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As market observers point toward a perceived bottom to the US housing industry and signs of stabilization -- and even recovery -- the UK financial sector looks poised to take on heavy losses as it continues to work through its own credit crisis. UK banks have experienced £110bn ($182.2bn) in loans and securities losses since the credit crisis began in 2007, and could lose an additional £130bn (for a total of $398bn) before the extent of the financial fallout concludes, analysts at Moody’s Investors Services wrote in a recent report. Economic strains like growing unemployment and high levels of indebtedness, along with the decline in the UK gross domestic product (GDP) will lead to higher loan arrears, affecting bank profitability, Moody’s wrote, and government support and regulation will be essential for UK banks to recovery in the coming years. The British government has invested more than £1trn through its bank bailout efforts, and the banks themselves have raised £120bn in new capital by the middle of 2009, Moody’s said.  While Moody’s maintained its negative outlook on UK banks, it said further risk downgrades are unlikely because current ratings already incorporate future risks. Moody’s also warned that default rates could increase, especially on commercial real estate. Commercial real estate values have dropped 37% since peaking in Q207 and 26% in the last year, Moody’s said, citing the Investment Property Databank (IPD) UK All Property Index. Moody’s said the high proportion of commercial property exposures at UK building societies “remain an area of concern.” The decline of the securitization markets, the shortening of wholesale funding maturities and increased competition for retail deposits has hurt bank funding. While the government’s efforts have helped, Moody’s wrote, liquidity remains the central challenge to UK banks. Write to Austin Kilgore.

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