LYG Lloyds Banking Group Plc

By Sara Schaefer Muñoz, Jenny Strasburg and Giovanni Legorano 

Europe's struggling banks were dealt a fresh blow Friday as the U.K. voted to leave the European Union, sending share prices plunging and fueling concerns about banks' long-term profits and health.

Following an announcement of the 'Leave' decision, which was largely unanticipated by Britain's financial sector, the Stoxx Europe 600 Banks index fell 14% Friday, compared with a decline of just 7% in the broader index. U.K. bank Barclays PLC was one of the hardest hit, with its shares falling nearly 30% in early trading before clawing back to close down 20%, at 153.51 pence.

Shares of banks on the Continent were also punished, with Italy's UniCredit SpA closing down 23% and Spain's Banco Santander SA down 20%, as investors feared the U.K.'s 'Leave' outcome would both harm investment banks' cross-border business and spur an economic slowdown that could weigh on consumer loans.

"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."

The British exit, or "Brexit," could disrupt trade with the continent and harm the region's business sector, which could cause loans to U.K. corporations to sour, said banks and analysts. French bank Dexia SA said in a statement Friday that it "will closely monitor its exposure counterparties in the United Kingdom," where it has assets of EUR22 billion in both the U.K. public and private sector.

The exit also opens up a two-year period of uncertainty as the U.K. negotiates its withdrawal from the union.

It presents "heightened levels of complexity and uncertainty to financial institutions and markets alike," said former Deutsche Bank AG co-CEO Anshu Jain, who is now advising financial firms.

Banks reliant on their investment-banking units also suffered Friday, since their London-based cross-border trading and clearing operations could face disruption or relocation when the U.K. severs ties with bloc. They may also have to grapple with new or complex regulation.

"You've got a real muddle of issues," said Joseph Lynyak, a banking regulatory partner at U.S. law firm Dorsey & Whitney. "Sorting them out could be costly and problematic."

Shares of Switzerland's Credit Suisse Group AG closed down 13.94% and shares Deutsche Bank, Germany's biggest lender, were down 14.13% at the close, to EUR13.36.

Across executive suites and office buildings in London's financial heart on Friday the mood was generally one of disbelief and disappointment, said bankers and executives, as they woke up to falling share prices and the possibility that London could lose its place as a global financial hub.

"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."

J.P. Morgan Chase & Co. CEO James Dimon, with asset-management chief Mary Erdoes and corporate and investment bank head Daniel Pinto, told employees in a joint morning note that the U.K. vote was a "seminal moment" that could cause the bank to move employees and restructure parts of its business. The details can't yet be known, they wrote, and for now client relationships are unchanged.

The U.S. bank has 16,000 employees in the U.K., the executives wrote: "Regardless of today's outcome, we will maintain a large presence in London, Bournemouth and Scotland, serving local clients as we have for more than 150 years."

But Luca Azzani, a consultant at headhunting firm TW Partners who had stepped outside his central London office Friday, wasn't optimistic about London banks post the Brexit vote.

"They will fire people because many deals will be on standby, a lot of people won't be able to be useful in the short-term, and it could be difficult to hire people when the sterling is so low," he said.

Trading desks at large banks in London reported a sharp slowdown by midday Friday, with liquidity for trades decreasing as investors clung to their cash amid uncertainty. Other bank desks braced for hedge fund clients' losses or gains made on bets during the wild market swings.

Bank executives said there was no pressure on interbank funding, which is crucial to keep financial markets functioning. The Bank of England and the European Central Bank have made billions of euros and pounds available to prevent a 2008-style credit crunch with the referendum vote.

Some executives felt the sharp selloff in bank stocks Friday was overdone.

Gianni Franco Papa, deputy general manager of UniCredit, shares of which closed down 23.7% Friday, said it is too early to make forecasts on the medium-term economic and financial effect on the U.K., Europe and the rest of the world and said London will remain an international financial hub.

"It would take years to build a new financial center in Europe comparable to London. As a consequence we have no plans for any material changes in the near future," he said.

In Spain, where the referendum outcome hammered the shares of all Spanish banks, a team of executives at a major domestic Spanish bank used their Friday morning meeting to instruct bankers in their branch network to head off any panic and to reassure British citizens who have mortgages with the lender.

Albert Coll, institutional policy and market relations director for Spain's Banco de Sabadell SA, also felt investors were too quick to dump bank shares. Sabadell's share price plunged 19.3% on Friday, in part because of its exposure to the U.K. where it bought TSB Banking Group PLC last year.

"Sometimes, the average individual on the street has a longer-term perspective than people sitting in the city, who react on a short-term basis," said Mr. Coll, noting that even if the pound falls as much as 10% this year, that would trigger a manageable 2% decline in Sabadell's net profits. "The right attitude is to wait and see what agreements are negotiated between the U.K. and other countries."

--Jeannette Neumann and Lucy Burton contributed to this article.

Write to Sara Schaefer Muñoz at Sara.Munoz@wsj.com, Jenny Strasburg at jenny.strasburg@wsj.com and Giovanni Legorano at giovanni.legorano@wsj.com

(END) Dow Jones Newswires

June 24, 2016 14:35 ET (18:35 GMT)

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