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The interdealer broker has had to make several changes to its business in the past few years as the post-credit crunch financial markets industry has witnessed increased regulation and a drop in risk appetite at banks. The London-based firm specialises in acting as an intermediary in complex, over-the-counter derivate deals often entered into by investment banks. Essentially, ICAP thrives on high trading volumes which are usually triggered by a spike in volatility.
In May, annual revenues and profits were down 4% and 5% respectively. Nowadays major banks are putting less focus on earnings from fixed income, currencies and commodities and this is evident when you look at ICAP’s figures. In addition to lower trading volumes, ICAP is changing the way it does business.
Since May the brokerage has trimmed the headcount of voice brokers by more than 10%, and there is also a push for electronic screen-based broking. The company has shut down over 20 brokering desks that were deemed to be ‘underperforming’. While the number of brokers is dwindling, the brokerage is beefing up its compliance department in order to keep up with the increase in regulation. In September, CEO Michael Spencer stated that trading conditions were tough but since then there has been a jump in trading volumes.
October was a record month for CME Group in terms of volumes but that is partially to do with banks shifting away from over-the-counter products and trading more exchange-listed derivatives, which in itself is a problem for interdealer brokers like ICAP.
Traders are expecting first-half revenue to come in at £631 million and adjusted net income is expected to be £74 million.
The broking house will announce its full-year figures in May of next year. The consensus is for revenue of £1.28 billion and adjusted net profit of £185 million, which compares with last year’s revenue and adjusted net profit of £1.39 billion and £217 million respectively.
Equity analysts are leaning to the bullish side when it comes to ICAP. Out of the 18 recommendations, three are buys, 11 are holds and four are sells, with the average target price of £3.85, which is 9% lower than the current price. Tullett Prebon has a higher percentage of sell ratings attached to it but analysts' average target price is 5% above the current price.
Year-to-date, ICAP’s share price has only lost 4% after a considerable rebound since July, while Tullett Prebon's share price lost 26% of its value during the same period.
ICAP’s share price is receiving support at £4. The next support level down is £3.80, and if that is breeched £3.45 will be on the radar. To the upside, £4.40 is the initial target but if that level is taken out the 2014 high of $4.59 will be in focus.