Financial sector seen to be major loser post Brexit

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Companies that provide financial services have long been considered attractive investments, particularly for handsome dividends paid by many banks and insurers. Investors now need to reappraise the sector in light of new Brexit-related risks.

Banking stocks

The UK’s decision to leave the European Union (EU) is negative for the banking sector as it could trigger a recession and a reduction in interest rates. Those two factors would be very bad for UK-focused retail banks.

Any fall in economic growth resulting from Brexit could hit the quality of bank assets. This is especially the case with falling property prices.

Lloyds Banking is a prime example of a bank at risk from Brexit. It has a large mortgage book and a fall in valuations could see it having to meet higher capital requirements.

That hasn’t stopped investors from wanting to own its shares following a near-30% slump as soon as the markets opened following the Brexit news on 24 June. Lloyds was the most bought share on AJ Bell Youinvest’s platform on the day.

Royal Bank of Scotland and CYBG are two more banks viewed by analysts as losers from Brexit.

Lloyds and RBS would face a large bill should they have to separate Scottish operations if Scotland votes to leave the UK. In a Northern Ireland breakup, RBS would also have to deal with its Irish division, Ulster Bank.

Among the FTSE 250 lenders, OneSavingsShawbrook and Aldermore face the risk of being hit by macroeconomic factors.

A weaker pound could be good news for those generating the bulk of their revenue from overseas. That makes HSBC worth a closer look. Standard Chartered has no UK exposure apart from London headquarters where US dollar-denominated running costs will benefit from the fall in sterling.

Life insurers

Brexit uncertainty will hit life insurance providers. They will have to renegotiate their access to the European Union, probably by forming bilateral agreements.

Solvency II regulation, which sets the amount life companies need to hold in reserve to cover their risks, is not expected to be affected. ‘Any UK variations to this would remain closely aligned to EU rules,’ say UBS.

The life company expected to suffer less, if at all, from Brexit is Prudential, while Standard Life and Aviva will experience some impact.

A weak pound will see Prudential benefit from 72% of its earnings generated overseas, split between Asia (30%) and the US (42%), but group accounts are reported in sterling so there will be foreign exchange benefits.

Asset managers

Earning a margin on their assets under management (AuM), asset managers are always big losers when financial markets fall. For example, more than half of Henderson’s AuM is in equities, which were hammered on the referendum result.

‘In the asset manager sector we expect large negative mark-to-markets and an impaired flow outlook to be only partially offset by a weaker sterling,’ says RBC analyst Peter Lenardos.

Ashmore, which has most of its assets outside equities, and Man Group, which offers a range of products with less correlation to equity markets, are the best positioned according to Lenardos.

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