01 August 2017

Financial Times: Brexit set to raise UK banks’ costs 4% and capital needs 30%

The findings by consultants Oliver Wyman will make grim reading for its bank clients, many of which are struggling with low profitability. They come a day after HSBC became the first lender to put a price tag on Brexit, saying the immediate disruption would cost it $200m-$300m.

Stuart Gulliver, chief executive of HSBC, said $1bn of revenue in its global banking and markets unit would be put “at risk” from Brexit. But he said it planned to protect this revenue by moving up to 1,000 of its 6,000 UK investment banking jobs to France.

The pace of announcements about banks’ Brexit plans has picked up in recent weeks, partly because of pressure from the Bank of England for them to submit their plans for coping with the “worst-case scenario” of a hard Brexit, severing access to EU clients. The UK is set to leave the EU in March 2019.

Such plans are expected to cause duplication of resources and capital for large banks in Europe, Oliver Wyman warned. It said this may cause some banks to abandon some European activities altogether and shift resources to the US and Asia. [...]

The consultancy, which has access to detailed figures on almost every bank from the benchmarking work it does for the sector, estimated that 2 percentage points would be knocked off wholesale banks’ return on equity in Europe because of the disruption. 

Wholesale banks — which serve corporate and institutional clients — would need to find $30bn-$50bn extra capital to support their new European operations, an increase of 15 to 30 per cent, it estimated. The industry’s annual costs would rise by $1bn, or 2-4 per cent. “Any time you split a portfolio up — whether it be a credit portfolio or a trading book portfolio — you lose the benefits of diversification that allow you to reduce the capital you hold against it,” said Mr Austen. [...]

The consultancy stuck to the forecast it made last year that Brexit would drive 31,000-35,000 financial services jobs out of the UK, of which 12,000-17,000 would be in banking. In a worst-case scenario, in which euro clearing is shifted to the eurozone, banks could shift as many as 40,000 jobs out of the UK.

Full article on Financial Times (subscription required)

Oliver Wyman report

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