Bank Shares Drop as Analysts Weigh 'Brexit' Impact -- 2nd Update

By Margot Patrick 

LONDON--Shares in U.K. and European financial firms fell again Monday as banks and asset managers faced existential questions from Thursday's vote by Britons to leave the European Union.

Fears that volatile markets could delay if not undermine fragile recoveries at many banks have rattled investors.

Most European banks are in far stronger shape than they were before 2008's financial meltdown and subsequent eurozone crisis in terms of their capital and ability to withstand shocks.

Jolts to their businesses could still come from political turmoil, jittery markets and worried businesses and consumers in the wake of the U.K.'s vote for "Brexit."

To help struggling lenders cope, the Italian government is considering a EUR40 billion ($44.4 billion) capital infusion into its banks, people familiar with the matter said. The sector has suffered from chronically low profitability, thin capital buffers and high costs.

U.K. banks remained on the front line in Monday's selloff. Barclays PLC dropped 18% and trading in its shares had to be suspended at one stage in the morning. Jefferies said Brexit "changes everything" about how investors should view the bank, and slashed its 2016 earnings estimate for the bank by a whopping 76%. Barclays, along with Credit Suisse Group and Deutsche Bank AG, was counting on relatively stable markets and economic conditions to reshape its operations in the next few years. Shares in Credit Suisse and Deutsche Bank were both down by around 9%.

Royal Bank of Scotland Group PLC slumped as much as 25% to 152 pence, its lowest level ever, as a slow path to independence from 73% state ownership extended far into the future. Stock in Lloyds Banking Group PLC, the U.K.'s dominant mortgage lender, was down 10%, hurting a plan by the U.K. government to sell shares it still holds in that bank from the financial crisis. Retail investors in the U.K. were to have been offered Lloyds shares this fall in the case of a "remain" vote.

Deutsche Bank analysts painted a gloomy picture for U.K. banks Monday. Loan growth would likely be lower, bad loans higher, and dividends at greater risk as the dust settles from Thursday's historic decision, analysts at the German bank said.

"Political and economic uncertainty is here to stay, and we expect the coming weeks and months will see significant volatility in the share prices of U.K. financials and those with U.K. operations," they wrote.

In a statement that did little to calm markets, Chancellor George Osborne said the British economy "is about as strong as it could be to confront the challenge our country now faces."

Investors also sought to make sense Monday of how badly insurers and asset managers will be affected by a Brexit. After double-digit falls Friday, asset managers Henderson Group PLC and Schroders PLC were sharply down again Monday, as Citigroup analysts put them in a "sit this out" category. They cut Henderson's rating to neutral and said it might not meet its financial targets.

Asset managers have a morass of Brexit-related issues to sift through including potentially sweeping regulatory change in addition to fears of large outflows from their U.K. and European stock and bond funds,

Money managers from BlackRock Inc, the world's largest, to U.K. firm Hermès Investment Management, said they may have to make some changes to their London businesses, with industry experts predicting many fund-management jobs could relocate to other EU country capitals.

Financial firms of all types are considering the potential loss of the so-called "passport" that currently lets U. K-based banks and asset managers conduct business and market products almost seamlessly across the EU bloc.

Old worries over capital strength at Aviva PLC also flared up, pushing its shares 6% lower after a 21% fall Friday. The insurer on Monday said it has "one of the strongest and most resilient balance sheets" in the U.K. insurance sector, and some analysts said the stock may have been oversold.

Goldman Sachs analysts said the market turmoil since Friday increases the risk of "a casualty" in the financial system, in a hark back to the financial crisis when weak lenders fell like dominoes.

'"Is this a Lehman moment?" was the most frequently asked question on Friday, the bank analysts wrote.

They said anything of that magnitude is unlikely.

Mark Cobley in London and Giovanni Legorano in Milan contributed to this article.

Write to Margot Patrick at [e-mail]

(END) Dow Jones Newswires

June 27, 2016 09:29 ET (13:29 GMT)

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