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

By Margot Patrick 

LONDON--Shares in U.K. and European banks fell again Monday as their earlier plans to improve returns looked like pipe dreams after Thursday's vote by Britons to leave the European Union.

The region's financial sector is being battered on fears that fragile recoveries at many banks will be delayed and that volatile markets could claim scalps. 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. But jolts to their businesses from political turmoil, jittery markets and worried businesses and consumers appear unavoidable.

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 12% and trading in its shares had to be suspended at one stage in the morning. Jefferies said Brexit "is a game changer" that presents existential questions for Barclays' investment bank. 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 7%.

Royal Bank of Scotland Group PLC fell 15%, its slow path to independence from 73% state ownership now seen far in the future. Stock in Lloyds Banking Group PLC, the U.K.'s dominant mortgage lender, was down 8%, 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 in the case of a "remain" vote.

Deutsche Bank analysts painted a gloomy picture for European banks in a note Monday, saying that it looks a lot harder for them to deliver "reasonable returns." In the U.K., 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 month 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 on Monday 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.

Old worries over capital strength at Aviva PLC also flared up, pushing its shares 4% 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.

Giovanni Legorano in Milan contributed to this article.

Write to Margot Patrick at [e-mail]

(END) Dow Jones Newswires

June 27, 2016 06:58 ET (10:58 GMT)

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