Calling the deal “a first” for the financial world, Standard & Poor’s says that the largest Nordic banking group, Nordea, is shutting down its internal research department and will be buying all of S&P’s equity research for its institutional and private clients.

Under the five-year deal, Nordea will cease to provide stock research internally and instead will buy independent research from Standard & Poor’s. Nordea will close its present Nordic research department and establish a new integrated research unit, Alpha Research Team, with in-house sector specialists, quantitative analysts and strategists.

Standard & Poor’s, in turn, will set up a 20-strong equity research team in Stockholm specialising in Nordic companies, to supplement its existing global team of over 100 equity analysts. It will provide Nordea with research and recommendations on 200 Nordic stocks, in addition to Standard & Poor’s existing coverage of over 1,500 European, US and Asian equities.

“This is the first time that a bank has contracted to buy all its traditional equity research from an independent provider,” said Geoff Hawksworth, managing director of Standard & Poor’s in Europe. “It is a bold and imaginative approach to tackling a problem that many investment banks face – how to transform the economics of their research function and provide their clients with genuine added-value research.”

Nordea said the arrangement was a response to growing pressures in the equity research market – including constrained margins, regulatory developments and low credibility – which are putting the spotlight on the future of in-house company research.

“The Nordic market is a microcosm of the dilemma facing the wider equity research industry,” commented Frans Lindelow, head of equities at Nordea. “There are over 650 analysts worldwide following Nordic stocks, all of them essentially producing the same sort of research and not all of them adding value for clients. Transferring the function to an independent provider improves the credibility of our company research, makes the economics of the research function more transparent, and enables us to focus on generating and communicating strong investment ideas for our clients.”

“Banks realise there is a gap between what investors are looking for and what the sell-side is offering,” said Julien Hardwick, European head of equity operations at Standard & Poor’s. “The market for equity research is labouring with over-capacity, continuing questions about quality, increasing regulatory constraints and declining margins. Many banks are taking a long hard look at their research function and we expect others to follow Nordea’s path.”