Europe’s bank analysts are getting crushed, small firms are getting hit the worst

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• Revenues for banks from European equity research are
  plummeting in the aftermath of the introduction of MiFID
  II.
• Banks will be earning about 20% less on their European
  equity research — a drop of about $300 million — by the start
  of 2019, according to a report from Greenwich
  Associates.
• Under MiFID, a 7,000 page tome that aims to increase
  transparency on how clients are charged for services, banks
  must charge separately for research and trading.

LONDON — Bad news for analysts who publish research on European
companies: investment banks will be earning about 20% less on
their European equity research — a drop of about $300 million —
by the start of 2019.

That’s according to a report from Greenwich Associates, which
attributed the declines to the fallout from new regulations that
kicked in this year known as
MiFID II. Research budgets are also being slashed. The
largest funds in the region cut their budgets for external
European equity research by 19% in 2018, and they’re planning
another 5% to 6% reduction next year. 

It’s a grim, but not unexpected, outcome from the European law,
which kicked in on January 3. Under MiFID, a 7,000 page tome that
aims to increase transparency on how clients are charged for
services, banks must charge separately for research and trading.
(Previously, banks handed out research for free to lure trading
commissions.)

While charging separately for research and trading, also known as
“unbundling,” has won some fans, the reporting costs and
requirements are onerous even for giant banks with huge
compliance departments. For smaller firms, it’s a nightmare.

Just how much is MiFID hurting the little guys? Greenwich
released a report on that, too. And surprise, surprise:

“So far, the biggest winners from the industry-changing
‘unbundling’ regulations have been global bulge-bracket dealers,”
Greenwich said on September 25. The law has helped catapult big
banks even further ahead of their smaller peers. “Global
bulge-bracket brokers have clearly increased relative share and
impact since MiFID II went live.”  

The biggest winners in European equity trading this
year: Bank of America Merrill Lynch and UBS, which together
lead the market in trading share, followed by JPMorgan, Credit
Suisse and Morgan Stanley.

And those firms and their biggest rivals may get an even
bigger slice of that commission pie. Their clients, the
big investment firms, have been holding back about
30% of their total annual research budget for allocation,
Greenwich estimates, meaning that some $300 million in
unallocated research budget is up for grabs. 

That extra cash “will likely be used to top off and award current
providers for additional service throughout the year,” the firm
said. “With so many hands in a smaller cookie jar, this
unallocated budget will be incentive enough for global investment
banks to provide exceptional service to their clients.” 

But one London fund manager pushed back on this idea, saying that
the world of fund management is not unlike the big government
bureaucracies, in that if you don’t spend your budget, by next
year, you lose it.