U.K. Bank Investors May Have Ignored Brexit Risk, Citigroup Says

  • Major U.K. banks face ‘material downside risk’ on Brexit vote
  • Citi analysts say risks of biggest U.K. banks outweigh rewards

How Nervous Should Investors Be Over Brexit?

Britain’s biggest banks, down 28 percent on average in the past year, have even further to fall if U.K. voters opt to leave the European Union this month, according to Citigroup Inc. analysts.

Barclays Plc, HSBC Holdings Plc, Standard Chartered Plc, Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc have slumped in the last 12 months primarily because of “weak” earnings and investors haven’t taken the risk of a so-called Brexit fully into account, analysts led by Andrew Coombs wrote in a note to clients on Thursday.

“Brexit is a non-trivial risk and does not appear to be factored into current valuations,” the Citigroup analysts wrote. “In the event of a remain victory, we expect to see only a modest bounce to U.K. bank share prices. In contrast, in the event of a leave victory we see material downside risk to U.K. bank share prices.”

A raft of senior global financiers from JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon to RBS Chairman Howard Davies and HSBC CEO Stuart Gulliver have warned a Brexit could derail Britain’s economy and force jobs in banking to be relocated overseas. While the outcome will probably be closely fought, some polls show the leave camp pulling ahead in recent weeks ahead of the June 23 referendum.

The “vast majority of the share price declines can be explained by weak earnings, rather than any de-rating associated with Brexit fears,” Citigroup said. Analysts’ expectations for U.K. banks’ 2017 earnings per share have declined 30 percent, according to the note.

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