Analyst coverage shrinks after fee shake-up

Even larger companies are affected as investment banks retrench

Investment banks’ cuts to their research departments have begun to weigh on their coverage of even Europe’s largest companies, as regulatory and commercial pressures force them to retrench from unprofitable business lines. The average number of analysts who cover European companies with a market capitalisation of $100bn or more has dropped 22 per cent since 2011, according to StarMine numbers compiled by Bank of America. Those companies with a market value of $10bn to $100bn have seen their coverage contract by 26 per cent, it found. The numbers underscore how investment banks prefer to focus their limited resources on companies of a size necessary to interest big asset management clients, or those that may yield dealmaking work for the banks themselves. Coverage is declining everywhere but the trend is particularly acute in Europe, where the introduction of the Mifid II regulatory package in January 2018 has forced asset managers to “unbundle” payment for research from trading business. As a result of having to pay directly for research, many investment groups have sharply curtailed how much they use. But the impact has been felt everywhere. “Mifid II has made everyone a lot more aware of the research they consume, whether they’re directly affected by Mifid or not,” said Joyce Chang, chair of research at JPMorgan. “You’re not going to call 10 analysts, you’re only going to call the top people, so we have to work hard to stay comprehensive . . . if you’re numbers five through 10, it will be harder to stay on everyone’s radar.” The rules aimed to reduce potential conflicts of interest and encourage more research from independent sources, but they sparked a battle between investment banks and asset managers over the cost of the research. While capital-markets regulators remain keen to promote competition, some have also raised concerns that research capacity was being pared back for many smaller companies. The pattern is similar outside of Europe. Globally, companies with a market cap of $10bn to $100bn have seen the number of analysts covered by them drop by a fifth to an average of 18.7 in the last eight years, according to StarMine. The world’s biggest companies remain well-covered by dozens of analysts, but even they have on average seen the number of analysts that follow them fall by 12 per cent since 2011 to 28.5. The number of analysts working at the world’s 12 biggest investment banks fell to 4,967 in the first half of the year, according to the latest numbers from Coalition, a data provider. That is down from 5,558 at the end of 2017, just before the introduction of Mifid II, and 6,634 at the end of 2012, when Coalition began to collect the numbers. Full-year numbers are likely to be starker as investment banks continue to cut back on business lines they see as least profitable. In recent months Deutsche Bank, HSBC, Royal Bank of Canada and Macquarie have all announced plans to scale back their London operations. “Mifid II has not been a catastrophe for us, but I suspect it is for some firms,” said the head of research at one major investment bank. “People have been predicting consolidation [of the investment research industry] since I was in high school, but given the trends it’s hard to see it not happening.”