Against all odds, the citizens of the United Kingdom have voted to exit the European Union by a large 4 point margin. Against all odds literally, because UK bookies all favored “Remain” and will be paying out handsomely to Brexit betters today. Stock futures are set for a plunge, the British pound is collapsing to multi-decade lows, and European banks are at ground zero. This after many bank stocks were already at record lows before the vote.
The Brexit vote will not have any immediate practical effect on much of anything. The UK is not leaving the EU tomorrow, and when markets have time to calm down and remember this fact over the weekend, most knee jerk reactions from today are likely to be reversed.
British and Eurozone banks are at the epicenter of this mess and could be good buys on the dip, but there are also more conservative plays than going right into the main blast radius. Many peripheral European banks that are outside the Eurozone and even outside the EU itself are also plunging this morning with even less of a fundamental reason to do so. These include Swiss and Scandinavian banks, and should be on any bargain hunter’s list today, June 24 and in the following week.
UBS Group AG (NYSE:UBS) is a $50 billion Swiss bank, with native shares in Switzerland having trading down 11% on the Swiss exchange at the open. The American Depositary Receipt shares will follow, bringing the dividend yield near 7%. UBS is one of the lucky European banks that have yet to break through 2009 lows, and never joining the Eurozone nor the European Union has helped insulate it. The Swiss National Bank breaking its Euro peg in January 2015 has also further distanced the Swiss banking system from any fault lines resulting from its monetary connections with the euro currency. This bank stock is likely to recover faster than either UK banks or Eurozone banks.
Societe Generale Group (OTCBB:SCGLY) hit a new 52 week low at the opening of trading but quickly bounced back. This French bank is more at the epicenter but it is one of the few trending higher since 2012, which makes it slightly less risky. If the ADR breaks 52 week lows at the open, the dividend yield will climb past 7%, a very good deal for a $30 billion bank. Since a good portion of the selling across markets is coming from margin calls on traders who made bad Brexit bets, when those margin calls dry up stocks like SocGen will quickly rise back up. This one is more of a trade than a long term hold as SocGen is tied to the Eurozone.
Danske Bank AS (OTCBB:DNKEY) is one of the only banks in Europe to trend consistently higher since the end of the last financial crisis. While it is an EU member, it is still outside the Eurozone, and that is important because the real fundamental danger of the EU disintegrating is the Eurozone disintegrating in its wake as governments get tired of perpetual bailouts and see a way out. Recovering from a Eurozone collapse will be much harder for Eurozone banks than separate Scandinavian banks.
The other reason that Danske is a buy is that the money supply in Denmark exploded to a record high last quarter, and that will keep the boom phase of the business cycle going for now, bringing Danish banks up with it.