Credit Suisse says house price declines set to continue

(Reuters) - House prices in the UK are set to fall further, putting pressure on the banks to increase their balance sheet provisions due to higher mortgage and unsecured impairments, as well as higher capital needs, Credit Suisse said.

The brokerage, which is cautious on UK banks, estimated that a 10 percent fall in house prices and a doubling of arrears would require banks to increase balance sheet provisions by around 23 basis points of loans.

"We estimate a 20 percent fall in house prices would increase this (requirement for provisions) towards 89 basis points, leading to a 45 basis points increase in impairment charges if taken over two years," analyst Jonathan Pierce said. "For some it could be a lot worse."

A 10 percent fall in house prices combined with a doubling in arrears would require Bradford & Bingley to increase its provisions by 54 basis points, more than double the impact on the industry, the brokerage said.

Credit Suisse cuts it price target on mortgage lender Bradford & Bingley to 135 pence from 190 pence to reflect concerns on the impairment outlook.

A more severe early 1990's style downturn could lead to a 210 basis points increase in provision requirements, which if spread over two years would lead to a 105 basis points increase in impairment charges per annum to the brokerage's forecasts, Credit Suisse said.

"This would take almost 200 percent off our 2009 profit-before-tax forecast," the brokerage added.

Shares of Bradford & Bingley were trading down nearly 5 percent at 165 pence by 9:47 a.m. on the London Stock Exchange, while shares of rival Alliance & Leicester were trading down nearly 8 percent at 462 pence. (Reporting by Tenzin Pema in Bangalore; Editing by Anil D'Silva)