U.K. Banks - RBS, LYG, BCS - Down Despite Draft Brexit Deal

Shares of The Royal Bank of Scotland Group (LON:RBS) plc (NYSE:RBS) , Lloyds Banking Group (LON:LLOY) plc (NYSE:LYG) and Barclays (LON:BARC) PLC (NYSE:BCS) — three of the biggest U.K.-based banks — fell more than 5% on the NYSE in yesterday’s trading. The stocks declined amid political turmoil following the resignation of two cabinet ministers and some other ministers of Theresa May’s government.

Earlier this week, the Prime Minister secured a draft Brexit deal with Brussels with the support of her cabinet. According to this deal between the U.K. and the European Union (“EU”), London's financial centre will be offered only a basic level of access to the bloc's markets post Brexit.

This means that according to the agreement, which is based on the EU’s existing system of financial market access — equivalence — London will be given access to the EU markets in the same way as countries like the United States, Japan and Singapore.



However, following the resignations, the chances of the draft deal getting final approval become less likely.

Initially, Britain was expecting a much more accommodative version of equivalence that would cover a broader range of financial activities including commercial bank lending and deposit taking. Nonetheless, per the draft deal, London becomes more exposed to losing its financial importance.

But now, as the final approval for the deal becomes unlikely, Britain will suffer even more. This is because a no-deal Brexit will make things significantly worse for banks.

In case of a no-deal Brexit, British banks, in order to conduct operations within the EU, will have to set up subsidiaries within the bloc. This will not only add to their existing costs but will also require higher capital base and bring in additional regulations to follow.

Thus, whether or not this draft Brexit deal gets approval, the U.K. based banks are likely to face several challenges in the near term.

Of the banks mentioned above, Barclays currently has a Zacks Rank #2 (Buy) while Royal Bank of Scotland and Lloyds carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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