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Banks to bear brunt of brewing Brexit

Rising regulatory costs and falling asset values are two threats to global banks in a sea of unknowns with vote looming.

European banks' stocks are taking a beating, and many are chasing lows not seen since February when their shares were hard-hit by plummeting oil prices.

But this time it's for a different reason: the growing likelihood of a Brexit.

The banks are facing the prospect of greater turbulence in the immediate future should Britons vote next week in favor of quitting the European Union, and it is looking more and more like the U.K. is leaning toward "leave."

"Brexit is probably more concerning for EU banks than failing stress tests," said Christopher Whalen, senior managing director at the Kroll Bond Rating Agency. "It's a big unknown. It's certainly not helping large-bank equity valuations."

As a flotilla of fishing vessels on the River Thames arrive outside the Houses of Parliament, protesters gather to cheer them on as part of the Vote Leave Campaign, to make the case for Brexit in the EU Referendum on June 15th in London, United Kingdom.
Mike Kemp | Getty Images
As a flotilla of fishing vessels on the River Thames arrive outside the Houses of Parliament, protesters gather to cheer them on as part of the Vote Leave Campaign, to make the case for Brexit in the EU Referendum on June 15th in London, United Kingdom.

This includes companies like Deutsche Bank and Credit Suisse, but also U.K. banks, including Barclays, which market watchers say will come under greater pressure in the event of a Brexit.

Each of the banks' shares fell in recent weeks as the odds of a Brexit increased. After days of slumping stock prices, the companies' shares were up and topped market benchmarks in Wednesday morning trading. Deutsche Bank and Barclays declined comment and Credit Suisse could not be immediately reached for comment.

"We would expect some mortgage loans' performance to weaken due to lower house prices, higher interest rates and falling commercial property values," Fitch Ratings analysts said recently, also noting that banks' ratings could be jeopardized.

U.S. and European bankers alike are worried that, beyond asset values and market turbulence on uncertainty, they'll have other headaches to deal with in the event of a "leave" vote. All banks will have to relocate more staff to satisfy regulatory requirements in the EU, where they'll still operate.

"There will certainly be more regulatory and administrative costs," said John Stadtler, partner in PricewaterhouseCoopers' U.S. financial services industry group.

At a time when big banks are fighting off low interest rates, pressure to keep cutting staff and economic slowness, untold compliance cost increases only tightens margins at banks globally.

Should U.K. voters push the Brexit through, one investor is holding out hope for a silver lining in otherwise dour news: the European Central Bank's bond-buying campaign, which has helped to keep bankers busy lately, is likely to continue. This would be a much-needed top-line injection for some banks, particularly in the EU.

"Policymakers would end up supporting the economy far more," said Krishna Memani, chief investment officer at OppenheimerFunds. "From a policy support standpoint it may end up being a positive for banks rather than a negative."