Brexit set to raise UK banks’ costs 4% and capital needs 30%

Brexit will push up costs for banks by as much as 4 per cent and their capital requirements will rise up to 30 per cent, according to the most detailed assessment yet of what Britain’s departure from the EU means for the sector.

The findings by consultants Oliver Wyman will make grim reading for its bank clients, many of which are struggling with low profitability. They come a day after HSBC became the first lender to put a price tag on Brexit, saying the immediate disruption would cost it $200m-$300m.

Stuart Gulliver, chief executive of HSBC, said $1bn of revenue in its global banking and markets unit would be put “at risk” by Britain leaving the EU. But he said it planned to protect this revenue by moving up to 1,000 of its 6,000 UK investment banking jobs to France.

The pace of announcements about banks’ Brexit plans has picked up in recent weeks, partly because of pressure from the Bank of England for them to submit their plans for coping with the “worst-case scenario” of a hard Brexit, severing access to EU clients. The UK is set to leave the EU in March 2019.

Such plans are expected to cause duplication of resources and capital for large banks in Europe, Oliver Wyman warned. It said this may cause some banks to abandon some European activities altogether and shift resources to the US and Asia.

“At the moment what everyone is doing is planning to be able to continue doing what they already do after a hard Brexit,” said Matthew Austen, head of European corporate and institutional banking at Oliver Wyman.

“Once you have done that, if you have a strong performance in the US or Asia, then that is when you start to look at the post-Brexit foundations and it will prompt you to look at what the right business mix is,” he said.

The consultancy, which has access to detailed figures on almost every bank from the benchmarking work it does for the sector, estimated that 2 percentage points would be knocked off wholesale banks’ return on equity in Europe because of the disruption.

Wholesale banks — which serve corporate and institutional clients — would need to find $30bn-$50bn extra capital to support their new European operations, an increase of 15 to 30 per cent, it estimated. The industry’s annual costs would rise by $1bn, or 2 to 4 per cent.

“Any time you split a portfolio up — whether it be a credit portfolio or a trading book portfolio — you lose the benefits of diversification that allow you to reduce the capital you hold against it,” said Mr Austen.

Many banks have decided they cannot afford to wait for the political uncertainty over the outcome of Brexit negotiations to clear before implementing their plans and have started finding office space and applying for licences with regulators.

“Once everyone is back from this summer holidays, the annual planning process will really start in earnest and at that point people will start planning for next year’s costs and returns,” said Mr Austen.

“As you move into the back end of this year and the start of next year you have to start making those decisions. You would want to have moved people by next summer if they are going to get their kids into school in September.”

The consultancy stuck to the forecast it made last year that Brexit would drive 31,000-35,000 financial services jobs out of the UK, of which 12,000-17,000 would be in banking. In a worst-case scenario, in which euro clearing is shifted to the eurozone, banks could shift as many as 40,000 jobs out of the UK.

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