27 October 2016
Deutsche Bank shares experienced a 57 percent fall over the past one year. Photo: Reuters
Deutsche Bank shares experienced a 57 percent fall over the past one year. Photo: Reuters

Why Brexit may hurt European banks

The Brexit vote has dragged down the pound, but boosted global equity and bond markets.

As the United Kingdom won’t officially leave the European Union until 2019 at the earliest, the financial market may not have fully appreciated the long-term impact of Brexit, especially on Europe.

For example, Brexit’s negative impact on European financial institutions will gradually emerge.

Europe’s financial industry has been faring badly in recent years and losing business to their US counterparts; Brexit and the ensuing uncertainty could intensify this trend.

For example, Deutsche Bank and Barclays Bank both saw their market value plunge, seriously hurting these banks’ competitiveness in Europe and even worldwide.

Over the past year Europe’s top four banks – Barclays, Credit Suisse, Deutsche Bank and UBS – have posted a 17.5 percent slump in their revenue generated from Europe.

By contrast, the top five US banks – Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America and Citi Bank – have reported a 3.5 percent rise in their income from Europe.

That’s partly because the capital of European financial institutions has contracted, while their US counterparts have made sweeping reforms in various areas after the financial crisis.

European banks lost out to US rivals in investment banking income, as well as transaction volume in fixed-income products, commodities and currencies.

Brexit will bring more constraints to European banks. By contrast, US banks are less affected, and they are able to gain more market share in European markets on top of the strong growth at home.

Looking into the future, the gap between European banks and their US peers in terms of competitiveness and profitability is likely to widen further.

On the Hong Kong market, mainland demand for local shares, in particular those offering relatively high yields, is expected to grow following the approval of the Shenzhen-Hong Kong Stock Connect.

A weaker renminbi will further accelerate fund flows into Hong Kong as Chinese investors seek exposure to Hong Kong dollar assets.

Techtronic Industries Co. (00669.HK), AAC Technologies Holdings (02018.HK), Sunny Optical Technology Group (02382.HK), Johnson Electric Holdings (00179.HK), Kingboard Chemical Holdings (00148.HK), Vitasoy International Holdings (00345.HK) and Hong Kong Aircraft Engineering Co. (00044.HK) are some of the counters that may attract mainland interests.

This article appeared in the Hong Kong Economic Journal on Aug. 19.

Translation by Julie Zhu 

[Chinese version 中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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