A THOMSON REUTERS FINANCIAL & RISK PROPRIETARY ...

TRUST

A THOMSON REUTERS FINANCIAL & RISK PROPRIETARY BENCHMARK OF TRUST IN THE GLOBAL FINANCIAL MARKETPLACE, Q2 2013

Trust. Where does it come from and how is it measured? What is its value – and how is that earned or lost? Over the past five years, the financial industry has looked in the mirror of public perception for those answers. Today, we offer a wider lens. Data-driven and analytically tested. For a market based on trust, a series of benchmarks built on facts, drawn from Thomson Reuters data, news, and analytics capabilities. THE TRUST INDEX. Whether you work in the financial industry; analyze, invest in, or write about it; are a customer of the banks and investment firms that comprise it; or are a citizen of any of the economies that depend upon its health and stability, trust is a core topic today. As the currency of the new economy, the value of trust and its restoration to the financial sector – and of reputational capital to individual financial institutions around the globe – cannot be understated. In this, our Q2 release of the TRust Index, we offer an array of metrics that align to the state of trust in the global financial community through the first half of 2013.

TRACKING TRUST THROUGH NEWS AND SOCIAL MEDIA SENTIMENT Our proprietary sentiment analysis provides an ongoing indicator by drawing on millions of news and social media sources to illustrate the state of trust in global financial institutions. Here, tracking trust for the Top 50 Global Financials (based on market capitalization) shows trust remained relatively stable over Q2 for the benchmark group as a whole, but revealed variances on a regional level. Trust, as expressed through news and social media sentiment analysis, declined slightly for institutions in Asia and the Americas, while European institutions gained. ȕ ' PS"TJBOȮOBODJBMT USVTUQFBLFEBUUIFCFHJOOJOHPGUIFZFBSBOEIBTEFDMJOFETJODF MJLFMZEVFJOQBSUUP concerns about China’s shadow banking system and fears of a liquidity squeeze after the Chinese central bank abstained from injecting money into the market. ȕ 4FOUJNFOUPOȮOBODJBMJOTUJUVUJPOTJOUIF"NFSJDBTBMTPTIPXFENPEFTUEFUFSJPSBUJPOPGUSVTUPWFSBMM while financials in the European region saw a steady rise for Q2, converging with peers by the end of the period, likely due in part to positive sentiment regarding privatization of UK banks.

Trust in the Top 50 Global Financials Expressed Through Media Sentiment 0.01 0 -0.01 -0.02 -0.03

U.S. DEBT DOWNGRADE

-0.04

MF GLOBAL COLLAPSE

-0.05

GREEK DEBT RESTRUCTURING

ECONOMIC GROWTH AND BANK PROFITS IMPROVE

LIBORFIXING SCANDAL

-0.06

BRITISH BANKER’S ASSOCIATION RELINQUISHES LIBOR-SETTING TO U.K. REGULATORS

-0.07 MAY ‘11

JUL ‘11

Global (50)

SEP ‘11

NOV ‘11

Americas (19)

JAN ‘12

Asia (19)

SOURCE: TRNA/MarketPsych/Sentiment Indicators

MAR ‘12

MAY ‘12

Europe (12)

JUL ‘12

SEP ‘12

NOV ‘12

JAN ‘13

MAR ‘13

MAY ‘13

Regions based on domicile institutions in the Top 50 Global Financials


THE CONFIDENCE OF THE MARKETPLACE – INVESTORS AND ANALYSTS Our second proxy for trust in the financial sector comes from the markets – investors and analysts. Earnings Growth Estimates for Q2/2013 show analysts continue to have high expectations for financials relative to other sectors.

Q2/2013 Earnings Growth Estimates for Financials Remain High S&P 500: Earnings Growth Estimates, Q2 2013

20% 18% 16% 14% 12% 10% 8%

RI AT E

IL UT

M

IT

IE

S

AL

S

LO GY NO

2%

CH

4%

TE

IN DU ST RI AL S

6%

HE

AL TH

CA

RE

ER GY EN

CO N ST SU AP M LE ER S

DI

-6%

SC C RE ON TI SU ON M AR ER Y

LS IA NC NA

-4%

FI

-2%

TE LE CO M

0%

-8%

SOURCE: Thomson Reuters I/B/E/S

In the StarMine data below, analyst forecasts of forward 5-year EPS CAGR for the Top 50 Global Financials of 8.1% (up from 7.9% in Q1), and market prices implied forward 5-year EPS CAGR of -3.4% (down from -3.0% in Q1), reveal that the market continues to discount the group relative to analyst expectations. Price change over the past 90 days was 3.2% (down from 6.9% in Q1).

Analyst Expectations/Q2 ANALYST FORECASTS OF FORWARD 5-YEAR EPS CAGR (STARMINE)

MARKET PRICES IMPLIED FORWARD 5-YEAR EPS CAGR (STARMINE)

S&P 500

7.7%

TOP 50 GLOBAL FINANCIALS THOMSON REUTERS GLOBAL INDEX

Analyst Recommendation Changes/Q2

Percentage of companies that describe, claim to have, or mention processes in place

40 35

PRICE CHANGE % (PAST 90 DAYS)

CREDIT SMARTRATIOS IMPLIED RATING (STARMINE)

30

4.5%

4.7%

BBB-

20

8.1%

-3.4%

3.2%

BBB

10

8.0%

2.6%

3.5%

25 15 5

(BBB- and higher: investment grade)

SOURCE: StarMine Professional

0

AMERICAS

# of Upgrades

ASIA

EUROPE

# of Downgrades

In the graphic above, the aggregate changes analysts made to their recommendations over the quarter reveal more upgrades than downgrades (31 vs. 18) for Asian institutions, driven largely by Japanese banks and likely due to Abenomics and the low interest rate environment. For institutions in the Americas, downgrades outpaced upgrades more than 2:1 (17 vs. 7), likely the result of the Fed hinting that quantitative easing may be coming to an end, and possible interest rate increases in 2014. For European institutions, the rate of downgrades to upgrades in Q2 was roughly even.


COUNTERPARTIES: CREDIT SPREADS AS AN INDICATOR OF TRUST Credit spreads (CDS) provide another, implied measure of trust. In this Datastream analysis, spreads imply levels of confidence in the Top 50 Global Financials as reliable counterparties. Credit spreads – indeed any of these measures of trust or confidence – reflect more than just the health or reliability of any institution or group in question. They also reflect the macroeconomic environment, government and central bank policies, and other external factors. After nearly a year of relative CDS stability, there was a small increase at the end of Q2, evident for both the Top 50 Global Financials and within all three regions, but well below the spreads seen in 2011. Credit spreads continue to be highest for the European institutions in our benchmark group, reflecting relative evaluation of firms located in or highly exposed to the euro and are lowest for the Asian institutions.

Credit Spread (CDS) Trends for the Top 50 Global Financials Weighted CDS Spreads (2012 Revenue)

350 300 250 200 150 100 50 0 JUN ‘11

DEC ‘11

Global

Americas (14 companies)

JUN ‘12

DEC ‘12

Asia (13 companies)

Europe (10 companies)

JUN ‘13 SOURCE: Thomson Reuters Datastream

TRACKING CONTROVERSY AND GOVERNANCE AS FACTORS IN REBUILDING TRUST Employing our ASSET4® environmental, social, and governance (ESG) data, the first analysis below shows that a far higher percentage of companies within the Top 50 Global Financials, than the financial sector as a whole, have been involved in various controversies.

Percentage of Financials that Have Had Controversies

Percentage of Companies with Processes in Place

80%

80%

60%

60%

40%

40%

20%

20%

Percentage of companies that describe, claim to have, or mention processes in place

Percentage of Financials that have had Controversies

0%

BRIBERY AND FRAUD

PRODUCT MARKETING ANTIRESPONSIBILITY RESPONSIBILITY COMPETITION

Top 50

Financial Sector

WAGES, WORKING CONDITIONS

DIVERSITY AND OPPORTUNITY

SOURCE: ASSET4

0%

MAINTAIN RESPONSIBLE MARKETING PRACTICES

Top 50

IMPROVE FAIR COMPETITION

Financial Sector

AVOID BRIBERY AND CORRUPTION PRACTICES

SOURCE: ASSET4

The second analysis above demonstrates that adoption is higher within the Top 50 Global Financials, than the financial sector as a whole, for corporate governance policies around responsible marketing, fair competition, and avoidance of bribery and corruption practices.


REGULATION AS BAROMETER OF TRUST New to the TRust Index this quarter, data drawn from our Governance, Risk & Compliance business and Thomson Reuters AccelusTM shows the proliferation of regulatory activity over the past two years and its clear implications for the financial sector in terms of compliance burden. The number of alerts rose 25% in 2012 to 17,763 globally and in 2013 is averaging 85 regulatory alerts per day. The greatest volumes are tracked in North America, followed by Asia and UK/Europe.

Regulatory Activity Tracked 2011-2013

EU REGULATION ON OTC DERIVATIVES (EMIR) ENTERED INTO FORCE

SHORT SELLING REGULATION ENTERED INTO FORCE

FATCA INTERGOVERNMENTAL AGREEMENT

2500 UK BRIBERY ACT LIVE

2000

UK FINANCIAL SERVICES BILL PASSED

DODD-FRANK FINAL ENTITY DEFINITION RULES FINALIZED

1500 1000 500 0 J F M A M J J A S 2011 Latin America (beginning 2013)

O

N

D

J F M A M J J A 2012 Australasia Asia Middle East

S

J F M A M 2013 North America UK/Europe

TOTAL ALERTS YEAR–ON–YEAR 2012 2011 2010 2009 2008

17,763 (+25%) 14,215 (+17%) 12,179 (+21%) 10,075 (+16%) 8,704

O

N

D

J

AVERAGE DAILY ALERTS

85

*NOTE: Tracked activity includes document changes, announcements, and enforcements by regulators. Average Daily Alerts = Total alerts year–on–year / 261 working days

SOURCE: Thomson Reuters Accelus

TRUST VIEWPOINTS “Trust in the financial system is the lifeblood of the markets, and its restoration is crucial to the economic recovery. While re-regulation of the sector is an important step in this direction, it is the actions of the banks themselves, and a focus on their clients and long-term results, that will result in a lasting restoration of their good standing.” Sallie Krawcheck’s career made her one of the most successful and influential executives in financial services. Named “The Last Honest Analyst” by Fortune during her tenure at Sanford Bernstein, she served in leadership roles at Smith Barney, Merrill Lynch, and US Trust. Since 2011 she has focused on regulatory reform and investor protection and more recently, her purchase of 85 Broads, a 30,000-strong global professional woman’s network.

“Trust does not exist in a vacuum - the rise of Europe and declines in the Americas and Asia this quarter, while modest, show that it is highly influenced by macro-economic developments, central bank policies, market conditions and regulatory climate. While trust momentum overall was generally stable to positive, its sensitivity to these externals makes evident how critical the health and stability of these institutions are to our global financial ecosystem.” Thomson Reuters Financial & Risk President David Craig serves on the board of the Atlantic Council, the Advisory Board of CityUK in London, and as a Trustee of the Thomson Reuters Foundation. Named one of Institutional Investor’s top 50 global leaders and innovators in financial services technology, he formerly served as the head of Thomson Reuters GRC business and as the company’s Chief Strategy Officer and was a McKinsey & Company Partner in the Global Business Technology Office, advising banks, technology, and media companies.


METHODOLOGY Except where otherwise indicated, data is for the Top 50 Global Financial Institutions based on market capitalization and for the period through Q2/2013. Regions based on domicile of institutions within the Top 50 Global Financial Institutions.

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