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Why banks are suffering the most amid Brexit uncertainty

Chris Ratcliffe | Bloomberg | Getty Images

World markets may be trying to slowly edge back to their pre-Brexit levels, but the European banking sector continues to be dragged down by the U.K. referendum's result..

Global stocks look set for the worst performing month since January this year amid fears of uncertainty as European Union leaders scramble to put a deal together after UK voted to exit the region.

Banking stocks are among the worst performing, pulling the Stoxx 600 down nearly 7 percent this month – its worst since August 2015.

Big European banks like Deutsche Bank and Credit Suisse saw their shares plunge to an all-time low after results of the EU referendum were announced on Friday morning. Shares in Deutsche Bank and Santander further fell 4 percent and 2.9 percent respectively on Thursday after the U.S. units for both the banks failed stress tests this year.


In the UK, Royal Bank of Scotland was the worst hit among all banks after the bank saw its shares plunge by more than 30 percent since June 24. It fell a further 4 percent on Thursday after Morgan Stanley cut its rating on the stock to 'equal weight' from 'overweight.'

David Stubbs, Global Market Strategist, JPMorgan Asset Management, told CNBC via email that there were three main reasons for banking stocks recent volatility.

"If there is an economic hit from Brexit, banks' business could be impacted. Secondly, rates may move lower and yield curves may flatten further if Brexit has a significant economic impact. Finally, uncertainly overt the future of the UK, which is a global financial centre, may cause question marks over banking business models and transition costs."

But the banking sector has been seeing a bit of seesaw in its performance this week. Earlier this week, stock markets rallied pushing banking stocks up but analysts called it a dead cat bounce. However, the sector again came under renewed pressure on Thursday as uncertainty about Brexit continued.

Craig Orlam, senior UK economist at Oanda told CNBC via email that there are a number of reasons why banking stocks have come under pressure at the moment.

"The result of the referendum has added another cloud of uncertainty and negativity for the global economy which could hit the banks. An increase in non-performing loans, particularly if the housing sector struggles, on the back of any slowdown will create further headwinds for the banks."


Meanwhile, the Italian banks have also added to the pressure on the overall banking sector after German Chancellor Angela Merkel dismissed Italy's plan to inject money into the country's banking system. Shares in Unicredit were briefly suspended after falling by nearly 4.5 percent in early morning trading.

Naeem Aslam, chief markets analyst at ThinkForex UK says while there is optimism that the Italian banking sector will stabilize as the country injects more capital in the system, that will only be possible if they convince Germany that is reluctant for such strategy.

"Further downward pressure for banking sector will come if they cannot access the euro zone on their current platform. Remember even if the UK strikes a new favorable deal with the EU through which these banks can access the EU, it will still involve massive costs to set up new systems. Access to single market is the key here and investors should not underestimate this before they want to move any of their hard earned money in this sector."


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