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JPMorgan, Goldman likely most exposed to Brexit shocks, KBW says

Friday, June 17, 2016 - 08:22
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JPMorgan Chase & Co and Goldman Sachs Group Inc are likely to be hardest hit among America's biggest banks by a possible British disavowal of the European Union this month, according to analysts at Keefe, Bruyette & Woods Inc.

[NEW YORK] JPMorgan Chase & Co and Goldman Sachs Group Inc are likely to be hardest hit among America's biggest banks by a possible British disavowal of the European Union this month, according to analysts at Keefe, Bruyette & Woods Inc.

The two US-based lenders are "most exposed to the potential negative fallout" from a so-called Brexit because they generate a large amount of their income from the UK compared with peers, the analysts led by Brian Kleinhanzl wrote in a research note dated June 15.

JPMorgan's and Goldman Sachs's UK-based units generated a total of US$14 billion in operating income in 2014, exceeding that of their three main US rivals combined, according to the note.

Policy makers at the Bank of England intensified warnings Thursday about the risks of leaving the EU, saying the damage could extend to global markets and the world economy.

All of the five biggest US banks, including Bank of America Corp, Citigroup Inc and Morgan Stanley, would see costs increase and capital markets activity decline in the event of vote in favor of Brexit on June 23, according to the note.

"We'd expect the banks to experience both revenue and expense headwinds" during a two-year transition period, the analysts said in the note. The analysts wrote that longer term, the impact for the banks would "be a wash."

If an exit occurs, banks could lose the ability to use their UK subsidiaries for so-called passporting privileges that allow the firms to conduct business in other European economic area countries. That means banks will probably need to move jobs in the UK to other European countries.

As many as 4,000 of JPMorgan's UK employees could be affected, more than any other US lender, according to KBW. On a percentage basis, Goldman Sachs employees would suffer the most, with 4.4 per cent of all employees or 1,600, impacted.

Estimates for 2017 earnings per share for JPMorgan would drop by 6.7 per cent to US$5.96 in the event of a Brexit and by 7.9 per cent to US$16.76 for Goldman Sachs, KBW said.

Spokesmen for Goldman Sachs and JPMorgan declined to comment.

Exchange houses would also be affected by a vote to leave, KBW said. Earnings estimates for US-based Intercontinental Exchange Inc. would drop by 5.1 per cent to US$14.78 a share because of a "negative impact" on European rate futures volume and foreign-exchange. Estimates for Bats Global Markets Inc, another exchange firm, would fall 5.9 per cent to US$1.57 a share, KBW said.

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