Knight Capital Earnings Slump, Reverse Business “Poised to Gain”

Second quarter consolidated earnings for Knight Capital Group Inc. (NYSE Euronext: KCG) saw a major decrease in SQ 2011 compared to the previous year with $17.6 million, or $0.19 per diluted share, the company reported yesterday. Knight’s SQ 2010 consolidated earnings were more than triple this amount, at $54.4 million, and $0.58 per diluted share.

However, Knight’s earnings in fixed income, currency, and commodities (FICC) shot up 46% to $88.4 million from $60.4 million in Q2 2010.

Knight attributes this growth in part to reverse mortgage origination and HMBS securitization. Last summer, the company closed its acquisition of Urban Financial Group, which obtained Ginnie Mae HMBS issuer approval this spring thanks to Knight’s backing; Urban was reported as having a “nice” impact on Knight’s profitability for the first quarter 2011, and it seems the impact has continued into the second quarter.

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“In FICC, during the second quarter, Knight improved profitability despite lower overall U.S. corporate bond volumes and narrower spreads year over year,” said Thomas M. Joyce, Knight’s Chairman and CEO, in the company’s earnings report. “Institutional fixed income worked to further reduce expenses while selectively increasing sales and product coverage. Urban increased reverse mortgage origination as well as HMBS issuance and is poised to gain further market share.”

Steve Bisgay, Knight’s senior managing director and CFO, described the company’s financial condition as “strong and fluid,” saying that assets grew to $6.4 billion by the end of June 2011, from $4.7 billion at the end of December 2010.

“The majority of this growth is due to the expansion of our option market-making activity and the Urban business,” said Bisgay.

The company also pulled in revenues from continuing operations of $326 million in the SQ 2011, compared to last year’s $366.3 million. Equities also slumped, representing $236.4 million in revenue for the second quarter, considerably less than last year’s $305 million.

Joyce explained the lower numbers in consolidated earnings, equities, and revenue in terms of the struggling economy, and again recognized Urban’s positive role.

“Knight recorded positive earnings in the second quarter of 2011 as we worked to make the best of a challenging environment,” said Joyce. “The financial results were driven by electronic and cash market making as well as institutional electronic trading. Also making a strong contribution was Knight subsidiary Urban Financial Group which is cementing its position as a leading provider of reverse mortgages and HMBS securities in a growing market segment. In addition, the capital markets team is making an impact by leveraging Knight’s distribution strength to institutional clients.”

View the report here.

Written by Alyssa Gerace

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