Royal Bank of Scotland and Lloyds Banking Group are the two major U.K. banks 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.
Bloomberg News reports that RBS has $33bn of lending to the sector, accounting for 66% of its tangible net asset value, a measure of capital, and Lloyds has $23.4bn, 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 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.
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