European equities on the rise
15 September 2020
August was the fourth month of 2020 to deliver less revenue than the 2019 comparable and the first since May, IHS Markit data reveals
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Global securities lending returns declined by 22 percent year-on-year (YoY) in August. US equities were the largest contributor to the shortfall, as special balances continued to decline from the year-to-date (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 quarter-to-date (QTD) revenue at $1.5 billion, a 9.9 percent YoY decline. To some degree the decline could have been anticipated, with US equity revenue trending down steadily over the month of July, however, the magnitude was startling.
Lower mergers and acquisitions and new issuance activity contributed to the sequential decline, though likely seasonal with some high-profile initial public offerings (IPOs) expected this fall; Some formerly lucrative lending opportunities relating to arbitrage trades earlier this year have also concluded. In this note we review some of the drivers of global lending income in August (see Figure 1, overleaf).
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 of YTD, with Varta Ag delivering $11.9 million revenue in August. The Europe, Middle East and Africa (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 percent 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 and Dutch revenues in August puts EMEA QTD revenues at $248 million, a 14 percent YoY increase (see Figure 2, overleaf).
Americas equity revenues came in at $220 million for August, a 35 percent YoY decline, however, the $656 million QTD total only reflects a decline of 9 percent 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 $194 million in August revenue, a 30 percent 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 a special purpose acquisition company, 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 $48 million in August 2019, excluding that the YoY decline was only 16 percent; BYND generated $65 million 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 $65 million QTD, a 45 percent YoY decline.
Asia equity lending revenues continue to fall short of 2019, with August revenues of $118 million reflecting a 23 percent YoY decline.
The largest market, Japan equities, delivered $47 million in August revenues, a decline of 28 percent YoY, although there was also an 8.6 percent improvement compared with July.
Hong Kong equity lending revenues slipped in August, with $27 million in revenues the lowest monthly figure since April. The short sale ban in South Korea continues to limit lending revenue, with $13.5 million in August revenue being the lowest for any month of 2020 and reflecting a 52 percent YoY decline.
Global exchange-traded fund (ETF) revenues were $29.8 million for August, an 11 percent 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 percent YoY and at 62 basis points remains in a similar range to June and July. Global ETF utilisation 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 $2 million in August.
Corporate bond lending revenues continue to be lacklustre. Corporate lending returns came in at $34.4 million for August, a 33 percent decline YoY. Corporate bond lending revenues declined during Q1 and have been consistently near $35 million per month since. Central bank support for global credit has dampened borrow demand while lendable value has increased steadily since April, causing utilisation and spreads to decline.
Government bond lending activity has substantially returned to pre-COVID-19 levels in terms of spread and reinvestment revenue. Global government debt lending revenues totalled $117 million in August, a 2.1 percent YoY increase resulting from larger on-loan balances while average fees declined by 5.8 percent. Fee-based revenue for US government bond lending came in at $67 million for July, a 1.8 percent 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 $39.6 million for August, a 7 percent YoY increase and the most revenue for any month since March.
Conclusion
Global securities finance revenues decreased 22 percent 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 utilisation of assets in securities lending programmes has been on a steady 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 materialise this fall. YTD global returns are down 6 percent through August.
August was the fourth month of 2020 to deliver less revenue than the 2019 comparable and the first since May. The August shortfall puts quarter-to-date (QTD) revenue at $1.5 billion, a 9.9 percent YoY decline. To some degree the decline could have been anticipated, with US equity revenue trending down steadily over the month of July, however, the magnitude was startling.
Lower mergers and acquisitions and new issuance activity contributed to the sequential decline, though likely seasonal with some high-profile initial public offerings (IPOs) expected this fall; Some formerly lucrative lending opportunities relating to arbitrage trades earlier this year have also concluded. In this note we review some of the drivers of global lending income in August (see Figure 1, overleaf).
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 of YTD, with Varta Ag delivering $11.9 million revenue in August. The Europe, Middle East and Africa (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 percent 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 and Dutch revenues in August puts EMEA QTD revenues at $248 million, a 14 percent YoY increase (see Figure 2, overleaf).
Americas equity revenues came in at $220 million for August, a 35 percent YoY decline, however, the $656 million QTD total only reflects a decline of 9 percent 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 $194 million in August revenue, a 30 percent 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 a special purpose acquisition company, 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 $48 million in August 2019, excluding that the YoY decline was only 16 percent; BYND generated $65 million 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 $65 million QTD, a 45 percent YoY decline.
Asia equity lending revenues continue to fall short of 2019, with August revenues of $118 million reflecting a 23 percent YoY decline.
The largest market, Japan equities, delivered $47 million in August revenues, a decline of 28 percent YoY, although there was also an 8.6 percent improvement compared with July.
Hong Kong equity lending revenues slipped in August, with $27 million in revenues the lowest monthly figure since April. The short sale ban in South Korea continues to limit lending revenue, with $13.5 million in August revenue being the lowest for any month of 2020 and reflecting a 52 percent YoY decline.
Global exchange-traded fund (ETF) revenues were $29.8 million for August, an 11 percent 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 percent YoY and at 62 basis points remains in a similar range to June and July. Global ETF utilisation 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 $2 million in August.
Corporate bond lending revenues continue to be lacklustre. Corporate lending returns came in at $34.4 million for August, a 33 percent decline YoY. Corporate bond lending revenues declined during Q1 and have been consistently near $35 million per month since. Central bank support for global credit has dampened borrow demand while lendable value has increased steadily since April, causing utilisation and spreads to decline.
Government bond lending activity has substantially returned to pre-COVID-19 levels in terms of spread and reinvestment revenue. Global government debt lending revenues totalled $117 million in August, a 2.1 percent YoY increase resulting from larger on-loan balances while average fees declined by 5.8 percent. Fee-based revenue for US government bond lending came in at $67 million for July, a 1.8 percent 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 $39.6 million for August, a 7 percent YoY increase and the most revenue for any month since March.
Conclusion
Global securities finance revenues decreased 22 percent 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 utilisation of assets in securities lending programmes has been on a steady 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 materialise this fall. YTD global returns are down 6 percent through August.
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