Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Call it a Brexit relief rally, of sorts. After an opinion poll showed the Remain campaign in the lead once again, stock markets across Europe rebounded on Monday.

Rough Ride
European financial stocks have tumbled over the past year
Source: Bloomberg

Banks were among the big beneficiaries -- including those outside Britain. That's because a vote in favor of Brexit would also threaten European banks that are still only part-way through cleaning up their balance sheets.

Brexit Boost
European banking shares on the rise after polls point to lead for vote in favor of remaining in the EU
Source: Bloomberg data
Intraday times are displayed in ET.

Asset managers like NN Investment Partners and Natixis have warned of political contagion and credit-market jitters which would threaten those lenders with large sovereign-bond holdings like those in Italy or Spain. Deal making would likely remain muted and trading revenue would be hit, bankers say.

A vote in favor of remain would leave euro-zone lenders with a more stable environment in which to raise capital and sell assets.

Italian Banks Have Work To Do
Net non-performing loans as proportion of shareholders' equity
Source: Bloomberg Intelligence, 06/02/2016
Footnote: Shareholders' equity excludes minority interest

And they need it. Take Italy, where an industry battered by bad loans needs a capital infusion and asset sales. The country's banks trade at a steeper discount to most European peers, let alone their British ones. Brexit would likely make it harder and costlier to solve those problems and close that valuation gap.

Even UniCredit, Italy's only globally systemic bank and one that has been called upon to help its weaker domestic rivals, is expected by analysts to raise an estimated 5 billion euros ($5.7 billion) to bolster capital -- that is as soon as it has picked a new CEO. Imagine doing that in the market turmoil created by a Brexit vote and you can see what's at stake for banking systems outside the U.K.

Sure, British banks aren't insulated from Brexit risks and a consumer bank like Lloyds may not be immune to the long-term hit to economic growth or house prices that leaving the EU may bring.

But ultimately Lloyds has a stronger capital base, a more profitable retail operation and less vulnerability to currency swings than a global investment bank like Deutsche Bank -- and certainly less need to strengthen its balance sheet than many euro zone banks.

So on Friday, if the U.K. votes to stay in the EU, don't be surprised to see a stronger rebound in banks outside the U.K. than in. But don't take that to be a vote of confidence in the health of euro-zone banks.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net