Citigroup’s Brexit Warning for London

(Bloomberg Opinion) -- If you weren’t listening extremely carefully, you’d be forgiven for missing it. But slipped into a broader conversation about Brexit’s impact on banking, a global finance chief has signaled that one of most dreaded, longer-term effects on the City of London is a real possibility.

Asked about Citigroup Inc.’s Brexit plans, Chief Executive Officer Michael Corbat confirmed what is, by now, a given: assuming U.K.-based finance firms lose their passport to sell services into the European Union, the bank will shift a large chunk of its non-U.K. European assets to the continent. They account for about a third of the lender’s business in Britain.

The other near-certainty is that activities with U.K. clients, which make up another third of Citigroup’s operations in London, will remain in the country, he said.

That leaves the remaining third: business with the rest of the world that the bank books through London. On this, Corbat didn’t provide much in the way of reassurance. “We'll see over time what evolves around the other piece,’’ he told Bloomberg News in an interview in Davos.

While Citigroup’s hesitation over its long-term plans for London may not sound too alarming, its significance to the U.K.’s preeminence as a financial center should not be underestimated. Unlike what we saw in the financial and sovereign debt crises, Brexit is forcing financial firms to break up their European operations regardless of their individual strengths and weaknesses. After years of lackluster economic growth, the region’s role within companies’ global footprints is facing forced scrutiny.

Banks rave about the efficiencies that are gained by housing derivatives and loans under one roof: costs and complexities are lower. Once forced to divide up what they book in London, adding capital and funding costs, there will be far fewer incentives to keep what’s left in the U.K. capital. And that slow erosion may already be irreversible.

Much attention has been placed on the number of people and roles that investment banks and brokers are moving out of Britain. For most firms, those amount to no more than hundreds, a fraction of their activities. A more telling sign is what companies are planning to do with their balance sheets.

Citigroup, Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. will probably shift about $400 billion of assets in total to the continent over the coming years, according to Bloomberg News. Add to that another 400 billion euros ($455 billion) or more that Deutsche Bank AG is planning to repatriate to Germany and the book that Barclays Plc expects to move, and the numbers start to look quite chunky. To put them into context, EY estimates that banking assets in the U.K. total about 8 trillion pounds ($10.3 trillion).

While the adjustment will be gradual, banking chiefs say that their plans for a no-deal Brexit are already past the point of no return.

The winners in all this? Frankfurt, Paris, Dublin will each get a share of the spoils. But it’s easy to see the U.S. being the outright beneficiary as global companies rethink how they approach Europe. Nomura Holdings Inc., which has struggled in Europe for a decade, recently said it will continue to redistribute resources away from the region to the Americas, where profitability is better. And for U.S. firms too, home is probably the better place. Wall Street firms have long subsidized their less profitable European units. But as returns in the region come under further pressure, London’s pain will be much more than the loss of its role as the EU’s financial hub.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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