The prevailing UK stock market uncertainty amidst slowing global economy has led the financial sector reorganising things ahead of the Brexit resolution. To mitigate the repercussions of a ‘no deal’ scenario and broaden business horizons, banks have begun relocating operations, staff and funds to Europe. Frankfurt, Luxembourg, Dublin and Paris have been identified to be the key preferred locations given the entire landscape. Certain banks are even sparing contingency funds to assist clients to help manage Brexit. Many banking sector groups have indicated to have a shift of jobs from UK to other favourable locations. However, they are still following a wait and see approach until the decision comes out. Moreover, EU and UK are working to maintain contractual continuity to provide customers with enough legal and regulatory assurance.
The case of UK firms losing access to the flourishing USD19 trillion Europe economy, is being expected to render Britain to be a far less lucrative place to do business, as per many market experts. As per some reports, London is expected to lose over EUR800 billion of assets to certain parts of Europe by March 2019. While the picture is quite hazy, getting too negative on the situation can be detrimental to the equity market outlook specially when the banks are concerned.
Looking at the banks over the period from 2016 to 2018, most of the leading UK banks enhanced their market capitalisation. For instance, HSBC Holdings had the market capitalisation of EUR166 billion followed by Lloyds Banking Group and then Barclays with EUR39 billion in year 2018. Currently, the market cap numbers are a bit lower given the recent wipe out in prices. On January 07, 2019, many of the key banks still witnessed some price rise.
As per Barclays, they need clarity on the terms of agreement before they can plan firmly. Nonetheless, the bank claims to be well prepared for a hard Brexit as it established its primary subsidiary in Ireland as the main European hub. About, 150-200 additional jobs have been created in Dublin to sustain trading with the European Union. Besides employing local people in new subsidiaries across Europe, many senior employees are also being transferred as per convenience and scope.
Overall, the macroeconomic uncertainty is weighing somewhere on the performance of the banks. Many banking giants have been facing slump in terms of performance in the past quarters. However, with any ease in the uncertainty surrounding Brexit over the coming months, banks like Barclays might exhibit some resilience in the UK equity market.
London has long been a key financial hub and the situation currently sets many investors and key market players keep a close watch on the London stock exchange and the evolution of stock movement over time.
The banks are hopefully speculating that Britain must act pragmatically to let the banks trade securities across Europe from London and to save the UK stock market from a major disruption. On the other side, a no favourable Brexit deal might pose risks to banks unless they demonstrate some stability and resilience in a case of the above event inspired crisis. Thus, a lot will be based on factors such as exposure to volatility, past performance during challenging conditions and funding position, which will set the conviction for the banks to perform. As of January 7, 2019, Sterling GBP/USD remained volatile but GBP still managed to increase to a high of about USD1.28 by mid-day.