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UBS is cutting earnings estimates for Wall Street firms, saying the industry is unprepared for impending European regulatory changes.
The sweeping market regulatory reforms in Europe known as MiFID II (Markets in Financial Instruments Directive) are set to go live at the start of 2018, and uncertainty is lingering across the financial world regarding the extent of the impact.
In a research note, UBS says many firms are downplaying the potential pressure on earnings over the next couple years, adding that firms “seem unprepared given the magnitude of change presented by the rule” and that the impact “is not likely reflected in consensus estimates or valuations at this point.”
UBS flags asset managers and investment banks as especially susceptible to absorbing unforeseen costs, cutting earnings-per-share estimates for these firms by slightly less than 1% and 1.2% on average, respectively.
These are the broad-strokes changes under MiFID II, from the note:
“MIFID II is large and complex, but basically it is a push to improve transparency and eliminate conflicts by implementing best execution standards, shifting trading to lit venues, improving post-trade transparency, and requiring research to be paid separately from commissions.”
As a result of these changes, UBS anticipates many asset managers will have to start funding research internally in Europe and beyond, and investment banks’ already-battered trading operations could suffer more pressure from the enhanced transparency and shift to exchange-trading.
That said, UBS expects some firms to fair better than others. Here are the firms they expect to be most and least impacted by the rule:
And here’s a breakdown of UBS’ estimate revisions: