Why triggering Brexit signals a long, slow bleed for the UK banking sector – CNBC

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As U.K. Prime Minister Theresa May begins the Brexit process on Wednesday, the country’s financial center in London, known as the City, will likely face a slow hemorrhaging of its business, analysts said.

Wednesday marks the point of no return for May as the critical step to notify the European Council that the U.K. will officially terminate its 44-year old membership. The move follows a referendum on June 23 last year that rocked the country’s political establishment with a narrow win in favor of leaving and led to the resignation of David Cameron as prime minister.

For the financial center in London, that could signal a slow steam toward the exit as banks based there could lose “passporting” rights, or the ability to provide services to the rest of Europe.

“You cannot drop your membership in the country club and still enjoy all the benefits with it,” Horst Geicke, chairman of the European Chamber of Commerce in Hong Kong, told CNBC’s “Squawk Box” on Wednesday.

“For those banks, as long as they are international banks, it is much easier for them to just move the outfit they were running in London to Paris or to Frankfurt or another EU city,” Geicke said. “It’s hard on the U.K. You have job losses, you have volume losses in your financial transactions and it might also affect the London Stock Exchange size.”

Analysts don’t expect London’s financial sector to evaporate quickly, especially as the shape of the two-year exit negotiation process and the trade-agreement negotiations remained unclear.

But Martin Smith, head of markets analysis at banking market research firm East & Partners noted some banks were already making contingency plans and moving jobs.

“London’s place as a key economic hub will not be relinquished over this period,” Smith told CNBC’s “Squawk Box” on Wednesday. “But its lead over other key financial hubs such as New York, Singapore and Hong Kong is going to wane as this process extends out.”

Indeed, late last year, a KPMG survey found around three-quarters of U.K. CEOs were considering moving operations or their headquarters abroad.

Some banks have already begun, with HSBC planning to move around 1,000 trading staff to its Paris unit and UBS expecting to move around 1,000 of its 5,000 U.K.-based workers to Europe.

That could eventually herald a large blow to the U.K. economy, noted Smith, citing the financial sector’s contribution to government revenue.

The sector paid around 71 billion pounds ($88.2 billion) in taxes in the fiscal year ended March 31, 2016, according to a Reuters report. Smith claimed that’s larger than the contributions from Wales and Scotland combined.

“Financial services contributes almost a tenth to economic output in the U.K. so any kind of difficulty that the U.K. faces with on-going negotiations of the Brexit is going to reflected in falling capital spending,” Smith said. “In the short term, certainly, we expect to see both retail and business credit growth impacted negatively.”

—Nyshka Chandran contributed to this article.

—By CNBC.Com’s Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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Why triggering Brexit signals a long, slow bleed for the UK banking sector – CNBC