Europe’s banks face ‘direct hit’ to profits from house price slide

Europe’s banks risk a significant hit to their profits if house prices across the region begin to slide, regulators and ratings agencies have warned.

While banks’ robust balance sheets mean declining house prices are unlikely to pose a systemic risk, the scale of lenders’ exposure to the property sector means they could face a hit to earnings, S&P Global (NYSE:SPGI) Ratings said on Tuesday.

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

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

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

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

S&P said that while it had yet to downgrade any country in its official risk assessment framework, it noted early signs of house price declines in Britain in particular as the country’s economy slows.

A senior executive at Britain’s Nationwide Building Society earlier this month told lawmakers the mortgage lender’s worst-case scenario was for house prices to fall by 30% next year, though its central forecast was for an 8% drop.

Hungarian and Irish banks project the highest mortgage delinquency rates under more adverse economic scenarios, S&P said, with so called ‘stage 3’ loans most at risk of default rising from single digits to around 15% for both markets.

($1 = 0.9602 euros)