Bank stocks are getting pounded post-Brexit, and here's why

Banks hit hard by Brexit
Banks hit hard by Brexit

Banks were hit hard Friday after the U.K. chose to leave the European Union, with U.S. banks falling sharply when the market opened, including a 4 percent drop for JPMorgan Chase and a 8 percent decline for Morgan Stanley.

Shock and uncertainty were a drag on all markets, of course. But the banking sector faces specific headwinds that could hurt their bottom lines. For starters, analysts say the U.K.'s move out of the EU will force many banks to eliminate and relocate thousands of jobs to meet new regulations.

For example, JPMorgan CEO Jamie Dimon issued a statement after the vote maintaining the bank's commitment to its London operations, but adding it may need to make staffing changes to accommodate the Brexit and the change to the EU regulatory landscape that accompanies it. While banks are not making clear their immediate staffing plans, analysts say that relocating executives to other EU cities will be a yearslong project for banks, one for which some firms have sought a head start.

"The last 12 months, it has been difficult to find a seat on a plane between Dublin and London," said David Montgomery, head of the risk and regulatory advisory practice at advisory firm EisnerAmper's office in Ireland.

A campaigner hands out a 'Vote Remain' leaflet near Angel London Underground Station in London, U.K.
Chris Ratcliffe | Bloomberg | Getty Images

More challenging, perhaps: The move by the U.K. may cause the U.S. Federal Reserve to again delay raising interest rates — or even cut rates — which could wreck banks' chances of maintaining profitability without substantial staff cuts.

Traders substantially downgraded their expectations for the remainder of 2016, and began pricing in the slight possibility that the Fed would actually cut rates by the end of the year. According to the CME's FedWatch tracker, which monitors market sentiment applied to the Federal Open Market Committee's likelihood of raising interest rates, traders drastically cut expectations for a rate hike in 2016, reducing the odds of a December hike to 16.3 percent.

"Most banks have gotten tired of trying to figure out when interest rates will rise," said Erik Oja, S&P Global Market Intelligence banking analyst. "It's a bad day for net interest margins."

The last 12 months, it has been difficult to find a seat on a plane between Dublin and London.
David Montgomery
head of risk and regulatory advisory, EisnerAmper

Facing lots of uncertainty, U.K. banks sought to put on a brave face and a business-as-usual attitude.

"This is a significant decision and there will be many questions asked in the coming days and weeks about what happens next. The answers are complex but our position is not: we will not break our stride in delivering the Barclays of the future," Barclays CEO Jes Staley said in a statement. "We have stood in service of our customers and clients for over 325 years. We have been here for them through equally profound changes before."