UK upstart banks lack too-big-to-fail airbag
06/07/2016 10:09
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Dominic Elliott
LONDON, July 6 (Reuters Breakingviews) - Britain's biggest
banks are coping with its European Union exit - but upstart
smaller peers may struggle. The Bank of England said on July 5
so-called challenger banks were more likely to have highly
leveraged commercial property loans on their books than bigger
peers. With UK open-ended property funds freezing redemptions,
this is not a great place to be.
The minnows look reasonably well capitalised, with an
average common equity Tier 1 ratio around 15 percent - partly
because they have to use tougher standardised templates for
assessing asset risk. They are also small: none of Aldermore
ALD.L , Clydesdale CEOh.V , Metro Bank MTRO.L , Secure Trust
Bank STBS.L , Shawbrook SHAW.L , OneSavings Bank OSBO.L or
Virgin Money had assets over 40 billion pounds ($52 billion)
last year. The smallest of the biggest six UK banks - building
society Nationwide POB_p.L - has around 200 billion pounds in
assets.
Still, a Brexit-induced recession or real estate downturn
could expose shoddy underwriting. Provisions do cover 45 percent
of Aldermore's assets, and 62 percent of Shawbrook's. But as of
December three-quarters of Shawbrook's assets - 2.6 billion
pounds - were commercial real estate or small and medium sized
business (SME) loans. Aldermore, meanwhile, had 800 million
pounds in commercial property loans, with 1.5 billion pounds in
asset finance loans and invoice financing - more than a third of
its loan book.
SME lending and commercial property are linked - 75 percent
of UK corporate borrowers use real estate as collateral,
according to the BoE. Every one-tenth drop in commercial
property prices means the wider UK economy suffers a 1 percent
fall in investment, the BoE reckons.
Others may suffer, too. Citi research shows that OneSavings
Bank and Metro Bank have the largest exposure to residential
mortgages in the inflated Greater London area, and Virgin Money
has an especially low net interest margin - which would put
profitability at risk following a rate cut.
At the very least, the upstart lenders' rapid growth -
thanks to the dire customer service of bigger rivals - should
slow. Share price falls reflect that, with an average drop of 37
percent since June 23, but worse could follow. The comfort for
regulators - and the problem for investors - is that challenger
banks' small stature means they are small enough to fail.
CONTEXT NEWS
- The Bank of England on July 5 said that UK challenger
banks had a relatively high proportion of more highly leveraged
commercial property loans on their books than bigger lenders.
- The central bank pointed to research showing that while
only around 15 percent of big UK banks' lending for commercial
property was at a loan-to-value ratio of 70 percent or more, at
other British banks it accounted for almost a third of the
total.
- Moreover, the BoE said that 75 percent of UK companies
that borrow from banks use commercial real estate as collateral.
- It added that research by its staff suggests that every 10
percent fall in UK commercial real estate prices is associated
with a 1 percent decline in economy-wide investment.
- Bank of England Financial Stability Report, July 5:
http://bit.ly/29fcbGO
- Reuters: Britain's upstart banks face a bumpy
ride through Brexit fall-out urn:newsml:reuters.com:*:nL8N19N4F2
RELATED COLUMNS
Proportionally challenged urn:newsml:reuters.com:*:nL5N16I2HJ
Buff buffers urn:newsml:reuters.com:*:nL4N19R2PV
- For previous columns by the author, Reuters customers can
click on ELLIOTT/
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(On Twitter https://twitter.com/DominicElliott Editing by
George Hay and Sarah Hurst)
((dominic.elliott@thomsonreuters.com; Reuters Messaging:
dominic.elliott.thomsonreuters.com@reuters.net))
Keywords: BRITAIN EU/BANKS BREAKINGVIEWS