January 16, 2014
Trust in Global Financial Institutions Stronger Over 2013 but Remains Negative
- Trust in global financial institutions remains negative at the year end; regional differences narrow
- Regulatory activity up 43% on 2012, with 103 average daily alerts in 2013
- Divergence between strong analyst growth estimates and low investor expectations for growth continues
LONDON/NEW YORK - Thomson Reuters, the world’s leading source of intelligent information for businesses and professionals, today announced the latest results of its proprietary TRust Index showing that trust sentiment in the Top 50 Global Financial institutions finished the year stronger, but still negative, with fourth-quarter sentiment below that of the third quarter. Analysis of the Top 50 Global Financial institutions for the fourth consecutive quarter of TRust Index metrics revealed several trends observed throughout 2013, among them a regional convergence of news and social media sentiment; continued confidence in analyst expectations; and proliferation of regulatory activity.
“Throughout a year which saw dramatic improvement in markets and numerous headline events impact the financial industry, trust sentiment amongst news and social media, whilst still modestly negative, had recovered from 2012’s lows and stabilized,” said David Craig, president, Financial & Risk, Thomson Reuters. “Our data reveals a stronger industry, which enters 2014 within a much-changed landscape and an ever-increasing regulatory focus.”
Tracking trust through news and social media sentiment shows that the Top 50 Global Financials ended the year with a fourth-quarter trust score of -1.75 percent, down from -1.5 percent in the third quarter. At the regional level, the top institutions in Europe/UK scored the highest trust sentiment in the fourth quarter, ending the year at -1.25 percent, down from -1.0 percent in the third quarter. Institutions in the Americas scored lowest with -1.85 percent in the fourth quarter, versus -1.6 percent in the third quarter. The Asian institutions, which had led in trust scores for most of 2013, were down at -1.5 percent (-1.0 percent in the third quarter).
Headline events affecting trust sentiment scores over the fourth quarter included:
- Record mortgage- and LIBOR-related bank fines, penalties and settlements exacted by US and European regulators
- The US government shutdown; cuts to Asian GDP growth forecasts by the World Bank
- IMF and ECB activities around capital buffers, debt, leverage and risk
- The release of the approved Volker Rule on December 10, 2013.
The Confidence of the Marketplace – Investors and Analysts
Fourth-quarter earnings growth estimates for the financials sector continue to show high expectations by analysts. Sridharan Raman, senior research analyst at Thomson Reuters, said, “At 22.4 percent earnings growth estimates for the sector, financials are just below telecommunications companies this quarter at 22.6 percent, but still well ahead of all other S&P 500 sectors.”
According to Thomson Reuters StarMine, analysts forecast forward 5-year growth rate for the Top 50 Global Financials at 9.0 percent, above the 8.0 percent expectations for the S&P 500. However, we are still seeing investors discount growth, with market-implied growth rates at -2.1 percent. This is further reflected by a 4.9 percent price appreciation in the Top 50 Global Financials stocks over the quarter, below both the S&P 500 (9.3%) and Thomson Reuters Global Index (6.7%).
Aggregate changes to analyst recommendations over the fourth quarter for the Top 50 Global Financial institutions reveal downgrades continued to outnumber upgrades across all regions, although only by a small margin. This quarter, the highest numbers of upward revisions were seen for the UK/Europe institutions, due in part to the improved UK housing market increasing loan demand.
Counterparties: Credit Spreads as an Indicator of Trust
In the fourth quarter, credit default spreads (CDS) continued a long-term tightening trend, reflecting an overall increase in confidence among the Top 50 Global Financial institutions in pricing the relative risk of doing business with each other. Institutions in the Americas ended the year with tightest spreads, and Asia the widest. With the average spread for the Top 50 Global Financials at about 103 basis points, CDS ended 2013 far below 2011’s high of nearly 350, demonstrating the positive appetite in the bond market and reduced risk of default.
Regulation as a Barometer of Trust
According to Chris Perry, managing director of Risk at Thomson Reuters, “The proliferation of regulatory activity over the past several years must be seen as a growing and permanent condition for the global financial industry and a significant factor in the cost of doing business”.
The average daily number of regulatory alerts tracked by Thomson Reuters Accelus was above 100 for the second consecutive quarter, roughly double the daily average in 2010, and at the end of 2013 stood at 26,898 alerts, an increase of 43 percent over 2012 (18,761). This increase reflects both increased activity by regulators and additional monitoring by Thomson Reuters.
Tracking Controversy and Governance as Factors in Rebuilding Trust
Thomson Reuters ASSET4 environmental, social and governance data, shows that a high level of controversies have been reported for the Top 50 Global Financials relative to the Financial Sector as a whole, but that adoption of processes and governance to address responsible marketing practices, improve fair competition and avoid bribery and corruption, all continue to be priorities.
Thomson Reuters TRust Index leverages proprietary data analytics, news and social media sentiment analysis. This latter indicator draws on over four million business and financial news and media sources to track the state of trust in the Top 50 Global Financial institutions.
Sources: Thomson Reuters ASSET4, Thomson Reuters Business Classification (TRBC), Thomson Reuters Datastream, Thomson Reuters I/B/E/S, Thomson Reuters MarketPsych Indices, Thomson Reuters News Analytics (TRNA), Thomson Reuters StarMine Quantitative Models
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