The Worst Performing Big Bank Stocks Since Brexit

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Bank stocks have taken a pounding since the British voted on June 23 to leave the European Union, with shares of the average large-cap bank falling by 6.4% in the referendum's wake -- and that's after a post-stress test rally.

This didn't come as a surprise, as analysts had predicted that banks would be hit especially hard from a vote in favor of Brexit. What is surprising, however, are the bank stocks that dropped the most -- namely, regional banks such as Zions Bancorp (ZION 1.04%) and Regions Financial (RF 0.89%), shares of which are still down by more than 12% compared to their pre-Brexit closing prices.

Data source: YCharts.com.

Most people, myself included, assumed that shares of universal banks like Bank of America (BAC 1.70%) and Citigroup (C 2.82%) would suffer the most given that they supplement their domestic retail operations with global investment banks operating in part out of London. This will potentially require these banks to relocate thousands of their U.K.-based employees to the European continent.

An analysis by Keefe, Bruyette & Woods, for instance, found that Citigroup could have to relocate as many as 2,000 of its employees in the United Kingdom while Bank of America would have to move 1,386 of its employees there.

On top of this, most universal banks have trading operations that will suffer from the turmoil ignited by the Brexit vote. This was one of the factors that caused revenues and profits at the biggest banks to fall in the first quarter of the year, as concerns about slower economic growth in China and higher loan losses tied to low energy prices fueled volatility in asset markets.

To be clear, it's not as if shares of the biggest banks weren't initially hit in the wake of the Brexit vote. At one point, shares of Bank of America and Citigroup were down by as much as 14%. They subsequently rallied, however, after getting the green light from the Federal Reserve this week to increase their dividends. Bank of America boosted its quarterly payout by 50%, while Citigroup more than tripled the size of its distribution.

But despite all of the factors that seemed to be allayed against the universal banks, it has been shares of regional banks that have bared the brunt of the Brexit blues. And leading the way in this regard are Zions Bancorp and Regions Financial, which are the two worst-performing stocks on the KBW Bank Index over the past week.

With the benefit of hindsight, it's clearer why this is the case. The issue for Zions Bancorp and Regions Financial, as well as other regional banks, is that they derive a majority of their revenue from net interest income. Zions Bancorp looks to net interest income for 80% of its net revenue, while Regions Financial looks to it for 63% of its top line. The revenue at most universal banks, by contrast, tends to be split roughly evening between interest and noninterest income.

Thus, regional banks such as Zions Bancorp and Regions Financial have more to lose by a lower-for-longer interest rate environment, which now seems to be a certainty. The Fed said as much in the lead-up to the Brexit vote, following the latest jobs report, which showed that job creation in the United States fell in May to its lowest level in more than five years. The Brexit vote will bolster this decision, translating into longer-term headwinds for banks' interest income than originally forecast by analysts and commentators.

The net result is, while most analyses showed that universal banks would be hit hardest by the Brexit vote, the exact opposite has occurred, as the drop in large-cap bank stocks is being led instead by Zions Bancorp, Regions Financial, and other regional lenders.