Emma Wall: Hello and welcome to the Morningstar Series "Ask The Expert". I'm Emma Wall and I'm joined today by Stephen Ellis, Director of Equity Research for Morningstar.
Hi Stephen.
Stephen Ellis: Hi Emma.
Wall: So we are here today to talk about financials U.K. banks. Obviously, Brexit has had a big impact on the banks. How has it affected the share prices?
Ellis: Well, the share prices collapsed unfortunately. They were down anywhere from 20% to 30% in the immediate aftermath of the vote. And it was a surprise. And what I think investors are still worried about and what we are concerned about is with U.K. seeking to exit the European Union, you know that will obviously mean slower economic growth impact.
For the banks what really that means is slow loan growth, higher loan losses and particularly for banks that have investment banking operations that are also potential like lower fees and asset management companies there is also lower fees there associated with the market volatility.
So there is quite a lot of unfortunate negative impacts for the U.K. banks in the immediate aftermath for sure.
Wall: Part of the concern for lot of U.K. stocks not just financials, was the uncertainty that followed Brexit. Some of that has been taken away with the appointment of a new Prime Minister in the U.K. Theresa May. How does that impact the banking sector in particular?
Ellis: Well, with Theresa, I mean there was considerable uncertainty I think right at the start, whether Britain will actually seek to exit the EU. And there were lot of reports that were going back and forth about well, you know they might potential seek to ignore the actual outcome. Or they might do a variety of different maneuvers to stay within the EU while trying to find the referendum outcome.
But what May has made pretty clear – and this is a bit of a benefit in a way – she has made pretty clear that they plan to exit. And so that I think in a way helps to reduce uncertainty around the banks, but also of course be negative impact is certainly lot more clear.
Wall: Of course, we are lumping all the banks together for the purpose of this conversation, but U.K. banks are quite a disparate group. So are there any – in particular, that have harder hit by the implications of over Brexit vote and those perhaps that may fare a little better.
Ellis: Well, the way I think about the U.K. bank drive, we really divide them into two buckets. You know we have I think the highest quality name in the group which is Lloyds (LLOY) and you know we can see we are undervalued. But Lloyd is particularly attractive just because it's much more of a retail focused bank than Royal Bank of Scotland (RBS) and Barclays (BARC).
We think that retail is probably – it certainly going to be negative for the sector, but it's not as volatile, as let's say, investment banking or asset management operations, and we don't necessarily think that the public are necessarily going to be running around from bank-to-bank as a result of Brexit.
Because, well, you can go with another U.K. bank, but it won't exactly help much. It is not going to make a big difference in the overall scheme of things. Whereas Barclays and Royal Bank of Scotland, they have fairly large investment banking operations.
And with the uncertainty around Brexit, you know it's pretty clear that there can be a pretty substantial down step in terms of investment banking fees and just overall business activity. And you know, that is going to affect them certainly more so than Lloyds which won’t necessarily have those issues.
Wall: Stephen, thank you very much.
Ellis: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
