Survey of 150 Analysts in U.S., Europe, Asia Cites So-Called "Basel IV" Rules
as Key Challenge
LAKE SUCCESS, New York,
Dec. 9, 2015 /PRNewswire/
-- Nearly two-thirds of equity analysts (61 percent) who cover
global capital markets institutions expect regulatory pressures on
banks to intensify further through 2020, with potential new capital
rules, informally known as "Basel IV," likely to have the greatest
effect on their operations, according to a global survey of nearly
150 buy-side and sell-side analysts. The first-of-its-kind survey,
developed by Broadridge Financial Solutions, Inc. (NYSE: BR),
canvassed analysts across the U.S., Europe and Asia on their outlook for banks and their
views on the industry's opportunities and challenges over the next
five years.
According to the report, "Restructuring for Profitability," more
than two-thirds of analysts (68 percent) believe regulation has
made the financial system safer. But, they are also concerned about
"regulatory creep" and its potential impacts on the industry.
Although so-called "Basel IV" rules are still under discussion,
nearly three-quarters of the analysts surveyed (72 percent) believe
these rules – which are expected to standardize the risk-weighting
of bank assets – will have the biggest regulatory impacts in the
next five years. Among European analysts, 87 percent held this
view. U.S. analysts surveyed are primarily concerned with the
future effects of annual stress tests (cited by 77 percent).
New regulation will have the most impact on banks' trading
operations through 2020, according to the study:
- More than three-quarters of analysts (78 percent) expect
regulations to disrupt equity-trading business models over the next
five years. Ninety-two percent expect FICC trading business models
to be disrupted, including 28 percent of analysts who characterize
these changes as "dramatic."
- While analysts predict revenue growth rates to increase across
business lines, compared to the period between 2010 and 2014,
trading growth is expected to recover but remain relatively muted.
FICC, which experienced annualized declines of 8.5 percent over the
previous four-year period, is expected to grow at 0.2 percent,
while annual equity trading growth is estimated at 2.8 percent,
versus 1.7 percent previously.
"Regulation has imposed tougher capital rules on banks, creating
pressure on traditional models," said Broadridge Senior Vice
President of Strategy Vijay Mayadas,
who oversaw the study. "This means that banks will need to explore
more creative ways to realign their operations and employ more
transformative measures to reduce costs."
Favoring Cost Reduction, Restructuring
Analysts generally favor bank responses focused on cost
reduction – above efforts in balance-sheet management and top-line
growth – or restructuring. More than half believe banks over the
past five years were not aggressive enough at re-engineering
business processes (55 percent) and investing in new technology (54
percent) to improve efficiencies. More than half (55 percent) sees
back-office technology as having high potential to increase
efficiency and reduce costs over the next five years, with another
30 percent citing some potential.
A key challenge facing these institutions is how to streamline
the technology and operations that enable equities and fixed income
trading. Commenting in the report, Brad
Hintz, a top-ranked banking analyst for more than a decade
and now adjunct professor at New York
University's Stern School of Business who advised on the
study, said, "Wall Street has cut back in each silo but done very
little re-engineering across the business."
Three-Speed Industry Transformation
The survey spotlights major differences in how analysts across
the U.S., Europe and Asia foresee the industry evolving over the
next five years:
- U.S. analysts are the most positive about the outlook for
global banks and had the most upbeat predictions for revenue growth
across nearly all lines of business. Similarly, they expect
return-on-equity to double from 2014 levels over the next five
years, essentially meeting the cost of capital. European and Asian
analysts also expect banks' returns to increase substantially, but
still fall short of average equity capital costs.
- European analysts advocate most strongly for restructuring and
cost reduction. More than half (58 percent) cited "significant
opportunity" in rationalizing and disposing business units to
improve performance, compared to 38 percent of U.S. analysts and 40
percent of Asia analysts.
Forty-five percent of European analysts believe cost controls will
have the greatest impact on bank valuations over the next five
years—above balance-sheet management or growth—compared to 39
percent of U.S. analysts and 28 percent of Asia analysts.
- Asian analysts hold the strongest views on regulatory changes.
Nearly half (49 percent) believe that new regulations since the
2008 financial crisis have not notably improved the stability of
the financial system, compared with 22 percent of U.S. analysts.
They were nearly twice as likely as U.S. analysts (75 percent vs.
39 percent) to predict regulatory pressures on global securities
firms will increase—rather than remain the same or decrease—over
the next five years.
"These trans-oceanic differences reflect a three-speed industry
transformation," added Mayadas. "Put simply, U.S. banks have
adapted more quickly to the post-crisis environment. Many of the
most persistent cost challenges are still common across regions,
but rulemaking will weigh more heavily on Europe and Asia in the years to come."
Methodology
The report is based on qualitative
interviews with top-ranking analysts and a global survey of 147
buy-side and sell-side analysts (56 percent and 44 percent,
respectively). Broadridge, Brad
Hintz, adjunct professor of finance at New York University's Stern School of Business,
Institutional Investor Custom Research Group (IIRG), and various
capital markets experts collaborated in the design of the survey
and analysis of results. IIRG fielded the survey online between
June and September 2015. Respondents
included analysts in North America
(33 percent), Europe (29 percent),
Asia (30 percent) and other
geographies (7 percent). The sample consisted of buy-side voters
and sell-side nominees from II's annual rankings; it represents 10
to 15 percent of the overall population, according to IIRG.
About Broadridge
Broadridge Financial Solutions, Inc.
(NYSE: BR) is the leading provider of investor communications and
technology-driven solutions for broker-dealers, banks, mutual funds
and corporate issuers globally. Broadridge's investor
communications, securities processing and managed services
solutions help clients reduce their capital investments in
operations infrastructure, allowing them to increase their focus on
core business activities. With over 50 years of experience,
Broadridge's infrastructure underpins proxy voting services for
over 90% of public companies and mutual funds in North America, and processes on average
$5 trillion in equity and fixed
income trades per day. Broadridge employs approximately 7,400
full-time associates in 14 countries. For more information about
Broadridge, please visit www.broadridge.com.
Media Contacts
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Kate
McGann
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Brett Philbin
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Broadridge
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Edelman
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Katherine.mcgann@broadridge.com
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broadridge@edelman.com
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212.981.1395
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212.704.8263
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