Financials Trounced in Brexit Results
Ever since the Brexit results rolled in, the media has been completely obsessed with talking about the British pound. But there are plenty of other investments that also crashed and burned, namely bank stocks—they got pummeled last Friday.
Just look at the financials listed on European stock exchanges. The Stoxx 600 Banks Index lost 14.28% of its value on Friday. It doesn’t matter where those banks are headquartered; the market is taking huge bites out of any bank with counterparty risk in British assets.
U.S. banks weren’t spared in the market sell-off. If anything, they took the brunt of the attack, suffering huge losses in market capitalization. It was the worst day of trading for U.S. bank stocks since 2011.
A lot of the losses happened because no one quite knows how the Brexit will impact the financial sector. Analysts at ING tried to crunch the numbers, but they concluded that “[q]uantifying the impact from a possible Brexit is anything but easy.” (Source: “Brexit: here’s how top economists are reacting to Britain’s shocking vote,” Vox, June 24, 2016.)
Why? Well, the problem is that a lot of the risk depends on how others react to the Brexit. For instance, Italy and Spain could hold their own referendums to leave the EU. The countries could be inspired to hold their own version of a Brexit, which would effectively end the European Union and possibly the eurozone. Alternatively, they could look at the disaster caused by the Brexit as a warning to not abandon the dream of European integration.
There’s simply no way of accurately measuring the reaction at this time, but we do know that these wild currency swings could seriously hurt some banks. The market has been proving that since the Brexit results poured in. Here are the five banks that lost a ton of value following the voting.
1. Morgan Stanley (NYSE:MS)
In this age of interconnected banks, there was simply no hope of containing the fallout within Britain’s borders. Morgan Stanley was eviscerated by investors on Friday, losing more than 10.15% of its market capitalization. To be clear, that means the bank lost more than a 10th of its value.
2. Citigroup Inc (NYSE:C)
As the original mega-bank, Citigroup helped create the global financial system that is now dragging down the stock. Think about it: Citigroup has most of its assets denominated in U.S. dollars. Why would the market turn bearish on the stock unless there was significant exposure there? This is the direct consequence of interconnectivity, plain and simple. That’s why investors wiped out 9.36% from the firm’s share price.
3. Deutsche Bank AG (USA) (NYSE:DB)
Over in Germany, shares of Deutsche Bank were down a staggering 17.49%. It was a shocking downturn for a bank that does significant business in both the United Kingdom and the rest of Europe. What’s interesting is that Deutsche Bank actively campaigned to keep Britain in the EU. The company even threatened to move its U.K. operations back to Germany if Britain voted to leave. We’ll see how that plays out now that the Brexit is for real.
4. Barclays PLC (ADR) (NYSE:BCS)
British banks were, predictably, the worst hit. Shares of Barclays plummeted by 20.48% after the results were tallied. Losing more than one-fifth of its value can be damaging to any company, but it’s especially bad for a bank, since banks are leveraged businesses.
5. Royal Bank of Scotland Group PLC (NYSE:RBS)
The slaughter of Barclays stock looks bad until you look at what happened to the Royal Bank of Scotland. RBS stock fell by 27.5% in a single day—a single day! I remember a short while ago when the firm was worried about a Scottish secession from the U.K. Now they have to deal with something far, far worse.
The Brexit may have been the cause of this particular crash, but it proves a much larger point about bank stocks: they’re too interconnected. The risk from one bank carries over to others in ways we don’t fully understand. There’s no way of knowing where the buck stops. Critics of banks often accuse them of being black boxes and, unfortunately, the aftermath of the Brexit vote suggests the critics may be right.