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Are U.S. Bank Stocks Fated for a Huge Fall Post Brexit?
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In a historic move, Britain, the world's fifth largest economy became the first nation to leave the European Union (EU), laying ground for turmoil in the global financial markets. The Brexit referendum crushed market speculations of Britain voting to remain in the E.U, giving rise to a flood of uncertainties.
Major U.S. banking giants plunged in premarket trading on Friday following the U.K. vote. At the time of writing this article, shares of Citigroup Inc. (C - Free Report) fell 7.56%, Bank of America Corporation (BAC - Free Report) declined 6.98%, JPMorgan Chase & Co. (JPM - Free Report) was down 5.82% while The Goldman Sachs Group, Inc. (GS - Free Report) tanked 5.28%.
Major Concerns
While several banks and financial firms have contingency plans, the immediate impact of Brexit on U.S. banks seems be an unfavorable one. According to a report from Keefe, Bruyette & Woods released on Jun 16, Brexit could take a toll on the earnings of U.S. Banks. In fact, they may see a drop in earnings in the range of 1-6% this year. Investments banks, given their U.K. exposure are likely to experience higher costs, increased volatility and weak capital market activities.
Per the report, earnings per share in 2017 for Morgan Stanley (MS - Free Report) and Goldman are expected to be worst hit with a likely decline of 9% and 7.9%, respectively, from the current 2017 estimates. For JPMorgan, BofA and Citigroup the decline is projected to be 6.7%, 6.1% and 5.1%, respectively.
The U.S. banks, which once used their London units post crisis to uplift the overall business and offset the revenues pressure from the then issued Dodd-Frank regulations in the domestic market, will now be pushed to take initiatives post Brexit.
Several U.S. banks have their base in the U.K. that accommodates over 250 foreign banks for European operations, as the country provides them an automatic passport to conduct business throughout all the 28 countries in the EU. Brexit – the term coined to refer to Britain’s exit from the Eurozone – will probably lead to the termination of the foreign banks’ passport rights to the U.K.
Previously, a number of foreign banks had expressed their views against the exit, given Britain’s importance in influencing EU rules and business volume. However, as Britain exits the EU, they will likely reconsider continuing operations in Britain and may shift to some other region. Notably, JPMorgan, Morgan Stanley, Citigroup and Goldman have all donated to the campaign for Britain to remain a part of the EU.
What Lies Ahead?
In an emailed statement on Friday, Goldman's CEO Lloyd Blankfein stated, "We respect the decision of the British electorate and have been focused on planning for either referendum outcome for many months. Goldman Sachs has a long history of adapting to change, and we will work with relevant authorities as the terms of the exit become clear. Our primary focus, as always, remains serving our clients' needs."
Recently, news hit the market that Morgan Stanley is set to relocate around 1,000 workers from Britain to the continent over the coming years owing to Brexit. Earlier this month, JPMorgan’s Chief Executive Jamie Dimon said the exit of the U.K. from the EU may result in “fewer JPMorgan jobs in the U.K. and more jobs in Europe.” The company projects elimination of around 4,000 U.K. positions as well as reorganization of its U.K. business following Brexit.
Citigroup, which has about 9,000 workers in the U.K. and around 22,000 employees in the EU, also has a similar contingency plan ahead of the referendum. The company talked about rebalancing operations in the event of Brexit in an internal memorandum.
Bottom Line
We believe the major focus for the banks now will be tied with the regulatory and legal environment post Brexit which again depends on the nature of the transitional arrangements agreed upon following the referendum.
On the brighter side, the Federal Reserve released the Dodd-Frank Act supervisory stress test 2016 (DFAST 2016) results on Thursday, which reflected the continued stability in the banking system despite the Fed’s harsher hypothetical “severely adverse” scenario this time. However, amid several macro challenges, Brexit added to the global growth concerns which may result in further delay in rate hikes, giving banks a tough time ahead.
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Are U.S. Bank Stocks Fated for a Huge Fall Post Brexit?
In a historic move, Britain, the world's fifth largest economy became the first nation to leave the European Union (EU), laying ground for turmoil in the global financial markets. The Brexit referendum crushed market speculations of Britain voting to remain in the E.U, giving rise to a flood of uncertainties.
Major U.S. banking giants plunged in premarket trading on Friday following the U.K. vote. At the time of writing this article, shares of Citigroup Inc. (C - Free Report) fell 7.56%, Bank of America Corporation (BAC - Free Report) declined 6.98%, JPMorgan Chase & Co. (JPM - Free Report) was down 5.82% while The Goldman Sachs Group, Inc. (GS - Free Report) tanked 5.28%.
Major Concerns
While several banks and financial firms have contingency plans, the immediate impact of Brexit on U.S. banks seems be an unfavorable one. According to a report from Keefe, Bruyette & Woods released on Jun 16, Brexit could take a toll on the earnings of U.S. Banks. In fact, they may see a drop in earnings in the range of 1-6% this year. Investments banks, given their U.K. exposure are likely to experience higher costs, increased volatility and weak capital market activities.
Per the report, earnings per share in 2017 for Morgan Stanley (MS - Free Report) and Goldman are expected to be worst hit with a likely decline of 9% and 7.9%, respectively, from the current 2017 estimates. For JPMorgan, BofA and Citigroup the decline is projected to be 6.7%, 6.1% and 5.1%, respectively.
The U.S. banks, which once used their London units post crisis to uplift the overall business and offset the revenues pressure from the then issued Dodd-Frank regulations in the domestic market, will now be pushed to take initiatives post Brexit.
Several U.S. banks have their base in the U.K. that accommodates over 250 foreign banks for European operations, as the country provides them an automatic passport to conduct business throughout all the 28 countries in the EU. Brexit – the term coined to refer to Britain’s exit from the Eurozone – will probably lead to the termination of the foreign banks’ passport rights to the U.K.
Previously, a number of foreign banks had expressed their views against the exit, given Britain’s importance in influencing EU rules and business volume. However, as Britain exits the EU, they will likely reconsider continuing operations in Britain and may shift to some other region. Notably, JPMorgan, Morgan Stanley, Citigroup and Goldman have all donated to the campaign for Britain to remain a part of the EU.
What Lies Ahead?
In an emailed statement on Friday, Goldman's CEO Lloyd Blankfein stated, "We respect the decision of the British electorate and have been focused on planning for either referendum outcome for many months. Goldman Sachs has a long history of adapting to change, and we will work with relevant authorities as the terms of the exit become clear. Our primary focus, as always, remains serving our clients' needs."
Recently, news hit the market that Morgan Stanley is set to relocate around 1,000 workers from Britain to the continent over the coming years owing to Brexit. Earlier this month, JPMorgan’s Chief Executive Jamie Dimon said the exit of the U.K. from the EU may result in “fewer JPMorgan jobs in the U.K. and more jobs in Europe.” The company projects elimination of around 4,000 U.K. positions as well as reorganization of its U.K. business following Brexit.
Citigroup, which has about 9,000 workers in the U.K. and around 22,000 employees in the EU, also has a similar contingency plan ahead of the referendum. The company talked about rebalancing operations in the event of Brexit in an internal memorandum.
Bottom Line
We believe the major focus for the banks now will be tied with the regulatory and legal environment post Brexit which again depends on the nature of the transitional arrangements agreed upon following the referendum.
On the brighter side, the Federal Reserve released the Dodd-Frank Act supervisory stress test 2016 (DFAST 2016) results on Thursday, which reflected the continued stability in the banking system despite the Fed’s harsher hypothetical “severely adverse” scenario this time. However, amid several macro challenges, Brexit added to the global growth concerns which may result in further delay in rate hikes, giving banks a tough time ahead.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>