Investors should sell their shares in HBOS but consider buying Royal Bank of Scotland, Collins Stewart analyst Alex Potter tipped yesterday amid warnings that falling prices on commercial property could have a knock-on impact on lenders' profits.

Potter believes that HBOS, along with Royal Bank and Lloyds TSB, has as much as 8% to 10% of its loan book invested in commercial property.

He said HBOS, Royal Bank and Barclays also have large private-equity-style businesses. These might be less successful in future as the economy slows and it becomes hard to finance large deals with borrowings.

Potter added that HBOS with Lloyds TSB also has around 60% of its loan book in UK mortgages and unsecured lending and suggested that the Edinburgh bank had done much of its lending later in the cycle. This might make it more vulnerable to losses if the housing market continues to drop.

He also suggested that if buy-to-let investments turn sour this could leave HBOS and Bradford & Bingley exposed.

While Potter likes HSBC, the UK bank with the biggest business in the still-booming Far East, he said in the short term he favoured switching to Royal Bank, which could benefit from the integration of Dutch bank ABN Amro.

His analysis came after the Bank of England yesterday said a steep decline in prices has raised the probability of loan defaults and could have a knock-on effect on profits at lenders.

In its latest financial stability report, the Bank said the 16% drop in commercial property prices since late June had raised the risk of losses on the UK's £175bn outstanding real estate loans to "material levels".

HBOS shares closed down 1.2% yesterday at 465p and Lloyds TSB fell 0.4% to 430.75p. Royal Bank closed up 0.3% at 346p, and Barclays gained 1.9% to close at 465p.