By Frances Schwartzkopff With assistance by Hanna Hoikkala Source: Bloomberg.com DNB will publish its first sponsored research in
By Frances Schwartzkopff
With assistance by Hanna Hoikkala
Source: Bloomberg.com
- DNB will publish its first sponsored research in coming weeks
- MiFID II-related revenue losses estimated at up to 15%
Banks in Scandinavia are preparing to write equity research commissioned and paid for by listed companies, as they look for ways to recoup revenue losses because of MiFID II.
Alexander Opstad, head of equities at DNB Markets, said the revision of Europe’s Markets in Financial Instruments Directive poses “an existential threat” that’s forcing banks to reconsider how they operate. They now have to itemize research costs, and that transparency is leading customers to demand lower prices.
According to Opstad, the “equity research pie” will shrink by as much as 50 percent over the next two to three years. To compensate, Oslo-based DNB will start offering sponsored research, with its first report due sometime after April 1, he said. By the end of the year DNB will have started covering a “handful” of companies, he said.
“The sponsored research market will increase,” he said. “Three or four of our Nordic competitors are rolling out the same product.”
By some estimates, the world’s biggest banks may lose as much as 15 percent of their revenue from stocks trading as a result of MiFID II, with income from research taking the biggest hit. Previously, research was included in a bundle of services that buy-side firms received in return for paying trading commissions. Now, they have to pay for reports separately.
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Conflicting Interests
Can bank analysts render objective opinions on companies that are paying their salaries? The financial crisis highlighted the danger of that business model when credit ratings companies failed to spot the risks of complex debt instruments issued by their customers.
Opstad said conflicts of interest can be mitigated, not eliminated. DNB is labeling research to make clear it was paid for by the company being covered, and it won’t give traditional buy-sell-hold recommendations.
“We do have regular earnings estimates and we do have a valuation section, but it only concludes on a valuation range rather than a specific target price,” he said. “I’m not sure that eliminates all conflicts of interest, but we believe our process addresses them in a reasonable way.”
Other Nordic banks considering or offering sponsored research include SEB AB and Nordea Bank AB. On its website, Nordea highlights that the information “does not constitute investment advice” and is designed “to provide support” for investors.
The potential market is large. Now, “many hundreds of companies” in the Nordic region have “zero research coverage,” and banks are trimming the list of firms they track to cut costs, Opstad said. Without investor contact, companies find it harder to raise money.
Still, it could take as long as three years before sponsored research makes up revenue lost as a result of MiFID, he said. DNB is also adding derivatives offerings and convertible-bonds as well as prime-broker offerings to its product line. It’s also building up its equity unit, which in 2017 had its best year since the start of the decade.
