March 27, 2013 / 9:40 AM / 5 years ago

UPDATE 2-ICAP warns on profit as trading recovery falters

* Expects 13 pct drop in full-year revenue

* Forecasts 280 mln stg pre-tax profit, down 21 pct

* Cost savings remain on track

* Shares fall 8 pct

By Tommy Wilkes

LONDON, March 27 (Reuters) - Interdealer broker ICAP has warned investors to brace for underwhelming full-year profit as the latest chapter in the euro zone crisis dashes hopes of matching the buoyant trading volumes of early this year.

London-based ICAP said on Wednesday that it expects pre-tax profit for the year to March 31 to be about 280 million pounds ($424 million), in line with the lower end of guidance and knocking its shares by 8 percent to 296 pence at 0935 GMT.

The profit forecast represents a 21 percent drop on the 354 million pounds it made a year earlier.

Increased levels of volatility, including heavy electronic trading of the Japanese yen, had helped activity in January and February, but trading had tailed off this month.

“While we had a better start to the fourth quarter, we are not yet seeing a sustained upturn, with market activity remaining fragile and unpredictable,” Chief Executive Michael Spencer said in a statement.

Shares declined against a flat FTSE 250 index, erasing gains recorded so far in 2013. Analysts had forecast pre-tax profit of between 280 million and 305 million pounds. In September ICAP forecast profit of between 307 million to 346 million pounds.

Brokers such as ICAP and rival Tullett Prebon, which make money by matching buyers and sellers of bonds, currencies and swaps, have been battling falling trading volumes since the onset of the financial crisis and many have responded with cost cuts.


The reduced risk appetite of clients because of the euro zone debt crisis has combined with more structural issues to squeeze broker revenues. These have included banks exiting proprietary trading and the threat of tougher regulations.

“Despite the 60 million pounds of cost savings and the numerous downgrades, yet again ICAP has disappointed,” Numis analyst James Hamilton said in a note.

ICAP said that its cost-cutting programme remained on track to produce at least 60 million pounds of annualised savings by the year end. Revenues are expected to fall 13 percent from the 1.681 billion pounds earned last year.

Further clouding the outlook for ICAP, Numis’s Hamilton said, is uncertainty over the role some of its traders may have played in the Libor rate-rigging scandal.

ICAP said in January that one of its subsidiaries was the subject of a Financial Services Authority investigation over rate fixing. One employee had been suspended and three more put on administrative leave in connection with the inquiry, CEO Spencer said in February.

Spencer also said that the company’s internal investigation had found no signs of so-called “wash trades”, fake trades used by banks to reward brokers for their help in manipulating interest rates.

“We cannot know if either ICAP or any of its employees have done anything wrong but Libor-driven new regulation of the IDBs (interdealer brokers) could be negative for shareholders, and until this is resolved we can see no reason to own the shares,” Numis’s Hamilton wrote.

ICAP gave no update on Wednesday about the Libor investigations.

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