Analysis: Amid discount sales, concern over loan book valuations
By Jochelle Mendonca and Abhinav Sharma
BANGALORE | Wed Dec 1, 2010 2:52pm EST
(Reuters) - U.S. regional banks are shedding big chunks of their bad loans amid improved demand for distressed assets, but investors worry that the losses some lenders are willing to take may mean they're over-valuing their loan book.
Comerica Inc (CMA.N), Associated Bancorp (ASBC.O), Whitney Holding Corp (WTNY.O), PNC Financial Services Group (PNC.N) and BB&T Corp (BBT.N) are willing to sacrifice some of their capital levels to free themselves from soured assets.
Regions Financial (RF.N) has put nearly $1 billion in non-performing loans on the market, and Flagstar Bancorp (FBC.N) has ditched about $500 million in bad loans from its books.
They are finding eager buyers in hedge funds, private equity and debt buyers, who are betting on earning more cents to the dollar than they paid for the loans.
More sales by smaller regional lenders are likely to follow.
As of end-September, First Horizon National Corp (FHN.N) had $414 million as loans held for sale, Synovus Financial (SNV.N) had $292 million and Iberiabank Corp (IBKC.O) $171.5 million.
"As many banks come to the understanding that home prices may not rebound in 2011 as quickly as people felt earlier, they're wondering why not take that loss today," said Oppenheimer analyst Terry McEvoy.
However, those losses could be substantial, with banks taking a haircut on already marked-down loans.
That has prompted some investors to fear that banks have not properly valued their portfolios and are overstating the value of the loans, said veteran bank analyst Richard Bove.
That concern was further fueled by last month's fire sale of Wilmington Trust (WL.N) to M&T Bank Corp (MTB.N).
Wilmington, which was believed to have written down its loan portfolio to acceptable amounts in the second quarter, set aside another $281.5 million to cover bad loans at the end of the third quarter. M&T said it expects to lose another $1 billion on the loans.
Whitney Holding has said the sale of its troubled loans would add $65 million to its loan loss provisions in the fourth quarter, while Flagstar expects a $132 million loss on its sale.
The loan sales and the discounts offered also indicate banks' thinking on how 2011 may shape up.
"It depends whether you're optimistic about 2011. If you are, you'll sit on the loan and hope it improves," Guggenheim analyst Jeff Davis said.
Flagstar sold its already marked-down loans for about 45 cents on the dollar, while Whitney sold its loans for about 55 cents on the dollar.
Bad loans originated in Florida and the Midwest are sold at sharp discounts, highlighting the economic distress in those regions and a bank's desire to cut its losses.
TAKE HIT NOW ...
The hit to capital would be easier to make up for those banks selling their loans, than for those writing down the value every quarter.
"They'll be able to tell the capital markets, 'Look, I've gotten the bad stuff off my balance sheet so you can trust that I will use the capital for new profitable loans and not to absorb losses on old loans'," said Professor Lawrence White of the Stern School of Business at New York University.
Working out troubled loans and moving back to profit means banks should also be able to repay funds they took from the U.S. Treasury's Troubled Asset Relief Program (TARP).
For banks like Louisiana-based Whitney, the loan sell-off is a bet that the inflow of troubled loans has been staunched -- a bet against the risk of a double-dip recession.
"It does depend on how you look at it," said Guggenheim's Davis.
"Do you look at troubled loans like a tumor that can be ripped out or cancer that has spread throughout the body."
(Reporting by Jochelle Mendonca and Abhinav Sharma in BANGALORE, Editing by Ian Geoghegan)
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