Bank Troubles

Struck Down by Brexit Blues

RBS-Reuters
RBS isn't the only bank suffering the consequences of Brexit.
  • Why it matters

    Why it matters

    The uncertainty caused by Brexit threatens to scupper planned banking deals not just in Britain but across Europe.

  • Facts

    Facts

    • The British government’s planned reduction in its holding in Royal Bank of Scotland by 2020 will be postponed because Brexit hit the bank’s share price.
    • Slovenia this week postponed investment road shows for the sale of its largest bank, Nova Ljubljanska Banka, citing the market impact of Brexit.
    • Deutsche Bank’s planned sale of its Postbank unit has also become more difficult in the wake of the referendum, and Deutsche may have to write down Postbank’s value even further, analysts said.
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    Audio

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George Osborne promised British voters that the government would reduce its stake in the bailed-out Royal Bank of Scotland (RBS) to 25 percent by the end of the current parliament in 2020. But like so many promises made by British politicians, this one by the country’s finance minister has been blown away by the cold winds of Brexit.

“This will be quite a setback, let’s be honest,” said RBS Chief Executive Ross McEwan on Tuesday. He added that the sale would have to be pushed back by a couple of years at least.

The reprivatization of RBS isn’t the only bank deal that has been put at risk as a result of Britain’s vote to withdraw from the European Union. The shockwaves of the quake have reverberated around Europe.

Germany’s largest bank, Deutsche Bank, which is trying to sell its retail arm Postbank, could be among those that suffer the consequences.

“Most investors were skeptical about Europe’s banks even before the referendum, and that’s now worsened so much that large transactions are hard to imagine right now.”

Frankfurt-based investment banker

All European banks are suffering. Share prices have been slumping across the board – and not just since the June 23 referendum in Britain. The U.K. decision to leave the European Union has only hastened the process.

“Most investors were skeptical about Europe’s banks even before the referendum, and that’s now worsened so much that large transactions are hard to imagine right now,” said one Frankfurt-based investment banker.

Their mistrust has even hit banks that have no or hardly any business links with Britain. Slovenia this week postponed investment road shows for the sale of its largest bank, Nova Ljubljanska Banka, blaming market volatility caused by Brexit.

In Germany, Deutsche Bank’s planned sale of its subsidiary Postbank was shaping up to be difficult enough as it is. Brexit has made it even harder, said banking sources.

 

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Economists said Brexit has increased global economic uncertainty and could therefore prolong the current phase of record low – or in many cases negative – interest rates. That hits retail banks like Postbank particularly hard because they rely on savings deposits and interest income for their profits.

Deutsche Bank paid a total of €5.5 billion, or $6.01 billion, for Postbank back in 2008. Analysts estimate that the unit is valued at €4 to €4.5 billion in Deutsche’s books following writedowns. Yet most analysts are certain that Deutsche Bank won’t even be able to raise €4 billion anymore, neither via a bourse flotation nor a sale. So the bank will probably have to write down the value of Postbank again ahead of a spin-off.

That’s a bitter pill for Deutsche Bank’s Chief Executive John Cryan, a British citizen, who already had to announce the bank’s worst-ever results in 2015. Investors have sent the bank’s share price to a record low in the aftermath of Brexit.

Despite all the uncertainty, Mr. Cryan likely plans to go ahead with the Postbank sale. Put simply, the bank needs the money as it undergoes a massive restructuring and tries to meet the demands of regulators. The sale will raise much-needed capital.

 

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Of course, the effects of Brexit are being felt most strongly in Britain. And of all the top British banks affected by Brexit, RBS was hit hardest.

RBS received a £45 billion, or $58.6 billion, taxpayer bailout in 2008 and 2009. The average price the British government paid for RBS was 502 pence per share.

Last year, Mr. Osborne sold 5 percent of the shares at 303 pence, sustaining a loss of some half a billion pounds. But from today’s point of view, in the aftermath of another massive crash in banking stocks since the referendum, that now appears to be a good deal.

The government still owns 73 percent of RBS. Shortly before the fateful referendum on June 23, they were worth 250 pence. On Tuesday, they were trading at 160 pence. The political and economic uncertainty unleashed by the vote hit the bank particularly hard.

It increased its focus on its home market after it was bailed out in the financial crisis, and now it’s paying the price.

 

Michael Maisch is deputy editor of Handelsblatt’s finance section and is based in Frankfurt. To contact the author: maisch@handelsblatt.com 

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