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Brexit wounds: How firms are coping with prospect of EU divorce


The financial services industry has been left reeling following the UK’s shock vote to leave the European Union.

As politicians, regulators and policymakers grapple with the looming question of “what next?”, financial services firms have been among those seeing dramatic falls in their share price as the markets digest the outcome of the referendum.

Providers, fund groups and banks have all been hammered. But as we make our way through the first working week post-Brexit, it is emerging that some financial firms may be better positioned to withstand market volatility than others.

Money Marketing has spoken to some of the people charged with making sense of it all, and those who will be advising major financial services brand on their next moves. Here we examine the potential winners and losers in the wake of the vote and how the decision to leave the EU will impact their business strategy, at a time when all markets know is uncertainty.

Set to struggle

Earlier this week Money Marketing reported how analysts were already scrutinising which financial firms could take the pain of recent market volatility.

An analyst note issued by JP Morgan Cazenove put St James’s Place, Standard Life and Aviva on top, thanks to a strong capital position and their track record on paying dividends.

Prudential, Legal & General, and the Just Retirement Partnership group were earmarked as the insurers most likely to struggle if volatility continues, due to a capital position described as “not very impressive”.

Shore Capital director Eamonn Flanagan agrees there may be trouble ahead for providers, but believes the uncertainty around Brexit will prove problematic to different firms for different reasons.

He says: “Clearly the backdrop is equity markets are falling, and there are a number of implications for the ‘asset gatherer’ or asset management type of businesses, such as Standard Life, Old Mutual Wealth or SJP. When revenues are linked to assets, in a falling market those revenues are clearly diminishing.”

Flanagan says those firms represent a concern around annual management charges and ultimately future profits. But he argues providers such as Aviva, Legal & General, JRP and Pru represent a balance sheet risk, in terms of the liabilities they are carrying with the size of their annuity books.

Strategic impact

EY insurance director Jason Whyte sees things differently. He says asset managers who have been used to passporting in much of their business into Europe may be looking at their strategic options.

He argues for life and pensions companies the impact of the vote may be less dramatic, as many of them have pulled back in recent years and already have a much clearer geographic focus for their business they did a few years ago.

He says:“Although theoretically it is possible to operate from a base in one EU country and distribute through the rest, in practice the markets and the distribution are sufficiently different that in most cases it makes sense to have a subsidiary in the relevant country. It may lead some organisations to look at what are their strategic plans for the countries they are in, and with the uncertainty hanging over them they might decide to act more swiftly if they have a clear strategy.”

EY was already forecasting a wave of activity on mergers and acquisitions activity ahead of the referendum. Whyte expects this to be less concerned with one company buying another, but more in the vein of Axa selling off Elevate to Standard Life, and the possible deal to sell off Cofunds.

He says: “It may well be that the waiting period crystallises firms’ determination to tidy up a business, particularly if by selling a subsidiary they can realise a reasonable price and save themselves from a lot of the transitional impact. If you have one or two European subsidiaries that are sub-scale, you might think about not hanging onto them.”

Hargreaves Lansdown senior analyst Laith Khalaf is wary of recent research from the Institute of Directors that suggested a large proportion of businesses plan to delay investment and hiring, and to put off making strategic business decisions.

He says: “That survey took place very close to the decision on Brexit. There were probably a lot of knee-jerk reactions, both in the market but also understandably among businesses as well. I wonder whether in the fullness of time that knee-jerk effect becomes a bit more moderated.

“Ultimately companies adjust to new economic circumstances in their attempts to continue to make a profit. The unsettling thing is we do not know what those circumstances are going to be as yet and we are not going to know for some time.”

What about the banks?

Bank have also been burned by the EU fallout, with trading in Barclays and Royal Bank of Scotland shares temporarily suspended after they each saw their share price fall by more than 10 per cent on 27 June.

Flanagan says: “Banks have a lot more gearing than the life insurance companies would have, meaning the liabilities divided by the shareholder funds will be materially higher. There are specific concerns about property and housing market exposure [following the vote], and banks are highly geared toward that market.”

Khalaf notes Henderson’s decision to cut the price on its UK Property fund by 5 per cent based on uncertain property valuations following the Leave vote.

He says: “This is interesting, because it is basically saying now that the Brexit vote has taken place, it is really difficult to price property. There is a lack of commercial property transactions, but obviously something very significant has happened, and this is valuers saying we don’t know what effect this is going to have on the market. You could probably make the same case for a lot of the stocks on the stockmarket, but they are traded every second.”

Cazalet Consulting chief executive chief executive Ned Cazalet says this is not just a problem for the banks.

He says: “As a banker you want to have something known as the ‘endowment effect’, where you take money in, pay Mrs Miggins 1 per cent and lend it out at 3 per cent. If rates continue to be low or negative, there is no gap between the two. “So why the leap from insurance companies to pension providers to banks? Insurers, particularly those in continental Europe, are investing their money in government bonds. They then switch to corporates except most of these corporate bonds are actually issued by financial institutions, other insurance companies and banks. This creates a contagion risk.”

Not a crisis re-run

However, analysts are keen to stress that should the recent falls in markets prove to be sustained, banks and providers are in a much better place to cope with these headwinds.

Flanagan says: “The comments made by Bank of England governor Mark Carney have been quite instructive. He has referenced the fact that Basle III, the new regulatory regime impacting the banks, is doing what it says on the tin. It is providing that extra cushion for shareholder, and that should be recognised to a greater extent than the markets have given credit for.

“The market is saying: ‘This is a re-run of the credit crunch – hit the banks as hard as you can. But their balance sheet positions are materially different to what they were eight or nine years ago.”

Cazalet agrees banks and providers are better equipped to deal with market turmoil thanks to higher capital requirements.

But he adds: “For the banks, they may have capital, but the question is if rates are low, can they make money?”

Whyte says: “As long as it’s just volatility, we shouldn’t see anything dramatic happen. The real danger is if the market concludes this is going to be a long, drawn-out period of uncertainty and it starts pushing the economy back into recession. That is going to be unpleasant.

“But firms have been through this in the recent past and have put measures in place so that although it won’t be comfortable, it will not have the same catastrophic impact the financial crisis did.”

Khalaf adds: “Potentially this is going to take a long time to work through. It may dawn on people that we may not be talking weeks and months until we get some certainty about what the plan for withdrawal looks like. When that happens, markets and businesses might conclude they have to move on from this issue. But they might not.”



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There are 16 comments at the moment, we would love to hear your opinion too.

  1. 95% of those I have spoken to are hugely depressed – as am I.

    Churchill’s words keep ringing in my ears:

    “The best argument against democracy is a five-minute conversation with the average voter. ”

    This of course from the man that the Brexiters no doubt admire hugely.

  2. 96% of those that I have spoken to are hugely excited – as am I
    Churchill’s words keep ringing in my ears:
    “To improve is to change; to be perfect, is to change often”
    This of course from the man that the Remainers no doubt admire hugely.
    Two sides to every story.

  3. @Ted

    Change should be for the good – not a retrograde step. No man is an island, but it seems that 17 million prefer it that way. I wonder how pleased you will be when your pension and investments melt away and you stand in the slow moving queue with all the non EU people when going on holiday.

    • Ref your statement about the queues at airports. Any time I come through ANY EU airport, the queues for the NON EU passports is virtually non existent as the vast majority of those travelling are EU citizens so the lines are always huge. Virtually nothing on the Non-EU passport line. Personally I can wait because I can get to the villa in about 20 minutes from touch down as apposed to 35/40 so bring it on

  4. 100% of those I have spoken to believe that politicians are liars!
    Of that there can be no doubt!

  5. This is what happens when misinformed people are allowed to vote on a subject they do not understand. The referendum should never have taken place in the first place.

    Every day I have heard about a different company that has said they will either review their UK operations, or expect to cut jobs and move them into mainland Europe. Well done Brexiteers.

  6. Dear Windgers. Stop bleating on about it. The vote was cast, you lost. Get behind the changes that are coming and take all the positives out of it you can. The EU is an economic basket case whose insatiable obsession with centralised regulation will be its downfall. There is just too much wrong with the EU in its current format for it to survive long term. If they change the whole model to one simply for mutually beneficial inter country trade then they may be able to save themselves and that would be for all of EU’s benefit. However the highly paid Eurocrats will not do this as they will be putting themselves out of a job. As they are not fit to do anything else they too could be looking for work. As for pension values going down the swanny, that is utter crap. Markets will continue to increase and decrease as they always have done. they have to find their own level. Long term Brexit will be good for the UK.

  7. Marty when you look at the positives for Brexiting, they are far outweighed by the negatives. What the leave camp did was spin lies with their famous battle bus slogan and their “project fear” taunts. I assume you aren’t an IFA because 90% of us wanted to remain in the EU and we also know that despite the markets recovering in $ or euro terms things are much worse than they appear. Unless you have been well advised and have a widely diversified portfolio of overseas stocks, bonds and commodities. Brexit wasn’t project fear, it was project ignorance at all levels.

  8. Well I am sure your clients would like to receive suitability reports that are spell checked, if your comments above are anything to go by.

  9. Harry and Sanjay – your attitude seems to be that because 17 million voters disagreed with us they must be idiots.
    Nobody is suggesting trade with the EU Member States stops. Those Member States are net gainers from the trade to the tune of £68 billion, so they are not going to want trade with the UK to stop

  10. @David Severn

    Obviously Sanjay and I disagree with Brexit. We can argue back and forth all day. But there is one point which I think Brexiters should feel embarrassed about.

    Whilst I perfectly concede that there are those on the Brexit side who are perfectly intelligent and are by no means racist, there are so far no figures to show how many on either side were less well informed or had overt prejudices.

    However one thing is for sure Brexiters do have some very unsavoury fellow travellers, which as far as I am aware doesn’t seem to be the case for Remainers. Personally I wouldn’t want to be associated with those sort of people. We have all seen them on the TV and in the media.

  11. Ps

    They are going to have to make an example of the UK (if UK will still be out title) pour encourager les autres. As for their trade with us, please bear in mind that when one buys from anyone, one has to have the money to do so. We may well not have quite so much to spend abroad as hitherto. Perhaps many will not buy a new BMW, but a small Nissan (made in Belgium or France perhaps) instead.

  12. Re. the spinning of lies – if Blair / Brown / Major et al have it right, current market positions will be meaningless. Remember, now we’ve voted “Leave”, the Irish peace treaty will fail and we’re heading for war in Europe.

    Perhaps recommend your clients invest in war industries?

    If politicians were not prepared to issue the electorate with facts and THEN extrapolate their opinions of those facts, they should not have held a referendum. Expecting the public to make a balanced, rational choice based on the soundbite-based PR campaign we got was nonsense.

    Having held that referendum, they should not allow unelected “statesmen” like Tony Blair, who appears to believe that “remaining is an option” anywhere near the process. He is not accountable to the people who voted in any way, shape or form.

  13. @ Lee D

    Actually Cobham looks like a good investment prospect at present and it does seem as if defence spending is on the up.

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