By Steve Slater
LONDON, July 11 (IFR) - Major US and European investmentbanks face extra costs of US$1.5bn a year combined if they needto move operations out of London as a result of Britain leavingthe EU, analysts at JP Morgan have estimated.
For eight major US and European banks that would equate toan average 2% of their annual expenses, the analysts estimated.It would probably last for about five years, so cost $7.5bnbetween them over that time.
JP Morgan analyst Kian Abouhossein said banks will facehigher costs to move operations from London to other cities andto restructure in the event Britain does not negotiatenear-equivalent terms for financial services "passporting" withthe rest of the European Union.
"In the tail-risk scenario, we believe that the investmentbanks may have to set up legal entities, relocate staff andprocure licences and real estate licences in Europe, which willlikely result in meaningful cost increases during the transitionperiod," Abouhossein said in the note released on Monday.
That would cut average return on equity across the banks to6% in 2018 from an already low forecast of 6.5%, well belowtheir average cost of equity - which would rise to 14% forEuropean banks in 2018, he estimated.
The eight investment banks covered by the research are UBS,Credit Suisse, Deutsche Bank, Societe Generale, BNP Paribas andBarclays in Europe and US rivals Goldman Sachs and MorganStanley.
Analysts at Deutsche Bank last week estimated Brexit willlead to platform duplication and higher costs, which could cutreturn on equity for European banks by 50bp-100bp.
The full implications of Britain's exit from the EU remainhard to assess, however. Since the vote on June 23 to leave theEU there is mounting concern about the terms of passporting forfinancial services firms and lawyers have said it is likely totake at least two years to clarify.
Passporting allows firms in one EU country to providefinancial services to clients elsewhere in the single market.Britain's passporting arrangements could be scrapped or watereddown, making it less attractive as an EU gateway for US, Swissor Asian firms.
The JP Morgan report said there were three potentialoutcomes: a 'blue sky' Norwegian scenario where EU passportingcontinues; a 'third country' agreement under MiFID II that willallow equivalent status for UK-authorized firms selling capitaland derivatives markets products from the UK to the EU; and a'tail risk', whereby material operations are moved from the UKto the EU to obtain market access.
The analysts said their base case is the second option of athird country agreement.
Under the tail risk scenario, sales trading and riskmanagement operations may move to an EU state, followed byassets, capital and technology, Abouhossein said.
Banks have said it is too early to say what their plans are,but senior bankers say firms are assessing options and will needto move relatively swiftly, even if decisions to actually movestaff can be delayed for some time.
"Global IBs will not move their operations immediately, butwill not wait until formal Brexit either to make decisions,considering the complexity of such tasks and the need forclarity soon to operate as going concerns," Abouhossein said.
Barclays (BARC)
