Custodians have experienced a quarterly increase in securities lending revenues, but income remains far below Q2 2009 levels.
Despite eight personnel leaving to join a rival third-party lender founded by a State Street alumnus, the Boston-based bank has seen an improved performance in Q2, with securities lending revenue increasing 51.4% from Q1 2010 to $109 million. Although experiencing an increase in volumes, lending revenues were down 45.8% year-on-year – primarily due to compressed spreads, according to the Q2 2010 statement.
Northern Trust also saw a quarterly increase in lending revenue in Q2 reaching $66.3 million, up from $55.6 million in Q1 2010. But lending revenue levels still fell far short of Q2 2009 levels of $172.5 million. Again, despite increasing volumes, lower spreads were blamed for the shortfall. However, Q2 lending revenue did include the recovery of previously recorded unrealized asset valuation losses of approximately $37 million relating to a mark-to-market investment fund.
BNY Mellon saw a $17 million increase in securities lending quarterly revenue, totaling $46 million in Q2 compared with $97 million in Q2 2009. According to CEO Bob Kelly in the Q2 2010 Earnings Call: The sequential increase reflects seasonality, while the year-over-year decline reflects narrower spreads and slightly lower loan balances.
BNY Mellon is in the process of closing two asset servicing acquisitions, PNC GIS, and BHF Asset Servicing. According to Kelly, the BHF deal will close in August 2010, and the PNC deal is already experiencing revenue synergies. Both deals should have some effect on Q3 securities lending revenues.
Brown Brothers Harriman, by the benefit of being a private bank, is exempt in publishing quarterly figures. However a BBH spokesperson said: Although borrowing demand is lower than expected across the industry, BBH has been able to achieve consistent performance results year over year, due in large part to strong growth in the supply of assets available for lending through our program. Our intrinsic value philosophy is resonating even more deeply with beneficial owners, and has resulted in a 40% year over year increase in lendable assets within our program.
Neither J.P. Morgan nor Deutsche Bank separate the securities lending earnings from their securities services revenue and declined to offer business line breakdown. In J.P. Morgans Q2 earnings call, Mike Cavanagh, CEO of Treasury & Securities Services, explained the seasonal benefit from securities lending, particularly coming out of Europe in the second quarter of the year.
Seasonal increases are to be expected during Q2, due to the demand for stocks during the European dividend season. However, in a recent Bank of England Securities Lending and Repo Committee Meeting, William Duff-Gordon, managing director at Data Explorers, noted that the market remained subdued due to reduced proprietary trading, and hedge funds suffering from market volatility in May.
Germany also instigated a short selling ban on European Union government debt and banks, tempering possible lending revenue.