Exclusive: Report says EU firms face higher banking bills after Brexit

By Huw Jones

LONDON (Reuters) - A report has concluded that a so-called hard Brexit could cost banks up to 35 billion euros ($39 billion) and European customers were being overly optimistic if they thought lenders would pick up the bill, an industry source said on Friday.

The conclusions may surprise businesses as company treasurers contacted by Reuters in recent weeks have said they fully expect their banks to sort out and absorb any Brexit-related costs to keep their custom.

The source was quoting from a report on the impact of Brexit on companies and investors commissioned by the Association for Financial Markets in Europe (AFME), a banking industry lobby group, and compiled by the Boston Consulting Group.

The report, due to be published next month and could still be changed, surveyed officials from more than 60 companies, most of which expected any higher costs from an abrupt cut in financial services links between Britain and the rest of the EU to be absorbed by banks.

The report concluded that, "this may be overly optimistic", the source said.

It said that banking capacity could be maintained after a hard Brexit - where Britain ends up outside the single market altogether - if banks in London operated from new subsidiaries in the European Union after Britain leaves the bloc in 2019.

But reconfiguring banks would be "slow" and could cost as much as 15 billion euros which, if spread over three to five years, could cut banks' return on equity by 0.5 to 0.8 of a percentage point.

Fragmenting Europe's capital markets would also force banks to hold up to 20 billion euros in extra capital across the sector, the source quoted from the report.

The aim of the report is to show policymakers negotiating Britain's departure from the EU that failing to give banks in London access to the single market would hit Europe's companies and economy.

The report will say that investors and companies in the other 27 EU member states (EU27) and Britain face direct costs from a hard Brexit, and could be hit indirectly through the banking services they use.

A hard Brexit would mean that investors and companies would find it harder to get debt funding, risk management and equity capital, the report will say.

Businesses could be under-estimating the banking-related impact of a hard Brexit on their cost of capital as 1.3 trillion euros of bank loans, derivatives and securities may need to be re-booked from Britain to the EU27, the report will say.

Banks based in Britain have lent 180 billion euros to customers in the EU27, or 7 percent of outstanding loans to small and medium sized companies.

($1 = 0.8949 euros)

(Editing by David Clarke)