It's no secret that the financial services industry has suffered a bruised reputation since the financial crisis. We've all seen the headlines, such as "Main Street Doesn't Trust Wall Street," as well as numerous reports that large investors have also lost trust in some of the world's largest financial institutions.
But how much of the lack of trust is just hyperbole designed to attract readers and how much is a legitimate degradation in trust between market participants? In order to shed some light on the topic, Thomson Reuters has launched a new index designed to measure trust in global financial institutions. The Thomson Reuters TRust Index (TRust Index) is a fact-based and data-driven series of quarterly proprietary benchmarks built on Thomson Reuters data, news and analytics capabilities, according to Thomson Reuters.
"Whilst much has been said on the topic of trust in the financial sector since 2008, rebuilding the global financial system requires a clear understanding of the measures and values of key constituencies and the events impacting the confidence with which the industry is regarded," said David Craig, president, Financial & Risk at Thomson Reuters, in press release. "No one is better positioned to offer objective, fact-based benchmarks. Through our own trusted data, news and analytics, we have built the TRust Index to provide ongoing measures of trust to enable insight and foster constructive dialogue."
Video: How Does the TRust Index Measure Trust?
The TRust Index is based on data for the top 50 global financial institutions -- the largest banks, investment banks and investment managers based on market cap -- as a proxy for the sector as a whole for the period through the first-quarter 2013. It provides a number of metrics derived from Thomson Reuters proprietary news and social media sentiment analysis, analyst expectations, credit spreads and governance data. It will be published on a quarterly basis, according to Thomson Reuters.
For instance, the first-quarter 2013 TRust report shows that social media sentiment toweard financial firms showed dips based on market events since 2008, with a large drop in the latter half of 2012 because of the LIBOR scandal. In early 2013, however, the TRust report shows that sentiment toward banks greatly improved.
TRust Index key findings for the first-quarter 2013 include:
Sentiment: Thomson Reuters news and social media sentiment analysis shows that after several years of decline since 2008, the first quarter of 2013 shows a rebound in trust sentiment for the top 50 global financials with an overall improvement in the economy, markets and bank profitability. Other contributors to improved sentiment may include regulation, and regional strengths, for example Asian institutions are strengthening due to interest rate easing and liquidity infusion.
Confidence of the marketplace: The analyst community’s first-quarter estimates for financials led all other sectors, which seemed to be validated by strong first-quarter reporting for many financial institutions. The confidence the analyst community has in the sector’s prospects extends to the 5-year outlook, and while there might be intermediate weaker quarters or periods, the long-term view continues to outpace every other sector. In addition, analysts assess the financials differently based on regional and macroeconomic variables, with recent estimates higher for Asian institutions than for their U.S. and European counterparts.
Interestingly, this first TRust Index analysis reveals the market itself is lagging the improved analyst view, discounting the sector relative to its prospects. The investor view (market price) contains an implied view on future earnings growth (or market-implied growth) and globally that implied number is forecasting negative earnings growth. This means investors (the market price) and analysts (the forecasts) views diverge at present.
Counterparties: Thomson Reuters Datastream shows tightening credit spreads over the past year, signaling greater confidence in financials as reliable counterparties. They also reflect the external environment – our TRust analysis shows spreads widest for European firms in the index, likely reflecting relative evaluation of firms located in or highly exposed to the euro.
Controversy/Governance: Thomson Reuters ASSET4 data shows that in a period of many controversies across the sector, the Top 50 Global Financials experienced a high incidence of 'trust events'. And that the erosion of trust, regulatory pressure and increased awareness of the costs - reputational and monetary - appear to be driving increasingly widespread adoption of policies intended to reduce controversy risk. We believe that tracking this data in the quarters ahead will enable insight into their effectiveness and metrics on progress.
"Overall, the inaugural TRust Index metrics reveal a number of encouraging indications that trust and confidence in financial institutions are rebounding -- as evidenced in positive media sentiment, strong analyst assessment and first-quarter performance in an improving market economy, and tighter credit spreads as a measure of counterparty confidence," says Scott McCleskey, global head of regulatory intelligence, Financial & Risk, Thomson Reuters. "But continued wariness by investors in the sector, and potential future vulnerabilities in the controversy and governance arena suggest that we are early in the chapter on rebuilding trust in the global financial community."