BlackRock’s ETF Lending Cap Will Weigh On Revenue
Growing concerns among its clients forced BlackRock (NYSE:BLK) to recently announce a 50% security lending limit for each of its iShares exchange traded funds (ETFs). [1] Late last year, clients started raising objections to the asset management giant’s unchecked security lending policy, as it brought in significant counter-party risk to their investments. [2] The securities lending business is an essential source of revenue for asset managers like BlackRock and its competitors including State Street (NYSE:STT) and Legg Mason (NYSE:LM), driven by a high demand in the global market.
We maintain a $217 price estimate for BlackRock, which is nearly 30% above its current market price – something we attribute to the pessimism prevalent in the stock market towards stocks of financial firms.
See our complete analysis of BlackRock’s stock here
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Late last year, reports suggested that some of BlackRock’s iShares ETFs had lent out more than 90% of the securities they held, with the average figure being around 92%. Clients did not take this news very well, considering the fact that such a large proportion of the securities being loaned presented additional counter-party risks to their portfolio. Clearly BlackRock’s policy of returning 60% of the security lending revenue back to the fund did not provide the clients with sufficient returns for the added risk – something which was further heightened by the weak global economic scenario.
BlackRock finally gave in to the pressure from its clients, announcing its decision to limit lending to 50% of the total value of securities that the fund holds. The company, though, maintains that it has the ability to lend out more – something which can be read as an option to stretch this limit in the future if revenues take a bigger hit from the new cap than what is anticipated.
So how much will the revenues be hit by? And how much of BlackRock’s overall value will this in-turn affect?
Historically, security lending for a particular ETF has added anything between 1 basis point and 15 basis points (0.01% to 0.15% of the fund’s value) to the fund’s revenue. [2] Considering the fact that the highest earning ETFs which roped in 0.15% of the fund’s value in additional revenue also lent out the most securities – up to 95% – would mean that after the new limit, the range of revenue from lending will be 0.08% of the fund’s value at most.
An assumption that before the limit, average additional returns were around a ballpark figure of 0.07% would make returns around 0.04% the likely average after the limit is imposed. This implies a reduction in revenues equal to 0.03% of total ETF value for BlackRock ETF. Making this change to the chart above shaves off nearly $6 from our $217 price estimate for BlackRock.
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Notes:- BlackRock imposes 50% cap on ETF security lending, Citywire, June 20 2012 [↩]
- ETF securities lending comes under scrutiny for collateral risk, Citywire, Nov 11 2011 [↩] [↩]