Q2 2018 overview of investment firm sector

Finantsinspektsioon has published a short review of the developments in the Estonian investment firms sector in the first quarter of 2018 and of the main risks to the sector. 

A new investment firm, AS Redgate Capital, came to the market in the first quarter of 2018. This meant there were four investment firms operating in Estonia at the end of the quarter instead of three in the previous quarter.

The volume of client assets managed by local investment firms declined by 4% in the first quarter to 886 million euros. As investment firms mostly operate internationally, the majority of client assets belonged to non-resident clients.

Key Indicators

Q4 2017   Q1 2018
Value of client assets 926 bln € 886 bln €
Value of assets of investment firms 49 mln € 52 mln €
Liquidity coverage ratio 796% 824%
Profit/loss    0,7 mln € 2,4 mln €
Net service fee income 4,8 mln € 7,2 mln €
Return on equity   14,6% 21,2%
Core Equity Tier 1 ratio  32,4% 33,7%

 

The market risk exposures of investment firms remain at a high level, as investment firms trade actively with off-balance-sheet instruments. Market risk exposures totalled 49 million euros, and 96% of the market risk exposures came from currency risk.

In response to the risk profile of investment firms, Finantsinspektsioon has introduced elevated additional capital requirements to make sure that investment firms hold sufficient own funds to cover their exposures.

The investment firms were sufficiently capitalised at the end of the quarter. The average Core Equity Tier 1 ratio of the sector was 33.7%. 

All the investment firms met the Liquidity Coverage Ratio (LCR) with sufficient margin, and the average indicator for the sector was 824%.

The profit and gross income earned by investment firms were significantly larger than in the previous quarter. Profit for the quarter was 2.4 million euros and net income was 7.1 million. Profitability was aided by large trading income.

Main development trends and risks

  • The quarterly profit of investment firms increased markedly thanks to good results from trading.
  • The main risk to investment firms stems from their business model, which are often based on taking high levels of market risk.
  • A significant risk factor is the risk of non-compliance with standards. As investment firms provide services in multiple jurisdictions and the regulations that apply to them are similar in complexity to those that apply to banks, there is an an elevated risk not being able to ensure compliance with the legislation of different states.