ICAP Restructuring Along with Financial Clients

Financial reforms could provide a moat-widening opportunity or business model threat to ICAP

Michael Wong, CPA 21 November, 2011 | 12:03PM
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The 16% revenue decline reported by ICAP (IAP) in the first half is better than some investment banks that reported substantial marks on their fixed-income securities inventory, but ICAP underperformed several interdealer broker peers that managed to slightly increase their credit trading revenue.

ICAP announced it is restructuring its Brazil and Japan operations and is looking for cost cuts across the company. Many other financial firms have announced workforce reductions and cost-saving initiatives, so we're not surprised that ICAP is doing likewise. In fact, ICAP's restructuring could be a direct result of the cost cuts at other financial institutions, as a shrinking of financial firms that are primary customers of interdealer brokers such as ICAP would potentially lead to a shrinking of trading volume that is directed through the company

Going forward, ICAP's revenue and earnings remain murky. In general, we remain positive on the company's high-margin electronic broking and post-trade risk services. Generally strong growth in foreign exchange trading, high issuance of U.S. Treasuries, and demand for more secure collateralised lending and risk management services should serve as tailwinds. The company's sale of ownership interests in its iSwap electronic interest rate swaps platform to four large dealers should also increase the likelihood that iSwap will become one of the industry-leading platforms when there's more clarity in regards to the trading and clearing of certain over-the-counter derivatives. That said, macroeconomic concerns, the generally high level of market volatility that differentially affects trading in asset classes, and regulatory restrictions on the company's financial customers in regards to higher capital requirements and certain trading practices make an upward trajectory in revenue and earnings anything but certain.

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Michael Wong, CPA  Michael Wong is a stock analyst at Morningstar.