Lloyds will be hit by fall in house prices
LLOYDS would be the hardest hit of the UK banks by an expected decline in house prices over the next two years, according to analysts at Morgan Stanley.
A note released yesterday by researchers at the bank painted a more pessimistic view of the housing market than analysts had previously predicted, with a 10 per cent drop in value from the last quarter of 2010 to the end of 2012.
The note identifies Lloyds as the most exposed listed bank to UK mortgages, due to the fact its loan book is 58 per cent mortgages, of which Morgan Stanley expects 27 per cent (£90bn) of these to be in negative equity by Dec 2012.
As a result, Lloyds would be hit hardest by the problems that would face all UK banks if prices fall, with higher impairments in the mortgage book, higher capital charges and elevated funding costs stretching balance sheets across the board.
Morgan Stanley says that Lloyds’ profits could be hit by loan losses of up to £1.4bn in 2011-12, compared to £300m in 2010, and has cut its earnings estimate for the bank by seven per cent. Morgan Stanley now expects 21 per cent lower profit before tax for Lloyds than consensus estimates in 2012.
Analysts at the bank see a comparatively much smaller impact on Barclays, HSBC and RBS, which all have loan book exposure to mortgages of well below 25 per cent.
Morgan Stanley’s house price revisions are based on a weakness in household income growth, rising mortgage rates and overambitious valuations.
“Demand looks set to be relatively unsupportive for prices over the next year and a half or so,” said the note. “We don’t expect any significant further increase in availability of higher loan-to-value mortgages and expect only modest improvements in credit availability more broadly.”