RBS and Lloyds have the largest exposure to UK commercial real estate risks, according to a Moody’s Investors Service report.
The rating agency expects the commercial real estate sector to weaken post-Brexit vote. Moody’s says large UK banks are better placed to handle this risk than during the financial crash of 2008/09.
Moody’s senior vice president Andrea Usai says: “We estimate that the six largest UK banks have reduced their aggregate gross UK commercial real estate lending exposure by around 40 per cent, to £84.6bn at end-June 2016 from £138.9bn at the end of 2010.”
RBS and Lloyds had exposures of £25bn and £20bn respectively.
Santander UK has the largest exposure as a proportion of its fully-loaded Basel III Tier 1 capital at 94 per cent.
Usai adds: “Pressures on the UK [commercial real estate] market mounted in early 2016 amid uncertainty about the outcome of the Brexit referendum. And following the actual vote to leave the EU, we have seen the collapse of some large [commercial real estate] deals, as well as the suspension of redemptions at some UK property funds — these events signal a sharp change in investor sentiment.”
Moody’s base-case scenario would see average UK commercial real estate values fall by up to 10 per cent depending on type, quality and location.
Moody’s says a severe stress test would erode bank capital despite their protective measures.
If the stress test involves a UK recession then Moody’s expects losses of up to £12bn across the six largest UK banks, making up 14 per cent of their commercial real estate exposure.
The rating agency also says the worst-case scenario would slash large UK banks’ fully-loaded Basel III Tier 1 capital ratios by 113 basis points on average.
RBS would see a drop of 173bps, Santander UK 141bps, Lloyds 136bps, Nationwide 113bps, HSBC 71bps and Barclays 40bps.
But the rating agency says that these firms should be able to offset some of their credit losses through “profits and other management actions”.
The report adds: “In addition, its assessment of these banks’ capitalisation under stress is already reflected in the relevant ratings.”