Brexit May Cut Investment Banks’ Revenue by $8 Billion, BCG Saysby and
Boston Consulting Group sees global fees falling on EU vote
Banks could shut some units or move to other European cities
Britain’s vote to leave the European Union will probably reduce global investment banks’ revenue by about $8 billion and could push securities firms to exit some trading businesses, according to a report by the Boston Consulting Group.
Revenue from mergers and acquisitions advice, equity underwriting, bond sales and securities trading is forecast to fall to about $204 billion in 2016 from $228 billion a year ago, the consulting firm wrote in a research report published on Friday. The estimate was revised down from $212 billion as a direct consequence of Brexit, which has the potential to cut M&A fees in the European region by as much as 60 percent.
Brexit has plunged global businesses into the dark over the U.K.’s future relationship with the world’s largest trading bloc, threatening their plans to grow or acquire other companies. Facing high costs of moving some trading units to other EU nations, banks that are already struggling in those areas may choose to bow out instead, the report said.
“For some banks, Brexit could accelerate their withdrawal,” the authors led by Philippe Morel wrote in the report. “Brexit will likely affect both the short-term revenue outlook, through market shocks and loss of business confidence, and the long-term revenue outlook through disruptive business transformation.”
The political decision could also boost costs and headaches in both directions. Capital requirements at European firms in the City may climb by as much as 40 billion euros ($45 billion), with about 10 billion euros of capital needed to convert branches of German banks into U.K. subsidiaries, according to the report. Deutsche Bank AG’s London business is carried out through a branch rather than a subsidiary, allowing the firm to answer to its home regulator.
About half of trading volume in London relates to Europe, and some of this may be forced to move to other nations, according to the report. Euro-denominated derivatives and credit trading are more likely to have to move, while M&A advisory and commodities and currency trading have better chances of staying in London, BCG said.
For banks who already have significant operations in many European countries, moving staff and activities will probably increase costs in Europe by 8 percent, according to the report. Banks without a significant European presence outside London would need to build new operations, with the potential to increase annual costs by 22 percent in the region.
“Clearly, the ability of banks to center their operations and maintain scale in a single, well-capitalized London entity is now uncertain,” according to the report. “We are forced to consider a bifurcated U.K./EU environment in which banks will have to manage and maintain two separately-capitalized units, including a split liquidity pool that is able to serve only particular clients or offer particular products.”
Revenue from M&A advisory and underwriting stocks and bonds will probably see the “sharpest short-term decline due to protracted uncertainty, high volatility, and lower confidence in markets,” according to the report. While the impact will predominantly affect Europe, the Middle East and Africa revenue, BCG expects global revenue to fall by 32 percent to $40 billion this year.
While trading income could benefit from the uncertainty in the short term, BCG raised questions over the sustainability of high client demand and said revenue will probably decline as banks shift operations to lower-margin electronic platforms.