Citi stays top

The results of our 2005 Fixed Income Research Poll.

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.

How they scored
    Macroeconomic research Bank and financial sector research Investment grade credit research Asian high yield/ distressed credits research Sovereign credit research Fixed income and credit strategy Total votes Position last year
1 Citigroup 128 116 118 80 141 113 696 1
2 UBS 102 84 114 94 89 96 579 2
3 JPMorgan 75 62 66 49 81 60 393 3
4 HSBC 73 62 57 28 73 54 347 5
5 Barclays Capital 56 55 64 51 44 56 326 8
6 CSFB 42 56 41 74 42 52 307 7
7 Deutsche 63 30 37 43 44 58 275 4
8 ING 44 38 34 47 43 42 248 9
9 Morgan Stanley 51 43 40 49 29 32 244 6
10 Merrill Lynch 26 53 32 32 21 27 191 10
11 Calyon 20 24 23 15 18 21 121 13
12 Lehman Brothers 20 15 20 19 10 15 99 12
13 Goldman Sachs 27 17 13 10 16 15 98 11
14 BNP Paribas 14 16 17 11 12 15 85 17
15 Nomura 15 12 11 13 12 15 78 16
16 Standard Chartered 11 10 11 9 7 7 55 15
17 ABN AMRO 11 7 14 8 6 7 53 14
18 Bear Stearns 7 5 2 8 7 7 36 18
19 Bank of America 4 5 4 3 5 7 28 20
20 DBS 4 4 1 3 4 2 18 19

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."

Best Macroeconomic research
Rank Name/Firm Total votes
1 Citigroup 128
2 UBS 102
3 JPMorgan 75
4 HSBC 73
5 Deutsche 63
6 Barclays Capital 56
7 Morgan Stanley 51
8 ING 44
9 CSFB 42
10 Goldman Sachs 27
Best Bank and financial sector research
Rank Name/Firm Total votes
1 Citigroup 116
2 UBS 84
3 JPMorgan 62
3 HSBC 62
5 CSFB 56
6 Barclays Capital 55
7 Merrill Lynch 53
8 Morgan Stanley 43
9 ING 38
10 Deutsche 30
Best Investment grade credit research
Rank Name/Firm Total votes
1 Citigroup 118
2 UBS 114
3 JPMorgan 66
4 Barclays Capital 64
5 HSBC 57
6 CSFB 41
7 Morgan Stanley 40
8 Deutsche 37
9 ING 34
10 Merrill Lynch 32
Best Asian high yield / distressed credits research
Rank Name/Firm Total votes
1 UBS 94
2 Citigroup 80
3 CSFB 74
4 JPMorgan 49
5 Barclays Capital 51
6 Morgan Stanley 49
7 ING 47
8 Deutsche 43
9 Merrill Lynch 32
10 HSBC 28
Best Sovereign credit research
Rank Name/Firm Total votes
1 Citigroup 141
2 UBS 89
3 JPMorgan 81
4 HSBC 73
5 Barclays Capital 44
5 Deutsche 44
7 ING 43
8 CSFB 42
9 Morgan Stanley 29
10 Merrill Lynch 21
Best at Fixed income and credit strategy
Rank Name/Firm Total votes
1 Citigroup 113
2 UBS 96
3 JPMorgan 60
4 Deutsche 58
5 Barclays Capital 56
6 HSBC 54
7 CSFB 52
8 ING 42
9 Morgan Stanley 32
10 Merrill Lynch 27
Best sales and trading
Rank Name/Firm Total votes
1 UBS 72
2 Citigroup 62
3 HSBC 57
4 Barclays Capital 52
5 JPMorgan 49
6 CSFB 40
7 Deutsche 38
7 ING 38
9 Morgan Stanley 31
10 Merrill Lynch 26
Best borrowers
Australia Telstra 72
China CNOOC 16
Hong Kong Hutchison Whampoa 29
India ICICI Bank 26
Indonesia Indosat 20
Korea KDB 23
Malaysia Petronas 30
Philippines PLDT 39
Singapore Temasek 14
Thailand PTT 12

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."

Which rating agencies most influence investment decisions
Rank Firm For sovereigns For banks For corporates For structured finance Overall score
1 S&P 378 329 352 285 1344
2 Moody's 347 335 368 282 1332
3 Fitch 4 111 71 115 371
Methodology: A first place nomination got 2 points, a second place nomination received 1 point. The four scores were added to get the overall score.
The best research calls of 2005
Damien Wood (CSFB) on Bangkok Bank, Tony Watson (MS) on FCX and Sinoforest, Ben Hall (Barclays) on G-Steel
Call to buy Hynix bonds - offered at 97 in May, now at 111
Call since June from HSBC to buy Asia Aluminum 2011 - bond prices up almost 5 points.
Call on KFB perps by Merrill Lynch in July 2005. Spread tightened by 20bp
Citigroup's So-Yon Sohn's call to buy Bangkok Bank 2029.
Ivan Lee of Citigroup's call on Hutchison Whampoa for the 3G turnaround.
Deutsche's call to go long Philippines sovereign after the political crisis in July
Who is the best analyst?
Rank Name/Firm Total votes
1 Stephen Cheng, UBS 38
2 Johanna Chua, Citigroup 20
3 Ivan Lee, Citigroup 13
4 Tony Watson, Morgan Stanley 9
4 Tim Condon, ING 9
6 Scott Wilson, UBS 5
6 Eden Wong, CSFB 5
6 Andy Xie, Morgan Stanley 5
9 Damien Wood, CSFB 4
10 So-Yon Sohn, Citigroup 3
10 Jon Scoffin, Barclays Capital 3
Most likely sovereign upgrades
Hong Kong 280
Malaysia 101
Most likely sovereign downgrades
Thailand 99
Philippines 92


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.

Q&A with top analyst: Stephen Cheng of UBS

What have been the best calls that you've made this year?
Stephen Cheng: At the start of the year, we were obviously cautious about the credit cycle and cautious generally about the direction of interest rates. Volatility was obviously something that we still had to get comfortable with. Between high-grade and high-yield, we still made a tactical call that you should still be very much positioned in high-yield, but increasingly selective in terms of choices.
At the time, we were saying Philippine corporates were probably the key area to put your assets. If you look at year-to-date returns, 15-16 out of the top 20 performing bonds across Asia are from the Philippines credit space.

Was that call counter-intuitive, since a lot of people have been very worried about the Philippines?
That is correct, and it is still fair to say that volatility remains high at the sovereign level. At the corporate level we've seen earnings and performance stability, which on the back of limited issuance from the corporate space, has meant that volatility in the Philippines corporate arena has been very low beta. That's been our key call.

What was your top picks among Philippines' corporates?
It was the usual suspects. We like PLDT, Globe, SM Investments, the utility operators, as well as the likes of Universal Robina and JG Summit. The banks have also been a preferred way to play the sovereign angle.

When you compare this year with last year, was it more difficult to make calls as a fixed income analyst?
Sure. Everyone has been preparing for the risk of higher inflation and higher rates, and it seemed that credit ratings and credit quality had peaked out. Obviously, you also had rising oil prices as a nervous backdrop. If you aggregate those issues together, the risk-reward scenario appeared fairly asymmetric for the credit world. That being said, I've always had the view that Asia, in the context of global emerging markets and certainly global credit markets, has actually been very low beta. This is because I don't think we have the same degree of exuberance on the new issue front in terms of size and structure whilst credit fundamentals continue to surprise on the upside. Besides treasury volatility, credit fundamentals will continue to drive the direction of spreads. Hence, stay selective on credits.

Looking into 2006, do you see inflation becoming a problem and interest rates continuing to rise or can you see the top now?
The house call is obviously for oil to remain high and we're looking in the region of $66 per barrel throughout the course of 2006 and largely filtering into 2007 as well. Headline inflation risks will continue to be an issue and potentially start feeding into weaker profitability. The house call for rates is still at least another 50 basis points. Basically we see two rate hikes and then a holding pattern for most of next year.

Do you think the yield curve is going to invert?
I don't think it is bad enough to invert, given that we are still expecting the economy to grow at a rate of 3%. I think you'll see it stay very flattish.

If it stays flat, is that a problem for hedge funds?
Yes, in terms of the leveraging aspect, since this has been a key area for hedge funds to generate greater returns in the past. At the same time, I think hedge funds are likely to find more opportunities in the credit markets because we're seeing greater volatility in the high-yield sector right now. The high yield market has become more polarized. There is a bigger variety of names and the historically popular convergence themes have stalled - cheap assets no longer guarantee strong returns. Building tactical short positions can prove just as beneficial when liquidity and credit selection is becoming critical. That's a better but more challenging way to make money than just leveraging and playing the yield curves.

There is an increasing number of new high yield credits coming out of China, do you see this as leading to some defaults in the future?
I don't see defaults being a big issue for Asia over the next couple of years because the reality is that while a lot of these credits are coming out to borrow money and becoming increasingly leveraged, they are becoming very liquid in the short-term. Nor am I too worried about interest rates rising because most of these companies are quite cashed-up and at least pre-funded to finish their capital expenditure plans.
What is more of worry over the next two to three years is if growth does not materialise and they suddenly have all this excess capacity on their hands, and leverage does not come down to the levels they anticipate – then you'll start worrying about refinancing risk. But we will go through a three-to-five year cycle before we enter that concerning phase.

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