US banks get Brexit boost but face longterm pain

Large US banks got a lift from the June "Brexit" vote in the second quarter, but could face long-term pain from a British retreat from the European Union.

Earnings released by JPMorgan Chase, Citigroup and others over the last week showed a pickup in some key trading businesses in the days after the surprise June 23 vote by Britain to leave the EU. 

Banks attributed the bounce to a rise in market volatility after the British vote, resulting in double-digit revenue gains in some trading operations. 

"There was increased volatility around Brexit that I think we were probably positioned for, and importantly with that volatility, customers came to us with their issues," said Citigroup chief financial officer John Gerspach.

Morgan Stanley chief financial officer Jonathan Pruzan pointed to a "high level of activity at the very end of June, primarily due to Brexit as we supported our clients."

The higher trading revenues were a factor in earnings reports that generally bested market expectations.

Some analysts say the US banks are also relatively well positioned compared with their European counterparts, which suffer from weaker economic growth in the EU and the prospect of low and negative interest rates.

Yet bank executives also pointed to a host of unknowns after the British vote. 

- What's after London? -

US banks have their European headquarters in London, and the five largest US banks currently employ more than 40,000 people in the city.

But that structure that will make less sense if London loses direct access to the 27 other members of the EU single market.

If Britain withdraws from the European Union, banks based in London could no longer be allowed to freely market services to EU countries without a presence there.

Relocating staff from London woold cost banks an average of £50,000 ($66,000) per employee, said consultancy Synechron. Moving 1,000 jobs to hubs like Dublin, Frankfurt or Paris would then cost some £50 million.

Banks have already begun informal discussions with regulators in other European countries on procedures for obtaining bank licenses and establishing compliance with local capital requirements, said one banking source who spoke on the condition of anonymity.

Of the preferred cities, Frankfurt offers close access to the European Central Bank, as well as the custom of employing English in addition to German in business affairs.

Dublin in some ways is a natural choice, because English is the primary language, and the culture is more similar to the United States.

But limited housing and the absence of a true downtown business center are considered liabilities, according to a banking source.

Paris has a vibrant business district, but could suffer comparatively from high taxes and heavy regulatory burdens.

Bank executives have so far offered few clues on their thinking, emphasizing that much rests on negotiations between Britain and the EU over the structure of their post-Brexit trade relations, which could take years. 

The pace of decision-making is expected to accelerate when Britain officially notifies the EU of its plan to leave, triggering a two-year negotiation period.

"It's very early days," said JPMorgan chief financial officer Marianne Lake

"We would like to believe that we can continue to have our European franchise headquarters in London, and London would be a strong financial center. But there's a long time before we'll have certainty about what the outcomes are."

Goldman Sachs chief financial officer Harvey Schwartz also predicted a lengthy shakeout before the impact of Brexit on bank operations is known. 

"We are hopeful, along with everyone else, that the parties that are engaged in these negotiations will be prudent and thoughtful, because obviously ... a thoughtful negotiation outcome would just be good for economic growth," he said.