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Bet Against a Brexit and Buy These Banks

06/20/2016 9:48 am EST


Michael Berger

President & Founder,

Although recent polls only show a slight lead for the stay party, bookies very much expect the United Kingdom (U.K.) to stay in the European Union (EU); Michael Berger the Associate Editor of, discusses the risks associated with a Brexit and the bank stocks he would buy before the vote.

If the U.K. votes to leave the EU this week, many US based companies will be affected.

Although some companies will be impacted more than others, a Brexit would affect all stocks and increase the amount of fear in the market.

Banks Highlight Risks of a Brexit

On Friday, the International Monetary Fund (IMF) said the net economic effects would likely be negative and substantial if voters choose to leave the EU.

The financial sector would be impacted as many domestic financial institutions use London as a gateway to Europe. If the U.K. leaves the EU, this gateway would no longer exist and firms would have to move to cities like Dublin or Frankfurt.

J.P. Morgan (JPM) CEO Jamie Dimon recently warned of the impact a Brexit would have on the British economy. JP Morgan has more than 16,000 employees in Britain and CEO Dimon said a Brexit would force the bank to move a quarter of those jobs from the U.K.

Banks like HSBC Holdings (HSBC), Deutsche Bank (DB), Citigroup (C), and Morgan Stanley (MS) have issued similar warnings.

A Perfect Storm

June has already been a significant month for global markets. From the OPEC meeting to the Federal Open Market Committee meeting, June has been an event-driven month for global markets.

The results of the U.K. referendum will be announced on June 23; the same day the Fed will announce the results of its annual stress tests on the 33 largest domestic banks, which is required by the Dodd-Frank Act.

A week after the results of the Brexit and Fed’s stress test are announced, the Fed will announce whether it has decided to approve the capital plans of the largest banks which include ideas such as increasing dividends and buybacks.

Two Banks to Watch

Although Bank of the Ozarks (OZRK) is one of the industry’s fastest growing and most efficient banks from a profitability standpoint, its shares have plunged more than 25% this year. We see significant upside to current levels after its recent acquisitions and its outlook for a minimum of $2.5 billion of non-purchased loan growth this year.

Another factor in our thesis is that OZRK’s unfunded balance of closed loans has exceeded non-purchased loan growth for eight consecutive quarters. This leads us to believe that loan growth is accelerating and we do not think the market has recognized this opportunity.

We continue to prefer smaller banks that are not heavily levered to the energy sector and the recent pullback provides an opportunity to buy a best-in-breed company on sale.

Northern Trust Corporation (NTRS) is a leading provider of asset and fund management services and the company would benefit from higher interest rates. Northern Trust saw its share price fall in early 2016 and its shares were down more than 20% at one point. NTRS came off of its lows and it is down less than 4% this year.

Northern Trust offers investors a 2% dividend and is levered to global secular trends such as the modernization of global pension plans, continued growth in alternative investing, increased compliance demands, an aging population, and wealth creation. These trends should benefit Northern Trust’s global custody and wealth management businesses through new growth opportunities.

Although we are favorable on Northern Trust’s leverage to these trends, we do not expect to see interest rates increase (especially if the U.K. leaves the EU) and we would wait for NTRS to pullback before buying.

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