Tuesday, August 17, 2010

Big Banks Cleaning Up Balance Sheets

Bloomberg News

PNC, Regions Break $3.1 Billion Logjam of Bad Loans


Aug. 17 (Bloomberg) -- PNC Financial Services Group Inc. and BB&T Corp. led banks that found buyers for at least $3.1 billion of distressed property loans since March as U.S. lenders clear out bad assets that have cast doubt on their health.

PNC will finish selling $2 billion of mortgages and home equity loans during this quarter, according to the Pittsburgh- based bank. Regions Financial Corp., Associated Banc-Corp and BB&T completed at least $1.1 billion of combined sales in the second quarter and said they will unload more. Prices on the loans were cut as much as 27 percent from their previously assessed value. The buyers weren’t disclosed.

Until recently, most bankers have been unable or unwilling to sell busted assets at depressed prices. Regulators counted $409.3 billion of noncurrent loans and leases in the first quarter, swelling the list of troubled banks to 775. The PNC sale shows regional banks can get deals done now, even if it means booking losses, because they’ve had time to build enough reserves to absorb the blow, according to banking analysts.

“That is a major transaction,” Mark Grinis, leader of the distressed assets group at Ernst & Young LLP in New York, said of PNC’s sale. “Lenders finally recognize that they need to start selling.”

The deals could spawn more transactions by giving banks and investors confidence that they know which prices are fair, Grinis said. At DebtX, a private loan market based in Boston, the number of banks selling distressed loans has more than doubled this year, according to Kingsley Greenland, chief executive officer.

For Sale

The Carlton Group Ltd., a New York-based real estate investment bank that runs sales for lenders, has more than $1 billion of assets on the market, Chairman Howard L. Michaels said in an interview. Regional lenders are big sellers, he said.

“Banks have gotten their arms around what they have, and they have a better sense what the value is,” Michaels said.

Buyers range from wealthy and sophisticated individuals to the biggest hedge funds and financial institutions, said Greenland, whose electronic market divides hundred-million- dollar lots of assets from banks into individual loans for sale. Bids from buyers firmed in the last year amid increasing confidence “that we are not in a free-fall,” Greenland said.

Worst Loans

Selling the delinquent loans means PNC will avoid “very expensive” foreclosures, CEO James Rohr, 61, said in a July 22 conference call. “This is the worst portfolio we had and we didn’t think, frankly, that the market would open for such assets, but we’re delighted that it did,” Rohr said.

PNC ranks sixth among U.S. commercial banks by assets. The sale of the loans will be completed at about 10 percent less than their value on the bank’s books, which prompted PNC to record a $109 million expense in the second quarter, according to the bank’s filings. Most came from its December 2008 acquisition of National City Corp., the filings said.

National City had been among the nation’s biggest subprime lenders, the business of giving mortgages to people with weak credit. PNC spokesman Fred Solomon declined to comment.

BB&T, North Carolina’s second-biggest bank after Bank of America Corp., sold $430 million of troubled loans in the second quarter, CEO Kelly King said in a conference call July 22. BB&T wasn’t willing 18 months ago “to go out and dump assets” when financial markets were panicky, King told investors. As bids improved, “we implemented a strategy of being aggressive,” and BB&T will increase sales providing bids stay up, he said.

Price Cut

The bank, with $155 billion in assets, got 14 percent less for the loans than their carrying value. Winston-Salem, North Carolina-based BB&T regards the difference as the cost of salvaging their value now, instead of continuing to manage them, Clarke Starnes, BB&T’s chief risk officer, said in an interview.

Associated, operator of Wisconsin’s largest branch system, sold $216 million in problem loans during the second quarter at about 27 percent less than their carrying value, according to a regulatory filing.

CEO Philip B. Flynn said in an interview he was happy to get as much as he did for the loans, which were tied to commercial real estate and construction projects and ranked among the worst of the bank’s holdings. Green Bay-based Associated had to act because the nonperforming loans hurt its standing with investors, credit raters and regulators, said Flynn, 52, hired in December.

Clean-Up

Associated posted a $131.9 million loss last year, when regulators told the bank to improve risk management and develop a capital plan. Associated is almost halfway to its goal of unloading $500 million of problem loans this year, Flynn said.

Regions Financial, Alabama’s biggest bank with $135 billion of assets, sold $449 million of problem loans and $171 million of real estate in the second quarter, more than four times the troubled asset sales in the same period last year, according to company statements. The bank said sales prices and updated appraisals on $159 million of other assets it now intends to sell were 24 percent lower than their carrying value. Regions spokesman Tim Deighton declined to comment.

A complete clean-up of bank balance sheets may drag on because prices are still too low for some banks, said Daniel Teclaw, a bank analyst at Standard & Poor’s. Time and more capital will let the banks be more aggressive, said Gerard S. Cassidy, an analyst based in Portland, Maine for RBC Capital Markets.

“As liquidity improves, the banks want to rid themselves of non-performing assets as efficiently as they can,” Cassidy said.

To contact the reporter on this story: David Henry in New York at dhenry19@bloomberg.net