10-K: Freedom Holding Corp. Reports Strong Growth in Fiscal Year 2024, Driven by Strategic Expansion and Digital Innovation

Freedom Holding Corp. experienced significant growth in fiscal year 2024, marked by a substantial increase in revenue, assets, and customer base across its brokerage, banking, and insurance segments.

Summary

• Freedom Holding Corp. reported a total revenue, net of $1.635 billion for fiscal year 2024, a 105% increase compared to the previous year.
• The company's interest income rose by 181% to $828.2 million, primarily due to increased earnings from trading securities.
• Fee and commission income grew by 35% to $440.3 million, driven by brokerage services and payment processing.
• Net gain on trading securities increased by 88% to $133.9 million, mainly from appreciation of Kazakhstan sovereign bonds.
• Insurance underwriting income saw a 129% increase to $264.2 million, reflecting growth in insurance operations.
• The company's net income for the year was $375 million, a significant increase from $205.6 million in the previous year.
• Total assets reached $8.3 billion, a 52% increase from the previous year, with significant growth in the loan portfolio of Freedom Bank KZ.
• The company's brokerage customer accounts increased to 530,000, and active accounts reached 96,000.
• Freedom Bank KZ's assets increased by 52%, loan portfolio by 68%, deposit portfolio by 47% and trading portfolio by 69% in comparison with March 31, 2023.

Sentiment

Score: 8

Explanation: The document presents a very positive outlook with strong financial growth and strategic expansion. However, there are some risks and challenges that need to be monitored.

Positives

• The company has successfully expanded its digital fintech ecosystem, integrating brokerage, banking, and insurance services.
• Freedom Bank KZ has become a leader in digital banking services in Kazakhstan, with significant growth in assets, deposits, and loan portfolio.
• The company has shown a strong commitment to ESG principles, publishing its first Sustainability Report in December 2023.
• The company has expanded its operations to include new countries including Armenia, Austria, Azerbaijan, Belgium, Bulgaria, France, Germany, Greece, Italy, Netherlands, Poland, Spain, the UAE, the United Kingdom and Uzbekistan.

Negatives

• The company's new telecommunications and media businesses are expected to incur losses in the initial years.
• The company is exposed to credit risk through its loan portfolio and margin lending activities.
• The company's revenues are concentrated in certain customers and products, which may materially adversely affect its business.
• The company is subject to potential losses as a result of its clearing and execution activities.

Risks

• The company's relatively limited operational history has coincided with sustained market growth, which may not be predictive of future operating results.
• The company may not be able to manage its growth effectively.
• The company anticipates that acquisitions will continue to play a key role in its growth strategy, but it may be unable to identify, acquire, complete or integrate acquisition targets successfully.
• The company has engaged in related party transactions and arrangements, which exposes it to a number of risks.
• Competition in the markets in which the company operates may result in a decrease in its market share and/or profitability.
• The company plans to incur losses in its new telecommunications and media businesses.
• The company may be unable to implement its digital fintech ecosystem strategy successfully.
• The company could suffer significant losses from credit exposure.
• The company's revenues are concentrated in certain customers and products, which may materially adversely affect its business, results of operations, financial condition and cash flows.
• Risks related to the company's business relationships with third-party broker-dealers, clearing firms and market makers could result in reduced profitability, increased compliance costs, regulatory violations and negative publicity.
• The company is subject to potential losses as a result of its clearing and execution activities.
• A breakdown or interruption in the company's operational systems or processes may adversely affect its reputation, customers, clients, business activities, operational outcomes, and financial stability.
• The company's ability to meet its obligations, and the cost of funds to do so, depend on its ability to access identified sources of liquidity at a reasonable cost.
• The company may need to raise additional capital, and it cannot be sure that additional financing will be available or available on attractive terms.
• Reductions in the company's credit ratings or an increase in its credit spreads could adversely affect its business, liquidity and cost of funding.
• The company's investments expose it to a significant risk of capital loss.
• The company may suffer significant loss from changes in the KASE's requirements related to the discount coefficients on the securities in securities repurchase transactions.
• The company's risk management framework may not be effective in mitigating risks and/or losses to it.
• The company's modeling and assumptions used in assessing risks in its business may differ materially from actual results.
• In the company's insurance business, it may not be able to obtain reinsurance at required levels or prices, or otherwise collect on reinsurance, which could increase its exposure or limit its ability to write new policies.
• The company is dependent on its executive management team, particularly Timur Turlov, and its ability to hire and retain skilled personnel.
• Extraordinary events beyond the company's control could negatively impact its business.
• Possible future pandemics may impact the global economy, global financial markets and the company's business, financial condition, results of operations and cash flows.
• The company's financial results depend on interest rate volatility.
• The company is exposed to foreign currency fluctuation risks.
• Damage to the company's reputation could harm its business.
• The company's business and operations may be materially adversely affected by the ongoing Russia-Ukraine conflict.
• Sanctions imposed by Ukraine on the company's Chief Executive Officer and its former Ukrainian subsidiary could have a material adverse effect on it.
• Non-compliance with U.S., EU, UK, Russian or other sanctions programs could adversely impact the company.
• Emerging markets, such as many of the markets in which the company operates, are subject to greater risks than more mature markets, including significant political, economic and legal risks.
• The economies of Kazakhstan and other countries in which the company operates are vulnerable to external shocks and fluctuations in the global economy.
• Kazakhstan's economy is vulnerable to internal political and social unrest.
• The company is subject to extensive regulation, and the failure to comply with laws and regulations could subject it to monetary penalties or sanctions.
• Financial services firms have been subject to increased regulatory scrutiny increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions.
• As a U.S. public company listed on Nasdaq the company has substantial regulatory reporting obligations.
• The company is subject to risks related to anti-corruption laws in effect in the United States and the non-U.S. jurisdictions where it conducts business.
• A failure by the company's subsidiaries to meet capital adequacy and liquidity requirements could affect its operations, financial condition and cash flows.
• The countries in which the company operates have changing regulatory regimes, regulatory policies, and interpretations.
• The company's measures to prevent money laundering and terrorist financing violations may not be completely effective.
• If the company violates securities laws, or is involved in litigation in connection with a violation, its reputation and results of operations may be adversely affected.
• The company is subject to risks related to potential litigation.
• The company's operations are highly dependent on the continued and proper functioning of its information technology systems.
• The company interacts with large volumes of sensitive data that exposes it to IT breach and other data security risks and liabilities.
• The infrastructure on which the company's IT systems depend is subject to events that could interrupt its ability to operate.
• Failure or compromise of third-party systems operations or security could adversely affect the company's business and expose it to data breaches and cyber attacks.
• To remain competitive, the company must keep pace with rapid technological change.
• Global anti-offshore measures could adversely impact the company's business.
• Frequent tax law changes in regions where the company conducts operations could adversely affect its business and the value of investments.
• Kazakhstan transfer pricing legislation may require pricing adjustments and impose additional tax liabilities.
• Uncertainties and ongoing changes in Kazakhstan's tax regime may have an adverse impact on the company's business.
• Changes in regulations related to taxes on stock transfers and other financial transactions could reduce the volume of market transactions and impact the company's business.
• As a diversified holding company with few operations of its own, FRHC is reliant on the operations of its subsidiaries to fund its holding company operations.
• As a controlled company under Nasdaq rules, the company qualifies for exemptions from certain corporate governance requirements that may adversely affect its stock price.
• The interests of the company's controlling shareholder may conflict with those of other shareholders.
• Civil liability may be difficult or impossible to enforce against the company.
• The company has identified material weaknesses in its internal control over financial reporting in the past, and it may identify material weaknesses in the future or fail to establish and maintain effective internal control over financial reporting, which could have a material adverse effect on its business and stock price.
• The price of the company's common stock has fluctuated historically and may be volatile.
• Future offerings of securities which would rank senior to the company's common stock may adversely affect the market price of its common stock.
• The company does not intend to pay dividends on its common stock for the foreseeable future and, consequently, its stockholders ability to achieve a return on their investment will depend on appreciation in the price of its common stock.

Future Outlook

The company is committed to further developing its digital fintech ecosystem by integrating its core financial services businesses with its ancillary business offerings. The company seeks to establish a new independent telecommunications operator in Kazakhstan and a national media platform.

Management Comments

• The company is pursuing a strategy to become a leader in the financial services industry, serving individuals and institutions desiring enhanced market access to international capital markets using state of the art technology platforms for their brokerage and other financial services needs.
• The company is committed to further developing its digital fintech ecosystem going forward by integrating its core financial services businesses with its ancillary business offerings.
• The company's strategic objective is to provide customers with a comprehensive and user-centric digital experience, offering them convenient access to a wide array of products and services through a single platform.

Industry Context

The company's growth is aligned with the broader trend of digital transformation in the financial services industry, with a focus on providing convenient and integrated digital solutions to customers. The company's expansion into telecommunications and media reflects a strategy to create a comprehensive digital ecosystem, similar to other tech-driven financial services companies.

Comparison to Industry Standards

• The company's growth in revenue and customer base is significant compared to industry averages, particularly in the emerging markets where it operates.
• The company's digital mortgage product in Kazakhstan has achieved a market share of 19.4%, indicating a strong competitive position.
• The company's digital auto loan product has achieved a market share of 9.3% in Kazakhstan.
• The company's digital business loan product has achieved a market share of 21.3% in Kazakhstan.
• The company's share of electronic payments in the Kazakhstan market was 30% in 2022.
• Freedom Life's market share in the Kazakhstan life insurance market was 12% based on gross written premiums for life insurance.
• Freedom Life held an approximately 56% market share in the Kazakhstan voluntary life-related accident insurance market.
• Freedom Insurance had an approximately 7% share of the total Kazakhstan general insurance market based on total assets.
• Freedom Insurance had an approximately 3% share of the Kazakhstan car owners liability insurance market based on insurance premiums received.
• The company's expansion into telecommunications and media is a unique strategy compared to traditional financial services companies, but is similar to other tech-driven financial services companies.

Legal Proceedings

• The Estate of Toleush Tolmakov commenced a legal action against Freedom Holding Corp., and its subsidiary FFIN Securities, Inc. in the Third Judicial District Court of Salt Lake County, State of Utah in December 2021. The Company has deposited $8.4 million into the registry of the court and is currently in settlement discussions with the Estate.

Related Party Transactions

• The company has engaged in related party transactions and arrangements, in particular with companies controlled by its Chief Executive Officer Timur Turlov.
• The company has continuing involvement with an affiliated company, microfinance organization Freedom Finance Credit, through the purchase and sale of right of claims of retail loans.
• Historically, the company engaged in a significant volume of transactions with FST Belize through an omnibus brokerage arrangement, but the extent of this arrangement was actively scaled down in recent periods and the omnibus brokerage arrangement had been terminated as of March 31, 2024.

Stakeholder Impact

• Shareholders will benefit from the company's strong financial performance and growth.
• Employees will have opportunities for career growth and development.
• Customers will have access to a wider range of integrated financial services.
• The company's expansion into new markets will create new opportunities for suppliers and partners.

Next Steps

• The company plans to continue expanding its digital fintech ecosystem.
• The company plans to establish a new independent telecommunications operator in Kazakhstan.
• The company plans to launch a national media platform in Kazakhstan.

Key Dates

Keywords

Financial Services, Brokerage, Banking, Insurance, Fintech, Kazakhstan, Digital Banking, Investment Banking, Securities Trading, Digital Mortgages, Digital Car Loans, Payment Processing, Telecommunications, Media