Spet0789 wrote:I’m afraid that’s a naive view.
Firstly, there are enough mortgages with LTV worse than 50% that, accompanied by the higher defaults we would expect to see in that environment, the banks would be foreclosing and booking losses. That would obviously hurt the numerator of their capital ratios.
Secondly and far more importantly, the risk weighted capital consumption of a mortgage book is a (highly convex) function of LTV. 1bn of 50% LTV mortgages consumes almost no capital. If those become 100% LTV following a fall in market value, even those mortgages that continue to be repaid will consume many many times more capital. It is this factor which will blow the doors off.
The PRA will either require a capital raise, or shut off divis for 5 odd years until capital is rebuilt. Either way, the stock is toast.
For this reason, until we see a normalisation of house prices (ie a fall>30%), I wouldn’t touch UK banks. I am more conservative than that.
Been there, done that. It happened in 2008/9: prices normalised, the repossessions** happened, the shareholders lost all their money, the capital was raised. It's not going to happen again in the foreseeable.
Meanwhile such negativity actually supports a bull thesis: conservative investors having no allocation to banks means lower prices for those willing to take the risk now. [Point 4 in the list here: https://www.lemonfool.co.uk/viewtopic.php?p=138139#p138139]
(** foreclosure is not a term used in the UK; similarly you cannot "hand back the keys" here.)