Large UK Banks’ CRE in the UK Contained, But Weak Prospects For Retail and Business Hospitality
This commentary looks at the commercial real estate (CRE) sector for banks domiciled in the UK, and is based on publicly available data reported by the large UK banks rated by DBRS Morningstar (HSBC, Lloyds, Barclays, and NatWest) for their CRE portfolios.• The large UK banks’ exposure to UK CRE has decreased over recent years on an aggregate basis, reflective of targeted reductions, while their average share of total CRE lending to total lending is in line with European peers’ average CRE lending.
• Based on the banks’ individual reporting, the UK CRE Stage 3 loans (i.e. credit impaired loans) to total CRE loans ratio for the large UK banks has deteriorated compared to end-FY19, prior to the beginning of the pandemic. The share of UK CRE Stage 2 loans (i.e. loans with increased credit risk) to total CRE loans, when disclosed, provides another insight into the stress experienced and shows a bigger magnitude in the deterioration compared to prior years.
• The outlook for asset quality remains uncertain in spite of few clear signs of deterioration in FY21, but the weak prospects for retail and business hospitality CRE, in particular, could negatively affect the asset quality of UK CRE lending.
“The UK CRE sector has been experiencing stress since the pandemic started, retail and hospitality in particular, and this is reflected in the evolution of the large UK banks’ CRE Stage 2 and 3 loans. The environment remains challenging, however, the recent solvency stress test published this week by the PRA shows the resiliency of large UK banks under a severe scenario which includes further drops in CRE valuations alongside no additional government support measures” said Vitaline Yeterian, Senior Vice President, Global FIG.
Barclays is a holding company. Through its subsidiaries, Co. is a financial services provider engaged in retail banking, credit cards, wholesale banking, investment banking, wealth management and investment management services. Co.'s business segments are: Barclays U.K, which provides everyday products and services to retail customers and small to medium sized enterprises; Barclays International, which delivers products and services designed for Co.'s corporate, wholesale and international banking clients; and Head Office, which comprises head office and central support functions (including treasury) and businesses in transition.
HSBC Holdings is a financial services holding company. Through its subsidiaries, Co. operates four businesses: Retail Banking and Wealth Management, which serves customers through four businesses: Retail Banking, Wealth Management, Asset Management, and Insurance; Commercial Banking, which provides working capital, term loans, payment services, and international trade facilitation; Global Banking and Markets, which delivers a range of transaction banking, financing, advisory, capital markets, and risk management services; and Global Private Banking, which provides a range of private banking services. At Dec 31 2017, Co. had total assets of US$2.52 trillion and deposits of US$69.92 trillion.
Lloyds Banking Group is a financial services provider. Co.'s main business activities are retail and commercial banking, general insurance and long-term savings. Co.'s Lending products are mortgages, credit cards, personal and business loans; Deposit products include taking Current accounts and savings accounts; Insurance products are home insurance, motor insurance and protection; Commercial financing products includes term lending, debt capital markets and private equity; and Risk management products includes interest rate hedging, currency and liquidity. As of Dec 31 2017, Co. had total assets of £812.1 million and total deposits of £448.0 million.
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