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Being an old-school broker in the City of London ain’t what it used to be. Technology and competition have hurt profitability in traditional dealing services. Look at stalwart TP ICAP: the part-creation of Michael Spencer is worth just £1.7bn, about half what it was when the entrepreneur sold out in 2017.
The company’s traditional brokerage business is dominated by interest rate contracts that accounted for about a quarter of group revenues last year. There are three potential explanations for its malaise.
First is the low interest rate era, which drove down demand for rate hedging services. Second, Brexit has impaired London’s attractiveness as a financial hub. Third is that mismanagement has simply dulled a once-ruthless edge.
The end result for investors is the same. But the shares, having traded sideways for some time, jumped a tenth this month. The broker acquiesced to shareholder demands to sell a stake in its data business Parameta to unlock value.
The fact is that a large chunk of the company’s core brokerage services remain under pressure. Business has picked up with interest rate rises. But TP ICAP’s brokers are working harder to earn their keep: total revenues were flat last year against a 5 per cent rise in revenue per broker.
That looks lacklustre compared with US peer BGC. Its overall brokerage revenues grew 11 per cent and revenues per broker increased faster too. TP ICAP shares have underperformed BGC by half since the start of 2023. Shares in the US rival are up 120 per cent and are trading at more than nine times forward earnings. TP ICAP remains stuck at six, the largest valuation gap since 2014.
The London factor plays a part. The City is losing market share in over-the-counter interest rate derivatives. There are two reasons for this, according to Deutsche Bank. The first is the move away from Libor contracts. The other is Brexit. In interest rate swaps and options, the UK’s share fell to 43 per cent in 2022, from more than 50 per cent in 2019, as euro-denominated trading shifts inside the EU.
TP ICAP is trying to diversify into equities and commodities. But its real hopes lie with market data division Parameta, which collects and sells data from the core business.
A spin-off might make sense. On 30 per cent profit margins and a 20 times forward multiple — a discount to data group LSEG — Parameta would be worth about £1.2bn, versus £1.7bn for the group. Buying back shares with any proceeds would, however, just hammer home that the best days for this breed of City broker have passed.
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