foreseeable future.
Key risks include the ongoing Russia-Ukraine conflict, sanctions and countersanctions, currency and interest-rate volatility, emerging-market and regulatory exposure, and dependence on third-party clearing and technology providers. Freedom UA’s brokerage license was suspended for five years and its assets frozen by Ukrainian authorities; the company is appealing the action. The filing also identifies significant dependence on related-party broker FST Belize: it generated approximately 60% of FY2023 fee and commission income, and approximately 91% of Europe-segment revenue was received from FST Belize. The company intends to reduce and ultimately end the omnibus arrangement, but provides no firm timetable.
Other notable exposures include $361.7 million of margin-lending receivables, of which approximately 98% of related-party margin receivables were due from FST Belize; $539.4 million of bank customer time deposits exceeding deposit-insurance coverage; and $27.6 million of lending-related commitments and guarantees. The company reported $8.4 million deposited with a court registry in the Tolmakov estate litigation and denies liability.
Controls, audit and reporting considerations
The financial-statement audit expressed an unqualified opinion, but the auditor issued an adverse opinion on internal control over financial reporting. Management and the auditor identified material weaknesses involving insufficient qualified U.S. GAAP accounting staff and controls over complex transactions, cash-flow and interest-income classification, and financial-statement disclosures. Management said remediation is underway through training, hiring and outside assistance. Management also reported that previously filed reports contained material misstatements and had been amended. The auditor excluded acquired companies representing 10% of consolidated assets and 22% of revenue from its internal-control audit.
Most important facts for investors to verify
- Whether FST Belize-related business and related-party exposures decline as intended, and the effect on brokerage revenue.
- The remediation and independent testing of the reported material weaknesses, including whether further amended filings are needed.
- The quality, recoverability and concentration of the rapidly expanded loan and margin-lending portfolios, including related-party balances.
- Liquidity and collateral exposure from $1.52 billion of repurchase obligations and the substantial share of trading securities pledged against them.
- The status and financial consequences of Ukrainian sanctions, the Maxim Group transaction, and continuing Russia-related restrictions.
- The impact of the expected approximately $10 million allowance adjustment when the company adopts the expected-credit-loss standard in FY2024.