RBS will near £50bn CRE de-leveraging since 2008 by year end

Royal Bank of Scotland expects to shrink its non-core global commercial real estate loan book to a rump of less than £15bn by the end of this year which will crystalise a near £50bn de-leveraging programme in five years. 

RBS logoIn a detailed analysis of RBS’s 2012 annual results, CoStar News examines how the colossal run-down has been achieved, the maturity profile for the core and non-core loan books for the year ahead, new lending ambitions as well as the bank’s £12bn of capital set aside to comply with the controversial “slotting regime”.

£48bn in non-core CRE de-leveraging in five years 

By the end of this year, RBS forecasts a total of £48bn of real estate loans will be removed from the non-core segment of its overall global property loan book, driven by loan repayments, asset sales – consensual and enforcements – and write-downs taken in loan impairment charges against defaulted loans.

In the four years from when RBS set up its non-core divisional reporting – from the year end 2008 to 2012 – the bank has so far de-leveraged by £40.7bn across its non-core global CRE loan book.

Against this £40.7bn exposure, RBS has taken an aggregate £12.28bn in loan impairment losses over the last four years – comprised of £1.7bn in 2012, £3.4bn in 2011, £4.6bn in 2010 and £2.58bn in 2009, according to the bank’s annual results since 2009.

This £12.28bn in impairment write-downs reflects 30% of the four-year de-leveraging total.

RBS now forecasts that by the end of this year, only a rump of £14.8bn in non-core commercial real estate loans will remain – comprised of circa £6.6bn in UK loans, £4.4bn in legacy Ulster Bank loans and around £3.7bn its remaining global real estate exposures.

If this de-leveraging is achieved, RBS will have shed £48bn in five years – from £62.8bn at the end of 2008, to around £14.8bn by the end of 2013.

RBS said its Global Restructuring Group (GRG) will continue to actively manage down stressed assets with a focus on optimising recovery rates and releasing capital.

Around half of the £14.8bn is expected to be run-off by the end of 2016, with the balance more stressed assets and on longer maturities for which there will be a greater passive management with no major disposals planned.

2012 non-core de-leveraging

A further £2.9bn of CRE loans was shed in the fourth quarter, taking the annual de-leveraging in 2012 to £9.4bn and RBS’ non-core CRE loan book at the end of last year to £22.1bn, according to the bank’s annual results published this morning.

This annual £9.4bn de-leveraging is comprised of a run-off of £5bn worth of loans due to maturity and repayments, £2.2bn in disposals and restructurings, £1.7bn in loan impairment losses and £600m in negative currency fluctuations.

The end of 2012 £22.1bn figure for non-core CRE excludes £4.3bn in loans to property companies and housebuilders for corporate purposes and not secured by mortgaged properties. Including this pool of loans, RBS entire non-core exposure to the property and construction industry is now £26.43bn.

Inclusive of  which, in total RBS reduced its exposure to the property and construction sectors by £11bn last year.

The geographic split of this £22.1bn first-mortgaged secured non-core CRE loan book is as follows:

  • £8.9bn (2011: £11.4bn) in UK, excluding Northern Ireland (NI),
  • £5.8bn (2011: £7.7bn) in the Republic of Ireland (RoI) and NI,
  • £1.4bn (2011: £1.8bn) in Spain
  • £4.9bn (2011: £7.9bn) in rest of Europe
  • £0.9bn (2011: £2.2bn) in the US
  • £0.2bn (2011: £0.5n) in the rest of the world

Combined core and non-core loan book: £19bn of loans above 100% LTV

RBS’ combined £63.0bn core and non-core global real estate loan book is comprised of £19.29bn of loans with LTVs above 100%, at the end of 2012.

Of this £19.3bn, RBS have recorded £10.81bn worth of real estate loans above 150%, with a further £1.4bn between 130% and 150%, and £2.9bn between 110% and 130%.

The £63bn total, reduced by £11.8bn over 2012, includes £6.6bn in general corporate lending to property companies and house builders.

Excluding these loans, and also excluding a further £1.48bn in development loans with no physical asset security to enforce against, RBS’ combined loan book is £53.04bn.

Of this £53.04bn, the £19.3bn worth of property loans above 100% LTV reflect 36.3% as a proportion of the total book with mortgaged security. By contrast £21.28bn of real estate loans, or 40.1% of the £53.04bn total, are below a 70% LTV.

Returning to the broader £63bn total, RBS reported £39.89bn, or 63.3%, as performing and £23.15bn, or 36.7%, as non-performing. RBS reported as much as £4.5bn of real estate loans above 100% LTV are considered otherwise performing.

The weighted average LTV of RBS combined real estate loan book 122%, comprised of 71% across the performing £39.89bn segment and 206% across the £23.15bn non-performing component.

The £11.8bn de-leveraging in 2012 across the aggregate loan book comprises a £3.95bn fall in RBS’ core book, from £40.56bn to £36.61bn, and a £7.85bn fall in non-core to £26.43bn.

In its annual results, RBS stated: “The commercial real estate sector is expected to remain challenging in key markets and new business will be accommodated from run-off of existing core exposure.

“Over £5.5bn of loans in UK corporate (core and non-core) have been repaid over the last 12 months whilst the risk profile of the remaining performing book has remained relatively unchanged.”

Refinancing spike: RBS’ £29bn of debt maturing within a year

RBS has a combined £29.05bn worth of property loans which have staggered maturities within the nest 12 months, including an undisclosed proportion of loans already passed due.

The enormous loan maturity profile – comprised of £16.3bn in non-core and £12.7bn in core – will be managed by RBS through a combination of securing repayments, agreeing restructurings and extensions for core clients, debt roll-overs where necessary to ensure best recovery to the bank for non-core clients, as well as consensual and enforced sales.

“Refinancing risk remains a focus of management attention and is assessed throughout the credit risk management life cycle,” RBS wrote in its annual results this morning.

Within the core loan book, £8.6bn of property loans to UK corporates are due to mature, for which there will be a likely considerable natural run-off.

This year, RBS plans to lend above £3bn in new lending to core clients, repeating the volumes achieved last year, CoStar News has separately learned.

Slotting: RBS expects to set aside up to £15bn

RBS set aside £12bn of capital to comply with the ‘slotting’ regime in 2012 and forecast a capital reserve requirement of between £10bn and £15bn for this this year.

Slotting, a legacy capital reserve requirement as prescribed under Basel II, requires banks to classify the risk of each income-producing commercial real estate loans according to one of five slots ranging: ‘strong’, ‘good’, ‘satisfactory’ and ‘weak’ to ‘default’.

Each slot requires the bank to hold a progressively higher amount of capital.

RBS stated in its results this morning: “The group, in conjunction with the FSA, regularly evaluates its models for the assessment of risk-weighted assets (RWAs) ascribed to credit risk (including counterparty risk) across various classes.

“This includes implementing changes to the RWA requirements for commercial real estate portfolios consistent with revised industry guidance from the FSA.

“The changes to RWA resulting from model changes during 2012 have increased RWA requirements by £44bn of which £12bn relates to property guidance. Further uplifts are expected in 2013 totaling c.£10bn to £15bn.”

“The changes to RWA resulting from model changes during 2012 have increased RWA requirements by £44bn of which £12bn relates to property guidance. Further uplifts are expected in 2013 totaling c.£10bn to £15bn.”


About CoStar News

Finance Editor, CoStar News
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