Fitch ratings have maintained its outlook on Invesco Ltd. (IVZ) at ‘Stable’ as a part of its review of four rated investment managers. Despite a decent first quarter 2012 results, the outlook remains unchanged as the agency is concerned about the impact of volatile equity markets on the company’s financials.
Rationale for Stable Outlook
Invesco reported a moderate quarterly performance along with continuous growth in assets under management as well as enhanced debt and leverage ratios. The balance sheet also remained low on risk quotient. Benefits availed from the acquisition of Van Kampen also contributed to the marginally improved performance.
Results mainly benefited from increased net revenue, partially mitigated by rising operating expenses. Net revenue inched up 2.7% sequentially and 1.7% year over year to $736.3 million, whereas operating expenses hiked 1.4% sequentially and 3.3% year over year to $467.1 million.
As of March 31, 2012, leverage ratio stood at 1.03 to1.00 as against 1.01 to1.00 as of December 31, 2011 whereas interest coverage ratio was 22.06 to 1.00 compared with 22.93 to 1.00 as of December 31, 2011.
The long-term issuer default ratings and senior unsecured debt ratings of Invesco as well as its subsidiaries - Invesco Holding Company Ltd and IVZ, Inc. – remained unchanged at ‘A-‘.
Fitch expects Invesco to maintain its current rating given a lack of steadiness in the equity market. However, Invesco’s ratings may benefit from the constant improvement in debt and leverage ratios along with expansion of operational activities. On the other hand, sudden unfavorable changes in equity markets and unexpected losses from its business activities will significantly affect Fitch’s outlook on the company.
Rating action on Other Companies
Other investment managers under Fitch’s scrutiny were Alliance Bernstein Holding L.P. (AB), Affiliated Managers Group Inc. (AMG) and Schroders plc. Fitch has reiterated ‘Stable’ rating on all these firms.
Though the outlook and ratings remain unchanged, we remain cautious about Invesco’s rising expenses that have the potential to dent its profitability in the upcoming quarters. However, the company’s extensive share deployment activities will reinforce investors’ confidence in the stock. Moreover, opportunities stemming from enhanced global investment flows will likely promote its expansion activities.
Persistent problems in the overall economy, especially volatility of U.S. dollar and stressful equity markets, pose serious threat to the company.
Currently, shares of Invesco retain a Zacks #5 Rank, which translates into a Strong Sell rating. Considering the fundamentals, we also maintain a long term Underperform recommendation.
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