It’s all looking surprisingly rosy at the world’s largest interdealer broker. This from today’s interim statement at Icap:
ICAP has continued to benefit from the generally high levels of volatility in the wholesale financial markets. Having had a busy first quarter, markets quietened during the summer period, following the normal seasonal pattern - in contrast with the same period in 2007, which was unusually busy. During September, extraordinary events in financial markets again generated record trading volumes in many markets as participants reassessed their exposures and the flight to quality and liquidity resumed.
In fact, the turbulent climate is even helping. The group posted a record H1 pretax profit before one-off items and impairments - Icap’s preferred measure of performance - of £174m (£148m pretax).
The broker now expects FY profit to beat average analyst forecasts as it continues to flourish from an ongoing crisis that is generating record trading volumes.
ICAP’s pure intermediary role means that we do not have the exposures or the leverage of many other financial services businesses. ICAP has low capital requirements, a strong balance sheet and strong cash flow.
On top of that, a smoothly resolved Lehman CDS settlement will only help bolster the group’s OTC position, says Icap. The group’s own associated costs with Lehman’s collapse totalled a slim £3m.
How about the fear that increased OTC market regulation could signal the beginning of tougher times for Icap?
The broker has a positive spin on that too. Firstly, it doesn’t believe it will be the end of ‘off exchange’ trading. Secondly, whatever measures are imposed will likely translate to lower costs for Icap.
Increased regulatory oversight and the drive for greater transparency in OTC markets will push more OTC products to central counterparty or cleared mechanisms for settlement and provide a further boost to electronic trading. These will be welcome developments for ICAP as they will reduce the overall cost of trading and thereby serve to increase trading volumes. We emphatically do not believe that OTC markets will suddenly become exchange listed.
The market has responded accordingly - shares in Icap were as much as 6 per cent higher in early morning trade, opting to reverse last week’s sudden concerns over the broker’s survivability in an increasingly ‘on exchange’ trade climate.
Meanwhile, on the balance sheet front, things are looking positive too. While the group says it was forced to draw down £53m under a revolving facility to meet FICC margin calls during the most turbulent part of the crisis, the good news is it managed to do successfully. It also has another £75m it can use under a facility with Lloyds TSB until May 2009. The group has also been able to restructure a £150m term loan repayable in 2 years, leaving no imminent refinancing requirements until 2011.
