Brexit ‘poses passporting question for non-UK investment banks’

The referendum vote in favour of the UK leaving the European Union (EU) will pose new challenges for non-UK global investment banks’ (GIBs) pan-European business models, as they face the potential loss of ‘passporting’ rights that allow them to serve clients across the EU and UK, says Moody’s Investors Service.

In a newly-published report, entitled ‘Brexit-related Costs and Uncertainties Pose Fresh Challenge to Non-UK GIBS’ Pan-European Business Models’, the credit ratings agency (CRA) says that while Brexit may have significant consequences for non-UK GIBs’ operating models in the EU, it expects these added operational challenges and costs to be manageable in the context of their global earnings and operations.

“We expect non-UK GIBs to incur additional costs and revenue pressures as they reconfigure their European businesses in response to a Brexit outcome,” says Michael Eberhardt, a senior credit officer at Moody’s.

“This comes at a time when European investment banks are facing pressures from subdued market activity, regulation and competitive pressure that have depressed investment banking and trading revenues.”

The costs for non-UK GIBS to adapt to the UK leaving the EU will relate closely to whether only client-facing staff or more substantial parts of the GIBs’ pan-European operations will need to be reconfigured, suggests Moody’s. Although the agency expects any immediate revenue loss to be modest, Brexit’s lasting credit effects on GIBs will depend on the nature of the new EU/UK trade model.

In addition, the two-year timeframe in which to negotiate withdrawal from the EU places considerable pressure on firms to adapt organisational structures, reposition their UK and EU businesses, and address most operational and personnel issues. The report suggests that the added costs and operational challenges, however, will likely be manageable in the context of the global earnings and operations of these GIBS.

A couple of key mitigating factors will help to keep the credit strength of these banks consistent with their current rating levels. For example, many firms are already licensed to operate from multiple jurisdictions within the EU, including the UK. These firms have investment banking, wealth and asset management businesses licensed through local subsidiaries or branches, and firms are assessing their options to reconfigure their footprint in key markets in order to continue to serve their UK and EU clients, according to Moody’s.

In addition, the global scope of these firms’ franchises limits the potential impact of Brexit on their overall revenue and income.

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