European banks ‘directly hit’ by profits from falling house prices

LONDON, Nov 15 (Reuters) – European banks risk seeing their profits badly hit if house prices in the region start to fall, regulators and rating agencies have warned.

While banks’ strong balance sheets mean falling house prices shouldn’t pose systemic risk, the scale of lenders’ exposure to the real estate sector means they could face lower profits , S&P Global Ratings said on Tuesday.

Home loans typically account for between 30% and 50% of total customer loans to European banks, the rating agency said, adding that more cash would likely have to be set aside by lenders for possible defaults. payment as economic conditions deteriorate.

“Increasing credit risk in mortgage portfolios will lead to a commensurate increase in bank provisioning [for defaults]and a direct impact on their earnings prospects,” the agency said.

S&P’s comments echo concerns raised last week by the European Banking Authority (EBA). The regulator said European Union banks reported more than 4.1 trillion euros ($4.3 trillion) in loans and advances secured by residential property, about a third of all loans to households and non-financial businesses.

Banks have “significantly” increased their exposure to mortgages in recent years and are seeing some early signs of deteriorating asset quality, the EBA said.

S&P said that although it has not yet downgraded any country in its official risk assessment framework, it has noted early signs of falling property prices in Britain, particularly as the the country’s economy is slowing down.

Earlier this month, a senior official at Britain’s Nationwide Building Society told lawmakers the mortgage lender’s worst-case scenario was for house prices to fall 30% next year, despite its central forecast calling for a decrease of 8%.

Hungarian and Irish banks forecast the highest mortgage default rates under worse economic scenarios, S&P said, with so-called “stage 3” loans most at risk of default rising from single digits to around 15% for two markets.

($1 = 0.9602 euros)

Reporting by Lawrence White Editing by Mark Potter

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