Finance

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

The shadow of Brexit, as nebulous a risk as it may be, looms large over the finance industry. The U.K. is still a long way from triggering the exit process, so the bluster remains just that for now. But that won't help those trying to get a good price for assets.

Case in point: Santander is said to have walked away from a proposed deal to buy RBS consumer brand Williams & Glyn over price. In a normal environment, the negotiation over 314 branches and 2 million customers would probably be more straightforward, even taking into account RBS's inability to untangle the unit from its IT systems (despite spending 1.4 billion pounds trying). As tricky as it might be to transfer those assets, they do at least offer growth. Usually, RBS would have the option of scrapping a deal if it couldn't get a good bid.

No Return
RBS' return on equity (ROE) was already under pressure before Brexit -- revenue uncertainty won't help
Source: Bloomberg Intelligence

Yet these aren't normal times, while the U.K. relationship with the EU runs to the heart of why this deal is happening in the first place. The sale was offered as a remedy to comply with EU state aid rules after Britain bailed out RBS in 2008. Brussels set a 2017 deadline for the disposal, a burden to RBS when trying to negotiate with buyers. They know it's desperate.

Brexit just weakens its hand further. Imagine trying to re-negotiate or cancel that deadline in this environment, with Brexit hardliners such as David Davis and Liam Fox pushing for a clean break.

RBS has conceded that Williams & Glyn will probably be sold at a discount to its 1.3 billion pounds ($1.7 billion) of equity. Even getting to about 1 billion pounds would be an achievement. It makes sense for a buyer like Santander to consider a bid, given the pound's post-Brexit-vote drop against the euro and the potential for market-share growth. But it's able to use pressure tactics like walking away precisely because the political environment is so uncertain.

And this murkiness about Brexit has a broader impact too. Shares of RBS and Lloyds, as well as London-focused real-estate stocks such as Foxtons or Derwent, have fallen some 20 to 30 percent from pre-referendum levels, even though the FTSE 100 has rebounded to a near record.

Spot the Difference
U.K. bank and real-estate equities are still trading below pre-referendum levels, unlike the FTSE 100
Source: Bloomberg

Economic data has reassured so far but investors worry that record low interest rates won't be enough to keep property prices afloat. There's also the fear that the need to control immigration shows the U.K. is headed for a "hard Brexit": that is, no financial passporting (which allows bankers to operate freely across EU borders) and an end to the City's primacy.

So while we're still in a period of phony war before the real thing starts -- probably some time next year, but who knows? -- the RBS debacle shows that even bluster carries a real financial penalty.

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:
James Boxell at jboxell@bloomberg.net