October 20, 2014

Trust Sentiment in Top Global Financial Institutions Remains Positive in Q3 2014 As Confidence in Asian Banks Continues to Climb

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 third-quarter 2014 trust sentiment in the top 50 global financial institutions remained positive, driven by Asia, where existing positive trust sentiment continued to climb.

Tracking trust through news sentiment shows that confidence in the top 50 global institutions as a whole remained stable with a score of 0.5 percent in the third quarter (0.5 percent Q2). However, the data reveal significant divergence at the regional level:

  • The 13 institutions in Asia posted a considerable rise, with trust sentiment increasing to 6 percent from 1 percent in the prior quarter.
  • The 19 Americas institutions posted a trust score of 4 percent, down slightly from 5 percent in Q2.
  • The 18 Europe/UK financial institutions saw a further decline, to -8 percent from -5 percent in Q2.

"Our TRust Index recorded positive sentiment across the financial industry as a whole for the second consecutive quarter," said David Craig, president of Financial & Risk, Thomson Reuters. "The results were led by a steep rise for Asian financial institutions, due to positive economic news including cross-border investment in China, and supported by positive US sentiment resulting from stronger earnings reported by US banks. This deeply contrasted with European institutions, which continued to fall due to negative news primarily relating to benchmark probes. Given the disparity between analysts' optimistic expectations and investors' pessimistic outlooks for the sector, we will see how these conflicting messages impact the index next quarter."

The Confidence of the Marketplace – Investors and Analysts

Earnings growth estimates for the financial sector of the S&P 500 reflect more bullish analyst sentiment than previous quarters. Commenting on the earnings data, senior research analyst at Thomson Reuters, Sridharan Raman, said, "At 10.4 percent, the financial sector growth rates have picked up after reporting a disappointing -6.6 percent in Q2. Excluding the huge fine for Bank of America, the expected growth rate for financials jumps to over 18 percent. With many banks already taking large litigation charges, growth rates can be expected to remain in double digits for the following two quarters, a sign of strength”.

According to Thomson Reuters StarMine, analysts forecast a forward 5-year growth rate for the top 50 global financials at 9.2 percent, above the 8.2 percent they forecast for the S&P 500 as a whole. Raman continued, "At a -2 percent market implied growth rate, the gap between the analysts' expected growth rate and market assessment has now grown to 11.2 percent, as investors continue to discount these institutions. The markets continue to discount this group relative to analyst expectations, which forecast growth in the coming quarters and improved capitalization at the banks”.

Aggregate changes to analyst recommendations over the third quarter reveal more upgrades than downgrades (56:49) for the top 50 global financial institutions as a group, driven primarily by Europe (38:27). This confidence by analysts may signal that the markets are overly pessimistic about prospects in the region.

Counterparties: Credit Spreads as an Indicator of Trust

Credit Default Spreads (CDS) remain tight as confidence amongst the top global financial institutions in pricing the relative risk of doing business with each other continued. CDS for institutions in the Americas ended Q3 with the widest spreads at 96.1 basis points (81.5 in Q2) and Europe the narrowest at 83.9. Institutions in Asia posted tightening rates over the quarter, to 93.1 basis points from 97.6 in Q2. Although the average spread for the top 50 global financials rose in Q3 to about 90 basis points from 86 in Q2, CDS remain far below 2011's high of nearly 350.

Regulation as a Barometer of Trust

Regulatory activity worldwide continued unabated this quarter, although the average daily number of regulatory alerts tracked by Thomson Reuters Accelus was 140, down slightly from 143 in Q2 but above 100 for the fifth consecutive quarter. Total 2014 alerts now count more than 27,000 to date in 2014, surpassing 2013's full-year total.

Tracking Controversy and Governance as Factors in Rebuilding Trust

Thomson Reuters ASSET4 environmental, social and governance (ESG) analyst, André Chanavat, said Q3 data show, "the number of controversy events has decreased slightly since the last quarter for the top 50 whereas the financial sector as a whole has increased slightly. Still more than half of the top 50 report some business ethics event, that has remained unchanged". Thomson Reuters ASSET4 data further shows that adoption of processes and governance to avoid bribery and corruption (88 percent) and improve fair competition (52 percent) continue to be priorities for the top 50 global financial institutions.

Thomson Reuters TRust Index harnesses proprietary data analytics and news 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. 

Thomson Reuters Data Sources: Thomson Reuters ASSET4, Thomson Reuters Accelus, Thomson Reuters Business Classification, Thomson Reuters Datastream, Thomson Reuters I/B/E/S, Thomson Reuters MarketPsych Indices, Thomson Reuters News Analytics, Thomson Reuters StarMine Quantitative Models.

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