Citi stays top

This year's Fixed Income Research Poll sees Citigroup hold onto the top spot. The poll of 310 investors saw Citi score an aggregate of 696 votes, beating UBS with 579 votes. However, will this be Citi's last year on top? A major change in the firm's strategy suggests that it could be tough for Ivan Lee and his team to fend off UBS next year.

In a bold response to spiraling regulatory costs, Citigroup has grasped the nettle and taken the decision to cease publishing credit research recommendations in Asia.

Citi has informed its Asian clients of the decision, and informed 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 is 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 has 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 it's new approach will see those clients served more intensely by its 'credit sector specialists' than currently.

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 instead 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 (but which doesn't make 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 its 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 the 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.

"We have to go through more hoops these days to get research out," concedes Dilip Shahani, HSBC's head of credit research. "But we believe it is still worth doing in order to target a broader client base."
"I see it as an opportunity for banks like us which still focus on publishing research," says Damien Wood, who heads credit research at CSFB.

Tim Condon, head of fixed income research at ING agrees: "We try to provide research that is as applicable to as many investors as possible. To the extent that other banks stop serving the middle market, hopefully that will leave a niche open that we are happy to fill."

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."

UBS: the beneficiary?
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.

This year UBS closed the gap on Citi with 597 votes versus the US bank's 696. This year UBS was top ranked in high yield research and was also voted the top house in the sales and trading category.

UBS has six publishing analysts, and according to its fixed income research head, Stephen Cheng it has no plans to change its model: "We have not adopted a desk analyst or proprietary analyst-type role. I feel that if you're doing the job properly, you should be able to service both internal and external clients simultaneously."

Cheng, who was voted once again the region's best analyst, continues: "For UBS, one of our mission statements is to be a major intermediary of financial products and obviously this means that we will ensure a very strong distribution presence. If that is going to be the case, I can't see how you would have that model without the research, views and opinions to back it up. We clearly want to capture a very wide audience space and if you're going to do that, there has to be a very fair process of disseminating views and information."

Cheng concludes: "I think that the market is going to consolidate into the hands of the top two or three providers. You'll always have houses that will select niche parts of the business that they feel are profitable. We are clearly trying to capture a larger share of the revenue pie and I think because the dynamics of the industry is shifting, the flow side of the business is going to increasingly consolidate into the top two service providers. We clearly want to be one of those."

UBS clearly stands at one end of the spectrum, with Citi now moving to the other. What other firms will do remains to be seen. But 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.