Deutsche Bank Should Benefit From Bank of England’s Softer Stance Towards EU Banks

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Earlier this week, the Bank of England (BoE) softened its position on the treatment of European banks with a presence in the U.K. post-Brexit by proposing that these banks can continue operating in the country without any changes. This decision by the British central bank serves several purposes – primary among them being to ensure that London remains an international financial hub. Additionally, the move should deter European financial institutions from relocating a chunk of their operations in the U.K. to other regions in the EU, while also nudging EU regulators to take a similar lenient stance towards the foreign operations of British banks.

The biggest gainers from the BoE’s decision are Deutsche Bank, BNP Paribas and Société Générale, who have a combined headcount of around 20,000 in London alone. Deutsche Bank in particular stands to gain the most, as its investment banking operations form a sizable chunk of its business model, and a majority of its European operations are based out of London.

We are currently in the process of updating our $18 price estimate for Deutsche Bank’s shares.

See our full analysis for Deutsche Bank

An important consideration for the U.K. in its ongoing Brexit negotiations with the European Union has been to ensure that London’s position as a financial center is not undermined. As some of the largest global banks have discussed moving most of their operations in the U.K. to other European centers in the event of a hard Brexit, Britain has focused a lot on alleviating their concerns over the months. After all, financial services companies in the U.K. account for roughly 7% of the country’s GDP, employ over 1 million people and bring in roughly £70 billion ($93.5 billion) in annual tax revenues. Also, London’s strong financial market (second only to New York) ensures that the cost of financing in the U.K. is low – directly impacting the economic condition of individuals and businesses in the country. The Bank of England’s decision to relax its position on the local operations of European banks, therefore, does not come as a surprise.

Incidentally, the BoE’s announcement came on the same day the European Commission (EC) toughened its stance against large foreign banks operating in the European Union. Although the EC is pushing for changes that de-emphasize London’s role in the region, the BoE’s move will likely be reciprocated by the European Commission over coming months – helping all banks in Europe avoid expensive capital requirements for their foreign subsidiaries in the U.K. or EU. This should allow the banks to largely maintain the status quo. Deutsche Bank is likely to benefit the most from the BoE’s move, while a similar step by the EC should make things easier for banks such as Barclays and HSBC in the EU going forward.

In the absence of the BoE’s leniency, higher capital requirements on Deutsche Bank’s operations in the U.K. would have weighed considerably on margins for the bank’s core investment banking division. You can see how lower operating margins for Deutsche Bank’s investment banking division impact our price estimate for the bank by modifying the chart below.

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