HEARD ON THE STREET
AUGUST 2, 2010
By PETER EAVIS, Wall Street Journal
Selling stuff on eBay is a way to find out what it is really worth.
Similarly, banks are finding buyers for cruddy loans in a market that is slowly coming to life. But the real-world prices can raise questions about the values banks have assumed for their stressed assets.
A valid criticism of the banking sector cleanup is that it hasn't been much of a cleanup; Lenders still hold vast amounts of loans and repossessed property that are vulnerable to further losses.
In theory, banks' balance sheets are already supposed to reflect the impaired value of such assets, either through reserves or write-downs.
But a closer look at banks' second-quarter asset sales suggests some reserves and write-downs may not be adequate.
Exhibit one is Winston-Salem-based BB&T's $1.43 billion of foreclosed property. It is equivalent to 33% of BB&T's nonperforming assets.
CLSA bank analyst Mike Mayo notes this is far higher than at five of BB&T's peers, where the ratio is between 7% and 11%.
Banks are supposed to mark such foreclosed property to fair value, which in theory means a sale price shouldn't be substantially less than balance-sheet value.
Yet BB&T sold $252 million of foreclosed property in the second quarter at an 8.3% discount to its last balance-sheet value.
In the quarter, the bank also said it did a "comprehensive review" of foreclosed-property values, leading to a $61 million second-quarter write-down.
No appraisals are now more than six months old, BB&T said. Investors might reasonably ask why appraisals weren't previously more up-to-date on such a large fair-value asset.
Next up is Pittsburgh-based PNC Financial, which weathered the crisis well and trades at an above-market valuation.
It sold distressed loans in the second quarter, once worth $2 billion and valued at $1 billion on its balance sheet.
Even so, the sale prompted a $109 million addition to its bad-loan reserve, to absorb a good part of the loss incurred in the sale.
If reserves had been higher before the sale, a hit of this size may not have been necessary.
Given the size of PNC's distressed asset portfolio—it contains $17 billion worth of loans—investors need to watch it, in case any future sales prompt big hits.
BB&T and PNC at least provided key details on how loan sales affected their income statements and balance sheets.
Citigroup, by contrast, sold $3 billion of mortgages in the second quarter, but didn't say whether that led to any hits.
More loan sales would be welcome.
Not only because they relieve banks of burdensome assets, but also because they might inject more reality into the balance sheets seen by investors.
Write to Peter Eavis at email@example.com