Broker-dealers and other financial firms felt the pain of the Brexit vote on Friday, falling as much as 17% over concerns such as rising global market volatility, slower economic growth worldwide and continued low interest rates.
Firms with large operations in London – such as Morgan Stanley (MS), Goldman Sachs (GS) and JPMorgan (JPM) – are expected to suffer from lower trading in the capital markets “as companies stop transacting due to uncertainty in law and markets,” analysts with Keefe Bruyette & Woods said in a recent report.
The impact on earnings in 2016 and 2017 for such firms could be substantial, the KBW group says. For instance, the Brexit vote may push Morgan Stanley’s earnings down 5.6% this year and 9% next year. Earnings at Bank of America (BAC) might take a 3.1% hit in 2016 and a 6.1% dip in 2017 due to the shift.
With Brexit, “We would also expect the British pound and euro to depreciate versus the dollar and this would cause [foreign exchange] headwinds for select companies,” the KBW analysts explained.
Morgan Stanley’s shares dropped about 10% on Friday, while Goldman Sachs and JPMorgan weakened 7%; their European counterparts had an even harder day, with Deutsche Bank (DB) dropping 17%, Credit Suisse (CS) 16% and UBS (UBS) 13%.
But at least one industry analyst sees a silver lining for U.S. banks in Friday’s mayhem.
“Buying bank stocks at this moment makes a great deal of sense,” said Richard Bove of Rafferty Capital Markets, in a report obtained by CNBC. “There is no basis for arguing that there will be a financial collapse in this country.”
On Friday, Morgan Stanley – which has some 5,000 employees in the United Kingdom – denied a report that it had begun moving 2,000 investment banking staffers out of London.
JPMorgan, which has 16,000 staff members in the U.K., issued a memo explaining possible shifts to come: “In the months ahead, however, we may need to make changes to our European legal entity structure and the location of some roles. While these changes are not certain, we have to be prepared to comply with new laws as we serve our clients around the world.”
Bove says these changes won’t happen overnight. “Once Britain notifies the European Union that it wishes to withdraw, a two-year clock starts running. However, Britain has not given any such notification and it may take some time for it to do so. There may have to be parliamentary elections and then a debate before this decision is taken.”
Interest Rate Blues
For many U.S.-based broker-dealer and custodial firms, the uncertainty created by Brexit is likely to push back the timing of any interest rate hikes in the United States. This hurts the net interest margins they earn on money market funds and cash sweep accounts, making these operations less profitable than anticipated. “Fundamentally, this … impacts sectors like financials because it looks like there won’t be a Fed rate hike for a little bit longer, though even they don’t really know,” Tim Ghriskey, chief investment officer at Solaris Asset Management, said in a Bloomberg report.
Firm expect the next rate hike could come at the end of the year. “On the heels of the Brexit developments we are pushing back our Fed call from September to December; there is exceptionally low visibility on the monetary policy outlook right now,” J.P. Morgan economist Michael Feroli wrote in a research note.
LPL Financial, for instance, had a roughly 11% drop in its share price, while Charles Schwab (SCHW) moved down 12%. Raymond James (RJF), which has about 100 advisors in the United Kindom, fell 9%. Meanwhile, Ameriprise Financial (AMP) and TD Ameritrade (AMTD) weakened around 10% Friday.
Still, Bove says, lower rates could bring some good news to U.S. banks. “If rates plummet, a mortgage refinance boom will develop, which will increase bank earnings,” he wrote. “If European banks are dealing with internal issues, they will lose even more market share to American banks in this country.”