Oh dear, everyone sounds like Cassandra ..... Overseas banks in post-Brexit Britain

Tuesday 5th July 2016

Oh dear, everyone sounds like Cassandra ..... Overseas banks in post-Brexit Britain

ref:- "Challenges multiply for battered global banks on wake of Brexit vote", The Financial Times, Companies and Markets

Just what the banks needed ..... more bad news. The performance of share prices in the banking sector across the globe this year is evidence enough of the difficulties facing banks. Ultra-low interest rates make it much harder to fulfil the basic tenet of banking: lend money a lot more expensively than you borrow it ..... the turn just isn't there at these low levels. Throw in some extra localised issues, the enormous and imminent threat to the Italian banking system posed by bad loans for example and .... well, it's not ideal, is it?

And now we've got Brexit .... some may talk a good game now but not many in the financial services arena expected that , and even fewer prepared properly for it. The FT puts forward some suggestions as to how overseas banks in the UK might be affected. Suffice to say that not too many of them are optimistic .... from the UK's point of view, that is.

Uncertainty over the business model: banks from outside the EU have been basing themselves in London in order to "passport" themselves into the other 27 EU nations. Conceivably, they now face months or even years before finding out if they need to apply for new EU banking licenses (very likely, should real Brexit go ahead). And will euro clearing move to Frankfurt or Paris (again, very likely).

Relocation issues: these would obviously have a negative short-term impact, cost-wise. Looking further ahead, a move away from the high costs associated with London may be beneficial (for the banks, that is ..... not London.

Trading revenue up short term, down long term: we saw 10 times normal trading levels on June 24th after the shock Brexit vote .... nice for revenue, not so good if the banks were holding falling assets. Moreover, looking further ahead uncertainty may breed volatility which in turn can lead to investors sitting on their hands .... not so good for investment banks with large markets businesses.

Investment Banking revenue down short term: economic, political and market uncertainty with increased market volatility will put a dampener on deal making (M&As etc), according to Citi.

Rates lower for longer: we've touched on this already, and you could make a strong case that this was likely anyway. Still, Brexit-related uncertainty seems to have put paid to any ideas of raising rates in the foreseeable future, even in the US. As we were saying, ultra-low and negative rates are BAD NEWS for bankers.

Less profitable UK subsidiaries: Morgan Stanley for example cut its forecasts  for UK bank earnings anywhere between 12 and 27% from its pre-Brexit levels. Expect lower levels of lending, and higher losses on loans.

Less valuable UK earnings through weak sterling: not too much explanation required here .... Any profits earned in the UK will be worth a lot less by the time they're repatriated ..... assuming sterling stays weak, that is.

US banks move further ahead of their European equivalents: it's not a trend that Europeans want to see continued, but it seems more than likely given the ability of more strongly capitalised US banks being able to pick up market share from weakened European counterparts.

So somebody may do all right out of it then? Theoretically perhaps ..... although right now the challenges for everybody seem much more like obstacles than opportunities.