2016 a banner year for lending
21 December 2016 London
Image: Shutterstock
Political upheaval, energy sector disruption and a crop of consistently high-earning shorting targets has helped to make 2016 a “banner year” for securities lending, according to Simon Colvin of IHS Makit.
Lending revenue is on track to beat last year’s total by 6.3 percent, making it highest revenue generating 12 months in more than five years.
This year has seen revenues of $8.06 billion as of 20 December, compared to the $7.81 billion earned in 2015.
The Markit Securities Finance database monitors more than $15 trillion of assets in lending programmes.
According to Colvin, the bumper revenue haul has been mostly driven by lenders achieving better pricing as the weighted average fees, year-to-date, hit 43.8 basis points (bps)—1.1 bps higher than 2015.
The importance of this price boost is exemplified by the fact that demand has been flat over the year, as the average balance has been recorded at $1.45 trillion, or the same as 2015.
By region, IHS Markit’s data reveals that the strong revenue haul has not been spread equally across global markets.
North America, which has taken the lion’s share of global lending revenue, Asia and the Nordics have all seen 2016’s revenue build on last year, while Europe has slumped, primarily due to the unwinding of the German yield enhancement trade wiping as much as 62 percent off German equity revenues.
North American equities, led by the US, have accounted for 40 percent of global securities lending revenue this year and are set to beat their own 2015 performance by 8 percent, due to a 9 percent uptick in loan balances.
Colvin highlighted that “unsurprisingly, energy producers were at the forefront of this wave of shorting activity as demand to borrow their shares was three times higher than the rest of the index".
“Despite the recent rebound in oil prices, the sector is still responsible for a fifth of the North American shares trading special as many producers continue to face headwinds, with oil trading in the $50 to $55 range.”
Turning to specific high-interest stocks, US electric car manufacturer Tesla has provided an “outsized contribution the the industry’s revenues”, with demand to borrow never falling below 15 percent of shares outstanding.
In Europe, revenue has lagged by 7 percent representing a $115 million shortfall. For securities lending participants, the pain caused by the German market upheaval was mitigated somewhat by the UK’s unexpected vote to leave the EU, which contributed UK-specific revenue outdoing 2015’s figure by 27 percent, valued at $35 million.
“Uncertainty surrounding Brexit has been the main catalyst driving the increased UK revenues as short selling in UK equities has surged to a multi-year high since the referendum vote back in June,” explained Colvin.
This trend is likely to continue into 2017 as average demand to borrow constituents of the FTSE 350 sits at at 2.3 percent of shares outstanding, the highest in over two years, according to IHS Markit data.
Meanwhile, Asia’s lending revenue trajectory suggests it will soar over last year’s regional figure by 11 percent, thanks to fees to borrow Japanese equities boasting a 33-percent increase.
Asian revenue has been held back by Hong Kong as, in contrast to the rest of the region, its beneficial owners stand to make a third less revenue from lending out equities than they did in 2015.
In the Nordics, every market beat its 2015 target, but Sweden stood out more than the rest with a 45 percent increase in revenue.
This was driven by a 22 percent increase in the demand to borrow Swedish equities as well as better pricing dynamics as the fees generated by these loans have increased by a fifth to 260 bps so far this year.
Lending revenue is on track to beat last year’s total by 6.3 percent, making it highest revenue generating 12 months in more than five years.
This year has seen revenues of $8.06 billion as of 20 December, compared to the $7.81 billion earned in 2015.
The Markit Securities Finance database monitors more than $15 trillion of assets in lending programmes.
According to Colvin, the bumper revenue haul has been mostly driven by lenders achieving better pricing as the weighted average fees, year-to-date, hit 43.8 basis points (bps)—1.1 bps higher than 2015.
The importance of this price boost is exemplified by the fact that demand has been flat over the year, as the average balance has been recorded at $1.45 trillion, or the same as 2015.
By region, IHS Markit’s data reveals that the strong revenue haul has not been spread equally across global markets.
North America, which has taken the lion’s share of global lending revenue, Asia and the Nordics have all seen 2016’s revenue build on last year, while Europe has slumped, primarily due to the unwinding of the German yield enhancement trade wiping as much as 62 percent off German equity revenues.
North American equities, led by the US, have accounted for 40 percent of global securities lending revenue this year and are set to beat their own 2015 performance by 8 percent, due to a 9 percent uptick in loan balances.
Colvin highlighted that “unsurprisingly, energy producers were at the forefront of this wave of shorting activity as demand to borrow their shares was three times higher than the rest of the index".
“Despite the recent rebound in oil prices, the sector is still responsible for a fifth of the North American shares trading special as many producers continue to face headwinds, with oil trading in the $50 to $55 range.”
Turning to specific high-interest stocks, US electric car manufacturer Tesla has provided an “outsized contribution the the industry’s revenues”, with demand to borrow never falling below 15 percent of shares outstanding.
In Europe, revenue has lagged by 7 percent representing a $115 million shortfall. For securities lending participants, the pain caused by the German market upheaval was mitigated somewhat by the UK’s unexpected vote to leave the EU, which contributed UK-specific revenue outdoing 2015’s figure by 27 percent, valued at $35 million.
“Uncertainty surrounding Brexit has been the main catalyst driving the increased UK revenues as short selling in UK equities has surged to a multi-year high since the referendum vote back in June,” explained Colvin.
This trend is likely to continue into 2017 as average demand to borrow constituents of the FTSE 350 sits at at 2.3 percent of shares outstanding, the highest in over two years, according to IHS Markit data.
Meanwhile, Asia’s lending revenue trajectory suggests it will soar over last year’s regional figure by 11 percent, thanks to fees to borrow Japanese equities boasting a 33-percent increase.
Asian revenue has been held back by Hong Kong as, in contrast to the rest of the region, its beneficial owners stand to make a third less revenue from lending out equities than they did in 2015.
In the Nordics, every market beat its 2015 target, but Sweden stood out more than the rest with a 45 percent increase in revenue.
This was driven by a 22 percent increase in the demand to borrow Swedish equities as well as better pricing dynamics as the fees generated by these loans have increased by a fifth to 260 bps so far this year.
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