Trust in Asian Financial Institutions Declines

Trust in Asian financial institutions declined towards the end of the second quarter, following a peak in May, likely due in part to 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.


Despite regional variations, trust and confidence in financial institutions remained relatively stable over the second quarter of the year, shows data from Thomson Reuters' proprietary TRust Index, a study that measures trust in the top 50 global financial institutions.


“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,” said David Craig, president, Financial & Risk, Thomson Reuters. “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.”


Sentiment in the Americas also showed deterioration in trust for the group, possibly because of the perceived end of quantitative easing and fears of rising interest rates at the time.


Trust in European Financials dipped in April but then rose steadily, converging with peers by the end of the quarter, likely due in part to positive sentiment regarding privatisation of UK banks.


Confidence of the marketplace differs between analysts and investors. Analysts continue to have high expectations for the top 50 financials as earnings growth estimates for the second quarter and a 5 year earnings growth rate of 8.1% show; however a -3.4% implied 5 year growth rate shows the market continues to discount the group relative to analyst growth expectations.


The changes analysts made to their up/downgrade recommendations for the top 50 financials reveal a significant measure of confidence in Asian financial institutions, as more upgrades than downgrades (31 vs 18) were made, driven largely by Japanese banks and likely due to Abenomics and the low interest rate environment.


Credit spreads, as indicators of trust between counterparties, show that after nearly a year of relative credit spread stability, there was a slight reversal of the previous trend and at the end of the second quarter a small increase was seen. However spreads are still well below 2011 levels. Spreads continue to be highest for the European institutions in the group, reflecting relative evaluations of firms located in or highly-exposed to the euro and lowest for those from Asia.


Tracking controversy and governance as factors in rebuilding trust shows that a far higher percentage of companies within the top 50 global financial group than the financial sector as a whole have been involved in various controversies. However, adoption of corporate governance policies is higher among the top 50 group than the wider financial sector as a whole, for responsible marketing, fair competition and avoidance of bribery and corruption practices.


The proliferation of regulations over the past two years has had clear implications for the financial sector in terms of compliance burden. Taking a look at what we gauge from the regulatory arena as an indicator of trust, the number of regulatory alerts increased to almost 18,000 in 2012, from 8,704 in 2008. The number of average daily alerts now stands at 85.


“In the second quarter, we saw a number of regional developments worth noting.  It is clear that trust and confidence in the market are very sensitive to macroeconomic developments and to policy decisions, especially those made by central banks,” said Scott McCleskey, global head of regulatory intelligence, Financial & Risk, Thomson Reuters. “We get a mixed view when we compare analyst forecasts for growth against our analysis of the growth rates implied by market prices.  While analysts see moderate growth in the financial services industry in the medium term, the growth rate implied by markets prices actually implies negative earnings growth. Clearly one of these two views must win out, and we will continue to watch this data with interest.”


“By looking at trust through a range of analytical lenses, we are able to see not only the high-level developing trends, but the underlying currents beneath them as different participants in various regions reflect different views. These trends are certainly worth watching as we move through the third quarter,” McCleskey added. In this 2-minute video, he explains further how the measures in this quarter’s TRust Index offers relate to the state of trust in the global financial marketplace over the quarter.

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