BCS Barclays PLC

By Max Colchester 

LONDON--Barclays PLC executives spent a couple of days holed up in a "situation room" ahead of last week's Brexit vote to ensure the bank could handle anything from panicked customers to wild algorithmic trading.

When they came up for air, investors raised a different concern: does Barclays need to rethink its strategy?

British banks, packed with huge stocks of cash, rode out the wild market swings in the immediate aftermath of Brexit. But now analysts are concerned about how they will deal with the longer-term problems: namely, an economic slowdown, a potential cut in interest rates and a fall in U.K. house prices.

Moody's Investor s Service Tuesday night changed its outlook on the U.K. banking system from "stable" to "negative." And on Wednesday Bernstein Research said that the huge uncertainty made several lenders "almost uninvestible." Already pressure is rising on executive teams to accelerate cost-cutting plans and investors are bracing for dividend cuts.

Bankers aren't the only ones flummoxed. Investors, who before the vote were scrutinizing the minutiae of bank regulatory rule changes, are now trying to predict how British politicians will handle negotiations with the European Union. "It's outside of most people's comfort zone," said Thomas Moore, investment director at Standard Life Investments.

Barclays, which has seen its share price slump 30% since last Thursday, finds itself in the eye of the storm. Following his arrival last year, Chief Executive Jes Staley pledged Barclays would remain diversified with a sizable investment bank and that his team could boil down a mountain of unwanted assets by 2017.

Analysts say that the uncertainty around Brexit could hamper the bank's plan to cut costs as it may have to relocate certain investment banking operations outside the U.K. It could also dull investor appetite for some unwanted assets. "It puts a spanner in the works," says Joseph Dickerson, a banks analyst at Jeffries.

Barclays currently has no plan to alter its strategy, according to one senior executive. Around 60% of Barclays' investment banking revenue comes from the U.S., and a fall in sterling makes dollar generated revenues more valuable. So far, volumes in foreign currency trading have managed to offset falls in other products across Europe and plans to sell down its "noncore" unit are on track, the executive added.

Instead, the pain will likely be felt in its more vanilla businesses. Barclays' credit cards unit, which is the bank's profit engine, could be hit if people cut spending amid a slowdown. The bank is also exposed to corporate lending in the U.K. which could see a pickup in bad loans if investment slows.

The picture isn't much brighter for other British banks. Royal Bank of Scotland Group PLC was struggling to make profits even before Brexit happened. The 73% state-owned lender is still spending billions restructuring following a bailout in 2008. And to make matters worse it will likely be hit by a multibillion fine from U.S. regulators for having sold on toxic subprime mortgages during the crisis.

Against that backdrop, Brexit doesn't make life easier. Scotland may again push for independence, raising the question of where the Edinburgh based bank will be located. Moving its headquarters alone could cost around GBP1 billion, according to analysts at Jeffries. The government's plans to privatize the bank have been scrapped for now, according to one person familiar with the matter. Analysts expect the bank to accelerate cost reductions later this year.

Lloyds Banking Group PLC, the poster child of postcrisis restructuring, made a point of ditching its global operations to focus on the U.K. Today 95% of its exposure is to the British economy, according to Bernstein Research. Even before the vote, it was speeding up its cost cuts. On Wednesday it announced 525 job cuts.

HSBC Holdings PLC, with roughly two-thirds of its $1.1 trillion risk-adjusted assets outside of the U.K. and Europe, has fared the best so far with stock investors. Its shares Wednesday traded around the same price as before the vote. But analysts caution that the bank, one of the world's largest, still faces pressures in its U.K. mortgage and unsecured lending. Flush with customer deposits in the U.K. and Asia, HSBC is also set to feel the ongoing drag from low interest rates cutting into its net interest margin, or the difference between what it pays to borrow and what it charges to lend.

U.K. lending has been keenly priced, and HSBC just days before the referendum started offering U.K. home buyers the lowest rate ever from a major lender, at 0.99%. Some analysts say it's inevitable HSBC will have to hold or even cut its dividend.

Margot Patrick contributed to this article

Write to Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

June 29, 2016 10:28 ET (14:28 GMT)

Barclays (NYSE:BCS)
Historical Stock Chart
From Mar 2024 to Apr 2024

Barclays (NYSE:BCS)
Historical Stock Chart
From Apr 2023 to Apr 2024