Equity lending revenue for Asia and Europe in Q1 had their worst performance in several years, while North American revenue was only propped up by a few significant market events, according to IHS Markit.
The data provider's figures show that global securities lending revenue for Q1 decreased by 5.5 percent year-over-year (YoY) despite an increase in borrow demand for some asset classes, most notably exchange-traded funds (ETFs), and the increased market volatility brought on by the COVID-19 pandemic.
However, this data “belies the evolving mix of demand drivers and spread incomes", says Sam Pierson, securities finance director at IHS Markit, in a research note.
"After reaching an all-time low in mid-January, equity utilisation increased by a third to end March at 5.6 percent,” he adds.
ETFs and general collateral equities have been the primary beneficiary of increased borrow demand and revenues during the virus-related 2020 economic slowdown, the data shows.
Pierson explains that part of the uptick in borrow demand for ETFs in was likely driven by short term unwinding create-to-lend trades, which is reflected in increased borrow demand for ETF shares, beyond changes in short interest.
Driving the increase in utilisation, global equity lendable assets declined at a more rapid pace than loan balances, causing the largest one 30-day increase in utilisation since May 2011, he says.
IHS Markit data shows that the peak in utilisation was on 23 March, reversing the past 12 months during which lendable asset growth dramatically outpaced borrow demand.
Despite an uptick in global utilisation for the month, global lending revenue for March was down by 18 percent YoY.
However, Pierson suggests that the about-turn in utilisation decline last month may set the table for increasing returns to lendable assets in Q2.
Broken down by region, European equity revenues fell by 22 percent YoY in Q1 to total $282 million, the lowest take-home since Q3 2014.
Pierson explains that, compared with Q1 2019, loan balances and fees are down, depressing revenues, while lendable assets have increased, pushing down on utilisation.
North American equity revenues came in at $884 million for Q1, a decline of 9 percent compared to Q4 2019.
Of this, Pierson says that the major event last month from a revenue perspective was the McKesson exchange offer for shares of Change Healthcare on 9 March, which generated just over $33 million in reported revenue.
Meanwhile, Asia equity revenues totalled $427 million in Q1, a 22 percent decline YoY and a 2 percent decline from Q4 figures, making it the worst lending revenue quarter for Asian equities since Q2 2017.
Pierson notes that while revenue was lacklustre, largely due to a lack of regional specials, Asia equity lendable assets reached an all-time high of $2.1 trillion in early January, having broken the $2 trillion mark in late December 2019.
Commenting on the global revenue data, Peirson says: “There has been a dearth of emergent equity specials during the sell-off, however, given the speed of the decline it makes sense that demand for liquid hedges has led borrow demand.
“Going forward the lack of initial public offerings with lockup expiries will be felt in YoY comparisons, however not all demand drivers for 2019 have dried up, with the cannabis sector still seeing outsized fees and revenues.”
Image: Shutterstock 