(Boursier.com) – European banks’ profits could be hit if real estate prices start to fall in Europe, according to a study published by S&P Global on Tuesday. The rating agency said their exposure to the real estate sector is at risk of seeing their earnings decline.

Home loans typically represent 30% to 50% of all credit portfolios of banks in Europe, according to S&P Global. The agency estimates that a deterioration in economic conditions will lead to increased risk in the sector. “Increasing credit risk in mortgage loan portfolios could lead to a marked increase in banks’ provisions (for default risk) and directly affect their earnings outlook,” S&P Global said.

More than 4,000 billion euros in loans

This observation echoes the concerns expressed by the European Banking Authority last week: accordingly, banks in the European Union have pledged more than 4.100 billion euros of loans and advances in real estate, that is, a third of loans to individuals and non-financial corporations.

Banks have “significantly” increased their exposure to mortgages in recent years and are now seeing the first signs of deteriorating asset quality, the EBA added. S&P notes early signs of falling property prices in Great Britain as a result of a general slowdown in the economy.

A 30% drop?

A senior executive at UK mortgage specialist Nationwide Building Society recently told MPs that in a worst-case scenario prepared by the society, house prices could fall by 30% next year. But its base case involves a decline limited to 8%.

For S&P Global, in a “dark” scenario, banks foresee the highest default rates on mortgages in Hungary and Ireland.