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February 15, 2013 9:37 am
LCH.Clearnet almost tripled its net profit last year after the transatlantic clearing house being bid for by the London Stock Exchange experienced what it called “a transformational year”.
The group, in which the LSE is looking to take a controlling stake of up to 60 per cent, said net profit rose to €59.7m from €21.2m in the previous year thanks to higher revenues.
Its net revenues grew by almost a quarter to €426.2m, driven by an expansion of its over-the-counter business, particularly in interest rate swaps and credit default swaps, and a better performance in commodities.
The figures reflected a concerted push by Ian Axe, chief executive, to turn a utility-like business that was facing the loss of its key exchange customers into a more commercial organisation able to better exploit a sweeping regulatory overhaul of the derivatives market.
Authorities want more of the vast over-the-counter derivatives market to be processed through clearing houses, which stand between two parties in a trade and ensure the deal in the case of a default. LCH is the one of the world’s largest clearing houses and by far the world’s largest clearer of interest rate swaps, which are used by banks, institutions and corporations to hedge against risk.
Operating profit before impairment and non-recurring items grew by 89 per cent to €127.5m.
“These results helped to strengthen our balance sheet, hire the best market talent, invest in improving risk management and technology and fast-track our expansion plans in the US with the acquisition of International Derivatives Clearing Group [from Nasdaq OMX]” said Mr Axe.
The group said it was preparing a capital increase of around €300m, towards the lower end of its estimates, once the planned majority takeover by the LSE had completed. The group needs to raise its capital levels to comply with European regulators’ recommendations for clearing houses. “All our shareholders are very supportive,” said Mr Axe.
However, shares in the London Stock Exchange fell 3.4 per cent due to investor concerns that LCH’s operating costs rose 8 per cent to €298.7m. Mr Axe said the costs were due in part to adverse foreign exchange effects and further investments in its over-the-counter derivatives business SwapClear.
Revenues from the unit rose 36 per cent to €59.8m. It cleared swaps with a notional outstanding value of $11.9tn in the first year of a new service for institutional investors such as hedge funds and pension funds.
Richard Perrott, an analyst at Berenberg Bank, said there were concerns about the subsidiary’s profit-sharing arrangements between the dealer-banks and LCH.
“We expect OTC derivatives clearing to grow extremely quickly, but LCH.Clearnet keeps just 15 per cent of surplus profits beyond an initial £7.5m level,” he said. “Significant OTC investment might be something that’s good for SwapClear but the appeal is less obvious for LCH.”
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