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2 Banks that Would Feel the Most Pain From a Brexit

By John Maxfield - Jun 21, 2016 at 2:20PM

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America's biggest investment banks hope that voters in the United Kingdom come to their senses.

Image source: iStock/Thinkstock.

The most immediate issue that could affect the price of bank stocks this week is Brexit -- the vote in the United Kingdom on Thursday over whether to separate from the European Union. But even though all bank stocks will be impacted by the outcome of the vote, Goldman Sachs (GS 0.74%) and Morgan Stanley (MS 0.91%) are expected to suffer the most if the measure is approved.

A report released last week by Keefe, Bruyette & Woods, an investment bank that specializes in the financial services sector, estimates that a vote in favor of Brexit would cause Goldman Sachs and Morgan Stanley's earnings per share to fall over the next two years. They wouldn't be the only banks to experience a drop -- as KBW expects all American universal banks such as JPMorgan Chase and Citigroup, among others, to see an EPS decline as well -- but Goldman Sachs and Morgan Stanley would be hit the hardest.

According to KBW's analysis, Goldman Sachs' EPS would fall by 4.6% this year and 7.9% next year. Morgan Stanley's is estimated to drop by 5.6% and 9%, respectively. As you can see in the table below, that makes them the most vulnerable to a Brexit vote.


Estimated EPS Change Due to Brexit in 2016

Estimated EPS Change Due to Brexit in 2017

Goldman Sachs



Morgan Stanley



JPMorgan Chase



Bank of America






Data source: KBW.

The reason that Goldman Sachs and Morgan Stanley are expected to bear the brunt of this is because, as investment banks, they generate a larger share of their earnings from capital markets-related activities -- buying, selling, and holding securities. This is where the pain is likely to be felt, as KBW's analysts explain:

A vote for Brexit would lead to macro uncertainty and this would likely result in higher volatility (sometimes unhealthy), but also lower capital markets activity as companies stop transacting due to uncertainty in law and markets. We would also expect the British Pound and Euro to depreciate versus the dollar and this would cause FX headwinds for select companies.

Goldman Sachs and Morgan Stanley would also be hit by higher expenses, as they would presumably have to reallocate a portion of their U.K.-based workforces to the continent -- Goldman has 6,400 employees in the U.K. while Morgan Stanley has 5,000. In 2017, for instance, roughly a third of the predicted drop in Goldman's EPS would come from higher expenses. This compares to 40% of Morgan Stanley's anticipated earnings decline.

While these numbers seem precise, KBW emphasized that they are only high-level estimates, as it's all but impossible to forecast something as unprecedented as Brexit with any semblance of precision. At the same time, however, there's little question that global financial firms will be negatively impacted. This is why it's prudent to assume that shares of Goldman Sachs and Morgan Stanley will take a hit in the short term if a plurality of voters in the U.K. cast their ballots in favor of leaving the EU.

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The Goldman Sachs Group, Inc. Stock Quote
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