Blue chip investment firm Schroders PLC (LON:SDR) has been downgraded by Numis Securities to factor in the impact of new EU regulations on the way it pays for research and to reflect weaker markets and the stronger pound.
The City broker was mainly assessing the net effect of MIFID II, which will be enacted next year and essentially means businesses such as Schroders have to pay for sell-side research.
READ: Schroders receives Macquarie upgrade after better-than-expected first half
In the past, banks and brokers would provide their insights ‘free of charge’, hoping to receive a commission when a pension fund or investment manager bought or sold shares.
There are two ways institutions are expected to pay for research - directly from their own profit and loss accounts and via research payment accounts (RPAs) - pools of money set aside to pay for notes and market intelligence.
The latter was deemed the most efficient and cost effective approach - in fact only 10% of fund management firms are expected to go the P&L route.
And indeed Schroders was thought to want to pay City firms and banks via an RPA.
Change of tack perceived
However it has emerged its tack is to follow the European Commission’s preferred route for payment. Numis estimates the costs could be £32mln, although Schroders is expected to find savings elsewhere in the business to keep the cost-to-income ratio in check.
The net result for Numis after running through the numbers is a downgrade to ‘hold’ from ‘add’ on the stock, which it reckons is now worth 3,560p, down from 3,750p.
“Whilst we still regard Schroders as a core long term sector holding, we also acknowledge that there are now short term consensus earnings downgrade risks and/or the risk of earnings disappointment,” Numis said.
“We therefore now consider a neutral rating as more appropriate than a positive one at the current share price.”
In mid morning trading, Schroders shares were 0.2%, or 6.0p lower at 3,260p.