JPMorgan Downgrades Lloyd's, RBS And Barclays, Calls Them Most Exposed To The UK

JPMorgan’s Kian Abouhossein reconfirmed a cautious view on the banking sector, following the UK’s vote to leave the EU. The analyst estimated downward revisions in EPS forecasts by 2018 by an average of 13 percent for Eurobanks, in-line with the decline in their shares following the Brexit announcement.

While the banking sector continues to be expensive, the implied CoE [Cost of Equity], currently at 11 percent, is likely to increase, due to significant uncertainties related to the UK and EU banking sector, analyst Kian Abouhossein said. He noted the reasons for the expected increase in CoE as:

1. JPMorgan’s base case is of a slowdown in the EU economy, which will lead to a decline in rates
2. Decline in the B3CET1 ratio following EPS cuts
3. EU sovereign CDS spreads have already widened by 46bps in Spain and by 54bps in Italy, following Brexit.

Downgrades In Rating

Abouhossein downgraded the ratings for the following stocks:

• Lloyds Banking Group PLC (ADR) LYG – from Overweight to Neutral
• Barclays PLC (ADR) BCS – from Overweight to Neutral
• Royal Bank of Scotland Group PLC RBS – from Neutral to Underweight

The analyst noted that Lloyds has more than 90 percent UK exposure, while Barclays has 40 percent and RBS has 65 percent. He added that there were further risks from a potential Scottish referendum, with Lloyds having 6.2 percent group loans in Scotland and RBS having 4.4 percent.