On Monday, a number of banks downgraded U.K. stocks and warned of the sectors most vulnerable to the effects of a Brexit. Citigroup said banks were one of the most exposed sectors to Brexit, particularly the U.K.'s domestic lenders. But Citigroup added that European investment banks were also at risk.
Citigroup cut its price target and outlook on a number of Italian banking stocks, which have been under pressure because of their large portfolios of non-performing loans. Intesa Sanpaolo and BP Emilia were among the downgrades, while Citigroup said Unicredit could be seen by the market as one of the weakest Italian banks given the questions over its strategy and capital generation. All three banks posted losses by the close.
Deutsche Bank and UBS were among other major investment banks who suffered a price target cut from Citigroup. Deutsche Bank shares touched a record low level during trade, closing over 6 percent down.
Barclays waded in later in the morning with a note suggesting that a mild recession will begin in the second half of 2016 in the U.K. and the Bank of England will have to cut its key interest rate to zero from a current level of 0.5 percent. As a result, Barclays downgraded the European banking sector to "neutral", adding that earnings per share risks are skewed to the downside after the Brexit vote.
JPMorgan also said that it expects to see earnings per share cuts from European banks. But the British banks were feeling the pain, with Barclays down over 17 percent and Royal Bank of Scotland fell as much as 25 percent before paring to close 15.1 percent down, after receiving unfavorable outlooks from brokers.
Overall the banking sector was one of the worst hit, off 7.7 percent, with financial services and insurance also feeling the pain, both closing down more than 7 percent each.