Brexit drives European businesses from UK banks

Brexit is driving European companies to turn their backs on UK banks in areas such as foreign exchange hedging, cash management and trade finance, a new report says. Greenwich Associates, the consultancy, found that “virtually all” of the Brexit-inspired changes to the European market appears to be “working against” UK lenders.

Three-quarters of 61 companies (13 in the UK and 48 on the continent) surveyed said their banking and financing needs had changed because of Brexit. The companies, all with annual sales over 500m euros are users of banks’ foreign exchange hedging, cash management, lending and trade financing services.

Tobias Miarka, who co-authored the report, said: “A series of Brexit-triggered changes in corporate demand and preferences appear to be lining up as new headwinds for UK banks as they prepare to compete in a post-brexit Europe.” More than half of the continental European companies responding to Greenwich’s survey said that, after Brexit, it will matter to them whether their lending banks book their debt inside the EU or outside. Even UK banks that have established EU subsidiaries may face a loss of business, the survey warned: “Booking debt with these EU entities potentially takes their massive UK balance sheets off the table, forcing them to rely on the liquidity they are able to generate in the euro zone and potentially placing them at a competitive disadvantage.”

Trade finance includes similar challenges, according to Greenwich, which said that “the need to build and rely on separate EU liquidity — apart from the parent’s balance sheet in the UK —

could make it difficult to compete on pricing.” In cash management, Greenwich said UK banks’ home-country specialism “might not be as valuable an asset in a post-brexit market as some UK banks are hoping.” Despite encouraging talks between British Prime Minister Boris Johnson and his Irish counterpart, Leo Varadkar, a disorderly Brexit cannot as yet be totally ruled out. According to Factset data, some of the stocks worst hit by Brexit uncertainty are not just in the UK: they are Irish banks. The republic of Ireland’s two largest lenders are among the worst-performing European banks this year.

Shares in AIB (Allied Irish Banks) and Bank of Ireland began a sharp decline when Boris Johnson took over as the UK’S prime minister at the end of July. His determination to pull out of the European Union by October 31 fuelled investors’ concerns that he would engineer the exit even without a trade deal in place. That has left AIB stock hovering near a record

THE IRISH AND BRITISH ECONOMIES ARE CLOSELY TIED AND ECONOMIC TURMOIL THAT ENSUES IF THE UK CRASHES OUT OF THE EU WITHOUT A DEAL IS LIKELY TO HAVE A CONTAGION IMPACT ON IRELAND

low, while Bank of Ireland has risen slightly from its weakest level in almost six years.

The Irish and British economies are closely tied — Ireland is the UK’S fifth largest export market and ninth-largest source of imports — and economic turmoil that ensues if the UK crashes out of the EU without a deal is likely to have a contagion impact on Ireland. Shares in the two banks have been a barometer for investors’ expectations about Irish growth prospects.

Senior European bank analyst at Creditsights, Simon Adamson said: “It’s purely the Brexit effect. It’s more the fear that any economic weakness on the back of Brexit would push itself onto the banks’ balance sheets.” Shares in AIB have fallen about 34 per cent this quarter, in their steepest descent since the three months ended June 2016, Bank of Ireland has fallen about 17 per cent.

The uncertainty surrounding Brexit is already weighing on banks’ profitability as businesses take out fewer loans, according to Daragh Quinn, a European bank analyst at Keefe, Bruyette and Woods.

The souring outlook comes just as the banks showed signs of finally emerging from the 2008 financial crisis, which weighed the lenders down with bad debts as Ireland’s property market crashed, and forced them to take a government bailout. While both AIB and the Bank of Ireland have reduced their non-performing loans, they remain under pressure from the European Central Bank to pare their exposure further.

Historically low borrowing costs have also damped investor appetite, said Anastasia Turdyeva, an analyst at S&P Global.

As central banks cut rates, it becomes more difficult for lenders to generate money from lending operations. However, the underperformance of Irish banks looks more tied to political uncertainty. “A lot will depend on what happens in the UK,” said Quinn.