ICAP drifting lower

The firm will announce its first-half numbers on 11 November, and less risk taking by major banks is hurting its profits.

ICAP office
Source: Bloomberg

The inter-dealer broker has been finding it difficult in the post-credit crisis era as tighter regulation has prompted investment banks to allocate less funds to their trading departments, and the result has been less business for ICAP. As major finance houses are reducing what they trade, they are also changing how they trade, and ICAP has been moving away from voice broking and more towards electronic systems. The inter-dealer broker has had success with electronic platforms to match up buyers and sellers, but ultimately banks don’t have the same risk appetite they once did.

In the first-half of the year the company saw revenues fall by 7% and pre-tax profits decline by 15.5%. As I previously stated, ICAP benefit from high market volatility and the financial markets saw major swings during the summer months, and this may help its profitability in the upcoming reporting period. The possibility of an interest rate rise in the US between the end of this year and early 2016 will ensure the financial markets are lively which will help ICAP.

When ICAP announces its first-half numbers, traders are anticipating revenue of £638 million, which compares with the first-half revenue of £656 million. The inter-dealer broker will report its full-year figures in May, and the market is anticipating revenue of £1.26 billion and adjusted net income of £201 million. That equates to a small fall in revenue and an 8.6% rise in adjusted net income.

Equity analysts have a moderately bullish outlook on ICAP, and out of the 12 ratings, ten are buys, and two are sells. The average target price is 494p, which is 10.5% above the current price. Investment banks also hold a moderately bullish outlook for Tullett Prebon, and out of the ten recommendations, one is a buy, eight are holds, and one is a sell. The average target price is 388p, which is 18% above the current price.

ICAP’s share price has been falling since May and the trend is set to continue. Support will be found at 420p and then at 380p. The 475p area will act as a barrier to any rallies, and a move through it will bring the resistance at £5.20 into play.

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