Lloyds Banking Group PLC (LSE:LLOY) remains on the 'buy' list at UBS as the bank's analysts addressed investor fears that a fall in the value of commercial real estate (CRE) highlighted by Direct Line Insurance Group PLC (LSE:DLG) yesterday could hit UK banks as well.
On Wednesday, Direct Line highlighted a 15% decline in property values and UBS banking analysts said the real estate team has forecast UK CRE values will have fallen by between 10% to 20% in 2022.
But the analysts suggested that UK banks have learned to curtail CRE (and other) risks since the 2008 global financial crisis and are protected against the kinds of price falls expected by its real estate analysts.
In 2021 UK CRE exposure was 2.3%, 2.5% and 4.9% of loans at Barclays PLC (LSE:BARC), Lloyds and NatWest Group PLC (LSE:NWG) respectively, the UBS analysts estimated, with the most recent disclosures showing over 80% of CRE exposures are in Stage 1 - where credit risk has not changed materially since the loans were made.
Portfolio loan to values of these investment exposures are low, with Lloyds and NatWest at 42% and 50% for 2021, respectively.
The UBS analysts noted that Lloyds disclosed interest cover on 92% of its CRE exposures was over 2 times and although this is likely to have fallen they see the bank's CRE exposure as well covered by customer profits and collateral.
Borrower NAVs are likely to fall as property values are revalued lower but the probability of default and loss on default looks entirely manageable even before considering the modest percentage of loans in CRE, the UBS analysts concluded.
They said they continue to have a positive view of the UK banks with Lloyds, Barclays and NatWest all attracting ‘buy’ ratings, with upside potential of 46%, 53% and 20% respectively.