Q2FY14 trust sentiment in top 50 global financial institutions continued to improve: Thomson Reuters

Thomson Reuters, the world’s leading source of intelligent information for businesses and professionals, announced the latest results of its proprietary TRust Index, showing that second-quarter 2014 trust sentiment in the top 50 global financial institutions continued to improve, as more banks – particularly those in the Americas - received positive scores to push the global TRust Index into positive territory for the first time since the index was launched in January 2013.

Tracking trust through news sentiment shows that the top 50 global institutions as a whole rose to score 0.5% (-1% Q1) in the second quarter, largely due to a substantial increase in trust scores for the Americas institutions, which rose to 5% (2% Q1).  Institutions in Asia also received a positive score for trust sentiment in the second quarter, increasing to 1% (-2% Q1).  However, sentiment for European institutions fell to -5% (-2% Q1), as the European financial constituents of the TRust Index continued to suffer reputational damage from increasing regulation, customer issues, tax probes, lawsuits and fines.

“For the first time since the Thomson Reuters TRust Index's launch in January 2013, sentiment on the 50 largest financial institutions globally turned positive in Q2 2014,” said David Craig, president, Financial & Risk, Thomson Reuters. “Financial institutions in the Americas have led and built on this trend for the past two quarters, supported by strengthening economic and market conditions.  Whilst this is encouraging news for our industry, we are not there yet.  There is more work to do in Europe, which dipped into further negative sentiment as reputational damage from ongoing scandals, fines and concerns over the climate weakened the region’s results.”

The Confidence of the Marketplace – Investors and Analysts

Earnings growth estimates for the Financial sector of the S&P 500 are less bullish than previous quarters. Sridharan Raman, senior research analyst at Thomson Reuters, commented, “At -2.4%, the Financial sector has the lowest expected earnings growth rate this quarter of all sectors, mainly due to tough comparisons relative to last year. This is down from an expected 1.7% estimated earnings growth at the end of Q1 and 10.7% at the end of Q2 2013.”

According to Thomson Reuters StarMine, analysts forecast forward 5-year growth rate for the top 50 global financials at 8.8%, just above the 8.6% expectations for the S&P 500.  Raman continued, “At a -1.8% market implied growth rate for the top 50 global financial companies, the difference between the market expected growth rates and analyst expectations, has increased to 10.6%, as investors continue to discount these institutions, at odds with analyst expectations. And for the first time in over a year the top 50 global banks actually have a negative share price change for the past 90 days, possibly as the market adjusts to the lower growth expectations for the sector”.

Aggregate changes to analyst recommendations for the top 50 global financial institutions over the second quarter reveal roughly equal numbers of analyst upgrades/downgrades as a group. Although the Americas institutions saw more upgrades, in Asia downgrades outnumbered upgrades by nearly two to one.  Institutions in Europe saw marginally more upgrades than downgrades.

Counterparties: Credit Spreads as an Indicator of Trust

Credit default spreads (CDS) continued to tighten, as confidence amongst the top global financial institutions in pricing the relative risk of doing business with each other continued to grow.  CDS for institutions in the Americas ended the second quarter with the tightest spreads (around 81.5 basis points), and Asia the widest (around 97.6).  With the average spread for the top 50 global financials at about 86 basis points, CDS continue to be far below 2011’s high of nearly 350.

Regulation as a Barometer of Trust

The average daily number of regulatory alerts tracked by Thomson Reuters Accelus was 143, above 100 for the fourth consecutive quarter.  A total of 17,800 alerts have been recorded as of the end of second quarter, well on track to exceed 2013’s total by year-end.

Tracking Controversy and Governance as Factors in Rebuilding Trust

Thomson Reuters ASSET4 environmental, social and governance data shows that there has been a reduction in the number of controversy events reported, with an average 19.8% of the top 50 global financials subject to a controversy in the second quarter, down from 22.4% in the previous quarter. The Financial sector as a whole also experienced a decline in the number of controversies reported, down to an average of 3.20% from the previous quarter’s 3.06%, although more than half of the top 50 global financials report some business ethics event.