No British bank was hit harder by the Brexit referendum than Barclays PLC (ADR) (NYSE:BCS), but that also means BCS stock has the most rebound potential if the U.K. somehow wiggles out of this jam.
This is a speculative bet, to be sure, but with every passing day it seems more and more likely that Brexit can be avoided. Sure, outgoing British Prime Minister David Cameron knocked down the idea of a do-over.
But perhaps the Scottish parliament will scuttle the process. Or there’s the possibility that the incoming prime minister realizes that going forward with Brexit will cook his career as surely as failing to leave the EU would.
Against this backdrop is absolute panic in the market for U.K. bank stocks. BCS stock tumbled 20% Friday and another 20% after Monday’s opening bell. Barclays stock is now off more than 30% for the year-to-date with no floor in sight.
Ordinarily, it’s a terrible idea to try and catch a falling knife. It’s quite possible that the U.K. will sleepwalk of the Brexit cliff and the economic fallout will devastate the British financial industry. And if that happens, Barclays is uniquely exposed to the carnage.
BCS Is Primed for Pain
Recession — deep or not — is going to cause a reduction in lending and a spike in bad loans. Worse, BCS has a large international investment bank and broad footprint of corporate banking in Europe.
As an analyst at Bernstein Research wrote in a note to clients:
“We see 40% downside in … Barclays. Simply put, Barclays has the highest gearing to London in terms of their U.K. portfolio. It also has the highest gearing to investment banking revenues which we believe are going to tank.”
If the U.K. does manage to somehow avoid leaving the EU, it will be a messy, months-long process, at least. BCS and other British bank stocks will have ample opportunity to sell off further.
On the other hand, six months after BP plc (ADR) (NYSE:BP) stock crashed on the Deepwater Horizon disaster, it was up more than 80%.
Is a BCS buy call insane? Maybe. But then the idea is to buy low, right?
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
