Royal Bank of Scotland and Lloyds Banking Group have the largest exposure to UK commercial property risks, according to Moody’s.
The rating agency’s investor service report says it expects the commercial real estate sector to weaken post-Brexit vote.
Moody’s says large UK banks are better placed to handle this risk than during the financial crisis.
Moody’s senior vice president Andrea Usai says: “We estimate that the six largest UK banks have reduced their aggregate gross UK commercial real estate lending exposure by around 40 per cent, to £84.6bn at end-June 2016 from £138.9bn at the end of 2010.”
RBS and Lloyds have exposures of £25bn and £20bn respectively.
Santander UK has the largest exposure as a proportion of capital at 94 per cent.
Usai adds: “Pressures on the UK commercial real estate market mounted in early 2016 amid uncertainty about the outcome of the Brexit referendum.
“Following the acutal vote to leave the EU, we have seen the collapse of some large commercial real estate deals, as well as the suspension of redemptions at some UK property funds – these events signal a sharp change in investor sentiment.”
Moody’s says a severe stress test would erode bank capital despite their protective measures.
Moody’s base-case scenario would see average UK commercial property values fall by up to 10 per cent depending on type, quality and location.
If the stress test involves a UK recession then Moody’s expects losses of up to £12bn across the six largest UK banks, making up 14 per cent of their property exposure.
But the rating agency says these firms should be able to offset some of their credit losses through “profits and other management actions”.