Major US and European investment banks face extra costs of US $1.5bn a year combined if they need to move operations out of London as a result of Britain leaving the EU, analysts at J. P Morgan have estimated. For eight major US and European banks that would equate to an average 2% of their annual expenses, the analysts estimated. It would probably last for about five years, so cost $7.5bn between them over that time.
J. P Morgan analyst Kian Abouhossein said banks will face higher costs to move operations from London to other cities and to restructure in the event Britain does not negotiate near-equivalent terms for financial services "passporting" with the rest of the European Union.
"In the tail-risk scenario, we believe that the investment banks may have to set up legal entities, relocate staff and procure licences and real estate licences in Europe, which will likely result in meaningful cost increases during the transition period," Abouhossein said in the note released on Monday. That would cut average return on equity across the banks to 6% in 2018 from an already low forecast of 6.5%, well below their average cost of equity - which would rise to 14% for European banks in 2018, he estimated.
The eight investment banks covered by the research are UBS, Credit Suisse, Deutsche Bank, Societe Generale, BNP Paribas and Barclays in Europe and US rivals Goldman Sachs and Morgan Stanley. Analysts at Deutsche Bank last week estimated Brexit will lead to platform duplication and higher costs, which could cut return on equity for European banks by 50bp-100bp.
The full implications of Britain's exit from the EU remain hard to assess, however. Since the vote on June 23 to leave the EU there is mounting concern about the terms of passporting for financial services firms and lawyers have said it is likely to take at least two years to clarify.
Passporting allows firms in one EU country to provide financial services to clients elsewhere in the single market. Britain's passporting arrangements could be scrapped or watered down, making it less attractive as an EU gateway for US, Swiss or Asian firms. The J. P Morgan report said there were three potential outcomes: a 'blue sky' Norwegian scenario where EU passporting continues; a 'third country' agreement under MiFID II that will allow equivalent status for UK-authorised firms selling capital and derivatives markets products from the UK to the EU; and a 'tail risk', whereby material operations are moved from the UK to the EU to obtain market access.
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