Euroclear delivered a strong financial performance in H1 2022, with the underlying business continuing to perform well. Euroclear also reported higher interest earnings due to rising interest rates on cash balances as well as increased cash balances from frozen assets due to Russian sanctions.
Net profit increased 42% to €351 million ($355.8mn), of which €277 million resulted from the strong underlying business performance.
Operating income was up 24% year-on-year to €998 million. Business income was up 7% to €807 million, reflecting the continued strong growth of Euroclear’s core business lines as it implements its strategy.
Interest, banking and other income increased by 262% to €191 million as a consequence of rising interest rates and higher cash balances from frozen assets due to the Russian sanctions.
Operating Expenses increased to €534 million, up 12% compared to H1 2021, as Euroclear continued to invest in its technology and service offering, as well as being impacted by inflation and costs related to managing the Russian sanctions. An increase of 40% in earnings per share to €111.7 per share, reflected the increase in net profit.
Implications of frozen assets due to Russian sanctions
As a result of sanctions imposed by the US, the EU and other jurisdictions, as well as Russian countermeasures, the cash on the balance sheet has increased as blocked coupon payments and redemptions accumulate. During the first half of 2022, Euroclear Bank’s balance sheet increased by €72 billion year-on-year.
At the end of June 2022, Euroclear Bank’s cash balances had increased by €72 billion year-on-year. As per Euroclear’s standard process, the cash is invested which results in interest income. During the first half, the interest income earned from frozen assets held as a result of Russian sanctions was €110 million.
The Board expects these interest earnings to grow materially as blocked payments and redemptions continue to accumulate in a rising interest rate environment.
While this is expected to have an impact on the balance sheet, it should not result in material change in credit risk profile and therefore will not have a meaningful impact on the group’s capital ratios.
Business Performance & H1 Highlights
Excluding the impact of frozen assets due to the Russian sanctions, adjusted net profit rose by 12% to €277 million.
Adjusted operating income was up 11% to €892 million. This was driven by adjusted business income growth, up 8%. Adjusted Interest, Banking and Other income was up 53% to €81 million.
Market volatility remains high, driving transaction volumes to record levels. Equity market valuations have fallen significantly during the period which has restricted growth in assets under custody and fund asset under custody during the period.
Euroclear continues to see very strong demand for collateral management and lending services from a broad range of market participants. Since 2016, structural demand has been driven by the introduction of the Uncleared Margin Rules (UMR) under Basel III as more participants were require to adopt collateral management services to reduce the risk of derivatives exposures. The fifth wave of the UMR came into force last year.
In the second quarter, Euroclear launched a new ESG reporting solution for asset managers, through the combination of MFEX by Euroclear and Greenomy, two recent investments. In addition to illustrating the benefits of the expanded product offering, the new service demonstrates Euroclear’s increased strategic focus on Sustainable Finance.
The integration of MFEX is progressing to plan as MFEX’s established fund distribution platforms are combined with Euroclear’s post-trade expertise to create a new end-to-end funds offering.
The group also continues to modernize its legacy technology infrastructure, including the domestic CSDs. These investments will further strengthen the resilience and efficiency of the group’s platforms, allowing for further digitalization and service enhancements.
Lieve Mostrey, chief executive officer, said in a statement: “We delivered a strong performance across the business and saw an increase in interest earnings due to higher interest rates and accumulated cash balances as a consequence of frozen assets due to the Russian sanctions. In a context where financial market conditions have been dynamic, we have continued to operate safe and efficient infrastructure to support our clients. As we look forward, we see opportunities to further enhance our client offerings, such as through innovative data-enabled services and connecting to global markets, while meeting our responsibilities as a financial market infrastructure to support sustainable economic growth.”