Wirecard’s sea of buy ratings highlights analysts’ balancing act

Bank analysts have been left red-faced in the wake of the collapse of Wirecard — one of the biggest frauds in European history — for continuing to issue favourable calls on the company even as the sea of bad news swelled around the fintech firm. 

But any lessons learned from the scandal may be hard won. Banks rely not just on paid subscriptions to their written research, but also act as middlemen between investor clients and powerful companies.

Scott Davies, a former Barclays industrials analyst who left in 2017 to set up research venture Melius Research, said that negative calls can lead some companies to restrict access to their management teams. Management insights are a key part of analyst commentary to investors. 

“This has happened to me multiple times — likely more common than people think,” he told Financial News. “Often, it’s subtle.” 

That’s not the only downside of slapping a negative rating on a stock. Going against a client or an executive not pleased with a “sell” can also be fraught. In an ultra-competitive industry, analysts can get caught between selling accurate research and trying to please clients and the firms they cover.   

“You would hope institutional investors value the research, particularly if analysts are exposing fraud or if they feel a company is being over-egged,” said an analyst at a large investment bank. “However, from experience, we have been pilloried for our strong stance on some companies to the point where complaints have been made by management teams and some investors.” 

Perhaps it’s not a surprise then that with Wirecard, many followed the herd. Bloomberg reported that 10 out of 25 analysts covering Wirecard had buy ratings on the stock on the same day the company’s auditors revealed that €1.9bn was missing from the German payment firm’s balance sheet.

Among those going against the grain was Neil Campling, a tech analyst at Mirabaud Securities. After spending “hundreds of hours” poring over company files, he slapped a price target of zero on Wirecard for more than a year. 

Campling’s more positive peers will likely take a reputational hit over Wirecard, but senior analysts at large investment banks deny that they are conflicted. One head of research has told Financial News that many are forced to rely on audited figures. “If there are any repercussions from this, I think it will be that we rely less heavily on auditors — if we’re going to point the finger.” 

Research departments, hollowed out following the implementation of sweeping European regulation in January 2018, are likely to stay on the defensive. They must constantly market the quality of their research to an ever-dwindling pool of fees from selective fund managers.    

Neil Scarth, a principal at Frost Consulting, a firm which monitors investment research usage, said: “Analysts are wrong on stocks a lot. Obviously it looks more egregious in a situation where the company goes under. Asset managers can vote with their feet in terms of who they give business.”

Perhaps that’s why they’re keen to shift the blame. One London trader at a large investment bank said analysts at his firm continued to have a buy recommendation on Wirecard, despite some on the bank’s own trading floor who suspected fraud. Still, he pointed the finger at the auditors. 

“When a management team are so determined to be dishonest, it is challenging for an analyst to develop a view on public information,” the trader said. “We perhaps place too much trust in auditors who don’t, well, audit.”

The analyst blunders come as Brussels is about to embark on a wide-ranging review of European rules dubbed MiFID II, which were revised and implemented across Europe in January 2018. 

German MEP Markus Ferber, who is also a member of the influential European Parliament’s Economic and Monetary Affairs Committee, said that a probe by the European Securities and Markets Authority into Wirecard’s collapse, requested by the European Commission, could prompt action.

“If the investigation points to structural regulatory deficiencies in any areas that should indeed trigger a legislative follow-up,” said Ferber. “I would assume that sell-side analysts that consistently get it completely wrong will be punished by their clients. So, the incentive structure seems to be less lopsided than, for example, auditors.”

Davis, who has never rated Wirecard, said any urge to make a positive call on a stock is often more a function of management’s ability to tell a good story.

“I’ve gotten many wrong and many right, and to cherry-pick the wrong calls and blame it on bias would be wrong,” he said. “Sometimes you just miss stuff, even if it’s obvious in hindsight. Management teams can be very persuasive. They often have armies of people to direct that narrative.”

He added: “The blame game when things go wrong is a slippery slope. “

To contact the authors of this story with feedback or news, email David Ricketts, Paul Clarke and Trista Kelley

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