Sunday, 22 December 2024
Moody's: Large UK banks more resilient to weakening commercial real estate sector than during financial crisis
London -- Although Moody's expects the commercial real estate (CRE) sector in the United Kingdom (UK) to weaken over the coming quarters following the country's vote to leave the European Union (EU), large UK banks will be better placed to cope with a deterioration in the sector than during the 2008/09 global financial crisis, says Moody's Investors Service in a report published today.
Moody's report, entitled "Banks - United Kingdom: Large UK Banks Are More Resilient To a Weakening Commercial Real Estate Sector Than In the Financial Crisis," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. Please note that this report does not constitute a rating action.
"We estimate that the six largest UK banks have reduced their aggregate gross UK Commercial Real Estate lending exposure by around 40%, to GBP84.6 billion at end-June 2016 from GBP138.9 billion at the end of 2010," says Andrea Usai, Senior Vice President at Moody's. "Reduced exposures to UK CRE coupled with stronger capital buffers means that large UK banks should be better positioned to handle a deterioration in the sector than during the 2008/09 global financial crisis."
RBS and Lloyds had the largest exposure to UK commercial real estate of around GBP25 billion and GBP20 billion at the end of June 2016, respectively, while Santander UK has the largest exposure as a proportion of its fully-loaded Basel III Tier 1 capital at 94%, as at the same reporting date.
"Pressures on the UK CRE market mounted in early 2016 amid uncertainty about the outcome of the Brexit referendum," explains Mr. Usai. "And following the acutal vote to leave the EU, we have seen the collapse of some large CRE deals, as well as the suspension of redemptions at some UK property funds -- these events signal a sharp change in investor sentitment."
But though banks may be better placed to deal with a CRE slump than they were a number of years ago, a severe stress would certainly erode capital, and materially in some cases, according to the rating agency. As noted earlier in August, Moody's base-case scenario foresees average UK CRE values declining by up to 10%, depending on type, quality and location. In a hypothetical adverse scenario, where Moody's assumes the UK economy is in recession, the rating agency expects significantly greater property price declines albeit unlikely to be of the magnitude witnessed during the financial crisis when they fell by around 45%.
Under a severe stress scenario, Moody's stress test results in meaningful losses totalling GBP12.0 billion across the six large UK banks, accounting for 14% of their gross CRE exposures, as of the end of June 2016. The rating agency also estimates that this hypothetical adverse scenario could reduce large UK banks' fully-loaded Basel III Tier 1 capital ratios by 113 basis points (bps) on average; a drop in The Royal Bank of Scotland Group plc (Ba1 Positive) Tier 1 capital of 173 bps, 141 bps for Santander UK PLC (LT deposits Aa3 negative/LT senior unsecured A1 stable, BCA a3), 136 bps for Lloyds Banking Group plc (Baa1 stable), 113 bps for Nationwide Building Society (LT deposits Aa3 negative/LT senior unsecured Aa3 negative, BCA a3), 71 bps for HSBC Bank plc (LT deposits Aa2 negative/LT senior unsecured Aa2 negative, BCA a3), and 40 bps for Barclays Plc (Baa3 negative).
Moody's notes, however, that these institutions would likely be able to partly offset these credit losses under the adverse scenario through profits and other management actions. In addition, its assessment of these banks' capitalisation under stress is already reflected in the relevant ratings.
Re-disseminated by The Asian Banker
