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.