In a bold response to spiraling regulatory costs, Citigroup has grasped the nettle and taken the decision to cease publishing credit research recommendations. The move - which was driven out of New York - will have a major impact in Asia where Citi's fixed income research has topped FinanceAsia's annual poll in recent years.
Citi has informed its Asian clients of the decision and told them that it will take effect on January 1 after a three month transition.
Four senior analysts will cease to publish lengthy credit research reports and investment recommendations: Ivan Lee, So-Yon Sohn, Soo-Chong Lim and Kasemsak Charoensiddhi. They will see their title change to 'credit sector specialists' and will join sales and trading.
Johanna Chua, who covers sovereigns, will still publish written research, but will move to Citi's global emerging markets strategy team.
The upshot of the change is that Citi will no longer publish investment recommendations on Asian corporate credits. However, Ivan Lee's team will instead focus on talking to the top 30 Asian buyside accounts - which now includes a considerable number of hedge funds - and will offer them verbal advice and communicate via short emails.
But - in a crucial distinction - they will no longer be deemed 'independent'. In fact, under the new model the analysts will be able to talk to Citi's trading desk about their ideas. In this respect, the analyst team will become an extension of Citi's trading group - with the intention of generating more trading profits for the bank as a result.
This is very different to the current structure. The classical research model has very strict rules designed to protect analyst independence. Typically the analysts sit in a separate area (often on a different floor from sales and trading) and are not able to discuss any new investment recommendation, or a change to a recommendation, until a research piece has been published - ie emailed to a universe of around 500 clients.
Citi's change of direction has been driven both by regulatory concerns and a revolution in its own strategic view. In the case of the former, the compliance costs and hassles that ensue have led the world's biggest bank to conclude that publishing recommendations does not merit the risk.
In the case of the latter, the bank reckons that the top 30 key clients in Asia pay the bulk of the available fees; and that its new approach will see those clients served more intensely by its 'credit sector specialists' than they currently are.
According to Ivan Lee, who runs the credit research team, "We will still actively interact with the key investors. We can serve them more vigorously than under the old model."
He adds, "Our substantive investment recommendations will be largely based on one-to-one and reverse enquiry. We will do more trade ideas and investor solutions focusing on hedge funds and larger conventional funds. In fact, those funds see limited value in the more generic, conventional research products anyway."
Citi will cease to publish such generic research - an example of which would be an outlook piece on a particular corporate credit such as PCCW or PLDT. The US bank has taken the view that the market is awash with generic corporate research.
It believes it can add more value with its new approach. This will see more energies devoted to fewer clients. Accordingly, the analysts can divert the bulk of the time they spent writing generic research to forming a deeper relationship with the top accounts.
However, Citi will still produce some written research, but of a more formulaic, factual nature (that is to say, of the variety that is not making investment recommendations). Says Lee, "We will continue to provide market commentary and factual company updates to the larger customer base."
Citi's own debt capital markets team will have to adapt since the analysts will no longer be able to write pre-deal research for new issues. This may see debt capital markets hire its own 'publishing analyst', or just publish 'factsheets' on the issuer in question (which no longer contain in-depth analysis or forward-looking statements).
Citi's overhaul of fixed income research is the most pioneering yet seen in Asia. Other houses have tinkered with their approach. For example, JPMorgan moved its high yield analysts into proprietary trading - but none are as wholesale as this one.
Some firms have already taken a similar approach in Europe where non-publishing analysts are now termed 'desk analysts'. "In Europe this has already happened," says Rebecca Lea, a director with search firm, Alexander Mann. "In fact, the analysts were very keen to become desk analysts because it meant their pay was linked to the performance of the trading desk and they were not viewed as a cost centre."
Given Citi's size and prominence, its decision is likely to make other banks in Asia think about what is the optimal approach. All firms that FinanceAsia spoke to agreed that regulatory issues are becoming more and more of a concern, although most said they had no plans (as yet) to follow Citi and cut back on publishing their investment recommendations.
It would be ironic if the regulators - whose goal is the noble one of ensuring a level playing field for all investors - only end up pushing more firms to stop publishing. For the majority of investors this will just lead to poorer information flow and dramatically disadvantage them vis-a-vis the very top long only funds and hedge funds.
One senior analyst commented that he thought Citi's move was also cyclical. "Banks are taking more and more proprietary risk at this point in the cycle," he says. "Moving analysts onto the trading side to facilitate the bank's own trading is part of this."
From the perspective of polls, the biggest beneficiary of Citi's decision to curtail its publishing is likely to be UBS, which in recent years has come a close second to Citi in the FinanceAsia poll. Citi won our Fixed Income Research Poll last year with a combined score of 1056 votes (generated from six categories).
FinanceAsia will publish its 2005 Fixed Income Research Poll in the forthcoming November issue of FinanceAsia magazine.
