HGG Hend Group Cdi 1:1

U.K. lenders suffer the worst of the carnage, but peers in Europe, U.S. aren't spared

By Margot Patrick And Christina Rexrode 

LONDON -- The banking bloodbath continued Monday.

After being pummeled in the immediate aftermath of the U.K.'s Brexit vote late last week, financial shares came under renewed pressure in both Europe and the U.S. The selloff was spurred by a range of concerns, from existential questions facing the European Union to worries a long period of market uncertainty could undermine fragile recoveries at many banks to fears tumbling long-term bond yields will mean renewed pressure on profits.

The interest-rate outlook is particularly dire. Banks have struggled to improve profits in the face of superlow, or in some cases negative, yields. Now, Brexit looks set to make matters even worse as investors seek shelter in government bonds, pushing prices higher and yields lower. The yield on the 10-year U.S. Treasury fell to 1.46% Monday. It had been 1.74% before Thursday's U.K. vote to exit the EU.

Making matters worse: There is no clear path ahead for investors in terms of how the crisis may be resolved or even for negotiations between the EU and U.K. There is only political uncertainty.

Banks in the U.K. remained at the center of the tumult: London-traded shares of Barclays PLC fell 17.4%, Royal Bank of Scotland Group PLC slid 15.1% and Lloyds Banking Group PLC dropped 10.3%. The three banks have together shed about one-third of their market value, or about GBP34 billion ($46.4 billion), since the Brexit result.

Deutsche Bank analysts painted a gloomy picture for U.K. lenders Monday. Loan growth will 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," they wrote.

Big losers in Europe included Credit Suisse, down 9.2%, France's Société Générale, down 8.4% and Italy's UniCredit SpA, off 8.1%. Most European banks are in stronger shape than they were before 2008's financial meltdown and subsequent eurozone crisis in terms of their capital and ability to withstand shocks. Still, investors are worried about the jolts to their businesses that could still come from political turmoil, jittery markets and worried businesses and consumers.

In Italy, the government, hoping to help struggling lenders cope, 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.

One note of reassurance came from Spain's Banco Santander SA, which on Monday reiterated financial targets for this year. Santander generates around one-quarter of its net profit in the U.K.

In the U.S., bank stocks fared only slightly better than their European peers: Bank of America Corp. dropped 6.3%, Citigroup Inc. fell 4.5% and Regions Financial Corp. was off 7.3%.

Bank of America appeared to be the subject of worry on multiple fronts. It is considered particularly reliant on U.S. interest rates rising because of its large base of U.S. deposits and loans. Last week's Brexit referendum makes it far less likely the Federal Reserve will raise interest rates again at its July meeting. Some market participants believe it could even cut rates.

Bank of America's sensitivity to rising interest rates had increased of late. In its most recent quarterly securities filing, the bank calculated that if short- and long-term interest rates rose by 1 percentage point, it would earn an extra $5.96 billion in net interest income over the next 12 months. A year ago, the bank calculated the benefit would be $4.55 billion.

"It's the flattening of the yield curve that Brexit caused," said Paul Muoio, who runs a commodity-trading adviser, Yellowhook Capital, in New York. "That's the problem."

Aside from rates, Bank of America also has a large capital-markets business that could be adversely impacted by market tumult. And while its direct exposure to the U.K. is relatively minor, it is enough to spook investors.

Analysts at Keefe, Bruyette & Woods estimated that Bank of America gets about 6% of its revenue from its U.K. subsidiaries, less than Goldman Sachs Group Inc.'s 18%, Morgan Stanley's 12% and J.P. Morgan Chase & Co.'s 8%. According to regulatory filings, Bank of America has more lending exposure to the U.K. than to any nation other than the U.S., though U.K. lending still accounts for only about 3% of total loans and leases.

Besides banks, investors also sought to make sense Monday of how badly insurers and asset managers will be affected by a Brexit. 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 asset manager, 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.

--Mark Cobley in London, Giovanni Legorano in Milan and Jeannette Neumann in Madrid contributed to this article.

Write to Margot Patrick at margot.patrick@wsj.com

(END) Dow Jones Newswires

June 28, 2016 02:47 ET (06:47 GMT)

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