(Bloomberg) -- As the likelihood of Britain crashing out of the European Union without a trading agreement rises, Citigroup Inc. estimates that such an event could cut domestic banks' earnings by as much as 25%.
A “no-deal exit” would curtail the revenue of high street lenders as economic growth slows and interest rates remain depressed, analysts including Andrew Coombs wrote in a note to clients Friday.
That said, it wouldn't necessarily lead to downside for the share prices of banks' focused on their home economy.
“What is different to June 2016 is that implied equity risk premiums are already at elevated levels, so one could argue this risk is already captured in existing U.K. domestic bank valuations,” they wrote.
Investors should buy shares of Lloyds Banking Group Plc, whose resilient organic capital generation should support buybacks, as well as Royal Bank of Scotland Group Plc, which is gaining market share and has more cost-saving opportunities, the analysts said.
They recommend selling Barclays Plc, however, describing its revenue and returns targets as “aspirational,” and adding that it may disappoint on costs.
Prime Minister Boris Johnson's plan to suspend Parliament from mid-September has led to a backlash and legal action by opponents of a no-deal exit, although it survived an early court test on Friday. Johnson's Brexit team will meet with European Union officials at least twice a week in September as they attempt to negotiate a new agreement.
To contact the reporter on this story: Joe Easton in London at jeaston7@bloomberg.net
To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Jon Menon, John Viljoen
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