RBS and Lloyds are ‘most exposed’ to UK commercial property market

Royal Bank of Scotland (RBS) and Lloyds Banking Group are the two major UK lenders most exposed to the commercial real estate market, which poses a risk for banks after asset managers froze withdrawals from property funds, according to analysts.

RBS has £25.2bn (€29.4bn) of lending to the sector, accounting for 66% of its tangible net asset value, a measure of capital, and Lloyds has £18.1bn, or about 46% percent of its TNAV, JP Morgan analyst Raul Sinha, an analyst, said in a research report.

While the risks for major banks are “manageable,” smal lenders could see greater losses because of higher loan-to-value ratios on their commercial real estate (CRE) debt.

“Downside risk from UK commercial property prices is likely to pressure domestic UK-exposed bank valuations,” Mr. Sinha wrote.

“Major UK banks have broadly maintained their underwriting standards in recent years, with smaller banks and building societies 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 EU. The Bank of England said on Tuesday it was “closely monitoring” valuations in the commercial real estate market.

The shock caused by the freezes in the real estate funds may prompt more redemptions from investors, putting them under more stress, Morgan Stanley said.

The analysts said 45% 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 said.

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