Credit Suisse calculates UK banks’ Brexit costs

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Analysts led by Claire Kane said the most restrictive outcome for the UK would have a “meaningful” impact on the financial industry, with Barclays, HSBC and Royal Bank of Scotland most affected by the change, they say.

• What is ‘Low Access’?
–UK would move to a ‘third country’ position with the EU, meaning no regulatory equivalence ‘–Passporting’ rights- which allow certain services to be offered across the European Economic Area without the need for local licenses- would be lost

While the UK could take advantage of “equivalence” provisions, Kane said these would cover a more limited range of services and may not be negotiated in the two-year time frame.

Kane said: “In theory, [the UK] could find itself outside the EU with no such rights, if nothing was agreed within that time.”

Kane estimates that £15.6 billion, or 33% of global and wholesale revenue could be “at risk” under this scenario.

For Barclays, RBS and HSBC that represents a hit to group revenues of 3.2%, 2.7% and 2%, respectively, the Credit Suisse analysts say.

A spokesman at Barclays said the numbers “assume we do nothing” to mitigate the loss of access to the single market. He said that the company has a range of options whatever the outcome of the negotiations “to execute in a way that adds value.”

The other banks did not immediately comment on the figures.

Still, Kane noted that recent volatility in the banking sector presents an opportunity. She said Brexit-related downgrades have been “largely overdone”, noting that the economy has performed more strongly than expected.

Kane said: “Following the shock outcome of the EU referendum vote, consensus earnings followed share prices lower and now look set, on the whole, to follow them higher. The message from banks on the UK outlook is better than initial expectations; Net interest margins should be more resilient than feared and credit demand is holding up.”

Kane also noted that most UK banks should perform “reasonably well” in stress tests, the results of which are due to be published by the Prudential Regulation Authority on Wednesday.

She added that uncertainty about future growth, unemployment and asset quality would “likely limit the extent of earnings upgrades such that a re-rating to pre-vote highs is unlikely in the near term”.

• A version of this article appeared on WSJ City, a made-for-mobile app that combines the best of the Wall Street Journal and Financial News, tailored for an audience in the City of London. Download here

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