Asia-Pacific: Q3 Performance YoY
Cameron Cole and Imogen Berger-North, Product Specialists, Data & Analytics
October 23, 2023
Asia-Pacific (APAC) region has been a hot topic for the securities lending industry for many years, with markets in the region being characterised by varying tax treatments, settlement requirements, collateral margins, and short selling restrictions. In the wake of the post-COVID era, Asia has certainly not been insulated from rising interest rates and inflation, with geopolitical tensions and the risk of contagion from a distressed Chinese real estate sector adding to the complexity.
Within this context of continued market volatility, the APAC securities lending market has generated an impressive $1.63 billion in revenue year-to-date, an increase of 13% YoY. This can be attributed to an 12% rise in on loan balances (the only region with a year-to-date rise compared to the same period last year) with fees remaining flat. Equities constitute the bulk of activity, generating $1.51 billion and equating to an 12% increase YoY. Notably, Information Technology, Industrials and Consumer Discretionary sectors led in revenue generation, earning $386 million, $251 million and $196 million respectively.
Japan was the top performing market in the region with combined equities and fixed income activity generating $491 million in revenue for lenders. Revenue from Japanese equities totalled $472 million and was the second highest earning equity market globally, behind only the United States. Fees averaged 51 bps for equities YTD, an increase of 14% YoY as they continue to trend upwards, with on loan balances also up 21% compared to the same period last year.
Some of the top revenue generating equities include capital goods company (3856 JP) Abalance earning $11.8 million, luxury camping giant (7816 JP) Snow Peak Inc earning $11.6 million and (4393 JP) Bank of Innovation Inc earning $8.63 million. Despite equities comprising most lending income in Japan, Japanese Government Bonds (JGBs) have stood out in the region. While inflation is running above target, the Bank of Japan (BoJ) maintains an ultra-loose monetary policy. However, the central bank is showing signs of moving away from yield curve control, which previously reduced the supply of government bonds, and easing the conditions governing its securities lending facility of JGBs. As a result, Japanese government bonds earned a modest $10.5 million, an increase of 82% year on year.
Lender-to-broker activity for Taiwanese equities has amassed $373 million in revenue so far this year, trending downwards by 2% compared to the same period last year. Yet, Taiwan still places second in the region for the highest revenue generation year-to-date. Although equity on loan balances remained steady, lendable increased by 30% YoY. Alongside lower utilization, fees have also dipped slightly by 3% YoY, contributing to the fall in securities lending revenue. Fees remain hot for some Taiwanese equities though, the Information Technology sector led securities lending revenue in Taiwan, earning $224 million with the top names being (8046 TT) Nan Ya Printed Circuit Board Corp and (2303 TT) United Micro Electronics, cumulatively generating $18.4 million.
Hong Kong, the third highest revenue generating market in the region, has earned $266 million in lending activity in 2023 to date, driven by a 26% increase in fees YoY. Hong Kong is often seen as a proxy for the Chinese securities lending market, with the increase in fees being consistent with economic worries stemming from China’s slowdown in growth. A downturn in the Chinese property market adds to the complexity, creating apprehension about a potential contagion effect in the wider APAC region and helping fuel higher fees for the distressed real estate sector. Consequently, securities lending generated $58.3 million from real estate equities alone. After (2007 HK) Country Garden Holdings narrowly avoided default, fees for the security were up 976% YoY, becoming the second-highest revenue generating security in the region, earning $22 million. Outside of real-estate, China and Hong Kong’s stuttering post-Covid recovery is weighing on market sentiment. The Consumer Discretionary sector also performed well, earning $78 million in revenue, up by 48% YoY. The sector was led by securities such as (1797 HK) East Buy Holding Limited, (819 HK) Tianneng Power International Ltd, and (9992 HK) Pop Mart Intl Group Ltd collectively generating nearly $40 million in revenue.
South Korea missed out on ‘developed’ market status this year and so may be looking to lift short selling bans on more securities in the future; a full removal of which is required to reach the desired ‘developed’ status. However, with a large retail investor base and a general election around the corner in April 2024, the potential political repercussions may persuade the Korean government to avoid any ban removals in the near future.
Nevertheless, lending activity of Korean equities generated $251 million in revenue year-to-date, an increase of 21% YoY. This is attributed to a 21% increase in on loan balances with fees staying relatively unchanged. The securities leading Korea’s sizeable revenue generation are (086520 KS) EcoPro and its subsidiary, (247540 KS) EcoProBM – the first and third highest revenue generating securities in APAC. A legion of retail investors, colloquially referred to as ‘ants’, triggered a substantial nine-fold surge in the stock price of the cathode and battery producers. This trend mirrors that seen in the U.S. meme stock craze, with larger investors concurrently increasing their short positions. As a result, revenue for these names generated a combined total of $62 million.
Australia has had to navigate some economic hurdles during the post-pandemic recovery. The Reserve Bank of Australia has raised interest rates several times this year in attempt to curb inflation. This increase, combined with the anticipated diminishing demand for construction materials in the wake of China’s troubled real estate market, is weighing on Australian sentiment. Revenue from lending Australian equities has fallen this year by 31% to $82 million compared to the same period last year. The fall in revenue is accompanied by a 30% reduction in fees and a minor 2% decrease in on loan balances.
The Materials sector has accounted for the highest revenue generation, earning $34 million followed by Information Technology and Financials generating $11 million and $10 million respectively. Top performing names in the market include Core Lithium Ltd NPV (CXO AU), Brainchip Holdings NPV (BRN AU) and Lake Resources (LKE AU) cumulatively generating $12 million in securities lending revenue. Fixed income revenue in the Australian market has also fallen 3%, with corporate debt generating $4 million and government debt earning $19 million.
So far it has been a strong year for securities lending revenue in APAC. This looks likely to improve as more markets in the region look to ease restrictions on short selling and offshore lending activity. Earlier this year, Indonesia took a step forward to an offshore model by issuing new regulations on a bilateral securities lending facility.
Similarly, the Philippines have recently moved to permit overseas collateral for onshore transactions, seen as a sign by many as a move towards an international model. Year-to-date revenue, combined with the potential for new markets, indicates a promising trajectory for 2023 should the trend continue.
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About EquiLend
EquiLend is a global financial technology firm offering Trading, Post-Trade, Data & Analytics, RegTech and Platform Solutions for the securities finance industry. EquiLend has offices in North America, EMEA and Asia-Pacific and is regulated in jurisdictions around the globe. The company is Great Place to Work Certified™ in the U.S., UK, Ireland and India and was named Best Post-Trade Service Provider Globally, Best Market Data Provider Globally and awarded for its Diversity & Inclusion in the Securities Finance Times Industry Excellence Awards 2023. www.equilend.com