Fitch: Challenges of Financial Statement Analysis from Loan Modifications, Purchase Impaired Loans

NEW YORK--(Business Wire)--
The increasing significance of modified loans and purchase impaired loans on
financial institutions' balance sheets has increased the challenges posed to
users of financial statements, according to Fitch Ratings in two special reports
published today. With more principles-based accounting, financial statement
preparers are able to use varying degrees of opinion and judgment in the
treatment of modified loans, also known as troubled debt restructured loans
(TDRs) and purchase impaired loans (PILs) which challenge analysis with regard
to comparability across different companies as well as trend analysis over
several periods.

TDRs have remained at the forefront of the public discussion as a solution for
resolving the continued influx of past due residential loans. At Dec. 31, 2009,
of the $74 billion in TDRs in the Fitch-rated universe, most are related to
residential loans, though Fitch expects the pace of commercial-related
modifications will increase through 2010. In 'Troubled Debt Restructuring:
Challenges for Ratio Analysis', Fitch explores the effect of differing
accounting treatment on asset quality measures, as well as idiosyncrasies that
complicate understanding the full extent of TDRs in the loan portfolio.

'Fitch has a heightened awareness of TDRs and the potential for additional
losses due to a high level of recidivism of residential mortgages in the
market,' said Managing Director Christopher Wolfe. This heightened risk is
evidenced in the recently reported 40% re-default rate for portfolio residential
mortgages 12 months after modification. This further supports Fitch's continued
treatment of modified loans, in which restructured loans, including those that
are performing, are classified as non-performing until the borrower demonstrates
the ability to perform within the new loan terms.

In 'Purchased Impaired Loans: Challenges for Ratio Analysis', Fitch illustrates
the impact PILs have on capital and profitability simply by a differing judgment
of value. This is one of many considerations that must be contemplated by
financial statement users when engaging in comparability analysis, where PILs
are material. Of the $204 billion in PILs at year-end 2009 reported by
Fitch-rated banks, two financial institutions account for a combined 65%. Fitch
believes the level of PILs could grow if non-assisted merger and acquisition
activity increases.

Both reports provide adjustments to standard performance metrics used to
evaluate profitability and asset quality in an effort to improve comparability
and trend analysis.

'Troubled Debt Restructuring: Challenges for Ratio Analysis' and 'Purchased
Impaired Loans: Challenges for Ratio Analysis' are both available on Fitch's
website at www.fitchratings.com.

Additional information is available at www.fitchratings.com.

Related Research: Troubled Debt Restructuring (Challenges for Ratio Analysis)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=512825

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Fitch Ratings, New York
Christopher Wolfe, +1-212-908-0771
Dina Maher, CPA, +1-212-908-9175
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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