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Sharp decline in North America equity lending revenues
EMEA equity revenues increase YoY
Lowest monthly revenue YTD
Global securities lending returns declined by 22% YoY in August.
US equities were the largest contributor to the shortfall, as
special balances continued to decline from the YTD peak in June.
August was the fourth month of 2020 to deliver less revenue than
the 2019 comparable and the first since May. The August shortfall
puts QTD revenue at $1.5bn, a 9.9% YoY decline. To some degree the
decline could be anticipated, with US equity revenue trending down
steadily over the month of
July, however the magnitude was startling. Lower M&A and
new issuance activity contributed to the sequential decline, which
was largely seasonal with some high-profile IPOs expected this
Fall. Formerly lucrative lending opportunities relating to
arbitrage trades in June and July concluded. In this note we'll
review some of the drivers of global lending income in August.
August was the first month of 2020 to have the most revenue
generating security be a European equity. German equity lending
revenue has been bolstered by hard to borrow shares YTD, with Varta
Ag delivering $11.9m in August revenue. EMEA was the only region
for equities to deliver YoY growth in August; Germany represented
most of the growth, the rest of EMEA combined for 15% YoY decline
in August revenues. A pair of equities listed in the Netherlands
also appear on the top revenue generating equities for August, NN
Group Nv and Unibail Rodamco Westfield Se, which led Dutch equity
lending revenues more than doubling YoY. The boost to July
revenues, partly from delayed dividend record dates, along with the
increase in German & Dutch revenues in August puts EMEA QTD
revenues at $248m, a 14% YoY increase.
Americas equity revenues came in at $220m for August, a 35% YoY
decline, however the $656m QTD total only reflects a decline of 9%
YoY. US equity revenues tumbled in August after stellar returns in
June and July. Share borrowing related to convertible, merger and
warrant arbitrage led in the prior months but had already
substantially trailed off by the end of July; August offered
limited special situation lending opportunities. US equities
delivered $194m in August revenue, a 30% YoY decline. Despite the
sharp decline in August there is cause for optimism heading into
the Fall with several firms planning to go public via IPO or SPAC,
which will likely result in elevated fees. It's also worth noting
that the YoY shortfall in US equity returns was partly just a
function of Beyond Meat (BYND) delivering $48m in August 2019,
excluding that the YoY decline was 'only' 16%; BYND generated $65M
in September of 2019, which will make the YoY comparison even more
challenging next month. Canadian equity lending revenues also
declined sequentially and YoY, with the Cannabis related returns
declining steadily as increased issuance translated to additional
lendable shares and lower fees. Canadian equities have delivered
$65m QTD, a 45% YoY decline.
Asia equity lending revenues continue to fall short of 2019,
with August revenues of $118m reflecting a 23% YoY decline. The
largest market, Japan equities, delivered $47m in August revenues,
a decline of 28% YoY, though also an 8.6% improvement compared with
July. Hong Kong equity lending revenues slipped in August, with
$27m in revenues the lowest monthly figure since April. The short
sale ban in South Korea continues to limit lending revenue, with
$13.5m in August revenue being the lowest for any month of 2020 and
reflecting a 52% YoY decline.
Global ETF revenues were $29.8m for August, an 11% YoY increase,
however it is also the lowest monthly revenue for the asset class
since February. The lower returns are the result of declining
on-loan balances, average fees increased 11% YoY and at 62bps
remains in a similar range to June and July. Global ETF utilization
in August extended the trend lower from the March peak, as borrow
demand failed to keep pace with the growth in lendable assets.
There has also been a dearth of hard to borrow ETFs with any
significant balances; The most revenue generating fund globally,
Chinaamc Csi 300 Index ETF, generated less than $2m in August.
Corporate bond lending revenues continue to be lacklustre.
Corporate lending returns came in at $34.4m for August, a 33%
decline YoY. Corporate bond lending revenues declined during Q1 and
have been consistently near $35m per month since. Central bank
support for global credit has dampened borrow demand while lendable
value has increased steadily since April, causing utilization and
spreads to decline.
Government bond lending activity has substantially returned to
pre-COVID levels in terms of spread and reinvestment revenue.
Global government debt lending revenues totalled $117m in August, a
2.1% YoY increase resulting from larger on-loan balances while
average fees declined by 5.8%. Fee-based revenue for US government
bond lending came in at $67m for July, a 1.8% increase YoY. From
the peak revenue in April, the downtrend in spread returns for UST
lenders has been steady, with August delivering the lowest monthly
return since February. Returns from lending European sovereigns
were $39.6m for August, a 7% YoY increase and the most revenue for
any month since March.
Conclusion:
Global securities finance revenues decreased 22% YoY in August,
a particularly challenging month following stellar returns in June
and July. The trend for US equities remains to the downside, with
the last week of August having the lowest revenue for any week in
the month for the largest contributor to global returns, which was
also the case for July. Global Utilization of assets in securities
lending programs has been on a stead downtrend after spiking in
March, with August having the lowest average globally for any month
YTD. Despite the recent challenges there is cause for optimism in
terms of corporate action related trades which are likely to
materialize this Fall. YTD global returns are down 6% through
August.
Stay tuned for monthly Securities Finance updates from IHS
Markit!
Posted 08 September 2020 by Sam Pierson, Director of Securities Finance, S&P Global Market Intelligence
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
