February 12, 2013 / 3:45 PM / 5 years ago

TEXT-Fitch: US. banks' bulk loan sales to grow, aid in NPA reduction

Feb 12 - U.S. banks holding large levels of nonperforming assets (NPAs) on
their balance sheets are likely to pursue more bulk sales of distressed loans
this year and next, according to Fitch Ratings. Four years after non-accruals
began to spike during the financial crisis, many smaller institutions with large
residual NPA balances, particularly related to commercial loans, will be in a
better position to use bulk sales to strengthen balance sheets if market
liquidity and asset pricing continue to improve in 2013.

We see tightening risk spreads reflecting an influx of yield-starved investors
such as hedge funds, high-yield asset managers, and other lightly regulated
entities seeking higher returns in a continued low interest rate environment.

Recent asset dispositions by U.S. banks, including Synovus Financial (SNV),
SunTrust (STI), and Hancock Holding Co. (HBHC) point toward a more active market
for distressed assets. Synovus began a distressed asset disposition sale in
2009, but hadn't done a bulk loan sale since 2010 when many other institutions
were attempting to unload underperforming assets. The company sold $530 million
in NPAs in fourth-quarter 2012, realizing $155 million in related chargeoffs, or
a 30% loss rate. We note that many of the NPAs had likely already been written
down from their respective unpaid balance. However, this appears to be an
improvement from SNV's last outsized NPA sale in fourth-quarter 2010 when it
sold $573 million of assets with a 40% loss rate.

Meanwhile, STI sold $706 million in distressed real estate loans in the last few
months of 2012, taking a similar level of charge downs at just under 30% of
carrying value. In order to further clean up credit quality metrics, the company
sold $2.0 billion of government-guaranteed student loans in the third- and
fourth-quarter of 2012, some of which were delinquent.

Successful sales will allow banks to focus more attention on core banking
activities, while lowering fixed costs related to the retention of nonperforming
real estate loans (including real estate taxes, property insurance, maintenance,
and work-out staff). Hancock's $40 million bulk asset sale in the fourth quarter
was done with these cost-savings factors in mind as communicated by management
on its quarterly earnings call. HBHC noted that it will continue to evaluate NPA
sales going forward.

According to FDIC data, U.S. banks had $65 billion of commercial loans on
non-accrual status as of Sept. 30, 2012, the majority of which are related to
commercial real estate (CRE). In addition, banks reported approximately $41
billion in other real estate owned (OREO).

We expect banks with stubbornly high commercial-related NPAs to accelerate sales
activity over the next 12 to 18 months, particularly as many CRE loans
originated prior to the crisis approach maturity. Additional scrutiny of loss
reserve positions by bank regulators, as well as the absence of access to
attractive financing, may also increase pressure on more small and midsize banks
to unload NPAs. Sales also make sense for banks in closing out regulatory
actions related to asset quality.

Many institutions will likely view the successful completion of a bulk loan sale
as critical in validating loan carrying values and reserves, while demonstrating
their ability to work down NPA balances over time. As risk spreads for NPAs
continue to tighten, many banks will likely capitalize on a window of
opportunity in the secondary market, with many prospective buyers of commercial
assets more willing to boost bids in a more stable CRE environment.

Ultimately, we believe that most of the benefits driven by better liquidity and
pricing in bulk loan sales will be realized by institutions with
commercial-heavy balance sheets. Institutions with more of a consumer-lending
focus will be less likely to follow the bulk sales route, since spreads on
consumer loans have not tightened as significantly given favorable consumer
protection laws in many states.

The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.

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