Pressure on ASX earnings is likely to build throughout FY21, with derivatives providing the main area of weakness.
-Decline in derivatives volume entirely driven by interest-rate futures
-Equities trading activity now starting to normalise
-Project expenditure likely to be elevated
Recent volatility has provided
Citi assesses there are many headwinds developing, although expects a solid second half in FY20, supported by record levels of cash equities trading. However, derivatives trade is likely to slump further as the
Admittedly, some of the negative impact will be delayed amid recognition of capital raisings income over the medium term. Regardless, the record second half in cash equities trading is unlikely to be repeated.
Cash equity daily average turnover is up 45%, while capital raisings totalled
Derivatives
Derivative volume declines were entirely driven by interest rate futures, as the targeting of low interest rates by the RBA for durations up to three years has meant reduced activity in the three-year futures market.
Credit Suisse believes the majority of the decline in interest rate volumes will come from principal traders rather than house clients, as house clients need to continue hedging their interest-rate risk.
So, as principal trader volumes are reduced, the level of discounting is likely to wind back and cushion the revenue impact. Revenue will also be supported by a change in the mix, as a result of declines in lower fee interest rate futures and increases in a higher fee electricity futures.
Commodity futures were the one bright spark, albeit these contribute less than 1% of total futures volumes. Commodity futures were up 65% in the second half and carry gross average fees of more than 15x gross fees on interest-rate products.
Interest Income
Macquarie expects interest income to decline throughout FY21 because of lower client charges for futures, lower investment spreads and cash rates. Interest margin income accounted for 13% of first half net profit.
Looking into the second half, the broker envisages the spread between the BBSW (bank bill swap rate) and cash rate will narrow significantly, noting since early April it has actually been negative.
Hence, earnings pressure is expected to extend across the second half of FY20 and FY21. Moreover, strong equities trading activity is now starting to normalise.
Overvalued?
Given delays to the CHESS replacement platform, now intended for
This now takes the total to seven Sell ratings on FNArena's database and the consensus target is
Annual listing fees account for 11% of ASX revenue and, Macquarie points out, for the first time in eight years ASX has decided not to raise its annual listing fee price. The broker agrees the stock is overvalued, trading at around 48% above the five-year average.
Capital markets are also not as strong as they seem at first glance. Secondary capital raisings in the second half were supported by a strengthening of corporate balance sheets but beyond the merger of
However, as Citi highlights, with accounting standards requiring revenue to be smoothed over several years, the impact on the balance sheet over the short term is likely to be muted.
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