From the Securities Lending Trading Desk

new growth

Fee levels are trending higher for BofI Holding Inc., the most shorted U.S. lender, amid a federal money laundering probe into the company’s main subsidiary, BofI Federal Bank. In Asia, we continue to witness long term securities lending demand for Bellamy’s Australia, whilst in Europe Apple calls time on Imagination Technologies Group,which fell 69% last week.

Below please find this April 12 edition of From the Trading Desk, which provides timely commentary about top security earners, revenue drivers and other factors influencing the securities lending market from the BBH Securities Lending Trading Team.

Americas

Fee levels are trending higher for BofI Holding Inc., the most shorted U.S. lender, amid a federal money laundering probe into the company’s main subsidiary, BofI Federal Bank. According to Bloomberg, the probe and resulting lawsuit “accuses several lenders of violating banking laws by charging high interest rates”. Lam Cloud Management, in particular has since been driven into bankruptcy because of such a loan, the suit alleges. According to reports Bofl charged roughly 76% on a $132k loan over six months. Markit reports that BofI short interest is 27 percent of shares outstanding, as of March 28.

We are seeing strong demand for stocks in the Mortgage Finance industry, specifically Orchid Island Capital Inc. (ORC). Orchid’s share price declined in the weeks following a fourth-quarter loss of $20.4 million, after reporting a profit in the same period a year earlier. The price fell to a 52-week low of $9.23 on 3/8. While much of the demand for ORC has followed their earnings miss, it is important to note that we are seeing broader demand for the sector as a whole. While the increasing rate environment is largely good for the sector, some investors still remain wary as to when the expected roll back of financial regulations will be implemented. Other names we have seen strong demand for in this sector include; New York Mortgage Trust, Inc. ARMOUR Residential REIT Inc., and Five Oaks Investment Corp.

Asia Pacific

According to local media reports, a leading manufacturer of biologic drugs, affiliated with one of Korea’s largest conglomerates, is potentially facing scrutiny from the local regulator in relation to a recent audit of its accounts. Yonhap News reported last month that the Financial Supervisory Service (FSS) may conduct an additional review of Samsung Biologics, part of the Samsung Group, on concerns that there were inconsistencies in an audit overseen by the Korean Institute of Certified Public Accountants before Samsung Biologics’ initial public offering in November 2016. Part of the concerns relate to Samsung Biologics’ reporting of a substantial net profit in 2015, despite several years of the company being unprofitable. The company issued a public statement last week denying any wrongdoing. We have witnessed strong securities demand for Samsung Biologics in recent weeks which, despite the controversy, has seen its share price rise by over 30% since its IPO.

Future prospects for one of Australia’s largest infant-formula exporters are looking even bleaker after it said it will miss a deadline to register its products for sale in China. Bellamy’s Australia Ltd, which gets about 14 percent of its total sales in China, said it wouldn’t get the required registration from the China Food and Drug Administration (CFDA) by 1st January 2018. The company said testing at a new canning line would take as much as six months, further adding to its woes after forecasting waning profits on unsold inventory of infant formula several months ago. We continue to witness long term securities lending demand for Bellamy’s Australia, which has seen its share price decline by more than half in the past year, as investors remain concerned about their ability to reshape their businesses in the face of a rapidly changing operating environment.

Europe

Apple calls time on Imagination Technologies Group. UK based audio and video chip designer Imagination Technologies fell as much as 69 percent last week as it announced that its largest client Apple Inc. will discontinue using its intellectual property in their products. The US firm informed the provider that it hopes to use its own designs within two years, making the firms graphics processor chip surplus to requirements. The news highlights to investors that half of the annual $150 million in revenue earned by the firm last year was made up from servicing Apple. Analysts have discussed whether the US firm will be able to design and implement its own processors without infringing on UK intellectual property.

CEO resignation and Audit concerns renews interest in Spain’s Banco Popular. Interest in the troubled Spanish lender intensified as the announcement that an internal audit had identified financial shortcomings in last year’s capital increase. The Audit found a shortfall in its provisions and asked questions on how the bank accounted for client loans that were potentially used to buy shares in the capital increase. On top of the audit announcement, the negative sentiment towards the bank intensified when the CEO, Pedro Larena, announced that he will step down after only seven months in the role. The share price fell as much as 11.3%, its largest drop since June.