BT : Banks face mounting losses in commercial property

Business Times - 29 Jun 2010

Banks face mounting losses in commercial property

Risk of further losses from exposure to real estate sector: BIS

(BASEL) The body grouping central banks around the world warned yesterday that banks are still worryingly exposed to risks such as falling commercial property prices which are likely to dent their earnings.

'Despite the improvement in banks' balance sheets, several factors raise doubts about the sustainability of bank profits,' said the Bank for International Settlements (BIS) in its annual report.

The so-called central bank for central bankers noted in particular that 'there is growing evidence that further losses can be expected from exposure to the commercial real estate sector'. Commercial property values in the United States have plunged by a third from their peak and rates of overdue loan payments have risen to more than 8 per cent, said the Basel-based bank.

In European countries like Ireland and Britain, commercial property prices have also plummeted by up to 46 per cent from their peak.

'Losses on European bank balance sheets are expected to mount over the next few years,' it said, noting that some banks have in fact been rolling over loans rather than inducing foreclosures, a move that is delaying recognition of losses.

Beyond losses in commercial properties, some banks are also highly exposed to sovereign debt risks, said BIS.

At the same time, with governments also having significant borrowing needs, BIS said banks may find it tougher to obtain refinancing.

Many international banks including Citigroup, UBS and Royal Bank of Scotland suffered from massive writedowns and losses during the financial crisis as their bets on the sub-prime private home loan market soured.

By April 2010, losses or writedowns reported by banks reached US$1.306 trillion, BIS said.

But new capital injected - mostly by governments through special rescue funds - almost matched these losses, reaching US$1.236 trillion.

The BIS groups more than 54 central banks\. \-- AFP

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