OREANDA-NEWS. Fitch: Brexit Adds to Challenges for European GTUBs' Earnings London The UK's vote to leave the European Union will add to revenue challenges faced by European global trading and universal banks (GTUBs), Fitch Ratings says.

We expect increased economic uncertainty to lower transaction volumes in the medium term. But in the short term, higher market volatility and activity in certain asset classes, notably in foreign exchange, are likely to bolster sales and trading revenue for all European GTUBs in 2Q16.

Underwriting and advisory revenue is likely to be depressed as corporates postpone issuance and acquisitions until capital markets are more favourable and businesses adjust to the new operating environment. Subdued issuance and corporate actions could affect trading volumes, putting further pressure on profitability.

Credit Suisse Group and Deutsche Bank are most reliant on capital markets activities, with sales, trading, underwriting and advisory revenue at about 50% and 40% of total group revenue, respectively. These two banks and Barclays are already undergoing substantial restructuring, cutting costs and reallocating resources as they adapt to more challenging capital markets and changed capital requirements. The Brexit vote has also complicated staffing decisions.

Wealth-management operations, key to the two Swiss GTUBs' business models, are likely to feel less direct effects. The EU referendum adds to the uncertainty about global economic growth, which will affect net new money inflows and transaction fees. Prospects for wealth management are particularly sensitive to economic growth in Asia-Pacific, and so have suffered moderately from China's slowdown.

Larger drag than expected from non-core units if non-strategic asset disposals prove more protracted or costly than anticipated would be another earnings pressure. Deutsche Bank, which aims to shed at least EUR21bn risk-weighted assets (RWAs) by end-2016, and Barclays, which aims to shrink its non-core unit by about GBP30bn RWAs by end-2017, are likely to be most affected. Credit Suisse's non-core RWAs account for a material 20% of the group, but the reduction target of around CHF5bn by end-2016 is less ambitious.

The sharp UK pound depreciation should be neutral to positive for earnings. Most European GTUBs' sterling cost bases are larger than sterling revenue. There is also the benefit from increased FX transactions. We expect the impact on regulatory capital ratios to be contained, as the groups at least partly hedge FX mismatches between their equity base, RWAs and leverage exposure. Nevertheless, any large position losses could lead to a rating review if they indicate increased risk appetite or ineffective hedges.

We expect net interest margins to remain under pressure as central banks are likely to keep interest rates lower for longer. The Brexit vote is also likely to have further delayed broader European economic growth, which would put pressure on European commercial banking revenue more generally.

The most significant long-term issue is maintaining the ability to sell products and services to the single European market, given most banks' significant presence in London. But we expect any operational changes made to preserve this access to be only gradual and manageable. Banks based in the eurozone should be better placed, as substantial business is already undertaken from Frankfurt or Paris.

The UK-based GTUBs have operations in other EU countries, and HSBC's French subsidiary already carries out a substantial amount of the group's securities operations. We expect the Swiss banks, which already operate in various EU countries through subsidiaries and branches, to adapt operations accordingly. If competitors move securities operations away from London, the UK-based GTUBs could extend their strong market shares in sterling operations.