The rating agency has published its credit loss assumptions for UK lenders and says, in a worst-case scenario, the banks may lose 8 per cent of their loan book, or £150bn. It says if the economy continues as currently predicted lenders will still suffer credit losses of 4.5 per cent of all loans, or £86bn by the end of 2011.
S&P predicts that 1.5 per cent of losses will come from the UK residential mortgage market. It estimates that during he last downturn in the early nineties, lenders made losses of 1 per cent.
It says some of these losses will come as a result of rising unemployment figures, which it says could reach as much as 9.5 per cent by 2010. It says: “We forecast a major acceleration in possessions, to a level considerably higher than in the last recession.”
The report also estimates the cost of repossession faced by lenders – it says a forced sale discount of 15 per cent on top of an already depressed housing market, along with possession and court costs and 18 months of capitalised arrears means a property possessed in 2009 could make a lender a loss of around 30 per cent. S&P says tenant-occupied buy-to-let repossessions will lose a further 10 per cent due to additional costs and speed of the process.
The ratings agency paints an even bleaker picture for commercial property losses – it says there could be a loss rate of as much as 15 per cent on commercial loans. It notes that HBOS will be one of the most severely affected by commercial losses.
It says: “We consider that the UK is currently in the midst of its worst recession for at least a generation. As such, we expect the recession to have a severe affect on loan impairments – as can already be seen, we think, at the worst-affected institutions.”