After clawing back the losses made during the financial crisis, the outlook for high street banks at the beginning of the year looked brighter, with Lloyds forecasting significant dividend growth and investors benefitting from share price growth in all four major high street banks.
But this morning trading has been suspended in Royal Bank of Scotland (RBS), Lloyds (LLOY) and Barclays (BARC) following dramatic 10% plus drops in their share prices.
RBS has seen shares drop by 15% in mid-day-trading – meaning the bank has erased gains made over the five years, to return to levels last seen in 2012.
Banking stocks are in turmoil due to the uncertainty surrounding their future; will London continue to be the financial hub of Europe, arguably the world, if the UK is not a member of the European Union?
Before Friday’s result specialist law firm Ashurst produced a paper entitled “Brexit: Potential Impact on the UK’s Banking Industry”. The report states that “Brexit would challenge London’s role as the venue of choice for global firms to conduct their European business… One thing is for sure – if there is a Brexit, the UK’s banking industry will never be the same.”
“Much cross-border banking business within the EU is made possible by EU-level legislation, including, for example, investment services, deposit taking and payment services,” the report reads.
“A primary risk for institutions which access EU markets from the UK is therefore the post-Brexit loss of that access on a short or longer term basis because no equivalence decision has been issued in time. Whether this risk is material depends on the business mix of the institution in question and its current structure.
“A key challenge in mitigating this risk is that implementation of a solution may be a lengthy process, and the final landscape will only become clear at a relatively late stage in the Brexit process. Brexit could, absent agreements as to equivalence, also affect elements of financial services infrastructure, such as access to clearing houses or payment services, or the provision of custody services to certain clients.
“Other issues are harder to assess at this stage, for example the effect of Brexit on a highly-skilled and multinational workforce and – longer term – any effect on London’s esteemed status as a financial and legal centre.”
Osborne Believes in Banks
This morning Chancellor George Osborne pledged that UK banks would work alongside the Government and Bank of England to help control stock market volatility.
“You should not underestimate our resolve. We were prepared for the unexpected. We are equipped for whatever happens,” he said. “And we are determined that unlike eight years ago, Britain’s financial system will help our country deal with any shocks and dampen them – not contribute to those shocks or make them worse.”
Osborne also addressed concerns over the future of The City saying: “In the meantime, and during the negotiations that will follow, there will be no change to people’s rights to travel and work, and to the way our goods and services are traded, or to the way our economy and financial system is regulated.”
Biggest Fallers of the Day
The banks are among the top 10 fallers on Monday, joined by EasyJet (EZJ) who has issued a profits warning blaming Brexit and seen shares fall 18% on the announcement.
EasyJet have followed International Airlines Group and issued a profit warning for the next three months of the year after operational disruption, caused by strikes and weather events, combined with lower demand in the run up to the EU referendum and following the Egyptair tragedy, explained Nicholas Hyett, Equity Analyst at Hargreaves Lansdown.
Also in the red today, are housebuilders Taylor Wimpey (TW.), Barratt Homes (BDEV) and Persimmon (PSN).
“After the initial panic, themes are emerging in terms of how markets are responding to the UK’s unexpected decision to leave the EU,” said Russ Mould, investment director at AJ Bell.
“Within the UK the best performing sectors are the gold and silver miners, as investors look for havens. The worst are banks, life insurers and housebuilders, owing to fears over what the vote means for the UK economy, demand for UK assets and also the ability to sell financial products into the EU via the “passporting” mechanism.”
Take a Long-term View
Colin Morton, lead manager of the Franklin UK Equity Income Fund says that long term investors should not lose sight of the outlook for UK companies – which he believes is positive.
“Whether in EU or not, the UK remains a very important market and regardless of what might happen with trade tariffs, there is no reason why, all of a sudden, people won’t want to buy products or services from solid, quality companies,” he argued.
“The true impact may not be seen for two to three years, and the market often struggles to see more than six months ahead, but we can be certain that volatility will prevail in the coming months. These are unprecedented times and there are a number of issues to play out in the next few months, but active managers should see various opportunities as over-reactions play out.”
