Thursday 5 May 2016 1:34 pm

UK banks would face a squeeze on their balance sheets after Brexit

Profits at the UK’s largest banks would be squeezed if the UK votes to leave the European Union, a top credit ratings agency has said today.

Moody’s has warned that Brexit would hit demand for loans, potentially reduce the value of banks’ balance sheets and heap pressure onto London’s fragile investment banking sector.

“Uncertainty before the referendum is likely to raise banks' wholesale funding costs, squeeze margins and reduce business volumes. This would be exacerbated in the event of a vote to leave the EU,” said Carlos Suarez Duarte, a senior analyst at Moody’s in a new study released today.

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The period between a vote for Brexit and the eventual succession – which could take a number of years – will “be characterised by prolonged volatility … this may further increase wholesale funding costs for UK institutions and dampen investment activity,” Moody’s said.

Investment houses would be the most at risk from a profits slowdown in the short-term, the analysts said, since “the negative effects of slower growth [after Brexit] would take longer to reach households,” and thus longer to affect retail lenders.

Demand for London houses would also dip “given a large foreign-born population that might be sensitive to an exit. This would have a negative effect on rents” and hit banks that have a large exposure to buy to let or more risky mortgages.

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However, Moody’s stressed that the combined effect of these factors is “unlikely to be dramatic” given that the UK’s economy is in a relatively strong position and the quality of banks’ balance sheets has improved since the financial crisis.

A longer-term challenge could present itself if either UK lenders or foreign banks based here needed to overhaul their business models to meet any new compliance requirements that arise from a vote to leave the UK.