5 SEPTEMBER 2001
According to The Financial Times HSBC is radically restructuring its investment research in a sign that banks are responding to criticism of the quality of equity analysis.
The influential financial newspaper says that the bank's analysts will be required to publish as many "sell" recommendations on stocks as "buys" and HSBC will invest its own money in its best research ideas. The move is in response to criticism that investment banks' analysts are too positive about companies in the hope of generating lucrative corporate finance work.
According to the FT, criticism has been particularly strong in the US, where many banks continued to talk up technology shares at the peak of the market. Investment banks are facing a wave of litigation from investors who have lost money by following analysts' recommendations. Merrill Lynch recently paid Dollars 400,000 (Pounds 275,000) to a client to drop a case against Henry Blodget, its star internet analyst. Banks have also been attacked by regulators and politicians.
The newspaper continues to report that on average, bank analysts recommend nine stocks as a "buy" for every one they cite a "sell". HSBC will now produce as many negative as positive recommendations by asking analysts to rank stocks relative to their sectors, forcing them to choose between, say, BP and Shell, rather than argue that both will outperform the market. The individual sectors will then be ranked relative to the market. "Hold" recommendations will be virtually eliminated.
"A 'hold' is just a place for an analyst to hide," said Mark Brown, HSBC research head.
The reports underlines that the reason most investment banks have so many "buy" recommendations is that they do not wish to offend their corporate clients. Companies can refuse access to analysts who are negative on their stock, or boycott the analyst's investment bank when handing out mandates for new issues or takeover activity.
The London newspaper says, HSBC is a relatively small participant in the investment banking sector and cynics may claim it can afford to take a lofty stance.
HSBC's new approach involves an annual review of the success (or failure) of its recommendations and a fund that will invest the bank's money in its best tips.
HSBC's first review found that 63 per cent of its "buy"
and "add" recommendations outperformed the market, while 68
per cent of its "sells" underperformed. The only failure was
in the "reduce" recommendations 48 per cent of which