Brexit To Rob Europe’s Banks … Of Profits

The impact of Brexit will have an outsized effect on banks, where as much as 32 billion euros could be erased from their bottom lines over the next two years, according to analysts at Goldman Sachs. That would represent a loss of roughly 11 percent of the bottom line projected through that period. 

Bloomberg reported that, per Goldman’s estimates, and perhaps of no surprise, the U.K. banks would be hit the hardest, as the exit from the E.U. will lead to a 10 billion euro decline in profits for those firms. The least exposed would be those financial institutions operating in the Nordic and Benelux regions.

The analysts, a team headed by Jernej Omahen, wrote that “we forecast a weaker outlook owing to lower volumes, margins and fees,” in tandem a heightened credit risk environment. The impact on the continent proper will be most keenly felt by Germany, stated the research team. The latest swath of rating downgrades has continued to target Barclays, which up until the most recent stock trading on Monday had lost roughly a third of value since the Thursday vote came through.  Goldman cut its rating on the company to “neutral” from “buy” with an eye on what it termed “heightened operational risk due to passporting.” The newswire explained passportng as a system and practice in place in the E.U. wherein membership in the E.U. lets banks have and work with clients across the union.  The smaller players in the industry, known as challenger banks, could indeed see growth slow as well.

Separate from the Goldman report, the question remains as to what would happen as U.K. banks suffer and retrench through the aftermath of Brexit.  It is likely that London would recede from its lofty perch as the thus far unarguable financial center of Europe. Though there has been talk that the banks (and the British government) would try to negotiate some sort of override where passporting would be allowed, it is a long shot that may have a precondition full membership in the E.U.

The fact that the U.K. gets a sizable chunk of GDP from the financial sector – to the tune of 12 percent – means that the impact of the vote would be felt far beyond financial firms themselves, partly in the form of jobs that could be “relocated” to find bases in other financial capitals in Europe (Amsterdam and Paris, for example) to keep some sort of continuity for business serving the E.U. Then, of course, there’s the speculation about whether Ireland and Scotland remain part of the U.K. or initiate their own “-xits” which could put even more pressure on what then would be England, with a big city called London.

With such sobering stats and scenarios in place, could it be that the Tuesday rally in stocks is a bit shortsighted?