European banks exposure to commercial property will become an issue in 2010 and develop into an acute concern in 2011-12 when a large number of loans mature, according to Fitch.

In the report it stated that the risk is particularly intense in countries such as Britain, Ireland and Spain where banks have high exposure relative to tier-one capital and whose domestic property markets have seen a big fall in values.

Gordon Scott, managing director of Fitchs Financial Institutions team, said: "Many banks have not yet reported substantial losses on their CRE portfolios, despite significant declines in asset values in certain markets and segments.

"With a large proportion of loans in negative equity, Fitch expects pressure on borrower cash-flows and increasing loan covenant breaches to result in further losses."

With banks unlikely to report loans as non-performing whilst they are still being serviced, loan losses are unlikely to peak until into 2010 because corporate defaults typically peak two quarters after economic contraction ends the report said.