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.”