UK Banks’ CRE: Some Deterioration But Contained; Impact of Higher Rates Yet to Be Seen
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 or “the banks”) for their CRE portfolios.Key highlights:
• The large UK banks have reduced their Commercial Real Estate (CRE) exposures in the UK both in absolute terms and as a proportion of UK lending over the past three years, while the overall CRE exposure in the UK seems moderate and similar to most international peers.
• There has been some uneven deterioration in asset quality metrics. However, the banks’ CRE asset quality metrics currently available do not yet reflect the recent evolution in interest rates in the UK in a deteriorating economic outlook.
• In addition, property values could be affected and add pressure to UK CRE businesses in repaying their debt. There could be hidden weaknesses around collateral valuations and underwriting standards that are not yet visible.
“Quickly rising interest rates in a deteriorating economic environment can negatively affect the asset quality of UK CRE lending,” said Vitaline Yeterian, Senior Vice President, Global FIG. “However, the still uncertain outlook on the banks’ Stage 3 (i.e. credit impaired loans) and Stage 2 CRE loans (i.e. loans with increased credit risk) would only be visible in the coming months. DBRS Morningstar will therefore continue to monitor any deterioration in CRE lending closely.”
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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