Banks on both sides of the Atlantic were pummeled by the U.K.'s
decision to exit the European Union, hit by concern about the
potential for big trading losses, slowing economic growth and the
prospect of even lower interest rates for longer.
Even so, the severity of share-price falls highlighted the
widening divide between how markets perceive the strength of U.S.
banks and their overseas peers as the damage was far worse in
Europe. The U.K. decision came just hours after the U.S. Federal
Reserve in the first round of its annual bank "stress tests" said
the biggest U.S. banks were strong enough to withstand a
hypothetical recession and sharp market falls.
In the U.K., shares of Barclays PLC fell around 30% at one point
Friday, although they later recovered somewhat. It and Royal Bank
of Scotland Group closed the day down around 18%.
Among continental European bank stocks: Deutsche Bank AG fell
around 14%, France's BNP Paris SA tumbled more than 17%, Spain's
Banco Santander SA dropped nearly 20% and Italy's UniCredit plunged
23%.
"Europe is weak already in terms of economic growth, and
[Brexit] isn't going to help matters," said Laith Khalaf, an
analyst for U.K. investment manager Hargreaves Lansdown. "That's
the risk you are seeing priced in today."
Losses in the U.S. weren't as severe, but were dramatic. Morgan
Stanley, the smallest of the big U.S. banks by assets, fell about
10%; Citigroup Inc., seen as the most global of the U.S. banks,
dropped around 9%. Even regional, U.S. focused banks, such as U.S.
Bancorp and PNC Financial Services Group Inc., were hit due to
fears that even lower interest rates could pressure profits
further.
The drubbing followed what had been a tense night for many
bankers. At J.P. Morgan Chase & Co., the biggest U.S. bank by
assets, some of the firm's top executives had a call at 5 a.m. New
York time, said Daniel Pinto, chief executive of its corporate and
investment bank and head of Europe, Middle East and Africa. He
added that he had been in touch with Chief Executive James Dimon
several times through the night.
At Citigroup, Chief Executive Michael Corbat stayed up until
about 11:30 p.m. Thursday watching the results come in, according
to a person familiar with the matter. He slept for an hour and a
half before getting on the phone at 1 a.m. with other executives.
He slept again for an hour at 4 a.m., before arriving at the office
at 6 a.m. Friday.
Underscoring the situation's severity, the Fed's point person on
regulation, Governor Daniel Tarullo called the heads of several
large U.S. financial institutions Friday to gauge how those firms
and markets were faring, according to people familiar with the
matter.
Like other financial firms, J.P. Morgan is still assessing what
the Brexit vote means. The bank employs around 16,000 people in the
U.K. At Morgan Stanley, top executives wrote a memorandum to
employees Friday to quell rumors that it would move employees from
its U.K. offices.
In terms of the big U.S. banks' direct exposures to Europe,
Goldman Sachs Group Inc. got around 26% of its 2015 revenue from
the continent, more than any of its peers, according to analysts at
Wells Fargo & Co. In terms of balance-sheet risk, J.P. Morgan
had around $144 billion in loans, securities and other exposure to
countries in the EU at the end of the first quarter, with around
35% of that in the U.K., according to a securities filing.
For European banks, the potential outcomes are bleakest. "I'm
afraid that this is not such a good day for Europe," Deutsche Bank
Chief Executive John Cryan said in a statement. "At this stage, we
cannot fully foresee the consequences, but there's no doubt that
they will be negative on all sides."
Europe's banks were already retrenching before the vote and
markets remain fearful many don't have thick enough capital
buffers. Even before the vote, shares were valued at levels that
signaled distress; Deutsche Bank trades at just 30% of its book
value, or net worth.
Contributing to the woes of European banks is an anemic economic
backdrop despite extraordinary stimulus measures from the European
Central Bank that have included buying bonds and the introduction
of negative rates for some deposits banks keep with the central
bank.
One big question for U.S. banks is how any further economic and
market disruption in Europe will affect already subpar U.S. growth.
Worrying, even if it doesn't ding the economy too much, market and
political turmoil could keep the Federal Reserve from raising
interest rates further.
That means banks could continue to labor under superlow rates,
which weigh on profits. The yield on the U.S. 10-year Treasury
note, for example, fell to 1.57% Friday from 1.74% before the U.K.
decision Thursday.
But while bank stocks were battered, credit markets weren't
panicking. The cost of insuring big, U.S. banks against default
jumped Friday, but remained low compared with the cost during
market turmoil a few years ago. Bank executives in London said
there was no pressure on interbank funding, which is crucial to
keep financial markets functioning.
What's more, there weren't visible signs Friday of bank
distress. That is a difference between today and 2008, according to
Karen Shaw Petrou, managing partner of research firm Federal
Financial Analytics.
"The reason is market confidence in the resilience of the
largest U.S. and U.K. banks—this time, counterparties know they can
count on these banks for the funding that is their lifeblood," she
wrote in a note Friday. "What's going on now is ugly, but not
cataclysmic."
Peter Rudegeair and Ryan Tracy contributed to this article.
(END) Dow Jones Newswires
June 24, 2016 17:55 ET (21:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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