How analysts get paid

January 15, 2012 § Leave a comment

I had a lovely holiday skiing, Xmas at the family pile and thus I return fresh and invigorated. We’ve been moving a new issue– for a Japanese Sushi firm. There timing couldn’t be worse and Paul is calling all his contacts to get the thing sold. We’ve also been leaning on analysts to push out a good comment on them. The analysts know the truth but they’ll do anything for a bonus.

Back at my desk. In among the lies and deception I came across an interesting article.

Bankers skew stock research to boost bonuses

As banks prepare to dolly out their bonuses another instance of City skullduggery comes to light. This time it’s to do with the Chinese Walls separating analyst roles from corporate finance. 

Data from Morningstar shows that bank equity analysts currently recommend buying 59% of the FTSE 100 stocks with only 10% of stocks carrying sell warnings. This is at a time when the FTSE 100 index has fallen by 8% during the course of the year and warnings of a Eurozone crisis threaten to kill Britain’s economy.

The current stats are even higher than the figures from January when 53% of FTSE 100 companies had buy recommendations on them with only 14% on sell warnings.

The most bullish UK analysts come from Royal Bank of Scotland. The bank currently has a whopping 45 buy recommendations on the FTSE 100 index compared to just two sells. 

So why are banks so optimistic? Could it be the pressure put on them by other parts of the business?

Analysts are paid according to the volume of trading— the broker commission—generated from the research reports they release. The more bullish they are the more trading is likely to occur— and concurrently the higher the bonus they are paid.

This was the conclusion of a report delivered by the FSA, the UK’s financial services regulator, when it first looked into this issue in 2002, and found that banks with brokerage and advisory arms had twice as many buy recommendations than those without. “There is evidence that in certain cases analysts have compromised their integrity by issuing recommendations contrary to their own views,” said the FSA at the time. While departments within banks are supposed to be strictly separated by Chinese Walls, so that one cannot unduly influence the other, as the crude City joke goes– “there remain many chinks in Chinese Walls.” 

So not much has changed since 2002. 

RBS is set to press ahead with an estimated bonus pool of around £500m at the end of the year.

“They’re probably bankers to half these companies,” says an insider who didn’t want to be named. “If you’ve got a loan out to one of these companies you don’t want to give it a sell note.”

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