Banks face $240m losses from Mifid II research rules

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Investment banks face losses of $240m by 2020 from changes to investment research from Mifid II changes, a new report forecasts.

While full-service investment banks face conflicts between their research and investment banking departments, independent research providers have been gaining traction, the report by financial services consultancy Quinlan & Associates says.

Combined with the high costs with sustaining research divisions this will put increasing pressure on the P&Ls of large banks, leading the report to argue some investment banking research departments are facing potential losses of up to $240m by 2020.

The report notes sector heads within research divisions can command $300,000 with a 50 per cent to 100 per cent bonus on top.

The report also notes that there is a heavy bias towards positive ratings with 43 per cent of analyst stock recommendations from Tier 1 banks, which include the likes of J P Morgan and Goldman Sachs, being a buy, while 44 per cent are neutral and just 12 per cent are sell.

This is even more skewed for Tier 2 banks, which include the likes of Barclays and HSBC, where 48 per cent of recommendations are buy, 45 per cent are neutral and just 7 per cent are sell.

“Regulation to-date has failed to fully resolve the inherent conflicts, whilst the structural complexity and costs of sell-side research departments remain stubbornly high,” says report co-author Yvette Kwan.

Analysts from major investment banks have been capitalising on low barriers to entry to establish their own research providers, which are currently going through a period of consolidation, the report says.

In the wake of rising competition the report lists separately-owned entities and outsourced research as alternative models available to brokers.

Quinlan & Associates chief executive Benjamin Quinlan says sell-side is facing the largest competitive disadvantage from Mifid II, with global investment banks facing the greatest downside risks.

“The most important priority for brokers now is to start making decisions around the structural make-up of their investment research offering as the status quo of the fully-integrated model is no longer an option.”