Financial services: Accounting for Brexit and the fiduciary rule

Brexit increases the uncertainty around global financials, and the U.S. Department of Labor's fiduciary standard rule will reshape many business models in the sector.

Michael Wong, CFA, CPA 6 July, 2016 | 5:00PM

The Brexit vote will have wide-reaching implications for our European financials coverage universe. We plan to lower the fair value estimates for several UK banks such as  Barclays (BCS),  Royal Bank of Scotland (RBS) and  Lloyds (LYG), and we will review others such as  Banco Santander (SAN), which has UK exposure. This raises the strong possibility that we may change our moat trend ratings for Lloyds, Royal Bank of Scotland and Barclays to negative from stable.

We do expect the UK system and the broader European Union to experience substantial uncertainty and volatility going forward, as the UK seeks to renegotiate trade agreements with other countries, unwind other legal agreements with the EU over the next several years, and deal with the political aftermath of Prime Minister David Cameron's resignation. We also now see the strong possibility of Scotland seeking independence, causing further turmoil to the overall system, particularly the Edinburgh-based banks Lloyds and Royal Bank of Scotland, which may need to re-domicile. Although the impact of Brexit is far reaching, we do see an undervalued opportunity with  HSBC (HSBC), primarily due to its relative lack of UK exposure and its pivot toward Asia.

There are several fairly immediate considerations for banks. We would expect to see higher funding costs for UK banks, sharply lower loan growth (as we expect anywhere between a 3%-6% impact to UK GDP), and a significant drop-off (potentially 40%-50%) in investment banking fees. Asset management and trading operations will be impacted by the stock, bond and currency volatility, and we expect trading losses as well as lower asset management fees.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Commerzbank AG ADR4.73 0.64

About Author

Michael Wong, CFA, CPA

Michael Wong, CFA, CPA  Michael Wong, CFA, CPA, is director of equity research, financial services, North America, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

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