OREANDA-NEWS. The UK's decision to leave the European Union will be disruptive for US global banks with significant operations in the UK and will weigh on their profitability in the short to medium term, Fitch Ratings says. However, the impact is likely to be moderate as we believe they will be able to operate through other EU legal entities.

US global banks are likely to start strategically implementing parts of their contingency plans rather than wait for trade and service arrangements to be agreed. Resolution planning for US global systemically important banks was constructive for their Brexit contingency planning because of the requirement to rationalize and understand their global legal entity structure and activities.

Restructuring operations will depend on license status in various jurisdictions, as well as establishing operational scale, potentially reallocating capital and relocating where trades and clients are booked. Relocation of staff is likely to follow; for example, ahead of the referendum, JP Morgan had announced that as many as 4,000 of its UK roles could be shifted out of the country.

Management will have to decide where to focus its European operations, depending on language requirements, staff expertise and incentives offered by these countries. Flexible labor laws will be important for US firms, so this may favor countries like Ireland and the Netherlands, rather than Germany and France.

Associated restructuring costs will hit earnings and may offset any margin growth from potential US interest rate rises, although these are likely delayed given uncertain market conditions as a result of the exit vote. Operating profitability is likely to remain under pressure. However, it is unlikely that the US global banks would be required to inject additional capital into their European operations, although there may be reallocation among entities. We believe the UK capital regime is unlikely to change materially as a result of the referendum result and that the EU is likely to consider the UK's regulatory and supervisory arrangements as equivalent to those applied in the EU.

More broadly, we expect increased foreign exchange and bond market volatility, which should boost trading revenue. However, long bouts of market volatility would dampen activity. Corporate issuance and M&A activity are likely to be lower, particularly for cross-border transactions, while clients face uncertainty during the two-year exit process. This will put pressure on investment banking profitability and could lead US firms to review their European business models.