OREANDA-NEWS. Fitch Ratings said in that the rating impact of hypothetical scenarios in the upcoming UK referendum on EU membership is highly uncertain. Fitch's base case is that the UK will vote to remain in the EU.

In a special report published today Fitch considers four hypothetical scenario outcomes for the referendum. The four scenarios comprise one "remain" scenario and three "leave" scenarios - one with favourable UK exit terms agreed ("favourable leave scenario"), one with UK exit on unfavourable terms and tight labour market conditions ("unfavourable leave scenario"), and leave under either scenario with a subsequent vote for Scottish independence ("Scotland independence scenario") . Fitch emphasised that none of the leave scenarios represent Fitch's expectations in the event of a leave vote and the consequences of a 'leave' vote could take many turns other to the scenarios it considered.

The "remain" scenario would be mildly credit positive across sectors as it would end uncertainty surrounding the "EU question" for the medium term with limits defined on the extent of UK integration. The effects would, however, be insufficient to result in upgrades in any sector, including the sovereign rating. However, EU migration to the UK would remain high and the same UK/EU tensions could re-emerge in the longer term.

The sovereign rating would, as we have indicated before, be subject to review in the event of a 'leave' vote. In Fitch's favourable leave scenario, exit and trade agreements are concluded smoothly and swiftly, such that the effect would be mildly negative after short-term market and currency volatility. However, in the unfavourable leave scenario, protracted negotiation resulting in unfavourable trade terms for the UK would be more negative. A combination of a leave vote with subsequent Scottish independence would bring the UK's ratings under further pressure.

Favourable exit terms are unlikely to affect bank ratings. Unfavourable terms would hurt asset quality, funding profiles and earnings, possibly putting some ratings under pressure. We would expect some mortgage loans' performance to weaken due to lower house prices, higher interest rates and falling commercial property values. Corporate asset quality dynamics would be sector- dependent, but impairments would rise. Unfavourable terms would make raising debt for resolution planning more challenging and expensive. However, UK banks' overall funding and liquidity profiles are strong and they have Bank of England backstops, making them well placed to face exit scenarios.

For the corporate sector, the leave scenarios could have mixed effects, depending on sector. UK exporters would benefit from improved price competitiveness, due to sterling's depreciation. But UK companies with significant foreign currency debt would face servicing issues. UK airlines could be significantly affected by sterling depreciation due to their foreign currency cost base. The unfavourable leave scenario would also result in reduced financial and operational flexibility for many corporates and, notably, retail sector failures could multiply.

The report also considers the impact of the scenarios on the insurance, infrastructure, public finance, CMBS, RMBS and covered bond sectors. For more information on our scenarios and their potential implications, see the report " Leave or Remain: Hypothetical Brexit Scenarios Examined ", available from www.fitchratings.com or by clicking the link above.

Fitch is not recommending any particular position, vote or outcome regarding the referendum vote on 23 June 2016. This research simply provides the financial marketplace with increased transparency as to the possible impact on our ratings of various hypothetical outcomes from the referendum.