Now that not just 3 (as of last night) but 5 UK property funds, with Henderson and Columbia Threadneedle became the latest two entrants to this exclusive club of clueless asset managers who have no idea how to factor in liquidity mismatch during market stress, have “frozen” their assets and gated investors from accessing assets, concerned traders are wondering how far the downstream effects of this domino chain will go. Luckily, overnight analysts at Morgan Stanley, JPM and SocGen did the math and found what they believe is (are) the most impacted bank(s) from UK’s commercial real estate troubles.
Here is the verdict, first from SocGen:
- RBS exposure to CRE is GBP26b, most of U.K.’s major banks, and equivalent to 63% of tangible equity
- Lloyds 2nd most exposed at 46% of tangible equity, Santander 3rd at 24%, Barclays 4th at 23% and HSBC 5th at 17%
- U.K. banks debt financing of CRE is down 34% since 2008 to GBP168b, according to De Montfort University
- Says watch out for other banks, challenger banks have relatively high proportion of more highly leveraged CREs on books
- Lloyds is most preferred, will be able to absorb Brexit bumps; RBS is least preferred
Next, from JPM:
- RBS, Lloyds and Bank of Ireland are more exposed to risks from U.K. commercial property prices than Barclays, HSBC and Standard Chartered
- RBS, Lloyds TNAV sensitivity in stress scenario may be up to 5.5% with CT1 sensitivity at 90bps-100bps
- Major U.K. banks’ exposure is GBP69b
- Is “cautious” on U.K. domestic-exposed banks
- U.K. lenders exposure is GBP86b down from GBP150b in 2011
- Flags BOE remarks that U.K. challenger banks have high proportion of more highly leveraged commercial real estate loans
- Says BOE research shows 10% drop in U.K. CRE prices leads to 1% drop in economy-wide investment
Finally, Morgan Stanley is outright negative on everything:
- Morgan Stanley analysts see potential for further stress with GBP25b-40b of AUM in property funds, or 2-5% of total U.K. mutual fund assets, according to note.
- Outflows are always high when REIT discounts are wide, whilst Henderson, Aberdeen and Schroders have some exposure among asset managers
- Number of redemption requests normally correlated with discount to NAV for listed property stocks, currently close to historical wides
- Fund suspensions designed as circuit-breakers, but sentiment generated can still drive negative feedback loop similar to that seen during last financial crisis
- Liquidity mismatch the main concern:
- Liquidity of investment funds is a significant concern for global regulators, particularly where illiquid underlying investments are being sold in daily dealing fund structures to retail investors
* * *
The conclusion: Italy has Monte Paschi, Germany has Deutsche Bank, and the UK is now saddled with RBS.
At this rate, all three will soon require taxpayer bailouts. Just remember: it’s all Brexit’s fault that 7 years after the financial crisis, not a single of Europe’s most systemically important banks were actually “fixed.”
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