RBS, Lloyds Top Commercial Property Exposures, JPMorgan Saysby
Smaller lenders at more risk due to greater leverage on debt
Asset managers freeze real-estate fund withdrawals post-Brexit
Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc are the two major U.K. lenders most exposed to the commercial real estate market, which poses a risk for banks after asset managers froze withdrawals from property funds, JPMorgan Chase & Co. said.
RBS has 25.2 billion pounds ($33 billion) of lending to the sector, accounting for 66 percent of its tangible net asset value, a measure of capital, and Lloyds has 18.1 billion pounds, or about 46 percent of its TNAV, Raul Sinha, an analyst, said in a report dated July 5. While the risks for major banks are “manageable,” small lenders could see greater losses because of higher loan-to-value ratios on their CRE debt.
“Downside risk from U.K. commercial property prices is likely to pressure domestic U.K.-exposed bank valuations,” Sinha wrote. “Major U.K. banks have broadly maintained their underwriting standards in recent years, with smaller banks and building societies including challenger banks having a relatively high proportion of more highly leveraged CRE loans.”
This week, three asset managers halted withdrawals from real-estate funds after investors rushed to redeem money as concern grows about the future of the British economy. The pound has dropped to a 31-year low less than two weeks after the nation voted to leave the European Union. The Bank of England said Tuesday it was “closely monitoring” valuations in the commercial real-estate market and moved to ease banks’ capital requirements.
The shock caused by the freezes in the real estate funds may prompt more redemptions from investors, putting them under more stress, Morgan Stanley told clients in a report. The analysts said 45 percent of investors in the funds weren’t British and therefore would also be suffering from the devaluation of the pound.
A collapse in prices would “hurt Lloyds and RBS particularly badly; both have large commercial property loan portfolios, and the coming falls in commercial property price indices will translate into higher required impairment provisions against them,” Cenkos Securities analyst Sandy Chen said in a separate report sent Wednesday, which reiterated sell ratings on both lenders.
The industry as a whole has 86 billion pounds of commercial real estate lending, “reduced significantly” from five years ago, when it totaled more than 150 billion pounds, JPMorgan said. The major banks have 69 billion pounds of exposure and smaller banks and building societies hold the remaining 17 billion pounds. Societe Generale SA analysts echoed Sinha’s warning smaller challenger banks were most at risk due to high leverage.
Banks will be shielded from losses of the scale seen in the 2008 and 2009 financial because they’ve shrunk their portfolios and lent a smaller portion of the property’s value, analysts at HSBC said. Risk-aversion, new regulations and recent increases in property prices account for the change, Ivan Zubo and Robin Down wrote in a note to clients.
JPMorgan cut its 2018 earnings per share estimates for U.K. banks by 22 percent last week.