European banks face tough outlook after Brexit vote, analysts warn

[LONDON] European banks will likely suffer subdued earnings growth and rising cost of equity amid growing political risks as a result of Britain's vote to leave the European Union, analysts warned, as they made a slew of rating and target cuts on bank stocks.

Europe's bank sector index suffered its biggest-ever single-day loss on Friday, falling to a new low of 128.11 points, after Britain's vote to leave the EU raised concerns over the growth outlook for Britain and Europe and fresh fears of political instability on the continent.

Barclays downgraded the European banking sector to"neutral," saying banks' cost of equity may not fall anytime soon given the heightened risk of anti-EU contagion.

JP Morgan, which downgraded all UK domestic banks, said European banks could suffer an average 13 percent in earnings estimate cuts by 2018, with banks' implied cost of equity of 11 percent set to increase due to the uncertainty in the sector.

"European IBs are to be avoided considering our inability to assess short-term counterparty, liquidity, and market gapping risk, but also structural uncertainty such as the risk of losing EU 'passporting', which would lead to net additional staff and costs for IBs," JP Morgan analyst Kian Abouhossein said.

JP Morgan made a one-notch downgrade on UK banks Lloyds Banking Group Plc and Barclays Plc to"neutral" and Royal Bank of Scotland Group and CYBG to "underweight."

Among European investment banks, it downgraded Germany's Deutsche Bank to "neutral" and Swiss banks UBS Group and Credit Suisse Group to "underweight."

"Banks are one of the most exposed sectors to Brexit, particularly UK domestic banks, given the likely headwinds of a deteriorating domestic economy and higher risk premia associated with a less predictable political and economic landscape," Citigroup analyst Andrew Coombs said.

Analysts also expect any further central bank easing in response to a deteriorating economic environment to put pressure on margins and exacerbate revenue downgrades.

"Rates and margins potentially compress from here if central banks ease further and the optimism around an improving trend in European credit quality stalls," Barclays analyst Jeremy Sigee said.

Barclays downgraded UBI Banca, Bankia and Banca Popolare di Milano to "equal weight" from"overweight." Citigroup lowered its price targets on European investment banks by 8-12 per cent, while RBC Capital Markets slashed its price targets on UK banks by 30 per cent.

REUTERS

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