Volatility boost couldn’t last forever

THE RECEIVED wisdom is that inter-dealer brokers such as Icap benefit from market volatility. Unlike dealer banks, which have to manage positional risk, inter-dealer brokers have always been seen as pure volume plays.

In August, the stock had a great run as multiple crises in North Africa and Europe gripped markets. On 11 August, the shares jumped 6.3 per cent in a day to close at 419p, and climbed throughout the month to enter September at 479p.

It didn’t last. Banks simply aren’t making trades and Icap’s voice broking business has been hard hit. Operating profits in its core voice broking division fell 11 per cent in to £85m in the first half, on revenues that were down three per cent at £608m.
Icap should be commended for its commitment to electronic broking platforms, in which it has invested far more that rivals such as Tullett Prebon. These higher-margin activities have helped to offset the decline in traditional voice broking revenues so far. Operating profit and revenue in this division each grew by five per cent in the first half.

But the fact remains that core voice broking accounts for some 70 per cent of Icap’s revenues. So whether or not you buy Icap has become a play on when banks start making trades again. And we’re not optimistic it will be any time soon.

Yesterday, analysts at Numis said Icap’s pre-tax profit for the year to 31 March 2012 would be within the current analyst range of £358m-£390m only if “markets normalise in the last quarter”.

Sadly, we think they’re unlikely to do so.