The largest U.S. banks traded down significantly early Friday over uncertainty stemming from the impact on their heavy London presence and cloudy revenue and expenses expectations in the aftermath of the U.K.'s stunning vote to leave the European Union.
"There is a reason they are called G-SIBS or globally systemically important banks," said Boston University Finance and Law professor Cornelius Hurley. "To think of them as U.S. banks is misleading. They are not down as much as U.K. banks but I am not surprised at all that they are down significantly."
The major U.S. banks have a significant presence in the U.K. JPMorgan Chase (JPM - Get Report) has the largest operations there with roughly 16,000 employees, followed by Citigroup's (C - Get Report) 8,000, Bank of America's (BAC - Get Report) 5,545, Goldman Sachs' (GS - Get Report) 6,410 and Morgan Stanley's (MS - Get Report) 5,000.
JPMorgan garnered $7.7 billion in 2014 operating income in Britain, or about 8% of the company-wide total; Goldman's $6.3 billion represented 18.5% and Morgan Stanley's $4 billion accounted for 12%
The uncertainty is particularly great given that London has been a key center of financial activity and the fact that no country has ever left the E.U. before. Analysts expect that many U.S. banks operating in the U.K. may lay off or relocate workers to other countries. Still adding to the uncertainty is the possibility that other countries may soon hold referendums of their own to exit the European Union.
Seeking to stem rumors that J.P. Morgan would move U.K. operations to Paris, the mega-bank's chief, Jamie Dimon, released an internal memo Friday, obtained by TheStreet, saying it will maintain a large presence in London, Bournemouth, U.K. and Scotland. "The framework of the U.K.'s engagement with the E.U., including trade agreements, will be negotiated over a period of years," Dimon said. "For the moment, we will continue to serve our clients as usual, and our operating model in the U.K. remains the same."
The memo comes after Dimon earlier this month said in a townhall meeting in Bournemouth that 1,000 to 4,000 U.K. employees could be cut over a few years due to Brexit with much of that headcount relocated to another European Union location.
Joseph Lynyak, a partner Dorsey & Whitney and a former regulator at the Federal Deposit Insurance Corp. in Washington, suggested that Brexit likely will at least complicate the lives of U.S. banks with significant U.K. operations because of the "duplication factor" between U.K. and European rules. In addition, he notes, Brussels or Frankfurt could supersede London as the key go-to financial center in the European sphere, which could put pressure on U.S. banks to relocate. "London is one of the financial centers of the world and the question of whether one of the other money centers of the E.U. such as Brussels or Frankfurt will see this as an opportunity," he said.
However, Boston University's Hurley suggested that shifting those employees and functions in the near term didn't make much sense because of the distinct possibility that other European countries will now hold their own referendums over separation from Europe, further complicating trade ties with big U.S. banks.
"Clearly it's a jump ball. There are so many mega-trends going on at the same time that the U.K. is exiting the European Union," Hurley said. "They're talking about Scotland separating [from the U.K.] and the E.U. dismembering itself. I think the bankers will stay put for a while until they see how the dust settles. Why move to Brussels and Frankfurt if there is no E.U. anymore? It's clearly a tectonic moment but it will be a while before we find out how the plates have shifted."
Banks would likely have a two-year transition period as the British government negotiates the details of its departure and what level of participation in European trade deals the country might retain.
In a report issued June 15, Keefe, Bruyette & Woods suggested that the U.K. vote to leave the E.U. would have a negative impact on the major global U.S. financial institutions largely because their costs would increase and capital markets activity could weaken. It noted that JPMorgan and Goldman Sachs are the most exposed to Brexit "due to the relatively large amount of income each company generates from UK entities."
Alternatively, KBW viewed Citigroup, State Street (STT - Get Report) , Bank of New York Mellon (BK - Get Report) and Northern Trust (NTRS - Get Report) to be less impacted because their U.K. operations are relatively small compared to their overall sizes.
"Banks may have a two-year transition period and we'd expect the banks to experience both revenue and expense headwinds during the transition," said the report. "However, longer term we'd expect the impact of Brexit to be a wash for U.S. universal banks."
The negative pressure on the largest U.S. banks from Brexit comes, ironically, on the heels of a mostly strong performance from the largest financial institutions in the first part of this year's two-stage Federal Reserve stress tests designed to make sure the largest financial institutions have sufficient capital buffers to survive a crisis similar to the 2008 economic meltdown. JPMorgan, Citigroup, Bank of America, Goldman Sachs, Wells Fargo (WFC - Get Report) , all were well above the central bank's required minimum levels while Morgan Stanley did well in all categories except a measure of its leverage. Morgan Stanley had a leverage ratio of 4.9%, just up from a 4% minimum. The results of a second and more important Federal Reserve test will be released Wednesday.
"The stress test results get lost in the shuffle," Hurley said. "These global trends are taking precedence."
In addition, the Federal Reserve Board issued a statement Friday noting that it is "carefully monitoring developments in global financial markets in cooperation with other central banks" and is "prepared to provide dollar liquidity through its existing swap lines with central banks to help address pressures in global funding markets."
See full Brexit coverage here.