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(Bloomberg) -- Deutsche Bank AG could take the biggest hit to trading revenues when Europe’s MiFID II rules come into force because of its exposure to the continent, according to a UBS Group AG report.

In its most severe “bear case” scenario, where growth in European trading revenue slows by 9 percent next year, Deutsche Bank would see growth cut by 4.7 percent, UBS predicted. Barclays Plc would be the second most-exposed lender with a 3.7 percent slowdown in trading revenues, said the Swiss bank, which didn’t include itself in the analysis.

Spokesman for Deutsche Bank and Barclays declined to comment.

Many companies are unprepared for the revised Markets in Financial Instruments Directive, which comes into effect on Jan. 3, UBS said. The rules will force banks to charge for research separately from broking services to improve transparency and require firms to report deals in far more detail to demonstrate they’re executing clients’ trades at the best prices, with appropriate costs and on the right platforms.

“We do not expect the revenue headwinds to be offset by expense cuts in year one due to the upward pressure from implementation costs, a desire to avoid cuts before the impact is more certain and a changing competitive landscape,” UBS analysts including New York-based Brennan Hawken wrote in the report.

More Exposed

The Swiss bank’s base case, though, is for a less severe reduction in European trading-revenue growth of about 1.5 percent, with both Deutsche Bank and Barclays seeing a 2.7 percent impact. 

The calculations are based on the assumption that lenders such as Credit Suisse Group AG, Deutsche Bank and Barclays generate about a third to half of their trading revenue in Europe, making them more exposed to MiFID II.

JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. will suffer less than the European banks from the rule change because the biggest U.S. banks only generate about a quarter to a third of their trading revenue in the continent, UBS said. The Swiss lender still named Goldman Sachs as among its “least preferred” companies because of the impact of the rules, with BlackRock Inc. one of its top picks.

In terms of implementation costs, UBS predicted that the largest banks and brokers could each spend $80 million to $120 million preparing for MiFID II, and that staffing cuts are likely across their businesses.

It will cost the industry $2.5 billion to $3 billion to make the technology changes to comply with the rules, which represents “a substantial increase in regulatory burden for some firms,” UBS said.

To contact the reporter on this story: Stefania Spezzati in London at sspezzati@bloomberg.net.

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Paul Armstrong, Jon Menon

©2017 Bloomberg L.P.

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