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Icap warns on profits – and sees shares jump, while FTSE climbs again

Interdealer broker sees signs of optimism despite cutting forecasts due to eurozone crisis

Here’s something of a novelty – a profit warning which has seen the company’s shares soar.

Icap, the interdealer broker, said full year profits would be in the range of £336m to £358m after it recorded lower volumes in the third quarter, as customers reduced risk in the wake of the eurozone crisis. In November the company had said it expected annual profits to be between £358m and £390m. This was “based on the assumption that markets normalise in the last quarter.”

It said third quarter revenues to the end of December fell by 7% and in January volumes fell 19% compared to the same month in 2011. It has cut its cost base by £20m by reducing staff numbers in areas where profits are falling, while investing in its futures and commodities businesses.

But it saw signs for “cautious optimism”, especially in the improvement in the US economy. Chief executive Michael Spencer said:

Like everyone else we saw a significant reduction in risk appetite in November and December. In January we saw encouragin signs of activity starting to return, albeit cautiously in some markets.

This positive spin has helped lift the company’s shares 28.4p to 364.4p, making them the biggest riser in the FTSE 100. It has also helped smaller rival Tullett Prebon, which is leading the second tier risers with a 13.7p increase to 311.5p.

On Icap, Numis analysts said:

The £20m of cost savings means they should be at the top of the very much reduced £336m-358m pre-tax profit range for the year. Icap had previously guided that they expected to see a recovery in volumes through to their March year end and this may form part of their profit and loss guidance for the full year. Further cost saving could help and are likely next year. The immediate net £20m benefit is a mixture of reduced staff numbers (the Brazilian redundancies was announced last year) and lower bonus payments opposed to just redundancies. Icap is being valued at 9.2 times this year’s earnings which is not expensive but with forecast risk remaining we retain our hold recommendation.

Overall the market has moved higher as better than expected Chinese manufacturing data encouraged investors, despite a rather more mixed bag from the eurozone’s purchasing managers indices for January. The FTSE 100 is currently 69.40 points higher 5751.01.

Banks are higher on continuing hopes – usually dashed, it has to be said – that the financial crisis could be easing. Royal Bank of Scotland has risen 1.09p to 27.71p, while Lloyds Banking Group has added 0.8p to 31.42p after an expected shake-up of its management structure.

Barclays is 7.7p better at 220.25p following an update from a South African subsidiary. This has done nothing to put Shore Capital off its sell recommendation on Barclays, however:

Absa is a South African bank that is 56% owned by Barclays. This morning, it has issued a trading statement ahead of its full year results announcement on 10 February 2012. Overall Absa expects full year headline earnings per share growth of 18% and diluted headline earnings growth of 22%. A quick check of Bloomberg indicates that this is broadly in line with consensus market expectations. We do not explicitly split out Absa in our forecasts for Barclays as its results are spread across a number of divisions, although we are not expecting to make any changes following this announcement. Overall, Africa is viewed by the company as a key area of opportunity and growth.

We have a sell recommendation on Barclays shares highlighting that (1) the majority of the company’s profits are derived from low quality investment banking earnings, (2) the company has significant ‘PIIGS’ exposure (notably Spain and Italy) and (3) it is the most exposed of the UK banks to regulatory headwinds, in our view. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds