Groupe 4 – How does Brexit Impact HSBC and Prudential ?

The United Kingdom’s Brexit vote has major implications for the insurance and financial sectors, considering their investment yields and income are likely to fall due to the pressure on interest rates. Prudential ‘s ( PRU ) stock fell over 7% following the Brexit vote on June 23 amid increased economic uncertainty and fears of falling investment income owing to subdued interest rates and falling yields. However, it has since recovered on expectations of additional stimulus measures by central banks around the world to tide over the Brexit-related decline in trade and money supply.

Impact Of Lower Interest Rates (Jul 01, 2016)

Prudential is expected to generate about 20% of its revenues from investments in the global markets in 2016, totaling about $11 billion. 

The risk of persistent lower interest rates will definitely impact this metric, considering fixed maturity securities contributed almost 67% of Prudential’s net investment income in the last two years. 

Prudential has considerable exposure to fixed maturity securities in the U.S., U.K as well as the rest of Europe. Post-Brexit, the yield on the 10-year U.S. treasury note fell below 1.5% for the first time since 2012, yields on U.K. benchmark government bonds fell below 1% for the first time on record and 10-year government bond yields in Germany ended below 0%. Other developed economies such as France, Sweden, Switzerland and Japan all touched all-time lows.

The fall in investment yields is likely to have a considerable impact on Prudential’s valuation, considering that investments contribute over 20% of the company’s valuation, per our estimates. We expect Prudential’s yield on U.S. retirement assets to decline to around 0.8% by the end of our forecast period. Owing to persistent low interest rates and falling government bond yields, there could be a downside of about 10% to the company’s valuation if its yield on U.S. retirement assets declines to about 0.7%.
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Prudential may relocate M&G funds following Brexit vote (Aug 10, 2016)

M&G’s operating profits dropped 10% to £225m in the first six months of the year, as investors pulled out nearly £7bn in the run-up to the EU referendum. The fund outflows are now slowing, after the Brexit vote triggered a spike in withdrawals.

The new head of Prudential’s M&G fund management arm, Anne Richards, has said it is considering shifting more funds to Dublin and Luxembourg after the Brexit vote.

Richards, who joined in June from Aberdeen Asset Management, said a tenth of M&G’s £255.4bn assets under management were from EU clients. “It’s a very important client base for us.”

“What we are trying to do … is give ourselves options so we are in a position to react and adapt,” she said. “Dublin and Luxembourg would potentially be options for us if we decide we want to have additional funds domiciled in Europe.”

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Brexit: HSBC may move 20% of its London banking operations to Paris, chief executive Stuart Gulliver says (Jan 18, 2017)

Activities specifically covered by EU legislation will move, and looking at our own numbers, that’s about 20 per cent of revenue,” Gulliver said in a Bloomberg Television interview at the World Economic Forum in Davos, Switzerland, with John Micklethwait. The bank confirmed that he was referring to the lender’s global banking and markets operations in the UK capital.

Gulliver, who runs one of the world’s most globalised banks, praised Prime Minister Theresa May’s handling of Brexit so far and also said he doesn’t expect a trade war to erupt between the US and China under incoming US President Donald Trump. Such an outcome could damage HSBC, given it makes most of its earnings in Asia. On Tuesday in Davos, Chinese President Xi Jinping urged business and political elites to reject protectionism in his first public rebuttal of Trump’s rhetoric on trade. A trade war “would clearly be negative for us,” Gulliver said. “We are the biggest trade-finance bank in the world.”

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HSBC Is Officially Moving Some U.K. Staff to Paris After Brexit (Jan 18, 2017)

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HSBC ‘s global banking and markets division that houses those trading jobs made profits of $384 million in the U.K. in 2015, according to a company filing.

Gulliver has been among the more outspoken global bank chief executives about the impact of the Brexit vote, saying in the immediate aftermath of the referendum last June that the bank could move around 1,000 roles to Paris.

Britain’s financial services sector has said it will accelerate plans to move some business overseas after Prime Minister Theresa May said on Tuesday the country will quit the European Union’s single market.

Banks had initially hoped Britain could retain the access to Europe’s single market that allows them to trade and sell all financial products from London, meaning they would not have to move staff, but such a deal now looks unlikely.

Financial firms instead have shifted to pushing for a transitional period in case it proves difficult to negotiate a favorable deal or if talks are protracted and go beyond the two-year time frame for divorce talks.

HSBC shares were up 1% by 08:21 GMT, against a 0.8% fall in the broader European banks index.

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