Invezz.com - European banks may face challenges in handling property loan defaults if there is a significant rise in problem loans due to severe market pressure, according to a Moody’s Ratings report released on Thursday.
However, the report indicated that most lenders possess robust capital reserves that should allow them to manage the strain.
The report highlights how property owners across Europe are grappling with falling property values and increased borrowing costs, elevating the risk of loan defaults.
While recent interest rate cuts by central banks have provided some relief, concerns remain about the overall health of the property market.
Moody’s test reveals loan risks for European banks
Moody’s conducted a stress test on 21 European banks with high exposure to commercial real estate, using a scenario comparable to the aftermath of the 2008 global financial crisis.
The banks tested were those with significant commercial real estate portfolios relative to their capital strength. The majority of these banks were German real estate specialists, with others hailing from Sweden, Austria, and Denmark.
The rating agency applied a loan loss reserve ratio of 40%, which is the average reported by major European banks over the past five years.
However, the actual average for the first quarter of this year was lower at 33.5%, signaling that problem loans are growing at a faster pace than banks’ provisioning efforts.
Moody’s cautioned in the report, saying:
Although a move toward higher-quality assets may justify lower coverage, we believe there is an increased risk that banks have not provisioned adequately.
This concern mirrors a warning issued by the European Central Bank (ECB) last month, which noted that eurozone banks might have been overly optimistic in valuing their commercial real estate holdings, possibly concealing a deterioration in loan quality.
Vulnerability of US and UK office property exposure
Moody’s findings indicate that the greatest pressure would fall on banks with significant exposure to US and UK office properties, while banks lending to housing projects would experience less strain.
Nonetheless, the report concluded that all the surveyed banks would remain above their regulatory minimum capital requirements, even under the stressed scenarios.
Moody’s added:
While our tests incorporate simplifying assumptions, the results suggest no breaches of minimum regulatory capital levels under the modeled conditions.
This article first appeared on Invezz.com
