ICAP plc (IAP.L), the interdealer broker, is making this Interim Management Statement in relation to the period from 1 October 2008 to today’s date and the outlook for ICAP’s financial year ending 31 March 2009.
After investing significantly in the future growth of the business and benefiting from changes in foreign exchange rates, profit (before tax, amortisation and impairment of intangibles arising on consolidation and exceptional items) for the financial year ending 31 March 2009 is anticipated to be within the range of analysts’ current forecasts.
Performance in turbulent conditions:
– Interest rates – In Europe, interest rate derivatives have continued to be very active, less in North America. Low short term interest rates and steep yield curves tend to make favourable trading conditions for dealers and investors.
The company expects to take advantage of the substantially increased issuance of government bonds, particularly in the US and Europe. A new market has been created with the issuance of securities through the Temporary Liquidity Guarantee Program (TLGP). To date about US$150 billion of combined fixed and floating rate securities has been issued; it is anticipated to rise to US$600 billion.
– Credit – Both bonds and derivatives markets stand out as strong performers. January proved to be a bumper month for the new issue bond markets with a total of Investment Grade corporate benchmarks issued in Europe in January and $60 billion of Investment Grade debt was priced in the US. ICAP has continued to invest in developing our teams, particularly in the US.
– Commodities – Overall a good performance with oil and emissions particularly active. Company has recently started broking base metals on the LME following the approval of ICAP’s application for Category Two membership and have continued to invest in this area.
– Shipping business has felt the impact of negative economic sentiment. Dry freight rates fell back sharply last year but have recently begun to increase again. The tanker markets have been less affected.
– Foreign exchange – The volatility in exchange rates and foreign exchange’s lack of correlation with other traded products kept volumes in this market high, only really slowing in recent months.
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Equities and equity derivatives – ICAP’s cash equity business is growing well, albeit from a low base. Our market leading equity derivatives business has experienced much tighter, more difficult conditions in many markets.
– Emerging markets – Many markets have seen patchy liquidity and lower volumes. Company’s joint venture in China continues to perform well and we are investing in the expansion our operations in Brazil.
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Electronic broking – Volumes in electronic broking have fallen recently, but company’s market position in both foreign exchange and fixed income remains very strong.
Total average daily electronic broking volume on ICAP’s OTC electronic broking platforms EBS and BrokerTec in the 12 months to January 2009 was $780 billion, 4% down on the corresponding period 12 months earlier. ICAP continues to invest in the expansion and development of the Group’s electronic systems to keep pace with customer demand.
There is significant demand both within and beyond ICAP’s existing customer base to improve the efficiency of post-trade processing and to reduce the capital allocated to existing positions.
ICAP is building a range of other post-trade processing, portfolio compression and reconciliation and risk management services – Traiana, TriOptima and Reset. All three are experiencing significant growth in the volumes that they process.
As previously announced ICAP is an equal member of a consortium of a number of leading financial institutions that is collectively considering a possible cash offer for LCH.Clearnet Group Limited. Discussions are at a very preliminary stage, and there can be no certainty that such an offer will be made.
Outlook
Changes in customers’ business models and retrenchment in the banking industry are changing ICAP’s customer mix. In electronic markets, algorithmic trading now accounts for an increasing share of trading volumes. This environment also creates new opportunities for an un-conflicted, independent agency broker like ICAP in areas such as equities and futures.
There is potential for further consolidation of market share among interdealer brokers as traders concentrate their business in the largest, deepest and most reliable liquidity pools.
ICAP is maintaining its focus on costs and is taking advantage of a number of opportunities to reduce overheads. These savings will partially offset the investment in the new areas described above, which are still in their start up phase. The Group continues to be highly cash generative to support these investments and benefits from a strong balance sheet.
“Our business continues to perform well in these challenging conditions,” says Michael Spencer, chief executive, ICAP. “We expect to take full advantage of the restructuring of the financial markets currently underway and remain positive about the medium term potential for the business.”
“Group revenue in the quarter ended 31 December 2008 was some 20% ahead of the same period in the previous year, when the markets were very active. The quarter began strongly but activity in the financial markets began to slow in November and was followed by the seasonal slowdown in December.”
“The scale and diversity of ICAP are key strengths of the business. Our broad geographic and product spread and strong market share have helped us in the first weeks of 2009 with very strong activity in some markets being more than offset by lower levels in others.”
L.D.