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London - Royal Bank of Scotland Group 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, JPMorgan Chase said.
RBS has £25.2bn 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% 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 UK commercial property prices is likely to pressure domestic UK-exposed bank valuations," Sinha wrote.
"Major UK 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 on Tuesday it was "closely monitoring" valuations in the commercial real-estate market and moved to ease banks’ capital requirements.
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 on Wednesday, which reiterated sell ratings on both lenders.
The industry as a whole has £86bn of commercial real estate lending, "reduced significantly" from five years ago, when it totalled more than £150bn, JPMorgan said.
The major banks have £69bn pounds of exposure and smaller banks and building societies hold the remaining £17bn.
JPMorgan cut its 2018 earnings per share estimates for UK banks by 22% last week.
