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Integration costs, Brexit cast shadows on TP Icap's post-merger results

U.K. broker/dealer TP Icap Plc saw largely flat 2017 underlying earnings compared with 2016 and said its response to Brexit would require more investment and likely lead to the fragmentation of its currently centralized model.

In a conference call with analysts, CEO John Phizackerley said 2018 had seen "a good start" for the newly combined firm, with increasing market volatility and the prospect of rising interest rates ahead. The former Tullett Prebon bought the global hybrid voice broking and information business of Icap, changing its name to TP Icap at the end of 2016.

Regarding Brexit, Phizackerley said the firm has moved from analysis and planning to actual decisions. Its efforts to prepare for Britain leaving the EU has been hampered by political uncertainty, he said, but it has been talking with various European financial regulators to find out what needs to happen if it sets up a European hub. The firm anticipates a "potentially more costly model in Europe."

The broker/dealer's underlying pretax profit for 2017, which did not include acquisition and integration costs from the merger, was flat at £233 million against the previous year's £232 million.

Meanwhile statutory operating profit, which includes those additional costs, was £102 million, down from £181 million pro forma.

Over-the-counter trading, and therefore TP Icap's broking revenue from commissions, suffered as financial market volatility declined in 2017, compared with a 2016 that featured the Brexit vote and U.S. presidential elections, Phizackerley said. Analyst Paul McGinnis of investment group Shore Capital called the results "relatively weak" and slightly below expectations.

Phizackerley said the business was "fundamentally different" and "truly unrecognizable" compared with before the merger it completed on Dec. 30, 2016. It is now not only the world's largest broker/dealer, but also its largest energy and commodities broker and independent provider of over-the-counter data, he said.

Energy and commodities had "a difficult year," and a 4% revenue decline, with commodities at their lowest levels since 2006, the CEO said, but the data and analytics teams saw 8% growth and aimed to achieve double-digit growth amid rising demand for independent data products after the implementation of new MiFID II market rules. The new regulations aim to harmonize rules across Europe and increase competition and transparency.

The firm's global broking business stands to benefit the most from increased market volatility and ongoing rate rises in 2018, Phizackerley said. Bright spots include growth in underlying operating profit in the Americas, up 12% to £64 million, and in Asia Pacific, up 26% to £29 million. A 2017 set of cost measures seemed to have had some effect, as average revenue per broker increased 10% to £579,000.

Some of the firm's 2018 synergy targets after its merger, chiefly through a head count reduction of 295, were met ahead of schedule in 2017. The year saw £27 million in synergy savings against a target of £10 million, said acting CFO Robin Stewart, and the firm "remained committed" to its existing target of $100 million in synergy savings by 2020.

The firm was fully MiFID II-compliant on Jan. 3, said Stewart, and with that challenge met, the firm could now focus on the more complex next two years of integration.

A combined U.K. headquarters would be "announced shortly," Phizackerley said. Energy and commodities teams are set to move in summer 2018 into one headquarters in London's Victoria neighborhood, and U.S. operations into a single premise in Manhattan. The group is also building a support center in Belfast to underpin the next phase of integration.