10-Q: Freedom Holding Q2 Net Income Plunges 66% Amid Tax Changes

Freedom Holding Corp. reported a significant 66% drop in net income for the second fiscal quarter, driven by decreased revenue, higher expenses, and new tax legislation in Kazakhstan.

Summary

• Net income for the three months ended September 30, 2025, decreased by 66% to $38.7 million, compared to $114.5 million for the same period in 2024.
• Total revenue, net, for the three months ended September 30, 2025, was $526.1 million, a 10% decrease from $586.1 million in the prior year.
• For the six months ended September 30, 2025, net income decreased by 54% to $69.1 million, while total revenue, net, saw a slight 2% increase to $1,059.5 million.
• The effective tax rate significantly increased to 36.0% for the three months and 31.6% for the six months ended September 30, 2025, primarily due to new Kazakhstan tax legislation and accruals for Global Anti-Base Erosion Model Rules (Pillar Two).
• Customer growth was strong across all segments: retail brokerage customers increased to 776,000 (from 683,000), banking customers to 3,617,000 (from 2,515,000), and insurance customers to 1,285,000 (from 1,170,000).
• Total expenses increased by 2% for the three months and 10% for the six months, mainly driven by higher payroll and bonuses, and insurance claims incurred.
• The company acquired 100% interest in Astel Group Ltd., a telecommunications and digital solutions provider, on April 30, 2025, as part of its telecommunications expansion strategy.
• An arbitration claim was filed against the company by Einride AB in January 2025, seeking $10 million in damages for an alleged breach of a Subscription Commitment related to a convertible loan.

Sentiment

Score: 4

Explanation: While the company demonstrates strong customer growth and strategic expansion into new digital and telecommunications sectors, the significant decline in net income and quarterly revenue, coupled with increased expenses and a higher effective tax rate due to regulatory changes, indicates a challenging financial period. The ongoing arbitration case also adds uncertainty. The positive credit rating revisions for subsidiaries and long-term strategic moves are encouraging, but the immediate financial performance warrants a cautious approach.

Positives

• Strong customer growth across all segments: retail brokerage customers increased by 93,000 to 776,000, banking customers by 1,102,000 to 3,617,000, and insurance customers by 115,000 to 1,285,000.
• Fee and commission income from brokerage services increased by 28% to $137.6 million for the three months and 20% to $240.5 million for the six months, reflecting increased activity.
• Net gain on trading securities for the six months ended September 30, 2025, surged by 410% to $82.7 million, primarily due to realized gains on Kazakhstani corporate debt securities and unrealized gains on sovereign bonds.
• Interest income on margin loans to customers increased by 78% to $72.8 million for the three months and 45% to $133.1 million for the six months, driven by higher customer activity.
• Interest income on loans to customers grew by 35% to $66.7 million for the three months and 26% to $128.4 million for the six months, reflecting loan portfolio expansion.
• The held-to-maturity portfolio expanded significantly, leading to $15.4 million in interest income for the three months and $20.5 million for the six months.
• S&P Global Ratings revised its outlook to positive from stable for the company's financial operating companies (Freedom KZ, Freedom EU, Freedom Global, Freedom Bank KZ) and affirmed their ratings.
• S&P raised the long-term issuer credit and financial strength ratings on Freedom Life to 'BB+' from 'BB', citing a track record of market share and profit growth.
• Strategic acquisitions, including Astel Group Ltd. and the planned acquisition of Wallet Solutions, support the company's digital fintech ecosystem expansion.

Negatives

• Net income decreased by 66% to $38.7 million for the three months ended September 30, 2025, and by 54% to $69.1 million for the six months, compared to the prior year periods.
• Total revenue, net, decreased by 10% to $526.1 million for the three months ended September 30, 2025.
• Insurance premiums earned, net of reinsurance, decreased by 22% to $125.2 million for the three months and 4% to $278.5 million for the six months, primarily due to a regulatory cap on commissions to insurance agents.
• Net gain on trading securities decreased by 46% to $37.1 million for the three months ended September 30, 2025, due to a decline in the value of proprietary securities positions.
• The company recorded a net loss on derivatives of $3.2 million for the three months ended September 30, 2025, a 150% decrease from a net gain in the prior year, mainly due to losses on currency swaps.
• Significant foreign currency translation losses of $65.5 million for the three months and $107.3 million for the six months were incurred due to the depreciation of the Kazakhstan Tenge against the U.S. dollar.
• Total expenses increased by 2% to $465.6 million for the three months and 10% to $958.5 million for the six months, driven by higher payroll and bonuses, and insurance claims.
• Payroll and bonuses expense increased by 41% to $93.1 million for the three months and 51% to $186.2 million for the six months, due to workforce expansion and increased compensation.
• Insurance claims incurred, net of reinsurance, increased by 20% to $79.9 million for the three months and 41% to $160.2 million for the six months, primarily due to higher claims paid for compulsory motor third-party liability.
• The effective tax rate rose sharply to 36.0% for the three months and 31.6% for the six months, mainly due to new Kazakhstan tax legislation introducing a 10% income tax on certain sovereign securities income and accruals for Pillar Two taxes.
• Fee and commission income from banking services decreased by $20.8 million for the three months and $32.7 million for the six months, attributed to the active use of a cashback-based loyalty program to reduce customer transaction costs.

Risks

• Exposure to economic, political, and regulatory conditions in operating regions, including fluctuations in interest rates and foreign currency exchange rates.
• Direct and indirect effects on business stemming from Russia's military action against Ukraine, economic sanctions, and countersanctions.
• Impact of legal and regulatory actions, investigations, and disputes, including the Einride arbitration case seeking $10 million in damages.
• Challenges in managing growth effectively and successfully integrating acquired businesses.
• Availability of funds at reasonable rates for business expansion and capital expenditures.
• Impact of competition, including downward pressures on fee and commissions.
• Ability to meet regulatory capital adequacy or liquidity requirements, or prudential norms.
• Cybersecurity threats, information technology, trading platform, and other system failures.
• Market risks affecting the value of proprietary investments, particularly during periods of fast market movements or concentrated collateral.
• Credit risk from margin lending and banking loans, which can increase during market downturns or property value decreases, potentially leading to higher default and delinquency rates.
• Dependence of Kazakhstan's economy on oil exports and influence from Russia, which can lead to local currency devaluation.
• Regulatory cap on commissions to insurance agents for policies associated with bank and microfinance loan products, reducing new business volumes.
• Operational risk resulting from inadequate or failed operations or external events.
• Legal and compliance risk, including non-compliance with AML, counter terrorist financing, anti-corruption, and sanctions rules and regulations.
• Impact of tax laws and regulations, and their changes, in any of the jurisdictions in which the company operates, as evidenced by the recent Kazakhstan tax law changes.
• Unforeseen or catastrophic events, including geopolitical conflicts, pandemics, natural disasters, or political discord.

Future Outlook

The company plans to continue its expansion into the telecommunications market in Kazakhstan through its Freedom Telecom subsidiary, requiring significant capital expenditures to be financed by a combination of own funds and borrowings, including vendor financing and proceeds from bond placements. The strategy and budget for Freedom Telecom are dynamic and subject to material adjustments. The company is also taking initial steps to establish a bank in Georgia, pending regulatory approvals, and intends to either acquire FFIN Credit or implement an in-house solution for uncollateralized retail loans. Freedom Media is being developed as a national media platform in Kazakhstan. The company does not anticipate paying cash dividends on common stock in the foreseeable future, intending to retain earnings for business operation, development, and expansion. New tax legislation in Kazakhstan, effective January 1, 2026, will increase the corporate income tax rate for the banking sector to 25% (with exceptions), eliminate VAT exemptions on certain financial operations, and raise the VAT rate to 16%.

Management Comments

• Our mission has always been to democratize access to financial markets for global customers.
• Our company was founded to provide access to the international capital markets for retail brokerage customers and has rapidly grown providing a world-class digital infrastructure that has led to innovative, integrated financial technologies that address customer needs in Kazakhstan, our home market, and dozens of other countries across Europe, Asia, and North America.
• As part of our strategic approach, we do not prioritize revenue generation from banking service commissions. Instead, the loyalty program is leveraged to effectively reduce transaction costs for customers by supporting our customer base expansion and increasing engagement across the ecosystem.
• The gain primarily reflected our active portfolio management strategy, which mostly attributable to the sale of Kazakhstani corporate debts at favorable market prices following a short-term rally in the local debt market.
• The increase in the loan and deposit portfolios reflects continued customer demand and growth in our banking services, while the decline in trading portfolio aligns with our strategic focus on core banking operations.
• The decrease in active contracts was due to the newly introduced regulatory cap on commissions to insurance agents for policies associated with bank and microfinance loan products, which reduced new business volumes during the period.
• The increase in payroll and bonus expenses is primarily attributable to increased salary and bonus amounts between the two periods. The increase was also due to the expansion of our workforce through acquisitions, establishment of new subsidiaries and hiring.
• The increase in the provision for expected credit losses during the period was primarily attributable to a deterioration in macroeconomic conditions and other factors impacting the estimated probability of default in our loan portfolio, and the incorporation of revised forward-looking information.
• The main factor of an increase in the effective tax rate was the change in Kazakhstani tax legislation, enacted during July 2025 with retrospective effect from calendar 2025, introducing a 10% income tax on interest income and realized capital gains from Kazakhstani sovereign securities.
• We believe that our current cash and cash equivalents, cash expected to be generated from operating activities, and forecasted returns from our proprietary trading, combined with our ability to raise additional capital will be sufficient to meet our present and anticipated financing needs.

Industry Context

The company operates in a highly competitive and rapidly evolving financial services landscape, emphasizing digital transformation and the development of a comprehensive fintech ecosystem. Its strategic expansion into telecommunications and media in Kazakhstan aligns with broader industry trends towards integrated digital service offerings. The company's performance is significantly influenced by the economic conditions in Kazakhstan, which are tied to oil exports and Russian economic stability, leading to foreign currency exchange rate volatility. Regulatory changes, such as the new Kazakhstan tax code and global Pillar Two rules, are reshaping the operational and financial environment for financial institutions.

Comparison to Industry Standards

• S&P Global Ratings revised its outlook to positive from stable for the company's financial operating companies (Freedom KZ, Freedom EU, Freedom Global, Freedom Bank KZ), affirming their 'B+/B' longand short-term issuer credit ratings, reflecting substantial achievements in risk management and compliance.
• S&P raised the long-term issuer credit and financial strength ratings on Freedom Life to 'BB+' from 'BB', with a stable outlook, acknowledging Freedom Life's track record of market share and profit growth over recent years.
• S&P also raised the Kazakhstan national scale rating on Freedom Insurance to 'kzA-' from 'kzBBB+', indicating improved creditworthiness within the local market.

Management Changes

Corporate Governance

Legal Proceedings

• Einride AB filed an arbitration claim against the company in January 2025 (updated September 15, 2025) with the SCC Arbitration Institute, alleging failure to pay to subscribe for a nominal convertible debenture amount of $10,000. Einride seeks $10 million in monetary damages, applicable interest, and legal costs. The company contests the claim, and the final award is preliminarily scheduled for May 2026.
• The company is involved in certain additional employment-related claims, complaints, and legal or regulatory proceedings arising in the ordinary course of business. The company believes these complaints are without merit and is defending against the allegations, but is currently unable to reasonably estimate the possible loss or range of loss.

Related Party Transactions

• Loans issued include uncollateralized bank customer loans purchased from Microfinance Organization Freedom Finance Credit LLP (FFIN Credit), a company controlled by Timur Turlov (controlling shareholder, chairman, and CEO).
• 47% of the company's total related party other assets as of September 30, 2025, consisted of a prepayment to Freedom Data Centers LLP (formerly, Freedom Telecom LLP), a related party, for the potential acquisition of A-Telecom LLP.
• 7% of the company's total related party customer liabilities as of September 30, 2025, were bank deposits from Turlov Family Office Securities (PTY) LTD, a private securities brokerage company wholly owned by Timur Turlov, held with Freedom Bank KZ.
• 32% of the company's total related party customer liabilities as of September 30, 2025, were from ITS Central Securities Depository Limited, a subsidiary of International Trading System Limited, an affiliate of the Group.
• 99.7% of the company's total related party liabilities from insurance activity as of September 30, 2025, and March 31, 2025, were liabilities from FFIN Credit, for which the company provides voluntary credit risk insurance.
• The company recognized $1,327 (3 months) and $6,789 (6 months) in insurance premiums earned, net of reinsurance, from FFIN Credit.
• Advertising and sponsorship expense from Kazakhstan Chess Federation (where Timur Turlov holds a management position) amounted to $851 (3 months) and $2,459 (6 months).
• Advertising and sponsorship expense from Freedom Youth Football League of Kazakhstan (fully owned by Turlov Private Holding, where Timur Turlov holds 99.9% of shares) amounted to $2,730 (3 months) and $5,256 (6 months).

Stakeholder Impact

• Shareholders: Significant decrease in net income and quarterly revenue, coupled with increased tax burden, may negatively impact shareholder returns and stock price. However, long-term strategic growth initiatives and positive credit rating revisions for subsidiaries could offer future value.
• Employees: Increased payroll and bonuses expenses reflect continued investment in attracting and retaining talent, potentially benefiting employees. Stock compensation awards also provide incentives.
• Customers: Expansion of the digital fintech ecosystem, new banking products, and loyalty programs aim to enhance customer experience and engagement. However, regulatory caps on insurance commissions might affect product offerings or agent incentives.
• Creditors: The company's ability to raise additional capital through bond placements and maintain strong regulatory capital adequacy ratios provides comfort to creditors. Positive S&P ratings for subsidiaries also indicate financial stability.
• Regulatory Authorities: Compliance with new tax legislation in Kazakhstan and global Pillar Two rules, along with ongoing adherence to various securities, banking, and insurance regulations, is critical for maintaining operational licenses and avoiding penalties.

Next Steps

• Complete the final valuation of Astel Group Ltd. acquired on April 30, 2025.
• Either acquire Microfinance Organization Freedom Finance Credit LLP (FFIN Credit) from Timur Turlov or implement an in-house solution to replicate its functions for uncollateralized retail loans.
• Continue initial steps to establish a bank in Georgia, subject to obtaining the required regulatory approvals.
• Freedom Telecom's strategy and budget will continue to evolve dynamically in response to internal developments and external market factors.
• Freedom Media is intended to become a national media platform in Kazakhstan, offering tailored streaming services.
• Freedom Bank KZ may decide to place bonds from its established programs as needed to support its liquidity.
• The arbitration tribunal in the Einride AB case is preliminarily scheduled to issue a final award in May 2026.
• The closing of the acquisition of Wallet Solutions is subject to the satisfaction of conditions set forth in the purchase agreement.

Key Dates

Recommendation

While the company demonstrates strong customer growth and strategic expansion into new digital and telecommunications sectors, the significant decline in net income and quarterly revenue, coupled with increased expenses and a higher effective tax rate due to regulatory changes, presents immediate financial headwinds. The ongoing arbitration case adds a layer of uncertainty. The positive credit rating revisions for subsidiaries and long-term strategic moves are encouraging, but the short-term financial performance warrants a cautious approach. Investors should monitor the impact of new tax legislation, the resolution of legal proceedings, and the successful execution of the digital ecosystem expansion before considering a stronger position.

Keywords

Financial Services, Brokerage, Banking, Insurance, Fintech, Kazakhstan, SEC Filing, Earnings Report, Stock Compensation, Capital Markets, Digital Ecosystem, Telecommunications, Acquisitions, Regulatory Compliance, Risk Management, FRHC, S&P Ratings, Tax Legislation