- Analysts slash earnings estimates as U.K. votes to leave EU
- Trading in Barclays and RBS briefly halted after rapid drops
Barclays Plc and Royal Bank of Scotland Group Plc had their shares halted as the banks plunged to the lowest level since the financial crisis, accelerating declines after the U.K.’s vote to leave the European Union sparked fears about political and economic risks.
Barclays shares fell more than 17 percent for the second straight day, and the stock has now lost more than half its value in the last 12 months. RBS plummeted as much as 26 percent in London trading, reaching the lowest levels since January 2009 amid the lender’s taxpayer bailout. Trading in both banks was halted earlier in the day amid the rapid drops.
Analysts downgraded Barclays, RBS and Lloyds Banking Group Plc en masse, cutting their earnings outlooks as investors seek to comprehend the fallout from Brexit. The average share-price estimate for these banks dropped more than 13 percent in the past two trading days, while all three lenders had ratings on their stocks cut by at least six analysts.
Lloyds fell 10 percent at 4 p.m. in London, while challenger banks Virgin Money Holdings UK Plc, OneSavings Bank Plc and Shawbrook Group Plc all plunged more than 25 percent.
Even before the U.K. voted to leave the EU on Thursday, the nation’s banks faced a 7.9 billion-pound ($10.4 billion) revenue headwind from rising competition and low interest rates, analysts led by Michael Helsby at Bank of America Merrill Lynch wrote in a note to clients on Monday. The Bank of England could cut interest rates by at least 25 basis points to hurt the outlook even further, they added.
On the other hand, London’s two emerging market-focused lenders HSBC Holdings Plc and Standard Chartered Plc have been upgraded by some analysts today as their reliance on Asia for earnings is now seen as a help rather than a hindrance. Additionally, their financial performance and dividends, which are reported and paid in dollars, may look more attractive as the U.S. currency appreciates against the British pound.
While every bank operating in the U.K. will probably be hurt by a slowdown in borrowing, as corporates put their investment plans on hold, each bank is exposed to its own particular risks.
Jes Staley faces the toughest task among the British bank chief executive officers post-Brexit because of his commitment to running a large, London-based investment bank, analysts at Jefferies International Ltd. and Bank of America said Monday.
The out vote “changes everything about Barclays’s investment proposition,” according to Joseph Dickerson at Jefferies. The “structure, profitability and, indeed, existence of Barclays’s investment bank are called into question,” and “the U.K. referendum is likely to require an expensive reshape of the investment bank,” he said.
The problem stems from the potential loss of “passporting” rules for London’s banks, which allow them to operate across the region without having to set up local subsidiaries. If Britain loses this right, Barclays will have bulk up operations in cities such as Frankfurt and Dublin to continue trading and underwriting securities in the EU, a costly prospect.
“The complexities of managing an exit from the EU alongside the introduction of ringfencing makes its investment bank operations potentially even more problematic than before,” BofA analyst Michael Helsby wrote.
Meanwhile, the investment bank will suffer a drop in revenue as British bond and loan issuance dry up. Barclays is the number two arranger of sterling-denominated bonds this year, according to data compiled by Bloomberg.
Royal Bank of Scotland
The lender is 73 percent-owned by a government in turmoil, casting doubt over Chancellor of the Exchequer George Osborne’s plans to raise about 25 billion pounds disposing of the U.K.’s stake by 2020. While it’s unclear if the lender would still have to sell its Williams & Glyn consumer bank to satisfy EU state aid rules, CEO Ross McEwan has previously said he would push ahead anyway.
“RBS continues to face challenges in restructuring its business which we don’t expect to be helped by political and economic uncertainty,” analysts led by Rohith Chandra-Rajan at Barclays wrote in a note to clients on Monday, cutting the stock from equal weight to underweight. It’s likely to take “many years” for the U.K. to exit its stake.
With some operations in Europe and a consumer bank in Ireland, RBS could find itself cut off from some of its business units, Chairman Howard Davies warned in March. The bank is also exposed to the risk of a Scottish referendum on U.K. membership, which could cost it about 1 billion pounds in restructuring expenses associated with separating its units in the country, Jefferies’ Dickerson wrote in a note to clients, downgrading the stock from buy to hold. RBS has about 4.4 percent of group loans in Scotland, according to analysts at JPMorgan.
Lloyds fell amid concerns its almost entirely domestically-focused business would come under pressure as the U.K. slides toward recession. Additionally, like RBS, the lender may have to spend about 1 billion pounds reorganizing its operations in the event of Scottish independence, according to Jefferies. As the owner of the Bank of Scotland, the nation’s oldest lender founded in 1695, Lloyds has about 6.2 percent of its total assets in the country, according to JPMorgan.
“Lloyds is arguably the most exposed to a slowdown in the economy,” the analysts at Bank of America wrote, cutting the shares from buy to underperform. “We do not think the shares yet capture the uncertainties of the U.K.’s leave vote and the potential further complexities of Scottish independence.”
With uncertainty over George Osborne’s future as Chancellor, combined with a slump in shares and spike in market volatility, the government may not be able to dispose of its 9.1 percent stake in Lloyds by the end of March as planned.
These fast-growing British lenders may now have to face their first economic downturn as public companies, pitting their balance sheets to the test after a period of rapid expansion.
CYBG Plc, the owner of the Clydesdale and Yorkshire Bank brands spun out of National Australia Bank earlier this year, would probably be among lenders hurt most by the U.K.’s decision to leave if the BOE cuts interest rates, according to Bank of America. The bank also has the largest concentration of Scottish loans among British firms at 17 percent, according to JPMorgan.
Others including Billionaire Richard Branson’s Virgin Money and Shawbrook face concerns about their exposure to the U.K. housing market, which the U.K. Treasury warned before the vote may be as much as 18 percent lower than if the country stayed in the EU.