Euroclear achieves robust third quarter results

BRUSSELS, Oct. 31, 2024 /PRNewswire/ -- Results for the first nine months of 2024

Highlights

Annexes

Euroclear's business income and interest earnings reached record levels

•  Underlying operating income increased by 6% to reach €2.18 billion. Net profit increased by 8% to €890 million.
•  Underlying business income is up by 5% to €1,302 million, driven by record levels in settlement and safe keeping activities, with assets under custody crossing the €40 trillion mark for the first time ever. In Q3 2024, business income increased by 8% compared to Q3 2023, driven by strong performance especially in the Eurobonds & European assets and funds business.
•  Underlying interest income continues to increase, up 9% to €882 million in the context of sustained high interest rates environment and gradual policy rate cuts.

Pace of cost growth continues to slow

•  After a step-up in investment in digital capabilities, workforce and IT infrastructure in 2023, the growth of underlying operating expenses slowed to 3% for the first nine months of 2024.
•  In Q3 2024, underlying costs decreased by 1.5% compared to Q3 2023, reflecting Euroclear's continued focus on cost mitigation and non-recurrence of specific items. 
•  As a result, the business income operating margin improved to 24.7% for the first nine months of 2024.

Strong shareholder return and capital position

•  Underlying earnings per share increased by 8% to €283 in line with continued increase in net profit. 
•  Euroclear group retains a very strong capital position, comfortably above regulatory requirements with an underlying Common Equity Tier 1 capital ratio slightly below 60%^[1].

Russian sanctioned assets

• Following the implementation of the EU windfall contribution regulation, Euroclear provisioned €2.9 billion as windfall contribution for the first nine months of 2024, of which a first tranche of €1.55 billion for H1 2024 was paid to the European Fund for Ukraine in July 2024.
• Gradual rate cuts have led to a decline in interest income related to the Central Bank of Russia's assets in Q3 2024 with the outlook for future interest earnings dependent on policymaking decisions.
• The impacts of the Russian sanctions are detailed in the last section of this press release.

Valerie Urbain, Chief Executive Officer of Euroclear, commented:

"We are maintaining our trajectory of strong financial results and excellent performance, with our settlement and safe keeping activities reaching once again record levels. We remain focused on the execution of our strategy and delivering outstanding service to our customers, while continuing to invest to support our long-term growth.

We believe digital assets offer significant benefits and our teams have continued to innovate to advance their adoption across geographies and asset classes. After two successful issuances, Euroclear now welcomed the first issuance in USD by an Asia-based issuer on its Digital Securities Issuance (D-SI) platform. Euroclear took part in a groundbreaking pilot project to tokenise gold, Gilts and Eurobonds for collateral management and completed the dress rehearsal of its trial for Eurosystem wholesale Central Bank Digital Currency (CBDC) exploratory work. Finally, Euroclear joined forces with Singapore-based Marketnode to help establish a key market infrastructure in Asia-Pacific designed to simplify the management of fund flows and reduce settlement times by using Distributed Ledger Technology (DLT).

As a group with European roots, Euroclear reiterated its commitment to supporting the European Capital Markets Union. With Europe entering a new political cycle, Euroclear presented a detailed memorandum on the competitiveness in Europe's markets and engaged with key stakeholders to chart the course for enhanced market development and integration in Europe. I firmly believe that by attracting more issuers and investors, by removing barriers to efficiency, competition and integration and by supporting innovation, European capital markets can become more liquid, resilient and competitive."

Business performance

The key operating metrics (end of period unless stated otherwise) demonstrate an excellent business performance during the period.

Euroclear's assets under custody reached a record €40 trillion, growing for the eighth quarter in a row, thanks to solid stock exchange performances coupled with robust results in fixed income.

Despite the usual summer slowdown, settlement volumes hit a new high due to sustained activity since the beginning of the year.

Funds depot is boosted by the success of ETFs, combined with the positive evolution of the stock valuations, and breaks its all-time record level close to €3.4 trillion.

The Collateral Highway's outstanding continues to increase and is now very close to the early 2022 peak.

Business milestones

Reshaping traditional financial services

Euroclear made significant progress in its journey to become a digital, data-enabled Financial Market Infrastructure by welcoming the first Digital Native Note (DNN) issued by the Asian Infrastructure Investment Bank on its Digital Securities Issuance (D-SI) platform. This marks the first digital issuance in USD for Euroclear and the first such issuance by an Asia-based issuer on its platform. Euroclear's DSI service enables the issuance, distribution and settlement of fully digital international securities on Distributed Ledger Technology (DLT).

In the related digital securities space, Euroclear, alongside Digital Asset and The World Gold Council, has successfully completed a groundbreaking pilot to tokenise gold, Gilts and Eurobonds for collateral management. This initiative showcases how DLT can revolutionise collateral mobility, enhance liquidity and boost transactional efficiency.

Furthermore, with the support of Paris Europlace, Euroclear has brought together a group of French banks around its D-SI platform and Banque de France's DL3S platform for Central Bank Digital Currency (CBDC). As a result, these financial institutions will issue the first Digital Native Note (DNN) under French Law and settle it in CBDC.

Advancing the funds business

In October 2024, Euroclear acquired a strategic stake in Marketnode, a Singapore-based digital market infrastructure operator. By joining forces with Marketnode and its existing shareholders – the Singapore Exchange (SGX Group), Temasek and HSBC – Euroclear will contribute to establish a key market infrastructure in Asia-Pacific designed to simplify the management of fund flows and reduce settlement times by using new technology. This first strategic investment in Asia reinforces the region's importance to Euroclear's positioning and business growth. 

In line with its commitment to make private markets more accessible to a wider range, Euroclear announced a pioneer collaboration with BlackRock. Both companies join forces to expand the distribution of BlackRock's private market funds via Euroclear's FundsPlace. With a global reach serving over 2,500 clients across the globe, FundsPlace is well-equipped to extend BlackRock's diverse range of private market funds to an even broader array of investors.

Simplification of Euroclear's group structure  

On 1 October 2024, Euroclear completed the previously announced simplification of its group structure. Two out of the four financial holding companies of the Euroclear group, Euroclear AG and Euroclear Investments SA/NV, were successively merged into Euroclear Holding SA/NV, the ultimate parent entity of the Euroclear group.

This simplification of the corporate structure results in a significant reduction of complexity both in terms of governance and financial administration, while keeping direct participations in regulated entities at the level of Euroclear SA/NV. This merger also streamlines and accelerates the dividend upstreaming process.

A call for unlocking scale and competitiveness in Europe's markets

As a trusted market infrastructure having contributed to the integration of European and global markets over decades, Euroclear is committed to advance the European Capital Markets Union. To instigate a meaningful dialogue with all involved stakeholders, Euroclear published a thought leadership paper on the European capital markets highlighting, key challenges, real opportunities and the critical need to improve integration and competitiveness, specifically in the post-trade sector.

To read the full paper, go to https://www.euroclear.com/content/dam/euroclear/news%20&%20insights/Format/Whitepapers-Reports/Whitepaper-Unlocking-Europe-capital-markets.pdf 

Supporting academic research on sustainable finance

In line with its ambition to advancing the understanding of sustainable finance, Euroclear announced its sponsorship of a new Chair in Sustainable Finance at the Solvay Brussels School of Economics and Management of the Université Libre de Bruxelles (ULB). Professor Dr Guntram Wolff will be the first holder of this newly created Chair, which will contribute to the creation of knowledge on sustainable finance, executive training as well as teaching.

Russian sanctions impacts 

Financial impacts of the Russian assets

•  The Russian sanctions continue to have a significant impact on Euroclear's earnings.
•  Interest earnings related to Russian assets, which are subject to Belgian corporate tax, generated €1.27 billion tax revenue.
• Following the implementation of the EU windfall contribution regulation applicable to the Central Bank of Russia's (CBR) assets dating from 15 February 2024 onwards, Euroclear provisioned €2.9 billion as windfall contribution for the first nine months of 2024.
• Euroclear made a first payment for H1 2024 of approx. €1.55 billion to the European Fund for Ukraine in July 2024.
•  The sanctions and Russian countermeasures resulted in direct costs of €68 million and a loss of business income of €20 million.
•  Gradual rate cuts have led to a decline in interest income related to the Central Bank of Russia's assets in Q3 2024 (see quarterly evolution in the table below) with the outlook for future interest earnings dependent on policymaking decisions. As a reference, an interest rate cut of 0.25% in Euro would have a potential impact of €51 million on the windfall contribution on quarterly basis.

Update on Russian sanctions and countermeasures

Russia's invasion of Ukraine in February 2022 resulted in market-wide application of international sanctions. Euroclear considers the application of international sanctions as a key obligation. Therefore, well established processes are in place which have allowed the group to implement the sanctions while maintaining our normal course of business.

As a result of the sanctions, blocked coupon payments and redemptions owed to sanctioned entities continue to accumulate on Euroclear Bank's balance sheet. At the end of September 2024, Euroclear Bank's balance sheet totalled €216 billion, of which €176 billion relate to sanctioned Russian assets.

In line with Euroclear's risk appetite and policies and as expected by the EU Capital Requirements Regulation, Euroclear's cash balances are re-invested to minimise risk and capital requirements. In the first nine months of 2024, interest arising on cash balances from Russian-sanctioned assets was approximately €5.15 billion. Such interest earnings are driven by the prevailing interest rates and the amount of cash balances that Euroclear is required to invest. Subject to Belgian corporate tax, these earnings generated €1.27 billion tax revenue for the Belgian State. As such, future earnings will be influenced by the evolving interest rate environment.

Effective 15 February 2024, the EU Council adopted a Regulation requiring Central Securities Depositories (CSDs) holding reserves and assets of the Central Bank of Russia with a total value of more than €1 million to apply specific rules in relation to the cash balances accumulating due to restrictive measures. These CSDs, such as Euroclear Bank, should account for and manage such extraordinary cash balances separately from their other activities, should keep separate the net profit generated and should not dispose of these ensuing net profits (e.g. in the form of dividends to shareholders).

In May 2024, the European Commission has adopted a new regulation about a windfall contribution applicable to CSDs holding Russian Central Bank assets with a total value of more than €1 million. The profits generated by the reinvestment of these sanctioned amounts dating from 15 February 2024 onwards are required to be contributed to the European Fund for Ukraine. Consequently, Euroclear made a first payment of approx. €1.55 billion to the European Fund for Ukraine in July 2024.

Euroclear continues to act prudently and to strengthen its capital by retaining the remainder of the Russian sanction related profits as a buffer against current and future risks. Euroclear is focused on minimising potential legal, financial, and operational risks that may arise for itself and its clients, while complying with its obligations.

As a direct consequence of the sanctions and countermeasures, Euroclear faces multiple proceedings in Russian courts. Since Russia considers international sanctions against public order, Russian claimants initiated legal proceedings aiming mainly to access assets blocked in Euroclear Bank's books, by claiming an equivalent amount in Russian Ruble and enforcing their claim in Russia. Despite all legal actions taken by Euroclear and the considerable resources mobilised, the probability of unfavourable rulings in Russian courts is high since Russia does not recognise the international sanctions.

Euroclear Bank and Euroclear Investments are the two group issuing entities. The summary income statements and financial positions at Q3 2024 for both entities are shown below.

The drop in Q3 2024 figures compared to Q3 2023 reflects the booking of the windfall contribution related to the Central Bank of Russia's (CBR) assets dating from 15 February 2024.

The evolution of Q3 2024 figures compared to Q3 2023 reflects the increase in intragroup dividend.

Euroclear group is the financial industry's trusted provider of post trade services. Guided by its purpose, Euroclear innovates to bring safety, efficiency, and connections to financial markets for sustainable economic growth. Euroclear provides settlement and custody of domestic and cross-border securities for bonds, equities and derivatives, and investment funds. As a proven, resilient capital market infrastructure, Euroclear is committed to delivering risk-mitigation, automation, and efficiency at scale for its global client franchise. The Euroclear group comprises Euroclear Bank, the International and Irish CSD, as well as Euroclear Belgium, Euroclear Finland, Euroclear France, Euroclear Nederland, Euroclear Sweden and Euroclear UK & International.

1 Post deduction of dividend relating to 2023 earnings, including Sept. 2024 YTD profit and based on estimated underlying RWA of around EUR 7.4bn. Assuming a 60% dividend pay-out on the Sept. 2024 profit, the CET1 ratio would be 52%.

Pascal Brabant / pascal.brabant@euroclear.com / +32 475 78 36 62